Michael G. Williamson, United States Bankruptcy Judge
This Court previously ruled in a March 2013 Memorandum Opinion that the Trustee, standing in the shoes of Trans Health Management, Inc. ("THMI"), was entitled
Reconsideration is warranted — as the parties suggest — where newly discovered evidence would merit a different result. But here, the Court was aware of the potential unenforceability of the indemnification agreement (i.e., the "newly discovered evidence") at the time it issued its Memorandum Opinion. In fact, it briefly addressed that issue at the outset of the Memorandum Opinion. So that evidence cannot be "newly discovered." And even if it was, it would not merit a different result. For starters, the Court's ruling did not hinge on the existence of the indemnification agreement but rather the parties' belief at the time that it existed and was enforceable. Moreover, the indemnification agreement is not indispensable to the existence of a co-client relationship. It is one factor evidencing a client's objectively reasonable belief that it had an attorney-client relationship. Here, the overwhelming evidence is that it was objectively reasonable under all the circumstances (regardless of the existence of the indemnification agreement) for THMI to believe it had an attorney-client relationship with the law firms defending it in the wrongful death cases. Accordingly, the motions for reconsideration should be denied.
This involuntary chapter 7 case was filed on December 5, 2011.
The Court later granted the Trustee's motion requesting production of those documents from the various law firms under Rule 2004.
In all, the Court received and considered a total of 34 memoranda — which cited to over 80 cases — filed by the parties. The briefing was, to say the least, comprehensive. And all of the relevant parties had an opportunity to be heard on the privilege issues. After reviewing the memoranda and hearing substantial argument from counsel, the Court issued its comprehensive March 2013 Memorandum Opinion.
As set forth in the Memorandum Opinion, the Court concluded that the Trustee is entitled to invoke the co-client exception to the attorney-client privilege to obtain (i) any communications between THI (and the THI Receiver) and the law firms representing THI and THMI in the wrongful death cases; (ii) any communications between Fundamental Administrative Services (including Ms. Zack and Ms. Anderson) and the law firms representing THI and THMI (but not communications solely between Fundamental Administrative Services and the THI Receiver); (iii) communications between the parties to the January 5, 2012 settlement agreement (and their lawyers) with respect to the defense of the wrongful death cases; and (iv) copies of the litigation files (including any attorney work product) for the wrongful death cases.
First, the Court concluded that the Trustee is not entitled to any communications or litigation files relating to the defense of any proceedings supplementary in state court, opposition to the Trustee's efforts to obtain the litigation files, the Trustee's efforts to control the defense of THMI, or other issues unrelated to the defense of the wrongful death cases.
The THI Receiver and the Fundamental entities now seek reconsideration of the
"Parties seeking reconsideration of a prior order are held to a high standard."
But there is no newly discovered evidence here. The primary argument in support of reconsideration is that the Court discovered that the indemnification agreement was unenforceable for the first time at the hearing on THI Holdings' motion to dismiss the Trustee's adversary complaint seeking to enforce that agreement. That hearing took place on March 21, 2013 — two days after the Court issued its Memorandum Opinion. According to the Fundamental entities, the "Court had an opportunity to review and consider for the first time terms of the stock purchase agreement" and that the "Court's new consideration of the contractual language underpinning the alleged indemnity claim undoubtedly affects many explicit conclusions within" the Court's Memorandum Opinion.
In actuality, the Court has reviewed the stock purchase agreement — including the indemnification provisions — numerous times throughout this case. And it specifically reviewed it in connection with ruling on the privilege issues addressed in its Memorandum Opinion. To be fair, the Court did not hear THI Holdings' oral argument until after the Court entered its Memorandum Opinion. But the same argument it advanced at the March 21 hearing had been raised in its preliminary statement regarding the Trustee's indemnification demand,
In fact, the Court specifically addressed that issue in its Memorandum Opinion. The first time it mentioned the indemnification agreement, the Court explained that its ruling depended, at least in part, on the existence of the indemnification agreement and observed that THI Holdings denied it was obligated to indemnify THMI.
It is also worth noting that the Court did not determine that the indemnification agreement was unenforceable when it dismissed the Trustee's original complaint seeking a declaratory judgment regarding her rights under — and damages for THI Holdings' alleged breach of — that agreement. The Court dismissed the complaint because the Trustee failed to allege sufficient facts giving rise to a plausible claim for relief under that agreement. The Trustee has since amended her complaint, and the Court recently denied THI Holdings' motion to dismiss the amended complaint. At this point, the Court has not determined whether the indemnification agreement is, in fact, enforceable.
And that leads to the second reason reconsideration is not warranted: even if the Court ultimately determines that the indemnification agreement is unenforceable, that fact would not merit a different result in this case. In its Memorandum Opinion, the Court looked to Sky Valley Limited Partnership v. ATX Sky Valley, which enumerated a number of factors to consider in determining whether the co-client exception to the attorney-client privilege applies.
The THI Receiver and Fundamental entities say that the Court's finding with respect to two of those factors — the contractual right to access information and the existence of a fiduciary relationship — is based on the erroneous assumption that a contractual right to indemnification exists. They say there is no right to indemnification because the agreement only obligates THI to indemnify THMI for losses relating to nursing homes operated by THI or one of its subsidiaries other than THMI, and the nursing homes in this case allegedly were operated by Lyric and Claremont (which are not THI subsidiaries). But that argument overlooks two important points.
First, the three Sky Valley factors relied on by the Court are proxies for whether (i) THMI reasonably believed under all the circumstances that it was a client of the law firms defending it in the wrongful death cases; and (ii) the THI Receiver had a reasonable expectation that its communications with counsel defending THI and THMI in the wrongful death cases would be confidential. As the Court explained in its Memorandum Opinion, the test for determining the existence of a co-client relationship for purposes of triggering
If THI and the THI Receiver believed they were bound by the indemnification agreement, then it would have been reasonable for THMI to have inferred it was, in fact, a client of the law firms defending it in the wrongful death cases.
And there can be no serious argument that THI and the THI Receiver believed they were bound by the indemnification agreement until very recently. Otherwise, what is the explanation for the repeated references by THI and the THI Receiver — as well as the Debtor and Fundamental Administrative Services — to THI's obligations under the indemnification agreement when seeking affirmative relief from the various state courts in the wrongful death cases and this Court during the pendency of this bankruptcy case?
Second, those three factors are not indispensable to the finding of a co-client relationship. They are, as the Court pointed out, the most important of the numerous factors enumerated by the Sky Valley court. But other courts have looked to different factors.
In fact, the First Circuit Court of Appeals did just that in its 2000 decision in FDIC v. Ogden Corp.
The court in Ogden noted that courts "customarily determine the existence vel non of an attorney-client relationship by evaluating whether the putative client's belief that such a relationship existed was objectively reasonable under all the circumstances."
Notably, in concluding that a co-client relationship existed between the banks and Dickstein, the court did not rely on the existence of a fiduciary relationship.
The facts in Ogden are analogous to those here. Like in Ogden, the engagement letters in this case specifically provide that the law firms were retained to represent THMI in the wrongful death cases. The law firms actually made appearances (and advanced legal positions) in the wrongful death cases on THMI's behalf. And those law firms coordinated the legal strategy for THI and THMI. Those facts are sufficient, by themselves, for THMI — like the banks in Ogden — to reasonably conclude that it was a client of the law firms. Accordingly, a co-client relationship exists between THI and TMI regardless of the existence or ultimate enforceability of the indemnification agreement.
That leaves for consideration the last argument raised by the THI Receiver: the indemnification provides that Delaware law applies, and a duty to defend does not give rise to a fiduciary duty under Delaware law.
Nevertheless, the Court is not convinced that a person assuming the defense of another does not owe the other a fiduciary duty. The THI Receiver cites two cases for the proposition a duty to defend does not give rise to a fiduciary duty under Delaware law.
And the idea that a party assuming the defense of another does not owe a fiduciary — or analogous — duty to the other party seems illogical. Under the THI Receiver's analysis, once it assumed THMI's defense it was free to do whatever it pleased with no recourse. The Court is not convinced Delaware law, if it applies, would allow that.
The potential unenforceability of the indemnification agreement is not newly discovered evidence. And even if it was, it would not merit a different result here. Accordingly, it is