SHIRA A. SCHEINDLIN, U.S.D.J.
This is a consolidated multi-district litigation ("MDL") relating to contamination — actual or threatened — of groundwater from various defendants' use of the gasoline additive methyl tertiary butyl ether ("MTBE") and/or tertiary butyl alcohol, a product formed by the breakdown of MTBE in water. In this case, the Commonwealth of Pennsylvania ("the Commonwealth") alleges that defendants' use and handling of MTBE has contaminated, or threatens to contaminate groundwater within its jurisdiction. Familiarity with the underlying facts is presumed for the purposes of this Order.
Defendant LUKOIL Americas Corporation ("LAC") inadvertently disclosed certain emails in the present litigation that it now asserts are covered by attorney-client privilege. The Commonwealth asserts variously that the documents are not privileged, privilege was waived, and that the crime fraud exception applies. The parties agreed that the Court should conduct an in camera review. Having now done so, I find that while the documents are privileged, they are covered by the crime fraud exception.
During discovery in the present litigation, LAC produced, "pursuant to a stipulation and order[,] ... all of the non-privileged [] documents" in the possession of the bankruptcy trustee for its former subsidiary Getty Petroleum Marketing Inc. ("GPMI").
The emails are between LAC employees, GPMI employees, and Michael Lewis who served as the general counsel for both organizations.
In December, 2008, when the emails were sent, LAC was attempting to restructure and spin-off GPMI. The Commonwealth
Another LAC officer on the email chain suggested that GPMI or LNA should pay the bill and LAC could reimburse them. Lewis responded that the safer legal approach for preserving privilege is a complex payment scheme where "[GPMI] can pay LUKOIL USA (LUSA) per the services agreement, LUSA can pay LAC for monies owed and LAC can use those funds to satisfy [counsel's] restructuring invoices."
To fully understand the Commonwealth's allegations it is necessary to explain LAC's relationship with GPMI. In December, 2000, LAC acquired a controlling interest in GPMI from Getty Petroleum Corp. ("Getty").
Vincent De Laurentis, the former President and Chief Operating Officer of GPMI, tells the story of GPMI's bankruptcy in his declaration. De Laurentis avers that in 2005 GPMI's profitability declined due to a number of "longer-term market trends" though the immediate impact of Hurricane Katrina marked the beginning of GPMI's unprofitability.
In 2009, GPMI "participated in a series of transactions designed to raise funds, reduce debt, and strengthen its balance sheet."
The sale to LNA was consummated November, 2009.
After these transactions, De Laurentis says GPMI was "virtually debt-free."
On February 28, 2011, LAC sold GPMI for one dollar
The Commonwealth alleges that LAC attempted to "fraudulently strip GPMI of its valuable assets and steer it into bankruptcy in order to escape liabilities, including environmental damage at MTBE contaminated stations."
The former CEO of Getty Real Estate, David Driscoll, testified at the GPMI bankruptcy proceedings that the Chairman and CEO of LAC and GPMI, Vadim Gluzman, explained the GPMI restructuring plan to him. He stated that Gluzman explained the plan as leverage "to get ... concessions from [Getty Real Estate] with respect to reduced rent [for the Master Lease] and relief from his environmental obligations."
Driscoll described the plan communicated to him as one to "remov[e] the assets from GPMI, then ... to hold it for one year, which [Gluzman] assured me that the lawyers were requiring ... then the intention was to sell GPMI to anyone they could."
Driscoll testified that OAO Lukoil, the ultimate Lukoil family parent company, planned to hold GPMI for at least a year and that Gluzman told him that GPMI would remain current on its Master Lease obligations so long as OAO Lukoil owned GPMI.
At the GPMI bankruptcy proceeding, an expert testified that following the November, 2009 sale of assets to LNA, GPMI was insolvent, although he did not opine on the state of GPMI prior to the transactions.
Whether the attorney-client privilege applies to these emails involves three issues: (1) whether New York or Pennsylvania law applies, (2) whether the communications are covered by the attorney-client privilege, and (3) whether the crime fraud exception applies to the communication based on the accusation that the restructuring was intended to defraud GPMI's creditors.
Under Federal Rules of Evidence 501, "in a civil case, state law governs privilege regarding a claim or defense for which state law supplies the rule of decision." I have previously held, and the parties do not dispute, that Pennsylvania choice of law rules apply to this case.
I find that New York law applies. Under Pennsylvania choice of law rules, a court must conduct an interest analysis. This requires a court to first "determin[e] whether the laws of the competing states actually differ."
In order to determine who has the greater interest, a court must "`weigh the contacts on a qualitative scale according to their relation to the policies and interests underlying the [particular] issue.'"
New York has the greater interest. Lewis and the two LAC executives were located in New York, and the legal work they discussed occurred in New York.
Under New York law, attorney-client privilege applies "when the communication is made "for the purpose of facilitating the rendition of legal advice or services, in the course of a professional relationship. The communication itself must be primarily or predominantly of a legal character."
In New York the party seeking privileged communications under the crime fraud exception must demonstrate "a factual basis for a showing of probable cause to believe that a fraud or crime has been committed and that the communications in question were in furtherance of the fraud
At least two provisions of the New York Debtor and Creditor Law addressing fraudulent conveyance are relevant to the Commonwealth's allegations. First, Section 273 provides:
Second, Section 274 provides:
Therefore, the crux of the crime fraud exception, for the purposes of this opinion, is probable cause to believe that GPMI did not receive fair consideration in the sale of its assets.
The communications at issue involved the general counsel of LAC and GPMI giving legal advice to employees of LAC and GPMI about how best to protect the attorney-client privilege. Lewis was acting in his role as general counsel and providing specific advice to his clients on a clear legal issue. The Commonwealth asserts that the emails are primarily of a business character because they mention payment to a consultant. It is well established, however, that "the privilege is not lost merely by reason of the fact that it also refers to certain nonlegal matters."
I find sufficient factual support for the allegation that the GPMI restructuring was a fraudulent scheme to deprive creditors of GPMI's profitable assets. The very nature of the asset transfer from GPMI to LNA is suspicious. LAC transferred all of the GPMI stock to LNA, then GPMI sold its profitable assets to LNA, and finally LNA transferred all of GPMI's stock back to LAC.
The record is replete with facts that indicate the profitable assets of GPMI were stripped and then GPMI was sold for the express purpose of taking it into bankruptcy. Hantman's email to Gluzman strongly suggests LAC's intent to sell only profitable assets to LNA. And while Houlihan Lokey opined that the consideration received in the sale of assets to LNA was fair, such an opinion was based entirely on unverified financial data provided by GPMI. Driscoll's testimony also suggests LAC's intent to remove assets from GPMI such that GPMI would no longer be able to supports its obligations under the Master Lease. Finally, Driscoll's testimony about LAC and OAO Lukoil's plan to support GPMI just long enough for the two-year clawback period under section 548 to expire, coupled with the fact that GPMI in fact filed for bankruptcy one month after the two-year period ended, suggests that the restructuring was intended to defraud creditors.
LAC argues that the allegations of fraudulent conveyance ignore the $340 million capital infusion made after the emails were sent. This argument is unavailing given that these funds originated with OAO Lukoil, and De Laurentis concedes that OAO Lukoil guaranteed GPMI's debt, making it responsible for repayment regardless of whether GPMI entered bankruptcy.
Finally, LAC argues that the legal advice provided by Lewis is not "in furtherance" of the alleged wrongdoing because the email chain does not concern the "restructuring itself."
For the foregoing reasons, I conclude that the inadvertently produced emails are covered by the attorney-client privilege but the crime fraud exception applies. Accordingly, the Commonwealth need not return these records and may use them in prosecuting this action.
SO ORDERED
The evidence goes directly to a scheme that demonstrates LAC domination of GPMI sufficient to justify veil piercing — the Commonwealth's defense to LAC's motion to dismiss. Furthermore, the evidence in the record related to the GPMI restructuring scheme discusses environmental liabilities facing GPMI, i.e., MTBE liability. Without veil piercing, LAC would have no liability nor would the Court have jurisdiction over LAC, making the marginal utility of such discovery high.