Well, That Backfired. A Privilege-Waiver Tale for Internal Investigations and In-House Counsel

We know that typically a company waives the privilege covering an internal-investigation memo if it discloses that memo to a government agency.  One company nevertheless wanted it both ways, so it created a second memo summarizing (the favorable) part of an in-house lawyer’s privileged internal-investigation memo, and disclosed the second memo to the feds.  Did this circumnavigation attempt avoid privilege waiver for the internal-investigation memo?

A Missouri federal court found that disclosing the second memo waived the privilege over the in-house lawyer’s memo, and ordered partial disclosure.  Sherman v. Berkadia Commercial Mortgage, LLC, 2018 WL 4300322 (E.D. Mo. Sept. 10, 2018).  You may read the opinion here.

Read This One, Not That One

When an allegation arose that Berkadia falsely certified to HUD that it complied with all HUD regulations, Berkadia retained outside counsel to conduct an internal investigation.  Based on outside counsel’s employee interviews, Berkadia’s in-house counsel drafted a memo about the investigation and underlying events.

Berkadia then prepared a second memo that summarized outside counsel’s investigation. This second memo discusssed some—but not all—details of the investigation findings, and Berkadia decided to disclose this second memo to HUD.

But I Want to Read That One

In an employee’s anti-retaliation lawsuit under the False Claims Act, the employee claimed that Berkadia’s disclosure of the second memo actually waived the privilege over the in-house lawyer’s memo summarizing the internal investigation.  He wanted the privileged memorandum to show that Berkadia had information contradicting its HUD disclosures.

Ruling—The Fairness Doctrine

The court read the in-house lawyer’s memo in camera, and agreed that it met the privilege elements: it contained communications between Berkadia’s in-house lawyer and employees, and was marked “confidential” and “subject to attorney-client privilege.”

The court referenced the at-issue waiver doctrine, which holds that one waives the privilege when it places the subject matter of the privileged communications at issue in the lawsuit.  A “closely related” concept is the fairness doctrine, which states that “a party should not be able to make use of privileged information as a sword when it is advantageous for the privilege holder[,] and then as a shield.”

The court applied this fairness doctrine to thwart Berkadia’s attempt to use the HUD-produced memo but withhold the in-house lawyer’s memo—from which the HUD memo derived—from the employee.  The court found that Berkadia waived the privilege over the in-house lawyer’s memo, and ordered the company to produce the sections that disclosed interviews with Berkadia’s employees.

PoP Analysis

While the company appropriately handled the in-house lawyer’s memo from a privilege perspective, its attempt to “disclose the memo without disclosing it” backfired.  The moral of the story is that disclosing privileged information to government entities typically waives the privilege.

While there are some instances of companies avoiding privilege waiver by entering into a NDA with the governmental entity, as discussed here and here, those situations are rare and companies must proceed with caution.  The “memo about the memo” idea was apparently not cautious enough.

Good-Faith Defense to Fraudulent-Transfer Claims Results in At-Issue Waiver

In a fraudulent-transfer lawsuit arising out of a bankruptcy action, a Florida bankruptcy court ruled that a defendant-bank’s assertion of a good-faith defense waived the attorney–client privilege over emails between bank employees and its counsel.  The court, however, limited the waiver to documents evidencing the bank’s state-of-mind during the period of the alleged improper transfers.  In re: Mongelluzzi, 2017 WL 1843049 (Bankr. M.D. Fla. May 8, 2017).  You may read the decision here.

Background

Frank Mongelluzzi owned and operated several companies, and he and his business entities maintained 61 accounts at a regional bank.  After Mongelluzzi and his companies filed bankruptcy, the bankruptcy trustees filed various complaints against the bank seeking to avoid allegedly fraudulent transfers under 11 U.S.C. § 548.

The trustees claimed that Mongelluzzi and his companies had engaged in a check-kiting scheme, that the bank had knowledge of this scheme, and that the bank devised a controlled exit strategy to reduce its financial exposure from $25M to $3M.

Good-Faith Defense and At-Issue Waiver More…

Geico’s “Improper Use” of Privilege Confirms the Privilege is not a Sword & Shield

In a bad-faith case against Geico, a Florida federal court ruled that Geico waived the attorney–client privilege when its coverage attorney testified to its good-faith efforts in the claims-handling process.  And because of Geico’s earlier “consistent and aggressive assertion” of the privilege, the court vacated Geico’s defense verdict and ordered a new trial.  Batchelor v. Geico Cas. Co., 2015 businessman_sword_shield_500_clr_9807WL 6468124 (M.D. Fla. Oct. 22, 2015).  You may read the decision here.

Background

Donna Batchelor suffered injuries in an automobile accident and submitted a claim to Geico for compensation under her uninsured motorist policy.  Geico refused the settle the claim for policy limits of $30,000, and a subsequent state-court jury awarded Batchelor damages in the amount of $1.8M.  She then filed a bad-faith lawsuit against Geico.

Geico Claims Privilege

During the bad-faith case, Geico asserted the attorney–client privilege when Batchelor sought documents between Geico and its counsel in the underlying UM action. Geico claimed that it limited counsel’s role to defending the UM claim and did not involve him in the claims-handling process.  The court accepted Geico’s representations and precluded discovery of these documents.

At trial, however, Geico stated in opening statements that its coverage counsel would testify “to defend Geico.”  The attorney took the stand and testified about his case evaluation, including communications he had with Geico.

Privilege Waiver

The court immediately ruled that the testimony of Geico’s coverage counsel waived the previously asserted attorney–client privilege.  The court denied Batchelor’s mistrial request, but gave her counsel the option to review the withheld documents before cross-examining Geico’s coverage counsel or having his testimony stricken altogether.  She chose the latter.

Geico received a defense verdict, but the court granted Batchelor a new trial, stating that he should have granted a mistrial given Geico’s “improper use” of the attorney–client privilege.  The court stated that it must “narrowly construe” the attorney–client privilege, “particularly when it is asserted by corporate entities.”

With this narrow construction in mind, the court followed the rule that “an insurer who relies on ‘advice of its counsel as a defense’ in a bad faith claim waives the privilege ‘under the at-issue doctrine.’”  It noted that “manifest unfairness” results when one party deprives another of privileged information through selective disclosure.

Sword or Shield?

If Batchelor had the privileged documents prior to trial, then her counsel could have effectively cross-examined Geico’s lawyer.  As the court found, “the jury could easily have reached a different result if Geico had not improperly used the privilege as a shield to hide evidence before trial and as a sword to establish its purported good faith at trial.”

PoP Analysis

Geico’s attempt to “have its cake and eat it too” failed miserably.  It is well-established that one cannot rely on an advice-of-counsel defense yet withhold privileged communications from its attorney.  Counsel in bad-faith cases should conduct an early assessment whether to assert the advice-of-counsel defense and then prepare to conduct the litigation and trial accordingly.  Geico’s payment for this failed shield–sword attempt is paying for another full trial, but it could have been worse.

One point in the court’s ruling is concerning.  It stated that courts should construe the attorney–client privilege narrowly, which is true; but it went further to say that this narrow construction is particularly true when a corporation asserts the privilege.  The privilege applies to individuals and corporations, and courts should construe its construction the same for all parties and not take a more limited review when a corporation asserts it.