Thursday, January 11, 2018

No Fraud, No Exception

The Delaware Court of Chancery denied a motion seeking disclosure of privileged materials

It bears repeating what this Court has stated before: that Delaware Rule of Evidence 502(b)—codifying the attorney-client privilege—stands in contrast to the bulk of the Rules of Evidence. The latter are largely designed to promote the search for truth with respect to the matter litigated. Rule 502, by contrast, protects attorney client privilege in a way that is, in a narrow sense, inimical to that goal. In a broader sense, of course, the rule promotes justice by allowing free communication between client and counsel, a right which the Rules (and common sense) hold superior, in most instances, to the incremental advantage in the search for truth to be gained from invading the privilege.

Here, the Plaintiffs move for an order to compel production despite the privilege. There are situations where the search for truth or other meritorious interests are so compromised by maintenance of the attorney-client privilege that justice requires that the privilege yield. Strait is the gate and narrow the road to an order vitiating the privilege, however. The Plaintiffs rely on the so-called Garner and crime-fraud exceptions to the application of the privilege; for the reasons below, I deny the Motion to Compel to the extent that it relies on those exceptions.

The litigation alleges breach of fiduciary duties

I issued a Memorandum Opinion holding that the Complaint stated a claim against the Polk family for breach of fiduciary duties, but that it failed to do so as to the non-Polk family directors or Polk’s law firm and financial advisor. Before me now is the Plaintiffs’ Motion to Compel, which seeks production of documents that the Defendants have withheld on the basis of attorney client privilege and the work-product doctrine. The Plaintiffs argue that several of the entries on the privilege logs produced by the Defendants are deficient, and that in any event, all of the documents withheld as privileged should be produced under the Garner and crime-fraud exceptions...

The Garner exception is a judicially created doctrine founded on the recognition that “where the corporation is in suit against its stockholders on charges of acting inimically to stockholder interests, protection of those interests as well as those of the corporation and of the public require that the availability of the privilege be subject to the right of the stockholders to show ‘good cause’ why the privilege should not apply.” A corporation invokes the attorney-client privilege through its officers and directors; those individuals owe a duty to the stockholders to exercise the privilege in the best interests of the corporation.

Movants failed to meet the Garner test.

Crime fraud

The Defendants argue that the crime-fraud exception is inapplicable here because the Plaintiffs have disclaimed any intention of bringing a fraud claim. As the Defendants point out, at the motion-to-dismiss stage, the Plaintiffs styled their  claim as one for breach of fiduciary duties stemming from, among other things, the failure to disclose several material facts in connection with the 2011 self-tender, and specifically disclaimed accusations of fraud.  I note that the rationale underlying the crime-fraud exception—that the administration of justice is undermined when individuals seek legal advice to assist them in breaking the law —appears to apply with equal force to a client who hires an attorney to help him commit an intentional breach of fiduciary duty premised on deceiving stockholders about a significant transaction.  Nonetheless, I need not decide whether the crime-fraud exception covers communications designed to further fraud-like intentional breaches of fiduciary duty, because assuming that it does, the Plaintiffs have failed to show that it applies here.

The Plaintiffs’ invocation of the crime-fraud exception suffers from a fatal flaw: the absence of any evidence that the Defendants sought the advice of their attorneys for the purpose of accomplishing their allegedly fraudulent scheme. The Plaintiffs aver that the 2011 self-tender was fraudulently induced via a failure to disclose several material facts, including that the Polk family was considering selling the company. And, as the privilege logs reveal, the Defendants consulted with attorneys about various restructuring options, including the self-tender. But there is no indication that the Defendants intended to use these consultations to further the purportedly fraudulent scheme, or that the advice received during these consultations helped them perpetrate the scheme. The Plaintiffs have shown only that, during the alleged fraud, the Defendants spoke with counsel about matters related to the transaction in connection with which they allegedly provided inadequate disclosures; the 2011 self-tender. That is not enough, to my mind, to invoke the crime-fraud exception.

(Mike Frisch)

https://lawprofessors.typepad.com/legal_profession/2018/01/the-delaware-court-of-chancery-it-bears-repeating-what-this-court-has-stated-before-that-delaware-rule-of-evidence-502b.html

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