IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MINNESOTA BANK OF MONTREAL, Plaintiff, v. AVALON CAPITAL GROUP, INC., ET AL., Defendants. Case No. 10-CV-591 (MJD/AJB EXHIBIT 5 FILED UNDER SEAL PURSUANT TO PROTECTIVE ORDER ENTERED Feb. 9, 2011 PLAINTIFF S, BANK OF MONTREAL S, MOTION TO COMPEL PRODUCTION OF CERTAIN DOCUMENTS WITHHELD ON CLAIM OF PRIVILEGE, BUT PREVIOUSLY VOLUNTARILY PROVIDED TO THIRD PERSONS NOW COMES plaintiff, Bank of Montreal ( BMO to respectfully request that, for all the reasons set forth in BMO s Memorandum in Support, filed herewith, the Court: (i find that defendant Avalon Capital Group, Inc. ( Avalon has improperly withheld certain documents on claim of privilege, where those documents either were not privileged -- but, business discussions -- or lost any privilege when they were previously voluntarily provided to a third-party; (ii find subject matter waiver with respect to the subject matter of those documents; (iii compel production of all related documents previously withheld; and (iv bar Avalon, or any other party, from asserting privilege at deposition on the subject matter of those documents; or, in the alternative, undertake an in camera review to ascertain if the crime-fraud exception should apply. In addition, for 3186704.01.13.B.doc
many of the same reasons, BMO respectfully requests that the Court order the production of certain documents claimed to be privileged and withheld from production by former Lakeland employee Mr. Joseph Burke. In support of this Motion, BMO files herewith it Memorandum in Support, which it incorporates by reference as if fully set forth herein. Plaintiff s counsel certifies, pursuant to Local Rule 37.1, that the parties conferred in good faith on Monday, April 23, 2012, and with counsel for Mr. Burke on Tuesday, May 8, 2012, each in attempt to resolve their differences with respect to these matters. Despite good faith efforts, the parties were unable to reach agreement. This Motion follows. Dated: May 9, 2012 Of Counsel: James E. Spiotto (pro hac vice Mark D. Rasmussen (pro hac vice Jeffrey G. Close (pro hac vice CHAPMAN AND CUTLER LLP 111 West Monroe Street Chicago, Illinois 60603 Tel: (312 845-3000 BASSFORD REMELE, P.A. By: s/christopher R. Morris Lewis A. Remele, Jr. (#90724 Christopher R. Morris (#230613 33 South Sixth Street Suite 3800 Minneapolis, MN 55402-3707 Tel: (612 333-3000 lremele@bassford.com cmorris@bassford.com ATTORNEYS FOR PLAINTIFF BANK OF MONTREAL - 2 -
IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MINNESOTA BANK OF MONTREAL, Plaintiff, v. AVALON CAPITAL GROUP, INC., ET AL., Defendants. Case No. 10-CV-591 (MJD/AJB EXHIBIT 5 FILED UNDER SEAL PURSUANT TO PROTECTIVE ORDER ENTERED Feb. 9, 2011 PLAINTIFF S, BANK OF MONTREAL S, MEMORANDUM IN SUPPORT OF ITS MOTION TO COMPEL PRODUCTION OF CERTAIN DOCUMENTS WITHHELD ON CLAIM OF PRIVILEGE, BUT PREVIOUSLY VOLUNTARILY PROVIDED TO THIRD PERSONS Bank of Montreal ( BMO respectfully requests that the Court: (i find that defendant Avalon Capital Group, Inc. ( Avalon has improperly withheld certain documents on claim of privilege, where those documents either were not privileged -- but, business discussions -- or lost any privilege when they were previously voluntarily provided to a third-party; (ii find subject matter waiver with respect to the subject matter of those documents; (iii compel production of all related documents previously withheld; and (iv bar Avalon, or any other party, from asserting privilege at deposition on the subject matter of those documents; or, in the alternative, undertake an in camera review to ascertain if the crime-fraud exception should apply. 3186704.01.13.B.doc
In addition, for many of the same reasons, BMO respectfully requests that the Court order the production of certain documents claimed to be privileged and withheld from production by former Lakeland employee Mr. Joseph Burke. BACKGROUND As alleged in Plaintiff s Second Amended Complaint, filed October 20, 2011, Avalon, defendant Ted Waitt ( Waitt, Avalon s wholly owned subsidiary, Lakeland Construction Finance, LLC ( Lakeland and Lakeland s wholly owned affiliate LCF Funding I, LLC ( LCF Funding (Avalon, Lakeland and LCF Funding together, the Company engaged in a pattern of misrepresentations and fraudulent omissions between 2005 and 2008, for the purpose of cashing Avalon and Waitt out of their investment in Lakeland to the detriment of BMO. (See Cmplt. passim. Among the misrepresentations and omissions alleged, the Company is alleged to have misrepresented and fraudulently omitted material facts regarding the status of Mr. Robert Machacek ( Machacek, the serious problems the Company had controlling Machacek (as described in the Complaint, the Bob Problem, its intent to terminate Machacek, and the facts and circumstances regarding Machacek s termination, which was falsely presented to the Banks, including BMO, as a transition at Machacek s initiative, rather than a termination. (Id. at 181-96. From mid-2005, until mid-2008, Mr. Joseph Burke ( Burke served as Chief Executive Officer of Lakeland, at the direction of Waitt and Avalon. As alleged in the - 2 -
Complaint, during this period, Burke did nothing significant without the express consent and approval of Waitt and Avalon. (Id. passim. In April 2007, Burke was ready to fire Machacek. (See Avalon-redacted documents, filed herewith as Group Exhibit 1 to Affidavit of Jeremy Schreiber, Esq. [ Counsel Aff. ], at AV 72073. On or about April 9, 2007, Burke had a meeting with Machacek where he told Machacek he had to leave the Company, that he and Machacek were not on the same page, and that he was a detriment to the efforts of Avalon and Waitt to cash out of their investment in Lakeland. (Id. Nonetheless, sometime after April 9, 2007, Machacek instructed a subordinate to originate a new deal, contrary to Burke s express instructions. (Id. at AV 72074. Recognizing that firing Machacek would trigger disclosure requirements and certain key man covenants with the Banks, including BMO, on or about April 23, 2007, Burke devised and presented to Waitt a plan for transitioning Machacek so as not to have to tell the Banks, including BMO, the truth of the Bob Problem, and of the decision to terminate Machacek (the Burke Plan. (See Id. at AV 72073-75. The Burke Plan was implemented, and on June 18, 2007, BMO was told that Machacek was leaving Lakeland due to personal reasons so that he could pursue other opportunities. (Complt., at 195. Avalon apparently has withheld parts of the Burke Plan and related documents, including: (i portions of the Burke s e-mail of April 23, 2007 comprising/forwarding the Plan; (ii an attached Key Terms of Proposed Transition Plan ; (iii a draft Termination for Good Reason letter, dated as of April 23, 2007; (iv Bob s Exit Plan ; and certain - 3 -
responses by Waitt to Burke s Plan. (See Id.; and Avalon Privilege Log (in relevant part, Counsel Aff. Ex. 2, at Entry Numbers 485-585, and 7 th Installment (reflecting redactions and withholding of deposition testimony and exhibits. Burke left the Company in or about October 2008, nearly ten months after BMO declared default under the RFA on or about January 31, 2008. When Burke left the Company, he was permitted to retain at least 3 file boxes of Company documents, and his laptop with e-mails and documents intact. In fact, the Company apparently mirror-imaged his laptop, but with the Company having taken a copy, Burke was allowed to keep all the documents and files, privileged, confidential or otherwise, on the laptop, as well as at least three boxes of paper documents. (See e-mail of April 14, 2011 from James Miller, Esq., counsel to Burke (discussing production and mirror-imaging of Burke s hard drive upon termination, Counsel Aff. at Exhibit 3. No effort was made to recover any documents from Burke, at the time of his termination or thereafter. Avalon, as the sole manager of Lakeland, had the right and power, among other things, to actively manage the business of Lakeland. Yet, Avalon, itself, took no precautions to prevent the loss of allegedly confidential and privileged materials, and failed to create or enforce any policies preventing former employees from removing confidential or privileged documents from the Lakeland premises, or to otherwise protect confidentiality or privilege. Two and a half years after Burke left the Company with the documents and files, in February 2011, BMO subpoenaed records from Burke, including any and all Company - 4 -
records in Burke s possession, custody or control related to Lakeland, the Securitization the RFA and/or Avalon. REQUEST NO. 1: All email messages (including attachments sent to or received by You relating to Lakeland, the Securitization, the RFA and/or Avalon. REQUEST NO. 2: All documents, including but not limited to desk files, working files, notes, handwritten notes, copies of computer hard-drives, and files maintained by You relating to Lakeland, the Securitization, the RFA and/or Avalon.... REQUEST NO. 4: All documents that consist of, refer or relate to any communication with Avalon and/or Waitt, or any person acting on behalf of Avalon and/or Waitt, and all documents that consist of, refer or relate to any distribution, payment, and/or transfer of funds to Avalon. (Subpoena and Cert. of Service, Counsel Aff. at Exhibit 4. These requests put Avalon on notice that BMO was seeking documents such as those Avalon now would claim as privileged and confidential. Notice of the subpoena was duly served on Avalon in this proceeding. (Id. Still the Company took no action to recover Company-documents from Burke, or to prevent their disclosure or production in response to the subpoena. At least a portion of the Burke Plan and related documents were produced by Burke in response to the subpoena on or about April 20, 2011. (JB0004314-4328 ( Burke s Production, Counsel Aff. at Exhibit 5. Even after Avalon had notice of the subpoena to Burke and his production, it took no action to recover any documents from Burke, or other action to protect any privilege claims. - 5 -
In September 2011, BMO s counsel provided defendants counsel with a draft of the Second Amended Complaint in connection with mediation. Shortly thereafter, Avalon s counsel objected to use of quotes from the Burke Plan-documents in the draft Complaint, and claimed that the related e-mail string, and attachments, were privileged in whole or in part, without specifying exactly which parts Avalon claimed were privileged. BMO disagreed that any parts of Burke s Production were privileged. As BMO informed Avalon: (i the Burke Production largely reflects business discussions between two executives and little or no legal advice; and (ii the privilege as to the subject matter of the Burke Production, if any, was waived when the Company allowed Burke to leave its employ without making any effort to hold on to, or recover, otherwise confidential or privileged documents, and again in February 2011 when Avalon had notice of the subpoena to Burke and failed to take any action. In an abundance of caution, BMO filed its unredacted Second Amended Complaint, quoting a portion of the Burke Plandocuments, under seal. Nonetheless, in December 2011, Avalon s counsel asked for, and had, a Local Rule 37.1 conference with counsel for BMO as to these documents. Three months later, on March 26, 2012 and March 28, 2012, Avalon provided privilege logs and supplemental production, where Avalon is attempting to assert claims of privilege with respect to the Burke Plan and related documents. On Monday, April 23, 2012, with oral discovery due to start, counsel had another Rule 37.1 conference -- this one initiated by BMO -- to attempt to resolve differences with respect to: (i documents withheld from production, related to the Burke Plan, and - 6 -
what the Company was going to tell the Banks, including BMO about it; and (ii whether Avalon would agree not to interpose privilege claims at deposition(s related to the Burke Plan. Despite good faith efforts, the parties were unable to reach agreement. This Motion follows. ARGUMENT As the parties are before this Court in the exercise of its diversity jurisdiction, 28 U.S.C. 1332, the rules of privilege are found in Minnesota law. See, e.g., Marvin Lumber and Cedar Co. v. PPG Ind. Inc., 168 F.R.D. 641, 644 (D. Minn. 1996; FED. R. EVID. 501. Minnesota Statutes section 595.02(1(b provides privilege for attorney-client communications. The key elements of privilege under Minnesota law are (i the communication must be confidential; and (ii it must be made for the purpose of seeking or providing legal advice. Marvin Lumber, 168 F.R.D. at 644. Both conditions must be shown by the party claiming privilege. Id. The attorney-client privilege is narrowly construed, as it operates to exclude potentially truthful evidence. Cardenas v. Prudential Ins. Co., No. 99-1421 (JRT/FLN, 2004 WL 234404, at *2 (D. Minn. Jan. 30, 2004. I. Avalon is Improperly Withholding or Redacting Business Discussions Documents created for business purposes, rather than legal advice, are not privileged. See, e.g., Cardenas, 2004 WL 234404 at *2 (year-end goal summary of in-house law department was made for business purposes, not legal advice, and was not, therefore, privileged; see also U.S. v. Horvath, 731 F.2d 557, 561 (8th Cir. 1984 ( where the attorney acts merely... as a business advisor, the privilege is inapplicable. - 7 -
Because of Burke s Production, we know that a substantial portion of the Burke Plan, and related correspondence, which Avalon seeks to withhold as attorney-client privileged is mere business discussions. (Compare, e.g., Ex. 5 at JB 4317 with Ex. 2 at AV 72072 (redacting business discussion about what to tell the Banks about Machacek; Ex. 5 at JB 4316 with Ex. 2 at AV 72075 (redacting business discussion about Burke Plan, including counsel s business thoughts on the matter; Ex. 5 at JB 4315 with Ex. 2 at AV 72074 (redacting expression of legal advice from Avalon counsel. Based on Avalon s claims of confidentiality and privilege, in an abundance of caution, BMO has filed Exhibit 5 (Burke s Production under seal, pursuant to the Protective Order entered in this matter on February 9, 2011. The relevant portions of Burke s Production are not quoted herein, so that this Memorandum could be filed in the open. Accordingly, under the circumstances, it must suffice to say here that the portions available from Burke s Production, but redacted by Avalon, largely reflect only business discussions, not legal advice. The only portion otherwise properly redacted is found at Exhibit 5 at JB 4315, 2 (discussing counsel s advice; but, as discussed below, Avalon has waived any claim of privilege even as to this, and as to the subject matter of the Burke Plan and its purpose. II. Avalon Waived Any Privilege By Failing to Take Adequate Steps to Protect the Confidentiality of the Documents it Claims to be Privileged One of the two key elements of privilege under Minnesota law is confidentiality. See, e.g., Marvin Lumber, 168 F.R.D. at 644. By allowing Burke to leave the Company s - 8 -
employ with otherwise privileged or confidential documents and files, and by taking no action upon notice of the subpoena to Burke, Avalon voluntarily disclosed the documents, waiving any privilege as to the documents and the subject matter of the documents. See, e.g., O Leary v. Purcell Co., Inc., 108 F.R.D. 641 (M.D.N.C. 1985 (where former employee was permitted to leave employ of company with otherwise confidential files, including documents claimed to be privileged, confidentiality prong of privilege was absent and documents could not be withheld on basis of privilege claim. 1 In O Leary, the plaintiffs received several allegedly confidential and privileged documents from the former president of the defendant s subsidiary, who in the days after he was no longer president of the subsidiary had returned to his former office to remove copies of certain files. After the former president took the documents, the subsidiary merged into its parent corporation with the parent surviving and succeeding to all rights, privileges and powers of its former subsidiary. Id. at 644. Although the facts were in dispute, the parent corporation claimed that it did not give the former president permission to take the files and thus, it claimed, the documents produced by the defunct subsidiary s former president remained privileged and confidential. Id. at 645. The O Leary court determined that even if the parent corporation had not given its permission, the parent and its former subsidiary treated the documents... in issue so loosely that they should not be considered confidential for purposes of the 1 As research finds no published case of a Minnesota state court addressing the standard that should be followed when otherwise privileged documents are voluntarily disclosed, this portion of the Motion relies largely on Eighth Circuit case law, and persuasive authorities from other jurisdictions. - 9 -
attorney-client privilege. Id. Important to the O Leary court was that neither the parent nor the former subsidiary had procedures or policies in place to ensure the confidentiality of documents. Id. at 645-46; see also Scott v. Glickman, 199 F.R.D. 174, 179 (E.D.N.C. 2001 (where no special effort is made to ensure confidentiality, privilege is waived; IMC Chemicals, Inc. v. Niro Inc., 98-2348-JTM, 2000 U.S. Dist. LEXIS 22850, *72 (D. Kan. July 19, 2000 (if a corporation fails to take adequate steps to insure the confidentiality of its documents... the corporation itself may impliedly waive the privilege with respect to the documents retained by former employees (citing O Leary. 2 Here, Burke s counsel states that an employee of the Company took a mirror image of Burke s laptop hard drive, and then the Company allowed Burke to walk out the door with his computer files and hard copies of a large number of documents and files. The Company made no effort to recover the files from Burke. 3 Moreover, as discussed 2 See also O Leary, 108 F.R.D. at 646 n.4 (comparing loss of confidentiality to waiver of privilege. 3 It should not matter that Burke s counsel s statement is hearsay. As the party asserting privilege, Avalon has the burden to show that it meets the essential requirements of the privilege claim, including adequate care to protect the confidentiality of the communications. See, e.g., O Leary, 108 F.R.D. at 644, citing WRIGHT & MILLER 8 Federal Practice and Procedure 2016 (1970. It will be Avalon s burden to show it diligently acted to prevent the loss of the documents at issue. As we are informed, no such facts exist for Avalon to carry its burden. Indeed, as noted herein, even when Avalon was informed of the subpoena to Burke, it took no action to recover any documents or files from Burke before or after Burke s production to BMO. - 10 -
above, even after notice of the subpoena to Burke in 2011, Avalon took no action to recover documents or protect any claim of privilege or confidentiality. Given the voluntary nature of the disclosure, the Court should find that the Company not only waived any privilege as to the specific documents Burke was permitted to keep, but also as to the subject matter of those documents. See, e.g., Imation Corp. v. Koninklijke Philips Elec. N.V., No. 07-CV-3668 (DWF/AJB (D. Minn. slip. op., Aug. 7, 2008 (attached hereto, for the Court s convenience, as Exhibit 6. In Imation, in assessing the difference between voluntary disclosure and inadvertent disclosure, this Court looked to: (i the reasonableness of precautions to prevent disclosure; (ii the number of disclosures; (iii the extent of the disclosures; (iv the promptness of measures taken to remedy the problem; and (v whether justice would be served by relieving the party of its error. Id. at 3-4 (citing Hydraflow, Inc. v. Enidine Inc., 145 F.R.D. 626, 637 (W.D.N.Y. 1993; see also Gray v. Bicknell, 86 F.3d 1472, 1482 (8th Cir. 1996. Voluntary disclosure waives the privilege not only for the documents disclosed, but covers any information directly related to that which was actually disclosed. Id. at 7-8, quoting United States v. Workman, 138 F.3d 1261, 1263 (8th Cir. 1998. As discussed above, Burke was allowed to leave the employ of the Company with at least three boxes of Company-documents and his laptop. In fact, as discussed, Burke sent his laptop to an employee at the Company so that the employee could make a mirror image of the materials on Burke s hard drive and then that employee sent the computer back to Burke without taking any action to remove or sequester documents that could be - 11 -
confidential or privileged. Indeed, Avalon s counsel, Nicole Blakely, was informed that upon his resignation Burke was taking his lap top, that he had been using since 2005 as a remote user. (Burke resignation letter, Counsel Aff. at Exhibit 7, 4. This reflects an intentional relinquishment of the data, files and documents, and a loss of their confidentiality and/or privilege. As a further matter, although Burke left Lakeland in October 2008, it was not until September 2011 that defendants counsel objected to the use of the documents produced by Burke. The defendants made no objection when Burke was first served with a subpoena by BMO, nor did they object once those documents were produced. Under these circumstances, the Court should order that Avalon produce documents withheld from production, related to the Burke Plan, and what the Company was going to tell the Banks, including BMO, about it, including without limitation Entries 485-585 and redacted deposition testimony and Exhibits (see Ex. 2, and unredacted copies of Avalon-redacted documents AV00076071-75, 70810-13, 72072-75 and 72062-64 (see Ex. 1; and (ii order that no party interpose privilege claims, objections or instructions at deposition(s in this matter related to the Burke Plan. III. For the Same Reasons, Documents Withheld By Burke on Claims of Privilege with Avalon Should Be Ordered Produced Late Monday, May 7, 2012, Mr. Burke, through counsel, provided a Supplemental Production and Privilege Log, in response to BMO s February 2011 subpoena, redacting and withholding certain documents upon claim of joint privilege - 12 -
with Avalon. (Counsel Aff. at Exhibit 8 (Privilege Log and Exhibit 9 (Supplemental Production. These documents, like the Burke Production documents, were in Mr. Burke s possession when he left Lakeland s employee and for years thereafter; and likewise, Avalon made no effort to recover or protect these documents. For all the reasons set forth above, Avalon has waived any claim of privilege with respect to these documents (the Burke Documents. See, e.g., O Leary, supra. Burke has no individual standing to assert corporate attorney-client privilege. See, e.g., EPSTEIN, THE ATTORNEY-CLIENT PRIVILEGE AND THE WORK-PRODUCT DOCTRINE (5th ed. 2007 ( absent special factors, courts will assume that any consultations were in a corporate not an individual capacity. A review of the Supplemental Production and Privilege Log clearly reflects that the communications sought to be protected were corporate communications, not Mr. Burke s individual or personal consultations. With Avalon and the Company having waived any privilege, Mr. Burke has no standing to assert corporate privilege. On Tuesday, May 8, 2012, BMO s counsel spoke with counsel for Mr. Burke to discuss these issues. Counsel was informed that Avalon prepared the privilege log, and the documents were redacted and withheld at Avalon s request. Despite good faith efforts, the parties were unable to reach agreement on the scope of privilege for the Burke Documents. IV. In the Alternative, BMO Requests that the Court Undertake an In Camera Inspection of Log Entries 485-585 and the Burke Documents, - 13 -
to Ascertain Whether They are In Furtherance of the Fraud Alleged in the Complaint Finally, if the Court finds for any reason that the privilege has not been waived as to the subject matter of the documents described herein, BMO requests that the Court undertake an in camera inspection of the specified documents to determine whether the documents fall within the crime-fraud exception to the privilege. See, e.g., In re Green Grand Jury Proceedings, 2007 U.S. App. LEXIS 16013, *6 (8th Cir. July 6, 2007 ( a client who has used his attorney s assistance to perpetrate a crime or fraud cannot assert the work product privilege as to any documents generated in furtherance of his misconduct. The unredacted Burke Plan, at Exhibit 5, filed under seal, clearly reflects an effort to mislead the Banks, including BMO, as to the true nature of Machacek s termination, and the circumstances involved. (Ex. 5 at JB 4314-16. This is a meaningful part of the fraud alleged in the Complaint. (See, e.g., Cmplt. at 181-96. If the other documents are in furtherance of this plan of fraud upon the Banks, and BMO, the privilege cannot be used to shield these documents. Id. CONCLUSION For the foregoing reasons, BMO respectfully requests that the Court enter an order: (i finding that Avalon waived any privilege as to the subject matter of the Burke Plan, by voluntarily allowing Burke to leave the Company s employ without making efforts to secure the documents or privilege, and by failing to take any action upon notice of the subpoena to Burke to retrieve or protect documents for which they would claim confidentiality or privilege; (ii ordering the production of the Burke Documents, and all - 14 -
documents withheld on the grounds of privilege related to the termination or transition of Bob Machacek, and any communications related to what the Company would tell the Banks, including BMO, about the same; and (iii ordering that Avalon not interpose any objection or instruction, on the grounds of claim of privilege, with respect to the subject matter of the Burke Plan; or, in the alternative, that the Court undertake an in camera inspection of Log Entries 485-585, the Burke Documents and redacted deposition testimony and exhibits to ascertain whether application of the crime-fraud exception would be appropriate. Dated: May 9, 2012 Of Counsel: James E. Spiotto (pro hac vice Mark D. Rasmussen (pro hac vice Jeffrey G. Close (pro hac vice CHAPMAN AND CUTLER LLP 111 West Monroe Street Chicago, Illinois 60603 Tel: (312 845-3000 BASSFORD REMELE, P.A. By: s/christopher R. Morris Lewis A. Remele, Jr. (#90724 Christopher R. Morris (#230613 33 South Sixth Street Suite 3800 Minneapolis, MN 55402-3707 Tel: (612 333-3000 lremele@bassford.com cmorris@bassford.com ATTORNEYS FOR PLAINTIFF BANK OF MONTREAL - 15 -