United States District Court, S.D. New York
January 15, 2004.
JOEL ROSS, ROSS PROPERTIES, INC., and CITADEL REALTY GROUP, LLC, Plaintiffs -against- UKI LTD., TONEX HOLDINGS LTD., JACOB SCHIMMEL, MARC SCHIMMEL and HAROLD SCHIMMEL, Defendants
The opinion of the court was delivered by: JAMES FRANCIS, Magistrate Judge
MEMORANDUM AND ORDER
The plaintiffs in this action have moved pursuant to Rule 37 of the
Federal Rules of Civil Procedure for an order compelling the defendants
to produce documents withheld on the basis that they are not relevant or
that they reflect privileged attorney-client communications. In a
Memorandum and Order dated October 8, 2003, I deferred decision on the
motion in order to give the defendants an opportunity to provide
additional details concerning the basis for asserting the attorney-client
privilege, to submit the disputed documents for an in camera review, and
to respond to the plaintiffs' arguments regarding relevance. Counsel have
supplemented the record as I requested, and, for the reasons set forth
below, the plaintiffs' motion is granted in part and denied in part.
The plaintiffs in this action are Joel Ross, a licensed real estate
broker in New York, and the two brokerage agencies through which he
operates, Ross Properties, Inc. ("Ross Properties"), and
Citadel Realty Group, L.L.C. ("Citadel"). (First Amended Complaint
("Compl.") ¶¶ 1, 2, 3). The defendants are Tonex Holdings Ltd.
("Tonex"), a holding company in Gibralter; UKI Ltd. ("UKI"), an English
limited liability company with a principal place of business in London;
and Harry Schimmel and his sons Jacob and Marc, each of whom resides in
London. (Compl. ¶¶ 4-8; Declaration of Jacob Schimmel dated Aug. 11,
2003 ("Jacob Schimmel Decl.") ¶¶ 1, 3, 5). The defendants are engaged
in the acquisition and development of real estate, primarily in the
United Kingdom. (Compl. ¶ 11). Tonex is a holding company whose
subsidiaries make the real estate investments and which, according to the
Complaint, is controlled by the Schimmels. (Declaration of Maurice Moses
Benady dated Aug. 11, 2003 ("Benady Decl.") ¶ 3; Compl. ¶ 11).
UKI acts as asset manager for Tonex, and Jacob and Marc Schimmel are both
directors of UKI. (Compl. ¶ 11; Benady Decl. ¶ 5).
The parties engaged in three series of transactions that gave rise to
this action First, the plaintiffs allege that they procured for the
defendants an arrangement they characterize as the Westbrook Brokerage
Agreement. In November 1998, the Schimmels purportedly asked Mr. Ross and
Ross Properties for assistance in obtaining financing for a series of
real estate transactions to be conducted by the Schimmels and Tonex.
(Compl. ¶ 13). In response, Mr. Ross helped negotiate a joint venture
on behalf of the Schimmels and Tonex with Westbrook Partners L.L.C.
("Westbrook"), an opportunity fund. (Compl. ¶ 14). According to the
plaintiffs, the Schimmels and Tonex agreed to pay Mr. Ross and Ross
1% of the gross proceeds of certain transactions between the Schimmels
and Tonex on one hand and Westbrook on the other. (Compl. ¶ 14). The
Schimmels and Tonex then sold a group of properties to Westbrook for
approximately $573 million. (Compl. ¶ 15). Mr. Ross and Ross
Properties contend that they are therefore entitled to a commission of
$5,730,000 on this transaction and that the defendants have refused to
make payment. (Compl. ¶¶ 16, 17).
The second transaction involved a purchase of real estate from The
British Land Company, PLC ("British Land"). The plaintiffs allege that in
1999, the Schimmels and Tonex received a viable offer from Westbrook to
finance their purchase of a portfolio of properties from British Land.
(Compl. ¶ 18). The Schimmels and Tonex did not utilize Westbrook's
financing, but they allegedly used the offer as leverage to obtain better
terms from a German bank. (Compl. ¶¶ 18, 19). On that basis, Ross and
Ross Properties claim that they are entitled to a commission of $150,000.
(Compl. ¶ 20).
The third transaction arose from a meeting in April 2000, when Mr.
Ross, acting on behalf of Citadel, introduced Jacob Schimmel and Tonex to
officers of GMAC Commercial Mortgage ("GMAC"). At that time, the
Schimmels and Tonex purportedly agreed that Mr. Ross and Citadel would be
entitled to 1% of any senior financing and 2% of any "mezzanine"
financing obtained from GMAC. (Compl. ¶ 22). In October 2002, the
Schimmels and Tonex were extended a loan of $200 million by GMAC, as a
result of which the plaintiffs seek a commission of $2.1 million. (Compl.
A. Attorney-Client Privilege
During the course of discovery, the plaintiffs have propounded document
requests to the defendants. In response, the defendants have withheld
some documents on the basis of the attorney-client privilege and have
objected to some requests on the ground that they do not seek relevant
information. The plaintiffs argue that any potential privilege has been
waived because the attorney-client communications were made in the
presence of, or later disseminated to, third-parties. The defendants
respond that these third-parties were their agents who were acting as the
functional equivalent of their own employees, so that the sharing of
attorney-client communications with them did not waive the privilege.
Although the defendants initially withheld many more documents as
privileged, the dispute now concerns only twelve.
Because subject matter jurisdiction in this case is based on diversity
of citizenship, questions of privilege are governed by state law.
Fed.R.Evid. 501. As the parties have treated New York law as controlling
with respect to the substantive claims, that law applies to the privilege
issues as well.
1. Nature of the Communications
In order for a communication to be privileged under New York law, it
must, among other things have been made principally to assist in
obtaining or providing legal advice or services for the client. People
v. Osorio, 75 N.Y.2d 80, 84, 550 N.Y.S.2d 612, 614 (1989). Accordingly,
simple business advice, even if provided by
a lawyer, is not privileged. See Rossi v. Blue Cross and Blue Shield of
Greater New York, 73 N.Y.2d 588, 592-93, 542 N.Y.S.2d 508, 510 (1989).
[i]n pursuing large and complex financial
transactions, commercial entities often seek the
assistance of attorneys who are well equipped both by
training and by experience to assess the risks and
advantages in alternative business strategies. When
providing this assistance, counsel are not limited to
offering their client purely abstract advice as to the
rules of law that may apply to their situation. Of
necessity, counsel will often be required to assess
specific tactics in putting together transactions or
shaping the terms of commercial agreements, and their
evaluation of alternative approaches may well take
into account not only the potential impact of
applicable legal norms, but also the commercial needs
of their client and the financial benefits or risks of
these alternative strategies. The fact that an
attorney's advice encompasses commercial as well as
legal considerations does not vitiate the privilege.
If the attorney's advice is sought, at least in part,
because of his legal expertise and the advice rests
"predominantly" on his assessment of the requirements
imposed, or the opportunities offered, by applicable
rules of law, he is performing the function of a
lawyer. Rossi, 73 N.Y.2d at 594, 542 N.Y.2d at 511. In
such circumstances, the privilege should be recognized
if all other elements are satisfied. See, e.g.,
Stratagem Dev. Corp. v. Heron Int'l N.V., 153 F.R.D. 535,
543 (S.D.N.Y. 1994).
Note Funding Corp. v. Bobian Investment Co., N.V., No. 93 Civ. 7427, 1995
WL 662402, at *2-3 (S.D.N.Y. Nov. 9, 1995).
Having reviewed the contested documents in camera, I find that each one
reflects communications made predominately for the purpose of giving
legal advice. Although business aspects of the transactions are certainly
discussed, this is clearly necessary to provide the context for providing
legal opinions. The documents are therefore protected from discovery
unless the privilege has been waived or an exception applies.
a. Legal Standard
Under New York law, the voluntary disclosure of a privileged
communication to a third party waives the privilege. See National
Education Training Group, Inc. v. Skillsoft Corp., No. M8-85, 1999 WL
378337, at *3 (S.D.N.Y. June 10, 1999). However, "New York courts have
recognized a narrow exception to this rule where privileged
communications are shared with the client's agent." Id. In order to come
within this agency exception and avoid waiver, the party asserting the
privilege must meet a two-pronged test. First, it must demonstrate that
the client had a "`reasonable expectation of confidentiality under the
circumstances.'" Id. at *4 (quoting Osorio, 75 N.Y.2d at 84, 550 N.Y.S.2d
at 615). Though a formal agency relationship is not required, the
relationship between the client and the third party must be sufficiently
close that the client's subjective expectation of confidentiality is
reasonable. See National Education Training Group, 1999 WL 378337, at
*4. Second, the client "must establish that disclosure to a third party
was necessary for the client to obtain informed legal advice." Id.
(citations omitted). "[T]he `necessity' element means more than just
useful and convenient, but rather requires that the involvement of the
third party be nearly indispensable or serve some specialized purpose in
facilitating the attorney-client communications." Id.
b. Application to the Contested Documents
With these principles in mind, the assertion of privilege with
respect to each of the contested documents can be analyzed.
(i) May 15, 2001 Facsimile (Document 1)
The first document at issue is a facsimile transmission dated May 15,
2001, from David Birns summarizing a meeting held the day before. The
meeting related to "Project Alliance" which was a group of potential
transactions by which subsidiaries of Tonex would sell a portfolio of
properties to Westbrook. (Supplemental Declaration of Alan A. Samson
dated Oct. 31, 2003 ("Samson Decl.") 1 8). Part of the meeting concerned
the structuring of the transactions, and the portion of the document
describing those discussions has been disclosed. The balance of the
document concerns legal advice about the tax consequences of the
transactions, and that portion has been withheld as privileged.
The "client" in these communications was Tonex, the holding company for
the entities that would be the sellers in the various transactions. It
was represented directly at the meeting by Maurice Moses Benady and Chris
White who were directors of Tonex and who participated by telephone.
(Benady Decl. OT 2, 4). Tonex was also represented by Jeffrey S. Cooper,
an independent contractor who provided financial services for UKI.
Because Tonex has no employees, it often utilizes UKI as its asset
manager. (Benady Decl. 55). Mr. Cooper, in turn, is functionally the head
of UKI's finance department: he works almost exclusively at UKI's
offices, writes to third parties on UKI letterhead, and attends meetings
on behalf of UKI. (Supplementary Declaration of Jeffrey S. Cooper dated
Oct. 31, 2003 ("Cooper Supp. Decl.") ¶¶ 3, 4, 5).
Mr. Cooper was a necessary adjunct to UKI and Tonex in this set of
proposed transactions, and his participation in a meeting where legal
advice was discussed therefore did not waive the privilege.
Mr. Birns, who wrote the memorandum, and Jeffrey Kahan were present on
behalf of Cohen Arnold & Co. ("Cohen Arnold"). Cohen Arnold has
provided tax accounting services for Tonex and UKI since 1997, and prior
to that for Harry Schimmel. (Supplemental Declaration of David Birns
dated Oct. 30, 2003 ("Birns Supp. Decl.") OT 4, 5, 9). While Mr. Birns
does work for other clients, he has a particularly close and continuous
working relationship with UKI and Tonex and is regularly included in
discussions with counsel. (Birns Supp. Decl. OT 5-8). The participation
of the Cohen Arnold firm, then, as a representative of Tonex and UKI, was
likewise necessary to the provision of legal advice.
Most of the other participants were attorneys. Alan Samson and Nicholas
Alexander appeared for Gibson, Dunn & Crutcher ("Gibson, Dunn"),
Tonex's primary counsel. (Benady Decl. 1 6; Samson Supp. Decl. OT 3, 4).
Peter Kempster of the firm of Nabarro Nathanson also represented Tonex
and UKI (Samson Supp. Decl. ¶¶ 8, 13), while Mortimer Rabin was
Tonex's counsel in Israel and the firm of Ogier & Le Masurier
represented it in Jersey in the Channel Islands. (Samson Supp. Decl.
¶¶ 8, 9).
The final participant in this meeting was Mark Morris, then a real
estate consultant with the firm of Jones Lang LaSalle. (Supplemental
Declaration of Mark Morris dated Oct. 31, 2003 ("Morris Supp. Decl.")
¶ 3). Mr. Morris represented the purchaser
in the transaction. However, he was excused from the meeting prior
to the discussions of legal advice, and his presence therefore did not
cause a waiver of the privilege.
As all of the participants in the portion of the May 14, 2001 meeting
were either attorneys or necessary representatives of the clients, the
communications in the redacted section of the May 15 memorandum remain
(ii) June 8, 2001 E-Mail (Document 2)
The next document is an e-mail dated June 18, 2001, from Nicholas
Alexander of Gibson, Dunn concerning Project Alliance and relaying legal
advice provided by Mr. Rabin. Most of the recipients were persons already
identified above as client representatives or attorneys. In addition, the
communication was sent to Richard Thomas who was a lawyer with Ogier
& Le Masurier, Tonex's Jersey counsel. (Samson Supp. Decl. ¶ 12).
It was also transmitted to Jacob and Mark Schimmel, who, as directors of
UKI, were client representatives. Finally, a copy was sent to Anne L.
Constantine, who was Mr. Samson's secretary. (Samson Supp. Decl. ¶
12). Accordingly, the privileged communication was not disseminated
beyond counsel and their clients.
(iii) April 8, 1999 Letter (Document 3)
A letter dated April 8, 1999, transmits legal advice concerning the
structuring of a transaction from Kim McMurray, an attorney at Nabarro
Nathanson, to Mr. Cooper at UKI. In addition to attorneys and clients
previously identified, a copy of the letter was sent to Ian Newman, who
is an attorney at Nabarro
Nathanson. (Samson Supp. Decl. ¶ 13). Therefore, no waiver of
the privilege occurred.
(iv) August 16, 2001 E-Mail (Document 4)
The next document is an August 16, 2001 e-mail from Nicholas Aleksander
at Gibson, Dunn to Mr. Cooper at UKI concerning legal advice about tax
issues relating to Project Alliance. Copies were sent to three other
attorneys at Gibson, Dunn: Mr. Samson, Jake Pidcock, and Nicholas Turner.
(Samson Supp. Decl. ¶ 14). Only attorneys and client representatives
were included in this exchange.
(v) August 7 and 8, 2001 E-Mails (Document 5)
The next document consists of an exchange of e-mails between Chris
White at Tonex and Mr. Aleksander at Gibson, Dunn dealing with tax issues
arising from Project Alliance. Copies were sent to a number of previously
identified counsel and client representatives. No waiver of the privilege
(vi) June 10 to July 7, 2001 E-Mail (Document 6)
This document contains a series of e-mails concerning the tax
implications of Project Alliance. The parties to this exchange are all
identified above except for James Lasry, an attorney with the firm of
Hassans, Tonex's counsel in Gibralter. (Samson Supp. Decl. ¶ 17).
(vii) September 12 October 1, 2002 E-Mails (Document 7)
The next document consists of a series of e-mails between Mr. Samson at
Gibson, Dunn, Chris White of Tonex, and Paul Finn at UKI.
The redacted portion relates to legal advice about the requirement for
opening bank accounts needed for the loan transaction with GMAC. Mr. Finn
was an employee of UKI who handled the opening of the accounts and was a
necessary client representative for purposes of these communications.
(Samson Supp. Decl. ¶ 18).
(viii) March 19-20, 2003 E-Mails (Documents 8, 9, & 10)
These three documents contain e-mails among lawyers from Gibson, Dunn,
Mr. Benady of Tonex, Mr. Cooper representing UKI, Jacob Schimmel, and
Mark Morris. The exchanges concern certain aspects of the structuring of
the GMAC transaction. With the exception of Mr. Morris, each of the
participants was either an attorney or a client representative.
By this time, Mr. Morris had become a director of Investream, a real
estate management services company. (Morris Supp. Decl., ¶ 2). That
firm provided services to Tonex with respect to the GMAC transaction,
"including sourcing and negotiating the financing and advising on the
finance documents, as well as asset managing and supervising the day to
day property managers at properties owned by Tonex. . . ." (Morris
Supp. Decl. ¶ 4). Investream thus acted as the functional equivalent
of Tonex employees, and the expectation that it would maintain the
confidentiality of attorney-client communications was reasonable.
Moreover, its participation in attorney-client discussions concerning the
GMAC transaction was necessary in light of its role in structuring the
(ix) February 19, 2003 E-Mails (Document 11)
The redacted portion of this document consists of e-mails between Mr.
Samson of Gibson, Dunn and Mr. Morris of Investream concerning the legal
implications of a particular aspect of the GMAC transaction. The e-mails
were also disseminated to representatives of Tonex and UKI and to two
other employees of Investream, Maurice Golker and Gavin Riordan. (Morris
Supp. Decl. ¶ 7). All of these persons are within the constellation
of appropriate participants in the attorney-client communications.
(x) January 29, 2003 E-Mails (Document 12)
Finally, the redacted section of this document is again an e-mail
exchange between Mr. Samson and Mr. Morris dealing with legal advice with
respect to the GMAC transaction The other addressees are representatives
of UKI and Investream. Once more, this document was not disseminated in a
manner that would waive the attorney-client privilege.
In sum, with respect to each of the documents at issue, the persons who
were privy to attorney-client communications were representatives of the
clients Tonex and UKI and were necessary to provide the information upon
which counsel could base their advice. There was therefore no waiver of
3. Crime/Fraud Exception
The plaintiffs also argue that the documents at issue are not
privileged because they reflect communications made in furtherance of the
crime of tax fraud. It is well established that a client's expressed
intent to commit a crime or perpetrate a fraud is not a
privileged communication. See Nix v. Whiteside, 475 U.S. 157, 174 (1986);
People v. DePallo, 96 N.Y.2d 437, 442, 729 N.Y.S.2d 649, 652 (2001);
Surgical Design Corp. v. Correa, 284 A.D.2d 528, 529, 727 N.Y.S.2d 462,
462 (2d Dep't 2001). There is no evidence, however, that the
communications at issue here were of that nature.
While the burden of establishing a privilege is generally on the party
seeking its protection, the responsibility for demonstrating that the
crime/fraud exception is applicable is on the party seeking to invoke
it. See Bria v. United States, No. 00 CV 1156, 2002 WL 663862, at *4 (D.
Conn. March 26, 2002).
A party wishing to invoke the crime-fraud exception
must demonstrate that there is 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 or
crime. This is a two-step process. First, the proposed
factual basis must strike "a prudent person" as
constituting "a reasonable basis to suspect the
perpetration or attempted perpetration of a crime or
fraud, and that the communications were in furtherance
thereof." In re John Doe, Inc., 13 F.3d 633, 637 (2d
Cir. 1994) (quoting In re Grand Jury Subpoena Puces
Tecum, 731 F.2d 1032, 1039 (2d Cir. 1984)). Once there
is a showing of a factual basis, the decision whether
to engage in an in camera review of the evidence lies
in the discretion of the district court. United States
v. Zolin, 491 U.S. 554, 572 (1989). Second, if and
when there has been an in camera review, the district
court exercises its discretion again to determine
whether the facts are such that the exception
United States v. Jacobs, 117 F.3d 82, 87 (2d Cir. 1997). Here, the
plaintiffs have satisfied neither prong of their burden. They speculate
that because the defendants have created business entities exclusively
for the purpose of engaging in specific transactions, they must have done
so to avoid paying taxes. But it is entirely appropriate for a party to
seek to minimize its taxes
and for counsel to provide advice on how to do so. See Knetsch v. United
States, 364 U.S. 361
, 365 (1960). The plaintiffs here have not presented
facts from which I could find probable cause to believe that the
defendants had crossed the line that separates tax avoidance from tax
fraud. See Bria, 2002 WL 663862, at *4 (speculation concerning tax fraud
insufficient to establish crime/fraud exception). Second, even if the
plaintiffs had met this threshold, I have reviewed the disputed documents
and find that their content does not support the plaintiffs'
speculation. The crime/fraud exception therefore does not apply.*fn1
The defendants have objected to many of the categories of items sought
in Plaintiffs' Second Request for the Production of Documents and Things
("Second Request"). The defendants contend that the plaintiffs' discovery
should be limited to information relating to "plaintiffs' claims that
they had oral agreements with the defendants to receive brokerage
commissions on the underlying transactions and that they were the
procuring cause of those transactions." (Defendants' Supplemental
Memorandum in Opposition to Plaintiffs' Motion to Compel Discovery, at
12). By contrast,
the plaintiffs argue that they are entitled to take discovery with
respect to issues which, although not the ultimate issue which the
defendants have identified, are nonetheless central to the litigation.
For example, the defendants apparently dispute whether Jacob Schimmel or
UKI had authority to act on behalf of Tonex in entering into any
agreements with the plaintiffs. Therefore, according to the plaintiffs,
they should be able to explore the question of authority, including
whether Mr. Schimmel and UKI are alter egos of Tonex. (Plaintiffs'
Memorandum of Law in Further Support of Their Motion to Compel Discovery
("Pl. Reply Memo."), at 9-10). Similarly, the plaintiffs contend that
they are entitled to take discovery regarding the financial arrangements
between Investream and the defendants because the services provided by
Mr. Morris of Investream paralleled those provided by the plaintiffs.
(Pl. Reply Memo. at 9-10). Finally, the plaintiffs seek information about
the ownership and control of the entities through which the transactions
at issue were conducted. (Pl. Reply Memo, at 10).
Although the plaintiffs' requests are in several instances overbroad,
they generally seek relevant information. Rule 26(b)(1) of the Federal
Rules of Civil Procedure provides that parties may obtain discovery
"regarding any matter, not privileged, that is relevant to the claim or
defenses of any party. . . . Relevant information need not be admissible
at the trial if the discovery appears reasonably calculated to lead to
the discovery of admissible evidence." Thus, relevance for purposes of
an extremely broad concept. See Melendez v. Greiner, No. 01 Civ. 7888,
2003 WL 22434101, at *1 (S.D.N.Y. Oct. 23, 2003); Zanowic v. Reno, No. 97
Civ. 5292, 2000 WL 1376251, at *2 (S.D.N.Y. Sept. 25, 2000). It is
certainly not limited, as the defendants suggest, to information directly
supporting or contradicting the ultimate question in a case, narrowly
In the instant action, the plaintiffs must be allowed to take discovery
regarding the relationships among the various defendants. They cannot be
denied the opportunity to develop evidence to rebut the defense that
commitments made by Jacob Schimmel or UKI cannot be attributed to Tonex.
Moreover, the Complaint itself contains allegations suggestive of an
alter ego argument. (Compl. ¶¶ 11, 12). Accordingly, the defendants
shall provide all documents responsive to items no. 3 and 5 in the Second
Request. Items no. 4, 14, and 15 also seek information related to the
relationships among the defendants, but they cast far too wide a net,
demanding all communications concerning the management of the trust that
owns Tonex, all minutes of UKI shareholder meetings, and all UKI board
minutes. These overbroad and burdensome requests need not be responded
Item no. 6 seeks information about the payment of fees to Mr. Morris by
Tonex, UKI, or any related entity in connection with the GMAC
transaction. This targeted request is appropriate since it is designated
to provide evidence about whether Mr. Morris had a financial arrangement
with the defendants similar to that which the plaintiffs contend they
were promised. The defendants shall
therefore produce the requested documents.
According to the plaintiffs, the defendants frequently engaged in
transactions utilizing business entities specially created for the
occasion. To the extent this is true, the structure of these entities
could well provide relevant information about the relationships among the
defendants similar to that sought in items no. 3 and 5. Accordingly, the
defendants shall produce the documents responsive to items no. 8, 9, 10,
11, 12, 13, 22, and 23. However, neither the decision to include certain
of the properties belonging to these entities in the Westbrook
transaction nor the value allocated to those properties is relevant to
any claim or defense in this action, and the defendants need not respond
to items 19, 20, or 24.
Finally, in item no. 7, the plaintiffs seek documents relating to
commissions paid by the defendants to the plaintiffs. Such information is
relevant because, to the extent such payments were based on
authorizations similar to those communicated in connection with the
contested transactions, and to the extent the services provided were
similar, it would provide support for the plaintiffs' claims.
Accordingly, the defendants shall produce all documents responsive to
For the reasons set forth above, the plaintiffs' motion to compel
discovery is denied insofar as it is directed to the twelve documents
that the defendants have withheld on the basis of the attorney-client
privilege. The motion is granted to the extent
that I have overruled certain of the defendants' relevance objections to
Plaintiffs' Second Request for the Production of Documents and Things.