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ROSS v. UKI LTD.

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.

Background

  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 Page 2 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 Properties Page 3 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. ¶ 23). Page 4

 Discussion

  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 Page 5 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). Nevertheless,
[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. Page 6

  2. Waiver

  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 ...


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