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ROSS v. UKI LTD.

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.

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 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 Page 7 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). Page 8 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 Page 9 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 privileged.

  (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 Page 10 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 resulted.

  (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. Page 11 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 deal. Page 12

  (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 the privilege.

  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 Page 13 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 applies.
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 Page 14 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 in camera

  and find that their content does not support the plaintiffs' speculation. The crime/fraud exception therefore does not apply.*fn1

  B. Relevance

  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, Page 15 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 discovery is Page 16 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 formulated.

  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 to.

  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 Page 17 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 this request.

 Conclusion

  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 Page 18 that I have overruled certain of the defendants' relevance objections to Plaintiffs' Second Request for the Production of Documents and Things.

  SO ORDERED.


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