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Comprehensive Habilitation Services, Inc. v. Commerce Funding Corp.

October 23, 2006

COMPREHENSIVE HABILITATION SERVICES, INC., PLAINTIFF,
v.
COMMERCE FUNDING CORPORATION, DEFENDANT.



The opinion of the court was delivered by: Gabriel W. Gorenstein, United States Magistrate Judge

OPINION AND ORDER

Defendant Commerce Funding Corporation ("CFC") has moved to compel plaintiff Comprehensive Habilitation Services, Inc. ("CHS") to disclose its correspondence and the substance of its conversations with the Internal Revenue Service ("IRS") and the Department of Justice ("DOJ"). CFC also seeks to compel CHS's principal to testify regarding certain purportedly attorney-client privileged matters on the ground that the privilege has been waived. For the reasons stated below, CFC's motion is granted. Its request for sanctions, however, is denied.

I. BACKGROUND

A. The First and Second Actions

CHS supplies administrative and consultation services to health care providers. See Commerce Funding Corp. v. Comprehensive Habilitation Servs., Inc., 2005 WL 1026515, at *1 (S.D.N.Y. 2005). In 1997, CHS entered into a factoring agreement with CFC pursuant to which CFC purchased CHS's accounts receivable. Plaintiff's Complaint, filed Nov. 15, 2005 (Docket #1) ("Compl."), ¶¶ 5-6. In 1999, CHS sued one of the obligors of the accounts receivable, Barnert Hospital ("Barnert"). See Comprehensive Habilitation Servs., Inc. v. Barnert Hosp., No. 99-cv-680 (D.N.J. filed Feb. 17, 1999) (the "First Action"); Compl. ¶ 11.

CFC then brought suit against CHS and six obligors of the accounts receivable, including Barnert, alleging that they had defaulted on obligations to CFC. See Commerce Funding Corp. v. Comprehensive Habilitation Servs., Inc., No. 01-Civ.-3796 (S.D.N.Y. filed May 3, 2001) (the "Second Action"); Compl. ¶ 9. Several months later, Barnert entered into an agreement that settled the First Action in its entirety and also settled the claims against Barnert in the Second Action. See Settlement Agreement, filed November 1, 2001, in 01 Civ. 3796 (PKL) ("Barnert Settlement"), ¶¶ 2-6; Compl. ¶ 14. The settlement is reflected in a "so ordered" agreement that was signed by CHS, Dr. Peter Magaro (CHS's President), Barnert and CFC. See Barnert Settlement. The Barnert Settlement required Barnert to pay $500,000 into an escrow account. See id. at ¶¶ 1(a)-(b), (d). The agreement directs that, once the funds are in the hands of the escrow agent, the agent shall disburse the funds to "CHS or holder(s) of any security interest(s) granted by CHS in and to its receivables and/or accounts, in such manner and such amounts as will comply with the legal obligations of CHS or to [CFC] and not expose Barnert to any claim . . . ." Id. ¶ 7(d). It appears from other language in the document that the "legal obligation" being referred to is any legal obligation that would be adjudicated as a result of the Second Action, see id. ¶¶ 7(b), (c) -- presumably an obligation that would run between CFC and CHS.

Almost a year later, an agreement was prepared that purported to resolve part of the Second Action: specifically, claims among CFC, CHS, and Saint Vincent's Hospital and Medical Center ("St. Vincent's"), another of the six obligors sued in that action (the "First Settlement"). See Compl. ¶¶ 19-20. The parties disagree, however, as to whether this agreement was ever in effect. Compare Compl. ¶ 21 with Defendant's Memorandum of Law, filed July 7, 2006 (Docket #15) ("Def. Mem."), at 2. The parties allege that this agreement bore a date of October 22, 2002, see Compl. ¶ 20; Defendant's Answer, filed Jan. 11, 2006 (Docket #6) ("Answer"), ¶ 20, though no copy has been provided to this Court. In any event, CHS alleges that on October 28, 2002, in reliance on this purported agreement, it directed that the escrow agent release the Barnert Settlement funds to CFC. See Compl. ¶ 32.

On November 7, 2002, St. Vincent's informed CHS that St. Vincent's had been served with a notice of levy from the IRS, dated August 6, 2002, to collect taxes allegedly owed by CHS. Compl. ¶ 22; Affidavit of Ronald B. Goodman, filed July 7, 2006 (Docket #14) ("Goodman Aff."), ¶ 8. St. Vincent's apparently would not execute the First Settlement until the tax levy was resolved. See Affidavit of John W. Clarke in Opposition to Defendant's Motion, filed Aug. 22, 2006 (Docket #16) ("Clarke Aff."), ¶ 5; Goodman Aff. ¶ 8.

A new settlement agreement (the "Second Settlement") was prepared in December 2002 between CFC, St. Vincent's, and Better Medical Services, Inc. ("BMS"), a guarantor of CHS's debt. See Compl. ¶ 28; Answer ¶ 28. CHS was at that time engaged in negotiations with the IRS to resolve its tax obligations. See Compl. ¶¶ 24-26. CHS alleges that "[o]n or about December 19, 2002," its attorneys advised CFC and St. Vincent's "by telephone message that the IRS matter had been resolved," Compl. ¶ 26 -- an assertion disputed by CFC. See Answer ¶ 26. Nonetheless, the Second Settlement -- without CHS as a party -- was executed on or about December 20, 2002. Goodman Aff. ¶ 11. That agreement allegedly provided that St. Vincent's would pay CFC $1,455,500. See Answer ¶ 97.

In a letter to CFC dated December 27, 2002, CHS confirmed that it had resolved its dispute with the IRS.*fn1 See Goodman Aff., Ex. C; see also Plaintiff's Memorandum of Law in Opposition to Defendant's Motion to Compel Production of Documents, filed Aug. 8, 2006 (Docket #17) ("Pl. Mem."), at 3.

B. The Instant Case

CHS alleges that it permitted release of the Barnert Settlement funds to CFC only because CHS was relying on the purported execution of the First Settlement. See Compl. ¶ 32. CHS asserts that CFC has wrongfully held those funds, which amount to more than $500,000. See id. at ¶¶ 37-38. CHS alleges the following claims in this case: that when CFC retained the funds but did not execute the settlement, it wrongfully converted those funds, see id. at ¶¶ 47-51; that in doing so, CFC intentionally and fraudulently misled CHS and induced reliance, thus damaging CHS in the amount of those funds, see id. at ¶¶ 53-56; and that CFC was thereby unjustly enriched. See id. at ¶¶ 58-60. In addition, CHS alleges that CFC breached their factoring agreements by failing to remit all funds paid to CFC (minus fees and monies advanced by CFC to CHS). See id. at ¶¶ 62-64. Finally, CHS alleges that CFC breached the covenants of good faith and fair dealing implied in their factoring agreements and the Barnert Settlement. See id. at ¶¶ 66-68.

II. DISCUSSION

CFC requests that this Court compel plaintiff CHS to disclose its communications with the IRS, see Def. Mem. at 1, some of which have already been "inadvertently" disclosed. See Clarke Aff. ¶ 11.*fn2 CFC seeks not only correspondence between CHS and the IRS, but also deposition testimony regarding any discussions they had. See Def. Mem. at 1-2.

In addition, CFC issued a subpoena to the IRS seeking deposition testimony and production of documents relating to CHS. See Goodman Aff., Ex. G. Because the IRS responded to that subpoena by asserting that 26 U.S.C. § 6103 bars it from complying without authorization from CHS, see Goodman Aff., Ex. H, CFC asks that this Court compel CHS to "waive" its § 6103 rights, see Def. Mem. at 10-12, which this Court interprets as a request that the Court order CHS to provide authorization to the IRS for release of the information.

Finally, CFC seeks to compel one of CHS's principals, Peter Magaro, to testify regarding certain purportedly attorney-client privileged matters on the ground that the privilege was ...


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