On May 8, 2017, the U.S. Bankruptcy Court for the Middle District of Florida entered an order compelling production of attorney-client communications between Regions Bank and its counsel, finding that Regions had put those communications “at issue” by raising a good faith affirmative defense under 11 U.S.C. § 548(c) in response to a fraudulent transfer claim brought against it. Welch v. Regions Bank (In re Mongelluzzi), No. 8:14-ap-00653-CED (Bankr. M.D. Fla. May 8, 2017), ECF No. 319 (Delano, J.) (herein Mongelluzzi).
Mongelluzzi bears comment for the considerations it may present to any party relying on a good faith defense, whether rooted in the Bankruptcy Code or otherwise.
Facts of Mongelluzzi
As recounted in the Mongelluzzi order, between 2007 and 2010, Frank Mongelluzzi and his related businesses (the Debtors) maintained a revolving line of credit and 61 bank accounts at Regions. When the Debtors eventually ended up in chapter 7 bankruptcies in early 2011, the trustees sued Regions, seeking to avoid fraudulent transfers. The trustees further alleged that the Debtors were engaged in a massive check-kiting scheme, that Regions had knowledge of the scheme, and that Regions devised a controlled exit strategy to reduce its exposure. The trustees alleged that, after becoming suspicious, Regions entered some 14 forbearance agreements to give Regions greater rights related to the Debtors’ accounts. Ultimately, Regions froze most of the accounts and, two weeks later, setoff roughly $12 million against the obligations it was owed on the revolving line of credit and other loans.
Regions answered the fraudulent transfer claims, denying the material allegations, and asserting, in its affirmative defenses, that it had acted in good faith at all times and that it took in good faith and for reasonably equivalent value in exchange therefor, including the satisfaction of the antecedent debt owed Regions. The trustees then issued discovery and later sought to compel the production of documents withheld pursuant to the attorney-client privilege and the work-product doctrine, arguing that Regions waived those privileges when it asserted a good faith defense to the fraudulent transfer claims.
The Court in Mongelluzzi found that Regions had waived the attorney-client privilege and work-product protection with respect to specific documents “that evidenced its knowledge, motive, or intent during the relevant time period.” Id. at 3, 8. The road to this order was an iterative one and involved a significant in camera review.1
The “At Issue” Doctrine – Authority Cited in Mongelluzzi
As described in Mongelluzzi, under the “at issue” doctrine, a party may be deemed to have implicitly waived the attorney-client privilege when:
(1) assertion of the protection results from some affirmative act by the party invoking the protection; (2) through this affirmative act, the asserting party puts the protected information at issue by making it relevant to the case; and (3) application of the protection would deny the opposing party access to information vital to its defense.
Mongelluzzi at 12 (citing Stern v. O’Quinn, 253 F.R.D. 663, 676 (S.D. Fla. 2008)).
Plaintiffs may take affirmative acts putting communications at issue when filing certain lawsuits. A hornbook example would be a suit for legal malpractice, as in one case cited by Mongelluzzi. See, e.g., Coates v. Akerman, Senterfitt & Eidson, P.A., 940 So. 2d 504, 507 (Fla. 2d DCA 2006). The clients in Coates sued their lawyers for malpractice with respect to legal advice concerning a “proprietary tax savings plan” and the establishment of a joint venture related thereto. 940 So. 2d at 506. Coates held that the “clients must necessarily present evidence of these [attorney-client] communications at trial to prove their claims.” Id. at 508. The “affirmative act” is clear in cases like Coates: clients are suing about legal advice.
Defendants may also put protected communications “at issue” by raising certain defenses, including defenses sounding in good faith. Mongelluzzi cited several examples.
In Hearn v. Rhay, 68 F.R.D. 574 (E.D. Wash 1975), which Regions argued was the seminal case on the issue, prison officials, faced with a 42 U.S.C. § 1983 civil rights case, raised qualified immunity as an affirmative defense. Hearn, citing U.S. Supreme Court cases, stated that for the defense of qualified immunity to apply, the “ultimate inquiry is always whether the defendant state official acted in good faith.” Hearn, 68 F.R.D. at 578 (internal citations omitted).Further, “the content of defendant’s communications with their attorney is inextricably merged with the elements of plaintiff’s case and defendants’ affirmative defense,” and the court and plaintiff would be prejudiced without them. Id. at 582. Hearn has been cited by both the Eleventh Circuit and Second Circuit in cases involving good faith defenses, and Mongelluzzi cited those cases.
In Cox v. Administrator U.S. Steel & Carnegie, 17 F.3d 1386 (11th Cir. 1994), union members sued certain union leaders and their employer, alleging that the leaders had sold them out in negotiations in exchange for receiving certain pension benefits from the employer. The benefits to the leaders were alleged to have been provided by the employer through retroactive changes to a leave-of-absence policy. The employer in Cox alleged that it believed the retroactive changes were lawful when made. Cox held that the employer had injected the issue of its state of mind in the case by raising this defense which “necessarily implicates all of the information at its disposal” when it amended the policy. 17 F.3d at 1419. “Having gone beyond mere denial, affirmatively to assert good faith, [the employer] injected the issue of its knowledge of the law into the case and thereby waived the attorney-client privilege.” Id. 1420.
In U.S. v. Bilzerian, 926 F.2d 1285, 1292 (2d. Cir. 1991), cert. denied, 502 U.S. 813 (1991), investor Paul Bilzerian was convicted of violating securities laws when he listed certain funds, which he used to buy stock, as being “personal” funds, despite the fact that they had come from other investors with whom he had a profit-sharing arrangement. Bilzerian had moved in limine for a ruling allowing him to testify regarding his belief in the lawfulness of describing the funds as “personal” without being subjected to cross examination on otherwise privileged communications with his attorney. The trial court denied the motion. The Second Circuit affirmed that denial, stating that “Bilzerian’s testimony that he thought his actions were legal would have put his knowledge of the law and the basis for his understanding of what the law required in issue.” Bilzerian, 926 F.2d at 1292. Bilzerian held that its namesake defendant “was free to deny criminal intent either without asserting good faith or to argue his good faith defense by means of defense counsel’s opening and closing statements and by his examination of witnesses.” Id. at 1293.
In re Gibvo, Inc., 185 F.R.D. 296 (D. Colo. 1997) was the case that the Court in Mongelluzzi considered most analogous and persuasive. Gibco involved a fraudulent transfer claim and a good faith defense under 11 U.S.C. § 548(c). In Gibco, homeowners sued the principal of a homebuilder company and the company itself. During the pendency of that suit and utilizing the services of his counsel in that suit, the principal arranged a series of transfers of property, such that the company had nothing left when a judgment was obtained by the homeowners against it. When the company filed for bankruptcy, the trustee brought a fraudulent transfer claim against the principal. The principal asserted that the transfers were made in good faith under § 548(c). The court in Gibco held that the attorney-client communications were “the most probative, if not the only, documentary evidence which would tend to show the information available to [the principal] when the transfer was under consideration, and [his] motive for the transfer.” Gibco, 185 F.R.D. at 301. Further, if the trustee were not permitted discovery on those documents, the principal “will be free to state his version of the facts” surrounding the transfer and leave the trustee “without any means to examine other evidence which would corroborate or contradict [the principal’s] statements on the issues.” Id.
Citing the Gibco decision, the Court in Mongelluzzi emphasized that the documents it was compelling Regions to produce were the “most probative, if not the only” evidence of Regions' state of mind during the relevant time period. Mongelluzzi at 18.
Considerations from Mongelluzzi
Mongelluzzi presents several considerations. First, parties faced with a discovery dispute involving the “at issue” doctrine may benefit from the more deliberate process employed in Mongelluzi. The order in Mongelluzzi compelling production was entered only after the Court had reviewed hundreds of documents in a thorough process. The decisions cited by Mongelluzzi do not reference such a procedure. However, where such process is employed, parties may want to consider the implications using of such a review in a bench trial setting.
Second, parties may want to pay careful attention to the characterization of the “issue” allegedly injected into the case. Mongelluzzi’s analysis was comparatively straightforward in finding that Regions’ affirmative defense under 11 U.S.C. § 548(c) – good faith for value – had raised the issue of its good faith belief. But the “issue” is not always so clear. Cases sometimes parse the “issue” in ways that allow the privilege to be used as both a sword and a shield. For instance, Coates held that the plaintiffs/clients had waived the attorney-client privilege as to the communications with their lawyers at the one law firm they were suing, but that they had not done so as to another law firm or an accounting firm that provided input on the transaction giving rise to the malpractice claim. Coates reasoned that the plaintiffs/clients had not put those communications at issue. Coates arguably represents the very harm the doctrine is intended to address that may arise when a court selects an inappropriate level of generality in defining the “issue” injected. The Coates plaintiffs/clients had, effectively, a sword and shield against the defendants in that suit, who could not obtain discovery on other potential causes of the damages alleged.
Third, parties may want to consider arguing, from an equitable and practical standpoint, that raising certain defenses should not be considered an “affirmative act” within the meaning of the doctrine. The cases cited in Mongelluzzi could be argued to remain, along with all the other cases applying the doctrine as to defendants, premised on a certain legal fiction of “choice” in how to defend a case.2 While plaintiffs may be, as a general matter, forbidden from using a privilege as a “sword” when they initiate litigation, the same cannot be said of defendants. Moreover, in many cases where good faith can be an affirmative defense, the claim itself contains some element of scienter which a defendant will deny. Bilzerian suggests that, at least in a criminal context with constitutional concerns, denial of an allegation would not be an affirmative act putting something “at issue.” 926 F.2d at 1293. Cox, likewise, drew a distinction between denying an allegation and raising an affirmative defense. 17 F.3d at 1420. However, a mere “denial” without more will not carry a burden of proof at any level. This notional choice – between a denial without more and putting otherwise privileged communications at issue – is a Catch-22, not an “affirmative act” (like choosing to file a lawsuit) that should be considered an implied waiver of privilege.
Ultimately, the outdated sword and shield metaphors underlying the “at issue” doctrine may need to evolve into a more holistic assessment of fundamental fairness and procedural advantage or disadvantage. The point ought to be whether a privilege is being abused to tilt the procedural playing field. Mongelluzzi, rather than focusing on such metaphors, engaged in such an analysis and emphasized that the otherwise privileged documents at issue were the most, if not only, probative documents as to Regions’ state of mind during the relevant time period. Mongelluzzi’s analysis was reminiscent of a work-product doctrine analysis inasmuch as it focused on the evidentiary value of the documents to the dispute and overall procedural fairness. That subtle shift may be the right, or at least more honest, direction for the “at issue” doctrine to evolve when applied to defendants. The common law history of the privilege – including its evolutions – was recounted by the Second Circuit in Bilzerian. The attorney-client privilege has certain goals to promote, but they are not absolute, as recognized by other exceptions to the privilege, such as the crime-fraud exception. Courts applying the “at issue” doctrine, could, rather than engaging in the fiction that parties are taking certain steps that implicitly waive the privilege, take into account other factors in determining what amounts to an “affirmative act... making it relevant to the case.” O’Quinn, 253 F.R.D. at 676. One could argue that is what courts are doing already, given the emphasis on the relevance and probative value of documents in cases like Mongelluzzi and Gibco.
Practitioners should be aware that raising common affirmative defenses may place certain documents “at issue.” They should also be aware that their clients’ discovery responses (as in O’Quinn), including deposition responses, could also place certain communications at issue. The authority in Mongelluzzi does not address whether dropping the “issue” that is being considered injected, or whether a narrower defense (such as new value for setoff purposes) can be relied on instead. Regardless, counsel and clients discussing transfers – or their belief in the lawfulness of their actions generally – should be mindful that emails and other exchanges may become subject to discovery disputes and judicial review.
1The Mongelluzzi order came after the Court initially denied the trustees’ motions to compel without prejudice, subject to the Court’s in camera review of the documents on Regions’ privilege log. After its review of hundreds of emails between Regions and its attorneys, the Court orally announced its intended ruling, noting that most of the emails did not reveal any knowledge, intent or motive on part of Regions or its attorneys, other than what could easily be inferred from the trustees’ own filings. The Court then provided an opportunity for counsel to comment and requested two additional documents for in camera review that had not been provided.
2These cases assume that defendants have some choice as to how they defend their case. For instance, Cox cited Bilzerian for this proposition – i.e., that a defendant could deny allegations without affirmatively asserting its belief as to the legality of its actions – and analogized its facts to it. Cox, 17 F.3d at 1419. Similarly, Hearn stated that the defendant state officials had asserted qualified immunity “for their own benefit.” 68 F.R.D. at 582.