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A recent short ruling from the Delaware Court of Chancery examined one of the exceptions to the general rule that attorney-client privileged information is not subject to production. In Tigani v. Tigani, C.A. No. 2017-0786-KSJM (Del. Ch. April 10, 2019), the court addressed a motion to compel documents from various law firms that were withheld as privileged or which were produced in redacted form.  The issue in the case is whether the fiduciary exception or the crime-fraud exception to the general rule applicable to attorney-client privileged information would require the production of documents.

Short Overview:

The parties relied on the decision in Riggs National Bank v. Zimmer, 355 A.2d 709, 710 (Del. Ch. 1976), in which the court granted a motion to compel filed by beneficiaries of a trust regarding privileged information prepared for their benefit.  By contrast, a Special Discovery Master in the instant matter recommended that the motion to compel in this case be denied based on a prior decision of the Court of Chancery in separate litigation involving the parties, issued in 2010, which held that the ultimate client of the law firm whose documents were sought to be produced was akin to an adverse party—based on the facts in 2010–and on that basis the motion in the 2010 decision was denied. The Special Discovery Master applied that same conclusion to the instant case. That 2010 decision referred to above, as well as related Chancery decisions involving the internecine Tigani litigation, have been highlighted on these pages here.

Court’s Reasoning:

Taking a different view than the Special Discovery Master, the court in the instant ruling determined that the situation between the parties currently was substantially different than it was in 2010–and now the party seeking the production was not clearly adverse as it was in prior litigation in 2010. The court observed that there was no pending litigation between the parties from August 2011 through September 2017, and that the documents requested were created during this “period of peace.” See footnote 58.

The court reasoned further that whether or not disclosure of the documents in question should be allowed “must be determined in light of the purpose for which it was prepared.” (citing Riggs).  In order to determine in this case the purpose for which the documents requested were prepared, the court determined that inspection in camera was appropriate.

The court ordered the production in camera within in five days so that the court could make its own determination. See generally, by comparison, the Garner exception to attorney/client privilege, that allows in some instances the production of otherwise privileged attorney-client communication, for example, in the context of a  stockholder who seeks copies of the legal advice given to fiduciaries who are the subject of claims that they breached fiduciary duties. Cases applying Garner have been highlighted on these pages.

The bottom line is that there are exceptions to the general rule that attorney-client privileged communications cannot be compelled, and this decision provides an example of one of those potentially applicable exceptions.

 

N.K.S. Distributors, Inc. v. Tigani, et al., C.A. No. 4640-VCP (Del. Ch. Feb. 3, 2012).

This summary was prepared by Tara Lattomus of Eckert Seamans.

Issues Addressed
Whether the automatic stay provisions of section 362(a) of the Bankruptcy Code deprived the Chancery Court of jurisdiction to terminate an existing sealing order where one of the individual defendant involved in the case had filed for bankruptcy.

Short Answers
The Court of Chancery in this decision concluded that it retained jurisdiction to determine the applicability of the automatic stay to litigation pending before it.  Specifically, the Court determined that it had jurisdiction to determine whether the automatic stay applied to the request to terminate the sealing order.  Turning to the merits, the Court then considered whether the request to unseal certain portions of an expert report and trial transcript should be granted.  Finding that the passage of time did nothing to change the fact that the information contained in the report was confidential and proprietary, the Court denied that portion of the request.  With respect to the twelve volume trial transcript, the Court found that with the exception of two volumes, only a handful of pages were redacted and that good cause existed for keeping such information under seal.

However, with respect to two volumes that were placed under seal in their entirety, the Court directed the parties to identify specific portions of those volumes that they believed should be kept confidential, and then to file a redacted, public version of those transcript volumes.

Background

This letter opinion was a result of a request from a reporter of The News Journal for full access to an expert report and the trial transcript.  Portions of the report and trial transcript had previously been designated as confidential and sealed pursuant to Court of Chancery Rule 5(g).  N.K.S. Distributors, Inc. (“N.K.S.”), plaintiff and counterclaim defendant, and Wilmington Trust Company, third-party counterclaim defendant, objected to the reporter’s requests on two grounds.  The first objection was that the Court lacked authority to terminate the sealing order because Christopher J. Tigani, a defendant in the matter, had filed for bankruptcy and the litigation was stayed pursuant to the automatic stay of section 362(a) of the Bankruptcy Code.  Second, they argued that the portions of the documents currently under seal contain non-public financial information and therefore, good cause existed to keep the documents under seal.

Summary of Court’s Reasoning

The Court began by recognizing that the purpose of the automatic stay under the Bankruptcy Code is to protect the debtor from harassment and collection efforts, and to protect all creditors from the overly aggressive collection tactics of a select few.  In short, the purpose of the stay is to maintain the status quo.  The Court did not contest the fact that the overall litigation was stayed pursuant to the automatic stay; however, it also recognized that all proceedings in a case are not lumped together for purposes of the automatic stay, and that some aspects of a case may be stayed and others not.

The Court further reasoned that, while only a Bankruptcy Court can grant relief from the automatic stay, other courts retain jurisdiction to determine the scope of the stay with respect to the litigation pending before them.  Finding that the reporter’s request did not constitute a collection effort, did not permit any of Mr. Tigani’s creditors to obtain payment, and did not disrupt the status quo, the request to terminate the sealing order was properly before the Court.

The Court then considered the reporter’s position that due to the passage of time, i.e., a year since the trial, that the information contained in the report and trial transcript no longer qualified as proprietary information.  The Court concluded that the passage of time did not change the fact that the report contained N.K.S.’s non-public financial information.  Accordingly, the continued enforcement of the sealing order with respect to the report was appropriate.  However, with respect to the transcript, the Court concluded that sealing two volumes in their entirety was not appropriate.  Of the other ten volumes of the transcript, only 87 pages were redacted.  Accordingly, the parties were directed to redact confidential portions of the two volumes and to file versions suitable for public access.

N.K.S. Distributors, Inc. v. Tigani, C.A. No. 4640-VCP (Del. Ch. June 7, 2010), read letter decision here.  Read highlights of prior Chancery decisions in this case here.

This letter decision is notable for its recitation of the familiar prerequisites of both a TRO and a preliminary injunction, but more practically, it provides a helpful comparison of the somewhat nuanced differences between the prerequisites that need to be satisfied for one seeking a TRO compared with the requirements that must be met before the Court will grant a motion for a preliminary injunction. See footnotes 6 and 14 through 17. There are other aspects of this factually rich decision that may be entertaining but do not have much legal importance for purposes of this blog.
 

N.K.S. Distributors, Inc. v. Tigani, Cons. No. 4640-VCP (Del. Ch. May 28, 2010), read opinion here. See prior Chancery decision in this case highlighted here.

Overview

This decision provides a useful discussion of the elements of a claim for tortious interference with prospective business relations, which was dismissed along with a claim for an alleged breach of the implied covenant and good faith and fair dealing.

Civil Conspiracy Claim Between Creditor Bank and Major Shareholder

However, the only part of this 23-page decision that I will focus on in this short overview is the refusal of the Court to dismiss a claim of civil conspiracy alleged against Wilmington Trust Company (WTC) and another shareholder of N.K.S. Distributors, the closely-held company involved.

Analysis

The Court reviewed the familiar elements of a claim for civil conspiracy, including the requirement of “knowing participation”, citing recent caselaw in footnote 27 for that showing of scienter. Other aspects of a civil conspiracy claim recognized by the Court were the reminder that it is not an independent cause of action but rather requires an underlying wrongful act such as a tort or statutory violation. See also footnote 29 (noting that a breach of contract is not the type of an underlying wrong that can give rise to a civil conspiracy claim).

Moreover, the importance of a civil conspiracy claim is that is provides a means to hold liable those that are not a direct party to the underlying wrong, and where a conspiracy is found, each conspirator is jointly and severally liable for the acts of co-conspirators committed in furtherance of the conspiracy.

In this case, the Court reasoned that it would not dismiss the claim of civil conspiracy against the bank (WTC) and the other major shareholder (referred to as Bob due to common last names), because it was at least “conceivable” that the plaintiff, Chris  (a shareholder forced out of management), could show that  WTC: “knowingly entered into a confederation with Bob and N.K.S. in the Fall of 2008 to unlawfully remove Chris from N.K.S. It is also conceivable that Chris may show that Bob and N.K.S. acted either unlawfully or for an unlawful purpose in furtherance of that conspiracy." In such a situation, if proven, WTC would be liable to the same degree as its co-conspirators, even though WTC itself had not committed an unlawful act in furtherance of the conspiracy.

This is so, notwithstanding the Court’s separate conclusion that WTC was entitled to enforce its rights as a creditor to foreclose on property due to default. Importantly however the other shareholder, Bob, who was alleged to have acted in concert with WTC, was not entitled to use WTC to assist him in breaching his fiduciary duties.

There are many other factual details that form the background for this opinion, but for present purposes the civil conspiracy aspect of the opinion is the only one that I want to highlight for this short blog post due to its potential relevance generally in business litigation cases.
 

N.K.S. Distributors, Inc. v. Tigani, et al., C.A.  No. 4640-VCP (Del. Ch. May 7, 2010), read letter decision here. Although this short letter decision decided a motion to compel, it came on the last day of a two-week trial in this case that relates to a battle for control of a substantial Delaware-based business owned by a local Delaware family. The local newspaper had a story on the two-week trial in this case here, which provides more factual background on this control contest between father and son over a large wholesaler. When the post-trial decision comes out, this will be another example of the many Delaware decisions that involve closely-held companies of considerabe size, owned by the second or third generation of a family that is now locked in a dispute over ownership or control of the enterprise.

This particular letter decision involves the trust that serves as the majority shareholder of the company, and the motion to compel filed by the son who is a contingent beneficiary. The Court determined that the trustee, who is the father of the moving party, was protected by the attorney/client privilege from disclosing advice or documents from the father’s lawyer. The Court’s reasoning was twofold. First, unlike the Riggs case cited by the son, in this case the son was only a contingent beneficiary and the father could remove him as a beneficiary. Also, at the time the advice was given, it was not given for the benefit of the beneficiary. Rather, the advice and documents sought in this motion were provided primarily for the benefit of the trustee individually, and unlike other cases where the ultimate client whom the legal advice was provided for was the beneficiary, the circumstances of this case were different. Thus, the motion to compel was denied.