IN RE NORTH PLAZA, LLCNo. 08-CV1194 W(CAB). Bankruptcy No. 04-00769-PB11.
395 B.R. 113 (2008)
In re NORTH PLAZA, LLC, Debtor.
Dynamic Finance Corporation et al., Appellants,
Chapter 11 Trustee Richard Kipperman, Appellee.
Dynamic Finance Corporation et al., Appellants,
Chapter 11 Trustee Richard Kipperman, Appellee.
United States District Court, S.D. California.
July 25, 2008.
K. Todd Curry, Curry & Associates, San Diego, CA, David M. Poitras, Jeffer Mangels Butler & Marmaro, Los Angeles, CA, for North Plaza, LLC. Michael Gerard Fletcher, Tricia L. Legittino, Frandzel Robins Bloom & Csato, Los Angeles, CA, for Appellant.
Ali M.M. Mojdehi, Janet D. Gertz, Baker & McKenzie, San Diego, CA, for Appellees.
ORDER DENYING APPELLANTS' MOTION FOR STAY PENDING APPEAL (Doc. No. 3.)
THOMAS J. WHELAN, District Judge.
On July 7, 2008 Appellee Richard Kipperman ("Trustee"), Chapter 11 Bankruptcy Trustee of the North Plaza, LLC bankruptcy estate, elected to have Appellants Dynamic Finance Corporation et al.'s (collectively, "Appellants") appeal heard by this District Court pursuant to 28 U.S.C. § 158(c)(1)(B). (Doc. No. 1.) Appellants appeal United States Bankruptcy Judge Peter W. Bowie's May 30, 2008 Order compelling production of documents that Appellants argue are protected by attorney-client privilege.
On July 11, 2007, after unsuccessfully petitioning the Bankruptcy Court, Appellants moved this Court for an order staying Judge Bowie's May 30, 2008 Order until the appeal is exhausted. (Doc. No. 3.) The Court takes the matter under submission and without oral argument. See S.D. Cal. Civ. R. 7.1(d)(1). For the following reasons, the Court
In July 1998, North Plaza, LLC ("North Plaza") entered into two loan agreements with Appellant Dynamic Finance Corporation ("Dynamic") and Appellant Angela Sabella ("Sabella") (collectively, "Appellants"). (Appellants' Mot. 2.) Sabella, the President of Dynamic, purchased a loan junior to Dynamic's. (Id.) Because both loans were secured by deeds of trust on North Plaza's real property, real estate broker Isaac Lei ("Lei") and his company, the Alcon Group ("Alcon") were enlisted to help negotiate and arrange the loans. (Id.) In order for Lei to adequately accomplish his brokerage duties, Dynamic and Sabella authorized Lei to meet with their
On January 28, 2004 North Plaza was forced into Chapter 11 bankruptcy, and is the debtor in the underlying bankruptcy action. (Bankr.Doc. No. 1.)
On September 14, 2006 the Trustee filed an ex parte application for a Federal Rule of Bankruptcy Procedure 2004
On May 2, 2007 the Trustee moved to compel responses for documents and testimony pursuant to the subpoenas issued to Lei and Alcon. (Bankr.Doc. No. 542.) In opposition, Lei and Sabella provided declarations to the effect that Appellants authorized Lei/Alcon to communicate with their attorneys to secure legal advice during
After briefing, the bankruptcy court was unable to determine whether Lei was a "client representative" of Dynamic or Sabella and ordered an evidentiary hearing. (Bankr.Doc. No. 661.) Much delay followed, mostly due to Appellants' change of counsel.
On January 28, 2008 Appellants filed an adversary proceeding for declaratory judgment against the Trustee. Dynamic Finance Corp. v. Kipperman, No. 08-90035 (Bankr.S.D. Cal. complaint filed January 28, 2008). On March 31, 2008 the Trustee counterclaimed for avoidance of fraudulent conveyance under Chapter 11, United States Code. Dynamic Finance Corp. v. Kipperman, No. 08-90035 (Bankr.S.D. Cal. answer and counterclaims filed March 31, 2008).
In March 2008, in the main bankruptcy action, the bankruptcy court finally held a three-day evidentiary hearing to determine whether Lei was a "client representative" of Dynamic or Sabella or both. Appellants and Trustee extensively briefed the issue both before and after the hearing. (Bankr.Doc.Nos.704, 712, 734, 735.)
On May 30, 2008, over a year after the Trustee moved to compel, the bankruptcy court entered an Order compelling Lei and Appellants to produce the documents to which they had asserted the attorney-client privilege (the "Order"). (Doc. No. 772.) The Order was primarily based on two findings. First, the relationship between Lei and Dynamic was really an individual relationship between Lei and Sabella, such that Lei could not properly be called a "client representative" of Dynamic Finance Corporation. (Bankr.Court's Order on Trustee's Mot. to Compel Disc. 7.) Second, the Court reviewed the law surrounding the "client representative" extension of the attorney-client privilege and, given the particular circumstances, found no reason to extend the privilege to cover communications between Lei and Sabella's counsel. (Id. 7-9.)
On June 9, 2008 Appellants timely appealed the bankruptcy court's Order. 28 U.S.C. § 158, Fed. R. Bankr.P. 8001(a), 8002(a). The Trustee then elected to have the district court hear the matter. 28 U.S.C. § 158(c).
On June 12, 2008, pursuant to Federal Rule of Bankruptcy Procedure 2005, Appellants moved the bankruptcy court for a stay of the Order pending appeal. (Bankr. Doc. No. 775.) On July 2, 2008 the bankruptcy court declined to stay enforcement of its Order. (Bankr.Doc. No. 796.)
On July 11, 2008 Appellants filed this motion to stay the bankruptcy court's order pending the outcome of the appeal. (Doc. No. 3.) The parties agreed to a shortened briefing schedule and also agreed to informally stay the bankruptcy court's Order until July 25, 2008.
II. STANDARD OF REVIEW
A motion for a stay of the judgment, order, or decree of a bankruptcy judge must ordinarily be presented to the bankruptcy judge in the first instance. Fed. R. Bankr.Proc. 8005. A motion for relief, or for modification or termination of relief granted by a bankruptcy judge, may be made to the district court, but the motion shall show why the relief, modification, or termination was not obtained from the bankruptcy judge. Id.
Initially, it is important to note that nowhere in their moving papers do Appellants argue that the bankruptcy court took an erroneous view of the facts. As discussed more fully below, whether or not this Court should issue a stay is determined almost entirely by a choice of law issue.
A. Legal Standard For Issuing a Stay Under Federal Rule of Bankruptcy Procedure 8005
When deciding whether to issue a discretionary stay pending a bankruptcy appeal, courts use the following four factors: (1) Movant's likelihood of success on the merits of the appeal; (2) significant and/or irreparable harm that will come to Movant absent a stay; (3) harm to the adverse party if a stay is granted; and (4) where the public interest lies. Hilton v. Braunskill,
Because these factors were imported from the standard for deciding preliminary injunctions or staying them pending
After reviewing the different standards, the Court finds that Lynch's "sliding scale" approach ignores the procedural posture of a Rule 8005 stay where the movant is appealing a bankruptcy court's final determination on the merits. A "sliding scale" approach, which often results in disproportionately weighting the "irreparable harm" prong, is appropriate for preliminary injunctions because a court deals with the dispute on first impressions, relies on a less-than-developed factual and legal record, and will ultimately revisit the issue down the road. In contrast, where — as here — a court has taken extensive evidence and briefing and issued a determination on the merits, an interest in finality arises.
B. Appellants Have Not Shown That They More Likely Than Not Will Prevail On The Merits
It is fair to say that the success of Appellants' appeal turns entirely on a question of choice and content of law; that is, whether California privilege law is applied to protect certain communications between Lei and Sabella/Dynamic's counsel. Very simply, Appellants contend that California Evidence Code sections 952 and 951 and California case law privileges Lei's communications with Dynamic/Sabella's counsel because Lei was acting as Dynamic/Sabella's "client representative" at the time. (Appellants' Mot. 9-12.)
To that end, Appellants seek to bring California law into this federal bankruptcy proceeding in two ways: (1) by arguing that the bankruptcy court erred by applying the federal common law of privilege, and not California privilege law, to determine the scope of attorney-client privilege in response to the bankruptcy court's Rule 2004 subpoenas (Appellants' Mot. 9-15); and (2) by arguing that, even if federal common law is applied, principles of comity dictate that California privilege law be used to "fill the gaps" and extend a federal
Showing a "likelihood of success" requires that the movant raise questions going to the merits so serious, substantial, difficult and doubtful as to make them a fair ground for litigation and thus for more deliberate inquiry. County of Alameda v. Weinberger,
The Court finds that Appellants have not raised such questions.
Appellants constantly intone that "the Order turns on a narrow and complex issue of law involving states' right, comity, federalism, and vertical choice of law issues." The Court, however, finds that the privilege question is clearly determined by federal common law, and that the bankruptcy court very likely properly applied the federal common law of privilege to the facts of the dispute.
1. The Law is Well-Settled that the Federal Common Law of Privilege Applies to Subpoenas Issued Pursuant to Federal Rule of Bankruptcy Procedure 2004
Appellants first argue that the bankruptcy court erred in not applying California privilege law pursuant to Federal Rule of Evidence 501. (Appellants' Mot. 12.) Specifically, Appellants argue that California law controls because the "primary issue" underlying the discovery dispute concerns the Trustee's intent to glean information to support a claim or defense where California law would supply the rule of decision. (Appellant's Mot. 13-14.) Appellants then run through various scenarios in which the information the Trustee seeks could be used to invoke California law and prove usury and holder in due course claims and determine claim amounts. (Id. 15.)
The Trustee contends, in response, that the bankruptcy court is a federal proceeding where the federal law of privilege, favoring admissibility, is controlling. (Trustee's Opp'n 10.) Moreover, the Trustee contends that it is "hornbook law" that discovery in connection with a Rule 2004 proceeding is governed by the federal law of privilege.
Federal Rule of Evidence 501 states that the federal common law of privilege applies when federal law determines the substantive rights of the parties. Fed. R.Evid. 501; accord United States v. Zolin,
Federal privilege law will control even if the evidence sought is relevant to both the federal and state claims, von Bulow v. von Bulow,
Here, the Trustee's subpoena, authorized by the bankruptcy court, requested documents from Lei pursuant to Bankruptcy Rule 2004. (Bankr.Doc. No. 509, 510; Bankr.Court's Order on Trustee's Mot. to Compel Disc. 2.) The law is uniform in that the federal common law of privilege, and not state law, applies to attorney-client privilege objections in response to Rule 2004 subpoena requests. See In re: Asia Global Crossing, Ltd.,
Although Appellants argue that applying federal privilege law is improper because the Trustee seeks information which could support state law claims, it is well-settled that Rule 2004 discovery enjoys a broad scope, regardless of any background state law issues. See In re: Rafsky, 300 B.R. at 153 n. 2; see also In re: Asia Global Crossing, Ltd., 322 B.R. at 254 ("Even if the Trustee ultimately intends to pursue state law claims, federal law nonetheless controls the privilege."). When the subpoena issued, the Trustee was not
2. Appellants Have Not Shown It Is Likely That Principles of Comity Warrant injecting California Privilege Law Into The Federal Common Law of Privilege
Appellants argue that, even if federal common law is applied, judicial comity dictates that federal courts should take into account the view of state authorities. (Appellants' Mot. 16.) Thus, California law should be considered in deciding whether to extend an attorney-client privilege to a "client representative" like Lei. (Appellants' Mot. 17.) Appellants find it troubling that the bankruptcy court overlooked favorable California law and instead applied "the [narrower privilege] laws from New York, Connecticut, Florida, and Michigan." (Id. 1.) Because California law would insulate Lei's communications with Sabella's counsel as a "client representative," Appellants contend, the bankruptcy court erred in applying law which did not so extend the privilege to protect Lei's communications. (Id. 9-12.)
Courts recognize that, for more than three centuries, there has existed a fundamental maxim that "the public has the right to every man's evidence." United States v. Bryan,
Because the Federal Rules of Evidence do not define the scope of the attorney-client privilege, courts start with proposed Federal Rule of Evidence 503 ("Supreme Court Standard 503") in analyzing the extent of the attorney-client privilege under federal law:
(Bankr.Court's Order on Trustee's Mot. to Compel Disc. 4-5 (citing Supreme Court Standard 503(b)) (emphasis added).) Supreme Court Standard 503 does not define "representative of the client," and the Advisory Committee Notes suggest that "the matter is better left to resolution by decision on a case-by-case basis." Weinstein & Berger, Weinstein's Federal, at § 503App.01.
To date, however, a federal "client representative" extension of the attorney-client privilege has only been recognized in two situations: (1) where the client is a corporation and requires communication on its behalf, see Memry Corp. v. Ky. Oil Tech. N.V., No. 04-3843, 2007 WL 39373, 2007 U.S. Dist. LEXIS 3094 (N.D.Cal. January 4, 2007) (adopting test set forth in In re: Bieter Co.,
It is important to note that nowhere in Appellants' moving papers do they argue that they are likely to succeed on the merits because the bankruptcy court got the facts wrong. Here, the bankruptcy court found—and Appellants do not here dispute—that Lei dealt with the individual Sabella, and not the corporation Dynamic.
Appellants mistakenly argue that because there was a "void" in the federal common law, the bankruptcy court should have simply applied California law as a matter of comity. There are two problems with this argument. First, the bankruptcy court did properly apply existing federal common law of client-representative privilege—Leone—to the facts of the case. Although Leone reviews state court decisions
Nor did Leone or the bankruptcy court likely err in considering Hendrick v. Avis Rent A Car Sys., Inc.,
Second, where Appellants seek to import a California privilege into a federal bankruptcy proceeding, Appellants likely overstate the case for comity. There is indeed authority for the proposition that federal courts should recognize state privileges where this can be done at no substantial cost to federal policies. See In re: Int'l Horizons, 689 F.2d at 1004 (collecting cases); Leon v. County of San Diego, 202 F.R.D. 631, 635 (S.D.Cal.2001); (Appellants' Mot. 16-17.) Bankruptcy Rule 2004, however, reflects a strong federal interest in allowing a court to gain a clear picture of the condition and whereabouts of the estate and to examine witnesses having knowledge of a debtor's acts, conduct, liabilities, assets. See, e.g., In re: Johns-Manville Corp.,
In sum, it is crystal clear that the federal common law of privilege applies to objections to Rule 2004 subpoena requests. Likewise, Appellants have not shown that they are likely to succeed in showing that California's broad "client representative" privilege should be incorporated into the federal common law of attorney-client privilege. Rather, it appears the bankruptcy court properly applied Leone, which is persuasive federal authority on the issue. Given the above, Appellants have not shown a likelihood of success on the merits and the Court thereby.
C. The Possibility of Irreparable Harm Does Not Entitle Appellant to a Stay Pending Appeal
Appellants contend that they will be irreparably harmed if a stay does not issue because the Court will be unable to undo the effect of improper disclosure, even if it eventually grants Appellants' appeal. (Appellants' Mot. 18.) Appellants' arguments are nicely summarized by In re: Napster,
The Trustee argues that merely pointing to the possibility of irreparable harm is not sufficient to warrant an automatic stay. (Trustee's Opp'n 18.) If this were the law, the Trustee contends, there would no reason for the four-prong test, for every appellant could make a meritless privilege claim in order to obtain a "free pass" to a stay. (Id.) The Trustee also points out the bankruptcy court's concerns over the ongoing delay in this case and argues that a stay would harm the bankruptcy estate. (Id.)
The Court agrees with the Trustee. As mentioned above, an appellate court must view the possibility of irreparable harm differently when reviewing a final determination on the merits rather than a preliminary determination not on the merits. Appellants have had three chances in front of two courts to argue extending the California client representative privilege into federal court: first by opposing the motion to compel, then by petitioning the bankruptcy court for a stay, and finally by the instant motion. At this point, the argument that potentially privileged documents might be disclosed is less powerful when one ruling has already found the privilege inapplicable, and two rulings have found it unlikely that the issue was wrongly decided. Because Appellants have not shown a likelihood of success on the merits, the slim possibility that the cat might jump out of the bag does not operate to automatically warrant a stay under the facts of this case.
In conclusion, the Court finds that Appellants have not shown that they are likely
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