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Mooney v. Diversified Business Communications

Superior Court of Massachusetts, Suffolk, Business Litigation Session

July 20, 2017

John J. Mooney et al.
v.
Diversified Business Communications et al

          Filed July 24, 2017

          MEMORANDUM OF DECISION AND ORDER ON PLAINTIFFS' MOTION TO COMPEL

          Janet L. Sanders, Justice

         This case involves a dispute among members of a limited liability company. Plaintiffs, who own a minority interest in the company, are suing (among others) the entity holding a majority interest. Also named as a defendant is the company itself. The case is now before the Court on plaintiffs' Motion to compel certain discovery. Part of the motion raises routine issues regarding the relevance of materials sought; this Court's resolution of those issues is contained in Part One of this opinion. The motion also raises difficult questions concerning attorney client privilege--specifically, whether a former officer of a company can obtain communications between corporate counsel and the corporation exchanged when he still worked for the company but where he is now adverse to the corporation itself. This Court concludes that neither plaintiff can claim to be a holder of the privilege so as to gain access to these communications. The reasons for that conclusion are spelled out in Part Two of this opinion.

         BACKGROUND

         Defendant Pri-Med, LLC is a Delaware limited liability company that provides in-person and digital continuing medical education to medical practitioners, in part through the use of electronic health records software and data analytics tools. The defendant Diversified Business Communications (Diversified) owns approximately 75 percent of Pri-Med. The individual defendants are Diversified officers and serve on Pri-Med's Board of Managers. Plaintiff John Wheelock and John Mooney each hold a five percent interest in Pri-Med. Up until the end of 2016, both plaintiffs were part of Pri-Med's senior management; Wheelock was a senior Vice President in charge of Sales and plaintiff John Mooney was Pri-Med's CEO.

         At issue in this lawsuit is the plaintiffs' right to require Diversified to buy out their interest in Pri-Med after January 1, 2017. That right is laid out in an LLC agreement among the parties. The amount that Diversified is required to pay is based on the appraised value of Pri-Med as of December 31, 2016. Plaintiffs contend that, leading up to that date, the defendants took steps to depress Pri-Med's value so as to decrease the amount that Diversified would have to pay to the minority Shareholders in a buy-out of their interests. One of those steps was a decision by Diversified to sell off one of Pri-Med's most valuable assets, Amazing Charts (AC), an electronic health records company. As alleged by plaintiffs, Diversified and its Board had concluded in September 2015 that AC was more valuable as part of Pri-Med, but then abruptly changed course and decided to put AC on the market when the defendants realized that keeping AC would require Diversified to pay plaintiffs substantially more. In their Second Amended Complaint, plaintiffs allege a breath of fiduciary duty and a breach of the LLC Agreement.

         Plaintiffs' motion seeks to compel production of two categories of documents. The first concerns minutes of Diversified's Board of Directors. Defendants have produced a redacted version of those minutes so as to eliminate discussion of matters that are not directly related to Pri-Med. Plaintiffs seek the minutes in unredacted form. The second category concerns communications among the defendants and Diversified's management team concerning the valuation of Pri-Med preceding its buyout of another individual's equity interests. That individual, Lynn Long, had threatened to sue the company. The defendants have withheld certain otherwise responsive documents based on a claim of attorney-client privilege. This Court's rulings on these requests are as follows.

         1. Diversified Board Minutes

         Defendants oppose production of the unredacted copies of the Board minutes on the grounds that the withheld material is not relevant to any claim or defense in this action. It points out that Diversified has other holdings, and that the redacted information relates to Diversified's overall business strategy and financial operations unrelated to Pri-Med. Plaintiffs contend, however, that central to the case is their claim that Diversified was acting in its own self-interest and in disregard of its duties to Pri-Med and its minority members. They argue that Diversified's financial status, information about its overall business strategy, and discussion among Board members about the impact of a buy-out on Diversified's other operations could provide some support for plaintiffs' position. This Court agrees. Certainly, production would not be burdensome, and defendants have agreed to keep the information confidential, for use in this litigation only. The Motion is therefore ALLOWED as to this category of documents.

         2. Communications Withheld on Grounds of Privilege

         The second category of documents that plaintiffs seek are communications among the defendants in 2015 and 2016 about the valuation of Pri-Med in connection with a buy-out of Lynn Long's equity interests. The defendants have withheld certain documents based on a claim of attorney-client privilege (Pri-Med being the " client"). They have identified those documents in a privilege log-a designation which plaintiffs question.[1] Plaintiffs assert that, even if the documents are covered by the attorney-client privilege, however, plaintiff Mooney is nevertheless entitled to access them since, as a former CEO of Pri-Med, he holds the privilege jointly with Pri-Med, thus preventing the defendants from using privilege to prevent him access to the information. Resolution of this dispute raises two thorny questions. First, which law-Delaware or Massachusetts law-should this Court apply? Second, if Massachusetts law applies, what is the result? The SJC has provided only limited guidance on these questions. This Court nevertheless concludes that Massachusetts law applies and that under Massachusetts law, Mooney as former CEO cannot access them given his adverse relationship to Pri-Med.

         The choice of law issue is an important one because Delaware law and Massachusetts law would (in this Court's view) require different outcomes on the privilege issue. Delaware, along with a few other courts, has adopted the so-called " collective-corporate-client" approach, which was first recognized in the Delaware Chancery Court. See, Kirby v. Kirby, Id. (Del.Ch. July 29, 1987); Moore Bus. Forms, Inc. Cordant Holdings Corp., Id. n.4 (Del.Ch. June 4, 1996); see also, e.g., Gottlieb v. Wiles, 143 F.R.D. 241, 246-47 (D.Colo. 1992); Glidden Co. v. Jandernoa, 173 F.R.D. 459, 473-74 (W.D.Mich. 1997); Inter-Fluve v. Montana Eighteenth Judicial Dist. Ct., 2005 MT 103, 327 Mont. 14, 24, 112 P.3d 258 (2005). Under this approach, former directors or officers are entitled to privileged communications created during their tenure because both the corporation and the then-current officer or director are viewed as joint clients (or separate parts of the collective corporate client) at the time the communications occurred. See Montgomery v. eTreppid Techs., LLC, 548 F.Supp.2d 1175, 1183-85 (D.Nev. 2008) (explaining this approach). Courts embracing this theory reason that " because [directors/officers] are collectively responsible for the management of a corporation and a corporation is an inanimate entity that cannot act without humans, it is consistent with a [director/officer's] role and duties that the [director/officer] be treated as a joint client when legal advice is rendered to the corporation." Id. at 1183-84. The corporation cannot therefore use a claim of privilege against the former officer or director, even where there interests are no longer aligned.

          In jurisdictions outside of Delaware, the majority of courts have adopted " the entity is the Client" approach. See, e.g., Fitzpatrick v. American Int'l Grp., Inc., 272 F.R.D. 100, 107-09 (S.D.N.Y. 2010); Montgomery, 548 F.Supp.2d at 1187; Lane v. Sharp Packaging Sys., Inc., 2002 WI 28, 251 Wis.2d 68, 99, 640 N.W.2d 788 (2002); Milroy v. Hanson, 875 F.Supp. 646, 649-50 (D.Neb. 1995). These courts hold that, despite the fact that a corporation can only act through individuals, officers and directors are not properly viewed as joint, independent clients of corporate counsel; the corporation alone is the client. Applying this approach, these courts do not permit former officers and directors to access privileged information for use in litigation where the corporation asserts a privilege. This doctrine represents the modern trend. See, Las Vegas Sands Corp. v. Eighth Jud. Dist. Ct., 331 P.3d 905, 913 (Nev. 2014); Todd Presnell & Kristi Wilcox, What's Mine is Not Yours: Former Officers and Directors and a Corporation's Attorney-Client Privilege, Lexology (Jan. 5, 2015).

         The courts that have adopted the " entity is the client" theory have done so because of certain perceived flaws with the collective-corporate-client approach. First, the approach is inconsistent with the rationale behind the attorney client privilege. The prospect that a director/officer could invade the privilege if he later leaves and sues the corporation could have a chilling effect on the candid communications between corporate managers and counsel that the privilege is designed to promote. Second, the approach conflates the director/officer's role as an individual and his role as a corporate representative, ignoring the fact that, in communicating with counsel, a director/officer acts in a fiduciary capacity and not in an individual capacity. Once the officer/director leaves his position, he no longer bears any fiduciary responsibilities and so there is no reason for him to need or expect access to the privileged communications made while he served the corporation. Third, the approach ...


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