BridgeBuilder Tax Legal Services, P.A. v. Torus Specialty Insurance Co.

          MEMORANDUM AND ORDER

          GWYNNE E. BIRZER United States Magistrate Judge.

         This matter is before the Court on Defendant's Motion to Compel Plaintiff to provide responses to Defendant's discovery requests (ECF No. 29). On January 3, 2017, the Court convened an in-person hearing to address the pending motion. Plaintiff BridgeBuilder Tax Legal Services, P.A. (“BridgeBuilder”) appeared through counsel, David L. Marcus. Defendant StarStone Specialty Insurance Company^[1] (“StarStone”) appeared through counsel, M. Courtney Koger. After consideration of both the arguments of counsel and the parties' briefing, Defendant's Motion (ECF No. 29) is GRANTED in part and DENIED in part for the reasons outlined below.

         I. Background^[2]

         A. Underlying Action in Johnson County District Court

         The current case stems from an underlying state action in Johnson County, Kansas between a client named John Grissinger and his attorney (“Grissinger action”).^[3] The state court matter, filed August 5, 2015, involved a malpractice action against BridgeBuilder, a tax and legal office located in Johnson County. BridgeBuilder is owned and operated by licensed attorney and certified public accountant, Kevan Acord.

         Grissinger claimed BridgeBuilder/Acord convinced him to loan a total of $6 million to an “online, fee-based lending” company called NorthRock, LLC, (Mem., ECF No. 30, at 2 n. 2.). Two promissory notes (one for $4 million and one for $2 million) were executed during the NorthRock transaction. After NorthRock defaulted on the notes, Grissinger filed the malpractice action, claiming in part that Acord “failed to disclose the lending risks” and “provided inaccurate information to Grissinger regarding the strength of collateral and personal guarantees for the loan.” (See ECF No. 33 at 2; ECF No. 1-1, at 13.) BridgeBuilder/Acord and Grissinger ultimately reached a confidential settlement and the case was terminated in October 2015. (ECF No. 1-1, at 9.)

         B. Current Case

         After conclusion of the Grissinger action, BridgeBuilder filed the instant suit against its legal malpractice insurer, StarStone, in Johnson County District Court, alleging StarStone breached its contract by failing to defend the Grissinger action and failing to pay out the settlement proceeds according to its policy. Under that policy, Plaintiff claims Defendant had the duty to defend it in the Grissinger action. However, Defendant refused defense or payment, asserting the Policy did not provide coverage for Grissinger's claims. Defendant removed the case to federal court on April 11, 2016.

         Defendant relies upon “Exclusion Q” of its policy to deny Plaintiff's claim. Exclusion Q states the policy does not apply to a claim against an insured “based upon, arising out of, directly or indirectly resulting from, or in any way involving any actual or alleged investment advice, promotion, sale, solicitation, or recommendation of any securities, real estate or other investments” by the insured.” (Pet., ECF No. 1-1, at 13-14.) Contending Plaintiff provided investment advice or recommendations to Grissinger, Defendant refused to defend the claim.

         Plaintiff claims Grissinger did not make the loan because BridgeBuilder/Acord recommended he do so, which is prohibited by Exclusion Q. He asserts Grissinger made the loan because he was unaware Acord represented other clients with competing financial interests and did not appreciate the full extent of the risks. (ECF No. 1-1 at 13.) Because it did not provide investment advice or recommendations to Grissinger, Plaintiff believes the denial of coverage was wrongful, and Defendant failed to properly investigate the claim.

         C. Current Procedural Posture

         This case followed a conventional progression since its filing, until the parties encountered a discovery dispute. On September 30, 2016, the Court held a telephone conference to discuss the parties' dispute regarding documents withheld by Plaintiff on the basis of attorney-client privilege. As a result of the conference, the parties were instructed to file written briefing, and all pretrial deadlines were stayed pending resolution of the discovery issues. (ECF No. 28.) The Court has now had the opportunity to review the written briefing and to hear argument from the parties at the January 3, 2017 hearing, and is prepared to rule.

         II. Defendant's Motion to Compel Production of Documents (ECF No. 29)

         Defendant propounded First and Second discovery requests to Plaintiff in August 2016 (ECF Nos. 16, 22) to which Plaintiff timely responded in part and objected in part on September 12 and 16, 2016 (ECF No. 30, Exs. 2, 3). After multiple letters and at least one telephone conference between counsel, and a telephone conference with this Court, the parties could not agree upon the proper scope of production to 11 categories of documents.

         A. Compliance with D. Kan. Rule 37.2

         Throughout the briefing, and during the in-person hearing, the parties demonstrated their multiple attempts to resolve their differences on the pending discovery issues. Therefore, the Court is satisfied they have sufficiently conferred as required by D. Kan. Rule 37.2 and Fed.R.Civ.P. 37(a)(1). However, despite their attempts, the parties could not resolve all disputes, leading to Defendant's motion to compel Plaintiff's discovery responses.

         B. Discovery Disputes

         Notwithstanding the parties' efforts, three primary issues remain: 1) whether Plaintiff must produce information relating to the NorthRock transactions withheld on the basis of attorney-client privilege; 2) whether documents related to other transactions between Plaintiff and Grissinger-beyond the NorthRock transactions-are relevant to establish a pattern and practice of investment advice; and 3) if documents related to the other transactions are deemed relevant, whether privilege will prohibit their production. (ECF No. 30 at 3.) Each topic is addressed in turn.

         1. Attorney-Client Privilege

         The primary disagreement, which led to the first discovery conference, is whether Defendant is entitled to the production of communications relating to the NorthRock transaction. Following the September 30, 2016 conference with the Court, Plaintiff provided a privilege log (ECF No. 30, Ex. 7) identifying 42 documents it withheld on the basis of attorney-client privilege. All documents identified on the log are emails (or documents discussed in emails) to or from Plaintiff which it argues contain legal advice. Plaintiff contends the communications between it and Grissinger are clearly protected by the attorney-client privilege, and because no communications were disclosed in the Grissinger action, no waiver occurred from the mere filing of the underlying suit.

         Defendant initially argues Plaintiff's assertion of privilege was insufficiently supported in its privilege log. And, even if the log supported its objection, any attorney-client privilege asserted by Plaintiff either does not exist, or was waived in the filing of the underlying lawsuit. Finally, Defendant argues the characterization of communications between Plaintiff and Grissinger-whether Acord provided investment “advice” or “recommendations” under Exclusion Q, or merely “convinced” Grissinger to make the loan-lies at the heart of this dispute, and is crucial to its defense.

         a. Applicable Law: Attorney-Client Privilege

         The attorney-client privilege is “the oldest of the privileges for confidential communications known to the common law. Its purpose is to encourage full and frank communication between attorneys and their clients and thereby promote broader public interests in the observance of law and administration of justice.”^[4] The attorney-client privilege “should be strictly confined within the narrowest possible limits, ”^[5] because “it deprives the factfinder from otherwise relevant information.”^[6]

         In federal court, Federal Rule of Evidence 501 determines what law applies to an analysis of privilege.^[7] In a diversity case such as this one, FRE 501 requires a decision on privilege be made according to state law.^[8] Though Kansas law necessarily provides the starting point, at least one court in this district indicated “whether the court applies federal or Kansas law generally makes no difference in determining whether the attorney-client privilege applies.”^[9]

         Under K.S.A. § 60-426 and interpreting caselaw, the essential elements of privilege are:

(1) Where legal advice is sought (2) from a professional legal advisor in his capacity as such, (3) the communications made in the course of that relationship (4) made in confidence (5) by the client (6) are permanently protected (7) from disclosures by the client, the legal advisor, or any other witness (8) unless the privilege is waived.^[10]

         Generally, confidential communications made between a client and his attorney-acting in the capacity of legal advisor-in the course of obtaining legal assistance are protected.^[11] However, communications between client and counsel may lack protection if they fall into one of three categories: 1) statutory exception to privilege, or the 2) voluntary, or 3) implied waiver of the privilege. In this dispute, Defendant claims the communications between Grissinger and Plaintiff fall into any one of these categories; therefore, each is considered.

         i. Demonstrating Privilege

         Before addressing the merits of the privilege, the Court must decide whether it has adequate information to do so. When a party withholds documents on the basis of attorney-client privilege, that party bears the burden of establishing the privilege applies.^[12] To meet its burden, the objecting party must describe in detail the information it deems protected, and must provide precise reasons for its objection.^[13]

         Generally, the withholding party makes this showing by submitting a privilege log. The contents of a privilege log vary, but courts in the District of Kansas commonly require a privilege log to include:

(1) A description of the document explaining whether the document is a memorandum, letter, e-mail, etc.;

(2) The date upon which the document was prepared;

(3) The date of the document (if different from # 2);

(4) The identity of the person(s) who prepared the document;

(5) The identity of the person(s) for whom the document was prepared, as well as the identities of those to whom the document and copies of the document were directed, including an evidentiary showing based on competent evidence supporting any assertion that the document was created under the supervision of an attorney;

(6) The purpose of preparing the document, including an evidentiary showing, based on competent evidence, “supporting any assertion that the document was prepared in the course of adversarial litigation or in anticipation of a threat of adversarial litigation that was real and imminent;” a similar evidentiary showing that the subject of communications within the document relates to seeking or giving legal advice; and a showing, again based on competent evidence, “that the documents do not contain or incorporate non-privileged underlying facts;”

(7) The number of pages of the document;

(8) The party's basis for withholding discovery of the document (i.e., the specific privilege or protection being asserted); and

(9) Any other pertinent information necessary to establish the elements of each asserted privilege.^[14]

         The objecting party must provide enough information in the privilege log to enable the other party, and the Court, to assess each element of the privilege and determine its applicability.^[15] Mere conclusions are insufficient, and a failure to provide supporting details in the privilege log may result in denial of the privilege.^[16]

         After hearing the arguments of counsel during the January 3, 2017 hearing, and having reviewed Plaintiff's initial privilege log (ECF No. 30, Ex. 7), the Court agreed the log was lacking under this district's precedent discussed above.^[17] However, acknowledging the effort of Plaintiff to support its objection, and the meritorious dispute regarding the applicability and scope of the privilege, the Court declined to overrule Plaintiff's objection on that basis, preferring to decide the issue on the merits. Plaintiff was ordered to prepare and serve a revised privilege log on Defendant within five days of that hearing. As ordered, Plaintiff produced a more detailed privilege log (ECF No. 36), and the Court accepts the amended log and turns to the merits of the privilege issue.

         ii. Statutory Exception to Attorney-Client Privilege

         Along with the definition of privilege found in K.S.A. § 60-426, the statute includes multiple exceptions. One such exception found in § 60-426(b)(3) is applicable when communications between a client and his attorney “are relevant to a breach of duty by the lawyer to his client.” The statute does not broadly expose any communication to disclosure “simply because it is raised in litigation;” rather, it requires “either the attorney or client [to] charge the other with a breach of duty arising from their professional relationship.”^[18] The underlying rationale for the exception is, when either an attorney or client accuses the other of a breach of duty, “it would be unjust for a party to that relationship to maintain the privilege so as to preclude disclosure of confidential communications relevant to the issue of breach.”^[19]

         Relying on this section, Defendant argues the communications between Grissinger and Plaintiff are not privileged at all. The communications between Grissinger and Plaintiff regarding NorthRock were clearly “relevant to a breach of duty by the lawyer to his client.”^[20] Though Plaintiff admits the exclusion may have applied in the Grissinger action-where Grissinger claimed malpractice against Acord and Bridgebuilder-the Court agrees the exclusion may not apply in this action, where Grissinger is not a party and neither party to this case claims malpractice. Neither party provides any authority for extending the statutory exclusion in the underlying case to the current action, and the Court declines to do so.

         iii. Waiver by Voluntary Disclosure (Explicit Waiver)

         Even if information is protected by attorney-client privilege, the privilege may be waived, either through voluntary disclosure or by implied waiver. Dealing first with voluntary waiver, two statutes discuss explicit waiver of the privilege: K.S.A. § 60-437 and K.S.A. § 60-426a.

         Kansas evidence rule K.S.A. § 60-437 describes the waiver of privilege by previous disclosure, explaining a person who otherwise holds a privilege has no privilege “if the judge finds that such person . . . without coercion, or without any trickery, deception, or fraud practiced against him or her, and with knowledge of the privilege, made disclosure of any part of the matter or consented to such a disclosure made by anyone.”^[21] Defendant claims Grissinger, as the holder of the privilege, waived the privilege by filing the underlying lawsuit. But Plaintiff argues Grissinger did not disclose any communications to a third party during the underlying suit-the suit was settled early on, and no public filings contained details of communications. Plaintiff contends the act of filing the lawsuit itself, without detailed disclosure, does not constitute explicit waiver. Arguably, Grissinger disclosed “part of the matter”^[22] as contemplated by the statute. However, because the Court finds § 60-426a more applicable, it is unnecessary to decide the ultimate issue on K.S.A. § 60-437.

         If voluntary disclosure of privileged information occurs in a court proceeding, both K.S.A. § 60-426a and Fed.R.Evid. 502 offer parameters on the scope of the waiver. Both the state and federal rules, in nearly identical language, contemplate “subject matter waiver, ” explaining how partial waiver of the privilege will constitute a complete waiver of the privilege as to the entire subject matter if the following elements are shown:

(1) the waiver is intentional;

(2) the disclosed and undisclosed communications or information concern the same subject matter; and

(3) they ought in fairness be considered together.^[23]

         Both K.S.A. § 60-426a and FRE 502 are relatively recent adoptions. A review of legislative history reveals nothing regarding the legislature's intent in adopting K.S.A. § 60-426a in 2011, ^[24] nor does a review of caselaw reveal any Kansas state cases analyzing the topic. But FRE 502 was adopted three years prior to the state rule.^[25] Not only are FRE 502 and K.S.A. § 60-426a practically identical, ^[26] but FRE 502 “applies even if state law provides the rule of ...