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Watchous Enterprises, L.L.C. v. Pacific National Capital

United States District Court, D. Kansas

September 28, 2017

WATCHOUS ENTERPRISES, L.L.C., Plaintiff,
v.
PACIFIC NATIONAL CAPITAL, et al., Defendants.

          ORDER

          James P. O'Hara U.S. Magistrate Judge.

         Nonparty Charles J. Hyland, former counsel for defendants Pacific National Capital (“Pacific”) and Waterfall Mountain USA LLC, Waterfall Mountain LLC, and Waterfall International Holdings Limited (collectively, “Waterfall”), has filed a motion to quash a subpoena issued by plaintiff Watchous Enterprises, LLC (“Watchous”) (ECF No. 60). Hyland objects that complying with the subpoena would require him to disclose his privileged communications with his then-clients. Pacific has filed briefs in support of the motion to quash. Waterfall has remained silent on the matter. As discussed below, the motion is taken under advisement and the parties are directed to take further action.

         I. Background

         In June 2016, Watchous and Pacific entered an agreement whereby Pacific would attempt to find a joint venturer, lender, or investor for certain of Watchous's oil and gas interests. Pacific introduced Watchous to Waterfall, and Watchous and Waterfall eventually executed a letter of intent (“LOI”) to become joint venturers. Watchous deposited $175, 000 into Waterfall's bank account in accordance with the terms of the LOI. However, because Watchous and Waterfall never reached a final agreement, the LOI required Waterfall to refund the deposit.

         Watchous filed this lawsuit in December 2016, alleging the deposit was never refunded. Hyland entered an appearance as counsel for all defendants (Waterfall funded Pacific's defense). In April 2017, the parties reached a settlement whereby one or more of the defendants agreed to pay $175, 000 to Watchous in three installments. When no payment was made on the first installment date, Watchous amended its complaint to add, among other things, a claim against Pacific and Waterfall for breach of the settlement agreement. In June 2017, Hyland withdrew from representing Waterfall and Pacific.

         In August 2017, Pacific, jointly with newly added defendants Charles A. Elfsten and Mark M. Hasegawa, filed an answer to the amended complaint, in which Pacific denied being a party to the settlement agreement.[1] Specifically, Pacific stated that it “did not give Charles Hyland express authorization or implied consent to settle with Plaintiff on the terms as alleged by Plaintiff, ” such that Hyland lacked authority to bind Pacific to the agreement.[2]Thus, whether Pacific gave Hyland authority to enter the settlement agreement has become an issue materially relevant to Watchous's breach-of-settlement-agreement claim.

         Seeking discovery on this issue, Watchous served a subpoena duces tecum on Hyland. The subpoena requested:

Copies of any and all documents or communications: 1) expressly or impliedly granting you authority to extend the offer conveyed by your email of April 3, 2017, to settle the litigation; 2) allowing any person or defendant to direct the litigation, or settlement of the litigation, on behalf of Pacific National Capital; 3) showing when Pacific National Capital was notified of the settlement; 4) showing that Pacific National Capital ratified the settlement; 5) showing that Pacific National Capital repudiated the settlement, claimed that you entered into without authorization, or objected to the terms of the offer or settlement; 6) showing that Pacific National Capital authorized you to stay the captioned litigation after the settlement was reached.[3]

         Hyland moves to quash the subpoena on the ground that complying would require him to produce communications protected by the attorney-client privilege. Hyland states the documents in his possession responsive to the subpoena are e-mails sent and received between Hyland and both Pacific and Waterfall. He implies there are no responsive documents showing communications between Hyland and Pacific only.

         Pacific has filed briefs in support of Hyland's motion to quash.[4] Pacific agrees with Hyland that the responsive e-mails are communications protected by the attorney-client privilege and argues it did not waive the privilege. Waterfall, which has been completely inactive in this case since Hyland withdrew as counsel, [5] has not asserted attorney-client privilege or otherwise responded to the instant motion or Watchous's notice of intent to issue a subpoena to Hyland.[6]

         II. Legal Standards

         Fed. R. Civ. P. 45 governs the issuance of subpoenas to non-parties, such as Hyland. Rule 45(d)(3)(A)(iii) directs the court to quash a subpoena that “requires disclosure of privileged or other protected matter, if no exception or waiver applies.” “In federal court, the determination of what is privileged depends upon the dictates of Rule 501 of the Federal Rules of Evidence.”[7] Because subject-matter jurisdiction in this case is based on diversity, Rule 501 directs that “state law governs privilege.”

         Under Kansas law, the essential elements of the attorney-client 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 privilege is waived.[8]

         The purpose of the attorney-client privilege “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.”[9] It protects “advice given by an attorney in the course of representing the client, ” as well as “disclosures of the client . . . incidental to the professional relationship.”[10] The privilege does not apply, however, “to every communication between attorney and client.”[11] For example, K.S.A. § 60-426(b) lists exceptions to the privilege, and many other instances of non-privileged attorney-client communications have been recognized by this court.[12]

         A person seeking to assert the attorney-client privilege as a bar to discovery has the burden of establishing that it applies.[13] Rule 45(e)(2) provides, “A person withholding subpoenaed information under a claim that it is privileged . . . must: (i) expressly make the claim; and (ii) describe the nature of the withheld documents, communications, or tangible things in a manner that, without revealing information itself privileged . . . will enable the parties to assess the claim.” To carry his burden on a motion to quash, the subpoenaed person “must provide sufficient information to enable the court to determine whether each element of the asserted privilege is satisfied. A claim of privilege fails upon a failure of proof as to any element. A ‘blanket claim' as to the applicability of a privilege does not satisfy the burden of proof.”[14]

         In addition, the burden of proving the privilege has not been waived remains with the person asserting the privilege.[15] Typically, waiver will be found if a client discloses confidential information to a third party. The Kansas Court of Appeals has recognized the joint-client doctrine, however, ruling that when “two or more persons employ an attorney as their common attorney, their communications to him in the presence of each other are regarded as confidential” and do not waive the privilege.[16] “The rule goes further and provides that where several persons employ an attorney and a third party seeks to have communications made therein disclosed, none of the several persons-not even a majority-can waive this privilege.”[17] However, the court does not hold (and the parties do not assert) that the privilege can never be waived when two or more people are jointly represented-when all clients waive the privilege the privilege is, indeed, waived.[18] In addition, although not addressed in Maxwell, there is authority for concluding a single client may waive privilege over communications affecting only him.[19]

         Waiver may be implicit, as well as explicit. An implied waiver “may be founded on delay or inaction in asserting a known right.”[20] For example, in S.E.C. v. McNaul, the court held former clients implicitly waived the attorney-client privilege when they asserted only blanket objections to a subpoena, “without specifically showing why they claimed any of the documents were privileged, ” and then failed to respond to a show cause order directing them to show why their motion to quash should not be denied.[21] An implied waiver may also be found when a party puts privileged communication at issue.[22] In McNaul, the court ruled, “[w]hen a party puts a privileged matter in issue as evidence in a case, it . . . waives the privilege as to all related privileged matters on the same subject.”[23] There, the court held that because the former clients argued they had acted upon the advice of counsel, they “placed in issue whether they received advice from the Firm, ” and thereby implicitly waived the attorney-client privilege as to communications on the subject.[24]

         III. Analysis

         As the record now stands, Hyland has failed to satisfy his burdens of establishing (1) that the attorney-client privilege protects all communications responsive to the subpoena and (2) that, even assuming the privilege applies, the privilege has not been waived by both Pacific and Waterfall.

         First, Hyland has failed to establish the attorney-client privilege protects responsive documents from disclosure. As noted above, Hyland was required to “describe the nature of the withheld documents, communications, or tangible things in a manner that, without revealing information itself privileged . . . will enable the parties to assess the claim.”[25] Hyland has not produced a privilege log or otherwise provided a detailed description of the documents. The court, therefore, does not possess sufficient information to enable it to determine whether each element of attorney-client privilege is satisfied with respect to each communication. “A ‘blanket claim' as to the applicability of a privilege does not satisfy the burden of proof.”[26]

         Second, Hyland has not adequately addressed the question of implicit waiver by Pacific and by Waterfall. Based on the caselaw discussed above, the court finds it very possible that Pacific waived privilege over the disputed emails by placing the communications at issue in its answer to the amended complaint, and ...


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