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

United States District Court, D. Kansas

October 24, 2017




         The issue before the court is whether a client waives the attorney-client privilege over communications related to a settlement agreement by asserting, in a lawsuit brought to enforce the settlement agreement, it did not authorize its attorney to settle. Because the court finds that such an assertion places the subject communications “at issue, ” the court finds the privilege waived as to those communications.

         This issue arises from a subpoena that plaintiff Watchous Enterprises, LLC (“Watchous”) served on 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”), requesting copies of communications related to Pacific's authorization, repudiation, or ratification of a settlement allegedly reached with Watchous. Hyland filed a motion to quash the subpoena, arguing compliance would require him to disclose privileged communications with Pacific and Waterfall (ECF No. 60). On September 28, 2017, the undersigned U.S. Magistrate Judge, James P. O'Hara, entered an order holding Hyland “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.”[1] Nevertheless, recognizing that the attorney-client privilege belongs to the client, not the attorney, the court took Hyland's motion under advisement and set forth a process to give Pacific and Waterfall “a direct opportunity to establish the applicability of the privilege, including the absence of waiver.”[2] While Waterfall remained silent on the matter, Pacific asserted privilege over most documents Hyland had identified as responsive to the subpoena, and submitted a privilege log in support of its privilege claims. Pacific further filed a brief, supplementing earlier briefs filed in support of the motion, arguing it did not waive the attorney-client privilege by placing protected communications at issue.[3] Because the court finds Pacific has failed to demonstrate the absence of waiver, the court now denies Hyland's motion to quash the subpoena.

         I. Background

         A complete summary of the facts leading to this action is set forth in the undersigned's September 28, 2017 order, but facts directly relevant to the instant privilege question are discussed here.

         Watchous filed its complaint against Pacific and Waterfall in December 2016, and shortly thereafter Hyland entered his appearance as counsel for both defendants. On April 7, 2017, the parties filed a joint motion to stay the case (which the court granted), representing that the parties had reached an oral settlement and that full performance of the settlement would occur by June 21, 2017.[4] Under the settlement, 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 moved the court to lift the stay.[5] The court granted the motion, and 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. Pacific retained new counsel and, jointly with newly added defendants Charles A. Elfsten and Mark M. Hasegawa, [6] filed an answer to the amended complaint in which Pacific denied being a party to the settlement agreement.[7] Specifically, Pacific pled:

Pacific National Capital did not give Charles Hyland express authorization or implied consent to settle with Plaintiff on the terms as alleged by Plaintiff in its First Amended Complaint. Therefore, Mr. Hyland lacked actual authority to bind Pacific National Capital to the terms of the alleged settlement agreement with Plaintiff.[8]

         Thereafter, Watchous served the subpoena at issue 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.[9]

         Rather than responding, Hyland filed the motion to quash the subpoena, arguing that responsive documents are protected by the attorney-client privilege.

         Following the process set forth in the court's September 28, 2017 order, Hyland produced copies of the responsive documents-all of them e-mails-to Pacific and Waterfall. On October 11, 2017, Pacific served a privilege log, asserting attorney-client privilege over 46 separate e-mails, [10] and submitted the e-mails to the court for in camera review. Waterfall, on the other hand, did not assert privilege over the documents, despite the court's warning that its failure to so do would be deemed “a clear intent to waive its ability to claim privilege over the communications at issue.”[11] The court now addresses whether Pacific satisfied its burden of proving the applicability of the attorney-client privilege to the documents, including the absence of waiver.[12]

         II. Legal Standards

         As the court's earlier order set forth, Kansas law governs the applicability of the attorney-client privilege in this diversity case.[13] 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.[14]

         A person seeking to assert the attorney-client privilege as a bar to discovery has the burden of establishing that it applies.[15] A claim of privilege fails upon a failure of proof as to any element.

         Because absence of waiver is an element, the burden of proving the privilege has not been waived remains with the person asserting the privilege.[16] The court's September 28, 2017 order recognized the presence of the joint-client doctrine in Kansas, which holds 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 attorney-client privilege.[17] The court noted, however, that the attorney-client privilege would nevertheless be deemed waived if each of the joint clients otherwise waived the privilege.[18]

         Waiver may be implicit, as well as explicit. An implied waiver “may be founded on delay or inaction in asserting a known right.”[19] 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.[20]

         An implied waiver may also be found when a party puts the fact of privileged communication “at issue.”[21] “[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.”[22] A party may not raise communications with counsel as a defense, “yet claim privilege to foreclose discovery on whether or not it is true. This would be an abuse of the attorney-client privilege by improperly using it as a sword and shield.”[23]

         III. Analysis

         Applying the above legal standards, the court finds that any attorney-client privilege which may have existed[24] to protect the e-mails identified by Hyland as responsive to Watchous's subpoena has been ...

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