OVERTON v. TODMAN CO., CPAS, P.C. (S.D.N.Y. 2008)

Citation Codes

Equivalent Citations

citation codes

Docket Number

No. 05 Civ. 7956 (JES).

Motions

Motion to compel : In Part Defendant

Attorney(S)

Hutner, Klarish, LLP, Eric S. Hutner, Esq., of Counsel, New York, NY, for Plaintiffs. Babchik Young, LLP, Jordan Sklar, Esq., of Counsel, White Plains, NY, for Defendants. Brunelle, Hadjikow Weltz, P.C, George Brunelle, Esq., of Counsel, New York, NY, pro se. Katsky Korins, LLP, Joshua S.. Margolin, Esq., of Counsel, New York, NY, pro se.

Judges

John Emilio Sprizzo

Acts

Commerce And Trade — Securities Exchanges — Manipulative And Deceptive Devices

See more information ...

Smart Summary

Factual and Procedural Background

Plaintiffs David Overton and Jerome I. Kransdorf filed suit against defendants Todman Co., CPAs, P.C., and Trien, Rosenberg, Rosenberg, Weinberg, Ciullo, Fazzari, LLP, alleging violations of Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5, along with claims for breach of contract, professional negligence, common law fraud, and negligent misrepresentation. The core allegation is that defendants performed deficient audits that enabled their client, Direct Brokerage, Inc. ("DBI"), to conceal growing payroll tax obligations.

Defendants filed a third-party complaint against DBI and several former officers. DBI, however, is no longer actively conducting business and has failed to respond to discovery or the third-party complaint. Defendants served subpoenas on various non-parties—including DBI’s former counsel, an accountant, and counsel for DBI’s lender—seeking documents related to DBI’s failure to remit payroll taxes. Some non-parties refused to produce documents, invoking attorney-client and work product privileges, which DBI’s current president and officer affirmed by affidavits. Defendants moved to compel production of these documents.

Legal Issues Presented

Whether the attorney-client and work product privileges claimed by DBI and asserted by non-parties are valid and applicable despite DBI’s inactive business status.
Whether plaintiffs, as assignees of DBI’s claims, have the authority to waive DBI’s privileges.
Whether the privileges apply to all requested documents, particularly those concerning business matters rather than legal advice.

Arguments of the Parties

Defendants' Arguments

No valid attorney-client or work product privileges exist because DBI is defunct and no one has standing to assert them.
If privileges existed, plaintiffs as assignees have waived them by affirmatively stating they will not assert such privileges.
Many documents sought do not qualify for privilege as they pertain to business matters rather than legal advice.

Non-Parties' and Plaintiffs' Arguments

DBI is technically still an active corporation with officers (President and another officer) who have properly asserted the privileges by affidavit.
The attorney-client privilege survives DBI’s inactive business status and is properly invoked by current management.
Plaintiffs have only a limited assignment of DBI’s claims without authority to waive DBI’s privileges.
The accountant’s privilege claim is supported by United States v. Kovel, which protects communications involving accountants acting as intermediaries for legal advice.
Determination of privilege applicability for certain documents requires in camera review due to the mixed nature of legal and business content.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
United States v. Kovel, 296 F.2d 918 (2d Cir. 1961)	Extended attorney-client privilege to communications involving accountants acting as intermediaries to facilitate legal advice.	Supported the privilege claim by DBI’s former accountant, Integrated Management Systems.
In re Fitch, Inc. v. UBS PaineWebber, Inc., 330 F.3d 104 (2d Cir. 2003)	Motions to compel discovery are reviewed under the district court’s sound discretion.	Guided the court’s discretionary denial in part of the motion to compel.
In re Grand Jury Subpoenas Dated March 19, 2002 and August 2, 2002, 318 F.3d 379 (2d Cir. 2003)	The party asserting privilege bears the burden of establishing its applicability.	Confirmed that subpoenaed non-parties met the burden for certain documents.
Gilliland v. Geramita, 2006 U.S. Dist. LEXIS 65546 (W.D. Pa. Sept. 14, 2006)	Attorney-client privilege may not survive when a corporation is defunct and no one has authority to assert it.	Rejected by the court as inapposite because DBI is technically active and officers asserted privilege.
Commodity Futures Trading Comm’n v. Weintraub, 471 U.S. 343 (1985)	A corporation’s current management controls the attorney-client privilege.	Supported court’s finding that DBI’s current officers properly asserted the privilege.
Upjohn Co. v. United States, 449 U.S. 383 (1981)	Defines scope of attorney-client privilege, distinguishing legal advice from business advice.	Informed court’s decision to conduct in camera review to determine privilege applicability for disputed documents.

Court's Reasoning and Analysis

The court began by acknowledging that motions to compel discovery are subject to the court’s discretion and that the party asserting privilege must demonstrate its applicability. The subpoenaed non-parties successfully met their burden by submitting affidavits from DBI’s president and officer asserting the privileges.

The court rejected defendants’ argument that DBI’s defunct status nullifies privilege, noting that DBI remains an active corporation on record, and its current management retains control over the privilege according to Weintraub. The affidavits affirming privilege were deemed valid.

Regarding waiver, the court found no clear evidence that plaintiffs, as assignees, possess authority to waive DBI’s privileges. The assignment’s scope was ambiguous, and plaintiffs denied responsibility for DBI’s claims beyond prosecuting them.

Defendants’ contention that many documents relate to business rather than legal advice was addressed by the court’s intention to conduct an in camera review to resolve disputes over privilege applicability, consistent with the principles in Upjohn.

Ultimately, the court denied the motion to compel as to documents where privilege was undisputed and reserved decision on documents requiring further review.

Holding and Implications

The court DENIED IN PART defendants’ Motion to Compel production of documents protected by attorney-client and work product privileges as properly asserted by DBI’s current management.

For documents where privilege applicability was disputed due to their mixed legal and business nature, the court reserved decision and authorized an in camera review.

The direct effect of this ruling is that defendants cannot compel production of certain privileged documents from non-parties, preserving DBI’s privileges despite its inactive business status. The opinion does not establish new legal precedent but applies existing privilege principles to the unique facts of this case.

Show full summary ...

Da v. d OVERTON and Jerome I. Kransdorf, Plaintiff(s),

MEMORANDUM OPINION AND ORDER

SPRIZZO, District Judge.

Plaintiffs, David Overton and Jerome I. Kransdorf, brought the above-captioned action against defendants, Todman Co., CPAs, P.C., and Trien, Rosenberg, Rosenberg, Weinberg, Ciullo Fazzari, LLP, for violations of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and SEC Rule 10b-5, 17 C.F.R. § 240.10b-5, breach of contract, professional negligence, common law fraud, and negligent misrepresentation. Essentially, plaintiffs charge defendants with performing deficient audits that allegedly allowed defendants' client, Direct Brokerage, Inc. ("DBI"), to hide mounting payroll tax obligations. Defendants brought a third-party action against DBI and a variety of its former officers. Currently before the Court is defendants' Motion to Compel the production of certain documents responsive to a Subpoena Duces Tecum served on various non-parties. The Court heard Oral Argument on March 4, 2008. For the reasons set forth below, the Court hereby denies in part defendants Motion to Compel and reserves decision as to the remaining documents in dispute.

BACKGROUND

DBI, third-party defendant and subject of the charge of failure to remit payroll obligations, is not readily available to respond to discovery and has failed to answer defendants' Third-Party Complaint. See Defs.' Mem. of Law, dated Dec. 27, 2007, ("Defs.' Mem.") at 2. Though it is still listed as an "active" corporation on the New York State Department of State website, see Aff. of Jordan Sklar, dated December 26, 2007 ("Sklar Aff."), Ex. F, and has not been dissolved, see Aff. of Eniko Henits, dated March 27, 2008, ("Henits Aff.") ¶ 1, it is "no longer actively in business," see id., ¶ 5. Because defendants could not obtain the subject documents from DBI itself, they served subpoenas on various non-parties seeking production of documents concerning "how it came to pass that DBI failed to remit its payroll tax obligations" and general information about DBI. See Defs.' Mem. at 2. These non-parties include: (1) DBI's former counsel, Kostelanetz Fink, LLP; Eaton Van Winkle, LLP; and Brunelle, Hadjikow Weltz, P.C; (2) an accountant retained by one of these firms, Integrated Management Systems; (3) and counsel for one of DBI's lenders, Katsky, Korins, LLP. Each has refused to produce some of the responsive documents based on the attorney-client or work product privilege. Eniko Henits, President of DBI, and Thomas Flynn, one of its officers, filed affidavits with the Court explicitly refusing to waive the privilege and "request[ing] protection of the privileges of Direct Brokerage, Inc. and those of its former personnel." See Henits Aff. ¶ 7; Aff. of Thomas Flynn, dated Mar. 29, 2008, ("Flynn Aff.") ¶ 7.

DBI's former accountant (Integrated Management Systems) asserted a privilege under United States v. Kovel, 296 F.2d 918 (2d Cir. 1961), which held that the privilege can protect communications between a client and his accountant or the accountant and the client's attorney when the accountant's role is to clarify communications between attorney and client. See id., at 922.

DISCUSSION

Motions to compel are "entrusted to the sound discretion of the district court." See In re Fitch, Inc. v. UBS PaineWebber, Inc., 330 F.3d 104, 108 (2d. Cir. 2003) (citations omitted). The party invoking the privilege bears the burden of establishing its applicability. See In re Grand Jury Subpoenas Dated March 19, 2002 and August 2, 2002, 318 F.3d 379, 384 (2d Cir. 2003). The Court finds that the subpoenaed non-parties have met that burden as to certain documents.

Defendants argue that (1) there are no attorney-client or work product privileges to assert (or no one with standing to assert them) since DBI is defunct; (2) that, if such privileges existed, they have been waived; and (3) that any such privileges are inapplicable to many of the documents that were not produced. See Defs.' Mem. at 3-6.

First, defendants cite case law for the proposition that when a corporation is no longer an ongoing business, there is no one with authority to properly invoke the attorney-client privilege and that there is essentially no privilege to assert. See Gilliland v. Geramita, 2006 U.S. Dist. LEXIS 65546, No. 05-01059 (W.D. Pa. Sept. 14, 2006). This case is clearly inapposite, as both the President and another former officer of DBI have asserted the attorney-client privilege in affidavits submitted to the Court. See Henits Aff. ¶ 7; Flynn Aff. ¶ 7. Since DBI is technically still an active corporation, as Ms. Henits and Mr. Flynn have stated that they are "still [DBI's] President" and "still one of its officers,"see Henits Aff. ¶ 1; Flynn Aff. ¶ 1, and a corporation's current management controls the attorney-client privilege, see Commodity Futures Trading Comm'n v. Weintraub, 471 U.S. 343, 351-52 (1985), the Court finds that DBI's privilege exists and has been properly asserted.

Second, as to waiver, defendants argue that as assignees of DBI, plaintiffs hold the power to exercise the privileges and they have affirmatively advised the non-parties that they "will not assert any such privilege." See Sklar Aff., Ex. O (emphasis in original). The Court cannot conclude that plaintiffs have this power. Not only is it unclear from the face of the assignment whether it includes the power to assert privileges on behalf of DBI, but defendants have argued that the assignment is invalid. See id., Exs. B, Am. Compl. ¶ 16 C, Defs.' Amended Answer ¶¶ 50, 61, 63, 65, 67. Additionally, plaintiffs submitted an affidavit to the Court noting that it "obtained a limited assignment of claims which DBI has against defendants, and thus plaintiffs have the right to prosecute those claims, not the responsibility." See Aff. of Eric S. Hutner, dated Jan. 29, 2008, at 2 (emphasis in original). Therefore, the Court cannot find, based on this record, that plaintiff's assertion can or does constitute a valid waiver of DBI's privileges.

Finally, defendants argue that the privileges are inapplicable because many of the documents appear to pertain to strictly business considerations and do not pertain to purely legal advice. See Upjohn Co. v. United States, 449 U.S. 383 (1981). In order to determine whether these documents fall under the properly asserted attorney-client and work product privileges, the Court would need to review the documents in camera..

The subpoenaed non-parties have met their burden of showing that the attorney-client and work product privileges are available to DBI and have presented affidavits from DBI's management asserting the privileges. Therefore, as to those documents for which all parties agree that the attorney-client and work product privileges would apply if properly asserted and available, the Motion to Compel is denied. As to those documents over which it is disputed whether the privileges are applicable due to the nature of the documents themselves, the Court will conduct an in camera review upon request.

CONCLUSION

For the reasons stated above, defendants' Motion to Compel shall be and hereby is denied in part. As to the documents still in dispute, the Court hereby reserves decision.

It is SO ORDERED.