DELTA FINANCIAL CORPORATION LLC v. MORRISON LLC (2006)

BACKGROUND

Delta Financial Corporation (“DFC”) filed a lawsuit against defendants James Morrison, Delta Funding Residual Exchange Company, LLC (“LLC”) and its management company, Delta Funding Residual Management, Inc. (“DFRM”) (collectively sometimes hereinafter known as the “LLC”), after the LLC withheld certain monies allegedly due DFC.   The LLC thereafter commenced an action for approximately $110 million plus interest for, among other things, fraud with regard to an exchange of assets between the LLC and DFC in and about August, 2001 (the “2001 Exchange”).

In and about July, 2004, the LLC commenced an action against the accounting firm of KPMG (“KPMG”) for approximately $110 million plus interest with regard to KPMG's alleged misconduct in connection with an audit of DFC that was related to the 2001 Exchange.   All matters have been consolidated before the Honorable Ira B. Warshawsky, Justice of the Supreme Court, Nassau County, Commercial Division.   Familiarity with the facts is assumed and only relevant facts will be restated when necessary.

DFC's Objection to the Designation of a Group of LLC Documents as Privileged

During the discovery phase of this litigation, DFC served a document demand upon the LLC that, inter alia, requested the production of documents (the “Demand”) relating to and concerning Boston Portfolio Associates (“BPA”).   In its response to DFC's Demand, the LLC apparently produced responsive documents and produced a privilege log that designated a number of the responsive documents as privileged (the “Disputed Documents”).   It is the designation of the Disputed Documents as privileged by the LLC to which DFC has voiced objection.   The issue was presented to the Court-Appointed Referee, Michael Cardello, Esq. for an in camera review of the Disputed Documents to render a determination regarding whether the Disputed Documents were protected as privileged, and therefore, not discoverable.   Upon discussion with Mr. Cardello, it was determined by the Court that oral argument was necessary for the Court to render a decision on the privilege issue.   Although Mr. Cardello has been designated to hear and determine these types of issues, the Court believes that a formal decision is warranted in this instance.

The LLC's Retention of BPA

In early 2002, BPA was hired by the LLC to assist with its preparation of the LLC's financial statements, namely, to conduct two residual certification evaluations;  one as of September 30, 2001 for SEC reporting purposes, and one as of August 23, 2001, to establish the value of excess cash flow certificates (“Certificates”) at the time of the Exchange (the “Initial Retention”).   Apparently, DFC would not assist the LLC with its reporting obligations to the SEC which led to the Initial Retention.

In or about January, 2003, when the LLC began to contemplate legal action based upon its concern that the Certificates were worth substantially less than what DFC purportedly represented in connection with the Exchange, LLC retained litigation counsel, Christopher Byrne, Esq. (“Mr. Byrne”).   In February, 2003, Mr. Byrne retained BPA to serve as a litigation consultant to assist him in understanding the complexities of the valuation of the Certificates (the “Litigation Consultant Retention”).

The LLC claims that the Litigation Consultant Retention was distinct from the initial retention as there was a separate engagement letter;  bills were sent separately, etc.   According to the LLC, because certificate valuation is a complex task in a highly specialized field, a consulting expert such as BPA was necessary for litigation counsel to effectively and properly litigate the case.   It is the universe of documents that relate directly to BPA's work as a litigation consultant that the LLC claims are privileged, and therefore, not subject to discovery.¹

During oral argument on September 15, 2006, counsel for the LLC argued that not every document created by BPA after February 10, 2003 (the date that the Litigation Consultant Retention commenced) is privileged.   Only documents created or communicated by BPA to Mr. Byrne within the scope of the litigation consultancy are protected and not subject to disclosure.   In fact, counsel for the LLC stated, it is not a temporal issue in that only documents dated prior to February 10, 2003 were produced.   Counsel for the LLC contends that it reviewed all documents and produced all responsive documents without consideration for date (before or after February 10, 2003) but withheld documents created in connection to the litigation consultancy, namely, the Disputed Documents.   Counsel for the LLC argued that the Disputed Documents are cloaked with privilege as attorney-work product and trial preparation materials, and therefore, are not subject to disclosure.   In support of its position, counsel for the LLC cites Aetna Casualty & Surety Company v. Manshul Construction Corp., 2001 WL 484438 (S.D.N.Y. May 7, 2001) claiming that the same principles in that case apply in the instant case in that someone likely to be named as a fact witness does not automatically translate into a requirement that any document the fact witness authored for an attorney is producible.

On the other hand, DFC contends that any document related to any valuation performed by BPA is discoverable because valuation is at issue in the case and might generate cross-examination materials.   Counsel for DFC argues that if BPA had not been hired as litigation consultants there would be no question that DFC would have the right to discover any repeated analyses that BPA did for the Certificates at issue here.   Counsel for DFC contends that any subsequent analyses, any statements of flaws in their prior analyses, and any analysis using DFC's assumptions are discoverable.   DFC claims that BPA documents cannot be shielded from discovery by the LLC engaging BPA as a litigation consultant.

In support of its position, DFC cites City of Rochester v. E & L Piping, Inc., 2001 WL 1263377 (N.Y. Sup.Ct. Monroe County August 29, 2001) for the proposition that conversations between a litigation consultant and an attorney who hired him are not privileged if the litigation consultant is also a fact witness.   Accordingly, DFC argues that it is entitled to discover all documents that bear on the value of the Certificates at any time and the fact that a fact witness was hired as a litigation consultant cannot be used to narrow or restrict disclosure by the fact witness.

DISCUSSION

Was BPA Retained as a Litigation Consultant?

The first inquiry for the Court to resolve is whether BPA was, in fact, retained by the LLC as a litigation consultant.   A review of the retention letter dated February 10, 2003 provided to the Discovery Referee, who provided a copy to the Court, indicates that BPA was retained as a litigation consultant on February 10, 2003.   Therefore, the Court finds that BPA has been and is a litigation consultant for the LLC as of February 10, 2003.

Are Litigation Consultants Afforded Certain Protection?

 The next issue is whether the Disputed Documents created by and/or communicated to or from BPA as litigation consultant to counsel should be privileged, and therefore, not subject to disclosure.   The First Department in Santariga v. McCann, 161 A.D.2d 320, 555 N.Y.S.2d 309 (1st Dep't 1990) held, citing 3A Weinstein-Korn-Miller, N.Y. Civ. Prac. 3101.52a at 31-214, that “an expert who is retained as a consultant to assist in analyzing or preparing the case is beyond the scope ․ [CPLR 3101(d) ];  in fact, such experts are generally seen as an adjunct to the lawyer's strategic thought processes, thus qualifying for complete exemption from disclosure under subdivision [3101(c) Attorney's work product] and, now, the mental impressions exclusions of CPLR 3101(d)(2) as well.”  Santariga, 161 A.D.2d 320, 555 N.Y.S.2d 309 (1st Dep't 1990);  see also Lichtenberg v. Zinn, 243 A.D.2d 1045, 663 N.Y.S.2d 452 (3rd Dep't 1997);  Xerox Corporation v. Town of Webster, 206 A.D.2d 935, 616 N.Y.S.2d 119 (4th Dep't 1994).

Accordingly, the Court finds that the litigation consultant hired by counsel for LLC, BPA, to assist in the preparation of its cases against DFC and KPMG is “an adjunct to the lawyer's strategic thought process, thus qualifying for complete exemption from disclosure under 3101(c).”  See Santariga, 555 N.Y.S.2d at 310.

Are the Disputed Documents At Issue Cloaked With Privilege?

 The Court must now determine whether the Disputed Documents created by and/or communicated to or from BPA as litigation consultant for the LLC should be cloaked with privilege, and therefore, not subject to discovery.   The Disputed Documents have been provided to the Court-Appointed Discovery Referee, Mr. Cardello, for an in camera review which has been completed.   Mr. Cardello has provided the Court with copies of the Disputed Document for its own in camera review.   The Disputed Documents consist of ten documents, which have been labeled Document Nos. 14, 15, 28, 47, 107, 109, 110, 119, 136, and 137.   Document Nos. 14, 15, and 119 are identical and Document Nos. 110 and 136 are identical.   Moreover, Document No. 137 has been removed from the privilege log and produced by the LLC to DFC.   A review of the Disputed Documents indicates that they are documents that have been either created as a result of the Litigation Consultant Retention or communications made in furtherance of the Litigation Consultant Retention.   Therefore, based upon an in camera review of the Disputed Documents, this Court finds that the Disputed Documents are privileged.

Are there any Exceptions To the Privilege?

The next inquiry for the Court is whether there are any exceptions to the rule that documents created by a litigation consultant for counsel pursuant to a litigation consultancy are privileged.

Does CPLR § 3101(d) Require Production of Privileged Documents?

One exception to the general rule may be whether section 3101(d) requires the production of documents created by a litigation consultant.

Section 3101(d)(1)(i) states in relevant part:

Experts. (i) Upon request, each party shall identify each person whom the party expects to call as an expert witness at trial and shall disclose in reasonable detail the subject matter on which each expert is expected to testify, the substance of the facts and opinions on which each expert is expected to testify, the qualifications of each expert witness and a summary of the grounds for each expert opinion.

Clearly, once a party has designated an expert, there is a requirement that certain discrete information be produced at the proper time during the litigation.   In these consolidated actions, expert discovery will take place between June, 2007 and September, 2007.   Currently, parties are not required to designate an expert to testify at trial.   However, as stated by the Court in Santariga, “an expert who is retained as a consultant to assist in analyzing or preparing the case is beyond the scope of this provision [CPLR 3101(d) ].” Santariga, 161 A.D.2d 320, 555 N.Y.S.2d 309 (1st Dep't 1990).

 Even if BPA were designated as an expert to testify at trial today, CPLR Section 3101(d), which requires the limited production of information to the other side regarding qualifications of the expert, the subject matter of the expert's testimony, the substance of the fact, and opinion on which the expert is expected to testify, and summary of the grounds for the expert's opinion, does not require the disclosure of the Disputed Documents.   See Einheber v. Bodenheimer, 12 Misc.3d 1177(A), 2006 WL 1835019 (Sup.Ct. N.Y. Cty.2006).

According to a memorandum from the State Executive Department, the purpose of CPLR 3101(d) is to “encourage prompt settlement by providing both parties an accurate measure of the strength of their adversaries' case and to discourage parties from asserting insupportable claims or defenses, knowing that they will be required to disclose, what, if any, expert evidence will support their allegations.”   Mem. of State Exec. Dept., 1985 McKinney's Sessions Laws of N.Y. at 3025.

After the designation of experts, each party is obligated to disclose a summary of the grounds for each expert's opinion.   See Einheber, 12 Misc.3d at 1177 citing Richards v. Herrick, 292 A.D.2d 874, 738 N.Y.S.2d 470 (4th Dep't 2002);  Pizzi v. Muccia, 127 A.D.2d 338, 515 N.Y.S.2d 341 (3rd Dep't 1987).   The statute does not require “particularity.”   Scher v. St. Lukes Roosevelt Hospital, N.Y.L.J., Jan 28, 2003 at 18 col 4 (Sup.Ct. New York County) (Bransten, J.).   Indeed, a party's request for facts and opinions on which another party's expert is expected to testify is improper.   See Krygier v. Airweld, Inc., 176 A.D.2d 700, 700-01, 574 N.Y.S.2d 790 (2nd Dep't 1991) (requesting party only entitled to substance of facts and opinions).   Thus, the Court finds that there is no exception to the privilege afforded the Disputed Documents pursuant to CPLR § 3101(d)

Does the Holding of City of Rochester v. E & L Piping, Inc. Provide For an Exception to the General Rule Regarding Privilege and Litigation Consultants?

DFC set forth the argument at oral argument that pursuant to City of Rochester v. E & L Piping, Inc., 2001 WL 1263377 (N.Y. Sup.Ct. Monroe Cty., August 29, 2001), notwithstanding LLC's designation of BPA as a litigation consultant, any document created by BPA touching upon valuation, which is an issue in this matter, must be produced.   In other words, the designation of BPA as LLC's litigation consultant cannot limit the discovery of documents from a fact witness.   In City of Rochester, the court held that the litigation consultant Barry Ingalsbe (“Mr. Ingalsbe”) hired by the City of Rochester as a litigation consultant must testify at deposition on all issues that were related directly or indirectly with his position as the Project Manager for LeCesse Construction Company, Inc. (“LeCesse”).  However, this Court finds that the City of Rochester case is distinguishable from the facts of the instant matter, and therefore, is not guiding in its holding.

The facts in the City of Rochester involved disputes regarding the City of Rochester Community War Memorial-Area Expansion Project (the “Project”).   LeCesse was the project manager on the Project and E & L Piping, Inc. (“E & L”) was the HVAC prime contractor.   Mr. Ingalsbe, an employee of LeCesse, was the Senior Project Manager assigned full time to the Project.   According to the court in City of Rochester, Mr. Ingalsbe is a fact witness, familiar with the day to day operation of the Project, and appropriate to be deposed.   See City of Rochester, 2001 WL 1263377 at 2.

On March 19, 1999, E & L was terminated from the Project and final change orders relative to extra works performed by E & L were not issued until November, 1999.   During the Project and through the final change orders, LeCesse was acting in its capacity as Project Manager.   LeCesse was determining the claims to be paid and credits to be applied in the final charge orders.   E & L filed claims under the claims process stated in the contract.  Id. Counsel for the City advised the court in the City of Rochester that in early 1998, the City requested LeCesse to act as a consultant to the City regarding the Project's related legal issues.   LeCesse, by Mr. Ingalsbe, agreed to assist the City as the need arose.   The City and LeCesse entered into a formal agreement, Agreement for Professional Services (the “Agreement”).   Id. Under the terms of the Agreement, LeCesse, by Mr. Ingalsbe, was to be a consultant, as directed by the City's agent, with respect to the City's potential claims against parties performing construction work on the Project.   Id. at 3. This Agreement included consulting services to assist the City with determining whether to pursue legal claims, to assist in the preparation of the pleading, participate in all aspects of discovery proceeding or trial and to give testimony at trial.  Id.

After an action was commenced by the City against, inter alia, E & L, the deposition of Mr. Ingalsbe was held during which counsel for the City directed Mr. Ingalsbe not to answer questions concerning a meeting held the previous week between Mr. Ingalsbe and counsel for the City. Id. Counsel for the City relied upon a claim of “attorney-work product and materials prepared in anticipation of litigation to protect certain documents and testimony.”   Id. The refusal to answer certain questions during the deposition of Mr. Ingalsbe was based upon counsel for the City direction to Mr. Ingalsbe to not answer questions concerning a meeting held the previous week between Mr. Ingalsbe and counsel for the City pursuant to the Agreement.

According to counsel for the City, he did not have any objection to the deposition of Mr. Ingalsbe, who is a fact witness, to the issues in the action, in his capacity as project manager.   However, Mr. Ingalsbe was, at times, acting in a dual capacity as both on-site Project Manager and consultant to the City on legal issues related to the Project.   The issue, as framed by the court in City of Rochester, was what effect does this dual position of the witness have on his obligation to answer certain deposition questions.   In other words, are such questions protected by CPLR 3101 or are some or all of the protections afforded a consultant to litigation lost because the witness is obligated to testify as a fact witness?

The court in City of Rochester stated that:

Mr. Ingalsbe, as a consultant to litigation, would normally be entitled to the protections from disclosure of material prepared in anticipation of litigation by a consultant under CPLR § 3101(d)(2).   However, hiring a fact witness as a litigation consultant cannot be used to narrow or restrict the testimony or disclosures by the fact witness.   This is particularly true because the City, when it contracted with LeCesse as a consultant on litigation issue, was fully aware that LeCesse's employees were or would be fact witness in any litigation.   Therefore this Court must guard carefully the right of the examining party not to be limited in its scope of examination by the mere fact of the dual role of the witness.   Barry Ingalsbe must be allowed to testify on all issues that are related, directly or indirectly with LeCesse's position as the Project Manager.

City of Rochester v. E & L Piping, Inc., 2001 WL 1263377 (N.Y.Sup.) (August 29, 2001)

However, the facts of the City of Rochester case are distinguishable from the facts of the instant case.   Here, the documents sought by DFC are not documents created by the litigation consultant, BPA, as a fact witness.   According to counsel for the LLC, all those documents have been produced.   The documents that have been withheld are documents created by BPA in its role as a litigation consultant.   The documents would not have existed but for the litigation consultancy.   The Court finds this distinction relevant as there has been no narrowing of the scope of discoverable documents.

The Court disagrees with counsel for DFC's analogy during oral argument where it was claimed that what the LLC was trying do was take a person, John Smith, who was standing on the corner of Fourth and Vine and had just witnessed an accident, and hire him as a litigation consultant to preclude his testimony as privileged.   See Tr. 23.   In the instant action, the Disputed Documents requested by DFC are documents that would not have existed but for the litigation consultancy.   They were created as a result of the litigation consultancy.   While the Court is mindful that it was the LLC who hired a fact witness as a litigation consultant, the Court finds because the LLC has produced all BPA documents that were not created as a result of the litigation consultancy, there has been no narrowing of the scope of disclosure due to the Litigation Consultant Retention.

Therefore, the Court concludes that BPA is a litigation consultant and the documents created in that capacity and role are privileged without any applicable exceptions, and therefore, not subject to disclosure.

FOOTNOTES

1.   LLC has stated that it has never claimed that documents created in connection with the Initial Retention by LLC are privileged.   In fact, LLC claims to have produced all documents in its possession related to the Initial Retention.   In addition, LLC claims to have produced all BPA related documents in its possession that were created after February, 2003 that are unrelated to BPA's retention as a litigation consultant.

IRA B. WARSHAWSKY, J.