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Louisiana Municipal Police Employees Retirement System v. Sealed Air Corp.

August 11, 2008

LOUISIANA MUNICIPAL POLICE EMPLOYEES RETIREMENT SYSTEM, INDIVIDUALLY AND ON BEHALF OF ALL OTHERS SIMILARLY SITUATED, PLAINTIFFS,
v.
SEALED AIR CORPORATION AND TJ DERMOT DUNPHY, DEFENDANTS.



The opinion of the court was delivered by: Falk, U.S.M.J.

OPINION

Before the Court is Plaintiff Louisiana Municipal Police Employees' Retirement System's ("Plaintiff" or "MPERS") motion to compel the production of documents. Defendants Sealed Air Corporation and T.J. Dermot Dunphy (collectively, "Defendants" or "Sealed Air") have opposed the motion. The motion is decided on the papers submitted. Fed. R. Civ. P. 78(b); L.Civ.R. 37.1(b)(4). For the reasons that follow, Plaintiff's motion is granted in part and denied in part.

BACKGROUND

This is a class action for alleged violations of the Securities Exchange Act of 1934. The background of this case has been set forth in detail by District Judge Cavanaugh in prior opinions and is repeated verbatim here:

W.R. Grace & Co. ("Grace") and Sealed Air Corporation ("Sealed Air") were involved in a corporate transaction in 1998 which lead to the subject claim. Grace was made up of several divisions of business, one of which was the Grace packaging division, which manufactured packaging products and specialized in packaging perishable foods. Sealed Air is a holding company that, through its subsidiaries, manufactures and sells a wide range of food and protective packaging products.

Before 1998, Grace faced growing asbestos liability problems. Grace's asbestos liability problems stemmed from its former asbestos-containing insulation business. Additionally, Grace accumulated liabilities from its 1963 acquisition of Zonolite Co. by assuming all of Zonolite's liabilities. Grace was involved with asbestos litigation for decades.

By the late 1970's, Grace was considering divestment of asbestos-related businesses in order to shelter the company's non-asbestos business areas. In a 1996 transaction, Grace spun off its medical care business to isolate those assets from asbestos liability. In a 1998 transaction, Grace spun off its packaging division of the company and absorbed Sealed Air packaging, in an effort to further insulate its non-asbestos businesses from the threat of liability. Thus, the corporate defendant in this action, currently bearing the name Sealed Air, is the same entity which prior to the 1998 transaction, was known as W.R. Grace & Co. This 1998 transaction is the heart of the subject litigation.

The significant issue in the 1998 transaction was whether Sealed Air, by merging with Grace, would be exposed to liability arising out of the asbestos lawsuits associated with Grace's chemical businesses. This issue turns on whether Grace would be solvent after the acquisition, because if insolvent, then the 1998 transaction would be deemed a fraudulent transfer, rendering Sealed Air liable.

In a joint proxy statement issued in connection with the 1998 transaction, Grace and Sealed Air acknowledged the potential for fraudulent transfer claims by creditors, but reassured investors that no fraudulent transfer occurred. Additionally, Sealed Air and Grace stated that based on available information from their legal, financial, and other advisors, Sealed Air and Grace believed that they would be able to satisfy all liabilities as they became due.

In an effort to prove Grace's solvency and avoid fraudulent transfer liability, Sealed Air would need to demonstrate that the spin-off's assets exceeded its liabilities including the asbestos liabilities. In March 1997, Sealed Air's counsel retained KPMG Peat Marwick LLP ("KPMG") to estimate costs of currently pending and future bodily injury claims related to Sealed Air's production of insulating material containing asbestos. KPMG prepared a report of the solvency analysis, not publicly disclosed, which projected Sealed Air's expected future asbestos claim liability.

The parties dispute whether KPMG's report was conclusive. Sealed Air failed to disclose to KPMG that it had suppressed asbestos claims at the time of the 1998 transaction. Additionally, the report failed to take into account the asbestos liabilities arising from contamination from mining operations at Libby, Montana; those liabilities have resulted in indictments and pending criminal proceedings against Grace officials.

In 2001, Grace filed for bankruptcy due to an increasing number of asbestos related bodily injury claims. In the Grace bankruptcy proceedings, Sealed Air was sued by the asbestos claimants' creditors' committee. The basis of that lawsuit was a claim that the 1998 transaction constituted a fraudulent transfer. The complaint in the fraudulent transfer proceeding was filed in March 2002, and the case was numbered Adversary Proceeding 02-02210.

On July 29, 2002, United States District Judge Wolin issued an opinion in the Adversary Proceeding. That ruling concerned a pre-trial in limine determination of the choice of law and legal standards to be applied at the upcoming trial to determine Grace's solvency. This ruling eased the burden of proof for asbestos plaintiffsto prove that the transfer was fraudulent and designed to shield Grace's assets from asbestos claims. Judge Wolin ruled that Grace was aware that at the time of the 1998 transaction, Grace faced growing asbestos liabilities and therefore was insolvent when Sealed Air acquired it. This disclosure resulted in a two-day, 60% decline in the price of Sealed Air stock. Sealed Air was charged $850,000,000 to reflect settlement of the fraudulent transfers. However, prior to this announcement, Sealed Air denied that it could be liable for a fraudulent transfer in order to inflate Sealed Air's stock price. (Opinion dated March 13, 2008, at 1-4) (citations omitted).

The present discovery motion focuses on Defendants' refusal to produce documents they claim are privileged. Plaintiff has requested four categories of documents: "(1) all transactional due diligence documents related to Sealed Air's analysis of Grace's solvency and asbestos and environmental liabilities; (2) all documents transmitted between Wachtell, Lipton, Rosen & Katz (Grace's corporate counsel) [("Wachtell")] and/or Grace on the one hand, and Sealed Air and/or Sealed Air's corporate counsel, Davis Polk & Wardwell [("Davis Polk")] on the other hand, prior to the filing of first successor liability suit against Sealed Air, entitled Priest v. W.R. Grace & Co.-Conn; (3) all documents transmitted between Donaldson, Lufkin & Jenrette on the one hand, and Sealed Air and/or Sealed Air's counsel, Davis Polk & Wardwell on the other hand; and (4) documents transmitted to various third parties." (Pl.'s Br. 1.) The crux of the motion is the applicability and/or waiver of the attorney-client privilege and work-product doctrine. Plaintiff has not identified the specific documents it seeks by reference to entries on Defendants' extensive privilege logs. Rather, Plaintiff asks this Court to accept certain legal principles, which if done presumably will result in disclosure of the documents it seeks.

Defendants object to this approach. They contend that Plaintiff must identify the specific documents in dispute and that the failure to do so should itself serve as a basis for the denial of the motion. Noting that their privilege logs amount to upward of 600 pages and 8,000 documents, Defendants contend they cannot adequately address the motion in the manner it has been presented.*fn1

Putting that aside, they have responded, to the extent possible, on the merits of each of the legal propositions.

Given the quantity of documents involved and the fact that the parties have argued purely legal issues with respect to categories of documents, the Court concludes that it is appropriate to decide the motion as presented. It is expected that the parties will confer as to the production of specific documents based on the categorical decisions herein.

DISCUSSION

A. General Standard: Attorney Client Privilege*fn2

The purpose of the attorney-client privilege is to "encourage full and frank communications between attorneys and their clients." Upjohn Co. v. United States, 449 U.S. 383, 389 (1981). The privilege is founded upon "the necessity, in the interests and administration of justice, of the aid of persons having knowledge of the law and skilled in its practice, which assistance can only be safely and readily availed of when free from the consequences or apprehension of disclosure." Hunt v. Blackburn, 128 U.S. 464, 470 (1888). The Third Circuit has enumerated the elements of the privilege as follows:

The privilege applies only if (1) the asserted holder of the privilege is or sought to become a client; (2) the person to whom the communication was made (a) is a member of the bar of a court, or his subordinate and (b) in connection with this communication is acting as a lawyer; (3) the communication relates to a fact of which the attorney was informed (a) by his client (b) without the presence of strangers (c) for the purpose of securing primarily either (I) an opinion on law or (ii) legal services or (iii) assistance in some legal proceeding, and not (d) for the purpose of committing a crime or tort; and (4) the privilege has been (a) claimed and (b) not waived by the client.

In re Grand Jury Investigation, 599 F.2d 1224, 1233 (3d Cir. 1979).

The party asserting the attorney-client privilege bears the burden to show that it applies. See In re Grand Jury Empaneled Feb. 14, 1978, 603 F.2d 469, 474 (3d Cir. 1979). While it is true that the attorney-client privilege is narrowly construed because it "obstructs the truth-finding process," Westinghouse Elec. Corp. v. Republic of the Phillippines, 951 F.2d 1414, 1423 (3d Cir. 1991), the privilege is not "disfavored." In re Teleglobe Commc'ns Corp., 493 F.3d 345, 361 n.13 (3d Cir. 2007). Courts should be cautious in their application of the privilege mindful that "it protects only those disclosures necessary to obtain informed legal advice which might not have been made absent the privilege." Fisher v. United States, 425 U.S. 391, 403 (1976). In all instances, the facts underlying any given communication remain discoverable. See Upjohn, 449 U.S. at 395-96 ("Protection of the privilege extends only to communications not to facts. The fact is one thing and a communication concerning that fact is entirely different." (quotation omitted)).

It is axiomatic that the privilege extends to corporations. See In re Bevill, Bresler & Schulman Asset Mgmt. Corp., 805 F.2d 120, 124 (3d Cir. 1986). "As the Supreme Court has recognized, however, 'the administration of the privilege in the case of corporations presents . . . special problems.'" Id. (quoting Commodity Futures Trading Comm'n v. Weintraub, 471 U.S. 343, 348 (1985)). "Communications which relate to business rather than legal matters do not fall within the protection of the privilege." Leonen v. Johns-Manville, 135 F.R.D. 94, 98 (D.N.J. 1990); see also Coleman v. Am. Broad. Co., 106 F.R.D. 201, 205 (D.D.C. 1985). Therefore, the general rule is "while legal advice given to a client by an attorney is protected by the privilege, business advice generally is not." In re Nat'l Smelting of New Jersey, Inc. Bondholders' Litig., No. 84-3199, 1989 U.S. Dist. LEXIS 16962, at *18 (D.N.J. June 29, 1989) (citation omitted); see also Claude P. Bamberger Int'l, Inc. v. Rohm & Haas Co., No. 96-1041, 1997 WL 33768546, at *2 (D.N.J. Aug. 12, 1997) (Cavanaugh, J.) ("Business and personal advice are not protected by the privilege. . . . " (citing United States v. Davis, 636 F.2d 1028, 1044 (5th Cir. 1978))).

While this rule seems simply stated, its application is much less so; the reason being, "in the corporate community, legal advice 'is often intimately intertwined with and difficult to distinguish from business advice.'" Leonen, 135 F.R.D. at 98-99 (quoting Sedco Int'l SA v. Cory, 683 F.2d 1201, 1205 (8th Cir. 1982)). Because it is "often too difficult, impractical and unrealistic to compartmentalize whether certain advice given to a client is legal in nature or business in nature in the context of a complicated securities transaction," the policy behind the attorney-client privilege is "best upheld . . . where the attorney-client relationship is predominantly for the purpose of rendering legal services." In re Nat'l Smelting, 1989 U.S. Dist. LEXIS 16962, at **21-22. Thus, the proper inquiry "is focused on whether the communication is designed to meet problems which can fairly be characterized as predominately legal." Leonen, 135 F.R.D. at 99; see Bamberger, 1997 WL 33768546, at *2 ("[W]here a communication contains both legal and business advice, the attorney-client privilege will only apply if the primary purpose of the communication was to aid in the provision of legal advice." (citation omitted)). In order to meet this standard, and to prevent corporate attorneys from abusing the privilege, the claimant should demonstrate "that the communication would not have been made but for the client's need for legal advice or services." Leonen, 135 F.R.D. at 99 (quotation omitted).

B. General Standard: Work-Product Doctrine

The federal work-product doctrine is set forth in Federal Rule of Civil Procedure 26(b)(3), which provides:

Ordinarily, a party may not discover documents and tangible things that are prepared in anticipation of litigation or for trial by or for another party or its representative (including the other party's attorney, consultant, surety, idemnitor, insurer, or agent). ...


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