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Morningstar Holding Corporation, A Foreign Corporation Qualified To v. G2

October 4, 2011

MORNINGSTAR HOLDING CORPORATION, A FOREIGN CORPORATION QUALIFIED TO DO BUSINESS IN IDAHO, PLAINTIFF,
v.
G2, LLC, A CALIFORNIA LIMITED LIABILITY COMPANY, HENRY GEORGE A/K/A JOHN DOE I, AND RICH DOUGLAS A/K/A JOHN DOE II, INDIVIDUALLY, AND AS PARTNERS OR MEMBERS OF A JOINT VENTURE, DEFENDANTS.



The opinion of the court was delivered by: Honorable B. Lynn Winmill Chief U. S. District Judge

ORDER ON DEFENDANTS' MOTION FOR PROTECTIVE ORDER (Dkt. 82) and PLAINTIFF'S MOTION FOR DISCOVERY (Dkt. 77)

The Court has before it several simultaneously filed motions and memoranda raising discovery disputes: Plaintiff's Motion for Discovery (Dkt. 77), Defendants' Memorandum on Pending Discovery Issues (Dkt. 79), and Defendants' Motion for Protective Order (Dkt. 82). The Court held an evidentiary hearing on one central issue raised in the memoranda on August 9, 2011, and took the matter under advisement. Having considered the evidence presented, and the parties' oral and written arguments, the Court issues the following Memoranda Decision and Order denying Defendants' Motion for Protective Order, and granting Plaintiff's Motion for Discovery.

PRIVILEGE CLAIM FOR E-MAIL BETWEEN G2 PARTNERS

A central issue raised in the pending motions is the applicability of the attorney-client privilege or the work product doctrine to an e-mail communication between co-defendants Henry George and Rich Douglas that had been reviewed by an attorney, Michael Josephs. The e-mail was produced by Josephs to Plaintiff Morningstar Holding Corporation during the discovery process and contains statements by Defendant George that arguably support Morningstar's claims in this litigation. Defendants contend the e-mail was an attorney-client communication that should not have been produced and ask the Court to issue a protective order regarding its use. Morningstar denies that the e-mail is protected and seeks further discovery on the contents of the communication.

A. Factual Background

The Court held an evidentiary hearing on August 11, 2011. Three witnesses provided testimony during the evidentiary hearing. Defendant Henry George and the attorney, Michael Josephs, testified in camera. Brett Marks, attorney for the bankruptcy trustee, testified by telephone in open court. The following factual record was developed.*fn1

Defendant G2 is a company established as, in essence, a high stakes collection agency. In 2005, G2 had been retained by a number of clients to recover their investment in a high yield investment scheme involving Bank of America and other foreign banks. In August 2005, Plaintiff Morningstar Holding Corporation engaged the Defendant G2 to recover assets that Morningstar had lost as a victim of the same scheme. (See Dkt. 20-1, p. 2). The engagement was embodied in an Asset Recovery Agreement signed by the parties. In connection with this agreement, G2, and its operating partners, the named individual co-defendants in this action, Rich Douglas and Henry George, received a broad power of attorney which included the power to hire legal counsel on Morningstar's behalf if necessary in the recovery efforts. (See Dkt. 20-2, p. 2.)

The investment fund, Sentinel Funds, and the Sentinel Partners filed for Chapter 7 bankruptcy in Florida. G2 hired a bankruptcy attorney to represent its client victims as creditors in the bankruptcy action. In August 2006, G2 then also engaged the Josephs Jack law firm to represent the clients in initiating a civil action against Bank of America and to assist in collecting and distributing the recovery. (See Retention Agreement, August 10, 2006, Exh. 1001). Michael Josephs was the responsible attorney on the matter, and believed at the time he was retained, that he could more efficiently represent the large group of G2 clients, by using G2 as the sole point of contact and communication between the law firm and the investors. Thus, the August 2006 retention agreement with Josephs Jack provided that the law firm would "report and communicate solely with the G2 organization . . . to avoid confusion and unnecessary repetitious reports," but would be available to the investors themselves periodically to discuss the status and progress of the case. (See Exh. 1001). The retention agreement also stated:

You acknowledge we are neither your general counsel, nor that of the group, and that our acceptance of this engagement does not involve an undertaking to represent you or the groups' other interests in any matter other than that described above. (Id.) It also required that G2 provide a list of the investors on whose behalf G2 was acting, and a copy of the power of attorney providing G2 with the authority to do so. (Id.)

Thus, initially, Josephs communicated almost exclusively with Henry George regarding the representation of Morningstar and G2's other clients regarding the distribution of the recovery. Notably, G2 and all of its clients had an aligned interest in the goal of the representation -- to maximize the recovery. G2's fees were commission based; the more the clients recovered, the more G2 would receive in fees.

Two situations arose sometime in 2008 that changed the nature of the relationships between many of the stakeholders to the recovery. First, a volatile partnership dispute arose between Henry George and Rich Douglas, the G2 principals. This dispute complicated Josephs' representation of the G2 clients; G2 was acting as the client representative and "go-between" between Josephs and the clients and the G2 partners apparently could agree on little.

Second, in late 2008, several G2 clients, including Morningstar, sent a notice of their termination of the Asset Recovery Agreement and corresponding power of attorney.

(See Exh. 1016). Morningstar, and some of G2's other clients, contend that it was their understanding and agreement with G2 that there would be no litigation or, if a lawsuit could not be avoided, the expense of litigation would not be born by them out of their percentage of the recovery. These clients contended that they agreed to pay G2 a very high percentage of their recovery because they would not have to incur the expense of litigation. This dispute, as well as an issue related to the prioritization of certain clients recovery over other clients, lead to in-fighting between nearly all of the stakeholders regarding their individual percentage of the recovery. (See Exh. 2004 -- George's detailed explanation to Brett Marks, attorney for bankruptcy Trustee, of various internal objections). It also provides the basis for this lawsuit.

Josephs determined at one point that he could no longer effectively represent the clients under the arrangement with G2 and withdrew from the representation altogether. (Trns. at 71, 73 - 75) In September 2008, however, a few of the prior clients, including Morningstar, re-retained Josephs directly. (Trns. at 76; see Exh. 1002). At some point, the Josephs Jack Ad Hoc committee was formed, which was comprised of the remaining G2 clients represented by Josephs Jack who were also creditors in the bankruptcy.

After the bankruptcy petition was filed, the bankruptcy court gave the Josephs Jack Ad Hoc Committee authority to investigate, commence and prosecute a fraudulent transfer or other avoidance action against third parties. The Court's order directed that Josephs Jack could either initiate the litigation or could jointly pursue the action with the trustee. (Exh. 1014.) The Ad Hoc Committee hired George "to assist the Committee and the Trustee's Special Counsel, David Cimo, Esquire and The Law Firm of Genovese Joblove and Battista, P.A. (Special Counsel), in the prosecution of the multiple Adversary Complaints filed by the bankruptcy trustee." (Id.; see Trns. at 28 - 29). George expected to be paid for the work, but the payment would have to be applied for from the bankruptcy Trustee, which could have been done by either the Ad Hoc Committee itself, or George. (See Exh. 2003; Trns. at 28 - 29).

The clients comprising the Ad Hoc Committee, however, were not in favor of seeing G2 receive more money out of the recovery by the time payment became an issue. (Trns. at 77). They contended that G2 was responsible for the attorneys fees they were paying, and therefore was already receiving or claiming far more than its fair share based on the Asset Recovery Agreement dispute. (Id.)

As the litigation continued, George was "transfixed" on how and when he would be paid his post-petition fees out of the bankruptcy estate, and how the payment of those fees could be accomplished without becoming tied up in the separate dispute about the Asset Recovery Agreement. (Trns. at 77; see e.g., Exhs. 2002, 2004, 20062007, 1005, 1006, 1020, 1009, 1011, 1010, 1013). George discussed his concerns with Josephs frequently, and with the bankruptcy Trustee's attorney, Brett Marks. Initially, Marks was concerned about speaking with George, a potentially represented party. (Trns. at 51). George advised Marks that he was not represented by counsel. (Id.)

Josephs was concerned that George's increasing agitation and frustration would jeopardize the case against Bank of America, and the total recovery, and thus proposed that the internal disputes be arbitrated privately. He told George that he would recommend private arbitration to his client, Hal McNee, President of Mornginstar. (Trns. at 84).

George indicated that he was in favor of arbitrating the Asset Recovery Agreement disputes, if Morningstar and the other clients would not object to his post-petition fee application. (Id.) Once Josephs was able to get Morningstar's agreement to arbitrate, however, the issue arose that George was only one part of the equation necessary to reach an agreement -- his partner, Rich Douglas, would also have to agree. George was concerned about being sued by his ex-partner, and sought Josephs' advice. (Trns. at 28-29). Josephs explained to George why arbitrating the prioritization issue privately was in G2's and the other clients' best interests.

George drafted an e-mail which he intended to send to his partner. He sent the draft to Josephs for his review on May 26, 2009. (Exh. 1003). The e-mail outlines the benefits to G2 of arbitrating the prioritization issue. The e-mail pointed out that the issues and resolution would be "hidden from Bank of America's lawyers, thus avoiding any problems that could arise if the dispute went to court." (Id.) In conclusion, George states "[w]hat you and I can do is act in a support mode and do everything possible to help Mike create the best possible outcome for all of us." (Id.) Josephs reviewed the draft e-mail and then responded to George by indicating, "you overstate my abilities but you make a compelling argument!" (Id.)

George informed Josephs the next day that based on Joseph's response, he sent the e-mail to Douglas the evening before. (Id.) This e-mail exchange is the subject of the current motions, and will be referred to as the "Disputed E-Mail."

In June 2009, arbitration was still being discussed as a possible means of resolving the internal disputes, but there was no resolution. George became increasingly upset about when he would get paid through the bankruptcy and the clients complaints about G2's fees. He wrote a lengthy e-mail to Josephs complaining about various issues and pressing him for a commitment that G2's 20% fees would be "carved out" of the distribution regardless of the remaining disputes on prioritization. (Exh. 2002). Josephs responded:

To quote you "I am sorry I cannot be more help on this". If we resolve priority issue all is cool. We arbitrate fee issue and disburse minimum amount you could get whittled to right now there but there are so many ...


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