U.S. Fid. & Guar. Co. v. Braspetro Oil Servs. Co.
U.S. Fid. & Guar. Co. v. Braspetro Oil Servs. Co.
2000 WL 744369 (S.D.N.Y. 2000)
June 8, 2000
Katz, Anne, United States Magistrate Judge
Summary
The court did not address ESI. The court conducted an in camera review of documents on defendants' privilege log and determined that certain documents were improperly withheld and should be produced. The court ordered that the documents improperly withheld should be produced, and that the redacted documents should be produced in redacted form to the plaintiffs.
Additional Decisions
UNITED STATES FIDELITY & GUARANTY COMPANY and American Home Assurance, Plaintiffs,
v.
BRASPETRO OIL SERVICES CO., et al., Defendants.
UNITED STATES FIDELITY & GUARANTY COMPANY and American Home Assurance, Plaintiffs,
v.
PETROLEO BRASILEIRO S.A., et al., Defendants
v.
BRASPETRO OIL SERVICES CO., et al., Defendants.
UNITED STATES FIDELITY & GUARANTY COMPANY and American Home Assurance, Plaintiffs,
v.
PETROLEO BRASILEIRO S.A., et al., Defendants
Nos. 97Civ.6124 (JGK)(THK), 98Civ.3099 (JGK)(THK)
United States District Court, S.D. New York
June 08, 2000
Katz, Anne, United States Magistrate Judge
MEMORANDUM OPINION AND ORDER
*1 These consolidated actions were referred to me for general pretrial supervision by the Honorable John G. Koeltl, United States District Judge. Several discovery motions are presently before this Court. Defendants Braspetro Oil Services Company and Petroleo Brasileiro S.A.—Petrobras (collectively referred to as “Petrobras/Brasoil”) have moved for an order compelling the return of privileged documents which were produced during discovery. Defendants Bank of Tokyo–Mitsubishi, Ltd. and the Long–Term Credit Bank of Japan, Ltd. (collectively referred to as “the Banks”) have moved for an order compelling the production of materials prepared by plaintiffs United States Fidelity & Guaranty Company (“USF & G”) and American Home Assurance Co. (“AHAC”) (collectively referred to as “the sureties”), during a pre-litigation investigation—documents which plaintiffs claim are protected work product. Finally, the sureties have moved for an in camera review of the documents on the privilege log of Petrobras/Brasoil.
BACKGROUND
The plaintiffs, USF & G and AHAC, as co-sureties, issued two multimillion dollar performance bonds (the “P–19 Bond” and the “P–31 Bond”), which guaranteed the construction of two oil production facilities (the P–19 and P–31 Projects) in Brazil by a construction consortium, of which defendant IVI was the principal contractor. The plaintiffs issued the Bonds in favor of Brasoil, which was named as the owner of the Projects and the obligee under the Bonds.[1] As part of the P–19 Bond, the sureties issued a Dual Obligee Rider in favor of the defendant Banks, who are lenders to the P–19 Project. The plaintiffs also issued a payment bond (“the MAC Payment Bond”), which secured financing provided by Marubeni America Corporation (“MAC”) to the P–19 consortium for purchasing millions of dollars of equipment. To protect themselves from liability for loss and expense on the P–19, P–31 and MAC Payment Bonds, the plaintiffs entered into three indemnity agreements with various principals in the construction consortium.
The sureties allege that in late 1995, the consortium began to experience serious financial difficulties and was unable to perform its duties under the contracts. Plaintiffs allege that Petrobras/Brasoil knew of these financial problems, but rather than terminating the contracts, they instituted drastic changes in the construction contracts, without the necessary change orders, which increased the costs of performance and resulted in delays. They also allege that Petrobras/Brasoil misdirected funds from the P–19 and P–31 Projects, and commingled those funds with funds from other projects, and that Petrobras–Brasoil made premature payments for non-job related costs or for work that had not yet been completed. Plaintiffs contend that all of these actions of Petrobras–Brasoil heightened the risk of contractor default under the contracts and materially increased the sureties' risks under the Bonds.
*2 In May and June 1997, respectively, Brasoil declared the construction consortium to be in default with respect to the two construction projects at issue, thus triggering the sureties' obligations under the Bonds. Under the terms of the Bonds, if there was a default on the construction contracts, the sureties had the option of completing performance, arranging for substitute contractors to complete performance, or paying damages to Brasoil. After an investigation, the sureties made a determination that Petrobras/Brasoil's declaration of default was improper, that the default was largely due to Petrobras/Brasoil's improper actions, and thus, the sureties declined to make payment under the performance Bonds. This and other litigation resulted.
In one of these consolidated cases, the sureties sued Brasoil and other entities, including the Banks, seeking a declaratory judgment with respect to their obligations and liabilities under the two performance guarantee Bonds. In the other action, the sureties sued Petrobras and other entities, seeking damages for tortious interference with contract and for breach of obligations allegedly owing to the sureties under the Bonds and indemnity agreements. In essence, plaintiffs contend that Petrobras interfered with the payment obligations of the P–19 consortium and Brasoil to MAC.[2]
Motions to dismiss these actions have been denied, see 1999 WL 307642 (S.D.N.Y. May 17, 1999) and 1999 WL 307666 (S.D.N.Y. May 17, 1999), and those decisions were affirmed in December 1999. See United States Fidelity and Guaranty Co. v. Braspetro Services Co., 199 F.3d 94 (2d Cir.1999). Upon the Second Circuit's decision, substantive discovery began in earnest. Although there is a relatively short deadline for completion of pretrial discovery, discovery matters have been complicated by the numerous parties and their complex relationship in these actions, and by voluminous documentary and deposition discovery, much of which has taken or will take place in Brazil. The Court turns now to the immediate discovery disputes that require resolution.
In contemplation of the exchange of documentary discovery, on January 21, 2000 the parties entered into a stipulated confidentiality agreement, which was entered as an Order by the Court. The agreement provided, at paragraph 9, that:
In the event documents which are claimed to be privileged or subject to the work product doctrine are inadvertently produced, such documents shall be returned by the receiving party within two days of any written request therefor, unless the receiving party challenges the privileged nature of the document(s), in which case the producing party shall be entitled to make an application to the Court for the return of the document(s). While such application is pending, the receiving parties shall not use or divulge the contents of such document(s) except to the Court under seal. The inadvertent production of any document claimed to be privileged or subject to the work product doctrine shall not constitute a waiver of such privilege.
*3 See Order, dated January 21, 2000.
From January 11–28, 2000, Petrobras/Brasoil made its documents available for inspection by counsel for the sureties. The documents produced, consisting of approximately 400,000 pages, mostly in Portuguese, were located primarily in Brazil. On Friday, January 21, 2000, counsel for the sureties informed counsel for Petrobras/Brasoil that two letters to their clients, as well as other documents claimed as privileged, had been produced to plaintiffs. See Letter from Ian Strogatz, Esq., dated January 21, 2000, attached as Ex. A to Letter from Michele Sherman Davenport, Esq., dated February 2, 2000 (“Davenport 2/2/00 Letter”). The following Monday, January 24, 2000, counsel for Petrobras/Brasoil requested the return of these documents, asserted that they were privileged, and stated that any production of them had been inadvertent and was not intended to waive the privilege. See Letter from Michele Sherman Davenport, Esq., dated January 24, 2000, attached as Ex. B to Davenport 2/2/00 Letter. Numerous letters followed, both to the Court and between the parties, in which the sureties refused either to return the documents or to identify the additional privileged documents in their possession. The sureties claimed that the production was not inadvertent and that the privilege had been waived. In its correspondence, Petrobras/Brasoil demanded both the return of the documents and that the sureties identify the privileged documents which had been mistakenly produced.[3] Although it has not been made entirely clear, it appears that between 23 and 34 documents claimed as privileged have been produced to the sureties, some of which were produced more than once. See Letter from Jacob Cohen, Esq., dated May 5, 2000.
The voluntary disclosure of a document protected by the attorney-client privilege generally waives any claim of privilege as to that document. See In re Steinhardt Partners, L.P., 9 F.3d 230, 235 (2d Cir.1993); In re von Bulow, 828 F.2d 94, 101 (2d Cir.1987); Fabelo v. Greiner, No. 97 Civ. 2988(DC), 1999 WL 637233, at *7 (S.D.N.Y. Aug. 19, 1999); Aramony v. United Way of America, 969 F.Supp. 226, 235 (S.D.N.Y.1997). However, if the disclosure is inadvertent, the privilege will not be waived unless the producing party's conduct was “so careless as to suggest that it was not concerned with the protection of the asserted privilege.” Aramony, 969 F.Supp. at 235; see also Laquila Construction Inc. v. Travelers Indemnity Co. of Illinois, No. 98 Civ. 5920(HB), 1999 WL 232901, at *1 (S.D.N.Y. Apr. 21, 1999).
The sureties take the position that the term “inadvertent” in the confidentiality agreement should be construed as having the same meaning it has been given by courts where documents were not produced pursuant to a confidentiality agreement. In contrast, Petrobras/Brasoil argues that the purpose of the confidentiality agreement was to allow for the expeditious production of numerous documents without undue concern that the production of privileged documents would be irreversible. Thus, defendants argue that the provision in the agreement for the return of inadvertently produced documents suggests that the producing party has a far less onerous burden in demonstrating inadvertent production than it would under the caselaw in the absence of such an agreement. In any event, defendants argue that their production was inadvertent, whether viewed in light of the confidentiality agreement or otherwise.
*4 The Court finds the reasoning articulated in Prescient Partners, L.P. v. Fieldcrest Cannon, Inc., No. 96 Civ. 7590(DAB) (JCF), 1997 WL 736726 (S.D.N.Y. Nov. 26, 1997), to be persuasive. In that case, the court held that “the provision in the parties' confidentiality agreement regarding inadvertent production of privileged documents did not merely incorporate the caselaw standards governing inadvertent waiver, because, if it did, the provision would have no effect.” See Prescient, 1997 WL 736726, at *4 (citing Union Carbide Corp. v. Montell N.V., No. 95 Civ. 0134 (S.D.N.Y. Aug. 15, 1997)). The court held that the parties had drafted the provision in order to address their concerns related to a voluminous document production, to provide for out-of-court resolution of inadvertent production issues, and to avoid having to litigate issues of inadvertence. “If the provision applied only to documents inadvertently produced under governing caselaw ... this would contravene the provision's purpose of protecting the parties from having to litigate inadvertent production.” Id. Accordingly, the court found that unless the production was completely reckless and the producing party showed no regard for preserving the confidentiality of the privileged documents, the producing party would be protected under the provisions of the confidentiality agreement. See id.
This reasoning is fully applicable to the confidentiality agreement in this action. The relevant provision provides for the return of privileged documents claimed to be inadvertently produced. The only basis in the agreement for resisting the return of a document and seeking court resolution is where the receiving party challenges the privileged nature of the document. That is not the primary basis of plaintiff's challenge here.[4]
There is no basis for this Court to conclude that Petrobras/Brasoil acted completely recklessly in producing privileged documents. As discussed below, counsel for Petrobras/Brasoil established an elaborate system involving multiple layers of review of the documents by Brazilian law students, a Brazilian attorney, and American lawyers, which was designed to identify and segregate privileged documents while dealing with the practical challenges of producing 400,000 pages of documents, that were primarily in Portuguese, in Brazil. Defendants identified the documents in issue as being privileged, had placed them on their privilege log, and intended to withhold them from production. Nevertheless, they were mistakenly produced along with non-privileged documents. These documents were accidentally and unintentionally, i.e., inadvertently produced and, under the terms of the confidentiality agreement, there has been no waiver of privilege.
Even assuming, arguendo, that the parties intended the “inadvertent production” provision of their agreement to have the same meaning as that term has come to have under the governing caselaw, Petrobras/Brasoil did not waive the attorney-client privilege by producing privileged documents. In this Court, the criteria consistently applied to assess the issue of waiver are: (1) the reasonableness of the precautions taken to prevent inadvertent disclosure; (2) the time taken to rectify the error; (3) the scope of the discovery and the extent of the disclosure; and (4) overarching issues of fairness. See Lois Sportswear, U.S.A., Inc. v. Levi Strauss & Company, 104 F.R.D. 103, 105 (S.D.N.Y.1985); see also SEC v. Cassano, 189 F.R.D. 83, 85 (S.D.N.Y.1999); Aramony, 969 F.Supp. at 235; Prescient Partners, 1997 WL 736726; Bank Brussels Lambert v. Credit Lyonnais (Suisse) S.A., 160 F.R.D. 437, 443 (S.D.N.Y.1995); cf. Manufacturers and Traders Trust Co. v. Servotronics, Inc., 132 A.D.2d 392, 399–400, 522 N.Y.S.2d 999, 1004–1005 (4th Dep't 1987) (applying same criteria under New York law); John Blair Communications v. Reliance Capital Group, L.P., 182 A.D.2d 578, 579, 582 N.Y.S.2d 720–21 (1st Dep't 1992) (same); Note Funding Corp. v. Bobian Investment Co., N.V., No. 93 Civ. 7427(DAB)(MHD), 1995 WL 662402, at *6 (S.D.N.Y. Nov. 9, 1995) (applying New York standard on inadvertent production).
*5 Disclosure by itself does not lead to the conclusion that the precautions undertaken to protect the privilege evidence indifference. See Prescient Partners, 1997 WL 736726, at *5; Bank Brussels, 160 F.R.D. at 443. Rather, the Court must assess whether “the procedure[s] followed in maintaining the confidentiality of the document[s] [were] ... so lax, careless, inadequate or indifferent to consequences as to constitute a waiver.” Martin v. Valley National Bank of Arizona, No. 89 Civ. 8361(PKL), 1992 WL 196798, at *2 (S.D.N.Y. Aug. 6, 1992) (internal citations and quotations omitted). Inadvertent production will not waive the privilege unless the conduct of the producing party or its counsel evinced such extreme carelessness as to suggest that it was not concerned with the protection of the privilege. See Lloyds Bank PLC v. Republic of Ecuador, No. 96 Civ. 1789(DC), 1997 WL 96591, at *3 (S.D.N.Y. Mar. 5, 1997) (quoting Desai v. American Int'l Underwriters, No. 91 Civ. 7735(LBS) (MHD), 1992 WL 110731, at *1 (S.D.N.Y. May 12, 1992)).
Here, the Court is unable to conclude that the precautions taken by Petrobras/Brasoil to assure that privileged documents not be disclosed were unreasonable, in light of the extensive number of foreign language documents that were produced. Larry Thomas, a senior litigation partner at Cameron & Hornbostel, instructed Petrobras/Brasoil on the necessary preparations for the assembly and production of the documents. See Declaration of Jose Antonio Antunes Maciel (“Maciel Aff.”), at ¶ 6. Maciel, a Brazilian attorney with an L.L.M. degree from New York University, who is fluent in both Portuguese and English, supervised the document production in Brazil. See Maciel Aff., at ¶¶ 1–4. Maciel, with the assistance of several Brazilian law students, identified and segregated potentially privileged documents based on instructions from Maciel and Thomas on United States attorney-client privilege law. Maciel then reviewed all of the documents which the group had identified as privileged, and final determinations as to the appropriateness of the privilege were made by American attorneys at Cameron & Hornbostel. See Maciel Aff., at ¶¶ 9–11. Moreover, efforts were made to identify various corporate departments which had received copies of documents identified as privileged, and to remove those documents from their files. See Maciel Aff., at ¶ 18.
There is little doubt that Petrobras/Brasoil could have taken greater precautions to protect privileged documents, and it reflects poorly on the screening process that some privileged documents were produced multiple times.[5] Nonetheless, the Court finds that, in light of the voluminous document production and the fact that the documents were in a foreign country and language, the procedures used by Petrobras/Brasoil, including multiple checks of the documents, the segregating of privileged documents, attempts to locate all copies of privileged documents, and the final determination of privilege by American attorneys, constituted reasonable precautions to protect the privilege. Cf. Aramony, 969 F.Supp. at 236 (reasonable procedure to protect the privilege where paralegals and junior associates in large document production reviewed all documents and identified potentially privileged ones, which were then reviewed by a senior associate for a final determination of privilege); Lois Sportswear, 104 F.R.D. at 105 (defendant “only just adequately protected its privilege” where two paralegals made initial identification of privileged documents and attorney then went through a sampling of them and instructed that documents of that kind be segregated from those to be produced); Bank Brussels Lambert, 160 F.R.D. at 445 (where paralegal mistakenly produced an entire box of privileged documents, disclosure was nonetheless viewed as inadvertent and precautions taken by counsel were reasonable).
*6 Although inordinate delay in claiming the privilege may result in a waiver, the length of delay in claiming the privilege should be measured from the time the producing party learns of the disclosure, not from the time of the disclosure itself. See Aramony, 969 F.Supp. at 237; Prescient Partners, 1997 WL 736726, at *6; Lloyds Bank, 1997 WL 96591, at *4.
On Friday, January 21, 2000, counsel for the sureties informed counsel for Petrobras/Brasoil of their receipt of several privileged documents, including two letters from Cameron & Hornbostel to Petrobras, providing legal advice. The following Monday, January 24, 2000, Petrobras/Brasoil's counsel wrote to counsel for the sureties seeking the return and identification of these documents, and asserting that they had been inadvertently produced. The request for the return of these documents on the business day following notification of their production constituted prompt action to rectify the disclosure. Cf. Aramony, 969 F.Supp. at 237 (response within one day of learning of the production was timely); Georgia–Pacific Corp. v. GAF Roofing Mfg. Co., No. 93 Civ. 5125(RPP) 1995 WL 117871, at *2 (S.D.N.Y. Mar. 20, 1995) (response within two business days of learning of inadvertent production did not constitute a waiver).
The third factor to be considered focuses on the number of privileged documents disclosed in relation to the overall size of the document production. See Martin, 1992 WL 196798, at **3–4. “Courts have routinely found that where a large number of documents are involved, there is more likely to be an inadvertent disclosure rather than a knowing waiver.” Baker's Aid v. Hussmann Food Service Co., No. 87 Civ. 0937, 1988 WL 138254, at *5 (E.D .N.Y. Dec. 19, 1988); see also Lloyds, 1997 WL 96591, at *4.[6]
In the instant case, approximately 400,000 pages of documents, the majority of which were in Portuguese, were produced. Of these, the sureties claim that less than 40 documents identified as privileged were produced, some more than once (the record does not reveal how many pages in total of privileged documents were produced). In light of the voluminous document production, this disclosure, while not insignificant, is relatively small and suggests inadvertence, rather than recklessness in protection of the privilege. Cf. Lloyds Bank, 1997 WL 96591, at **2–4 (no waiver where counsel disclosed 227 pages of privileged documents in a production involving approximately 10,000 pages); Aramony, 969 F.Supp. at 237 (no waiver where 99 pages of privileged documents were produced in a 630,000–page document production); Strategem Development Corp. v. Heron Intl. N.V., 153 F.R.D. 535, 544 (S.D.N.Y.1994) (no waiver where 25 copies of 6 privileged documents out of 40,000 documents were produced); Lois Sportswear, 104 F.R .D. at 105 (no waiver where 22 privileged documents were disclosed out of approximately 16,000 pages).
*7 Under the fourth relevant factor, the Court looks to whether plaintiffs would be prejudiced by restoring privilege to the documents, not to whether the privilege itself deprives the parties of pertinent information. See Prescient, 1997 WL 736726, at *7; Bank Brussels, 160 F.R.D. at 446.
The Court has already ruled at oral argument that the privileged documents which have been submitted to courts in filings in other litigation (in New York State court and in Brazil) could not practicably be returned at this point, and that it would unfairly prejudice plaintiffs to do so. See Hearing Transcript, dated April 11, 2000, at 53. However, there has been no showing of any other prejudice to plaintiffs resulting from preservation of the privileged status of the remaining documents; rather plaintiffs would simply be deprived of the use of privileged documents which might be helpful to their case—a not uncommon situation. Therefore, this factor also weighs in Petrobras/Brasoil's favor.
Having concluded that all of the relevant factors weigh in favor of a finding of inadvertence in the production of privileged documents by Petrobras/Brasoil, it is this Court's determination that production of these documents did not constitute a waiver of privilege. Accordingly, the documents shall be returned to defendants' counsel and be treated as privileged.
On December 27, 1996, Petrobras/Brasoil notified the sureties that it was contemplating declaring a contractor default and executing on the performance Bonds. They therefore sought a meeting with the sureties, as required under Paragraph 3.1 of the Bonds prior to a default declaration. See Affidavit of Ian Strogatz, Esq., at ¶ 7, attached as Ex. 1 to Letter from Lisa Cohen, Esq., dated April 10, 2000. On December 28, 1996, the sureties retained Ian Strogatz, of the firm of Wolf, Block, Schorr and Solis–Cohen LLP, as counsel. In January 1997, the Paragraph 3.1 meeting was held, at which Petrobras/Brasoil informed the sureties that it was considering a default, and Petrobras and IVI agreed to “explore together ways to resolve their differences.” See Letter from Ian Strogatz, Esq., dated April 26, 2000; Strogatz Aff., at ¶ 9. Following this meeting, the sureties and Strogatz participated in discussions, through meetings and telephone calls, with Petrobras and other parties, during which Petrobras/Brasoil and the contractor consortium, with the assistance of the sureties, sought to reach a “global solution” in order to avoid a default. See Letter from Strogatz to Petrobras, dated February 21, 1997, attached as Ex. 4 to Cohen 4/10/00 Letter; Letter from Strogatz to Petrobras, dated May 8, 1997, attached as Ex. 6 to Cohen 4/10/00 Letter.
Ultimately, the parties' discussions were not fruitful, and on May 12, 1997 and June 16, 1997, respectively, Petrobras/Brasoil declared the consortium in default on the two Projects, and contacted the sureties to trigger their remedies under the performance Bonds. See Exs. 3 and 4 to Strogatz 4/26/00 Letter. On May 16, 1997, Strogatz advised Petrobras that the sureties “have determined to conduct an investigation under a full reservation of rights and defenses under the bond.” Letter from Strogatz to Petrobras, dated May 16, 1997, attached as Ex. 8 to Cohen 4/10/00 Letter. In connection with this investigation, Strogatz and others traveled to Brazil, met with various Petrobras and IVI personnel, and reviewed extensive documents provided by IVI. See Exs. 9–19 to Cohen 4/10/00 Letter. Strogatz also retained the services of an engineering consultant to assist in the investigation. See Letter from Strogatz to IVI, et al., dated May 23, 1997, attached as Ex. 11 to Cohen 4/10/00 Letter. On August 18, 1997, the sureties denied the claims under the Bond, and subsequently filed these declaratory judgment actions.
*8 The defendant Banks seek discovery with respect to the materials produced by Strogatz, his associates and the engineering consultant during the period prior to the sureties' declination of liability, including any witness statements, notes from witness interviews, documents identifying witnesses, translations, and investigative reports prepared by attorneys, investigators and engineering consultants. The Banks are not seeking documents that contain the seeking or giving of legal advice, which would be protected by the attorney-client privilege. See Letter from Lisa Cohen, Esq., dated May 4, 2000. Plaintiffs argue that Strogatz and the Wolf, Block firm were retained in contemplation of litigation and, therefore, all of the documents they created or that were created on their behalf, including those of the engineering consultant, are protected from disclosure by the work product doctrine.
The work product doctrine, codified in Fed.R.Civ.P. 26(b)(3), is intended to preserve a zone of privacy in which a lawyer can prepare and develop legal theories and strategy “with an eye toward litigation.” Hickman v. Taylor, 329 U.S. 495, 510–511, 67 S.Ct. 385, 393–394 (1947); see also United States v. Adlman, 134 F.3d 1194, 1196 (2d Cir.1998); Bogan v. Northwestern Mutual Life Insurance Co., 163 F.R.D. 460, 462 (S.D.N.Y.1995). The party seeking work product protection has the burden of establishing that the documents at issue were prepared in anticipation of litigation. See A. Michael's Piano, Inc. v. FTC, 18 F.3d 128, 146 (2d Cir.1994); Matter of Grand Jury Subpoenas, 959 F.2d 1158, 1166 (2d Cir.1992); Mount Vernon Fire Insurance Co. v. Try 3 Building Services, Inc., No. 96 Civ. 5590(MJL)(HBP), 1998 WL 729735, at *4 (S.D.N.Y. Oct. 16, 1998); Bogan, 163 F.R.D. at 462. The Second Circuit has held that the relevant inquiry is whether “in light of the nature of the document and the factual situation in the particular case, the document can fairly be said to have been prepared or obtained because of the prospect of litigation.” Adlman, 134 F.3d at 1203–1204; accord National Congress for Puerto Rican Rights v. City of New York, No. 99 Civ. 1695(SAS), 2000 WL 557261, at *1 (S.D.N.Y. May 8, 2000); Softview Company Products Corp. v. Haworth, Inc., No. 97 Civ. 8815(KMW) (HBP), 2000 WL 351411, at *4 (S.D.N.Y. March 31, 2000). While documents prepared for both litigation and business purposes generally enjoy work product protection, “documents that are prepared in the ordinary course of business or that would have been created in essentially similar form irrespective of the litigation” are not protected. Adlman, 134 F.3d at 1202; accord Softview, 2000 WL 351411, at *4. This holds true even if such documents might help in preparation for litigation. See Adlman, 134 F.3d at 1202.
If the proponent succeeds in establishing work product protection, the burden shifts to the party seeking discovery to show substantial need for the material and an inability to obtain its substantial equivalent from another source without undue hardship. See Mohdeen v. American Airlines, Inc., No. 99 Civ. 0016(HB)(FM), 1999 WL 714089, at *1 (S.D.N.Y. July 14, 1999); Mount Vernon v. Try 3, 1998 WL 729735, at *4; Weinhold v. White Heavy Lift, Inc., No. 90 Civ.2096(PKL), 1994 WL 132392, at *2 (S.D.N.Y. Apr. 11, 1994); In re Bairnco Corp. Securities Litigation, 148 F.R.D. 91, 102 (S.D.N.Y.1993). Where attorney thought processes and mental impressions are in issue, an even higher standard to overcome work product protection is applied. See Upjohn Co. v. United States, 449 U.S. 383, 401, 101 S.Ct. 677, 688 (1981); Adlman, 134 F.3d at 1204; United States v. Dessange, Inc., No. S2 99 C 1882(DLC), 2000 WL 310345, at *2 (S.D.N.Y. Mar. 27, 2000).
*9 Courts have observed that the application of the work product doctrine to documents prepared by insurance companies during claims investigations is difficult because “[t]he nature of the insurance business is such that an insurance company must investigate a claim prior to determining whether to pay its insured,” and thus pre-litigation investigation is the routine business of insurance companies. Westhemeco Ltd. v. New Hampshire Insurance Co., 82 F.R.D. 702, 708 (S.D.N.Y.1978); see also Mount Vernon v. Try 3, 1998 WL 729735, at *5; The American Insurance Co. v. Elgot Sales Corp., No. 97 Civ. 1327(RLC) (NRB), 1998 WL 647206, at *1 (S.D.N.Y. Sept. 21, 1998); Insurance Co. of North America v. M/V Savannah, No. 94 Civ. 8846(CSH), 1995 WL 608295, at *1 (S.D.N.Y. Oct. 17, 1995) (“were the rule otherwise, ... documents prepared by or at the request of an insurance company during the insurance company's ordinary business of claim handling would shield from discovery all documents falling within that category by a ritualistic incantation of ‘anticipation of litigation” ’); Bogan, 163 F.R.D. at 464; Fine v. Bellefonte Underwriters Insurance Co., 91 F.R.D. 420, 433 (S.D.N.Y.1981). Although at some point, a company's investigation may shift from the ordinary course of business to an anticipation of litigation, there is no hard and fast rule as to when this occurs; rather, a fact-specific inquiry is required to determine when this shift occurs. See Weiss v. Mucciloo, No. 95 Civ. 5686(PKL), 1997 WL 706444, at *2 (S.D.N.Y. Nov. 13, 1997); Bogan, 163 F.R.D. at 464; Westhemeco Ltd., 82 F.R.D. at 708; 6 Moore's Federal Practice, § 26.70[3][c] (case-by-case approach to insurance claim situations appears to be the best one).[7]
The sureties assert that to the extent that they conducted a claims review, they have produced their entire claims file to the defendants. Plaintiffs contend, however, that the investigation conducted by Strogatz and an engineering consultant was conducted in anticipation of litigation, primarily based on the fact that USF & G retained Strogatz, a litigator, in December 1996, following notification by Petrobras/Brasoil that they might declare a default under the contract and execute on the performance Bonds. Strogatz has affirmed that he was “retained solely to represent the co-sureties as trial counsel in expected litigation over the P–19 and P–31 projects, as my practice is limited almost exclusively to the areas of complex civil and commercial litigation.” Strogatz 4/26/00 Letter.[8]
The retention of an attorney is one indicia of the anticipation of litigation. Nevertheless, it is not dispositive. “While the retention of counsel is a factor to consider, ... an insurance company may not insulate itself from discovery by hiring an attorney to conduct ordinary claims investigation.” Arkwright Mutual Insurance Co. v. National Union Fire Insurance Co., No. 90 Civ. 7811(AGS)(JCF), 1994 WL 510043, at *5 (S.D.N.Y. Sept. 16, 1994); see also Mount Vernon v. Try 3, 1998 WL 728735, at *7. Moreover, although plaintiffs bear the burden of establishing work product protection, despite numerous submissions to the Court, plaintiffs have failed to offer any evidence from USF & G itself indicating that it hired Strogatz solely because of anticipated litigation. The only statement in the record by a representative of USF & G consists of January 1997 deposition testimony of Gary Wilson (in another case), who is a Vice–President and the head of the suretyship division of USF & G. Mr. Wilson's testimony does not address the issue of prospective litigation. Rather, he merely states that when Petrobras requested a meeting because of the possibility of a contractor default, he viewed the meeting as very important and determined that USF & G should have its own separate counsel, thus leading to the retention of Mr. Strogatz and the Wolf, Block firm. Mr. Wilson denied that at the time he expected claims to be made on the performance Bonds, but only knew that “there was a potential claim to be made because Petrobras referenced a potential contractor default.” Wilson Deposition, attached as Ex. 5 to Strogatz 4/26/00 Letter.[9]
*10 The record indicates that although, in January 1997, Petrobras stated that it was considering triggering the performance Bonds and asserting claims under them, at the time, the parties were jointly exploring ways to resolve their differences. This process took several months, during which Mr. Strogatz traveled to Rio de Janeiro and attended a number of meetings with representatives of Petrobras and IVI. See Strogatz Aff., ¶ 9. While, of course, the failure of the parties' efforts could ultimately result in litigation, and the Court accepts that the documentary evidence suggests a belief in the likelihood of litigation, it is also apparent from the record that there were complicated business and contractual negotiations going on, in which Mr. Strogatz and his associates, as well as other attorneys, played a pivotal role. For example, on January 28, 1997, Strogatz wrote a letter to a representative of Petrobras, discussing a planned trip to Rio to meet again with Petrobras and the construction consortium, in order to reach “a prompt global solution.” His letter makes reference to exploring issues of corporate restructuring, resolving legal issues between the parties, and efforts to reach a solution which would avoid substantial disruption of the construction projects. While alluding to the possibility of defenses by the sureties if Petrobras were to declare a default, Strogatz made clear that it was premature to draw any conclusions about future action and that cooperative efforts should be pursued. He stated:
These [default and contract defenses] are subjects, of course, which can only be determined after a full and complete investigation which, as we advised Petrobras, cannot be conducted prior to satisfaction of all bond conditions. For these reasons, among others, we share the Director's view that the potential delay and disruption to the projects, as well as the potential threat to Petrobras' future construction plans and future bonding needs that might very well result from a default/termination should be avoided if at all possible by the parties' continuing good-faith efforts to reach a global solution. We know ... you are all working in this direction, and we want to assure you again that, within the strictures of the three-party, principal-obligee-surety relationship, which we have discussed with you, we share your wish that such a mutually satisfactory resolution can be accomplished next week.
Cohen 4/10/00 Letter, Exhibit 2.[10]
Other evidence in the record shows that Strogatz, on behalf of the sureties, repeatedly informed Petrobras that until a default declaration and subsequent investigation, the sureties could not determine what action they would take under the Bonds. Although litigation was one possible option, Strogatz's letters indicated that:
[A]s the third-party in the surety relationship with certain duties at that point to both other parties, the sureties must independently determine their own position, if and when a default/termination is effected and all other conditions precedent are satisfied. Because, unlike Petrobras and IVI/Sade Vigesa, the sureties have not actively participated in the performance and administration of the underlying construction contracts and, therefore, do not know the relevant facts and circumstances, they would have no alternative under such conditions but to conduct an investigation to determine all of the facts and circumstances concerning, inter alia, the satisfaction of all conditions precedent and the availability of suretyship and other defenses. The outcome of that investigation could be an undertaking by the sureties of obligations under the bonds, or the denial of liability under the bonds, depending upon the facts and the circumstances discovered during the investigation. As we have stated on a number of occasions, at this point we cannot even hazard a guess as to the outcome of any such investigation.
*11 Strogatz Letter to Petrobras, dated February 21, 1997, attached as Ex. 4 to Cohen 4/10/00 Letter (emphasis added).
Other letters from Strogatz to Petrobras during this period reiterated that “the sureties are not in a position either to confirm or deny the efficacy of the bonds and, therefore, without an extensive investigation of a number of issues, cannot at this point either confirm or deny that Petrobras has any such rights to reserve .” Strogatz Letter to Petrobras, dated April 9, 1997, attached as Ex. 5 to Cohen 4/10/00 Letter.
Strogatz's letters to IVI following the default declaration in May similarly state that “[u]ntil the completion of the investigation, the sureties cannot and will not make those determinations [of which option to exercise under the bonds] and therefore, until then cannot and will not decide whether to exercise or waive their right to complete.” Strogatz Letter to IVI, dated May 29, 1997, attached as Ex. 13 to Cohen 4/10/00 Letter. These letters all clearly indicate that the sureties intended to, indeed were obligated to, conduct an investigation prior to determining their coverage position.
Once a default was declared, the manner in which Strogatz conducted the investigation further suggests that what was done would have been done for business purposes, regardless of the possibility of litigation. During the investigation, Strogatz sought the cooperation of IVI and Petrobras, including requesting that they produce extensive documentation, make personnel available, and meet with Strogatz. See Exs. 9–19 to Cohen 4/10/00 Letter. There is no evidence that the investigation, which consisted of interviewing witnesses, reviewing documents, and retaining engineering consultants to advise on the technically complex issues involved, would not have been similarly performed in order for the sureties to fulfill their obligations to the owners and contractors, and to determine their course of action under the performance Bonds. As Strogatz acknowledged in a May 16, 1997 letter, “the sureties have (and have the right to decide to exercise or waive) certain alternative rights, including inter alia, the right to complete the P–19 contract themselves, through agents or through independent contractors of their choice, and Petrobras/Brasoil should take no action during the investigation period that would interfere with or breach any such rights.” Exhibit 8 to Cohen 4/10/00 Letter. Obviously relevant to the sureties' business decision as to whether they should elect to complete the work on the projects themselves or through the services of another contractor, were the consulting services of the engineers—Trauner Consulting Services, Inc.[11] Moreover, the sureties informed IVI and the construction consortium that they would keep them advised on the investigation, in view of their joint and several liability to the sureties for any losses, costs and expenses, including the expense of the investigation. See Exhibit 22 to Cohen 4/10/00 Letter.
*12 Simply because an attorney participated in and supervised this process does not transform investigative documents into work product. By all accounts, there were complex issues to be addressed, regardless of litigation, for which an attorney knowledgeable in suretyship issues, such as Strogatz, could provide invaluable assistance.[12] Tellingly, in their many submissions to the Court on this issue, the sureties have not made any assertions about what their routine business practice is when confronted with claims of the magnitude of those in issue here, and how the investigation that occurred in this situation differed from the type of investigation they would routinely undertake when confronted with large claims in a complex surety matter. See Adlman, 134 F.3d at 1202 (where notes would have been prepared in essentially similar form irrespective of the possibility of litigation, they are not protected work product); cf. Mount Vernon Fire Insurance Co. v. Platt, No. 98 Civ. 8074(CSH)(FM), 1999 WL 892825, at *3 (S.D.N.Y. Oct. 19, 1999) (finding that investigator's report was not protected by work product privilege because the insurance company would plainly have had to conduct a similar investigation in evaluating the claim, even in the absence of litigation); American Insurance, 1998 WL 647026, at *2 (no work product protection for documents prepared during insurance investigation where insurance company had not yet determined coverage position and where, although outside counsel was hired, outside counsel was routinely hired for large claims); In re Kidder, Peabody Securities Litigation, 168 F.R.D. 459, 465 (S.D.N.Y.1996) (no work product privilege attached to reports generated in internal investigation by outside counsel because court found that company would have hired outside counsel to perform the investigation even if no litigation had been threatened at the time, and the notes recounting witness statements would have been necessary to serve the business needs related to the investigation, even absent the threat of litigation); Westhemeco, 82 F.R.D. at 708 (denying work product protection to documents from insurance investigation where insurer had not determined coverage position, was continuing negotiations, and based on these facts, plaintiff was cooperating with insurer).
This conclusion is not intended to preclude the possibility that, in conducting and supervising the investigation, Mr. Strogatz and others made notes which were specifically directed to litigation strategy or possible litigation defenses; under Adlman, these notes would fall within work product protection, because they would not have been produced in the same form irrespective of the threat of litigation. Moreover, defendants are not seeking any documents that contain privileged attorney-client communications. To date, there has been only the general assertion that the notes of Strogatz and the engineer, as a general matter, constitute work product, with no suggestion that on their face the notes themselves discuss or reflect litigation strategy or advice. To the extent that there are such notes, they may be redacted from documents that are produced, with appropriate notation, or, if inseparable from non-privileged information, withheld and itemized on a privilege list. Cf. Mount Vernon v. Platt, 1999 WL 892825, at *3 (investigation reports ordered to be produced, except insofar as they reveal legal theories of attorneys).[13]
*13 The sureties have not met their burden of demonstrating that all documents and notes created in the course of their discussions with the defendants and subsequent investigation, were produced in anticipation of litigation and are protected work product. Evidence exists indicating that following the notification of a possibility of a contractor default and the actual notice of default, the sureties attempted to reach a business solution to avoid a default, and then were required to undertake an investigation to determine their position with respect to their options and obligations under the Bonds, including their position on defendants' claims. Of course, one possible position would be to deny the claims, which in fact occurred. But until that decision was made, the investigation was undertaken, with the defendants' cooperation, in order to arrive at a business determination as to which options to exercise under the Bonds. Accordingly, the documents prepared during the investigation are not protected by the work product privilege, except as noted above, and are to be produced.[14]
Plaintiffs have challenged the propriety of entries on defendants' privilege log. They argue that many of the entries which are claimed to be protected by the attorney-client privilege or as work product, either do not appear to have been written by or to an attorney, or were copied to numerous individuals who are not attorneys. In response to plaintiffs' concerns, the Court agreed to undertake an in camera review of specified documents on defendants' privilege log. Eighty-eight documents were identified by plaintiffs, eighty-four of which defendants have provided to the Court, along with an index that identifies the various individuals who wrote or received the documents.[15]
Having reviewed the documents and the privilege log, the Court concludes that, with a few exceptions described below, privilege was properly invoked. On their face, many of the entries in the privilege log induce skepticism because the documents in issue appear to have been generated and circulated within various departments of Petrobras and Brasoil, which had responsibility for different aspects of the construction projects which are at issue in this case. Nevertheless, the defendant corporations are large, complex structures, which have legal departments that were intimately involved in various aspects of the construction projects and their related contracts. Most of the documents involve legal opinions issued by personnel in the corporate legal department, or responses to inquiries from individuals in the corporate legal department, which were sent to corporate personnel. The inquiries and responses relate to legal advice and services that were being rendered.[16]
Nevertheless, the Court has determined that the following documents were improperly withheld and should be produced:
Tab 13—Cover fax dated 3/17/97—Although this fax was accompanied by a draft letter with respect to which comment from the legal division was sought, the fax itself contains no substantive information, privileged or otherwise.
*14 Tab 21—Redacted Paragraph 4—Although one could make an argument, however tenuous, that this paragraph reflects upon some form of legal advice, the document was withheld on the basis of work product. The Court fails to see how paragraph 4 was written because of actual or impending litigation.
Tab 69—Internal memo in response to attorney letter dated April 30, 1997—The memo itself is privileged attorney-client and work product material. However, the attachments to the memo are entirely factual and appear to have been provided by or to the construction consortium. The attachments shall be produced.
The Court assumes that the redacted documents have been produced in redacted form to the plaintiffs. If that has not occurred, such production shall be completed promptly.
CONCLUSION
For the reasons set forth above, Petrobras/Brasoil's motion for the return of the inadvertently produced privileged documents is granted. Plaintiffs are hereby ordered to return those documents and are prohibited from using them in discovery or at trial (with the exceptions noted above). The Banks' motion for the production of documents prepared in connection with the sureties' investigation is also granted.
Footnotes
Defendant Brasoil is a wholly owned subsidiary of Petrobras Internacional S.A.-Braspetro (“Braspetro”), which in turn is a fully owned subsidiary of Petroleo Brasileiro S.A.—Petrobras (“Petrobras”). Although Petrobras was not a signatory to the P–19 and P–13 Bonds or contracts, plaintiffs allege that it acted as if it were the owner of the Projects and the obligee under the Bonds. See Am. Comp. ¶ 12.
The parties are involved in other litigation in other courts. Brasoil has filed suit in Brazil, asserting liability against the sureties for loss and/or damages pursuant to the P–19 and P–31 Bonds. MAC has sued the sureties in New York State Supreme Court for liability on the MAC payment bond.
The issue of identifying the privileged documents was complicated by the fact that, pursuant to an agreement between the parties, privilege logs were not produced until after the sureties had copied the documents in Brazil. The issue was further complicated by the fact that the Portuguese documents needed to be translated before plaintiff's attorneys could fully determine the nature of the documents.
Although plaintiffs did express some doubt about the privileged nature of the first two documents which were identified as being inadvertently produced, the Court has reviewed those documents and has already determined that the attorney-client privilege was appropriately invoked.
There is additional merit to plaintiffs' contention that defendants had been on notice that once the Court of Appeals ruled on their jurisdictional challenges, they would be required to effect the document production in a relatively short period of time. They thus should have, but failed to, commence the document collection and identification of privileged documents during the months prior to the Second Circuit's ruling. Their procrastination in doing so can be viewed as contributing to the disclosure of privileged documents; however, the Court is not prepared to conclude that it evidences recklessness or indifference with respect to protecting privileged information.
Plaintiffs argue that the relevant comparison is between the total number of privileged documents and the percentage of those documents “inadvertently” produced. They claim that approximately 11% of the 206 documents listed on the original privilege log were disclosed. See Letter of Jacob Cohn, dated May 5, 2000, at 8. This perspective, while interesting and not entirely irrelevant, is not the approach taken by the vast majority of courts, and it fails to take into account the reality that the more voluminous and complex the overall document production, the more likely it becomes that certain documents will escape notice or be mistakenly produced.
The Banks contend that the sureties' investigation is analogous to the routine business investigation of an ordinary insurance claim because the sureties had a duty to investigate the claim in order to determine their coverage position, and had a direct relationship to the parties. See Cohen 5/4/00 Letter. The sureties argue that because their duty to investigate commenced only after the default declaration, the proper analogy is to the investigation of a third-party insurance claim. The sureties cite to a few cases from other jurisdictions which suggest that there is a greater likelihood of work product protection attaching to the investigation of a third-party insurance claim than to a first-party insurance claim. See Letter from Ian Strogatz, Esq., dated May 11, 2000. The Court need not resolve this issue. Although some first-party insurance cases apply a presumption against work product protection to documents prepared prior to a coverage determination, cases in both contexts recognize that a fact-specific determination of the nature of the investigation may be necessary to determine whether the documents were prepared in anticipation of litigation. See, e.g. The Goodyear Tire and Rubber Co. v. Chiles Power Supply, Inc., 190 F.R.D. 532, 536 (S.D.Ind.1999) (court should conduct a case-by-case analysis of whether the third party insurer has made the required showing for work product protection); American Insurance, 1998 WL 647206, at *1 (case-specific analysis to determine work product privilege with respect to insurance investigations generally); Bogan, 163 F.R.D. at 463 (“determining whether the ‘in anticipation’ requirement has been satisfied involves the resolution of factual issues concerning the circumstances surrounding the creation of the documents in question”). The complexity of the nature of the sureties' investigation requires such a fact-specific analysis here.
Plaintiffs point to the fact that in January 1997, Petrobras/Brasoil also retained outside counsel—Cameron & Hornbostel—thus supporting the inference that all of the parties were anticipating litigation at the time. This is simply not the only reasonable inference to be drawn from the fact of retention of counsel. As discussed above, the deteriorating situation between the owners and the contractors, the complex inter-relationship of the parties to the sureties, and the various contractual options available, all presented complex issues, independent of litigation. Indeed, in an internal memorandum dated April 25, 1997, that has been or will be produced by defendants in redacted form (Tab 21 of the in camera review documents), reference is made to Petrobras–Brasoil's hiring of United States counsel “for the purpose of evaluating the situation, studying the alternative solutions for safeguarding the interests of Petrobras, and proposing a course of action for the contracts with the IVI Group, as a result of Petrobras' lack of prior experience in collecting on this type of bond.”
An internal memorandum from American Home Assurance, USF & G's co-surety, indicates that it hired outside counsel in January 1997 because “we felt it prudent ... to monitor the situation.” Internal Memorandum, dated August 20, 1997, attached as Ex. 36 to Cohen 4/10/00 Letter.
Throughout February of 1997, Strogatz continued his involvement with Petrobras and IVI, discussing various business options to be pursued, with surety approval, in order to avoid a default. See Exhibits 3 and 4 to Cohen 4/10/00 Letter.
The sureties have stated that during expert discovery, they will probably designate this engineering consultant as their expert, at which time the reports and other documents prepared by the engineering consultants would, in any event, be discoverable. See Strogatz Aff., at ¶ 14.
In addition to being a member of his firm's litigation department, for a number of years Strogatz also chaired its Complex Liability/Surety/Fidelity Practice Group. See Strogatz Aff., ¶ 3.
Although there are occasions where the Court's in camera review of documents can assist in the determination of whether an attorney's notes were made in anticipation of litigation, rather than in the regular course of business, there has been no offer of the documents for in camera review and no assertion here that the substance of the notes would make apparent that they were litigation-oriented rather than for the purpose of the claim investigation. Rather, the only assertion has been that the documents generally reflect attorney thought processes—not that specific documents, on their face, would demonstrate litigation planning or strategy.
This conclusion obviates the need to resolve the issue of whether the Banks would be entitled to these materials even if they were work product, based on a showing of substantial need and undue hardship. The Court notes that, in any event, the Banks' assertion of substantial need and undue hardship is premature. It is based on speculation about their ability to locate and depose witnesses and about the witnesses' ability to recall past events. At this stage of discovery, the parties are still in the process of identifying witnesses and arranging for depositions.
Defendants have agreed to produce to plaintiffs four of the challenged documents, apparently conceding that they were improperly withheld.
Although the Court questions the assertion of work product protection with respect to certain documents, see, e.g., Tab 5, June 12, 1996 Internal Memo regarding proposed contract revisions; Tab 8, January 13, 1997 internal memo providing legal opinions about construction contract options), because they were also withheld on the basis of the attorney-client privilege, their non-production is valid.