MCC Management of Naples, Inc. et al v. Arnold & Porter, LLP et al

Filing 276

OPINION AND ORDER denying 66 Motion to Strike Privileged and Confidential Material. Defendants shall file their answers within 10 days of the date of this Opinion and Order. See Opinion and Order for details. Signed by Judge John E. Steele on 5/29/2009. (RKM) Modified on 5/29/2009 to correct conversion errors in document (RKM).

UNITED STATES DISTRICT COURT MIDDLE DISTRICT OF FLORIDA FORT MYERS DIVISION MCC MANAGEMENT OF NAPLES, INC.; BGC II MANAGEMENT OF NAPLES, INC.; MILES C. COLLIER; BARRON G. COLLIER, II, Plaintiffs, vs. Case No. 2:07-cv-387-FtM-29SPC

ARNOLD & PORTER, LLP; KENT A. YALOWITZ; THOMAS R. DWYER; MELVIN C. GARBOW, Defendants. ___________________________________ MCC MANAGEMENT OF NAPLES, INC., BGC II MANAGEMENT OF NAPLES, INC., MILES C. COLLIER, BARRON G. COLLIER, II, Plaintiffs, Case No. ARNOLD & PORTER, LLP, Defendant. ___________________________________ OPINION AND ORDER This matter comes before the Court on Defendants' Motion to Strike Privileged and Confidential Material (Doc. #66).1 This 2:07-cv-420-FtM-29DNF

motion seeks to strike approximately 169 paragraphs from the Second Amended Complaint (Doc. #40) on the basis that information set forth in those paragraphs was derived from privileged and

confidential communications between defendant Arnold & Porter LLP

Unless otherwise stated, the docket numbers refer to Case No. 2-07-cv-387.

1

and

its

client,

Local

Financial

Corporation

(LFC)

and

its

subsidiaries, predecessors and successors (collectively, "Local") (see Doc. #66, pp. 2-3).2 Defendants assert that plaintiffs and

their counsel induced a former executive of LFC, Kristy Diane Carver (Carver), to disclose this privileged and confidential information, in violation of Carver's fiduciary and professional duties and in violation of counsel's ethical obligations, and that plaintiffs' counsel used the information to draft the Second Amended Complaint. (See id. at p. 2.) Plaintiffs filed a Response

(Doc. #81) in opposition to the motion. In a prior Opinion and Order (Doc. #190), the undersigned vacated an Order (Doc. #92) in which the magistrate judge denied the Motion to Strike. The Court in part found that, even assuming

the allegations in the Motion to Strike were correct and the attorney-client privilege belonging to Local was violated,

defendants lacked standing to assert that privilege or to seek a remedy for its breach in this litigation (see Doc. #190, p. 6). The Court further found, however, that a federal court has the inherent authority to impose sanctions on parties and lawyers if there is a showing of bad faith, Gwynn v. Walker (In re Walker), 532 F.3d 1304, 1309 (11th Cir. 2008); Amlong & Amlong, P.A. v.
2

In their Closing Memorandum, defendants expand the requested relief to include suppression of information obtained from Kristy Carver, dismissal of the Second Amended Complaint with prejudice, imposition of attorneys' fees and costs, and disqualification of all current counsel for plaintiffs (see Defs.' Closing Mem., p. 27).
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Denny's, Inc., 500 F.3d 1230, 1239 (11th Cir. 2006), and has the inherent power to "manage the conduct of litigation before it." Reese v. Herbert, 527 F.3d 1253, 1263 (11th Cir. 2008). #190, pp. 6-7.) (See Doc.

The Court agreed that inducing a violation of the

attorney-client privilege under the circumstances alleged in this case, if true, may indeed warrant the exercise of the Court's inherent power to remedy misconduct (see id. at p. 7). The Court

was satisfied that defendants had proffered sufficient grounds and facts to justify an evidentiary hearing concerning whether

plaintiffs' counsel engaged in misconduct regarding Carver during the course of this litigation (see id.). The Court scheduled an

evidentiary hearing to determine the facts prior to determining what, if any, misconduct occurred and what, if any, remedy is appropriate (see id. at p. 8). The Court conducted the evidentiary hearing on December 12 and 23, 2008, and January 28, 2009. The Court heard live testimony

from three of plaintiffs' attorneys: Carl Joseph Coleman, Terry A. Moore, and David Potter; plaintiffs' representative Joseph

Perkovich; and two of the defendants: Thomas R. Dwyer and Dent A. Yalowitz. The Court also heard testimony by video deposition from

Kristy Diane Carver, Abigail C. Watts-FitzGerald, Bruce Stephen Sherman, Edward A. Townsend, and Lisa Kelley Gallagher. Each side has also submitted under seal an expert report by well-credentialed attorneys opining on the matters before the Court. Perhaps not surprisingly, the experts disagree with each
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other and support the positions of their respective clients.

The

parties have each filed closing argument memoranda under seal. Both sides were also permitted to supplement the record of the evidentiary hearing. Defendants assert that plaintiffs and their counsel induced Carver to disclose privileged and confidential information; that Carver in fact disclosed privileged and confidential communications to plaintiffs and their counsel, in violation of her fiduciary and professional duties; that the conduct of plaintiffs' attorneys violated rules of professional conduct; that plaintiffs' counsel used the privileged and confidential information to draft the Second Amended Complaint; and that such conduct cannot be

tolerated.

Plaintiffs respond that their attorneys complied with

all legal and ethical requirements when making contact with Carver. Further, plaintiffs assert that the information received from Carver was neither privileged nor confidential as to them, and alternatively, that any purported privilege or confidentiality had been waived by Local in multiple ways. I. The legal issues are premised on a lengthy and sometimes contentious relationship between Local and the Colliers. To place

the parties' arguments in context, some rather detailed factual background is necessary. The Court makes the following findings of fact solely for the purpose of this motion.

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A.

The Parties and Relevant Third Parties: Plaintiff MCC Management of Naples, Inc. ("MCC Management") is

a Florida corporation which is the assignee of certain rights and obligations of plaintiff Miles C. Collier relating to the matters relevant to the Second Amended Complaint. Plaintiff BGC II

Management of Naples, Inc. ("BGC II Management") is a Florida corporation which is the assignee of certain rights and obligations of plaintiff Barron G. Collier II relating to the matters relevant to the Second Amended Complaint. Miles C. Collier, Barron G.

Collier II and various in-house representatives are collectively referred to as the "Colliers"; plaintiffs are collectively referred to as the "Collier Parties" or plaintiffs. Defendant Arnold & Porter, LLP ("Arnold & Porter") is a limited services. liability partnership providing professional legal

At all relevant times, defendants Kent A. Yalowitz

(Yalowitz), Thomas R. Dwyer (Dwyer) and Melvin C. Garbow (Garbow) were attorneys employed by Arnold & Porter. The identity of the financial institution that was a client of Arnold & Porter has changed over the relevant time period. Unless

otherwise specified, the financial institution will be generically referred to as "Local." B. The Savings and Loan Crisis of the 1980s: In the late 1980s, the Federal Savings and Loan Insurance Corporation (FSLIC) made efforts to sell failing savings and loan

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institutions ("thrift institutions") in exchange for, inter alia, certain reimbursement and tax benefits. Under the provisions of

the Internal Revenue Code at the time, FSLIC's reimbursement of covered asset losses was not included in the gross income of the acquiring institution. Additionally, the Internal Revenue Code

allowed the acquiring institution to take a tax deduction for covered asset losses even though FSLIC reimbursed those losses with tax-free assistance. These tax benefits were intended to encourage investors to buy failing thrift institutions, typically

accomplished through an Assistance Agreement. C. Local Acquires a Thrift Institution: In 1988, Edward A. Townsend (Townsend) joined Local as its President, Chairman and Chief Executive Officer (CEO). In due

course, Townsend was authorized by Local's Board of Directors to submit a proposal to acquire a failing thrift institution. On

December 29, 1988, Local and the FSLIC executed an Assistance Agreement (Defs.' Exh. BBB) wherein Local agreed to acquire

Community Federal Savings & Loan Association, a renamed entity composed of two failing thrift institutions. The Assistance

Agreement provided for a sharing between Local and the FSLIC of the covered asset loss tax deductions and other tax benefits, and required Local to make sharing payments to FSLIC thirty days after Local filed its annual tax returns.3
3

In 1989, Congress adopted the Financial Institutions Reform, (continued...)
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D.

Local Is Purchased by the Colliers: In the Spring of 1989, the Colliers purchased all of the

outstanding shares of stock in Local.

Afterwards, Bruce Sherman

(Sherman) became a Director and Officer and was charged, among other things, with recruiting management to run Local. In August-

September, 1992, Townsend left Local at the request of the new Board because of management differences. E. The Guarini Legislation: On August 10, 1993, the Omnibus Budget Reconciliation Act of 1993 (the "Guarini legislation" or OBRA) was signed into law. Pub. L. No. 103-66, 107 Stat. 312, 485 (1993). The Guarini legislation

eliminated the favorable covered asset loss deduction that had been available to Local in connection with the acquired thrift

institution.

Sherman, acting on behalf of the Colliers, directed

Local's officers to take whatever action was necessary to manage the Guarini legislation process to the most successful possible conclusion. Sherman's designees began by engaging the law firm of

Arnold & Porter.

(...continued) Recovery, and Enforcement Act, 12 U.S.C. § 1811, et seq. (FIRREA). Among other things, FIRREA abolished the FSLIC and shifted its deposit insurance functions to the Federal Deposit Insurance Corporation (FDIC). The FDIC assumed all of FSLIC's rights, privileges, duties and obligations under the Assistance Agreement. Therefore, the Court will refer to the FDIC instead of the FSLIC from this point forward.
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3

F.

Local's Retention of Arnold & Porter: On December 10, 1993, Local signed a retainer agreement with

the law firm of Arnold & Porter for legal services in connection with the preparation of a memorandum regarding certain options available to entities adversely affected by the Guarini

legislation's enactment.

(See Defs.' Exh. CCC.)

Arnold & Porter

had other similarly-situated clients, and the costs of this legal service were being shared among the clients. Three clients

ultimately sued the United States, as discussed below. On March 14, 1994, beginning with the first payment due after the Guarini legislation, Local stopped making tax sharing payments to the FDIC, asserting that it was entitled to do so under Section 9(f) of the Assistance Agreement. Local began to escrow funds,

however, to cover the principal amounts of the tax sharing payments that it may eventually owe the FDIC under the Assistance Agreement. Local also created a deferred tax asset on its books, based on its position when the principal amounts were paid to the FDIC, they would be deductible for tax purposes. These actions were not taken based upon advice from Arnold & Porter, which had no role in the decision. G. FDIC Lawsuit: On September 17, 1996, Local, through its retained counsel Arnold & Porter, filed suit in the United States Court of Federal Claims asserting, inter alia, that the Guarini legislation

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constituted Claim").

a

breach

of

the

Assistance

Agreement

(the

"FDIC

In January 1997, the United States filed a counterclaim

seeking recovery of the tax sharing payments, plus interest, due under the Assistance Agreement that had been withheld by Local (the "FDIC Counterclaim") (collectively, the "FDIC Case"). Kristy Carver, Local's director of corporate tax, was Local's primary contact with Arnold & Porter concerning the FDIC Case. Carver, an Oklahoma licensed Certified Public Accountant,

eventually became Local's Vice President and then Senior Vice President, but her relevant job functions remained essentially the same. Carver was the Local official who knew the most about the

FDIC Case and had the most hands-on involvement with it and Arnold & Porter. In early 1997, attorney Tom Dwyer of Arnold & Porter informed Carver that none of his other clients had deducted any principal payments to the FDIC and that none had created a deferred tax asset. Dwyer stated that he was very surprised that Local would By 1997, Local's principal accrual had

have booked such an asset.

reached approximately $12 million and the deferred tax asset had reached approximately $3 million. In a Memorandum dated June 10,

1997, Carver advised Bruce Sherman that Arnold & Porter, the Arthur Anderson accounting firm, and she had determined that the principal payments would not be deductible when made to the FDIC and thus there was no deferred tax asset. Carver reported that Arthur

Anderson advised that the entire $3 million deferred tax asset must
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be written off before June 30, 1997.

In a July 21, 1997 Memorandum

to Sherman and others, Carver provided a more detailed analysis as to why any principal payments made to the FDIC in satisfaction of the Assistance Agreement would not be deductible for federal income tax purposes and why the deferred tax asset relating to this liability was worthless and must be written off as of June 30, 1997 (the end of Local's fiscal year). amounts were written off. During the Colliers' ownership of Local, no law firm other than Arnold & Porter provided Local with legal services in the FDIC dispute. While the scope of work performed changed dramatically A substantial portion of the

from that set forth in the initial December 10, 1993 written retainer agreement, no amended or new retainer agreement entered between Local and Arnold & Porter. H. Local Sold by the Colliers Pursuant to Redemption Agreement: Although Edward Townsend was no longer employed at Local, he continued to follow its status. By 1995-96, Townsend had observed was

what he believed to be a deterioration in the numbers at Local and felt there might be an opportunity to purchase Local, an

institution he knew well. group of private

In early 1997, Townsend put together a to purchase Local (the "Townsend

investors

Investment Group"). The sale of Local was accomplished in a series of documents through which Local offered securities to investors and used the proceeds to redeem Local's stock held by the Colliers.
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On August

25, 1997, the Colliers sold all of the issued and outstanding shares of Local's common stock back to Local for $154 million pursuant to a Redemption Agreement (Pls.' Exh. 2). This Redemption Agreement was signed by Sherman, as president of Local, and by the Colliers. Arnold & Porter had no role in drafting or reviewing the

Redemption Agreement, and was not a party to it. To account for the pending FDIC Case, the Redemption Agreement provided for certain "Adjustments Related to FDIC Assistance Ten

Agreement" (id. at § 5.1) to be addressed after closing.

million dollars of the purchase price would be deposited in an FDIC Assistance Agreement Escrow Account. (Id. at § 5.1(a).) If the

Final FDIC Net Resolution Amount (defined as the Final FDIC Claim Resolution Amount offset by the Final FDIC Counterclaim Resolution Amount) required Local to pay the FDIC, the payment would be paid sequentially from the following sources: (1) the FDIC Reserve Account, until exhausted; (2) the FDIC Assistance Agreement Escrow Account, until exhausted; and (3) the Colliers. After full

payment, any remaining amounts in the FDIC Reserve Account and the FDIC Assistance Agreement Escrow Account were to be paid to the Colliers. (Id. at § 5.1(b).) If the Final FDIC Net Resolution

Amount required the FDIC to pay Local, then that amount plus the amount in the FDIC Reserve Account and the amount in the FDIC Assistance Agreement Escrow Account, plus interest, would be paid to the Colliers. (Id. at § 5.1(c).)

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Additionally,

the

Colliers

were

"solely

and

exclusively

responsible for all reasonable litigation costs and expenses" incurred by Local in the prosecution, defense, and settlement of the FDIC Dispute. (Pls.' Exh. 2, § 5.1(d).) Local was required to

submit all invoices for litigation costs and expenses to an escrow agent, with a copy to the Colliers, along with written instructions to pay the amounts from the FDIC Assistance Agreement Escrow Account. (Id.) If funds were available, they were to be paid from

that Escrow Account; if funds were not available in the Escrow Account, the Colliers were required to pay the amounts. In prosecuting the FDIC Claim and defending (Id.) the FDIC

Counterclaim, Local agreed to: diligently and in good faith and on a commercially reasonable basis, prosecute the FDIC Claim and defend the FDIC Counterclaim, and consult in good faith with a representative of the Colliers4 regarding such prosecution and defense; provide the Colliers with copies of all notices,

pleadings, subpoenas, filings, correspondence or other documents received in connection with the FDIC Dispute; provide the Colliers with "full and direct access to all attorneys representing" Local in connection with the FDIC Dispute; give the Colliers adequate prior notice of and the full opportunity to review and comment on all filings, motions or other pleadings with respect to the FDIC

Sherman acted as the Colliers' representative until approximately August 1, 2001. That function was then undertaken by Joseph Perkovich.
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4

Case; and use best efforts to maximize the amounts of any payment from the FDIC with respect to the FDIC Claim and minimize the amount of any payment to the FDIC with respect to the FDIC Counterclaim. (Pls.' Exh. 2, § 5.1(e)). Additionally, Local

agreed that neither it nor its subsidiaries would take any action to settle, terminate or cease litigation, or to appeal or to decline to appeal, without the prior written consent of the

Colliers' representative.

(Id.)

The parties also agreed to enter

into a common interest agreement on customary terms and conditions, at or prior to the closing. (Id.)

On September 8, 1997, a Common Interest Agreement (Defs.' Exh. J) was executed by Townsend on behalf of Local and by the Colliers, so that documents and information relating to the FDIC Case and any future action or proceeding that may arise in connection with the FDIC Case could be exchanged in confidence between and among counsel for Local and counsel for the Colliers. The parties agreed that: Local and the Colliers "share a common interest as against the defendants in the [FDIC] case and third parties"; the attorneyclient privilege and the work product doctrine shall apply to all privileged information and work product exchanged between and among counsel for Local and counsel for the Colliers and their respective clients relating to any and all acts, facts, transactions and occurrences that are subject to the FDIC Case, the issues therein, or any matters relating thereto or arising therefrom; and any voluntary exchange of such information and documents between and
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among counsel and their respective clients shall not constitute a waiver of any applicable privilege or work product claims that may be asserted as to the information and documents exchanged. Defs.' Exh. J, ¶¶ 1-3.) (See

The information and documents subject to

the Common Interest Agreement were broadly defined, and the Common Interest Agreement was made retroactive to the commencement of the FDIC Case. (See id. at ¶¶ 4-6.) Both Local and the Colliers

authorized Arnold & Porter and any outside counsel, experts or consultants prosecution that of Arnold the FDIC & Porter Claim or retained the to assist of in the FDIC

defense

the

Counterclaim, to accept directions from a Litigation Committee5 and its designee on all matters concerning the FDIC Case

"notwithstanding the fact that such directions may be contrary to the best interests of the Company Parties or the Colliers." at ¶7.) (Id.

The Common Interest Agreement was to be governed and

construed in accordance with the laws of the State of Oklahoma, without regard to any applicable conflicts of law (id. at ¶9). The

sale of Local by the Colliers was to have no effect on the terms of the Common Interest Agreement (id. at ¶10). I. Post-Sale Relationship Between Local and the Colliers: After the sale, Townsend became Chairman and CEO of Local, and Arnold & Porter continued to represent Local in the FDIC Case. The

There is no record evidence that such a Litigation Committee ever existed. Lisa Kelley testified that no such committee was ever formed, and that Bruce Sherman functioned as the committee.
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5

law firm of Fellers, Snider, Blakenship, Bailey & Tippens, P.C. ("Fellers, Snider") became Local's general law firm, with Michael Ford being primary counsel; however, that firm did not represent Local in the FDIC Case. Two areas of controversy, not related to the FDIC Case, soon arose between Local and the Colliers. These related to several

Closing Date Balance Sheet disputes and the Open Hedges losses. In October 1997, Townsend instructed Local's attorneys Fellers, Snider to file suit in Oklahoma state court against the Colliers for breach of the Redemption Agreement. lawsuit. The relationship between Local and the Colliers regarding the FDIC Case was initially uneventful and in accordance with the Redemption Agreement. Arnold & Porter continued to regularly Fellers, Snider filed the

communicate directly with Sherman, as the Colliers' representative, about the FDIC dispute, sometimes in the presence of Local

representatives and sometimes alone.

Arnold & Porter provided

Sherman with what Sherman perceived as legal advice in his capacity as the Colliers' representative, made recommendations as to how the FDIC Case should progress, discussed legal strategy, and

recommended how the FDIC Case should be resolved.6

Sherman had

See, e.g., April 24, 1998 letter from Arnold & Porter regarding possible settlement and the possible consequences to the Colliers on the Redemption Agreement (Pls.' Exh. 9); June 8, 1998 letter from Arnold & Porter regarding settlement meeting (Pls.' Exh. 10). (See generally Pls.' Exhs. 35, 36.)
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6

extensive conversations and meetings with the Arnold & Porter attorneys, and Arnold & Porter continued to seek Sherman's comments before filing documents in the FDIC Case.7 Porter sent Sherman correspondence Additionally, Arnold & "privileged and

marked

confidential, attorney-client communication and work attorney work product" without sending a copy to any attorney for Sherman or the Colliers. Sherman testified that no one from Arnold & Porter ever

refused to provide him with any requested information, or claimed that information was confidential, or claimed information was protected by the attorney-client privilege. Sherman stated that he had full and direct access to Arnold & Porter attorneys without restrictions. From Arnold & Porter's perspective, Dwyer testified

that Local was always its client, it was Local who had contractual duties to the Colliers, and that Arnold & Porter simply assisted its client, Local, in fulfilling these contractual obligations. Townsend testified that he recognized that the Redemption Agreement committed Local to fulfill certain obligations to the Colliers in connection with the FDIC Case, and he believes those obligations had been fulfilled. Townsend testified that it was not Local's intent to withhold any documents related to the FDIC Case from the Colliers, or to treat such documents as confidential, and that to his knowledge none had been withheld.
7

Townsend further

E.g, January 22, 1998 Memorandum from Arnold & Porter requesting review and comment on proposed Reply (Pls.' Exh. 8); March 29, 1999 letter requesting review and comment on motion to compel (Pls.' Exh. 11). (See generally Pls.' Exhs. 35, 36.)
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testified it was never Local's intent to limit the Colliers' discussions with the Arnold & Porter attorneys. Similarly, Carver testified that after the sale of Local, her supervisors at Local instructed her that the Colliers were to receive everything related to the FDIC Dispute. This included full disclosure of information from Arnold & Porter and outside

accountants.

Carver described the typical information flow as

being from the outside person to Local, from Local to Arnold & Porter, and from Arnold & Porter to the Colliers. Carver felt that

there was no information which related to the FDIC Dispute which was confidential as to the Colliers. While there was basic agreement as to these factual matters, there was disagreement as to whether the relationship meant that Arnold & Porter represented Local alone or both Local and the Colliers. Townsend testified forcefully that after the sale,

Arnold & Porter represented only Local in the FDIC Case, even though the Colliers had unrestricted access to Arnold & Porter. Sherman asserted just as vigorously that Arnold & Porter

represented both Local and the Colliers, and that as the Colliers' representative he had an attorney-client relationship with Arnold & Porter. These competing views seem to have remained largely

unarticulated until March 1999, when disputes between Local and the Colliers regarding the FDIC Case intensified, as discussed below. After the sale of Local to the Townsend Investment Group, Arnold & Porter continued settlement discussions with the FDIC.
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During the first part of 1998, Arnold & Porter had numerous discussions and correspondence with both Local and the Colliers as to settlement terms and strategies. By October 1998, however, it

was clear that there were significant disputes between Local and the Colliers regarding the FDIC Case. While Sherman believed that Arnold & Porter represented the Colliers, he was concerned with the quality of the representation. Sherman therefore retained Albert Turkus of Skadden, Arps, Slate, Meagher & Flom LLP ("Skadden, Arps") to represent the Colliers' interests vis-a-vis Local. Thus, an October 29, 1998 Memorandum

from Laura Crawford to Sherman discussed an anticipated meeting with Arnold & Porter to advise Tom Dwyer "that the Colliers' now have counsel involved to represent their best interest, as well as to determine what exactly needs to be accomplished so that this dispute can come to a closure." (Pls.' Exh. 18.) The Memorandum

discusses several outstanding issues and disagreements between the position of Local and the position of the Colliers. In a five-page March 12, 1999 letter, Dwyer addressed a number of issues with Sherman (Pls.' Exh. 19). The letter asserted that

Local could not make a settlement offer to the FDIC because there were unresolved disputes between Local and the Colliers as to the amounts owed by the FDIC to Local under the Assistance Agreement. The letter also stated that "Arnold & Porter is not in a position to resolve the ongoing disputes between our clients, the Local

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Plaintiffs, and the Colliers, whom you represent."8 continued: Plaintiffs. "Our only clients in this matter are

The letter the Local The

We represent and take direction from them.

Colliers, whom you represent, are not, and never have been, clients of Arnold & Porter. . . . [o]ur assistance to our clients in honoring their contractual relationship with the Colliers does not establish an attorney-client relationship between Arnold & Porter and your clients." (See Pls.' Exh. 19.) A copy of the letter was This was the

not sent to the Colliers' attorney, Albert Turkus.

first correspondence with the Colliers specifically addressing the issue of Arnold & Porter's non-representation of the Colliers. There was no direct response from Sherman. J. 1999 Settlement Agreement: By July 1999, Local and the Colliers were preparing a

settlement agreement to resolve their FDIC differences.

This

agreement was negotiated by Fellers, Snider for Local and Skadden, Arps for the Colliers. sent to Arnold & A draft of the settlement agreement was because a portion of the agreement In

Porter

pertained to Arnold & Porter's representation in the FDIC Case.

a July 22, 1999 letter, attorneys from Arnold & Porter responded to the draft settlement agreement (Pls.' Exh. 20; Defs.' Exh. TT). Arnold & Porter stated that to date it had represented only Local in the FDIC Case, and that "the Colliers are not, and never have

8

Sherman is not an attorney.
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been, clients of Arnold & Porter." TT.)

(See Pls.' Exh. 20; Defs.' Exh.

The proposed settlement agreement would change that, and

called for Arnold & Porter to represent Local and the Colliers as co-equal joint clients in the FDIC Case. Arnold & Porter stated it

could not consent to such an alteration of its existing attorneyclient relationship, was not willing to enter into the proposed joint representation, and would not agree to proposed additional litigation restrictions. (See id.)

A July 27, 1999 responsive letter from Fellers, Snider advised Arnold & Porter that, according to counsel for the Colliers, the Colliers were willing to remove the provision relating to the Colliers becoming co-clients of Arnold & Porter and to remove the proposed litigation restrictions (see Pls.' Exh. 21). The language was removed from the ultimate Settlement Agreement. A Settlement Agreement (Pls.' Exh. 3) between Local and the Colliers was signed in August 1999, but made effective May 27, 1999. This Settlement Agreement resulted in dismissal of the

Oklahoma litigation as well as resolution of other disputes related to the Redemption Agreement with respect to the FDIC Case. Settlement Agreement made "major amendments" to § 5.1, The the

"Adjustments Related to FDIC Assistance Agreement" portion of the Redemption Agreement. The Settlement Agreement recited that

"[c]ertain disputes have arisen between Local Financial and the Colliers as to which of them is entitled to the economic benefit of the Remaining Assistance Amount
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and

how

to

proceed

with

negotiations with the FDIC for the complete settlement of the FDIC Dispute." (Pls.' Exh. 3, p. 4.) In the Settlement Agreement: the

parties amended the definition of "Final FDIC Claim Resolution Amount"; Local represented and warranted that, with a certain proviso, it would not incur any federal or state income tax liability by reason of the settlement of the FDIC Claim; and the parties agreed to reduce the amount of the FDIC Reserve Amount. The Settlement Agreement also "set forth a revised procedure for their proceeding with settlement negotiations with the FDIC in the FDIC Dispute." (Id. at p. 5.) The parties agreed that: Arnold &

Porter would continue to represent Local in the FDIC Case; all legal fees, costs and expenses of the FDIC Case would continue to be paid as set forth in the Redemption Agreement; the parties would diligently, in good faith and on a commercially reasonable basis attempt to resolve the FDIC Dispute as expeditiously as possible and would consult in good faith to accomplish that goal; unless either otherwise requested, each party would be provided with copies of all notices, pleadings, subpoenas, filings,

correspondence or other documents received in connection with the FDIC Case and each would have full, complete and direct access to all attorneys directly representing Local or it subsidiaries in connection with the FDIC Case; the parties would be given adequate prior notice of, and the full opportunity to review and comment on, all filings, motions or other pleadings with respect to the FDIC Case, and would use their best efforts to minimize the amount of
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any payment to FDIC with respect to the FDIC Counterclaim and to fully resolve the FDIC Dispute as expeditiously as possible; generally, no action to settle, terminate or cease litigation of any claim or counterclaim in the FDIC Dispute, or to appeal or decline to appeal, could be made without prior written consent of both Local and the Collier Parties; and, if necessary, an

appropriate common interest agreement would be entered between the parties. (See Pls.' Exh. 3, p. 5.)

Additionally, Local agreed in the Settlement Agreement that the Colliers would have a one-time unilateral right to change counsel representing Local in the FDIC Case. (See id. at pp. 8-9.)

This would be at such time and in such event that the Colliers deemed appropriate in their discretion, and pursuant to an agreedupon procedure (id.). If such new counsel was chosen, the parties

agreed to take necessary steps to have the new counsel substituted for Arnold & Porter as their joint counsel in the FDIC Case (id.). The parties further agreed that they would continue to cooperate and would manage the FDIC Dispute on a equal basis as co-clients after new counsel was chosen (id.). Any further change of counsel

had to be made by mutual agreement of Local and the Colliers (id.). As to settlement of the FDIC Case, Local agreed, with certain provisos, that it would give its written consent to any amount proposed by the Colliers to be paid to the FDIC in full and complete settlement of the FDIC Case and complete resolution and termination of the Assistance Agreement (see Pls.' Exh. 3, pp. 9-22-

10).

If the conditions in the provisos were not satisfied, then

settlement of the FDIC Case could only be by mutual agreement of Local and the Colliers (id.). Local attached to the Settlement Agreement a copy of all settlement communications regarding the FDIC Case that it had received from Arnold & Porter. Local further represented and

warranted that it would promptly provide the Colliers with copies of all written communications that it sent to, or received from, Arnold & Porter directly or indirectly, concerning the possibility of settlement of the FDIC Case, and would "otherwise keep the Colliers fully informed as to the status of all ongoing settlement discussions with the FDIC of the FDIC Case." (Id. at p. 10.)

Local and the Colliers also agreed that they would take all necessary steps to cause Arnold & Porter to deliver a certain settlement agreement proposal to the Department of Justice (id. at pp. 10-11). An August 26, 1999 Supplement to Settlement Agreement (Doc. #40-5) made certain changes in recognition of trusts formed by the Colliers. The relevant obligations of the Settlement Agreement

were not changed. K. Post-Settlement Agreement Relationships: After the Settlement Agreement between Local and the Colliers, Arnold & Porter resumed its settlement negotiations with the FDIC. Both Fellers, Snider and Skadden, Arps had some involvement in advising Local and the Colliers respectively as to the renewed
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negotiations.9 minimal.

This involvement appears to have been relatively

While settlement discussions by Arnold & Porter with the FDIC continued, the Colliers' relationship with Arnold & Porter became strained. Sherman testified that he had always been concerned

about the effectiveness and cost of the representation by Arnold & Porter. In October 1999, Sherman asked Lisa M. Kelley née

Gallagher (Kelley), an in-house compliance officer and attorney, to take the FDIC project away from Laura Crawford, an in-house

accountant, and review documents in their FDIC file.

This action

was triggered by a September 30, 1999 invoice from Arnold & Porter which had, according to Kelley, "infuriated" Sherman because of its amount. Kelley was instructed to go through the invoice, contact

Arnold & Porter, identify herself as the new liaison between the law firm and Sherman, get brought up to speed on the FDIC Case, get an accounting of the time on the invoice, and get the FDIC Case settled. review. In a seven-page, single-spaced November 13, 1999 letter to Arnold & Porter, Kelley introduced herself, asserted the attorneyclient privilege for the contents of the letter, indicated a desire to discuss a broad-ranging set of issues with Arnold & Porter, and posed twenty-two questions about the September 30, 1999 Arnold & Kelley was not given prior attorney fee invoices to

See, e.g., September 1, 1999 letter of Skadden, Arps to Fellers, Snider (Pls.' Exh. 22).
-24-

9

Porter invoice (see Kelley Dep., Exh. B).

On November 30, 1999, a

conference call of several hours' duration was held between Kelley and three Arnold & Porter attorneys (see Pls.' Exh. 5, pp. 7-11). They discussed the issues listed in Kelley's letter, and from Kelley's perspective, the Arnold & Porter attorneys provided legal advice and discussed work product information in a wide-ranging discussion of the FDIC Case. The Arnold & Porter attorneys

discussed that there was a likely shortfall between what the FDIC would settle for and the amounts in the escrow and reserve

accounts, and attempted to determine a value for the FDIC Claim as an offsetting amount. Arnold & Porter asked for certain financial formulate a

information, and agreed to take the information,

settlement strategy, and arrange a settlement conference with the FDIC as to both the FDIC Counterclaim and the FDIC Claim. Kelley also told the Arnold & Porter attorneys, as directed by Sherman, that they were failing to move the FDIC Case along expeditiously and it was costing the Colliers a lot of money. Kelley discussed Sherman's concerns about the attorneys' fees, including their size, the billing rates, and accountability. During the November 30 call no information was withheld by Arnold & Porter. Kelley's sense of it was that the Arnold & Porter

attorneys were pleased that someone from the Colliers was taking an active interest and wanted to move the case forward. Arnold &

Porter provided the information requested by Kelley to bring her up to speed on the case.
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On December 22, 1999, Arnold & Porter sent Kelley various documents, including a 70-page draft Memorandum containing a legal analysis of the tax-benefits contract claim (the FDIC Claim) (see Pls.' Exhs. D, E). about the case. In letters both before and after the November 30 conference call (November 18, 1999 and January 19, 2000), Kelley, as counsel for the Colliers and Sherman, directed the Escrow Agent not to pay invoices submitted by Arnold & Porter for legal fees (see Pls.' Exhs. 3, 4). In a February 1, 2000 responsive letter, Fellers, This became the basis for Kelley's knowledge

Snider took the position that the Colliers could not address objections about Arnold & Porter's invoices to either Arnold & Porter or the Escrow Agent because the Colliers had no attorneyclient relationship with Arnold & Porter and there was no

requirement under the Redemption Agreement for Local to obtain the Colliers' approval to pay the invoices (see Pls.' Exh. F). This response was not well-received by Sherman, and in a February 3, 2000 fax Kelley advised Arnold & Porter, in part, that Local's positions were interfering with the possibility of

settlement with the FDIC and running the risk that Sherman would exercise the Colliers' unilateral option of terminating Arnold & Porter (Pls.' Exh. G). The Fellers, Snider letter was not

discussed by Kelley with Arnold & Porter, and Kelley testified that no one from Arnold & Porter ever said to her that Arnold & Porter did not represent the Colliers.
-26-

Kelley viewed herself as Arnold & Porter's client since she was the Colliers' designee. Initially, she believed this because

that was what she had been told by Sherman; subsequently, because that was how she perceived the relationship based on the day-to-day contacts. Additionally, the Colliers were not represented by any

other law firm with respect to the FDIC Case, and Skadden, Arps was not involved in any of the activities in which Kelley was involved. Kelley testified that during her ensuing relationship with Arnold & Porter she was given full access to Arnold & Porter attorneys, and they worked extremely well together. Dwyer's testimony did not dispute these basic facts, but disagreed that an attorney-client relationship existed with anyone other than Local. Arnold & Porter continued to negotiate a settlement with the FDIC, and kept both Local and the Colliers apprised of the progress by telephone conversations, electronic mail (e-mails), and

correspondence.10

A settlement conference with the FDIC took place

in Washington, D.C. on October 19, 2000, attended by Sherman and Kelley and two Arnold & Porter attorneys, but at Arnold & Porter's suggestion, no representative of Local. Sherman viewed this as

evidence that the Colliers were a client; Dwyer testified that Sherman wanted to settle the FDIC Counterclaim for a lesser amount,

See, e.g., Arnold & Porter fax of February 14, 2000 (Pls.' Exh. H); Dwyer e-mail of March 29, 2000 (Pls.' Exh. 5); Dwyer email of May 26, 2000 and replies of May 31, 2000 (Pls.' Exhs. I, J, K. L, M); Dywer e-mails of October 24 and 30, 2000 (Pls.' Exhs. S, T); Karron e-mails of July 24, 25, 2001 (Pls.' Exhs. O, P, Q).
-27-

10

so Sherman was allowed to attend the meeting to see for himself if such an amount was feasible. The government would not settle the

FDIC Claim, and from the discussion it became apparent that the government's settlement position as to the FDIC Counterclaim was such that there would be about a $2.1 million shortfall in the money which was available from various designated accounts. Sherman wanted Local to contribute money to this shortfall. E-mails on October 24 and 30, 2000, from Arnold & Porter to Kelley summarized their prior telephone conversation and outlined a

revised possible

settlement approach in which the $2 million

shortfall would not have to be paid until the FDIC Claim was decided (see Pls.' Exhs. S, T). that the Colliers as it and Local to It soon became clear, however, had who fundamental would pay the disagreements, $2.1 million

especially shortfall.11

related

A November 8, 2000 letter from Arnold & Porter to the FDIC attorney, with copies to both the Colliers' representatives and Local, conveyed certain requested settlement information to the FDIC, including Local's state and federal tax returns for the calendar year ending December 31, 1999 (see Pls.' Exh. U).

See, e.g., October 26, 2000 letter from Townsend to Sherman (Pls.' Exh. 27); November 6, 2000 letter from Sherman to Townsend (Pls.' Exh. 28); December 4, 2000 letter from Townsend to Sherman (Pls.' Exh. 7).
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11

L.

Colliers' Change of Personnel: On August 1, 2001, prior to any specific settlement offer from

the FDIC, Sherman ceased being the Colliers' representative, and his position was assumed by Joseph Perkovich.12 p. 82). (See Pls.' Exh. 6,

Kelley stopped her activities in connection with the FDIC

Case on that date as well and turned her files over to Perkovich, at his request. Arnold & Porter immediately began dealing with

Perkovich concerning the FDIC Case, forwarding proposed court filings for his review. (Pls.' Exh. 26.)

On or about August 9, 2001, Perkovich retained the law firm of Hunton & Williams LLP ("Hunton & Williams") to oversee Arnold & Porter in the FDIC Case litigation on behalf of the Colliers,13 and provided them with the eight boxes of files he received from Kelley. Attorney Abigail C. Watts-FitzGerald (Watts-Fitzgerald) Hunton & Williams' view

took the lead role for Hunton & Williams.

was that it did not represent the Colliers in the FDIC Case but rather, served as a conduit between Arnold & Porter and the Colliers. The evidence establishes, however, that attorneys for

Hunton & Williams had several direct contacts with Department of Justice attorneys in an attempt to settle the FDIC Case. (See,

Perkovich has a law degree and masters degrees in taxation and estate planning, and was a Certified Public Accountant (CPA). He let his law and CPA licenses expire. Perkovich was never licensed to practice law in Florida. Hunton & Williams had represented the Colliers in a number of other matters for a number of years.
-2913

12

e.g., Defs.' Exh. P.)

These relatively few contacts seem to have

had little positive effect on the negotiations, but rather chiefly served to confuse lines of communications. Hunton & Williams also

represented the Colliers in their other disputes with Local. After Watts-FitzGerald became involved, Arnold & Porter would provide her with copies of documents, and provide their legal opinions in response to her questions. The Arnold & Porter

attorneys would also directly contact Perkovich and discuss the FDIC Case. Watts-FitzGerald was of the opinion that the Colliers

were relying upon Arnold & Porter as their attorney in the FDIC Case (see id.). Watts-FitzGerald acknowledged, however, that

between August 2001 and December 2002, lawyers at Arnold & Porter consistently told her that Arnold & Porter was not the lawyer for the Colliers and would not accept a joint representation of the Colliers. M. Summary Judgment on FDIC Claim Liability: On March 27, 2002, the United States Court of Federal Claims entered summary judgment as to liability on the FDIC Claim, holding that the United States breached the implied covenant of good faith and fair dealing by enacting the Guarini legislation. Local Am. The

Bank v. United States, 52 Fed. Cl. 184 (2002) ("Local I").

amount of damages owed to Local by the FDIC was left to be resolved at a latter time.

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N. Second Supplement to Settlement Agreement: On September 17, 2002, in anticipation of settling the FDIC Counterclaim, Local and the Colliers entered into a Second In the

Supplement to Settlement Agreement (Defs.' Exh. MMM).14

Second Supplement, the parties agreed that they would make a $19 million interim payment to the United States government in order to cease the accrual of interest and penalties while the parties pursued final settlement of the FDIC Counterclaim (id. at p. 2). The parties continued to agree to cooperate with each other to negotiate in good faith a settlement of the FDIC Claim and FDIC Counterclaim (id. at p. 3). The parties also continued to agree

that the Colliers would be liable for payment of attorneys' fees and costs in the FDIC Case and FDIC Counterclaim, and that Arnold & Porter would continue to be the primary negotiator with the government (id.). The parties further agreed that "[a]t all times, Arnold & Porter, as counsel for Local, shall continue to

communicate in a timely and meaningful manner with counsel for the Colliers and seek their input, as well as Local's, on decisions pertaining to litigation or settlement with the U.S. Government." (Id.) The Colliers were given the right to request that Thomas

Dwyer and Kent Yalowitz be the primary Arnold & Porter attorneys on the FDIC Case (id.). Local and the Colliers agreed to negotiate a

fee arrangement with Arnold & Porter mutually acceptable to Local

14

Hunton & Williams represented the Colliers on this agreement.
-31-

and the Colliers for continued prosecution of the FDIC Claims and FDIC Counterclaim (Defs.' Exh. MMM, p. 3). A billing procedure was

established wherein Arnold & Porter would bill Local, with copies to a representative of the Colliers, and a procedure for resolution of billing disputes was established (id.). O. Settlement and Termination Agreement with FDIC: On December 30, 2002, Local and the FDIC signed a Settlement and Termination Agreement (Doc. #40-7, pp. 16-32) that terminated the Assistance Agreement and settled the FDIC Counterclaim, but left unresolved the FDIC Claim and the interest offset issue. Under the Settlement and Termination Agreement, Local was required to pay $24,660,404 to the FDIC ($20,047,249 in tax benefit sharing payments, plus $7,718,893 in prejudgment interest, less $3,105,738 already collected by FDIC) (see id. at pp. 18-19). Arnold & Porter In due

negotiated the settlement with the Department of Justice.

course, Local remitted the FDIC Counterclaim settlement amount to the FDIC. P. Resolution and Modification Agreement: Also effective December 30, 2002, Local and the Colliers entered into a Resolution and Modification Agreement (Defs.' Exh. NN) which, with certain exceptions, superceded the Redemption Agreement and the Settlement Agreement, as supplemented. Resolution and Modification Agreement was negotiated The

between

Michael Ford (for Local) and Watts-FitzGerald (for the Colliers);
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Arnold & Porter had no direct role in the negotiation or drafting of the Resolution and Modification Agreement. The Resolution and Modification Agreement established sources and procedures for payment of the FDIC Counterclaim settlement amount (see Defs.' Exh. NN, p. 2). Additionally, the parties

agreed to continue to cooperate with each other to negotiate in good faith a settlement of the FDIC Claim (see id. at p. 3). Local

and the Colliers further agreed that as of the date of the payment of the FDIC Counterclaim amount and all outstanding attorneys' fees to Arnold & Porter, the Colliers would have sole authority, in their sole discretion and without the consent of Local, to instruct Local as to how the FDIC Claim should be settled, terminated, ceased, or appealed (see id.). Local was given a ten percent The Resolution and

interest in any proceeds (see id. at pp. 3-7).

Modification Agreement also provided the disposition procedure for any proceeds from the FDIC Claim (see id.). Under the Resolution and Modification Agreement, some

provisions of the Redemption Agreement, Settlement Agreement, First Supplement, and Second Supplement were amended and continued in full force as amended (id. at pp. 8-9). The parties continued to

agree that the Colliers would be solely and exclusively liable for payment of attorneys' fees and costs in connection with the FDIC Claim (id. at p. 9). Local agreed to submit all invoices to the

Colliers for payment; to diligently and in good faith pursue the

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FDIC Claim and consult in good faith with the Colliers regarding such prosecution and litigation strategy (see Defs.' Exh. NN, p. 10); to provide the Colliers with copies of all notices, pleadings, subpoenas, filings, correspondence or other documents received in connection with the FDIC Claim and with full and direct access to all attorneys representing Local in connection with the FDIC Claim; to give the Colliers adequate prior notice of and the full

opportunity to review and comment upon all filings, motions and other pleadings with respect to the FDIC Claim (see id.); and to use best efforts to maximize the amounts of any payment from the FDIC regarding the FDIC Claim. Local agreed not to settle,

terminate or cease litigation of the FDIC Claim, or appeal or decline appeal, without prior written consent of the Colliers (see id.). The parties also agreed that Arnold & Porter would continue to be the primary negotiator with the government on the FDIC Claim, subject to a replacement provision (see id.). The parties further

agreed that "[a]t all times, Arnold & Porter, as counsel for Local, shall continue to communicate in a timely and meaningful manner with counsel for the Colliers and seek their input, as well as Local's, on decisions pertaining to litigation or settlement with the United States Government." (Id.) The Colliers were given the

right to request that Thomas Dwyer and Kent Yalowitz be the primary Arnold & Porter attorneys on the FDIC Case (see id.).

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The parties further agreed that Arnold & Porter would continue to issue its fee statements on the FDIC Claim directly to its client, Local, with a copy to the Colliers (see Defs.' Exh. NN, p. 10). The Colliers were given the right to review and approve the

attorney fee statements, and were responsible for payment of the fees (see id.). A procedure was established to resolve attorney

fee disputes between the Colliers and Arnold & Porter (see id. at pp. 9-11). Local additionally agreed that the Colliers would have a onetime unilateral right to change counsel representing Local in the FDIC Claim (see id.). This would be at such time and in such event

that the Colliers deemed appropriate in their discretion, and pursuant to an agreed-upon procedure (see id.). If such new

counsel was chosen, the parties agreed to take necessary steps to have the new counsel substituted for Arnold & Porter as their joint counsel in the FDIC Claim (see id.). The parties further agreed

that they would continue to cooperate and would manage the FDIC Claim on an equal basis as co-clients after new counsel was chosen (see id.). Any further change of counsel had to be made by mutual

agreement of Local and the Colliers (see id.). Q. Local's 2003 Tax Deductions: As it relates to this case, the year 2003 was notable because certain tax deductions were taken by Local that year. No one at

Local made the Colliers aware of these tax deductions and the

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associated benefits. The disclosure of the deductions by Carver in 2006 constitutes the bulk of the allegedly privileged and

confidential information given by Carver to the Colliers. (1) Attorneys' Fees Deduction: In 2003, Local filed amended tax returns for 1999 through 2002, taking a tax deduction for tax years 1997 through 2002 for the attorneys' fees paid to Arnold & Porter during the course of the FDIC Dispute. Carver testified that Dwyer had advised her such a deduction was legal and appropriate even if the attorneys' fees had been paid by the Colliers. Dwyer confirmed this, adding that

he also said this was a proper deduction unless there was a contractual obligation to the contrary. After discussing the

matter with Richard Park (Park), Local's Chief Financial Officer (CFO), Park and Carver decided that if there was a viable tax position, Local would take the deduction on its tax return. The

tax benefit of such a deduction to Local was approximately 35% of the amount of the attorneys' fees. Park instructed Carver not to

discuss this matter with the Colliers. (2) Principal Payments Deduction: In 2003, while the FDIC Claim was still being litigated, Carver spearheaded internal discussions of whether Local could obtain a tax advantage from the FDIC Counterclaim settlement. Carver testified that she and Park had discussions as to whether Local could file an amended 2002 federal tax return claiming a
-36-

deduction for the principal payments made pursuant to the FDIC Counterclaim settlement.15 this possibility. Carver took the lead on investigating

This was the same issue previously discussed in

1997, which caused the write-off of a $3 million asset upon the determination that there was no basis for a deduction of principal payments. When Carver told Dwyer that she wanted to deduct the principal payments, Dwyer thought she was crazy and stated that he did not think there was a tax basis to do so. Dwyer felt that it would not

be appropriate for Arnold & Porter to do the work to determine if the principal payments were deductible, and referred Carver to Patrick Mitchell (Mitchell), an attorney at Jenkens & Gilchrist. Carver called Mitchell, and it was decided that Jenkens & Gilchrist would generate a tax opinion on the issue. by Jenkens & Gilchrist opined The tax opinion issued

that there existed substantial (Pls.'

authority to support Local taking a $20 million deduction. Exh. 10.)

Carver testified that there was a lot of discussion between herself, Dwyer and Mitchell about the methodology of taking the deduction, and it was ultimately decided to avoid a justification that relied upon the Guarini claim or the FDIC Counterclaim. The

The tax benefit of the interest deduction had already been passed on to the Colliers in the form of proceeds credited towards the settlement of the FDIC Counterclaim.
-37-

15

deduction was approximately $20 million, which had a tax benefit of approximately $7 million. Carver testified that neither she nor Dwyer thought it was fair and equitable for Local to take the principal deduction and not pass the tax benefits through to the Colliers. Carver's

understanding was that Local was to pass the benefits associated with both deductions to the Colliers. Carver also testified,

somewhat inconsistently, that she believed that the Colliers had released whatever claim to tax benefits they had when they signed the Resolution and Modification Agreement. Park concluded that the tax benefit on the principal payment did not need to be passed through to the Colliers, and instructed Carver not to talk about it with any of the Colliers' representatives. (3) Excess Tax Basis: In the tax returns it originally filed, Local did not

differentiate between book basis and tax basis, considering both to be the same. In March 2003, Local filed an amended tax return for

its tax year ending June 30, 1999, which claimed an excess basis deduction that was equal to the tax basis that existed on the date of acquisition of the failing thrift, Community Federal Savings & Loan Association. The deduction was for $20 million, and had All of the excess

approximately a $7 million tax benefit to Local. basis was captured in the amended tax return.

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Arnold & Porter sent a copy of this amended tax return to the attorney for the FDIC by a cover letter dated March 31, 2003 (see Pls.' Exh. 14). The cover letter and a copy of this amended tax

return were also sent to Perkovich and Watts-FitzGerald by fax transmittal on March 31, 2003 (see Pls.' Exh. 14). Watts-

FitzGerald testified she received the letter and amended tax return, but did not discuss it with anyone. Carver testified that

this cured her concern over non-disclosure of excess basis to the Colliers. R. The FDIC Claim and the Sale of Local: On February 26, 2004, and April 9, 2004, the Court of Federal Claims awarded Local $5,883,296 as tax benefits lost as a result of the passage of the Guarini legislation. Local Okla. Bank, N.A. v. The government

United States, 59 Fed. Cl. 713 (2004) ("Local II"). appealed this decision.

In May-June, 2004, Townsend's group sold Local in a private sale for approximately $384 million to International Bancshares Corporation (IBC). On August 31, 2005, Carver signed an

International Bancshares Corporation Code of Ethics. Dep., Exh. 10.) would "[t]ake

(See Carver

This provided, among other things, that Carver all of reasonable non-public measures to about protect IBC or the its

confidentiality

information

subsidiaries and their customers obtained or created in connection with your activities and to prevent the unauthorized disclosure of

-39-

such information unless required by applicable law or regulation or legal or regulatory process." (See Carver Dep., Exh. 10, p. 3.)

Carver recognized that she was bound to adhere to the provisions of the Code of Ethics. On June 29, 2006, the decision of the Court of Federal Claims awarding $5.8 million was affirmed by the Federal Circuit. Local

Okla. Bank, N.A. v. United States, 452 F.3d 1371 (Fed. Cir. 2006). As a result, Local was called upon to distribute the proceeds to be received from the FDIC. The anticipated distribution of the $5.8

million brings us at long last to the facts immediately surrounding the issues in the pending motion. II. In the first part of July 2006, Carver left IBC because, at least in part, she became unhappy with her compensation. On July

26, 2006, Dwyer drafted a "Privileged and Confidential AttorneyClient Communication Memorandum" to Jon Nixon (Nixon), General Counsel of IBC, with a proposed distribution allocation of the $5.8 million pursuant to his review of the Resolution and Modification Agreement. (Pls.' Exh. 90.) Dwyer sent a copy of the memorandum (Id.) of the

by e-mail to Watts-FitzGerald on August 8, 2006. In August 2006, Carver called a

representative

Colliers to notify them of her departure from IBC and to inform them that she should not be sent information about matters on which she had previously worked. At about the same time, Perkovich and
-40-

Watts-FitzGerald also heard that Carver had left IBC.

Perkovich

wished to retain Carver to consult with the Colliers regarding the distribution of the $5.8 million from the FDIC because he was not comfortable with the distribution proposed by Dwyer. Thus,

Perkovich arranged for a telephone conference with Carver. During a thirty-minute call on August 16, 2006, Perkovich stated that he wished to hire Carver to work on the Colliers' behalf in connection with allocation of the Guarini claim proceeds awarded by the federal court. principle to an hourly rate. Carver agreed, and they agreed in Carver then informed Perkovich that

she could not work for him in good conscience unless he understood that there were actions taken by Local that she believed to be improper. Carver did not discuss specifics, but told Perkovich

that the magnitude of these actions was $15-20 million. On August 21, 2006, Carver held a thirty to sixty-minute telephone call, first with Perkovich alone and then in a conference call with both Perkovich and Watts-FitzGerald. During this

conference call, they discussed that Carver had been asked to work for the Colliers to assist in the allocation of the $5.8 million Guarini money, and that Carver had told Perkovich she could not in good conscience take this work without disclosing that there were certain tax benefits, taken by Local, that should have been

credited to the Colliers.

Watts-FitzGerald stopped Carver at that

point, stating that Carver should not disclose attorney-client

-41-

privileged information.

Watts-FitzGerald asked Carver if she was Carver

subject to any confidentiality or similar agreements.

responded that the bank had a code of ethics, the contents of which Carver did not recall, but that she did not recall being subject to any confidentiality or other restrictive agreements. The

participants then had a brief, general conversation in which Carver stated that there were three categories, or "buckets," of tax deductions that Local had taken, which Carver felt belonged to the Colliers. Perkovich asked Watts-FitzGerald to call Carver back the next day to get more information. Watts-FitzGerald testified that

at that time, she felt that an employee did not have a fiduciary obligation to an employer, but conceded that she did not inquire as to Carver's position within Local. Watts-FitzGerald also testified that she did not think confidentiality was an issue because there was a binding contract giving the Colliers free access to

everything dealing with the Colliers. Watts-FitzGerald called Carver on August 22, 2006. Carver

discussed the three "buckets" in more detail, identifying them as (1) legal fees paid to Arnold & Porter with regard to the FDIC Case, which Local had deducted on its federal tax returns; (2) payments of principal made by the Colliers from the escrow account to the FDIC, which Local had deducted on its federal tax returns; and (3) certain of Local's assets which had an excess tax basis compared to their book basis, which Local had deducted on its federal tax return. Carver stated that she felt the Colliers were
-42-

entitled to the benefits of these deductions.

Watts-FitzGerald

recognized that Carver's statements created at least a potential adversarial relationship between Local and the Colliers. Pursuant to the August 21 conversation, an Independent

Contractor/Confidentiality Agreement was drafted by Perkovich and reviewed by Watts-Fitzgerald. (Defs.' Exh. Q.) The agreement

provided that Carver would be paid at a rate of $400 per hour for work related to Guarini and a related interest offset matter, and that the parties anticipated entering into additional agreements for "other services" after further discussion. The "other

services" referred to the three tax "buckets" that Local had failed to disclose to the Colliers. On August 31, 2006, Perkovich sent a letter to Nixon at IBC acknowledging receipt of Dwyer's July 26, 2006 allocation of the $5.8 million. Perkovich advised Nixon that the Colliers had

"retained Kristy Carver as our consultant effective August 16, 2006, to advise the Colliers thereon. employment with IBC ended last July." We understand that Kristy's (Defs.' Exh. SSS.) A copy

of this letter was sent by Watts-FitzGerald to Arnold & Porter on September 13, 2006. (Id.)

Also on August 31, 2006, Carver met with Perkovich and WattsFitzGerald (and attorney Vance Salter [Salter] by conference call) in Naples, Florida, for a couple of hours. The purpose of the

meeting was to decide whether there would be a separate retention

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of Carver with regard to the three undisclosed tax "buckets." Salter instructed Carver not to discuss conversations she had had with Arnold & Porter attorneys. Carver's recollection was that the attorney-client privilege was discussed and she was instructed not to talk in detail about conversations she had had directly with Arnold & Porter attorneys. Watts-Fitzgerald again asked if Carver

was subject to a confidentiality or other agreement, but received no more definitive an answer than she had previously. Carver

discussed Guarini and the allocation of the money, and the three tax "buckets" that Carver believed had been wrongfully withheld from the Colliers. More specifically, Carver described the tax

treatment taken by Local of the attorneys' fees deduction, the excess tax basis issue in the various amended tax returns and the settlement payment; Local's first amended tax return; statements by CFO Park that Carver should not worry about the Co