LIBERTY INTERNATIONAL UNDERWRITERS CANADA v. SCOTTSDALE INSURANCE COMPANY et al

Filing 137

OPINION filed. Signed by Judge Noel L. Hillman on 12/29/2015. (drw)

UNITED STATES DISTRICT COURT
DISTRICT OF NEW JERSEY

LIBERTY INTERNATIONAL
UNDERWRITERS CANADA,

Civil No. 12-4934 (NLH/JS)

Plaintiff,
OPINION
v.

SCOTTSDALE INSURANCE COMPANY
and INFINITY ACCESS LLC,
Defendants.

APPEARANCES:
STEPHEN ALLEN LONEY, JR.
HOGAN LOVELLS US LLP
1835 MARKET STREET, 29th FLOOR
PHILADELPHIA, PA 19103
MARK C. GOODMAN (pro hac vice)
HOGAN LOVELLS US LLP
3 EMBARCADERO CENTER, 15TH FLOOR
SAN FRANCISCO, CA 94111
On behalf of plaintiff Liberty International
Underwriters Canada
GARY S. KULL
APRIL T. VILLAVERDE
CARROLL, McNULTY & KULL LLC
120 MOUNTAIN VIEW BLVD.
P.O. BOX 650
BASKING RIDGE, NJ 07920
LISA MARTIN LAMPKIN (pro hac vice)
SELMAN BREITMAN LLP
11766 WILSHIRE BOULEVARD, 6TH FL.
LOS ANGELES, CA 90025
On behalf of defendants Scottsdale Insurance
Company and Infinity Access LLC

HILLMAN, District Judge
Pending before the Court is the motion of plaintiff,
Liberty International Underwriters Canada, asking the Court to
reconsider its September 30, 2015 denial of cross-motions filed
by plaintiff and defendants, Scottsdale Insurance Company and
Infinity Access LLC, appealing the Magistrate Judge’s resolution
of a discovery dispute involving defendants’ request for
documents plaintiff claims are protected by the attorney-client
privilege and work-product doctrine.

In a summary Order, this

Court determined that the Magistrate Judge’s decision was not
“clearly erroneous or contrary to law,” 28 U.S.C. §
636(b)(1)(A); Fed. R. Civ. P. 72(a); L. Civ. R. 72.1(c)(1)(A),
when he determined that some of plaintiff’s privileged documents
should be produced to defendants.
On December 9, 2015, the Court held oral argument on
plaintiff’s motion for reconsideration.

While we remain

unconvinced that the decision by the Magistrate Judge was
“clearly erroneous or contrary to law,” there is sufficient
ambiguity regarding the application of In re Kozlov, 398 A.2d
882, 887 (N.J. 1979), and its progeny, to warrant remand.
Accordingly, for the reasons expressed on the record and below,
plaintiff’s motion will be granted, and the matter remanded to
the Magistrate Judge for further consideration consistent with
this Opinion.
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BACKGROUND and ANALYSIS
This action concerns Liberty’s claims to recover from
Scottsdale $1 million plus attorneys’ fees that Liberty paid in
November 2011 to settle a lawsuit where it was alleged that
Liberty’s insured, Tractel, Inc., started a fire at the Borgata
Hotel, Casino and Spa in Atlantic City, New Jersey.

Defendants

contend that Liberty’s lawsuit is barred by the terms of the
settlement agreement Tractel entered into with Borgata.
Previously, on defendants’ motion for judgment on the pleadings
where they argued that Liberty’s claims against them must be
dismissed because Liberty and Tractel assigned to Borgata all
their rights to pursue any claims relating to the fire, this
Court found that “[t]he fog of ambiguity surrounding the
drafting of the assignment provision may no doubt clear during
further discovery when the parties — and the Court — have more
information available to them.”

(June 28, 2013 Opinion, Docket

No. 46 at 38.)
Extensive discovery has been undertaken by the parties
since the Court’s Opinion over two years ago, and the current
discovery dispute centers on defendants’ insistence that they
are entitled to see Liberty’s communications with its attorneys
and the attorneys representing Tractel regarding negotiations

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over the terms of the Tractel/Borgata settlement agreement. 1
Liberty argues that the requested documents are protected and
should not be produced, but the Magistrate Judge determined that
some of the documents that can be considered as privileged
nonetheless should be produced.
Both sides appealed the Magistrate Judge’s decision. 2
Liberty argued that the circumstances of this case do not
warrant the application of the very narrow exceptions allowing
the disclosure of privileged and work-product documents.
Defendants argued that all of Liberty’s documents concerning the
settlement agreement and assignment of rights, not the few
allowed by the Magistrate Judge, should be produced to them,
particularly because Liberty has put the documents “at issue,”

1

In deciding defendants’ motion for judgment on the pleadings,
this Court was not provided with, and therefore did not
consider, the settlement agreement between Tractel and Borgata.
The Court noted that “it remains unclear whether Tractel,
represented by LIU attorneys during settlement negotiations, had
the authority and permission to include [Liberty] in the
assignment provision of the stipulation and assignment
agreement. According to [Liberty], counsel only sought to bind
the subrogor, Tractel.” (Docket No. 46 at 37.)
2

A United States magistrate judge may hear and determine any
non-dispositive pretrial matter pending before the court
pursuant to 28 U.S.C. § 636(b)(1)(A), and a district court judge
will only reverse a magistrate judge’s opinion on pretrial
matters if it is “clearly erroneous or contrary to law,” 28
U.S.C. § 636(b)(1)(A); Fed. R. Civ. P. 72(a); L. Civ. R.
72.1(c)(1)(A).
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and because the documents are not actually privileged. 3

More

specifically, defendants argued that the plain language of the
settlement agreement “says what it says” – that Tractel and
Liberty agreed to assign all rights they might have against
other parties in the case, including Infinity Access, to
Borgata.

Defendants further argued that if Liberty’s contention

that the settlement and assignment agreement does not “say what
it says,” Liberty should be required to provide all of the
documents relating to the execution of the settlement agreement
because Liberty’s position has placed its attorney-client
communications “at issue.”
In response, Liberty argued that its answers to questions
regarding what it authorized Tractel to do, and Tractel’s
testimony about what it understood it was doing, simply do not
require confirmation through the advice, opinions, impressions
or communications of attorneys for both Liberty and Tractel
regarding all things “relevant to” Tractel’s settlement, and
that such discovery would irreparably harm the notions of
privilege and the relationship between an insurer and its

3

Defendants also argued that because Liberty and Tractel each
had their own independent counsel who argued over the terms of
the settlement agreement, and because Liberty stated in its
complaint that it agreed to defend Tractel subject to a
reservation of rights, no tripartite relationship existed that
would implicate the attorney-client privilege. Liberty refutes
defendants’ characterization. The Court does not need to
consider this argument at this time.
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insured.
The Magistrate Judge performed a “painstaking” in camera
review of the documents plaintiff is withholding on the grounds
of privilege and work-product.

(Docket No. 115 at 6.)

The

documents included the emails and draft agreements the
interested parties exchanged from August to November 2011
regarding the terms of the Settlement Agreement that was
eventually signed on November 22, 2011.

The Magistrate Judge

noted, “It is evident from the documents that Robert Philpott
[plaintiff’s Assistant Vice-President/Casualty Claims Officer]
played the key role for Liberty regarding Liberty’s input into
the Tractel/Borgata settlement terms.

During the key time

period Philpott exchanged emails and draft agreements with
various individuals regarding the settlement terms, including
Tractel’s assigned defense counsel, Infinity’s counsel, and
Liberty’s own counsel.”

(Id.)

The Magistrate Judge accurately set forth and considered
the law governing the purpose and application of the attorneyclient privilege, as well as the circumstances of when the
privilege can be pierced.

Citing In re Kozlov, 398 A.2d 882,

887 (N.J. 1979), the Magistrate Judge noted that the attorneyclient privilege may be pierced where (1) there is a legitimate
need for the requested information, (2) the information is
relevant and material, and (3) the information could not be
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obtained from a less intrusive source.

Kozlov, 398 A.2d at 887.

However, the Kozlov test has not been applied as broadly as
its own language suggests.

Those courts applying Koslov have

recognized, despite the plain language of the test, that merely
needing relevant and material information not available from
other sources is insufficient standing alone to warrant the
disclosure of otherwise privileged matters.

The Magistrate

Judge noted this as well: “[g]iven the importance of the
attorney-client privilege, . . .

merely because privileged

information is relevant does not necessarily require that it be
produced.”

(Docket No. 115 at 9-10.)

Instead, the

circumstances must be so grave or compelling that the “privilege
must yield to the most fundamental values of our justice
system.” (Id. citing Matter of Nackson, 555 A.2d 1101, 1106
(1989); ACBBBits, LLC v. 550 Broad Street, L.P., 2011 WL
5838737, at *8 (N.J. Super. Ct. App. Div. Nov. 22, 2011).)
Under these precepts, the Magistrate Judge found that he
was “left with the firm conviction that fairness dictates that
some of plaintiff’s privileged and work-product documents be
produced, and that defendants have a substantial need for these
documents that are not otherwise available in discovery.”
at 10-11.)

After describing the deposition testimony of

(Id.

Philpott with regard to the creation of the assignment
agreement, the Magistrate Judge “believe[d] that additional
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documents should be produced in order to give defendants a
clearer picture of what went on.

Given the stakes in the case

and Philpott’s important role and self-interest, defendants
should not have to accept Philpott’s testimony at ‘face value,’
especially since he could not remember important details
regarding his communications in 2011.”

(Id. at 13.)

At oral argument on plaintiff’s motion for reconsideration
of the Court’s affirmance of the Magistrate Judge’s decision, it
became evident that this Court could not discern with sufficient
certainty what compelling and grave circumstances warranted the
piercing of the privilege.

While it is clear that the

Magistrate performed a detailed and exhaustive review of the
relevant documents in a manner respectful of the importance of
the privilege (and only granted a limited disclosure), and may
have indeed found such circumstances, the Opinion could be
interpreted as applying a simple balancing test between need and
fairness.

If so, this would have been an overbroad application

of the Koslov and its progeny.
Case law has developed three limited predicates where
fairness dictates that the privilege should be pierced:

(1)

when the nature of the claims place the content of confidential
communications “at issue”; (2) to protect the constitutional
rights of an accused; and (3) when the client “calls his
attorney to the stand.”

United Jersey Bank v. Wolosoff, 483
8

A.2d 821, 827 (N.J. Super. App. Div. 1984) (citing cases).
The second and third predicates do not apply here, and the
Magistrate Judge’s decision does not explicitly state that the
privilege afforded to plaintiff’s materials regarding the
assignment agreement was waived because the claims in the case
put the content of those materials “at issue.”

Instead, the

decision focuses on defendants’ ability to get a “fair and
complete” picture of what transpired with regard to the
assignment agreement in order for defendants to assert their
defense to plaintiff’s claims against them.

It is unclear to

this Court whether these circumstances satisfy the predicate
event of a claim placing the content of the privileged material
directly in issue.
Where the “information sought is highly germane to a
critical issue raised by the party seeking to invoke” the
privilege, it has been held that the privileged is waived.
Wolosoff, 483 A.2d at 828.

The Magistrate Judge’s decision is

silent as to whether plaintiff has waived its privilege because
the information sought by defendants is “highly germane” to a
critical issue raised by plaintiff.

The decision is also silent

as to whether a defendant’s defense can meet the “at issue”
waiver criteria. 4

4

This line of cases does not clearly apply to the discovery
dispute in the matter although it may by analogy. A party who
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Consequently, this Court will grant plaintiff’s motion for
reconsideration and amend the Order denying the parties’ crossappeals of the Magistrate Judge’s decision.

In order to allow

the Magistrate Judge to more fully explain his findings and the
application of the Koslov test, as modified by subsequent
decisions, to the unique facts of the case, the Court will
remand the matter to the Magistrate Judge so that he may more
explicitly articulate whether the predicate circumstances
necessary to pierce the attorney-client privilege exist in this
matter.

This Court expresses no view on the outcome of such a

review.
An appropriate Order will be entered.

Date: December 29, 2015
At Camden, New Jersey

s/ Noel L. Hillman
NOEL L. HILLMAN, U.S.D.J.

brings a claim that implicates its own privilege can be said to
waive that privilege by placing the privilege “at issue.” A
common example is a plaintiff who brings a malpractice claim
against a lawyer. Here, however, defendant seeks to pierce the
plaintiff’s privilege by asserting a defense that focuses on
plaintiff’s relationship with a third party - its insured wholly independent of any action taken by defendant. Whether
plaintiff’s claim that it did not know of or otherwise authorize
its insured’s purported release of its subrogation rights
against defendant (an argument not part of its affirmative case
but made in response to defendant’s affirmative defense that it
had) is sufficient to place the contents of the admittedly
privileged communications “at issue” is a matter for the
Magistrate Judge to resolve in the first instance on remand.
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