IMPALA PLATINUM HOLDINGS LIMITED et al v. A-1 SPECIALZED SERVICES & SUPPLIES, INC. et al

Filing 240

MEMORANDUM AND ORDER RE: CRIME-FRAUD EXCEPTION.. SIGNED BY HONORABLE MICHAEL M. BAYLSON ON 2/2/2017. 2/3/2017 ENTERED AND COPIES MAILED, E-MAILED.(kp, )

IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF PENNSYLVANIA
IMPALA PLATINUM HOLDINGS
LIMITED, et al.

CIVIL ACTION
NO. 16-1343

v.
A-1 SPECIALIZED SERVICES AND
SUPPLIES, INC., et al.
Baylson, J.

February 2, 2017
MEMORANDUM RE: CRIME-FRAUD EXCEPTION

At issue in this complex commercial litigation is whether to compel production of certain
attorney-client privileged documents under the crime-fraud exception. Plaintiffs Impala
Platinum Holdings Limited and Impala Refining Services Limited (“Impala”) filed a Motion to
Require the Shareholder/Director Defendants to Produce Privilege Logs and to Produce Certain
Communications Based on the Crime-Fraud Exception on November 11, 2016 (ECF No. 150).
After considering the Motion, as well as the responses and reply thereto, this Court scheduled a
hearing on January 12, 2017 for argument on whether in camera review of the privileged
documents was appropriate. At the hearing, defense counsel argued that Impala had not met its
burden of showing a prima facie case of fraud sufficient to justify in camera review of the
challenged documents. They further contended that a fraudulent conveyance, such as that
alleged by Impala, cannot constitute “fraud” for purposes of the crime-fraud exception. Impala,
on the other hand, argued that they had met the Third Circuit’s standard for in camera review
under the crime-fraud exception, and cited a recent Supreme Court case to bolster their argument
that a fraudulent conveyance can be a “fraud” under the exception.
Following the hearing, the Court ordered the Defendants to prepare a log of all attorneyclient communications from the client to counsel in the six months prior to each of the allegedly
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fraudulent transactions (ECF No. 205). The Court found that because the evidence showed that
Defendant A-1 Specialized Services and Supplies, Inc. (“A-1”) had engaged in significant
financial transactions at a time when it may have been insolvent and when Defendants may have
known Impala to have a superior right of recovery, in camera review was justified. Defendants
submitted their privilege logs and all communications described therein on January 24, 2017,
with the exception of Ashok Kumar Khosla and Alliance Industries Limited (“Alliance”), who
requested a phone call to discuss the time and expense associated with producing every logged
document. The Court agreed that requiring Alliance to produce upwards of 20,000 pages of
documents was unnecessary at that juncture, and a compromise was reached whereby Alliance
and Impala would each select one month of documents for the Court to review. After this first
step, the Court would determine whether further review was necessary.
Alliance submitted 578 emails to the Court, from the months of May and June 2015. The
vast majority of the communications were innocuous discussion of litigation filings, scheduling,
and strategy. In a few instances, the documents showed the clients asking counsel for legal
advice regarding the consequences of the proposed settlements, or of A-1 filing for bankruptcy.
But, contrary to Impala’s position, we do not find that documents of this sort are sufficient to
meet the stringent standard for piercing the attorney-client privilege.
The Third Circuit has established that to pierce the attorney-client privilege under the
crime-fraud exception, the court must find that the movant has demonstrated there is a
reasonable basis that “(1) the client was committing or intending to commit a fraud or crime, and
(2) the attorney-client communications were in furtherance of that alleged crime or fraud.” In re
Grand Jury Subp., 705 F.3d 133, 151, 153 (3d Cir. 2012). “The reasonable basis standard is
intended to be reasonably demanding; neither speculation nor evidence that shows only a distant

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likelihood of corruption is enough.” Id. at 153 (quoting In re Grand Jury Proceedings, 417 F.3d
at 23). “Only when a client knowingly seeks legal counsel to further a continuing or future crime
does the crime-fraud exception apply.” United States v. Doe, 429 F.3d 450, 454 (3d Cir. 2005).
In addition, before compelling production of the privileged documents, the court must hold an
evidentiary hearing at which “the party defending the privilege [is] given the opportunity to be
heard, by evidence and argument.” Haines v. Liggett Group Inc., 975 F.2d 81, 97 (3d Cir. 1992).
We have found no precedent for piercing the attorney-client privilege under
circumstances similar to these, where there is no evidence of intent to defraud or commit a crime.
In Alliance’s letter dated January 25, 2017, there are citations to several cases that show the
stringent standard courts apply before compelling production of privileged documents under the
crime-fraud exception. Most factually similar to the instant case is Tindall v. H & S Homes,
LLC, 757 F. Supp. 2d 1339 (M.D. Ga. 2011), in which the communications at issue were
likewise alleged to be in furtherance of fraudulent transfers. The court engaged in an in camera
review and concluded that the plaintiff had satisfied his burden of showing the exception was
applicable to communications relating to one of the three challenged transfers. That finding was
largely based on the court’s review of one damning document, which laid out a scheme by the
defendants’ attorney to “form[] a completely new entity . . . designed to avoid claims of
successor liability to the maximum extent possible.” Id. at 1363. There is no evidence in this
case that shows any comparable level of fraudulent intent on the part of Defendants or their
counsel. In addition, in Kickflip, Inc. v. Facebook, Inc., No. 12-1369, 2016 WL 5929003 (D.
Del. Oct. 11, 2016), the court compelled production of two documents under the crime-fraud
exception because they reflected misrepresentations by the plaintiff to counsel regarding the
creation of an agreement which the court had already found was likely to have been backdated.

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See id. at *6.
The cases cited by Impala in their letter dated January 25, 2017, on the other hand, are
factually inapposite. In In re Rosich, 561 B.R. 668 (Bank. W.D. Mich., 2016), there was far
greater indicia of fraud than is present in the instant case, insofar as the defendants in Rosich
conceded that the transfer at issue had occurred “at least in part to limit the number of creditors
who could reach [the asset at issue].” Id. at 669. Similarly, in Fragin v. First Fund Holdings
LLC, 2016 WL 4256984 (Sup. Ct. N.Y. Cty. Aug. 11, 2016), the court concluded that the
plaintiff had shown fraud sufficient for the exception’s application based on significant evidence
of a fraudulent transfer, including the fact that the same law firm advised both parties to the
challenged transaction. There is simply not a comparable level of fraud shown by the documents
reviewed.
We also note the recently published precedential Third Circuit decision of In re Grand
Jury Matter # 3, No. 15-2475, 2017 WL 383361 (3d Cir. Jan. 27, 2017), that considers this issue
and finds that the district court erred in finding the crime-fraud exception applicable. In that
case, an attorney had sent an email to his client explaining how to fraudulently amend his tax
returns, and the client had forwarded the email to his accountant. Id. at *2. The court concluded
that a reasonable basis existed to believe the client had committed fraud, based on that email and
other evidence, but held that there was insufficient evidence to show the client had followed
through on the lawyer’s advice and amended the returns. Id. at *6-7. Because the “in
furtherance” element of the crime-fraud exception test was absent, the exception could not apply
to pierce the privilege. We read this opinion as another example of the Third Circuit embracing
a strict test for invading the attorney-client privilege, and find that it bolsters our conclusion that
Impala has failed to meet its burden to show that the crime-fraud exception applies.

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Based on the foregoing, we find that further sampling of documents by date is not a
worthwhile exercise. To the extent Impala requests the Court to conduct additional in camera
review, we will allow the searching of terms suggested by Impala but order that the costs of any
such additional searching and production be borne by Impala.
BY THE COURT:

/s/ Michael M. Baylson
MICHAEL M. BAYLSON
United States District Court Judge

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