Sovereign Holdings, Inc. v. Deck et al
ORDER granting in part and denying in part 42 Motion to Compel. Signed by U.S. District Judge Karen E. Schreier on 9/17/18. (DJP)
UNITED STATES DISTRICT COURT
DISTRICT OF SOUTH DAKOTA
SOVEREIGN HOLDINGS, INC.,
PAUL W. DECK, JR. and SCOTT A.
ORDER GRANTING IN PART AND
DENYING IN PART MOTION TO
MARY ELLEN KISTING,
Plaintiff, Sovereign Holdings, Inc., moves to compel defendant Paul W.
Deck, Jr., to produce documents associated with Deck’s representation of
Sovereign during previous litigation. Docket 42. Deck opposes the motion,
arguing that the documents are privileged because they contain confidential
communications between Deck and Mary Ellen Kisting, the former president
and 75% owner of Sovereign, when Mark Nylen, the current owner of
Sovereign, was adverse to Sovereign. Docket 56. Following a telephonic hearing
on the motion (Docket 70), Deck produced the documents identified in his
privilege logs to the court for an in-camera review. On May 1, 2018, the court
held an evidentiary hearing on the merits of Sovereign’s motion to compel.
Docket 81. The court permitted Sovereign, Deck, and Kisting, an interested
party, to submit supplemental briefing following the hearing. See Dockets 89,
92, 94, 95, 97. For the reasons that follow, the court grants Sovereign’s motion
in part and denies Sovereign’s motion in part.
Sovereign Holdings was incorporated as a South Dakota corporation in
2007 by Mary Ellen Kisting, formerly Mary Ellen Nylen. 1 Docket 57-1, Docket
81 at 20. Kisting created Sovereign from the assets of a previous company she
owned, and she ran the business with her husband at the time, Mark Nylen.
Docket 81 at 20-21. Kisting was a 75% shareholder, president, and treasurer of
Sovereign until June 21, 2017. Id. at 23. Nylen was vice president and
secretary of Sovereign until March 2015, and, as trustee for two family trusts,
was a 25% shareholder until June 21, 2017. Id.; Docket 57-2.
Sovereign’s primary assets consisted of transportation equipment, such
as an airplane, 2 semi-trucks, tankers, and some processing equipment. Docket
81 at 21. Kisting and Nylen also started Hepar BioScience, LLC, 3 which was a
company that bought and sold animal by-products. Id. at 22. Sovereign leased
The facts are derived from the March 7, 2018 telephonic hearing, May 1, 2018
evidentiary hearing, the parties’ submitted briefs, attachments, and the
memorandum decisions and other filings from the dissolution court in Nylen v.
Nylen, that were submitted to the court under a protective order (Docket 22)
and supplemental protective order (Docket 69).
2 Kisting testified that the airplane was owned by Hepar LLC, a holding
company created to keep insurance liability of the assets separate. While she
mentioned that Sovereign owned Hepar LLC, Kisting did not detail when Hepar
LLC was created or when the airplane was transferred to Hepar LLC. See
Docket 81 at 29.
3 Kisting was a 99% shareholder and Nylen a 1% shareholder in Hepar
BioScience, LLC. Docket 81 at 22.
its transportation equipment and airplane to Hepar BioScience to transport
Hepar BioScience’s by-products. Id. Sovereign employed two truck drivers as
its only employees and did not lease its equipment to any company other than
Hepar BioScience. Id. at 22-23.
In December 2011, January 2012, and May 2013, Sovereign guaranteed
Hepar BioScience loans from Northwest Bank, formerly known as First
National Bank. Docket 57-7. The guaranties were signed by Mark Nylen as vice
president and secretary of Sovereign. Id. Kisting testified she “found out
afterwards,” sometime in 2011 or 2012 that Sovereign had guaranteed a loan of
Hepar BioScience. Docket 81 at 24-25. Nylen also personally guaranteed the
Hepar BioScience loans, but Kisting did not. Docket 57-5; Docket 81 at 26.
On January 1, 2014, Nylen filed for divorce from Kisting. Docket 81 at
24. In May 2014, Nylen sent Kisting a letter notifying her that Hepar
BioScience was discontinuing its lease of the equipment from Sovereign and
would no longer do business with Sovereign. Docket 57-6. As a result,
Sovereign no longer received income and did not have the money to maintain
the transportation equipment. Docket 81 at 34. Kisting testified that Nylen, as
part of the dissolution proceeding, proposed selling the Sovereign assets. Id. at
34-35. But because Northwest Bank used Sovereign’s assets to guarantee its
loan, Kisting was worried that Northwest Bank would come after the proceeds
of the assets once Sovereign sold them. Id. at 35. The bank represented that it
agreed to the sale and waived any interest it may have in the proceeds, so
Kisting agreed to sell the airplane and other equipment. Id. at 104-05.
The proceeds of the airplane and other transportation equipment, which
totaled approximately $10 million, were ultimately placed in a marital escrow
account. Docket 81 at 38-39. At some point the dissolution court ordered the
proceeds to be transferred back to Sovereign’s account. Id. at 39-40. Kisting
contested the transfer through “both” her divorce attorneys and Deck. Id. at 40.
When you say “both,” what do you mean?
I contacted Mr. Deck. Because he was the one that was
involved, too, with getting the release from the bank to not get
those proceeds. So it was – no, he did not appear in front of
Judge Jensen, but I contacted him, and I contacted my
attorneys who appeared before Judge Jensen.
So you spoke to both your personal divorce attorneys and
spoke to Mr. Deck who was still representing Sovereign at that
Id. at 40:10-20.
Deck testified that as general counsel for Sovereign, he advised on
whether Northwest Bank waived its claim to the proceeds of Sovereign’s
airplane sale. Id. at 97. He also advised that he believed the bank waived its
claim when the bank agreed to the transfer of the proceeds out of the Sovereign
account to the marital escrow account. Id. Deck believed his communications
with Kisting, as president of Sovereign, were privileged because:
[a]t the time I didn’t know whether or not [Kisting] was going to
retain – what the divorce court was going to do. But it was obvious
that if the divorce court gave the company to her former husband,
given the animosity that was between the two, that it was a very
hostile relationship, and a severing of that relationship, that my
communications with her would have to be privileged.
Id. at 98:17-24.
After the proceeds were transferred to Sovereign’s account, Northwest
Bank tried “to seize that account.” Id. at 40:21-24. 4 Northwest Bank sued
Sovereign, Hepar LLC, and Kisting for the outstanding debt as provided in the
loan guarantees. See Northwest Bank v. Sovereign Holdings, Inc. et al., CV 154066. Kisting retained Paul Deck and Scott Hindman to represent Sovereign in
the lawsuit brought by the bank. Docket 81 at 41. 5
Northwest Bank dismissed the claims against Hepar LLC and Kisting,
but continued with its claim against Sovereign. See CV 15-4066 Docket 38. In
February 2016, the court granted Northwest Bank’s motion for partial
The sale of Sovereign’s assets, particularly the airplane, resulted in significant
tax liabilities for Kisting as the 75% owner of an S corporation. See Docket 92
at 5-6; Nylen Divorce 0056 (dissolution court memorandum decision dated 1207-15). Kisting also owed interest and late filing penalties. Id. In a
memorandum decision, the dissolution court granted Kisting’s request to
release approximately $5.2 million to pay her tax liabilities, plus an additional
$400,000 to pay Kisting’s interest and penalties. Id.
After the taxes and penalties, approximately $5 million remained in Sovereign’s
account, which is the money Northwest Bank tried to seize. Docket 81 at 57.
Deck was general corporate counsel for Sovereign during this time, but Scott
Hindman was litigation counsel for the Northwest Bank lawsuit against
Sovereign. Docket 81 at 105-06. Deck never appeared in Northwest Bank v.
Sovereign, but Hindman kept Deck informed on the status of the litigation. Id.
at 160. Deck also stated: “I communicated quite often. I primarily was the
communicator with [Kisting], and then I would confer with Scott Hindman, who
was the litigation counsel. Scott also communicated some directly with
[Kisting].” Id. at 108:25-109:3.
summary judgment against Sovereign on a claim for breach of contract. CV 154066 Dockets 59, 61. 6
Deck has known Kisting and Nylen since 2012 or 2013 when he began
representing Hepar BioScience in corporate filing matters. Docket 81 at 92. He
represented Kisting personally in a guardianship matter in late 2013 and aided
her with a will at some later date. Id. at 92-93. He also represented Nylen
personally, jointly with Kisting, regarding a real estate matter, and other
miscellaneous property disputes or small matters. Id. at 93-94.
Deck never represented Kisting in the divorce proceedings. Id. at 95.
Deck was general counsel for Sovereign from 2012 or 2013 until 2017. Id. at
95. While he initially represented the other companies, he disassociated
himself with Nylen and Hepar BioScience after the divorce proceedings began.
Id. at 96. Deck, aware that Sovereign was deemed a marital asset by the
dissolution court, testified that “[w]hat was done in the divorce court affected
Sovereign Holdings corporate, so I had to deal with those issues.” Id. at 97:6-8.
Kisting gave her divorce attorneys permission to contact Deck to discuss
issues involving both Sovereign and the divorce “[b]ecause Sovereign Holdings
was a marital asset in the divorce.” Docket 81 at 42:22-23. Under Kisting,
Meanwhile, the dissolution court ordered 25% of Sovereign’s remaining
balance to be paid to the Nylen trusts for the trusts’ interest in Sovereign.
Docket 81 at 56. Additionally, Nylen personally owed $6 million to Sovereign,
so the dissolution court ordered that 25% of his debt must be paid to the
trusts. Id. In total, Nylen owed the trusts approximately $2.75 million for the
trusts’ 25% ownership interest in Sovereign ($1.25 million + $1.5 million). Id.
at 57. Thus, after seizing the $5 million, Northwest Bank paid $2.75 million to
the trusts and applied the remaining balance to Hepar BioScience’s debt. Id.
Sovereign’s position was to keep the money in Sovereign’s account rather than
allow Northwest Bank to reduce Hepar BioScience’s debt. Id. at 43.
So you were trying to keep that money from the bank?
I was trying to keep from Mark Nylen having the bank seize the
Why would Mark Nylen want the bank to seize the money?
To reduce down the loan for the Hepar BioScience loan.
Did you feel Mr. Nylen’s interests with regard to that money that was
sitting in the Sovereign Holdings’ bank was adverse to Sovereign
Id. at 43:14-25.
And Deck testified:
Basically we were trying to figure out a way so the bank couldn’t
get the $5 million.
Did you think that was consistent with the interests of Sovereign
It would have been consistent with the interests of those that
owned Sovereign Holdings.
And Sovereign Holdings itself?
Sovereign Holdings itself.
Id. at 109:4-11.
Deck also communicated with Kisting and her divorce attorneys about
Sovereign’s defense to the Northwest Bank lawsuit. Id. He believed such
communication was necessary because Sovereign was a marital asset and
“Judge Jensen ultimately was doing things in the divorce that I needed to be
kept abreast of and apprised of.” Id. at 110:1-3. When asked if he viewed
Sovereign’s interests in the bank litigation as adverse to Nylen’s interests, Deck
responded “[a]bsolutely.” Id. at 110:9.
Kisting, as the president of Sovereign, approached Deck for the purpose
of seeking legal advice. Docket 81 at 53. See also id. at 112 (Deck testifying
that he provided legal advice to Kisting as president of Sovereign). Kisting
believed her conversations with Deck, as president of Sovereign, were
confidential. Id. at 44. She communicated with Deck to obtain legal advice in
her role as president of Sovereign. Id. at 45.
And as far as personal legal advice related to your divorce, you
would contact your own divorce attorneys. Is that true?
So as far as the advice you were seeking from Mr. Deck, that was
advice you were seeking wearing your hat as President of Sovereign
Holdings. Is that true?
Again, if you needed advice related to the divorce, you would go to
your divorce attorneys?
Id. at 53:8-18.
Deck’s testimony was largely similar to Kisting’s testimony. While Kisting
was still the 75% shareholder of Sovereign, he did not represent Kisting
personally, but “[a]s it turned out, her personal interests, as an officer of
Sovereign, merged with the interests of the company as it went forward.” Id. at
130:12-14. Additionally, Deck testified:
Right. But did I ever represent [Kisting] personally? No. In
that regard, no.
As to her personal interest in Sovereign, there was no
personal representation by you of [Kisting]. Correct?
I think I’ve already answered that question.
And you said that you agreed with that. You didn’t get
involved on her behalf personally. Correct? You represented
I represented the company, and her as an officer of the
In her role as a majority owner, president, and board
Yes, and her personal interests in the company was [sic] left
to the divorce attorneys.
Id. at 131:1-15.
Kisting only disclosed her conversations with Deck to her attorneys and
her accountant. Id. at 44. And she believed her personal interest aligned with
Sovereign’s interest—namely, keep the bank from acquiring the money—
“[b]ecause it was going to go to Mark Nylen personally to bring down the debt of
Hepar BioScience” and reduce his personal guaranty obligations. Id. at 44:2021. She kept Deck informed of events occurring in the divorce related to the
corporations and the corporations’ assets so Deck could adequately represent
Sovereign. Id. at 46. She believed it was “necessary” for Deck to “have
knowledge of the divorce proceedings related to Sovereign” because Sovereign
was a marital asset. Id. at 50-51. And when asked if her communications with
Deck “concern[ed] matters with regard to the general affairs of Sovereign
Holdings[,]” Kisting said yes. Id. at 54:25-55:3. In addition, Deck’s testimony
indicated that his communications with Kisting’s divorce attorneys were related
to his work for Sovereign. Id. at 132.
Regarding Deck’s attorney’s fees, Kisting testified:
Who paid Mr. Deck’s attorney’s fees?
Was that something that was reimbursed from the marital account,
or did you pay those personally?
When there was money in the marital escrow account, Judge Jensen
let us use that money to pay attorney’s fees. But in the Sovereign
Holdings lawsuit with the bank, I asked Judge Jensen if I could be
reimbursed for all of those expenses, and he said no. So I personally
paid all of Sovereign Holdings’ legal fees.
Id. at 51:17-52:2.
When questioned on attorney’s fees further on cross-examination, Kisting
Correct. Fair to say that before the divorce, going back before the
divorce, any legal fees pre-2014, legal fees were paid by Sovereign
Yes. I would pay either out of Sovereign’s bank account or Hepar
BioScience’s bank account.
Once the divorce started, and Hepar and Sovereign were both
determined to be marital assets, they fell under Mr. Bieber’s 7 control
as a receiver?
Not right away, no.
At some point in time?
Mr. Bieber was appointed as the receiver in the dissolution proceeding, where
he processed and handled bills for Nylen and Kisting. Id. at 78-79.
And Mr. Bieber was in charge of making those payments?
For us personally, yes.
Id. at 79:3-16.
The dissolution court issued a memorandum opinion on December 18,
2015, which concluded that many of Kisting’s communications with Deck were
protected under the attorney-client privilege or work product doctrine. Docket
90-1, at Nylen Divorce 000019. The privilege log submitted to and reviewed by
the dissolution court listed communications between Kisting or her divorce
attorneys and Deck up until July 12, 2015. Id. at 000036. The dissolution
court further found that Kisting had not expressly or impliedly waived that
privilege. Id. at 000021.
On April 5, 2016, the dissolution court orally announced that as part of
the divorce proceedings, Kisting would be ordered to transfer her 75% interest
in Sovereign to Nylen. Docket 90-5, at Nylen Divorce 000629. Kisting conveyed
the dissolution court’s order to Deck. Docket 81 at 115. On April 13, 2017, the
dissolution court entered a supplemental judgment regarding property division,
which incorporated the order that Kisting’s 75% ownership interest in
Sovereign be transferred to Nylen. Docket 90-10. On June 21, 2017, Kisting
transferred her 75% interest to Nylen, and Nylen and the trusts continue to
own Sovereign today. Docket 81 at 61.
Deck testified that he stopped representing Sovereign at the end of June
2017, but he continued to communicate with Kisting after ending his
representation of Sovereign. Id. at 113. When asked why such communications
were necessary, Deck stated:
Hepar Bio, through Troy Heitman, made a written demand, as
well as verbal demands, for my entire Sovereign Holdings file
while I was representing that company, and, in particular, the
bank litigation file. We corresponded. Basically I said no.
Id. at 116:23-117:2.
On July 11, 2017, the dissolution court held a hearing to handle motions
related to the dissolution. Docket 78-1. At this hearing, the parties also
discussed an authorization that Nylen wanted Kisting to sign to allow third
parties to turn over their Sovereign files to Nylen. Id. After discussion, the
dissolution court did not require Kisting to sign the proposed authorization. Id.
In its motion to compel here, Sovereign seeks 1,084 documents. Docket
70 at 3. Deck and Kisting oppose Sovereign’s motion to compel on a number of
grounds, but they generally argue that the documents sought by Sovereign
contain attorney-client communications subject to Kisting’s personal privilege.
Federal Rule of Civil Procedure 26 governs the scope of discovery in civil
Unless otherwise limited by court order, the scope of discovery is as
follows: Parties may obtain discovery regarding any nonprivileged
matter that is relevant to any party’s claim or defense and
proportional to the needs of the case, considering the importance of
the issues at stake in the action, the amount in controversy, the
parties’ relative access to relevant information, the parties’
resources, the importance of the discovery in resolving the issues,
and whether the burden or expense of the proposed discovery
outweighs its likely benefit. Information within this scope of
discovery need not be admissible in evidence to be discoverable.
Fed. R. Civ. P. 26(b)(1). If a party does not produce requested documents, the
party seeking discovery requests may move for an order compelling production.
See Fed. R. Civ. P. 37(a)(3)(B).
The scope of discovery under Rule 26(b) is extremely broad. See 8
Charles A. Wright & Arthur R. Miller, Federal Practice & Procedure § 2007 (3d
ed. 2015). The reason for the broad scope of discovery is that “[m]utual
knowledge of all the relevant facts gathered by both parties is essential to
proper litigation. To that end, either party may compel the other to disgorge
whatever facts he has in his possession.” 8 Wright & Miller § 2007 (quoting
Hickman v. Taylor, 329 U.S. 495, 507 (1947)). The federal rules distinguish
between discoverability and admissibility of evidence. Christensen v. Quinn,
2013 WL 1702040, at *4 (D.S.D. Apr. 18, 2013). Thus, the rules of evidence
assume the task of keeping out incompetent, unreliable, or prejudicial evidence
at trial. But these considerations are not inherent barriers to discovery. Id.
In diversity actions, a federal court must apply federal law to determine
work-product claims and state law to determine the existence and scope of
attorney-client privilege. Fed. R. Evid. 501; Baker v. General Motors Corp., 209
F.3d 1051, 1053 (8th Cir. 2000). Because this matter arises under diversity
jurisdiction, the court must apply South Dakota law to determine if the
documents are privileged or whether a privilege has been waived. Under South
Dakota law, a client may assert the attorney-client privilege to prevent
disclosure of confidential communications made between the client and the
client’s attorney for the purpose of facilitating the rendition of professional legal
services. See SDCL § 19-19-502. For purposes of this statute, South Dakota
law defines “client” as “a person, public officer, or corporation, limited liability
company, association, or other organization or entity, either public or private,
who is rendered professional legal services by a lawyer, or who consults a
lawyer with a view to obtaining professional legal services from him[.]” SDCL
§ 19-19-502(a). And generally, a client has the ability “to prevent any other
person from disclosing” privileged communications with the client. SDCL § 1919-502(b). But the attorney-client privilege “may be waived if the client
voluntarily or through his attorney discloses the contents of the
communication or advice to someone outside that relationship.” State v. Catch
the Bear, 352 N.W.2d 640, 647 (S.D. 1984).
“The burden of showing entitlement to assert the privilege rests with [the]
claimant.” Id. at 645. The South Dakota Supreme Court has not addressed the
situation presented by the facts of this case. Thus, the court will rely on
persuasive authorities from other jurisdictions that align with South Dakota’s
Whether Collateral Estoppel Precludes Relitigation of the Issue
Deck argues that the dissolution court previously decided the issue
presented here. Docket 89 at 2; Docket 95 at 6. In a December 2015
memorandum order and while the divorce action was pending, the dissolution
court found that “Deck has acted as [Kisting’s] personal attorney in business
matters and as an attorney for Sovereign, which [Kisting] owns and operates.”
Docket 90-1 at 9. The court concluded that the communications between
Kisting, her divorce attorneys, and Deck were privileged and work product. Id.
Thus, the dissolution court denied Nylen’s motion to compel and noted its
specific findings on the issue of privilege as to each document that Kisting had
submitted for in-camera review. Id. at 10, 25. 8
The dissolution court issued its oral order on the division of property on
April 5, 2016. 9 Then in July 2017, a hearing was held on various motions in
the dissolution proceedings. See Docket 78-1 (transcript of hearing). At this
stage, Kisting had transferred all of her interest in Sovereign to Nylen. Nylen
had asked Kisting to sign an authorization directing third parties, including
Deck, to give Nylen the communications and documents of Sovereign. Id. at 11.
The dissolution court questioned whether Kisting had “any authority at this
point to waive anything” because the privilege belongs to the corporation. Id. at
13. Kisting contended that the authorization was too broad under the
dissolution court’s supplemental decree. Id. at 16-17.
As to any communications between Kisting and Deck that Kisting did not
include in the privilege log that she submitted to the dissolution court in 2015,
Kisting has waived the ability to assert a personal privilege over such
9 The privilege does not apply to any communications that occurred between
Kisting and Deck after the dissolution court ordered Kisting to transfer her
interest in Sovereign to Nylen because such conversations were no longer
confidential communications between Kisting as an officer of Sovereign (client)
and an attorney. Deck testified that he represented Sovereign as corporate
counsel. So if Kisting was no longer an officer, their communications were no
longer confidential. See Dakota, Minn. & E. R.R. Corp. v. Acuity, 771 N.W.2d
623, 637 (S.D. 2009).
Nylen’s attorney explained that Nylen wanted Kisting to sign the
authorization in order to speed up the process because Sovereign was entitled
to Sovereign’s documents. Id. at 25. The court then noted, “I don’t think I can
address your issue today. I understand what you’re saying, but I don’t think
I’m in a position to address it either in terms of what’s in front of me or under
paragraph nine of the agreement.” Id. at 26. The dissolution court then issued
an order stating that Kisting was not required to execute the authorization
because it was beyond paragraph 9 of the supplemental judgment. Docket 9014.
“Collateral estoppel is a legal doctrine that ‘bar[s] the relitigation of
factual or legal issues that were determined in a prior . . . court action’ and
applies to bar relitigation in federal court of issues previously determined in
state court.” In re Scarborough, 171 F.3d 638, 641 (8th Cir. 1999) (quoting In re
Miera, 926 F.2d 741, 743 (8th Cir. 1991)); see also 28 U.S.C. § 1738 (stating
that state court judicial proceedings “shall have the same full faith and credit”
in federal courts as they have in the state court from which they are taken).
The court looks to the substantive law of the forum state. In re Scarborough,
171 F.3d at 641. Because the dissolution court is a South Dakota court, this
court must apply South Dakota law to resolve the collateral estoppel issue.
South Dakota has adopted a four-part test to determine collateral
(1) Was the issue decided in the prior adjudication identical with the
one presented in the action in question?
(2) Was there a final judgment on the merits?
(3) Was the party against whom the plea is asserted a party or in
privity with a party to the prior adjudication?
(4) Did the party against whom the plea is asserted have a full and
fair opportunity to litigate the issue in the prior adjudication?
Hamilton v. Sommers, 855 N.W.2d 855, 866 (S.D. 2014) (quoting Estes v.
Millea, 464 N.W.2d 616, 618 (S.D. 1990)).
The court finds that collateral estoppel does not apply here. First, the
issue decided in the dissolution court’s December 2015 order is not identical to
the one presented here. The dissolution court ruled on Kisting’s personal
privilege before the divorce was finalized and before the court ordered Kisting to
transfer her interest in Sovereign to Nylen. Thus, the dissolution court’s
December 2015 order did not address whether Kisting’s personal privilege
prevents Nylen, the owner of Sovereign, from obtaining Sovereign’s corporate
documents in Deck’s possession.
Second, the dissolution court implied that Kisting’s personal privilege no
longer attached to Sovereign’s documents during the July 2017 hearing.
[Counsel for Nylen]: [Kisting] is not the owner of those privileges.
Sovereign was and Sovereign has been transferred now. And we
need to know what was going on in Sovereign and we don’t have that
ability, so we need to figure out a way to effectuate your order to get
us the documents that we need.
[Court]: So isn’t that the case then? I mean, it belongs to the
corporation right, the –
[Counsel for Nylen]: Indeed it does.
[Court]: The privilege? So does Miss Kisting have any authority at
this point to waive anything?
Docket 78-1 at 13.
Nylen and Kisting did not litigate the issue that is presented here—
whether Sovereign’s corporate documents are protected by Kisting’s attorney17
client privilege even after the dissolution court ordered Sovereign to be
transferred to Nylen—at the July 2017 hearing. The dissolution court was clear
that Kisting would not be ordered to sign the authorization proposed by Nylen
because it was broader than what was required under the supplemental
decree. Nylen did not raise in a motion the issue of whether the corporation
controlled the privilege after the transfer of the corporate stock; rather, the
parties discussed it at the hearing without any briefing. Thus, the parties did
not fully litigate the issue presented here and the dissolution court did not
decide the issue. In summary, collateral estoppel does not bar litigation of the
issue presented here.
General Rule: Corporation Controls the Privilege
Deck acknowledges the general rule that when a corporation changes
ownership, the corporation’s documents and privilege follow the corporation.
See Docket 70 at 9 (oral argument of Deck at telephonic hearing). Deck argues,
however, that the unique facts of this case fall within the exception found in
Tekni-Plex, Inc. v. Meyner & Landis, 674 N.E.2d 663 (N.Y. 1996), Facebook, Inc.
v. ConnectU, Inc., 2009 WL 10680755 (N.D. Cal. Sept. 2, 2009), and Chambers
v. Gold Medal Bakery, Inc., 983 N.E.2d 683 (Mass. 2013). Docket 56 at 10-11.
Kisting takes the same position as Deck (Dockets 92, 97), while Sovereign
argues that the general rule applies. Docket 44.
The United States Supreme Court has noted that it is “well
established . . . that the attorney-client privilege attaches to corporations as
well as to individuals.” Commodity Futures Trading Comm’n v. Weintraub, 471
U.S. 343, 348 (1985) (citing Upjohn Co. v. United States, 449 U.S. 383 (1981)).
But because a corporation is an entity, it must act through its agents. Id. Thus,
actions related to the corporation’s attorney-client privilege “must necessarily
be undertaken by individuals empowered to act on behalf of the corporation.”
Id. The corporate privilege covers communications between counsel and
management, and corporate officers can waive the corporation’s privilege. Id.
The parties also agree that when control of a corporation passes to
new management, the authority to assert and waive the
corporation’s attorney-client privilege passes as well. New managers
installed as a result of a takeover, merger, loss of confidence by
shareholders, or simply normal succession, may waive the attorneyclient privilege with respect to communications made by former
officers and directors. Displaced managers may not assert the
privilege over the wishes of current managers, even as to statements
that the former might have made to counsel concerning matters
within the scope of their corporate duties.
Id. at 349.
Thus, the court begins with the general rule that any attorney-client
privilege of Sovereign passes to Sovereign’s new management. So under this
general rule, the authority to assert the attorney-client privilege over
communications between Kisting, the past 75% owner and president of
Sovereign, and Deck, the past general corporate counsel for Sovereign, belongs
to Sovereign. It is Kisting and Deck’s burden to establish that the general rule
summarized in Weintraub does not apply in this case.
Because corporations must act through their agents, one privilege-
related issue is whether a corporate officer communicates with corporate
counsel as an officer of the corporation or individually. “[C]ourts will assume
that any consultations were in a corporate not an individual capacity.” Edna
Selan Epstein, The Attorney-Client Privilege and the Work-Product Doctrine 203
(6th ed. 2017). In re Bevill, Bresler & Schulman Asset Mgmt. Corp. developed a
five factor test that many courts have adopted to determine if a corporate
officer consulted the corporate attorney in a personal capacity, rather than in
the officer’s corporate capacity. Bevill, 805 F.2d 120 (3d Cir. 1986).
The issue in Bevill focused on whether individual directors could assert
an attorney-client privilege to prevent corporate communications with
corporate counsel from disclosure when the corporation’s privilege had been
waived. Id. at 124. The district court in Bevill adopted a five-factor test to
determine if corporate officers can assert a personal privilege over
communications with corporate counsel. Id. at 123. Subsequently adopted by
many other courts, the Bevill five-factor test provides:
The employee seeking to assert a personal attorney-client
privilege with respect to communications with corporate
counsel must show that the employee approached counsel for
the purpose of seeking legal advice.
The employee must further show that he or she made clear to
counsel that the employee was seeking legal advice in the
employee’s individual, rather than representative, capacity.
The employee must demonstrate that the corporate counsel,
knowing that a possible conflict could arise, nonetheless saw
fit to communicate with the employee in the employee’s
The employee must prove that the conversations with
corporate counsel were confidential.
The employee must show that the substance of the
conversations with corporate counsel did not concern matters
within the company or the general affairs of the company.
Epstein, supra, at 205.
Under this test, the district court in Bevill determined that
communications between the corporate officers and attorneys were corporate in
nature, not personal. Bevill, 805 F.2d at 123. On appeal, the officers argued
that “because their personal legal problems were inextricably intertwined with
those of the corporation, disclosure of discussions of corporate matters would
eviscerate their personal privileges.” Id. at 124. The Third Circuit, construing
this argument as one for a “blanket privilege” over communications with
counsel, rejected the officers’ position because it ignored the general rule
discussed in Weintraub and was contrary to public policy. Id. at 124-25. Citing
Weintraub, the Third Circuit noted that a corporate official cannot prevent the
corporation from waiving its privilege over communications with corporate
counsel about corporate matters. Id. at 125. The court then approvingly
discussed the five-factor test that was adopted and applied by the district court
and affirmed the order of the direct court. See id. (“The test adopted by the
district court does not invade the personal privilege of the officers because they
do not have an attorney-client privilege with regard to communications made in
their role as corporate officials.”).
While neither the Eighth Circuit nor the South Dakota Supreme Court
have addressed the Bevill test, several other circuit courts of appeals have
adopted Bevill to determine privilege issues involving corporate officers. See
United States v. Graf, 610 F.3d 1148, 1157 (9th Cir. 2010); In re Grand Jury
Subpoena, 274 F.3d 563, 571 (1st Cir. 2001); In re Grand Jury Subpoenas, 144
F.3d 653, 659 (10th Cir. 1998); United States v. Int’l Bhd. Of Teamsters, 119
F.3d 210, 215 (2d Cir. 1997). And the Bevill test was adopted by a district court
within the Eighth Circuit, namely United States v. Dose, 2005 WL 106493, at
*16 (N.D. Iowa Jan. 12, 2005).
Deck has taken the position that Bevill does not apply to this case given
its unique facts. See, e.g., Docket 96 at 4-6. In support of his position, Deck
attempts to distinguish Bevill from this case based on Bevill’s facts involving an
officer’s involvement in alleged criminal activity and the corporation’s filing for
Chapter 7 bankruptcy. Id. at 5. But the Bevill factors are not tailored to the
unique facts giving rise to the Bevill litigation. The Bevill test aligns with
general principles underlying attorney-client privilege. First, it keeps the
burden on the corporate officer to show why the general rule summarized in
Weintraub should not apply to a particular set of facts. Second, the test
balances the interests of both the corporation and corporate officers. As
explained by the Ninth Circuit Court of Appeals,
There are strong policy reasons to adopt the Bevill test. As noted
above, any time a corporation retains counsel, counsel will have to
talk to individual employees to represent the company effectively.
The Bevill test responds to this reality by ensuring that a corporation
is free to obtain information from its officers, employees, and
consultants about company matters and then control the attorneyclient privilege, waiving it when necessary to serve corporate
interests. The test also preserves the individual’s ability to claim a
personal attorney-client privilege when the individual makes clear
he or she is seeking personal legal advice and the communications
relate to personal legal affairs, not to the company’s business.
Graf, 610 F.3d at 1160-61.
Deck also argues that even if Bevill applies, the dissolution court’s
previous rulings dictate what documents Nylen should receive, and Sovereign’s
current motion to compel is a collateral attack on the dissolution court’s
rulings. Docket 95 at 6. After reviewing relevant materials from the dissolution
proceeding, the court finds that the dissolution court’s rulings do not “make
the Bevill analysis irrelevant” here as Deck contends. See id. And because the
court has found that collateral estoppel does not apply, the court concludes
that a Bevill factor analysis is appropriate.
Kisting argues that the communications between her, her divorce
attorneys, and Deck are privileged under Bevill “because Deck was acting as
Kisting’s individual counsel rather than as corporate counsel to Sovereign.”
Docket 97 at 2. She appears to generally assert a blanket privilege over any
documents submitted to this court for an in-camera review by Deck that
involve her dissolution counsel. Id.
Factor One: Employee Approached Corporate Counsel for Legal
Under the first factor, Kisting must show that she approached Deck for
the purpose of seeking legal advice. Bevill, 805 F.2d at 123. Kisting argues that
a review of the documents submitted for an in-camera review shows this factor
is easily met. Docket 92 at 6-7. At the evidentiary hearing, Kisting testified that
she approached Deck to seek legal advice (Docket 81 at 53) and she retained
Deck and Hindman to represent Sovereign in the Northwest Bank litigation (id.
Factor Two: Employee Made Clear to Counsel that She Sought
Personal Legal Advice
The second Bevill factor requires the employee to show that she made it
clear to corporate counsel that she was seeking legal advice in her individual,
rather than representative, capacity. Bevill, 805 F.2d at 123. Kisting argues
that she has met this factor because she gave her dissolution attorneys
permission to communicate with Deck about Sovereign as a marital asset, and
“it should have been apparent to Deck that much of the legal advice sought
from him was to assist Kisting personally in the dissolution action.” Docket 92
at 7. But the testimony of both Kisting and Deck plainly leads to the opposite
Deck was hired by Sovereign as general corporate counsel and provided
legal advice to Kisting as president of Sovereign. While he handled personal
matters for both Nylen and Kisting, he testified that he never represented
Kisting in the divorce proceedings. Deck takes the position that Sovereign’s
interests and Kisting’s personal interests merged, but the identity of his client
was clear to Deck. See id. at 131 (“But did I ever represent [Kisting] personally?
No. . . . I represented the company, and her as an officer of the company, yes.”).
Similarly, Kisting testified that she approached Deck for legal advice as the
president of Sovereign, and if she needed advice related to her divorce, she
contacted her divorce attorneys.
In her brief, Kisting argues that the fact that Kisting’s divorce attorneys
were communicating with Deck should have alerted Deck that Kisting sought
individual legal advice. Docket 92 at 7. The court finds this argument
unpersuasive. Under Bevill, and consistent with the general rule that it is the
individual’s burden to establish that a personal privilege applies, Kisting must
have made it clear to Deck that she was seeking individual advice. Neither
Deck nor Kisting has provided the court with authority to support the position
that it is a corporate attorney’s job to keep track of which hat an officer of the
corporation is wearing in each communication with the attorney. Thus, Kisting
did not make it clear to Deck that she sought personal legal advice from Deck.
Factor Three: Employee Demonstrates that Corporate Counsel
Communicated with Individual, Despite Possible Conflict
Under the third Bevill factor, Kisting must show that Deck
communicated with Kisting individually, despite knowing that a possible
conflict between Kisting and Sovereign could arise. Bevill, 805 F.2d at 123.
Kisting argues that this factor is met because the interests of Sovereign and
Kisting were aligned, as Kisting and Sovereign both sought to protect
Sovereign’s assets from Northwest Bank, and thus Deck did not have a conflict
of interest. Docket 92 at 8-9. But whether Deck actually had a conflict is not
the issue. The real question is whether Deck found communications with
Kisting in her individual capacity, or her divorce attorneys, appropriate despite
a potential conflict with Sovereign’s corporate interests in the future.
While their testimony does not directly address this factor, Deck did
write a letter to Nylen in April 2014, where he noted that he was conflicted in
representing either Nylen or Kisting in the divorce. See Docket 75, Exhibit 5.
Thus, Deck anticipated a potential conflict of interest between Kisting, Nylen,
and their business entities. Deck’s position in his letter to Nylen undermines
Kisting’s argument that the third Bevill factor is met. Deck knew a conflict
could arise, which is why he did not represent Kisting personally.
Factor Four: Employee Must Show Conversations were
The fourth factor requires Kisting to show that her conversations with
Deck were confidential. Bevill, 805 F.2d at 123. Kisting testified that she
believed her communications with Deck were confidential. Deck testified that
he “owed a duty of confidentiality to the principal, [Kisting].” Docket 81 at 124.
Factor Five: Employee Must Show Conversations did not
Concern General Affairs of Company
Finally, Kisting must show that the substance of her conversations with
Deck did not concern the general affairs of Sovereign. Bevill, 805 F.2d at 123.
Kisting argues this factor is met because many of the communications between
Kisting, her divorce attorneys, and Deck concerned Kisting’s personal rights
and responsibilities regarding Sovereign as a marital asset in the divorce rather
than Sovereign’s corporate affairs. Docket 92 at 10.
The fifth prong of . . . Bevill . . . only precludes an officer from
asserting an individual attorney client privilege when the
responsibilities. However, if the communication between a corporate
officer and corporate counsel specifically focuses upon the
individual officer’s personal rights and liabilities, then the fifth
prong . . . can be satisfied even though the general subject matter of
the conversation pertains to matters within the general affairs of the
In re Grand Jury Proceedings, 156 F.3d 1038, 1041 (10th Cir. 1998).
While Kisting testified that her communications with Deck concerned the
general affairs of Sovereign, she asks the court to review each individual
communication on the privilege log to determine which communications
involved Kisting’s rights and responsibilities and which involved Sovereign’s
general affairs. Docket 92 at 9-10. The court finds that communications
between Kisting, or her divorce attorneys, and Deck related to Sovereign’s
litigation with Northwest Bank, such as Deck’s advice that Northwest Bank
waived its claim to the equipment proceeds, concern the general affairs of
Sovereign—not Kisting’s personal rights. Sovereign retained Deck and
Hindman to represent Sovereign in the litigation with Northwest Bank. The
only exception to this is the personal federal tax liability advice that Deck
provided to Kisting. These communications do not involve the general affairs of
Other Factors for Closely-Held Corporations
Courts also generally apply the default assumption—that the corporation
is the client, not the individual corporate officer—to closely held corporations.
See Epstein, supra, at 210. In addition to the Bevill factors, courts can consider
factors such as who paid the attorney’s legal bills, whom the attorney
understood to be the client, and whether the attorney communicated with only
the corporate officer or also with other employees. See MacKenzie-Childs, LLC v.
MacKenzie-Childs, 262 F.R.D. 241, 242 (W.D.N.Y. 2009) (analyzing these three
issues); United States v. Okun, 281 F. App’x 228, 230-31 (4th Cir. 2008)
(affirming district court’s finding that the “subjective belief” of the sole
shareholder and CEO of the corporation that corporate counsel was his
personal attorney was not credible or reasonable in light of corporate counsel’s
Here, Kisting testified that she paid Deck’s attorney fees as counsel for
Sovereign and Judge Jensen did not allow her to be reimbursed for attorney
fees related to the Northwest Bank litigation. But Kisting also noted that before
the divorce, Sovereign’s legal fees were paid out of Sovereign or Hepar
BioScience’s bank account. At some point, a receiver was appointed in the
dissolution proceeding, and the receiver made the legal fee payments on behalf
of Kisting and Nylen.
Deck testified that he understood Sovereign to be the client here and he
never personally represented Kisting in her divorce. Deck communicated with
Nylen as an officer of Sovereign before the divorce proceedings began, but he
primarily communicated with Kisting. But Sovereign did not have any officers
other than Nylen or Kisting and only two employees who drove Sovereign
Balancing all Factors
The court finds that Kisting communicated with Deck about her personal
federal tax liability in a personal capacity, so these communications are
privileged. But with regard to the remainder of the communications, after
balancing all five Bevill factors, the court finds that Kisting has not established
a “clear showing” that she consulted with Deck in her individual capacity,
rather than her corporate capacity. There is no evidence that Kisting
approached Deck to explicitly seek personal legal advice while there is
abundant testimony that Deck represented Sovereign as corporate counsel and
gave Kisting advice as an officer of Sovereign. And while Deck argues that
Kisting’s interests and Sovereign’s interests were “inextricably intertwined”
(Docket 56 at 11), the Third Circuit Court of Appeals rejected that very
argument in Bevill because it was contrary to the general rule discussed in
Weintraub. See Bevill, 805 F.2d at 124. Thus, the court finds that under the
Bevill analysis, Kisting has not clearly shown that she, as a corporate officer,
sought personal legal advice from Deck, corporate counsel, on the remainder of
the communications. As such, the court continues with the additional
arguments presented by the parties, keeping in mind that the general rule in
Weintraub is still the default assumption.
Whether Mark Nylen was Adverse to Sovereign during the Northwest
Deck and Kisting argue that the general rule of Weintraub does not apply
in this case because Kisting and Sovereign were adverse to Nylen when the
privileged communications took place. See Docket 56 at 11-15, Docket 92 at
12, Docket 95 at 18, Docket 97 at 3. In support of their adversity argument as
an exception to the general rule, Deck and Kisting rely on Tekni-Plex, Inc. v.
Meyner & Landis, 674 N.E.2d 663 (N.Y. 1996), FaceBook, Inc. v. ConnectU, Inc.,
2009 WL 10680755 (N.D. Cal. Sept. 2, 2009), and Chambers v. Gold Medal
Bakery, Inc., 983 N.E.2d 683 (Mass. 2013). Sovereign acknowledges that Nylen
and Kisting were adverse to each other, but does not agree with Deck’s
argument that Nylen was adverse to Sovereign during the relevant time period.
See Docket 70 at 12; Docket 94 at 10.
In Tekni-Plex, Tang was the sole shareholder, president, CEO, and sole
director of Tekni-Plex during the relevant time period. 674 N.E.2d at 665.
Meyner and Landis (M&L), a law firm retained by Tekni-Plex for many years,
represented Tekni-Plex on various legal matters and represented Tang
individually on personal matters. Id. In a merger agreement with TP
Acquisition, Tang agreed to sell Tekni-Plex to TP Acquisition, and M&L
represented Tekni-Plex and Tang personally during that process. Id. In the
merger agreement, Tang agreed to indemnify TP Acquisition for any losses
resulting from breaches of warranty or representations. Id. TP Acquisition then
commenced an arbitration proceeding against Tang, alleging breach of
representations and warranties. Id. After Tang retained M&L to represent him,
TP Acquisition moved to disqualify the law firm and moved for M&L to give all
its Tekni-Plex files pre-merger to TP Acquisition. Id. at 666.
The New York Court of Appeals concluded that M&L should be
disqualified from representing Tang in the arbitration, and the authority to
assert the attorney-client privilege over confidential communications between
Tekni-Plex and M&L pre-merger passed to TP Acquisition—the new
management. Id. But the court noted that TP Acquisition could not assert the
privilege over communications between M&L and Tekni-Plex or Tang
individually about the acquisition because “Tekni-Plex and Tang were joined in
an adversarial relationship to [TP] Acquisition” during the acquisition. Id.
(emphasis added). The court also found that TP Acquisition was not entitled to
M&L’s confidential communications about its representation of Tekni-Plex
during the acquisition. Id. The court then discussed the Code of Professional
Responsibility under New York law to determine whether M&L should be
disqualified as counsel. Id. at 667-68.
Tang and M&L argued that TP Acquisition’s purchase of Tekni-Plex did
not transfer the attorney-client privilege under the general rule because the
acquisition was a transfer of assets and Tekni-Plex ceased to exist after the
merger. Id. at 668. In response, the court stated:
Weintraub establishes that, where efforts are made to run the preexisting business entity and manage its affairs, successor
management stands in the shoes of prior management and controls
the attorney-client privilege with respect to matters concerning the
company’s operations. It follows that, under such circumstances,
the prior attorney-client relationship continues with the newly
By contrast, the mere transfer of assets with no attempt to continue
the pre-existing operation generally does not transfer the attorneyclient relationship.
Id. The court then noted that the old Tekni-Plex, despite expiring after the
merger, did not cease in substance. Id. at 669. Rather, Tekni-Plex’s business
operations continued under its new management—TP Acquisition. Id. And
thus, the court found that control of the privilege over communications premerger indeed passed to TP Acquisition. Id.
The court next analyzed the communications related to the merger itself
and why TP Acquisition did not assume control of the privilege over those
communications, which is the reasoning Deck relies on here. Id. at 671; see
also Docket 56 at 13. The court reasoned that the parties’ merger agreement
“contemplated that, in any dispute arising from the merger transaction, the
rights of the acquired corporation, old Tekni-Plex, relating to the transaction
would remain independent from and adverse to the rights of [TP Acquisition].”
Tekni-Plex, 674 N.E.2d at 672. Thus, while citing the purposes underlying the
attorney-client privilege, the court’s ruling was largely based on “this particular
transaction and the structure of the underlying agreement.” Id. The court lastly
noted that its decision did not prevent TP Acquisition from obtaining
confidential documents for which the privilege had been waived through the
discovery process. Id.
Similarly, on a motion to disqualify counsel based on the California Rules
of Professional Conduct, the court in Facebook, Inc. v. ConnectU, Inc. relied on
the reasoning of Tekni-Plex in determining whether a law firm that previously
represented co-defendants (ConnectU and the Founders) could continue to
represent one of the defendants (the Founders) in the same litigation.
2009 WL 10680755, at *2, *10-11 (N.D. Cal. Sept. 2, 2009). The Founders had
owned ConnectU. Id. at *1. As part of the settlement agreement earlier in
litigation, Facebook became the sole shareholder of ConnectU and retained new
management. Id. at *2. ConnectU’s new management retained new counsel
that sought to disqualify previous counsel from continuing to represent the
Founders because such continued representation would be a conflict of
interest. Id. In opposition, the Founders argued that Facebook, through its
ownership of ConnectU, was trying to “cripple” the Founders, its long-time
litigation adversary. Id.
The court concluded that the Founders could continue in the litigation
with new attorneys, but ConnectU would be harmed if its former attorneys took
a position adverse to it by continuing to represent the Founders. Id. at *9.
More importantly, the public would be assured that should they
seek joint representation in a matter, with the inherent prospect that
a conflict of interest could arise, they could, nevertheless, have full
trust and confidence that the attorney would never become an
advocate for their adversary in the same or substantially related
Id. Thus, the court granted ConnectU’s motion to disqualify the Founders’
ConnectU also moved for an order directing the previous law firm to turn
over its client files on ConnectU, which the Founders opposed, arguing that
“[t]he guise that [the] files somehow belong to ConnectU is a smokescreen to
cripple Facebook’s adversaries by peering into their counsel’s attorney-client
and work product materials.” Id. at *9 (alterations in original). The court
weighed the competing interests, first noting that ConnectU has a separate
legal identity with interests, rights, and liabilities that are separate from either
of its owners—the Founders or Facebook. Id. “As the current principal of
ConnectU, Facebook now has the right to examine [ConnectU’s legal files] so
that it can competently conduct the business of ConnectU.” Id. On the other
[T]he representation collectively received by the Founders and
ConnectU related to the litigation against their mutual adversary,
Facebook. As a consequence, it is likely that documents were
generated on behalf of both the Founders and ConnectU which
reflect privileged communications between the Founders and their
counsel, the Founders’ litigation positions, and other confidential
information. These documents likely include confidential
information relating to the Settlement Agreement now in dispute. To
require [the law firm] to hand over all of ConnectU’s client files would
necessarily cause the Founders to expose confidential information
to Facebook that relates to the exact subject of this litigation,
potentially prejudicing the Founders on appeal and thereafter.
Id. (footnote omitted).
The court then relied on the reasoning in Tekni-Plex “because it reflects
an appropriate balance between the legitimate competing interests at play.” Id.
at *10. Thus, the court concluded that ConnectU was entitled to access its own
general business documents, but declined to order the law firm to turn over
files related to ConnectU’s litigation against Facebook. See id. at *11(“To
require a handover of all ConnectU files would be to expose to the Founders’
adversary all of the [sic] their relevant litigation documents.”).
Finally, in Chambers v. Gold Medal Bakery, Inc., the Supreme Judicial
Court of Massachusetts concluded that the interests of plaintiffs, who were two
of the four board members and 50% shareholders of a closely-held corporation,
were adverse to the interests of the closely-held corporation and the other two
board members who also ran the daily operations of the corporation as officers.
983 N.E.2d at 689. Thus, the court found “on the narrow facts of [the] case,”
that previous documents generated by the corporation’s law firm in
anticipation of or related to litigation with the plaintiffs were protected by the
attorney-client privilege and work product doctrine. Id.
Here, Deck and Kisting argue that like Tekni-Plex and ConnectU, Deck
properly turned over all Sovereign documents that relate to Sovereign’s general
business but requiring Deck to turn over all communications between Deck
and Kisting during a time that Sovereign was adverse to Nylen is a
“ ‘smokescreen’ to cripple Mark Nylen’s wife Mary Ellen by peering into
documents that expressly relate to their divorce.” Docket 56 at 14-15.
The court notes that Deck and Kisting’s adversity argument is based on a
theory that Nylen took positions in the dissolution proceeding and previous
litigation that aligned with Northwest Bank’s interests, which were adverse to
Sovereign’s interests. First, the court does not find the issue of whether Nylen
was adverse to Sovereign as clear-cut as Deck and Kisting argue it is. 10 See
Chambers, 983 N.E.2d at 693 (“We stress that no one factor or combination of
factors is dispositive in determining when a director has interests adverse for
attorney-client privilege purposes, particularly in the unique context of a close
corporation.”). “The analysis [of adversity] is fact specific and necessarily
depends upon the circumstances of each case.” Id. at 693-94 (quotation
omitted). The facts here are different from both Tekni-Plex and ConnectU.
In Tekni-Plex, for instance, the court noted that old Tekni-Plex’s rights
related to disputes arising from the merger transaction were independent and
In Chambers, the court noted that the evidence showing that plaintiffs had
sued the corporation frequently in the past was “[o]f great significance” in
determining that plaintiffs’ interests were adverse to the corporation.
Chambers, 983 N.E.2d at 694. There is no evidence here that Nylen previously
adverse to the rights of the buyer, TP Acquisition. Tekni-Plex, 674 N.E.2d at
671. And the Tekni-Plex case stemmed from the merger transaction itself. Id.
Analogizing the facts here to Tekni-Plex, Nylen and Kisting’s dissolution
proceeding would be this case’s merger transaction because the adversity
argument arises from the dissolution proceeding. Deck and Kisting argue that
allowing Sovereign to obtain the documents at issue will allow Nylen to obtain
documents related to Nylen and Kisting’s divorce. And it is Kisting’s personal
privilege related to the divorce that she seeks to assert now. In Tekni-Plex, the
parties argued over documents related to the merger negotiations, the event
from which adversity stemmed. Tekni-Plex, 674 N.E.2d at 671. But this is why
Tekni-Plex is distinguishable. The current dispute did not arise because of the
divorce. Sovereign is not seeking documents from the dissolution proceeding—
rather, Sovereign is seeking Sovereign documents that happen to include
communications related to the dissolution proceeding. Under the reasoning of
Tekni-Plex, adversity would be more applicable in a dispute arising from the
dissolution proceeding itself.
And in ConnectU, the court did not order the law firm to turn over all
ConnectU files because such an action would expose the Founders’ adversary
to all of the Founders’ litigation documents from litigation with that adversary.
ConnectU, 2009 WL 10680755, at *11. The parties were disputing the
settlement agreement that transferred ConnectU from the Founders to
Facebook. Id. And the law firm had jointly represented both the Founders,
previous owners, and the company, ConnectU. Id. In contrast, Deck did not
jointly represent both Sovereign and Kisting. And Sovereign is not suing on the
very agreement that transferred Sovereign from Kisting to Nylen.
Whether the Common Interest Privilege Applies
Kisting next argues that South Dakota’s common interest privilege
protects “many” of the communications between Deck and Kisting. Docket 92
at 19. Sovereign argues that Kisting has misconstrued the common interest
privilege. Docket 94 at 14.
The common interest privilege protects communications between the
client “or his lawyer . . . to a lawyer . . . representing another party in a
pending action and concerning a matter of common interest therein . . . .”
SDCL § 19-19-502(b)(3). In other words, if a lawyer for Sovereign and a lawyer
for Kisting communicated about a pending action where Sovereign and Kisting
had a common interest, the privilege would apply. Because the facts here are
unique, Kisting argues that the common interest privilege should apply to
communications between Deck and Kisting’s divorce lawyers about Sovereign
in the dissolution action, even though the statute requires each lawyer to
represent a party in a pending action. Docket 92 at 20. In response, Sovereign
argues that one party to the joint representation—here Kisting—cannot invoke
the common interest privilege against the other party to the joint
representation—here Sovereign. Docket 94 at 14.
The court finds that the common interest privilege does not apply.
Sovereign was not a party to the dissolution proceeding. Thus, the plain
language of the statute does not apply to conversations between Sovereign’s
lawyer and Kisting’s divorce lawyers. See Catch the Bear, 352 N.W.2d at 646-47
(noting that in South Dakota “privileges created by statute are to be strictly
construed to avoid suppressing otherwise competent evidence.”). Kisting argues
that the dissolution court would have allowed Sovereign to appear in the
dissolution proceeding after Northwest Bank filed its notice of appearance in
the dissolution, but Sovereign instead “chose to speak through Kisting’s
dissolution lawyers[.]” Docket 92 at 20. The court does not find this argument
persuasive because even if Sovereign had noticed its appearance in the
dissolution action, Kisting would not be able to later assert the common
interest privilege against Sovereign.
Under the general rule, any communications between Kisting as the
previous owner of Sovereign and Deck, corporate counsel for Sovereign, were in
a corporate rather than an individual capacity. Kisting and Deck, as the parties
claiming an attorney-client privilege over Sovereign documents and
communications with Deck, have the burden of showing a privilege applies.
The court concludes that Sovereign is not estopped from seeking the
communications between Kisting, her divorce attorneys, and Deck because the
dissolution court did not decide the issue presented here. Kisting and Deck
have failed to show that Deck’s communications were with Kisting in a
personal capacity under the Bevill test. Regarding adversity, the court
concludes that this case is distinguishable from the adversity cases cited by
Deck. Kisting has also failed to show that the common interest privilege applies
here. Thus, the general rule on corporate privilege applies.
Any documents in Deck’s possession that relate to Sovereign as a
corporation must be produced to Sovereign under the general rule that a
corporation’s privilege belongs to the corporation, not the individual officers.
The only exception is that any communications between Deck and Kisting
related to Kisting’s personal federal tax liability are privileged and not relevant
to Sovereign here. The documents that are privileged are: EHH 1st Production
Privileged 44-45, 47-49, 51-52, 55-56, and EHH Continuation Privileged 25859, 310-11, 312-13, 330. Thus, it is
ORDERED that Sovereign’s motion to compel (Docket 42) is granted in
part and denied in part.
Dated September 17, 2018.
BY THE COURT:
/s/ Karen E. Schreier
KAREN E. SCHREIER
UNITED STATES DISTRICT JUDGE
Disclaimer: Justia Dockets & Filings provides public litigation records from the federal appellate and district courts. These filings and docket sheets should not be considered findings of fact or liability, nor do they necessarily reflect the view of Justia.
Why Is My Information Online?