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Harleysville Insurance Co. v. Holding Funeral Home, Inc.

United States District Court, W.D. Virginia, Abingdon Division

October 2, 2017


          Robert Tayloe Ross, David Paul Abel, and Robert S. Reverski, Jr., Midkif Muncie & Ross, P.C., Richmond, Virginia, and John L. Coole CooleySublettPearson PLC, Roanoke, Virginia, for Plaintiff and Counter -Defendant

          Harleysville Insurance Company; Glenn H. Silver, C. Thomas Brow Erik B. Lawson, and Caitlin M. Brown, Silver & Brown, Fairfax, Virginia, for Insureds and Counter-Claimants Holding Funeral Home, Inc., Golden Ru Family Management, LLC, and L.J. Horton Florist, Inc.


          James P. Jones United States District Judge.

         This is a diversity action arising out of a claim for fire insurance coverage Harleysville Insurance Company (“Harleysville”) seeks a declaration that it has n duty to pay benefits under its policy to the insureds, Holding Funeral Home, Inc Golden Rule Family Management, LLC, doing business as Holding Funeral Hom of Castlewood, and L.J. Horton Florist, Inc. (the “Insureds”). The Insure counterclaim for breach of the insurance contract.

         Proceedings on the merits of this case have been stayed pending the disposition of a related criminal prosecution. However, as a separate matter, Harleysville has moved to disqualify counsel for the Insureds. The magistrate judge denied the motion, and the parties' objections to that decision, as well as an additional Motion to Strike, are now before me for review.

         I. Factual Summary.

         The basic facts surrounding the motion seeking disqualification of opposing counsel are uncontested. On October 22, 2014, the Insureds' funeral home burned to the ground. Harleysville received prompt notice of the fire loss and resulting claim. It immediately launched an investigation, and its independent fire expert found that the fire had been intentionally set. In its Complaint, filed in this court on November 23, 2015, Harleysville alleges that representatives of the Insureds “made material misrepresentations to Harleysville during the investigation of the Fire and the Claim.” Compl. ¶ 33, ECF No. 1. These alleged misrepresentations are also the subject of the pending criminal prosecution. Indictment, United States v. Riebe, 1:17CR00014, ECF No. 2 (W.D. Va. Apr. 24, 2017).

         Sometime after the fire, one or more employees of Nationwide Insurance Company (“Nationwide”), which owns Harleysville, began corresponding with representatives of the National Insurance Crime Bureau (“NICB”).[1] During the course of that correspondence, NICB asked Harleysville to provide surveillance video footage of the fire scene. In response, Thomas Cesario, a senior investigator for Nationwide, uploaded the video file to an electronic folder in an Internet-based file-sharing service operated by Box, Inc. (“Box Folder”). On September 22, 2015, Cesario sent an email to NICB agent Wes Rowe. The email contained a “sharing” link to the Box Folder and stated, “Here is the link to access the video.” Cesario Email, ECF No. 55-5. The email also contained a notice that it was “privileged and confidential.” Id. Rowe used the link to access the Box Folder on two occasions shortly after receiving the email. On both occasions, the video was the only file contained in the folder. No one from NICB accessed the Box Folder after that point.

         Some seven months later, Cesario was asked to share Harleysville's claims file and Nationwide's investigation file (collectively, “Claims File”) with Harleysville's counsel. On April 28, 2016, Cesario uploaded the Claims File to the Box Folder, generated a “sharing” link to the folder, and sent an email to Harleysville's counsel containing the link to the folder. Cesario did not realize that the link he provided to Harleysville's counsel was identical to the link he had provided to NICB seven months earlier.

         On May 24, 2016, Insureds' counsel issued a subpoena duces tecum to NICB requesting NICB's entire file relating to the funeral home fire. On June 23, 2016, NICB responded to the subpoena with electronic copies of all documents and information it had received from Harleysville. Included in the response was Cesario's September 22 email to Rowe, which contained the link to the Box Folder.

         That same day after receiving NICB's response, Insureds' counsel used the link contained in Cesario's email to access the Box Folder. When Cesario sent the link to NICB in September 2015, the Box Folder contained only the video; however, by the time Insureds' counsel came into possession of the link in June 2016, the Box Folder contained the Claims File as well. Insureds' counsel downloaded and reviewed the Claims File. During their review, Insureds' counsel noted that certain documents were marked as “Confidential” and “Attorney-Client Privileged.” Upon discovering these documents, they contacted the Virginia State Bar's ethics hotline for advice as to how to proceed, as well as conducted research of their own. Insureds' counsel, incorrectly assuming that Harleysville had used the Box Folder to share the Claims File with NICB, came to the conclusion that any attorney-client and work-product privileges had been waived by Harleysville and continued their review of the file. Insureds' counsel neither notified Harleysville's counsel that they were in possession of the Claims File nor sought this court's ruling on the issue of waiver.

         On August 22, 2016, Insureds' counsel produced a thumb drive to Harleysville's counsel in response to a request for production of documents. The thumb drive contained “tens of thousands of pages of documents, sorted into hundreds of folders and subfolders.” Mem. Supp. Mot. to Disqualify 5, ECF No. 53. During their review of the documents contained on the thumb drive, Harleysville's counsel noticed certain potentially privileged material inadvertently produced by Insureds' counsel. Harleysville's counsel notified Insureds' counsel of the disclosure, and Insureds' counsel requested that the privileged documents be destroyed. Harleysville's counsel complied with this request and continued to review the contents of the thumb drive.

         On October 27, 2016, Harleysville's counsel discovered that its Claims File was contained on the thumb drive in a folder labeled “NICB Video.” A few days later, on November 1, Harleysville's counsel contacted Insureds' counsel and requested that Insureds' counsel destroy their copies of the Claims File. Insureds' counsel refused, and Harleysville's counsel subsequently filed the present motion to disqualify Insureds' counsel.

         In issuing her Memorandum Opinion on this motion, the magistrate judge did not have the benefit of reviewing the Claims File, but assumed that at least some of the materials that make up the Claims File were privileged. Mem. Op. 5, ECF No. 68. Upon my in camera review of the Claims File, I find that it did, in fact, contain clearly privileged material. See infra at IV.A.1. Insureds' counsel have conceded that they reviewed the entire Claims File and that they shared the Claims File with counsel for both sides in the related criminal case.

         II. Procedural History.

         In seeking disqualification, Harleysville asserted that Insureds' counsel improperly accessed and reviewed certain privileged documents, that they concealed this access from Harleysville's counsel, and that they refused to destroy the Claims File when asked to do so. As relief, Harleysville sought the disqualification of Insureds' counsel. Harleysville also sought an order directing Insureds' counsel to destroy copies of the Claims File, directing Insureds' counsel not to disclose the Claims File, and barring the use of the Claims File in this action. See generally Mem. Supp. Mot. to Disqualify, ECF No. 53. Insureds' counsel contended in response that disqualification was inappropriate, first on the ground that Harleysville had failed to prove that material in the Claims File was privileged, and second on the ground that any privilege was waived when Harleysville posted the Claims File to a publicly-accessible folder on the Internet. See generally Opp'n to Mot. to Disqualify, ECF No. 55.

         The motion seeking disqualification was referred to the magistrate judge for determination. Following full briefing by the parties, the magistrate judge held an evidentiary hearing and she invited counsel to submit supplemental evidence and legal authorities following the hearing. Both Harleysville and the Insureds did so. The Insureds subsequently objected to Harleysville's submission, arguing that the evidence contained therein should properly have been presented at the hearing, where the witnesses would have been subject to cross-examination and evidentiary objections. The magistrate judge agreed and sustained Insureds' objections, a decision to which Harleysville's counsel timely objected. Order, ECF No. 67; Pl.'s Objs., ECF No. 73.

         The magistrate judge subsequently denied the motion to disqualify. She found that any privilege had been waived when Harleysville uploaded the files to a publically accessible, non-password-protected website. Mem. Op. 9, 13, ECF No. 68. Because any privilege was waived, she concluded, disqualification of Insureds' counsel was unwarranted, since replacement counsel would be entitled to access the same information. Id. at 17. However, she also held that because Insureds' counsel knew or should have known they had accessed potentially-privileged information, they should have revealed this access to Harleysville's counsel and should have asked the court to decide the question of waiver before making use of the information. Id. at 16. Because they did not do so, she said, their conduct “require[d] some sanction.” Id. She accordingly imposed monetary sanctions on the Insureds' counsel.

         Both Harleysville and the Insureds filed timely objections to the magistrate judge's rulings. Harleysville objected to the magistrate judge's finding that Harleysville had waived any privilege and to her denial of their motion to disqualify. Pl.'s Objs., ECF No. 73. Insureds' counsel objected to the magistrate judge's sua sponte imposition of monetary sanctions, arguing that such sanctions were both unwarranted and unjust. Defs.' Objs., ECF No. 70.

         After careful review of the record to that point, I concluded that there was a need for additional evidence as to certain important matters, including those encompassed by Harleysville's counsel's supplementary submission, which the magistrate judge excluded from consideration. Accordingly, I ordered a second evidentiary hearing and directed the parties to present additional evidence. Op. & Order, ECF No. 96.

         Prior to the hearing, Harleysville filed two written experts' reports in conjunction with the hearing: one by Paul Georgiadis, who testified at the hearing, and one by Michael Rigsby, who did not testify. Following the hearing, the Insureds filed a Motion to Strike both reports, arguing both that my order directing the evidentiary hearing did not permit the parties to file such reports and that Michael Rigsby's report was improper because he did not testify, and thus was not subject to cross-examination at the hearing.

         Before me for review are (1) the Harleysville objections to the magistrate judge's finding that Harleysville had waived any privilege, her finding that Harleysville's counsel's supplemental affidavits could not be considered, and her denial of the motion to disqualify; (2) the Insureds' objection to the magistrate judge's imposition of sanctions; and (3) the Insureds' Motion to Strike the written expert reports of Paul Georgiadis and Michael Rigsby. I consider each in turn.

         III. Standard of Review.

         The issues raised by both parties - namely, questions of privilege and waiver along with sanctions - are “not dispositive of a party's claim or defense.” Fed.R.Civ.P. 72(a). I therefore must consider the parties' objections to the magistrate judge's order and “modify or set aside any part of the order that is clearly erroneous or is contrary to law.” Id.

         Findings of fact are reviewed under the Rule's “clearly erroneous” standard. Gairola v. Va. Dep't of Gen. Servs., 753 F.2d 1281, 1288 (4th Cir. 1985); see also Bruce v. Hartford, 21 F.Supp.3d 590, 594 (E.D. Va. 2014); HSBC Bank USA, Nat'l Ass'n v. Resh, No. 3:12-CV-00668, 2014 WL 317820, at *7 (S.D. W.Va. Jan. 28, 2014). A court's “finding is ‘clearly erroneous' when although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed.” United States v. U.S. Gypsum Co., 333 U.S. 364, 395 (1948); see also Harman v. Levin (In re Robertson), 772 F.2d 1150, 1153 (4th Cir. 1985).

         In addition, it is within my discretion to receive and consider additional evidence. United States v. Caro, 461 F.Supp.2d 478, 480 n.2 (W.D. Va. 2006), aff'd, 597 F.3d 608 (4th Cir. 2010); see also United States v. Frans, 697 F.2d 188, 191 n.3 (7th Cir. 1983) (noting that Rule 72(a) “do[es] not necessarily restrict district court review of a magistrate's findings” and stating that the district court may “receiv[e] additional evidence or conduct[] a full review”); 12 Charles Allen Wright, et al., Federal Practice and Procedure § 3069 (2d ed. 2017) (noting that “a district judge should have at least the authority to consider further evidence in reviewing rulings on nondispositive matters”). I have supplemented the magistrate judge's findings of fact based on evidence adduced at the hearing before me.

         The magistrate judge's decisions on questions of law, however, I review under the Rule's “contrary to law” standard. PowerShare, Inc. v. Syntel, Inc., 597 F.3d 10, 15 (1st Cir. 2010). In the context of Rule 72(a), this “contrary to law” standard is equivalent to de novo review. Id. (holding that review of a question of law “is plenary under the ‘contrary to law' branch of the Rule 72(a) standard” and that therefore, “[f]or questions of law, there is no practical difference between review under Rule 72(a)'s ‘contrary to law' standard and . . . [a] de novo standard” (citations omitted)); Haines v. Liggett Grp. Inc., 975 F.2d 81, 91 (3d Cir. 1992) (holding that while “[t]he district court is bound by the clearly erroneous rule in findings of facts[, ] the phrase ‘contrary to law' indicates plenary review as to matters of law”); Bruce, 21 F.Supp.3d at 594; HSBC Bank USA, Nat'l Ass'n, 2014 WL 317820, at *7; 12 Charles Allen Wright, et al., supra (noting that “[r]egarding legal issues, the language ‘contrary to law' appears to invite plenary review”).

         IV. Privilege and Waiver.

         A. The Claims File Contained Privileged Materials.

         This court has jurisdiction over this declaratory judgment action based on diversity of citizenship. Accordingly, questions regarding the applicability and waiver of any evidentiary privilege, including the attorney-client privilege, are governed by Virginia state law. Fed.R.Evid. 501.

         The work-product doctrine, however, is a “qualified immunity from discovery, ” rather than an evidentiary privilege. FTC v. Grolier Inc., 462 U.S. 19, 24 (1983) (citing Hickman v. Taylor, 329 U.S. 495, 510 (1947)); see also Chevron Corp. v. Page (In re Naranjo), 768 F.3d 332, 345 n. 16 (4th Cir. 2014); Fed.R.Civ.P. 26(b)(3). Questions regarding the applicability and waiver of the protection provided by the work-product doctrine are therefore governed by federal law. Cont'l Cas. Co. v. Under Armour, Inc., 537 F.Supp.2d 761, 769-70 (D. Md. 2008).

         1. Attorney-Client Privilege.

         In Virginia, “confidential communications between an attorney and his or her client made in the course of that relationship and concerning the subject matter of the attorney's representation are privileged from disclosure.” Walton v. Mid-Atl. Spine Specialists, P.C., 694 S.E.2d 545, 549 (Va. 2010) (citations omitted). The purpose of the privilege is to “encourage clients to communicate with attorneys freely, without fearing disclosure of those communications . . . thereby enabling attorneys to provide informed and thorough legal advice.” Id. (citing Upjohn Co. v. United States, 449 U.S. 383, 389 (1981)). However, because the privilege is an “obstacle to investigation of the truth, ” it “should be strictly construed.” Id. (quoting Commonwealth v. Edwards, 370 S.E.2d 296, 301 (Va. 1988)). The burden of showing the privilege applies is on the proponent of the privilege - in this case, Harleysville. United States v. Jones, 696 F.2d 1069, 1072 (4th Cir. 1982).

         At the second evidentiary hearing, Harleysville's counsel provided the court with a copy of the Claims File. From my in camera review, I find that the attorney-client privilege attaches to multiple documents contained in the Claims File. Such documents include lengthy multipage reports by Harleysville's counsel to their client of the results of the attorneys' factual investigation and analysis of the law, as well as advice on litigation tactics and strategy. These documents are the epitome of privilege.

         2. Work-Product Protection.

         “[T]he work product doctrine belongs to the attorney and confers a qualified privilege on documents prepared by an attorney in anticipation of litigation.” Solis v. Food Emp'rs Labor Relations Ass'n, 644 F.3d 221, 231 (4th Cir. 2011) (citing, inter alia, Hickman, 329 U.S. at 509-14). As with the attorney-client privilege, the burden of showing that the work-product protection applies lies with Harleysville. From my in camera review, I find that the work-product protection applies to multiple documents contained in the Claims File.

         B. The Privilege and Protection Were Not Waived.

         1. Attorney-Client Privilege.

         a. The Disclosure Was Inadvertent.

         The attorney-client privilege “may be expressly or impliedly waived by the client's conduct.” Walton, 694 S.E.2d at 549. “[T]here is no bright line rule for what constitutes waiver”; instead, courts must “consider the specific facts of each case in making a waiver determination.” Id. “The proponent of the privilege has the burden to establish that the attorney-client relationship existed, that the communication under consideration is privileged, and that the privilege was not waived.” Id.

         Where a privileged document is inadvertently or involuntarily disclosed, the court must determine whether that disclosure constitutes a waiver of the attorney-client privilege. Id. at 550. An inadvertent disclosure may occur where a document is produced “knowingly, but mistakenly” or where the client “unknowingly provid[es] access to a document by failing to implement sufficient precautions to maintain its confidentiality.” Id. at 552. An involuntary disclosure may occur where a document is “knowingly produced by someone other than the holder of the privilege through criminal activity or bad faith” and “without the consent of the proponent of the privilege.” Id. at 551.

         Under the facts presented by this case, I find that disclosure of the privileged materials in the Claims File was inadvertent. The evidence shows that when investigator Cesario uploaded the Claims File to the Box Folder, he unknowingly made the Claims File available to NICB. NICB, in turn, unknowingly made the Claims File available to Insureds' counsel. Neither Harleysville nor Harleysville's counsel were aware the Insureds' counsel had access to the Claims File until they discovered the Claims File among documents produced by Insureds' counsel. Moreover, Harleysville's disclosure of the Claims File was intended for Harleysville's counsel, not for Insureds' counsel or NICB. This is a case where the client unknowingly and unintentionally made privileged documents available to a third party, and such disclosure is inadvertent under the law.

         Harleysville asserts that the disclosure of the Claims File was involuntary because it “was accomplished through [Insureds'] Counsel's misconduct.” Pls.' Objs. 2, ECF No. 73. This is incorrect. A document is not disclosed by the person who receives the document; it is disclosed by the person who sends it. Here, the disclosure was made by Harleysville when it uploaded the Claims File to the same Box Folder it had used to share the video with NICB. Insureds' counsel did not conduct themselves appropriately, and there is evidence to support Harleysville's assertion that they “attempted in bad faith to conceal [their] access of the [Box Folder] and procurement of [the Claims File], ” id., but it would defy logic to conclude that Insureds' counsel disclosed the documents by viewing them.

         Accordingly, to the extent that Harleysville objects to the magistrate judge's finding that the disclosure was inadvertent, such objection is overruled.

         b. There Was No Waiver.

         Having found that Harleysville's disclosure was inadvertent, I must now determine whether the attorney-client privilege has been waived. “[W]aiver may occur [through inadvertent disclosure] if the disclosing party failed to take reasonable measures to ensure and maintain the document's confidentiality, or to take prompt and reasonable steps to rectify the error.” Walton, 694 S.E.2d at 552.

         To determine whether the privilege has been waived, courts must consider five factors:

(1) [T]he reasonableness of the precautions to prevent inadvertent disclosures, (2) the time taken to rectify the error, (3) the scope of the discovery, (4) the extent of the disclosure, and (5) whether the party asserting the claim of privilege . . . has used its unavailability for misleading or otherwise improper or overreaching purposes in the ...

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