United States District Court, E.D. Virginia, Richmond Division
E. Payne Senior United States District Judge.
matter is before the Court on PLAINTIFFS' MOTION TO
COMPEL INFORMATION WITHHELD ON THE BASIS OF ATTORNEY-CLIENT
PRIVILEGE (the "Motion") (ECF No. 340). Although
the title of the Motion mentions only documents withheld on
the basis of the attorney-client privilege, the text of the
Motion seems to compel production of documents withheld on
the basis of the work-product doctrine as well. For the
following reasons, the Motion will be granted in part and
denied in part.
explained in detail in the MEMORANDUM OPINION (ECF No. 146)
entered on July 27, 2018 (the "Sovereign Immunity
Opinion")/ at the core of this case lie consumer loans
bearing interest rates of more than 600% that are alleged to
violate Virginia's usury laws and a lending scheme
(implemented through a convoluted corporate maze) that is
alleged to violate the Racketeer Influenced and Corrupt
Organizations Act ("RICO"). The Sovereign Immunity
Opinion is incorporated by reference to help explication of
the facts in this case as of the time the Sovereign Immunity
Opinion was issued. Since then, additional factual
information has been provided through discovery in the case
against Defendant Matt Martorello.
Additional Factual Background
The Lac Vieux Desert Band of Lake Superior Chippewa Indians
Starts An Online Lending Business
2011, the Lac Vieux Desert Band of Lake Superior Chippewa
Indians (the "Tribe") started to engage in online
lending. On July 8, 2011, the Tribe's council (the
"LVD Council") enacted the Tribal Consumer
Financial Services Regulatory Code (the "Code"),
which legalized online lending by the Tribe. July 8, 2011
Resolution (ECF No. 23-5) at 1; Nov. 18, 2011 Resolution (ECF
No. 23-3) at 1-2.
after the Code was enacted, the LVD Council organized Red
Rock Tribal Lending, LLC ("Red Rock") as a
tribally-owned LLC on September 14, 2011. See Sept.
14, 2011 Resolution (ECF No. 23-8). The company was managed
by two members of the Tribe, and the Tribe was Red Rock's
sole member. The purpose of Red Rock was to make loans to
consumers from its offices on the Reservation, and its
employees, computers, and records were all located there. Red
Rock was regulated by a governmental subdivision of the Tribe
called the Tribal Financial Services Regulatory Authority,
which was created to enforce the Code and regulate licensees.
Hazen Aff. (ECF No. 34-1) ¶¶ 8-9; Code (ECF No.
23-4) § 4.1.
Rock decided to contract with an outside entity to better
learn the lending industry and to obtain a source to fund its
online lending. The Tribe had identified Martorello as a
potential consultant in mid-2011. Martorello Decl. (ECF No.
366-10) ¶¶ 14, 17. Martorello owned Bellicose VI,
LLC ("Bellicose VI") and SourcePoint VI, LLC
("SourcePoint"),  On October 25, 2011, Red Rock
contracted with Bellicose VI for it to provide Red Rock with
vendor management services, compliance management assistance,
marketing material development, and risk modeling and data
analytics development. Hazen Aff. ¶ 10; Servicing
Agm't (ECF No. 344-2) at 1 (the "Servicing
Agreement") . On April 15, 2012, Bellicose VI assigned
its interest in the Servicing Agreement to SourcePoint. Hazen
Aff. ¶ 12; Servicing Agm't at 1.
though Red Rock was solely owned by the Tribe,
Martorello-through his company, SourcePoint-handled most
material aspects of the lending business and funded Red
Rock's operations. See generally Servicing
Agm't. Under the Servicing Agreement, revenues were
distributed first to Red Rock, which received 2% of all gross
revenues "plus bad debt recoveries minus the sum of
charge backs and bad debt charge-offs." Servicing
Agm't §§ 2.25, 6.4.1. The remainder was then
distributed in the following order: (1) to SourcePoint, to
reimburse it for funding advances made to Red Rock and for
servicing expenses; (2) to any of Red Rock's creditors,
to pay outstanding debt that was then due; and (3) to
SourcePoint, to pay its monthly servicing fee. Id.
§ 6.4.2-6.4.5. The Servicing Agreement also assigned
specific responsibilities to SourcePoint. For instance, after
noting that SourcePoint was being engaged as Red Rock's
"independent contractor" to perform the services
noted, the Servicing Agreement granted to SourcePoint
"the authority and responsibility over all
communication and interaction whatsoever between [Red Rock]
and each service provider, lender and other agents of [Red
Rock] ." Id. § 3.1 (emphasis added).
The Servicing Agreement also prevented Red Rock from
operating its lending business anywhere without using
SourcePoint to provide its management and consulting services
for those operations. Id. § 3.3.1. In addition,
the Servicing Agreement required SourcePoint to select a bank
account to store all funds generated by Red Rock's
lending, and it gave SourcePoint- unless otherwise agreed
between Red Rock and SourcePoint-the "sole signatory and
transfer authority over such bank accounts," as well as
"sole authority to sweep monies from such bank
accounts" to distribute revenues under the priority
structure. Id. §4.4. The Servicing Agreement
also placed in SourcePoint virtually all significant duties
concerning the day-to-day functioning of the lending business
being conducted in Red Rock's name, including: (1)
selecting and negotiating with service providers and lenders;
(2) "[d]evelopment and promotion of sound and positive
business relationships/' including "the enforcement
or termination of agreements with such service providers and
lenders'7; (3) preparation of regulatory, compliance,
training, education, and accounting standards, as well as
standards for "screening and review of"
"website contents, marketing and consumer relations
practices"; (4) providing "pre-qualified
leads" and the "credit-modeling data and risk
assessment strategies"; (5) oversight of Red Rock's
call center in the Philippines; and (6) sales to third-party
debt collectors. Id. § 4.2.l.
result of this structure, Red Rock received merely $3.2
million in profits from January 1, 2014 through August 31,
2015, even though the loans generated a net profit of $161.9
million, with most of the profit going to Martorello. Red
Rock Accounting Sheet (ECF No. 344-3) at 1-4. Martorello
owned 85.1% of Bellicose Capital; and his brother, Justin
Martorello, owned 9.9% of the shares. Dec. 31, 2015 Statement
for Bellicose Capital (ECF No. 193-3) . The remaining 5% was
owned by Brian McFadden, Simon Liang, and James
Dowd-Bellicose Capital's officers, who occupy their same
roles with Ascension Technologies, Inc.
The New York and CashCall Litigations And the Decision to
2013, New York regulators issued cease-and-desist letters to
Red Rock, accusing it and other lending entities of
"using the Internet to offer and originate illegal
payday loans to New York consumers, in violation of New
York's civil and criminal usury laws."
Otoe-Missouria Tribe v. N.Y. Dep't of Fin.
Servs., 974 F.Supp.2d 353, 356 (S.D.N.Y. 2013) .
Thereafter, the Tribe, along with the Otoe-Missouria Tribe of
Indians, sued the New York State Department of Financial
Services to prevent it from enforcing New York's usury
laws and to allow the Tribe to sell New York residents
short-term, high interest loans. Id. at 355.
United States District Court for the Southern District of New
York held that Red Rock was "subject to the State's
non-discriminatory anti-usury laws" because the
"undisputed facts demonstrate[d]" that the illegal
activity was "taking place in New York, off of the
Tribes' lands." Id. at 361. Ten days later,
Martorello formed Bellicose Capital, in order to add a
protective layer to insulate liability. See
Bellicose Capital's Delaware Incorporation Statement (ECF
a few months after the decision in Otoe-Missouria
Tribe was issued, the Consumer Financial Protection
Bureau (the "CFPB") brought a similar case against
CashCall, Inc. ("CashCall"), a payday loan
operation that used a "Tribal Lending Model."
See Consumer Fin. Prot. Bureau v. CashCall, Inc.,
No. CV 15-07522-JFW, 2018 WL 485963, at *l-*3 (CD. Cal. Jan.
19, 2018), appeal filed (9th Cir. April 12, 2018).
paid attention to the CashCall case, and, on January 3, 2014,
he wrote that he was concerned that the CFPB was attacking
"legit tribal lending operations." Jan. 2014 Email
Thread (ECF No. 341-4) at 3. He asked Rob Rosette of Rosette,
LLP-which is counsel for Ascension and Big Picture Loans, LLC
("Big Picture") (collectively the "Corporate
Defendants") in this case-about whether the CFPB thought
differently about "true sovereign nation lending"
compared to the "Tribal Lending Model" that
involved Native American lenders assigning the loans to
different non-tribal servicers. Id. In the same
email chain-which included lawyers from Rosette, members of
the Tribe, the Tribe's general counsel, and
Martorello's brother-Martorello expressed that he was
"glad" that a meeting between him and CFPB
regulators had not occurred and that the regulator did not
know that Martorello was going to meet with him. Id.
And, Martorello acknowledged that, if the CFPB began to take
action against Red Rock and similar lenders, there would
bewa long, expensive and difficult fight where the
stakes are very literally everything."
the Servicing Agreement between Red Rock and Martorello's
companies-Bellicose VI and SourcePoint, which were
subsidiaries of Bellicose Capital-was to last until December
31, 2018. Servicing Agm't § 3.2. However, Martorello
changed his mind about how the lending business should
operate and decided to make changes. To that end, on August
11, 2014, Martorello told Jim Williams, Jr., Chairman of the
Tribe, that "we're working on something we should
have in the next few days which will have some talking points
to go over about the concept for a potential bigger deal for
LVD learning the Servicing business. Maybe we should start
from here with a phone call, and then if we're close you
can come to Puerto Rico to finalize business terms?'7
Aug. 2014 Email Thread (ECF No. 344-6) at 1.
meantime, the LVD Council enacted the Business Entity
Ordinance on August 26, 2014. First Aug. 26, 2014 Resolution
(ECF No. 23-6) at 1-2. The Business Entity Ordinance created
comprehensive procedures for the creation, operation, and
dissolution of various tribal entities, including limited
liability companies ("LLCs"). See
generally Business Entity Ordinance (ECF No. 23-7). The
Business Entity Ordinance further stated that a tribally
owned LLC that had the Tribe as its sole member would
"be considered a wholly owned and operated
instrumentality of the Tribe and . . . [would] have all the
privileges and immunities of the Tribe, including but not
limited to the Tribe's sovereign immunity from suit,
except as explicitly waived by the [LVD] Council."
Id. Ch. 5, § 8(E). That same day, the LVD
Council organized Big Picture. Second Aug. 26, 2014
Resolution (ECF No. 23-10). Big Picture was formed "as a
wholly owned and operated instrumentality of the Tribe,"
and was nominally managed by two tribal members, Michelle
Hazen ("Hazen") and James Williams
("Williams") . Id. at 2-3. Big Picture was
meant to "ultimately consolidate the business" of
the Tribe's other lending entities, Red Rock and Duck
Creek Tribal Financial, LLC. Id. at 1.
after, on October 1, 2014, the United States Court of Appeals
for the Second Circuit affirmed the decision of the Southern
District of New York in Otoe-Missouria Tribe of Indians
v. New York State Department of Financial Services, 769
F.3d 105 (2d Cir. 2014), finding that the district court had
"reasonably concluded" that Red Rock failed to
establish that it was likely to succeed on its claim that New
York could not stop it from issuing loans and that "a
tribe has no legitimate interest in selling an opportunity to
evade state law." Id. at 112-14. After that
decision, on November 4, 2014, Karrie Wichtman, a lawyer who
was with Rosette, LLP and who was counsel for Red Rock at the
time, sent an email to Martorello, explaining that, although
the Second Circuit's decision was in some ways a victory
for the Tribe, Martorello should take the option of
"go[ing] quietly into the night and restructure based on
what we know from the opinion in order to build an even
stronger case for future litigation.'' Nov. 4 Email
From Wichtman to Martorello (ECF No. 398-1) at 2.
response to the decision of the Second Circuit, Martorello
and the Tribe took steps to make Ascension (the new servicer
of the loans) and Big Picture operational relatively quickly.
Big Picture received an employer identification number
("EIN") from the Internal Revenue Service on
December 1, 2014, which is shown in an email that Wichtman
sent to Martorello and members of the Tribe among others. IRS
Email Containing Big Picture's EIN (ECF No. 344-7) at
1-2. On February 5, 2015, the Tribe formed another entity,
Tribal Economic Development Holdings, LLC ("TED"),
the asserted purpose of which was to operate the Tribe's
current and future lending companies. Fed. 5, 2015 TED
Resolution (ECF No. 23-13). On the same day, the LVD Council
created Ascension as a wholly owned and operated servicing
entity and a subsidiary of TED, and it designated
McFadden-the former president of Bellicose Capital and a part
owner of Eventide Credit Acquisitions, LLC
("Eventide"), a company managed and majority-owned
by multiple entities of which Martorello was the president-as
the president of Ascension. Feb. 5, 2015 Ascension Resolution
(ECF No. 344-8) at 1-2. Ascension was created "as a
wholly owned and operated instrumentality of the Tribe/'
with TED as its sole member, and was managed by Hazen and
Williams. Id. at 2-3.
the same time, the LVD Council had formed Tribal Acquisition
Company, LLC ("TAC")-which, like Ascension, had TED
as its sole member and Hazen and Williams as co-managers-for
the sole purpose of acquiring Bellicose Capital without
creating a nexus between TED and Delaware. Sept. 14, 2015
Merger Resolution (ECF No. 34-2) (the "Merger
Resolution") at 2.
The Merger and the Creation of the Corporate
early 2015, the parties agreed on the basic framework of the
merger: a seller-financed transaction with non-fixed payments
over a seven-year term, with any outstanding amount due being
forgiven at the end of that term. The seller-financier would
be Eventide. Merger Resolution at 3; see generally
Eventide Operating Agm't (ECF No. 344-12). Eventide was
to provide a $300 million loan to TED, which TED would then
use to purchase Bellicose Capital. Merger Resolution at 3.
After this rather convoluted structure was set, Martorello
continued negotiating with the Tribe over the next several
months. Martorello Decl. ¶ 52. The parties reached a
final agreement on September 14, 2015, memorializing the
terms of the deal in a loan agreement (the "Loan
Agreement") and a promissory note (the
"Note"). Merger Resolution at 7-9; see
generally Loan Agm't (ECF No. 83-17); Note (ECF No.
83-11). As part of the transaction, the LVD Council approved
a limited waiver of TED's and Big Picture's sovereign
immunity in connection with TED's repayment of the
Eventide loan during its seven-year term. See Sept.
14, 2015 Immunity Waiver Resolution (ECF No. 34-3) at 2-8. On
September 14, 2015, the Tribe entered into the Merger
Agreement and Plan of Merger to purchase Bellicose Capital
from Eventide. Merger Agm't (ECF No. 344-1). In a most
unusual provision, the Merger Agreement provides that all
Bellicose Capital's "information now or that may be
discovered on equipment of any kind or in any written
materials shall be immediately provided to [the
Tribe's acquisition company] and deleted or destroyed by
the holder so that holder retains no copies of [Bellicose
Capital's] information." Merger Agm't
§ 2.6(d) (emphasis added). Finally, on January 26, 2016,
using the loan from Eventide, the Tribe completed its
purchase of Bellicose Capital, including subsidiaries like
SourcePoint and Bellicose VI, and it acquired all of
Bellicose Capital's data, software, and corporate
goodwill. Martorello Decl. ¶ 53; Hazen Aff. ¶ 22.
Tribe finished restructuring its lending businesses soon
after the Bellicose Capital purchase. TAC dissolved in late
January 2016 after control of Bellicose Capital had been
transferred to TED. Arts, of Dissolution (ECF No. 91-9).
Around the same time, Bellicose Capital's assets were
assigned to Ascension, and its liabilities were assigned to
Big Picture. Afterward, Bellicose Capital ceased to exist.
Shortly thereafter, on February 16, 2016, Big Picture, which
was to own the loans, engaged Ascension as an independent
contractor to provide Big Picture with the servicing support
services that Ascension had carried over from Bellicose
Capital. Intratribal Servicing Agm't (ECF No. 398-13)
§ 3.1. Big Picture retained the same managerial
authority as Red Rock. Thus, "[t]he criteria used to
extend funds to individual borrowers will remain within the
sole and absolute discretion of [Big Picture] . . . and [Big
Picture] . . . shall execute all necessary loan
documentations." Id. § 4.2.l(k). Likewise,
Ascension "has no authority to engage in origination
activities, execute loan documentation, or approve the
issuance of loans to consumers. Final determination as to
whether to lend to a consumer rests with [Big Picture]."
Id. § 4.1.
the sale, the ownership interest in Eventide was essentially
the same as it had been under the Bellicose Capital
arrangement: Martorello's companies owned an 85% interest
in Eventide; his brother, Justin Martorello, owned a 10%
interest; and McFadden, Dowd, and Liang owned a 5% interest
collectively, even as they each served as officers for
Ascension. Member Listing of Eventide (ECF No. 193-8).
The Corporate Defendants' Structure
same day that Big Picture contracted with Ascension, the LVD
Council also authorized Red Rock to assign the majority of
its consumer loans and obligations to Big Picture. Hazen Aff.
¶ 23; Feb. 16, 2016 Assignment Resolution (ECF No.
23-23) at 2-3; see generally Assignment Agm't
(ECF No. 23-24). Big Picture currently employs fifteen
individuals on the Reservation. Hazen Aff. ¶ 24.
Ascension employs at least forty individuals, who work
outside the Reservation at Ascension's satellite offices,
which appear to be in Atlanta, Puerto Rico, and the Virgin
Islands. Ascension's Second Am. Resp. to Interrog. at
Attachment 2 (ECF No. 193-10) at 12. The Tribe has no
involvement with Ascension's day-to-day operations.
Ascension's Second Am. Resp. to Interrog. At 6-8.
has been Big Picture's CEO since December 2015. Hazen
Aff. ¶ 20. However, as with Ascension, Hazen and
Williams have delegated to McFadden (the president of
Ascension, who is not a member of the Tribe and formerly was
the president of Bellicose Capital): (1) the "approval
of Ascension strategic direction," which must be
communicated at least quarterly to the co-managers; (2)
"authority to execute documents on behalf of
Ascension"; (3) "authority to open and maintain
bank accounts"; (4) "authority to adopt, terminate,
or change employee benefit plans or programs"; and (5)
"authority regarding all matters necessary for the day
to day management of Ascension." Ascension Delegation of
Authority Policy (ECF No. 91-13) § 1.4.
from the evidence presented by the plaintiffs and as
previously discussed by the Court in the Sovereign Immunity
Opinion, Hazen and Williams do little to oversee the lending
business as co-managers. Williams' testimony about his
non-involvement in Big Picture's day-to-day operations
and lack of knowledge about customer service
representatives' responsibilities show that his oversight
is narrow in scope and death. Sovereign Immunity Opinion at
68-69. Further, as previously discussed, Ascension conducts
most (if not all) operations from outside of the Tribe's
reservation and employs only non-tribal members. Id.
Martorello's Communications With Attorneys About the
these events from the time of the Otoe-Missouria
Tribe litigation up until the eventual sale of Bellicose
Capital to the Tribe, Martorello discussed corporate
restructuring, the Tribal lending model, and the Tribe's
lending operations with several attorneys. From the privilege
logs attached to the Motion, it appears that Martorello
discussed those topics with, and received advice on them
from, the following attorneys: (1) Jennifer Weddle of
Greenberg Traurig, LLP and Mike McBride III of Crowe &
Dunlevy about filing with Commissioner of Financial
Regulation" on January 23, 2015; (2) James Fitzsimmons
of Budd Lerner about a broker agreement on June 9, 2015 and
on June 24, 2015, and about the sale of Bellicose Capital on
August 29, 2016, which included various agreements involved
in the merger; (3) William Blum and Robert Ladislaw of
Solomon Blum Heymann LLP about an "entity
structure" on June 17, 2015 and about various tax
matters relating to the Bellicose Capital sale from May 11,
2016 through August 31, 2016; (4) Dianette M. Rivera
Melendez, Juan Feliciano, and Edgar Rios Mendez of
Pietrantoni Mendez & Alvarez LLC about "structure
changes" and tax matters related to the sale from June
16, 2015 to August 31, 2016; (5) Jeanelle Alemar of JAE Legal
Services LLC about "structure changes" and
"corporate structure" on June 17, 2015 and June 23,
2015; (6) John L. Williams of Conner & Winters about the
Bellicose Capital merger and" [n] on-surviving
companies" from January 27, 2016 to August 30, 2016; (7)
David Nissman of ILP McChain Miller Nissman LLC about a
document called the "Zeke article" on February 8,
2016; (8) Joel Winston, Blake ...