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Williams v. Big Picture Loans, LLC

United States District Court, E.D. Virginia, Richmond Division

May 3, 2019

LULA WILLIAMS, et al., Plaintiffs,
BIG PICTURE LOANS, LLC, et al., Defendants.


          Robert E. Payne Senior United States District Judge.

         The 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.


         As 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.

         A. Additional Factual Background

         1. The Lac Vieux Desert Band of Lake Superior Chippewa Indians Starts An Online Lending Business

         In 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.

         Soon 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.

         Red 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"), [1] 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.

         Even 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.[2]

         As a 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. ("Ascension"). Id.

         2. The New York and CashCall Litigations And the Decision to Restructure

         In 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.

         The 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 No. 344-4).

         Additionally, 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).

         Martorello 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." Id.

         Originally, 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.

         In the 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.

         Soon 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.

         In 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.

         Around 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.

         3. The Merger and the Creation of the Corporate Defendants

         In 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.

         The 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.

         After 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).

         4. The Corporate Defendants' Structure

         On the 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.

         Hazen 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.

         Further, 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. at 69.

         5. Martorello's Communications With Attorneys About the Sale

         Throughout 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 ...

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