Ex-officers cannot claim privilege for documents

Listen to this article

Former corporate officers sued over an allegedly unlawful online lending scheme could not claim the protection of attorney-client privilege over documents between the company and its counsel, as the privilege was lost when the company changed management.

U.S. District Judge M. Hannah Lauck made the ruling in an Oct. 17 memorandum opinion, granting in part and denying in part both the plaintiffs’ motion to compel and the defendants’ motion for a protective order.

The case heard before the U.S. District Court for the Eastern District of Virginia is Gibbs v. Stinson (VLW 021-3-491).

Background

The matter arose from the involvement of the defendants in an allegedly unlawful lending scheme operated by Think Finance. The lending operation allegedly offered loans to the plaintiffs charging interest rates ranging from 118% to 448%.

A previous memorandum opinion in this case described the scheme as a “rent-a-tribe” scheme, where “actors establish entities to originate internet-based high interest loans so as to evade state and federal usury and lending laws.” The 2019 opinion states that to effectuate the scheme, a nontribal entity and a Native American tribe agreed to establish a lending company in the tribe’s name, where the nontribal entity retains the vast majority of the profits while the tribe receives a “small percentage” of the revenue.

According to the Oct. 17 opinion, the named defendants had varying levels of involvement with Think Finance, ranging from founding the original online lending entity to service in leadership roles to varying levels of ownership interests.

“During each Defendant’s tenure, however, no Defendant functioned merely as a passive investor,” Lauck wrote.

On Feb. 1, 2019, an amended complaint in a putative class action was filed, alleging numerous violations of federal and state law in relation to the alleged unlawful lending scheme, setting into motion the current proceedings.

Privilege

On Dec. 31, 2020, the defendants filed a motion requesting that the court enter a protective order preventing the plaintiffs from obtaining discovery of privileged materials in the defendants’ possession. To support the motion, the defendants argued that their intent to assert a good faith defense did not constitute a waiver of attorney-client privilege on these facts.

On that same day, the plaintiffs sought to compel production “of the vast majority of documents” the defendants cited attorney-client privilege for. They argued the defendants’ good faith defense did in fact waive attorney-client privilege, further stating that the defendants should not be allowed to “summarily shield” communications between some of the defendants and their attorneys.

In the most recent opinion, Lauck granted in part and denied in part both motions, and provided that the court would review the correspondence requested by the plaintiffs in camera to determine if attorney-client privilege shielded those communications.

“This discovery dispute turns primarily on whether Think Finance or Defendants, as former directors and officers of that company, hold the attorney-client privilege Defendants seek to invoke,” Lauck wrote. “The Court concludes that for the vast majority of documents at issue here, the attorney-client privilege belongs to Think Finance, not those Defendants.”

Lauck made this ruling by citing examples of case holding that “in the corporate context, the company is the client and holds the corresponding attorney-client privilege.”

“Thus, control over the privilege ‘must necessarily be undertaken by individuals empowered to act on behalf of the corporation,’ which are normally the corporation’s current ‘officers and directors,’” Lauck wrote, citing Williams v. Big Picture Loans LLC.

The opinion states that control of Think Finance passed to new management “around 2017,” which meant that the defendants have lost the ability to assert Think Finance’s attorney-client privilege.

The opinion also refuted the defendants’ claim that agency law prevented them from disclosing privileged documents from Think Finance. In making the claim, the defendants stated that they “have no right to disclose that information and [have] a duty not to.”

Lauck wrote that since the defendants are no longer agents of Think Finance, they cannot assert attorney-client privilege on these grounds.

The opinion did allow Think Finance itself the opportunity to intervene in the matter “to the extent Think Finance seeks to do so.”

“The Court will afford it seven days from the issuance of this Memorandum Opinion… ‘to raise objections to production of the documents here at issue or otherwise move for a Protective Order.’” Lauck wrote. According to court records, Think Finance did not intervene within the seven day time frame.

Court documents state that after granting an extension of time, the court gave the defendants a deadline of Nov. 7 to produce the requested documents in compliance with the amended order.

According to court documents, Fairfax attorneys Kristi C. Kelly, Andrew J. Guzzo and Casey S. Nash served as counsel for the plaintiffs. Philadelphia attorneys Richard L. Scheff, David F. Herman and Michael C. Witsch of Armstrong Teasdale represented the defendants. None of the attorneys in the case provided comment for this story.