Richardson v. Frontier Spinning Mills, Inc.

Richardson v. Frontier Spinning Mills, Inc., 2011 NCBC 39.

STATE OF NORTH CAROLINA IN THE GENERAL COURT OF JUSTICE
SUPERIOR COURT DIVISION
COUNTY OF LEE 10 CVS 4660

CLAY VANCE RICHARDSON, et al., )
Plaintiffs )
)
v. )
)
FRONTIER SPINNING MILLS, INC., et al., )
Defendants )

STATE OF NORTH CAROLINA IN THE GENERAL COURT OF JUSTICE
SUPERIOR COURT DIVISION
COUNTY OF LEE 10 CVS 8307

MURRAY C. GREASON, JR., et al., )
Plaintiffs )
)
v. )
)
FRONTIER SPINNING MILLS, INC., et al., )
Defendants )

ORDER ON PLAINTIFFS' MOTION TO COMPEL

THESE MATTERS, consolidated for discovery and pretrial purposes, are before

the court on the captioned respective Plaintiffs' Motion to Compel Compliance with

Subpoena and Compel Production of Documents (the "Motion"), filed on July 27, 2011,

and

THE COURT, having reviewed and considered the Motion and the respective

briefs propounded in support of and opposition to the Motion, FINDS and CONCLUDES

that:
1. These civil actions arise from the sale (the "Sale") of Frontier Spinning

Mills, Inc. ("Frontier"), a closely-held corporation in which Plaintiffs were minority

shareholders. Frontier was sold to Sun Capital ("Sun"), a private equity firm.

2. Among other things, the Plaintiffs allege that the Defendants wrongfully

caused the Sale to be structured so that shareholders of a single class of Frontier

common stock were divided into two classes for sale and pricing purposes – the

Plaintiffs ("Outside Shareholders") and the shareholding Defendants ("Inside

Shareholders"). The Plaintiffs complain about the fact that the Outside Shareholders

were paid less per share than the similarly situated Inside Shareholders when the Sale

closed.

3. The Plaintiffs further allege that Defendants failed to disclose certain

material facts concerning the Sale and affirmatively made materially misleading

statements in order to create a sense of desperation about Frontier's financial condition

prior to the Sale. They allege that this induced the Plaintiffs to accept a

disproportionately lower share of the purchase price from the Frontier Sale.

4. Defendants contend that the Plaintiffs were informed fully about how the

Sale was structured, including the disparate pricing of the shares held by Outside

Shareholders and Inside Shareholders. Further, they contend that by signing a Stock

Purchase Agreement ("SPA") and a separate release relative to the Sale, the Plaintiffs

knowingly ratified and approved the very things they now are complaining about.

Defendants further point out that the SPA contained a specific acknowledgement by

Plaintiffs that they were approving the Sale knowing that they lacked certain "Seller

Excluded Information" that either then was or later might come into the possession of
Sun and the Inside Shareholders. Defendants also contend that Plaintiffs should not

be heard to complain because any Outside Shareholders who did not want to approve

the Sale had a right to dissent and receive "fair value" for their shares pursuant to N.C.

Gen. Stat. §55-11-04. 1

5. In responding to the substantive allegations of the Complaint, the

Defendants have pled a number of affirmative defenses. One of those defenses is that

Defendants were relying on the advice of counsel with regard to material parts of how

the Sale was structured, including but not limited to the provision of two disparate

purchase prices for the respective Frontier shares held by the Outside Shareholders

and the Inside Shareholders. This defense has been raised both in the context of

answers by one or more Defendants during oral depositions 2 and by the formal filing of

a Sixth Affirmative Defense ("Sixth Defense"), allowed as an amendment to Defendants'

Answer by Order of this court on June 29, 2011. 3 The Sixth Defense states that:

In response to all Plaintiffs' claims based on allegations of
illegal disparate treatment of "Outside Shareholders" and the
"Inside Shareholders" and all Plaintiffs' Claims based upon
allegations of insufficient material disclosures in the Stock
Purchase Agreement and otherwise, which Defendants
specifically deny, and if it is determined that there was illegal
disparate treatment of the "Outside Shareholder[s]" and the
"Inside Shareholders" or insufficient material disclosure in
the Stock Purchase Agreement and otherwise, which the
Defendants specifically deny, then Defendants assert that in

1
None of the potential dispositive substantive issues raised by Defendants' contentions are formally
before the court at this time.
2
See testimony given by former Frontier CEO, George R. Perkins ("Perkins"), Perkins Dep. 125:23 –
126:11; and by former Frontier CFO, Barbara F. Walton ("Walton"), Walton Dep. 161:15-16.
3
Defendants have argued that the defense is not raised formally, and therefore no waiver is effected, by
the act of a Defendant-deponent providing an answer that in substance says the Defendant relied upon
the advice of counsel in undertaking certain actions with regard to the Sale. Rather, they argue that a
privilege waiver can only arise when the advice of counsel is relied upon formally, and then only in the
narrow context of the issue(s) raised by that reliance. The reported cases Defendants rely upon do not
appear supportive of Defendants' position. However, in the context of this matter, given the broad form of
the Sixth Defense, the court concludes that Defendants' position makes a distinction without a difference.
the discharge of any legal responsibilities with respect to
these allegations, they relied on the advice of counsel. 4

6. The Plaintiffs contend that by raising the defense that Defendants relied

upon the advice of counsel, Defendants have waived any attorney-client privilege or

work-product privilege between them and counsel with regard to all aspects of the

Sale. 5 Specifically, Plaintiffs seek to discover information and to depose the

Defendants and Frontier counsel, Jamie Clarke, Esq. ("Clarke"), of the firm Moore &

Van Allen, PLLC ("MVA"), free of attorney-client or work-product privilege constraints.

7. In response, the Defendants argue that any such waivers must be very

narrowly limited in scope. They contend that any waiver of the attorney-client privilege

arising from the advice of counsel defense must be confined to specific communications

that are related to the subject matter for which the defense is asserted. Further,

Defendants argue in substance that a waiver of the attorney-client privilege does not

constitute a waiver of the work-product privilege, since the latter involves mental

processes of the attorney and is not necessarily communicated to the client. Among

other things, they contend that unless work product was communicated to the client, it

could not have been relied upon by the client and should not be discoverable as part of

an attorney-client waiver.

8. The deposition testimony of Perkins and Walton reflects broad reliance by

Defendants upon the advice of counsel in the context of defending Plaintiffs' allegations

in this civil action. The Sixth Defense formally raises the advice of counsel defense in

4
Am. Answer, Sixth Def. (emphasis added).
5
Plaintiffs also contend that an "advice of counsel" defense, as apparently contemplated by N.C. Gen.
Stat. § 55-8-42, is not available to all or some of the Defendants here. Although that issue is not formally
before the court at this time, for the limited purposes of this Order the Sixth Defense is deemed to be
viable as to all Defendants.
three categories: (a) the alleged disparate share pricing treatment of Outside

Shareholders and Inside Shareholders, (b) material disclosures in the SPA and (c)

"otherwise." The first category, alleged disparate treatment of the respective

shareholders, is relatively narrow and susceptible to reasonable definition. The second

category, alleged insufficient material disclosures in the SPA, is not as narrow. In the

context of the material allegations in the Complaint, it is not as susceptible to definition.

The third category, "otherwise," is so broad as to be elusive of clear and reasonable

definition.

Attorney-Client Privilege

9. The attorney-client privilege long has been a fundamental principle of

client-lawyer confidentiality. 6 It is one of the cornerstones of the trust that is the

"hallmark of the client-lawyer relationship," 7 and it is not cavalierly invaded by our

courts. However, as Plaintiffs here contend, and Defendants concede, there is ample

authority supporting the proposition that the act of raising an advice of counsel defense

waives the attorney-client privilege with regard to certain matters in a particular dispute.

State v. Fair, 354 N.C. 131 (2001); Jones v. Marble Co., 137 N.C. 185 (1904) 8 The

scope of the waiver is the thorny issue that has caused problems for courts and

litigants. Plaintiffs argue for a broader waiver, relying heavily upon Panter v. Marshall

Field & Co., 80 F.R.D. 718 (D.C. Ill. 1978); and Defendants argue for a more narrow

waiver. Although the reported cases are inconsistent, there is persuasive authority to

the effect that such a waiver is limited to communications with counsel involving the

6
Rules of Professional Conduct, Rule 1.6, n. 2, 3.
7
Id. at n. 2.
8
This reported case is cited as being located at 137 N.C. 237, and the Cases Reported directory of
Volume 137 of the North Carolina Reports shows it as being published at p. 237. However, in reality it is
published in Volume 137 at p. 185.
specific conduct complained of and ostensibly excused by the advice of counsel

defense. According to such authority, the waiver does not include all communications

between the client and counsel, but rather only those reasonably related to the conduct

in question. This court, in Bank of America Securities, LLC v. Evergreen International

Aviation, Inc., 2006 NCBC 2 ¶ 27 (N.C. Super. Ct. Jan. 25, 2006), observed that an

attorney's advice:

does not necessarily become in issue merely because the
attorney's advice might affect the client's state of mind in a
relevant manner. Instead, the advice of counsel is placed in
issue where the client asserts a claim or defense, and
attempts to prove that claim or defense by disclosing or
describing an attorney client communication.

10. The problem presented in the instant matter is that, notwithstanding their

arguments to the contrary, the Defendants have elected to raise the advice of counsel

defense in a very broad fashion. It would not have been difficult to limit the factual

context of the Sixth Defense, and potentially any resulting waiver of attorney-client

privilege, by limiting the wording of the defense. 9 By example, the Sixth Defense could

have been limited to advice relied upon with regard to the alleged disparate treatment of

Outside Shareholders and Inside Shareholders. However, rather than limit the breadth

and scope of the Sixth Defense, the Defendants took the opposite course. They

broadly allege that they relied upon the advice of counsel relative to the disparate share

pricing, any material disclosures in the SPA and "otherwise." Such broad language

makes it extremely difficult for the court to define fairly and reasonably where any

resulting waiver of the attorney-client privilege begins and ends. While there has been

a waiver of the attorney-client privilege as to communications between the Defendants

9
In view of this analysis, there is no need to determine what attorney-client waiver, if any, would have
been effected by the deposition testimony of various Defendants had the Sixth Defense not been lodged.
and Clarke with regard to the Sale, the waiver is not without reasonable limitations, as

reflected below.

11. Accordingly, the court CONCLUDES that, having raised the Sixth Defense

in such a broad form, the Defendants have waived the attorney-client privilege as to all

communications, in any form, between any Defendants and Clarke that took place on or

before the March 17, 2008 closing of the Sale and which reasonably relate to:

(a) The mechanics of and manner in which the Sale was structured;

(b) The manner in which information concerning the Sale was

disclosed to any of the Outside Shareholders;

(c) The legality of the Sale and its structure, including considerations of

(i) the disparate pricing structure between Inside Shareholders and Outside

Shareholders and (ii) the Seller Excluded Information provision in the SPA;

(d) The manner and level of information disclosed in or omitted from

the SPA; and

(e) The risks and impact of fiduciary duty considerations on the part of

any Defendants relative to the Sale.

Work-Product Privilege

12. The work-product privilege is another fundamentally important concept

that supports and fosters the principle of client-lawyer confidentiality. 10 However, as is

the case with the attorney-client privilege, the enforceability of the work-product

privilege sometimes becomes an issue when a civil litigant elects to raise an advice of

counsel defense.

10
Rules of Professional Conduct, Rule 1.6, n. 3.
13. As discussed above, the Defendants here vigorously argue that a waiver

of the attorney-client privilege does not necessarily lead to a waiver of the work-product

privilege. The Plaintiffs argue to the contrary, contending that when reliance upon

advice of counsel is raised defensively, one of the underlying fundamental issues is the

reasonableness of the contended reliance. 11 They argue that they should be entitled to

discover attorney work product relevant to the advice ostensibly relied upon in order to

examine the underlying good faith and reasonableness of that advice. Plaintiffs'

arguments are based upon the concepts of (i) waiver, as discussed above with regard

to the attorney-client privilege and (ii) compelling need 12 as discussed below.

14. This court is not aware of any reported North Carolina appellate cases

directly on point on this issue. However, other jurisdictions have held that in this

context, fairness dictates the necessity for an examination of the underlying good faith

and reasonableness of the advice itself, including the circumstances surrounding

issuance of the legal opinion, and that relevant work product therefore loses its privilege

protections. In the final analysis, it does not make a substantive difference whether the

underlying theory of production is one of waiver or of compelling need. Either way, the

privilege is overcome by the need for production. Panter, 80 F.R.D. at 726; Handgards,

Inc. v. Johnson & Johnson, 413 F. Supp. 926 (N.D. Cal. 1976); Garfinkle v. Arcata Nat.

11
Among other things, Plaintiffs cite N.C. Gen. Stat. § 55-8-42 for the proposition that to the extent the
advice of counsel defense is available to a corporate officer, the officer must have reasonably believed
that the advice was within the attorney's professional competence.
12
Plaintiffs contend the production they seek is not restricted by the language of Rule 26(b)(3), which only
applies, upon a showing of "substantial need" and "undue hardship," to production of materials prepared
in anticipation of litigation or for trial and not constituting "mental impressions, conclusions, opinions, or
legal theories of an attorney or other representative of a party concerning the litigation in which the
material is sought or work product of the attorney or attorneys of record in the particular action." They
contend that the materials they seek do not fall within the Rule 26(b)(3) discovery limitations because the
materials (a) were prepared years ago and not in anticipation of litigation, (b) do not constitute mental
impressions, etc. of an attorney or party representative concerning this particular litigation and (c) do not
seek work product of an attorney of record for Defendants in this matter.
Corp., 64 F.R.D. 688, 689 (S.D.N.Y. 1974). See also Netalog v. Giffin Tech., 2006 WL

1666747, *3 (M.D.N.C. 2006). While not binding upon this court, those cases are

instructive.

15. Accordingly, the court CONCLUDES that, in light of its determination that

filing of the Defendants' Sixth Defense resulted in a waiver of the attorney-client

privilege between Defendants and Clarke, the same filing (i) resulted in a waiver of the

work-product privilege and/or (ii) gave rise to a compelling need for discovery by

Plaintiffs with regard to Clarke's and MVA's work product while acting as Frontier legal

counsel relative to the Sale. Therefore, Plaintiffs are entitled to discovery, as limited

below, with regard to all notes, documents, e-mails, memoranda, communications or

other materials, whether in tangible, electronic or other form, that reflect conversations

between any Defendants and Clarke, or between Clarke and other attorneys at MVA,

that took place on or before the March 17, 2008 closing of the Sale and which relate to:

(a) The mechanics of and manner in which the Sale was structured;

(b) The manner in which information concerning the Sale was

disclosed to any of the Outside Shareholders;

(c) The legality of the Sale and its structure, including considerations of

(i) the disparate pricing structure between Inside Shareholders and Outside

Shareholders and (ii) the Seller Excluded Information provision in the SPA;

(d) The manner and level of information disclosed in or omitted from

the SPA; and

(e) The risks and impact of fiduciary duty considerations on the part of

any Defendants relative to the Sale.
NOW THEREFORE, based upon the foregoing FINDINGS and CONCLUSIONS,

Plaintiffs' Motion is GRANTED, in part, and it is ORDERED that:

1. On or before November 16, 2011, upon appropriate notice given, the

Plaintiffs may depose Defendants and Clarke with regard to all communications, in any

form, between any Defendants and Clarke that took place on or before the March 17,

2008 closing of the Sale and which reasonably relate to:

(a) The mechanics of and manner in which the Sale was structured;

(b) The manner in which information concerning the Sale was

disclosed to any of the Outside Shareholders;

(c) The legality of the Sale and its structure, including considerations of

(i) the disparate pricing structure between Inside Shareholders and Outside

Shareholders and (ii) the Seller Excluded Information provision in the SPA;

(d) The manner and level of information disclosed in or omitted from

the SPA; and

(e) The risks and impact of fiduciary duty considerations on the part of

any Defendants relative to the Sale.

2. With regard to the foregoing testimony, neither Defendants nor Clarke

shall fail to respond to propounded questions upon claim of attorney-client privilege.

3. On or before October 26, 2011, Defendants, Clarke and MVA shall

produce to Plaintiffs all notes, documents, communications or other materials, whether

in tangible, electronic or other form, that reflect conversations between any Defendants

and Clarke, or between Clarke and other attorneys at MVA, that took place on or before

the March 17, 2008 closing of the Sale and which relate to:
(a) The mechanics of and manner in which the Sale was structured;

(b) The manner in which information concerning the Sale was

disclosed to any of the Outside Shareholders;

(c) The legality of the Sale and its structure, including considerations of

(i) the disparate pricing structure between Inside Shareholders and Outside

Shareholders and (ii) the Seller Excluded Information provision in the SPA;

(d) The manner and level of information disclosed in or omitted from

the SPA; and

(e) The risks and impact of fiduciary duty considerations on the part of

any Defendants relative to the Sale.

4. With regard to the foregoing production, neither Defendants, nor Clarke

nor MVA shall fail to respond upon claim of work-product privilege.

5. The Case Management Order in this matter will be amended under

separate Order of even date herewith to accommodate the foregoing discovery.

6. Except as ORDERED herein, Plaintiffs' Motion is DENIED.

This the 6th day of October, 2011.