Case No. 06 CV 1040 Division 5 RULING AND ORDER DISCOVERY

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1 DISTRICT COURT, BOULDER COUNTY, STATE OF COLORADO Boulder Justice Center th Street, Boulder, CO Plaintiffs(s): JENNIFER LATHAM, individually and as mother and natural guardian of EDEN and JACKSON LATHAM, minors EFILED Document CO Boulder County District Court 20th JD Filing Date: Apr :26PM MDT Filing ID: Review Clerk: N/A v. Defendant(s): ASSURANT HEALTH, ASSURANT, INC., FORTIS INSURANCE COMPANY, TIME INSURANCE COMPANY, AND JENNIFER G. SMITH COURT USE ONLY RULING AND ORDER DISCOVERY 1 Case No. 06 CV 1040 Division 5 This matter comes before the Court on the Plaintiffs Motion for Leave to Conduct Post-Trial Discovery and Finding of Waiver of Time s Attorney-Client Privilege Pursuant to the Crime- Fraud Exception as well as the Motion to Supplement. The Defendant has responded. The Plaintiffs have replied. The Plaintiffs have essentially four grounds for requesting discovery regarding their motion for increased punitive damages. 1. The abusive use of Jennifer Smith s bankruptcy petition. 2. Improper use of subpoenas to obtain medical records. 3. Improper removal of the case to federal court on multiple occasions. 4. Improper direction by counsel to Time employees not to record any information about what occurs during Rescission Committee meetings. The Plaintiffs are seeking to depose Joseph Franklin, in-house counsel for Time. Time has filed a motion for protective order. Further the Plaintiffs request that Time identify with particularity all reasons why (and the goals being pursued by such actions) Time wanted to move quickly on the bankruptcy front as stated by counsel Clint Vanderver in his of May 29, 2009, and identify all persons involved in such discussions or planning, including any supervisors of Mr. Vanderver. The Plaintiffs have also filed Requests for Production including all notes, writings, and/or communications between time and its legal counsel regarding the decision to retain bankruptcy counsel for Jennifer Smith at any time and to prosecute an action against Ms. Latham and her attorneys in federal bankruptcy court, and/or all claims that were being considered. The

2 Plaintiffs seek the same items as they relate to decisions to remove the case to federal court and to serve subpoenas duces tecum on Ms. Latham s medical providers. In their supplementary motion, the Plaintiffs wish to discover how Time s general counsel directed and/or instructed the Rescission Committee on conducting rescission activities, including directions not to record the identity of committee members and not to keep records. In invoking the crime-fraud exception, the Plaintiffs note that two instances of improper conduct have already been found by the Court. Specifically, that Time abused its subpoena power by obtaining Ms. Latham s medical records. Second, there is prima facie evidence that Time s representations to the Court regarding the circumstances of its relationship to Jennifer Smith s bankruptcy counsel were not truthful. The Plaintiffs state that they already have many s that show that Time s counsel consulted with bankruptcy counsel for months and directed his conduct. Further, the Plaintiffs argue that collateral information from an article in Reuters and the trial court s order in the Mitchell case in South Carolina support their claim that Time s counsel did direct employees not to record any information during Rescission Committee meetings and their claim that Dara Sever committed perjury during her testimony in this case. In response, Time asserts that there is no justification for deposing Mr. Franklin. Time argues that the so-called Shelton factors, pursuant to Shelton v. Am. Motors, Corp. 805 F.2d 1323 (8 th Cir. 1986) apply. The Plaintiffs must show that (1) no other means exist to obtain the information sought, (2) the information sought is relevant and non-privileged, and (3) the information is crucial to the preparation of the case. It further argues that discovery and the trial are over and that there is no legal provision for posttrial discovery except in specific situations not present here. It cites several cases involving postjudgment punitive damages and note that all of them decided the matter on the record and none refers to post-judgment discovery, suggesting by implication that discovery is not allowed. Third, Time argues that the issues of the medical records, improper removal, and the relationship to Jennifer Smith s bankruptcy counsel have already been argued and resolved. Time argues that the crime-fraud exception does not apply. First, fraud requires a showing of a fraudulent misrepresentation of a material fact, justifiable reliance, and damages. They argue that the two instances of improper conduct are not grounds for invocation of the exception. Specifically, they argue that allegations of nondisclosure during pretrial discovery are not sufficient to support an action for fraud on the court. 11 C. Wright & A. Miller, Fed.Prac. & Proc. s 2870, p. 254 (1973); nor is the alleged perjury of a witness a ground for an action for fraud upon the court. Id. at 256. Time also argues that the communications are work product. In its recently-filed Reply, Plaintiffs counsel informs the Court that Time plans to call an expert who will opine that there is no evidence that the acts of defense counsel were purposefully 2

3 committed, done heedlessly or recklessly, or without regard to the rights and safety of the plaintiffs. The Plaintiffs argue that this, alone, is sufficient to waive the privilege without the crime-fraud exception. 1. Post-judgment discovery RULING The Court does not agree that post-judgment discovery is not allowed. Although Time provided several cases in which there was no apparent discovery in connection with a motion to increase punitive damages, there is no indication in those cases that discovery was ever requested or that an evidentiary hearing was held. Furthermore, in a case cited by Time, the federal court in Ohio held a hearing to determine whether additional discovery after final judgment was appropriate upon an allegation of fraud. H.J. Porter Co., Inc. 536 F.2d at 1115, 1118 (C.A.Ohio 1976). Moreover, the Court has inherent power to order discovery in the interests of justice. In addition, the request for discovery is not truly post-judgment. When the Plaintiffs complained during the trial that they had not received all the discovery previously ordered regarding the bankruptcy issue, the Court ruled the bankruptcy issue would be decided post-trial in the context of the motion to increase punitive damages and that further discovery would be taken up at that time. All parties seemed satisfied with that plan. It is disingenuous for Time to now argue that all discovery should have been completed before trial. Post-judgment discovery in this context is simply a continuation of pre-trial discovery not yet obtained. The exemplary damages statute, C.R.S , specifically provides for post-trial hearings before the trial judge for determination of whether damages should be increased. To insist that all discovery for trial and post-trial matters be completed before trial does not make sense. The Court also notes that Time has requested an evidentiary hearing pursuant to Blood v. QwestServices Corp. ---P.3d---,2009WL (Colo. App. 2009). Time intends to provide the Court with testimony and other evidence beyond that which has been presented in other hearings or through pleadings. As such the parties must be allowed to conduct discovery. In addition, Time has endorsed an expert who will opine concerning the conduct of defense counsel as well as on the conduct of Plaintiffs counsel. This includes whether they have violated any ethical rules. As this is the case, it would be odd indeed to allow an expert witness to testify about what Time s lawyers did without Plaintiffs counsel knowing what that is. 2. Previously-Imposed Sanctions Time argues that sanctions have already been imposed. This is true regarding the improper removal; however, a careful reading of the Magistrate s ruling (Order Part Two of Two January 13, 2010), shows that she did not foreclose the possibility of punitive damages being awarded for this conduct. The Defendant s "improvident" (the term used by Federal District Court Judge Matsch) removal of this case on the morning of December 17, 2009: This Court finds the term 3

4 "improvident" to be, if anything, restrained. The removal was accomplished on the morning the case was scheduled for an extensive motions hearing before this Court, barely a month before trial and a week before the winter holidays, on the heels of extensive motions practice by the Defendant, including two motions to continue trial filed December 15, 2009, and also on the heels of extensive trial preparation by both sides. The dismissal of Jennifer Smith, upon which the removal was ostensibly based, had occurred weeks before the removal attempt, and before the extensive trial preparation and motions practice. This sequence of events, coupled with the context of the protracted, convoluted litigation of this case, can leave this Court with no other conclusion than that reached by the federal court in its remand order: that the Defendant effected the removal, temporary though it was, with the purpose of avoiding the upcoming trial and the rulings of this Court that had been unfavorable to the Defendant. That purpose was improper, and it was costly, to both the Plaintiff and the Court. While the Court does not agree with the Plaintiff that evidentiary or substantive, preclusive sanctions can be imposed at this stage of the proceedings, it is forwarding the Tait v.underwriters Insurance Company, 49 P.3d 337 (Colo. App. 2001), cert. denied 2002, case to the trial judge for purposes of determining whether an increase in an exemplary damages award may be appropriate if such an award is an outcome of the trial in this matter. It is appropriate at this stage of the proceedings; however, to impose monetary sanctions for the Defendant's improvident removal, and the Court does so as follows: The Court notes that these are truly sanctions, intended not only to compensate the Plaintiff and the Court for time wasted, but to punish the Defendant for its wrongful conduct. The Defendant shall pay the Plaintiff the sum of $7,000 as sanction and compensation, no later than January 30, 2010; the Defendant shall also pay $3,000 into the registry of the Court, no later than January 30, 2010, also as both sanction and compensation. Whether Time can be punished for the removals by fine and by an increase in punitive damages is a matter for argument at the hearing. Second, the Court is not aware of any sanctions imposed for using subpoenas to obtain medical records. Third, clearly the issue of the bankruptcy has not been addressed. 3. Attorney-Client Privilege On November 18, 2009, Time s counsel told the Magistrate that What Time Insurance Company has done with that whole process [is that it] has agreed to pay the bankruptcy lawyer who represents Ms. Smith, he does not represent Time Insurance Company. Transcript p. 15: Counsel also told this Court the same thing in their argument that the bankruptcy issue should not be admitted during the trial; but rather, be dealt with at a later time. If this were true, then Forrest Morgan, the bankruptcy attorney, is not counsel for Time and communications between any legal counsel for Time and Forrest Morgan are not covered by attorney-client privilege. This Court has previously upheld a Magistrate order allowing these communications to be discovered. See Order of January 11,

5 Internal discussions at Time between counsel and employees of Time about using the collateral proceedings as a litigation tactic would be covered by attorney-client privilege unless the crimefraud exception applies or implied waiver by some other means has occurred. Time argues that the Plaintiffs have not made a showing of fraud in that fraud requires an intentional misrepresentation or nondisclosure, reliance that is reasonable and justified, and damages. 4. Crime-Fraud Exception Application of the Exception The policy reasons for this exception to the privilege have been well set out in The Attorney- Client Privilege and Work-Product Doctrine, Edna Selan Epstein, Fifth Edition, pp : The policy reasons for the crime or fraud exception to the attorney-client privilege are obvious. Society has every interest in ensuring that legal advice is sought as to how contemplated business transactions can be made to conform to the law. So too, a civilized society has every interest in protecting the innocent, falsely or erroneously accused of having committed a crime or fraud. A necessary corollary to that goal is that the guilty must be afforded legal representation for complete crimes and frauds. Society, however, has no interest in facilitating the commission of contemplated but not yet committed crimes, torts, or frauds. On the contrary, it has every interest in forestalling prohibited conduct. *** Obviously, one can seek legal advice for prospective action. In order to obtain valid legal advice, a client must feel free to disclose all relevant facts, both favorable and unfavorable, to the attorney without fear of compelled disclosure. So too, attorneys commonly give legal advice to and represent individuals charged with having committed a crime or a fraud. Such a client is deemed entitled to advise counsel of all relevant facts, including inculpatory ones, without fear that the attorney may be called as a witness against the client to prove his or her guilt. These privileges, however, disappear when one seeks to obtain advice for how best to circumvent the law in order to effect an ongoing or contemplated future crime or fraud or other legal action. Legal advice sought or given for such illegal ends will not be protected from compelled disclosure. Then, neither the attorney-client privilege nor the existence of such a relationship will function as a shield for either party. The essential question for the Court is whether the crime-fraud exception as it relates to fraud applies only to those actions that are technical intentional torts of fraud or whether it applies to other tortious actions or other civil wrongs. The Court finds that the crime-fraud exception is not limited to the intentional tort of fraud. 5

6 Although some states have not extended the crime-fraud exception to other tortious conduct and some states have, 1 Colorado has done so. In Lee v. State Farm Mut. Auto. Ins. Co., 249 F.R.D. 662 (D. Colo. 2008), the Court allowed discovery regarding alleged actions by various attorneys including civil conspiracy, outrageous conduct, abuse of process, and fraud. Likewise in Caldwell v. District Court In and For City and County of Denver, 644 P.2d 26 (Colo. 1982) discovery was allowed related to fraud and civil conspiracy. In her treatise quoted above, Edna Epstein states: [s]ociety, however, has no interest in facilitating the commission of contemplated but not yet committed crimes, torts, or frauds. (Emphasis added) It makes no sense to limit the exception to technical claims of fraud when the policy is intended to prevent attorneys and clients from giving and receiving advice for the express purpose of harming others. Accordingly, the Court finds that the crime-fraud exception applies. The Requisite Showing Caldwell v. District Court In and For City and County of Denver, 644 P.2d 26 (Colo. 1982) is the seminal case regarding the use of the crime-fraud exception and what must be shown by the Plaintiffs. A lengthy portion of that case is set forth below. [W]e believe A. v. District Court, supra, appropriately reconciled the need for protection of the attorney-client relationship and the competing need to avoid use of that relationship as a shield for the perpetration of wrongful conduct by concluding that a foundation in fact for the charge is sufficient to invoke the crime exception. Requiring a strict prima facie case may not be possible at the discovery stage, and would result in an overzealous protection of the attorney-client privilege in a context where the rationale for that privilege may be inapplicable. This intermediate burden of proof has been approved in recognition of the significant proof problems facing a proponent of the exception. See Note, The Future Crime or Tort Exception, supra; Gardner, The Crime or Fraud Exception, supra. Further, because of those proof problems, we follow A. v. District Court in holding that the trial court, in its discretion and without prior establishment of a foundation in fact that the crime or fraud exception applies, may order the production of relevant documents for an in camera inspection to determine whether that exception is applicable. See Duplan Corp. v. Deering Milliken, Inc., supra, 397 F.Supp. at In exercising that discretion the judge should require a showing of a factual basis adequate to support a good faith belief by a reasonable person that wrongful conduct sufficient to invoke the crime or fraud exception to the attorney-client privilege has occurred... 1 For example, see Motley v. Marathon Oil Co. 71 F.3d 1547 (10 th Cir. 1995)(declines to extend exception to illegal racial discrimination) and Coleman v. American Broad. Cos. 106 F.R.D. 201 (D.D.C. 1985)(extends exception to cover-up of sexual harassment and reprisal claims). 6

7 Consequently, the trial court should determine in the course of further proceedings whether the Caldwells have made a prima facie showing-one that gives their assertions a foundation in fact-that the crime or fraud exception is applicable. If this showing is made, then the documents relevant to their claim of civil fraud are discoverable. In determining whether this is a proper case for application of the exception the court, if it deems it advisable, may order a production of the documents for in camera review. The Court finds that the Plaintiffs have easily made the requisite prima face showing that requires Time and its counsel (including Joseph Franklin) to turn over all written records, notes, writings, and s to the Court for in camera inspection. The s already turned over from a previous discovery request are sufficient to show on a prima facie basis that the involvement by Time in the bankruptcy matter was not consistent with its statements to the Magistrate and to this Court. In addition, the harsh remand order from Judge Matsch and the findings of Magistrate Hamilton-Fieldman constitute a prima facie showing that the repeated removals to federal court were abusive. Third, the use of subpoenas to obtain medical records has already been found by the Magistrate to be in violation of the Rules of Civil Procedure and statute. Obtaining medical records in violation of state and federal statutes and in violation of rules of procedure provides the requisite prima facie showing of criminal and civil wrong-doing. 5. Waiver of Attorney-Client Privilege Time plans to call an expert who will opine that there is no evidence that the acts of defense counsel were purposefully committed, done heedlessly or recklessly, or without regard to the rights and safety of the plaintiffs. The Plaintiffs argue that this, alone, is sufficient to waive the privilege without the crime-fraud exception. In this case, Time s expert makes a number of statements that can be based on a review of the record. These include his opinions, among others, that removing or attempting to remove the case to Federal court were within the bounds of existing law. These opinions alone do not constitute an implied waiver because they do not require examination of s, notes, and other documents for their formation. However, the expert s opinion that there is no evidence that the acts of defense counsel were purposefully committed, done heedlessly or recklessly, or without regard to the rights and safety of the plaintiffs changes the matter from opinion on what Time s attorneys did to why they did it. Time has put their counsels own conduct at issue. It opens the door to discovery of counsel s motives and intentions. As such, it has impliedly waived the attorney-client privilege. The Court finds that Time has waived attorney-client privilege as to any written communications expressing Time or Time s counsel s intentions with regard to the bankruptcy issue and the removal issue. 6. Work Product Time also argues that the communication sought to be discovered is work-product in that they contain the attorney s work and mental impressions prepared in anticipation of litigation. First, the communications regarding the bankruptcy cannot be work product because Time s counsel has asserted vehemently that all Time did was pay for Jennifer Smith s bankruptcy 7

8 attorney. As such there can be no work product. To say otherwise would be to admit that the bankruptcy plan was part of the litigation. Regarding the medical records release and the removal, the Court finds that in this context, the crime-fraud exception applies simultaneously and equally to the attorney-client privilege and work product. If counsel for Time are communicating with each other and their client in furtherance of tortious conduct and such communication is discoverable under the crime-fraud exception, those same communications cannot be protected under work product doctrine because, to do so, would allow counsel and their client to hide behind the doctrine and would defeat the policy reasons for which the exception was created. The crime-fraud exception would be vitiated. 7. Deposition of Joseph Franklin In their Reply, the Plaintiffs narrow their request for deposing Joseph Franklin, Time s in-house counsel. They argue that he is not opposing counsel, but rather an employee of Time whose work in certain capacities is not covered by attorney-client privilege. As such, they feel that they can depose him regarding rescission committee policy and claims handling. The Court finds that Mr. Franklin as in-house counsel helped Time to make business decisions. Business decisions are not protected by the attorney-client privilege. Hawkins v. District Court, 638 P.2d 1372, 1378 (Colo. 1982). Accordingly, he may be deposed regarding the operations of Time s rescission committee and to what extent he or one of his predecessors or someone working under his direction directed the rescission committee not to record the reasons for the decision to rescind and the vote. Time has also opposed the deposition of Mr. Franklin on the basis that he is an apex official. They cite case law that suggests that such officials should only be deposed if other means of obtaining the information has been exhausted and only when it is shown that the deposition is a necessary method of obtaining that person s unique personal knowledge of relevant facts [citations omitted]. The Court finds that this showing has been made. Decisions regarding the rescission committee must have been made at the highest level. Ms. Sever s explanations for why no notes are taken may be deliberately untruthful or it may be her understanding. Without obtaining the information directly from general counsel, the Court cannot have a full understanding of the protocols and rules put in place by him and the reason for them. The Court is disallowing a full deposition into all of Time s claims handling processes in the Plaintiffs case as they have been adequately identified in testimony already before the Court. The motion for protective order is denied. 8. Second Set of Interrogatories Based upon the findings that business procedures and decisions are not privileged, the second set of interrogatories is approved. ORDER 1. The parties shall schedule the deposition of Joseph Franklin forthwith. The deposition shall be within the limits set forth in Paragraph 6 above. 8

9 2. Time will turn over all written communications regarding the bankruptcy, medical records, and removal issues to the Court within 7 days for in camera review. The s and other electronic communication as well as electronic documents and other writings shall be placed on a CDROM for the Court s viewing. Other items that exist only in hard copy must be copied for the Court. These items must be delivered to Division 5 directly after arranging for such delivery with Kathy McDonald at Dated: April 21, 2010 By the Court R. Bailin, District Judge 9