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Morris v. Spectra Energy Partners (De) GP LP

Court of Chancery of Delaware

May 7, 2018

Paul Morris
Spectra Energy Partners (DE) GP, LP et al.,

          Date Submitted: April 27, 2018

          Stuart M. Grant, Esquire Michael J. Barry, Esquire Michael T. Manuel, Esquire Grant & Eisenhofer P.A.

          Peter B. Andrews, Esquire Craig J. Springer, Esquire Andrews & Springer LLC

          Robert S. Saunders, Esquire Ronald N. Brown, III, Esquire Skadden, Arps, Slate, Meagher & Flom LLP


         Dear Counsel:

         The following Letter Opinion (as is generally true of letter opinions) is written for benefit of the parties, with the understanding that it will have little interest for those uninvolved in the litigation. To those readers so uninvolved, I paraphrase the philosopher Finn: you won't know about this case without you have read my Memorandum Opinion denying in part a motion to dismiss, [1] but that ain't no matter.[2] I do not intend to repeat the weary complex of facts necessary to the understanding of this master limited partnership ("MLP") dispute, to inform the following resolution of a sub-dispute regarding discovery obligations. Sufficient to understand the discovery issue is that a transfer of certain assets of the MLP, by the general partner to its principal, is constrained by the general partner's duty to act in good faith with respect to the transaction; that the Complaint alleges lack of good faith; and that the dispute is over two redacted documents to which I find the attorney-client privilege attaches, and that are relevant to the good-faith issue. I agreed to review the documents in camera. They include emails between counsel for the general partner's Conflicts Committee, [3] on the one hand, and the members of that Committee and its financial advisor, on the other.

         I conclude that the redacted portions of the documents in dispute are not subject to discovery.[4] My rationale follows.


         The attorney-client privilege promotes justice by encouraging candor between clients and their attorneys.[5] The privilege is codified in Delaware Rule of Evidence 502(b), which provides that

[a] client has a privilege to refuse to disclose and to prevent any other person from disclosing confidential communications made for the purpose of facilitating the rendition of professional legal services to the client (1) between the client or the client's representative and the client's lawyer or the lawyer's representative, (2) between the lawyer and the lawyer's representative, (3) by the client or the client's representative or the client's lawyer or a representative of the lawyer to a lawyer or a representative of a lawyer representing another in a matter of common interest, (4) between representatives of the client or between the client and a representative of the client, or (5) among lawyers and their representatives representing the same client.[6]

         The attorney-client privilege is critical to "the proper administration of justice, " but it is not absolute.[7] There are several exceptions to the privilege, some of which are codified in Delaware Rule of Evidence 502(d).[8] "The burden of proving that the [attorney-client] privilege applies to a particular communication is on the party asserting the privilege."[9]

         The attorney-client privilege protects legal advice only; it does not shield business advice.[10] Thus, "[a]n attorney performing a business function 'cannot avail himself of the protection associated with the attorney-client privilege.'"[11] Where business and legal advice cannot be separated in a given communication, "the communication will be considered privileged only if the legal aspects predominate."[12] On the other hand, where business and legal advice can be easily segregated, the communication "must be produced with the legal-related portions redacted."[13] And if "it is too difficult to determine if the legal issues predominate in a given communication, " "the party asserting the privilege will be given the benefit of the doubt, and the communication will not be ordered produced."[14]

         Having reviewed the two documents in camera, I find that the redacted portions contain communications protected by the attorney-client privilege. The documents include a series of emails between the Conflicts Committee's counsel, the members of the Committee, and the Committee's financial advisor.[15] The redacted portions of those emails reflect a combination of legal and business advice relating to a draft of the agreement that ultimately effectuated the transaction at issue in this case. It is clear to me that the business and legal aspects of that advice cannot be separated. It is also clear to me that the legal component of the advice predominates over the business component. Thus, the redacted portions of the emails are protected by the attorney-client privilege.[16]


         Having found that the redacted portions of the emails are subject to the attorney-client privilege, I next address whether they nonetheless fall within an exception to the privilege. The Plaintiff argues that unredacted copies of the emails must be produced under the "at issue" and Garner[17] exceptions. In my view, neither of those exceptions applies here; thus, I decline to compel production.

         A. The "At Issue" Exception

         The attorney-client privilege "can be waived when a party places an otherwise privileged communication 'at issue' in the litigation."[18] The at-issue exception applies where "(1) a party injects the privileged communications themselves into the litigation, or (2) a party injects an issue into the litigation, the truthful resolution of which requires an examination of confidential communications."[19] "Application of the at-issue exception is guided by considerations of 'fairness and discouraging use of the attorney-client privilege as a litigation weapon.'"[20] In the oft-repeated cliché, the exception "recognizes that a party cannot use the attorney-client privilege as both a 'shield' from discovery and a 'sword' in litigation."[21] Nevertheless, a defendant does not waive the privilege simply by denying a plaintiff's allegations.[22]

         Here, the Plaintiff does not argue that SEP GP injected the privileged communications themselves into the litigation. Instead, the Plaintiff claims that SEP GP put at issue whether the Conflicts Committee in fact viewed "Reduced GP Cash Flow"/"IDR Reduction" as consideration. But that is incorrect. It was the Plaintiff who raised this issue. The crux of the Complaint is that the Committee acted in bad faith by knowingly approving a transfer of SEP assets to SE Corp for approximately $500 million less than they were actually worth.[23] The Committee's financial advisor initially valued the consideration to be received by SEP at $1.46 billion, $575 million of which would come from "Reduced GP Cash Flow."[24] The problem was that, according to the Complaint, "'Reduced GP Cash Flow' . . . is not an element of consideration that was to be received by SEP in exchange for transferring the . . . assets to SE Corp."[25] Perhaps recognizing this reality, the Committee's financial advisor switched gears, excluding "Reduced GP Cash Flow" from its final presentation and estimating in its fairness opinion that SEP would receive only $946 million in the transaction.[26] The Committee purportedly knew, however, that the assets SEP was giving up would be valued at $1.5 billion when SE Corp transferred them to DCP.[27] In my motion-to-dismiss opinion, I held that this half-a-billion dollar gap in consideration (and the Committee's apparent knowledge of that gap) raised a reasonable inference of bad faith.[28]

         Thus, it was the Plaintiff, not SEP GP, who put at issue whether the Committee truly believed that "Reduced GP Cash Flow" constituted consideration. Indeed, the Complaint itself suggests that the Committee could not have viewed it as such, in part because the Committee's financial advisor allegedly never mentioned "Reduced GP Cash Flow" as a component of value after its initial presentation. And if the Committee did not perceive half a billion dollars of value in "Reduced GP Cash Flow" as consideration, it may have acted in bad faith by agreeing to transfer assets it knew were worth far more than what SE Corp was giving up. To be sure, SEP GP addressed this issue in arguing for dismissal of the Complaint, but a defendant does not waive the attorney-client privilege simply by advancing arguments for dismissal that respond to allegations in a pleading.

         The Plaintiff argues that this case is analogous to JP Morgan Chase & Co. v. American Century Cos., Inc.[29] Not so. In JP Morgan, American Century held an option to buy back shares from JP Morgan, a major investor in American Century.[30]Under the option agreement, the per share purchase price would be conclusively determined by an independent advisor.[31] JP Morgan had a contractual right to challenge the advisor's determination if it believed in good faith that the valuation was manifestly wrong.[32] American Century exercised its option right in July 2011, when it was in the midst of arbitrating breach of contract claims against JP Morgan.[33]As it turned out, JP Morgan had already conceded liability in the arbitration, and in August, American Century received about $373 million in damages.[34] JP Morgan alleged that American Century breached the implied covenant of good faith and fair dealing by failing to disclose to the independent advisor the value of its pending arbitration claims against JP Morgan.[35] According to JP Morgan, if the independent advisor had known American Century's arbitration claims were worth hundreds of millions of dollars, it would have incorporated that information into its valuation of American Century's share price.[36]

         American Century sought discovery relating to JP Morgan's calculation of its litigation reserve for the arbitration claims.[37] That information was relevant because, if JP Morgan had placed a very low value on the claims, American Century might not have been obligated to disclose its own calculations to the independent advisor.[38]The Court held that documents reflecting JP Morgan's litigation reserve calculations were privileged.[39] But it found that JP Morgan had waived the privilege by "inject[ing] the valuation issue into the litigation."[40] Specifically, having alleged that American Century should have disclosed its valuation, JP Morgan "could have reasonably foreseen that American Century would seek to expose JP Morgan's own beliefs as to the valuation of the arbitration claims as a defense."[41]

         Here, by contrast, SEP GP did not raise the issue that led the Plaintiff to seek discovery regarding the Committee's beliefs about "Reduced GP Cash Flow." Instead, the Plaintiff is simply seeking discovery relevant to allegations he himself advanced in his Complaint. That does not give him carte blanche to invade the attorney-client privilege as to discovery material that bears on those allegations. Thus, JP Morgan does not help the Plaintiff, and the at-issue exception is inapplicable.

         B. The Garner Exception

         The Garner exception is a judicially created doctrine founded on the recognition that "where the corporation is in suit against its stockholders on charges of acting inimically to stockholder interests, protection of those interests as well as those of the corporation and of the public require that the availability of the privilege be subject to the right of the stockholders to show 'good cause' why the privilege should not apply."[42] A corporation invokes the attorney-client privilege through its officers and directors; those individuals owe a duty as fiduciaries to the stockholders to exercise the privilege in the best interests of the corporation.[43] On the other hand, "management has a legitimate concern that its confidential communications should be allowed to remain confidential."[44] Thus, the Garner exception balances "the privilege's purpose of encouraging open communication between counsel and client [against] . . . the right of a stockholder to understand what advice was given to fiduciaries who are charged with breaching their duties."[45] Our Supreme Court has described the Garner exception as "narrow, exacting, and intended to be very difficult to satisfy."[46]

         Garner provides the following non-exhaustive list of factors a court may consider in deciding whether the exception should apply:

[1] the number of shareholders and the percentage of stock they represent; [2] the bona fides of the shareholders; [3] the nature of the shareholders' claim and whether it is obviously colorable; [4] the apparent necessity or desirability of the shareholders having the information and the availability of it from other sources; [5] whether, if the shareholders' claim is of wrongful action by the corporation, it is of action criminal, or illegal but not criminal, or of doubtful legality; [6] whether the communication related to past or to prospective actions; [7] whether the communication is of advice concerning the litigation itself; [8] the extent to which the communication is identified versus the extent to which the shareholders are blindly fishing; [9] the risk of revelation of trade secrets or other information in whose confidentiality the corporation has an interest for independent reasons.[47]

Garner itself does not say that certain factors are more important than others, but Delaware courts have typically accorded "particular significance" to three.[48] "They are: (1) the colorability of the claim; (2) the extent to which the communication is identified versus the extent to which the shareholders are blindly fishing; and (3) the apparent necessity or desirability of shareholders having the information and availability of it from other sources."[49]

         Here, the Plaintiff is a unitholder in a limited partnership, and he is pursuing a derivative action premised on an alleged breach of contract. The limited partnership agreement at issue expressly eliminates all fiduciary duties.[50]Nevertheless, the Plaintiff argues that Garner requires production of unredacted copies of the emails reviewed in camera. Thus, the Plaintiff's Motion raises an issue that has yet to be addressed by a written opinion in this state: does the Garner exception apply to a limited partnership that has eliminated common-law fiduciary duties?[51] In my view, the answer to that question is no.

         At the outset, this Court has expressly held that the Garner exception "will not apply absent a fiduciary relationship."[52] That is in line with how courts in other jurisdictions tend to approach Garner. In most jurisdictions, courts will not apply the balancing test set out above unless they first determine that there is a fiduciary relationship between the party challenging the privilege and the party asserting it.[53]The reason for this threshold requirement goes to the core of the Garner exception. At bottom, Garner rests on the mutuality of interest that exists "when a fiduciary (such as a corporate director) seeks legal advice in connection with actions taken or contemplated in his role as a fiduciary."[54] "Because the director is obligated to act in the best interest of the corporation and its shareholders, there is a mutuality of interest among the director, the corporation, and the shareholders when such legal advice is sought."[55] Indeed, the ...

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