4-S Ranch Partners, LLC

• Court: United States Bankruptcy Court, E.D. California
• Decided: September 30, 2020
• Docket: 20-10800
• Status: Unknown

Opinion

UNITED STATES BANKRUPTCY COURT 1 EASTERN DISTRICT OF CALIFORNIA 2 FRESNO DIVISION 3 4 In re ) Case No. 20-10800-B-11 ) 5 4-S RANCH PARTNERS, LLC, ) DCN: WJH-3 ) 6 ) Debtor. ) 7 ) _______________________________ ) 8 ) ) Date: September 10, 2020 9 In re ) Time: 1:30 p.m. ) Department B, Judge Lastreto 10 STEPHEN WILLIAM SLOAN, ) Fifth Floor, Courtroom 13 ) 2500 Tulare Street, Fresno, CA 11 Debtor. ) ) 12 )

13 14 RULING AFTER IN CAMERA REVIEW 15 16 INTRODUCTION 17 Invoking the attorney-client privilege and work-product 18 protection, a law firm resisted producing certain documents 19 requested in a subpoena served by a creditor. The subpoena is 20 part of discovery concerning a pending stay relief motion 21 involving the creditor. After producing a Privilege Log, the 22 law firm and the creditor reached an impasse on the appropriate 23 extent of the documents protected. The creditor filed a motion 24 to compel and the court issued an order including a provision 25 requiring in camera review of those documents that remain in 26 dispute. After that review, the court issues this ruling 27 requiring production of certain documents and withholding of 28 others. 1 BACKGROUND 2 About seven months ago, 4-S Ranch Partners and Stephen 3 Sloan (collectively “4-S”) filed voluntary chapter 11 cases. 4 These debtors are seeking to reorganize large farming 5 enterprises in a unique way. Rather than “farming their way out 6 of it,” these entities seek to continue their pre-petition 7 efforts to capitalize on California’s recently enacted 8 groundwater management laws and become approved underground 9 water storage providers. They also plan to sell water and 10 divert it to other users. The future may be lucrative or not. 11 The outcome largely depends on receipt of regulatory approvals 12 and the legal establishment of entities authorized to store and 13 divert water. 14 4-S’s primary secured lender is Sandton Credit Solutions 15 Master Fund IV, LP (“Sandton”). Sandton is owed over Fifty- 16 Seven Million Dollars. The debt is secured by many parcels of 17 real estate in Merced County. Pre-petition, Sandton negotiated 18 with 4-S and entered into a few forbearance agreements. They 19 were not performed. Foreclosure proceeded until the bankruptcies 20 were filed. 21 Sandton promptly filed stay relief motions in these cases 22 asserting § 362 (d) (2) supports the relief they request. 23 Sandton contends their collateral is not protected by equity and 24 is not necessary for a prospective reorganization within a 25 reasonable time. 4-S disputes this claiming that Sandton’s 26 collateral is worth far more than Sandton alleges because 4-S is 27 on the threshold of the necessary approvals to become an 28 1 underground water storage provider.1 4-S also contends the 2 collateral is critical for their proposed reorganization. 3 At the hearing on Sandton’s motions in April 2020, the 4 parties and the court noted there were issues of material fact 5 requiring an evidentiary hearing. The parties agreed on a 6 schedule for the evidentiary hearing. The court consolidated 7 the motions in these two cases for purposes of discovery and the 8 evidentiary hearing. Discovery began. 9 Among the issues involved is the status of 4-S’s efforts to 10 obtain necessary legal clearances and establishing necessary 11 entities for the water storage/diversion proposals and the 12 likelihood of that happening reasonably soon. This issue may be 13 critical to the §362 (d) (2) inquiry on these motions. So, 14 Sandton subpoenaed records from a law firm assisting 4-S with 15 the numerous land use issues it faced. The law firm, O’Laughlin 16 & Paris, LLP, and two of its lawyers, Valerie Kincaid, Esq., and 17 Sarah Glatt, Esq., primarily communicated with 4-S’s consultant, 18 Bruce Marlow (“Marlow”), on the land use issues pre-petition.2 19 The law firm through Ms. Kincaid (collectively “Kincaid”) 20 responded and included a privilege log identifying 229 documents 21 withheld from production on attorney client privilege and work 22 product protection grounds. From June 2020 through August 2020, 23 Sandton’s and 4-S’s counsel conferred about the documents 24 withheld.3 In the absence of what Sandton considered a 25 1 Sandton claims the collateral is worth about $15 million. 26 2 So far, neither Ms. Kincaid, Ms. Glatt nor the O’Laughlin & Paris law firm has been employed by either debtor to continue assisting on the land use 27 issues. 28 and con3 fT eh ro ”u g wh e rn eo t e ia tt h ei rs s iu ge n on ro ew d, oS ra n ud nt ro en a sc oo nn at be ln yd s p oi st ts p oe na er dl y b yo v te hr et u dr ee bs t ot ro s .“ m eet The debtors disagree citing many reasons including the volume of documents 1 satisfactory resolution and with a looming trial date, Sandton 2 brought this motion to compel.4 3 After the hearing on the motion, the court issued an order on 4 September 14, 2020 (Doc. 234). As pertinent here, the order 5 provided: 6 • the parties were to meet and confer and determine which 7 documents truly remain in dispute as privileged or 8 protected; 9 • the privilege log and copies of the documents in dispute 10 were to be delivered to the court for in camera review; 11 • Sandton was permitted to provide a small exemplar of 12 produced documents to assist the court in determining if 13 any privilege or protection had been waived. 14 • Kincaid had concluded representation of debtors and any 15 order requiring production of withheld documents would be 16 directed to 4-S since it was provided all the disputed 17 documents. 18 Through the parties’ efforts, the 229 documents have been 19 winnowed down to eight. The documents have been produced to the 20 court. The court has reviewed the documents and the exemplars. 21 22 PARTIES’ CONTENTIONS 23 4-S contends the withheld documents are either privileged 24 attorney-client communications or protected by the work product 25 privilege. Most of the documents are emails between Kincaid or 26 Glatt and Marlow. Marlow is a “de facto” high level employee of

27 and difficulty in contacting their client so decisions could be made as 28 reasons 4 Bf eo fr o rd ee l ta hy es . h earing on the motion, the parties had reduced the number of documents subject to dispute substantially. 1 these debtors and so communications with he and counsel for the 2 debtors should be protected. 3 Sandton originally contended Marlow was an independent 4 consultant and a recipient of attorney-client communications, 5 which was consistent with debtor’s actions. At the hearing on 6 the motion, debtors took the position Marlow was a “de facto” 7 high level employee. Now, Sandton contends even so, the debtors 8 have waived the attorney-client privilege, or any protection 9 given the breadth of documents already produced. 10 11 JURISDICTION 12 The District Court has jurisdiction of this contested 13 matter under 28 U.S.C. § 1334 (b) since this is a civil 14 proceeding arising under title 11 of the United States Code. 15 The District Court referred this matter to this court under 28 16 U.S.C. § 157 (a). This court has authority to enter a final 17 decision on this motion and the underlying relief from stay 18 motion under 28 U.S.C. § 157 (b) (2) (G). The Federal Discovery 19 Rules largely apply to contested matters under Fed. R. Bankr. 20 Proc. 9014 (c). 21 22 ANALYSIS 23 1. Application of Attorney-Client Privilege 24 Questions of evidentiary privilege arising in the course of 25 the adjudication of federal rights is governed by principles of 26 federal common law. U.S. v. Zolin, 491 U.S. 554, 562 (1989). 27 Since privileges impede the discovery of truth, they are 28 strictly construed. Branch v. Umphenour, 936 F. 3d 994, 1006 1 (9th Cir. 2019). Stay relief litigation is uniquely a federal 2 issue, so federal common law concerning the attorney client 3 privilege applies. 4 A party asserting the privilege has the burden of proof of 5 each element of the privilege. U.S. v. Ruehle, 583 F. 3d 600, 6 607 (9th Cir. 2009). There are eight elements: 7 1) Legal advice must be sought. 8 2) Advice sought must be from a professional legal advisor 9 in the advisor’s capacity as such. 10 3) The communication must be related to that purpose. 11 4) The advice or communication must be given in confidence. 12 5) The client must have wanted the communication in 13 confidence. 14 6) At the client’s insistence, the communication is 15 permanently protected. 16 7) The client and the legal advisor may not disclose the 17 communication. 18 8) The exception is if the protection is waived. U.S. v. 19 Landorf, 591 F. 2d 36, 38 (9th Cir. 1978); U.S. v. Graf, 20 610 F. 3d 1148, 1156 (9th Cir. 2010). 21 There is no real dispute here that the documents subject to 22 in camera review are arguably privileged. Rather, Sandton 23 contends that despite the privilege, the documents withheld 24 should be disclosed because the documents already produced 25 essentially waive the privilege. Fed. R. Evid. 502 (a) 26 addresses waiver of the attorney-client privilege or work- 27 product protection as to undisclosed communications or 28 information when other privileged documents or information have 1 been produced. The waiver extends to undisclosed communication 2 or information only if: 3 • The waiver is intentional; 4 • The disclosed and undisclosed communications or 5 information concern the same subject matter; and 6 • They ought in fairness to be considered together. Fed. 7 R. Evid. 502 (a). 8 Subject matter waiver is reserved for those unusual situations 9 in which fairness requires a further disclosure of related, 10 protected information, in order to prevent a selective and 11 misleading presentation to the disadvantage of the adversary. 12 Fed. R. Evid. 502 (a) advisory committee’s note. 13 These elements of subject matter waiver are applicable to 14 both the privilege and the procedural protection afforded work- 15 product. Work-product protection is examined next. 16 17 2. Application of work-product protection. 18 The procedural immunity of the work product doctrine is not 19 a privilege. So, the scope of the work-product doctrine is 20 determined by federal law even if the federal court must apply 21 state substantive law. Holliday v. Extex, 447 F. Supp. 2d 1138 22 (D. Haw. 2006) citing Baker v. General Motors Corp., 209 F. 3d 23 1051, 1053 (8th Cir. 2000). There is very little or no 24 protection surrounding work product dealing with an expert who 25 will testify. See, Fed. R. Civ. Proc 26 (a) (2); (b) (4) (A). 26 Marlow is slated to testify at the trial of the stay relief 27 motion. He is a consultant but also a “de facto” employee of 28 the debtors. Thus, the court looks at work-product protection 1 claims dealing with documents related to subjects Marlow will 2 testify about with a “gimlet eye.” 3 Some documents may have been prepared by Marlow or counsel 4 for a business purpose unrelated to litigation. Others may have 5 a dual purpose-both business and litigation relevance. In the 6 ninth circuit, those documents must be carefully considered. The 7 court should consider facts surrounding the creation of the 8 documents. If their litigation purpose “so permeates any non- 9 litigation purpose that the two purposes cannot be discretely 10 separated from the factual nexus as a whole,” the documents can 11 be within the ambit of work product. U.S. v. Torf (In re Grand 12 Jury Subpoena), 357 F. 3d 900, 910 (9th Cir. 2003). 13 The court now turns to the remaining eight documents described 14 in the privilege log which are in dispute. 15 16 3. Rulings on document production 17 The following rulings on the disclosure of disputed 18 documents will follow the numbers set forth in the privilege 19 log. 20 #40 – Documents should be produced. 21 The documents do not contain a legal analysis or 22 discussion. They do represent a list of tasks, but the list 23 does not reflect legal opinions or analysis. The documents also 24 cover the same subjects as the exemplars, and it is fair to 25 review these together with the documents produced. 26 #41 – Documents should be produced. 27 Same as #40 above. 28 #53 – Documents to remain privileged. 1 These documents contain discussions of matters to be 2 analyzed or considered in the future. The documents also 3 include a strategic discussion concerning timing of submissions 4 to various agencies. These documents also contain information 5 that is not the same subject matter as those documents already 6 produced. The documents reflect counsel’s opinions and 7 considerations. 8 #56 – Documents to remain privileged. 9 Same as # 53 above. 10 #62 – Documents to remain privileged except pages 3-8, 11 which are public records. Those pages (3-8) should be produced. 12 It is not fair to consider these documents together with 13 those already produced. These documents cover other topics 14 besides the Owens Creek diversions. They also contain attorney 15 opinions and conclusions. 16 #98 – Documents to remain privileged. 17 These documents reflect strategic discussions concerning 18 the content and form of a LAFCO application. They are legal 19 opinions and conclusions, which have an expectation of being 20 privileged. The court has reviewed the exemplars which include 21 an interlineated copy of a LAFCO application. But production of 22 that document does not “open up” all discussions concerning the 23 LAFCO application. 24 #135 – Documents should be produced. 25 This is a checklist of actions Mr. Marlow is to take. It 26 is a data checklist without any legal analysis. The 27 communication only contains information. It is not protected by 28 1 ||}work product because the subjects covered in this document are 2 |/included in the documents already produced. 3 #136 -— Documents should be produced. 4 Same as # 135 above. 5 6 CONCLUSION 7 For the foregoing reasons, the listed documents should be 8 |iproduced or withheld as stated. The court will issue a 9 ||] contemporaneous order. 10 11 12 13 14 Dated: Sep 30, 2020 By the Court 15 fori ) . ZZ 16 ort streto II, Judge L7 United States Bankruptcy Court 18 19 20 21 22 23 24 25 26 27 28

1 Instructions to Clerk of Court 2 Service List - Not Part of Order/Judgment 3 The Clerk of Court is instructed to send the Order/Judgment 4 or other court generated document transmitted herewith to the parties below. The Clerk of Court will send the Order via the 5 BNC or, if checked X , via the U.S. mail. 6

7 4-S Ranch Partners, LLC 8 264 I Street Los Banos CA 93635-9363 9 Stephen William Sloan 10 317 Kingsbury 11 Aptos CA 95003

12 Office of the U.S. Trustee United States Courthouse 13 2500 Tulare Street, Room 1401 14 Fresno CA 93721

15 Alexander K. Lee 16 221 Sansome Street, Third Floor San Francisco CA 94104 17 Kurt F. Vote 18 265 E. River Park Circle, Suite 310 19 Fresno CA 93720

20 Peter L. Fear 21 7650 N. Palm Ave., Suite 101 Fresno CA 93711 22 Valerie Kincaid 23 2617 K Street, Suite 101 24 Sacramento, CA 95816 25 26 27 28