Brandt v. nVidia Corp. (In re 3dfx Interactive, Inc.)

347 B.R. 386, 2006 Bankr. LEXIS 1731
CourtUnited States Bankruptcy Court, N.D. California
DecidedJune 7, 2006
DocketBankruptcy No. 02-55795 JRG; Adversary No. 03-5079
StatusPublished

This text of 347 B.R. 386 (Brandt v. nVidia Corp. (In re 3dfx Interactive, Inc.)) is published on Counsel Stack Legal Research, covering United States Bankruptcy Court, N.D. California primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
Brandt v. nVidia Corp. (In re 3dfx Interactive, Inc.), 347 B.R. 386, 2006 Bankr. LEXIS 1731 (Cal. 2006).

Opinion

ORDER RE MOTION TO COMPEL PRODUCTION OF DOCUMENTS (CRIME FRAUD)

JAMES R. GRUBE, Bankruptcy Judge.

On March 2, 2006, the court heard Trustee’s motion to compel the production of documents based on the crime-fraud exception to the attorney-client privilege. The court has considered the papers filed and the arguments presented at the hearing. For the reasons stated below, the court denies the motion in part and grants the motion in part.

I. BACKGROUND

Debtor 3dfx and nVidia were competitors in the field of 3D graphics processor chips. In 1998 3dfx filed a patent infringement lawsuit against nVidia. In October 2000, 3dfx received a ruling adopting 3dfx’s claimed construction of the patent and rejecting nVidia’s construction. Within weeks, nVidia initiated negotiations to purchase 3dfx’s graphics chip business. At the time of the asset purchase negotiations, the parties expected 3dfx to run out of cash in early 2001.

nVidia’s opening offer to 3dfx was $100 million in eash.3dfx countered with $100 million in cash and one million shares of nVidia stock. The parties ultimately agreed that nVidia would pay $70 million to 3dfx for the business — $15 million at the time the deal was signed as a bridge loan and $55 million at closing — plus one million shares of nVidia stock. Under the terms of the signed asset purchase agreement (APA) dated December 15, 2000, the transfer of the one million shares of nVidia stock was conditioned upon 3dfx dissolving in a manner approved by nVidia and certifying that all liabilities had been paid in full or in a manner satisfactory to nVidia. That was not done and the nVidia stock was not transferred to 3dfx.

3dfx filed its chapter 11 bankruptcy petition on October 15, 2002. William Brandt, Jr. (“Trustee”) was appointed the chapter 11 trustee on January 24, 2003. Trustee sued nVidia on February 24, 2003 to recover a fraudulent transfer.

II. PARTIES’POSITIONS

A. Trustee’s Argument

Trustee asserts that state law governs the attorney-client privilege analysis and that a fraudulent transfer is a misdemean- or crime under California Penal Code § 5311, thus invoking the crime-fraud ex[390]*390ception. Trustee argues that at the time the APA was signed, nVidia knew that the $70 million would not pay 3dfx’s creditors in full and knowingly participated in a scheme to defraud 3dfx’s creditors by structuring the APA in such a way that it conditioned the release of the stock on certain unattainable conditions. Trustee alleges that nVidia communicated with its attorneys to further the fraudulent transfer and, since such communications violate California Penal Code § 531, all privileged documents that refer, reflect, or evidence the planning, structuring, drafting, negotiation, and/or closing of the transaction reasonably relate to the crime or fraud and must be produced since the attorney-client privilege is waived.

In addition, Trustee alleges that at the closing 3dfx had five creditors with writs of attachment against monies owed 3dfx under the APA. Rather than comply with the writs, nVidia paid a portion of the closing funds into an escrow account that it did not reveal to the writ creditors at the request of 3dfx. Trustee asserts that all documents that refer, reflect, or evidence the “secret” escrow account are subject to the crime-fraud exception.

Finally, around the time that the APA was executed, Trustee alleges nVidia agreed that it would assume the long term leases for 3dfx’s premises. nVidia later decided not to assume the leases or occupy those premises for the long term, purposely did not tell the landlords of this decision for several months and directed its in-house counsel to tell 3dfx and the Austin, Texas landlord that nVidia did not want the lease only after securing other space. Trustee alleges nVidia sought or obtained the services of its in-house counsel to deceive the Austin, Texas landlord.

B. nVidia’s Argument

nVidia opposes Trustee’s motion on timeliness and substantive grounds. nVidia asserts that the crime-fraud exception is limited in nature and Trustee has not made his requisite prima facie case of a crime or fraud. Even if Trustee makes that case, there is no reasonable, causal relationship between the fraud and the specific attorney-client communications at issue.

nVidia’s asserts at the time that the APA was executed in December 2000, 3dfx and nVidia believed that $70 million from the transaction would be enough to satisfy creditors and the deal was structured to provide a cushion in case the parties were wrong. The APA was structured so that the cash would be used to satisfy creditors and 3dfx’s shareholders would not receive the nVidia stock until the creditors were satisfied. The APA permitted 3dfx to monetize an additional $25 million of the nVidia stock as an additional means of satisfying creditors. With respect to the escrow account, nVidia previously showed that the escrow account was established to ensure that certain of 3dfx’s creditors were paid. With respect to the leases, nVidia asserts that nVidia never agreed to assume any of the leases and that the leases are expressly excluded as assets purchased by nVidia in the APA. The leases were only included in draft schedules of the APA and were not in the final version. nVidia asserts that it never intended to acquire or assume the leases.

[391]*391Finally, nVidia argues that the crime-fraud exception applies only to individual documents and not to broad categories of documents as asserted by Trustee. Only documents reasonably related to the fraud are discoverable and there must be some relationship between each communication in question and the supposed fraud or illegality. nVidia requests sanctions.

III. DISCUSSION

A. Timeliness of Motion

Civil Local Rule 26-2, incorporated by Bankruptcy Local Rule 1001-2(37), provides:

Unless otherwise ordered, as used in any order of this Court or in these Local Rules, a “discovery cut-off’ is the date by which all responses to written discovery are due and by which all depositions must be concluded.
Where the Court has set a single discovery cut-off for both fact and expert discovery, no motions to compel discovery may be filed more than 7 court days after the discovery cut-off.
Where the Court has set separate deadlines for fact and expert discovery, no motions to compel fact discovery may be filed more than 7 court days after the fact discovery cut-off, and no motions to compel expert discovery may be filed more than 7 court days after the expert discovery cut-off.
Discovery requests that call for responses or depositions after the applicable discovery cut-off are not enforceable, except by order of the Court for good cause shown.

In Goodwortk Holdings Inc. v. Suh, 239 F.Supp.2d 947, 966 (N.D.Cal.2002), aff'd, 99 Fed.Appx. 806 (9th Cir.2004), the district court inferred that a motion to compel could be brought after the 7 court day deadline of Civil Local Rule 26-2. In denying a motion for reconsideration, the district court stated:

Plaintiffs motion to compel was not denied because the desired evidence was not likely to be helpful to its case — it was denied because it was inexcusably late.

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Cite This Page — Counsel Stack

Bluebook (online)
347 B.R. 386, 2006 Bankr. LEXIS 1731, Counsel Stack Legal Research, https://law.counselstack.com/opinion/brandt-v-nvidia-corp-in-re-3dfx-interactive-inc-canb-2006.