approved all of the loans at issue and maintained ultimate authority for all loan activities.
At some point, the United States Department of Labor ("DOL") began investigating the loan transactions involved in this action. At the DOL's request, McMorgan transmitted to the DOL various documents relating to the loan transaction. McMorgan's counsel engaged in a correspondence with the DOL that is apparently reflected in various letters and reports, copies of which remain in McMorgan's possession. As of yet, the DOL has not initiated any legal proceedings against either McMorgan or FCMC.
In the current dispute before the Court, FCMC moves the court for an order compelling McMorgan to produce all documents McMorgan transmitted to the DOL as well as all communications with the DOL relating to the loans at issue in this litigation and to McMorgan's construction loan program in general. In the alternative, FCMC seeks an order compelling McMorgan to produce immediately all such documents to which McMorgan asserts no privilege, and to produce a detailed privilege log for those documents McMorgan claims are privileged. FCMC also moves for sanctions against McMorgan for the attorneys' fees and costs involved in bringing this motion.
McMorgan brings a countermotion for a protective order to (1) deny discovery of documents and communications exchanged between McMorgan and the DOL; and (2) protect McMorgan from the burdens of producing a privilege log of any kind respecting any documents and communications between McMorgan and the DOL.
During the deposition of Daniel O'Donnell, McMorgan's Federal Rule of Civil Procedure 30(b)(6) designee, O'Donnell testified that the DOL was reviewing eight of the McMorgan construction loans that are, or were, involved in this litigation. (McLeod Decl., Ex. A, O'Donnell Dep. 51:3-10.) Since then, McMorgan has steadfastly refused to produce to FCMC any of the documents that it provided to the DOL on the grounds that (1) all of the nonprivileged documents have already been produced, and (2) the remainder are attorney work product and/or protected by attorney/client privilege. McMorgan has also refused to provide a privilege log of the allegedly privileged communications between McMorgan and the DOL.
FCMC then attempted to obtain the documents McMorgan transmitted to the DOL by filing a Freedom of Information Act ("FOZA") request with the DOL. The DOL responded that it was withholding all nonpublic documents at this time pursuant to 5 U.S.C. 552(b)(7)(A), which authorizes the withholding of records or information compiled for law enforcement purposes to the extent that production of such information could reasonably be expected to interfere with enforcement proceedings. (Ramirez Decl., Ex. A.)
After a telephone conference on February 2, 1996, Special Master Edward S. Washburn ordered McMorgan to provide, for in camera review, the documents to which McMorgan asserts a privilege. Special Master Washburn ordered McMorgan to produce to FCMC all other documents that McMorgan sent to the DOL. (McLeod Decl., Ex. B, Tr. 44:14-19.)
On February 23, 1996, counsel for FCMC reviewed two boxes of the nonprivileged documents that Special Master Washburn ordered McMorgan to produce. McMorgan did not allow FCMC's counsel to make copies of any of these documents, even though FCMC's counsel located some documents that McMorgan had not previously produced.
After reviewing the allegedly privileged documents, and after further briefing on the question of whether the DOL investigation prevents further inquiry by FCMC into the communications between McMorgan and the DOL, Special Master Washburn referred the matter to this Court for decision.
There is no question but that the McMorgan/DOL documents are relevant to this litigation, and responsive to FCMC's various document requests and deposition questions. Both parties agree that certain documents that McMorgan produced to the DOL are not privileged. In the two boxes of documents McMorgan produced on February 23, which it admits are not privileged, FCMC's counsel located documents that were not previously produced. (Palmer Decl. P 4.) The Court finds that McMorgan must again produce to FCMC the McMorgan/DOL documents that even McMorgan agrees are not privileged. FCMC then may flag or copy all of the documents that it believes have not been previously produced in this litigation. These documents must be produced to the Document Depository immediately.
The key issue in these motions is whether producing otherwise privileged documents to a government investigatory agency at the agency's request constitutes a waiver of the privilege. In the Ninth Circuit, the party asserting a privilege bears the burden of proving that the privilege applies, and that the privilege has not been waived. Weil v. Investment/Indicators, Research & Management, Inc., 647 F.2d 18, 25 (9th Cir. 1981); Fed. R. Civ. P. 26(b)(5). Thus, McMorgan bears the burden of demonstrating that it did not waive the attorney-client privilege and work product doctrine by producing otherwise privileged material to the DOL.
McMorgan argues that disclosure of privileged materials voluntarily surrendered to a government agency in a separate and nonpublic investigation constitutes only a limited waiver, so that such material is not discoverable in a subsequent private action.
McMorgan relies primarily on Diversified Industries, Inc. v. Meredith, 572 F.2d 596, 611 (8th Cir. 1977) (en banc).
In Diversified, the Eighth Circuit examined whether Diversified waived its attorney-client privilege by voluntarily producing privileged materials to the SEC pursuant to subpoena. The court held that because Diversified disclosed those documents in a separate and nonpublic SEC investigation, only a limited waiver of the privilege occurred. "To hold otherwise may have the effect of thwarting the developing procedure of corporations to employ independent outside counsel to investigate and advise them in order to protect stockholders, potential stockholders and customers." Id.
One district court has interpreted Diversified as holding that "voluntary submissions [of privileged material] to agencies in separate, private proceedings should be a waiver only as to that proceeding." Byrnes v. IDS Realty Trust, 85 F.R.D. 679, 689 (S.D.N.Y. 1980). The Byrnes court reasoned that "voluntary disclosures to agencies should be encouraged rather than requiring that agency requests or subpoenas be fought to the hilt." Id. at 688.
This rule, however, has not been adopted by the Ninth Circuit. The Diversified rule has been examined only once in the Ninth Circuit, in Fox v. California Sierra Financial Services, 120 F.R.D. 520 (N.D. Cal. 1988). In that case, Chief Magistrate Woelflen expressly rejected Diversified, and held that:
In weighing the policy considerations of cooperation with the SEC against the public interest in discovering the truth, I find that where, as here, information has been voluntarily and selectively disclosed to the SEC without steps to protect the privileged nature of such information, fairness requires that the attorney-client privilege has been waived as to the disclosed information and all information on the same subject.
Id. at 527 (citations omitted). Chief Magistrate Woelflen emphasized that, in Fox, documents and testimony had been provided to the SEC without any assertion of privilege.
"Diversified. . . does not advance any compelling reason for overriding this basic attribute of the attorney-client privilege [that is, 'that the client must take pains to ensure that the confidentiality of the communications has been preserved before he may invoke the privilege.']"