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Industrial Systems & Fabrication, Inc. v. Western National Assurance Co.

United States District Court, E.D. Washington

October 30, 2014

INDUSTRIAL SYSTEMS & FABRICATION, INC., a Washington corporation, Plaintiff,
v.
WESTERN NATIONAL ASSURANCE COMPANY, a Minnesota company, Defendant.

ORDER REGARDING DISCOVERY MOTIONS

ROSANNA MALOUF PETERSON, Chief District Judge.

Before the Court are several motions related to discovery: Plaintiff's Motion to Compel, ECF No. 47; Defendant's Motion to Compel Written and Deposition Testimony, ECF No. 49; Plaintiff's Motion for Protective Order, ECF No. 64; and Defendant's Motion to Expedite and for Leave to File Supplemental Memorandum, ECF No. 69.

The Court held a telephonic hearing on these motions on October 24, 2014. Adam Chambers represented Plaintiff. Dana Ferestien and Bridget Schuster appeared on behalf of Defendant. The Court has considered all of the relevant filings and the parties' oral arguments. The Court is fully informed. This Order memorializes and supplements the Court's oral rulings.

The background of this action is discussed in the Court's Order Denying Motion to Quash, ECF No. 46, and will not be repeated here. The Court considers each motion in turn.

1. Plaintiff's Motion to Compel

Plaintiff moves for an order compelling Defendant, Plaintiff's insurer, to provide discovery documents that Defendant claims are protected by the attorneyclient privilege. ECF No. 47. Defendant submitted a privilege log, claiming that multiple documents are subject to the attorney-client privilege or other protections. ECF No. 54-1. The parties dispute whether the attorney-client privilege applies in light of a recent decision of the Washington State Supreme Court, Cedell v. Farmers Insurance Company of Washington, 176 Wn.2d 686, 697 (2013).

In Cedell, the court attempted to balance the tension between the attorneyclient privilege and an insured's need for adequate discovery from an insurer in order to pursue an insurance bad faith claim. 176 Wn.2d at 698. Recognizing that an insured must have access to an insurer's file to discover facts in support of a bad faith claim, the court found that permitting "a blanket privilege in insurance bad faith claims because of the participation of lawyers hired or employed by insurers would unreasonably obstruct discovery of meritorious claims and conceal unwarranted practices." Id. at 696-97. Therefore, the court adopted "the presumption that there is no attorney-client privilege relevant between the insured and the insurer in the claims adjusting process, and that the attorney-client and work product privileges are generally not relevant." Id. at 698-99.

An insurer may rebut this presumption, however, "by showing its attorney was not engaged in the quasi-fiduciary tasks of investigating and evaluating or processing the claim, but instead in providing the insurer with counsel as to its own potential liability; for example, whether or not coverage exists under the law." Id. at 699. If the insurer meets this showing, "[it] is entitled to an in camera review of the claims file, and to the redaction of communications from counsel that reflected the mental impressions of the attorney to the insurance company, unless those mental impressions are directly at issue in its quasi-fiduciary responsibilities to its insured." Id.

If an insurer successfully shows that the attorney-client privilege applies, Cedell holds that the insured nevertheless may be entitled to allegedly protected documents under the civil-fraud exception. The Cedell court outlined the following procedure for determining whether the civil-fraud exception applies:

First, upon a showing that a reasonable person would have a reasonable belief that an act of bad faith has occurred, the trial court will perform an in camera review of the claimed privileged materials. Second, after in camera review and upon a finding there is a foundation to permit a claim of bad faith to proceed, the attorneyclient privilege shall be deemed to be waived.

Id. at 700.

Cedell is applied somewhat differently in federal court than in state court, as the parties agree. See ECF Nos. 53 at 4-5; 57 at 3 n.2. "Under the Erie doctrine, a federal court sitting in diversity generally applies the substantive law of the forum state, but federal procedural law." MKB Constructors v. Am. Zurich Ins. Co., C-13-0611-JLR, 2014 WL 2526901, at *5 (W.D. Wash. May 27, 2014) (citing Erie R.R. Co. v. Tompkins, 304 U.S. 64, 78-79 (1939)). Accordingly, while the scope of the attorney-client privilege, as described in Cedell, is a matter of substantive law that applies in this Court, Cedell 's detailed process of in camera review is a matter of procedural law. Id. at *6-7. Pursuant to federal law, the Court exercises its discretion in determining whether to conduct in camera review. Id. at *7; see also Carolina Cas. Ins. Co. v. Omeros Corp., C-12-287-RAJ, 2013 WL 1561963, at *3 (W.D. Wash. Apr. 12, 2013) ("exercise[ing] its authority to order an in camera review" without suggesting that the process is mandatory in federal court).

Another difference regarding the application of Cedell in federal court, and again due to the Erie doctrine, is that while the attorney-client privilege is a substantive legal issue, the work product doctrine is a matter of procedural rule. MKB Constructors, 2014 WL 2526901, at *8; see also Fed.R.Civ.P. 26(b)(3). Therefore, Cedell 's work product analysis does not apply here.

Parsing only the attorney-client privilege law from Cedell is complicated by the fact that Cedell at times does not differentiate between that privilege and the separate work product doctrine. See MKB Constructors, WL 2526901, at *4 n.3 (noting that Cedell "often conflates the two in its analysis or uses the terms nearly interchangeably"); Philadelphia Indem. Ins. Co. v. Olympia Early Learning Ctr., C-12-5759-RBL, 2013 WL 3338503, at *3 (W.D. Wash. July 2, 2013).

The Court finds that Defendant has met its burden to show that its attorneys were not engaged in the quasi-fiduciary tasks of the insurer, unlike the attorney in Cedell. The attorney in that case was hired "to do more than give legal opinions." Cedell, 176 Wn.2d at 701. Rather, he assisted in the investigation by taking sworn statements from the insured and from a witness, assisted in adjusting the claim by negotiating with the insured, and threatened denial of coverage if a "one time offer" was not accepted. Id. In short, "[w]hile [the attorney] may have advised [the insurer] as to the law and strategy, he also performed the functions of investigating, evaluating, negotiating, and processing the claim." Id.

Here, Defendant submitted declarations from its litigation counsel and from its coverage counsel, both of whom declare under penalty of perjury that they did not engage in any quasi-fiduciary activities on Defendant's behalf. ECF Nos. 54, 56. Indeed, Defendant's coverage counsel, who worked for Defendant before litigation commenced and who presumably would have been more likely to have played a quasi-fiduciary role, specifies that he did not examine any witnesses under oath and that he "had no communications with adjusters, investigators, consultants, experts or appraisers." ECF No. 56 at 2.

As evidence that Defendant's attorneys acted as quasi-fiduciaries, Plaintiff notes that on multiple occasions Defendant communicated with Plaintiff about its claims shortly after it apparently communicated with its counsel. See ECF No. 57 at 4-7. However, such communications also would be consistent with a client seeking legal counsel from its attorney, which is not necessarily subject to disclosure. See Cedell, 176 Wn.2d at 699 (an insurer may overcome the presumption of discoverability by showing that its attorney was engaged "in providing the insurer with counsel as to its own potential liability").

Plaintiff also contends that, even if Defendant overcomes the Cedell presumption, it is still entitled to communications that reflect the mental impressions of Defendant's attorneys if those impressions are "directly at issue" in the insurer's quasi-fiduciary duty. Id. at 699 (citing Escalante v. Sentry Ins., 49 Wn.App. 375 (1987)). However, a review of Cedell indicates that this statement pertains to the work product doctrine. The relevant section of Escalante, the Washington Court of Appeals case on which the Supreme Court relied for finding this exception for mental impressions that are directly at issue, concerned the work product doctrine. See Escalante, 49 Wn.App. at 396 ("address[ing] one other issue raised by the parties regarding the work product doctrine; i.e. the discoverability, under CR 26(b)(3), of mental impressions, conclusions, opinions, etc. of an attorney or other representative of [the insurer]"). Moreover, both the federal and state rules governing the work product doctrine use the term "mental impressions" to describe material that must be protected from disclosure even if an opponent overcomes an assertion that documents are protected work product, indicating that Cedell was discussing an exception to that doctrine. See Fed.R.Civ.P. 26(b)(3)(B) and Wash. Super. Ct. Civ. R. 26(b)(4). As discussed above, the work product doctrine is a matter of procedural rather than substantive law, so Cedell 's holdings regarding the work product doctrine do not apply in federal court.[1]

Based on the evidence submitted by the parties, the Court finds that Defendant's attorneys did not engage in the quasi-fiduciary tasks that Cedell identifies.

Defendant next contends that the attorney-client privilege is vitiated under the civil fraud exception. See Cedell, 176 Wn.2d at 699-700. Plaintiff failed to raise this issue in its motion. See ECF No. 47. Only after Defendant explained that Plaintiff had not argued that the civil fraud exception applies, ECF No. 53 at 1, did Plaintiff argue and submit evidence in support of the civil fraud exception, ECF No. 57 at 9-10.

The Court is not obliged to consider arguments first offered in a reply brief. Zamani v. Carnes, 491 F.3d 990, 997 (9th Cir. 2007). Because Defendant has not been given an appropriate opportunity to respond to Plaintiff's untimely submission, the Court declines to consider whether Plaintiff has met Cedell 's standard for the civil-fraud exception at this time.

Accordingly, Plaintiff's Motion to Compel is denied.

2. Defendant's Motion to Compel Written and Deposition Testimony

Defendant moves to compel Plaintiff to supplement its responses to interrogatories, to comply with the Court's order denying a motion to quash a subpoena duces tecum, and to produce its witnesses for deposition.[2] ECF No. 49. Defendant also requests the Court to appoint a discovery master and to consider awarding fees.

Defendant claims that Plaintiff's responses to interrogatories are deficient. For example, in response to Defendant's Interrogatory No. 4, requesting Plaintiff to state the facts and circumstances that support its building repairs and business interruption claims, Plaintiff objected and directed that "in lieu of a narrative response, see the documents previously produced by Industrial Systems regarding its insurance claims and the factual basis set forth in the Complaint." ECF No. 50-2 at 4. Plaintiff then referred to its response to Interrogatory No. 4 instead of substantively answering multiple other interrogatories. ECF No. 50-2 at 4-6.

The Court finds that Plaintiff's answers to the interrogatories are inadequate. Plaintiff's suggestion that Defendant refer to the complaint and to documents presumably produced in discovery is unhelpful. See 8B CHARLES ALAN WRIGHT ET AL., FEDERAL PRACTICE AND PROCEDURE ยง 2177 (3d ed.) ("Simply referring to pleadings or other discovery is frequently found insufficient.").

Plaintiff argues that its responses comply with Rule 33(d), which permits a party to produce business records in response to interrogatories. See Fed.R.Civ.P. 33(d). However, the rule requires the answering party to specify "the records that must be reviewed, in sufficient detail to enable the interrogating party to locate and identify them as readily as the responding party could...." Fed.R.Civ.P. 33(d)(1). Plaintiff's general reference to "the documents previously produced" falls short of this requirement.

Plaintiff is directed to respond in detail to all of Defendant's interrogatories by November 7, 2014. The Court trusts that Defendant will communicate swiftly about specific information that it needs, assuming that Plaintiff requires clarification.

Next, Defendant claims that Plaintiff has failed to comply with the Court's order requiring it to produce all documents from the Alex Sill N. Company ("Sill") claim file and to supply a privilege log of all documents that Plaintiff alleged were protected, ECF No. 46. Documents and a privilege log were produced, but Defendant states that a number of categories of documents are not reflected in the materials produced.

However, Defendant has not provided evidence that anything actually has been withheld. At the hearing on this matter, counsel for Plaintiff stated that although he does not represent Sill and is not responsible for its responses to a subpoena duces tecum, he has verified with Sill that all responsive records have been produced or recorded in the privilege log. Plaintiff also indicated that it does not possess any records responsive to the subpoena that have not been produced. Based on Plaintiff's representations on the record, the Court assumes that Plaintiff has disclosed everything responsive to date.

Defendant also requests the Court to appoint a discovery master, and Plaintiff does not object. Considering the contentious history of discovery in this matter, the Court agrees that a discovery master could help resolve any future disputes more expeditiously and economically than they are managed in motion practice. The parties will divide the fees evenly for a discovery master, who will be permitted to reallocate the expense if either party unnecessarily delays discovery. The discovery master will be authorized to conduct in camera reviews as he or she finds appropriate. The Court declines to award sanctions at this time, but the discovery master will have the authority to impose sanctions, should the discovery master find it necessary to do so.

On or before November 6, 2014, the parties are ordered to jointly recommend an attorney to serve as discovery master and to file a jointly proposed order appointing a discovery master. If the parties are unable to agree on a discovery master, each party is ordered to submit the names of two attorneys whom it recommends to serve as a discovery master.[3]

Defendant's Motion to Compel Written and Deposition Testimony is granted in part and denied in part.

3. Plaintiff's Motion for Protective Order

The parties have quarreled vigorously over the scheduling of depositions. The parties agreed (tentatively, at least) that depositions of Plaintiff's witnesses Jim Hamlin and Jason Hamlin would occur on November 25 and 26, 2014. See ECF No 65-1 at 2. Defense counsel later wrote that they were not available to conduct depositions at all during that week and requested to reschedule the depositions for an earlier date. ECF No. 65-2 at 1. Plaintiff responded that no earlier dates were available. ECF No. 65-3 at 1. Defendant argued that it could not delay the depositions of Plaintiff's witnesses later than the week when they originally were scheduled, and therefore Defendant issued notices of depositions for November 19, 2014, without Plaintiff's consent. ECF No. 65-4. Plaintiff requests the Court to issue a protective order, stopping the depositions from occurring on November 19, 2014, when Plaintiff's counsel will be participating in a hearing out-of-state. See ECF No. 65-6.

Rule 26(c) provides that, after a good faith attempt to confer, a party may obtain a protective order by establishing good cause "to protect a party or person from annoyance, embarrassment, oppression, or undue burden or expense...." Fed.R.Civ.P. 26(c)(1). Plaintiff has certified that the parties attempted to confer on this matter, and the Court finds that Plaintiff has established good cause for a protective order sparing it from complying with a deposition deadline that Defendant unilaterally set.

Both parties also move for attorney fees, ECF Nos. 49 at 11; 64 at 6-7, which the Court denies. In light of the conduct of both parties, the Court finds that it would be unjust to grant either party's request for fees at this time. See Fed.R.Civ.P. 37(a)(5)(A)(iii).

Plaintiff's Motion for Protective Order is granted in part and denied in part. The parties shall stipulate to new deposition dates for Jim Hamlin and Jason Hamlin. If necessary, the parties may move to extend discovery and ask for a new trial date.

Accordingly, IT IS HEREBY ORDERED:

1. Plaintiff's Motion to Compel, ECF No. 47, is DENIED.
2. Defendant's Motion to Compel Written and Deposition Testimony, ECF No. 49, is GRANTED IN PART AND DENIED IN PART, as described above.
3. Plaintiff's Motion for Protective Order, ECF No. 64, is GRANTED IN PART AND DENIED IN PART, as described above.
4. Defendant's Motion to Expedite and Motion for Leave to File Supplemental Memorandum, ECF No. 69, is GRANTED.

The District Court Clerk is directed to enter this Order and provide copies to counsel.


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