Ford v. Jurgens

Ford v. Jurgens, 2021 NCBC 64.

STATE OF NORTH CAROLINA IN THE GENERAL COURT OF JUSTICE

SUPERIOR COURT DIVISION

WAKE COUNTY 20 CVS 4896

JOHN FORD and CHRISTOPHER

KISGEN, derivatively on behalf of

TRIANGLE REAL ESTATE

INVESTORS ASSOCIATION, INC.,

Plaintiffs,

v.

CARL ARNOLD JURGENS, JR.;

KATHIE RUSSELL; TRIANGLE REAL

ESTATE INVESTORS ASSOCIATION ORDER AND OPINION ON

(TREIA), LLC; and TREIA PLAINTIFFS’ MOTION TO COMPEL

FOUNDATION, INC.,

Defendants,

v.

TRIANGLE REAL ESTATE

INVESTORS ASSOCIATION, INC.,

Nominal Defendant.

1. THIS MATTER is before the Court on Plaintiffs’ Motion to Compel the

production of documents that have been withheld from discovery by Defendants on

the basis of attorney-client privilege and the work product doctrine (the “Motion”).

(ECF No. 78.) Following review and consideration of the Motion, briefs and exhibits

filed in support and in opposition to the Motion, arguments of counsel during a

hearing held on 24 June 2021, and other matters of record, and after having

conducted an in camera review of the documents at issue, the Court determines that

the Motion should be GRANTED in part and DENIED in part for the reasons set

forth below.

Brooks, Pierce, McLendon, Humphrey & Leonard LLP, by Clint S. Morse,

Katarina K. Wong, and James L. Bobbitt III, for Plaintiffs Christopher

Kisgen and John Ford.

Wilson Ratledge, PLLC, by Michael Ostrander, for Defendants TREIA

Foundation, Inc. and Triangle Real Estate Investors Association

(TREIA), LLC.

Harris Sarratt & Hodges, LLP, by Donald J. Harris, and McAngus,

Goudelock & Courie, PLLC, by Jeffrey D. Keister and Sean R. Madden,

for Defendants Kathie Russell and Carl Jurgens, Jr.

Wilson Ratledge, PLLC, by Michael Ostrander, and Goldberg Segalla, by

Thomas M. Buckley and Allegra Amelia Sinclair, for Nominal Defendant

Triangle Real Estate Investors Association, Inc.

Earp, Judge.

I. BACKGROUND

2. The underlying derivative action was filed on 9 April 2020 by John Ford

and Christopher Kisgen (“Derivative Plaintiffs”), two former Board members of

Triangle Real Estate Investors Association Inc. (the “Association” or “TREIA Inc.”), a

non-profit real estate investment association founded in 2003 to provide educational

and networking benefits to its membership. (Am. Compl., ¶¶ 1, 13, ECF No. 11; Aff.

Kathie Russell, at Ex. D (“Articles of Incorporation”), ECF 9.5.)

3. Plaintiffs complain on behalf of the Association that two other

Association Board members, Kathie Russell (“Russell”) and Carl Arnold Jurgens, Jr.

(“Jurgens”), “through a series of misrepresentations and blatant omissions . . . took

actions to redirect control and ownership of the [Association,]” (Am. Compl., ¶ 2), to

two newly formed entities: Triangle Real Estate Investors Association, LLC, a for-

profit entity (“TREIA, LLC” or the “LLC”), and TREIA Foundation, Inc., a nonprofit

corporation established for charitable purposes (the “Foundation”) (collectively the

“New Entities”), (Am. Compl. ¶ 11). They further allege that Russell and Jurgens did

not reveal to either the Association’s Board or its membership that they intended to

be the sole members and owners of the new TREIA, LLC, that Russell and Jurgens

misled the Association Board regarding its role in the governance of the new LLC,

and that Russell and Jurgens improperly transferred funds from the Association to

the New Entities in violation of the Association’s Articles of Incorporation. (Am.

Compl., ¶¶ 26, 37–39, 60–63.)

4. Defendants deny any wrongdoing with respect to the formation of the

New Entities or their funding from the Association’s coffers. They contend that both

the Board and the Association’s membership approved the conversion of the

Association into the New Entities, and that Russell and Jurgens acted to carry out

the Association’s decision. They argue that this action is brought by two former Board

members who simply disagree with the strategic direction the Association has taken.

(Resp. Br. Opp. Pls.’ Mot. Compel 9, ECF No. 83.)

5. As amended, 1 the Complaint alleges derivative claims for: (1) Breach of

Fiduciary Duty against fellow Association Board members Jurgens and Russell, (2)

Improper Distribution of monies transferred from the Association to the New

Entities, (3) a Declaration that the dissolution of the Association and “all transactions

1 An amended complaint was filed on 28 April 2020. (ECF No. 11.)

related thereto” are void, (4) Legal Malpractice and Attorney Fraud against Russell,

(5) Common Law Trademark Infringement and Unfair Competition, and (6) Unfair

and Deceptive Trade Practices in violation of Chapter 75 of the North Carolina

General Statutes.

6. The case has followed an arduous path to reach this point. Earlier

motions for preliminary injunction, to appoint a receiver and, by the Plaintiff, for

partial summary judgment, have been denied. A Case Management Order was

entered on 28 July 2020 and has been amended to extend the discovery period six

times.

7. Most recently, a series of discovery issues have erupted that the Court

has heard pursuant to Business Court Rule (“BCR”) 10.9. This Motion arises from

one of the disputes that was not resolved during the BCR 10.9 process and pertains

to drafts of the LLC’s operating agreement and the individual Defendants’

communications with counsel during the drafting process.

8. Specifically, Plaintiffs state that they served requests for production on

each of the Defendants separately on 26 October 2020. Request 23 sought, “[a]ll

drafts of the LLC’s Operating Agreement and all communications related to the LLC’s

Operating Agreement and any drafts thereof.” (Pls.’ Br. Supp. Mot. Compel 2, ECF

No. 79.) All Defendants responded on 29 December 2020 objecting to Request 23 on

multiple grounds, including “attorney-client privilege and work product.” (Pls.’ Br.

Supp. Mot. Compel 2.) On 15 March 2021 Defendants produced, and later

supplemented, a privilege log asserting that drafts of the requested operating

agreement, some containing redlined edits, and communications to and from counsel

were protected from discovery by “the attorney-client privilege, privileged

communication and work product.” (Pls.’ Br. Supp. Mot. Compel, at Ex. 1, ECF No.

79.1.)

9. Plaintiffs filed the Motion on 19 April 2021 requesting that the Court

compel production of drafts of the operating agreement that were created for the LLC,

along with the communications to and from counsel that were generated during the

drafting process.

10. Plaintiffs argue that these documents are relevant to their claims that

Russell and Jurgens misled the Association’s Board and its members—both

affirmatively and by omission—into changing the corporate structure so that Russell

and Jurgens could take control of the Association and its assets for themselves. They

point to fact disputes that have arisen concerning the terms of the operating

agreement. (Pls.’ Br. Supp. Mot. Compel 12.)

11. In response to Defendants’ objection that the requested documents are

protected by the attorney-client privilege and/or the work product doctrine, Plaintiffs

argue that the work product doctrine is inapplicable, that Defendants waived the

attorney-client privilege by putting the advice they received from counsel at issue,

that drafts of the Operating Agreement are not confidential communications, and

that, in any event, the fiduciary and crime-fraud exceptions to the attorney-client

privilege apply such that the documents are not protected.

12. Having reviewed the briefs submitted and heard the arguments of

counsel, the Court determined that an in camera review of the documents at issue

was appropriate. (See Order Following Conference, ECF No. 92.) Defendants

submitted the documents in question, which fall into two categories: (1) drafts of the

LLC’s Operating Agreement; and (2) e-mail communications between and among

Russell, Jurgens, Donald Harris (counsel for Russell and Jurgens), and attorneys of

the Wilson Ratledge law firm (representing the Association, the LLC, and the

Foundation). The Court has conducted its review, and the Motion is ripe for

disposition.

II. ANALYSIS

13. The Court starts with the framework for determining whether the

documents at issue are protected from discovery by either the attorney-client

privilege or the work product doctrine.

A. Attorney-Client Privilege

14. It is well-established that in North Carolina, the attorney-client

privilege applies if: “(1) the relation of the attorney and the client existed at the time

the communication was made, (2) the communication was made in confidence, (3) the

communication relates to a matter about which the attorney is being professionally

consulted, (4) the communication was made in the course of giving or seeking legal

advice for a proper purpose although litigation need not be contemplated[,] and (5)

the client has not waived the privilege.” State v. Murvin, 304 N.C. 523, 531 (1981);

see also Window World of Baton Rouge, LLC v. Window World, Inc., 2019 NCBC

LEXIS 54, at *23 (N.C. Super. Ct. 16 Aug. 2019), aff’d per curiam, 377 N.C. 551

(2021); Morris v. Scenera Research, LLC, 2011 NCBC LEXIS 34, at *14 (N.C. Super.

Ct. 26 Aug. 2011). “If any one of these five elements is not present in any portion of

an attorney-client communication, that portion of the communication is not

privileged.” In re Investigation of the Death of Miller, 357 N.C. 316, 335 (2003).

15. Given its impact, the attorney-client privilege is construed strictly.

Evans v. United Servs. Auto. Ass’n, 142 N.C. App. 18, 31 (2001) (providing that “courts

are obligated to strictly construe the privilege”); State v. Smith, 138 N.C. 700, 703

(1905) (“As the rule of privilege has a tendency to prevent the full disclosure of the

truth, it should be limited to cases which are strictly within the principle of the policy

that gave birth to it.”) (quotation marks omitted).

16. The party seeking to utilize the attorney-client privilege as a shield from

discovery bears the burden of proof. Wachovia Bank v. Clean River Corp., 178 N.C.

App. 528, 531 (2006). Here, that burden is on Defendants.

B. Work Product Doctrine

17. In contrast to the robust protection bestowed by the attorney-client

privilege, the work product doctrine provides limited immunity from discovery for

documents and other tangible things prepared “in anticipation of litigation.”

N.C.G.S. § 1A-1, Rule 26(b)(3). Once the party invoking the doctrine establishes that

the documents or things in question were prepared in anticipation of litigation, work

product immunity attaches unless the other party establishes that he has

“substantial need of the materials in preparation of the case” and that he “is unable

without undue hardship to obtain the substantial equivalent of the materials by other

means.” Id. Even so, if the work product contains the mental impressions,

conclusions, opinions, or legal theories of an attorney concerning the litigation in

which the material is sought, the court will not order disclosure of that information.

Id.

18. Although the reach of the work product doctrine is broader than that of

the attorney-client privilege, because it is a limit on discovery, it, too, must be

narrowly construed. Evans, 142 N.C. App. at 29 (“Because work product protection

by its nature may hinder an investigation into the true facts, it should be narrowly

construed consistent with its purpose . . . .”) (citation omitted). Therefore, not every

document created when litigation looms is subject to its protection. To be covered by

the work product doctrine, the document must be created in anticipation of litigation.

See Willis v. Duke Power Co., 291 N.C. 19, 35 (1976); Evans, 142 N.C. App. at 29.

19. However, “[t]he phrase ‘in anticipation of litigation’ is an elastic

concept[,]” and determining whether a document was or was not prepared in

anticipation of litigation is dependent on the circumstances. Cook v. Wake Cty. Hosp.

Sys., 125 N.C. App. 618, 623 (1997). Federal decisions provide some guidance.

Brewer v. Harris, 279 N.C. 288, 292 (1971) (Where our case law on civil procedure is

not definitive, our Supreme Court directs us to federal decisions for “enlightenment

and guidance.”) (citation omitted).

20. While the federal courts are not aligned with respect to the wording used

to define when a document is prepared “in anticipation of litigation,” they do require

that the prospect of litigation—rather than business considerations—be the central

motivator. See United States v. Richey, 632 F.3d 559, 567 (9th Cir. 2011) (applying

the “because of” test to “determine whether the document was created because of

anticipated litigation, and would not have been created in substantially similar form

but for the prospect of litigation”) (citation and quotation marks omitted); Nat’l Union

Fire Ins. Co. v. Murray Sheet Metal Co., 967 F.2d 980, 984 (4th Cir. 1992) (“[I]n

resolving the question of whether matters are immune from discovery because of the

work product rule, attention must be turned first to whether the documents or

tangible things were prepared in anticipation of litigation or for trial . . . .”); United

States v. Davis, 636 F.2d 1028, 1040 (5th Cir. 1981), cert. denied, 454 U.S. 862 (1981)

(“[T]he primary motivating purpose behind the creation of the document was to aid

in possible future litigation.”).

21. If documents are prepared in the ordinary course of business—even if

drafted in response to an event that portends litigation—they are not work product.

Saunders v. Hull Prop. Grp., LLC, No. COA17-1115, 2018 N.C. App. LEXIS 254, at

*7 (N.C. Ct. App. 20 Mar. 2018) (unpublished) (stating that the North Carolina Court

of Appeals “has consistently held that reports published in accordance with a

company’s established policy are not protected work product, even when drafted in

response to an event that might foreseeably give rise to litigation”); Fulmore v.

Howell, 189 N.C. App. 93, 102 (2008) (concluding that a report created pursuant to a

safety manual was prepared in the ordinary course of business negating “the

possibility of the protection of the report under the doctrine of work product”); Evans,

142 N.C. App. at 30 (affirming the trial court’s denial of work product immunity over

the defendant-insurers’ “claims diary” because “the investigation stage of the claims

process is one carried out in the ordinary course of an insurer’s business”); Cook, 125

N.C. App. at 625 (reversing the trial court’s denial of a motion to compel production

of an accident report that “would have been compiled, pursuant to the hospital’s

policy, regardless of whether [the plaintiff] intimated a desire to sue the hospital or

whether litigation was ever anticipated by the hospital”).

22. This is true even if litigation involving the document might result. See,

e.g., United States v. El Paso Co., 682 F.2d 530, 542–43 (5th Cir. 1982), cert. denied,

466 U.S. 944 (1984) (papers relating to the preparation of tax returns do not gain

work product immunity solely because the IRS may conduct an audit); Status Time

Corp., v. Sharp Elecs., Corp., 95 F.R.D. 27, 29 (S.D.N.Y. 1982) (documents relating to

filing for or maintaining a patent are not protected solely because litigation of the

patent right is a possibility); In re Penn Cent. Commercial Paper Litig., 61 F.R.D. 453,

468 (S.D.N.Y. 1973) (finding that offering circulars are not protected solely because

liability may result or because their author is a lawyer).

23. The Court now turns to the documents that are the subject of the

Motion.

Drafts of the Operating Agreement

24. The drafts at issue include a first draft of the Operating Agreement

prepared by Kathie Russell (identified by LLC as Exhibit B) and subsequent drafts

with edits made either by attorneys from Wilson Ratledge, who represent the LLC,

or by Russell or Jurgens (identified by LLC as “Exhibits D, F, G, I, J, L, O, Q). The

LLC’s final Operating Agreement (Exhibit R) has been produced to Plaintiffs and is

already a part of the record. (See Aff. Kathie Russell, at Ex. B (“TREIA, LLC

Operating Agreement”), ECF No. 9.3.)

25. Defendants argue that the requested drafts exchanged between counsel

for the LLC 2 and Russell and Jurgens constitute attorney-client privileged

communications because they contain redlined changes and communications between

the LLC and its counsel made in confidence about a matter for which counsel was

being professionally consulted. (Resp. Br. Opp. Pls.’ Mot. Compel 3–5.)

26. However, Plaintiffs contend that the operating agreement—at least,

once it was final—was not intended to be a confidential document. Moreover, they

argue that even if drafts of the operating agreement are protected by the attorney-

client privilege, any such privilege has been waived because Defendants put advice

they received from counsel “at issue.” Alternatively, they argue that either the

fiduciary exception or the crime-fraud exception to the attorney-client privilege

requires disclosure of the drafts. (Pls.’ Br. Supp. Mot. Compel 8–15.) The Court

addresses these arguments in turn.

A. Confidential Communication

27. A communication intended to be disclosed to third parties is not

confidential. Window World of Baton Rouge, LLC, 2019 NCBC LEXIS 54, at *73. In

2 The Court notes that Mr. Harris was also privy to these communications. However, no

party has raised an issue regarding waiver or application of the common-interest doctrine

and, therefore, the Court will not raise one.

many instances, however, determining when one’s intention regarding a draft

document changes from an intention to seek and receive attorney advice to an

intention to publish the document to others can be difficult. In this case, however, e-

mail communications accompanying the drafts, beginning with the first, indicate that

they were sent between clients and counsel for discussion and revision. Even those

portions of the drafts that went through the process unchanged and became part of

the final operating agreement were first subject to attorney scrutiny. Other portions

of the drafts reflect legal advice in the form of marginal comments and redline edits

made by counsel. Given this e-mail traffic revealing that Defendants’ intent was not

to publish the drafts until their counsel had fully advised them regarding revisions,

the drafts are protected by the attorney-client privilege. Morris, 2011 NCBC LEXIS

34, at *21–22 (noting in dicta that “drafts of potential [contracts] prepared by counsel

for client review would be privileged up to the point at which they were intended to

be given” to a third party); cf. Window World of Baton Rouge, LLC, 2019 NCBC LEXIS

54, at *75–76 (involving drafts that appear to have been intended for disclosure to

third parties).

B. Implicit (Subject Matter) Waiver: Putting Legal Advice at Issue

28. Plaintiffs argue that Defendants implicitly waived the privilege by

“putting at issue” the advice received from counsel regarding the legality of the

process used to transition to the New Entities. Specifically, they point to a 6 April

2020 e-mail from several Board members, including Jurgens and Russell, telling the

membership: “It’s important to know the attorney has reviewed the

restructuring initiative and confirmed that it is being done in a manner that

complies with applicable laws and regulations.” (Pls.’ Br. Supp. Mot. Compel,

at Ex. 12, ECF No. 79.12.)

29. Given the import of the privilege and the fact that Defendants did not

expressly state their intention to waive the privilege, the Court treads cautiously in

the area of implied waiver. See, e.g., In re Keeper of Records, 348 F.3d 16, 23 (1st Cir.

2003) (explaining that the evaluation of claims for implied waiver of attorney-client

privilege “demands a fastidious sifting of the facts and a careful weighing of the

circumstances”); United States v. Desir, 273 F.3d 39, 46 (1st Cir. 2001) (“Implied

waiver requires a careful weighing of the facts and ‘should not be applied

cavalierly.’ ”) (quoting In re Grand Jury Proceedings, 219 F.3d 175, 186 (2d Cir.

2000)).

30. This Court uses a balancing approach to determine the scope of subject

matter waiver so that the result is remedial, rather than punitive. Technetics Grp.

Daytona, Inc. v. N2 Biomedical, LLC, 2018 NCBC LEXIS 116, 17–19 (N.C. Super. Ct

8 Nov. 2018). Under this approach, when one party waives the privilege to use a

portion of the party’s communications with the party’s attorney to advance a position

in litigation, the court broadens the waiver to eliminate any unfair advantage. “On

the other hand, ‘when the disclosure does not create an unfair advantage, courts

typically limit the waiver to the communications actually disclosed.’ ” Id. at *18

(quoting Teleglobe Commc’ns v. BCE, Inc., 493 F.3d 345, 361 (3d Cir. 2007)).

31. In this case, the e-mail purporting to put attorney advice at issue is

dated 6 April 2020 and refers to the past (“. . . the attorney has reviewed . . . and

confirmed”). The earliest date of the documents at issue—drafts of the Operating

Agreement and accompanying communications with counsel—is 9 April 2020.

Consequently, the e-mail above, which predates the documents at issue, could not

have referred to them and, therefore, cannot be considered a waiver as to them.

Indeed, the documents produced for in camera review do not express an opinion

regarding whether the Association’s restructuring efforts complied with the law or

not. Moreover, it is unclear who “the attorney” referenced is and whether that person

is the same counsel consulted with respect to the LLC’s operating agreement.

32. On these facts the Court finds that the 6 April 2020 e-mail referencing

a review done by an attorney at some point in the past does not result in waiver of

the privilege with respect to subsequent drafts of the LLC’s operating agreement and

the accompanying attorney-client communications.

C. Fiduciary Exception

33. Plaintiffs contend that attorneys from Wilson Ratledge represented both

the Association and the LLC. Therefore, they argue, Plaintiffs, as members of the

Association’s Board, should be privy to all communications with Wilson Ratledge,

including the redlined drafts of the LLC’s operating agreement and the accompanying

e-mail communications. (Reply Br. Supp. Mot. Compel 5, ECF No. 85.)

34. Defendants respond that the documents and communications at issue

only relate to the LLC and not the Association, and that the lawyers were working

only for the LLC at the time. They further argue that, in any event, the lawyers owed

no fiduciary duty to these particular Plaintiffs who were not members of the

Association’s Board at the time of the communications. (Resp. Br. Opp. Pls.’ Mot.

Compel 5–7.)

35. The fiduciary exception has not been recognized by the North Carolina

state courts. However, non-binding authority suggests that in some circumstances a

shareholder in a derivative action may access documents that a corporation claims

are protected from the attorney-client privilege if the shareholder shows good cause

as to why the privilege should not apply. See, e.g., Marketel Media, Inc. v.

Mediapotamus, Inc., No. 5:13-CV-427-D, 2015 U.S. Dist. LEXIS 76523, at *12

(E.D.N.C. 11 June 2015) (“In some shareholder derivative contexts, the so-called

fiduciary exception to the attorney-client privilege can require, for good cause,

disclosure of communications covered by the corporation's privilege to dissident

shareholders.”).

36. However, in jurisdictions that have recognized the fiduciary exception,

“courts have generally found the fiduciary exception inapplicable to communications

made during a time when the parties’ interests were not aligned or when the subject

of the communications did not involve matters that a fiduciary would owe a duty to

disclose to a beneficiary.” Herrmann v. Rain Link, Inc., No. 11-1123-RDR, 2012 U.S.

Dist. LEXIS 50553, at *6 (D. Kan. 11 Apr. 2012).

37. Thus, even if the exception were to be recognized in this State’s

jurisprudence, it is undisputed that the parties’ interests were not aligned when the

communications occurred. (Pls.’ Br. Supp. Mot. Compel 3–6.) Accordingly, the Court

concludes that the fiduciary exception is inapplicable.

D. Crime-Fraud Exception

38. Plaintiffs contend that the crime-fraud exception to the attorney-client

privilege applies because the communications at issue were generated as part of an

effort to carry out fraudulent activity. Specifically, Plaintiffs allege that counsel was

retained to assist Defendants’ effort to “paper over” Defendants’ secret, true

intentions with respect to the LLC’s ownership and its finances.

39. Defendants contend that preparation of the Operating Agreement was

not activity in furtherance of fraud but was merely to record in written form what

Defendants contend had already been decided. Russell and Jurgens argue that, prior

to engaging in the drafting process with counsel, they were forthcoming about their

position with respect to both the ownership of the LLC and its funding but that

Plaintiffs simply did not agree with them. In short, Defendants assert that the

operating agreement does nothing more than reflect their stated position. They

contend, therefore, that Plaintiffs have not made a showing sufficient to meet their

burden for asserting the crime-fraud exception.

40. The crime-fraud exception eliminates attorney-client privilege

protection when a client uses legal representation for an improper purpose such as to

commit or facilitate a crime or fraud. Miller, 357 N.C. at 335 (“the attorney-client

privilege cannot serve as a shield for fraud or as a tool to aid in the commission of

future criminal activities; if a communication is not ‘made in the course of seeking or

giving legal advice for a proper purpose,’ it is not protected.”) (quoting State v.

Jennings, 333 N.C. 579, 611 (1993)) (citation and quotation marks omitted); see also

State v. Davenport, 227 N.C. 475, 498 (1947) (“the communication must have been

made in the course of seeking legal advice for a proper purpose; hence, no privilege

exists where advice is sought in aid of a contemplated violation of law.”); Window

World of Baton Rouge, LLC, 2019 NCBC LEXIS 54, at *39–40.

41. Unlike the fiduciary exception, North Carolina courts have recognized

the crime-fraud exception to the attorney-client privilege. See Miller, 357 N.C. at 335

(noting that “[w]hen certain extraordinary circumstances are present, the need for

disclosure of attorney-client communications will trump the confidential nature of

the privilege”) (citing United States v. Zolin, 491 U.S. 554 (1989)); Window World of

Baton Rouge, LLC, 2019 NCBC LEXIS 54, at *39. Even so, the case law defining the

contours of the exception is limited. Window World of Baton Rouge, LLC, 2019 NCBC

LEXIS 54, at *42.

42. As explained by Chief Judge Bledsoe in Window World of Baton Rouge,

LLC, the party invoking the crime-fraud exception must make a prima facie showing

that otherwise privileged communications fall within the exception. Id. at *43

(citation omitted). “The invoking party must show that (1) the client was engaged in

or planning a criminal or fraudulent scheme when he sought the advice of counsel to

further the scheme, and (2) the documents containing the privileged materials bear

a close relationship to the client's existing or future scheme to commit a crime or

fraud.” Id. (citation and quotation marks omitted). “Prong one of this test is satisfied

by a prima facie showing of evidence that, if believed by a trier of fact, would establish

the elements of some violation that was ongoing or about to be committed.” Id. at

*43–44. “Prong two may be satisfied with a showing of a close relationship between

the attorney-client communications and the possible criminal or fraudulent activity.”

Id. at *44.

43. Given the importance of the attorney-client privilege to North Carolina’s

jurisprudence and the resulting scrutiny that should be applied to any exceptions,

Miller, 357 N.C. at 331, parties advancing the crime-fraud exception must prove the

prima facie case by a preponderance of the evidence. Window World of Baton Rouge,

2019 NCBC LEXIS 54 at *45–46 (citing In re Napster Copyright Litig., 479 F.3d 1078,

1095 (9th Cir. 2007) (“requiring a moving party to establish the existence of the crime-

fraud exception by a preponderance of the evidence is consonant with the importance

of the attorney-client privilege.”).

44. Furthermore, the crime-fraud exception applies only when the client has

engaged the services of a lawyer “in furtherance of future illegal conduct.” Zolin, 491

U.S. at 556 (emphasis added); see also In re Grand Jury Subpoena, 220 F.R.D. 130,

151–52 (D. Mass. 2004). Past or completed crimes or frauds do not trigger the

exception. Zolin, 491 U.S. at 556.

45. At the time the communications in this case occurred, Defendants had

already communicated their intention to be the only members of the LLC—at least

for the time-being—and to finance the LLC and the Foundation with Association

funds. While they may or may not have fully understood the legal ramifications

resulting from the transfer of Association funds at the time the transfer occurred,

Defendants point out that the operating agreement that was thereafter created

clearly reflected the distribution to the New Entities. Accordingly, Plaintiffs have not

alleged that the attorneys were consulted to facilitate criminal or fraudulent activity

that was ongoing or was to take place in the future.

46. Plaintiffs’ reliance on United States v. Gorski, 807 F.3d 451 (1st Cir.

2015), is unavailing. In Gorski, the defendant engaged counsel to create corporate

documents crafted to appear as though they were signed before the date of applicable

regulatory amendments so that the defendant could perpetuate a false impression

with the U.S. Small Business Association. After he was indicted and the government

issued subpoenas for documents, the defendant withheld certain documents

containing communications with his counsel on the basis of the attorney-client

privilege. The prosecution argued that, even if the documents were covered by the

privilege, the crime-fraud exception applied because the defendant had used the

attorneys’ work in furtherance of his illegal scheme. The district court agreed that

the exception applied because there was a reasonable basis to believe that the

attorney-client communications “were intended by the client to facilitate or conceal

the criminal or fraudulent activity.” Id. at 461. The First Circuit affirmed. 3 Id. at

462.

3 Although the First Circuit’s “reasonable basis” standard differs from the “preponderance

of the evidence” standard adopted herein, this difference is not determinative of the

outcome in the case before the Court.

47. As stated above, in this case the attorney-client communications

occurred after Defendants made plain their position that the LLC would be owned,

at least initially, by them and funded by monies from the Association. There is no

evidence to suggest that the attorneys were engaged to help Plaintiffs conceal this

position or otherwise to create an ongoing subterfuge. To the contrary, the operating

agreement at issue documents Defendants’ position. Whether or not the Association

Board or its members were aware of these aspects of the restructuring at earlier, key

times, is a different issue.

48. Therefore, the Court concludes that, at least as to the attorney-client

communications at issue, Plaintiffs have failed to carry their burden to show by a

preponderance of the evidence that the crime-fraud exception applies to defeat the

assertion of attorney-client privilege over drafts of the operating agreement.

E. Work Product Doctrine

49. As a governing document for the LLC, the operating agreement has a

distinct business purpose separate and apart from any concern about possible

litigation. Stated differently, although the threat of litigation may have been in the

air, the independent business reason for drafting the operating agreement to govern

the LLC strips the resulting drafts from work product protection. Therefore, any

drafts not protected by the attorney-client privilege would not be shielded from

discovery by the work product doctrine. Here, however, the attorney-client privilege

insulates the drafts at issue from discovery.

Related E-mail Communications

50. Defendants claim that e-mails accompanying and related to the draft

Operating Agreements sent among members of the group of Russell, Jurgens, various

counsel at Wilson Ratledge, and Donald Harris are protected from discovery by the

attorney-client privilege.

51. A number of the e-mails are in the nature of “transmittal”

communications. When the e-mails do not furnish or request legal advice and are

merely transmittal documents, they are not attorney-client privileged

communications. Window World of Baton Rouge, LLC, 2019 NCBC LEXIS 54, at

*68–72 (gathering cases). Accordingly, the Court finds that e-mails identified as

Exhibit N, Exhibit P, and Jurgens-Russell Exhibit C are subject to discovery and

should be produced.

52. On the other hand, more substantive e-mails are protected by the

privilege. There is no dispute that Wilson Ratledge counsel represented the LLC,

(Reply Br. Supp. Mot. Compel 5 (arguing that Wilson Ratledge counsel represented

both the Association and the LLC)), the communications were intended to be

confidential and relate to a matter about which counsel was being professionally

consulted, and the communications were made in the course of giving or seeking legal

advice for a proper purpose. For the reasons discussed above, Plaintiffs’ arguments

regarding waiver or application of an exception to the privilege does not change the

result. The attorney-client privilege protects these communications. Therefore, e-

mails identified as Exhibit A, Exhibit C, Exhibit E, Exhibit H, Exhibit K, Exhibit M,

Jurgens-Russell Exhibit A, and Jurgens-Russell Exhibit B are privileged and are not

subject to discovery.

III. CONCLUSION

53. For the reasons state above, Plaintiffs’ Motion to Compel is GRANTED

in part and DENIED in part. The Court ORDERS Defendants to produce e-mails

identified as Exhibit N, Exhibit P, and Jurgens-Russell Exhibit C within ten days

from entry of this Order. The remaining documents are protected by the attorney-

client privilege and shall not be produced.

IT IS SO ORDERED this the 5th day of October, 2021.

/s/ Julianna Theall Earp

Julianna Theall Earp

Special Superior Court Judge

for Complex Business Cases