Richard L. Salberg, M.D. and David Pinkoski v. Genworth Financial, Inc. ( 2017 )

EFiled: Jul 27 2017 02:06PM EDT
Transaction ID 60906016
Case No. 2017-0018-JRS
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
RICHARD L. SALBERG, M.D. and :
DAVID PINKOSKI, :
:
Plaintiffs, :
:
v. : C.A. No. 2017-0018-JRS
:
GENWORTH FINANCIAL, INC., :
:
Defendant. :
MEMORANDUM OPINION
Date Submitted: May 1, 2017
Date Decided: July 27, 2017
Jessica Zeldin, Esquire and P. Bradford deLeeuw, Esquire of Rosenthal, Monhait &
Goddess, P.A., Wilmington, Delaware; Judith S. Scolnick, Esquire, Thomas L.
Laughlin IV, Esquire and Donald A. Broggi, Esquire of Scott+Scott, Attorneys At
Law, LLP, New York, New York; David R. Scott, Esquire of Scott+Scott, Attorneys
at Law, LLP, Colchester, Connecticut; Robert C. Schubert, Esquire, Willem F.
Jonckheer, Esquire and Dustin L Schubert Esquire of Schubert Jonckheer & Kolbe
LLP, San Francisco, California; Robert B. Weiser, Esquire, Brett D. Stecker, Esquire
and James M. Ficaro, Esquire of The Weiser Law Firm P.C., Berwyn, Pennsylvania;
Michael I. Fistel, Jr., Esquire of Johnson & Weaver, LLP, Marietta, Georgia; and
Corey D. Holzer, Esquire of Holzer & Holzer, LLC, Atlanta, Georgia, Attorneys for
Plaintiffs.
Daniel A. Dreisbach, Esquire, Srinivas M. Raju, Esquire and Sarah A. Clark, Esquire
of Richards, Layton & Finger, P.A., Wilmington, Delaware, and Greg A Danilow,
Esquire, Caroline Hickey Zalka, Esquire and Evert J. Christensen, Esquire of Weil,
Gotshal & Manges LLP, New York, New York, Attorneys for Defendant.
SLIGHTS, Vice Chancellor
Plaintiffs, Richard L. Salberg, M.D. and David Pinkoski, filed a Verified
Complaint Pursuant to 8 Del C. § 220 (the “Complaint”) to compel Defendant,
Genworth Financial, Inc. (“Genworth” or the “Company”), to produce unredacted
copies of documents that Genworth claims are subject to the attorney-client
privilege. These same Plaintiffs, represented by the same counsel, previously filed
derivative claims in this Court alleging breaches of fiduciary duties by Genworth’s
board of directors and several of its officers (the “Derivative Action”). The
derivative claims are still pending.1
On October 23, 2016, after the Derivative Action was filed, Genworth
announced that it had agreed to be acquired by China Oceanwide Holdings Group,
Co., Ltd. (“China Oceanwide”) (the “Merger”). Shortly after the announcement of
the Merger, Plaintiffs made a demand on the Company to produce documents they
believed would reflect whether Genworth’s board of directors considered the value
of the derivative claims in negotiating the merger consideration with China
Oceanwide. Genworth responded to the demand and produced hundreds of pages of
responsive documents. Many of these documents, however, were heavily redacted
1
The parties have agreed that the Court’s decision on a motion to dismiss the Derivative
Action, sub judice, should be delayed based on the expectation that the Merger, if it passes
regulatory approvals, would close sometime this summer or early fall. See Genworth Fin.,
Inc. Consol. Deriv. Litig., C.A. No. 11901-VCS, Letter to the Honorable Joseph R.
Slights III from Srinivas M. Raju, dated May 5, 2017 (Trans. ID 60560783).
1
in keeping with Genworth’s assertion that their contents were protected by the
attorney-client privilege.
Plaintiffs do not dispute that the Company likely has produced all documents
responsive to their demand. The difficulty, of course, is that the documents are of
little value to Plaintiffs given their heavily redacted state. To address this impasse,
Plaintiffs invoke the well-known Garner fiduciary exception to the attorney-client
privilege to argue that Genworth must produce unredacted documents.2 The dispute
between the parties, therefore, raises only the narrow legal issue of whether the
Garner exception applies in these circumstances.
This is my decision after “trial” on a stipulated paper record. For the reasons
that follow, I conclude that Garner does not aid the Plaintiffs in this instance to
overcome Genworth’s invocation of the attorney-client privilege. I agree with
Plaintiff that most of the factors identified by Garner as relevant when assessing
whether a fiduciary exception to the privilege should apply favor their position here.
Even so, these factors are neither all-inclusive nor dispositive in every case. The
attorney-client privilege does not lend itself to mechanistic analysis; the court’s
2
Garner v. Wolfinbarger, 430 F.2d 1093 (5th Cir. 1970), cert denied, 401 U.S. 974 (1971).
Just as “Daubert” is now well-known to trial lawyers by that single name to personify the
court’s mandated gatekeeping function with respect to expert evidence, see Daubert v.
Merrell Dow Pharm., 509 U.S. 579 (1993), “Garner” is nearly as well-known to corporate
litigators to embody the rule that, in certain instances, the attorney-client privilege will be
unavailable to corporate fiduciaries who are defending claims brought against them by
those to whom the fiduciary duty is owed.
2
assessment and enforcement of the privilege must take into account the relevant and
unique circumstances of each case. Given that Plaintiff’s demand for books and
records seeks information directly related to separate claims they are actively
litigating against the parties who have invoked the privilege, I am satisfied that they
have failed to show good cause, at least for now, to overcome the privilege.
I. BACKGROUND
The limited issue joined for decision in this action has enabled the parties to
stipulate to most of the relevant facts. These are my findings based on the stipulated
paper record submitted as evidence at trial.3
A. Parties
Plaintiffs, Richard L. Salberg, M.D. and David Pinkoski, hold and have
continuously held shares of Genworth common stock since October 2008 and April
2009, respectively. Defendant, Genworth, is a Delaware corporation with its
principal executive offices in Richmond, Virginia. The Company offers a variety of
financial services but specializes in writing several lines of insurance, including life,
long-term care and mortgage insurance. The Company’s common stock trades on
the New York Stock Exchange under the symbol “GNW.”
3
See Ruggles v. Riggs, 477 A.2d 697, 705–06 (Del. 1984) (“[I]t has long been a principles
of law in this State that . . . a judge may take judicial notice of the record and pleadings in
the case before him . . .”).
3
B. The Derivative Action
Almost a year before making their Section 220 demand, the Plaintiffs in this
action, represented by the same counsel, filed a Verified Stockholder Derivative
Complaint in this Court on January 13, 2016. The complaint contained two counts
for breach of fiduciary duty against the Genworth board of directors and several of
its officers relating to alleged false and misleading statements made about the
Company’s Long-Term Care insurance business and related insurance reserves as
well as its Australian mortgage insurance business. After amending their complaint
twice, the operative complaint became the Verified Second Amended Stockholder
Derivative Complaint filed on August 17, 2016.
Defendants filed a motion to dismiss on September 16, 2016. Briefing on the
motion was scheduled to be completed on December 2, 2016. A little more than
three weeks before that date, Plaintiffs filed a motion to stay. Their basis for seeking
a stay was that the Company had announced just a few weeks earlier that it would
be acquired by China Oceanwide in an all-cash transaction. The concern was that
Plaintiffs’ standing to pursue the Derivative Action would be extinguished by the
Merger prior to the adjudication of the motion to dismiss. Defendants opposed the
requested stay and urged the Court to take up their motion to dismiss. Ultimately, I
denied the motion to stay both because the serious allegations against the Genworth
officers and directors had been looming for quite some time and because the parties
4
had already substantially completed briefing on the motion to dismiss. After an
amendment to the case scheduling order, oral argument on the motion to dismiss was
held on February 20, 2017.
C. The Section 220 Action
Shortly after the announcement of the Merger in October 2016, and while the
parties were briefing the motion to dismiss the Derivative Action, Plaintiffs made a
Section 220 demand on Genworth by letter dated November 2, 2016. Plaintiffs
sought books and records that would allow them to investigate the manner in which
the Genworth board of directors valued the claims asserted in the Derivative Action
in connection with the Merger. In response, the Company did not contest that
Plaintiffs had satisfied the form and manner requirements of Section 220 and had
stated a proper purpose. The Company did object to the scope of the demand but
agreed to produce the minutes of certain meetings where the Genworth board
discussed the value of the derivative claims in the context of the Merger.
The parties engaged in several meet-and-confer sessions in November 2016
during which the Company agreed to produce additional board and subcommittee
meeting minutes as well as all materials presented to the board concerning the value
of the claims asserted in the Derivative Action. In total, Genworth produced
approximately 700 pages of documents to Plaintiffs. These documents, however,
were heavily redacted based on assertions of attorney-client privilege. After
5
discussions between counsel regarding the redactions were not productive, the
Company maintained its assertion of privilege and provided Plaintiffs with a
privilege log on January 11, 2017.
D. Procedural History
Plaintiffs filed their Section 220 Complaint on January 12, 2017, seeking an
order compelling Genworth to permit Plaintiffs to inspect unredacted copies of the
books and records, or portions thereof, withheld on privilege grounds. The parties’
pretrial briefs presented a single issue for decision: whether the Garner fiduciary
exception should preclude Genworth from redacting documents for privilege. The
trial was held on May 1, 2017.
II. ANALYSIS
A. The Attorney-Client Privilege and the Garner Fiduciary Exception
It is well settled in our law that the attorney-client privilege is “critical to
encourage full and frank communication between attorneys and their clients and
thereby promote broader public interests in the observance of law and administration
6
of justice . . .”4 This rationale holds true in cases where the client is a corporation.5
The attorney-client privilege, rooted in common law principles, is now codified in
Delaware Rule of Evidence 502(b), which provides:
A client has a privilege to refuse to disclose and to prevent any other
person from disclosing confidential communications made for the
purpose of facilitating the rendition of professional legal services to the
client (1) between the client or the client’s representative and the
client’s lawyer or the lawyer’s representative, (2) between the lawyer
and the lawyer’s representative, (3) by the client or the client’s
representative or the client’s lawyer or a representative of the lawyer to
a lawyer or a representative of a lawyer representing another in a matter
of common interest, (4) between representatives of the client or
between the client and a representative of the client, or (5) among
lawyers and their representatives representing the same client.6
While our law embraces the attorney-client privilege and recognizes its
importance to the proper administration of justice, it cannot be forgotten that the
privilege represents “an exception to the usual rules requiring full disclosure and
[that] its scope can be limited where circumstances so justify.”7 To be sure, “the
4
Wal-Mart Stores, Inc. v. Indiana Elec. Workers Pension Trust Fund IBEW (“Wal-Mart
II”), 95 A.3d 1264, 1278 (Del. 2014) (quoting Upjohn Co. v. United States, 449 U.S. 383,
389 (1981)) (internal quotation marks omitted). See also Riggs Nat. Bank of Washington,
D.C. v. Zimmer, 355 A.2d 709, 713 (Del. Ch. 1976) (“Thus, the purpose of the attorney-
client privilege is to foster the confidence of the client and enable him to communicate
without fear in order to seek legal advice. This is indeed important.”) (citing Valente v.
Pepsico, Inc., 68 F.R.D. 361, 367 (D. Del. 1975)).
5
Id.6
D.R.E. 502(b).
7
Riggs, 355 A.2d at 713 (internal citation omitted).
7
privilege is not absolute.”8 Indeed, this reality is explicitly recognized in DRE 502
itself.9
In addition to the codified exceptions to the attorney-client privilege,
Delaware recognizes “an oft-invoked exception [that] applies in suits by minority
shareholders.”10 This exception—the celebrated “Garner fiduciary exception”—
recognizes that “where the corporation is in suit against its stockholders on charges
of acting inimically to stockholder interests, protection of those interests as well as
those of the corporation and of the public require that the availability of the privilege
be subject to the right of the stockholders to show ‘good cause’ why the privilege
should not apply.”11 Our Supreme Court has adopted the Garner fiduciary exception
in both plenary actions and Section 220 actions.12
In keeping with the important policy rationales that justify the attorney-client
privilege, “the Garner fiduciary exception to the attorney-client privilege is narrow,
8
Grimes v. DSC Commc’ns Corp., 724 A.2d 561, 568 (Del. Ch. 1998) (internal quotation
marks and citation omitted).
9
D.R.E. 502(d) (listing exceptions to the rule of privilege).
10
Grimes, 724 A.2d at 568 (internal quotation marks and citation omitted).
11
Id. (citing Garner, 430 F.2d at 1103–04).
12
Wal-Mart II, 95 A.3d at 1278.
8
exacting, and intended to be very difficult to satisfy.”13 The plaintiff stockholder
must carry a burden of showing “good cause” to overcome the privilege.14
Genworth’s sole basis for refusing to produce unredacted copies of the books
and records Plaintiffs seek here is that Plaintiffs have failed to show “good cause”
to overcome the otherwise properly invoked attorney-client privilege. Plaintiffs, of
course, disagree. In resolving this dispute, I have remained mindful of our Supreme
Court’s admonition that the goal of the “good cause” inquiry is to achieve “a proper
balance between legitimate competing interests.”15
B. The Good Cause Factors
Garner sets forth an illustrative, though not exhaustive, list of factors a court
may consider when determining whether good cause exists to invoke the fiduciary
exception. Garner lists the following factors:
(1) the number of shareholders and the percentage of stock they
represent; (2) the bona fides of the shareholders; (3) the nature of the
shareholders' claim and whether it is obviously colorable; (4) the
apparent necessity or desirability of the shareholders having the
information and the availability of it from other sources; (5) whether, if
the shareholders' claim is of wrongful action by the corporation, it is of
action criminal, or illegal but not criminal, or of doubtful legality;
(6) whether the communication related to past or to prospective actions;
(7) whether the communication is of advice concerning the litigation
itself; (8) the extent to which the communication is identified versus the
13
Id.
14
In re Lululemon Athletica Inc. 220 Litig., 2015 WL 1957196, at *10 (Del. Ch. Apr. 30,
2015).
15
Wal-Mart II, 95 A.3d at 1278.
9
extent to which the shareholders are blindly fishing; (9) the risk of
revelation of trade secrets or other information in whose confidentiality
the corporation has an interest for independent reasons.16
The court’s purpose in considering these factors is to conduct a “balancing
test . . . to determine whether the balance tips in favor of disclosure or non-
disclosure.”17 While any or all of these factors, among others, may be relevant in
the court’s analysis, Delaware courts have identified three as having “particular
significance.”18 They are: “(1) the colorability of the claim; (2) the extent to which
the communication is identified versus the extent to which the shareholders are
blindly fishing; and (3) the apparent necessity or desirability of shareholders having
the information and availability of it from other sources.”19 In addition to these three
16
Garner, 430 F.2d at 1104. Despite the relatively recent express adoption of the Garner
framework by our Supreme Court for both plenary and Section 220 actions, Delaware
courts have a long history of utilizing the framework as a “workable and logical” approach
to analyzing claims of attorney-client privilege in the context of stockholder litigation. See
Lee v. Engle, 1995 WL 761222 (Del. Ch. Dec. 15, 1995) (“Although not a binding case,
this Court adopted and consistently has followed Garner v. Wolfinbarger. . .”); Zirn v. VLI
Corp., 621 A.2d 773, 782–83 (Del. 1993) (determining whether plaintiff was entitled to
production of documents prepared in anticipation of litigation by analyzing “good cause”
factors set forth in Garner); Deutsch v. Cogan, 580 A.2d 100, 105 (Del. Ch. 1990) (stating
that while not binding on this court, Delaware courts have consistently followed Garner);
Sealy Mattress Co. of New Jersey, Inc. v. Sealy Inc., 1987 WL 12500 (Del. Ch. June 19,
1987) (following the Garner framework for determining whether plaintiffs have shown
“good cause” that the attorney-client privilege should not apply).
17
In re Fuqua Indus., Inc., 2002 WL 991666, at *4 (Del. Ch. May 2, 2002) (quoting
Deutsch, 580 A.2d at 105).
18
Id.19
Id. (citing Sealy, 1987 WL 12500, at *3); de Vries v. Diamante Del Mar, L.L.C., 2015
WL 3534073, at *7 (Del. Ch. June 3, 2015) (Master’s Report), adopted, 2015 WL 3902623(Del. Ch. June 18, 2015).
10
factors, the parties have focused heavily on Garner’s seventh factor: “whether the
communication is of advice concerning the litigation itself.”
C. Plaintiffs have Failed to Show “Good Cause” under Garner
Genworth takes issue with Plaintiffs on only two of the relevant factors. For
instance, Genworth does not dispute that Plaintiffs have precisely identified the
documents at issue and thus are not blindly fishing. Likewise, Genworth does not
contend that Plaintiffs have other sources from which they can obtain the
information they seek. Instead, Genworth pushes back on the colorability of the
Plaintiffs’ claim as well as whether the privileged communications reflect “advice
concerning the litigation itself.” I address these arguments in turn.
1. Plaintiffs Have Stated a Colorable Claim
Genworth argues that Plaintiffs have failed to allege an “obviously colorable”
claim for breach of fiduciary duty relating to the board’s analysis of the derivative
claims when considering the Merger. In this regard, Genworth notes that under
Corwin v. KKR Financial Holdings LLC,20 the fully informed and uncoerced vote of
stockholders would “cleanse” all price and process claims arising from the Merger.
Genworth then contends that even if the vote did not cleanse the price and process
claims, Plaintiffs have not alleged sufficient facts to support a finding that the
directors breached their fiduciary duties. Plaintiffs counter by invoking the proper
20
125 A.3d 304 (Del. 2015).
11
purpose standard under Section 220 and argue that they have “clearly stated a
credible basis from which the Court may infer possible mismanagement or
wrongdoing.”21
In the context of this Section 220 action, I agree with Plaintiffs that the
“colorability” of their claim must be assessed under the standard that applies here—
“credible basis”—a standard that has notoriously been described as “the lowest
possible burden of proof.”22 Plaintiffs have alleged in the Derivative Action that
Genworth’s fiduciaries failed to oversee, detect and prevent fraudulent conduct in
two of Genworth’s business lines. The Company maintains that its board ascribed
no value to those claims when negotiating for merger consideration. Plaintiffs have
challenged that position and, inter alia, point to the serious allegations of systemic
fraud that have been levelled against the Company in connection with its long-term
care insurance and Australian mortgage insurance lines. Given the serious nature of
the underlying conduct, and the significant harm that Plaintiffs allege to have been
21
Pls.’ Opening Pre-Trial Br. 11. See de Vries, 2015 WL 3534073, at *7 (holding that
when a stockholder asserts corporate wrongdoing as its proper purpose for demanding
books and records the stockholder need only state a ‘credible basis’ from which the Court
may infer possible mismanagement and wrongdoing.”); see also, Lululemon, 2015 WL
1957196, at *11 (same).
22
Seinfeld v. Verizon Commc’ns, Inc., 909 A.2d 117, 123 (Del. 2006) (“[T]he ‘credible
basis’ standard sets the lowest possible burden of proof. The only way to reduce the burden
of proof further would be to eliminate any requirement that a stockholder show some
evidence of possible wrongdoing.”) (emphasis in original).
12
caused by the failure of oversight with respect to this conduct, Plaintiffs question the
Company’s assertion that its board deemed the derivative claim to be worthless.
To be clear, the strength of Plaintiffs’ claims in the Derivative Action as
measured against Chancery Rule 12(b)(6) or Rule 23.1 standards is not at issue here.
The question is whether Plaintiffs have articulated a credible basis from which the
Court may infer possible mismanagement or wrongdoing in connection with the
Genworth board’s evaluation of the derivative claims during the negotiation of the
Merger. I am satisfied that they have. Accordingly, in the context of this Section
220 action, Plaintiffs have also demonstrated a colorable claim under Garner.23
2. The Communications Contain Advice Regarding the Derivative
Action
Genworth next argues that the communications that have been redacted from
the produced documents reflect advice concerning the litigation itself. Plaintiffs’
initial response is that this Garner factor does not fit here because the advice the
board received related to the Derivative Action, not the direct breach of fiduciary
duty action they are contemplating with respect to the Merger. Genworth does not
directly address this argument but instead focuses on the impropriety of derivative
23
I note that Genworth did not initially object to producing documents to Plaintiffs on the
ground that Plaintiffs had not stated a proper purpose or a credible basis to infer
wrongdoing or mismanagement. That argument came later in response to the filing of this
Section 220 action.
13
plaintiffs securing information through a Section 220 action that they inarguably
could not secure through discovery in the underlying derivative litigation.
At first glance, it is difficult to quarrel with Plaintiffs’ reading of Garner’s
seventh factor. The litigation to which the privileged communications directly relate
is not this litigation or the litigation Plaintiffs are thinking of bringing. But the
Garner factors are not “talismanic.”24 In every case, the court must make “a
particular judgment . . . in light of the general role played by the lawyer-client
privilege, and all of the specifics of the case, whether production of withheld
materials is warranted.”25 Here, these same Plaintiffs are the plaintiffs in the
Derivative Action. They are represented in both actions by the same counsel. They
have initiated this action to gain access to privileged documents that they undeniably
would not have access to through discovery in the Derivative Action.26 While I take
Plaintiffs at their word that they seek the documents to investigate potential direct
claims relating to the Merger, the fact remains that the documents undoubtedly will
contain the mental impressions and assessments of the defendants and defense
counsel in the Derivative Action regarding the strengths and weaknesses of the
24
Cole v. Wilmington Materials, Inc., 1993 WL 257415, at * 2 (Del. Ch. July 1, 1993).
25
Id. See also Tabas v. Bowden, 1982 WL 17820, at *2 (Del. Ch. Feb. 16, 1982) (“[e]ach
case involving the attorney-client privilege turns on its own facts . . .”).
26
Cf. Khanna v. Covad Comm’cns Gp., Inc., 2004 WL 187274, at *9 (Del. Ch. Jan. 23,
2004) (“A Section 220 action is not a substitute for discovery under the rules of civil
procedure.”).
14
derivative claims. The Company’s board is understandably concerned that the
production of these most sensitive documents will give Plaintiffs an unfair advantage
in the Derivative Action. One can hardly blame them.
Plaintiffs attempt to allay this concern by noting that all constituencies expect
the Merger to close during the summer or early fall of this year and, when it does
close, Plaintiffs’ derivative standing will be extinguished. Genworth, in response,
poses the question: why not wait to see if the Merger closes before determining
whether privileged books and records that reflect a party’s analyses of pending
claims should be produced to the adverse party? Plaintiffs’ best argument against
waiting is that Genworth is in the midst of negotiating a settlement of related
securities claims brought in the Eastern District of Virginia and that the release of
those claims could prejudice their rights to proceed here on a direct claim relating to
the Merger. They also contend that they might need access to the privileged
information in order to oppose any proposed settlement. During closing arguments,
Genworth’s counsel, also counsel to the Company in the Virginia securities action,
was quick with the riposte that any releases sought in the securities action “are going
to relate to Section 14 (a), and 14 (a) alone.”27 Counsel continued, “[w]e do not
27
Trial Tr. 29.
15
believe the Court could grant anything more because the claims didn’t have anything
more, and we’re not going to ask for anything more.”28
I noted at argument that Genworth’s counsel’s representations regarding the
scope of the settlement in the securities case reflected “an important concession.”29
With that concession, I am satisfied that Plaintiffs do not require access to the
Company’s privileged attorney-client communications regarding the strengths and
weaknesses of Plaintiffs’ derivative claims in order to protect themselves or other
stockholders in connection with the settlement of the federal securities action. There
is simply no reason, then, not to wait to see what happens with the Merger. If the
transaction closes, and the Derivative Action goes away, then there will be ample
time for Plaintiffs to discover whether the Genworth board adequately considered
the value of the derivative claims when negotiating merger consideration should they
choose to bring direct claims relating to the Merger. If, for some reason, the Merger
does not close, then there will be no basis under Section 220 or otherwise to compel
the defendants in the Derivative Action to produce to their adversary the privileged
communications they engaged in with their attorneys regarding the bona fides of the
claims they are defending.
28
Trial Tr. 29–30.
29
Trial Tr. 30.
16
III. CONCLUSION
The unique circumstances of this case do not warrant unredacted production
of privileged communications under the Garner fiduciary exception. Plaintiffs
cannot achieve via Section 220 what they could not achieve via discovery in the
Derivative Action. Striking a “balance between [the parties’] legitimate competing
interests” in this instance requires that Plaintiffs’ Section 220 demand be rejected.30
Judgment will be entered for Defendants. The parties shall cooperate to submit a
final order and judgment in conformity with this Memorandum Opinion within ten
(10) days.
30
Wal-Mart II, 95 A.3d at 1278.
17