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Sovereign Holdings, Inc. v. Deck

United States District Court, D. South Dakota, Southern Division

September 17, 2018

SOVEREIGN HOLDINGS, INC., Plaintiff,
v.
PAUL W. DECK, JR. and SCOTT A. HINDMAN, Defendants, and MARY ELLEN KISTING, Interested Party.

          ORDER GRANTING IN PART AND DENYING IN PART MOTION TO COMPEL

          KAREN E. SCHREIER, UNITED STATES DISTRICT JUDGE.

         Plaintiff, Sovereign Holdings, Inc., moves to compel defendant Paul W. Deck, Jr., to produce documents associated with Deck's representation of Sovereign during previous litigation. Docket 42. Deck opposes the motion, arguing that the documents are privileged because they contain confidential communications between Deck and Mary Ellen Kisting, the former president and 75% owner of Sovereign, when Mark Nylen, the current owner of Sovereign, was adverse to Sovereign. Docket 56. Following a telephonic hearing on the motion (Docket 70), Deck produced the documents identified in his privilege logs to the court for an in-camera review. On May 1, 2018, the court held an evidentiary hearing on the merits of Sovereign's motion to compel. Docket 81. The court permitted Sovereign, Deck, and Kisting, an interested party, to submit supplemental briefing following the hearing. See Dockets 89, 92, 94, 95, 97. For the reasons that follow, the court grants Sovereign's motion in part and denies Sovereign's motion in part.

         BACKGROUND

         Sovereign Holdings was incorporated as a South Dakota corporation in 2007 by Mary Ellen Kisting, formerly Mary Ellen Nylen.[1] Docket 57-1, Docket 81 at 20. Kisting created Sovereign from the assets of a previous company she owned, and she ran the business with her husband at the time, Mark Nylen. Docket 81 at 20-21. Kisting was a 75% shareholder, president, and treasurer of Sovereign until June 21, 2017. Id. at 23. Nylen was vice president and secretary of Sovereign until March 2015, and, as trustee for two family trusts, was a 25% shareholder until June 21, 2017. Id.; Docket 57-2.

         Sovereign's primary assets consisted of transportation equipment, such as an airplane, [2] semi-trucks, tankers, and some processing equipment. Docket 81 at 21. Kisting and Nylen also started Hepar BioScience, LLC, [3] which was a company that bought and sold animal by-products. Id. at 22. Sovereign leased its transportation equipment and airplane to Hepar BioScience to transport Hepar BioScience's by-products. Id. Sovereign employed two truck drivers as its only employees and did not lease its equipment to any company other than Hepar BioScience. Id. at 22-23.

         In December 2011, January 2012, and May 2013, Sovereign guaranteed Hepar BioScience loans from Northwest Bank, formerly known as First National Bank. Docket 57-7. The guaranties were signed by Mark Nylen as vice president and secretary of Sovereign. Id. Kisting testified she “found out afterwards, ” sometime in 2011 or 2012 that Sovereign had guaranteed a loan of Hepar BioScience. Docket 81 at 24-25. Nylen also personally guaranteed the Hepar BioScience loans, but Kisting did not. Docket 57-5; Docket 81 at 26.

         On January 1, 2014, Nylen filed for divorce from Kisting. Docket 81 at 24. In May 2014, Nylen sent Kisting a letter notifying her that Hepar BioScience was discontinuing its lease of the equipment from Sovereign and would no longer do business with Sovereign. Docket 57-6. As a result, Sovereign no longer received income and did not have the money to maintain the transportation equipment. Docket 81 at 34. Kisting testified that Nylen, as part of the dissolution proceeding, proposed selling the Sovereign assets. Id. at 34-35. But because Northwest Bank used Sovereign's assets to guarantee its loan, Kisting was worried that Northwest Bank would come after the proceeds of the assets once Sovereign sold them. Id. at 35. The bank represented that it agreed to the sale and waived any interest it may have in the proceeds, so Kisting agreed to sell the airplane and other equipment. Id. at 104-05.

         The proceeds of the airplane and other transportation equipment, which totaled approximately $10 million, were ultimately placed in a marital escrow account. Docket 81 at 38-39. At some point the dissolution court ordered the proceeds to be transferred back to Sovereign's account. Id. at 39-40. Kisting contested the transfer through “both” her divorce attorneys and Deck. Id. at 40.

Q. When you say “both, ” what do you mean?
A. I contacted Mr. Deck. Because he was the one that was involved, too, with getting the release from the bank to not get those proceeds. So it was - no, he did not appear in front of Judge Jensen, but I contacted him, and I contacted my attorneys who appeared before Judge Jensen.
Q. So you spoke to both your personal divorce attorneys and spoke to Mr. Deck who was still representing Sovereign at that time?
A. Correct.

Id. at 40:10-20.

         Deck testified that as general counsel for Sovereign, he advised on whether Northwest Bank waived its claim to the proceeds of Sovereign's airplane sale. Id. at 97. He also advised that he believed the bank waived its claim when the bank agreed to the transfer of the proceeds out of the Sovereign account to the marital escrow account. Id. Deck believed his communications with Kisting, as president of Sovereign, were privileged because:

[a]t the time I didn't know whether or not [Kisting] was going to retain - what the divorce court was going to do. But it was obvious that if the divorce court gave the company to her former husband, given the animosity that was between the two, that it was a very hostile relationship, and a severing of that relationship, that my communications with her would have to be privileged.

Id. at 98:17-24.

         After the proceeds were transferred to Sovereign's account, Northwest Bank tried “to seize that account.” Id. at 40:21-24.[4] Northwest Bank sued Sovereign, Hepar LLC, and Kisting for the outstanding debt as provided in the loan guarantees. See Northwest Bank v. Sovereign Holdings, Inc. et al., CV 15-4066. Kisting retained Paul Deck and Scott Hindman to represent Sovereign in the lawsuit brought by the bank. Docket 81 at 41.[5]

         Northwest Bank dismissed the claims against Hepar LLC and Kisting, but continued with its claim against Sovereign. See CV 15-4066 Docket 38. In February 2016, the court granted Northwest Bank's motion for partial summary judgment against Sovereign on a claim for breach of contract. CV 15-4066 Dockets 59, 61.[6]

         Deck has known Kisting and Nylen since 2012 or 2013 when he began representing Hepar BioScience in corporate filing matters. Docket 81 at 92. He represented Kisting personally in a guardianship matter in late 2013 and aided her with a will at some later date. Id. at 92-93. He also represented Nylen personally, jointly with Kisting, regarding a real estate matter, and other miscellaneous property disputes or small matters. Id. at 93-94.

         Deck never represented Kisting in the divorce proceedings. Id. at 95. Deck was general counsel for Sovereign from 2012 or 2013 until 2017. Id. at 95. While he initially represented the other companies, he disassociated himself with Nylen and Hepar BioScience after the divorce proceedings began. Id. at 96. Deck, aware that Sovereign was deemed a marital asset by the dissolution court, testified that “[w]hat was done in the divorce court affected Sovereign Holdings corporate, so I had to deal with those issues.” Id. at 97:6-8.

         Kisting gave her divorce attorneys permission to contact Deck to discuss issues involving both Sovereign and the divorce “[b]ecause Sovereign Holdings was a marital asset in the divorce.” Docket 81 at 42:22-23. Under Kisting, Sovereign's position was to keep the money in Sovereign's account rather than allow Northwest Bank to reduce Hepar BioScience's debt. Id. at 43.

Q. So you were trying to keep that money from the bank?
A. I was trying to keep from Mark Nylen having the bank seize the money.
Q. Why would Mark Nylen want the bank to seize the money?
A. To reduce down the loan for the Hepar BioScience loan.
Q. Did you feel Mr. Nylen's interests with regard to that money that was sitting in the Sovereign Holdings' bank was adverse to Sovereign Holdings' interests?
A. Correct.

Id. at 43:14-25.

         And Deck testified:

A: Basically we were trying to figure out a way so the bank couldn't get the $5 million.
Q: Did you think that was consistent with the interests of Sovereign Holdings?
A: It would have been consistent with the interests of those that owned Sovereign Holdings.
Q: And Sovereign Holdings itself?
A: Sovereign Holdings itself.

Id. at 109:4-11.

         Deck also communicated with Kisting and her divorce attorneys about Sovereign's defense to the Northwest Bank lawsuit. Id. He believed such communication was necessary because Sovereign was a marital asset and “Judge Jensen ultimately was doing things in the divorce that I needed to be kept abreast of and apprised of.” Id. at 110:1-3. When asked if he viewed Sovereign's interests in the bank litigation as adverse to Nylen's interests, Deck responded “[a]bsolutely.” Id. at 110:9.

         Kisting, as the president of Sovereign, approached Deck for the purpose of seeking legal advice. Docket 81 at 53. See also Id. at 112 (Deck testifying that he provided legal advice to Kisting as president of Sovereign). Kisting believed her conversations with Deck, as president of Sovereign, were confidential. Id. at 44. She communicated with Deck to obtain legal advice in her role as president of Sovereign. Id. at 45.

Q. And as far as personal legal advice related to your divorce, you would contact your own divorce attorneys. Is that true?
A. Yes.
Q. So as far as the advice you were seeking from Mr. Deck, that was advice you were seeking wearing your hat as President of Sovereign Holdings. Is that true?
A. Yes.
Q. Again, if you needed advice related to the divorce, you would go to your divorce attorneys?
A. Correct.

Id. at 53:8-18.

         Deck's testimony was largely similar to Kisting's testimony. While Kisting was still the 75% shareholder of Sovereign, he did not represent Kisting personally, but “[a]s it turned out, her personal interests, as an officer of Sovereign, merged with the interests of the company as it went forward.” Id. at 130:12-14. Additionally, Deck testified:

A: Right. But did I ever represent [Kisting] personally? No. In that regard, no.
Q: As to her personal interest in Sovereign, there was no personal representation by you of [Kisting]. Correct?
A: I think I've already answered that question.
Q: And you said that you agreed with that. You didn't get involved on her behalf personally. Correct? You represented the company.
A: I represented the company, and her as an officer of the company, yes.
Q: In her role as a majority owner, president, and board member.
A: Yes, and her personal interests in the company was [sic] left to the divorce attorneys.

Id. at 131:1-15.

         Kisting only disclosed her conversations with Deck to her attorneys and her accountant. Id. at 44. And she believed her personal interest aligned with Sovereign's interest-namely, keep the bank from acquiring the money- “[b]ecause it was going to go to Mark Nylen personally to bring down the debt of Hepar BioScience” and reduce his personal guaranty obligations. Id. at 44:20-21. She kept Deck informed of events occurring in the divorce related to the corporations and the corporations' assets so Deck could adequately represent Sovereign. Id. at 46. She believed it was “necessary” for Deck to “have knowledge of the divorce proceedings related to Sovereign” because Sovereign was a marital asset. Id. at 50-51. And when asked if her communications with Deck “concern[ed] matters with regard to the general affairs of Sovereign Holdings[, ]” Kisting said yes. Id. at 54:25-55:3. In addition, Deck's testimony indicated that his communications with Kisting's divorce attorneys were related to his work for Sovereign. Id. at 132.

         Regarding Deck's attorney's fees, Kisting testified:

Q. Who paid Mr. Deck's ...

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