Eletson Holdings Inc. v. Levona Holdings Ltd.

Background

Levona Holdings Ltd., the cross-petitioner, served document requests on Eletson Holdings Inc. and Eletson Corporation. Levona later moved under Federal Rule of Civil Procedure 37(a), which permits a party to ask the court to order discovery, to compel Eletson to produce responsive documents or identify documents withheld on privilege grounds in a privilege log.

The dispute arose after a bankruptcy reorganization plan transferred control of Eletson Holdings to Pach Shemen and a new board selected by certain creditors and the creditors’ committee. A bankruptcy court order also authorized Microsoft Corporation to suspend user accounts belonging to the debtors’ former management and provide administrator access to Eletson Holdings and its designees. Eletson told Levona that it possessed many documents from the Microsoft server that appeared responsive to Levona’s requests.

Eletson had not produced those documents because Reed Smith, its former counsel, threatened sanctions and disqualification against anyone who reviewed or used privileged documents on the server. Reed Smith, purportedly on its own behalf and on behalf of “clients,” and the intervenors opposed Levona’s motion. They argued that the Microsoft order and production would conflict with an administrative stay issued by the Second Circuit in an appeal involving the turnover of Reed Smith’s client file.

Court’s analysis

The court first questioned whether Reed Smith, its purported clients, or the intervenors had standing to object to discovery directed to Eletson. The court stated that “Provisional Holdings” had no legal existence and therefore could not establish standing. It also concluded that Reed Smith lacked standing because the requests were directed to Eletson, not to Reed Smith, and Reed Smith had not shown a personal or property interest in the documents on Eletson’s Microsoft server.

The court distinguished Reed Smith’s claimed interest in retaining its former client file from the documents already possessed by Eletson. It stated that a law firm’s retaining lien, which may allow a firm owed fees to retain a client file, did not give Reed Smith the right to recover or control copies of documents in Eletson’s possession. The court also found that the intervenors had not asserted a protectable interest in the Microsoft documents themselves.

The court further reasoned that the parties objecting to production had not sought a stay of the Microsoft order from the bankruptcy court or from the appropriate appellate court, and that the Second Circuit had denied Reed Smith’s request for an emergency stay. The court concluded that the only issue properly before it was whether Levona was entitled to discovery under the Federal Rules of Civil Procedure.

The court held that the administrative stay did not shield documents in Eletson’s possession, custody, or control. Eletson could review the documents, determine which were responsive, make privilege decisions, and prepare a privilege log for documents it claimed were privileged. The court stated that it was continuing to protect the asserted interest in Reed Smith’s client file while allowing discovery of documents already in Eletson’s possession.

Ruling

Judge Lewis J. Liman granted in part Levona’s motion to compel. The court ordered Eletson to produce documents responsive to Levona’s requests, including documents from the Microsoft server, and to provide a privilege log to the extent Eletson asserted privilege. Eletson and Levona were directed to meet and confer about the means of review and production within the timeframe of the proceeding.

The court also stated that Eletson had no choice but to comply with the order and would not be subject to sanctions from this court for doing so. The court assumed that Eletson would likewise not be subject to sanctions or disqualification from another court for actions required by this order. The clerk was directed to close the motion docket entry.