DRC LV Ventures, LLC v. Dalpour

Background

The plaintiffs moved to compel production of documents containing communications between the defendants and their former law firm, Morritt Hock & Hamroff (MHH). The plaintiffs argued that the crime-fraud exception applied. That exception removes attorney-client privilege—the usual protection for confidential communications between a lawyer and client—when communications further a crime or fraud.

The alleged crime was wire fraud under 18 U.S.C. § 1343. The opinion states that the defendants had been charged in an indictment. The plaintiffs alleged that MHH made false statements concerning: an operating partner’s distribution of funds; delays in payments allegedly caused by bank technical problems; assets allegedly pledged to the plaintiffs; funds supposedly available to pay the plaintiffs; and stock allegedly being sold to raise money for payment. The plaintiffs said these statements concealed earlier fraud and helped continue a fraud scheme, including by inducing them to renegotiate loan terms.

The defendants argued that the alleged conduct was merely an unsuccessful effort to avoid litigation through misrepresentations about their financial condition.

Legal standard

To ultimately overcome attorney-client privilege under the crime-fraud exception, a party must provide a factual basis supporting probable cause to believe that a crime or fraud occurred and that the communications furthered it. The court explained that the fraudulent objective need not be proven conclusively at this stage; there must be a reasonable basis to believe it was fraudulent.

The showing required to obtain an in camera review—meaning the judge’s private review of the documents—is lower than the showing required to ultimately defeat the privilege. A party must provide enough factual support for a reasonable person to believe that the private review may reveal evidence establishing the exception. Whether to conduct that review is within the district court’s discretion.

Court’s analysis and ruling

The court held that the indictment supplied probable cause to believe that the charged crime had been committed, satisfying the first part of the crime-fraud showing. It also found that a prudent person would have a reasonable basis to suspect that the alleged false statements were made in furtherance of a crime or fraud, satisfying the showing needed for private review.

The court nevertheless chose to review the documents itself rather than immediately order their production to the plaintiffs. It stated that respect for attorney-client privilege favored a narrowly tailored review limited to communications found to be in furtherance of fraud. The court ordered MHH to send the documents withheld on attorney-client privilege grounds to the court by email by May 20, 2024.

The order therefore authorized an in camera review; it did not finally determine which documents fall within the crime-fraud exception or require their production to the plaintiffs.