Court Opinion

ID: 2763474
Source: CourtListenerOpinion
Date Created: 2014-12-22 17:00:57.967718+00
Date Added: 2024-06-11T10:44:34.089583
License: Public Domain

FILED
                                                                  United States Court of Appeals
                                           PUBLISH                        Tenth Circuit

                        UNITED STATES COURT OF APPEALS                December 22, 2014

                                                                      Elisabeth A. Shumaker
                              FOR THE TENTH CIRCUIT                       Clerk of Court
                          _________________________________

SENECA INSURANCE COMPANY,
INC., a foreign corporation,

     Plaintiff-Appellant/Cross-Appellee,

v.
                                                     Nos. 13-6284 and 14-6002
WESTERN CLAIMS, INC., a for profit
Oklahoma corporation; LOU BARBARO,
individually and as agent and employee of
Western Claims, Inc.,

     Defendants-Appellees/Cross-Appellants.
                         _________________________________

                       Appeal from the United States District Court
                          for the Western District of Oklahoma
                              (D.C. No. 5:12-CV-00141-HE)

Murray E. Abowitz, Abowitz, Timberlake & Dahnke, P.C., Oklahoma City, Oklahoma,
for Plaintiff-Appellant/Cross-Appellee, Seneca Insurance Company.

Maurice G. Woods, II, McAtee and Woods, P.C., Oklahoma City, Oklahoma, for
Defendants-Appellees/Cross Appellants, Western Claims, Inc., et al.

Before GORSUCH, MURPHY, and MORITZ, Circuit Judges.

MORITZ, Circuit Judge.
       Seneca Insurance Company paid $1 million to settle a lawsuit in which its insured

alleged Seneca had mishandled insurance claims for hail damage to the insured’s

property. Seeking to recoup the costs of defending and settling the lawsuit, Seneca

brought this action for implied equitable indemnity and negligence against its insurance

adjuster, Western Claims, Inc., and Western Claims’ agent Lou Barbaro (together

“Western Claims”).

       The district court allowed Western Claims to discover and admit as evidence at

trial correspondence containing advice from Seneca’s lawyers regarding the underlying

hail damage claim and litigation. It concluded Seneca put the advice at issue in this

lawsuit, thereby waiving any attorney-client privilege or work-product protection. The

jury ultimately found in Western Claims’ favor.

       In this appeal, Seneca seeks a new trial, arguing the district court erred in

concluding Seneca put the legal advice at issue. Western Claims cross appeals,

contending that even if the district court erred, Western Claims is nevertheless entitled to

judgment as a matter of law on both of Seneca’s claims.

       Exercising jurisdiction under 28 U.S.C. § 1291, we conclude that because Seneca

cited “advice of counsel” to justify settling with its insured in the underlying action,

Seneca could not shield that advice from Western Claims. Because we affirm the district

court’s conclusion that Seneca waived any attorney-client privilege or work-product

protection, we do not reach Western Claims’ cross appeal.

                                       BACKGROUND

       Seneca hired Western Claims to investigate a claim by Route 66 Trader Market

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d/b/a Laser Expedition for wind and hail damage to buildings Seneca insured. Western

Claims assigned adjuster Lou Barbaro to investigate the claim.

       Barbaro inspected Route 66’s buildings and concluded the buildings had sustained

hail damage but the metal roof on Route 66’s large, flea-market-style building had not

been damaged. Barbaro estimated Route 66’s net claim to be about $1,081. Seneca

promptly issued a check to Route 66 for that amount and closed its file.

       Nearly eight months later, Route 66 asked Seneca to reopen Route 66’s hail

damage claim based on a new estimate from Route 66’s roofing contractor indicating the

roof of the large building had sustained hail damage in the amount of $759,607.77.

Seneca refused to pay, insisting the roof had not been damaged.

       Route 66 eventually sued Seneca, Western Claims, and Barbaro in Oklahoma state

court, claiming all three had mishandled its claims. Against Seneca, Route 66 alleged

breach of insurance contract, bad faith, and fraud, seeking extra-contractual and punitive

damages.

       During the Route 66 litigation, John Mrakovcic, Seneca’s Claims Examiner,

prepared and distributed a Large Loss Report to several individuals, including Frank

Donahue, Seneca’s Vice President of Claims, and Marc Wolin, Seneca’s Chief Operating

Officer. The loss report suggested a settlement range of $200,000 to $500,000, and a

potential jury verdict range of $300,000 to $1,500,000, while establishing reserves for the

suit at $345,000. Seneca later obtained an estimate for replacing the large metal roof, and

paid Route 66 $151,685.17, the undisputed amount of the damage minus the applicable

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deductibles. This payment did not, however, resolve Route 66’s claims for extra-

contractual and punitive damages.

       For assistance defending the Route 66 lawsuit, Seneca sought advice from two

attorneys in separate firms, James N. Isbell and Murray E. Abowitz. About the time

Mrakovcic issued his loss report, he received correspondence from Isbell detailing

Seneca’s handling of Route 66’s damage claim, summarizing Oklahoma law regarding

Route 66’s bad faith claim, and making suggestions regarding Seneca’s appraisal or

replacement options. Isbell also suggested Seneca’s failure to pay Route 66’s damage

claim could be viewed as unreasonable and unjustified, leaving Seneca vulnerable to

Route 66’s bad faith claim, and therefore punitive damages.

       About four months later, Mrakovcic received correspondence from Abowitz

highlighting Seneca’s potential vulnerabilities and identifying several potential flaws

with both Seneca’s and Western Claims’ handling of Route 66’s claim. In his

correspondence, Abowitz advised that even Seneca’s “best defense,” i.e., attributing all

the bad faith conduct to Barbaro, would not allow it to escape liability on Route 66’s bad

faith claim. He further warned that if a jury found Seneca acted in bad faith, it might

award punitive damages, which would be difficult to shift to Western Claims. Ultimately,

Abowitz recommended Seneca avoid an adverse jury verdict and possible punitive

damages by settling the Route 66 litigation and then suing Western Claims and Barbaro

to recover the cost of settlement, blaming them for mishandling Route 66’s claims.

       Consistent with Abowitz’s advice, after Route 66 voluntarily dismissed its claims

against Western Claims and Barbaro, Seneca settled with Route 66 for $1 million in “new

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money.” Seneca then filed this suit asserting implied equitable indemnity and negligence

claims against Western Claims and Barbaro. Specifically, Seneca alleged Barbaro caused

any mishandling of Route 66’s claims by misleading Seneca to conclude Route 66’s roof

had sustained no hail damage. Seneca sought to recover the $1 million it had paid to

settle the Route 66 litigation, plus $64,079.14 in costs it incurred defending the suit.

       In discovery, Seneca disclosed a claim note that stated Seneca had settled the

Route 66 litigation for “$1 million dollars new money” “on advice of Counsel.” Western

Claims then filed a motion seeking to compel Seneca to produce, among other things,

documents Seneca relied on in settling the Route 66 litigation. Seneca responded,

claiming attorney-client privilege and work-product protection justified its refusal to

produce the Isbell and Abowitz correspondence. Over Seneca’s objection, the district

court granted Western Claims’ motion to compel.

       Shortly before trial and again at trial, Seneca moved to prohibit Western Claims

from introducing the Isbell and Abowitz correspondence. Seneca reiterated its assertion

that the documents were subject to attorney-client privilege and work-product protection.

The district court denied both motions, finding Seneca had placed the advice at issue. The

district court later admitted the correspondence for the limited purpose of establishing

Seneca’s reasons for settling the Route 66 litigation and the basis for the amount of the

settlement.

       At trial, Mrakovcic testified he relied on the Isbell and Abowitz correspondence

in handling the Route 66 claim. Further, Mrakovcic testified that Gregory Crapanzano,

Seneca’s Vice President of Property Claims, told him Seneca settled the Route 66

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litigation for $1 million based on Abowitz’s advice. Crapanzano also testified that his

“conversations with counsel” as well as “conversations with the home office” and his

superiors led him to conclude that $1 million was a “reasonable settlement” because a

jury might have awarded Route 66 $2.5 million.

       Donahue, Seneca’s Vice President of Claims, and Wolin, its Chief Operating

Officer, both testified they relied on “advice of counsel”—particularly Abowitz’s

advice—in settling the Route 66 litigation for $1 million instead of the $200,000 to

$500,000 range suggested in the loss report.

       At the close of Seneca’s case-in-chief, the district court granted Western Claims’

Rule 50 motion for judgment as a matter of law as to Seneca’s equitable indemnity claim.

However, the court permitted Seneca’s negligence claim to go to the jury, which

ultimately found in favor of Western Claims.

       Seneca appeals the district court’s decision allowing Western Claims to discover

and introduce as evidence at trial the Isbell and Abowitz correspondence. Western Claims

conditionally cross appeals the district court’s denial of its Rule 50 motion as to Seneca’s

negligence claim.

                                       DISCUSSION

       Seneca argues the district court erred in concluding Seneca waived its attorney-

client privilege and work-product protection as to the Isbell and Abowitz correspondence.

We review district court decisions regarding waiver of attorney-client privilege and

work-product protection for abuse of discretion. Frontier Ref., Inc. v. Gorman-Rupp Co.,

136 F.3d 695, 699 (10th Cir. 1998). But we review the district court’s underlying factual

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findings for clear error and its rulings on purely legal questions de novo. Thiessen v. Gen.

Elec. Capital Corp., 267 F.3d 1095, 1112 (10th Cir. 2001).

       I.     “At-Issue” Waiver of Attorney-Client Privilege

       Because this diversity suit arises under Oklahoma law, Oklahoma law governs the

contours of the attorney-client privilege. Fed. R. Evid. 501. As we summarized in

Frontier Refining, Inc. v Gorman-Rupp Co.,136 F.3d 695 (10th Cir. 1998), courts

generally apply one of three approaches to determine whether a litigant has waived the

attorney-client privilege:

       The first of these general approaches is the “automatic waiver” rule, which
       provides that a litigant automatically waives the privilege upon assertion of
       a claim, counterclaim, or affirmative defense that raises as an issue a matter
       to which otherwise privileged material is relevant. See Independent Prods.
       Corp. v. Loew’s Inc., 22 F.R.D. 266, 276-77 (S.D.N.Y. 1958) (originating
       “automatic waiver” rule); see also FDIC v. Wise, 139 F.R.D. 168, 170-71
       (D. Colo. 1991) (discussing Independent Productions and “automatic
       waiver” rule). The second set of generalized approaches provides that the
       privilege is waived only when the material to be discovered is both relevant
       to the issues raised in the case and either vital or necessary to the opposing
       party’s defense of the case. See Black Panther Party v. Smith, 661 F.2d
       1243, 1266-68 (D.C. Cir. 1981) (balancing need for discovery with
       importance of privilege), vacated without opinion, 458 U.S. 1118, 102 S.
       Ct. 3505, 73 L. Ed. 2d 1381 (1982); Hearn v. Rhay, 68 F.R.D. 574, 581
       (E.D. Wash. 1975) (setting forth three-factor test, which includes relevance
       and vitality prongs). Finally, several courts have recently concluded that a
       litigant waives the attorney-client privilege if, and only if, the litigant
       directly puts the attorney’s advice at issue in the litigation. See, e.g., Rhone-
       Poulenc Rorer Inc. v. Home Indem. Co., 32 F.3d 851, 863-64 (3d Cir.
       1994) (adopting restrictive test and criticizing more liberal views of
       waiver).

136 F.3d at 699-700 (emphasis added).

       The Oklahoma Supreme Court has not definitively adopted any of these

                                              7
approaches, but the parties agree Oklahoma courts would apply some version of the

second approach, i.e., the Hearn test. See Aplt. Br. 14-17; Aplt./Cross-Aplee. Resp. &

Reply 5; Aplee./Cross-Aplt. Principal & Resp. Br. 20-22; see also Gilson v. State, 8 P.3d

883, 908-09 (Okla. Crim. App. 2000) (applying version of Hearn test); see also Lindley

v. Life Invs. Ins. Co. of Am., 267 F.R.D. 382, 392-393 (N.D. Okla. 2010), aff’d in part as

modified, 08-CV-0379-CVE-PJC, 2010 WL 1741407 (N.D. Okla. Apr. 28, 2010)

(applying Hearn test).

       Under the Hearn test, “at-issue” waiver requires—

       (1) assertion of the privilege was the result of some affirmative act, such as
           filing suit, by the asserting party;

       (2) through this affirmative act, the asserting party put the protected
           information at issue by making it relevant to the case; and

       (3) application of the privilege would have denied the opposing party
           access to information vital to [its] defense.

Frontier, 136 F.3d at 701 (quoting Hearn, 68 F.R.D. at 581) (formatting altered;

emphasis and brackets in original).

       Here, Western Claims argues Seneca’s assertion of attorney-client privilege

undoubtedly resulted from affirmative acts by Seneca—i.e., Seneca filed suit against

Western Claims to recover the cost of the Route 66 settlement and then relied on “advice

of counsel” as a basis for its settlement with Route 66.

       Further, Western Claims asserts that the Isbell and Abowitz correspondence is

relevant to the reasonableness of the Route 66 settlement because the correspondence

explains Seneca’s rationale for settling as well as the amount of the settlement. Seneca

                                             8
concedes that to succeed on its indemnity and negligence claims, it was required to prove

the “underlying reasonableness of” its settlement with Route 66. See Aplt./Cross-Aplee.

Resp. & Reply, at 6; see also Caterpillar Inc. v. Trinity Indus., Inc., 134 P.3d 881, 885

(Okla. Civ. App. 2005) (stating party is entitled to indemnity for cost of settlement when

indemnitor is legally liable and settlement was reasonable and in good faith); cf. St. Paul

Reins. Co. v. Club Servs. Corp., 30 F. App’x 834, 836 (10th Cir. 2002) (holding insurer

could recover from its agent the cost of settling insured’s lawsuit for mishandling her

insurance application to the extent the agent caused the insurer’s alleged damages (citing

Washington v. Mechanics & Traders Ins. Co., 50 P.2d 621, 624 (Okla. 1935); Okla. Stat.

tit. 23, § 61)) (unpublished).

       Seneca contends, however, that this application of the first two prongs of the

Hearn test creates a “meaningless threshold” that would allow admission of any

potentially relevant advice from an attorney. Seneca’s argument both misapprehends the

crucial “affirmative act” requirement and downplays its conduct in this action. Here,

Seneca affirmatively put at issue its attorney’s advice by invoking “advice of counsel” to

support its claims in this litigation. Thus, the first two prongs of the Hearn test were met

in this case.

       Focusing on the third Hearn prong, Seneca contends its assertion of attorney-client

privilege would not have denied Western Claims access to information “vital” to its

defense because the information in the Isbell and Abowitz correspondence was available

through other sources. Seneca argues Frontier controls this question.

       In Frontier, the plaintiff, Frontier Refining, Inc., settled personal injury claims

                                              9
resulting from an explosion at its refinery. Frontier Refining then sued Gorman-Rupp for

implied equitable indemnity alleging a defective Gorman-Rupp pump caused the

explosion that resulted in the personal injuries. Frontier, 136 F.3d at 699. Finding the

advice of Frontier Refining’s counsel relevant to determining the reasonableness of the

personal injury settlements, the district court allowed Gorman-Rupp to discover and

admit at trial Frontier Refining’s counsel’s files from the underlying personal injury suits.

Id. at 701.

       A panel of this court reversed, holding “[m]ere relevance . . . is not the standard”

for determining at-issue waiver. Instead, the panel held the “information must also be

‘vital,’ which necessarily implies the information is available from no other source.” Id.

The panel further concluded that because “Gorman-Rupp had access to information

regarding the reasonableness of the settlement and Frontier’s motivations for settling

through witnesses other than Frontier’s attorneys,” the “privileged and protected

information at issue was not truly ‘vital’ to Gorman-Rupp’s defense.” Id. at 701-02.

       Seneca contends Frontier’s holding requires reversal because, like Gorman-Rupp,

Western Claims had access to information regarding the reasonableness of the Route 66

settlement from sources other than the Isbell and Abowitz correspondence. This case,

however, differs significantly from Frontier in that the “other sources”—namely

Seneca’s officers—generally did not rely on their own reasons for settling with Route 66

for $1 million. Instead, they chose to rely on “advice of counsel” to justify the

reasonableness of the settlement.

       In contrast, in Frontier, the company “did not rely on the [attorney] work product

                                             10
in any manner to justify its right to recovery or to respond to Gorman-Rupp’s defense

that the initial settlements were not reasonable.” Id. at 704. And nothing in the Frontier

decision suggests the company relied on attorney-client-privileged advice to justify the

settlements.

       Indeed, in Frontier the court framed the issue as whether “Frontier had waived its

attorney-client privilege in bringing th[e] indemnity action against Gorman-Rupp.” Id. at

700 (emphasis added). Here, Seneca not only sued Western Claims, it expressly relied on

“advice of counsel” as a reason—if not the primary reason—for settling the Route 66

lawsuit for $1 million.

       Further, allowing Seneca to rely on “advice of counsel” to establish the

reasonableness of the Route 66 settlement while excluding the contents of that advice

would violate the well-established principle that “attorney-client communications cannot

be used both as a sword and a shield.” See Motley v. Marathon Oil Co., 71 F.3d 1547,

1552 (10th Cir. 1995); see also Frontier, 136 F.3d at 700 (bringing indemnity suit does

not impliedly waive attorney-client privilege unless plaintiff asserts reliance on advice of

counsel to prove reasonableness of underlying settlement); EDWARD J. IMWINKELRIED,

THE NEW WIGMORE: EVIDENTIARY PRIVILEGES, § 6.12.4 (2014) (noting thrust of “in

issue” doctrine is that party’s privilege cannot be used as both shield and sword).

       Based on the facts and circumstances of this case, we conclude the district court

did not abuse its discretion in concluding Seneca waived attorney-client privilege as to

the Isbell and Abowitz correspondence.

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         II.     “At-Issue” Waiver Of Work-Product Protection

         Although attorney-client privilege and work-product doctrine are separate and

distinct concepts, neither the parties nor the district court distinguished between the two

for purposes of determining at-issue waiver. Like the attorney-client privilege, “a litigant

cannot use the work product doctrine as both a sword and shield by selectively using the

privileged documents to prove a point but then invok[e] the privilege to prevent an

opponent from challenging the assertion.” Frontier, 136 F.3d at 704. For the reasons

stated above, Seneca waived work-product protection by putting the correspondence at

issue.

                                         CONCLUSION

         The district court’s judgment is affirmed.

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