Court Opinion

ID: 2672893
Source: CourtListenerOpinion
Date Created: 2014-05-07 21:01:56.674591+00
Date Added: 2024-06-11T12:34:54.166757
License: Public Domain

IN THE

    SUPREME COURT OF THE STATE OF ARIZONA
    EMPIRE WEST TITLE AGENCY, L.L.C. F/K/A EMPIRE TITLE AGENCY OF
       ARIZONA, L.L.C., AN ARIZONA LIMITED LIABILITY COMPANY,
                             Petitioner,

                                    v.

THE HONORABLE DAVID M. TALAMANTE, JUDGE OF THE SUPERIOR COURT OF
     THE STATE OF ARIZONA, IN AND FOR THE COUNTY OF MARICOPA,
                         Respondent Judge,

  DOS LAND HOLDINGS, L.L.C., AN ARIZONA LIMITED LIABILITY COMPANY,
                       Real Party in Interest.

                          No. CV-13-0268-PR
                           Filed May 7, 2014

          Appeal from the Superior Court in Maricopa County
             The Honorable David M. Talamante, Judge
                         No. CV2011-094829
                            REMANDED

          Decision Order of the Court of Appeals, Division One
                         Filed August 13, 2013
                               VACATED

COUNSEL:

James L. Blair, Bryan M. Folger, Kevin R. Myer (argued), Renaud Cook
Drury Mesaros, PA, Phoenix, for Empire West Title Agency, LLC

Chad A. Hester, Wallin Hester, PLC, Gilbert; and Blake T. Ostler (argued),
Thompson Ostler & Olsen, Salt Lake City, UT, for DOS Land Holdings,
L.L.C.

JUSTICE PELANDER authored the opinion of the Court, in which CHIEF
JUSTICE BERCH, VICE CHIEF JUSTICE BALES, JUSTICE BRUTINEL and
JUSTICE TIMMER joined.
JUSTICE PELANDER, opinion of the Court:

¶1            In this contract case, the issue is whether the plaintiff
impliedly waived the attorney–client privilege by alleging that it
“reasonably believed” the defendant had met its contractual obligations.
We find no waiver and hold that merely alleging the reasonableness of
one’s beliefs does not, in itself, waive the privilege; rather, the litigant
must advance a subjective evaluation or understanding that incorporates
the advice of counsel.

                                     I.

¶2             In 2006, while pursuing the purchase of a vacant lot in Mesa,
David Jemmett discovered a recorded quitclaim deed abandoning an
access easement essential for developing the property. Empire West Title
Agency, L.L.C., acting as title agent for Fidelity National Title Insurance
Company, allegedly informed Jemmett that the quitclaim deed would not
affect his claim to the easement. Jemmett later decided not to complete
the transaction and informed Empire that DOS Land Holdings, L.L.C.
would instead purchase the property.

¶3            On August 3, 2007, DOS’s attorneys, Chester & Shein
(“C&S”),  1 sent Empire a Closing Instructions Letter (“CIL”), which

attached a legal description of the property that included the access
easement. In an email accompanying the CIL, C&S asked Empire to
“make sure that the legal description attached . . . is the same legal
description that will be attached to the conveyance deed.” Under the CIL,
Empire acknowledged that, by signing, it agreed to comply with the
letter’s terms. Empire signed and returned the CIL, and the transaction
closed on August 10, 2007. Contrary to the CIL’s terms, however, the
closing documents omitted the easement from the property’s legal
description.

¶4             In 2008, DOS sued the owners of the adjacent property to
establish its right to the easement. After that case was dismissed as time-
barred, DOS filed this action, naming Fidelity and Empire as defendants
and alleging claims of bad faith against Fidelity and breach of contract
and breach of the covenant of good faith and fair dealing against both
defendants. (DOS has since settled all claims against Fidelity.) In its

1     C&S also represented Jemmett, who allegedly planned to assist in
developing the property after DOS’s purchase. Those facts do not affect
our analysis here.
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breach of contract claim against Empire, DOS alleged that, based on
Empire’s agreement to use the legal description attached to the CIL, DOS
“reasonably believed that [the easement] was represented in all
documents used at the closing.”

¶5            Empire moved to compel DOS to disclose any attorney–
client communications indicating whether DOS knew before close of
escrow that the easement had been abandoned. The superior court denied
the motion, finding that “this matter can be litigated and decided without
breaching [the attorney–client] privilege.”

¶6             Empire filed a petition for special action in the court of
appeals, arguing that DOS had impliedly waived the attorney-client
privilege. In an unpublished decision, the court agreed, holding that “[b]y
pleading a contract claim based on its ‘reasonable belief,’ DOS put in issue
all information in its possession at the time . . . bear[ing] on the
reasonableness of its belief that Empire West agreed to provide coverage
of the easement.” Distinguishing State Farm Mutual Automobile Insurance
Co. v. Lee, 199 Ariz. 52, 13 P.3d 1169 (2000), the court of appeals stated that
this case concerns “a party’s reasonable belief about a particular
situation,” not whether an insurer reasonably responded to a demand for
coverage. The court ordered DOS and C&S to provide all attorney–client
communications for which the privilege was claimed for the superior
court’s in-camera inspection and instructed that court to order the
disclosure of communications found “relevant to the reasonableness of
DOS’s expectation of coverage.”

¶7             We granted review on two issues:            (1) whether DOS
impliedly waived the attorney–client privilege by injecting its “reasonable
belief” into the litigation, and (2) whether the court of appeals’ decision is
overbroad. We have jurisdiction under Article 6, Section 5(3) of the
Arizona Constitution and A.R.S. § 12-120.24.

                                      II.

¶8           Whether a party has impliedly waived the attorney–client
privilege poses a mixed question of law and fact, which we review de
novo. Twin City Fire Ins. Co. v. Burke, 204 Ariz. 251, 254 ¶ 10, 63 P.3d 282,
285 (2003).

¶9            In State Farm v. Lee, we adopted the following criteria,
referred to as the Hearn test, for determining whether the attorney–client
privilege has been waived when a litigant’s mental state is at issue:

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       “(1) [The] assertion of the privilege was a result of some
       affirmative act, such as filing suit [or raising an affirmative
       defense], 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 his defense.”
199 Ariz. at 56 ¶ 10, 13 P.3d at 1173 (emphasis omitted) (quoting Hearn v.
Rhay, 68 F.R.D. 574, 581 (E.D. Wash. 1975)).2 Under the Hearn test, when a
litigant advances “a subjective and allegedly reasonable evaluation of the
law . . . that necessarily incorporates [the advice of counsel],” confidential
attorney–client communications relevant to that evaluation are
discoverable. Id. at 58 ¶ 15, 13 P.3d at 1175; see also id. at 62 ¶ 28, 13 P.3d at
1179 (explaining that no waiver results unless the party asserting the
privilege “has asserted some claim or defense, such as the reasonableness
of its evaluation of the law, which necessarily includes the information
received from counsel”).

¶10           We emphasized in Lee, however, that merely filing an action
or denying an allegation does not waive the privilege. Id. at 58 ¶ 16, 62
¶ 28, 13 P.3d at 1175, 1179. Rather, the party claiming the privilege must
affirmatively “interject[] the issue of advice of counsel into the litigation.”
Id. at 62 ¶ 28, 13 P.3d at 1179. In addition, neither the “relevance nor
pragmatic importance alone [of the information sought] will support a
finding that the attorney–client privilege has been waived.” Twin City,

2      The Court in Lee also adopted the test set forth in Restatement
(Third) of The Law Governing Lawyers § 80(1)(2000), which states in relevant
part:
           The attorney–client privilege is waived for any relevant
           communication if the client asserts as to a material issue in a
           proceeding that:
           (a) the client acted upon the advice of a lawyer or that the
           advice was otherwise relevant to the legal significance of the
           client’s conduct.
199 Ariz. at 62 ¶ 27, 13 P.3d at 1179. Although that test provided
additional support for our decision in Lee, id. ¶ 28, it applies when a
litigant’s legal knowledge is at issue, a situation not presented here.
Regardless, because the Restatement test is consistent with and
encompassed by the broader Hearn test, we need not apply both tests here.
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204 Ariz. at 256 ¶ 22, 63 P.3d at 287; see also Lee, 199 Ariz. at 58 ¶ 15, 13
P.3d at 1175.

¶11            The underlying issue in Lee was whether defendant State
Farm acted in bad faith when it denied its policyholders’ underinsured
and uninsured motorist claims based on State Farm’s interpretation of a
policy provision. 199 Ariz. at 54–55 ¶¶ 2–4, 13 P.3d at 1171–72. During
discovery, State Farm refused to produce its communications with counsel
relating to the denials, invoking the attorney–client privilege. Id. at 55 ¶ 5,
13 P.3d at 1172. Although it admitted receiving advice from counsel
before deciding whether to pay the claims, State Farm argued that its
conduct was objectively and subjectively reasonable based on “what its
personnel actually knew,” not based on its lawyers’ advice. Id. at 57 ¶ 13,
13 P.3d at 1174 (emphasis, citation, and internal quotation marks omitted).

¶12             We held that by asserting “the subjective evaluation and
understanding of its personnel about the state of the law” as a defense,
State Farm “affirmatively injected” those issues into the litigation and
thereby invited scrutiny of the bases of that legal knowledge, including
any relevant communications with counsel. Id. at 65 ¶ 34, 13 P.3d at 1182.
State Farm’s defense of its employees’ “subjective belief,” which in turn
was directly based on “information and advice received from a number of
lawyers,” was crucial to our finding an implied waiver in Lee. Id. at 66
¶ 38, 13 P.3d at 1183. It would make “a mockery of the law,” we
explained, to allow a litigant to assert that it acted reasonably based on its
interpretation of law, “while at the same time allowing that litigant to
withhold . . . information it received from counsel on that very subject.” Id.
at 65 ¶ 33, 13 P.3d at 1182.

¶13            This case differs from Lee, though not for the reason
advanced by the court of appeals. Lee was an “unusual case” involving
waiver of the attorney–client privilege when “the mental state of a litigant
[was] at issue.” Id. at 54 ¶ 1, 57 ¶ 11, 13 P.3d at 1171, 1174. We considered
the waiver issue “only in light of the bad faith and fraud counts” in the
plaintiffs’ complaint. Id. at 55 ¶ 3, 13 P.3d at 1172.

¶14           In contrast to State Farm’s defense against the bad faith
claims in Lee, the breach of contract claim in this case does not depend on
DOS’s mental state or subjective knowledge. And, unlike State Farm,
DOS has not affirmatively put those matters at issue. It simply alleged
that Empire breached the parties’ contract by failing to comply with the
CIL’s terms. Although DOS’s knowledge of the alleged title defect might
be material to Empire’s defense, DOS has done nothing to inject that issue

                                          5
into the litigation. Merely pleading a claim, as we noted in Lee, does not
waive the attorney–client privilege. Id. at 58 ¶ 16, 62 ¶ 28, 13 P.3d at 1175,
1179.

¶15           The statement in DOS’s complaint that it “reasonably
believed” that the CIL’s property description, including the easement, was
included in all closing documents does not alter our analysis. That
allegation is not essential to stating the breach of contract claim and
therefore did not place DOS’s mental state or subjective knowledge “at
issue.” As DOS’s counsel acknowledged at oral argument, DOS could
have sufficiently alleged its contract claims against Empire without the
“reasonable belief” assertion. That allegation reflects DOS’s factual
understanding of the CIL, rather than “a subjective and allegedly
reasonable evaluation of the law . . . that necessarily incorporates”
knowledge or advice obtained from counsel and that formed a basis for
State Farm’s defense in Lee. Id. at 58 ¶ 15, 13 P.3d at 1175. We will not
find a waiver based merely on imprecise or superfluous pleading.

¶16           Even if DOS’s state of mind were at issue, Empire has not
demonstrated that denying it access to the requested communications
would undermine its defense. See Twin City, 204 Ariz. at 256–57 ¶ 22, 63
P.3d at 287–88 (finding no implied waiver in part because the “[t]he
evaluation of Twin City’s counsel is not vital to General Star’s defense”).
Empire has other means of obtaining information about what DOS knew
or should have known regarding the easement’s purported abandonment.
For instance, because agency law principles apply to the attorney–client
relationship, Panzino v. City of Phoenix, 196 Ariz. 442, 447 ¶ 16, 999 P.2d
198, 203 (2000), C&S’s knowledge about the allegedly abandoned
easement may be imputable to DOS. See Restatement (Third) of Agency
§ 5.03 (2006). We see no reason to disturb the superior court’s ruling that
“this matter can be litigated and decided without breaching [the]
privilege.” Cf. Lee, 199 Ariz. at 67 ¶ 40, 13 P.3d at 1184 (deferring to trial
judge’s finding that State Farm “implicitly asserted the advice of counsel
as a defense”).

¶17           Finally, the policy concern that motivated our decision in Lee
is not implicated here. Unlike State Farm, DOS has not “‘thrust [its] lack
of knowledge into the litigation’” as a basis for its claim, while at the same
time asserting the privilege so as to frustrate discovery of what it actually
knew. See Lee, 199 Ariz. at 58–59 ¶ 18, 13 P.3d at 1175–76 (quoting Ulibarri
v. Superior Court in & for Cnty. of Coconino (Gerstenberger), 184 Ariz. 382,
385, 909 P.2d 449, 452 (App. 1995)). Rather, DOS is attempting to use the
privilege purely as a shield, consistent with its intended purpose. See

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A.R.S. § 12-2234; Ulibarri, 184 Ariz. at 384, 909 P.2d at 451 (noting that the
purpose of the attorney–client privilege is “to encourage a client to
provide all information to the attorney so the attorney can provide
effective legal representation to the client”).

                                     III.

¶18           The court of appeals erred in ruling that DOS impliedly
waived the privilege by pleading its “reasonable belief” in this breach of
contract case. In light of this conclusion, we need not address the second
issue raised. We vacate the court of appeals’ decision order and remand
the case to the superior court for further proceedings consistent with this
opinion.

¶19           Both parties request an award of attorneys’ fees pursuant to
A.R.S. § 12-341.01. Empire has not prevailed and is therefore ineligible for
a fee award. Exercising our discretion, we deny DOS’s fee request
without prejudice to DOS seeking an award by the superior court of fees
expended on appeal if DOS ultimately prevails.

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