Top court affirms $40M verdict

Defendants alleged to have acted in bad faith in a failed Montgomery County development deal waived the attorney-client privilege when they cited private conversations with their lawyer as part of their defense, Maryland’s highest court held on Tuesday.

The Court of Appeals upheld $40 million in damages against the two defendants, Camalier L.P. and Davis Brothers Montgomery Farm L.P.

In upholding the ruling, the court also said that the decline in the real estate market in 2008 was irrelevant to the assessment of the plaintiff’s lost-profit damages from the 2006 breach.

On the waiver issue, the court said the defendants opened the door by quoting their attorney’s advice in explaining why they declined, in good faith, to submit financing certificates as contemplated under a development contract.

The defendants could not then rely on attorney-client privilege in refusing to answer subsequent questions on that point, the high court held.

The privilege waiver meant the Montgomery County Circuit Court properly admitted into evidence an email communication in which one of the defendants instructed counsel to “just make sure you stop the bastards…. Whichever way you choose to go. We need some leverage,” the opinion said.

Writing for the court, Judge Sally D. Adkins said the email message might have been the “smoking gun” showing the landlords’ bad faith. She added that the defendants could have simply denied the allegation of bad faith, and not waived the attorney-client privilege.

“Yet what defendants cannot do is defend a charge of bad faith by referencing specific communications with attorneys that purportedly provided a good-faith basis for certain actions, and then refuse to allow any further investigation into those actions,” Adkins wrote. “Such tactics would allow the defendant to use the attorney-client communication to his benefit and then refuse to answer more questions about it. This would be an abuse of the privilege — using it both as a sword and a shield.”

Law professor Abe Dash agreed with the court’s conclusion.

“It’s like you have the right to take the Fifth Amendment but if you take the stand, you waive” the right to remain silent, said Dash, who teaches professional responsibility at the University of Maryland Francis King Carey School of Law.

“You’ve got to take the privilege or not,” Dash added. “You can’t pick and choose how you are going to use the privilege.”

The plaintiffs’ appellate attorney, Brian L. Schwalb, said the defendants “were trying to have their cake and eat it too.”

“I don’t think [the court’s decision] is at all a deviation or an erosion of the privilege,” added Schwalb, of Venable LLP in Washington, D.C.

The defendants’ appellate attorney, Andrew Jay Graham, declined to comment Tuesday, saying he had not had time to review the 82-page majority opinion. Graham is with Kramon & Graham PA in Baltimore

A Montgomery County jury in March 2010 found the defendants had exercised bad faith in dealing with their tenant partners to develop condominium units, a hotel and a spa resort at Rock Spring Park. The jury awarded the tenants — RSC Tower I LLC and RSC Tower II LLC — nearly $36.4 million in damages and $3.7 million in attorney’s fees.

During happier times in 2004, the landlords, Camalier and Davis Brothers, and the tenants planned big.

Their proposed development was to be anchored by Canyon Ranch, the successful resort developer. The Maryland National Capital Park and Planning Commission approved the site plan in March 2005.

When the plan hit a snag due to a Maryland law prohibiting development of residential condominiums on leasehold estates, the landlords agreed to sell the land to their tenant partners.

But friction ensued in August 2006 after Canyon Ranch pulled out of the project, citing a slowdown in the condominium market.

The tenants wanted to press ahead with development of an apartment complex and signed a memorandum of understanding with Northwestern Mutual Life Insurance Co., under which NML would provide both a construction loan and equity financing for the apartment towers.

To finalize the financial agreement, however, the tenants needed certificates from the landlords that they were in compliance with their lease agreements.

The landlords refused to issue unconditional certificates, and the financing fell through.

The tenants sued the landlords, alleging breach of the covenant of good faith and fair dealing.

The landlords said their actions regarding the certificates were taken with the advice of counsel and in good faith.

The tenants sought discovery of the landlords’ communications with their attorneys, which the circuit court granted, leading to the disclosure of the smoking-gun email.

The Court of Special Appeals upheld the jury’s verdict in a reported opinion on Oct. 26, 2011.

The landlords sought review by the Court of Appeals.

The high court rejected not only the defendants’ privilege argument but also their opposition to the award of attorneys’ fees and lost profits, saying the windfall should have been reduced due to the drop in the housing market.

Dissent

The windfall argument did, however, draw the support of Judges Lynne A. Battaglia and Glenn T. Harrell Jr. They cited the email in expressing concern that the large damages award was punitive rather than compensatory.

“The majority references the ‘bastards’ email, suggesting it may have been the ‘smoking gun’ in the case, highlighting the spectre that the damages awarded are really punitive in nature because, what would it be a ‘smoking gun’ of, other than willfulness?” Battaglia wrote in a dissent Harrell joined. “Certainly, we should not be sanctioning punitives in the guise of ‘lost profits.’”

Adkins was joined in her opinion by Chief Judge Robert M. Bell and Judges Clayton Greene Jr., Mary Ellen Barbera and Robert N. McDonald.

WHAT THE COURT HELD

Case:

CR-RSC Tower et al. v. RSC Tower, CA No. 115, Sept. Term 2011. Reported. Opinion by Adkins, J. Dissent by Battaglia, J. Argued June 7, 2012. Filed Nov. 27, 2012.

Issue:

Does a defendant alleged to have acted in bad faith waive the attorney-client privilege by citing his lawyers’ advice in defending himself against the claim?

Holding:

Yes; a defendant waives the privilege when he uses is it as both a “shield” and a “sword” when answering a discovery request or providing testimony.

Counsel:

Andrew Jay Graham for petitioners; Brian L. Schwalb for respondents.

RecordFax # 12-1127-20 (95 pages).