Work Product Doctrine Protects Litigation Finance Documents from Discovery in Delaware
Litigation finance is a nascent industry in the United States. As litigation finance has gained a foothold in the legal landscape, more and more courts have been confronted with legal issues surrounding litigation funding transactions – namely, whether communications exchanged between a funder and a claimant and/or their attorney are subject to protection from discovery by the Work Product Doctrine. This issue was most recently resolved in the Delaware Chancery Court in Carlyle Investment Management L.L.C., et al. v. Moonmouth Company S.A., et al. (“Carlyle”).
What started as a narrow discovery issue over personal jurisdiction spurned a legal drama reminiscent of Charles Dickens’ A Tale of Two Cities as it required consideration of ongoing litigation rooted in both the Bailiwick of Guernsey, a British Crown dependency (“Guernsey”) and the Delaware Chancery Court in the United States. Carlyle Capital Corporation Limited (“CCC”) is a Guernsey limited company which was placed into liquidation due to billions of dollars of losses sustained during the 2007-2008 financial crises. Liquidators of CCC determined the only viable assets remaining for CCC stakeholders were claims against CCC personnel (“Guernsey Case”). In order to pursue these assets, CCC Liquidators turned to several unknown parties to fund the Guernsey Case. Allegedly, the Delaware Carlyle defendants [i] provided some funding in violation of their releases with CCC.
Although the Delaware court stayed the Carlyle case on its merits, it allowed discovery on the sole issue of personal jurisdiction over the defendants. Liquidators of CCC brought a Motion to Intervene requesting a protective order for documents relating to all communications concerning the litigation funding agreement in the Guernsey Case on the basis that such documents were privileged and confidential and thus protected under the Work Product Doctrine.
The CCC Liquidators alleged that discovery of the funding agreement would “reveal their mental impressions and evaluations as to the strengths and weaknesses of the ongoing litigation in (the Guernsey Case).”[ii] As there was no statutory or case law in Guernsey that was on point as to this discovery issue and this was an issue of first impression in Delaware, the Delaware court decided they would “not read a conflict where none exists, and will apply the law of the forum state, Delaware.”[iii]
At the crux of determining whether the Work Product Doctrine applies in Delaware is whether the funding documents were created for a business purpose or because of litigation. The Delaware court applied the broad “because of” test to establish the purpose of the creation of the litigation funding documents. The court reasoned:
“In the litigation funding context, this analysis becomes blurry because the
litigation itself arguably is part of the business. Potentially every document
a third-party-litigation-funding company creates is created ‘because of
litigation’ in that the company is in the business of funding litigation…[t]he
negotiations between those two parties almost certainly would involve the
lawyers mental impressions, theories and strategies about the case, which
‘were only prepared because of the litigation.’ Similarly, the terms of the
final agreement – such as the financing premium or acceptable settlement
conditions – could reflect an analysis of the merits of the case.” [iv]
The Delaware court determined that the principles underlying the purpose of the Work Product Doctrine favored protecting the discovery of third-party litigation funding documents because of the high likelihood that such documents contained discussion of the merits and strategies in the related Guernsey Case. More importantly, the Delaware court was able to look past the white noise of arguments against litigation finance and take note of its increasing value to the U.S. legal system. As Vice Chancellor Parsons so aptly stated in his decision:
“Allowing work product protection for documents and communications
relating to third-party funding places those parties that require outside
funding on the same footing as those who do not and maintains a level
playing field among adversaries in litigation. Thus, even though claim
funding is the business of financing lawsuits … those documents
simultaneously also are litigation documents and work product protection is
[i] Carlyle Investment Management L.L.C., et al. v. Moonmouth Company S.A., et al., In the Court of Chancery of the State of Delaware, C.A. No. 7841-VCP, February 24, 2015. Plaintiffs in this case include Carlyle Investment Management, L.L.C. ("CIM"), TC Group, L.L.C. ("TC Group"), and TCG Holdings, L.L.C. ("TCGH"). CIM is a Delaware limited liability company that served as the investment manager for CCC. TCG is a global investment management firm and an affiliate of CIM. TCGH is its sole managing member.
[iii] Ibid. citing Homeland Ins. Co. v. Corvel Corp., 2013 WL 3937022 at p.9 (Del. Super. June 12, 2013)(quoting Tyson Foods, 2011 WL 3926195 at p.6).
[iv] Ibid. citing AM Gen. Hldgs, 2013 WL 1668627, at pg.2.