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Endeavor Energy Resources, L.P. v. Gatto & Reitz, LLC

United States District Court, W.D. Pennsylvania

March 31, 2017

ENDEAVOR ENERGY RESOURCES, L.P., a Texas Limited Partnership, Plaintiff,
v.
GATTO & REITZ, LLC, a Pennsylvania Limited Liability Company, Defendant/Third Party Plaintiff,
v.
RIDEC, INC., MARCELLUS MINERAL GROUP, LLC and JAMES C. ELLIS, Third Party Defendants.

          Denise D. Pentino, Esquire

          William E. Robinson, Esquire

          Randal M. Whitlach, Esquire

          Nicholas J. Godfrey, Esquire

          Dennis J. Roman, Esquire

          Timothy R. Stienstraw, Esquire

          Charlene S. Seibert, Esquire

          Harry F. Kunselman, Esquire

          Trent A. Echard, Esquire

          Joseph M. George, Esquire

          Christopher L. Blackwell, Esquire

          OPINION

          David Stewart Cercone United States District Judge.

         I. Introduction

         Plaintiff Endeavor Energy Resources ("Endeavor" or "plaintiff"), a Texas entity, commenced this action against defendant Gatto & Reitz (“G&R”), a Pennsylvania law firm, seeking redress for the alleged improper distribution of funds that G&R held in escrow. Presently before the court is G&R's motion to compel production of various documents withheld from discovery by Endeavor pursuant to the attorney-client and work-product privileges. The motion also seeks to have more detailed information set forth in Endeavor's privilege log with regard to additional withheld documents. In its response to the motion Endeavor volunteered to produce the documents for in camera review and pursuant to that offer the court has received and reviewed the documents. For the reasons set forth below, G&R's motion will be granted in part and denied in part. Endeavor will be ordered to disclose certain documents forthwith and to provide more detailed information in its privilege log with regard to the additional withheld documents. The motion will be denied in all other aspects.

         In its complaint Endeavor advances claims for breach of contract, breach of fiduciary duty, conversion, fraud and civil conspiracy and seeks to recover $2, 702, 500.00 that was held in escrow as well as related damages, fees and costs. G&R assertedly was not to distribute the escrow funds until (1) RIDEC, Inc. (“RIDEC”), a Pennsylvania entity, entered into an oil and gas lease on terms that were acceptable to Endeavor and (2) Endeavor authorized G&R to release the funds in writing. The escrow funds were being held in trust from a prior attempted oil and gas lease that was never consummated. Thereafter, an understanding was reached that the funds would be used to (1) pay a lease-signing bonus to RIDEC upon consummation of the contemplated RIDEC lease (the “RIDEC lease”) and (2) pay a fee to Marcellus Mineral Group, LLC (“MMG”), a Pennsylvania entity controlled by Pennsylvania resident James C. Ellis (“Ellis”), for brokering the lease between RIDEC and Endeavor. Plaintiff avers that it did not get a lease that contained the terms which it had insisted on as acceptable and G&R failed to follow Endeavor's instructions to not distribute the escrow funds and return them to Endeavor.

         G&R filed an answer denying liability and a third-party complaint against RIDEC, MMG, and Ellis (collectively the “third-party defendants”) seeking indemnification in the event G&R is held liable for distributing the escrow funds. G&R advances claims for declaratory relief and unjust enrichment. It seeks a declaration that a binding lease was entered between Endeavor and RIDEC. In the event Endeavor and RIDEC did not agree to a lease, it seeks to recoup the funds that the third-party defendants received from G&R's distribution of the escrow account pursuant to an equitable theory of unjust enrichment.

         RIDEC answered the third-party complaint and filed a counterclaim against G&R, crossclaims against Ellis and MMG, and a claim against Endeavor. RIDEC advances claims for breach of contract, negligence, promissory estoppel and unjust enrichment against Endeavor, breach of contract, negligent misrepresentation and unjust enrichment against G&R, and breach of contract, negligent misrepresentation and unjust enrichment against Ellis and MMG. RIDEC asserts that for over a year none of the other parties informed it of Endeavor's contention that the lease was invalid and the first notice it received of that contention was G&R's third-party complaint, notwithstanding Endeavor having informed the other parties at least a year earlier that the lease did not contain the terms to which it had agreed. RIDEC maintains that disgorgement of the signing bonus received from the G&R escrow account would be unjust because RIDEC labored under the understanding that Endeavor obtained a valid lease for over one year of a two year lease and RIDEC was unable to lease its land during what it thought was the lease's two-year term. RIDEC also complains that (1) it was never made aware that Ellis was affiliated with MMG and (2) Ellis received a grossly disproportionate fee for facilitating the RIDEC lease. It maintains that under these circumstances it would be a breach of its rights and inequitable for it to have to return the money received from the escrow account as a bonus for signing the RIDEC lease.

         Endeavor fired a return salvo of claims against G&R and the third party defendants. These consist of breach of contract, aiding and abetting breach of fiduciary duty, conversion, fraud, unjust enrichment and civil conspiracy against Ellis and MMG, civil conspiracy against G&R and unjust enrichment and constructive trust against RIDEC. In the event that the RIDEC lease is determined to be valid, Endeavor seeks to recover the bonuses and fees paid to the third-party defendants because, in that scenario, the third-party defendants (potentially with G&R's support) mislead Endeavor into believing that the RIDEC lease contained Endeavor's demanded terms when, in reality, it did not. And this in turn assertedly caused Endeavor to release the escrow funds under misleading or false pretenses.

         It is against this backdrop that the court turns to the pending discovery dispute involving documents withheld on the basis of the attorney-client and work-product privileges. G&R contends that the documents will evidence Endeavor's treatment and/or belief that the RIDEC lease was valid. From its perspective the documents are discoverable because either Endeavor disclosed them to or they were produced by a third-party independent contractor, Don B. Estill (“Estill”), who did not communicate directly with Endeavor's general counsel Michael Short (“Short”). It reasons that because Pennsylvania law does not equate independent contractors with corporate employees or agents, the attorney-client privilege does not apply. Likewise, Endeavor purportedly did not hire Estill in anticipation of litigation; and it also failed to meet its burden to prove that the documents disclosed to or produced by Estill were made in anticipation of litigation, thereby preventing application of the work-product doctrine. G&R thus concludes that without the protection of the attorney-client privilege and work-product doctrine, the documents are discoverable.

         Endeavor responds that the attorney-client privilege and work-product doctrine shield the documents from discovery. It posits that Pennsylvania law implicitly recognizes a functional-equivalent doctrine that permits courts to treat independent contractors in the same manner as corporate employees or agents for attorney-client privilege purposes under appropriate circumstances. Applying this understanding of the attorney-client privilege, Estill assertedly is functionally an Endeavor employee whose conversations regarding legal matters are not subject to disclosure. The work-product doctrine also protects the documents G&R seeks because Endeavor disclosed the documents to Estill or he produced them in order to prepare for litigation. Thus, Endeavor maintains that all documents properly have been withheld as privileged.

         G&R's motion to compel production will be granted as to ENDEAVOR 735-36 and ESTILL 169-171, 172-182, 185, 186-87, 198-99, 201 (starting with the Short email on the bottom of ESTILL 201)-203. The motion to compel production will be denied and the court will issue a protective order as to ENDEAVOR 578, 580-604, 607-21, 646-57, 711-14, 753-57 and ESTILL 1-168, 183-184, 188-197, 200, 201 (not including Short's email to Bradley Reitz on the bottom of ESTILL 201), and 204-362.

         II. Discovery Dispute Background

         The origins of this particular discovery dispute arose when Estill, a "contract landman, " appeared for a deposition on January 20, 2015. (Docket Nos. 133 at ¶ 7; 133-4 at 12:6-7). There, a conflict quickly emerged over whether information Estill obtained from and exchanged with Gilmour is protected. For instance, Endeavor's counsel instructed Estill not to answer “any follow-up questions to the degree that Mr. Gilmour discussed anything with you that Mr. Short and he discussed.” (Docket No. 133-4 at 72:4-7). Estill's counsel stated: “after February or March of 2013, I think, that virtually everything . . . that Mr. Estill or his company did after, say, January of 2013, . . . certainly March of '13 was in connection with the litigation.” (Docket No. 133-4 at 115:24-116:4).[1]

         G&R requests the court compel Endeavor to produce documents bates stamped ESTILL 1-362 and ENDEAVOR 578, 580-603, 604, 607-21, 646-57, 711-14, 735-36, and 753-57. These documents were “disclosed to Estill.” (Docket No. 133 at ¶ 17). Endeavor thereafter removed them from Estill's possession. (Docket No. 133 at ¶ 6). And these documents do not include direct communications between Short and Estill. (Docket No. 133 at ¶ 14). With regard to these interactions, Estill admitted he could not recall “any conversations directly with [Short], but [only knew] in [his] conversations with [Gilmour] that the information he was giving me had been discussed with [Short].” (Docket No. 133-4 at 96:4-7). G&R thus contends that the documents only contain communications between Gilmour and Estill that were derived from Gilmour's communications with Short and as a result they are discoverable. (Docket No. 133 at ¶ 15).

         The record does not indicate that Estill was Endeavor's employee or agent. During his deposition Estill defined the nature of his relationship with Endeavor:

Q Endeavor . . . refers to you as their agent. Are you aware of that?
A I'm not their agent.
Q Okay . . . what's your understanding of an agent?
A I don't know what the definition is, but I'm a contractor. I don't have any authority to act on their behalf, so I don't consider myself an agent. I consider myself a contractor.

(Docket No. 133-4 at 19:16-24). Endeavor pays Estill through invoices. (Docket No. 133-4 at 19:2-5).

         Estill described his work as providing “contract land services” including assisting Endeavor's “exploration and operations” anywhere Endeavor “want[s] me to go.” (Docket No. 133-4 at 18:15-23). Specific tasks he performed included running title searches and reviewing leases. (Docket No. 133-4 at 27:11-16). He ran a title search on “the RIDEC land” at Short's instruction. (Docket No. 133-4 at 27:19-28:10). He also described running a title search occurring in “early-maybe March of 2013” at Gilmour's instruction. (Docket No. 133-4 at 30:9-31:7). The purpose of this search was “to verify . . . that RIDEC owned the oil and gas rights.” (Docket No. 133-4 at 33:15-23).[2]

         III. Discussion

         A. Attorney-Client Privilege

         Federal courts in diversity cases must look to state law when contemplating attorney-client privilege issues. See Fed.R.Evid. 501; United Coal Co. v. Powell Constr. Co., 839 F.2d 958, 965 (3d Cir. 1988). Pennsylvania's attorney-client privilege rule has been codified since 1887. Nationwide Mut. Ins. Co. v. Fleming, 992 A.2d 65, 68 (Pa. 2010) (Eakin, J.) (affirming Superior Court by equally divided Pennsylvania Supreme Court); accord Upjohn v. United States, 449 U.S. 383, 389 (1981) (the attorney-client privilege is “one of the oldest of the privileges for confidential communications known to the common law.”). The current statute states: “[i]n a civil matter counsel shall not be competent or permitted to testify to confidential communications made to him by his client, nor shall the client be compelled to disclose the same, unless in either case this privilege is waived upon the trial by the client.” 42 Pa. C. S. § 5928. “[T]he ...


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