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United States v. Hallinan

United States District Court, E.D. Pennsylvania

December 4, 2017

UNITED STATES OF AMERICA,
v.
CHARLES M. HALLINAN, et al.

          MEMORANDUM

          EDUARDO C. ROBRENO, J.

         In this criminal action, the Government sought to introduce at trial fifteen documents withheld by a law firm in response to a subpoena, the testimony of the law firm's partner, who represented one of the defendants, concerning the subject matter of the documents, and the testimony of two other attorneys, who represented a company which was alleged to be owned by one of the defendants. Defendant Charles M. Hallinan and an uncharged third party intervenor objected to the admission of the documents and testimony on the basis that they are protected by the attorney-client privilege, the attorney work product privilege, or the community-of-interest privilege. The Government disputed the assertions of privilege, and argued that, to the extent any privilege exists, it was unavailable here by application of the crime-fraud exception.

         The Court reviewed the documents in camera, and held two hearings, portions of which were ex parte and in camera, at which it allowed Hallinan and the third-party intervenor to object to the testimony of the attorney witnesses on the basis of privilege.

         Following each of the hearings, the Court determined that, in the first instance, all of the documents before it and portions of the testimony of the three attorneys are protected by the attorney-client, attorney work product, or community-of-interest privileges. Nevertheless, with respect to the fifteen documents and the testimony of one of the attorneys, the Court found that the protection is lost by application of the crime-fraud exception, and allowed the Government to introduce the documents and that attorney's testimony at trial.

         The Court issued its ruling in orders dated October 11, 2017, October 23, 2017, and October 30, 2017. The case proceeded to trial, and the defendants were convicted. The Court now supplements the legal reasoning for the issuance of those orders.

         I. THE SUPERSEDING INDICTMENT

         Defendants Charles M. Hallinan, Wheeler K. Neff, and Randall P. Ginger (“Defendants”) were indicted by a grand jury on charges of conspiracy to violate the Racketeer Influenced and Corrupt Organization (“RICO”) Act, conspiracy to commit fraud, mail fraud, wire fraud, and money laundering.[1] A second grand jury was later empaneled and returned a superseding indictment.

         The superseding indictment charged that, from at least 1997 until 2013, Defendant Hallinan owned, operated, controlled, and financed numerous business entities based in Bala Cynwyd, Pennsylvania, which issued, serviced, funded, and collected debt from small, short-term, high-interest loans, commonly referred to as “payday loans” because they were meant to be repaid when the borrower received his or her next paycheck (“the Hallinan Companies”). See Superseding Indictment at 2, ECF No. 87. According to the superseding indictment, Hallinan directed some of his companies to charge fees of approximately thirty dollars for every one hundred dollars borrowed, which translated to annual percentage rates of interest of approximately 780 percent, given the short-term nature of the loans. Id. The grand jury charged that the payday loans issued by the Hallinan Companies violated the laws of Pennsylvania and more than a dozen other states restricting the amount of interest permissible on personal loans. See Id. at 5-6.

         According to the superseding indictment, Hallinan, aided and abetted by Defendant Neff, attempted to avoid the operation of state lending laws restricting the issuance of payday loans by entering into multiple partnerships with Native American tribes, who would then claim sovereign immunity from the state lending laws. See Id. at 7-8. The superseding indictment charged that these partnerships were a sham, as the tribes had very little connection to the day-to-day operations of the payday lending operations, and did not provide the money advanced for the payday loans, service the loans, collect on the loans, or incur any losses if the borrowers defaulted. Id. at 8. The grand jury further charged that Hallinan paid the tribes at least $10, 000 a month in return for the tribes' agreement to claim ownership of the various Hallinan Companies and assert sovereign immunity. Id.

         Apex 1 Processing, Inc. (“Apex 1”) is a payday lending corporation incorporated by Hallinan in Florida in July 2008. See Id. at 13. According to the superseding indictment, in November 2008, Hallinan pretended to sell Apex 1 to an entity owned by Defendant Ginger, a purported chief of a Canadian-based Native American tribe. See Id. at 13-14. As part of their agreement, Hallinan promised to pay approximately $10, 000 per month to Ginger, and Ginger promised to claim that his tribe owned Apex 1 whenever necessary to evade state payday lending laws and regulations. See id.

         On March 23, 2010, payday loan borrowers filed a class action lawsuit in Indiana state court against Apex 1 (“the Indiana Litigation”). Id. at 32. The borrowers alleged that Apex 1 issued payday loans to them that violated Indiana law. See Id. On May 8, 2013, the Indiana state court certified a class of 1, 393 plaintiffs in the Indiana Litigation (“the Indiana Plaintiffs”). See Id. at 33. According to the superseding indictment, beginning around July 2013, Hallinan, Neff, and Ginger engaged in a scheme to defraud the Indiana Plaintiffs by deceiving them into believing that Apex 1 was effectively judgment proof so that they would accept a discounted settlement offer on their claims. See Id. at 33-34.

         The superseding indictment further charged that, in order to convince the Indiana Plaintiffs that Apex 1 was judgment proof, Defendants defrauded the plaintiffs into believing that (1) Ginger was the sole owner of Apex 1, (2) Ginger was a Canadian Indian chief who lived on tribal lands in Canada, (3) Apex 1 had few if any assets that could be recovered, and (4) Hallinan did not exercise managerial control over Apex 1. See Id. at 34-35. According to the grand jury, Hallinan took part in this scheme after Neff warned him, in July 2013, that if the Indiana Plaintiffs established that Hallinan had not actually sold Apex 1 to Ginger in 2008, Hallinan could face personal exposure of up to $10 million. See Id. at 33.

         In April 2014, the Indiana Plaintiffs agreed to settle their claims for approximately $260, 000, although their attorneys had valued their clients' cause of action at greater than $2.6 million. See Id. at 36. According to the superseding indictment, Hallinan caused one of the Hallinan Companies to pay the entirety of the settlement. See Id. at 36-37.

         II. PROCEDURAL HISTORY

         Defendants were first charged by indictment on March 31, 2016. ECF No. 1. A superseding indictment was issued on December 1, 2016. ECF No. 87. Defendants Hallinan and Neff filed a motion to dismiss the charges against them on February 8, 2017, ECF No. 149, which the Court denied on August 15, 2017, ECF No. 203. A jury trial commenced on September 26, 2017 against Hallinan and Neff, [2] and the jury returned a guilty verdict against both Defendants on all counts of the superseding indictment on November 27, 2017.[3]

         Prior to trial, the Government issued a subpoena to the Chartwell Law Offices LLP (“Chartwell”) to produce various categories of documents related to the Indiana Litigation. In response to the subpoena, Chartwell withheld fifteen documents on the basis of the attorney-client privilege and the attorney work product privilege with respect to the firm's representation of Apex 1 and Hallinan in his personal capacity in the Indiana Litigation (“the Chartwell Documents”).

         At trial, the Government sought to introduce all fifteen of the Chartwell Documents, on the basis that even if the documents are protected by the attorney-client privilege or the attorney work product privilege in the first instance, any privilege is lost through the application of the crime-fraud exception. The Government also sought to introduce the testimony of (1) Kenneth M. Dubrow, Esquire, a Chartwell attorney who represented Apex 1 and Hallinan in the Indiana Litigation; (2) Susan Verbonitz, Esquire, an attorney employed by Weir & Partners, LLP (“Weir”), who represented Apex 1 at an earlier point in the Indiana Litigation; and (3) Lisa Mathewson, Esquire, an attorney and sole practitioner from the Law Offices of Lisa A. Mathewson LLC, who represented Apex 1 in the grand jury investigation in this case.

         The Government filed a motion under seal requesting that the Court perform an in camera review of the Chartwell Documents pursuant to United States v. Zolin, 491 U.S. 554 (1989), and conduct an in camera hearing of the testimony of the three attorney witnesses, using questions provided by the Government, in order to determine whether the crime-fraud exception applied to the documents and testimony. ECF No. 216. The Government claimed that, to the extent any of the documents and testimony fell within the scope of the attorney-client privilege, attorney work product privilege, or any other privilege, there was a sufficient basis to hold an in camera review of the documents and testimony to determine whether the crime-fraud exception to the privilege applied. See Id. The Government further argued that Defendants and their counsel should be excluded from any in camera hearing, because Judge Surrick, who presided over the grand jury proceedings, had excluded Defendants from in camera reviews for the purpose of evaluating the applicability of the crime-fraud exception during the grand jury investigation.

         After finding that the Government had met the standards articulated by the Supreme Court in Zolin to hold an in camera review of the documents and testimony, the Court conducted an in camera review of the Chartwell Documents, and held two hearings, portions of which were also in camera, at which the three attorney witnesses testified. See Zolin, 491 U.S. at 568-69 (permitting district courts to conduct an in camera review of documents to assess the applicability of the crime-fraud exception).[4] Following the in camera review of the Chartwell Documents, the Court found that portions of the documents were protected by the attorney-client privilege, but that they fell within the crime-fraud exception. The Court ordered Chartwell to produce the documents on October 11, 2017. ECF No. 257.

         The Court held a hearing on October 12, 2017, at which Verbonitz, Dubrow, and Mathewson testified. During the hearing, the Court permitted the Government to ask Verbonitz and Dubrow questions, with counsel for Hallinan asserting objections to the testimony on the basis of attorney-client privilege.[5] For each question for which counsel for Hallinan asserted a privilege, the witness was instructed not to answer. The Court then conducted an ex parte, in camera hearing (without the Government present), asking each witness the questions that they had previously not answered on the basis of privilege.

         With respect to Mathewson, who never represented Hallinan personally, the Court allowed the Government to ask questions about the applicability and scope of the community-of- interest privilege, but did not allow the Government to proceed with substantive questions about her conversations with Hallinan and his attorneys. Instead, the Court instructed the parties to file supplemental submissions regarding whether a community-of-interest privilege existed between Hallinan and Apex 1, and whether, if the privilege existed, there was a sufficient basis to hold an in camera hearing pursuant to Zolin to determine whether the crime-fraud exception applied.

         Following the October 12, 2017, hearing, and on the basis of Mathewson's testimony, the Court concluded that Apex 1 and Hallinan had met their burden to establish the existence of a community-of-interest privilege with respect to certain communications between Mathewson and Hallinan's attorneys. Accordingly, the Court scheduled a Zolin hearing for October 25, 2017, at which time Hallinan could assert any objections to Mathewson's testimony on the basis of the community-of-interest privilege. ECF No. 267.

         The Government filed a post-hearing submission regarding Mathewson on October 16, 2017, arguing that there was no community-of-interest privilege between Hallinan and Apex 1, but if even there was, the crime-fraud exception applied. ECF No. 261. In response, Apex 1 filed a motion to intervene in this action to assert the attorney-client privilege, attorney work product privilege, and/or the community-of-interest privilege on its own behalf with respect to Mathewson's testimony. ECF No. 264. Apex 1 also argued that the crime-fraud exception did not apply to any of the privileged testimony. See id.

         At the Zolin hearing held on October 25, 2017, the Court granted Apex 1's motion to intervene for the purpose of asserting privilege objections to Mathewson's testimony. Hallinan and Apex 1 then objected to all of the Government's questions.[6] The Court then conducted an ex parte, in camera hearing (without the Government present), at which it asked Mathewson the questions that she had previously refused to answer on the basis of privilege.

         Following the Zolin hearings on October 12 and 25, 2017, the Court reviewed the transcript of the testimony of each attorney witness in order to determine whether the answers are protected by the attorney-client, attorney work product, or community-of-interest privileges, and if so, whether the crime-fraud exception applies. The Court then issued orders dated October 23, 2017, and October 30, 2017, sustaining in part and overruling in part Hallinan and Apex 1's objections.

         III. LEGAL STANDARDS

         A. The Attorney-Client Privilege and the Attorney Work Product Doctrine

         The attorney-client privilege applies to any communication that is “(1) a communication (2) made between privileged persons (3) in confidence (4) for the purpose of obtaining or providing legal assistance for the client.” In re Teleglobe Commc'ns Corp., 493 F.3d 345, 359 (3d Cir. 2007) (quoting Restatement (Third) of the Law Governing Lawyers ยง 68 (2000)). In order to establish that the ...


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