- Buttonwood Tree Value Partners v. R.L. Polk & Co. and Morris v. Spectra Energy Partners are two recent cases providing new guidance on the limits of the Garner exception.
- The Supreme Court of Delaware has emphasized that the Garner exception is narrow and difficult to satisfy.
- Practitioners should understand the key takeaways from these cases as to when Garner does and does not apply.
Two recent decisions from the Delaware Court of Chancery offer new insight into the court’s application of an important exception to the attorney-client privilege in breach of fiduciary duty actions. The Garner exception to the attorney-client privilege, first articulated by the Fifth Circuit Court of Appeals in Garner v. Wolfinbarger, 430 F.2d 1093 (5th Cir. 1970), cert. denied, 401 U.S. 974 (1971), requires fiduciaries defending claims for breaches of fiduciary duty to produce otherwise privileged documents upon a showing of good cause by the party asserting the claims. The Supreme Court of Delaware has emphasized that the exception is “narrow, exacting, and intended to be very difficult to satisfy.” Wal-Mart Stores, Inc. v. Indiana Elec. Workers Pension Trust Fund IBEW, 95 A.3d 1264, 1278 (Del. 2014). Consistent with this view, in Buttonwood Tree Value Partners, L.P. v. R.L. Polk & Co., Inc., 2018 WL 346036 (Del. Ch. Jan. 10, 2018) and Morris v. Spectra Energy Partners (DE) GP, LP, 2018 WL 2095241 (Del. Ch. May 7, 2018), the Court of Chancery found the Garner exception inapplicable while providing new guidance on its limits.
Buttonwood Tree Value Partners, L.P. v. R.L. Polk & Co., Inc.
In this case, former minority stockholders of R.L. Polk & Co., Inc. (Polk) asserted direct breach of fiduciary duty claims against the Polk family, which collectively held approximately 90 percent of Polk common stock, and against directors affiliated with the Polk family. Plaintiffs alleged that these defendants breached their duties of loyalty and care in connection with a self-tender transaction orchestrated by the Polk family. According to plaintiffs, the transaction enriched the Polk family, who afterwards received dividends amounting to one-third of the self-tender price and sold the company for three times the self-tender valuation.
Invoking the Garner exception, plaintiffs moved to compel the production of privileged documents withheld by defendants that related to the sale of the company, the self-tender, and various restructuring options under consideration at the time of the self-tender. The court explained that in evaluating whether a stockholder has established sufficient “good cause” to warrant application of the Garner exception, Delaware courts focus on three of the factors identified by the Fifth Circuit in Garner: “(1) the colorability of the claim; (2) the extent to which the communication is identified versus the extent to which the shareholders are blindly fishing; and (3) the apparent necessity or desirability of shareholders having the information and availability of it from other sources.” In its view, the first and second of these factors act as “gatekeepers” that “strain out frivolous attempts to vitiate the privilege.” The third factor, applicable only when the first two are satisfied, reflects “a balancing test to see whether the interest in discovery, or that of maintaining the privilege, is paramount.” The court noted that Garner “balances the [attorney-client] privilege’s purpose of encouraging open communication between counsel and client against the right of a stockholder to understand what advice was given to fiduciaries who are charged with breaching their duties.” (Quotations and citations omitted.)
The court found that the first factor weighed in favor of disclosure of the privileged documents at issue because the court previously held that the complaint stated claims against the Polk family and its affiliated directors for breaches of fiduciary duty, and therefore the claims were colorable. The court found that the second factor also weighed in favor of disclosure because the documents at issue, although “relatively large” in number (1,200), were tailored to plaintiffs’ allegations, and there was no indication that production of the documents would be overly burdensome.
Having found that plaintiffs “cleared the initial hurdle” imposed by the first two factors, the court turned to the third factor and found that it weighed against disclosure because the plaintiffs had not demonstrated that the information sought was unavailable from other nonprivileged sources. In so finding, the court noted that plaintiffs had yet to depose any witnesses, and there was no reason to believe that depositions would fail to reveal information about the sale of the company, the self-tender, and the restructuring options considered at the time of the self-tender. The court rejected plaintiffs’ argument that the documents at issue were necessary to prepare for the forthcoming depositions or to test the witnesses’ credibility. The court reasoned that such concerns are always present, and if the court were to adopt them as a basis to apply the Garner exception, the scope of the exception “would expand significantly, an outcome contrary to our Supreme Court’s admonition that the exception is ‘narrow, exacting, and intended to be very difficult to satisfy.’” (quoting Wal-Mart, 95 A.3d at 1278). The court emphasized that a stockholder invoking Garner must establish that they “have exhausted every available method of obtaining the information they seek.” Given that plaintiffs did not do so, the court concluded that the balancing test under the third factor “tip[ped] against disclosure of the privileged documents,” and held that the Garner exception did not apply.
Having held that plaintiffs failed to demonstrate that their motion to compel should be granted, the court found it unnecessary to decide whether Garner could apply to the direct, as opposed to derivative, claims in issue. Defendants argued that Garner applies only to derivative claims “where [the] defendant corporate actors assert the privilege on behalf of the very entity that the plaintiffs purport to represent derivatively, in which case the assertion of the privilege on behalf of the corporation and its principals may be inimical to the corporate interest.” Without deciding the issue, the court noted that the Garner exception logically applied in the context of direct claims for breach of fiduciary duty, “but that the nature of the action must be accounted for in the balance of interests that Garner requires.”
Morris v. Spectra Energy Partners (DE) GP, LP
The discovery dispute at issue in this decision arose in the context of a challenge to a transfer of certain assets of Spectra Energy Partners, LP (Spectra LP) to a principal of Spectra LP’s general partner, Spectra Energy Partners (DE) GP, LP (Spectra GP). Spectra LP’s limited partnership agreement (the LPA) eliminated common-law fiduciary duties, but required Spectra GP to act in good faith with respect to such transfers. The plaintiff, a common unitholder of Spectra LP, claimed that Spectra GP breached its duty to act in good faith by knowingly approving a transfer of assets for approximately $500 million less than the assets were purportedly worth.
The plaintiff moved to compel the production of two documents in unredacted form under the Garner exception. In a matter of first impression, the court considered whether the Garner exception applies in circumstances where a limited partnership has eliminated common-law fiduciary duties. Relying on precedent holding that the Garner exception is limited to circumstances where there is a fiduciary relationship between the party challenging the privilege and the party asserting it, the court concluded that the Garner exception does not apply when fiduciary duties are expressly disclaimed.
In so finding, the court emphasized the policy underlying the Garner exception, which rests on the “mutuality of interest” between a stockholder and a fiduciary when the fiduciary seeks legal advice in connection with actions taken or contemplated in his role as a fiduciary. In such circumstances, the court reasoned, the stockholder is “the ultimate beneficiary of legal advice sought by fiduciaries qua fiduciaries,” making it appropriate for the stockholder to view the communications reflecting the advice in certain circumstances. The court recognized that the Garner exception has been applied in situations far removed from stockholder derivative suits (i.e., actions by trust beneficiaries against the trust and trustee, and actions by creditors against a bankruptcy creditor’s committee), but a fiduciary relationship existed in these cases, establishing the requisite mutuality of interest between the parties.
Given that there was no fiduciary relationship between the plaintiff and Spectra GP under the express terms of the LPA, the court concluded that the mutuality of interest underpinning the Garner exception did not exist, and the Garner exception therefore did not apply.
Although application of the Garner exception is necessarily a fact-specific inquiry, these recent decisions offer certain key insights for litigants prosecuting or defending breach of fiduciary duty claims in the Delaware Court of Chancery:
- Fiduciary relationship required, and contractual duties are not enough. The court’s decision in Morris makes clear that the Garner exception is unavailable where common-law fiduciary duties are disclaimed by contract and therefore no fiduciary relationship exists. The LPA in Morris replaced common-law fiduciary duties with contractual duties, and although not expressly addressed, the court’s decision appears to render Garner inapplicable to actions involving breaches of contractual duties. Therefore, even if a plaintiff asserting breaches of contractual duties could otherwise satisfy the high burden required for Garner’s application, it is unavailable in that setting.
- Garner likely applies to direct fiduciary breach claims, but the burden of establishing good cause may be higher in that context. Although the court in Buttonwood did not decide the issue, it surmised in dicta that the Garner exception would apply to direct fiduciary duty claims as well as derivative claims. In Garner, where the claims were both direct and derivative, the Fifth Circuit noted that its decision was not dependent on whether the derivative claim was “in the case or out.” Garner, 430 F.2d at 1097 n.11. In Buttonwood, however, the court cautioned that the nature of the claim should be considered when balancing the interests inherent in the attorney-client privilege against the interests of a stockholder seeking to review privileged communications. This suggests that stockholders invoking the Garner exception in the context of direct fiduciary duty claims may face a higher burden of establishing the requisite “good cause” necessary to invoke the exception.
- Garner does not apply if information sought is potentially available through depositions. When evaluating “the apparent necessity or desirability of shareholders having the information and availability of it from other sources,” the court will not likely find sufficient good cause to invoke Garner if the moving stockholder can obtain the information sought through depositions. Similarly, the potential usefulness of otherwise privileged documents to deposition preparation is not enough under Garner. Rather, a stockholder must exhaust other available options, consistent with the Delaware Supreme Court’s expectation that the Garner exception should “be very difficult to satisfy.”