Alan Schorr’s Case of The Week ending August 31, 2012

Gilvey v. Creative Dimensions in Education, Inc., 2012 WL 3656332 (N.J..App. Div., August 28, 2012) (unpublished)

This week’s creative plaintiff’s attorney figured out a way to take financial discovery from an employer during pre-trial discovery, earning Gilvey v. Creative Dimensions in Education, Inc., the honor of being Case of the Week. The plaintiff, Robert W. Gilvey, sued his former employer and its closely-held owners for discriminatory termination in violation of NJLAD; CEPA; good faith and fair dealing; and wage and hour violations. The defendant counterclaimed for various tort and contract claims. The plaintiff was successful in obtaining an order to discover the financial condition of the business based upon the defendants’ counterclaim. To prevent the discovery, the defendants voluntarily dismissed their counterclaim.

The plaintiff still wanted that financial discovery, however, and filed a motion to amend his complaint to add counts for fraudulent transfer, aiding and abetting fraudulent transfer, and a demand to pierce the corporate veil. In the same motion, the plaintiff requested an order requiring the defendants to produce their personal and business records in conjunction with the new claims. The trial judge granted both requests. The defendants moved for leave to file an interlocutory appeal, which was granted. The Appellate Division then affirmed on the issues of amendment and discovery of financial records.

The Court rejected the defendants’ argument that the discovery of financial records was not ripe for purposes of the fraudulent transfer-related counterclaims. The Appellate Division, however, instructed the trial court to bifurcate the fraudulent transfer claims either at trial or into separate trials so that the discovery obtained in the fraudulent transfer claim could not be used in the case in chief.

In New Jersey, discovery of the Defendant’s financial condition has been governed by Herman v. Sunshine Chemical Specialties, Inc., 133 N.J. 329 (1993). The Supreme Court held that because of the sensitive nature of an individual’s financial information and the fact that punitive damages are often sought but infrequently awarded, discovery of the defendant’s financial condition may be had only after plaintiff presents a prima facie case of the right to recover punitive damages. Herman at 343-44.

Although there is little in the way of case law, it has become common practice for discovery of financial information to only be provided after the jury has returned a verdict in plaintiff’s favor. Then, the plaintiff has less than 24 hours to review the financial documents in preparation for the punitive damages phase of the trial the next day. It has always struck me as incongruent that discovery takes place for years for compensatory damages, but only for mere hours for punitive damages, which is often a larger amount than the compensatory damages. Nevertheless, that remains the process, unless, like Mr. Gilvey, you have a good faith basis for asserting a fraudulent transfers claim. Then you can get your financial discovery along with your case in chief discovery.

The Gilvey case also addressed the issue of deposing an attorney when the defendant uses “advice of counsel” as a defense for its actions. The Court affirmed the three elements for piercing attorney-client privilege when “advice of counsel” is raised.

First, there must be a legitimate need of the party to reach the evidence sought to be shielded. Second, there must be a showing of relevance and materiality of that evidence to the issue before the court. Third, the motion court must determine by a fair preponderance of the evidence including all reasonable inferences that the information could not be secured from any less intrusive source. The second factor is generally satisfied where the party claiming the privilege has implicitly waived it by putting the confidential communications in issue in the litigation. In other words, where the plaintiff has placed in issue a communication which goes to the heart of the claim in controversy the privilege is waived. Gilvey at *6 (citations omitted)

In this case, the Appellate Division reversed the order permitting plaintiff to depose defendant’s counsel, finding that the plaintiff had failed to establish that the advice of counsel was relevant to an issue in controversy. Nevertheless, this unpublished opinion is a good case to print out and save because these issues come up fairly often in litigation with small, closely-held businesses.

Plaintiff’s counsel: Amer S. Pharaon, James E. Tyrrell, Jr., Kashif T. Chand and Patrick F. Conti, Patton Boggs, LLP

Defendants’ counsel: Jed L. Marcus and Emily J. Wexler, Bressler, Amery & Ross, P.C.

Judges: Cuff, Lihotz & St. John, Judges of the Appellate Division.