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Sher v. Barclays Capital Inc.

United States District Court, Fourth Circuit

June 26, 2013

JOEL I. SHER, CHAPTER 11 TRUSTEE for TMST, INC., f/k/a Thornburg Mortgage, Inc. Plaintiff,


TIMOTHY J. SULLIVAN, Magistrate Judge.

Now pending before this Court is a discovery dispute regarding the production of a document referred to by the parties as the "Petrush Spreadsheet." This spreadsheet was inadvertently produced to the defendant, Barclays Capital, Inc. ("Barclays"), by the plaintiff, Joel I. Sher, Chapter 11 Trustee for TMST, Inc., f/k/a Thornburg Mortgage, Inc. ("TMST"), and then "clawed back"[1] pursuant to an agreement between the parties. Barclays contends that the Petrush Spreadsheet is not protected from disclosure and has filed a motion to compel its production after good faith efforts by both parties to resolve this dispute failed.

This Memorandum Opinion[2] addresses: (1) Barclays' Motion to Compel Production of Documents Withheld on the Basis of the Work-Product Doctrine dated March 1, 2013 (ECF No. 69-1); (2) TMST's Opposition to Barclays' Motion to Compel dated March 22, 2013 (ECF No. 69-2); (3) Barclays' Reply Memorandum of Law in Support of Barclays' Motion to Compel dated April 10, 2013 (ECF No. 69-3); and (4) TMST's Sur-Reply to Barclays' Motion to Compel filed on May 28, 2013 (ECF No. 75). Pursuant to Local Rule 104.7, Barclays has certified that counsel have conferred regarding the discovery dispute. ECF No. 69. The Court expressly notes that the issues have been well briefed by the parties and finds that no hearing is necessary. See Local Rule 105.6. For the reasons set forth below, Barclays' Motion to Compel is DENIED. This Memorandum Opinion disposes of ECF Nos. 69 and 75.


This lawsuit is based on a Master Repurchase Agreement ("MRA") between Barclays and TMST, a real estate investment trust that focused on residential mortgage-backed securities ("MBS"). ECF No. 69-1 at 5. The MRA governed "individual repurchase transactions, " allowing TMST to temporarily finance its purchase of securities through loans from Barclays. Id. The transactions were the "economic equivalent of a secured loan" (ECF No. 69-1 at 5); Barclays would hold the purchased securities as collateral until TMST effectively repurchased the securities by repaying the loans with interest on a specified date. ECF No. 69-1 at 5-7. The MRA allowed either TMST or Barclays to make margin calls "at any time" if the market value of the securities serving as collateral became less than or exceeded the designated repurchase price by more than the agreed upon "margin amount." ECF No. 69-1 at 6.

At the beginning of August 2007, seven repurchase transactions were outstanding under the MRA. Id. These transactions represented 13 MBS, valued at approximately $2.7 billion. ECF No. 69-1 at 6. When the value of those securities began to decline below the margin amount, Barclays issued a series of margin calls and declared an event of default on August 14, 2007. Id. Barclays claims it declared the default because TMST failed to satisfy its duty to meet the margin call. Id. TMST claims Barclays did not provide "the contractually mandated time to contest or meet the call." ECF No. 7 at 9. After issuing a Notice of Default, Barclays disposed of TMST's collateral by liquidating some of the MBS assets and taking some of those assets into its own inventory. ECF Nos. 69-1 at 6 & 69-2 at 5. TMST alleges that Barclays failed to liquidate the securities at "reasonably satisfactory prices or otherwise in a commercially reasonable manner." ECF Nos. 7 at 11 & 69-2 at 6-7.

TMST disputed the values Barclays received during the liquidation as soon as Barclays provided the results (ECF No. 69-2 at 6), and in September 2007, TMST hired Heller Ehrman ("Outside Counsel") to determine whether TMST had any potential causes of action against Barclays. ECF No. 75 at 1. Outside Counsel requested that TMST analyze the liquidation prices Barclays received by comparing those prices to the sales of comparable securities on August 14, 2007. ECF No. 69-2 at 6. Dan Petrush, a TMST employee ("Mr. Petrush"), completed the analysis requested by Outside Counsel, compiled the data into a spreadsheet, and sent that spreadsheet ("the Petrush Spreadsheet") to TMST's CFO, Clay Simmons, in an email titled "At the Request of Counsel." ECF No. 69-2 at 8. Mr. Simmons then forwarded the spreadsheet to Robert Badal, the partner at Heller Ehrman handling the matter. Id.

During discovery, TMST inadvertently produced several versions of the Petrush Spreadsheet to Barclays. ECF No. 69-1 at 328 & 69-2 at 8. Barclays noted the spreadsheet's header, "At the Request of Counsel, " and alerted TMST that it might have been inadvertently produced. Id. TMST agreed and clawed back the spreadsheet. Upon the subsequent discovery of several other versions of the spreadsheet, Barclays provided similar notice to TMST of the potentially inadvertent production. ECF Nos. 69-1 at 331 & 69-2 at 9. This time, however, Barclays claimed that it had a substantial need for the document. ECF No. 69-1 at 331. TMST clawed back those versions as well, asserting that the spreadsheet was protected from disclosure by the work-product doctrine. ECF No. 69-1 at 333.

After deposing Mr. Petrush, Barclays made another request for the documents from TMST, and TMST again asserted the work-product doctrine. After good faith efforts of the parties were not successful in resolving the dispute, Barclays filed a Motion to Compel. ECF No. 69-1. It contends that the Petrush Spreadsheet is not protected by the work-product privilege because it is an ordinary business document. Alternatively, Barclays argues that even if TMST has appropriately asserted the work-product doctrine, Barclays' substantial need for the Petrush Spreadsheet overrides that privilege. ECF No. 69-1 at 5. It claims that, because Mr. Petrush does not recall the details of the work he completed on the spreadsheet, the Petrush Spreadsheet is the only way Barclays can determine how TMST calculated its losses. Barclays further asserts that this knowledge is essential to defending itself against TMST's allegations, particularly with respect to TMST's alleged damages. See ECF No. 69-3.


Rule 26(b) of the Federal Rules of Civil Procedure establishes the framework for the work-product doctrine and forms the foundation for resolving this discovery dispute. In pertinent part, the rule provides that "ordinarily, a party may not discover documents and tangible things that are prepared in anticipation of litigation" unless that party "shows that it has a substantial need for the materials to prepare its case and cannot, without undue hardship, obtain their substantial equivalent by other means." Fed.R.Civ.P. 26(b)(3)(A).

The Court finds that the Petrush Spreadsheet was prepared in anticipation of litigation. Barclays argues that, because the calculations performed for the spreadsheet involved analysis that TMST would ordinarily perform to determine its losses, the Petrush Spreadsheet must be considered an ordinary business document rather than a privileged work product. The Court disagrees. In determining whether a document was prepared in anticipation of litigation, the Fourth Circuit has adopted the "because of" test outlined in National Union Fire Ins. Co. of Pittsburgh v. Murray Sheet Metal Co., 967 F.2d 980, 984 (4th Cir. 1992). See also Millennium Inorganic Chems. Ltd. v. Nat'l Union Fire Ins. Co., No. ELH-09-1893, 2011 WL 1466428, at *7 (D. Md. April 15, 2011). The "because of" test asks "whether, in light of the nature of the document and the factual situation in that particular case, the document can fairly be said to have been prepared or obtained because of the prospect of litigation." National Union, 967 F.2d at 985. Documents prepared in the "ordinary course of business" do not fall within the definition of having been prepared in "anticipation of litigation." Id.; See also American Piledriving Equip., Inc. v. Travelers Cas. & Sur. Co. of Am., No. ELH-11-01404, 2011 WL 5402441, at *3 (D. Md. Nov. 7, 2011) (finding that business documents, such as purchase orders and rental agreements, created in the regular course of business were the "sort of business records" that did not meet the "because of" test).

Applying the "because of" test in this case, the nature of the Petrush Spreadsheet and the facts surrounding its creation indicate that it was prepared "because of the prospect of litigation." See National Union, 967 F.2d at 985. "The document must be prepared because of the prospect of litigation when the preparer faces an actual claim or a potential claim following an actual event or series of events that reasonably could result in litigation." National Union, 967 F.2d at 984; American Piledriving, 2011 WL 5402441 at *3. It is clear that litigation by TMST against Barclays was being pursued at the time the Petrush Spreadsheet was created. TMST had retained Outside Counsel in September 2007, before the creation of the Petrush Spreadsheet. ECF Nos. 69-2 at 11 & 75 at 2. The spreadsheet has a header containing the phrase "At the Request of Counsel."[3] ECF No. 69-1 at 5. When Petrush emailed the completed document to TMST's CFO, his email was titled "At the Request of Counsel, " and the CFO, within ten minutes of receiving this email, forwarded it to the TMST's retained Outside Counsel.[4]

Having established that the Petrush Spreadsheet was created because of the prospect of litigation, it must be determined whether Barclays has established the substantial need and undue hardship required under Rule 26(b) to override TMST's work product privilege. See ...

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