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Friday Investments, LLC v. Bally Total Fitness of Mid-Atlantic, Inc.

Supreme Court of North Carolina

November 3, 2017

BALLY TOTAL FITNESS OF THE MID-ATLANTIC, INC. f/k/a Bally Total Fitness of the Southeast, Inc. f/k/a Holiday Health Clubs of the Southeast, Inc. as successor-in-interest to Bally Total Fitness Corporation; and BALLY TOTAL FITNESS HOLDING CORPORATION

          Heard in the Supreme Court on 29 August 2017.

         On discretionary review pursuant to N.C. G.S. § 7A-31 of a unanimous decision of the Court of Appeals, __ N.C.App. __, 788 S.E.2d 170 (2016), affirming an order entered on 13 April 2015 by Judge Jesse B. Caldwell III in Superior Court, Mecklenburg County.

          Horack, Talley, Pharr & Lowndes, P.A., by Keith B. Nichols, for plaintiff-appellee.

          Knox, Brotherton, Knox & Godfrey, by Lisa G. Godfrey; and Burt & Cordes, PLLC, by Stacy C. Cordes, for defendant-appellants.

          NEWBY, JUSTICE.

         In this case we consider whether an attorney-client relationship exists between defendants and a non-party that contractually agreed to indemnify defendants. Recognizing its tripartite nature, we conclude that the contractual duty to defend and indemnify gives rise to an attorney-client relationship. Nonetheless, because defendants failed to request that the trial court provide written findings of fact and did not present in a timely manner the documents at issue for appellate review, we must presume the trial court found facts sufficient to support its conclusion. Given the bare record before us, we cannot conclude that the trial court erroneously determined that the attorney-client privilege did not extend to the communications at issue. Accordingly, we modify and affirm the decision of the Court of Appeals.

         In February 2000, the predecessor in interest to defendant Bally Total Fitness of the Mid-Atlantic, Inc. (Bally Mid-Atlantic) entered into a lease agreement with the predecessor in interest to Friday Investments, LLC (plaintiff) for a large commercial space in Charlotte, North Carolina, in which to place a health club.[1] Codefendant Bally Total Fitness Holding Corporation (Bally Holding), the parent company of both Bally Mid-Atlantic and the original tenant, guaranteed the lease. Bally Mid-Atlantic later sold some of its health clubs, including the Charlotte club, to Blast Fitness Group, LLC (Blast). The Asset Purchase Agreement between Bally Mid-Atlantic and Blast transferred any obligations arising under the real property leases of the clubs sold. The Agreement also included an indemnification clause, wherein Blast agreed to "defend, indemnify, and hold [defendants] . . . harmless of, from and against any Losses incurred . . . on account of or relating to . . . any Assumed Liabilities, including those arising from or under the Real Property Leases after the Closing."

         On 9 May 2014, plaintiff sued defendants for payment of back rent and other charges due under the lease stemming from Blast's failure to pay rent on the space defendants had assigned to Blast. Defendants notified Blast of the lawsuit, and Blast promptly agreed to indemnify and defend defendants in accord with their Agreement. During discovery, counsel for plaintiff requested copies of "post-suit correspondence and documents exchanged between [defendants] and Blast." After defendants refused to comply, plaintiff moved to compel production of the requested documents. Defendants objected and moved for a protective order, asserting the attorney-client privilege. The trial court orally ordered defendants to produce the documents and a privilege log for in camera review.

         On 2 April 2015, after completing its in camera review, the trial court notified counsel via e-mail that it had denied defendants' motion for a protective order and granted plaintiff's motion to compel. On 13 April 2015, the trial court entered its written order summarily denying defendants' motion for a protective order and granting plaintiff's motion to compel. At no point did either party request that the trial court make written findings of fact and conclusions of law. Defendants appealed the trial court's interlocutory order, successfully contending that the subject of the appeal affects a "substantial right." After settling the record on appeal, and after the briefing deadline had passed, defendants moved to submit the documents at issue under seal for in camera review by the Court of Appeals.

         The Court of Appeals affirmed the trial court's grant of plaintiff's motion to compel. Friday Invs., LLC v. Bally Total Fitness of the Mid-Atl., Inc., __ N.C.App. __, 788 S.E.2d 170 (2016). Before discussing the merits of the appeal, the Court of Appeals denied defendants' request to present the records for appellate review as untimely because the request was made after plaintiff had submitted its brief to the Court of Appeals. Id. at, 788 S.E.2d at 175; see N.C. R. App. P. 9(b)(5)(a). On the merits, the Court of Appeals held that a tripartite attorney-client relationship did not exist between defendants and Blast because "an indemnification provision in an asset purchase agreement, standing alone, is insufficient to create a common legal interest between a civil litigant indemnitee and a third-party indemnitor." Friday Invs., LLC, __ N.C.App. at __, 788 S.E.2d at 172. The Court of Appeals reasoned that defendants and Blast shared merely a common business interest and that this distinction rendered inapplicable our previous decision in Raymond v. North Carolina Police Benevolent Ass'n, 365 N.C. 94, 98, 721 S.E.2d 923, 926 (2011) (recognizing the tripartite attorney-client relationship). As a result, the attorney-client privilege did not extend to the communications between defendants and Blast. This Court allowed discretionary review. Friday Invs., LLC v. Bally Total Fitness of the Mid-Atl., Inc., 369 N.C. 185, 793 S.E.2d 685 (2016).

         "The primary purpose of the discovery rules is to facilitate the disclosure prior to trial of any unprivileged information that is relevant and material to the lawsuit so as to permit the narrowing and sharpening of the basic issues and facts that will require trial." Bumgarner v. Reneau, 332 N.C. 624, 628, 422 S.E.2d 686, 688-89 (1992) (emphasis added) (citation omitted). Rule 26 provides for a broad scope of discovery, allowing "[p]arties [to] obtain discovery regarding any matter, not privileged, which is relevant to the subject matter involved in the pending action." N.C. G.S. § 1A-1, Rule 26(b)(1) (2015) (emphasis added).

         "The attorney-client privilege is the oldest of the privileges for confidential communications known to the common law." Upjohn Co. v. United States, 449 U.S. 383, 389, 101 S.Ct. 677, 682, 66 L.Ed.2d 584, 591 (1981) (citation omitted). For the privilege to apply and thus exclude relevant evidence, "the relation of attorney and client [must have] existed at the time the [particular] communication was made." In re Investigation of Miller, 357 N.C. 316, 335, 584 S.E.2d 772, 786 (2003) (quoting State v. McIntosh, 336 N.C. 517, 523, 444 S.E.2d 438, 442 (1994)).

         Historically, an attorney-client relationship arises between an attorney and a single client the attorney represents. See id. at 335, 584 S.E.2d at 786. This Court, however, has also recognized a multiparty attorney-client relationship in which an attorney represents two or more clients. See Dobias v. White, 240 N.C. 680, 685, 83 S.E.2d 785, 788 (1954) (indicating that an attorney-client relationship can exist when "two or more persons employ the same attorney to act for them in some business transaction"). "The rationale for recognizing this tripartite attorney-client relationship is that individuals with a common interest in the litigation should be able to freely communicate with their attorney, and with each other, to more effectively defend or prosecute their claims." Raymond, 365 N.C. at 99, 721 S.E.2d at 926 (citation omitted).

         In Raymond a former police officer and member of the Southern States Police Benevolent Association (SSPBA) contacted the SSPBA and spoke with an SSPBA attorney in confidence, seeking legal advice regarding his recent demotion. Id. at 95-96, 721 S.E.2d at 924-25. The SSPBA then referred the officer to outside legal counsel paid for by the SSPBA. As a dues-paying member, the former officer's SSPBA membership entitled him to various SSPBA services, including legal representation in grievance and disciplinary matters. Recognizing the tripartite nature of the arrangement, this Court held that an attorney-client relationship existed between the former police officer, the SSPBA and its attorney, and the outside legal counsel selected by the association to represent the former officer. Id. at 99, 721 S.E.2d at 927. As such, ...

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