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United States v. Drake

United States District Court, M.D. North Carolina

April 16, 2018

UNITED STATES OF AMERICA
v.
SHANNON MICHELLE DRAKE RONALD KEITH EARNEST ROBERT THOMAS TAYLOR

          MEMORANDUM OPINION AND ORDER

          OSTEEN, JR., DISTRICT JUDGE

         Defendant Ronald Earnest (“Earnest”) has filed several related pretrial motions, including a Motion to Preclude the Disclosure of Privileged Materials to the Government, (Doc. 98), a Motion for Discovery on the Disclosure of Information to the Government and Requests for Disclosure, (Doc. 101), a Motion to Compel Legal File from Defendant's Prior Attorneys, (Doc. 106), a Motion for Ex Parte Hearing, (Doc. 115), a Motion for Government to Return all Privileged Documents, (Doc. 120), as supplemented, (Doc. 138), [1] and a Motion to Allow Mr. Earnest to Review SML File prior to Disclosure to the Government, (Doc. 199). Defendant Shannon Drake (“Drake”) joined in several of Earnest's motions, however, these issues as to Drake will be addressed by a separate, forthcoming order. In summary, it is not disputed that during the course of an investigation by the United States beginning in 2012, GrandSouth Bank (“the Bank”) engaged Jim Medford and Smith Moore Leatherwood, LLP (“Smith Moore”) to represent the Bank in that investigation. At that time, Earnest was President of the Bank and Drake was an employee of the Bank. It is also undisputed that the Bank was subpoenaed to appear and produce records to a Grand Jury in the Middle District of North Carolina as part of that investigation.

         These motions are premised upon Earnest's allegation that during the course of the Government's investigation, an attorney-client relationship existed between himself and Smith Moore, that the attorney-client privilege attached to many documents produced during the course of this representation, and disclosure of these documents by counsel for the Bank to the Government was and is a violation of that privilege unless and until Earnest waives that privilege.

         The United States contends no such attorney-client relationship or privilege existed between Earnest and Smith Moore, and further that it is free to seek records from the Bank and its past and present attorneys as the Bank is the holder of any attorney-client privilege.

         On November 9, 2017, a hearing was held during which the parties presented evidence as to whether there was an attorney-client relationship between Earnest and Smith Moore and/or between Drake and Smith Moore and, if so, what documents may be privileged. (Tr. of Nov. 9, 2017 Hr'g (Doc. 135) at 19-20.) Present at that hearing were the parties and their counsel; Jon Berkelhammer on behalf of Smith Moore; and Dan Boyce, Mark Moore, and Andrew Mathias on behalf of the Bank. This court overruled Smith Moore's objection as to attorney-client privilege in part and permitted the testimony of current and former Smith Moore attorneys. (Id. at 46-47.) This testimony was subject to such specific objections raised by counsel during the hearing. (Id.) This court did not issue a final ruling regarding the objection as to the production of documents. (Id. at 224.) Both counsel for Smith Moore and the Bank were permitted to participate during the hearing for the purpose of lodging any objections to specific questions propounded by the parties. (Id. at 46-47.)

         Defendant Earnest called as witnesses Bruce Ashley, Laura Dildine, and Stephen Petersen, all of whom were attorneys at Smith Moore during the relevant time period. (Id. at 53, 107, 171-72.) The hearing was continued to February 8, 2018, at which time Earnest called as witnesses Professor Nathan Crystal and FBI Special Agent Mike Knapp. (Tr. of Feb. 8, 2018 Hr'g (Doc. 212) at 65, 181.) The United States called as a witness James B. Schwiers, the current President of the Bank. (Id. at 21.)

         In addition to the testimony and exhibits presented during the hearing, the court has also considered the affidavit of Earnest, (see Aff. of Ronald Keith Earnest (“Earnest Aff.”) (Doc. 119)), and the attachments to pleadings not otherwise objected to by opposing counsel.

         For the reasons explained hereafter, this court finds that an attorney-client relationship did not exist between Earnest and Smith Moore during 2012 and 2013 with respect to the ongoing Grand Jury investigation.

         I. FACTUAL BACKGROUND[2]

         Smith Moore represented the Bank in civil litigation involving factoring that started around 2008 and may have been resolved in early 2013. (Tr. of Nov. 9, 2017 Hr'g (Doc. 135) at 54-55.) While that case was pending, an individual named Bruce Gregory Harrison, III, was prosecuted and convicted in the Middle District of North Carolina, in a case involving transactions in which the Bank had involvement but which involved tax law violations. (See Superseding Indictment (Doc. 10), United States v. Harrison, No. 1:10CR411-1 (M.D. N.C. ); Judgment (Doc. 127), United States v. Harrison, No. 1:10CR411-1 (M.D. N.C. ).)

         On September 11, 2012, following the conviction and sentencing of Harrison, the United States issued a Grand Jury subpoena to the Bank for files related to Harrison and his staffing companies. (See Def. Earnest's Mem. in Supp. of Mot. to Dismiss Indictment (“Def. Earnest's Mem.”), Ex. 10, Grand South Bank Sept. 11, 2012 Subpoena (Doc. 146-10).) The subpoena was directed to “GrandSouth Bank, Attn. Legal Order Processing” and sought the production of records and correspondence between the Bank and several entities. (See id. at 1.) Apparently, some of those entities were related to Harrison. Additionally, the subpoena sought the personnel file for Douglas Corriher, the Vice President of the Bank, and various emails between Corriher and others, including Drake. (See id. at 2.) Production was directed to occur on September 24, 2012. (Id. at 1.) Earnest was not mentioned specifically in the subpoena.

         Earnest contacted an attorney with Smith Moore “for representation because the firm had done corporate work for the Bank and represented the Bank in related civil litigation.” (Earnest Aff. (Doc. 119) ¶ 3.) Medford, an attorney with Smith Moore and experienced in criminal law, (id. ¶ 4), handled the matter. It is not disputed that Earnest met with Medford and thereafter Medford and Smith Moore began working on the Bank matter.

         Bruce Ashley, an attorney with Smith Moore, represented the Bank in a related civil proceeding. Ashley testified that his understanding was that he represented the Bank through his work in civil litigation. (Tr. of Nov. 9, 2017 Hr'g (Doc. 135) at 64.) Ashley recalls rendering legal advice to Earnest, but not in a personal capacity, only to advise the Bank through Earnest as an officer of the Bank. (Id. at 70.) Ashley advised that Medford had primary responsibility for the criminal investigation at Smith Moore. (Id. at 91.)

         Laura Dildine was an attorney with Smith Moore beginning in 2011. She testified that when she “came on board, this was an existing matter, and [she] assisted with responding to subpoenas that the Government had served on [the Bank] for documents and in preparing [Bank] employees to testify before the grand jury and the Government's investigation of Doug Corriher.” (Id. at 109.) Dildine did not understand the Government to be investigating Earnest or the Bank for criminal conduct. (Id. at 113-14.) Dildine's recollection is that Earnest was “strictly a fact witness as a bank employee in the Government's investigation of Mr. Corriher . . . in my mind, [Earnest] was testifying . . . as the bank president, but not as someone separate and apart from the bank.” (Id. at 123.) Dildine has no recollection of acting as Earnest's attorney “in a personal or individual capacity. Mr. Earnest, from [her] recollection, was [Smith Moore's] primary point of contact for [the Bank].” (Id. at 117.)

         This court finds, for purposes of this case, that Medford was lead counsel for the Bank at least during 2012 and 2013 with respect to the Grand Jury investigation. Ashley, although his recollection was limited, significantly participated in the representation, including making arrangements of counsel for Corriher and Drake. While Dildine's participation was extensive in terms of participation in meetings, it appears to this court that Dildine had limited involvement, and perhaps no involvement, in communications with clients or third parties regarding specific representation arrangements.

         From mid-2012 through July 2013, Smith Moore met with Earnest and other Bank employees, produced documents of the Bank as called for in the original subpoena issued in September 2012 as well as a second subpoena issued in November 2012. (See Government's Am. Resp. to Def.'s Mot. to Preclude the Disclosure of Privilege Materials, Attach. 1, Resp. to Subpoena (Doc. 113-1).)

         During the period of 2012 until November 2013, the United States advised counsel for Earnest and Drake, as well as Earnest and Drake themselves, that neither individual was a target nor a subject of the Grand Jury investigation. (See Tr. of Nov. 9, 2017 Hr'g (Doc. 135) at 123, 191; Tr. of Mar. 7, 2018 Hr'g (Doc. 248) at 49.) Both individuals were told they were called before the Grand Jury as fact witnesses. (Government's Consolidated Resp. to the Mots. Filed by Def. Shannon Drake on June 9, 2018, (“Government's Consolidated Resp.”), Drake Sept. 25, 2012 Grand Jury Test. (Doc. 62-1) at 3; Gov't Consolidated Resp., Ex. 2, Drake May 29, 2013 Grand Jury Test. (Doc. 62-2) at 2; Resp. of the United States to Mot. to Dismiss or Suppress Based on Sixth Amendment Violations (“Government's Sixth Amendment Resp.”), Ex. 1, Ronald Earnest Mar. 27, 2013 Grand Jury Test. (Doc. 176-1) at 2-3; Government's Sixth Amendment Resp., Ex. 2, Ronald Earnest Aug. 27, 2013 Grand Jury Test. (Doc. 176-2) at 2.)

         Although Dildine and Ashley believed they were counsel for the Bank, there is conflicting evidence as to the nature of the engagement by and between Earnest and Medford. Specifically, Earnest contends:

5. During our first meeting in September 2012, Mr. Medford informed me that he had two goals in this matter: to ensure that neither I, nor the Bank were indicted. He informed me that he could represent me individually as well as represent the Bank.
6. Thereafter, Mr. Medford and several other attorneys of Smith Moore began representing me and the Bank. During the course of the investigation, Smith Moore also began representing other employees of the Bank, including Shannon Drake, David Burgess and David Switzer.

(Earnest Aff. (Doc. 119) ¶¶ 5-6.)

         Not long after Earnest's meeting with Medford and Smith Moore in September 2012 when the engagement of Smith Moore began for purposes of the Grand Jury investigation, Earnest appeared at the September 19, 2012 board of directors meeting for the Bank. (Government's Sixth Amendment Resp., ex. 3, Bank Board of Directors Meeting Agenda and Mins. (176-3) at 2.)[3] According to the board minutes, Mason Garrett led a discussion regarding Corriher's receipt of a target letter from the Department of Justice. (See id. at 3.) The board minutes then recite the following:

Mr. Earnest and Mr. Mason Garrett indicated that the bank has engaged legal representation for the bank. Mr. Corriher has requested that the bank provide legal representation for his defense. In consultation with the bank's legal representatives, Mr. Jim Medford and Mr. Bruce Ashley of the law firm of Smith Moore Leatherwood, it was recommended that the bank agree to provide an advance of funds to Mr. Corriher, evidenced by an agreement titled “Undertaking Regarding Payment of Legal Fees & Expenses” (the “Undertaking Agreement”) constructed by Mr. Medford which outlines the terms and conditions under which the bank will advance the funds for Mr. Corriher's legal defense. Mr. Earnest also stated that the Leatherwood firm researched banking law and regulation to ensure that there were no restrictions on providing the requested legal assistance to Mr. Corriher. Mr. Bruce Ashley of the Leatherwood firm indicated that they did not find any restriction that would prohibit the bank from providing the support.

(Id. at 2.) The following month, at the October meeting of the Bank board of directors meeting, the minutes reflect the following:

Mr. Earnest updated the Board on litigation issues including the BHC v. Harrison case and the production of documents under subpoena's received by the Assistant U.S. Attorney (AUSA) related to investigations in which Doug Corriher has been named as a target. . . . On the other issue, Mr. Earnest stated that he and Bert Taylor met with Jim Medford and Kathy Hawkins of the firm of Smith Moore Leatherwood in Greensboro, N.C. to deliver and discuss documentation provided in response to the subpoena. Mr. Earnest stated that Ms. Hawkins was in the bank on this date to further understand how the documents were obtained and meeting with each employee responsible for the production and to find out if there were any additional documents that should be provided in response to the subpoena. Mr. Earnest stated that his understanding was that the bank's legal counsel will review the documents, make the appropriate copies, place in order and deliver to the AUSA. Mr. Earnest also stated that it was his understanding that Mr. Medford would attempt to meet with the AUSA at some point in time to review the documents and his understanding of the bank's position relative to the Government's theories about how the bank is involved in this case. Mr. Earnest further stated that he was unsure of the time ...

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