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Appraisal Report Prepared for Estate Tax Purposes Is Discoverable Says the Third Department

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  • Posted on: Mar 1 2019

It is not uncommon for the owners of a business wishing to remove or buy-out one of their own, or who wish to dissolve the entity, to retain a valuation expert to perform an appraisal of the entity or the ownership interest at stake. When the parties cannot reach an agreement and choose to litigate their dispute, the question arises whether the valuation report is discoverable? Like many questions under the law, the answer depends upon the circumstances under which report was commissioned.  If the appraisal was requested for reasons that are not “of a legal character,” as in Galasso v. Cobleskill Stone Products, Inc., 2019 N.Y. Slip Op. 01483 (3d Dept. Feb. 28, 2019) (here), the report is discoverable.

In holding that the appraisal report was discoverable, the Galasso Court considered whether the report was relevant to the action and privileged. We consider the legal principles underlying the decision below.

Generally, “[t]here shall be full disclosure of all matter[s] material and necessary in the prosecution or defense of an action, regardless of the burden of proof.” CPLR § 3101(a). The Court of Appeals has “emphasize[d]” time and again that the “[t]he words, ‘material and necessary,’ are to be interpreted liberally to require disclosure, upon request, of any facts bearing on the controversy which will assist preparation for trial.” Forman v. Henkin, 30 N.Y.3d 656, 661 (2018) (internal quotation marks, brackets, ellipsis and citations omitted); Andon v. 302-304 Mott St. Assoc., 94 N.Y.2d 740, 746 (2000). In short, CPLR § 3101(a) requires the production of information that is “relevant” to the disposition of the action. Id.

Importantly, “[t]he right to disclosure, although broad, is not unlimited.” Forman, 30 N.Y.3d at 661. “The test [for disclosure] is one of usefulness and reason.” Allen v. Crowell-Collier Publ. Co., 21 N.Y.2d 403, 406 (1968).

In addition, privileged matter, attorney work product, and trial preparation materials are protected from disclosure unless the moving party can demonstrate a “substantial need” for the information and an “undue hardship” if the material is not disclosed. Forman, 30 N.Y.2d at 661-662; Spectrum Sys. Intl. Corp. v. Chemical Bank, 78 N.Y.2d 371, 376-377 (1991). The burden of establishing a right to protection under the CPLR is with the party asserting it — “the protection claimed must be narrowly construed; and its application must be consistent with the purposes underlying the immunity.” Spectrum, 78 N.Y.2d at 377.

“The attorney-client privilege shields from disclosure any confidential communications between an attorney and his or her client made for the purpose of obtaining or facilitating legal advice in the course of a professional relationship.” NYAHSA Servs., Inc., Self-Ins. Trust v. People Care Inc., 155 AD3d 1208, 1209-1210 (3d Dept. 2017) (internal quotation marks and citation omitted); see also Ambac Assur. Corp. v. Countrywide Home Loans, Inc., 27 N.Y.3d 616, 623 (2016). “The party asserting the privilege bears the burden of establishing . . . that the communication at issue was between an attorney and a client for the purpose of facilitating the rendition of legal advice or services, in the course of a professional relationship [and] that the communication was predominately of a legal character.” Ambac, 27 N.Y.3d at 624 (internal quotation marks and citation omitted).

The purpose of the privilege is “to ensure that one seeking legal advice will be able to confide fully and freely in his [or her] attorney, secure in the knowledge that his [or her] confidences will not later be exposed to public view to his [or her] embarrassment or legal detriment.” Matter of Priest v. Hennessy, 51 N.Y.2d 62, 67-68 (1980). “Generally, communications made in the presence of third parties, whose presence is known to the client, are not privileged.” Ambac, 27 N.Y.3d at 624 (internal quotation marks and citation omitted). However, “statements made to the agents or employees of the attorney or client, or through a hired interpreter, retain their confidential (and therefore, privileged) character, where the presence of such third parties is deemed necessary to enable the attorney-client communication and the client has a reasonable expectation of confidentiality.” Id. at 624.

Notably, “[t]he scope of the privilege is not defined by the third parties’ employment or function, however; it depends on whether the client had a reasonable expectation of confidentiality under the circumstances.” People v. Osorio, 75 N.Y.2d 80, 84 (1989).

Galasso v. Cobleskill Stone Products, Inc.

In December 2015, plaintiff, Mark A. Galasso (“Galasso”), a shareholder of defendant Cobleskill Stone Products, Inc. (“Cobleskill” or the “Company”), commenced the action against, among others, the Company pursuant to Business Corporation Law §§ 706(d) and 716(c) for injunctive relief and damages. Plaintiff alleged, among other things, that the defendants wasted the Company’s assets and engaged in self-dealing.

In November 2017, the defendants made a discovery demand for, among other things, a valuation report that was created by Management Planning Inc. (“MPI”), a business valuation and advisory firm, for the estate of Martin Galasso (the “Decedent”). Plaintiff did not provide the defendants with the valuation report, asserting that it was not discoverable on several grounds, including that it was not material and necessary to the disposition of the action and was otherwise privileged.

Defendants subsequently moved to compel discovery, which Galasso opposed. After a conference, the motion court, among other things, granted the defendants’ motion and required Galasso to produce the final valuation report.

Plaintiff appealed.

The Court’s Decision

The Court affirmed.

The Court concluded that the valuation report was material and necessary to the disposition of the action. As noted by the Court, Galasso retained MPI to appraise his ownership interest in the Company for estate tax filing purposes. According to Galasso, after conclusion of the appraisal, MPI raised “serious and substantial concerns” that prompted him to commence the action against the defendants. Based upon these facts, the Court concluded that the valuation report was relevant to the action: “[B]ecause [the valuation report] played a role in the commencement of the action, … it may be probative as to why plaintiff believe[d] that defendant is guilty of gross malfeasance.” Slip op. at *2 (citations omitted).

Additionally, the Court held that the motion court “correctly determined” that “the valuation report, which values decedent’s stock in defendant, provides a benchmark ‘by which to . . . evaluate plaintiff’s damages.’” Id.

The Court also rejected Galasso’s argument that the valuation report was protected by the attorney-client privilege. “Although MPI was hired by plaintiff’s counsel and the agreement between MPI and plaintiff’s counsel state[d] that its communications would be confidential,” the Court held that “the primary purpose for which MPI was hired was to appraise plaintiff’s stocks in defendant for estate tax filing purposes.” Id. “In fact,” said the Court, “the instant action was not commenced until after MPI expressed ‘serious and substantial concerns’ upon completion of its appraisal.” Id. Therefore, concluded the Court, “the mere fact that MPI’s report now supports plaintiff’s legal action [did] not eliminate the fact that the report was not initially done for legal purposes.” Id.

Takeaway

Galasso is a good example of how the courts determine whether an expert report is privileged – they look to “whether the client had a reasonable expectation of confidentiality under the circumstances.” In Galasso, the plaintiff did not have such an expectation. Indeed, as the Court noted, it did not help that Galasso “confirmed” “during a court conference… that the valuation report did not include any legal information, nor did it disclose plaintiff’s confidences.” Under those circumstances, the Court easily concluded that Galasso had no “reasonable expectation of confidentiality” in the report.

 

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