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Click here for the full text of this decision FACTS:El Naggar Fine Arts Furniture Inc. and Ahmed El Naggar (collectively, El Naggar) contracted with Frederick Bell and, subsequently, his corporation Traxel Construction Inc. for the construction of a steel building and a concrete slab. In 2001, El Naggar filed suit against Bell, Traxel and other parties, alleging defective construction. General Agents Insurance Company of America Inc. (Gainsco) had previously issued a $500,000 commercial general liability policy to Traxel, covering the time period from March 22, 2000, to March 22, 2001. Gainsco retained attorney Glen Fahl as Traxel’s defense counsel, assigned Sharon Preen as claims adjuster and established a claims file in connection with the proceeding. Gainsco also requested and received a coverage opinion regarding the El Naggar suit from attorney Brent Cooper. The first trial in the action ended in a mistrial. On Oct. 6, 2004, shortly before the second trial was set to begin, Gainsco and Traxel entered into a buy-back agreement. Under the terms of this agreement, Gainsco repurchased Traxel’s $500,000 policy for $50,000 and Traxel released Gainsco from any and all claims or demands arising out of the policy. As further consideration, Traxel and Gainsco agreed that the terms would remain confidential, “except that counsel for Traxel may tell opposing counsel that there is no insurance available.” A handwritten and initialed notation on the agreement, however, provided that Traxel could “supplement discovery in this pending litigation by supplying this agreement.” Shortly thereafter, Traxel produced a copy of the agreement to El Naggar. The suit proceeded to a second trial, which on Aug. 8, 2005, resulted in a $3.5 million judgment in El Naggar’s favor. El Naggar subsequently sued Gainsco, alleging that: the Gainsco-Traxel policy provided coverage for El Naggar’s claims; Gainsco breached its insurance contract with Traxel; and the buyback agreement violated public policy. El Naggar additionally asserted claims for fraudulent transfer, civil conspiracy, Deceptive Trade Practices Act violations, insurance code violations, breach of the duty of good faith and fair dealing, and tortious interference with contract. Some of the claims derived from an assignment of rights that Traxel granted to El Naggar on which El Naggar claimed the right to sue on its own behalf and as Traxel’s assignee. In discovery requests, El Naggar asked for materials contained in Gainsco’s claims handling file, pertaining to both the underlying suit against Traxel and the current coverage lawsuit against Gainsco. In response, Gainsco produced some documents, raised general objections to the requests, and asserted the attorney-client and work product privileges in relation to certain other materials. El Naggar then filed motions to compel production, arguing, inter alia, that: 1. Traxel had waived and released its attorney-client and work product privileges in relation to the documents in Gainsco’s file (in its assignment of claims to El Naggar); and 2. the documents were required to be produced under the crime/fraud exception to the asserted privileges because Gainsco and Traxel had perpetrated a fraudulent transfer by entering into the buyback agreement. Subsequently, Gainsco produced a privilege log and tendered the disputed documents to the trial court for in camera review. In its briefing to this court and in its privilege log, Gainsco grouped the documents into two main categories: those pertaining to the underlying litigation against Traxel and those pertaining to the current (or coverage) suit against Gainsco. Gainsco also requested that certain documents be redacted if produced, because they contained information regarding its reserves for both the underlying litigation and the current litigation. The trial court granted El Naggar’s motions to compel and ordered Gainsco to produce its entire claims file, without specifying the grounds on which it based its ruling. Gainsco filed a petition for writ of mandamus requesting that the 14th Court of Appeals order Judge Elizabeth Ray of the 165th District Court to vacate and set aside her order compelling production of Gainsco’s insurance claims file. HOLDING:The court conditionally granted in part Gainsco’s petition for a writ of mandamus. Mandamus is an appropriate remedy only when the record shows that the trial court clearly abused its discretion or violated a duty imposed by law, and no adequate remedy by appeal exists. In the case of privileged documents that a trial court erroneously orders to be produced, the court stated that direct appeal cannot remedy the resulting harm of having the documents inspected, examined and reproduced. Gainsco, the court stated, argued that the trial court erred in compelling production because: 1. Gainsco properly asserted attorney-client and work product privileges in the documents as Traxel’s representative; 2. Gainsco properly asserted its own privileges in the documents; 3. Traxel’s attorney had a right to assert privileges; and 4. The documents were not relevant to any issues in the suit. But El Naggar argued that Traxel’s assignment of claims to El Naggar resulted in waiver of Traxel’s right to assert any privileges relative to the documents held by Gainsco. The court agreed and stated that Gainsco lacked grounds on which to assert privileges on Traxel’s behalf. Gainsco then suggested that even if Traxel’s assignment was valid, such an assignment would not prevent Gainsco from asserting its own privileges in the claims file documents. Because protection of attorney-client and work product privileges was an important concern, the court conducted its own document-by-document review. The court grouped the underlying case documents into three categories: 1. communications involving Fahl, the attorney representing Traxel in the underlying litigation; 2. communications involving only Cooper, the attorney representing Gainsco, and Gainsco itself; and 3. computer database notes made by Gainsco employees relating either to Traxel’s defense in the underlying case or to coverage issues. Regarding the first subcategory, documents drafted by or addressed to Fahl, the court stated that Gainsco failed to establish the existence of an attorney-client relationship with Fahl. Accordingly, the court found that Gainsco cannot assert attorney-client privilege in its communications with Fahl and cannot assert attorney work product in regards to documents prepared by Fahl. Regarding the second subcategory, the court found that Gainsco’s attorney-client privilege covered the documents related to communications involving only Cooper and Gainsco. All of the documents falling into the category, the court stated, were invoices for legal services from Cooper to Gainsco. In the third and final subcategory, the court stated, Gainsco asserted privileges regarding entries in a database of file notes. These notes were uniformly terse statements of events (court filings, receipt of documents, communications, settings, etc.) regarding the suit filed by El Naggar against Traxel. In reviewing the notes, the court stated that it was not clear whether they pertained only to Traxel’s defense in the underlying litigation or whether they also involved coverage issues. Additionally, the court stated that in some of the notes, it was unclear whether the attorney being referenced was Fahl or Cooper. Gainsco offered no explanation or evidence to clarify the ambiguities, merely arguing instead that the documents themselves revealed their privileged nature. But the court stated that the party asserting a privilege has the burden of demonstrating application of the privilege. Accordingly, the court found that where Gainsco offered no new explanation for the asserted privileges, Gainsco effectively waived its privilege unless the substance of the individual note clearly demonstrated otherwise. Next, Gainsco suggested that even if Traxel’s assignment of privileges was valid, any waiver of privileges by Traxel would not prevent Fahl from asserting his core work product privilege to prevent production of the documents in Gainsco’s possession. But Fahl made no assertion of any privilege in the affidavit and did not refute the fact that Traxel waived or at least assigned the privileges in question. Accordingly, the court found Gainsco’s argument that it was entitled to protect Fahl’s privileges to be without merit. Lastly in regard to the documents, Gainsco contended that the trial court erred in refusing to sustain its relevancy objection to the request for the claims file. But the court could find no abuse of discretion by the trial court. Next, El Naggar contended that Gainsco could not assert the attorney-client privilege with regard to any of the underlying case documents or the coverage case documents, because the crime/fraud exception applied. Under this exception, the attorney-client privilege cannot be enforced when “the services of the lawyer were sought or obtained to enable or aid anyone to commit what the client knew or reasonably should have known to be a crime or fraud.” El Naggar, the court noted, alleged that Gainsco committed a “fraudulent transfer” by entering into the buyback agreement with Traxel. But El Naggar, the court stated, offered no analysis regarding whether the crime/fraud exception applied in the fraudulent transfer context. The court concluded that the crime/fraud exception did not apply based on El Naggar’s allegations in the present suit. Thus, the court held that the trial court abused its discretion by compelling production of some of the underlying case documents. OPINION:Hedges, C.J.; Hedges, C.J., and Yates and Seymore, J.J.

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