BACKGROUND

In or about July 2003, Delta Financial Corporation ("DFC") filed a lawsuit against Delta Funding Residual Exchange Company, LLC ("DFREC"), its management company, Delta Funding Residual Management, Inc. ("DFRM") (collectively known hereinafter as the "LLC") and James Morrison, individually, the CEO of what has been denominated the LLC, after the LLC withheld certain distributions allegedly due to DFC under the terms and conditions of a number of agreements entered into between the LLC and DFC regarding the 2001 Exchange (as defined below). On or about September 11, 2003, the LLC commenced its own action against DFC and individual defendants Sidney A. Miller, Hugh Miller, Marc E. Miller, Richard Blass and Arnold B. Pollard (collectively the "Individual Defendants") for approximately $110 million plus interest for, inter alia, fraud and breach of contract regarding the exchange of assets between the LLC and DFC in and about August 23, 2001 (the "2001 Exchange").^[FN1]

In December 2007, DFC filed for bankruptcy protection under Chapter 11 in the United States Bankruptcy Court for the District of Delaware. According to §361(a) of the Bankruptcy Code (the "Code"), the action by the LLC against DFC is stayed. In addition, Counsel for the Individual Defendants and the LLC have entered into a stipulation extending the stay to preclude this Court from moving the action forward against the Individual Defendants until September 18, 2008, which was So Ordered by the Bankruptcy Court. (the "Stipulation").^[FN2]

In a decision dated October 11, 2007, this Court concluded, inter alia, that the LLC's assertion of privilege over fifty-five e-mail communications (the "e-mails") and the submission of those e-mails to the Court-Appointed Discovery Referee, Michael Cardello, Esq. for an in camera review, which was subsequently reviewed in camera by the Court was, as defined in Part 130 of the Rules of Chief Administrator (22 NYCRR 130-1.1(a) and (c) (1,2, and 3)), frivolous conduct as the e-mails could not have been protected by either the attorney-client privilege and/or the litigation committee privilege (the "October 11, 2007 Decision"). Instead of immediately imposing sanctions upon the LLC and/or its counsel for this frivolous conduct, the Court set down the matter for a hearing and permitted the LLC to show cause why the Court should not sanction the LLC and/or its counsel for such conduct (the "Order to Show Cause").

In the October 11, 2007 Decision, this Court held that no privilege could have been asserted as to the e-mails as no attorney was a participant in the communications and no litigation committee privilege could have attached as evidenced by an e-mail dated March 28, 2005 from James Morrison ("Mr. Morrison") to Wayne Teetsel ("Mr. Teetsel") and Harrison Bubrosky ("Mr. Bubrosky") (the "March 28, 2005 e-mail"). In the Court's view, the March 28, 2005 e-mail clearly indicates that no litigation committee could have existed prior to March 28, [*2]2005. That e-mail read:

I, the board would like to establish a litigation committee,' or something similarly named. The purpose would be to work closely with counsel and me to monitor the details of the litigation as it goes forward. Is this something you all can and will do? I am looking into the implications of this re " - ... attorney/client privilege. Now we should have an answer by tomorrow.

After receipt of the produced documents and the privilege log dated March 2, 2007, DFC objected to the assertion of privilege over the e-mails. In addition, during the deposition of Mr. Bubrosky in or about June, 2007, and in subsequent correspondence dated July 16, 2007, counsel for KPMG challenged the assertion of privilege over the e-mails and demanded production of the same. Notwithstanding, counsel's demand, LLC maintained the assertion of privilege over the e-mails (when the court uses the term LLC, it could have been one of several lawyers or law firms who spoke for the LLC). As a means to resolve the issue, counsel for the parties agreed to have the Court-Appointed Discovery Referee, Michael Cardello, Esq. conduct an in camera review of the e-mails. Mr. Cardello directed the LLC to submit the e-mails to him along with a brief and concise cover sheet for each document to substantiate the assertion of privilege over the e-mails which were received by Mr. Cardello on or about September 7, 2007. Soon thereafter, Mr. Cardello conducted his in camera review of the e-mails. Upon completion of his in camera review, Mr. Cardello determined that several fundamental issues needed to be resolved by this court, and not him, prior to any determination regarding the LLC's assertion of privilege over the e-mails. Mr. Cardello believed that the court [*3]needed to rule first upon the issues regarding; (1) if and when a litigation committee was formed, and if formed, (2) who were members of the litigation committee and at what time. The court agreed.

On September 20, 2007, the court held a settlement conference in yet another attempt to settle all the consolidated matters. It was during this settlement conference that the Court informed counsel for the parties that the court was, in fact, going to conduct its own in camera review of the e-mails for the asserted claim of privilege by the LLC. Unbeknownst to the court and Mr. Cardello at the time, Christopher A. Byrne, Esq., counsel for the LLC, had been instructed by new lead counsel Thomas Brown, Esq., to remain silent during the settlement conference. Until September 20, 2007, Mr. Byrne, along with Mr. Tepper, of Arent Fox, both of Washington, D.C. had represented the LLC.^[FN4]Since September 21, 2007, counsel of record and lead counsel for the LLC has been Orans, Elsen, Lupert & Brown, specifically Thomas Brown.

Apparently, as a result of change in lead counsel and some concern that the court was now going to conduct its own in camera review of the e-mails, on September 21, 2007, Mr. Tepper, thinking "something was awry" (T-329), contacted Mr. Cardello to request additional time to permit new lead counsel, Mr. Brown, to review the e-mails to decide if the LLC still wanted to assert privilege over the e-mails. Mr. Cardello informed counsel that he had one week to conduct his review and report back. On Thursday September 27, 2007, Mr. Brown informed Mr. Cardello, via e-mail, that upon Mr. Brown's review, the LLC has decide to withdraw its assertion of privilege as to all but parts of six e-mails that comprised the e-mails. However, this change of heart on behalf of the LLC came after the court's painstaking review of all the e-mails and the related law.

THE ARGUMENT AGAINST SANCTIONS BY NEW COUNSEL

TOM BROWN OF ORANS, ELSEN LUPERT & BROWN, LLP

New counsel for the LLC, Mr. Brown, of Orans Elsen, Lupert & Brown, LLP, who was retained and appeared as counsel for the LLC at the September 20, 2007 settlement conference (who also represented Stonehill), argues in his submission to the court that his firm relied upon sworn testimony and case law precedence in believing that a committee had been formed in 2003 and that its discussions with counsel and discussions about counsel's advice are protected by the attorney client privilege. Mr. Brown relies on the testimony of Mr. Byrne (he had been deposed on August 28, 2007, as well as after the court's decision of October 11, 2007) to support the claim that they believed a Litigation Committee had been formed in 2003 and its members were Mr. Teetsel of Stonehill, Mr. Bubrosky of Jefferies & Co., and Mr. Morrison, the only officer of the LLC, its only director (once referred to as the "chief cook and bottle washer" by Mr. Byrne), and who had and has no ownership interest in the LLC. Mr. Brown also cites the court to selective sections of the testimony of Bubrosky, Teetsel and Morrison as to when a litigation "group" was formed.

Mr. Brown also refers to an affidavit of Mr. Daniel C. Malone, a former attorney of the LLC, as to his involvement with the "Litigation Committee" from May 2005 to September 2006.

In addition, Mr. Brown argues that his firm did not have anything to do with the assertion [*4]of privilege over the original fifty-five e-mails and only learned of the size of the in camera review at the September 20, 2007 settlement conference. Mr. Brown also states that he subsequently reviewed the e-mails and determined that other than portions of six e-mails, the other e-mails were not protected by the attorney-client or work product privilege and that the Court should not have been asked to spend the considerable time necessary to review them. Furthermore, Mr. Brown argues that in any event, even if no formal committee had been established, Messrs. Morrison, Teetsel, and Bubrosky had the right under the joint interest privilege to meet and discuss legal advice about the case in confidence, including before the lawsuit was filed in 2003. Therefore, the assertion of privilege was proper.

ARGUMENT AGAINST

SANCTIONS BY ARENT FOX

Submitted with the submission from the LLC was the affidavit of Hunter T. Carter, Esq., from Arent Fox in New York. Arent Fox represented the LLC until February, 2008. Mr. Carter states in his submission that neither Mr. Tepper, another Arent Fox partner nor he, were involved in the creation, operation, communications with, or defense of the Special Litigation Committee or its communications. Mr Carter contends that he and Mr. Tepper formed a reasonable belief that such a committee existed and its communication was privileged. Mr. Carter states that his belief was based upon several things. According to Mr. Carter, it made sense to him that in light of reason and his experience that the largest investors of the LLC have a joint interest in the progress of the litigation, its costs, and its prospects, and would therefore normally demand access to privileged communications and advice to monitor the case and their investment in the LLC. Mr. Carter contends that he and Mr. Tepper had little reason to doubt that the litigation committee existed and its work included the sharing of information and advice from counsel.

Mr. Carter also points out in his Affidavit that as a result of a division of labor, Arent Fox had virtually nothing to do with the review of the fifty-five e-mails. In fact, apparently Arent Fox's only involvement in the process was to contact the Discovery Referee to request time to complete a new review of the e-mail, which was subsequently, performed by Mr. Brown. Accordingly, Mr. Carter respectfully submits that sanctions are not warranted or needed.

JOINT INTEREST PRIVILEGE

In Dupler v. Deering, 397 F.Supp. 1146 (D.SC. 1974), the court created a "community of interest" test. Mr. Brown as well as Mr. Bracken have invoked this test to protect the fifty-five e-mails or at least to provide a reasonable basis for the LLC to have claimed a privilege protection for those e-mails.

In Dupler (a patent infringement case) the issue was communications between a parent and subsidiary corporation and the entities did not use a common attorney. The court ruled that the communication between the French corporation (owner of the patent) and some of its subsidiaries were covered by attorney-client privilege because there was a sufficient "community of interest" among them. The court held there had to be an identical legal interest for the privilege to apply. "The key consideration is that the nature of the interest be identical, not similar, not solely commercial..." The court further stated "... if a corporation with a legal interest in an attorney-client communication relays it to another related corporation, the attorney-client privilege is not thereby waived. If the communications were relayed to an unrelated third-party corporation, the privilege would be waived." 397 F.Supp. at 1172. Bottom line interrelated corporate communications will not waive the attorney-client privilege.

Although the court does not necessarily agree that a joint-interest or common interest privilege could exist in this case, it should be clear now that none of the e-mails that Mr. Byrne claimed were privileged conveyed attorney-client communications. The communications neither involved an attorney nor anything he said to the members of the LLC. These e-mails were between Morrison, Bubrosky and Teetsel. None of the above are attorneys. Did Jefferies and Stonehill have a joint interest? Of course they did, to make money on their investment (an investment made after the "loss" had occurred to the LLC). None of the discussions as reflected in the e-mails involved an attorney. Nothing about them is related to the legal argument of "joint privilege" and the cases cited by the LLC's multiple counsel are absolutely irrelevant. It is all about business in the commercial world. Bank Brussels Lambert v. Credit Lyonnais (Suisse) S.A. v. Banque Paribas (Suisse) S.A., 160 F.R.D. 437, 446.

Thus, the court has found there was no attorney communication, directly or indirectly, to Morrison to be conveyed to Teetsel or Bubrosky, conveying legal advice nor any request for legal advice made to Morrison by Teetsel or Bubrosky to be conveyed to Byrne within these e-mails. In any event, the "community of interest" test or "common interest" test is an after thought of the attorneys to justify their actions. It did not exist until after the court's decision of October 11, 2007 and was never claimed on any privilege log submitted to the adverse parties nor to the court.

This court has never ruled that there is no Litigation Committee privilege - quite the opposite. However, three men in a room, especially when none of them is an attorney, without more does not serve to create a Litigation Committee.

Mr. Morrison did not truly seek the advice of Teetsel and/or Bubrosky. He placated them so he would not lose his job. The LLC's legal action created a sinecur for Morrison. He had everything to gain and nothing to lose by continuing the litigation. It is all about money, and in the opinion of the court, not any monies that might be owed to the LLC by DFC, but rather the fees that were earned and continued to be earned by Morrison, a defendant in this action and an employee of the LLC.[*7]Various affidavits were submitted to the court on behalf of the LLC and its various attorneys. The Court feels compelled to comment upon them.

Mr. Malone: Malone's contact with Teetsel and Bubrosky was from May 2005 to October 2006, however, the court is more concerned with the time prior to March 28, 2005. Mr. Malone's use of language, when referring to what Teetsel did, is far from enlightening, for example, "It is my understanding Mr. Teetsel communicated. . ." (Paragraph 5). His reference to meeting with Teetsel and Bubrosky is meaningless as to Litigation Committee communication privilege.

In Malone's affidavit, paragraph 8, he refers to direct attorney-client communication - not challenged - nor at issue. However, the court has never declared that Bubrosky or Teetsel, as major financial members of the LLC, clients of any of the LLC attorneys. In fact, it was made clear to the court early on in the litigation that Morrison was the one and only person who represented the LLC and its members. In the words of Mr. Byrne, "Morrison was the chief cook and bottle washer."

Malone's affidavit, paragraph 6, related to conversations with Bubrosky in the first half of 2006. What a memory. If they spoke about KPMG to Mr. Bubrosky, which I doubt they did, then there was a waiver of any privilege. In any event, it is not attorney-client communications that were at the heart of the Litigation Committee privilege. In fact, there were none.

Hunter Carter was another lawyer who represented the LLC from January 20, 2005 to July 19, 2005, and again as of September 23, 2005. The Court has previously ruled on Mr. Carter's role in the privilege log or lack thereof. He makes reference to a special Litigation Committee. He believed it existed and its communications among members were privileged.

a) His affidavit is based upon "reasonable belief."

b) In paragraph 7 he states it was logical to assume communication with members would be confidential. In paragraph 8 he states, "[w]e also understood that the testimony of Teetsel and Bubrosky established that there was a special Litigation Committee." [Emphasis supplied].

Mr. Carter's affidavit has little to no bearing on the issue at hand. From his testimony, (T-342), he had no connection to the privilege log. He never met Mr. Bubrosky, but worked with Teetsel on the settlement conference.

Any statement from these counsel that they would have presented the e-mail review differently if they believed the court was going to review it and not merely the Discovery Referee is a) insulting to the Referee, and b) provides an insight to their lawyering style in this hotly contested matter.

James Morrison also submitted an affidavit in response to the Court's order to show cause on sanctions. One would have hoped that an affidavit from a party who was the keystone to any alleged Litigation Committee would have been enlightening. The only words that can describe it are, "revisionist history" and the best single word "incredible."

James Morrison testified at the hearing. Initially, it should be clear that he played no role in reviewing any e-mails or in creating or reviewing the privilege log (T-135). In fact, he does not know who reviewed the e-mails for privilege.

Morrison testified Mr. Bryne did not learn about the March 28, 2005 e-mail until the summer of 2007. Perhaps what he meant was that Mr. Byrne did not learn what Mr. Morrison meant by the March 28, 2005 e-mail until July 2007. Yet, Mr. Byrne supposedly had reviewed them in January 2007, or at least no later than the end of February 2007. He, Morrison, was [*8]alerted to Byrne's "lack of knowledge" during a conference held at the offices of Arent Fox in Washington, D.C. in July 2007. Counsel for Jefferies raised it because it was on a privilege log and they had some concern about it. (T-134-135). Morrison says he was called into an office used by Byrne in the offices of Arent Fox and explained to Byrne what the e-mail meant. Mr. Byrne testified the first he remembered seeing the March 28, 2005 e-mail was shortly after October 12, 2007 (after the court's decision ordering a sanctions hearing). He also said that since it was part of a submission to the Referee, he must have seen it earlier, but had no independent memory of seeing it. The pertinent parts of the e-mail that drew the court's attention in September 2007 and apparently the attention of counsel to Jefferies in July 2007 reads as follows (the writer is Mr. Morrison):

I, the board would like to establish a litigation committee,' or something similarly named. The purpose would be to work closely with counsel and me to monitor the details of the litigation as it goes forward. Is this something you all can and will do? I am looking into the implications of this re " - ... attorney/client privilege. Now we should have an answer by tomorrow. [Mr. Byrne says he was never contacted by Morrison on this issue.]

In response to an issue raised by Mr. Bubrosky a few days prior to this March 28th date, Mr. Bubrosky had indicated that because KPMG served as auditors for Jefferies, he was having - - his ability to participate in the discussions re the litigation committee that involved KPMG were going to be limited - - in fact, restricted - - and that was going to cause them an issue, again, from him being able to participate in the KPMG portion of the discussions for the litigation committee and I wrote this. In hindsight reading it, I wish it was more clear in terms of what I was exactly saying, but what I was precisely wanted to get at is an offer that I made to them, to Jefferies, to consider a replacement for Jefferies on the litigation committee. And, in my view, that didn't necessarily mean finding another member of the LLC to take the place of Jefferies. What I was asking and wanting to say here is that, Jefferies, would you like to appoint an outside person to be your representative regarding KPMG matters for the litigation committee?'

MR. BROWN: Objection. I direct the witness not to answer on the

grounds of attorney/client communication.

MR. VASEY: Whether Mr. Morrison received complaints from an

LLC member - - I'm not seeking the communications that Mr. Morrison had

with Mr. Byrne regarding these complaints. I just want to know whether

Mr. Morrison ever received complaints from LLC members. And that

can be answered by a yes or a no.

How a complaint received by Mr. Morrison, a non-lawyer, from an LLC member, and Byrne's knowledge of this complaint, could be privileged is unbelievable especially since the court received a complaint from an LLC member and forwarded it to all counsel through the [*12]Court-Appointed Referee. Said complaint was cc'd to Morrison. The fact that Byrne could only know if Morrison received it is by communicating with Morrison does not mean the knowledge of the communication is privileged.

Not every communication between a client and an attorney is privileged. The privilege is limited to communications not disclosure of the underlying facts by those who communicated with the attorney. Upjohn Co. v United States, 449 US 383, 395-396 (1981). In order for the privilege to apply, the communication from attorney to client must be made "for the purpose of facilitating the rendition of legal advice or services, in the course of a professional relationship." Rossi v Blue Cross & Blue Shield, 73 NY2d 588, 593 (1989). The communication itself must be primarily or predominantly of a legal character, Id. at 594; Spectrum Systems Int'l. Corp. v. Chemical Bank, 78 NY2d 371, 377-78 (1991), and the mere fact that Morrison received such a complaint from a non-party (question to be answered yes or no) and told his attorney, does not cloak the communication under the attorney-client privilege. The court only comments on this to note the atmosphere in which this case proceeded for the last four years. During the over four years this court had handled this matter, it has been the recipient of a high level of legal argument on a panalopy of issues.

Mr. Brown tells us how something that is not work product becomes work product (during a deposition). Mr. Byrne tells us when Morrison uses the word "my", (i.e. "my opinion"), it really means "the attorney" said or the attorney told me to say, and by inference when Morrison spoke in the first person "I" it was Byrne talking.

Mr. Brown tells us that non-lawyers (Morrison, Teetsel and Bubrosky) cannot make decisions on or discuss funding of litigation without the advice of counsel or implicating the advice of counsel. Thus, according to Mr. Brown, every time these three men discussed funding the litigation they were "implicating the advice of counsel" and the discussion was privileged. The court rejects this theory. It is legal argument of this nature that, rather than strengthening the attorney-client privilege, a privilege that is historically at the heart of the attorney-client relationship, it weakens it.

This court previously ruled, and restates now, that the actions of the LLC (through Mr. Morrison and Christopher Byrne as lead counsel) resulted in what the Rules of Chief Administrator (Part 130) (22 NYCRR 130-1.1(a)(c)(1-3) define as frivolous conduct:

Conduct is frivolous if:

1. It is completely without merit in law or fact and cannot be supported

by a reasonable argument for an extension, modification or reversal of

existing law;

2. It is undertaken primarily to delay or prolong the resolution of the

litigation, or to harass or maliciously injure another; or

3. It asserts material factual statements that are false.

The court further finds there was neither a reasonable nor good faith basis to assert the privilege.

The LLC intentionally presented to the court for review fifty-five e-mails contending privilege protection of their contents (attorney-client, Litigation Committee), either without [*13]reading them, or having read them rejecting the plain English meaning of their contents. A contention by Mr. Byrne that he believed a Litigation Committee existed in 2003 does not support this wholesale claim of Litigation Committee privilege as to everything said by these three men in a room (virtually speaking) is a privileged communication. There is no law to support it.

Based upon this court's prior rulings on the existence of a Litigation Committee and the "plain English" reading of the e-mail from March 28, 2005, a claim of Litigation Committee privilege is without merit in law or fact.

Finally, in light of the procedural history of this case and the rulings of the court, such a claim as addressed to the fifty-five e-mails could only have been undertaken to delay or prolong the litigation and/or to harass or annoy another (KPMG and DFC).

The review of the e-mails by Mr. Byrne was either negligently done, not done at all, or done in so grossly negligent a fashion that it violates the tenure of 130-1.1(c) and that the offering of these fifty-five e-mails under a claim of privilege is frivolous conduct.

The court further finds that though Mr. Byrne may have had a reasonable basis for his conclusion that there was once something akin to a Litigation Committee (an area of law with which he admits he had no prior experience) he could not have offered the e-mails to the court claiming privilege protection if he had actually read the e-mails.

It is clear that Mr. Byrne has told the court of his lack of memory of reviewing the privilege log, of reading the e-mails, or discussing them with Morrison. However, his memory has dramatically changed from deposition to affirmation to deposition to hearing (2007-2008).

The court firmly believes that the conduct of Mr. Byrne as well as the LLC is frivolous conduct with respect to the e-mails and whether said conduct was negligent conduct, grossly negligent conduct, overwork of counsel, or merely a laissez faire attitude toward the whole process of the privilege log is irrelevant.

The LLC and Christopher Byrne are each sanctioned $5,000.00. Said sums are to be payable to The Lawyers' Fund for Client Protection of the State of New York, 119 Washington Avenue, Albany, New York 12210, within thirty (30) days of the date of this decision.

It is SO ORDERED.

Dated: August 12, 2008

J.S.C.