The debtor in a Florida bankruptcy case must turn over privileged communications and documents from former counsel at Carlton Fields in litigation involving a transaction that has exposed the Am Law 200 firm to a malpractice lawsuit.

Florida title company ATIF Inc. came out on the losing end of a creditor trustee's motion to compel discovery of the communications between ATIF and Carlton Fields, which worked on negotiations in a joint venture agreement.

The documents had been protected by attorney-client privilege, but Chief U.S. Bankruptcy Judge Caryl Delano in the Middle District of Florida waived that protection under a crime-fraud exception.

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Asset transfer

Jon Polenberg of Becker & Poliakoff in Fort Lauderdale represents creditor trustee Daniel Stermer in the underlying bankruptcy case involving ATIF, formerly Attorneys' Title Insurance Fund, which used to help Florida lawyers write real estate title policies before it went out of business.

In an effort to claw back money for creditors, Stermer filed an adversary complaint, accusing ATIF of conducting a fraudulent transfer when it pledged certain assets in exchange for a promise that its business partner Old Republic National Title Insurance Co. would guarantee title policies that had been written.

The assets included cash, bonds, intellectual property, unpaid judgments and titles that likely totaled at least $80 million, according to Polenberg, who said although it was supposed to be an even exchange, it left ATIF with almost nothing. Polenberg alleges ATIF did that in an effort to hinder, delay or defraud its creditors as it was in financial trouble and facing multiple lawsuits seeking millions of dollars.

"Under bankruptcy law and Florida law, if you transfer an asset while you have creditors making claims against you and you have certain obligations you owe to your creditors, if you transfer your assets away such that creditors can't get to them, if there are certain regulations that exist, then the court can reverse that transfer as a fraudulent transfer," Polenberg said.

Though he doesn't yet know what the documents contain, Polenberg suspects they might bolster his case.

The transfer was arranged under a joint venture agreement, which made Old Republic the title insurance underwriter for policies. It was set up because ATIF was on the brink of insolvency and in 2009 surrendered its license to sell insurance.

The agreement went through various amendments until it become a master agreement that has since resulted in a legal malpractice lawsuit against Carlton Fields, which represented ATIF.

The law firm is accused of helping Old Republic to draft the agreement without first getting a conflict waiver from its client. Damien H. Prosser, Keith W. Meehan and Jessica L. Thorson of Morgan & Morgan represent Stermer in that case, which alleges the firm switched sides once it realized Old Republic "would be the more lucrative client going forward."

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Production deadline

Carlton Fields declined to comment on this case but has denied any wrongdoing in response to the legal malpractice suit. Counsel to Old Republic, Lara Fernandez of Trenam Law in Tampa, did not respond to a request for comment by deadline.

Attorney-client privilege exists to encourage clients to speak freely with their attorney to gain their advice. But under the crime-fraud exception, that protection doesn't apply if the client is simultaneously engaging in criminal or fraudulent activity.

"There's no dispute that Carlton Fields was assisting Old Republic with the master agreement at the time," Polenberg said. "Therefore the communication that were exchanged between Old Rep and its attorney Carlton Fields while this fraud was going on cannot be privileged."

The judge found Polenberg had made a prima facie case for fraudulent transfer but deferred ruling on the attorney's other arguments under the common-interest doctrine, which allows parties with similar legal interests to share documents with one another, and the at-issue doctrine, which allows litigants to waive attorney-client privilege with an affirmative argument that relies on privileged information.

ATIF has until Oct. 24 to produce the documents.

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