Friday Invs., LLC v. Bally Total Fitness of the Mid-Atlantic, Inc.

IN THE SUPREME COURT OF NORTH CAROLINA

No. 248PA16

Filed 3 November 2017

FRIDAY INVESTMENTS, LLC
v.
BALLY TOTAL FITNESS OF THE MID-ATLANTIC, INC. f/k/a Bally Total Fitness
of the Southeast, Inc. f/k/a Holiday Health Clubs of the Southeast, Inc. as successor-
in-interest to Bally Total Fitness Corporation; and BALLY TOTAL FITNESS
HOLDING CORPORATION

On discretionary review pursuant to N.C.G.S. § 7A-31 of a unanimous decision

of the Court of Appeals, ___ N.C. App. ___, 788 S.E.2d 170 (2016), affirming an order

entered on 13 April 2015 by Judge Jesse B. Caldwell III in Superior Court,

Mecklenburg County. Heard in the Supreme Court on 29 August 2017.

Horack, Talley, Pharr & Lowndes, P.A., by Keith B. Nichols, for plaintiff-
appellee.

Knox, Brotherton, Knox & Godfrey, by Lisa G. Godfrey; and Burt & Cordes,
PLLC, by Stacy C. Cordes, for defendant-appellants.

NEWBY, Justice.

In this case we consider whether an attorney–client relationship exists

between defendants and a non-party that contractually agreed to indemnify

defendants. Recognizing its tripartite nature, we conclude that the contractual duty

to defend and indemnify gives rise to an attorney–client relationship. Nonetheless,

because defendants failed to request that the trial court provide written findings of

fact and did not present in a timely manner the documents at issue for appellate
 FRIDAY INVS., LLC V. BALLY TOTAL FITNESS OF THE MID-ATL., INC.

Opinion of the Court

review, we must presume the trial court found facts sufficient to support its

conclusion. Given the bare record before us, we cannot conclude that the trial court

erroneously determined that the attorney–client privilege did not extend to the

communications at issue. Accordingly, we modify and affirm the decision of the Court

of Appeals.

In February 2000, the predecessor in interest to defendant Bally Total Fitness

of the Mid-Atlantic, Inc. (Bally Mid-Atlantic) entered into a lease agreement with the

predecessor in interest to Friday Investments, LLC (plaintiff) for a large commercial

space in Charlotte, North Carolina, in which to place a health club.1 Codefendant

Bally Total Fitness Holding Corporation (Bally Holding), the parent company of both

Bally Mid-Atlantic and the original tenant, guaranteed the lease. Bally Mid-Atlantic

later sold some of its health clubs, including the Charlotte club, to Blast Fitness

Group, LLC (Blast). The Asset Purchase Agreement between Bally Mid-Atlantic and

Blast transferred any obligations arising under the real property leases of the clubs

sold. The Agreement also included an indemnification clause, wherein Blast agreed

to “defend, indemnify, and hold [defendants] . . . harmless of, from and against any

1 Around 14 February 2000, Tower Place Joint Venture (Original Lessor), as landlord,
and Bally Total Fitness Corporation (Original Lessee), as tenant, entered into a lease
agreement for the property at issue. Friday Investments, LLC (plaintiff) is the current owner
of the property at issue and successor in interest to Tisano Realty Inc., the successor in
interest to the Original Lessor. Defendant Bally Mid-Atlantic is the successor in interest to
the Original Lessee.

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Opinion of the Court

Losses incurred . . . on account of or relating to . . . any Assumed Liabilities, including

those arising from or under the Real Property Leases after the Closing.”

On 9 May 2014, plaintiff sued defendants for payment of back rent and other

charges due under the lease stemming from Blast’s failure to pay rent on the space

defendants had assigned to Blast. Defendants notified Blast of the lawsuit, and Blast

promptly agreed to indemnify and defend defendants in accord with their Agreement.

During discovery, counsel for plaintiff requested copies of “post-suit correspondence

and documents exchanged between [defendants] and Blast.” After defendants

refused to comply, plaintiff moved to compel production of the requested documents.

Defendants objected and moved for a protective order, asserting the attorney–client

privilege. The trial court orally ordered defendants to produce the documents and a

privilege log for in camera review.

On 2 April 2015, after completing its in camera review, the trial court notified

counsel via e-mail that it had denied defendants’ motion for a protective order and

granted plaintiff’s motion to compel. On 13 April 2015, the trial court entered its

written order summarily denying defendants’ motion for a protective order and

granting plaintiff’s motion to compel. At no point did either party request that the

trial court make written findings of fact and conclusions of law. Defendants appealed

the trial court’s interlocutory order, successfully contending that the subject of the

appeal affects a “substantial right.” After settling the record on appeal, and after the

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Opinion of the Court

briefing deadline had passed, defendants moved to submit the documents at issue

under seal for in camera review by the Court of Appeals.

The Court of Appeals affirmed the trial court’s grant of plaintiff’s motion to

compel. Friday Invs., LLC v. Bally Total Fitness of the Mid-Atl., Inc., ___ N.C. App.

___, 788 S.E.2d 170 (2016). Before discussing the merits of the appeal, the Court of

Appeals denied defendants’ request to present the records for appellate review as

untimely because the request was made after plaintiff had submitted its brief to the

Court of Appeals. Id. at ___, 788 S.E.2d at 175; see N.C. R. App. P. 9(b)(5)(a). On the

merits, the Court of Appeals held that a tripartite attorney–client relationship did

not exist between defendants and Blast because “an indemnification provision in an

asset purchase agreement, standing alone, is insufficient to create a common legal

interest between a civil litigant indemnitee and a third-party indemnitor.” Friday

Invs., LLC, ___ N.C. App. at ___, 788 S.E.2d at 172. The Court of Appeals reasoned

that defendants and Blast shared merely a common business interest and that this

distinction rendered inapplicable our previous decision in Raymond v. North Carolina

Police Benevolent Ass’n, 365 N.C. 94, 98, 721 S.E.2d 923, 926 (2011) (recognizing the

tripartite attorney–client relationship). As a result, the attorney–client privilege did

not extend to the communications between defendants and Blast. This Court allowed

discretionary review. Friday Invs., LLC v. Bally Total Fitness of the Mid-Atl., Inc.,

369 N.C. 185, 793 S.E.2d 685 (2016).

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Opinion of the Court

“The primary purpose of the discovery rules is to facilitate the disclosure prior

to trial of any unprivileged information that is relevant and material to the lawsuit

so as to permit the narrowing and sharpening of the basic issues and facts that will

require trial.” Bumgarner v. Reneau, 332 N.C. 624, 628, 422 S.E.2d 686, 688-89

(1992) (emphasis added) (citation omitted). Rule 26 provides for a broad scope of

discovery, allowing “[p]arties [to] obtain discovery regarding any matter, not

privileged, which is relevant to the subject matter involved in the pending action.”

N.C.G.S. § 1A-1, Rule 26(b)(1) (2015) (emphasis added).

“The attorney-client privilege is the oldest of the privileges for confidential

communications known to the common law.” Upjohn Co. v. United States, 449 U.S.

383, 389, 101 S. Ct. 677, 682, 66 L. Ed. 2d 584, 591 (1981) (citation omitted). For the

privilege to apply and thus exclude relevant evidence, “the relation of attorney and

client [must have] existed at the time the [particular] communication was made.” In

re Investigation of Miller, 357 N.C. 316, 335, 584 S.E.2d 772, 786 (2003) (quoting State

v. McIntosh, 336 N.C. 517, 523, 444 S.E.2d 438, 442 (1994)).

Historically, an attorney–client relationship arises between an attorney and a

single client the attorney represents. See id. at 335, 584 S.E.2d at 786. This Court,

however, has also recognized a multiparty attorney–client relationship in which an

attorney represents two or more clients. See Dobias v. White, 240 N.C. 680, 685, 83

S.E.2d 785, 788 (1954) (indicating that an attorney–client relationship can exist when

“two or more persons employ the same attorney to act for them in some business

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transaction”). “The rationale for recognizing this tripartite attorney-client

relationship is that individuals with a common interest in the litigation should be

able to freely communicate with their attorney, and with each other, to more

effectively defend or prosecute their claims.” Raymond, 365 N.C. at 99, 721 S.E.2d at

926 (citation omitted).

In Raymond a former police officer and member of the Southern States Police

Benevolent Association (SSPBA) contacted the SSPBA and spoke with an SSPBA

attorney in confidence, seeking legal advice regarding his recent demotion. Id. at 95-

96, 721 S.E.2d at 924-25. The SSPBA then referred the officer to outside legal counsel

paid for by the SSPBA. As a dues-paying member, the former officer’s SSPBA

membership entitled him to various SSPBA services, including legal representation

in grievance and disciplinary matters. Recognizing the tripartite nature of the

arrangement, this Court held that an attorney–client relationship existed between

the former police officer, the SSPBA and its attorney, and the outside legal counsel

selected by the association to represent the former officer. Id. at 99, 721 S.E.2d at

927. As such, any communications between them that also satisfied the five-factor

test articulated in State v. Murvin, 304 N.C. 523, 531, 284 S.E.2d 289, 294 (1981),

were privileged. Raymond, 365 N.C. at 100-01, 721 S.E.2d at 927-28.

Our decision in Raymond analogized the relationship between the officer, the

SSPBA and an attorney for the association, and outside defense counsel to those

relationships common in the insurance context. See id. at 98, 721 S.E.2d at 926 (“In

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Opinion of the Court

the insurance context, courts find that the attorney defending the insured and

receiving payment from the insurance company represents both the insured and the

insurer . . . .” (citing Nationwide Mut. Fire Ins. Co. v. Bourlon, 172 N.C. App. 595,

602-03, 617 S.E.2d 40, 46 (2005), aff’d per curiam, 360 N.C. 356, 625 S.E.2d 779 (2006)

(mem.))). As in the insurance context, a tripartite attorney–client relationship arose

from the officer and the SSPBA’s common interest in the litigation, stemming from

the officer’s contractual relationship with the SSPBA as a dues-paying member. See

Raymond, 365 N.C. at 98, 721 S.E.2d at 926 (“[N]otwithstanding that usually only

the insured has been sued, a tripartite attorney-client relationship exists because the

interests of both the insured and the insurer in prevailing against the plaintiff’s claim

are closely aligned.”).

“[A] contractual duty to defend and indemnify creates a common interest and

tripartite relationship between the insurer, the insured, and the defense attorney.”

Id. at 98-99, 721 S.E.2d at 926 (citing Bourlon, 172 N.C. App. at 603-05, 617 S.E.2d

at 46-47). Like the common interest found between the insurer and the insured, an

indemnification agreement creates a common interest between the indemnitor and

the indemnitee in that the indemnitor contractually shares in the indemnitee’s legal

well-being because the agreement subjects the indemnitor to the “damages assessed

and loss resulting from an adverse judgment.” Queen City Coach Co. v. Lumberton

Coach Co., 229 N.C. 534, 536, 50 S.E.2d 288, 289 (1948) (citation omitted); see also

Dixie Container Corp. of N.C. v. Dale, 273 N.C. 624, 627, 160 S.E.2d 708, 711 (1968)

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(noting that an indemnity contract “will be construed to cover all losses, damages,

and liabilities which reasonably appear to have been within the contemplation of the

parties”). The fact that indemnification relates to a business purpose does not sever

but strengthens that common interest. See Dobias, 240 N.C. at 685, 83 S.E.2d at 788

(recognizing an attorney–client relationship between more than two individuals

when “two or more persons employ the same attorney to act for them in some business

transaction”). As a result, a tripartite attorney–client relationship arises because the

interests of both the indemnitor and indemnitee in prevailing against the plaintiff’s

claim are contractually aligned, notwithstanding that usually only the indemnitee

has been sued. See Raymond, 365 N.C. at 98, 721 S.E.2d at 926.

In all significant ways, the question of the formation of an attorney–client

relationship here is indistinguishable from that resolved by our decision in Raymond.

Blast contractually agreed to indemnify and defend defendants against any losses

incurred relating to their real property lease. After this litigation commenced,

defendants notified Blast of the litigation, and Blast engaged counsel to defend the

case under the indemnification agreement. Like the common interest found in the

insurance context, Blast’s interest in defendants’ legal well-being as indemnitees

creates the common interest in this litigation: The indemnification provision subjects

Blast to any damages that result from an adverse judgment against defendants.

Accordingly, a tripartite attorney–client relationship exists between defendants,

Blast, and their defense counsel.

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Opinion of the Court

The mere fact that an attorney–client relationship exists, however, does not

automatically trigger the attorney–client privilege. See Dobias, 240 N.C. at 684, 83

S.E.2d at 788 (Simply because “the evidence relates to communications between

attorney and client alone does not require its exclusion.”). For the attorney–client

privilege to apply, the communication must satisfy the five-factor Murvin test:

(1) the relation of attorney and client existed at the time
the communication was made, (2) the communication was
made in confidence, (3) the communication relates to a
matter about which the attorney is being professionally
consulted, (4) the communication was made in the course
of giving or seeking legal advice for a proper purpose
although litigation need not be contemplated and (5) the
client has not waived the privilege.

Murvin, 304 N.C. at 531, 284 S.E.2d at 294 (citing 1 Henry Brandis, Jr., Stansbury’s

North Carolina Evidence § 62 (1973)). “[I]f any one of these five elements is not

present in any portion of an attorney-client communication, that portion of the

communication is not privileged.” Brown v. Am. Partners Fed. Credit Union, 183 N.C.

App. 529, 534, 645 S.E.2d 117, 121 (2007) (quoting In re Miller, 357 N.C. at 335, 584

S.E.2d at 786). “The trial court is best suited to determine, through a fact-sensitive

inquiry, whether the attorney-client privilege applies to a specific communication.”

Raymond, 365 N.C. at 100, 721 S.E.2d at 927 (emphasis added) (citing In re Miller,

357 N.C. at 336, 584 S.E.2d at 787).

“Findings of fact and conclusions of law are necessary on decisions of any

motion . . . only when requested by a party . . . .” N.C.G.S. § 1A-1, Rule 52(a)(2)

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(2015). The purpose of requiring findings of fact and conclusions of law by the trial

court “is to allow meaningful review by the appellate courts.” O’Neill v. S. Nat’l Bank

of N.C., 40 N.C. App. 227, 231, 252 S.E.2d 231, 234 (1979) (citation omitted). “When

the trial court is not required to find facts and make conclusions of law and does not

do so, it is presumed that the court on proper evidence found facts to support its

judgment.” Estrada v. Burnham, 316 N.C. 318, 324, 341 S.E.2d 538, 542 (1986),

superseded by statute, N.C.G.S. § 1A-1, Rule 11(a) (Cum. Supp. 1988), on other

grounds as stated in Turner v. Duke Univ., 325 N.C. 152, 163-64, 381 S.E.2d 706, 712-

13 (1989) (citations omitted).

A trial court’s discovery ruling is reviewed for abuse of discretion, see Firemen’s

Mut. Ins. Co. v. High Point Sprinkler Co., 266 N.C. 134, 143, 146 S.E.2d 53, 62 (1966),

and will be overturned “only upon a showing that its ruling was manifestly

unsupported by reason and could not have been the result of a reasoned decision,” In

re Foreclosure of Lucks, 369 N.C. 222, 228, 794 S.E.2d 501, 506 (2016) (quoting State

v. Riddick, 315 N.C. 749, 756, 340 S.E.2d 55, 59 (1986)).

Though a tripartite attorney–client relationship exists, we cannot conclude,

given the bare record before us, that the trial court abused its discretion or misapplied

the law in compelling disclosure of the communications at issue. The underlying trial

court order compelling discovery contains neither findings of fact nor conclusions of

law, as neither party requested them. Therefore, we must presume that the trial

court found facts sufficient to support its determination that the communications at

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Opinion of the Court

issue were not privileged. Moreover, defendants did not properly present the

allegedly privileged documents for appellate review. See State v. Alston, 307 N.C.

321, 341, 298 S.E.2d 631, 644 (1983) (“It is the appellant’s duty and responsibility to

see that the record is in proper form and complete.”). As such, the record merely

contains a privilege log that briefly describes each of the allegedly privileged

documents. Nothing in the privilege log or the trial court’s order suggests that the

trial court erroneously concluded that a tripartite attorney–client relationship had

not formed or that the court misapplied the five-factor Murvin test. Given the record

before us, we cannot conclude that the trial court’s decision was so arbitrary that it

could not have been the result of a reasoned decision.

In sum, we hold that Blast’s contractual duty to defend and indemnify

defendants created a tripartite attorney–client relationship. Nonetheless, the record

before us fails to indicate that the trial court abused its discretion in determining that

the post-litigation communications between defendants and Blast were not

privileged. Accordingly, we modify and affirm the decision of the Court of Appeals.

We remand this case to the Court of Appeals for further remand to the trial court for

additional proceedings not inconsistent with this opinion.

MODIFIED AND AFFIRMED; REMANDED.

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