Even Defunct Company Can Keep Privilege If Someone Still Has Authority to Assert It

The ABA/BNA Lawyers’ Manual on Professional Conduct™ is a trusted resource that helps attorneys understand cases and decisions that directly impacts their work, practice ethically, and...

By Samson Habte

Jan. 15 — Communications between a business entity and its lawyers remain protected by the attorney-client privilege after the company dissolves or ceases operations “so long as the company retains some form of continued existence evidenced by having someone with the authority to speak for the ‘client,'” the Pennsylvania Superior Court held Jan. 13.

Surveying Outside Authority, Court Finds Emerging Consensus on Survival of Corporate Privilege

The Pennsylvania Superior Court said authority from other jurisdictions supports its conclusion that the “continued existence of [a defunct] corporation's privilege turns on whether there is anyone with continued authority to raise it.” Quoting Gilliland v. Geramita, 2006 BL 97667, No. 2:05-cv-01059 (W.D. Pa. Sept. 14, 2006), it said:

[C]ounsel has no duty to assert the attorney-client privilege on behalf of a non-operating/defunct corporation, and indeed, counsel lacks the ability to do so. The better rule … is that there should be a presumption that the attorney-client privilege is no longer viable after a corporate entity ceases to function, unless a party seeking to establish the privilege demonstrates authority and good cause.

The court said Gilliland has been cited with approval or adopted in several cases, including:

▸ In re Fundamental Long Term Care Inc., No. 8:11-bk-22258 (Bankr. M.D. Fla. Oct. 9, 2012) (privilege can't be invoked where no one remained to assert it on behalf of dissolved company);

▸ SEC v. Espuelas, No. 1:11-cv-00025-WSD (N.D. Ga. Jan. 27, 2011) (privilege does not survive dissolution of corporation, absent compelling reason);

▸ Lopes v. Vieira, 688 F. Supp. 2d 1050 (E.D. Cal. 2010) (defunct company didn't retain privilege);

▸ TAS Distrib. Co. v. Cummins Inc., No. 1:07-cv-01141 (C.D. Ill. Oct. 7, 2009) (“Absent some compelling reason to the contrary, the attorney client privilege does not survive the death of a corporation”).

The court said the same principles have been applied in other cases, including:

▸ Cnty. of Santa Clara v. Myers Indus. Inc., No. 95-298 (E.D. Pa. Feb. 9, 1996) (refusing to deem privilege waived until determining whether entity alleged to be successor to defunct partnership was in fact its successor);

▸ Lewis v. United States, No. 02-2958 B/AN (W.D. Tenn. Dec. 7, 2004) (holding attorney-client privilege no longer applied where company was bankrupt and had no assets or managers);

▸ Official Comm. of Admin. Claimants ex rel. LTV Steel Co. v. Moran, 802 F. Supp. 2d 947 (N.D. Ill. 2011) (privilege continued to exist for company that had temporarily dissolved and ceased normal business operations but had “not yet ‘died'” because company was pursuing claims as part of windup process and retained management which could assert privilege);

▸ Melendrez v. Superior Court, 156 Cal. Rptr. 3d 335 (Cal. Ct. App. 2013) (de facto assignee of defunct corporation had authority to waive privilege, but “[i]f there is no ... successor entity, and the corporation no longer exists, we presume the privilege would no longer exist”).

See also PCS Nitrogen, Inc. v. Ross Dev. Corp., 2011 BL 215478, No. 2:09-3171-MBS (D.S.C. Aug. 19, 2011); Randy Int'l, Ltd. v. Automatic Compactor Corp., 12 N.Y.S.2d 995 (N.Y. Civ. Ct. 1979); Trading Techs. Int'l, Inc. v. GL Consultants, Inc., 2012 BL 59869, No. 05-4120 (N.D. Ill. March 14, 2012) (“A company that has ceased normal business operations but is still going through the windup process, which can involve pursuing claims, is not ‘dead' for purposes of the privilege. However, a ‘completely defunct company should not be allowed to assert privilege, regardless of whether it has technically maintained its legal status.'” ).

A trial court had ruled that unlike communications with individuals—which remain confidential posthumously—an organization's right to invoke the attorney-client privilege terminates upon dissolution.

But the appeals court said that holding was too categorical. Rather, “the continued existence of the corporation's privilege turns on whether there is anyone with continued authority to raise it,” the panel declared in an opinion by Judge Eugene B. Strassburger III.

The court found that in this instance the privilege was lost because the former in-house counsel for the defunct defendants couldn't establish that those entities had given him legal authority to control the former clients' attorney-client privilege.

Majority View Adopted

Whether the attorney-client privilege survives the dissolution of a business entity was a question of first impression in Pennsylvania, Strassburger found.

But the panel said its holding aligns with an emerging consensus: that the “key fact” in determining whether the privilege survives is “whether the corporation is ‘dead' as opposed to being in some other state, such as a windup phase, bankruptcy or liquidation, or having merged into or been acquired by a successor.” (See box.)

“In the latter cases, there was a person or entity which succeeded to the defunct company's interests and authority to assert the privilege,” the court said:

That person may be a bankruptcy trustee as in [CFTC v. Weintraub, 471 U.S. 343 (1985)]; a statutory liquidator as in [Maleski v. Corporate Life Ins. Co., 641 A.2d 1 (Pa. Commw. Ct. 1994)]; a successor-in-interest as in [Cnty. of Santa Clara v. Myers Indus. Inc., No. 95-298 (E.D. Pa. Feb. 9, 1996)] and [City of Rialto v. DOD, 492 F. Supp. 2d 1193 (C.D. Cal. 2007)]; a person managing the corporation during the windup process as in [Reilly v. Greenwald & Hoffman LLP, 127 Cal. Rptr. 3d 317 (Cal. Ct. App. 2011)]; or some other person or group who succeeds to the defunct company's management as in [Melendrez v. Superior Court, 156 Cal. Rptr. 3d 335 (Cal. Ct. App. 2013)]. 

“However,” the court added, “if a business is dissolved and/or has ceased to operate, and has neither a legal successor nor some remaining management with authority to handle the company's post-dissolution windup, then there is no longer any ‘client' to raise or waive the privilege.”

No Protection Here

While the Superior Court rejected the trial judge's categorical statement that the attorney-client privilege never survives corporate dissolution, it affirmed the finding that the privilege was not validly invoked in this case.

The discovery dispute arose during a lawsuit by two vendors who alleged that they were owed $500,000 for services they provided to National Real Estate Information Services LP (NREIS), a now-defunct real estate company. Believing that NREIS transferred assets to other entities to avoid paying creditors, the plaintiffs subpoenaed the company's former in-house counsel for testimony and documents relating to the disposition of the company's assets during the dissolution period.

The lawyer, Thomas K. Lammert Jr., moved to quash the subpoena, invoking the attorney-client privilege. But the court said “Lammert's claim of privilege cannot be sustained on the record before us” because he “points to no person who presently has the authority to claim or waive the privilege on behalf” of NREIS.

“Although at some point he had held management positions with [NREIS] and had retained company documents and the ability to receive company email, Lammert does not claim to have retained the power to act on behalf of [NREIS] post-dissolution,” Strassburger wrote. “Rather, he emphasized that he is a non-party and is acting pro se to discharge his ethical duties to his former clients.”

The court also rejected Lammert's attempt to “justify his bald claim of privilege by pointing to the burden it would cause him, a non-party who is no longer being compensated for his time by Defendants, to review the documents and compile a privilege log.”

“The fact that such a burden of time and money would be placed upon Lammert if the privilege were still applicable under the circumstances of this case further supports our determination that the interests of justice outweigh the motivation for the client to speak openly with its counsel when the client is a business which no longer has any existence,” the court said.

Industry Win

The decision marks a victory for the Association of Corporate Counsel (ACC), which sharply criticized the trial court's ruling that the corporate attorney-client privilege terminates upon dissolution.

The trial judge said the “justification for allowing the attorney-client privilege to survive the death of a client does not apply to a corporate entity that no longer conducts business.” That justification—encouraging clients to communicate fully and frankly with counsel—was inapplicable because corporate officers are aware their discussions with lawyers could be disclosed by new management or bankruptcy trustees, the judge said.

“Furthermore,” he added, “a corporation that has ceased to exist is not concerned about reputation, civil liability or harm to friends or family.”

In an amicus brief, ACC said the judge's “observation is both irrelevant and wrong.” Corporate entities “have interests that can and should be subject to protection after their dissolution,” ACC argued, because “At bottom, corporations and other organizations are merely groups of individuals.”

The plaintiffs were represented by Stonecipher, Cunningham, Beard & Schmitt P.C. and Cohen & Grigsby P.C. Lammert was represented by Del Sole Cavanaugh Stroyd LLC and Ballard Spahr LLP.

Full text at http://www.bloomberglaw.com/public/document/Red_Vision_Sys_Inc_v_Natl_Real_Estate_Info_Servs_LP_2015_PA_Super.

The ABA/BNA Lawyers’ Manual on Professional Conduct is a joint publication of the American Bar Association Center for Professional Responsibility and Bloomberg BNA.

Copyright 2015, the American Bar Association and The Bureau of National Affairs, Inc. All Rights Reserved.