Corporate ‘Death’ and Attorney-Client Privilege
New York Law Journal
A stimulating article in the Spring 2014 issue of Litigation (the Journal of the American Bar Association’s Section of Litigation) posed an interesting question: “Does client confidentiality live forever?”1 What if the client dies? What if that death occurred 100 years ago? Rather provocatively, the authors set up their discussion by referring to Lizzie Borden, tried and acquitted of the 1892 murder in Massachusetts of her father and stepmother. The case inspired a rhyme:
Lizzy Borden took an axe
And gave her mother forty whacks.
When she saw what she had done
She gave her father forty one.
The authors inform us that Lizzie Borden’s lead attorney’s law firm continues to maintain her client files in a confidential manner. In contrast, the collection of notes kept by another attorney on Borden’s defense team were discovered by his grandson who willed the client materials to the local Massachusetts historical society to make them generally accessible some 100 years after the murder trial. The authors ask, “which is the right result?”2
It turns out that ethical obligations are one of the reasons Lizzie Borden’s lead lawyer’s files continue to be kept locked away. Attorneys at that firm considered sharing the files in the 1980s for use in a symposium on the Lizzie Borden trial. However, they received a private letter from the Massachusetts Board of Bar Overseers advising the firm that its ethical obligations included the duty to protect the files’ confidentiality and even general information about the type of materials within those files.3
In 1998, the U.S. Supreme Court, in Swidler & Berlin v. United States,4 held that the attorney-client privilege survives the death of the client. The legal wrangle arose early during the so-called “Whitewater” inquiry involving President Bill Clinton’s firing of White House Travel Office employees. Deputy White House counsel Vince Foster sought legal advice from an attorney in private practice, James Hamilton. Nine days later Foster committed suicide. The independent counsel investigating Clinton had the grand jury issue a subpoena for Hamilton’s handwritten notes. The Supreme Court held that Hamilton’s notes did not have to be produced since the attorney-client privilege survived Foster’s death. Indeed, the court noted that nearly every state recognizes the survival of the privilege after the death of client. Exceptions relate to disclosures needed to carry out the client’s intent regarding settlement of the estate.5
However, the Swidler case, which dealt with the death of a natural person, did not answer questions regarding survival of the attorney-client privilege when a corporation becomes defunct. Corporations can cease to exist—in effect “die”—in a variety of ways. Companies can cease to exist by operation of a statute as, for example, because of failure to pay franchise taxes, failure to deliver an annual report to the Secretary of State, prolonged failure to maintain a registered agent, or an expiration of the corporation’s period of duration as stated in its articles of incorporation. Although states give companies some specified time to correct such administrative defects, the company may elect to end its existence by accepting the administrative dissolution.6
Corporate existence can also cease by fundamental changes to the company’s structure. Dissolution might occur through a court order or state statute. Shareholders may act voluntarily to dissolve the company. A merger can mean the end of a corporation’s existence since the merger combines two or more business entities into one entity. A corporation also can “die” through the sale of all of its assets which often is followed by the company’s dissolution.7 Bankruptcy, too, can lead to the end of a company’s existence but, here, the bankruptcy trustee usually is held to assume the rights and powers formerly held by corporate managers and, so, assumes all the bankrupt’s confidentiality rights.8
When a corporation “dies,” what happens to the attorney-client privilege? Does it die too? Is there a continuing right to confidentiality inhering in the communications between the company’s officials and employees? Who can (or will) assert the privilege against attempts to force disclosure? Do attorneys whose files contain privileged communications of the defunct corporation have to resist subpoenas, document requests and other intrusions at all costs? If so, for how long? Surprisingly, the case law is relatively scant and clear boundaries have not been set.
A Pennsylvania Superior Court ruling issued just a month ago seems to offer some clarification. The Jan. 13 intermediate appellate decision grappled with the question whether a former corporate attorney who was subpoenaed for documents related to his legal work for three defunct companies had to comply and produce the papers. The case is called Red Vision Systems v. Nat’l Real Estate Information Services.9 The court observed that the question presented was an “issue of first impression” in Pennsylvania, namely, “whether the attorney-client privilege survives the dissolution of a business entity.”10 This factor caused the court to examine case law and approaches in other jurisdictions. In turn, that effort makes Red Vision a useful resource for all practitioners interested in the issue.
Plaintiffs were affiliated companies providing real estate services such as title searches to customers throughout the United States. They sued defendants for failure to pay invoices for services totaling some $500,000. After unsuccessful attempts at service of process, plaintiffs learned that each defendant was defunct and/or dissolved. Believing that defendants transferred substantial assets to avoid paying creditors, plaintiffs sought to obtain information about fraudulent asset transfers and to identify possible sources of recovery. The only possessor of information they knew was Thomas K. Lammert Jr. who had been in-house counsel to each of the defendants.
Plaintiffs directed a subpoena to Lammert to testify and to produce documents related to defendants’ management personnel, insurance coverage and asset transfers. Lammert filed a motion to quash the subpoena claiming that many of the requested documents were protected by the attorney-client privilege or would require disclosure of sensitive information of third parties subject to non-disclosure agreements. Lammert also said he would incur “considerable burden and expense” in reviewing and categorizing the records which were electronically stored. Plaintiffs contested the existence of any privilege and agreed to a protective order to limit plaintiffs’ use of confidential information. They also contended that Lammert failed to demonstrate that compliance with the subpoena would be unduly burdensome.
The trial court denied Lammert’s motion, holding that defendants’ documents were not protected by the privilege because defendants “no longer existed or had interests in need of protection.” Further, Lammert would not violate any confidentiality agreements. Finally, because Lammert need not concern himself with applicability of the privilege or confidentiality agreement, Lammert could “blindly turn over” the documents and thus not undergo any burdensome document review. Lammert appealed.
The intermediate appellate court entertained only two of Lammert’s questions: (1) Does the attorney-client privilege survive dissolution of a limited liability company, limited partnership, corporation or other legal entity, particularly when the entity continues to be subject to suit? (2) Whether former counsel to a dissolved entity may invoke the attorney-client privilege on behalf of the entity? The appellate court observed that there was no Pennsylvania case law on point so it would consider other state and federal precedents “for their persuasive value.”11
The appellate court noted that the attorney-client privilege has “deep historical roots” and is available to corporate clients. The privilege extends to communications between the company’s attorney and agents or employees authorized to act on the entity’s behalf. Quoting from a U.S. Supreme Court decision, Commodity Futures Trading Com’n v. Weintraub,12 the appellate court observed that the administration of the attorney-client privilege in the case of corporations must be undertaken by individuals empowered to act on behalf of the company. For solvent corporations, the power to waive the privilege rests with the company’s management and is normally exercised by its officers and directors.
When control passes to new management, the authority to assert or waive the privilege passes as well. Thus, new managers installed in a takeover, merger, loss of confidence by shareholders, or simply normal succession may waive the privilege as to communications made by former officers and directors.13 In Weintraub, the Supreme Court held that, because the role of the bankruptcy trustee was analogous to a solvent corporation’s management, the trustee could waive the privilege as to pre-bankruptcy communications. The attorney-client privilege is not “absolute” so the discharge in a given case of respective, shifting proof burdens by the person invoking the privilege and by the party seeking disclosure is important.14
Lammert cited a number of cases where, despite the existence of defunct companies or entities, the courts seemed to allow the attorney-client privilege to be asserted.15 One was a 1979 New York decision, Randy International v. Automatic Compactor,16 where the Civil Court held that the fact that corporations which were judgment debtors were “defunct and no longer functioning or operating” did not preclude them from invoking the attorney-client privilege. Randy also held that it was appropriate for the entity’s former attorneys to raise the privilege because under New York law, “the privilege may be raised by anyone.” However, the court held that the attorneys did not meet their burden of showing that the information sought was from confidential communications and that it had been received in the course of professional employment.17
Then the Red Vision court examined case law cited by the plaintiffs.18 The appellate panel concluded that the seeming rift in the case law did not amount to an application of different rules of law. Rather, the “disparate results” turned upon “differences in facts.” The “key fact,” said the court, 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. In the latter cases “there was a person or entity which succeeded to the defunct company’s interests and authority to assert the privilege.” In a case of corporate “death,” no such person or entity existed.19
Review of other cases cited by the litigants supported the appellate court’s conclusion that “the same basic legal concepts underlie them, with the different results based on the factually dissimilar statuses of the companies.”20 The notion that the continued existence of the corporation’s privilege turns on whether there is anyone with continued authority to raise it is in accord with the Restatement (Third) of the Law Governing Lawyers §73, Comment k, which provides: “[w]hen a corporation or other organization has ceased to have a legal existence such that no person can act on its behalf, ordinarily the attorney-client privilege terminates ….”21
Therefore, the court held that the attorney-client privilege survives after a company dissolves and/or ceases normal business operations “so long as the company retains some form of continued existence evidenced by having someone with authority to speak for the ‘client.'” However, if a business is dissolved 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. Without such a client, it is impossible to satisfy the burden of one invoking the privilege to show it has been claimed and not waived. In this case, Lammert did not discharge his burden of proof. He did not point to any person who presently had authority to claim or waive the privilege. Accordingly, the trial court’s ruling was affirmed.
The Pennsylvania court’s Red Vision opinion is informative in plowing through a thicket of complexities regarding survival of the attorney-client privilege when a corporation ceases to exist. It likely will not be the last word on the subject. Nevertheless, since many practical questions are raised in such corporate “death” scenarios, the reader has a convenient starting point with the recent decision along with the helpful legal articles cited in this column.
- A. Klinefelter & M. Laredo, “Is Confidentiality Really Forever: Even if the Client Dies or Ceases to Exist?” 40 ABA Litigation Journal, No. 3, pp. 1—10 (Spring 2014).http://www.americanbar.org/publications/litigation_journal/2013—14/spring/is_confidentiality_really_forever_even_if_client_dies_or_ceases_exist.html.
- Id. at 1.
- Id. at 5; see also Id. at 6—7 for additional discussion on the Borden confidentiality issues.
- 524 U.S. 399 (1998).
- See discussion of Swidler in the Klinefelter & Laredo article, supra n. 1 at 2—3.
- Michael J. Riordan, “The Attorney-Client Privilege & The ‘Posthumous’ Corporation—Should the Privilege Apply?” 34 Texas Tech L. Rev. 237 (2003).
- Id. at 240—243.
- Id. at 242—243. Apparently, some courts distinguish between a trustee appointed under Chapter 7 to liquidate a defunct corporation and the trustee who is appointed to assume management responsibilities in an ongoing entity. Some courts have held the Chapter 7 trustee to be a “liquidator of assets” and having no rights, including that of asserting the attorney-client privilege, other than those emanating only from the sale of the assets. Id. at 244 n. 55 (citing and quoting Paul R. Rice, Attorney-Client Privilege in the United States, §4:42 (2d ed. 1999)).
- 2015 Pa. Super. LEXIS 7 (Pa. Super. Jan. 13, 2015).
- Id., LEXIS at *10.
- Id., LEXIS at *11n.4.
- 471 U.S. 343, 348—49 (1985).
- Red Vision Systems, LEXIS at *12—*13.
- Id., LEXIS at *16—*18.
- Id., LEXIS at *19—*22 (discussing County of Santa Clara v. Myers Industries, 1996 U.S. Dist. LEXIS 1341 (E.D. Pa. Feb. 9, 1996) (claimed successor entity allowed to claim privilege on behalf of defunct partnership “for the time being”); PCS Nitrogen v. Ross Development, 2011 U.S. Dist. LEXIS 93021 (D.S.C., Aug. 19, 2011) (since South Carolina law permits dissolved corporation to be sued, it follows that dissolved company could assert the privilege where former directors or others properly exercise authority to do so); Official Committee of Administrative Claimants v. Bricker, 2011 U.S. Dist. LEXIS 49504 (N.D. Ohio May 9, 201) (Pennsylvania court did not view this case as an “aid in our determination” because an Ohio statute expressly extends the privilege for dissolved corporations; no equivalent in Pennsylvania).
- 97 Misc.2d 977, 412 N.Y.S. 2d 995 (N.Y. Civ. Ct. 1979).
- Red Vision, LEXIS at *21—*22 (discussing Randy decision).
- Id., LEXIS at *22—*26.
- Id., LEXIS at *25—*26.
- Id., LEXIS at *29.
- Id., LEXIS at *30. The court also cited a treatise, 1 Testimonial Privileges, §1:74 (3d ed. 2014) which states: “For organizations, the general rule is that when the organization ceases to have legal existence, such that no one can act on its behalf, the privilege terminates.”