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April 7, 2004

Venture Law Group v. Superior Court (Singhania) (2004) 118 Cal. App. 4th 96

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The Sixth Appellate District holds that a successor corporation succeeds to the attorney-client privilege of a prior corporation.  Prior management cannot expressly or impliedly waive the privilege by asserting an advice of counsel defense.  Implied waiver based on this defense can only be asserted against the corporate client.

Alok Singhania was one of a group of employees and shareholders of Soft Plus who left their employment before its merger with a wholly owned subsidiary of U.S.  Interactive, Inc.  (USI).  When they sued both corporations and its previous officers a dispute arose concerning the deposition of Ashley Giesler, an attorney with Venture Law Group (VLG) who had provided legal advice to Soft Plus.  Giesler asserted the attorney-client privilege and refused to answer questions about the legal advice that VLG gave to Soft Plus.  Plaintiffs argued that their questions were not barred by the attorney-client privilege because the individual defendants had raised advice of counsel as a defense, thereby waiving the privilege.  Plaintiffs also argued that they would be unable to evaluate or counter the advice of counsel defense absent discovery of the advice in question.

VLG and Giesler argued they were duty-bound to assert the attorney-client privilege until the holder of the privilege directed otherwise.  USI was the holder of Soft Plus’s attorney-client privilege as a result of the merger and USI had instructed VLG to maintain the privilege.  VLG and Giesler also argued there was no express or implied waiver of the attorney-client privilege.  Only the current management of the successor corporation, USI, had authority to waive the privilege, and had not done so.  The trial court ordered Giesler to provide answers to selected questions.

The Court of Appeal reversed, recognizing that a corporation’s confidential communications with its attorney are protected by the attorney-client privilege, regardless of a change of control.  Attorneys often confront complicated decisions involving personal and institutional relationships and loyalties when control of a corporation changes.  It is almost impossible to advise the corporation’s officers or its board on a course of action that does not benefit some competing interest such as majority or minority shareholders, the existing management, or a creditor.  The attorney must make recommendations clearly based on the best interests of the corporation.

Pursuant to Evidence Code § 953(d), after a merger the attorney-client privilege of the corporation no longer in existence belongs to the successor corporation.  USI, who would not authorize disclosure, became the holder of Soft Plus’s attorney-client privilege.  The fact that USI was discharged in bankruptcy did not vitiate the privilege.  Furthermore, Soft Plus’s insurance carrier was not the holder of the privilege even though it was directing the defense and asserted an advice of counsel defense.  An insurer cannot waive the attorney-client privilege for its insured.  Nor was the carrier analogous to new management.

The individual defendants, former managers of the merged company, did not hold the privilege and could not waive it.  Management must exercise the privilege in a manner consistent with the fiduciary duty to act in the best interests of the corporation and not of themselves as individuals.  Displaced managers may not assert the privilege over the wishes of current managers.

The implied waiver caused by asserting the advice of counsel defense is limited to situations where the corporate client has placed into issue the decisions, conclusions, and mental state of the attorney who will be called as a witness to prove such matters.  The individual defendants were not the clients and could not impliedly waive the attorney-client privilege.

Although Singhania was precluded from testing the validity of the individual defendants’ advice of counsel defense, the privilege is not waived because its exercise may suppress relevant evidence

Comment: This case provides guidance concerning the necessary assertion of the attorney-client privilege on behalf of the organizational client.  In addition, it adds to a growing body of case law recognizing that an attorney’s duty extends only to the client, and not to related third parties who may be affected by the attorney’s advice to the client.

 

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