New ruling denying privilege to defunct businesses challenged

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The Association of Corporate Counsel and its three Pennsylvania chapters have filed an amicus brief with the Pennsylvania Superior Court taking issue with an Allegheny County trial judge’s recent ruling that attorney-client privilege does not extend to corporations that are no longer in business.

The association, along with its Delaware Valley, Central Pennsylvania and Western Pennsylvania chapters, urged the Superior Court to reverse Senior Judge R. Stanton Wettick Jr.’s February ruling in RedVision Systems v. National Real Estate Information Services.

In RedVision, Judge Wettick ruled that the U.S. Supreme Court’s reasoning in the 1998 case Swidler & Berlin v. United States — that attorney-client privilege must extend to deceased clients because the knowledge that information will remain confidential posthumously encourages clients to be more open and forthcoming while alive — does not apply to shuttered corporate entities.

“In a corporate setting, corporate officers are not going to be reluctant to talk to counsel because of the possibility that the information could be communicated when the corporation is dissolved,” Judge Wettick said. “This is so because the client’s communications can be disclosed by new management or a trustee in bankruptcy. Thus, a corporate official does not have the same expectations as the client who is an individual.”

He added that a defunct corporation “is not concerned about reputation, civil liability, or harm to friends and family” and that its “corporate interests no longer need to be protected.”

But the Association of Corporate Counsel argued in its brief that this reasoning “completely misapprehends the purpose of the privilege,” which is to encourage clients to be candid with their attorneys. The rationale in the Swidler case “applies with equal if not greater force to business clients,” the association said in the brief.

In-house counsel The Legal Intelligencer spoke to agreed.

Lorraine K. Koc, senior counsel at SugarHouse Casino, said a ruling that attorney-client privilege does not apply to dissolved corporations is likely to make clients less inclined to be candid.

Michael A. Duff, Penske senior vice president and general counsel, said in-house and outside attorneys are being increasingly held responsible by regulators, legislators and prosecutors to ensure that their clients are good corporate citizens.

Being able to get as much information with as much candor as possible is essential to giving sound legal advice and eviscerating the attorney-client privilege for dissolved corporations runs the risk of making that much more difficult to do, Mr. Duff said.

“When you’re talking to people in a situation where they’re seeking legal advice, they really do rely on the fact that it’s privileged,” Mr. Duff said.

While Judge Wettick held that attorney-client privilege protection ceases when a company ceases operations because corporate counsel is obligated only to protect the interests of the corporation and not the individual interests of its officers and directors, the association said that reasoning is flawed because corporations can only act through their human agents.

“Given that a corporation’s agents are still living after an entity’s dissolution, posthumous abrogation of the privilege is likely to have a greater chilling effect on business clients than individual clients,” the association said in its brief.

According to Judge Wettick:

In RedVision, plaintiffs RedVision Systems and TitleVision Texas sued defendants National Real Estate Information Services LP, NREIS Inc. and NREIS of Texas, seeking $530,000 in fees they claim they never received for providing reports of title services and other real estate services.

The plaintiffs, alleging that the defendants transferred substantial assets to unknown successors in order to avoid paying creditors, sought to discover information related to those transfers from Thomas K. Lammert Jr., the former in-house counsel to the defendants.

Mr. Lammert sought to invoke attorney-client privilege, filing a motion to quash the subpoena and seeking a protective order, but Judge Wettick denied the motion.

“Mr. Lammert appears to take the position that he is obligated to protect his former clients. However, they do not exist,” the judge said.

The Association of Corporate Counsel argued in its brief that, while corporate management and bankruptcy trustees can waive a corporation’s privilege, they may only do so after considering all the interests of the various stakeholders and any confidentiality agreements with third parties.

“After a corporation is dissolved, however, there is no one left to consider the interests of corporate stakeholders in making a waiver decision,” the association said in the brief. “Because there is no one capable of waiving the privilege, there is correspondingly no basis for lifting it.”

Amar Sarwal, the association’s vice president and chief legal strategist, said there is a dearth of case law nationwide looking at whether attorney-client privilege extends to dissolved corporate entities.

Pennsylvania’s appellate courts now have an opportunity to lead the conversation and provide much-needed guidance for courts across the country, he said.


Zack Needles can be contacted at 215-557-2493 or zneedles@alm.com. Follow him on Twitter @ZNeedlesTLI. To read more articles like this, visit www.thelegalintelligencer.com.

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