Attorney-Client Privilege Does Not Shift In An Asset Sale

Attorney-Client Privilege Does Not Shift In An Asset Sale

       In a recent decision from Delaware, the court was called upon to consider who, after an asset sale, could assert the attorney-client privilege. On the facts of this case, it was held that the attorney-client relationship remained with the seller and had not shifted to the buyer. Re: DLO Enterprises, Inc. v. Innovative Chem. Prod. Grp., LLC, No. CV 2019-0276-MTZ, 2020 WL 2844497 (Del. Ch. June 1, 2020).

         In a merger, absent a contrary provision in the merger agreement, the attorney-client privilege with respect to pre-merger activities passes to the corporation/entity that survives the merger. See, e.g., Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP, ADA3d 155 (Del. Ch. 2013). In this instance there was not a merger, but rather a sale of only a distinct list of assets. It goes without saying that the attorney-client relationship between the seller and its attorneys was not identified as an asset being conveyed. Hence, the attorney-client relationship remained with the seller.

       Adding a wrinkle of complexity, the transferred assets included computers that contained pre-transaction privileged communications between the seller and its attorneys. The court held that this disclosure did not constitute a waiver of the attorney-client privilege, and set up mechanisms by which to police the use of those communications by the purchaser. Other companies in similar situations may not be so lucky. Hence, as a practice pointer, if computers are being transferred in an asset transaction, it is advisable to carefully and comprehensively scrub them of attorney-client communications.

Dissolved LLCs and the Attorney-Client Privilege

Dissolved LLCs and the Attorney-Client Privilege

      In recent decision from Mississippi, the court considered whether a dissolved corporation continues to enjoy an attorney-client privilege. On the facts of this case, it was held that it did not. United States v. Walters, 2020 WL 1934803 (S.D. Miss. April 21, 2020).

      Walters served a subpoena duces tecum upon Jonell Beller, an attorney with the Baker Donelson law firm seeking records relating to, amongst others, Prime Care Marketing, LLC and Total Care Marketing, LLC. The exact relationship between Walters and either of these business entities was not recited in the decision, although Walters had, in 2015, filed the articles of dissolution with respect to Prime Care Marketing, LLC.

       In response to the subpoena duces tecum, Beller filed a motion to quash on the basis of privilege, to which Walters responded that Beller “had no standing to assert the privilege because it belongs to the clients” and he “has authority to waive the privilege for the companies.” The court granted the motion to quash, finding that Beller had standing to assert the privilege and that Bellers had failed to demonstrate, on behalf of each of the LLCs, that he had authority to waive the privilege. That ruling led to a motion for reconsideration, which is the subject of this decision.

      On reconsideration, the focus was upon the extent to which a dissolved corporation (although this case involved LLCs) enjoys a post-dissolution attorney-client privilege. Drawing a distinction between natural persons, for whom the privilege does survive death, the court cited a variety of authorities that stand generally for the proposition that a business entity, after its dissolution, notwithstanding the possibility of reinstatement thereafter, does not continue to enjoy an attorney-client privilege. For example, the court cited TAS Bistriv. Co. v. Cummins, Inc., 2009 WL 3255297 (C.D. Ill. Oct. 7, 2009) for the proposition “absent some compelling reason to the contrary, the attorney-client privilege does not survive the death of the corporation.”

      On that basis, the motion to reconsider was granted, the quashing of the subpoena was set aside, and Beller was directed to produce the documents responsive to the subpoena duces tecum.

New Jersey Court Considers Effect of Law Firm Not Maintaining Required Malpractice Insurance

New Jersey Court Considers Effect of Law Firm Not Maintaining

Required Malpractice Insurance

 

In a recent case from New Jersey, that was considered the effect of a dissolving law firm not maintaining tail malpractice insurance coverage and the impact of that failure on the part nurse personal responsibility for claims against the partnership.  In this instance, based particular on the wording of the New Jersey statute, it was determined that the partners did not lose the limited liability afforded by LLP status.  Mortgage Grader, Inc. v. Ward & Olivo, LLP, Docket No. A-3777-13T3 (NJ App. Div. Nov. 14, 2014).

 

Ward and Olivo organized Ward & Olivo, LLP with themselves as the only partners.  In July, 2009, plaintiff Mortgage Grader, Inc. retained W & O and specifically Olivo to represent it in some patent infringement litigation. The litigation was ultimately settled in return for certain one-time payments to Mortgage Grader for which the defendants received licenses of the intellectual property.

 

On June 30, 2011, Ward and Olivo ceased actively practicing through W & O; thereafter it had no activities except collecting outstanding fees.  The firm’s professional malpractice policy expired on August 8, 2011, and no tail coverage was acquired.

 

In October, 2012, Mortgage Grader filed a lawsuit against the W & O partnership, Oliva and Ward, it being alleged that Oliva’s representation of it in the litigation was deficient.  Ward had never been involved in the representation of Mortgage Grader.

 

While Ward sought to be dismissed from the lawsuit on the basis that he has no liability for the activities of the partnership, it being an LLP, Mortgage Grader asserted that LLP status had been lost where the partnership ceased to maintain malpractice insurance coverage, that being a condition precedent under the New Jersey statute for law firms organized as LLPs.

 

The trial court held that, inter alia, as W&O no longer maintained liability insurance it lost its LLP status and would be treated as a traditional general partnership in which Ward would be responsible for Olivo’s malpractice.  The appellate court disagreed.  Referring to the language of the controlling Supreme Court rule, there were defined consequences for a firm not maintaining the required insurance including termination or suspension of the firm’s ability to practice law or to otherwise discipline it.  N.J. S. Ct. Rule 1:21-1C.    As treatment of an LLP as a general partnership was not a defined consequence of the failure to maintain required insurance, the trial court’s effort to do so was reversed.  As such Ward was practicing with Olivo as partners in an LLP, and Ward was properly dismissed from the suit against W&O and Olivo alleging Olivo’s malpractice.

 

The Court alluded to, but did not base its decision upon, the question of whether a firm is required to maintain tail coverage. 

 

The Kentucky LLP statute was amended in 2012 in response to Evanston Ins. Co. v. Dillard Department Stores, Inc., 602 F.3d 610 (5th Cir. 2010), to provide, inter alia, that the question of LLP status will be determined as of the time of the operative facts giving rise to the claim versus when the claim is filed.  See also Rutledge, The 2012 Amendments to Kentucky’s Business Entity Statutes, 101 Kentucky Law Journal Online 1, 2-3 (2012).  For that reason the question presented in Mortgage Grader, Inc. v. Ward & Olivo, LLP has in Kentucky already been resolved.

Counsel for Partnership Disqualified Based Upon “Substantially Related” Work on Behalf of a Partner

Counsel for Partnership Disqualified Based Upon

“Substantially Related” Work on Behalf of a Partner

 

      As described by the Sixth Circuit, this case is about the meaning of “substantially related” in the context of the rule disqualifying counsel from being adverse to a former client as to a “substantially related” matter.  Bowers v. The Ophthalmology Group, __ F.3d __, 2013 WL 5763173 (6^th Cir. Oct. 25, 2013).

      Bowers was a partner in The Ophthalmology Group, LLP; she was expelled from the partnership in 2010.  She filed suit over that expulsion under Title VII and Kentucky law.  She moved to disqualify the partnership’s attorney on the basis that another attorney in the same firm (M&L) had previously represented Bowers on a substantially related matter.  Specifically, she referenced assistance from the firm on an ultimately uncompleted effort to open an ophthalmology practice in Louisville and counsel provided the partnership several years prior on the expulsion of another partner.

      The trial court dismissed the Title VII claim as Bowers was a partner and not covered thereby, determined to not exercise supplemental jurisdiction over the state law claims, and dismissed as moot the motion to disqualify counsel.  This appeal followed.

      The Sixth Circuit held (i) the motion to disqualify counsel should have been addressed before considering the merits of Bower’s claims and (ii) the counsel should have been disqualified.  As to the first point it wrote “A district court must rule on a motion for disqualification of counsel prior to ruling on a dispositive motion because the success of a disqualification motion has the potential to change the proceedings entirely.”  2013 WL 5763173, *6.

      As to the substance of the disqualification, the burden is not upon the objecting former client to divulge the previously disclosed confidential information, and the court is to look to the type of information “as would normally have been obtained in the prior representation.”  2013 WL 5763173, *4, quoting Ky. S. Ct. R. 3.130 (1.9 comment 3).  For similar formula the court also cited the Hazard & Hodes treatise and the Restatement (3^rd) of the Law Governing Lawyers.  Addressing only the representation as to opening another practice in Louisville, the Court created hypothetical disclosures that Bower’s might have made and then explained how they might be detrimental to her in this case, acknowledging them to be “scenarios.”  2013 WL 5763173, *5.  Still, these hypothetical scenarios were enough to disqualify M&L.

      Judge Griffin filed a dissent to the majority’s determination that a conflict existed and that M&L should have been disqualified.  Beginning from the rule that motions to disqualify are viewed with disfavor, she would have found there to be no conflict as there was no “substantial relationship” to the earlier matters.  As to the earlier partner expulsion, the discussions were between all of the partners and M&L as its counsel.  On that basis she found there to be no possibility of confidential communications between Bowers and M&L.  2013 WL 5763137, *7.  As for opening a Louisville practice, those plans were disclosed to the partnership’s other partners and never materialized.  Judge Griffin was unable to see those earlier efforts as being substantially related to defending the partnership against Bower’s discrimination claims, characterizing the majority opinion as “rife with speculative scenarios.”

Rules of Professional Conduct and Employment-at-Will

Sixth Circuit Court of Appeals Hold That Requirement That Attorney Violate Ethical Rules Does Not Constitute an Exception to the Rule of At-Will Employment

      A recent decision out of the Sixth Circuit Court of Appeals held, inter alia, that an assertion by an attorney that he was fired for his refusal to violate what he understands to be his ethical obligations under the Kentucky Rules of Professional Conduct will not constitute an exception to Kentucky’s rule of employment-at-will.  Gadlage v. Winters & Yonker, Attorneys at Law, PSC, ___ Fed. Appx. ___, 2013 WL 5749547 (6^th Cir. Oct. 24, 2013).

      Anthony Gadlage, an attorney, was dismissed from his employment by the Winters & Yonkers firm (W&Y) alleging due to his refusal to refer clients to the “Ask Gary” medical service providers.  In his wrongful discharge suit, he asserted that the rules applicable to Kentucky attorneys fall within the scope of the “public policy” exception to Kentucky’s general applicable rule of employment-at-will.  Gadlage also asked the Federal District Court to certify to the Kentucky Supreme Court the question of whether “a violation of the Kentucky Supreme Court Rules can form the basis of a wrongful discharge claim as a ‘public policy’ exemption to the employment-at-will doctrine.”  

      The trial court upheld W&Y’s motion to dismiss for failure to state a claim on which relief can be granted.  On a motion for reconsideration, the District Court refused to certify the question believing it had already been sufficiently addressed by the Kentucky Supreme Court. 

      Curiously, while the Sixth Circuit acknowledged that Greissman v. Rawlings & Associates, No. 12-CI-00744 (Oldham Cr. Ct. Apr. 8, 2013) and Isaacs & Isaacs, PSC v. Rigor, No. 05-CI-7688 (Jefferson Cir. Ct. Oct. 18, 2010) both held, inter alia, that the Rules of Professional Conduct may support a public policy exception to the rule of at-will employment, the Court of Appeals retreated from the question, upholding the dismissal on what is effectively an insufficient pleading standard, namely:

Even if obligatory Supreme Court Rules can ground a public-policy exception to the at-will doctrine, Gadlage does not allege a singular particularized Rule violation in his complaint or in his appellate briefing.  He relies instead on vague and generalized statements about third-party conflicts of interests and obligations to clients.  Gadlage has thus failed to state a claim that is “plausible on its face.”

      A dissenting opinion by Judge White would have referred to the Kentucky Supreme Court the question Gadlage sought to be certified and she would also have found that the pleadings were sufficient to avoid dismissal.

      With due respect to the majority, I found this decision to be quite unsatisfactory.  The Kentucky Supreme Court alone has the final voice on the interpretation and application of the Rules of Professional Conduct.  The Sixth Circuit’s affirmance of the trial court’s refusal to certify the question, not wanting to “trouble” the Kentucky Supreme Court, is without justification.  In fact, not “troubling” the Supreme Court with this question has created uncertainty as this decision and those in the Greissman and Isaac cases are in conflict; a certification would have provided a clear opportunity for its resolution.

Effort to Hold Attorney's Liable on Client's Securities Frraud Rejected

7^th Circuit Reject Efforts to Hold Attorneys Liable for Client’s Securities Fraud

      In a recent decision, the 7^th Circuit Court of Appeals determined that the attorneys to the promoter of an investment security plan were not responsible to make good the investor’s losses when the venture ultimately failed.  Rosenbaum v. White, No. 11-3224 (7^th Cir. Aug. 16, 2012). 

      Chad Seybold, a securities broker turned real estate investor, enlisted the aid of attorneys Beau Jack White and James Beaman to assist in organizing an investment vehicle, a LLC, through which to purchase, rehabilitate, and then either sell or rent commercial real estate properties in Marion, Indiana.  To that end, a pair of business entities were organized, one of which would be partially owned by private investors.  Seybold was successful in soliciting investments in excess of $1 million for his plan.  However, it failed shortly after launch; the opinion does not indicate exactly how long it took for the venture to fail, but it can be inferred it took place within a matter of mere months.  In response, the investors filed suit against not only Seybold but also the attorneys.  Seybold, individually, filed for bankruptcy.  Ultimately, the suit was either dismissed or settled as all of the defendants save the attorneys.  They sought and were granted summary judgment by the trial court, and the plaintiffs appealed to the 7^th Circuit.

      With respect to claims for legal malpractice, constructive fraud and securities fraud, the Court found that all three hinged on whether the attorneys owed the plaintiffs a legal duty, that being a question of law.  Slip op. at 12.  With respect to the claims of legal malpractice and constructive fraud, the court found that the facts did not support the existence of an attorney/fiduciary relationship between the attorneys and the individual investors in the venture, it being organized as an LLC.  Arguing against the defendants’ position was the fact that Seybold, in the course of an oral presentation to some of the ultimate investors in the LLC, had indicated that the attorneys were working on their behalf, a statement not corrected by the attorney.  However, analyzing the broader context of the discussion, including the explanation that the attorneys were hired to organize the LLC’s in question, the Court determined that these facts were not sufficient to create an attorney/client relationship.  Rather, the statement was not made to all investors, many of the investors never met the attorneys, and language in the operating agreement inviting each investor to consult with their own counsel.

       The court also rejected efforts to impose liability based on alleged violations of standards set forth in the Indiana Rules of Professional Conduct Governing Attorneys.  Essentially, the Court upheld the rule, recited in those rules of professional conduct, that they do themselves create duties, rather those duties must arise at common law.

      With respect to the alleged violations of federal and state securities laws, the 7^th Circuit cited various holdings such Chiarella holding that the failure to speak cannot give rise to a claim for fraud absent a duty to speak based upon a fiduciary relationship.  In that the attorneys did not stand in a fiduciary relationship with the individual investors, they had no obligation to speak in order to address the either ambiguous or misleading statements by Seybold as to the attorneys’ role in the transaction.

      Ultimately, the attorneys work in the organization of the ventures and the related financing were not subject to criticism, and that being the case it is somewhat difficult to ascertain what would be the ultimate theory of recovery by the plaintiffs.  Even in the absence of a breach of duty, there must be shown damages consequent to that breach.  The attorneys in this case were not managing the venture and were not involved in its ultimate collapse, so the suggestion of their culpability for damages is at best questionable.  With dismissal, they at least avoid having to make that demonstration.

Attorney Ethics – “Blame It on the Chablis”

Attorney Ethics – “Blame It on the Chablis”

The following is reproduced from the September update from the newsletter of the Disciplinary Board of Pennsylvania, it discussing an attorney disciplinary case from Illinois.  Certain footnotes have been deleted.

Blame It on the Chablis

The most interesting disciplinary case this month is the decision of the Review Board of the Illinois Attorney Registration and Disciplinary Commission in the matter of Kelly Maureen Murawski.

Ms. Murawski’s problems arose out of her decision to represent a married man by the name of Matthew, with whom she had formerly had an intimate relationship.  It seems Matthew also had an affair with one Chablis, whom he met on match.com.  His profile failed to disclose that he was married to Sally.  A year later, Chablis found out Matthew was married, threatened to tell his wife, and began a pattern of appearing at and telephoning his home.

On a recommendation from a police officer that he obtain a protective order, Matthew contacted Respondent, who agreed to represent him “as a friend.”  Matthew neglected to advise Respondent of the precise nature of his relationship with Chablis.  Respondent filed papers for an ex parte protection order, which was scheduled for a hearing.  Respondent appeared at the hearing with Matthew, at which Chablis appeared with 59 pages of emails and texts from Matthew professing his love and twice proposing marriage.  Respondent asked to see the documentation and sat down on a bench with Chablis to read it.  The sight of his former inamoratas sharing notes on their experience was too much for Matthew, who became enraged and discharged Respondent as his attorney.  She went back into the courtroom and withdrew as his attorney, and after an ensuing scuffle over possession of the documentation, Respondent filed a battery charge against Matthew, who was arrested and jailed.  The protection order was dismissed.

Later that day, Respondent telephoned Sally and informed her that Matthew was in jail, and also of his relationships with Respondent and Chablis.  Ostensibly, this was to arrange a time for service of a protective order.  It turned out Sally already knew about Chablis.  Nonetheless much unpleasantness ensued, and Matthew and Sally divorced.

Despite the bad judgment evident in Respondent’s handling of the matter, all disciplinary charges were dismissed.  Murawski was found not to have violated a requirement of Rule 1.16(d) to deliver documents to her client upon withdrawal because Matthew never had a right to the documents.  The documents remained Chablis’s property unless introduced in the proceeding, which never happened.  She did not betray a client’s confidence in violation of Rule 1.6(a) by her call to Sally because Sally already knew about Chablis.  She did not use information adverse to a former client in violation of Rule 1.9(a)(2) because Matthew’s relationship with Chablis was known not only to Sally, but also to those in the public courtroom.

Although Ms. Murawski was not disciplined, a few lessons appear from the case:

1.       Representing a married former paramour “as a friend” is probably a bad idea.

2.       Representing a married former paramour in a domestic dispute with another former paramour “as a friend” is definitely a bad idea.

3.       Representing a married former paramour with anger issues in a domestic dispute with another former paramour named Chablis he met while trolling match.com as a single man is absolutely a bad idea.

4.       Not asking your married former paramour with anger issues why he wants you to file a protective order against a woman named Chablis is a very bad idea.

5.       Calling your married former paramour’s wife to explain that her husband is in jail and that you are filing a protective order against him because of his behavior in a protective order case you filed against another former paramour named Chablis he met on match.com cannot possibly have seemed like a good idea at the time.