Tuesday, June 21, 2011
C.A. Upholds Suitís Dismissal Based on Attorney-Client Privilege
Corporate Client Does Not Lose Privilege Upon Dissolution, Justices Rule
By KENNETH OFGANG, Staff Writer
A San Diego Superior Court judge was correct in dismissing a shareholder derivative suit against a dissolved corporationís outside counsel, on the ground that the claims invade the corporationís attorney-client privilege, the Fourth District Court of Appeal has ruled.
Div. One yesterday ordered publication of its May 23 opinion affirming the dismissal of claims by the minority shareholder in an architectural and design firm that Paul E. Greenwald and Greenwald & Hoffman, LLP facilitated conversion of corporate funds by the majority shareholder.
Presiding Justice Judith McConnell said that Brion Reilly, Inc. did not lose its attorney-client privilege when it dissolved.
Owners and Officers
The plaintiff, Mark S. Reilly, owned 49 percent of the corporation, which was formed in March 2003. Lena Brion, who owned the remaining 51 percent, was the president and chief financial officer; Reilly was also an officer, and both were directors.
In April 2004, Brion and Reilly agreed to dissolve the corporation. In August 2009, Reilly sued a number of defendants, including Brion, Brion Reilly, and the Greenwald firm. Among other things, Reilly claimed that Brion converted various corporate assets, including work in progress, between 2006 and 2008.
He also accused the law firm of constructive fraud and negligent misrepresentation, saying it advised Brion that she could transfer Brion Reilly assets to her new company without compensating Reilly for his share. The law firm demurred, saying it could not defend itself because its communications with Brion in her capacity as head of the corporation were covered by the corporationís attorney-client privilege, which Brion Reilly had not waived.
Judge Jacqueline Stern sustained the demurrer based on McDermott, Will & Emery v. Superior Court (2000) 83 Cal.App.4th 378. That case held that in a shareholder derivative suit, the corporation is the ďreal plaintiff,Ē and that if the defendant was the corporationís lawyer and cannot defend itself without disclosing attorney-client communications, the suit must be dismissed unless the corporation waives the privilege.
Reilly argued that McDermott does not apply to a dissolved corporation. While his appeal was pending, however, this districtís Court of Appeal ruled otherwise in Favila v. Katten Muchin Roseman LLP (2010) 188 Cal.App.4th 189.
Reilly sought to distinguish his case from Favila in that Brion Reilly had ďno functioning managementĒ to assert the privilege.
McConnell, however, said Reilly had conceded that Brion owned a majority of the stock and was an officer and director, and had a statutory duty to wind up the corporationís affairs.
ďEven if Brion were not following procedures set forth in the Corporations Code during the windup period, as Reilly suggests, absent a waiver of the attorney-client privilege by someone authorized to make it on BRIís behalf, Greenwald is duty-bound to claim the privilege,Ē the presiding justice wrote.
McConnell went on to say that the issue was properly resolved on demurrer, since there was no allegation the privilege had been waived and it was obvious Greenwald could not mount a defense without disclosing what advice it gave Brion.
The case is Reilly v. Greenwald & Hoffman, LLP, 11 S.O.S. 3291.
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