Ethics in Brief

Ethics in Brief is designed to present ethical issues that practitioners might well face on a daily basis. It is a service of the Legal Ethics Committee of the San Diego County Bar Association for SDCBA members.

“The Privilege is Mine and Mine Alone,” Says the Client-Organization

A core directive in the representation of an organization is set forth in Rule of Professional Conduct 3-600(A), “Organization as Client”: 

In representing an organization, a member shall conform his or her representation to the concept that the client is the organization itself, acting through its highest authorized officer, employee, body, or constituent overseeing the particular engagement.

In light of this, any attorney who represents organizations, and, in particular, corporations, must understand the workings of the attorney-client privilege in this context.

It has long been the case that the privilege applies to corporate clients. (D. I. Chadbourne, Inc. v. Superior Court (1964) 60 Cal.2d 723, 732.)  Thus, the corporation itself is the holder of the privilege (Evid. Code § 953(a)), and, as with other corporate decisions, the decision to exercise or waive the privilege belongs to the corporation’s duly authorized representative. (Evid. Code § 954(b).)  Of course, a corporation’s current attorney normally should invoke the privilege even without express prior instruction from the client.  Even a former attorney who was the lawyer at the time of the confidential communication may, and normally should, invoke the privilege unless there is no longer a holder or unless the holder has instructed the attorney to disclose the information at issue. (Evid. Code § 954(c).) 

The above principles came into play in Smith v. Laguna Sur Villas Community Ass'n (2000) 79 Cal.App.4th 639.  There, the defendant homeowners association had sued the condominium project’s developer for construction defects.  The litigation became so costly that the board of directors imposed an emergency assessment (HOA dues) of $2000 per unit.  Upset by the "runaway budget for expenditures," a dissident group of owners sued and demanded to review the association’s law firm’s work product and legal bills.  The trial court held that such information was covered by the attorney-client privilege and that the owners were not entitled to it.  The Court of Appeal affirmed explaining that the corporate homeowners association has a separate legal identity and enjoys the benefit of the attorney-client privilege, that there is no statutory exception for shareholders—not even in closely held corporations—and that courts are powerless to elaborate upon the legislative scheme governing the privilege. (Id. at 643-644.)  Observing that crowds do not keep secrets, the Court further reasoned: 

‘[O]ne can only imagine the sleepless nights an attorney and the Board of Directors may incur if privileged information is placed in the hands of hundreds of homeowners who may not all have the same goals in mind.’ With the privilege restricted to an association's board of directors, this is one worry, at least, that their lawyers can put to rest. (Id. at 645.)          

A corollary nuance of the privilege is that directors/officers themselves are not, generally, the “client” and do not have authority regarding the privilege separate from their role of corporate director/officer/agent.  A curious application of this principle is found in bankruptcy law where, in a Chapter 7 corporate bankruptcy, it is not the directors but the bankruptcy trustee who exercises control over the corporation and, consequently, the privilege. (Commodity Futures Trading Comm'n v. Weintraub, 471 U.S. 343, 348-358; 105 S.Ct. 1986, 1995 (1985).) 

Without a prior detailed explanation from corporate counsel, many directors/agents believe that the attorney is rendering services for him or her and are normally surprised to learn that any communications with counsel are not confidential if the interests of the corporation become adverse to the director/agent, such as in claims of director misconduct.  Indeed, where corporate counsel obtains pertinent information from a corporate officer/agent, this normally does not prevent the corporation from using such information against that officer/agent in litigation. (Meehan v. Hopps (1956) 144 Cal.App.2d 284, 293.)  Consequently, Rule 3-600(D) contains a pertinent additional mandate:

In dealing with an organization's directors, officers, employees, members, shareholders, or other constituents, a member shall explain the identity of the client for whom the member acts, whenever it is or becomes apparent that the organization's interests are or may become adverse to those of the constituent(s) with whom the member is dealing. The member shall not mislead such a constituent into believing that the constituent may communicate confidential information to the member in a way that will not be used in the organization's interest if that is or becomes adverse to the constituent.

Although this requirement is triggered “whenever it is or becomes apparent” that the organization's interests and those of the corporate agents are or may become adverse, it is a prudent step for corporate counsel to explain the contours of the special attorney/organization-client relationship upon establishing the same and with any change directors, officers, or relevant corporate personnel.   

-- Luis E. Ventura

**No portion of this summary is intended to constitute legal advice. Be sure to perform independent research and analysis. Any views expressed are those of the author only and not of the SDCBA or its Legal Ethics Committee.**