Foran Glennon Palandech Ponzi & Rudloff

December 2013

Insurer Controls Attorney-Client Privilege of Bankrupt Insured with No Directors or Officers

By John Eggum

The attorney-client privilege belongs to the client-insured, and can only be waived by the client-insured.  In a recent case, a California court was called upon to determine who controls the privilege when a company is out of business and no longer has any directors and officers.  The court determined that, absent the ability to have a director or officer appointed, the corporation’s attorney-client privilege would pass to its insurers.  Melendrez v. Superior Court of the State of California, 215 Cal. App. 4th 1343, 156 Cal. Rptr. 3d 335 (2013).

Factual Background

Special Electric Company, Inc. (“SECO” or “the Insured”) was a manufacturer and supplier of crocidolite mats, and faced numerous allegations of liability for these manufacturing activities, and as an alleged supplier of raw crocidolite asbestos.  In 2004, SECO filed for bankruptcy protection, and confirmed a bankruptcy plan that resulted in the complete liquidation of the company.  Under the chapter 11 bankruptcy plan, SECO remains in existence, however, for the sole purpose of dealing with the multitude of asbestos claims made against it.  Although the company was a mere shell with no assets and no ongoing business operations, a registered agent was appointed to facilitate the tender of asbestos claims to SECO’s insurers.

Several years after SECO terminated its business operations, counsel for one of the asbestos claimants served requests for admission (“RFAs”) on SECO’s counsel, in accordance with California law.  SECO’s attorneys prepared a response and signed it, but did not verify it.  Because the failure to verify a response to RFAs is “tantamount to no response at all,” the claimant moved to have the matters specified in the RFAs admitted.

SECO’s counsel opposed the motion on the grounds that it was impossible for SECO to verify its response because it had no directors, officers, employees, or agents.  (SECO had a director and president appointed in connection with the bankruptcy, but that person resigned three years after the bankruptcy plan became effective – prior to the discovery – and was not replaced).  Additionally, counsel for SECO declined to verify the responses to the RFAs himself because there was no director or officer to authorize him to verify the responses.  Counsel for SECO agreed to stipulate that the responses that the RFAs could be used against SECO, but the claimant demurred, demanding that all matters set out in the RFAs be found to be admitted.

Discussion

California law provides that although an attorney may verify responses, attorney verification results in a limited waiver of the attorney-client privilege.  CAL. CIV. PROC. CODE § 2030.250 (“”If the officer or agent signing the response on behalf of that party is an attorney acting in that capacity for the party, that party waives any lawyer-client privilege and any protection for work product . . . during any subsequent discovery from that attorney concerning the identity of the sources of the information contained in the response.”).  This limited waiver is sensible, given that an attorney that verifies discovery responses could otherwise frustrate follow-up discovery by asserting the privilege.

As the Melandez court acknowledged, SECO’s counsel was placed in a difficult position by the RFA verification requirement.  Although counsel had adequate knowledge to sign the verification, California law prohibits an attorney from waiving an applicable privilege without client consent.  Cal. Evid. Code § 955 (“The lawyer who received or made a communication subject to the privilege under this article shall claim the privilege.”).  Given SECO’s bankruptcy and  the resignation of its last remaining officer, counsel had no one at SECO with authority to permit the waiver of the attorney-client privilege.

In resolving the apparent catch-22 faced by SECO’s counsel, the court distinguished “dissolved companies” from those that are “no longer in existence.”  A dissolved corporation may continue to have representatives with authority to control the privilege, as part of the corporation’s winding up process.  With regard to a corporation that was no longer in existence, however, the privilege would, of necessity, pass to any successor, assign, trustee in dissolution, or similar representative, pursuant to Cal. Evid. Code § 953.

To the extent that it was possible to elect or appoint a director for SECO pursuant to traditional corporate law principles, the Melendrez court found that such appointment would be the preferred course of action.  However, to the extent that such election or appointment was not possible, and considering that there was no management personnel to turn to, the court found that the privilege would pass to the only persons left that could act on SECO’s behalf: its insurers.  The court therefore ordered the lower court to determine, conclusively, whether a director or officer could be appointed to evaluate the waiver issue.  If it could not be, SECO’s insurers would hold the privilege, and could authorize the waiver so that the attorney for SECO could sign the RFAs.

Conclusion

The bankruptcy or insolvency of an insured can give rise to a number of issues for insurers.  Navigating these complex matters can be difficult, especially given the uncertain state of the law on many of the issues that arise.  Melendrez addresses a significant practical issue that can be faced by insurers attempting to defend claims long after the insured as disappeared, preventing prejudice that might otherwise exist on account of the insured’s bankruptcy and the resignation of its last remaining officer.