More On Asset Sales And The Attorney-Client Privilege

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Last week, I dipped a toe into the difficult topic of what happens to the attorney-client privilege in merger and acquisition transactions.  In that post, I framed a definitional question – is the attorney-client privilege an asset?  If the attorney-client privilege is an asset, an agreement that purports to transfer all of a seller’s assets would seem to include the privilege as well.  But, as I noted, there is more than a definitional question.  That question is whether the seller’s status as “holder” can be transferred.

In Favila v. Katten Muchin Rosenman LLP, 188 Cal. App. 4th 189 (2010), Justice Dennis M. Perluss of the Second District Court of Appeal distinguished mergers from assets sales and concluded that an implied transfer of the privilege with a sale of assets would be contrary to the California Evidence Code’s definition of “holder of the privilege”:

First, did Get Flipped acquire Motion Graphix’s privilege when it acquired the company’s assets?  Evidence Code section 953, subdivision (d), provides the successor to a corporation “that is no longer in existence” becomes the holder of the extinct corporation’s lawyer-client privilege. (See Venture Law Group v. Superior Court (2004) 118 Cal.App.4th 96, 103 [12 Cal. Rptr. 3d 656] [“[a]fter a merger, the attorney-client privilege of the corporation no longer in existence belongs to the successor corporation”]; Dickerson v. Superior Court (1982) 135 Cal.App.3d 93, 98 [185 Cal. Rptr. 97].)  However, in the absence of a merger or transfer of control of the corporation holding the privilege, the sale of the corporation’s assets generally does not also transfer the privilege. (Cf. HLC Properties, Ltd. v. Superior Court (2005) 35 Cal.4th 54, 64 [24 Cal. Rptr. 3d 199, 105 P.3d 560] [“To support its claim of privilege, HLC relies on several cases involving trusts and/or incorporated organizations to argue that control over the assets of a business organization brings with it the right to assert the attorney-client privilege.  HLC's authorities, however, merely hold or recognize that when corporate organizations are merged or when control of a corporation or formalized trust passes to new management, the power to assert or waive the privilege resides in the new managers.”].)  In fact, to recognize an implied transfer of the privilege with a sale of assets would be contrary to the express language of section 953, subdivision (d), which identifies the successor or assign of a corporate entity as the holder of the privilege only when the original corporation “is no longer in existence.”  As we emphasized in McDermott, Will, supra, 83 Cal.App.4th at page 385, in applying the lawyer-client privilege, courts are obligated to strictly follow the statutory language.  (See also Hoiles v. Superior Court (1984) 157 Cal.App.3d 1192, 1200 [204 Cal. Rptr. 111].)  The trial court’s conclusion the privilege transferred to Get Flipped with the sale of Motion Graphix’s assets is incorrect.

188 Cal. App. 4th at 218-19 (footnotes omitted).