Weekly Law Resume - May 23, 2013: Insurers May Exercise the Attorney-Client Privilege On Behalf of Dissolved Corporate Insured

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Mary Melendrez et al., v. Superior Court of the State of California, County of Los Angeles
COURT OF APPEAL, SECOND APPELLATE DISTRICT (April 30, 2013)

Petitioners and Plaintiffs Mary Melendrez, individually and as personal representative of the Estate of Lario Melendrez, and several heirs (collectively “Melendrez”) filed a wrongful death action against defendant and respondent Special Electric Company, Inc. (“SECO”). Melendrez alleged that decedent died of mesothelioma as a result of asbestos exposure from products manufactured and supplied by SECO. Prior to the wrongful death lawsuit, SECO filed for Chapter 11 bankruptcy. By virtue of the bankruptcy, SECO was converted to a “shell” corporation whose sole function was to transmit asbestos lawsuits to its insurers for defense and resolution. John Erato (“Erato”) served as SECO’s post-bankruptcy director and president.

Melendrez served SECO’s counsel with requests for admission (“RFAs”) in support of the wrongful death action. SECO’s counsel prepared and signed unverified objections and denials to the RFAs. Melendrez moved under CCP § 2033.280 for an order deeming that the RFAs be admitted, arguing that an unverified response is “tantamount” to no response under California law. SECO opposed the motion, stating that it was impossible for SECO’s counsel to provide verified responses to the RFAs. Its only officer and director, John Erato, resigned rendering him unavailable to waive the attorney client-privilege or authorize defense counsel to sign verifications on SECO’s behalf.

At the hearing, SECO represented that it based its denials of the RFAs on deposition testimony and attorney-client communications. At the trial court’s suggestion, Melendrez served SECO with form interrogatory 17.1 requiring disclosure of facts, witnesses and documents supporting SECO’s denials of the RFAs. SECO’s counsel provided substantive but unverified responses to form interrogatory 17.1. Melendrez moved to compel verified responses or to depose SECO’s counsel who signed the response. In opposition, SECO again represented that it had no officer or director who could waive the attorney client-privilege or authorize defense counsel to sign verifications on its behalf. SECO offered to stipulate that the substantive responses would be admissible at trial. Accordingly, the trial court denied Melendrez’s motion to compel and deemed SECO’s responses to both the RFAs and form interrogatory 17.1 to be verified. Melendrez filed a petition for writ of mandate challenging the trial court’s rulings. While the writ proceedings were pending, SECO was dissolved.

The Court of Appeals held that the trial court’s rulings were in error. The Court of Appeals first addressed the issue of who could waive the attorney-client privilege on behalf of a dissolved corporation with no officers, directors, or employees. Pursuant to CCP §§ 2030.250 (a) and 2033.240 (a), substantive responses to RFAs and interrogatories must be signed by the responding party under oath. If a party is a corporation, one of its officers or agents must sign its discovery responses. The Court of Appeals ruled that SECO’s attorneys are agents who could verify its discovery. Even though John Erato resigned as SECO’s director and president, the shareholders could still elect a new director via the bankruptcy reorganization plan. The newly appointed director could then assert or waive the attorney client privilege and authorize attorney verification of discovery.

The Court of Appeal questioned whether SECO was still in existence due to its subsequent dissolution. If SECO ceased to exist, Evidence Code § 953 (d) provides that the attorney-client privilege is held by SECO’s “successor, assign, trustee in dissolution, or any similar representative.” Here, SECO existed in name only to pass claims to its insurance companies for resolution under existing insurance policies. The insurance companies were the de facto assignees of SECO’s insurance policy assets and claims. As such, the insurance companies held and could exercise SECO’s attorney-client privilege. No conflict of interest exists because the insurers owe SECO a duty of good faith. The Court of Appeals stated “we see no reason to assume the insurers would violate this duty if given the authority to waive or assert SECO’s attorney-client privilege in the context of this litigation.”

The Court of Appeals remanded the case to the trial court to determine whether SECO existed beyond a mere “shell” for transmission of insurance claims to its insurers. If so, SECO’s counsel could be ordered to seek appointment of a new director or officer. If not, SECO’s insurers would be deemed to hold the attorney-client privilege. The designated holder of the attorney-client privilege could decide whether to waive the privilege for the limited purpose of allowing SECO’s counsel to verify its discovery responses. However, if SECO chose not to waive the attorney-client privilege to provide verified discovery to Melendrez, the trial court was directed to rule as required for any discovery motion where the discovery responses are unverified.

COMMENT

If a corporation has dissolution or bankruptcy mechanisms to appoint a director, officer or managing agent to exercise its attorney-client privilege and verify its discovery responses, it should do so. If a corporation no longer exists, the attorney-client privilege is de facto assigned to its insurer. Insurers who hold the attorney-client privilege on behalf of dissolved corporations must carefully consider limited waivers of the privilege to provide verified discovery responses in defense of claims. Failure to do so could result in adverse discovery rulings including rulings that unverified responses to RFAs be deemed admitted.

For a copy of the complete decision see:

http://www.courts.ca.gov/opinions/documents/B243320.PDF

 

Topics:  Attorney-Client Privilege, Corporate Dissolution, Insureds, Insurers, Request for Admissions

Published In: Bankruptcy Updates, Business Organization Updates, Civil Procedure Updates, Insurance Updates, Products Liability Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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