Insurers Hold Attorney-Client Privilege in Instances where Bankrupt Corporation with No Officers or Directors is the Insured

In Melendrez v. Superior Court(download), 214 Cal.App.4th 1343 (2013),the California Court of Appeals, Second District, recently resolved the issue of who may verify discovery responses on behalf of a bankrupt entity with no directors or officers. The decision also reaffirms prior cases which hold that attorneys cannot waive the attorney-client privilege on behalf of their clients. Rather, insurers hold the privilege in instances where no corporate representative exists. If an insurer decides to waive the privilege to allow the attorney to verify responses, the waiver is only for the identity of the sources of the information contained in the responses.

Factual Background

Plaintiffs brought a wrongful death action against numerous defendants in which they alleged that decedent died of mesothelioma as a result of exposure to asbestos. Defendant Special Electric Company (“SECO”), a manufacturer and supplier of asbestos-containing products and supplier of raw asbestos fibers, had filed for bankruptcy years prior to the instant suit, and as a result of the reorganization, was reduced to a shell for the sole purpose of processing asbestos lawsuits.

Plaintiffs propounded discovery on defendants. SECO provided unverified responses to Requests for Admissions (“RFAs”), and Plaintiffs moved to deem the RFAs admitted and to compel verifications, as case law provides that unverified responses are tantamount to no response at all. The trial court denied the motion to deem the RFAs admitted, and at the request of SECO, it deemed the responses verified. Plaintiff subsequently served SECO with Form Interrogatory 17.1, which requires the responding party to provide substantive responses for all RFAs not unequivocally admitted. SECO provided substantive, unverified responses to Form Interrogatory 17.1, and Plaintiffs, again, moved to compel verifications. The trial court again denied Plaintiffs’ motion. Plaintiffs appealed.

The Court of Appeals Decision

The court distilled the issue in the case to this:

“‘Who can waive the privilege on behalf of a dissolved corporation with no officers, directors, or employees?’ It may be that although SECO had no officers or directors, a means may have existed by which a director could have been elected or appointed. If that is not the case, we believe that the privilege, in the somewhat unique circumstances of this case, would have passed to SECO insurers.”

The court noted that Civil Code § 2033.240(b) allows for an attorney acting as an agent of the party to verify responses. When an attorney does so, however, the party “waives any lawyer-client privilege and any protection for work product . . .concerning the identity of the sources of the information contained in the response.” The court further recognized that the client corporation is the holder of the attorney-client privilege and an attorney cannot waive the privilege. That means that although the attorney for a defendant corporation is an agent of the corporation capable of verifying discovery on its behalf, executing a verification requires a limited waiver of the attorney-client privilege, which, the attorney cannot do absent the consent of the client. This creates a Catch 22 in instances where no corporate officer exists.

The situation is resolved by passing the privilege to the insurer. The insurer, however, holds the privilege only when the defendant company exists solely as an empty shell to process the actions against it and a director cannot be obtained. In those instances, the insurer may waive the privilege on behalf of the corporation so that the attorney can verify discovery responses. Verifying discovery on behalf of a client waives the attorney-client privilege, but only concerning the identity of the sources of information contained in the response. The court was clear that there would not be any further intrusion into privileged matters and the verifying attorney should not be subject to deposition.

Conclusion

It is important for attorneys and insurers to understand the Melendrez holding, and to whom it may apply. The court clearly distinguished between dissolved corporations and those that are no longer in existence “in any real sense.” Melendrez only applies to the latter and only if there is no director, officer, or employee available to verify responses. When those factors are met, which will require a look at the individual corporation’s state laws, insurers need to be aware that they are the holders of the privilege and may have to waive it so that counsel may verify discovery responses.