Important Ruling: Attorney-Client Privilege Exists for Companies in Liquidation Proceedings

Does the corporate attorney-client privilege continue to exist when a company falls into liquidation proceedings?  Although the U.S. Supreme Court provided some guidance on this issue in CFTC v. Weintraub , 471 U.S. 343 (1986), federal courts remain split on whether the privilege exists after a company ceases operations and no longer has officers, directors, or managers who can assert or waive the privilege.

Although the attorney-client priviBankruptlege is absolute, meaning that a party may not overcome the privilege once established, some courts create an exception where a company ceases to exist and no longer has officers or directors.  And of the courts applying this exception, some hold that the privilege ceases only when the company is completely dissolved–meaning liquidation proceedings are complete, while other courts see no distinction between a company in liquidation proceedings and a company that has simply stopped functioning.

The USDC for the Eastern District of California faced this issue in Wallis v. Centennial Ins. Co., 2013 WL 43441 (E.D. Cal. Feb. 1, 2013), and ruled that the privilege continues to exist while a company remains in liquidation proceedings.  In Wallis, an insured sought a declaratory judgment that two insurance companies should pay her attorneys’ fees incurred in a lawsuit covered by the companies’ insurance policies.  The insured sought to depose the companies’ attorneys, but the companies asserted the attorney-client privilege even though they were in liquidation proceedings by order of a New York state court.

The insured argued that the privilege no longer existed because both companies were dissolved and were not “going concerns.”  The companies, however, argued that the privilege simply transferred from their management to the liquidator.

Given the split of authority, the court found some merit to each party’s argument, but ultimately ruled that the attorney-client privilege continues to apply while a company remains in liquidation proceedings.  Drawing support from Weintraub, which permitted a bankruptcy trustee to waive the privilege in a bankruptcy liquidation proceeding, the court found persuasive that the insurance companies were neither formally dissolved nor “so completely non-functioning that their attorney-client privilege is extinguished.”

The court did not indicate whether the privilege remained alive after completion of the liquidation proceedings, and so the Wallis decision lends support to the narrow position that the privilege transfers to the liquidator when a company ceases day-to-day functioning and lacks officers and directors to assert or waive the privilege.