Who Owns the Privilege?: Part II

February 27, 2019

Last week’s Privilege Point described a Colorado state court case holding that absent contrary direction in a decedent’s will, the decedent’s personal representative owns all the files generated by the decedent’s lawyer. Ten days earlier, another court dealt with privilege ownership issues in a corporate context.

In Utilisave, LLC v. Fox Horan & Camerini, LLP, one of Utilisave’s two managing members (MHS, which was owned by Michael Steifman) had earlier successfully “pursued both direct and derivative claims against Utilisave and its then-CEO.” 2018 NY Slip Op 33320(U), *2 (N.Y. Sup. Ct. Dec. 17, 2018). MHS and Steifman then: (1) purchased Utilisave’s assets from a liquidation trustee; (2) caused Utilisave to file a malpractice case against Utilisave’s law firm that had lost the earlier action, and (3) sought access to communications between that law firm and Utilisave’s then-CEO. The law firm argued that “Utilisave is not entitled to any privileged communications because the company was purchased by Steifman, who was adverse to Utilisave in the Prior Action.” Id. at *3. The court acknowledged that “had Steifman or MHS sought privileged communications during the pendency of that [earlier] action, defendants’ documents would have been prohibited from disclosure.” Id. at *9. But now that MHS and Steifman owned Utilisave, they could rely on what is called the “practical consequences” standard to assert ownership of Utilisave’s attorney-client privilege and its former law firm’s files. Id. at *8. The court therefore ordered Utilisave’s former law firm to describe the files in its possession so some could be produced. Inexplicitly, the court in contrast “note[d] that [Utilisave] has not advanced any argument that it is entitled to [its former law firm’s] work product.” Id. at *11.

It might seem odd that a corporation’s litigation adversary can later buy the corporation and thereby gain access to its law firm’s privileged files. But the privilege and privileged documents are assets that can be conveyed by operation of statute, under a will, or in a corporate asset purchase agreement. Corporations and their lawyers must always “keep their eye on the ball,” and know who owns the privilege.