This article was originally published by Bloomberg Law on May 30, 2024. Copyright 2024 Bloomberg Industry Group, Inc. (800-372-1033) www.bloombergindustry.com. Reproduced with permission.
For any company, the ability to have open discussions with legal counsel is key to managing litigation risk. Thus, the attorney-client privilege protects communications between the company's agents and its counsel when seeking or providing legal advice, preventing such communications from being discoverable.
However, whether attorney-client privilege remains viable after a company dissolves remains unsettled. The patchwork of court decisions reveals there is no hard and fast rule and that the result will depend on the facts of a particular case.
For many courts, the central consideration is whether the company is truly "dead" or continues to operate in some form. Courts have stated that a company is "dead" when it has no assets, liabilities, directors, shareholders, or employees.
In this vein, a Pennsylvania court held that privilege can be asserted on behalf of a dissolved company if "the company retains some form of continued existence evidenced by having someone with the authority to speak for the 'client.'"
In United States v. Cox, a dissolved shell company's communications had evidentiary value in prosecuting the company's former owner. Because the entity was defunct for years prior to being resurrected so the owner could intervene in the suit, the court found the entity had "no legal successor to maintain operations, and no remaining management with authority to handle the company's post-dissolution [affairs]," and thus there was "no longer a viable corporate client to assert the privilege."
Where the dissolved corporation continues to demonstrate some activity, courts have held that the privilege can be asserted. In Official Commission of Administrative Claimants v. Moran, the court permitted a company to assert privilege over attorney-client communications even though the company had dissolved.
Because the dissolved company had continued to pursue claims against the defendants and "retain[ed] management capable of asserting the privilege," the company hadn't truly "died." In cases where management continues to exist and the company demonstrates some activity, courts may hold the privilege is viable.
While not the deciding factor, courts also have relied on policy to conclude that dissolved entities couldn't assert privilege as a matter of federal law. A New Jersey district court last year declined to allow a dissolved company to assert privilege over its attorney-client communications because a largely defunct entity that didn't appear to be conducting ongoing business activity had "[n]either a reputation [n]or goodwill to protect such that the protections of privilege should apply."
By this logic, dissolved companies can't assert privilege because they no longer have executives to assert privilege or shareholders or assets to protect, and the countervailing interest in making sure all parties have full access to information weighs heavily.
Relying on these policy considerations, other district courts stated that where an entity is no longer operational, "there is a presumption that evidentiary privileges such as attorney-client privilege or the work-product doctrine are no longer viable."
While this suggests the assertion of privilege by a defunct company will be disfavored, it doesn't complete foreclose the possibility of doing so. However, it remains unclear what might constitute a "compelling reason" that permits a defunct company to overcome the presumption against the assertion of privilege.
State law may create another possible avenue for posthumous attorney-client privilege. State "survival statutes," such as N.Y. Bus. Corp. Law Section 1006(b) and 15 Pa. C.S. Section 1979, prolong the "life" of a corporation and permit dissolved corporations to sue and be sued. They may make attorney-client privilege viable where the dissolved entity is a party to a lawsuit and state law supplies the rule of decision.
For example, in PCS Nitrogen, Inc. v. Ross Dev. Corp., the court cited South Carolina's survival statute and said that because "corporations have the same rights regarding litigation that they had before dissolution," privilege could be asserted where former management could exercise proper authority to do so. Because of the statute, PCS Nitrogen and similar cases leave the door open to privilege where state law permits a dissolved company to defend or initiate a suit.
Whether privilege may survive the dissolution of an entity will highly depend on facts of the case and application of state or federal law. If a state survival statute applies, it may render the privilege viable even for fully defunct companies.
Alternatively, if the court deciding the issue determines that the company isn't truly defunct—but rather demonstrates continued existence through the presence of someone able to "speak" on its behalf—the privilege may then also be viable.
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