Lopes et al v. Vieira et al, No. 1:2006cv01243 - Document 214 (E.D. Cal. 2010)

Court Description: MEMORANDUM Decision and ORDER Granting in Part and Denying in Part Plaintiff's Motion To Compel Production Of Discovery And For Sanctions 104 , Denying Defendant Downey Brand's Motion For Protective Order 106 , And Denying Defendant Downey Brand's Motion For Summary Judgment Against Plaintiff Valley Gold LLC On The Issue of Attorney Client Privilege 96 , signed by Judge Oliver W. Wanger on 2/1/2010. (Gaumnitz, R)

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1 2 3 4 5 IN THE UNITED STATES DISTRICT COURT FOR THE 6 EASTERN DISTRICT OF CALIFORNIA 7 8 MANUEL LOPES, et al., 9 Plaintiffs, 10 11 vs. 12 GEORGE VIEIRA, et al., 13 14 15 Defendants. ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) No. CV-F-06-1243 OWW/SMS MEMORANDUM DECISION AND ORDER GRANTING IN PART AND DENYING IN PART PLAINTIFFS' MOTION TO COMPEL PRODUCTION OF DISCOVERY AND FOR SANCTIONS (Doc. 104), DENYING DEFENDANT DOWNEY BRAND'S MOTION FOR PROTECTIVE ORDER (Doc. 106), AND DENYING DEFENDANT DOWNEY BRAND'S MOTION FOR SUMMARY JUDGMENT AGAINST PLAINTIFF VALLEY GOLD LLC ON THE ISSUE OF ATTORNEY-CLIENT PRIVILEGE (Doc. 96) 16 17 18 19 20 On August 3, 2009, Plaintiffs moved to compel defendant 21 Downey Brand LLP ( Downey Brand ) to produce (1) all billing 22 records and/or invoices related to Valley Gold, LLC ("Valley 23 Gold") or Central Valley Dairymen ("CVD") for the period January 24 1, 2003 through December 31, 2004; (2) all versions or drafts of 25 any private Offering Memorandum prepared for Valley Gold; (3) all 26 documents that reflect, refer, or relate to Downey Brand's 1 1 preparation of a confidential private Offering Memorandum for 2 Valley Gold; (5) all communications that refer or relate to what 3 disclosures should or should not be included in the confidential 4 private Offering Memorandum prepared for Valley Gold; (6) all 5 communications that refer or relate to the distribution of the 6 confidential private Offering Memorandum to Valley Gold or its 7 investors; (7) all communications that refer or relate to the 8 confidential private Offering Memorandum prepared for Valley 9 Gold; (8) all documents that refer or relate to the investigation 10 of George Vieira conducted by the Securities and Exchange 11 Commission and/or U.S. Attorney's Office; (9) all communications 12 that refer or relate to the investigation of George Vieira 13 conducted by the Securities and Exchange Commission and/or U.S. 14 Attorney's Office; (10) all documents that refer or relate to any 15 investigation of George Vieira; (11) all documents that refer or 16 relate to any due diligence review of George Vieira, whether 17 performed by Downey Brand, Anthony Cary, Curtis Colaw, Genske 18 Mulder or any other person or entity; (12) all documents that 19 refer or relate to potential disclosure issues either addressed 20 or considered during the preparation of the confidential private 21 Offering Memorandum prepared for Valley Gold; (13) all documents 22 related to any negotiations or agreements between Valley Gold and 23 Joseph Profaci or J.S.P. Marketing, LLC; (14) all documents that 24 refer or relate to any communication between Valley Gold and 25 Joseph Profaci or J.S.P. Marketing, LLC during the years 2002 to 26 present; (15) all documents related to any agreement between CVD 2 1 and Joseph Profaci or J.S.P. Marketing, LLC; (16) all documents 2 that reflect or relate to any negotiations or discussions between 3 Valley Gold and a cheese distributor in New Jersey to purchase 4 Valley Gold's products; (17) all documents that reflect or refer 5 to any negotiations or discussions with any cheese distributors 6 for the purchase of Valley Gold's products; (18) the original or 7 best available copy of the "AGREEMENT TO CONTRIBUTE ADDITIONAL 8 CAPITAL BY OWNER" for each owner or investor; (19) all documents 9 that refer or relate to the "AGREEMENT TO CONTRIBUTE ADDITIONAL 10 CAPITAL BY OWNER;" (20) the original or best available copy of 11 the "CONTINUATION OF AGREEMENTS TO FOREGO MILK PAYMENTS IN RETURN 12 FOR AN INCREASED STAKE IN VALLEY GOLD, LLC" for each owner or 13 investor; and (21) all documents that relate to the "CONTINUATION 14 OF AGREEMENTS TO FOREGO MILK PAYMENTS IN RETURN FOR AN INCREASED 15 STAKE IN VALLEY GOLD, LLC."1 On August 7, 2009, Downey Brand responded by filing a 16 17 motion for a protective order requiring Plaintiffs to return 18 Downey Brand s bills for services rendered to Valley Gold, 19 Downey Brand s drafts of limited offering to investors prepared 20 for Valley Gold, and all other privileged and confidential Valley 21 Gold documents in Plaintiffs possession (Doc. 106). In 22 23 24 25 26 1 The requested discovery pertaining to a cheese distributor is irrelevant and is DENIED. The Court dismissed Plaintiffs claims that the disclosure in the Offering Memorandum regarding a cheese distributor was in violation of law. The requested discovery as to CVD is DENIED. Evidence presented in connection with Downey Brand s motions for summary judgment against Plaintiffs, heard on December 21, 2009, establishes that Downey Brand did not represent CVD. 3 1 compliance with Local Rule 37-251, Plaintiffs and Downey Brand 2 filed joint statements of discovery disagreements on August 31, 3 2009 (Docs. 109, 110 & 111). 4 disagreement filed in support of Downey Brand s motion for 5 protective order is limited solely to billing statements 6 submitted by Downey Brand to Valley Gold. (Doc. 110). 7 The joint statement of discovery Following a status conference on September 10, 2009, Downey 8 Brand submitted an amended privilege log (Doc. 120), and both 9 parties submitted numerous documents in camera (Doc. 121). 10 Magistrate Judge Snyder heard argument on October 9, 2009, and 11 requested further briefing of the question of Valley Gold s 12 continued existence as a legal entity relative to its capability 13 to assert the attorney-client privilege. 14 parties submitted supplemental points and authorities (Docs. 134, 15 135, 137 & 138). 16 Thereafter, both On July 10, 2009, Downey Brand filed a motion for summary 17 judgment against Plaintiff Valley Gold, (Doc. 96), on the grounds 18 that communications between Downey Brand and Valley Gold are 19 within the attorney-client privilege; that the filing of a 20 derivative action on behalf of Valley Gold does not waive the 21 attorney-client privilege; that Downey Brand cannot defend itself 22 against the claims made derivatively on behalf of Valley Gold 23 absent waiver of the attorney-client privilege; that Valley Gold, 24 the holder of the attorney-client privilege refuses to waive the 25 privilege. 26 Although the motions raise multiple issues, the gravamen of 4 1 both is whether the attorney-client privilege shields documents 2 formulated and prepared during Downey Brand s representation of 3 Valley Gold in preparation of Valley Gold s initial corporate 4 offering. 5 pertinent law and facts, Valley Gold cannot invoke the attorney- 6 client privilege to shield its communications with Downey Brand 7 and related professionals in the course of Valley Gold s 8 incorporation and preparation of the Offering Memorandum for the 9 limited public offering of its stock. In light of the parties arguments, the documents, and 10 A. 11 Securities fraud linked to Suprema Specialties, which forms 12 the background of this case, spawned multiple civil and criminal 13 cases, the allegations of which are a matter of public record.2 14 Background. In 2002 and 2003, the Plaintiffs were milk producers and 15 members of Central Valley Dairymen, an agricultural cooperative 16 managed by defendant George Vieira, who was its chief executive 17 officer for over ten years (Plaintiffs Second Amended Complaint, 18 Doc. 71-2 at 25). 19 Specialities of Paterson, New Jersey, a now defunct producer and 20 distributor of gourmet Italian cheeses, and its West Coast 21 subsidiary, Suprema West. 22 2002, Vieira was the Chief Operations Officer of Suprema West. Vieira regularly sold milk to Suprema From October or November 2001 to March 23 24 25 26 2 The factual background set forth in this Memorandum Decision and Order is based on allegations in various pleadings filed in actions against George Vieira and/or Suprema Specialties. No opinion is expressed as to the truth or falsity of these allegations. 5 1 In re Suprema Specialties, Inc. Securities Litigation, 2008 WL 2 2323363 at *3 (D.N.J. June 2, 2008) (Nos. 02-168(WHW) and 02- 3 3099(WHW)). 4 71-2 at 25 (alleging that Vieira managed Suprema West for one 5 year). 6 one of Suprema s seven largest accounts, and California Milk 7 Market, Inc., from 1998 to March 2002. 8 Specialties, Inc. Securities Litigation, 2008 WL 2323363 at *3. See also Plaintiffs Second Amended Complaint, Doc. Vieira also owned and operated West Coast Commodities, In re Suprema 9 In 2000 and 2001, Suprema reported dramatic growth in sales 10 and receivables, which it attributed primarily to growth in sales 11 of its domestically manufactured hard cheeses. 12 Specialties, Inc. Securities Litigation, 438 F.3d 256, 263 (3d 13 Cir. 2006). Federal investigators later discovered that the 14 secret of Suprema s explosive growth was a fraudulent scheme 15 known as round-trip sales, in which Suprema purportedly sold 16 hard cheese products to entities posing as customers, which then 17 sold the fictitious products to entities posing as suppliers. 18 The suppliers, in turn, sold the products back to Suprema. 19 most cases, the customer and the supplier in these sales shared a 20 common owner who would reap commissions on the fictitious 21 transactions. Id. at 265. 22 quarter of 2002, Suprema engaged in bogus round-tripping 23 transactions with [West Coast Commodities] and [California Milk 24 Market], both of which were owned or operated by Vieira. 25 Securities and Exchange Commission, SEC Sues 10 Defendants for 26 Securities Fraud Arising from $700 Million Round-Tripping Scheme In re Suprema In From at least 1989 through the first 6 U.S. 1 at Suprema Specialties, Litigation Release No. 18534 (January 7, 2 2004). 3 borrowing from banks and to inflate its stock price by 4 overstating its inventory and receivables. 5 Specialties, Inc., 2007 WL 1217980 (D.N.J. April 23, 2007) (No. 6 CIV. 02-168(WHW)). 7 federal authorities seized corporate records, and Suprema filed 8 for bankruptcy. 9 438 F.3d at 265-66. The fraudulent activities enabled Suprema to increase its Smith v. Suprema In 2002, the fraudulent scheme unraveled, Suprema Specialties, Inc. Securities Litigation, 10 Vieira played a key role in Suprema s business. 11 principal of one of the companies that acted as Suprema s 12 ostensible customer or supplier. Id. at 266; Suprema Specialties, 13 Inc. Securities Litigation, 2008 WL 2323363 at *3. 14 false audit confirmations that were provided to Suprema s 15 auditors and was paid commissions for his participation 16 fraudulent scheme. 17 Litigation, 438 F.3d at 265-66. 18 false invoices and checks in the round-tripping scheme. 19 He was a He signed in the Suprema Specialties, Inc. Securities He also coordinated the flow of Id. On January 7, 2004, Vieira, pled guilty to conspiracy to 20 defraud the United States and securities fraud. See United 21 States v. Vieira, United States v. Vieira, No. 2:04-CR-00111 SRC, 22 United States District Court for the District of New Jersey; 23 Suprema Specialties, Inc. Securities Litigation, 438 F.3d at 266; 24 Suprema Specialties, Inc. Securities Litigation, 2008 WL 2323363 25 at *3. 26 to West Coast Commodities were overstated by about $34 million In his plea agreement, Vieira stated that Suprema s sales 7 1 and its sales to California Milk Market were overstated by at 2 least one million dollars. 3 Litigation, 2008 WL 2323363 at *3. 4 months imprisonment and to pay restitution in the total amount of 5 $6,648,050.35. 6 Suprema Specialties, Inc. Securities Vieira was sentenced to four In 2003, Vieira was one of the principal organizers of an 7 effort to assemble a group of investors to purchase a cheese 8 manufacturing plant in Gustine, California (Doc. 71-2 at 4-5). 9 See also Joe Nunes, et al. v. Downey Brand LLP, 2006 WL 2147613 10 at *1 (Cal. Ct. App. August 30, 2006)(No. F048496). On April 4, 11 2003, Vieira formed Valley Gold as a limited liability company to 12 accomplish this objective (Plaintiffs Second Amended Complaint, 13 Doc. 71-2 at 4-5).3 14 Memorandum for Valley Gold, although its name did not appear on 15 the offering memorandum dated April 22, 2003. 16 2147613 at *1. 17 negotiations were under way for an agreement by which Valley Gold 18 would purchase all of its milk requirements from Central Valley 19 Dairymen (Plaintiffs Second Amended Complaint, Doc. 71-2 at 24). 20 It also disclosed that Valley Gold was negotiating with a New 21 Jersey distributor that intended to purchase substantially all 22 of the cheese that Valley Gold produced. 23 knowledge and experience of its anticipated employees, the Downey Brand prepared the Offering Nunes, 2006 WL The Offering Memorandum disclosed that Id. Addressing the 24 3 25 26 Although the offering memorandum discloses the involvement of others, the record does not establish that anyone other than Vieira participated on behalf of Valley Gold in its incorporation and limited private offering. 8 1 memorandum reported, The people that are coming over from 2 Suprema Specialties, Inc. in Manteca, California will be able to 3 bring with them new ideas and practices that can enhance 4 productivity, quality and yields (Plaintiffs Second Amended 5 Complaint, Doc. 71-2 at 7). 6 section detailing Risks Specific to Company , states in 7 pertinent part: The Offering Memorandum, in the 8 Dependency on Key Personnel 9 ... 10 11 12 13 14 15 16 17 18 Mr. Vieira, one of the principal organizers of the Company and this transaction is currently the chief executive officer of CVD. George Vieira, was, [sic] for a short period of time, an officer of Supreme West, Inc. ( Supreme West ). Suprema West is a subsidiary of Supreme Specialties, Inc. ( Suprema ). Suprema and Suprema West are in bankruptcy. Suprema is also the subject of an investigation being conducted by the Securities and Exchange Commission and the U.S. Attorney s Office. Assertions have been made that financial data for Suprema was misrepresented. Mr. Vieira has been contacted by the U.S. Attorney s Office and may be a subject of this investigation. No formal charges have been brought against Mr. Vieira .... 19 The Offering Memorandum failed to disclose that George Vieira, 20 who was to be Valley Gold s manager, was then negotiating a plea 21 agreement to securities fraud charges arising from his management 22 role at Suprema West. 23 At some point after Vieira pled guilty to securities fraud 24 in January 2004, Valley Gold defaulted on its loan obligations, 25 and the Gustine manufacturing plant was foreclosed (Plaintiffs 26 9 1 Second Amended Complaint, Doc. 71 at 7-8). 2 investments totaling $530,000 and were not paid for their milk, 3 which Central Valley Dairymen had shipped to Valley Gold 4 (Plaintiffs Second Amended Complaint, Doc. 71 at 7-8). 5 Plaintiffs lost Plaintiffs are proceeding in this action pursuant to the 6 Second Amended Complaint filed on April 2, 2008. (Doc. 71). 7 Downey Brand and Valley Gold are named as Defendants, among 8 others. 9 the summons and Second Amended Complaint on the California Plaintiffs applied for an Order authorizing service of 10 Secretary of State because Tim Brasil, Valley Gold s registered 11 agent for service of process could not be found at the address 12 designated for personal service as the building at the address 13 was closed and vacant. 14 April 10, 2008, service of summons and the Second Amended 15 Complaint was authorized to be made on the California Secretary 16 of State. 17 Complaint was made on the Secretary of State on April 15, 2008, 18 who forwarded the summons and Second Amended Complaint to Valley 19 Gold, LLC at 240 North Avenue, Gustine, California 95322 by 20 certified mail, return receipt requested. 21 appearance has been made by Valley Gold in this action. 22 letter dated May 26, 2009 from James Kirby, counsel for Downey 23 Brand, to Joe Machado, Chairman Valley Gold LLC, 2904 North 24 Village Drive, Merced, California, regarding this action, Mr. 25 Kirby states: This letter confirms that Valley Gold LLC has 26 instructed Downey Brand LLP to assert all available privileges in (Doc. 75). (Doc. 73). Pursuant to Order filed on Service of the summons and Second Amended 10 (Doc. 78). No In a 1 2 3 4 5 this matter. (Exh. 7, Doc. 99). Mr. Kirby avers: 4. Joe Machado is President of the Valley Gold Management Committee. Exhibit 7 is an accurate copy of my letter to Mr. Machado confirming that Valley Gold was continuing in this matter the instructions Valley Gold gave Downey Brand in the Nunes matter - to assert all privileges. 6 (Exh. 9, Doc. 99). 7 Secretary of State certified that the status of Valley Gold is 8 ACTIVE (GOOD STANDING), that [t]he records of this office 9 indicate the entity is authorized to exercise all of its powers, 10 rights and privileges in the State of California, but that [n]o 11 information is available from this office regarding the financial 12 condition, business activities or practices of the entity. 13 (Exh. 18, Doc. 111). 14 Statement of Information for Valley Gold filed with the Secretary 15 of State on June 3, 2005, listing Ted Kern as the Chief Operating 16 Officer, and Joe Machado, Tim Brasil, Dennis Nunes, Frank Borba, 17 Joe Lopes, and Everett Vaz as Managers, and Anthony Cary as agent 18 for service of process. 19 given when Tim Brasil became Valley Gold s designated agent for 20 service of process. 21 listed as Valley Gold s agent for service of process on the 22 California Secretary of State s website, California Business 23 Portal, kepler.ss.ca.gov/corpdata. 24 Applegate, avers: 25 26 As of August 13, 2009, the California Attached to Exhibit 18 is a copy of a (Exh. 18, Doc. 111). No explanation is However, as of April 4, 2008, Tim Brasil is Counsel for Plaintiffs, Mr. 5. The listed agent for service, Mr. Tim Brasil, was never available when the process servers sought him out. Further, the Gustine 11 1 2 3 4 address listed with the Secretary of State (and also listed on Valley Gold, LLC s formation documents) at 240 North Avenue was abandoned and vacant. And my understanding is that Valley Gold, LLC defaulted on a secured note that it used to purchase the plant, and the property was foreclosed in the fall of 2005. 5 ... 6 7 8 9 10 11 7. I further know of no business activity that Valley Gold, LLC, has conducted since the plant was foreclosed. Since 2005, none of the plaintiffs have been advised of any meetings of Valley Gold, LLC. And Valley Gold, LLC s Statement of Information filed with the Secretary of State has not been updated since June of 2005 ... Under California Corporations Code section 17060, an updated statement is required every two years. 12 ... 13 14 15 16 9. The Operating Agreement provides, at section 1.4, that Valley Gold s principal office shall be located at 240 North Avenue in Gustine, California, and documents required by Corporations Code section 17058 shall be maintained there. That property, as noted, was foreclosed. 17 18 19 20 10. Section 6.3 of the Operating Agreement states that The Company shall hold an annual meeting of the Members for the lection [sic] of Managers on such date, and at such time and place, within the State of California. No annual meeting for Valley Gold has been held since 2005. 21 22 23 24 25 26 11. Section 5.1 of the Operating Agreement vests day-to-day authority over the operations of Valley Gold in its management committee (the members of which, as noted, are supposed to be elected every year). As set forth in Section 5.2, however, the management committee can only act by majority vote with a quorum present, after at least 48 hours notice. A quorum, in turn, requires the participation of at least one-half of the 12 1 total managers. 2 12. I have not seen any information suggesting that any management committee meeting for Valley Gold has occurred since 2005, much less a meeting with a quorum present, and much less a meeting where, by a majority vote, the management committee made arrangements for the custody of Valley Gold s records, or provided any instructions on whether to assert any evidentiary privileges that might cover its records. 3 4 5 6 7 Ted Kern, COO of Valley Gold from March, 2005, avers that Valley 8 Gold closed its doors in January, 2006. (Exh. 10, Doc. 154-3). 9 B. Attorney-Client Privilege. 10 The attorney-client privilege is the oldest of the 11 privileges for confidential communications known to the common 12 law. Upjohn Co. v. United States, 449 U.S. 383, 389 (1981). 13 The privilege exists (1) [w]here legal advice of any kind is 14 sought, (2) from a professional legal advisor in his capacity as 15 such, (3) the communications relating to that purpose, (4) made 16 in confidence, (5) by the client, (6) are at his instance 17 permanently protected, (7) from disclosure by himself or by the 18 legal advisor, (8) unless the protection be waived. In re 19 Fischel, 557 F.2d 209, 211 (9th Cir. 1977). The party asserting 20 the privilege bears the burden of proof and must make a prima 21 facie showing that the documents it seeks to protect as 22 privileged satisfy these eight essential elements. In re Grand 23 Jury Investigation (United States v. The Corporation), 974 F.2d 24 1068, 1070 (9th Cir. 1992). That the privilege is limited to 25 communications made in confidence is key to the privilege. 26 13 1 Fischel, 557 F.2d at 211. 2 and done in connection with an attorney s legal representation of 3 a client, but is limited to the substance of the client s 4 confidential communication to the attorney. 5 attorney s involvement in, or recommendation of, a transaction 6 does not place a cloak of secrecy around all the incidents of 7 such a transaction. 8 protect and foster the client s freedom of expression, not to 9 permit his attorney to conduct the client s business affairs in 10 It does not conceal everything said Id. at 212. Id. at 211-12. An The privilege is intended to secret. Id. at 211. The client asserting the privilege has the burden of 11 12 demonstrating its application. United States v. Blackman, 72 13 F.3d 1418, 1423 (9th Cir. 1995), cert. denied, 519 U.S. 911 14 (1996); Clarke v. American Commerce Nat l Bank, 974 F.2d 127, 130 15 (9th Cir. 1992). 16 privilege are disfavored. 17 client privilege is concerned, hard cases should be resolved in 18 favor of the privilege. 19 uncertain privilege, or one which purports to be certain but 20 results in widely varying application by the courts, is little 21 better than no privilege at all. Blanket assertions of the attorney-client Nonetheless, where the attorney- Upjohn, 449 U.S. at 393. [A]n Id. 22 The privilege promotes public policy by recognizing that 23 sound legal advice and advocacy depends on the client s frank and 24 complete communication with its attorney. 25 389. 26 relevant information from the factfinder. Upjohn, 449 U.S. at The cost of this public benefit is the withholding of 14 In re Hunt, 153 B.R. 1 445, 450 (N.D. Tex. 1992), citing Fisher v. United States, 425 2 U.S. 391, 403 (1976). 3 the effect of withholding relevant information from the 4 factfinder, it is applied only when necessary to achieve its 5 limited purpose of encouraging full and frank disclosure by the 6 client to his or her attorney. 7 privilege must be narrowly construed. 8 Investigation No. 83-2-35, 723 F.2d 447, 451 (6th Cir. 1983), 9 cert. denied sub nom. Durant v. United States, 467 U.S. 1246 Because the attorney-client privilege has Clarke, 974 F.2d at 129. The In re Grand Jury 10 (1984). Whatever their origins, these exceptions to the demand 11 for every man s evidence are not lightly created nor expansively 12 construed, for they are in derogation of the search for truth. 13 United States v. Nixon, 418 U.S. 683, 710 (1974). 14 privilege has the effect of withholding relevant information from 15 the factfinder, it applies only where necessary to achieve its 16 purpose, which is to encourage the client to disclose fully to 17 its attorney all facts relating to its legal problem. 18 425 U.S. at 403; United States v. Osborn, 561 F.2d 1334, 1339 19 (9th Cir. 1977). 20 [S]ince the Fisher, The attorney-client privilege protects communications, not 21 facts. Upjohn Co., 449 U.S. at 395. A client may not refuse to 22 disclose a relevant fact simply because he incorporated it into 23 his communication with counsel. 24 may question corporate employees and officers to ascertain facts 25 relevant to the pending litigation even if the particular fact 26 was disclosed to counsel in a communication protected by the Id. at 396. 15 Opposing parties 1 attorney-client privilege. 2 simplify the discovery process by demanding copies of attorney- 3 client communications in which the facts are included. 4 example, in Upjohn, the government could question Upjohn s 5 employees about facts that had been transmitted to the corporate 6 counsel in response to his questionnaire but could not subpoena 7 the questionnaires themselves. 8 9 C. Id. But opposing parties may not Id. For Id. Ability of Valley Gold to Invoke Attorney-Client Privilege. 10 The threshold issue in resolving Plaintiffs motion to 11 compel and Downey Brand s motion for protective order is whether 12 Valley Gold can invoke the attorney-client privilege in this 13 case. 14 demonstrate that Valley Gold cannot invoke the attorney-client 15 privilege.4 16 The record in this action and applicable legal authorities Plaintiffs argue that Valley Gold no longer has the ability 17 to assert the attorney-client privilege as to documents in Downey 18 Brand s possession. 19 Brand asserts that Valley Gold has the legal capacity to sue. 20 See Rule 17(b)(3), Federal Rules of Civil Procedure (capacity to 21 sue determined by the law of the state where the court is 22 located). Downey Brand argues the contrary. Downey California Corporations Code § 17003(b) provides: Subject to any limitations contained in the 23 24 4 25 26 This conclusion makes unnecessary resolution of issues of waiver of the attorney-client privilege, the crime-fraud exception to the attorney-client privilege, and the extent to which the privilege applies to the documents sought to be discovered. 16 4 articles of incorporation and to compliance with this title and any other applicable laws, a limited liability company organized under this title shall have all of the powers of a natural person in carrying out its business activities, including, without limitation, the power to: 5 ... 6 (b) Sue, be sued, complain and defend any action, arbitration, or proceeding, whether judicial, administrative, or otherwise, in its own name. 1 2 3 7 8 Downey Brand argues that Valley Gold is no longer doing any 9 business is irrelevant to its legal capacity to sue or be sued, 10 citing Telink, Inc. v. United States, 24 F.3d 42 (9th Cir.1994). 11 In Telink, the United States argued that Telink had no 12 standing to petition for a writ of error coram nobis that the 13 indictment to which the defendant plead nolo contendere failed to 14 state a criminal offense. The Ninth Circuit ruled: 15 16 17 18 The government contends that Telink has no standing because the California corporation is no longer an operating entity. Both parties agree that Telink is a defunct corporation. The government argues that a defunct corporation, like a dead person, cannot seek coram nobis relief .... 19 20 21 22 23 24 25 26 We reject the contention that Telink has no standing. Although not currently operating, Telink has not undergone corporate dissolution. Under California law, a corporation may be dissolved in only two ways: through a court order for an involuntary dissolution proceeding ... or through the filing of a certificate of dissolution with the Secretary of State in a voluntary proceeding ... Neither step has been taken. Telink therefore remains a corporate entity. Telink has standing. 24 F.3d at 44-45. 17 Plaintiffs respond that Valley Gold s capacity to sue or be 1 2 sued is irrelevant to the determination whether Valley Gold may 3 invoke the attorney-client privilege. 4 corporations have the capacity to be sued. 5 Corporations Code § 2011(a); Penasquitos, Inc. v. Superior Court, 6 53 Cal.3d 1180, 1185 (1991). Even dissolved See California 7 Plaintiffs contend that because Valley Gold no longer 8 functions as an ongoing business, it no longer retains any right 9 to assert or waive the attorney-client privilege shielding its 10 agents communications with Downey Brand attendant to its 11 incorporation and private offering of its stock. 12 their argument on the Supreme Court s ruling in Weintraub, supra, 13 471 U.S. 343. Plaintiffs base In Weintraub, the Supreme Court held that the debtor s 14 15 trustee in bankruptcy had the power to waive the corporation s 16 attorney-client privilege with respect to prebankruptcy 17 communications. 18 the authority to assert and waive the attorney-client privilege 19 on behalf of the corporation also passes. 20 349. 21 22 23 24 25 26 When corporate control passes to new management, Weintraub, 471 U.S. at This means that New managers installed as a result of a takeover, merger, loss of confidence by shareholders, or simply normal succession, may waive the attorney-client privilege with respect to communications made by former officers and directors. Displaced managers may not assert the privilege over the wishes of current managers, even as to statements that the former might have made to counsel concerning matters within the scope of their corporate duties . . . . . See generally In 18 re O.P.M. Leasing Services, inc., [670 F.2d 383, ] 386 [(2d Cir. 1982)]; Citibank [, NA] v. Andros, [666 F.2d 1192,] 1195 [(8th Cir. 1981)]; In re Grand Jury Investigation, 599 F.2d 1224, 1236 (CA3 1979); Diversified Industries, Inc. v. Meredith, 572 F.2d 596, 611, n. 5 (CA8 1978)(en banc). 1 2 3 4 5 Weintraub, 471 U.S. at 349. Because the Bankruptcy Code does not 6 address the attorney-client privilege issue, the Supreme Court 7 analyzed the roles played by the various actors of a corporation 8 in bankruptcy to determine which is most analogous to the role 9 played by the management of a solvent corporation. Id. at 351. 10 Since a corporation s directors or managers control the use or 11 waiver of attorney-client privilege outside the bankruptcy 12 process, the Court sought to identify the actor in bankruptcy 13 whose role most resembles that of the management of a solvent 14 corporation that is operating as an ongoing concern. 15 52. 16 virtue of the trustee s nearly complete control of the 17 corporation in the course of its Chapter 7 liquidation. Id. at 351- In Weintraub, that person was the bankruptcy trustee by 18 Similarly, in Commodity Futures Trading Comm n v. Standard 19 Forex, Inc., 882 F.Supp. 40, 42-43 (E.D.N.Y. 1995), Yuanyi Lao, 20 Standard Forex s former corporate manager, appealed a magistrate 21 judge s order transferring control of the corporation s attorney- 22 client privilege to a corporate receiver. 23 magistrate s orders appointing the receiver vested in the 24 receiver the essential powers of management including the power 25 to sue and be sued on behalf of the corporation, the district 26 court determined that the receiver, nor prior management, then 19 Finding that the 1 possessed ultimate control of the corporation. 2 avoid chilling the public interest underlying the attorney-client 3 privilege (as expressed in Upjohn, 449 U.S. at 389), however, the 4 district court opined that a court should not transfer the 5 attorney-client privilege to a successor in control of the 6 corporation in the absence of a valid need to control the 7 privilege as to attorney-client communications conducted by prior 8 management. 9 transferring Forex s attorney-client privilege would enable the Standard Forex, 882 F.Supp. at 43. Id. at 42-43. To Because 10 receiver (1) to assist the plaintiff, the Commodity Futures 11 Trading Commission ( CFTC ), in evaluating Standard Forex s 12 violations of the Commodities Exchange Act and (2) to initiate 13 legal action against third parties to recover assets of Standard 14 Forex, the court determined that transferring Standard Forex s 15 attorney-client privilege to the receiver was appropriate. 16 Id. Plaintiffs phrase the applicable question as Who has the 17 authority to speak for the company now? (doc. 135 at p. 3). 18 Seizing upon the Court s terminology in Weintraub, 19 Plaintiffs argue that Valley Gold s president no longer retains 20 authority to invoke the attorney-client privilege because Valley 21 Gold is insolvent and inactive. 22 the Weintraub Court used the terms solvent and insolvent to 23 distinguish corporations that are being administered by a 24 bankruptcy trustee from corporations being administered by their 25 managers or corporate officers and board in the ordinary course 26 of business. Addressing a bankruptcy case, See 471 U.S. at 348-49. 20 A careful reading of 1 Weintraub reflects that the decision distinguished bankrupt and 2 non-bankrupt corporations, not solvent and insolvent corporations 3 that have not filed for bankruptcy or become subject to 4 receivership. 5 (rejecting the solvency language as dicta). 6 transfer the power to assert or waive the attorney-client 7 privilege from Valley Gold s officers and management simply by 8 asserting the apparent insolvency of Valley Gold. 9 See also Standard Forex, Inc., 882 F.Supp. at 42 Plaintiffs cannot More pertinent, there appears to be no one to transfer or 10 receive the power. The distinction between an insolvent 11 corporation and a corporation subject to bankruptcy or a 12 receivership is clearer when endeavoring to identify the person 13 or entity that has succeeded to corporate control in lieu of 14 prior corporate management. 15 insolvent, as Plaintiffs contend, no non-affiliated person or 16 entity analogous to a receiver or bankruptcy trustee has 17 succeeded to Valley Gold s corporate management. Although Valley Gold may be 18 Plaintiffs cite additional cases that are similarly 19 distinguishable because Valley Gold has not been wound down or 20 dissolved either by operation of California law or as part of 21 bankruptcy or other proceedings relating to insolvency. 22 JMP Newcor International, Inc., 204 B.R. 963 (Bankr.N.D.Ill. 23 1997), the court addressed the application of the attorney work- 24 product privilege to documents it had previously found 25 discoverable. 26 corporation s attorney-client privilege ceased to exist after the In In re It had been previously concluded that the 21 1 bankruptcy plan was confirmed, and the Creditors Committee ceased 2 to exist. 3 3203121 at *4 (W.D. Tenn. December 7, 2004), aff d, 2005 WL 4 1926655 (W.D.Tenn. June 20, 2005) (concluding that the 5 corporation in question was functionally dead, in that it was 6 bankrupt and had no assets, liabilities, directors, 7 shareholders, or employees ). 8 pursuant to California law may not invoke or waive the attorney- 9 client privilege even when it must defend itself as a party to Id. at 964. See also Lewis v. United States, 2004 WL Similarly, a corporation dissolved 10 litigation. 11 Defense, 492 F.Supp.2d 1193, 1197 (C.D.Cal. 2007). 12 City of Rialto v. United States Department of Only one case cited by Plaintiffs is arguably on point. 13 Gilliland v. Geramita, 2006 WL 2642525 (W.D.Pa. September 14, 14 2006).5 15 147, 148 (S.D.N.Y. 2008) (refusing to apply Gilliland where 16 corporate officers submitted affidavits alleging that corporation 17 continued to function and that they were the officers). 18 Characterizing the case as a novel question regarding the 19 application of the attorney-client privilege for a corporation But see Overton v. Todman & Co., CPAs, P.C., 249 F.R.D. 20 21 22 23 24 25 26 5 Downey Brand contends that Gilliland is inapplicable, both because it is unpublished and because it relies on an obscure provision of Pennsylvania law. That unpublished cases are not precedent is obvious. See Circuit Rule 36-3 (c). Nonetheless, Gilliland is valuable for its recognition of the lack of precedent as well as insight as to how another federal court has dealt with this issue. The court in Gilliland addressed the question of applicable law and observed, Given the paucity of precedent on this issue, the parties have not pointed to any differences between Pennsylvania, Delaware and federal common law, nor has the Court discovered any such differences. 2006 WL 2642525 at *2 n. 2. 22 1 that has ceased operations, a Pennsylvania District Court 2 considered who could assert or waive the privilege for a 3 corporation that had not been legally dissolved but whose chief 4 executive office had died, whose other officers had apparently 5 resigned, and whose management included no remaining officer, 6 manager, or director to exercise the privilege. Gilliland, 2006 7 WL 2642525 at *3. 8 to be produced, the court reasoned that, in the absence of a 9 person with authority to invoke the privilege on behalf of the In concluding that the disputed documents had 10 corporation, the defendant law firm could not meet its burden of 11 proving that the privilege had been validly asserted. 12 Id. at *4. Plaintiffs assert that, pursuant to California Corporations 13 Code § 17151, the management of a limited liability company is 14 either vested in all of its members, or if the articles of 15 organization or the operating agreement so provide, managerial 16 authority is vested in a selected subset of managers.6 17 6 18 19 20 21 22 23 24 25 26 California Corporations Code § 17151 provides in pertinent part: (a) The articles of organization may provide that the business and affairs of the limited liability company shall be managed by or under the authority of one or more managers who may, but need not be, members. (b) If the limited liability company is to be managed by one or more managers and not by all its members, the articles of organization shall contain a statement to that effect. Neither the names of the managers nor the number of managers need be specified in the articles of organization, but if management is vested in only one manager, the articles of organization shall so state. 23 1 Plaintiffs, relying on Section 5 of the Operating Agreement, 2 (Exh. D, Doc. 111), contend that managerial authority could only 3 be exercised by majority vote of seven duly elected Managers, 4 citing California Corporations Code § 17156.7 5 6 Section 5 of the Operating Agreement pertains to the management of Valley Gold. (Exh. D, Doc. 111): 7 5.1 Management of Company by the Managers. 8 (a) Rights, Powers, Duties and Obligations of Managers. The management of the Company shall be vested in a Management Committee comprised of each of the Managers of the Company ( Management Committee or Managers ). Except as to those matters in which the approval of the Members is expressly required by this Agreement, the Management Committee shall have all of the rights, powers and authority generally conferred by law or otherwise necessary, advisable or consistent with accomplishing the purposes of the Company. It shall be the responsibility and duty of the Management Committee to (i) carry out the purposes of the Company as set forth in Section 1.3 hereof; (ii) carry out and implement all decisions which are authorized by the Members pursuant to Section 6.4 hereof; and (iii) conduct the ordinary and usual business and affairs of the Company .... 9 10 11 12 13 14 15 16 17 18 (b) Election of Managers. The Company (and the Management Committee) shall have seven (7) Managers. Each Manager shall continue to serve on the Management Committee 19 20 21 22 7 California Corporations Code § 17156 provides: 23 24 25 26 Except as otherwise provided in the articles of organization or the operating agreement, if the members have appointed more than one manager, decisions of the managers shall be made by majority vote of the managers if at a meeting, or by unanimous written consent. 24 1 2 3 4 5 6 7 until the Manager is not re-elected at an Annual Meeting of Members, or until the occurrence of one or more of the events described below in Sections 5.1(c) through 5.1(e). ... Managers or Management Committee shall mean the Manager or Managers elected or appointed to manage the affairs and operations of the Company in accordance with the terms and conditions of this Agreement. The initial managers serving on the Management Committee of the Company shall be Tim Brasil, Avery Vaz, Dennis Nunes, Frank Borba, Joe Holman, Joe G. Machado, and Joe Nunes. 8 ... 9 10 11 12 13 14 15 5.2 Meetings of Management Committee. Meetings of the Management Committee may be called by any Manager or by the President ... A majority of the authorized number of Managers constitutes a quorum of the Management Committee for the transaction of business. Except to the extent that this Agreement expressly requires the approval of all Managers, every act or decision done or made by a majority of the Managers present at a meeting duly held at which a quorum is present is the act of the Management Committee .... 16 17 18 19 20 21 22 23 24 25 26 Any action required or permitted to be taken by the Management Committee may be taken by the Managers without a meeting, if a majority of the Managers individually or collectively consent in writing to such action, unless the action requires the unanimous vote of the Managers, in which case all Managers must consent in writing. Such action by written consent shall have the same force and effect as a majority vote or unanimous vote, as applicable, of such Managers. The provisions of this Section 5.2 govern meetings of the Management Committee if the Managers elect, in their discretion, to hold meetings. However, nothing in this Section 5.2 or in this Agreement is intended to require that meetings of the Management Committee be held, it being the intent of the 25 1 Members that meetings of the Management Committee not be required. 2 Downey Brand asserts that Plaintiffs contention that 3 managerial authority of Valley Gold could only be exercised by 4 majority vote of seven duly elected Managers is without merit. 5 Downey Brand refers to Section 5.6 of the Operating Agreement: 6 5.6 Officers 7 8 9 10 11 12 13 14 15 (a) Appointment of Officers. The Management Committee may appoint, but shall not be obligated to appoint, officers at any time with such duties and powers as set forth in this Section 5.6 or as otherwise determined by the Management Committee. The officers of the Company shall serve at the pleasure of the Management Committee, subject to all rights, if any, of an officer under any contract of employment. Any individual may hold any number of offices. The officers shall exercise such powers and perform such duties as specified in this Agreement and as shall be determined from time to time by the Management Committee. The Management Committee may appoint any one or more Managers to fill one or more offices. 16 ... 17 18 19 20 21 22 23 24 25 26 (d) Duties and Powers of the President. The President shall be the chief executive officer of the Company and shall have general and active management of the business of the Company and shall see that all orders and resolutions of the Members and the Management Committee are carried into effect. He or she shall have the general powers and duties of management usually vested in the office of president of a corporation, and shall have such other powers and duties as may be prescribed by the Management Committee or this Agreement. The President shall execute contracts, except where contracts are required or permitted by law to be otherwise signed and executed, and except where the signing and execution thereof shall be expressly delegated by the 26 1 Management Committee to some other officer or agent of the Company. 2 Downey Brand contends that, because the Operating Agreement 3 authorized the Management Committee to appoint a President, 4 represented by Downey Brand to be Joe Machado, vested with the 5 general and active management of the business of the Company 6 and the general powers and duties of management usually vested 7 in the office of president of a corporation, Mr. Machado has the 8 authority to assert the attorney-client privilege of behalf of 9 Valley Gold. 10 Plaintiffs contend that, under the Operating Agreement, the 11 Members were appointed to a one-year term, subject to re-election 12 or replacement at the annual meeting of the Members. Plaintiffs 13 cite California Corporations Code § 17152(d): 14 15 16 If management of the limited liability company is vested in one or more managers pursuant to a statement in the articles of organization: ... 17 18 19 20 (d) Unless they have earlier resigned or been removed, managers shall hold office until the expiration of the term for which they were elected or, if no term was provided, until their successors have been elected and qualified. 21 Plaintiffs refer to Section 6.3(a) of the Operating Agreement 22 that [t]he Company shall hold an annual meeting of the Members 23 for the election of Managers on such date, and at such time and 24 place, within the State of California. 25 Plaintiffs argue that, because Valley Gold elected to be managed 26 by a subset of managing members, its ability to continue as a 27 (Exh. D, Doc. 111). 1 business was dependent upon this continued annual election of 2 managing members. 3 [e]ach Manager shall continue to serve on the Management 4 Committee until the Manager is not re-elected at an Annual 5 Meeting of the Members in contending that the Operating 6 Agreement is very clear in providing that managing members had 7 to be re-elected at each annual meeting, and any managers who 8 were not re-elected would immediately cease to have managerial 9 authority. 10 11 12 13 14 15 16 17 Plaintiffs rely on Section 5.1(b) that Plaintiffs further rely on Section 5.1(g) of the Operating Agreement: (g) Election to Continue the Company/Replacement of the Manager. If a Manager ceases to be a Manager of the Company for any reason and there are no remaining Managers, the Company shall dissolve unless a Majority Interest of the Members elect to continue the Company in effect and appoint a new Manager in accordance with the provisions of this Section 5.1(g). If a Manager ceases to be a Manager of the Company for any reason and there are remaining Managers, the Company shall not dissolve and a new Manager may be appointed by a Majority Interest of the Members. 18 (Exh. D, Doc. 111). Plaintiffs argue: 19 20 21 22 23 24 25 26 Under these provisions, Valley Gold, LLC no longer has anyone to act as its manager. The management terms of the original seven managing members expired long ago. No manager has been re-elected since 2004 (if then), and the company has not even endeavored to meet with a quorum of managing members since mid-2005. The annual meetings mandated by the Articles of Organization for the election of managers have not occurred for five years. And the members have never appointed a single replacement manager to run the company to forestall the requirement under section 5.1(g) of the Articles of 28 1 2 Organization that Valley Gold, LLC dissolve. Downey Brand argues that Plaintiffs assumption that the 3 Managers terms were limited to one year is baseless. 4 Brand refers to California Corporations Code § 17152(d): 5 6 Downey If management of the limited liability company is vested in one or more managers pursuant to a statement in the articles of organization: 7 8 9 10 (d) Unless they have earlier resigned or been removed, managers shall hold office until the expiration of the term for which they were elected or, if no term was provided, until their successors have been elected and qualified. 11 Downey Brand contends that the Operating Agreement does not 12 provide that Managers cease to be Managers if the annual meeting 13 of the Members is not held, nor have Plaintiffs presented 14 admissible evidence that Valley Gold did not hold annual meetings 15 of the Members, arguing that the averments in Mr. Applegate s 16 declaration are not based on personal knowledge and are hearsay. 17 Because Plaintiffs left Valley Gold in 2005, Downey Brand asserts 18 that Plaintiffs contention that no annual meetings were held is 19 speculation and entitled to no weight. 20 point to evidence that annual meetings have been held, but argues 21 only that Plaintiffs are not in a position to know whether or not 22 Valley Gold has conducted the annual meetings required by its 23 operating agreement. 24 that any annual meetings have been conducted since Valley Gold 25 ceased operations in January, 2006. 26 Valley Gold s operations following consummation of Vieira s plea Downey Brand does not However, Downey Brand points to no evidence 29 Despite dramatic changes in 1 agreement in January 2005, the only Valley Gold Statement of 2 Information is the original filed with the California Secretary 3 of State in June 2005 (Doc. 134-2 at 5-7), despite the 4 requirement that corporations update their statements of 5 information every two years. 6 17060. 7 evident both from the fact that Plaintiff Joe Lopes is named as a 8 manager on the Statement, and from Plaintiffs inability to serve 9 the corporation on the most recent designated agent for service See California Corporations Code § That the 2005 Statement of Information is outdated is 10 of process, Tim Brasil, who cannot be found. 11 of business (240 North Avenue, Gustine, California) has been 12 abandoned and lost through foreclosure. 13 have been held, no managers have been re-elected at an annual 14 meeting, as required by § 5.1(b). 15 The principal place Since no annual meetings Plaintiffs argue that the officers of Valley Gold, including 16 its purported president, Joe Machado, were simply agents of 17 Valley Gold to whom the Management Committee delegated various 18 managerial duties. 19 § 17154(b) in contending that there is no authority under 20 California law for officers to act on behalf of a limited 21 liability company: 22 23 24 25 Plaintiffs cite California Corporations Code Officers, if any, shall be appointed in accordance with the written operating agreement or, if no such provision is made in the operating agreement, any officers shall be appointed by the managers and shall serve at the pleasure of the managers, subject to the rights, if any, of an officer under any contract of employment .... 26 30 1 Plaintiffs argue that Section 17154(b) allows the managing 2 members of a limited liability company to appoint officers to 3 carry out the duties that the managing members delegate to them. 4 However, Plaintiffs assert, the officers do not have independent 5 authority; they serve at the direction and pleasure of the 6 managing members, and are merely extensions of the managing 7 members themselves. 8 agents to whom specified duties had been delegated by the 9 Management Committee, Plaintiffs argue it follows that the Because Valley Gold s officers were simply 10 officers authority to act for Valley Gold ceased at the time the 11 managing members authority ceased. 12 the Law of Corporations § 509 (delegated authority of an agent 13 terminates at the same time the principal s authority 14 terminates). 15 the Law of Agency, § 110: Unless otherwise agreed, the loss or 16 destruction of the subject matter of the authority or the 17 termination of the principal s interest therein terminates the 18 agent s authority to deal with reference to it. 19 contend that, while Mr. Machado was delegated authority from the 20 Management Committee to handle the day-to-day operations of 21 Valley Gold, when those operations were destroyed by the failure 22 of the business, so too was Mr. Machado s authority to act on 23 behalf of Valley Gold. 24 (Second) of the Law of Agency § 109 in contending that Mr. 25 Machado is no longer authorized to act for Valley Gold even if 26 the managing members never convened another meeting to formally See Fletcher Cyclopedia of Plaintiffs also refer to Restatement (Second) of Plaintiffs Finally, Plaintiffs refer to Restatement 31 1 2 3 4 5 6 end his appointment: The authority of an agent terminates or is suspended when he has notice of a change in value of the subject matter or a change in business conditions from which he should infer that the principal, if he knew of it, would not consent to the further exercise of the authority. Downey Brand maintains that because Valley Gold retains a 7 president/chairman of the management committee, Joe Machado, its 8 situation is distinguishable from the defunct medical 9 corporations in Gilliland. Unlike Overton, Downey Brand provides 10 no affidavit from Joe Machado confirming the invocation of the 11 attorney-client privilege in this action or that Joe Machado is 12 currently authorized to act on behalf of Valley Gold. 13 Plaintiffs counter that Joe Machado s presidency does not 14 comply with the provisions of Valley Gold s operating agreement, 15 which plaintiffs contend require annual re-election of the 16 management committee. 17 provides that each manager shall continue to serve on the 18 Management Committee until the manager is not re-elected at an 19 Annual Meeting of the Members or until the occurrence of one or 20 more events described below in Sections 5.1(c) through 21 5.1(e)[death, disability, resignation, removal, or personal 22 dissolution or bankruptcy] (doc. 137 at 9)(emphasis added). 23 Plaintiffs contend that no annual meeting has been held 24 since 2005. 25 Section 5.1(b) of the operating agreement prove a negative, 26 Presenting the classic challenge to plaintiffs to Section 5.1(g) provides, in pertinent part, If . . . there 32 1 are no remaining Managers, the Company shall dissolve unless a 2 Majority Interest of the Members elect to continue the Company in 3 effect . . . (doc. 137 at 10) (emphasis added). 4 Agreement requires Valley Gold to dissolve. 5 Corporations Code § 17350(a) provides that Valley Gold must 6 dissolve and wind up its operations as its Operating Agreement 7 provides.8 8 procedures for a limited liability corporation to wind down its 9 affairs and dissolve. The Operating California Sections 17352 through 17354 set forth the Nothing indicates that Valley Gold s 10 managers have followed these procedures. Nor has any member or 11 manager initiated action under § 17351 for a court decree of 12 dissolution, as is appropriate when the business of the 13 corporation has been abandoned.9 14 8 15 A limited liability company shall be dissolved and its affairs shall be wound up upon the happening of the first to occur of the following: 16 17 18 (a) At the time specified in the articles of organization, if any, or upon the happening of the events, if any, specified in the articles of organization or a written operating agreement. 19 20 21 (b) By the vote of a majority in interest of the members, or a greater percentage of the voting interests of members as may be specified in the articles of organization or a written operating agreement. 22 23 24 25 26 California Corporations Code § 17350 provides: 9 California Corporations Code § 17351(a) provides: Pursuant to an action filed by any manager or by any member or members, a court of competent jurisdiction may decree the dissolution of a 33 1 Valley Gold s annual meetings have not been held, no manager 2 has been re-elected at an annual meeting, and no managers remain 3 under the terms of the Operating Agreement. 4 continue to be Valley Gold s president/chairman since he served 5 at the pleasure of a management committee that no longer exists 6 (Operating Agreement, § 5.6(a), Doc. 137 at 11). 7 5.6 of the Operating Agreement grants Valley Gold s president the 8 power to generally and actively manage Valley Gold s business, as 9 Downey Brand contends, is meaningless as Joe Machado no longer Joe Machado cannot That Section 10 validly holds the office of president/chairman and Valley Gold no 11 longer conducts any business. 12 been dissolved in compliance with California law, it continues to 13 exist as a corporate entity. 14 Nonetheless, until Valley Gold has Under the reasoning of Gilliland, because Valley Gold has no 15 corporate manager or officer to assert or waive the attorney- 16 client privilege, it follows that Valley Gold does not retain the 17 attorney-client privilege in this action. As in Gilliland and 18 19 limited liability following occurs: 20 22 (1) It is not reasonably practicable to carry on the business in conformity with the articles of organization or operating agreement. 23 ... 24 (3) The business of the limited company has been abandoned. 25 .... 21 company 26 34 whenever the liability 1 Weintraub, Valley Gold s ability to invoke or waive the attorney- 2 client privilege does not exist in the fiction of its corporate 3 survival, as an inactive corporation that has not complied with 4 California corporations law regarding its required corporate 5 information. 6 results of its analysis interfered with policies or federal 7 interests underlying bankruptcy. 8 Valley Gold is not in bankruptcy, a different policy analysis 9 pertains to applying In Weintraub, the Court considered whether the 471 U.S. at 351-52, 353. Since Weintraub to decide who may exercise the 10 attorney-client privilege of behalf of Valley Gold. Weintraub 11 analyzed federal bankruptcy interests in a single sentence, 12 emphasizing the potential for mischief by the corporation s pre- 13 bankruptcy corporate management: 25 [T]he rule suggested by respondents that the debtor s directors have this power would frustrate an important goal of the bankruptcy laws. In seeking to maximize the value of the estate, the trustee must investigate the conduct of prior management to uncover and assert causes of action against the debtor s officers and directors. It would often be extremely difficult to conduct this inquiry if the former management were allowed to control the corporation s attorney-client privilege and therefore to control access to the corporation s legal files. To the extent that management had wrongfully diverted or appropriated corporate assets, it could use the privilege as a shield against the trustee s efforts to identify those assets. The Code s goal of uncovering insider fraud would be substantially defeated if the debtor s directors were to retain the one management power that might effectively thwart an investigation into their own conduct. 26 Weintraub, supra, 471 U.S. at 353-54 (citations omitted)(emphasis 14 15 16 17 18 19 20 21 22 23 24 35 1 2 added). In an action under the Comprehensive Environmental Response, 3 Compensation, and Liability Act ( CERCLA ) (42 U.S.C. § 9601 et 4 seq.), a special master recommended granting the plaintiff s 5 motion to compel production of documents relating to a 6 corporation that had been acquired by the defendant corporation 7 nearly fifty years earlier. City of Rialto, supra, 492 F.Supp.2d 8 at 1193. Although City of Rialto s holding is 9 distinguishable from this case in that it addressed a corporation 10 dissolved nearly fifty years before Rialto brought its case, the 11 court s policy reasoning is instructive: 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 The court agreed. A dissolved corporation does not have the same concerns as a deceased natural person and therefore has less need for the privilege after dissolution is complete. As there are usually no assets left and no directors, the protections of the attorney-client privilege are less meaningful to the typically dissolved corporation. Moreover, because the attorney-client privilege has the effect of withholding relevant information from the factfinder, it should be applied only when necessary to achieve its limited purpose of encouraging full and fair disclosure by the client to his or her attorney. The privilege is to be strictly construed. Here, strictly construing the privilege, the Court finds that Kwikset, a dissolved corporation, has less need for the protections provided by the privilege than a natural person would. The Court and the litigants need for full disclosure of information outweighs Kwikset s need for protection of its pre-dissolution attorney-client communications. As such, this Court agrees with the Special Master and finds that Kwikset lost its right to assert the attorney-client privilege when its dissolution was complete in 1958. City of Rialto, 492 F.Supp.2d at 1200-01 (citations omitted). 36 1 Even though Valley Gold continues to exist as a corporate 2 entity under California law, the policies underlying the 3 attorney-client privilege do not favor recognizing that it 4 retains the right to assert or waive the privilege in this 5 instance. 6 corporate headquarters. 7 and agent for service of process are unknown. 8 longer functions; it carries out no ongoing business; and it has 9 no activities of any kind. Valley Gold retains no known assets. It has no known The location of its corporate records Its management no It has not amended its California 10 corporate registration to reflect a current address, managers, or 11 agent for service of process. 12 corporate purpose of manufacturing and marketing cheese. 13 shareholders long ago concluded that their investments were lost 14 and that their outstanding invoices would not be paid. 15 associated with investing in Valley Gold and selling it milk 16 forced several investor-dairymen out of business and spawned 17 multiple lawsuits. 18 importantly, nothing to protect if Downey Brand successfully 19 invokes attorney-client privilege on its behalf. 20 Valley Gold no longer pursues its Its Losses Valley Gold has little to gain and more On the other hand, Plaintiffs allegations and the public 21 record support the inference that Valley Gold s incorporators 22 disregarded their fiduciary duty to corporate investors. 23 Weintraub, Downey Brand s invocation of Valley Gold s attorney- 24 client privilege threatens Plaintiffs ability to uncover 25 evidence of fraud or misappropriation of corporate assets by 26 Valley Gold, its agents, or its management, as well as Downey 37 As in 1 Brand s own alleged participation in those bad acts. 2 the interests of perpetuating further fraud or simply to promote 3 a new business venture, Vieira acted to promote his own interests 4 at Valley Gold shareholders expense, failing to disclose fully 5 the nature of his role in the Suprema round-tripping scam and the 6 status of the criminal case against him. 7 fiduciary duty to Valley Gold and its shareholders, he was in a 8 conflict position, the attorney-client privilege does not apply 9 to his communications to Downey Brand as Valley Gold s agent in 10 Whether in If Vieira breached his the course of Valley Gold s incorporation. 11 D. Work-Product Doctrine. 12 Downey Brand has clarified that its invocation of the work- 13 product doctrine applies only to Plaintiffs Requests for 14 Documents Nos. 18-21, i.e., (18) the original or best available 15 copy of the "AGREEMENT TO CONTRIBUTE ADDITIONAL CAPITAL BY OWNER" 16 for each owner or investor; (19) all documents that refer or 17 relate to the "AGREEMENT TO CONTRIBUTE ADDITIONAL CAPITAL BY 18 OWNER;" (20) the original or best available copy of the 19 "CONTINUATION OF AGREEMENTS TO FOREGO MILK PAYMENTS IN RETURN FOR 20 AN INCREASED STAKE IN VALLEY GOLD, LLC" for each owner or 21 investor; and (21) all documents that relate to the "CONTINUATION 22 OF AGREEMENTS TO FOREGO MILK PAYMENTS IN RETURN FOR AN INCREASED 23 STAKE IN VALLEY GOLD, LLC." 24 Although the contested materials are not protected by the 25 attorney-client privilege, whether Downey Brand can withhold 26 under the work-product privilege must be decided because the 38 1 work-product doctrine applies to the attorney, rather than the 2 client. 3 F.3d 851, 866 (3rd Cir.1994). 4 See Rhone-Poulenc Rorer, Inc. v. Home Indemn. Co., 32 The work-product doctrine, originally promulgated in Hickman 5 v. Taylor, 329 U.S. 495 (1947), recognized that public policy is 6 served by protecting from disclosure to adverse parties, written 7 memoranda and private and personal recollections prepared by 8 attorneys in the course of their legal duties. 9 449 U.S. at 397-98. Upjohn, supra, The work-product privilege belongs to both 10 the attorney and the client. 11 Jury (II), 640 F.2d 49, 62 (7th Cir.1980). 12 protection continues even after the litigation is completed. 13 v. Grolier, Inc., 462 U.S. 19, 26 (1983). 14 privilege was substantially incorporated into F.R.Civ.P 15 26(b)(3)(A). 16 17 18 19 Id. In re Special September 1978 Grand The work-product FTC The work- product The pertinent portion of that rule provides: Ordinarily, a party may not discover documents and tangible things that are prepared in anticipation of litigation or for trial by or for another party or its representative (including the other party s attorney, consultant, surety, indemnitor, insurer, or agent). 20 (Emphasis added). 21 upon an adverse party s demonstration of substantial need [for] 22 the materials and undue hardship [in obtaining] the substantial 23 equivalent of the materials by other means. 24 Such documents may only be ordered produced Id. In In re Grand Jury Subpoena (Mark Torf/Torf Environmental 25 Management), 357 F.3d 900 (9th Cir.2004), the Ninth Circuit 26 addressed application of the work-product doctrine to dual 39 1 purpose documents, joining those Circuits in employing the 2 because of standard articulated in the Wright & Miller Federal 3 Practice treatise. 4 Manufacturing, Inc. that it was under investigation for violating 5 federal waste management laws. 6 to advise and defend it in anticipated civil and criminal 7 litigation with the Government. 8 Ponderosa, hired Torf, an environmental consultant, to assist him 9 in preparing a legal defense for Ponderosa and as an Id. at 907. The EPA informed Ponderosa Paint Ponderosa hired attorney McCreedy McCreedy, on behalf of 10 environmental consultant on Ponderosa s cleanup efforts at the 11 sites that aroused the EPA s suspicions. 12 litigation, Ponderosa submitted numerous documents to the EPA 13 pursuant to an Information Request from the EPA and an 14 Administrative Consent Order between Ponderosa and the EPA. 15 of these documents were prepared by Torf. 16 that Ponderosa complied with both the Information Request and the 17 Consent Order. 18 issued a subpoena to Torf for any and all records relating in 19 any way to any work regarding the disposal of waste material 20 ... from Ponderosa Paint[.] Id. at 907. 21 because of standard, the Ninth Circuit stated: 22 23 24 25 26 Seeking to avoid Many The EPA was satisfied However, a grand jury investigating Ponderosa In adopting the This formulation states that a document should be deemed prepared in anticipation of litigation and thus eligible for work product protection under Rule 26(b)(3) if in light of the nature of the document and the factual situation in a particular case, the document can be fairly said to have been prepared or obtained because of the prospect of litigation. Charles Alan Wright, Arthur 40 B. Miller, and Richard L. Marcus, 8 Federal Practice & Procedure, § 2024 (2nd ed. 1994) .... 1 2 3 Id. 4 1194 (2nd Cir.1998) as presenting a comprehensive discussion of 5 the because of standard: 6 7 8 9 10 11 12 13 14 15 The Ninth Circuit cited United States v. Adlman, 134 F.3d The because of standard does not consider whether litigation was a primary or secondary motive behind the creation of a document. Rather, it considers the totality of the circumstances and affords protection when it can fairly be said that the document was created because of anticipated litigation, and would not have been created in substantially similar form but for the prospect of that litigation[.] Adlman, 134 F.3d at 1195. Here, there is no question that all of the documents were produced in anticipation of litigation. McCreedy hired Torf because of Ponderosa s impending litigation and Torf conducted his investigations because of that threat. The threat animated every document Torf prepared, including the documents prepared to comply with the Information Request and Consent Order, and to consult regarding the cleanup. 16 Id. at 908. The Ninth Circuit rejected the Government s argument 17 that the withheld documents would have been created in 18 substantially similar form in any event to comply with the 19 Information Request and the Consent Order, and, therefore, were 20 not protected by the work product doctrine: 21 22 23 24 25 26 The question of entitlement to work product protection cannot be decided simply by looking at one motive that contributed to a document s preparation. The circumstances surrounding the document s preparation must also be considered. In the because of Wright & Miller formulation, the nature of the document and the factual situation of the particular case are key to a determination of whether work product protection applies. 41 1 2 3 Wright & Miller § 2024 (emphasis added). When there is a true independent purpose for creating a document, work product protection is less likely, but when two purposes are profoundly interconnected, the analysis is more complicated. 4 5 6 7 8 9 10 11 12 13 Here, Ponderosa s response to the Information Request and its accession to the Consent Order were done under the direction of an attorney in anticipation of litigation. By cooperating with the EPA, Ponderosa sought to avoid litigation ... Having chosen to pursue a criminal investigation, the government now seeks to capitalize on Ponderosa s earlier cooperation and obtain all of Torf s documents pertaining to the disposal of Ponderosa s waste material. The withheld documents, however, just like the others, were prepared by Torf, at least in part, to help McCreedy advise and defend Ponderosa in anticipated litigation with the government. Thus, the withheld documents fall within the broad category of documents that were prepared for the overall purpose of anticipated litigation. 14 15 16 17 18 19 20 21 22 23 24 25 26 To the extent that Adlman suggests there is no work product protection when, viewed in isolation of the facts of the case, a document can be said to have been created for a nonlitigation purpose, we believe the better view is set forth in two Seventh Circuit cases. In the first, In re Special September 1978 Grand Jury, 640 F.2d 49 (7th Cir.1980)( Special September ), the court extended work product protection to materials that were produced both in anticipation of litigation and for the filing of Board of Education reports required under state law. Work product protection was proper because, by the time the law firm s client received the Board s request for the required reports, the client had already received a subpoena from a federal grand jury. The so-called independent purpose of complying with the Board s request was grounded in the same set of facts that created the anticipation of litigation, and it was the anticipation of litigation that prompted the law firm s work in the first place. 42 1 2 3 4 5 In the later case, United States v. Frederick, 182 F.3d 496, 501-02 (7th Cir.1999), the Seventh Circuit held that a dual-purpose document - a document prepared for use in preparing tax returns and for use in litigation - is not privileged; otherwise, people in or contemplating would be able to invoke, in effect, an accountant s privilege, provided that they used their lawyer to fill out their tax returns. 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 Frederick does not discuss or distinguish Special September, but the two cases can be reconciled by the extent to which the socalled independent purpose is truly separable from the anticipation of litigation. In Frederick, at issue were accountants worksheets, albeit prepared by a lawyer, in preparation of his clients tax returns. Although his clients were under investigation (which the court acknowledged was a complicating factor ), work product protection was ultimately inappropriate because tax return preparation is a readily separable purpose from litigation preparation and using a lawyer in lieu of another form of tax preparer does nothing to blur that distinction. Frederick, 182 F.3d at 501. In Special September, on the other hand, the materials used to prepare the Board of Elections reports were complied by lawyers and were necessarily created in the first place because of impending litigation. Similarly here, by hiring McCreedy who in turn hired Torf, Ponderosa was not assigning an attorney a task that could just as well have been performed by a non-lawyer. The company hired McCreedy only after learning that the federal government was investigating if for criminal wrongdoing; a circumstance virtually necessitating legal representation. Torf assisted McCreedy in preparing Ponderosa s defense. He also acted as an environmental consultant on the cleanup. Although in that capacity he could have been retained by Ponderosa directly, this circumstance does not preclude the application of the work-product privilege to documents produced in that capacity, if the documents were also produced because of 43 litigation. The challenged documents were prepared under the direction of McCreedy, who was providing legal advice to Ponderosa in anticipation of the impending litigation. 1 2 3 We conclude that the withheld documents, notwithstanding their dual purpose character, fall within the ambit of the work product doctrine. The documents are entitled to work product protection because, taking into account the facts surrounding their creation, their litigation purpose so permeates any non-litigation purpose that the two purposes cannot be discretely separated from the factual nexus as a whole. 4 5 6 7 8 9 10 Id. at 908-910. Here, the contested materials were prepared for a securities 11 offering and capital raising effort. There was then no prospect 12 of or pending litigation. 13 related to corporate fund raising to advance the interests of 14 management and investors. 15 not prepared in anticipation of trial or for use in litigation, 16 this aspect of work-product privilege does not apply. 17 Brand does not describe legal strategy, mental sense impressions, 18 legal research, or evaluation that is denied the opponent in the 19 context of litigation. 20 doctrine are not served by withholding. The documents and materials all Because the contested materials were Downey The policy objectives of the work-product CONCLUSION 21 22 For the foregoing reasons: 23 1. 24 25 26 Plaintiffs motion to compel discovery is GRANTED IN PART AND DENIED IN PART; 2. Downey Brand s motion for a protective order as to the requested information is DENIED; the disputed information and 44 1 materials shall be produced; 3. 2 Downey Brand s motion for summary judgment against 3 Plaintiff Valley Gold on the issue of the attorney-client 4 privilege is DENIED. 4. 5 Counsel for Plaintiffs shall prepare and lodge a form of 6 order consistent with this Memorandum Decision within five (5) 7 court days following service of this Memorandum Decision. IT IS SO ORDERED. 8 9 Dated: 668554 February 1, 2010 /s/ Oliver W. Wanger UNITED STATES DISTRICT JUDGE 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 45

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