2002 WI 28
SUPREME COURT
CASE NO.: COMPLETE TITLE:
OF
WISCONSIN
00-1797 Harold C. Lane, Jr., Plaintiff-Respondent, v. Sharp Packaging Systems, Inc., Paul W. Scarberry and Virginia Scarberry, Defendants-Appellants, John H. Niebler and Niebler, Pyzyk, Klaver & Wagner, LLP, Intervening-Appellants. ON CERTIFICATION FROM THE COURT OF APPEALS
OPINION FILED: SUBMITTED ON BRIEFS: ORAL ARGUMENT: SOURCE OF APPEAL: COURT: COUNTY: JUDGE: JUSTICES: CONCURRED: DISSENTED: NOT PARTICIPATING: ATTORNEYS:
March 20, 2002 November 5, 2001
Circuit Waukesha Kathryn W. Foster
ABRAHAMSON, C.J., dissents (opinion filed). BABLITCH and BRADLEY, J.J., join dissent.
For the defendants-appellants there were briefs by Larry J. Britton, William J. Richards and Vlasak & Britton, S.C., Milwaukee, and James Reiher, Terrance E. Nilles and von Briesen, Purtell & Roper, Milwaukee, and oral argument by Larry J. Britton and James C. Reiher. For the intervening appellants there were briefs by Terry E. Johnson, Maria D. Sanders and Peterson, Johnson & Murray, S.C., Milwaukee, and oral argument by Terry E. Johnson. For the plaintiff-respondent there was a brief by James O. Huber, Maureen A. McGinnity, David W. Simon and Foley & Lardner, Milwaukee, and oral argument by Maureen A. McGinnity.
2002 WI 28
NOTICE
This opinion is subject to further editing and modification. The final version will appear in the bound volume of the official reports.
No.
00-1797
99-CV-2476)
(L.C. No.
STATE OF WISCONSIN Harold C. Lane, Jr., Plaintiff-Respondent, v. Sharp Packaging Systems, Inc., Paul W. Scarberry and Virginia Scarberry, Defendants-Appellants, John H. Niebler and Niebler, Pyzyk, Klaver & Wagner, LLP, Intervening-Appellants.
:
IN SUPREME COURT
FILED
MAR 20, 2002
Cornelia G. Clark Clerk of Supreme Court
APPEAL County,
from an order Kathryn
of W.
the
Circuit
Court
for Court
Waukesha Judge.
Honorable
Foster,
Circuit
Reversed and cause remanded.
¶1
N. PATRICK CROOKS, J.
This case is before the court
on certification by the Court of Appeals, District II, pursuant to Wis. Stat. § 809.61 (1999-2000).1
1
While this case arises from
All references to the Wisconsin Statutes are to the 19992000 version unless otherwise noted.
No.
00-1797
the
termination of
Harold
C.
Lane
(hereinafter
Lane)
by
his
employer, Sharp Packaging Systems, Inc. (hereinafter Sharp), the issues dispute. requesting before this court relate to the parties' discovery
During discovery, Lane filed a subpoena duces tecum, documents from Attorney John Niebler (hereinafter
Niebler) and his law firm, Niebler, Pyzyk, Klaver & Wagner, LLP, (hereinafter the Niebler law firm) regarding their
representation of Sharp.
Lane also filed a subpoena duces tecum
requesting production of documents from third parties, including M&I Mortgage Co. filed Sharp motions both and to the quash Scarberrys, both we the sole The the (1)
shareholders, circuit court
subpoenas. now address
denied
motions
and
discovery issues in dispute. whether a corporation can
Specifically, we address: the lawyer-client
invoke
privilege
against a former member of the corporation's board of directors; (2) whether an attorney's billing records are protected by the lawyer-client privilege; (3) whether the circuit court erred in ordering production of documents reflecting communications with third parties; (4) whether the circuit court should conduct an in camera review of records when otherwise privileged records are sought under the crime-fraud exception to the attorney
client privilege; and (5) whether documents created prior to an employee's termination are protected as work product. review the circuit court's award of attorneys' fees. ¶2 Recognizing that the discovery issues in this case are We also
matters of first impression and that the issues "go to the very core of the lawyer-client relationship 2 and the reach of the
No.
00-1797
lawyer-client privilege" the court of appeals certified the case to this court. We review the Waukesha County Circuit Court's
decision, the Honorable Kathryn W. Foster, presiding, regarding the lawyer-client privilege, the work product doctrine, and the award of attorneys' fees. ¶3 We first address whether the circuit court erroneously
exercised discretion in concluding that the documents requested from Niebler and his law firm are not protected by the lawyerclient privilege. We first conclude that Sharp can effectively Lane's status
assert the lawyer-client privilege against Lane.
as a former director does not allow him to waive the lawyerclient privilege as a representative of Sharp, nor does Lane's status preclude the current board of directors from asserting the lawyer-client privilege against him regarding documents
prepared during his tenure.
Second, we conclude that attorney
billing records are protected by the lawyer-client privilege. The circuit court erroneously exercised its discretion by
failing to examine the nature of the billing records in this case, specifically, that the billing records reveal the nature of legal services provided and the substance of lawyer-client communications. Third, we conclude that the circuit court did
not erroneously exercise its discretion in ordering production of non-privileged documents reflecting communications with third parties. facts, The applied circuit the court carefully of examined law, the relevant a
proper
standard
and
reached
reasonable conclusion on that issue.
Finally, we conclude that
the circuit court did not erroneously exercise its discretion in 3
No.
00-1797
concluding that Lane established a prima facie case that the crime-fraud exception to the lawyer-client privilege applies.
We further conclude, however, that the circuit court did err in failing to conduct an in camera review. Rather than considering
the appropriate factors, the circuit court simply allowed Lane to overcome the lawyer-client privilege by establishing a prima facie case. an in Upon remand, we instruct the circuit the court to
conduct
camera review
to determine
if
crime-fraud
exception applies. ¶4 In addition to the lawyer-client privilege issues, we
review the circuit court's decision that prior to May 31, 1999, litigation was not imminent and documents prepared during that time are not that protected the by the work product doctrine. exercised We its
conclude
circuit
court
erroneously
discretion because it failed to apply the proper standard of law and did not conduct an in camera review to determine if the documents litigation. ¶5 Finally, we review the circuit court's award of were prepared or obtained in anticipation of
attorneys' fees to Lane. the circuit court's
Based on the record, we conclude that of half the attorneys' fees and
award
expenses pertaining to two motions was reasonable and not an erroneous exercise of discretion. I. FACTS A. Lane's Employment with Sharp ¶6 Sharp Packaging Systems, Inc. (Sharp) is a Wisconsin
corporation of which Paul and Virginia Scarberry (hereinafter 4
No.
00-1797
the Scarberrys) are, and at all relevant times have been, the sole shareholders. In 1992, Harold C. "Bud" Lane joined Sharp During his agreements,
as Executive Vice President of Marketing and Sales. employment, Lane and Sharp maintained several
including an employment agreement, a stock option agreement, a stock transfer restriction agreement, and a non-compete
agreement. ¶7 In March 1995, Sharp, the Scarberrys, and Lane entered
into an employment agreement defining the terms and conditions of Lane's continued employment with Sharp. The employment
agreement allowed Sharp to terminate Lane's employment for any reason with ninety days written notice. The agreement also
provided that Lane maintained his position as Executive Vice President Scarberry, directors.2 of Sharp, was received elected a the same compensation of Sharp's as Paul of
and
director
board
Lane was also given an equal voice in selecting
Sharp's professional service providers and Lane, as well as Paul Scarberry, had veto power to discharge any professional failing to provide satisfactory performance. Furthermore, in
recognition of Lane's service to Sharp, the employment agreement referenced a Stock Option Agreement and a Stock Transfer
Restriction Agreement. ¶8 The Stock Option Agreement gave Lane the option to Until Lane exercised
purchase a 25% stock ownership in Sharp.
Lane actually replaced John Niebler, then legal counsel to Sharp, as a member of Sharp's board of directors. 5
2
No.
00-1797
the option, the agreement provided that he shall have no rights as a shareholder of the company, but shall be given at least forty-eight hours notice of, and shall be entitled to be present at, any meeting at which action is to be taken by shareholders. If Lane chose was not to exercise before his the be stock option, and his the
employment agreement
terminated that
agreement paid a
expired, sum of
provided
Lane
would
money
according to an appraisal formula in the agreement, based on the present stock value.3 ¶9 During the time of Lane's employment, Sharp prospered.
From October 1992, to October 1998, Sharp's gross sales more than doubled and shareholders' equity more than quadrupled. company's value increased from approximately $1.8 million The in
1992 to approximately $11 million by October 1995. ¶10 On March 2, 1999, Sharp terminated Lane's employment, Lane had not exercised his stock option Accordingly, on May 26, 1999, Agreement, receive Lane lump elected sum to
effective May 31, 1999.
at the time of his termination. pursuant surrender to his the Stock Option and
stock
options
his
stock
appreciation rights payments. and procedure laid out in
Pursuant to the appraisal formula the Stock Transfer Restriction
Agreement, Sharp and the Scarberrys retained Theodore F. Gunkel
3
Paragragh 6(a) of the Stock Option Agreement references the appraisal formula as the "Formula Price" determined under paragraph 9 of the Stock Transfer Restriction Agreement. Because the method of calculating the appraisal is not at issue here, we do not lay out the method used for valuation of the company's stock. 6
No.
00-1797
of
Madison
Valuation
Associates
to
appraise
the
fair
market
value of Lane's stock appreciation rights.
Lane received the
appraisal in October 1999, which revealed that prior to Lane's termination, shareholders. there was a distribution of profit to the
The appraiser concluded that the value of Lane's Lane disagreed with Gunkel's of Valuation Research
25% interest in Sharp was $91,000. appraisal and retained Bryan
Browning
Corp. to conduct an additional appraisal, as permitted under the parties' agreements. B. Niebler's Relationship with Sharp and the Scarberrys ¶11 Since approximately 1985, Attorney John Niebler and
his law firm, Niebler, Pyzyk, Klaver & Wagner, LLP (hereinafter "Niebler law firm"), have represented both Sharp and the
Scarberrys in various legal matters. advised Sharp and the Scarberrys
Since 1992, Niebler has about Sharp's employment
agreements and relationship with Lane.
At various times since
1994, Niebler and his law firm have also provided legal advice to Sharp and the Scarberrys about a proposed termination of
Lane's employment with Sharp.
Niebler and his law firm also did From
considerable legal work for Sharp regarding other matters.
at least 1995 through 1999, Niebler's firm sent monthly bills to Sharp, requesting payment and revealing the nature of legal
services performed. ¶12 on From 1993 to 1995, as Sharp's lawyer, Niebler served Board of Directors. Pursuant to Lane's 1995
Sharp's
employment contract with Sharp, Lane replaced Niebler on Sharp's board. In 1995, Sharp designated new corporate counsel, the law 7
No.
00-1797
firm of
Meissner
& Tierney,
replacing
the
Niebler
law
firm.
However, Niebler continued to represent the Scarberrys as their personal attorney. ¶13 corporate In 1998, Niebler advised the Scarberrys about taking a distribution from Sharp's accumulated profits.
Niebler subsequently consulted with M&I Bank about a possible loan to Sharp to finance the distribution. In February 1999,
the Scarberrys received a corporate distribution from Sharp in the amount of approximately $3,800,418.00, financed by a loan to Sharp from M&I Mortgage Corp. any meeting of the Board The distribution was made without of Directors and without Lane's
knowledge.
As stated previously, Lane had not exercised his Furthermore, Lane was he received Gunkel's
stock options prior to the distribution. not aware of the distribution until
appraisal in October of 1999. C. Trial Court Proceedings ¶14 On December 13, 1999, Lane filed suit against Sharp
and the Scarberrys in Waukesha County Circuit Court, alleging fraudulent transfer, breach of his employment agreement, breach of the stock option agreement, civil conspiracy, request for an accounting, and request for declaratory and injunctive relief seeking to undo the actions taken by Sharp and the Scarberrys. Represented by Niebler and two other attorneys,4 Sharp and the Scarberrys filed an answer to Lane's complaint. Sharp and the
Robert Horowitz and Barbara A. Neider of Stafford Rosenbaum LLP, also represented Sharp and the Scarberrys. 8
4
No.
00-1797
Scarberrys contended that Lane never exercised his stock option rights and that the distribution was valid. ¶15 During discovery, Lane subpoenaed documents from
Niebler and his firm. requested: 1.
Specifically, the subpoena duces tecum
All bills submitted by Niebler, Pyzyk, Klaver & Wagner, LLP (hereinafter "Niebler") to Sharp Packaging Systems, Inc. (hereinafter "Sharp") for the period May 3, 1995 to May 31, 1999. All charge records, day book records or other Documents* showing the date and/or time and/or work done by Niebler or any attorney associated with the firm of Niebler, Pyzyk, Klaver & Wagner with respect to services rendered for Sharp Packaging Systems, Inc. for the period May 3, 1995 to May 31, 1999. All Documents representing communications by or between Sharp and/or the Scarberrys and/or Niebler regarding Harold C. Lane, Jr. (hereinafter "Lane") and/or any agreements with Lane for the period January 1, 1998 to the present. All Documents relating to any loan or loan request for purposes of funding a shareholder distribution for Sharp shareholders for the period January 1, 1998 to May 31, 1999. All Documents comprising or relating to any negotiations and/or proposals and/or letters of intent and/or offers for the sale or recapitalization of all or a portion of Sharp, or its stock, for the period January 1, 1998 to the present. All Documents relating to the decision to distribute, or the distribution of, approximately $3,800,418 to the stockholders of Sharp in February or March, 1999, including but not
2.
3.
4.
5.
6.
9
No.
00-1797
limited to all loan documents and communications relating to the source of any such funds. *The word "Documents" is attachment to Exhibit A. ¶16 defined on the enclosed
Sharp and the Scarberrys responded to Lane's subpoena
of Niebler's documents with a motion for a protective order and to quash the subpoena duces tecum. Sharp and the Scarberrys
argued that the documents requested are protected by the lawyerclient privilege and the work product doctrine. Lane argued
that the subpoena fell within the crime-fraud exception to the lawyer-client privilege because his complaint sufficiently
alleged fraudulent transfer.
In a bench decision, the Honorable
Kathryn W. Foster, denied the motion to quash and ordered the defendants to produce all documents previously withheld on both lawyer-client privilege and work product grounds. In her
written decision, the circuit court ordered that the Niebler law firm provide: (a) bills from the Niebler firm to Sharp and documents reflecting confidential communications between the Niebler firm and defendants shall be produced for the period through May 31, 1999; and non-privileged documents, including documents reflecting the Niebler firm's communications with third parties, shall be produced for the time periods requested by plaintiff. the decision, the circuit court judge stated,
(b)
When
issuing
"[t]here's a foul odor that comes from this file."
With regard
to the connection with the Niebler firm, the circuit court judge stated, "there were billings 10 that were submitted to the
No.
00-1797
corporation and under Mr. Lane's obligations were reviewed by him but not retrievable by him upon his termination, I think he's entitled to examine them again with the benefit of
counsel." client
In finding the crime-fraud exception to the lawyerapplicable, the circuit court attributed
privilege
"sinister motives" to the defendants' acts, stating: I'm satisfied that there is based on the Court's previous review of the Complaint, as well as the other limited information presented here, that there is a prima facie case. . . . the combination of the relationship that existed between the immediate parties already named in this case and that prima facie showing and the circumstances, the allegation of breach and of that agreement going on, not just immediately prior to the termination but perhaps for a time pre-dating that, a time in which the Niebler law firm was supposedly only providing limited . . . services [to Sharp] . . . that the totality of all those matters I believe allow the attorney-client privilege to be dissipated under the parameters that the Court has outlined here. ¶17 In addition to the subpoena duces tecum requesting
documents from Niebler, Lane also served a subpoena duces tecum on third parties, including M&I Bank.5 In response to the
subpoena, Sharp and the Scarberrys again filed a motion for a protective order and to quash on the grounds that the documents were private and and irrelevant. Lane The circuit court on denied the the
motion
also awarded
attorneys' fees
motion.
There was no breakdown on the fees between the two motions to quash, so the circuit court based the awarded fees on half of
We do not lay out the language of the subpoena because the substance of the subpoena duces tecum is not at issue. 11
5
No.
00-1797
what was expended on the two motions. court judge stated:
Specifically, the circuit
The last matter I still want to get to is the plaintiff's request for costs pertaining to this motion. The Court will request a submission of what those costs are. But as far as the issue of the production of financial records, I am going to grant that request. As far as the matter of attorney-client privilege which I think present more difficult legal issues, I'll deny that. My inclination simply is to cut it strictly in half and not require that you say how much I did on this part of the motion or that on the other, but I would award 50 percent of costs pertaining to all of the matters brought before the Court here today. (Emphasis added.)6 D. Appellate Court Proceedings ¶18 Sharp and appeal the on Scarberrys the sought leave to file of an the
interlocutory
circuit
court's
denial
motions to quash Lane's subpoenas.
The Court of Appeals granted
review on an expedited schedule and also allowed John H. Niebler and Niebler, Pyzyk, Klaver & Wagner, LLP to intervene as
additional appellants.
Recognizing this case involves several
issues of first impression, the Court of Appeals certified a
Lane subsequently amended his complaint, adding Niebler and the Niebler law firm as party defendants. Niebler and his law firm filed a motion to dismiss. On March 1, 2001, the circuit court issued a written order dismissing all claims asserted against Niebler and his law firm. Issues involving that claim are not presently before this court. 12
6
No.
00-1797
portion7 of the appeal to this court. of all issues raised on appeal. II. ¶19
We granted certification
DISCUSSION
We review the circuit court's discovery order for an See Borgwardt v. Redlin, 196
erroneous exercise of discretion.
Wis. 2d 342, 350, 538 N.W.2d 581 (Ct. App. 1995); Swan Sales Corp. v. Jos. Schlitz Brewing Co., 126 Wis. 2d 16, 28, 374
N.W.2d 640 (Ct. App. 1985).
"The burden is on [the appellant]
to show that the trial court misused its discretion and we will not reverse unless such misuse is clearly shown." Konle v. We
Page, 205 Wis. 2d 389, 393, 556 N.W.2d 380 (Ct. App. 1996).
will sustain a discretionary act if we find the trial court examined the relevant facts, applied a proper standard of law, and using a demonstrative rational process, reached a conclusion that a reasonable judge could reach. 226 Wis. 2d 210, 233, 594 Paige K.B. v. Steven G.B., (1999). Whether the
N.W.2d 370
circuit court utilized the proper legal standard, however, is a question of law we review independently of the circuit court, benefiting from its analysis. See Three & One Co. v. Geilfuss,
178 Wis. 2d 400, 410, 504 N.W.2d 393 (Ct. App. 1993). ¶20 Sharp and the Scarberrys argue that the circuit court
erroneously exercised its discretion by denying their motion to
7
The Court of Appeals' certification directly asked this court to address four issues. In a footnote, however, the Court of Appeals noted five other issues raised in the appeal. We granted certification of all issues raised in the Court of Appeals, not just the four issues directly addressed in the certification. 13
No.
00-1797
quash the subpoena of Niebler's documents. the documents requested are protected
They maintain that by the lawyer-
either
client privilege or the work product doctrine.
Lane argues the
documents requested from Niebler either do not fall within the protection of the lawyer-client privilege or the work product doctrine, or the documents are exempt from privilege on several theories. A. We address each argument in turn.
Lawyer-Client Privilege ¶21 We first address whether the documents requested from Wisconsin between
Niebler are protected by the lawyer-client privilege. Stat. § 905.03 protects confidential communications
clients and their attorneys.
Section 905.03(1)(d) defines a
"confidential communication" as a communication "not intended to be disclosed to 3rd persons other than those to whom disclosure is in furtherance of the rendition of professional legal
services to the client or those reasonably necessary for the transmission of the communication." Wisconsin Stat. § 905.03(2)
details the scope of the lawyer-client privilege: A client has a privilege to refuse to disclose and to prevent any other person from disclosing confidential communications made for the purpose of facilitating the rendition of professional legal services to the client: between the client or the client's representative and the client's lawyer or the lawyer's representative; or between the client's lawyer and the lawyer's representative; or by the client or the client's lawyer to a lawyer representing another in a matter of common interest; or between representatives of the client or between the client and a representative of the client; or between lawyers representing the client.
14
No.
00-1797
In State ex rel. Dudek v. Circuit Court, 34 Wis. 2d 559, 580, 150 N.W.2d 387 (1967), we addressed the scope of privilege and held that "once the professional relationship is established, all communications, oral and written, between attorney and
client are privileged from production excluding those exceptions outlined in the statute." The privilege belongs to the client
and can only be claimed by the client or the lawyer at the time of the communication, on behalf of the client.
Wis. Stat. § 905.03(3).
The policy underlying this privilege is
to ensure full disclosure by clients who feel safe confiding in their attorney. See Jax v. Jax, 73 Wis. 2d 572, 579, 243
N.W.2d 831 (1976) (citing Jacobi v. Podevels, 23 Wis. 2d 152, 156-157, 127 N.W.2d 73 (1964)); Koeber v. Somers, 108 Wis. 497, 504, 84 N.W. 991 (1901); Dyson v. Hempe, 140 Wis. 2d 792, 813, 413 N.W.2d 379 (Ct. App. 1987). Furthermore, because the
lawyer-client privilege is "'an obstacle to the investigation of the truth' it should be 'strictly confined within the narrowest possible limits consistent with the logic of the principle.'" Jax, 73 Wis. 2d at 579 (quoting Jacobi, 23 Wis. 2d at 157). ¶22 erred Sharp and the the Scarberrys contend by the Lane circuit fall court
because
documents
requested
directly On the
within the protection of the lawyer-client privilege.
other hand, Lane argues the documents fall outside the scope of the privilege of for several was reasons: to (1) waive and Lane, the not as a former (2) the
officer billing
Sharp, are
allowed to
privilege; subject to
records
similar
fees
lawyer-client privilege; (3) communications with third parties 15
No.
00-1797
are not protected; and (4) the crime-fraud exception applies.8 We address each issue separately. 1. Lane's status as former director of Sharp ¶23 and First, we examine whether Lane, as a former officer of Sharp, can is entitled the to documents from Sharp or
director
either
because
he
waive
lawyer-client
privilege,
because as a corporate representative, he was entitled to the privileged communications at the time they were made, and the privilege survives his termination of employment. ¶24 Sharp, the Scarberrys, Niebler, and the Niebler law
firm (hereinafter appellants) argue that the circuit court erred in ordering the discovery of documents from Niebler because
according to the entity rule (the organization, not individual members, is the client), only Sharp can waive the lawyer-client privilege. Appellants urge this court to apply the entity rule
here and find that Lane's status as a former director does not
Lane also argues that the documents are not privileged because the advice Niebler gave to Sharp was business advice rather than legal advice. Sharp and the Scarberrys urge this court to create guidelines and strengthen the presumption in Wisconsin that lawyers are hired for legal advice. We decline to address this issue because the circuit court's decision was not based on whether Niebler provided business or legal advice. In fact, the circuit court did not even address this argument. Because we are reviewing the reasons stated by the circuit court for its decision, we decline appellants' invitation to address this issue simply to strengthen the presumption that lawyers are hired for legal advice. See United States v. Chen, 99 F.3d 1495, 1501 (9th Cir. 1996) (presumption that a lawyer is hired to give legal advice is rebutted only "when the facts show that the lawyer was 'employed without reference to his knowledge and discretion in the law'"). 16
8
No.
00-1797
allow him to waive the lawyer-client privilege, and that the current corporate representatives may effectively assert the
lawyer-client privilege against Lane. ¶25 Appellants first rely on SCR 20:1.13(a), which states:
"A lawyer employed or retained by an organization represents the organization acting through its duly authorized constituents." In Jesse v. Danforth, 169 Wis. 2d 229, 485 N.W.2d 63 (1992), this court discussed the entity rule expressed by SCR 20:1.13, holding that the organization, not the constituent, is the
lawyer's client.
We then applied the entity rule to privileged 20:1.6,9 and held that the corporate
communication under SCR
9
SCR 20:1.6 states in full: Confidentiality of information. (a) A lawyer shall not reveal information relating to representation of a client unless the client consents after consultation, except for disclosures that are impliedly authorized in order to carry out the representation, and except as stated in paragraphs (b), (c) and (d). (b) A lawyer shall reveal such information to the extent the lawyer reasonably believes necessary to prevent the client from committing a criminal or fraudulent act that the lawyer reasonably believes is likely to result in death or substantial bodily harm or in substantial injury to the financial interest or property of another. (c) A lawyer may reveal such information to the extent the lawyer reasonably believes necessary: (1) to rectify the consequences of a client's criminal or fraudulent act in the furtherance of which the lawyer's services had been used; (2) to establish a claim or defense on behalf of the lawyer in a controversy between the lawyer and the client, to establish a defense to a criminal charge or civil claim against the lawyer based upon conduct in which the client was involved, or to respond to allegations in any proceeding concerning the lawyer's representation of the client. 17
No.
00-1797
entity, not the constituent, holds the privilege.
Appellants
contend that under the entity rule, only Sharp, not Lane, can waive the lawyer-client privilege. ¶26 appellants In addition to relying on the entity rule and Jesse, rely on Commodity Futures Trading Commission v.
Weintraub, 471 U.S. 343 (1985), for their position that even as a former director of Sharp, Lane may not waive the lawyer-client privilege and the present directors of Sharp may effectively assert States the privilege Court against him. In Weintraub, the to the United of a
Supreme
addressed has
"whether power
trustee the
corporation
in bankruptcy
the
waive with
debtor to
corporation's
attorney-client
privilege
respect
communications that took place before the filing of the petition in bankruptcy." 471 U.S. at 345. As part of an investigation
of the Chicago Discount Commodity Brokers (CDCB) the Commodity Futures Trading Commission (hereafter the Commission) served a subpoena duces tecum upon CDCB's former counsel, Gary Weintraub. At his deposition, Weintraub refused to answer questions,
asserting the lawyer-client privilege.
The CDCB maintained that
former officers, directors and employees no longer had authority to assert the privilege. through agents, the Recognizing that corporations must act discussed how control of the
Court
(d) This rule does not prohibit a lawyer from revealing the name or identity of a client to comply with ss. 19.43 and 19.44, Stats. 1985-86, the code of ethics for public officials and employees. 18
No.
00-1797
corporation is exercised through management and the effect of new management. 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. Weintraub, 471 U.S. at 349. The Court noted that for solvent
corporations, the corporation's management retains the power to waive the corporate because lawyer-client trustee privilege. the role Id. most at 348.
Therefore,
"the
plays
closely
analogous to that of a solvent corporation's management" the Court held that the trustee retains control of the lawyer-client privilege. Id. at 353. Appellants urge this court to follow
Weintraub and hold that because Lane is "now neither an officer nor a director . . . [he] retains no control over the
corporation's privilege." ¶27 Finally,
Id. at 349 n.5. argue that the standard to
appellants
determine if the lawyer-client privilege applies should be based on why the information is requested, not when the documents are prepared. Neb. 1995), Relying on Milroy v. Hanson, 875 F. Supp. 646 (D. appellants be argue that whether on to the lawyer-client requesting privileged
privilege officer
can or
invoked
depends
whether acquire
the the
director
attempting
documents, is acting in his own capacity or as a representative of the corporation. 19
No.
00-1797
¶28
In Milroy, the United States District Court for the
District of Nebraska, examined whether a director and minority stockholder of a corporation has the right to documents 875 F.
otherwise protected under the lawyer-client privilege. Supp. at 646.
The director brought suit against the corporation
and remaining stockholders and directors seeking money damages and liquidation of the corporation. Id. The court focused on
whether the corporation could assert the lawyer-client privilege and prevent production of documents held by the corporation's accountants and lawyers. Id. at 647. The court examined case
law from other jurisdictions, particularly Kirby v. Kirby, No. Civ. A. 8604, 1987 WL 14862 (Del. Ch. July 29, 1987), and cases relying reasoned on Kirby.10 all In Kirby, are the Delaware Chancery for the Court proper
that
directors
responsible
management of the corporation and concluded that the lawyerclient privilege could not be asserted against a former
director.
1987 WL 14862, at *6.
The Milroy court disagreed
with the Kirby reasoning: With all due respect, cases like Kirby, Harris, and Gottlieb make a fundamental error by assuming that for a corporation there exists a "collective corporate 'client'" which may take a position adverse to "management" for purposes of the attorney-client privilege. There is but one client, and that client is the corporation. This is true despite the fact that a corporation can only act through human beings. . . . A dissident director is by definition
10
Harris v. Wells, Nos. B-89-391 (WWE), B-89-482 (WWE), 1990 U.S. Dist. LEXIS 13215, 1990 WL 150445 (D. Conn. Sept. 5, 1990); Gottlieb v. Wiles, 143 F.R.D. 241 (D. Colo. 1992). 20
No.
00-1797
not "management" and, accordingly, has no authority to pierce or otherwise frustrate the attorney-client privilege when such action conflicts with the will of "management." 875 F. Supp. 646, 649-650 (citations omitted). The court held
that under Nebraska law, the dissident director "has no right to waive or otherwise pierce [the corporation's] attorney-client
privilege because he is not the 'management' of the corporation and 'management' of the corporation, as it has a right to do, asserts the privilege against him." appellants director contend that because Id. at 651. is for a In this case, former the
Lane
dissident
seeking
privileged
documents
personal
gain,
lawyer-client privilege applies, it cannot be waived by Lane, and Sharp may effectively assert the privilege against him. ¶29 are not Lane argues that the documents requested from Niebler privileged because Sharp has not established the
communications were for the purpose of obtaining legal advice. Even if the documents are privileged, however, Lane contends that Sharp cannot withhold privileged documents because he was an officer and director of Sharp during the time the requested communications entity rule were made. solve According this to Lane, because applying he does the not
does
not
issue
dispute that Sharp is the client.
Rather, Lane argues that his
right to the documents is based on his former status as director and a representative of the entity. Lane contends that Milroy
and Weintraub are not on point because Milroy was principally a shareholder derivative suit and unlike here, the plaintiff did not contend he was entitled to corporate documents. According
21
No.
00-1797
to Lane, Weintraub is inapplicable because the case focuses on who has the authority to assert or waive a corporation's lawyerclient privilege, and not whether a former director is entitled to discover documents to which he was entitled during his
employment. ¶30 Instead of Milroy and Weintraub, Lane urges this court
to follow Moore Business Forms, Inc. v. Cordant Holdings Corp., 1996 WL 307444 (Del. Ch. June 4, 1996),11 because the facts are similar. In Moore, the Court of Chancery of Delaware was faced
with a situation where an attorney furnished legal advice about a purchase agreement and discussed strategies with all but one director. 1996 WL 307444, at *2. When the attorney was
subsequently deposed, the corporation asserted the lawyer-client privilege. held that Id. a Relying largely on Delaware case law, the court corporation cannot assert the lawyer-client
We recognize that Lane also cites other cases for his argument that a corporation may not invoke the lawyer-client privilege against a former officer or director of the corporation. See Carnegie Hill Fin., Inc. v. Krieger, No. 99CV-2592, 2000 WL 10446 (E.D. Pa. Jan. 5, 2000); Glidden Co. v. Jandernoa, 173 F.R.D. 459 (W.D. Mich. 1997); In re Hutchins, 211 B.R. 330 (Bankr. E.D. Ark. 1997); Resolution Trust Corp. v. Adams, No. 93-389-CIV-ORL-18, 1994 WL 315646 (M.D. Fla. Apr. 14, 1994); Gottleib v. Wiles, 143 F.R.D. 241 (D. Colo. 1992); AOC Ltd. P'ship v. Horsham Corp., Civ. A. No. 12480, 1992 WL 97220 (Del. Ch. May 5, 1992); Kirby v. Kirby, No. Civ. A. 8604, 1987 WL 14862 (Del. Ch. July 29, 1987). We note, however, that these cases are largely unpublished decisions and are only from Delaware and a few federal district courts. Rather than distinguishing all of these cases, we follow Lane's approach in his brief and address in detail only Moore Business Forms, Inc. v. Cordant Holdings Corp., Nos. 13911 and 14595, 1996 WL 307444 (Del. Ch. June 4, 1996). 22
11
No.
00-1797
privilege to deny a director access to legal advice furnished to the board during the director's tenure. 1996 WL 307444, at *4.
"Because the attorney-client privilege belongs to the client, it would be perverse to allow the privilege to be asserted against the client." Id. at *6 (emphasis in original). The court also
noted that under Delaware law, the corporation had alternative means to enable its directors to receive confidential attorney advice not discoverable by the other director.12 Lane contends that the circuit court did Based on Moore, not erroneously
exercise its discretion and properly held that the information in Niebler's files was not protected by the lawyer-client
privilege. entitled to
Lane urges this court to hold that because he was the communications regarding the shareholder
distribution when he was a director, he is entitled to the same communications in this litigation. ¶31 first In reviewing the circuit the circuit did court's not decision, rule we on note this the
that
court
directly
specific legal
issue. the
The court parties
did not
specifically this
address
issues
raise
before
court
regarding
whether Lane's former status as a director allows him access to Specifically, the court found that the corporation could have bargained for the protection of confidential attorney advice in the Stockholders Agreement or could have acted pursuant to 8 Del.C. § 141(c). Moore, 1996 WL 307444, at *6. Under 8 Del.C. § 141(c), the corporation could appoint a special committee empowered to address the confidential issues. Id. Under either option, the special committee could have retained separate legal counsel and the communications would be properly protected from disclosure under the lawyer-client privilege. Id. 23
12
No.
00-1797
otherwise privileged communications. only comment on this issue was
The circuit court judge's related specifically to
billings,13 but the court's ruling seemed to rely largely on Lane's former status as a director. There were (sic) a linking by contract of these parties during a significant period of time in which the Niebler law firm provided services to the Sharp Corporation. And if, in fact, there were billings that were submitted to the corporation and under Mr. Lane's obligations were reviewed by him but not retrievable by him upon his termination, I think he's entitled to examine them again with the benefit of counsel. ¶32 We conclude that the circuit court's ruling was an The circuit court did not
erroneous exercise of discretion.
directly address whether a former director is allowed to waive the lawyer-client privilege of the corporation, or whether the corporation against a is able to assert for the lawyer-client prepared privilege during the
former
director
documents
director's tenure.
However, we recognize the circuit court had
little guidance because this is an issue of first impression in Wisconsin. ¶33 him to Lane's status as a former director does not entitle access Niebler's files regarding communications with
Whether attorney billings are protected by the lawyerclient privilege is a somewhat different issue and is discussed below in Section 2. 24
13
No.
00-1797
Sharp.
Wisconsin follows the entity rule,14 and accordingly, the
lawyer-client privilege belongs to Sharp——Niebler's client——and only Sharp can waive the lawyer-client privilege. See
Wis. Stat. § 905.03(3); see also Dudek, 34 Wis. 2d at 605 (only the client can waive the lawyer-client privilege); Borgwardt, 196 Wis. 2d at a 355; Swan Sales can Corp., act 126 Wis. 2d at its 31-32.
While
corporate client
only
through
officers,
directors, employees, shareholders and other constituents, see Comment to SCR 20:1.13,15 we logically conclude that a former director cannot act on behalf of the client corporation and
waive the lawyer-client privilege. Even though Jesse v. Danforth, 169 Wis. 2d 229, 242, 485 N.W.2d 63 (1992), originally adopted and applied the entity rule in a conflict of interest case, we find it appropriate to rely on the entity rule here as well. As we recognized in Jesse, "the clear purpose of the entity rule was to enhance the corporate lawyer's ability to represent the best interests of the corporation without automatically having the additional and potentially conflicting burden of representing the corporation's Applying the constituents." Id. at 240 (emphasis added). entity rule here furthers this purpose, because it allows the corporate lawyer to focus on representing only the best interest of the client corporation. The corporation's lawyer does not need to worry about representing the interests of every member (or former member) of the corporation's board of directors. Accordingly, only the client corporation or the corporation's lawyer, acting on the corporation's behalf, can waive the lawyer-client privilege. We disagree with the dissent's interpretation that applying the entity rule makes the lawyer "become the corporation's guardian ad litem." Dissent at ¶85. Rather, we are merely applying the purpose of the entity rule as stated in Danforth. The Comment to SCR 20:1.13 states in part: "An organizational client is a legal entity, but it cannot act except through its officers, directors, employees, shareholders and other constituents." 25
15 14
No.
00-1797
¶34
We
further
conclude
that
even
though
the
documents
were created during Lane's tenure as a director, Lane is not entitled to the documents in Niebler's files. As the United
States Supreme Court stated in Weintraub, "the power to waive the corporate attorney-client management directors." and 471 is privilege normally at rests with by the its
corporation's officers and
exercised The
U.S.
348.
Scarberrys
currently comprise Sharp's board of directors, or management, and retain control over Sharp's lawyer-client privilege. is a former director, in and a "dissident." "A We agree with is Lane the by
court's
reasoning
Milroy:
dissident
director
definition not 'management' and, accordingly, has no authority to pierce or otherwise frustrate the attorney-client privilege when such action conflicts with the will of 'management.'"16 F. Supp. 646, at **13. Accordingly, we conclude that 875 even
though Lane is a former officer and director, and the documents
While we decline appellants' request to ground application of the lawyer-client privilege on why the information is being requested, we find it significant that Lane is acting in his individual capacity and requests the documents for personal gain in his lawsuit against the corporation. Lane's status as former director does not entitle him to pierce the lawyer-client privilege in order to further his personal gain against the corporation. 26
16
No.
00-1797
at issue were prepared during his tenure, Sharp can effectively assert the lawyer-client privilege against him.17
The dissenting opinion ignores the present facts, and instead bases its decision on the fact that Lane, when he was a member of the Sharp board of directors, could have acted on behalf of Sharp and waived the attorney-client privilege. Dissent at ¶80. Specifically, the dissent ignores that Lane, a "dissident," can no longer act on behalf of Sharp; only the current Sharp board of directors can waive the attorney-client privilege. Accordingly, and directly on point, the current board of directors, can, and has chosen to, not waive the attorney-client privilege in respect to the documents requested by Lane. To state this another way, the current board of directors has chosen to effectively assert the attorney-client privilege against Lane. Moreover, as discussed previously, it makes no difference to the attorney-client privilege that the documents Lane requested were prepared during his tenure with Sharp. 27
17
No.
00-1797
¶35
Finally, before addressing other issues involving the
lawyer-client privilege, we note that our holding here is based strictly on the facts as presented. that Lane is a former director. We rely largely on the fact
We specifically do not address,
or speculate, on the outcome of any similar situations involving a current member of a board of directors.18 2. Attorney billing records.
It also makes no difference if we note, as the dissent suggests, that Sharp is a closely held corporation. See dissent at ¶89. The dissent erroneously characterizes this situation as one where the Scarberrys and Lane retained a single attorney and later developed adverse interests. Dissent at ¶94. The dissent therefore concludes, "When the persons who joined together later develop adverse interests, they may not assert the attorneyclient privilege against one another as the basis for withholding legal information developed during their joint undertaking." Id. (footnote omitted). In drawing this conclusion, the dissent ignores, however, several relevant facts. First, at all relevant times the Scarberrys have been the sole shareholders of Sharp. Second, the Scarberrys and Sharp first retained Attorney Niebler in 1985, but Lane did not join Sharp as executive vice president until 1992. Based on these facts, Niebler was involved with the Scarberrys and Sharp nearly seven years before Lane could claim that they "shared a common interest in the success of Sharp Packaging." Dissent at ¶92. We therefore find it wrong to characterize this situation as one where the Scarberrys and Lane, together, retained Niebler in order to pursue a common interest. Accordingly, we conclude that it makes no difference to our decision that Sharp is a closely held corporation. We reiterate that, as the current representatives of Sharp, the Scarberrys have chosen to assert the attorney-client privilege against Lane. Throughout the time period at issue, Lane was an officer and employee of Sharp, never a shareholder. Contrary to the dissent's suggestion that limiting the scope of our opinion to the facts presented "mean[s]" something, dissent at ¶74 n.2, we note that the decision is limited to the facts of this case because we conclude it would be inappropriate to speculate on issues not before this court. 28
18
No.
00-1797
¶36
We next turn to appellants' argument that the circuit
court erred in ordering production of the Niebler firm's billing records because attorney billing records are protected by the lawyer-client privilege. Appellants contend that production of
attorney billing records would reveal the specific nature of legal services provided to Sharp and the Scarberrys, which is confidential privilege. ¶37 Appellants rely on the distinction drawn in In re information protected by the lawyer-client
Grand Jury Subpoena Issued to Horn, 976 F.2d 1314, 1316-1317 (9th Cir. 1992), and Real v. Continental Group, Inc., 116 F.R.D. 211, 213-214 (N.D. Cal. 1986), where the court distinguished billing records from fee arrangements, which are normally not protected. In both cases, the court found billing records
protected by the lawyer-client privilege because production of these records would reveal the nature of legal services
provided.
In re Grand Jury Subpoena, 976 F.2d at 1318; Real, Appellants argue that this case is similar
116 F.R.D. at 214.
because Niebler contends that the billing records at issue are more than just a bill for "services rendered" as they contain narrative descriptions of the legal services provided. Based on
this reasoning, appellants contend the circuit court erroneously exercised its discretion by ordering production of the attorney billing records. ¶38 Lane argues he is entitled to the Niebler law firm
billing records because when he was employed by Sharp, he was entitled to review attorney billing records. 29 In other words,
No.
00-1797
Lane contends that since he was entitled to review the billing records when they were originally sent to Sharp, he is entitled to see them as part of this litigation. ¶39 In ordering production of the Niebler firm's billing "And if, in fact, there were
records, the circuit court stated:
billings that were submitted to the corporation and under Mr. Lane's obligations were reviewed by him but not retrievable by him upon his termination, I think he's entitled to examine them again with the benefit of counsel." We conclude that the
circuit court erroneously exercised its discretion in ordering production of the attorney billing records. failed to examine the nature of the The circuit court communications;
specifically, it failed to note that the billing records reveal the nature of legal services provided We and the that substance this is of an
lawyer-client
communications.
recognize
issue of first impression for this court, and we conclude that the circuit court's ruling was not based on a proper application of the legal principles involved. ¶40 While the lawyer-client privilege readily protects
statements from the client to the lawyer, the privilege only protects communications of the from the lawyer to the client if
"disclosure directly or
lawyer-to-client reveal the
communications of the
would
indirectly
substance
client's
confidential communications to the lawyer."
Journal/Sentinel v.
Sch. Dist. of Shorewood, 186 Wis. 2d 443, 460, 521 N.W.2d 165 (Ct. App. 1994). attorney to the Billing records are communications from the client, and producing 30 these communications
No.
00-1797
violates
the
lawyer-client
privilege
if
production
of
the
documents reveals the substance of lawyer-client communications. See Dyson, 140 Wis. 2d at 815 (answer may not be compelled to inquiries that threaten to reveal the substance of lawyer-client communications). ¶41 According to Niebler's affidavit, which is
uncontested,19 the attorney billing records disputed here contain detailed rendered would,
19
descriptions to Sharp.
of
the
nature the
of
the
legal billing
services records
Producing reveal the
attorney
therefore,
substance
of
lawyer-client
We find it significant that Lane does not contest Niebler's affidavit regarding the contents of the billing records sent from Niebler's law firm to Sharp. In his brief at pages 41-42, Lane states: [It] is undisputed that [Lane] was entitled to review Niebler's legal bills while plaintiff was employed by Sharp. Sharp argued below that plaintiff "must have known" about Niebler's services because plaintiff was in charge of Sharp's accounting operations, and Niebler's monthly bills were sent to and reviewed by Sharp's corporate controller, who reported to [Lane]. . . . Especially since Sharp affirmatively contends [Lane] either did review or could have reviewed Niebler's bills while plaintiff was employed by Sharp, the trial court properly ruled that Sharp may not assert privilege against plaintiff to deny him discovery of billing records in this litigation. (emphasis added). Faced with the opportunity, Lane does not dispute, but actually relies on Sharp's argument that Lane either did review, or could have reviewed, Niebler's bills sent to Sharp. The record, therefore, reflects that Lane could have contested, with his own affidavit, Niebler's representation that the attorney billing records contain detailed descriptions of the nature of legal services, and, therefore, production would violate the lawyer-client privilege. 31
No.
00-1797
communications
between
Sharp
and
Niebler.
Accordingly,
we
conclude that the attorney billing records are protected by the lawyer-client privilege. Again, we note that our holding is We
limited by the particular facts presented before this court. decline to establish a broad rule that all attorney
billing Rather,
records are protected by the lawyer-client privilege. we focus only on the billing records in this case.
We do not
determine that all other attorney billing records or invoices are privileged, nor do we address whether the circuit court
should conduct an in camera review in cases where the parties dispute whether billing records reveal the substance of lawyerclient communications. 3. Communications with Third Parties ¶42 Sharp and the Scarberrys next argue that the circuit
court erred in ordering production of documents from Niebler involving communications with third parties. Sharp and the
Scarberrys contend that the circuit court's ruling sacrifices confidentiality for efficiency, and that Lane has made no
showing that he was unable to obtain these documents from third parties. ¶43 Lane argues that the circuit court's decision was
within the court's discretion, because Niebler's correspondence with third parties is relevant and not within the scope of the lawyer-client privilege. Lane argues that Sharp, the party
alleging privilege, bears the burden of showing good cause as to why the requested Lane documents it is 32 should not be that produced. he obtains
Furthermore,
contends
imperative
No.
00-1797
discovery from all involved parties, in order to compare notes and piece together circumstantial evidence of fraud. ¶44 During the oral decision denying Sharp's and the
Scarberry's motion to quash, the circuit court judge stated, There is an offer here that this kind of information may be available from third parties, but there's also documentation by way of the excerpts from depositions here that that was denied the plaintiff in the normal course of those depositions. And that being the case, it may be that there are other sources of this same information, but it occurs to this Court that the most efficient way of obtaining them is through the Niebler law firm file. Furthermore, in the written order, the circuit court required production of all "non-privileged documents, including documents reflecting the Niebler firm's communications with third parties" for the time period Lane requested. ¶45 We conclude that the circuit court did not erroneously The circuit court judge
exercise its discretion on this issue.
carefully examined the situation and, significantly, found that there was evidence in the that plaintiff course was of denied the requested More
information
normal
depositions.
importantly, however, is the fact that the circuit court ordered production of only non-privileged documents. Accordingly,
documents protected by the lawyer-client privilege, or the work product doctrine, were not part of the circuit court's order regarding this issue. court's decision does We, therefore, conclude that the circuit not reflect an erroneous the exercise of
discretion,
because
the
court
examined
relevant
facts,
applied the proper standard of law, and reached a reasonable 33
No.
00-1797
conclusion based on a demonstrative rational process. K.B., 226 Wis. 2d at 233. 4. Crime-Fraud Exception ¶46
See Paige
Appellants' final argument regarding the lawyer-client
privilege is that the circuit court erred by concluding that the crime-fraud exception in Wis. Stat. § 905.03(4)(a)20 applies,
because Lane failed to make out a prima facie case of fraud, and the circuit court failed to conduct an in camera review prior to reaching exception. case, and the conclusion as to the applicability of the
We first address whether Lane made out a prima facie then turn to whether the circuit court erred by
failing to conduct an in camera review. ¶47 Relying on Dyson v. Hempe, first complaint 140 Wis. 2d 792, that 413
N.W.2d 379 allegations
(1987), of fraud
appellants in the
argue are
Lane's to
insufficient
establish a prima facie case. illegality will not, however,
"The mere charge of fraud or 'set the confidences free.'"
Dyson, 140 Wis. 2d at 804 (quoting Clark v. United States, 289 U.S. 1, 15 (1933)). The test for invoking the crime-fraud
exception is whether there is "reasonable cause to believe that the attorney's services were utilized in furtherance of the
ongoing unlawful scheme." 1503 (9th
20
United States v. Chen, 99 F.3d 1495, (citations omitted). According to
Cir.
1996)
Wisconsin Stat. § 905.03(4)(a) provides that there is no privilege "If the services of the lawyer were sought or obtained to enable or aid anyone to commit or plan to commit what the client knew or reasonably should have known to be a crime or fraud." 34
No.
00-1797
appellants, Lane has failed to meet this threshold requirement, because he has failed to provide any evidentiary facts
supporting his position that services of the Niebler law firm were utilized in furtherance of fraud.21 Finally, appellants
contend that Lane has alleged only a breach of contract case, not actionable fraud. ¶48 Lane contends that the circuit court did not
erroneously exercise its discretion in determining that a prima facie case of fraud was made. sufficiently properly alleges According to Lane, the complaint transfer, evidence the of circuit fraud, and court the
fraudulent substantial
considered
record also establishes prima facie evidence that the intent of the distribution was to hinder Lane's rights as an equity
holder. that the
Among other things, Lane bases his argument on the fact $3.8 million distribution was not legal, because
neither Sharp's by-laws nor the Wisconsin Statutes grant the
Niebler and the Niebler law firm additionally contend that this case addresses an "inherent conflict" between Wis. Stat. § 905.03(2) and (4) and SCR 20:1.2 and SCR 20:1.6. They argue that these statutes and Supreme Court Rules create a conflict between an attorney's obligation to comply with court orders, and the Supreme Court rules requiring attorneys to "abide by a client's decisions concerning the objectives of representation." SCR 20:1.2(a). According to Niebler, because Sharp, the Scarberrys and Niebler deny participation in any fraudulent activity, Niebler faces an inherent conflict and must choose between violating his obligation to his client, and being found in contempt for refusing to comply with the circuit court's discovery order. We decline to address Niebler's "inherent conflict" argument, because we do not uphold the circuit court's application of the crime-fraud exception to the lawyer-client privilege. 35
21
No.
00-1797
right to receive shareholder dividends without a declaration by the board of directors. Based on the Stock Transfer Restriction
Agreement, the only alteration to the requirement of a board of directors' declaration is that which allows for distribution of dividends to pay income taxes, but nothing more. Lane contends
that the board meeting requirement was an express requirement intended to protect his 25% interest in Sharp. Lane further
argues that this is not merely a breach of contract case, and that he has established a claim for fraudulent conveyance under Wis. Stat. § 242.01(4). Furthermore, the fact that Lane's
status as a creditor derives from a contract, is immaterial. See, e.g., Marshall & Ilsley Bank v. Stepke, 228 Wis. 39, 279 N.W.2d 625 (1938) (recognizing mortgagee as creditor under
fraudulent conveyance statute). record contains ample evidence
Finally, Lane argues that the of Niebler's involvement in
furthering the fraudulent scheme to distribute the profits only to the Scarberrys. According to Lane, Niebler encouraged the
distribution to occur before Lane exercised his stock options, and, acting on the behalf M&I of Sharp, Co. Niebler loan applied to for and the
negotiated
Mortgage
finance
distribution.
Examined together, Lane argues that the complaint
and the record provide more than adequate evidence to satisfy his burden of making a prima facie case of fraud. ¶49 In finding that Lane had established a prima facie
case of fraud, the circuit court relied on the allegations in the complaint and the limited evidence in the record. The
circuit court judge stated: 36
No.
00-1797
I'm satisfied that there is based on the Court's previous review of the Complaint, as well as the other limited information presented here, that there is a prima facie case. . . . [T]he combination of the relationship that existed between the immediate parties already named in this case and that prima facie showing and the circumstances, the allegation of breach and of that agreement going on, not just immediately prior to the termination but perhaps for a time pre-dating that, a time in which the Niebler law firm was supposedly only providing . . . limited services pertaining to the industrial bond issue, that the totality of all those matters I believe allow the attorney-client privilege to be dissipated under the parameters that the Court has outlined here. ¶50 We conclude that the circuit court did not erroneously
exercise its discretion in finding that Lane established a prima facie case of fraud. While we recognize that the mere
allegation of fraud is insufficient, we note that the burden is low in that "[t]o give drive the privilege to the away, there must be 140
'something
to
colour
charge.'"
Dyson,
Wis. 2d 792, 804 (quoting Clark v. United States, 289 U.S. 1, 15 (1933)); see also, United States v. Zolin, 491 U.S. 554, 571 (1989) ("[A] lesser evidentiary showing is needed to trigger in camera review than is required ultimately to overcome the
privilege.")
In order to establish a prima facie case, Lane
must only show "reasonable cause to believe [Niebler's] services were utilized in furtherance of the ongoing unlawful scheme." Chen, 99 F.3d at 1503. "Reasonable cause is more than suspicion Id.
but less than a preponderance of evidence." ¶51
Under this standard, Lane needs only submit evidence
that, if believed, would establish an "ongoing unlawful scheme."
37
No.
00-1797
Id.
We conclude that the complaint, combined with evidence in
the record (deposition testimony and affidavits)——demonstrating, among other things, Niebler's involvement with the distribution, and the lack to of approval a by prima the board case of of directors——are fraud. The
sufficient
establish
facie
circuit court's conclusion, therefore, will be upheld, because it is consistent with the facts in the record and established legal principles. ¶52 court We next address appellants' argument that the circuit in failing to conduct an in camera review to
erred
determine whether the crime-fraud exception applies.
Sharp and
the Scarberrys argue that even if the circuit court correctly concluded that Lane established a prima facie case of fraud, the court erred by failing to conduct an in camera review of the disputed documents. According to Sharp and the Scarberrys, an
in camera review is the proper procedure to determine whether the crime-fraud on and exception applies because it is a smaller public decision
intrusion disclosure,
lawyer-client ensures that
confidentiality the circuit
than
court's
regarding the crime-fraud exception is an informed one. ¶53 because Lane the contends of an an in in camera camera review review is is unnecessary, to resolve
purpose
privilege disputes.
Lane again asks this court to adopt a rule
that Sharp cannot assert the lawyer-client privilege against a former director, making Lane entitled to discover all documents requested. Accordingly, an in camera review to determine
38
No.
00-1797
whether specific documents are privileged would be unnecessary, because Lane would be entitled to discover all such documents. ¶54 Lane also contends that Sharp and the Scarberrys have
waived their right to an in camera review by simply asserting a blanket claim of privilege (both attorney-client privilege and work product). Lane relies on Holifield v. United States, 909
F.2d 201, 204 (7th Cir. 1990), where the Seventh Circuit Court of Appeals refused to address the merits of the alleged lawyerclient privilege because Holifield failed to properly raise the issue. The court held that "brief conclusory summations" as to
why documents are protected were insufficient to support a claim of the lawyer-client in Holifield privilege. is Id. We here conclude for two that the
holding
inapplicable
reasons.
First, Sharp and the Scarberrys have submitted more than "brief conclusory summations" as to why the lawyer-client privilege and the work product doctrine apply. While we might have preferred
that they submit a privilege log, asserting the privilege on a document-by-document basis, we do not find that failure to do so in this case warrants denying Sharp and the Scarberrys an in camera review. By asserting that the circuit court erred in
this case, Sharp and the Scarberrys are basically disputing all of the documents that would fall within the discovery order. Based on this conclusion, we do not find unreasonable Sharp and the Scarberry's choice to appeal the circuit court's entire
decision. the
Second, contrary to Lane's assertion that Sharp and have made no good-faith effort to produce
Scarberrys
documents, after reviewing the record, we conclude that Sharp 39
No.
00-1797
and
the
Scarberrys
have
produced
numerous
documents
in
this
case.
Accordingly, we conclude that this is not a situation
where Sharp and the Scarberrys are shirking their responsibility to provide discovery by making "blanket allegations" of
privilege.
We, therefore, reject Lane's argument that Sharp and
the Scarberrys have waived their right to an in camera review. ¶55 Regarding the merits of the circuit court's decision
not to conduct an in camera review, we conclude that the circuit court erroneously exercised its discretion. The circuit court
simply determined that a prima facie case of the crime-fraud exception documents applied. had to been established, if the and did not examine any
determine must do
crime-fraud Borgwardt,
exception 196
actually 357
"It
so."
Wis. 2d at
(remanding for in camera review).
As discussed previously, the Once the circuit
burden to establish a prima facie case is low.
court determines the prima facie case has been established, an in camera review is the proper procedure to determine if the crime-fraud See George exception to v. Record the lawyer-client 169 privilege applies. 582, 485
Custodian,
Wis. 2d 573,
N.W.2d 460 (Ct. App. 1992) (instructing trial court to conduct in camera inspection to determine if lawyer-client privilege
applies). "smaller
An in camera review is appropriate, because it is a intrusion upon the confidentiality of the attorney-
client relationship than is public disclosure." at 572. ¶56
Zolin, 491 U.S.
While the decision to conduct an in camera review is a decision, we conclude 40 that, in this case, the
discretionary
No.
00-1797
circuit court erroneously exercised its discretion.
In United
States v. Zolin, 491 U.S. 554, 572 (1989), the United States Supreme Court discussed factors a trial court should consider in deciding whether to conduct an in camera review. The court should make that decision in light of the facts and circumstances of the particular case, including, among other things, the volume of materials the district court has been asked to review, the relative importance to the case of the alleged privileged information, and the likelihood that the evidence produced through in camera review, together with other available evidence then before the court, will establish that the crime-fraud exception does apply. Here, the circuit court did not consider any of these factors in deciding it would not conduct an in camera review. Rather, the
circuit court simply used the prima facie case to "allow the attorney-client review is privilege in to be dissipated." Only court by able An in camera the
appropriate at issue is
this
case.
reviewing to
documents
the
circuit
determine
whether Niebler's legal services were rendered in furtherance of fraud. conduct Upon remand, therefore, we instruct the circuit court to an in camera review of the disputed documents to
determine the applicability of the crime-fraud exception to the lawyer-client privilege.22 B. Work Product Doctrine
22
In determining that the crime-fraud exception is applicable, it is not intended that the circuit court invade the province of the jury to determine the claim of fraudulent transfer. Rather, the circuit court is only to make an evidentiary ruling that documents cannot be withheld from production based on the lawyer-client privilege. 41
No.
00-1797
¶57 the
In addition to the lawyer-client privilege, Sharp and contend that documents Lane requested from
Scarberrys
Niebler are protected by the work product doctrine. argue that the circuit court erroneously
Appellants its
exercised
discretion by concluding that, prior to May 31, 1999, litigation was not imminent, and documents prepared during that time are not protected by the work product doctrine. that Lane had standing to sue Sharp since Appellants contend the date he was
informed of his termination, March 2, 1999, and that litigation was anticipated as early as 1998. Based on these circumstances,
appellants argue that documents prepared or obtained as early as 1998 are protected by the work product doctrine. ¶58 Niebler and his law firm further contend that Lane has
not satisfied the burden to overcome the protection of the work product doctrine. Specifically, State Niebler ex rel. argues Dudek that v. under Circuit
Wis. Stat. § 804.01(2)(c),23
23
Wisconsin Stat. § 804.01(2)(c) provides:
(2) Scope of Discovery. Unless otherwise limited by order of the court in accordance with the provisions of this chapter, the scope of discovery is as follows: ... 42
No.
00-1797
Court, 34 Wis. 2d 559, 585, 150 N.W.2d 387 (1967), and Hickman v. Taylor, 329 U.S. 495, 511-512 (1947), Lane has failed to meet his burden of showing that production of the documents is
necessary to the preparation of his case, or that nonproduction would cause prejudice or hardship. ¶59 Lane argues that the circuit court's decision was not
an erroneous exercise of discretion, because litigation was not imminent until Lane's employment was officially terminated on May 31, 1999. Lane further argues that appellants bear the
burden of proving the documents were made in anticipation of litigation, and Niebler's conclusory affidavit is insufficient to meet that burden. ¶60 under We again review the circuit court's discovery order erroneous 196 exercise 350. of discretion In deciding standard. that See
the
Borgwardt,
Wis. 2d at
documents
prepared prior to May 31, 1999, are not protected by the work product doctrine, the circuit court judge stated: (c) Trial preparation: materials. 1. Subject to par. (d) a party may obtain discovery of documents and tangible things otherwise discoverable under par. (a) and prepared in anticipation of litigation or for trial by or for another party or by or for that other party's representative (including an attorney, consultant, surety, indemnitor, insurer, or agent) only upon a showing that the party seeking discovery has substantial need of the materials in the preparation of the case and that the party seeking discovery is unable without undue hardship to obtain the substantial equivalent of the materials by other means. In ordering discovery of such materials when the required showing has been made, the court shall protect against disclosure of the mental impressions, conclusions, opinions, or legal theories of an attorney or other representative of a party concerning the litigation. 43
No.
00-1797
. . . I certainly can accept at face value, Mr. Niebler's representation and by way of affidavit that whenever work is done, certainly the potential for litigation exists. Where [sic] in a litigious society in dealing with corporate entities certainly the possibility of litigation is always there, but the key is, the fact that when it is imminent, and I think under the circumstances here that test is not met until after the actual termination of Mr. Lane occurred and went into full force and effect. And he in effect had standing to bring a lawsuit such as we have here before the Court today. ¶61 The work product doctrine was adopted in Wisconsin in Unlike the is a
Dudek, and codified by Wis. Stat. § 804.01(2)(c).24 lawyer-client "qualified privilege, the work product 196
doctrine
privilege."
Borgwardt,
Wis. 2d at
353-354
(quoting United States v. Nobles, 422 U.S. 225, 237-238 (1975)). The work product doctrine only "gives way 'upon a showing that the party seeking discovery has substantial need of the
materials in the preparation of the case and that the party seeking discovery is unable without undue hardship to obtain the substantial equivalent of the materials by other means.'" Id.
at 354 (quoting Wis. Stat. § 804.01(2)(c)1.); see also Dudek, 34 Wis. 2d at 591 ("[T]he work product of the lawyer usually is privileged and not subject to discovery except where the
objectives of pretrial
24
discovery are
unnecessarily
frustrated
The work product doctrine announced in State ex rel. Dudek v. Circuit Court, 34 Wis. 2d 559, 150 N.W.2d 387 (1967), is unaffected, however, by the enactment of Wis. Stat. § 804.01. Meunier v. Ogurek, 140 Wis. 2d 782, 789, 412 N.W.2d 155 (Ct. App. 1987) (citing Judicial Council Committee's Note, 1974, 67 Wis. 2d at 659).
44
No.
00-1797
and where good cause is shown to make exception to the rule."). Furthermore, doctrine, commenced. in order to to be be covered by the but work not product already
litigation
has
anticipated,
Borgwardt, 196 Wis. 2d at 354.
"[T]he test should
be whether, in light of the nature of the document and the factual situation in the particular case, the document can
fairly be said to have been prepared or obtained because of the prospect of litigation." Id. (quoting 8 C.A. Wright, A.R.
Miller, & R.L. Marcus, Federal Practice and Procedure:
Civil 2d
§ 2024 at 343 (1994) (interpreting Fed. R. Civ. P. 26(b)(3), the federal analogue to Wis. Stat. § 804.01(2)(c))); see also
Meunier v. Ogurek, 140 Wis. 2d 782, 788, 412 N.W.2d 155 (Ct. App. 1987) (interpreting Wis. Stat. § 804.01(2)(c)1 the procedural by using
federal
decisions
construing
counterpart).
Finally, in Dudek, this court laid out what is necessary to overcome the protection of the work product doctrine. [O]nce a matter is classified as work product the court will require the party moving for discovery to make an adequate showing that the information contained in the work product is unavailable from other sources and that a denial of discovery would prejudice the movant's preparation for trial. What showing of unavailability or prejudice the court will require depends upon the particular facts and issues of the case, as well as what is deemed to be [the] basis for classifying the particular item as work product. Dudek, 34 Wis. 2d at 591. ¶62 We conclude that the circuit court erroneously
exercised its discretion by simply concluding that all documents prepared or obtained prior to May 31, 1999, are not covered by 45
No.
00-1797
the work product doctrine.
It is not apparent that the circuit We recognize
court applied the test from Dudek and Borgwardt.
that application of the work product doctrine is "a question of fairness tempered by the basic concepts of our adversary system and the desirable aspects of pretrial discovery." Wis. 2d at 592. Dudek, 34
However, the circuit court's decision does not
reflect a finding that Lane made a showing of substantial need for the documents, there is no determination that the documents were prepared or obtained because of the "prospect of
litigation," and although the circuit court's decision includes discussion about other sources of the information, the circuit court concluded, "the most efficient way of obtaining them is through the Niebler law firm." Because the circuit court failed
to apply the correct legal standard, and did not examine the documents to determine whether the work product doctrine
applies, we conclude that the circuit court's decision was an erroneous circuit conduct exercise of discretion. the On remand, we direct the
court to an in
apply
Dudek and of the
Borgwardt
standard and As
camera
review
disputed
documents.
discussed previously with regard to applicability of crime-fraud exception to the lawyer-client privilege, an in camera review is the proper procedure for See determining Borgwardt, whether the claimed 357-358
privilege
applies.
196
Wis. 2d at
(citing United States v. Zolin, 491 U.S. at 568-569). C. Attorneys' Fees and Costs ¶63 We now turn to Sharp's and Scarberry's final argument
that the circuit court's award of costs, including attorneys' 46
No.
00-1797
fees
was
an
erroneous
exercise On a June
of 5,
discretion 2000, order the and
and
violated heard the
Wis. Stat. § 804.12.25 defendant's motion for
court to
protective
quash
subpoena concerning the Niebler firm's files, and defendant's motion for a protective order and to quash the subpoena
regarding the scope of Lane's discovery of Scarberry's personal financial records from M&I Bank. motions. of costs, The circuit court denied both
Pursuant to § 804.12, Lane filed a motion for an award including attorneys' fees in connection with both
motions.
The circuit court denied Lane's attorneys' fees motion
regarding the Niebler firm's files, but granted Lane's motion for attorneys' fees regarding the personal financial records. In an oral ruling (as noted earlier), the circuit court judge stated: The last matter I still want to get to is the plaintiff's request for costs pertaining to this motion. The court will request a submission of what those costs are. But as far as the issue of the production of financial records, I am going to grant that request. As far as the matter of attorney-client privilege which I think presents a more difficult legal issue, I'll deny that. My inclination simply is to cut it strictly in half and not require that you say how much I did on this part of the motion or that on the other, but I would award 50 percent of costs pertaining to all of the matters brought before the Court here today.
Wisconsin Statute § 804.12(1)(c)3. provides: "If the motion is granted in part and denied in part, the court may apportion the reasonable expenses incurred in relation to the motion among the parties and persons in a just manner." 47
25
No.
00-1797
¶64 erred by
Sharp and the Scarberrys argue that the circuit court simply that the cutting circuit the attorneys' fees in half. arbitrary They and
contend
court's
decision
was
unreasonable in violation of Wis. Stat. § 804.12. ¶65 Lane contends the circuit court's decision was well The two motions were briefed and argued
within its discretion.
simultaneously, and it would have been difficult to segregate the time spent on each individual motion. Lane, therefore,
argues that it was logical for the court to simply split the attorneys' fees in half because it was a method of avoiding prolonged allocation arguments. ¶66 We review the circuit court's award of attorneys' fees Hughes v. N.W.2d 148
under the erroneous exercise of discretion standard. Chrysler (1996). Motors Corp., 197 Wis. 2d 973, 987, 542
We conclude that the circuit court did not erroneously
exercise its discretion by awarding half of the costs, including attorneys' fees, pertaining to both motions. The circuit court
reviewed the circumstances and determined the proper solution was to avoid any prolonged argument regarding costs and fees, and divide the costs and fees in half. conclude that the circuit court's Based on the record, we of costs, including
award
attorneys' fees, was reasonable and not an erroneous exercise of discretion. III. CONCLUSION ¶67 discovery standard. In summary, under we have reviewed the circuit of court's
orders
the
erroneous
exercise
discretion
We first examined the circuit court's conclusion that 48
No.
00-1797
documents
requested
from
Niebler
and
his
law
firm
are
not
protected under the lawyer-client privilege.
First, based on
the entity rule and the reasoning in Milroy, we concluded that Lane's status as a former director does not allow him to waive the lawyer-client board of privilege, directors him. nor from does it preclude the Sharp's
current
asserting we
lawyer-client that of because legal by the
privilege Niebler services
against firm's
Second, records billing
concluded the are
billing the
reveal records
nature
provided,
protected
lawyer-client privilege.
Third, we concluded that the circuit
court did not erroneously exercise its discretion in ordering production of non-privileged documents reflecting communications with third parties. Finally, we addressed the circuit court's
application of the crime-fraud exception to the lawyer-client privilege. We concluded that while the circuit court did not
err in finding that Lane established a prima facie case, the circuit court's failure to conduct an in camera review was an erroneous exercise of discretion. Accordingly, on remand, we
instruct the circuit court to conduct an in camera review of the disputed documents and determine whether the crime-fraud
exception is applicable. ¶68 In addition to lawyer-client privilege issues, we
examined the circuit court's order regarding the application of the work product doctrine. We concluded that the circuit The
court's decision was an erroneous exercise of discretion.
circuit court failed to apply the correct test from Dudek and Borgwardt to determine whether 49 Lane made a showing of
No.
00-1797
substantial
need
for
the
documents,
and
that
he
is
unable,
without undue hardship, to obtain the materials by other means. Furthermore, the circuit review and determine court did the not conduct were an in camera or
whether
documents
prepared
obtained because of the prospect of litigation.
Accordingly, on
remand, we instruct the circuit court to apply the Dudek and Borgwardt standard and conduct an in camera review of the
disputed documents. ¶69 Finally, we reviewed the circuit court's award of
costs, including attorneys' fees. court's award of half the costs
We concluded that the circuit was reasonable and not an
erroneous exercise of discretion. By the Court.—The order of the circuit court is reversed and the cause is remanded.
50
No. 00-1797.ssa
¶70
SHIRLEY
S.
ABRAHAMSON,
CHIEF
JUSTICE
(dissenting).
This case involves the questions of who is the client and who speaks for the client when a corporation claims an attorneyclient privilege. More specifically, the question presented in
this case is whether Lane, a former director in a closely held corporation, may have access to documents created during his tenure as a director of the corporation when the corporation's current board of directors asserts the corporation's attorneyclient privilege to those documents. The majority opinion
concludes that the current directors decide whether to waive the attorney-client privilege. I conclude that the corporation does
not have an attorney-client privilege in the present case. ¶71 Sharp Packaging is a closely held corporation composed Pursuant to an powers and
of two shareholders, Mr. and Mrs. Scarberry. employment agreement, Lane was given
extensive
interests in the corporation.
Although not a shareholder of the
corporation, Lane was entitled to notice of shareholder meetings and to be present at those meetings. and stock appreciation rights. discharge any professional who He was given stock options
He had the power to veto or was not performing to his
satisfaction. Niebler's
He exercised that power to terminate Attorney as Sharp Packaging's request, Sharp corporate Attorney with counsel. Niebler legal
employment at the
Nevertheless, apparently advice.
Scarberrys' to provide
continued
Packaging
Attorney Niebler also continued to bill Sharp Packaging At least some of Attorney Niebler's advice to
for his services.
1
No. 00-1797.ssa
the
corporation
was
kept
secret
from
Lane
while
Lane
was
a
director of the corporation. ¶72 opinion The guiding principle in this case, which the majority explicitly recognizes at ¶21, is that the attorney-
client privilege can be an obstacle to the investigation of the truth and should be strictly with confined the within of to the the narrowest principle. to this
possible
limits
consistent the majority
logic fails
Unfortunately, principle.
opinion
adhere
Instead, the majority opinion permits the current
board of directors to use the attorney-client privilege to block a former director from inspecting documents to which the former director had access during his tenure and that might contain evidence of wrongdoing. ¶73 I agree the with bulk much of of the majority does opinion. not support But the
unfortunately
the
opinion
ultimate conclusion the majority reaches. ¶74 For example, I agree with the majority opinion that if
a corporation's attorney-client privilege is to be waived, only the current corporate directors, not past corporate directors, have the power to waive that privilege.26 I also agree with the
majority opinion that under the entity rule, the attorney-client privilege belongs to the corporation, and only the corporation can waive the privilege.27
26
The corporate entity must, of course, Futures Trading
Majority op. at ¶¶33-34; Commodities Comm'n v. Weintraub, 471 U.S. 343, 349 (1985).
27
Majority op. at ¶33; Jesse v. Danforth, 169 Wis. 2d 229, 239-41, 485 N.W.2d 63 (1992). Jesse is not on point and the majority's reliance on it is misplaced. 2
No. 00-1797.ssa
act through a person or persons to carry out its many functions, including waiving or asserting the attorney-client privilege. ¶75 But these conclusions, embodied in the majority Lane
opinion, are not helpful in resolving the present case. does not seek The to waive the corporation's is not who
attorney-client can waive the
privilege.
issue
presented
privilege, but whether the current directors, the Scarberrys, can claim an attorney-client privilege against Lane, a former director. ¶76 Does a corporation have an attorney-client privilege
that it may assert against a former director as to corporate records majority developed opinion during does the former director's tenure? It The merely
not
answer
this
question.
states that the current directors determine whether an attorneyclient privilege can be waived.28 ¶77 entitled Wisconsin corporate law makes clear that directors are to receive communications from the corporation's
The majority opinion expressly declines to address the question of whether a current member of a board of directors in a situation similar to the one presented here can acquire legal advice secretly provided to the corporation. Majority op. at ¶35. What does this mean when the majority opinion explicitly states, without qualification, that a dissident director has no authority to frustrate the attorney-client privilege, majority op. at ¶34, citing Milroy v. Hanson, 875 F. Supp. 646, 649 (D. Neb. 1995), in which a current director was denied access to legal documents? I agree with Gottlieb v. Wiles, 143 F.R.D. 241, 247 (D. Colo. 1992): "The fact that former officers and directors lack the power to waive the corporate privilege does not resolve the question of whether they themselves are precluded by the attorney-client privilege or work product doctrine from inspecting documents generated during their tenure. There is a surprising dearth of authority on this subject." 3
28
No. 00-1797.ssa
lawyer.
Wisconsin law requires corporations to have a board of Wis. Stat. § 180.0801(1) (1999-2000). All corporate
directors.
powers shall be exercised by or under the authority of, and the business and affairs of the corporation managed under the
direction of, the board of directors, § 180.0801(2). meetings must be held and all directors must be
Directors' given an A
opportunity to participate in the meetings, § 180.0820-0824.
board of directors may authorize committees, which in turn may exercise the authority of the board, including the employment of counsel, § 180.0825(1). The creation of a committee does not
relieve the board of directors or any of its members of any responsibilities imposed on the members or the
board, § 180.0825(7).
The board of directors is entitled to
rely on information prepared by legal counsel, § 180.0826(2). Thus, Wisconsin corporate law recognizes that the board of
directors is entitled to legal information. ¶78 Most important for the present case, the board of
directors has the authority to determine whether and in what amount to declare shareholder dividends, § 180.0640(1). Yet the
distribution to the shareholders in the present case was made without a prior meeting of the board of directors, without
notice to director Lane, without Lane's knowledge, and with the advice of counsel paid with corporate funds. basis for this lawsuit. ¶79 was I conclude that under Wisconsin corporate law, Lane to have to access to legal advice that Attorney tenure as And therein lies a
entitled
Niebler
rendered
the
corporation
during
Lane's
director, especially with respect to the $3.8 million dividend 4
No. 00-1797.ssa
that is at issue in the present case.
Indeed, the very reason
Lane was a member of the board of directors was to protect his interest in the corporation by assuring that no shareholder
distributions would be made without his knowledge and consent. ¶80 When I apply the entity theory to this case, I reach a Applying the entity theory
different result from the majority.
and Chapter 180 of the Wisconsin Statutes governing business corporations to the present case means that the client is the corporate people; entity; the corporate are the entity can act only that through has the
the
directors
collective
body
responsibility to manage the corporation; and consistent with their joint obligations, the directors are the joint clients when legal advice is given to the corporation through one of its officers or directors.29 Lane was part of the collective body
and was, therefore, entitled to have access to the legal advice Sharp Packaging received during Lane's tenure on the board. An own
This legal information cannot be privileged against Lane. attorney client. may not withhold legal advice from his or her
The majority opinion's position holds otherwise and
allows the corporate entity of Sharp Packaging to assert the client's privilege against Lane, who was a member of the board and who was therefore also the client——a result that one court labeled "perverse."30
Kirby v. Kirby, No. Civ. A. 8604, 1987 WL 14862, at *7 (Del. Ch. July 29, 1987). Glidden Co. v. Jandernoa, 173 F.R.D. 459, 474 (W.D. Mich. 1997); Moore Bus. Forms, Inc. v. Cordant Holdings Corp., Nos. 13911 and 14595, 1996 WL 307444, at *6 (Del. Ch. June 4, 1996). 5
30
29
No. 00-1797.ssa
¶81
Wisconsin
courts
often
look
to
Delaware
law
for
guidance on matters of corporate law.31
I reach the same result
on the issue presented as that reached by the Delaware chancery courts. ¶82 For example, in Moore Bus. Forms, Inc. v. Cordant
Holdings Corp., Nos. 13911 and 14595, 1996 WL 307444, at *4 (Del. Ch. June 4, 1996), a Delaware case, the court addressed the precise issue presented in this case. former director of a corporation communications the former who Moore involved a sought the information corporation on the
regarding and its
confidential attorney
between director's
during
tenure
board.
The other directors had received legal advice regarding
a repurchase of the former director's stock; the former director had been excluded from secret meetings held by the other
directors.
Moore reasoned that the former director would have
been entitled to examine the documents while he was a member of the board. Thus, Moore held that a corporation cannot assert
attorney-client privilege in order to deny a director access to legal advice furnished to the board during the director's tenure
See, e.g., HMO-W Inc. v. SSM Health Care Sys., 2000 WI 46, ¶¶29-31, 38, 234 Wis. 2d 707, 611 N.W.2d 250 (following Delaware law in rejecting application of minority discount in determining "fair value" in dissenters' rights proceeding); Jacobson v. American Tool Companies, 222 Wis. 2d 384, 397, 588 N.W.2d 67 (Ct. App. 1998) (looking to Delaware law to define fiduciary duties); Advance Concrete Form, Inc. v. Accuform, Inc., 158 Wis. 2d 334, 344, 462 N.W.2d 271 (Ct. App. 1990) (citing Delaware cases to determine whether request to inspect corporate documents was for a "proper purpose"); Schweiner v. Hartford Accident & Indem. Co., 120 Wis. 2d 344, 351, 354 N.W.2d 767 (Ct. App. 1984) (citing Delaware law for effect of statutory merger on liabilities of merger corporation). 6
31
No. 00-1797.ssa
without alerting the former director that certain communications would be concealed from that director during the director's
tenure. ¶83 The Moore court is joined by numerous courts that have
considered this issue.32 ¶84 Moore is persuasive because, unlike the authorities
relied upon by the majority opinion, Moore directly addresses the question in the present case: Can Lane have access to
documents created during Lane's former tenure as a corporate director and that are now claimed by the remaining directors (the Scarberrys) to be subject to the corporation's attorneyclient privilege? information that Like Moore, Lane was excluded from privileged was provided secretly to the corporation's
other directors against Lane's interest during Lane's tenure as a corporate director. Lane had no reason to expect he would be
denied full access during his tenure as a director to legal advice provided to the corporation.
See, e.g., Carnegie Hill Fin., Inc. v. Krieger, No. 99CV-2592, 2000 WL 10446, at *2 (E.D. Pa. Jan. 5, 2000) (former directors entitled to discover corporation's attorney-client privileged documents that they could have seen prior to their resignations); Glidden Co. v. Jandernoa, 173 F.R.D. 459, 473 (W.D. Mich. 1997) (directors have a right to access attorney communications of the company relating to the time that they served as directors); Resolution Trust Corp. v. Adams, No. 93389-CIV-ORL-18, 1994 WL 315646, at *1 (M.D. Fla. Apr. 14, 1994) (rejecting any privilege asserted to any privileged documents that former corporate director previously had a right to possess or control); Gottlieb v. Wiles, 143 F.R.D. 241, 247 (D. Colo. 1992) (corporation may not assert attorney-client privilege against former director); Kirby v. Kirby, No. Civ. A. 8604, 1987 WL 14862, at *7 (Del. Ch. July 29, 1987) (attorney-client privilege may not be invoked against those persons who were directors at the time the requested documents were prepared). 7
32
No. 00-1797.ssa
¶85
The entity theory, according to the majority opinion,
allows "the corporate lawyer to focus on representing only the best interest of the client corporation." n.14. become Majority op. at ¶33
This language makes it sound as if corporate counsel has the corporation's lawyer must guardian speak of for the ad litem and that the best of
corporation's interest,
the wishes
corporation's of the
perhaps
regardless
board
directors or shareholders.
The Wisconsin Rules of Professional See SCR 20:1.13(a)
Conduct for Attorneys adopt an entity view. and (b). ¶86
The comments to the Rules of Professional Conduct for
Attorneys nevertheless recognize that the entity is made up of individuals individuals. and that an attorney has obligations to the
The comments caution that when an organization's
interest might presently be or might later become adverse to the interest of one or more constituents of the organization,
whether the organization be a partnership or a corporation, a lawyer must advise the constituent that the lawyer has a
potential conflict of interest, that the lawyer cannot represent that person, and that the person may wish to obtain independent representation. (A constituent of a corporation is, for
example, a shareholder or director.)
The Rules of Professional
Conduct for Attorneys also recognize, however, that a lawyer representing an organization may, under certain circumstances, also represent any of its partners, directors, or shareholders
8
No. 00-1797.ssa
individually, subject to the general conflict of interest rule set forth in SCR 20:1.7.33 ¶87 Just what is the best interest of the corporate
entity, Sharp Packaging, in the present case?
Why is permitting
the Scarberrys or Sharp Packaging to assert the corporation's alleged attorney-client privilege against Lane in the best
interest of the corporation?
Is it in the corporation's best
interest to incur debt and deplete corporate assets by a $3.8 million distribution to the shareholders? The majority opinion
implies that Lane is not acting in the best interest of the corporation. Lane is The majority opinion "finds it significant that in his individual capacity and requests the
acting
documents for personal gain against the corporation." op. at ¶34 n.16. However, the majority opinion
Majority does not
consider whether the Scarberrys might also be acting in their individual capacity for their personal gain in denying Lane
access to the corporation's legal documents.
For a discussion of the entity approach and issues of professional ethics faced by lawyers who represent partnerships and small business corporations, see, for example, Susanna M. Kim, Dual Identities and Dueling Obligations: Preserving Independence in Corporate Representation, 68 Tenn. L. Rev. 179 (2001); Paul J. Sigwarth, It's My Privilege and I'll Assert It If I Want To: The Attorney-Client Privilege in Closely-Held Corporations, 23 J. Corp. L. 345 (1998); Bryan J. Pechersky, Representing General Partnerships and Close Corporations: A Situational Analysis of Professional Responsibility, 73 Tex. L. Rev. 919 (1995); Nancy J. Moore, Expanding Duties of Attorneys to "Non-Clients": Reconceptualizing the Attorney-Client Relationship in Entity Representation and Other Inherently Ambiguous Situations, 45 S.C. L. Rev. 659 (1994); Lawrence E. Mitchell, Professional Responsibility and the Close Corporation: Toward a Realistic Ethic, 74 Cornell L. Rev. 466 (1989). 9
33
No. 00-1797.ssa
¶88
Raising these issues reminds us that the entity theory
is a legal fiction and that this legal fiction may not be a valuable analytical tool in cases involving a closely held
corporation.
As one commentator stated, "although the entity
fiction makes sense in the context of a large, publicly held corporation, the distinction between the entity and its
constituents begins to blur in the context of a small general partnership or close corporation."34 ¶89 I have thus far responded to the majority opinion
using its entity theory. at this case: the
I now present another way of looking held corporation approach. In a
closely
closely held corporation, the line between the entity and the individuals blurred.35 who The own most or control the or entity perhaps often sole becomes relevant
significant
interests in a closely held corporation might be those of the constituents, that is, the shareholders and the directors. closely held corporation may be a separate legal entity A for
purposes of its relation with outsiders, but with respect to its constituents (that is, intra-entity relations), the fictional
"entity" may have little, if any, import.
The court should look
at the practical realities of the closely held corporation in
Bryan J. Pechersky, Representing General Partnerships and Close Corporations: A Situational Analysis of Professional Responsibility, 73 Tex. L. Rev. 919, 930 (1995). Susanna M. Kim, Dual Identities and Dueling Obligations: Preserving Independence in Corporate Representation, 68 Tenn. L. Rev. 179, 192 (2001). 10
35
34
No. 00-1797.ssa
determining
attorney-client
questions
in
the
particular
situation before the court.36 ¶90 closely The Scarberrys (sole shareholders), Sharp Packaging (a held corporation), and Lane embarked on a joint
undertaking to manage and operate Sharp Packaging and to give Lane an ownership interest in Sharp Packaging. As early as
1991-1992, the Scarberrys and Sharp Packaging used Lane as a consultant. That relationship grew and Lane became executive
vice president for sales and marketing for Sharp Packaging. ¶91 and Lane In the fall of 1994, the Scarberrys, Sharp Packaging, jointly retained Attorney Paul Meissner to prepare
agreements to formalize the terms of Lane's employment with and equity interest in Sharp Packaging. The Scarberrys
individually, Sharp Packaging, and Lane each signed a March 1995 agreement, making the Scarberrys and Lane collectively
responsible for the proper management of Sharp Packaging and enabling Packaging. ¶92 By their agreement, the Scarberrys (the shareholders), Lane to acquire an ownership interest in Sharp
Sharp Packaging (the corporation), and Lane (a director) shared a common interest in the success of Sharp Packaging. Also by
their agreement, Lane was given powers as a director of Sharp Packaging to protect his ownership and management interests in the joint undertaking with the Scarberrys and Sharp Packaging
36
"No application of the attorney-client privilege can be made without concrete reference to the specific issues and the particular set of facts of the case in which the privilege is sought to be invoked." State ex rel. Dudek v. Circuit Court, 34 Wis. 2d 559, 582, 150 N.W.2d 387 (1967). 11
No. 00-1797.ssa
and to protect against acts by the Scarberrys or Sharp Packaging that would be adverse to his interests in the joint undertaking. The Scarberrys and Lane clearly shared a common interest in and with Sharp Packaging. ¶93 Attorney Niebler and members of his law firm handled a
wide variety of legal matters for Sharp Packaging and also for the Scarberrys individually during this joint undertaking.37
Because of these dealings and relationships, a fact-finder could conclude that the Scarberrys, Sharp Packaging, and Lane could each assume that when Attorney Niebler represented and billed Sharp Packaging, he was or should have been undertaking an
attorney-client relationship with each of them.38 joint undertaking, the Scarberrys and Lane
During their adverse
developed
interests.
And thus, this lawsuit.
Attorney Niebler's affidavit states his relationship with the Scarberrys, Sharp Packaging, and Lane as follows: Attorney Niebler has represented both the Scarberrys and Sharp Packaging since 1984. Attorney Niebler represented the Scarberrys and Sharp Packaging in their 1991 dealings with Lane. Sometime in 1992 Attorney Niebler became cognizant that litigation might develop between the Scarberrys, Sharp Packaging, and Lane. Since 1992 Attorney Niebler and his law firm have continued to handle a wide variety of legal matters for the Scarberrys individually and Sharp Packaging. The existence of an attorney-client relationship depends on the facts and circumstances of each case. See Note, An Expectations Approach to Client Identity, 106 Harv. L. Rev. 687 (1993) (advocating the "reasonable constituent expectation approach"). 12
38
37
No. 00-1797.ssa
¶94
The situation in the present case is, as a Colorado
federal district court stated, analogous to a situation in which persons with a common interest retain a single attorney. Here,
the Scarberrys, Sharp Packaging, and Lane had a common interest. They were in a joint undertaking involving the management and ownership of Sharp Packaging. Sharp Packaging was one with and When Attorney the
the same as the persons in the joint undertaking. Niebler represented Sharp Packaging, he was
representing
joint undertaking and each member thereof.
When the persons who
joined together later develop adverse interests, they may not assert the attorney-client privilege against one another as the basis for withholding legal information developed during their joint undertaking.39 ¶95 In summary, using either the entity theory or the
closely held corporation approach, I would uphold the circuit court's discretionary rulings allowing discovery. Sharp
Packaging's attorney-client privilege for legal advice that was developed for Sharp Packaging while Lane was a member of the board of directors and also while Lane was a member of the joint undertaking with Sharp Packaging and the Scarberrys cannot be asserted against either Lane or the Scarberrys. ¶96 For the reasons set forth, I dissent.
Gottlieb v. Wiles, 143 F.R.D. 241, 247 (D. Colo. 1992). Cf. McCormick on Evidence § 91 at 365-66 (5th ed. 1999) (when parties with a common interest retain a single attorney to represent them, but later become adverse parties, thereafter neither party is permitted to assert the attorney-client privilege as to the communications that occurred during the period of common interest). 13
39
No. 00-1797.ssa
¶97
I
am
authorized
to
state
that
Justices
WILLIAM
A.
BABLITCH and ANN WALSH BRADLEY join this opinion.
14
No. 00-1797.ssa
1
