Court Opinion

ID: 9671543
Source: CourtListenerOpinion
Date Created: 2023-08-24 03:38:50.135275+00
Date Added: 2024-06-11T18:16:10.633420
License: Public Domain

SHIRLEY S. ABRAHAMSON, CHIEF JUSTICE
¶ 70. (dissenting). This case involves the questions of
who is the client and who speaks for the client when a corporation claims an attorney-client 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 attorney-client 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 of two shareholders, Mr. and Mrs. Scar-berry. Pursuant to an employment agreement, Lane was given extensive powers and interests in the corporation. Although not a shareholder of the corporation, *123Lane was entitled to notice of shareholder meetings and to be present at those meetings. He was given stock options and stock appreciation rights. He had the power to veto or discharge any professional who was not performing to his satisfaction. He exercised that power to terminate Attorney Niebler's employment as Sharp Packaging's corporate counsel. Nevertheless, at the Scarberrys' request, Attorney Niebler apparently continued to provide Sharp Packaging with legal advice. Attorney Niebler also continued to bill Sharp Packaging for his services. At least some of Attorney Niebler's advice to the corporation was kept secret from Lane while Lane was a director of the corporation.
¶ 72. The guiding principle in this case, which the majority opinion explicitly recognizes at ¶ 21, is that the attorney-client privilege can be an obstacle to the investigation of the truth and should be strictly confined within the narrowest possible limits consistent with the logic of the principle. Unfortunately, the majority opinion fails to adhere to this principle. 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 with much of the majority opinion. But unfortunately the bulk of the opinion does not support the 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 *124privilege.1 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.2 The corporate entity must, of course, 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 opinion, are not helpful in resolving the present case. Lane does not seek to waive the corporation's attorney-client privilege. The issue presented is not who can waive the 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 developed during the former director's tenure? The majority opinion does not answer *125this question. It merely states that the current directors determine whether an attorney-client privilege can be waived.3
¶ 77. Wisconsin corporate law makes clear that directors are entitled to receive communications from the corporation's lawyer. Wisconsin law requires corporations to have a board of directors. Wis. Stat. § 180.0801(1) (1999-2000). All corporate 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). Directors' meetings must be held and all directors must be given an opportunity to participate in the meetings, § 180.0820-0824. A 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 *126dividends, § 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. And therein lies a basis for this lawsuit.
¶ 79. I conclude that under Wisconsin corporate law, Lane was entitled to have access to legal advice that Attorney Niebler rendered to the corporation during Lane's tenure as director, especially with respect to the $3.8 million dividend 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 different result from the majority. Applying the entity theory and Chapter 180 of the Wisconsin Statutes governing business corporations to the present case means that the client is the corporate entity; the corporate entity can act only through people; the directors are the collective body that has the 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.4 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. This legal information cannot be privileged against Lane. An attorney may not withhold legal advice from his or her own client. The majority *127opinion'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."5
¶ 81. Wisconsin courts often look to Delaware law for guidance on matters of corporate law.6 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. Moore involved a former director of a corporation who sought information regarding confidential communications between the corporation and its attorney during the former director's tenure on the board. The other directors had received legal advice regarding a repurchase of the former director's stock; the former *128director 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 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.7
¶ 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 attorney-client privilege? *129Like Moore, Lane was excluded from privileged information that 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.
¶ 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." Majority op. at ¶ 33 n.14. This language makes it sound as if corporate counsel has become the corporation's guardian ad litem and that the corporation's lawyer must speak for the corporation's best interest, perhaps regardless of the wishes of the board of directors or shareholders. The Wisconsin Rules of Professional Conduct for Attorneys adopt an entity view. See SCR 20:1.13(a) and (b).
¶ 86. The comments to the Rules of Professional Conduct for Attorneys nevertheless recognize that the entity is made up of individuals and that an attorney has obligations to the individuals. 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 *130individually, subject to the general conflict of interest rule set forth in SCR 20:1.7.8
¶ 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. The majority opinion "finds it significant that Lane is acting in his individual capacity and requests the documents for personal gain against the corporation." Majority op. at ¶ 34 n.16. However, the majority opinion 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.
*131¶ 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."9
¶ 89. I have thus far responded to the majority opinion using its entity theory. I now present another way of looking at this case: the closely held corporation approach. In a closely held corporation, the line between the entity and the individuals who own or control the entity often becomes blurred.10 The most significant or perhaps sole relevant interests in a closely held corporation might be those of the constituents, that is, the shareholders and the directors. A closely held corporation may be a separate legal entity 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 determining attorney-client questions in the particular situation before the court.11
*132¶ 90. The Scarberrys (sole shareholders), Sharp Packaging (a closely 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. In the fall of 1994, the Scarberrys, Sharp Packaging, and Lane 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 Lane to acquire an ownership interest in Sharp Packaging.
¶ 92. By their agreement, the Scarberrys (the shareholders), 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 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.
*133¶ 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.12 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.13 During their joint undertaking, the Scarber-rys and Lane developed adverse interests. And thus, this lawsuit.
¶ 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 *134ownership of Sharp Packaging. Sharp Packaging was one with and the same as the persons in the joint undertaking. When Attorney Niebler represented Sharp Packaging, he was representing the 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.14
¶ 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.
¶ 97. I am authorized to state that Justices WILLIAM A. BABLITCH and ANN WALSH BRADLEY join this opinion.

 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.
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."

 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).

 See, e.g., HMO-W Inc. v. SSM Health Care Sys., 2000 WI 46, ¶¶ 29-31, 38, 234 Wis. 2d 707, 611 N.W2d 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).

 See, e.g., Carnegie Hill Fin., Inc. v. Krieger, No. 99-CV-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. 93-389-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).

 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).

 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).

 "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 *132to be invoked." State ex rel. Dudek v. Circuit Court, 34 Wis. 2d 559, 582, 150 N.W.2d 387 (1967).

 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").

 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).