A recent decision by Nassau County Commercial Division Justice Stephen A. Bucaria in Vecchio v. Post Road Entertainment, LLC, Short Form Order, Index No. 187/08 (Sup Ct Nassau County May 1, 2012), draws attention to an issue that regularly arises in litigation among co-owners of closely held companies: Does attorney-client privilege protect from disclosure to the non-controlling owner the activities, work product and communications of the company counsel?
It’s a complex and nuanced issue, the outcome of which in any given case will depend on the specific factual circumstances. In some cases, the issue may arise as to outside company counsel who was involved in relevant events both before and after the dispute arose, and who represents the company under the direction of the controlling owners in the litigation against the non-controlling owner. The analysis under those circumstances may differ from a situation “merely” involving requested discovery of the company’s outside corporate counsel who is not involved in the litigation.
Vecchio involves the latter situation. In 2004, the plaintiff, Michael Vecchio, and the three individual defendants formed a New York limited liability company called Post Road Entertainment, LLC for the purpose of operating bars and restaurants. Vecchio allegedly provided $850,000 financing, and two of the defendants operated the business. The members also entered into a buy-sell agreement including a right of first refusal and a redemption of membership interest for $1.5 million upon death, funded by a company-owned life insurance policy.
In late 2006, the defendant members allegedly dissolved the LLC voluntarily without Vecchio’s consent. In 2008, Vecchio sued the other members for an accounting and return of his investment, and for breach of the operating agreement and fiduciary duty.
Vecchio died while the litigation was still pending in early 2010. By order dated August 11, 2011, Justice Bucaria permitted Vecchio’s litigation counsel, who also was Vecchio’s executor, to substitute as plaintiff in the action. In the same order, Justice Bucaria denied the defendants’ motion to disqualify the executor’s law firm from serving as litigation counsel based on supposed conflict of interest and the advocate-witness rule.
In January 2012, the executor served a subpoena on the corporate lawyer who represented the LLC and drafted its operating agreement. The subpoena sought testimony and production of all financial records concerning business dealings between Vecchio and the defendants.
The defendants moved to quash the subpoena based upon the LLC’s assertion of attorney-client privilege. Defendants contended that because they hold a majority interest in the LLC, they control the LLC’s assertion of privilege. The executor countered with his own motion to compel disclosure by the company’s attorney, arguing that it was needed because he handled the LLC’s voluntary dissolution allegedly done without Vecchio’s consent in violation of the operating agreement. The executor also argued that any privilege asserted could be overcome by the “fiduciary exception.”
Justice Bucaria’s legal analysis reviews the applicable New York Rules of Professional Conduct, starting with Rule 1.13(a) which requires a lawyer who is retained by an organization, where it appears that the organization’s interests may differ from those of its constituent owners with whom the lawyer is dealing, to explain that the lawyer is the lawyer for the organization and not for any of the constituents. Justice Bucaria also cites Rule 1.13(b) which requires the organization’s lawyer to proceed in the organization’s best interests when the lawyer knows that someone associated with the organization is violating a duty owed to the organization. Rule 1.13(b) also requires that any measure taken by the lawyer be designed to minimize disruption of the organization and the risk of revealing information relating to the representation to persons outside the organization.
Applying these rules in Vecchio, Justice Bucaria concludes that the executor is entitled to take discovery from the company lawyer concerning the voluntary dissolution and its aftermath. Justice Bucaria explains that, because the subpoenaed lawyer’s client was the LLC, his “duty of confidentiality runs to the limited liability company rather than to its individual members.” Because Vecchio was an “insider” with respect to the LLC, Justice Bucaria continues, disclosure to him would not violate the lawyer’s duty under Rule 1.13(b) “to minimize the risk of disclosure to outsiders.”
The decision also takes guidance from Tekni-Plex, Inc. v. Meyner & Landis, 89 NY2d 123 (1996), in which New York’s highest court ruled that the surviving corporation in a merger could not assert attorney-client privilege to preclude the law firm that represented the non-surviving corporation from revealing information about the merger to that corporation’s original sole shareholder. “In similar fashion,” Justice Bucaria writes, “a dissolved limited liability company cannot assert the attorney-client privilege to prevent its attorney from revealing information about the dissolution to one of the members.”
In the real world, the lines between the interests of a closely held business entity and its individual owners can get very blurry. The company lawyer’s duties of loyalty, care and confidentiality can become fraught with uncertainty and peril when dealing with a schism between co-owners. Vecchio stands as a reminder that one ownership faction may not be able to use its control power to the non-controlling faction’s disadvantage when it comes to accessing relevant information held by the company lawyer.