Law Firm Files

Receivers are often tasked with “finding the money” the corporate entity allegedly took from others. See SEC V. Shiv, 379 F. Supp. 2d 604, 618 (S.D.N.Y. 2005); S.E.C. v. American Bd. of Trade, Inc., 645 F.Supp. 1047. 1052 (S.D.N.Y. 1986). In carrying out his mission, therefore, a receiver may find the files of a law firm that represented the corporation in prior deals or transactions a useful avenue to follow.

Depending on the parameters of a court's appointment, the receiver generally stands in the shoes of the client; he is entitled to the same documents in the law firm's files to which the client would have been entitled had it requested such documents. See Commodity Futures Trading Com'n v. Weintraub 471 U.S 343 (1985). A typical court appointment might, among other things, grant the receiver the power to “take and retain immediate possession and control of ' all books, records, and documents” of the corporation under investigation, “and the rights and powers of it with respect thereto.” S.E.C. v. Byers, et al., Order Appointing Temporary Receiver, Civ – 08- 7104 (S.D.N.Y. Aug. 11, 2008). To that end, legal research and memoranda, contracts, due diligence reports, and correspondence all are documents that the client ' and hence the receiver ' would be entitled to receive and, should he choose to do so, make public. But what about draft memoranda, internal e-mails, case opening and billing files?

Defining the Client File

A minority of states, including Wisconsin and North Carolina, consider only the final product of a document part of a client file. See In re ANR Advance Transp. Co., Inc., 302 B.R. 607 (E.D.Wis. 2003); N. Carolina State Bar Revised Rules of Prof'l Conduct, Rule 1.16, Comment 10 (2006). Drafts and notes leading to final versions of pleadings, contracts, memoranda and other documents prepared for the client's representation are not considered part of the client file. Neither a client nor a receiver would be entitled to such documents.

The majority of states, however, such as Arkansas, Georgia, Iowa, New Hampshire, New York and Texas, consider any documents drafted in the process of reaching an “end product” part of a client's file. A client, or a receiver, would accordingly be entitled to them. See, e.g., Matter of Sage Realty Corp. v Proskauer Rose Goetz & Mendelsohn, 91 N.Y.2d 30, 666 N.Y.S.2d 985 (1997).

Even in the majority states, however, internal communications may be protected and not subject to disclosure to the client or receiver. In Sage Realty, New York recognized this limited exception to an attorney's obligation to turn over the entirety of communications related to a client. The N.Y. Court of Appeals found that, to the extent that such communications were purely internal and pertained to issues such as the allocation of legal work among firm attorneys or initial impressions of the issues presented by the representation, the internal communications were not part of the client's file. Similarly, earlier this year a Delaware bankruptcy court held that attorneys “are not required to turn over: 1) any documents which violate a duty of nondisclosure owed to a third party or otherwise imposed by law; or 2) firm documents intended for internal law office review and use.” In re Touch America Holdings, Inc., Slip Copy, 2009 WL 1393078, *2 (Bkrtcy.D.Del. May 14, 2009). See also Iowa Supreme Court Attorney Disciplinary Bd. v. Gottschalk, 729 N.W.2d 812 (Iowa 2007).

Arguably, internal communications could also include notes reflecting initial impressions of clients, ethical issues raised by the representation, and whether particular attorneys in the firm are qualified to handle a certain matter. Courts have recognized that there are a variety of reasons why an attorney should enjoy some measure of confidentiality in the course of representing a client. For example, such documents, if kept confidential, give attorneys freedom in their initial assessments of facts and clients, help attorneys in their decisions about how to staff or manage a case, and are of limited value to the client or succeeding counsel. In re Touch America Holdings, Inc. at *2.

The Restatement (Third) Law Governing Lawyers (2000) also provides a useful framework for analyzing whether a given document is an “internal communication.” The Restatement says, “a lawyer may refuse to disclose to the client certain law-firm documents reasonably intended only for internal review, such as a memorandum discussing which lawyers in the firm should be assigned to a case, whether a lawyer must withdraw because of the client's misconduct, or the firm's possible malpractice liability to the client. The need for lawyers to be able to set down their thoughts privately in order to assure effective and appropriate representation warrants keeping such documents secret from the client involved.” ' 46, comment c.

Billing discussions present another series of considerations in determining whether documents are subject to being turned over to a receiver. Any conversations that the client-corporation had with the firm regarding billing should naturally be turned over to a receiver, as it is a communication to which the client was a party. Intra-firm discussions regarding whether to write off certain charges or whether to move specific expenses to non-client accounts could all be internal communications to which the client, and hence the receiver, would generally not be privy.

Attorney-Client Privilege Issues

When the management of a corporation changes from one group or person to another, the power to waive that corporation's attorney-client privilege also changes. Commodity Futures Trading Com'n v. Weintraub, 471 U.S. 343 (1985). A court-appointed receiver charged with the management of a corporation under investigation comes within the circle of attorney-client privilege, is privy to the corporation's confidences to the same extent as the previous managers of that corporation, and has the power to waive the privilege.

But what happens when the law firm represented both the corporate entity and one of its officers? Is the receiver entitled to all documents? What about documents from the corporate e-mail system wherein the officer is seeking legal advice for himself and the corporate entity? If a receiver does receive such material, is she prevented by the officer's personal privilege from disclosing it further? A recent case highlights such questions.

In a stock options backdating investigation, the California law firm Irell & Manella LLP (“Irell”) was found to have “jettisoned” the interests of an individual client for the interests of a client corporation. U.S. v. Nicholas, 606 F.Supp.2d 1109 (C.D.Cal. 2009). In the case, Irell represented both a corporation and its chief financial officer in his personal capacity. The firm, nevertheless, gave information provided by the officer, who believed that information to be privileged, to outside auditors retained by the corporate client and to government investigators. Ultimately, a district judge in California found that the firm had turned over the CFO's privileged information without its client's consent. No law firm wants to find itself in that position. Therefore, if a receiver has been put in the shoes of your corporate client in a dual representation, you must take all reasonable steps to preserve the individual client's privilege.

Conclusion

Some factors to consider in deciding which party holds the privilege for a particular set of documents or communications are whether it was the corporation or the individual who was billed for the attorney time spent preparing or reviewing those documents, whether electronic correspondence came from the individual's work or personal account, whether anyone else in the corporation was copied on the communication, and whether the corporate entity required its officers to sign agreements that by using the company's e-mail system they were acknowledging that any e-mails generated belonged to the company and entitled it to do with them as it pleased. All these factors must be evaluated together to determine whether a document which appears to be in the corporate client's files can be provided to the receiver without breaching privilege in the absence of an agreement to preserve a joint privilege with the officer.

Jacqueline C. Wolff ([email protected]), a member of this newsletter's Board of Editors, is a former federal prosecutor and of counsel to Covington & Burling LLP in New York City. Natasha M. Korgaonkar is an associate at the firm.

Lawyers assume that their files will remain confidential within the firm's office unless a client is so unhappy as to change counsel or sue for malpractice. Early drafts of documents and internal e-mails will be safe from publication. If a third party adverse to the client seeks files from the client's counsel, the client's assertions of privilege and work product will prevail.

But what if this third party suddenly “stood in the shoes” of the client? This is essentially what happens when, in conjunction with an SEC investigation, a court-appointed receiver “standing in the shoes” of the corporate client asks for the lawyer's files. This article addresses what lawyers can do when they find themselves faced with a request for their files from receivers ostensibly standing in the shoes of their former clients but who, in fact, are working hand in hand with the SEC investigating the former client.

Is the Receiver Entitled to Everything?

Receivers are often tasked with “finding the money” the corporate entity allegedly took from others. See SEC V. Shiv , 379 F. Supp. 2d 604, 618 (S.D.N.Y. 2005); S.E.C. v. American Bd. of Trade, Inc. , 645 F.Supp. 1047. 1052 (S.D.N.Y. 1986). In carrying out his mission, therefore, a receiver may find the files of a law firm that represented the corporation in prior deals or transactions a useful avenue to follow.

Depending on the parameters of a court's appointment, the receiver generally stands in the shoes of the client; he is entitled to the same documents in the law firm's files to which the client would have been entitled had it requested such documents. See Commodity Futures Trading Com ' n v. Weintraub 471 U.S 343 (1985). A typical court appointment might, among other things, grant the receiver the power to “take and retain immediate possession and control of ' all books, records, and documents” of the corporation under investigation, “and the rights and powers of it with respect thereto.” S.E.C. v. Byers, et al., Order Appointing Temporary Receiver, Civ – 08- 7104 (S.D.N.Y. Aug. 11, 2008). To that end, legal research and memoranda, contracts, due diligence reports, and correspondence all are documents that the client ' and hence the receiver ' would be entitled to receive and, should he choose to do so, make public. But what about draft memoranda, internal e-mails, case opening and billing files?

Defining the Client File

A minority of states, including Wisconsin and North Carolina, consider only the final product of a document part of a client file. See In re ANR Advance Transp. Co., Inc., 302 B.R. 607 (E.D.Wis. 2003); N. Carolina State Bar Revised Rules of Prof'l Conduct, Rule 1.16, Comment 10 (2006). Drafts and notes leading to final versions of pleadings, contracts, memoranda and other documents prepared for the client's representation are not considered part of the client file. Neither a client nor a receiver would be entitled to such documents.

The majority of states, however, such as Arkansas, Georgia, Iowa, New Hampshire, New York and Texas, consider any documents drafted in the process of reaching an “end product” part of a client's file. A client, or a receiver, would accordingly be entitled to them. See, e.g., Matter of Sage Realty Corp. v Proskauer Rose Goetz & Mendelsohn, 91 N.Y.2d 30, 666 N.Y.S.2d 985 (1997).

Even in the majority states, however, internal communications may be protected and not subject to disclosure to the client or receiver. In Sage Realty, New York recognized this limited exception to an attorney's obligation to turn over the entirety of communications related to a client. The N.Y. Court of Appeals found that, to the extent that such communications were purely internal and pertained to issues such as the allocation of legal work among firm attorneys or initial impressions of the issues presented by the representation, the internal communications were not part of the client's file. Similarly, earlier this year a Delaware bankruptcy court held that attorneys “are not required to turn over: 1) any documents which violate a duty of nondisclosure owed to a third party or otherwise imposed by law; or 2) firm documents intended for internal law office review and use.” In re Touch America Holdings, Inc., Slip Copy, 2009 WL 1393078, *2 (Bkrtcy.D.Del. May 14, 2009). See also Iowa Supreme Court Attorney Disciplinary Bd. v. Gottschalk , 729 N.W.2d 812 (Iowa 2007).

Arguably, internal communications could also include notes reflecting initial impressions of clients, ethical issues raised by the representation, and whether particular attorneys in the firm are qualified to handle a certain matter. Courts have recognized that there are a variety of reasons why an attorney should enjoy some measure of confidentiality in the course of representing a client. For example, such documents, if kept confidential, give attorneys freedom in their initial assessments of facts and clients, help attorneys in their decisions about how to staff or manage a case, and are of limited value to the client or succeeding counsel. In re Touch America Holdings, Inc. at *2.

The Restatement (Third) Law Governing Lawyers (2000) also provides a useful framework for analyzing whether a given document is an “internal communication.” The Restatement says, “a lawyer may refuse to disclose to the client certain law-firm documents reasonably intended only for internal review, such as a memorandum discussing which lawyers in the firm should be assigned to a case, whether a lawyer must withdraw because of the client's misconduct, or the firm's possible malpractice liability to the client. The need for lawyers to be able to set down their thoughts privately in order to assure effective and appropriate representation warrants keeping such documents secret from the client involved.” ' 46, comment c.

Billing discussions present another series of considerations in determining whether documents are subject to being turned over to a receiver. Any conversations that the client-corporation had with the firm regarding billing should naturally be turned over to a receiver, as it is a communication to which the client was a party. Intra-firm discussions regarding whether to write off certain charges or whether to move specific expenses to non-client accounts could all be internal communications to which the client, and hence the receiver, would generally not be privy.

Attorney-Client Privilege Issues

When the management of a corporation changes from one group or person to another, the power to waive that corporation's attorney-client privilege also changes. Commodity Futures Trading Com ' n v. Weintraub , 471 U.S. 343 (1985). A court-appointed receiver charged with the management of a corporation under investigation comes within the circle of attorney-client privilege, is privy to the corporation's confidences to the same extent as the previous managers of that corporation, and has the power to waive the privilege.

But what happens when the law firm represented both the corporate entity and one of its officers? Is the receiver entitled to all documents? What about documents from the corporate e-mail system wherein the officer is seeking legal advice for himself and the corporate entity? If a receiver does receive such material, is she prevented by the officer's personal privilege from disclosing it further? A recent case highlights such questions.

In a stock options backdating investigation, the California law firm Irell & Manella LLP (“Irell”) was found to have “jettisoned” the interests of an individual client for the interests of a client corporation. U.S. v. Nicholas , 606 F.Supp.2d 1109 (C.D.Cal. 2009). In the case, Irell represented both a corporation and its chief financial officer in his personal capacity. The firm, nevertheless, gave information provided by the officer, who believed that information to be privileged, to outside auditors retained by the corporate client and to government investigators. Ultimately, a district judge in California found that the firm had turned over the CFO's privileged information without its client's consent. No law firm wants to find itself in that position. Therefore, if a receiver has been put in the shoes of your corporate client in a dual representation, you must take all reasonable steps to preserve the individual client's privilege.

Conclusion

Some factors to consider in deciding which party holds the privilege for a particular set of documents or communications are whether it was the corporation or the individual who was billed for the attorney time spent preparing or reviewing those documents, whether electronic correspondence came from the individual's work or personal account, whether anyone else in the corporation was copied on the communication, and whether the corporate entity required its officers to sign agreements that by using the company's e-mail system they were acknowledging that any e-mails generated belonged to the company and entitled it to do with them as it pleased. All these factors must be evaluated together to determine whether a document which appears to be in the corporate client's files can be provided to the receiver without breaching privilege in the absence of an agreement to preserve a joint privilege with the officer.

Jacqueline C. Wolff ([email protected]), a member of this newsletter's Board of Editors, is a former federal prosecutor and of counsel to Covington & Burling LLP in New York City. Natasha M. Korgaonkar is an associate at the firm.