Judge Peter Wilson, Case 2021-01191735 2023-08-10 Tentative Ruling

Judge: Peter Wilson, Case: 2021-01191735, Date: 2023-08-10 Tentative Ruling

Defendant/Cross-Defendant/Cross-Complainant Crate Modular, Inc. (Crate) seeks a protective order and to claw back an undetermined amount of confidential and privileged attorney files over which Defendant GrowthPoint Global Inc. (GrowthPoint) has control, and an order granting $29,750 in monetary sanctions for the reasonable attorney fees and costs incurred in connection with this Motion. Crate also seeks an order requiring GrowthPoint to return all privileged documents and verify they have no copies, and return all documents disclosed or disseminated either in filings or otherwise.

For the reasons set forth below, the Motion is DENIED.

Crate contends that it is the holder of the privilege with regard to documents from the law firm Jeffer Mangels Butler & Mitchell, LLP (JMBM), Attorney Joseph Cane formerly of Arendsen Cane Molnar LLP, “and any other law firms whose client files GrowthPoint requested”. ROA 1514, p. 1:5-7. Crate does not identify the “other law firms” but GrowthPoint confirms that it requested its files from the following:

1. Susan Morgan, GrowthPoint’s prior corporate counsel;

2. JMBM, GrowthPoint’s counsel in the assignment for the benefit of creditors (ABC) in October 2018 (ABC Transaction);

3. Attorney Joseph Cane, GrowthPoint’s transaction counsel in the leadup to the ABC Transaction;

4. Barry Kellman, GrowthPoint’s prior employment counsel;

5. Bremer Whyte Brown & O’Meara, LLP, counsel for GrowthPoint in the Trower/Rocky Hill litigation in 2017-2019; and

6. SMTD Law LLP, counsel for GrowthPoint in the Trower/Rocky Hill litigation in 2017-2019.

ROA 1608, Opp., pp. 2-3; ROA 1620, Unredacted Vu Decl., ¶¶4, 7, 10.

Crate argues it holds the privilege and the right to prohibit disclosure of these files because GrowthPoint transferred its attorney-client privilege in connection with the sale of its assets first to GPAR and then to Crate. Alternatively, Crate argues that GrowthPoint is no longer “in existence” for purposes of Evidence Code § 953(d), and as such, Crate holds the privilege as GrowthPoint’s successor. Neither contention is correct.

The Privilege Was Not Transferred Along with GrowthPoint’s Assets to Crate. The attorney client privilege is governed by statute. Courts have no power to expand the privilege or to recognize implied exceptions. This rule precludes judicial expansion of the attorney-client privilege in cases where contracts between an individual and a corporate entity give rise to disputes between those asserting rights under such contracts. (HLC Properties, Ltd. v. Superior Ct. (2015) 35 Cal. 4th 54, 59; Evid. Code § 911.) Those statutorily authorized to claim the attorney-client privilege and prevent its disclosure include the “holder of the privilege”, “a person authorized to claim the privilege by the holder of the privilege” or the attorney at the time of the communication if there is no holder of the privilege in existence or if he is otherwise instructed by a person authorized to permit the disclosure. (Evid. Code § 954.)

Of relevance here, the “holder of the privilege” is the client or “[a] successor, assign, trustee in dissolution, or any similar representative of a firm, association, organization, partnership, business trust, corporation, or public entity that is no longer in existence”. (Evid. Code § 953(a), (d). See also, HLC Properties, Ltd. v. Superior Ct., supra, 35 Cal. 4th at 60–61.) A “client” means “a person who, directly or through an authorized representative, consults a lawyer for the purpose of retaining the lawyer or securing legal service or advice from him in his professional capacity.” (Evid. Code § 951.) A “person” includes “a natural person, firm, association, organization, partnership, business trust, corporation, limited liability company, or public entity.” (Evid. Code § 175.)

There is no dispute that GrowthPoint is the “person” who consulted with the attorneys from whom the records at issue were sought, and as such, GrowthPoint is the “client”. (Melendrez v. Superior Ct. (2013) 215 Cal. App. 4th 1343, 1353 [“The attorney-client privilege, however, is held by the client. (Evid.Code, § 953, subd. (a).)”].)

Nevertheless, Crate argues it is the “holder of the privilege” because it is the successor or assignee of GP Asset Resolution, LLC (GPAR) pursuant to the Asset Purchase Agreement (APA), and GPAR is the successor or assignee of GrowthPoint pursuant to the ABC.

In general, under California law, after a sale of assets, the seller corporation continues to exist and continues to hold any attorney-client privilege. The sale itself does not transfer the privilege, and thus the purchaser corporation may not assert or waive the privilege that remains with the seller. As explained in Favila v. Katten Muchin Rosenman LLP (2010) 188 Cal. App. 4th 189, 218–19, as modified on denial of reh'g (Sept. 22, 2010):

Evidence Code section 953, subdivision (d), provides the successor to a corporation “that is no longer in existence” becomes the holder of the extinct corporation's lawyer-client privilege. (See Venture Law Group v. Superior Court (2004) 118 Cal.App.4th 96, 103, 12 Cal.Rptr.3d 656 [“[a]fter a merger, the attorney-client privilege of the corporation no longer in existence belongs to the successor corporation”]; Dickerson v. Superior Court (1982) 135 Cal.App.3d 93, 98, 185 Cal.Rptr. 97.) However, in the absence of a merger or transfer of control of the corporation holding the privilege, the sale of the corporation’s assets generally does not also transfer the privilege. (Cf. HLC Properties, Ltd. v. Superior Court (2005) 35 Cal.4th 54, 64–65, 24 Cal.Rptr.3d 199, 105 P.3d 560 [“To support its claim of privilege, HLC relies on several cases involving trusts and/or incorporated organizations to argue that control over the assets of a business organization brings with it the right to assert the attorney-client privilege. HLC's authorities, however, merely hold or recognize that when corporate organizations are merged or when control of a corporation or formalized trust passes to new management, the power to assert or waive the privilege resides in the new managers.”].) In fact, to recognize an implied transfer of the privilege with a sale of assets would be contrary to the express language of section 953, subdivision (d), which identifies the successor or assign of a corporate entity as the holder of the privilege only when the original corporation “is no longer in existence.” As we emphasized in McDermott, Will, supra, 83 Cal.App.4th at page 385, 99 Cal.Rptr.2d 622, in applying the lawyer-client privilege, courts are obligated to strictly follow the statutory language. (See also Hoiles v. Superior Court (1984) 157 Cal.App.3d 1192, 1200, 204 Cal.Rptr. 111.) (Emphasis added.)

Thus, the Favila court concluded that the attorney client privilege was not transferred in a sale of 100% of the company’s assets. (188 Cal.App.4^th at 200 and fn. 4, 219.)

Crate argues that pursuant to the ABC, GrowthPoint transferred the attorney-client privilege to GPAR. Pursuant to the ABC, GrowthPoint assigned and transferred its “currently existing right, title, and interest in all real or personal property and all other assets” to the GrowthPoint Assignment Estate and permitted GPAR to administer the estate. ROA 1531, Ex. A, ¶¶1, 2, 5. The only exceptions were leases and leasehold interests in real property and employee benefit plans. ROA 1531, Ex. A, ¶3.a and b.

Additionally, the ABC granted GPAR a general power of attorney, and provided that GPAR “shall succeed to all of the rights and privileges of [GrowthPoint], including without limitation, any attorney-client privilege, in respect to any potential or actual claims, cases, controversies, or causes of action, and shall be deemed to be a representative of the Assignor with respect to all such potential or actual claims, cases, controversies, or causes of action.” ROA 1531, Ex. A, ¶12.

The ABC also permits GPAR to resign and be discharged from its duties by appointing a successor assignee. ROA 1531, Ex. A, ¶14.

Accordingly, based on paragraph 12 in the ABC, the attorney client privilege was transferred to GPAR but it was not a wholesale transfer of the attorney client privilege; rather, the transfer was limited “in respect to any potential or actual claims, cases, controversies, or causes of action”.

But as discussed under Favila, the sale of GPAR’s interests in GrowthPoint’s assets does not mean the attorney-client privilege also transferred to Crate.

Unlike the ABC, there is no provision in the APA that expressly transfers any attorney-client privilege to Crate. Nor is there any provision in the APA that gives Crate control or management over GrowthPoint, or allows it to act as GrowthPoint’s representative and take action on its behalf. There is nothing in the APA that indicates it was appointed as a successor assignee.

Significantly, the APA did not transfer all of GrowthPoint’s assets and liabilities to Crate. The APA expressly excludes the Excluded Assets and the Rocky Hill Assets. See ROA 1531, Ex. B, ¶¶1, 2 and 3 and Ex. 1.1. The Excluded Assets include, among others, “except as set forth on Exhibit 1.1, any and all rights, title and interest in any litigation, claims, causes of action whether known or unknown, asserted or unasserted, for any action, conduct, or omissions arising prior to the Closing Date” and “corporate minute books and other books and records that do not relate to the Purchased Assets”. ROA 1531, Ex. B, ¶2.1. The APA also provides that Crate “will not assume and shall have no responsibility with respect to, any other liabilities, indebtedness or obligations of [GPAR] or [GrowthPoint], known or unknown, absolute or contingent, accrued or unaccrued, whether due or to become due”. ROA 1531, Ex. B, ¶3.1.

Consequently, there is nothing in the APA that requires a deviation from the general rule espoused in Favila that a sale of assets does not automatically transfer the attorney client privilege. Moreover, given the exclusions in the APA, Crate has no right, title or interest in any attorney client privilege with respect to any pre-close litigation, claims, and causes of action, to which all of the documents at issue would pertain.

Crate Is Not a Successor or Assign of GrowthPoint for Purposes of Evidence Code § 953(d). Even if Crate is correct that GrowthPoint did not exist for purposes of Evidence Code § 953(d), Crate is not GrowthPoint’s successor or assign under Evidence Code § 953(d).

Melendrez v. Superior Ct. (2013) 215 Cal. App. 4th 1343, 1353–54 provides guidance:

As a general matter, the power to assert and waive the attorney-client privilege held by a corporation belongs to corporate management and is normally exercised by the corporation's officers and directors. (Venture Law Group v. Superior Court (2004) 118 Cal.App.4th 96, 105, 12 Cal.Rptr.3d 656.) In considering the holder of the privilege of a corporation no longer in operation, it is important to recognize the distinction between a dissolved corporation, and one no longer in existence. If the corporation is dissolved, it continues to exist for the limited purposes of winding up. (Reilly v. Greenwald & Hoffman, LLP (2011) 196 Cal.App.4th 891, 901, 127 Cal.Rptr.3d 317 (Reilly).) “Because it continues in existence, not unlike the personal representative of an individual client who has died [citation], it would appear the persons authorized to act on the dissolved corporation's behalf during the windup process—its ongoing management personnel—should be able to assert the privilege, at least until all matters involving the company have been fully resolved and no further proceedings are contemplated.” (Favila v. Katten Muchin Rosenman LLP (2010) 188 Cal.App.4th 189, 219, 115 Cal.Rptr.3d 274 (Favila); see also Reilly, supra, 196 Cal.App.4th at p. 902, 127 Cal.Rptr.3d 317.) However, if the corporation “is no longer in existence,” the privilege is held by a “successor, assign, trustee in dissolution, or any similar representative” of the corporate entity no longer in existence. (Evid.Code, § 953, subd. (d).)

As discussed, pursuant to the ABC, GrowthPoint granted GPAR power of attorney to act on its behalf and transferred the privilege, at least in part, to GPAR. The APA did not grant Crate authority to manage or control GrowthPoint, did not transfer any attorney client privilege to Crate, and did not appoint Crate as a successor assignee. As such, even if GrowthPoint did not exist for purposes of Evidence Code § 953(d), Crate is not its successor or assign.

Accordingly, Crate has not demonstrated it is the holder of the privilege and it has no standing to assert the privilege and seek the relief requested in this motion.

Crate is ordered to give notice.