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.
No. 00-1797
Supreme Court of Wisconsin
March 20, 2002
2002 WI 28 | 640 N.W.2d 788
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.
¶ 1. N. PATRICK CROOKS, J. This case is before the court on certification by the Court of Appeals, District II, pursuant to
¶ 2. Recognizing that the discovery issues in this case are matters of first impression and that the issues “go to the very core of the lawyer-client relationship and the reach of the 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 lawyer-client privilege. We first conclude that Sharp can effectively assert the lawyer-client privilege against Lane. Lane‘s status as a former director does not allow him to waive the lawyer-client 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
¶ 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 protected by the work product doctrine. We conclude that the circuit court erroneously exercised its discretion because it failed to apply the proper standard of law and did not conduct an in camera review to determine if the documents were prepared or obtained in anticipation of litigation.
¶ 5. Finally, we review the circuit court‘s award of attorneys’ fees to Lane. Based on the record, we conclude that the circuit court‘s award of half the attor-
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 the Scarberrys) are, and at all relevant times have been, the sole shareholders. In 1992, Harold C. “Bud” Lane joined Sharp as Executive Vice President of Marketing and Sales. During his employment, Lane and Sharp maintained several agreements, 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 of Sharp, received the same compensation as Paul Scarberry, and was elected a director of Sharp‘s board of directors.2 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.
¶ 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. The company‘s value increased from approximately $1.8 million in 1992 to approximately $11 million by October 1995.
¶ 10. On March 2, 1999, Sharp terminated Lane‘s employment, effective May 31, 1999. Lane had not exercised his stock option at the time of his termination. Accordingly, on May 26, 1999, pursuant to the Stock Option Agreement, Lane elected to surrender his stock options and receive his lump sum stock appreciation rights payments. Pursuant to the appraisal formula and procedure laid out in the Stock Transfer Restriction Agreement, Sharp and the Scarberrys retained Theodore F. Gunkel of Madison Valuation Asso-
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. Since 1992, Niebler has advised Sharp and the Scarberrys 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 considerable legal work for Sharp regarding other matters. From at least 1995 through 1999, Niebler‘s firm sent monthly bills to Sharp, requesting payment and revealing the nature of legal services performed.
¶ 12. From 1993 to 1995, as Sharp‘s lawyer, Niebler served on Sharp‘s Board of Directors. Pursuant to Lane‘s 1995 employment contract with Sharp, Lane replaced Niebler on Sharp‘s board. In 1995, Sharp designated new corporate counsel, the law firm of Meissner & Tierney, replacing the Niebler law firm.
¶ 13. In 1998, Niebler advised the Scarberrys about taking a corporate 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. The distribution was made without any meeting of the Board of Directors and without Lane‘s knowledge. As stated previously, Lane had not exercised his stock options prior to the distribution. Furthermore, Lane was not aware of the distribution until he received Gunkel‘s 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 Scarberrys contended that Lane never exercised his stock option rights and that the distribution was valid.
- 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 limited
to all loan documents and communications relating to the source of any such funds.
*The word “Documents” is defined on the enclosed attachment to Exhibit A.
¶ 16. 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 lawyer-client 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
(b) non-privileged documents, including documents reflecting the Niebler firm‘s communications with third parties, shall be produced for the time periods requested by plaintiff.
When issuing the decision, the circuit court judge stated, “[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 that were submitted to the corporation and under Mr. Lane‘s
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 irrelevant. The circuit court denied the motion and also awarded Lane attorneys’ fees on the 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 what was expended on the two motions. Specifically, 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 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 the Scarberrys sought leave to file an interlocutory appeal on the circuit court‘s denial of the 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 por-
tion of the appeal to this court. We granted certification of all issues raised on appeal.II. DISCUSSION
¶ 19. We review the circuit court‘s discovery order for an erroneous exercise of discretion. See Borgwardt v. Redlin, 196 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. Page, 205 Wis. 2d 389, 393, 556 N.W.2d 380 (Ct. App. 1996). We 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. Paige K.B. v. Steven G.B., 226 Wis. 2d 210, 233, 594 N.W.2d 370 (1999). Whether the 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 quash the subpoena of Niebler‘s documents. They maintain that the documents re
A. Lawyer-Client Privilege
¶ 21. We first address whether the documents requested from Niebler are protected by 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.
In State ex rel. Dudek v. Circuit Court, 34 Wis. 2d 559, 580, 150 N.W.2d 387 (1967), we addressed the scope of
¶ 22. Sharp and the Scarberrys contend the circuit court erred because the documents requested by Lane fall directly within the protection of the lawyer-client privilege. On the other hand, Lane argues the documents fall outside the scope of the privilege for several reasons: (1) Lane, as a former officer of Sharp, was allowed to waive the privilege; (2) billing records are similar to fees and not subject to the lawyer-client privilege; (3) communications with third parties are not
1. Lane‘s status as former director of Sharp
¶ 23. First, we examine whether Lane, as a former officer and director of Sharp, is entitled to documents from Sharp either because he can waive the lawyer-client privilege, or 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 allow him to waive the lawyer-client privilege, and that
¶ 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 communication under SCR 20:1.6,9 and held that the corporate entity, not the constituent,
¶ 26. In addition to relying on the entity rule and Jesse, appellants 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 the privilege against him. In Weintraub, the United States Supreme Court addressed “whether the trustee of a corporation in bankruptcy has the power to waive the debtor corporation‘s attorney-client privilege with respect to 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. Recognizing that corporations must act through agents, the Court discussed how control of the 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 lawyer-client privilege. Id. at 348. Therefore, because “the trustee plays the role most 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.” Id. at 349 n.5.
¶ 27. Finally, appellants argue that the standard to determine if the lawyer-client privilege applies should be based on why the information is requested, not when the documents are prepared. Relying on Milroy v. Hanson, 875 F. Supp. 646 (D. Neb. 1995), appellants argue that whether the lawyer-client privilege can be invoked depends on whether the requesting officer or director attempting to acquire the privileged documents, is acting in his own capacity or as a representative of the corporation.
¶ 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 otherwise protected under the lawyer-client privilege. 875 F. 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
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 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.” Id. at 651. In this case, appellants contend that because Lane is a dissident
¶ 29. Lane argues that the documents requested from Niebler are not 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 were made. According to Lane, applying the entity rule does not solve this issue because he does not 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 to Lane, Weintraub is inapplicable because the case focuses on who has the authority to assert or waive a corporation‘s lawyer-client 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,
Lane contends that the circuit court did not erroneously exercise its discretion and properly held that the information in Niebler‘s files was not protected by the lawyer-client privilege. Lane urges this court to hold that because he was entitled to the communications regarding the shareholder distribution when he was a director, he is entitled to the same communications in this litigation.
¶ 31. In reviewing the circuit court‘s decision, we note first that the circuit court did not directly rule on this specific issue. The court did not specifically address the legal issues the parties raise before this court regarding whether Lane‘s former status as a director allows him access to otherwise privileged communications. The circuit court judge‘s only comment on this issue was 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 erroneous exercise of discretion. The circuit
¶ 33. Lane‘s status as a former director does not entitle him to access Niebler‘s files regarding communications with 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
¶ 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 privilege rests with the corporation‘s management and is normally exercised by its officers and directors.” 471 U.S. at 348. The Scarberrys currently comprise Sharp‘s board of directors, or management, and retain control over Sharp‘s lawyer-client privilege. Lane is a former director, and a “dissident.” We agree with the court‘s reasoning in Milroy: “A dissident director is by 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.‘”16 875 F. Supp. 646, at **13. Accordingly, we conclude that even though Lane is a former officer and director, and the documents at issue were prepared during his tenure, Sharp can effectively assert the lawyer-client privilege against him.17
¶ 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. We rely largely on the fact that Lane is a former director. 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
¶ 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 information protected by the lawyer-client privilege.
¶ 37. Appellants rely on the distinction drawn in In re 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, 116 F.R.D. at 214. Appellants argue that this case is similar 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. In other words, 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 records, the circuit court stated: “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.” We conclude that the circuit court erroneously exercised its discretion in ordering production of the attorney billing records. The circuit court failed to examine the nature of the communications; specifically, it failed to note that the
¶ 40. While the lawyer-client privilege readily protects statements from the client to the lawyer, the privilege only protects communications from the lawyer to the client if “disclosure of the lawyer-to-client communications would directly or indirectly reveal the substance of the 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). Billing records are communications from the attorney to the client, and producing these communications 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
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
¶ 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 documents should not be produced. Furthermore, Lane contends it is imperative that he obtains 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 exercise its discretion on this issue. The circuit court judge carefully examined the situation
4. Crime-Fraud Exception
¶ 46. Appellants’ final argument regarding the lawyer-client privilege is that the circuit court erred by concluding that the crime-fraud exception in
¶ 47. Relying on Dyson v. Hempe, 140 Wis. 2d 792, 413 N.W.2d 379 (1987), appellants first argue that
Lane‘s allegations of fraud in the complaint are insufficient to establish a prima facie case. “The mere charge of fraud or illegality will not, however, ‘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.” United States v. Chen, 99 F.3d 1495, 1503 (9th Cir. 1996) (citations omitted). According to 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. According to Lane, the complaint sufficiently alleges fraudulent transfer, the circuit court properly considered substantial evi
¶ 49. In finding that Lane had established a prima facie case of fraud, the circuit court relied on the
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 drive the privilege away, there must be ‘something to give colour to the charge.‘” Dyson, 140 Wis. 2d at 804 (quoting Clark, 289 U.S. at 15); 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 but less than a preponderance of evidence.” Id.
¶ 52. We next address appellants’ argument that the circuit court erred in failing to conduct an in camera review to 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 exception applies because it is a smaller intrusion on lawyer-client confidentiality than public disclosure, and ensures that the circuit court‘s decision regarding the crime-fraud exception is an informed one.
¶ 53. Lane contends an in camera review is unnecessary, because the purpose of an in camera review is to resolve 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 whether specific documents are privileged would be unnecessary, because Lane would be entitled to discover all such documents.
¶ 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 had been established, and did not examine any documents to determine if the crime-fraud exception actually applied. “It must do so.” Borgwardt, 196 Wis. 2d at 357 (remanding for in camera review). As discussed previously, the burden to establish a prima facie case is low. Once the circuit court determines the prima facie case has been established, an in camera review is the proper procedure to determine if the crime-fraud exception to the lawyer-client privilege applies. See George v. Record Custodian, 169 Wis. 2d 573, 582, 485 N.W.2d 460 (Ct. App. 1992) (instructing trial court to conduct in camera inspection to determine if lawyer-client privilege applies). An in camera review is appropriate, because it is a “smaller intrusion upon the confidentiality of the attorney-client relationship than is public disclosure.” Zolin, 491 U.S. at 572.
¶ 56. While the decision to conduct an in camera review is a discretionary decision, we conclude that, in this case, the 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 dis
trict 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 privilege to be dissipated.” An in camera review is appropriate in this case. Only by reviewing the documents at issue is the circuit court able to determine whether Niebler‘s legal services were rendered in furtherance of fraud. Upon remand, therefore, we instruct the circuit court to conduct 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
¶ 57. In addition to the lawyer-client privilege, Sharp and the Scarberrys contend that documents Lane requested from Niebler are protected by the work product doctrine. Appellants argue that the circuit court erroneously exercised its 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. Appellants
¶ 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, Niebler argues that under
¶ 60. We again review the circuit court‘s discovery order under the erroneous exercise of discretion standard. See Borgwardt, 196 Wis. 2d at 350. In deciding that documents prepared prior to May 31, 1999, are not protected by the work product doctrine, the circuit court judge stated:
. . . 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 Dudek, and codified by
[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.
¶ 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 the work product doctrine. It is not apparent that the circuit court applied the test from Dudek and Borgwardt. We recognize 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.” Dudek, 34 Wis. 2d at 592. 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 exercise of discretion. On remand, we direct the circuit court to apply the Dudek and Borgwardt standard and conduct an in camera review of the disputed documents. As discussed previously with regard to applicability of crime-fraud exception to the lawyer-client privilege, an in camera
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’ fees was an erroneous exercise of discretion and violated
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.
¶ 64. Sharp and the Scarberrys argue that the circuit court erred by simply cutting the attorneys’ fees in half. They contend that the circuit court‘s decision was arbitrary and unreasonable in violation of
¶ 65. Lane contends the circuit court‘s decision was well within its discretion. The two motions were briefed and argued 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 under the erroneous exercise of discretion standard. Hughes v. Chrysler Motors Corp., 197 Wis. 2d 973, 987, 542 N.W.2d 148 (1996). 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. Based on the record, we conclude that the circuit court‘s award of costs, including attorneys’ fees, was reasonable and not an erroneous exercise of discretion.
¶ 67. In summary, we have reviewed the circuit court‘s discovery orders under the erroneous exercise of discretion standard. We first examined the circuit court‘s conclusion that 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 privilege, nor does it preclude Sharp‘s current board of directors from asserting the lawyer-client privilege against him. Second, we concluded that because Niebler firm‘s billing records reveal the nature of legal services provided, the billing records are protected by the 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 court‘s decision was an erroneous exercise of discretion. The circuit court failed to apply the correct test from Dudek and Borgwardt to determine whether Lane made a showing of substantial need for
¶ 69. Finally, we reviewed the circuit court‘s award of costs, including attorneys’ fees. We concluded that the circuit court‘s award of half the costs 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.
¶ 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 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. Scarberry. Pursuant to an employment agreement, Lane was given extensive powers and interests in the corporation. Although not a shareholder 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
¶ 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
¶ 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.
¶ 78. Most important for the present case, the board of directors has the authority to determine whether and in what amount to declare shareholder
¶ 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
¶ 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
¶ 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?
¶ 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
¶ 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
¶ 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.
¶ 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
¶ 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.
¶ 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
¶ 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.
Notes
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.”
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.
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 attorney-client 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
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.[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).
(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:
. . .
(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.