Published in the ECHO Journal, May 2011
The question sometimes comes up, usually from a homeowner or group of homeowners, concerning whom an attorney representing the association in a matter actually represents. Some years ago, the California Court of Appeal provided a clear answer.
“Condominium associations may bring construction defect lawsuits against developers without fear of having to disclose privileged information to individual homeowners. Like closely held corporations and private trusts, the client is the entity that retained the attorney to act on its behalf.” (Smith v. Laguna Sur Villas Community Association (2000) 79 Cal. App. 4th 639)
That means the attorney’s client is the association—the incorporated or unincorporated entity; not the Board of Directors and not the association’s members either collectively or individually.
In Laguna Sur Villas a group of homeowners, upset by what they thought was a “runaway budget for expenditures” in an association’s construction defect lawsuit, demanded to see the work product and legal bills of the association’s attorneys in the lawsuit. The association declined to provide those materials on the basis of the attorney-client privilege. A lawsuit ensued raising a number of issues including the right of the demanding homeowners to have access to information and documents that were subject to the attorney-client privilege. The trial court ruled in favor of the association on that question, holding that the privilege was held by the corporation. On appeal, the Court of Appeal agreed, stating:
“The court correctly held [the association] was the holder of the attorney-client privilege and that individual homeowners could not demand the production of privileged documents, except as allowed by the [association’s] board.”
As noted by the appellate court, corporations are “persons” under California law, have their own separate legal identity and enjoy the benefit of the attorney-client privilege. Under the California Evidence Code, a client is a person who consults a lawyer for the purpose of retaining the lawyer. The term “Person” includes a corporation and may also include an unincorporated organization when the organization rather than its individual members so consults with a lawyer.
Rule 3-600 of the Rules of Professional Conduct of the State Bar of California, applicable to all California attorneys, provides, in part:
“In representing an organization, a [lawyer] shall conform his or her representation to the concept that the client is the organization itself.”
Because the individual members of the Laguna Sur Villas Community Association did not consult with or retain the association’s lawyers they were not clients of the law firm representing the association. The Court of Appeal rejected the argument of the homeowners that they were the “true clients” because the association was “faceless” and could act only in a representative capacity, and that they were the persons for whose benefit the lawsuit was brought and were paying for the attorneys’ legal services through their assessments. The court pointed out that the California Supreme Court had recently1 refused to create a so-called “fiduciary” exception to the attorney-client privilege.
In the Wells Fargo Bank case the beneficiaries of a trust sought to obtain confidential communications between the trustee and legal counsel for the trust. They claimed that the trustees owed them independent duties to provide complete and accurate information regarding administration of the trust and to allow them to inspect books and documents. The Supreme Court rejected their claim and declined to allow the trustee’s legal responsibilities to trump the attorney-client privilege. The Supreme Court stated:
“Certainly a trustee can keep beneficiaries ‘reasonably informed’ [citation omitted] and provide ‘a report of information’ [citation omitted] without necessarily having to disclose privileged communications.”
The court held that the attorneys represented only the trustees and not the trust beneficiaries. Like the Court of Appeal in Smith v. Laguna Sur, the Supreme Court in Wells Fargo Bank was not impressed with the argument that the trust beneficiaries were indirectly paying the attorneys’ legal fees because “[p]ayment of fees does not determine ownership of the attorney-client privilege.”
These principles were more recently reaffirmed in a 2004 appellate decision in La Jolla Cove Motel and Hotel Apartments, Inc. v. Superior Court where the Court of Appeal referred to Rule 3-600 of the Rules of Professional Conduct and said,
“In representing a corporation, an attorney’s client is the corporate entity [emphasis in original], not the individual shareholders or directors, and the individual shareholders or directors cannot presume that corporate counsel is protecting their interests.”
An earlier 1991 Court of Appeal decision is to the same effect. In Skarbrevik v. Cohen, England & Whitfield the appellate court rejected the claim of a minority shareholder that a law firm representing the corporation in which he held stock owed him a duty of care. The court held that an attorney representing a corporation does not become a representative of its stockholders merely because the attorneys’ actions on behalf of the corporation also benefit the stockholders. Corporate counsel’s direct duty is to the client corporation, not to shareholders individually, even though legal advice rendered to the corporation may affect its shareholders.
California case law is unequivocal. The client of a lawyer serving as legal counsel to a corporation or other entity is that entity itself and the attorney-client relationship does not extend to the members or shareholders of the entity.
1 In Wells Fargo Bank v. Superior Court (2000) 22 Cal. 4th 201, 212.
James O. Devereaux is a partner in the law firm of Berding & Weil, LLP. He has authored several Amicus Curiae (Friend of the Court) briefs on behalf of ECHO that were submitted to the California Supreme Court in important cases. He has been a frequent contributor to the ECHO Journal.