Barasch v. Williams Real Estate Co., Inc.

May a board member obtain copies of her corporation’s e-mails with the corporation’s legal counsel when they concern her, or are the documents protected by the attorney-client privilege? This was the issue in Barasch v. Williams Real Estate Co., Inc.

While not involving a cooperative or condominium, this case interprets a provision of the Business Corporation Law that is relied on regularly by co-ops and condos by analogy. It is important that boards be aware of the decision and its potential ramifications.

Discovery Demand

Candace Carmel Barasch was a shareholder and director of Williams Real Estate Company.

After Williams sold a 65 percent interest in its business to an investor, a transaction to which Barasch objected, she sued for an appraisal and for an order demanding that Williams pay her the fair value of her shares.

In connection with the proceeding, Barasch served a broad discovery demand, including a demand for all communications between the board and its legal counsel concerning the transaction. Williams claimed that Barasch should not have been permitted to receive copies of those communications because they were protected by attorney-client privilege and because she was in an adversarial relationship with Williams. The lower court held that, at the time of the creation of the documents, Barasch was not an adversary to Williams, and it should be required to turn over the documents. That lower court decision was never appealed.

Accordingly, Williams and its counsel spent many hours reviewing documents and produced more than 32,000 documents, including e-mails. A few months later, during a deposition of Williams’s in-house counsel, Barasch produced as an exhibit an e-mail from Williams’s outside counsel that described Barasch as “hostile” to the transaction and warned Williams that Barasch could use the terms of the shareholders’ agreement to her benefit.

Williams’s counsel objected to questions about the e-mail and asserted attorney-client privilege. Williams demanded that the e-mail, as well as an e-mail dated September 8, 2008, be returned as they were privileged and inadvertently produced. The September 8 e-mail from counsel stated that there was a concern that Barasch would not sign any documents and explained that Barasch had certain legal rights which gave her leverage to “blackmail” Williams. Williams claimed that it was clear that Barasch had become an adversary by September 8 so that even if she were entitled to see certain privileged communications, she was not by that date.

The lower court said that the question concerned a corporate director who dissented from a corporate transaction, retained separate counsel, and threatened legal action. Was this director now an adversary to the corporation who had waived her right to inspect priveleged corporate books and records? The lower court, relying on an earlier, unrelated case, stated that “a corporate director has an absolute and unqualified right to inspect the corporate books and records.”

In the lower court, Williams argued that Barasch should have been deemed to be an adversary – and the documents kept from her– because an attorney could not have ethically represented both Barasch and Williams.

The lower court disagreed. It found that Barasch was (at the time of the actions and the decision) a director of Williams. Accordingly, Williams’s other directors could not have reasonably expected to exclude a fellow director from their attorney-client communications concerning the value of shares.

A Reversal

The appellate court, however, disagreed and reversed. It believed that the basis of the lower court’s decision was that Barasch, as a director, was a corporate insider and therefore could not be adverse to the corporation. However, the appellate court noted, Barasch was both a director and a shareholder. She sued in her capacity as a shareholder and, in order to advance her interest as a shareholder, she sought attorney-client privileged communications that took place during the time that she was adverse to the corporation.

The court noted that the parties were in an adversarial position to each other: Barasch retained separate counsel and Williams’s attorney was advising Williams as to how to deal with Barasch. The appellate court stated that it was clear from the September 8 e-mail that Barasch was adversarial to Williams.

The appellate court looked to an earlier case decided by the New York Court of Appeals. That decision said that a corporate director should not be able to use her position to waive the corporation’s attorney-client privilege relating to her own rights or to rights surrounding documents in which the director is asserting claims adverse to the corporation.

In that case, the question was whether an attorney for the company prior to sale and its sole shareholder could represent the selling- shareholder in a dispute with the buyer of the company. The Court of Appeals found that confidential communications between counsel and the seller-firm now belonged to the buyer-firm, so that counsel was disqualified and could not now be adverse to the company. It also found that the law firm should be enjoined from disclosing those communications to the seller-shareholder, a former director.

The Court of Appeals had distinguished a case relied on by Barasch. In that, former directors – who participated in legal consultations and were not adversaries to the corporation – were entitled to otherwise privileged documents that supported their defense. Here, Barasch was not privy to the legal communications but rather was an adversary to the corporation and indeed was the subject of the communications.

In deciding the Barasch case, the New York appellate court also looked for guidance in a California case in which a person who was both a shareholder and a director in a family-owned business sought to dissolve the corporation. The director-shareholder claimed he was entitled to see privileged documents because he was a director. The However, a California court said that because he brought the action in his capacity as a shareholder, he was not entitled to the documents. The New York appellate court said that the situation in the California case was the same as the situation in Barasch – although Barasch was a director, she sued as a shareholder.

Finally, the New York appellate court explained that the purpose of the attorney-client privilege was to encourage “full and frank” communications between counsel and clients. If the lower court were correct and the documents were turned over to Barasch, then the corporation could not seek legal advice about a sitting director or one suspected of misconduct without the risk that such advice would be disclosed to the sitting director.

The court found that, as of September 8, 2008, the parties were adverse and Barasch was not entitled to the communications protected by the attorney-client privilege.

Attorneys

For Plaintiff

Wachtel, Masyr & Missry

For Defendant

Foley & Lardner