The Pennsylvania Supreme Court has agreed to hear arguments in a case about the complex attorney-client privilege issues that can arise during derivative actions involving nonprofit corporations and special investigating committees.
The justices issued a three-page per curiam order agreeing to hear arguments on four questions raised in the case Pittsburgh History and Landmarks Foundation v. Ziegler. Two of the questions were posed by the defendants in the case, while the other two were posed by the plaintiffs.
Specifically, the justices agreed to hear arguments on whether the attorney-client privilege standards outlined in the Restatement (Third) of Law Governing Lawyers and the U.S. Court of Appeals for the Fifth Circuit’s 1970 ruling in Garner v. Wolfinbarger conflict with state law, and about how the fiduciary duty and common-interest exceptions play into derivative actions involving a special investigative committee.
The appeal arose after an en banc Commonwealth Court panel in April determined that the trial court handling the underlying derivative action issued an improperly broad discovery order. As part of that decision, the Commonwealth Court said the lower court should not have applied the fiduciary duty or common-interest exceptions to the case, but should have looked for potential exceptions to the privilege based on Garner.
According to Commonwealth Court Judge Robert Simpson, the derivative action dates back to conduct that occurred between 2009 and 2013. The plaintiffs were members of the board of trustees of the Pittsburgh History and Landmarks Foundation and the related Landmarks Financial Corp. According to Simpson, questions began arising about the board’s management and efforts to reconstitute the board.
Simpson noted that the current board statuses of the plaintiffs are contested, but in October 2013 they formally demanded the nonprofit corporations secure enforcement of their claims on behalf of the companies. The board then appointed a joint investigating committee to determine whether to proceed with the derivative action. The investigative committee, which was composed of sitting members of the board with advice from independent counsel, ultimately determined not to proceed with the derivative action, and the board adopted that recommendation.
Based on the committee’s report, the board filed a motion with the lower court to dismiss the derivative action. The plaintiffs, however, also filed a motion to compel all information that had been provided to the investigating committee.
Relying on the state Supreme Court’s 1997 decision in Cuker v. Mikalauskas and the American Law Institute Principles of Corporate Governance, the lower court said the defendants needed to provide the requested materials, including all related legal opinions and communications between the board and the investigating committee.
On appeal, the defendants contended that the trial court’s decision would effectively eliminate attorney-client privilege in derivative actions and would “dramatically change the role of counsel to any corporation in Pennsylvania,” according to Simpson.
Simpson rejected several arguments raised by the defense, but he also said the court’s discovery order was too broad. The court, he said, should have applied Garner, which would have allowed for more limited discovery.
Simpson also noted that the plaintiffs were seeking legal advice about alleged efforts to pack the board, whether some of the board’s investments were proper, and whether the board could vote out all existing trustees and elect successors based on a state statute.
“Such legal advice rendered at about the time of those alleged events and before the current suit was pending could be reached by a discovery order, consistent with both Section 7.13 of the ALI Principles and Section 85 of the Restatement (Third) of the Law Governing Lawyers, after consideration of pertinent factors,” he said.
Gary Hunt of Tucker Arensberg, who represents the defendants, did not return a message seeking comment, and Walter DeForest of DeForest Koscelnik Yokitis & Berardinelli declined to comment.