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Pittsburgh History and Landmarks Foundation

Commonwealth Court of Pennsylvania

April 21, 2017

Pittsburgh History and Landmarks Foundation, a Pennsylvania Non-Profit Corporation; Landmarks Financial Corporation, a Pennsylvania Non-Profit Corporation; Henry P. Hoffstot, Jr.; David E. Barensfeld; Peter H. Stephaich; Patrick R. Wallace; Alexander Speyer; and Henry P. Hoffstot, III, Arthur P. Ziegler, Jr.; Mark S. Bibro; and Jack R. Norris, Pittsburgh History and Landmarks Foundation, a Pennsylvania Non-Profit Corporation; Landmarks Financial Corporation, a Pennsylvania Non-Profit Corporation, Appeal of: Arthur P. Ziegler Jr., Mark S. Bibro, Jack R. Norris, Pittsburgh History and Landmarks and Foundation Landmarks Financial Corporation,

          Argued: November 16, 2016

          BEFORE: HONORABLE MARY HANNAH LEAVITT, President Judge, HONORABLE RENÉE COHN JUBELIRER, Judge, HONORABLE ROBERT SIMPSON, Judge, HONORABLE P. KEVIN BROBSON, Judge, HONORABLE PATRICIA A. McCULLOUGH, Judge, HONORABLE MICHAEL H. WOJCIK, Judge, HONORABLE JOSEPH M. COSGROVE, Judge.

          OPINION

          ROBERT SIMPSON, Judge.

         I. Introduction

         This appeal of a discovery order is treated as an appealable collateral order to the extent it may require disclosure of legal opinions and advice otherwise privileged under the attorney-client privilege and the attorney work product doctrine. Commonwealth v. Blystone, 119 A.3d 306 (Pa. 2015); Red Vision Sys., Inc. v. Nat'l Real Estate Info. Servs., L.P., 108 A.3d 54 (Pa. Super. 2015) (court treated order compelling discovery as to issues relating to attorney-client privilege as collateral, but refused to treat order as to other issues as collateral).

         The underlying suit is a derivative action involving two related nonprofit corporations.[1] The suit pits a group of potentially former members of the Boards of Trustees (whose removal is contested) against a group of current officers and members of the Boards of Trustees, amid allegations of corporate mismanagement and breach of fiduciary duty. The nonprofit corporations are named as plaintiffs and defendants. In order to evaluate whether proceeding further was in the best interests of the nonprofit corporations, they formed what they called a joint Independent Investigating Committee (Investigating Committee). After an investigation, the Investigating Committee recommended that the derivative action not continue. Accordingly, the defendants filed a motion to dismiss, which is currently pending before the Court of Common Pleas of Allegheny County (trial court). [2]

         Following the guidelines set forth in Sections 7.02 to 7.10, and 7.13 of the American Law Institute Principles of Corporate Governance: Analysis and Recommendations (1994) (ALI Principles), specifically adopted by our Supreme Court in Cuker v. Mikalauskas, 692 A.2d 1042 (Pa. 1997), [3] to be applied in derivative actions, the trial court entered the discovery order in question.

         For the reasons discussed more fully below, we vacate the discovery order and remand the matter to the trial court for further proceedings.

         II. Background

         A. Derivative Action

         Because we will not address the merits of the underlying lawsuit, we mention the details of the action in summary fashion. Plaintiffs/Appellees[4] were members of the Boards of Trustees of the Pittsburgh History and Landmarks Foundation, and the related Landmarks Financial Corporation, their current status being contested. Defendants/Appellants[5] are the long-time President and Chairpersons of the Boards of Trustees of the same nonprofit corporations. Questions arose regarding appropriate management and efforts to reconstitute the Boards of the nonprofit corporations between 2009 and early 2013. In October 2013, Plaintiffs/Appellees formally demanded that the nonprofit corporations secure enforcement of their claims on behalf of the nonprofit corporations.

         In response, each Board of Trustees adopted a resolution to appoint a joint Investigating Committee, comprised of sitting members of the Boards of Trustees, advised by independent counsel, with the charge of investigating the allegations made in Plaintiffs'/Appellees' demand.

         During this process, in December 2013, Plaintiffs/Appellees brought suit in the name of the nonprofit corporations. Discovery ensued.

         Meanwhile, the Investigating Committee completed its investigation and recommended against the prosecution of the derivative action. The Boards of each nonprofit corporation considered the Report of the Investigating Committee and adopted its recommendations. Accordingly, Defendants/Appellants filed the motion to dismiss based on the Report of the Investigating Committee. Reproduced Record (R.R.) at 376a-410a. The motion to dismiss is pending before the trial court.

         B. Discovery Order

         During the discovery phase of the lawsuit, disputes arose. In particular, Plaintiffs/Appellees sought disclosure of all information provided to the Investigating Committee as part of its investigation, including material which may be privileged. Defendants/Appellants resisted such disclosure. Plaintiffs/Appellees filed a motion to compel, which, together with the pending motion to dismiss, prompted the trial court order under review.

         In response to the motion to compel, the trial court entered the discovery order, which provided in pertinent part as follows:

a. Defendants[/Appellants] will provide Plaintiffs[/Appellees] with all materials provided to or generated by the [Investigating Committee], including all related legal opinions and communications. Privilege in such opinions and communications is retained by Nominal Defendants as to all persons and entities not a party to this action.
b. Decision on further release of purportedly privileged material is reserved, as such production is disproportionate to the nature and scope of this litigation at this time. See Pa. R.C.P. [No.] 4009.1 (Explanatory Comment) (2012). After production and analysis of materials provided to the [Investigating Committee], further action on these materials may be requested by motion, upon showing that such production would be proportional to the issues at stake at that time.
c. Plaintiffs[/Appellees] may discuss with Anne Nelson the legal advice that she provided to the [Investigating Committee] and communications with the [Investigating Committee], as well as any non-privileged subjects.

Tr. Ct. Order, 9/21/15; R.R. at 683a-84a (emphasis added).

         Defendants/Appellants appealed the discovery order to the extent it may require disclosure of legal opinions and advice otherwise protected by the attorney-client privilege or work product doctrine.

         C. Trial Court Opinion

         In response to Defendants'/Appellants' concise statement of the errors complained of on appeal, the trial court filed an opinion. Initially, the trial court clarified "that the attorney-client and work product privileges do not apply to pre- existing materials provided to the [Investigating Committee] for the purpose of producing the [Investigating Committee Report] or, obviously, to the report itself." Tr. Ct., Slip Op., 2/8/16, at 9; R.R. at 730a. The trial court indicated that the privileges are applicable to communications between the Investigating Committee and its own counsel. Id.

         Next, and most relevant to our analysis, the trial court addressed the application of the ALI Principles and the Supreme Court's Cuker decision. In relevant part, the trial court stated the following:

ALI Principle of Corporate Governance § 7.13(e), which the Supreme Court of Pennsylvania adopted in [Cuker, 692 A.2d at 1049], states in relevant part, 'Plaintiff's counsel should be furnished a copy of related opinions received by the board or committee if any opinion is tendered to the court under § 7.13(a).'
Comment e to § 7.13 explains the logic behind this rule:
'The established law of the attorney-client privilege has long provided that invocation of the reliance-on-counsel defense waives the privilege… Thus, it would be unfair if the board or committee could rely on legal advice from its counsel that the actions was [sic] not meritorious as a ground for dismissing the action and then deny plaintiff access to the substance of that advice.'
The applicable case law also illustrates the long-held principle that derivative litigation should not be dismissed based on privileged documents. In Cuker, the Supreme Court held that the factors that courts should take into account when determining the sufficiency of a special litigation committee's investigation in a derivative suit include: 'whether the board or its special litigation committee was disinterested, whether it was assisted by counsel, whether it prepared a written report, whether it was independent, whether it conducted an investigation, and whether it rationally believed its decision was in the best interests of the corporation.' Cuker, 692 A.2d at 1048. See also Joy v. North, 692 F.2d 880, 893 (2d Cir. 1982) ('We simply do not understand the argument that derivative actions may be routinely dismissed on the basis of secret documents').
It follows from these cases that in order to determine the independence and investigative adequacy of a special litigation committee such as the [Investigating Committee], [Plaintiffs'/Appellees'] counsel must be allowed to access documents to which the committee itself had access.
Here, denying Plaintiffs'[/Appellees'] counsel access to pre-existing materials provided to the [Investigating Committee] for the purpose of producing the [Investigating Committee] report or to the report itself would create the exact problem that the Cuker and Joy courts sought to avoid: potentially dismissing a derivative action on the basis of secret documents.
Defendants[/Appellants] argue that § 7.13(e) only requires that Plaintiffs[/Appellees] receive the [Investigating Committee] materials submitted to the Court as well as related formal legal opinions given to the [Investigating Committee]. Defendants' Brief in Opposition to Plaintiffs' Motion to Compel at 14. Defendants[/Appellants] also assert that 'the [Investigating Committee] process does not create an across-the-board waiver of the attorney-client or work product doctrines.' Id. at 16.
Defendants[/Appellants] are correct that § 7.13(e) does not create an across-the-board waiver of privilege. See Comment (e) ('This understandable concern [that derivative actions may be dismissed on the basis of secret documents] does not, however, justify a complete waiver of the privilege.').
But we find that Plaintiffs[/Appellees] have the stronger argument because there is no attorney-client or work product privilege recognized in § 7.13(e) regarding documents that existed before the creation of the [Investigating Committee] and were not generated by counsel to the [Investigating Committee]. Furthermore, attorney-client privilege, as discussed in § 7.13(e) relates to communications with the [Investigating Committee's] counsel, not with Defendants'[/Appellants'] counsel. See Comment (e) ('Section 7.13(e) provides that the special counsel's communications with the board or committee with respect to a pending litigation shall be privileged and not subject to plaintiff's inspection, except as provided in § 7.13(a), which only requires disclosure to the plaintiff of the report or other written submission to the court and any supporting documentation.').
Thus, Plaintiffs[/Appellees] are correct that preexisting documents submitted to the [Investigating Committee] must be produced once the [Investigating Committee] report was submitted to the court.
Additionally, Defendants[/Appellants] would be unable to challenge the adequacy of the [Investigating Committee's] investigation if they were denied access to the materials reviewed during the investigation.

Tr. Ct., Slip Op., at 9-12; R.R. at 730a-33a (emphasis added).

         The trial court also discussed the fiduciary duty exception and the common interest exception to the attorney-client privilege and work product protection. The trial court concluded that these exceptions rendered the privileges inapplicable under these circumstances of this case.

         Finally, the trial court authorized Plaintiffs/Appellees to speak with Anne Nelson, the former General Counsel of one of the nonprofit corporations, about her potential testimony, over the objections of Defendants/Appellants. The trial court reasoned that before she stopped working in 2012, the individual Plaintiffs/Appellees were sitting members of the Boards of Trustees; therefore, at the time they shared a common interest with Ms. Nelson. In those circumstances the common interest exception negated the privileges, and Ms. Nelson could discuss her legal advice to and communications with the Investigating Committee.

         III. Issues

         Defendants/Appellants state several issues for our consideration, which we reorganize for discussion purposes. First, they question whether the attorney-client or work product privileges may be asserted as to communications during the time period when the individual Plaintiffs/Appellees were still members of the Boards of the nonprofit corporations. Second, they question whether the privileges may be asserted as to communications between Defendants/Appellants and counsel for the Investigating Committee. Third, they question whether the common interest exception and the fiduciary duty exception apply to this case. Fourth, they question whether the privileges may be asserted in derivative litigation brought by former Board members. Fifth, they question whether Plaintiffs/Appellees have a right to interview Anne Nelson regarding her communications with the Investigating Committee.

         IV. General Arguments

         A. Defendants/Appellants

         In addition to brief argument about the scope of an appeal from a collateral order, Defendants/Appellants emphasize the importance of the attorney-client privilege and work product protection to assure that attorneys and their clients can freely communicate. They assert the trial court's order has the effect of stripping the privilege from such communications based solely upon the status of the Plaintiffs/Appellees as derivative plaintiffs.

         Defendants/Appellants assert the trial court's discovery order failed to comply with long-established legal principles governing application of the attorney-client privilege. In particular, the privilege is a broad one. Also, it is held by the client, in this case the nonprofit corporations, not by its board members or other constituents. The status of Plaintiffs/Appellees as former ...


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