Posternak Blankstein & Lund LLP is now Arent Fox. Read the press release

Attorney-Client Privilege Issues: Illinois Corporations and Other Jurisdictions

This post explains the rules that apply to Illinois corporations and business entities organized in other jurisdictions.
On
  • In most jurisdictions, shareholders and LLC members generally do not have the right to obtain privileged communications of their corporation or LLC.
  • To determine whether a shareholder or member can obtain a corporation’s or LLC’s privileged communications, most courts apply a fact-intensive test that is difficult to satisfy.

We previously illustrated a scenario where the majority member and manager of an Illinois Limited Liability Company (LLC) investigates one of the LLC’s minority members for suspected wrongdoing. We explained that the minority member may be able to obtain copies of emails between the LLC’s manager and attorney through a books and records request or through discovery in litigation – even if the company’s investigation of the minority member is the subject of those emails – unless the LLC’s operating agreement places limitations on the member’s right to access those documents.

But that is not the case in every jurisdiction. Rather, in most jurisdictions, a member of an LLC or a shareholder of a corporation generally cannot access the privileged communications of their LLC or corporation. Only in rare circumstances can a member or shareholder demonstrate, after a fact-intensive analysis, that they have good cause to access those communications.

This post explains the rules that apply to Illinois corporations and business entities organized in other jurisdictions. (Our initial post explained how a member of an Illinois LLC can pierce the LLC’s attorney-client privilege to obtain communications between the LLC’s managers and its attorneys. Our second post addressed ways that an Illinois LLC and its other members can prevent a minority member from obtaining privileged communications.)

Majority Approach: The Garner Fiduciary Exception

In most jurisdictions, a shareholder of a corporation or a member of an LLC can obtain the corporation’s or LLC’s attorney-client privileged communications only if they can satisfy the Garner test,[1] which is also known as the fiduciary exception to the attorney-client privilege. Where a fiduciary duty is owed to the shareholder or member, that shareholder or member must show good cause why the attorney-client privilege should not protect those communications from disclosure. Courts consider several factors in determining whether the shareholder or member has shown good cause, typically conducting a document-by-document analysis. The Garner test is difficult for shareholders and members to satisfy.

Delaware courts apply the Garner test to determine whether members of Delaware LLCs can discover their LLCs’ privileged communications. For Delaware corporations, see “Minority Approaches” below.

New York courts take a slightly different approach in the context of LLCs. If a member of a New York LLC attempts to discover the LLC’s privileged communications, that member must first show that she is not acting adverse to the LLC. If she is acting adverse to the LLC, she probably cannot discover the privileged communications; if she can show that she is not acting adverse to the LLC, she must also satisfy the Garner test before she can access the privileged communications.

Minority Approaches

Other jurisdictions have declined to apply the Garner test. California and Illinois courts have explicitly declined to apply the fiduciary exception in the context of litigation between shareholders and their corporations. California courts have also suggested that the fiduciary exception does not apply where members attempt to discover their LLCs’ privileged communications in litigation. (For an explanation of how members of an Illinois LLC can access the LLC’s otherwise-privileged communications, see our initial post.) Consequently, shareholders of Illinois and California corporations and members of California LLCs probably cannot obtain their companies’ privileged communications.

In contrast, a shareholder of a Delaware or New York corporation may access the corporation’s privileged communications, but only if the shareholder is also a director and can show a proper purpose related to their duty as a director to protect the corporation. Courts are unlikely to permit a shareholder to access a Delaware corporation’s privileged communications where the shareholder is acting in a self-serving manner. Likewise, if a shareholder of a New York or Massachusetts corporation is acting adverse to the corporation, the shareholder likely cannot access the corporation’s privileged communications.[2]


[1] The Garner test comes from the case Garner v. Wolfinbarger, 430 F.2d 1093, 1103-1104 (5th Cir. 1970) (holding that a corporation’s shareholders have the right to “show cause” why the corporation should not invoke the attorney-client privilege to protect its communications in a suit alleging that the corporation has acted against shareholder interests).

[2] See Seaside Psych Health & Wellness, LLC v. Blue Hills Therapeutics, Inc., No. 1984CV01632BLS2, 2021 WL 5630787, at *2 (Mass. Super. Ct. Apr. 27, 2021) (citing Chambers v. Gold Medal Bakery, Inc., 464 Mass. 383, 395 (2013)).

Contacts

Continue Reading