Case Number: BC664381 Hearing Date: January 17, 2018 Dept: 74

DEANCO HEALTHCARE LLC, ET AL.,

Plaintiffs,

vs.

ARENT FOX LLP, ET AL.,

Defendants

Case No.: BC664381

[TENTATIVE] ORDER GRANTING DEFENDANTS’ MOTION FOR PROTECTIVE ORDER, IN PART

TENTATIVE RULING: The motion for a protective order is granted in part. Arent Fox and Thomas E. Jeffry, Jr. are not required to respond to written discovery concerning documents or information prior to January 10, 2011. Deanco Healthcare is ordered to return to San Fernando all attorney-client communications and confidential records dated prior to January 10, 2011, within 20 days. All requests for sanctions are denied.

Background

The complaint alleges a single cause of action in legal malpractice, stating defendants did not use the requisite skill and failed to exercise reasonable care in their representation of plaintiffs.

The cross-complaint alleges that plaintiffs assumed responsibility for paying for the legal services provided. Plaintiffs did not challenge the billings when issued, but failed to pay. The complaint alleges causes of action in: (1) breach of contract; (2) promissory estoppel; (3) account stated; (4) unjust enrichment and (5) quantum meruit.

Defendant’s Contentions

Defendant moves for a protective order to protect privileged and confidential attorney-client communications and attorney work product sought by plaintiffs and, to the extent plaintiffs have obtained such documents, that they be returned to defendant.

Defendant represented San Fernando Community Hospital, and continues to represent the hospital. Jeffry, the attorney who represented the hospital even before coming to work for defendants, defended the hospital in an action filed by its lessee, Darbun Enterprises, Inc. San Fernando later sold certain hospital assets to plaintiffs. Defendant represented the hospital in the sale. Defendant did not represent plaintiff Realty, and only briefly represented plaintiff Healthcare in an unrelated matter.

In the sale from San Fernando Hospital to plaintiff, San Fernando did not waive attorney-client privilege, and did not assign any legal negligence claims. Defendant cannot disclose its communications with San Fernando without violating its obligations to San Fernando.

In the litigation against San Fernando by Darbun, Darbun was represented by the attorneys currently representing plaintiffs in this litigation.

In the asset purchase agreement between San Fernando and plaintiffs, plaintiffs acquired some assets and assumed some liabilities. The attorney-client communications between San Fernando and defendant were specifically excluded from the sale. Plaintiffs did assume liability for paying San Fernando’s legal bills for the litigation. After the sale, defendant continued to represent San Fernando in the litigation. San Fernando did not sell all its assets, and remains an active corporation separate and apart from plaintiffs.

Defendant represented plaintiffs for one month in connection with a replacement line of credit facility. Defendant expressly continued to represent San Fernando at the same time. Plaintiffs paid the bill for that representation within a month of the representation.

Plaintiffs have served discovery which requests privileged attorney-client communications between defendant and San Fernando in the Darbun litigation. The requests include the entire client file, and all communications which relate to the Darbun litigation. Plaintiffs also request a detailed explanation of defendant’s strategy decisions in the litigation.

Plaintiffs’ Contentions

Plaintiff purchased all assets of the hospital from San Fernando over a period of three years. That included all pending legal claims and litigations. Plaintiff entered into a management services agreement, under which Lennartz continued her position as client representative. Lennartz handled all communications with defendant concerning the Darbun litigation, and was an employee of plaintiff, beginning in January 2011. In November 2011 Lennartz was replaced by Theiring who assumed the role of client representative in the litigation and who had access to all client communications by Lennartz.

The purchase agreement transferred all assets and liabilities except certain grants that were restricted from transfer to a for-profit corporation. Included were all computers and servers without restrictions. Attorney-client communications in pending cases were not excluded, as plaintiff became the real party in the litigation.

Defendant advised San Fernando not to dissolve, as would be the normal course of business, because of distribution from a trust. Instead, it merged with Health Center, and held the non-profit grants. Plaintiff became the client in the litigation, including the appeal and numerous post-appeal motions. Defendant signed a stipulation adding plaintiff to the action on the grounds that it was the continuation of the selling corporation and had the same directors and employees carrying on the same business. Defendant continued to do all the work on the appeal, although not appearing as attorney of record.

Simmons, the CEO of Health Center, formerly San Fernando, would not give defendant a declaration that attorney-client privilege had not been waived. Simmons told defendant that everything associated with the Darbun litigation was assumed by plaintiff after the purchase. The declarations obtained by defendant were not authorized by Health Center.

In moving for attorney fees in the Darbun litigation, defendant redacted the name of plaintiff over 60 times, but not names associated with Health Center. Health Center instructed defendant not to assert attorney-client privilege.

Evidentiary Objections

Defendants’ objections to plaintiffs’ evidence are overruled.

Relevant Facts

The discovery requests were from plaintiff Deanco Healthcare only. Plaintiff Deanco Realty not only did not make the discovery requests, it also was not a party to the asset purchase agreement. Deanco Realty was never represented by defendant Arent Fox or its attorneys. This motion addresses only Deanco Healthcare.

The Asset Purchase Agreement specifically excluded transfer of “attorney-client privileged communications and confidential records or correspondence of Seller.” (§ 2.2(a).)

Plaintiff took charge of assets, although the sale had not closed, on January 10, 2011. This included directing Darbun litigation.

The purchase closed July 12, 2013.

There are three distinct time periods, prior to January 10, 2011, after July 12, 2013, and the time between those two dates.

Any privileged communications or confidential documents dates before January 10, 2011, were excluded from the sale, and Deanco Healthcare is not authorized to have those communications or confidential documents. It does not appear that Deanco Healthcare ever notified San Fernando or Arent Fox that it was in possession of attorney-client privileged documents or confidential records or correspondence before it produced such documents in connection with this litigation. Those records should be returned to San Fernando.

Deanco Healthcare is owner beginning July 12, 2013, and entitled to all privileged communications and confidential records from the Darbun litigation dated July 12, 2013, and after. From that date, Deanco Healthcare was the real party in interest in the Darbun litigation, even if it was not formally substituted into the action.

Under either party’s scenario, Deanco Healthcare is entitled to communications and documents beginning January 10, 2011. Deanco Healthcare states that on that date it assumed its interest in the litigation, and became defendant’s client in the litigation. If this is so, Deanco Healthcare is the client and holds the privilege.

Defendant states Deanco Healthcare merely acted as San Fernando’s agent in the litigation, and San Fernando still held the privilege. However, as San Fernando’s agent in directing the litigation and making all litigation decisions, San Fernando waived the privilege as to Deanco Healthcare. Deanco Healthcare was necessarily involved in the communications, and in the position of reviewing defendant’s work product in order to make litigation decisions.

The attorney-client privilege is waived with respect to a communication protected by the privilege if any holder of the privilege, without coercion, has disclosed a significant part of the communication or has consented to disclosure made by anyone. (Evid. Code § 912, subd. (a).) The intent to disclose does not operate as a waiver, waiver comes into play after a disclosure has been made. (Lohman v. Superior Court (1978) 81 Cal. App. 3d 90, 95.) San Fernando waived any attorney-client privilege by appointing Deanco Healthcare to take charge of all communications and decisions regarding the Darbun litigation, under the facts submitted by defendants in support of the motion. It also appears that defendants did not object to the direction of the litigation by Deanco Healthcare, or to disclosure of their work product to Deanco Healthcare after January 10, 2011.

Conclusion

The asset purchase agreement was not a merger. San Fernando excluded specific property from the sale. San Fernando continued to operate after the sale, and continues to operate at this time. There does not appear to be agreement among the members of San Fernando’s board of directors at this time as to whether the board intends to enforce its attorney-client privilege as to the communications and confidential records prior to January 10, 2011. The court is inclined to give more weight to those board members who were with San Fernando at the time of the asset purchase agreement, and to the plain language of the contract. Additionally, as to any documents subject to the work product doctrine, Arent Fox and its attorneys hold the privilege, which San Fernando cannot waive. Defendants Arent Fox and Jeffry are not required to respond to the written discovery regarding any communications, confidential or privileged information or documents prior to January 10, 2011. Because those communications and records were specifically excluded from the sale, and Deanco Healthcare was not authorized to receive them, the court also instructs Deanco Healthcare to return those documents to San Fernando.

As to documents and information beginning January 10, 2011, neither San Fernando nor Arent Fox and its attorneys asserted any privilege when Deanco Healthcare took over direction of the Darbun litigation and acted as the real party and client. Whether Deanco Healthcare was the client or acted as agent of San Fernando at that time, any privilege was voluntarily waived as to Deanco Healthcare. The request for a protective order is denied.

Sanctions

The court is not inclined to award any sanctions. This was a complicated issue. Both parties were successful in portions of the motion and unsuccessful in others. Both had substantial justification for making or opposing the motion.

San Fernando is not a party to this action. As stated above, it also appears its board is not in agreement over its desire to assert privilege over documents, despite its contractual ability to do so. The court is not inclined to address the issue of Deanco Healthcare’s attorneys contacting principals of San Fernando in this motion.