Maleski by Chronister v. Corporate Life Ins. Co.

• Decision Date: 22 March 1994
• Citation: 163 Pa.Cmwlth. 49,641 A.2d 7
• Parties: Cynthia M. MALESKI, Insurance Commissioner of the Commonwealth of Pennsylvania, by Her Deputy, Ronald E. CHRONISTER, Plaintiff, v. CORPORATE LIFE INSURANCE COMPANY, Defendant. . Heard
• Court: Pennsylvania Commonwealth Court

Page 7

641 A.2d 7

163 Pa.Cmwlth. 49

Cynthia M. MALESKI, Insurance Commissioner of the Commonwealth of Pennsylvania, by Her Deputy Ronald E. CHRONISTER, Plaintiff, v. CORPORATE LIFE INSURANCE COMPANY, Defendant.

Commonwealth Court of Pennsylvania.

Heard March 22, 1994.

Decided March 25, 1994.

Publication Ordered April 11, 1994.

Jerome J. Shestack, Zachary L. Grayson and Linda J. Wells, for plaintiff.

Peter J. Tucci, Michael L. Browne, Denise Pallante and Richard A. Sprague, for defendant.

James D. Golkow, Patrick J. O'Connor, Gerianne Hannibal and Douglas B. Lang, for intervenor, Berry & Martin.

PELLEGRINI, Judge.

The law firm of Berry & Martin (Berry & Martin), former counsel to Corporate Life Insurance Company (Corporate Life) moves for reconsideration of this Court's order of March 9, 1994, regarding the disposition of nineteen sealed boxes of documents from files relating to its representation of Corporate Life. Berry & Martin now contends that it is entitled to retain all files related to its representation of Corporate Life because non-payment of its bills has given it a common law retaining lien on those files.

On February 18, 1994, following a determination that the corporation was insolvent within the meaning found in the Insurance Department Act (Act), ¹ this Court ordered that Corporate Life, a Pennsylvania stock life insurance company, be dissolved and liquidated and the Insurance Commissioner be appointed Statutory Liquidator. In addition to the Order of Liquidation, this Court also directed that all files pertaining to Corporate Life be turned over to the law firm of Wolf, Block, Schorr and Solis-Cohen (Wolf, Block) acting on behalf of the Statutory Liquidator. After Wolf, Block determined that Berry & Martin had served as legal counsel to Corporate Life, representatives of Wolf, Block demanded that all Berry & Martin files pertaining to the corporation be turned over.

In compliance with this Court's order, Berry & Martin turned over all Corporate Life files in its possession, but sealed nineteen boxes of documents, asserting immunity under the attorney-client privilege on behalf of both Corporate Life and its former directors and officers, as well as the work-product doctrine on its own behalf. Berry & Martin then filed a motion for reconsideration of the February 18, 1994, order, essentially seeking a protective order regarding the contents of the nineteen sealed boxes. At issue in that motion for reconsideration were three questions dealing with whether Berry & Martin could withhold documents relating to Corporate life. Specifically raised were:

1) Whether the former managers of Corporate Life could claim Corporate Life's attorney-client privilege in any documents in those files;

2) Whether former directors and officers of Corporate Life could claim a privilege separate from that of the corporation in any documents in those files; and

3) Whether Berry & Martin could assert a proprietary work-product privilege in those files.

On March 9, 1994, this Court issued an Order granting Berry & Martin's Petition for Reconsideration in part. In doing so, we held:

1) The ability to assert any attorney-client privilege with respect to documents in which Corporate Life could have claimed a privilege had passed to the Statutory Liquidator and that former officers and directors of Corporate Life could not assert such a privilege;

2) That Berry & Martin could not withhold any documents from the Statutory Liquidator on the basis of any work-product privilege; and

3) That the former officers and directors of Corporate Life could potentially assert attorney-client privilege as to any communications they could prove were made to Berry & Martin in their individual, as opposed to corporate capacities.

This Court then ordered that an inventory be taken of the nineteen sealed boxes to permit Berry & Martin to identify those documents in which it could assert a personal attorney-client privilege on behalf of the former officers and directors of Corporate Life.

Berry & Martin filed the instant motion for reconsideration which we granted in part by order limiting the reconsideration to the issue of whether Berry & Martin would be entitled to withhold the contents of its Corporate Life files on the basis of an attorney's retention lien. That argument was not raised previously and is presently the only issue before us.

Berry & Martin contends that because it has not been paid approximately $500,000 for legal work done on behalf of Corporate Life, Pennsylvania law gives it the right to retain all Corporate Life files in its possession, and consequently, it may refuse to turn those files over to the Statutory Liquidator. ² The Statutory Liquidator disputes whether Berry & Martin can assert such a lien, but contends that even if it can, the authority it has to take possession of Corporate Life files under the Act is paramount to such a lien. Moreover, it contends that Kevin Berry, a principle in Berry & Martin, was also an officer of Corporate Life acting as in-house counsel to the insurer and knew that Corporate Life was insolvent when it billed the insurer over $500,000. The Statutory Liquidator contends that to the extent Berry & Martin could exercise any lien, that lien would constitute a voidable preferential transfer under 40 P.S. § 221.30(a)(iv).

Pennsylvania recognizes the equitable right of an attorney to retain possession of documents, money, or other property coming into an attorney's possession by virtue of the professional relationship until the lawyer voluntarily surrenders them or has been paid for his services. Smyth v. Fidelity & Deposit Co., 125 Pa. Superior Ct. 597, 190 A. 398, aff'd, 326 Pa. 391, 192 A. 640 (1937). It is an equitable, passive lien, without the power of enforcement or sale and valuable only to the extent that the attorney's retention of a client's files will embarrass the client. Id. An attorney's retaining lien has no value to the attorney in and of itself. Rather, its value lies in the need of the client for its files. Berry & Martin may therefore be well entitled to assert such a lien, and may be entitled to payment for the services it rendered from the proceeds of the liquidation. However, even assuming that Berry & Martin can prove a valid interest in Corporate Life's files and is entitled to payment, such a purported attorney's lien, as a matter of law, does not act as a bar to a statutory liquidator taking possession of those files prior to the distribution of the proceeds of the insurer in liquidation proceedings under the Act.

In entering into a professional relationship with Corporate Life, Berry & Martin undertook to represent a client engaged in possibly the most regulated field of business in the Commonwealth: the selling of life insurance. By representing a business engaged in the sale of life insurance policies, Berry & Martin took on a client with full knowledge that it was regulated in every aspect of its operation, and subject to regulatory liquidation if need be for the "protection of the interests of the insureds, and the public generally." 40 P.S. § 221.1.

Berry & Martin's ability to retain Corporate Life's legal files is vitiated by two provisions of the Insurance Department Act relating to the power and authority of the statutory liquidator to recover the papers of a liquidated insurer. 40 P.S. § 221.20(c) provides that:

The liquidator shall be vested by operation of law with the title to all of the property, contracts, and rights of action and all of the books and records of the insurer ordered liquidated, wherever located, as of the date of the filing of the petition for liquidation. He may recover and reduce the same to possession....

In addition, 40 P.S. § 221.23(14) specifically gives the statutory liquidator the power to:

remove any or all records and property of the insurer to the offices of the commissioner or to such other place as may be convenient for the purposes of efficient and orderly execution of the liquidation.

These sections form part of a comprehensive regulatory scheme which speaks directly to the power of a statutory liquidator to gain access to those non-privileged documents which may assist in the Act's goal of maximizing the assets of a liquidated insurance company for distribution to the insureds.

Under the New York version of the Uniform Insurer's Liquidation Act containing provisions virtually identical to those found in the Act, the Federal District Court for the Northern District of Ohio addressed the issue presented here. In Superintendent of Insurance of the State of New York v. Baker & Hostetler, 668 F.Supp. 1054 (N.D.Oh.), aff'd without opinion, 826 F.2d 1065 (6th Cir.1987), the statutory liquidator sought possession of the liquidated insurer's files from its pre-liquidation law firm. The firm had refused to deliver the files, asserting that the insurer's non-payment of approximately $300,000 in legal fees entitled it to retain them under a common law attorney's lien. Id. at 1055. In ordering the law firm to turn over the files to the statutory liquidator, the court relied on the language of Section 7409 of the New York Insurance Law (Consol.1985), which gave the statutory liquidator the right to recover all books, records and papers of the liquidated insurer "wherever located." Id. Noting that the same language appears in Section 3903.52(A) of the Ohio Revised Code, the court stated that the language is:

very clear on this point-regardless of any lien Baker may have in the books, accounts or records of Union Indemnity, it must...