Seattle Northwest Securities Corp. v. SDG Holding Co., Inc.
| Decision Date | 01 July 1991 |
| Docket Number | No. 26027-8-I,26027-8-I |
| Citation | 61 Wn.App. 725,812 P.2d 488 |
| Parties | SEATTLE NORTHWEST SECURITIES CORPORATION, a Washington corporation, Respondent, v. SDG HOLDING COMPANY, INC., a Washington corporation, individually and as successor to SNW Enterprises, Inc., a Washington corporation; Seattle Development Group, Inc., a Washington corporation; Donald Morken and Jane Doe Morken, individually and as a marital community; Richard McLean and Jane Doe McLean, individually and as a marital community, Appellants. |
| Court | Washington Court of Appeals |
Christopher R. Osborn, Stephan J. Francks, Christopher J. Soelling, Short, Cressman & Burgess, Seattle, for appellants.
David F. Jurca, Helsell, Fetterman, Martin Todd & Hokanson, Seattle, for respondent.
Appellants challenge the trial court's order of contempt and entry of default judgment as sanctions for failure to comply with orders for discovery of documents and testimony which appellants claim are privileged. We agree that, on the record before us, appellants' claims of attorney-client privilege are valid. We therefore reverse the trial court's order of contempt and entry of default judgment and remand to the trial court for further proceedings in accordance with this opinion.
Appellant SDG Holding Company, Inc. ("SDG") is the successor in interest to SNW Enterprises, Inc., the former parent company of the former Seattle Northwest Securities Corporation. Appellants Donald Morken and Richard McLean are the officers, directors, and owners of SDG. In 1982, pursuant to a Business Transfer Agreement (the "Agreement"), SNW Enterprises agreed to sell the former Seattle Northwest Securities Corporation to New SN Securities Corporation, a new corporation formed by SNW Enterprises' minority stockholders. New SN Securities then changed its name to Seattle Northwest Securities Corporation ("SNW"), the plaintiff/respondent in the present case.
Anticipating that legal claims might be made against the former entity, the Agreement provides in pertinent part that:
(c) Any claim or liability arising out of the business or connected with the assets of either Seattle-Northwest, Seller, or SDG, as a result of event [sic ] occurring prior to May 1, 1982, ... shall be borne seventy-five percent (75%) by Seller [SDG] and twenty-five percent (25%) by Purchaser [SNW], provided that such claim or liability is asserted within three years of the date of this Agreement, and provided, further, that in no event shall Seller's liability hereunder for any claims or liabilities arising out of the securities business or connected with the assets of Seattle-Northwest exceed the aggregate sum of $2,475,000 ...
(c) ... The party which, pursuant to Section 4.1, is responsible for the greater proportion of the potential liability resulting from such claim shall be responsible for defending the same; ... the defending party may proceed in such manner as it deems appropriate to either defend or compromise the claim, without further participation or interference in the proceedings by the other party, which party shall be deemed to have waived any objection it may have had to any liability ultimately asserted against it as a result of the other party's handling of the claim. If the parties cannot agree on a course of action with respect to any such asserted claim, the party wishing to resist or defend, provided its counsel can state in writing that there is a [sic] least a reasonable possibility of successfully defending or resisting the claim, shall be entitled to control the disposition of the matter and shall, through counsel selected by it, proceed to resist or defend the claim in such manner as it deems appropriate; provided, however, that the other party may upon written notice at any time, by agreeing to assume all potential liability arising out of such claim, elect to take charge of the defense thereof, or to compromise or admit the same, in which event such party shall indemnify and hold harmless the other party from any liability with respect thereto and shall reimburse such other party for any costs theretofore incurred or expended by it in the defense thereof.
Shortly thereafter, in August 1983, the owners of the new SNW were notified that the lead underwriters for sales of WPPSS bonds had been named in several lawsuits concerning the bonds. This notification indicated that SNW was obligated to pay any share of liability plus legal fees required pursuant to an agreement between the former Seattle Northwest Securities Corporation and the underwriters. Within 10 days, SNW delivered a copy of the notification of the claim to SNW Enterprises, the forerunner of SDG, and formally requested that SNW Enterprises assume responsibility for defending the WPPSS claim pursuant to the provisions of the Agreement.
SDG hired the Davis, Wright law firm to represent SDG and SNW with respect to this claim, and later substituted George Greer of the Heller, Ehrman firm because of a conflict of interest on the part of Davis, Wright in the WPPSS litigation. Davis, Wright continued to represent SDG as general counsel and to provide advice regarding SDG's rights and obligations under the Agreement. However, in August 1987, allegedly at SNW's request that the Davis, Wright firm not be used at all because of potential conflicts, SDG retained John Burgess of Short, Cressman and Burgess. According to SDG, Burgess was retained solely for advice regarding SDG's rights and responsibilities under the Agreement. SDG asserts that Greer of Heller, Ehrman, who was also counsel at this time, was counsel for the WPPSS claims.
In early August 1987, the principal underwriter defendants requested that SDG, as representative of SNW under the Agreement, participate in a settlement proposal to the WPPSS class plaintiffs. This offer was communicated to both SDG and SNW by a series of letters sent from Greer that explained the settlement offer and attempted to weigh the advantages and disadvantages of participation in the settlement proposal. In his letter on the subject dated August 31, 1987, Greer recommended acceptance of the offer, but indicated that this was not the only acceptable course of action and that the risk of a catastrophic judgment against SNW in favor of WPPSS plaintiffs was "remote."
On this same day, Burgess wrote Greer that SDG was not recommending acceptance of this settlement offer because of lack of SNW fault as well as available defenses. On September 1, 1987, Burgess also wrote a letter to James Robart, counsel for SNW, explaining that he believed that SNW had valid defenses, that "good faith" required a "reasonable possibility of successfully defending or resisting the claim," and that SNW could assume the defense of the action pursuant to the Agreement if it disagreed with his recommendation.
Apparently in response to this letter, Greer wrote Burgess and clarified that the lead underwriters indicated that the chances of their winning on summary judgment or winning a jury verdict were slim, even though there appeared to be no fault on the part of SNW. He specifically noted that the attorneys for the lead underwriters had not suggested that "there is at least a reasonable possibility of successfully resisting or defending the claim" of the WPPSS plaintiffs against them, and that he had not commented on that issue either.
SDG continued to refuse to enter the settlement agreement, and SNW then entered into the settlement agreement on its own. SNW then sued SDG for damages, claiming that SDG had failed to give proper notice and to provide evidence of the reasonableness of its decision to pursue the case, and that it had acted in bad faith. SNW's theory of bad faith posits that SDG refused to enter into the settlement agreement in order to force SNW to assume responsibility for the defense, thereby allowing SDG, pursuant to section 4.2(c) of the Agreement, to avoid any liability to the WPPSS plaintiffs.
In June 1988, SNW made a motion to compel discovery of matters that SDG claimed were protected by the attorney-client privilege. Specifically, SNW wished to compel production of any legal opinions by Burgess regarding the advisability of settling the WPPSS litigation and any other documents relating to this decision. In a letter to the parties dated January 4, 1988, but apparently signed on January 4, 1989, the trial court granted this motion and ordered the defendants to promptly provide plaintiff with:
(a) communications between defendants and Short, Cressman & Burgess pertaining in any way to defendants' decision not to participate in the settlement, and
(b) Work performed, analyses made, conclusions drawn, and recommendations made as to the "reasonable possibility" language in the Business Transfer Agreement which is the subject of this suit....
The trial court also ordered and allowed the deposition of Burgess, but reserved ruling on the admissibility of the evidence at trial.
SDG then sought discretionary review of this interlocutory order in this court arguing that it was a violation of the attorney-client privilege. This request was denied. The Washington Supreme Court Commissioner then affirmed this denial, and a motion to modify this ruling before the Supreme Court was denied.
In spite of these rulings, SDG did not produce the requested documents and was held in contempt by the trial court on March 26, 1990. Pursuant to CR 37, the trial court then entered the sanction of default on all claims to which the requested material is relevant. The sanction was stayed on SDG's motion pending this appeal.
Appellants challenge the contempt order by claiming that the order of discovery of specific documents and the deposition of Burgess were improper since they violated the attorney-client privilege. Before we examine the issues of attorney-client privilege, however, we first address respondent's contention that a civil contempt proceeding is not...
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Table of Cases
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