On appeal from Superior Court, Chancery Division, Essex County.
Michels, Petrella and Baime. The opinion of the court was delivered by, Baime, J.A.D.
[196 NJSuper Page 557] We granted plaintiff's application for leave to appeal from an interlocutory order of the Superior Court, Chancery Division, to address significant questions pertaining to the parameters of the attorney-client privilege within the corporate context. At issue is the extent to which confidential communications between corporate officers, in-house counsel and others are protected under the attorney-client privilege. Auxiliary questions are presented concerning the doctrine of waiver. Finally, additional issues pertain to the appropriate procedures to be employed in resolving questions relating to the applicability and scope of the privilege within the framework of the pretrial discovery process. We hold that the privilege can be invoked only with respect to those confidential communications between corporate counsel and others which fall strictly within the attorney's professional capacity. We also conclude that the attorney-client shield may be pierced when confidential communications
are made a material issue by virtue of the allegations in the pleadings and where such information cannot be secured from any less intrusive source. Lastly, we find that resolution of these issues by the trial judge through an in camera inspection of the materials sought to be barred from disclosure does not substantially dilute the attorney-client privilege.
The facts are not in dispute for the purpose of this appeal. Sometime in 1971, defendant Morty Wolosoff and a group of investors executed a mortgage note with plaintiff United Jersey Bank. Following a default on that obligation, plaintiff instituted suit resulting in a final judgment being entered on March 2, 1981 against defendant Wolosoff in the sum of $3,957,571. According to allegations set forth in plaintiff's complaint in the instant case and the accompanying certification, Wolosoff's attorney, defendant Richard Salsburg, met with Robert Mulligan, the bank's vice-president and in-house counsel, in an effort to resolve questions concerning the manner in which the judgment was to be satisfied. Defendant Salsburg allegedly represented that Wolosoff's only assets were those disclosed in certain income tax returns and a 25% interest in Cable Systems, Inc. (CSI). According to Salsburg, Wolosoff's stock in CSI was worthless because that company had accumulated liabilities totaling $9,500,000. Salsburg further represented that by virtue of Wolosoff's precarious financial condition the most he could pay on the judgment was $680,000. Negotiations between the parties continued over an extended period of time and ultimately resulted in a stipulation of settlement which was filed on May 20, 1981. Under the stipulation, the judgment was to be satisfied by the payment of $875,000 in four installments.
According to Mulligan's certification, in June 1983, he first learned that Wolosoff had substantial assets during the period when the settlement negotiations were taking place and the stipulation was effected. Contrary to the representations which had been made during the negotiation process, Mulligan learned that Wolosoff's investment in CSI was substantial and had a value in excess of $5,000,000. Mulligan also found that
during the settlement negotiations Wolosoff owned marketable securities and municipal bonds in the amount of $1,235,000 as well as 97 acres of real estate in Florida worth well over $1,000,000. According to Mulligan, Wolosoff's attorneys had grossly misrepresented his financial condition. Considering the value of the assets that had not been disclosed, Mulligan estimated that Wolosoff's net worth exceeded $9,000,000.
As a result of this information, plaintiff instituted suit against Wolosoff seeking rescission of the stipulation of settlement and damages. Plaintiff also sought injunctive relief requiring Wolosoff to satisfy the entire amount of the judgment against him from his share of the proceeds of a transaction involving CSI stock. The matter was then removed to the United States District Court where a preliminary injunction was entered enjoining Wolosoff from transferring his income or assets. The case was thereafter remanded to the Chancery Division upon the basis that the removal request had been improvidently granted. In the interim, plaintiff filed another complaint against Wolosoff, the law firm of Mandelbaum, Salsburg, Gold and Lazris, and Salsburg individually. In the second suit, plaintiff alleged that Salsburg and the law firm intentionally and fraudulently misrepresented Wolosoff's financial condition in order to obtain a reduction of the amount owed on the judgment. Plaintiff sought various forms of injunctive relief and compensatory and punitive damages. Both complaints were subsequently consolidated for trial.
The tortured history surrounding the pretrial discovery process in this case need not be recounted at length here. Suffice it to say, the desultory pace of disclosure resulted in numerous court hearings. On the final date set for the simultaneous production of voluminous documents, plaintiff's attorney belatedly advised Wolosoff of the bank's intention to assert the attorney-client privilege. In a letter, defendants were advised that the bank would waive the privilege with respect to all documents prepared during the period of the settlement negotiations. Plaintiff's attorney acknowledged that some or all of
those materials were pertinent to the issue of whether Mulligan and the bank reasonably relied upon the representation of Salsburg and Wolosoff. Since reasonable reliance constituted a critical element of its claim, plaintiff apparently adopted the position that full pretrial disclosure was legally mandated. Nevertheless, plaintiff's attorney sought to assert the privilege with respect to all other documents and materials. In response, defendants immediately applied for sanctions against the bank pursuant to R. 4:23-1 and 2. In its notice of motion, defendants sought an order directing the bank to produce all of the documents requested without reservation or the claim of privilege. The atmosphere surrounding the hearing on the return date of the motion can best be described as acrimonious. Obviously exasperated by what he perceived to be the dilatory tactics of counsel, the trial judge nevertheless denied the application for sanctions. However, he "interpreted" his prior orders as compelling full pretrial ...