United States: Is The Immediate Duty To Defend Gone? California Court Of Appeal Holds That Attorney Invoices In Ongoing Litigation Are Privileged, Although Privilege Can "Expire" Upon Conclusion Of The Case

Parties involved in California construction defect lawsuits over the past nine years are familiar with the following scenario: A developer/general contractor moves for summary adjudication of the contractual duty to defend owed by one or more subcontractors. Pursuant to the Crawford decision, the court grants the motion and finds that, as a matter of law, the subcontractor(s) have an immediate and ongoing duty to defend the developer/general contractor. (Crawford v. Weather Shield (2008) 44 Cal.4th 541) As discussed in a companion article in this newsletter, in Crawford, the California Supreme Court held that a contractual indemnitor must immediately assume an indemnitee's defense, irrespective of whether it is determined that indemnity is actually owed. In our scenario, a developer/general contractor, having prevailed in its motion, then demands immediate payment of its ongoing defense fees and costs. In response, however, the subcontractor(s) demand that the developer/general contractor produce copies of its legal invoices, so that the amount of fees incurred in defending the plaintiff's claim can be determined and so that a reasonable allocation of those fees can be calculated, and the portion of the total which must be paid by a particular subcontractor determined. In response, the developer/general contractor either refuses to produce the invoices, citing privilege, or produces invoices which are so heavily redacted as to make them useless for the purpose of calculating an allocation. In so doing, the developer asserts that the invoices are attorney-client communications which are privileged and not subject to disclosure, pursuant to California Evidence Code Section 952.

In our experience, many judges have sided with subcontractors who argue that, in demanding immediate and ongoing payment for legal invoices, the developer/general contractor has placed the content of its bills in issue in the case and rendered them subject to disclosure. Although California judges have been left to determine how to resolve the dispute over production of legal invoices in an ongoing matter, anecdotal evidence suggests that that they have generally required produced of invoices by counsel for developer/general contractors with limited portions redacted, if immediate and ongoing payments from the subcontractors are desired. A recent decision by the California Supreme Court directly effects this scenario and is already having an impact on construction defect lawsuits.

In L.A. County Board of Supervisors v. Superior Court (2016) _ Cal.5th _ , the California Supreme Court reversed the judgment of the Court of Appeal holding that attorney invoices sent by outside counsel to a public agency were categorically privileged and therefore exempt from disclosure under the California Public Records Act (PRA; Government Code, section 6250 et seq.). The California Supreme Court ruled that the attorney-client privilege does not categorically shield everything in a billing invoice from PRA disclosure, but that invoices for work in pending and active legal matters are protected by the privilege, because they are closely related to attorney-client communications. Underlying the decision were allegations of excessive use of force in the Los Angeles County jail system, which lead to several lawsuits. The County employed outside counsel in defending the lawsuits. The ACLU requested production of the legal invoices generated by counsel, pursuant to a PRA request, to evaluate the nature and extent of the problem. The County willingly produced invoices for three matters which had been resolved, but withheld production of invoices for six more, which were ongoing. A divided Supreme Court ultimately concluded that the attorney-client privileged is limited and that invoices which are deemed privileged while a case is pending may lose that status and be subject to production post-dismissal, but that while an action is pending, an attorney's invoices, to the extent they are conveyed "for the purposes of legal representation," including the disclosure of the timing and amount of time spent on a particular issue or task, contain information which lies directly in the "heartland" of the attorney-client privilege.

Subcontractors can assert that the Los Angeles County Board decision is distinguishable from the construction defect scenario, because it involves a public records request by a third party to the ongoing litigation and because the party asserting the privilege did not place the invoices in issue by demanding payment of the billed amounts, however, it has been our experience so far that Superior Court judges are interpreting the Supreme Court's holding to apply to the production of attorney invoices in any ongoing matter, and to preclude the production of those invoices. As a practical matter, this effectively requires a second proceeding following conclusion of the construction defect litigation, during which the invoices may be produced and examined and an appropriate allocation of the developer/general contractor's invoices calculated.

A developer/general contractor can elect to waive the privilege and to produced invoices with limited redactions, so that the entire matter can be resolved at mediation or settlement conference while the construction defect lawsuit is pending. Absent such waiver, however, the amount of legal fees and costs owed by subcontractors, including potentially those found to have no liability to the developer in the underlying case, will need to be determined in a second proceeding which follows settlement or trial of the main action. Where the privilege is not waived, all parties to a defect case who entered into a subcontract which includes a contractual defense obligation, save for those with a carrier which is defending the developer as an additional insured, are subject to participation in a post-trial or post-settlement proceeding to determine their obligation to contribute to the developer's defense expenses.

The manner in which the Los Angeles County Board decision is interpreted and applied by judges in California construction defect matters will directly impact construction defect cases for the foreseeable future and may result in further relevant opinions by Courts of Appeal or the Supreme Court. Should any relevant new decisions be issued, we will report on them in future editions of this newsletter.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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