                                 IN THE
             ARIZONA COURT OF APPEALS
                              DIVISION ONE


     EVEREST INDEMNITY INSURANCE COMPANY, a Delaware
                   corporation, Petitioner,

                                     v.

THE HONORABLE JOHN REA, Judge of the SUPERIOR COURT OF THE
 STATE OF ARIZONA, in and for the County of MARICOPA, Respondent
                             Judge,

   RUDOLFO BROS. PLASTERING, INC., an Arizona corporation;
  WESTERN AGRICULTURAL INSURANCE COMPANY, an Arizona
              corporation, Real Parties in Interest.

                           No. 1 CA-SA 14-0094
                             FILED 1-15-2015


 Petition for Special Action from the Superior Court in Maricopa County
                              CV 2011-008576
                 The Honorable John Christian Rea, Judge

           JURISDICTION ACCEPTED, RELIEF GRANTED


                                COUNSEL

Kunz Plitt Hyland & Demlong, Phoenix
By Steven Plitt, Joshua D. Rogers, Steven J. Gross
Counsel for Petitioner,

Holm Wright Hyde & Hays, PLC, Phoenix
By Kirk H. Hays, Jared M. Scarbrough
Counsel for Real Parties in Interest
                    EVEREST v. HON REA/RUDOLFO
                         Opinion of the Court



                                 OPINION

Presiding Judge John C. Gemmill delivered the opinion of the Court, in
which Judge Peter B. Swann joined. Judge Patricia A. Orozco dissented.


G E M M I L L, Judge:


¶1             The issue presented in this special action is whether Petitioner
Everest Indemnity Insurance Company has impliedly waived the attorney-
client privilege by asserting subjective good faith as a defense in this bad
faith case. For the reasons that follow, we accept special action jurisdiction
and grant relief.

                              BACKGROUND

¶2             Everest challenges the trial court’s order requiring production
of documents it contends are privileged communications between it and its
counsel. Real Parties in Interest Rudolfo Brothers Plastering and Western
Agricultural Insurance Company (collectively “Rudolfo”) argue that
Everest impliedly waived the attorney-client privilege by defending against
their bad faith claim on the basis of subjective good faith.

¶3             In the underlying case, Rudolfo claims that Everest
committed bad faith by entering into a settlement agreement that exhausted
the liability coverage of an Owner Controlled Insurance Program (OCIP)
policy to the alleged detriment of certain insureds such as Rudolfo. Everest
contends that the decision to settle was made in good faith based on its
subjective beliefs concerning the relative merits of the various available
courses of action.1 Everest acknowledges that it communicated with
counsel during the process of making that decision. The issue is whether
Everest impliedly waived the attorney-client privilege regarding those



1  Everest is also defending on the basis of objective reasonableness. The
issue of implied waiver of the attorney-client privilege focuses, however,
on the subjective good faith defense. See State Farm Mut. Auto. Ins. Co. v.
Lee, 199 Ariz. 52, 56–58, ¶¶ 9–15, 13 P.3d 1169, 1173–75 (2000) (explaining
that generally no issue of implied waiver is presented when an insurer
defends a bad faith case on the basis of objective good faith).


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                    EVEREST v. HON REA/RUDOLFO
                         Opinion of the Court

communications by asserting its subjective belief in the good-faith nature
of its actions and by consulting with counsel during that period of time.

¶4            Acceptance of special action jurisdiction is highly
discretionary. Because an erroneous order compelling disclosure cannot be
remedied by appeal, we exercise jurisdiction here. See, e.g., Salvation Army
v. Bryson, 229 Ariz. 204, 205, ¶ 1, 273 P.3d 656, 657 (App. 2012).

       IMPLIED WAIVER OF ATTORNEY-CLIENT PRIVILEGE

¶5             The attorney-client privilege may be deemed waived when
application of the privilege would deny an opposing party access to
necessary information to counter a claim or defense asserted by the other
party. State Farm Mut. Auto. Ins. Co. v. Lee, 199 Ariz. 52, 62, ¶ 28, 13 P.3d
1169, 1179 (2000). It is not sufficient that the information sought is relevant
or important to a claim or defense; the party holding the privilege must take
steps to place the privileged information at issue. In Lee, the Arizona
Supreme Court explained that to waive the privilege, a party must do more
than simply confer with counsel and take action incorporating counsel’s
advice. Id. at 66, ¶ 38, 13 P.3d at 1183. Waiver is implied when, after
receiving advice from an attorney, a party makes an affirmative assertion
that it was acting in good faith because it relied on counsel’s advice to inform
its own evaluation and interpretation of the law. Id.

¶6           Rudolfo relies on this court’s decision in Mendoza v.
McDonald’s Corp., 222 Ariz. 139, 154, ¶ 51, 213 P.3d 288, 303 (App. 2009), for
the proposition that by choosing to defend itself based on the subjective
reasonableness of its actions after consulting with counsel, Everest has
necessarily waived the attorney-client privilege. That argument, however,
overreads Mendoza and is inconsistent with Lee. Indeed, Lee expressly held
that the assertion of a subjective good faith defense coupled with
consultation with counsel did not, without more, waive the attorney-client
privilege:

       We assume client and counsel will confer in every case,
       trading information for advice. This does not waive the
       privilege. We assume most if not all actions taken will be
       based on counsel’s advice. This does not waive the privilege.
       Based on counsel’s advice, the client will always have
       subjective evaluations of its claims and defenses. This does
       not waive the privilege. All of this occurred in the present
       case, and none of it, separately or together, created an implied
       waiver.



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                     EVEREST v. HON REA/RUDOLFO
                          Opinion of the Court

Lee, 199 Ariz. at 66, ¶ 38, 13 P.3d at 1183.

¶7             To waive the privilege, something more is required. Under
Lee, the attorney-client privilege is impliedly waived only when the litigant
asserts a claim or defense that is dependent upon the advice or consultation
of counsel:

       But the present case has one more factor—State Farm claims
       its actions were the result of its reasonable and good-faith
       belief that its conduct was permitted by law and its subjective
       belief based on its claims agents’ investigation into and
       evaluation of the law. It turns out that the investigation and
       evaluation included information and advice received from a
       number of lawyers. It is the last element, combined with the
       others, that impliedly waives the privilege. State Farm claims
       that its actions were prompted by what its employees knew
       and believed, not by what its lawyers told them. But a litigant
       cannot with one hand wield the sword—asserting as a
       defense that, as the law requires, it made a reasonable
       investigation into the state of the law and in good faith drew
       conclusions from that investigation—and with the other hand
       raise the shield—using the privilege to keep the jury from
       finding out what its employees actually did, learned in, and
       gained from that investigation.

Id. (emphasis added).

¶8            In Lee, State Farm waived the attorney-client privilege
because its defense was based on its “investigation and evaluation” of the
law, which inevitably depended on and necessarily included the advice it
received from its lawyers. Id. The coverage issue in Lee turned on State
Farm’s interpretation of recently-decided case law. In such a situation, “the
party’s knowledge about the law is vital, and the advice of counsel is highly
relevant to the legal significance of the client's conduct.” Id. at 62, ¶ 28, 13
P.3d at 1179. State Farm’s actions were therefore “inextricably intertwined”
with the advice it received from counsel. Id. at 60, ¶ 23, 13 P.3d at 1177.
Accordingly, our supreme court held that State Farm had impliedly waived
the attorney-client privilege in that situation.

¶9           Under Lee, to waive the attorney-client privilege, a party must
make an affirmative claim that its conduct was based on its understanding
of the advice of counsel—it is not sufficient that the party consult with
counsel and receive advice. Id. at 60, ¶ 23, 13 P.3d at 1177; see also Twin City



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                     EVEREST v. HON REA/RUDOLFO
                          Opinion of the Court

Fire Ins. Co. v. Burke, 204 Ariz. 251, 256, ¶ 21, 63 P.3d 282, 287 (2003) (finding
that no waiver of privilege occurred when party had not “affirmatively
injected any advice it received from counsel into the bad faith action”).
Here, there has been no showing that Everest was in doubt as to any legal
issue. Rather, it made decisions during the course of litigation and, of
necessity, involved lawyers in that litigation. The decision Everest made to
settle the case was not necessarily the product of legal advice, and Everest
has not yet asserted—expressly or impliedly—that it was.

¶10           In Mendoza, an employer relied on the advice of counsel in
scheduling independent medical examinations and determining whether to
issue surgical authorization for an employee’s worker’s compensation
claim. 222 Ariz. at 154, ¶¶ 48–49, 213 P.3d at 303. The employer expressly
admitted that it had relied substantially on the advice of worker’s
compensation counsel in reaching its decisions. Id. at 154, ¶¶ 48–50, 213
P.3d at 303. In the face of decisions made based on the advice of counsel,
such a claim that those decisions were made in subjective good faith
necessarily depends upon the information the client had learned from its
lawyers. In that circumstance, Mendoza found the attorney-client privilege
was impliedly waived under Lee. Id. at 155, ¶ 53, 213 P.3d at 304.

¶11            At present, Everest’s defense falls short of the Lee and
Mendoza requirements for an implied waiver. Everest contends that it acted
with a subjective belief in the good-faith nature of its actions. Everest also
admits that it consulted counsel before making the decision to enter into the
settlement agreement and that counsel were involved in the settlement
negotiations. But these facts alone are not enough to suggest that Everest’s
subjective belief in the legality of its actions necessarily included or
depended on the advice it received from counsel. See Lee, 199 Ariz. at 66, ¶
38, 13 P.3d at 1183. Everest has not asserted as a defense, at least not yet,
that it depended on advice of counsel in forming its subjective beliefs
regarding the appropriate course of conduct. Similarly, Everest has not yet
seen the need to share the advice of its counsel with its own expert—the
expert simply cites the fact of consultation as a procedural indication of
good faith. As such, Everest has not yet placed the advice it received from
counsel at issue in this litigation.2


2  We respectfully disagree with our dissenting colleague regarding the
significance of Everest’s counsel participating in the settlement
negotiations. No authority has been presented that participation by a
client’s attorneys in settlement negotiations automatically waives the



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                    EVEREST v. HON REA/RUDOLFO
                         Opinion of the Court



                               CONCLUSION

¶12          For these reasons, we vacate that portion of the trial court’s
order regarding implied waiver of Everest’s attorney-client privilege.



O R O Z C O, Judge, dissenting:

¶13            The Majority admirably analyzes the relevant law concerning
this special action. I respectfully disagree, however, with their application
of that law to these facts. In sum, I believe the facts here establish “the
something more” than Everest’s mere consultation with counsel, and, as a
result, I would decline jurisdiction over this special action.

¶14           Generally, I agree with the Majority’s conclusion that simply
asserting a subjective good faith defense does not, by itself, waive the
attorney-client privilege. I also agree with the Majority’s reading of
Mendoza as narrowly applying Lee to Mendoza’s particular facts, as opposed
to Rudolfo’s proffered reading that suggests Mendoza establishes automatic
waiver of privilege upon asserting subjective good faith.

¶15             The Majority and I part ways on the conclusion that “Everest
has not asserted as a defense, at least not yet, that it depended on advice of
counsel in forming its subjective beliefs[.]” Supra at ¶ 11. Everest has
asserted in its initial disclosure statement and in response to interrogatories
that it acted in good faith by reaching the settlement at issue. Additionally,
the Majority fails to mention that not only did Everest consult counsel
regarding the settlement negotiations, counsel also participated in those
negotiations on Everest’s behalf. In my view, such participation indicates
that Everest’s counsel did more than provide advice, counsel was directly
involved in the relevant events. Counsel’s participation, along with
Everest’s assertion of subjective good faith, is an affirmative interjection of
counsel’s role in formulating and acting upon Everest’s subjective good
faith in this litigation. See Empire West Title Agency, L.L.C. v. Talamante, 234
Ariz. 497, 499, ¶ 10, 323 P.3d 1148, 1150 (2014) (citing Lee, 199 Ariz. at 62, ¶

attorney-client privilege. And such a rule “would provide perverse
incentives: parties would leave attorneys out of commercial negotiations for
fear that their inclusion would later force wholesale disclosure of
confidential information.” In re Keeper of Records (Grand Jury Subpoena
Addressed to XYZ Corp.), 348 F.3d 16, 24–25 (1st Cir. 2003).


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                    EVEREST v. HON REA/RUDOLFO
                         Opinion of the Court

28, 13 P.3d at 1179) (noting that Lee requires “the party claiming the
privilege must affirmatively interject the issue of advice of counsel into the
litigation” (internal quotations omitted)).

¶16            By ignoring Everest’s counsel’s involvement with settlement
negotiations in their application of Lee and Mendoza, the Majority essentially
enforces, to borrow from Justice Feldman, a “magical admission” standard
that requires a party to formally state it actually relied on counsel before the
attorney-client privilege can be impliedly waived. See Lee, 199 Ariz. at 64,
¶ 32, 13 P.3d at 1181. Lee rejected such a framework, however. See id. at
64-65, ¶¶ 32-33, 13 P.3d at 1181-82. Lee does not require an affirmative
interjection in the sense that an implied waiver occurs only when a party
explicitly states it relied on counsel. Rather, as applied in Mendoza and Lee
itself, whether an affirmative interjection occurred that waives the privilege
depends on the facts. See id., 199 Ariz. at 67, ¶ 40, 13 P.3d at 1184
(concluding that the trial court’s “characterization of State Farm’s position
was reasonably correct under Arizona law”); Mendoza, 222 Ariz. at 152, ¶
41, 213 P.3d at 301 (“Applying Lee to the facts of this case . . . ”).

¶17            The Majority correctly reads Mendoza as a fact-based
application of Lee, but it declines to perform a similar analysis here, opting
instead to rely on the form of Everest’s assertions instead of the substance
of the facts before us. We need not apply Lee so mechanically. It is true that
Everest has not yet explicitly stated that it relied on counsel in acting with
subjective good faith, but its actions are proof enough. Counsel’s
participation in settlement negotiations shows Everest’s actions are
“inextricably intertwined” with the advice it received from counsel. See Lee,
199 Ariz. at 60, ¶ 23, 13 P.3d at 1177. Accordingly, I disagree that Everest is
entitled to relief, and I respectfully dissent.




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