Attorney-Client Privilege — Corporate Metamorphoses

Businesses move from one corporate entity to another. Does the attorney-client privilege covering communications between business executives and their counsel move with the business? Sometimes.

It is well-settled that a transfer of corporate assets, without more, does not transfer the right to assert or waive the attorney-client privilege. See, e.g., In re In-Store Advertising Sec. Litig., 163 F.R.D. 452, 458 (S.D.N.Y. 1995); Zenith Elec. Corp. v. v. WH-TV Broad. Corp., 2003 U.S. Dist. LEXIS 13816 (N.D. Ill. 2003). ‛Without more,“ however, is a loaded phrase. What ‛more“ is required?

The District of Maine, in Coffin v. Bowater Inc., 2005 U.S. Dist. LEXIS 9395 (D. Me. 2005), ruled that ‛the practical consequences rather than the formalities of the particular transaction“ control, and that, ‛if the practical consequences ... result in the transfer of control of the business and the continuation of the business under new management, the authority to assert or waive the attorney-client privilege will follow as well.“ Id. at *7 (quoting and following Soverain Software LLC v. Gap, Inc., 340 F. Supp. 2d 760, 763 (E.D. Tex. 2004)).

Last week, in Am. Int’l Specialty Lines Ins. Co. v. NW-1, Inc., 2007 U.S. Dist. LEXIS 3025 (N.D. Ill. Jan. 16, 2007), the Northern District of Illinois was faced with a knotty set of privilege claims arising out of the corporate metamorphosis of Fruit of the Loom (‛Old FTL“) after its Chapter 11 bankruptcy. At the time of its filing, Old FTL was embroiled in environmental claims relating to seven contaminated properties. In the final plan, six successor entities were recognized, five trusts and Newco, a Berkshire Hathaway subsidiary to which the apparel business assets were transferred (‛New FTL“). After the plan was confirmed, some of the environmental litigation was settled, but significant coverage claims against the insurers of Old FTL survived. The claims were reposed in two of the trusts, and all of the attorney-client privilege and work product protection relating to the environmental claims was also transferred to those trusts by agreements approved by the bankruptcy court. When the insurers sought relevant documents, the trusts to whom the privilege was transferred sought to assert it. Other successor entities (but not New FTL) also sought to assert the privilege as to other documents sought by the insurers relating to assets that devolved to them. U.S. Magistrate Judge Michael Mason found no precedent that ‛supports allocating the attorney-client privilege based on the division of a debtor's assets to multiple successor entities. Absent control of the corporation, this Court finds that the attorney-client privilege does not pass to a successor entity, even with respect to the assets that were transferred to that successor.“ Despite the agreements that purported to transfer privilege, the Court found none of the successor entities before it (which did not include New FLT) could assert the privilege.

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