Commercial Litigation and Arbitration

Trustee of Litigation Trust Succeeds to Attorney-Client Privilege of Creditors’ Committee for Reports Prepared by Committee Counsel — Common Interest and Work Product also Extend to Reports

The Creditors’ Committee in Osherow v. Vann, 2009 Bankr. LEXIS 1152 (Bankr. W.D. Tex. April 13, 2009), retained counsel to evaluate claims held by the debtor. After the reports were prepared, a Litigation Trust was appointed. It was assigned the claims and designated a successor-in-interest to the Committee. The Trustee of the Litigation Trust asserted attorney-client privilege and work product protection to protect the reports from disclosure to defendants in the action the Trustee had commenced:

Attorney-Client Privilege

We turn first to whether the Trustee is the holder of an attorney-client privilege. In Commodity Futures Trading Commission v. Weintraub, 471 U.S. 343, 85 L.Ed. 2d 372, 105 S. Ct. 1986 (1985), the Supreme Court noted that because a corporation can only act through its agents, a corporation itself can neither assert nor waive the attorney-client privilege. Official Comm. of Unsecured Creditors of Hechinger Inv. Co. of Del. v. Fleet Retail Fin. Group, et. al. (In re Hechinger Inv. Co. of Del.), 285 B.R. 601, 610 (D. Del. 2002) (discussing Weintraub). Instead, corporate management undertakes actions by a solvent company; when control of the company is passed to new management, the authority to act on behalf of the corporation also passes to that new management.... "'[N]ew managers installed as a result of a takeover, merger, loss of confidence by shareholders, or simply normal succession, may waive the attorney-client privilege with respect to communications made by former officers and directors.'" Am. Int'l Specialty Lines Ins. Co. v. NWI-I, Inc., et. al., 240 F.R.D. 401, 405 (N.D. Ill. 2007).... However, when a company declares bankruptcy, all of the corporation's property transfers to an estate managed by a trustee (or by a debtor-in-possession, as the case may be).... The bankruptcy trustee effectively becomes the bankrupt's management and the power of the company's pre-bankruptcy managers is severely restricted. Id. at 610-611. For this reason, the Supreme Court held in Weintraub that "the trustee's role is 'most analogous to that of a solvent corporation's management,' and therefore, the right to assert or waive the attorney-client privilege of the debtor corporation rests with the trustee in a bankruptcy situation." Id. at 611 (citing Weintraub, 471 U.S. at 349).

Apparently ignoring what the Supreme Court had to say in Weintraub, Signature and Adams rely on Fifth Circuit case that both pre-dates Weintraub and the enactment of the Bankruptcy Code. See In re Yarn Processing Patent Validity Litig., 530 F.2d 83 (5th Cir. 1976). They cite this older case for the proposition that, when assets are transferred, the attorney-client privilege does not follow the transfer. Of course, the Supreme Court's ruling necessarily trumps, but the case is inapposite anyway. The attorney-client privilege was not even an issue before the court.... The case concerned litigation over the disqualification of an attorney due to a conflict of interest, and did not even address the proposition for which it is here urged. See id.; see also Am. Int'l Specialty Lines Ins. Co. v. NWI-I, Inc., et. al. , 240 F.R.D. 401, 408 (N.D. Ill. 2007)... It is true that In re Yarn Processing does discuss whether an attorney can be said to represent a successor entity that acquires an asset from the predecessor who was the attorney's client, and it may be from that observation that Signature and Adams intend to extrapolate the broad proposition they urge in their pleadings. However, no such broad rule can be gleaned from Yarn Processing. To the contrary, Yarn Processing says only that the attorney-client relationship does not follow the transfer of an asset (there, a patent). Weintraub, on the other hand, concludes that the transfer of all the assets of a corporation, such that nothing is left behind, may result in a transfer of the privilege that inheres in the attorney-client relationship. A district court for the Eastern District of Texas explained it thusly:

'whether the attorney-client relationship transfers . . . to the new owners turns on the practical consequences rather than the formalities of the particular transaction.' *** If the practical consequences of the transaction 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. See Community Futures Trading Commn. v. Weintraub, 471 U.S. 343, 349, 85 L. Ed. 2d 372, 105 S. Ct. 1986 (1985) ('when control of a corporation passes to new management, the authority to assert and waive the corporation's attorney-client privilege passes as well.') ***

Soverain Software LLC v. Gap, Inc., 340 F.Supp.2d 760, 763 (E.D. Tex. 2004); see also American International, 240 F.R.D. at 406.... The facts of this case are much closer to Weintraub than to Yarn Processing. All of the Debtors' assets (including those causes of action that had been asserted on behalf of the debtor estate by the Committee) were transferred to the Litigation Trust under the sole management and control of the Trustee. Under Weintraub and Sovereign Software, the Trustee became the holder of the Debtors' attorney-client privilege.

Signature's argument that the Trustee cannot hold the Committee's attorney-client privilege because the Trustee lacks standing to pursue creditor's claims is incorrect and irrelevant to this discovery dispute. Signature misunderstands the roles of statutory committees in bankruptcy cases with regard to the assertion of causes of action. Committees, in the discharge of their statutory duties in the administration of a bankruptcy case, are entitled to retain their own counsel. Any communication that takes place between the committee and its counsel is then privileged. A committee might, as one of its tasks, evaluate causes of action that an estate might bring, to determine whether such actions are worth the estate's pursuing. Its consultations with its counsel in this regard are properly privileged. The committee might conclude that one or more such actions in fact ought to be brought. It might request the debtor-in-possession to do so. The debtor-in-possession might, for one reason or another, decide not to bring suit. The committee then may petition the bankruptcy court for permission to bring the lawsuit on behalf of the estate.*** If the court grants the relief, the Committee may then file the suit, with the Committee named as plaintiff. It may use its own counsel to represent it in the action. But the resulting suit is essentially derivative in nature. Any recovery would not go to the Committee, or even directly to unsecured creditors. It would instead go to the estate, for distribution either in accordance with the distribution scheme set out in the Code (in the event of a chapter 7 liquidation) or in accordance with the provisions of a confirmed plan (in the case of a chapter 11).


It is argued by the defendants in this case that communications to third party professionals can only be protected when it is the attorney who has hired them — that it is lost if the professional is hired by the client. The assertion is not supportable by either law or logic. The attorney-client privilege "encompasses contacts between the attorney and a client's agent or representative and between the client and the attorney's agents, provided that the communications are intended to facilitate the provision of legal services by the attorney to the client." ***

This proposition is especially true in the bankruptcy context because, pursuant to 11 U.S.C. §§ 327, 330, third party professionals such as financial advisors, must be hired by the bankruptcy estate, or risk not being compensated for their services. See Silverman v. Hidden Villa Ranch (In re Suprema Specialties, Inc.), 2007 Bankr. LEXIS 2304, at *12 n.5 (Bankr. S.D.N.Y., Jul. 2, 2007) (Peck, J.). In the context of a bankruptcy, a debtor's attorney would never be the one to hire an accountant for work that such an accountant would perform on behalf of the estate — even when the work is for the purpose of facilitating client and attorney communications. ***

[Common Interest Doctrine]

Another exception to the waiver-by-disclosure rule is the common interest doctrine. U.S.A. v. BDO Seidman, LLP, 492 F.3d 806, 815 (7th Cir. 2007). The doctrine applies "where the parties undertake a joint effort with respect to a common legal interest, and the doctrine is limited strictly to those communications made to further an ongoing enterprise." ... The Fifth Circuit requires a palpable threat of litigation for the common interest doctrine to apply....


*** "Bankruptcy itself constitutes 'litigation' for purposes of delineating privilege." Brown v. Adams (In re Fort Worth Osteopathic Hosp., Inc.), 2008 Bankr. LEXIS 3156, at *44 (Bankr. N.D. Tex. Nov. 14, 2008) (Lynn, J.); see also Tri-State Outdoor Media Group, Inc. v. Official Comm. Of Unsecured Creditors (In re Tri-State Outdoor Media Group, Inc.), 283 B.R. 358, 364 (Bankr. M.D. Ga. 2002) (saying that "[w]hile Bankruptcy is not entirely litigation, it is an adversarial proceeding, particularly when considering the rights of the debtor versus the rights of an unsecured creditor.")

Notwithstanding Adams' and Signature's arguments to the contrary, the common interest doctrine can apply to plaintiffs as well as to defendants ***

The Trustee has properly asserted the common interest doctrine as between the debtors, the Committee, and the Banks here. It is uncontested that, in connection with resolving their issues for final approval of the DIP financing, the debtors, the Committee and the Banks agreed to join forces for the ultimate purpose of confirming a liquidating plan of reorganization that recovered and distributed the debtors' assets, and arranged for the pursuit of causes of action held by the estate. In pursuit of that strategy the debtor hired A&M [forensic accountants] for the purpose of analyzing the debtors' causes of action. By the time the debtors hired A&M in May 2006, and subsequently when the A&M Report was shared, the three entities were working towards the common — and ultimately successful — goal of identifying and pursuing the debtors' causes of action. In fact, the Lenders had agreed to fund a large portion of the debtors' bankruptcy and post-confirmation expenses, ... and in September 2006, the court granted the Committee — with the consent of the debtors and the Lenders — standing to pursue certain of the estate's causes of action. Also in September 2006, the debtors hired both H&B as well as L&B [2 law firms] to initiate preference and avoidance causes of action on behalf of the estate. Clearly, beginning with the settlement of the DIP financing issues, the parties were already working in concert to recover, through litigation, causes of action of the estate for the benefit of the estate's creditors. The common legal goal of investigating and recovering the debtors' assets existed between the debtors, the Committee, and the Banks — the only parties whom saw the A&M Report — the common interest doctrine applies in this case.


Work Product Doctrine


"Unlike the attorney-client privilege, the work product privilege is held by both the client and the attorney and may be asserted by either one."


[T]he work product doctrine may apply "where litigation is not imminent, 'as long as the primary motivating purpose behind the creation of the document was to aid in possible future litigation.'" ***


The Reports in this case are both protected under the work product doctrine. ... [T]he Reports were prepared by H&B and A&M in anticipation of litigation and constitute both H&B's and A&M's mental impressions and strategies with regard to this litigation. Thus, both Reports are opinion work product. Even though the Debtors and the Committee no longer exist, the Trustee is the successor-in-interest and succeeds to their right to assert the privilege. The Reports do not cease to be opinion work product simply because a plan has been confirmed.

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