Who Controls the Privilege in a Chapter 11 Liquidation Proceeding?
BackgroundPrior to the bankruptcy, the debtor-corporation’s (Corporation) independent audit committee (Audit Committee) engaged a law firm (Law Firm), among other professionals, in connection with an internal investigation relating to “whether the [Corporation’s] senior financial management could be relied upon with respect to financial reporting and certifications.”2 The Corporation subsequently filed a chapter 11 petition and, ultimately, the Bankruptcy Court confirmed a liquidation plan (Plan). The Plan conveyed all of the debtor-Corporation’s claims and causes of action to a liquidation trust overseen by a trustee (Liquidation Trustee). The Plan also provided that, “[o]n the Effective Date, all of the Debtors' respective rights, titles and interests in any Privileges in respect of any Retained Causes of Action shall automatically vest jointly in the Liquidation Trust and the Reorganized Debtors pursuant to and in accordance with the Plan, and the Liquidation Trustee, as trustee for the Liquidation Trust and in its capacity as the Litigation Representative for the Reorganized Parent Debtors, shall have the sole power and authority to assert or waive such Privileges (subject only to the consent of the Liquidation Trust Advisory Board to the extent required under Section 3.5(b) of the Liquidation Trust Agreement) as further provided in the Plan and the Liquidation Trust Agreement.”3
After the effective date of the Plan, the Liquidation Trustee filed a motion under section 542 of the Bankruptcy Code for entry of an order compelling, among other things, turnover of the records collected by the Audit Committee’s professionals in connection with its investigation. The Law Firm objected to the relief sought in the motion, asserting that it provided “the Liquidation Trustee with ‘all non-privileged factual information’ requested by the Liquidation Trustee, and that the remaining materials sought by the Trustee [were] subject to the work product privilege.”4
Attorney-Client Privilege and Work-Product DoctrineIn analyzing who controlled the attorney-client privilege at issue, the Bankruptcy Court began by recognizing the applicability of the United States Supreme Court case Commodity Futures Trading Commission v. Weintraub.5 In that case, the Supreme Court held that a chapter 7 bankruptcy trustee had the power to waive a debtor-corporation’s attorney-client privilege. The case further provided that the control of the privilege passed along with control of the corporation itself. The Law Firm argued that the situation in In re Old BPSUSH was distinguishable from Weintraub, as the Corporation’s board of directors had granted the Audit Committee certain powers, including the authority to engage independent counsel. In making its argument, the Law Firm cited In re BCE West, LP,6 which stated that a special committee is “a separate and distinct group” and that it controlled its own privilege. Specifically, the court in BCE West provided that the “Plan Trustee [could not] waive the Special Committee’s attorney-client privilege” and that “[b]ecause the Special Committee is a separate and distinct group from the Board of Directors . . . the privilege afforded it is not the privilege of the corporation, but rather, is the privilege of the Special Committee.”7
The Liquidation Trustee, however, relied on a 2015 Southern District of New York case, In re China Med. Tech., Inc.,8 which declined to follow BCE West. That case decided the same issue in the opposite direction, ruling that the Weintraub analysis extended to an independent audit committee and that control of the committee’s privilege in that case passed to the foreign representative/liquidator.
Ultimately, after considering the arguments of both sides, the Bankruptcy Court in In re Old BPSUSH followed China Medical, ruling that, upon confirmation, and the effective date, of the Plan, control over the former Audit Committee’s privilege passed to the Liquidation Trustee.
The Bankruptcy Court then addressed the Law Firm’s assertion that the work product doctrine protected certain documents and found that (i) in line with extending the Supreme Court’s analysis in Weintraub and China Medical, the Liquidation Trustee had stepped into the shoes of the Audit Committee for the purpose of a work-product analysis and (ii) the work-product doctrine could not be asserted by counsel to withhold documents from a client or former client. As such, the Bankruptcy Court ruled that the records were not protected under the work-product doctrine.
Having found that the Liquidation Trustee was entitled to turnover of the records, the Bankruptcy Court then examined whether that meant the Law Firm had to turn over “all” records. The Bankruptcy Court noted that the “Court of Chancery of Delaware has observed that there is a split in authority regarding an attorney’s duty to release files to a client or former client.”9 The Bankruptcy Court recognized that the majority of jurisdictions follow an “entire file” approach, by which all documents are available to the client with some narrow exceptions, such as documents reasonably intended only for internal law firm review. The Bankruptcy Court also identified a minority view, referred to as the “end product” approach, by which clients are only entitled to an attorney’s external work product. Noting that the Delaware Court of Chancery has “determined that the ‘cases applying the entire-file approach are more persuasive and consistent with other aspects of Delaware law governing the attorney-client relationship,’”10 the Bankruptcy Court ultimately rejected the minority approach and directed the Law Firm to produce the entirety of the records to the Liquidation Trustee other than those documents intended only for “internal law office review and use.”11
Analysis and TakeawayThe opinion in In re Old BPSUSH demonstrates that the law on the survival of the attorney-client privilege and work-product doctrine post-bankruptcy, when it comes to investigatory records created by attorneys hired by an independent audit committee pre-bankruptcy, is still developing. Independent committees and the professionals engaged by such committees should be cognizant that there is a risk that if the company subsequently files for bankruptcy, a bankruptcy trustee could claim that they hold the privilege. Notably, trustees may have different perspectives and objectives than the board of directors that originally appointed the independent committee. Ultimately, if there is a dispute on who controls an independent committee’s privileges in a chapter 11 liquidation proceeding, the resolution of such dispute may depend on both the language in the plan and the confirmation order, as well as the court’s interpretation of the law surrounding privilege. This is an area that is still developing, and independent committees and their professionals should continue to follow the cases arising in this area of the law.
© Arnold & Porter Kaye Scholer LLP 2019 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.