As a general matter, the attorney-client privilege is perceived as an almost bullet-proof wall against disclosure of client communications. This perception rests largely on the often unstated assumption that the corporate entity will continue to operate as a going-concern and desires to maintain the confidentiality of its communications. Bankruptcy, however, fundamentally alters that assumption.
It is well-established that a bankruptcy trustee may waive the attorney-client privilege with respect to a corporate debtor’s pre-bankruptcy communications. 1 But does that rule apply in a chapter 15 proceeding? Moreover, is there any concern about the attorney-client privilege if the client is a U.S. corporate subsidiary of a foreign company that is the subject of a foreign insolvency proceeding? To date, there are no reported chapter 15 decisions where the attorney-client privilege has been at issue. Moreover, there was “scant case law” under old §304 as to whether foreign liquidators could waive the attorney-client privilege in an ancillary proceeding.2 Thus, to answer these questions, it is necessary to first consider the basic elements of the attorney-client privilege and the role of a foreign representative in a chapter 15 proceeding.
The Attorney-Client Privilege
The attorney-client privilege applies to “(1) communications (2) made in confidence (3) by the client (4) in the course of seeking legal advice (5) from a lawyer in his capacity as such, and [it] applies only when (6) invoked by the client and (7) not waived.” 3 “When the corporation is solvent, the agent that controls the corporate attorney-client privilege is the corporation’s management.”4 Likewise in bankruptcy, the privilege is controlled by the entity that most closely resembles its management.5 Whenever management changes, the new managers may waive the corporate attorney-client privilege with respect to communications made by the previous management. 6
Critically, directors or officers of a corporation cannot invoke the attorney-client privilege to protect disclosure of their personal communications with corporate counsel when those communications concern the corporation.7 Rather, communications between corporate counsel and individual corporate managers are only protected when the communications are for corporate manager’s personal liability, rights or causes of action.8
The Role of a Foreign Representative in a Chapter 15 Proceeding
A chapter 15 proceeding is commenced when a foreign representative applies to the bankruptcy court for recognition of the foreign insolvency proceeding in which the foreign representative has been appointed. 9 Upon recognition of a foreign main proceeding, the foreign representative may operate the debtor’s business and exercise the rights and powers of trustee as provided by §§363 and 552.10 Regardless of whether the proceeding is main or non-main, the court may also grant the foreign representative all other relief that a trustee would be entitled to under the Bankruptcy Code except for relief under §§522, 544, 545, 547, 548, 550 and 724(a).11 Moreover, the foreign representative may also simply file a chapter 7 or 11 petition for the corporate entity after chapter 15 recognition occurs.12 Despite the ability to act as a trustee in bankruptcy, the permissive language of chapter 15 conceivably allows for situations where a foreign representative could be appointed without the full rights and privileges that a trustee would enjoy under either chapter 7 or 11.13
The Attorney-Client Privilege in a Chapter 15 Proceeding
While there are no reported chapter 15 decisions relating to the attorney-client privilege, a recent decision from the Gold & Appel Transfer insolvency proceedings held that the foreign liquidator could waive the privilege in a §304 ancillary proceeding.14 It would be quite likely that a similar result would occur in a chapter 15 proceeding if the foreign representative truly has management-type authority of the insolvent entity’s assets. However, the fact that a foreign representative does not automatically obtain the rights of a bankruptcy trustee means that, in some instances, the representative will not be able to waive the privilege. In short, the question of waiver must be determined on a case-by-case basis.
With respect to a U.S. subsidiary of a foreign insolvent company, a waiver of the privilege cannot immediately occur because the insolvent entity only has an ownership interest. To effectuate a waiver, the foreign representative must either compel existing management to waive the privilege or replace management with someone who will waive the privilege. This will be quite easy where the subsidiary is wholly-owned and/or shares common personnel with the parent company. But it could be more difficult in situations where the insolvent debtor only has a percentage ownership or where the subsidiary is a viable and independent going-concern and a change of management would seriously disrupt business operations. Indeed, given the court’s ability to prohibit or significantly limit a foreign representative’s control of assets within the United States, it is quite conceivable that a foreign representative could be barred from waiving the privilege if such waiver would seriously damage the subsidiary. Ironically, if a foreign representative appoints herself as the new management of a subsidiary with the intent of waiving the attorney-client privilege, she also could face claims by the subsidiary’s creditors if her waiver of the attorney-client privilege ultimately inures to the benefit of the parent company at the detriment of existing creditors.
What Can an Attorney Do to Ensure that Communications Remain Privileged?
Given the overall strong likelihood that the attorney-client privilege can be waived in a cross-border insolvency proceeding, attorneys must consider what can be done to better insure that their communications remain privileged. Perhaps the most important consideration is to clearly identify who the attorney represents. To protect the interests of management, corporate counsel should be careful to avoid situations where he is asked to render advice about personal rights or obligations. Conversely, attorneys that represent individual directors and officers should take care in how they communicate with their clients because an at-work communication that is recorded by the company (such as e-mails on a server) could result in a waiver of the attorney-client privilege. 15
In certain limited situations, some communications may also be protected under the joint-defense privilege. The privilege is important because, for instance, where a subsidiary is divested, it is free to waive the attorney-client and work-product privileges, but may be prohibited from waiving a joint-defense privilege.16 To establish this privilege, three elements must be shown: “(1) the communications [must be] made in the course of a joint-defense effort, (2) the statements [must be] designed to further the effort, and (3) the privilege has not been waived.”17 Critically, there must be a strong possibility of litigation for the joint defense privilege to apply.18 Because a party is always free to disclose its own communications, the joint-defense privilege can only be used to prevent the other party to whom it was originally made from disclosing it.19 In short, the privilege is quite limited but still potentially useful given the right circumstances.
Conclusion
The attorney-client privilege is inherently placed on unstable ground when an insolvency filing becomes imminent. In a chapter 15 proceeding, there is a high likelihood that the privilege will be waived. However, the permissive nature of the Code provides a basis for distinguishing the role of a foreign representative from that of a bankruptcy trustee. In short, counsel for both companies and their management must take care in how they provide their advice.
1 Commodity Futures Trading Commission v. Weintraub, 471 U.S. 343, 358 (1985).
2 In re Gold & Appel Transfer S.A., 342 B.R. 386, 388 (Bankr. D. Col. 2006).
3 Meoli v. American Medical Service of San Diego, 287 B.R. 808, 813 (S.D. Cal. 2003) (citing United States v. Abrahams, 905 F.2d 1276, 1283 (9th Cir. 1990)).
4 Commodity Futures Trading Commission v. Weintraub, 471 U.S. 343, 356 (1985).
5 Commodity Futures Trading Commission v. Weintraub, 471 U.S. 343, 351-52 (1985).
6 See e.g., Commodity Futures Trading Commission v. Weintraub, 471 U.S. 343, 349 (1985); In re Grand Jury Subpoena, 274 F.3d 563, 571 (1st Cir. 2001); Medcom Holding Co. v. Baxter Travenol Laboratories, Inc., 689 F.Supp. 841 (N.D. Ill. 1988) (acquiring company-controlled attorney-client privilege of subsidiary).
7 See, e.g., In re Grand Jury Subpoena, 274 F.3d 563, 573 (1st Cir. 2001); In re Bevill, Bresler & Schulman Asset Management Corp., 805 F.2d 120, 125 (3d Cir. 1986).
8 In re Grand Jury Proceedings, 156 F.3d 1038, 1041-42 (10th Cir. 1998). There is a five-part test to determine whether a corporate manager has a personal attorney-client privilege with corporate counsel: (1) the manager must approach counsel seeking legal advice; (2) the manager must have made it clear that he/she was seeking advice in their individual capacity; (3) corporate counsel must have communicated with them in their individual capacity knowing that a conflict might arise; (4) the communications must have been confidential; and (5) their communications do not concern company affairs. In re Grand Jury Subpoena, 274 F.3d 563, 571 (1st Cir. 2001).
9 11 U.S.C. §§1515 and 1517.
10 11 U.S.C. §1520(a)(3).
11 11 U.S.C. §1521(a)(7).
12 11 U.S.C. §1523(a).
13 See, e.g., 11 U.S.C. §1520(a)(3) (“unless the court orders otherwise, the foreign representative may operate the debtor’s business and may exercise the rights and powers of a trustee”); §1521(a) (“the court may…grant any appropriate relief”); §1522(b) (“The court may subject relief…to conditions it considers appropriate”); §1522(c) (“The court may…modify or terminate such relief” that was previously granted under §§1519 or 1521).
14 In re Gold & Appel Transfer S.A., 342 B.R. 386 (Bankr. D. Col. 2006) (holding that under 11 U.S.C. §304 the foreign liquidator could waive the attorney-client privilege).
15 See, e.g., In re Asia Global Crossing, Ltd., 322 B.R. 247 (Bankr. S.D. N.Y. 2005) (considering whether communications that corporate officers had with their personal attorney via company e-mails were privileged).
16 See, e.g., In re Grand Jury Subpoenas, 902 F.2d 244 (4th Cir. 1990); see also Medcom Holding Co. v. Baxter Travenol Laboratories, Inc., 689 F.Supp. 841 (N.D. Ill. 1988) (prohibiting waiver of material subject to joint-defense privilege without the other parties’ consent).
17 In re Bevill, Bresler & Schulman Asset Management Corp., 805 F.2d 120, 126 (3d Cir. 1986).
18 Medcom Holding Co. v. Baxter Travenol Laboratories, Inc., 689 F.Supp. 841, 844 (N.D. Ill. 1988).
19 re Grand Jury Subpoena, 274 F.3d 563, 572-73 (1st Cir. 2001).