Protecting the Attorney/Client Privilege in Transnational Insolvency Proceedings

The ever-growing proliferation of international trade and the rise of increasingly large transnational corporations means that whenever the next big downturn overtakes us, there will be an unprecedented level of transnational insolvency proceedings. This, in turn, will likely result in a number of unprecedented legal issues that will need to be resolved through a patchwork of overlapping (and potentially contradicting) international treaties, country-specific laws, and established practices relating to international law. One of these key issues will be protection of the attorney/client privilege in a transnational insolvency proceeding.

The standards for the attorney/client privilege differ from country to country. What can be surprising, however, is how dramatic these differences can be. For example, it is well settled under U.S. law that the communications of in-house counsel will be protected by the attorney/client privilege. In contrast, certain European countries do not attach any privilege to any such communications (the general rationale being that the in-house counsel is not “independent” enough).¹

Typically, discovery outside of common law countries is relatively limited (if it is even permitted). As a result, one may find that some individuals are not as concerned about protecting attorney/client communications because, as a practical matter, there is very little risk that such communications will be accessed by third parties. Bankruptcy, however, significantly increases the likelihood that the communications will be made available to others—particularly in the digital age, when the vast majority of our communications are recorded. Indeed, in nearly every insolvency proceeding there will be a transfer of assets and/or review of company records and/or change of company management. In each of these situations, there is a practical and legal risk that previously confidential communications will be accessible to others. This, in turn, can lead to potentially significant monetary repercussions.

How does this risk impact a chapter 15 proceeding? Generally, the filing of a chapter 15 petition will mean that the debtor’s center of main interests (COMI) is not located in the United States. Rather, the chapter 15 proceeding is often filed to obtain some sort of ancillary protection or relief with respect to assets located in the United States. One key chapter 15 provision is the ability to obtain discovery.² It is well settled that a U.S. court can compel discovery in a U.S. proceeding even if a “blocking” statute from another country would prevent such an action.³ Such discovery could be used to facilitate an action originating from the debtor’s COMI, or it could provide the basis wherein the debtor would subsequently file a full-fledged plenary proceeding in the United States to avail itself of the chapter 5 avoidance powers (such as §§547 and 548 actions). ⁴ Obviously, discovery of any sort could potentially threaten the confidential nature of a privileged communication. In those situations, the discoverability of the confidential communication will directly depend on which country’s law will apply.

How will a U.S. court react to a discovery request in a chapter 15 proceeding where one party objects to production on the basis of the attorney/client privilege? Currently, the answer is far from certain.⁵ Nonetheless, existing jurisprudence suggests how a court may rule on the issue. “Whether foreign law should play a role in defining the contours of the attorney/client privilege in any given case is a determination within the sound discretion of the court.”⁶ In considering the privilege issue, a handful of courts have applied the “touch base” test.

The court will apply the “touching base” test as follows. “If…a communication has nothing to do with the United States or, in the court's view, only an incidental connection to this country, the privilege issue will be determined by the law of the foreign nation. If, however, the communication has more than an incidental connection to the United States, the court will undertake a more traditional analysis and defer to the law of privilege of the nation having the most direct and compelling interest in the communication or, at least, that part of the communication which mentions the United States. Such interest will be determined after considering the parties to and the substance of the communication, the place where the relationship was centered at the time of the communication, the needs of the international system, and whether the application of foreign privilege law would be ‘clearly inconsistent with important policies embedded in federal law.” ⁷

The “touch base” test standards comport with chapter 15 principles, and it is quite likely that a U.S. bankruptcy court would apply this approach in a transnational insolvency proceeding.

What can an attorney do to protect the attorney/client privilege in a transnational insolvency proceeding? An attorney must be aware of how privileged communications may be exposed. Indeed, one cannot expect to mount a good defense unless he knows where his weaknesses are. These weaknesses include both physical vulnerabilities (i.e., how and where and by whom the privileged communication can be accessed) and legal vulnerabilities (i.e., what law would apply and, based on that law, what may be done to strength the legal argument that the communication is privileged).⁸ Unfortunately, virtually all attorneys ignore and/or significantly downplay the “physical protection” defense and rely exclusively on legal arguments. What they often fail to realize is that strong physical protection of privileged communications can actually strengthen the legal arguments and/or simply make it extremely difficult to discover the privileged material in the event that no legal privilege applies. Examples of “physical protection” include, but are not limited to, limiting the terminals and/or people that can access electronically stored communication, encrypting e-mails and/or hard drives where the communications are stored, etc.

Bankruptcy attorneys should be wary about minimizing the need to understand issues relating to the physical storage and production of privileged communications. U.S. Magistrate Judge Ronald Hedges reminds us that “[b]usiness bankruptcies will have to quickly adapt to the provisions for electronically stored information (ESI) found in the amended FRCP that became law on Dec. 1, 2006… Like most judges, I expect litigants to understand their electronic discovery obligations.”⁹ Indeed, “[a]n attorney now risks committing malpractice if he or she does not adequately understand how electronic information is created, stored and communicated.”¹⁰

How can an attorney “get up to speed” on digital-protection issues? The key is to be diligently persistent in continually learning about how privileged communications are stored and transmitted in the digital age. Acquiring this knowledge is not an insurmountable task. It can be done with some effort. Indeed, those that make the effort to acquire this knowledge will obtain an advantage that will enable them to better serve their clients.

In sum, protection of the attorney/client privilege in a transnational insolvency proceeding is an issue that will increasingly arise in future proceedings. Existing laws and jurisprudence provide some guidance on how courts will address the issue. Bankruptcy attorneys can best protect these communications by obtaining a knowledge of existing laws and by taking steps to physically protect confidential communications.