Trustee Moves for Contempt against Pearlman’s Former Counsel

In the continuing fraud and bankruptcy saga of former music promoter Lou Pearlman, the appointed chapter 11 trustee recently filed an emergency motion against his former lawyer charging her with conduct "intended and designed to obstruct, frustrate, impede, delay and prevent the trustee and creditors of the bankruptcy estate" from pursuing their investigation of the debtor's financial condition and identifying and locating "hundreds of millions of dollars" alleged to have been fraudulently obtained by Pearlman and entities he controls from creditors.

Pearlman’s sojourn in the Middle District of Florida Bankruptcy Court began in March after four creditors, holding more than $48 million in claims on bank loans in default, filed an involuntary chapter 11 case against him and an emergency motion for appointment of a chapter 11 trustee. The creditors alleged that through various business endeavors conducted through numerous entities, including Trans-Continental Airlines (TCA), a charter airline, talent agencies and all-male revues, the former manager of boy band Back Street Boys had violated state securities laws and perpetrated the “largest Ponzi scheme in Florida history,” with more than $450 million in combined investor funds and bank loans unaccounted for, and that he had fled the country after transferring substantial funds to himself personally.

Citing fraud, dishonesty and mismanagement, evidenced by appointment of a receiver in state securities fraud proceedings involving entities controlled by him, Pearlman’s transfer of assets to himself and subsequent disappearance as “cause” under §1104(a)(1), the creditors moved for appointment of a trustee on an emergency basis. The court granted the motion, appointed a chapter 11 trustee, and subsequently entered an order for the relief requested by the petitioning creditors.

After Reca Chamberlain (counsel who had represented Pearlman and certain Pearlman entities before the bankruptcy) failed to respond to the trustee’s written demand for turnover of documents, records and computer filed relating to TCA, the trustee moved to compel turnover of those records as well as information as which Pearlman entities she had represented.[1] Counsel for the trustee also subpoenaed Chamberlain for 2004 examination, seeking production of documents relating to Pearlman, TCA and other Pearlman entities.

Neither Chamberlain, any other attorney, nor Pearlman himself had appeared on his behalf in the case up to this point. However, Pearlman surfaced to fax a pro se special appearance and objection to the motion to compel Chamberlain to turn over records to the bankruptcy court in his individual case. In his objection, Pearlman, who is currently in jail facing federal fraud charges, asserted that in light of pending criminal charges, he was not willing to waive attorney client privilege, that he had been unable to secure counsel to represent him in the bankruptcy case and that the court should protect his attorney/client privilege and his Constitutional right not to incriminate himself by denying the trustee’s motion until the criminal cases were resolved. The court granted the trustee’s motion in TCA, but denied it without prejudice in the Pearlman case, as the trustee’s turnover letter had only sought documents relating to TCA and not Pearlman individually.

In his emergency motion directed to Chamberlain, the trustee has asked the court to compel her to answer deposition questions and produce documents, conduct an in camera inspection of documents, which she claimed were privileged, appoint a computer expert to conduct a forensic examination of her computers and impose sanctions against her for contempt of court, alleging that Chamberlain:

• failed to appear for her 2004 examination;
• thereafter failed to comply with a court order granting his motion to compel her appearance and directing her to produce responsive documents and a privilege log;
• thereafter provided an incomplete privilege log consisting primarily of unopened mail to Pearlman forwarded to her after he fled the jurisdiction; and
• failed to answer questions during her 2004 examination based on improper assertion of the attorney/client privilege.

The emergency motion also alleges spoliation concerns in light of Chamberlain’s testimony that a laptop computer containing responsive documents was lost or stolen shortly after the original date set for her deposition her refusal to turnover backup discs to the court for inspection, as well as testimony that she delivered financial records to an unidentified man at Pearlman’s request during the course of the bankruptcy case. The trustee asserts that Chamberlain’s actions demonstrate bad faith and justify a finding of willful contempt for violating the court’s orders.

The emergency motion implicates several legal issues regarding the attorney/client privilege, the Fifth Amendment privilege against self-incrimination and spoliation by an attorney in the bankruptcy context.

If the bankruptcy court examines documents claimed to be privileged in camera as requested by the trustee, must the court determine not only whether the documents are subject to the attorney client privilege, but also whether their production violates the Fifth Amendment privilege? As to the latter, should a bankruptcy court decide whether documents are potentially incriminating in other matters, and how will it balance the debtor’s Fifth Amendment rights against the trustee’s need to obtain information to conduct his duties? The emergency motion argues that Chamberlain improperly invoked the attorney client privilege, but makes no mention of how the court should address the debtor’s Fifth Amendment interests.

And what is the standard by which the court will decide whether the attorney, who has not represented the debtor in the bankruptcy case, has been involved in spoliation of evidence related to the bankruptcy case? If computer experts examine her computers and determine that Chamberlain may have caused the destruction of documents and the documents cannot be reconstructed, how will the court determine whether the destroyed evidence was related to the bankruptcy case or the other unrelated entities?