Privileged Communication Post-petition Who Owns the Privilege and Who Can Waive It
Protecting privileged communication is one of the most important duties an attorney fulfills. In fact, remove the sanctity of the privileged communication, and you hinder effective client representation. Indeed, few clients would freely share information if it were subject to disclosure to others.
It is this principle that created the attorney/client privilege, which prohibits the divulgence of privileged communications to other parties. This principle remains applicable whether the client is a natural person or a legal fiction, such as a corporation or partnership.
However, the filing of a bankruptcy petition creates a new cast of legal fictions, which may include a chapter 7 trustee, a debtor-in-possession (DIP), a chapter 11 trustee, an examiner and/or a "responsible party." One or more of these legal fictions are responsible for administering the bankruptcy estate and, as such, step into the debtor's shoes. See 11 U.S.C. §§323, 704, 721, 1104, 1106, 1107 and 1108. As such, a newly created legal fiction, separate and distinct from the debtor, has the authority to take legal actions, make legal decisions and legally bind the bankruptcy estate.
Thus, upon filing a bankruptcy petition, the issue of who owns and who can waive the attorney/client privilege is not as simple as looking to the parties to the communication. In fact, ownership of the privilege may change, just as the bankruptcy estate becomes the charge of another.
The Attorney/Client Privilegeand the Corporate Debtor
The Federal Rules of Evidence adopt all federal common-law evidentiary privileges. Specifically, Federal Rule of Evidence 501 provides in relevant part:
[T]he privilege of a witness...shall be governed by the principles of the common law as they may be interpreted by the courts of the United States in the light of reason and experience...Thus, to the extent a federal common-law privilege exists, it applies in the bankruptcy context. See Fed. R. Evid. 501, 1101; Citibank N.A. v. Andros, 666 F.2d 1192, 1195 (8th Cir. 1981). However, the Federal Rules of Evidence do not address the application of the attorney/client privilege after a bankruptcy filing. Specifically, since these post-petition legal fictions operate and possess the debtor's assets and business, it becomes apparent that they also obtain the ability to waive, or opt not to waive, the attorney/client privilege.
Due to the importance and sanctity of the attorney/client privilege, its application post-petition has caused great controversy in the corporate context. Specifically, the issue of who owns the attorney/client privilege, and can therefore waive it, when a corporate debtor engages in communications with an attorney and subsequently files a bankruptcy petition was enough of an issue for a U.S. Supreme Court decision. See Commodity Futures Trading Comm. v. Weintraub, 471 U.S. 343, 105 S.Ct. 1986, 85 L.Ed.2d 372 (1985).
In Weintraub, the Supreme Court held that a chapter 7 trustee may waive the attorney/client privilege on behalf of a corporate debtor. See Weintraub, 471 U.S. at 352-54. As a result, the chapter 7 trustee in Weintraub was able to require the debtor's former attorney to testify as to conversations held between the attorney and the debtor. See Weintraub, 471 U.S. at 358. Likewise, Weintraub's holding also means that a trustee can require an officer/director of a corporate debtor to testify about conversations held between the officer/ director and the debtor's attorney, as the trustee may waive the privilege on the debtor's behalf.
Though Weintraub specifically addressed a chapter 7 trustee's ability to waive a corporate debtor's attorney/client privilege, Weintraub was subsequently expanded to allow a trustee of a chapter 11 liquidating trust to waive the privilege of the former corporate debtor and DIP. See In re Hechinger Investment Co. of Delaware, 285 B.R. 601, 613 (D. Del. 2002). At least one court has permitted an examiner to waive the attorney/client privilege of the corporate debtor/DIP. See In re Boileau, 736 F.2d 503, 505 (9th Cir. 1984). Though no court has addressed the ability of a "responsible party" to waive the attorney/client privilege, it only follows because a "responsible party" is a disguised chapter 11 trustee.
Courts have been reluctant, however, to apply the same privilege waiver decisions to individual debtors. In fact, the Supreme Court in Weintraub stated "our holding today has no bearing on the problem of individual bankruptcy, which we have no reason to address in this case." See Weintraub, 471 U.S. at 356. As such, divergent case law exists as to whether a trustee has the power to waive an individual debtor's attorney/client privilege.
The Attorney/Client Privilege of the Individual Debtor
Different considerations exist when examining the ownership and waiver of the attorney/client privilege of a corporate debtor versus that of an individual debtor. After all, the liberties of an individual and the interests of a corporation differ, particularly because of concerns arising from the Fifth Amendment and the right against self-incrimination. Courts have examined such considerations when an individual's attorney/client privilege is at issue.
For example, In re Bame, 251 B.R. 367 (Bankr. D. Minn. 2000), involved post-petition communications by an individual chapter 11 DIP to debtor's counsel. Upon conversion of the case to chapter 7, the chapter 7 trustee sought access to the communications that occurred between the DIP and debtor's counsel during case administration. The court held that a chapter 7 trustee may waive an individual DIP's post-petition communications with debtor's counsel as to all matters related to estate administration, and that the debtor has the burden of proof to demonstrate which communications were made based on counsel's representation of the individual versus counsel's representation of the DIP. See Bame, 251 B.R. at 375-78.
The Bame court compromised to allow the waiver of the privilege consistent with Weintraub, yet protect the civil liberties of the individual where the communication was unrelated to the administration of the bankruptcy estate. See Bame, 251 B.R. 378-79; see, also, In re Williams, 152 B.R. 123, 129 (Bankr. N.D. Tex. 1992) (holding that a liquidating trustee obtains control over certain, but not all, of a debtor's evidentiary privileges as of confirmation of a liquidating plan because a privilege, as a rule of evidence, may be invoked or waived by the person owning the related causes of action); In re Smith, 24 B.R. 3, 5 (Bankr. S.D. Fla. 1982) (holding a debtor's right to assert the attorney/client privilege, with respect to communications between the debtor and his attorney in a pre-petition wrongful-death suit, passed by operation of law to the chapter 7 trustee just as the pre-petition lawsuit became property of the bankruptcy estate).
Other courts, however, have declined to permit a trustee to waive an individual debtors' attorney/client privilege. See, e.g., In re Miller, 247 B.R. 704 (Bankr. N.D. Ohio 2000). In Miller, a chapter 7 trustee filed a discharge revocation proceeding and sought discovery of communications between the individual debtor and his attorney. Instead of creating a bright-line rule, the court held that a case-by-case determination of whether the trustee may waive the privilege was appropriate. See Miller, 247 B.R. at 709. In Miller, however, the court reasoned that since the debtor and the trustee had an adversarial relationship, it would be improper for the debtor's privilege to succeed to the trustee. See Miller, 247 B.R. at 710.
The cause of action asserted in Miller, and for which the privileged communication would be used, tread close to certain criminal provisions in Title 18. As such, the disclosure and use of such privileged communication tread much closer to violating the Fifth Amendment's self-incrimination protections than in other contexts. See, e.g., In re Silvio De Lindegg Ocean Developments of America Inc., 27 B.R. 28 (Bankr. S.D. Fla. 1982) (holding that a trustee could waive a corporate debtor's attorney-client privilege, but not that of an individual because "[a]n individual can be sent to prison on the testimony of his attorney divulging a confidence. A corporation cannot suffer any penalty greater than the loss of its fiscal assets").
However, even in jurisdictions that do not recognize a trustee's ability to waive the attorney/client privilege, a court might still require disclosure of the privileged communication. In fact, ownership of the privilege is just one consideration.
Exceptions to the Privilege
Even if a trustee may not waive the privilege on behalf of a debtor, the debtor may still be unable to assert the privilege if, for example, a party fails to carry the burden of proving the privilege exists. See In re Horowitz, 482 F.2d 72 (2d Cir. 1973); see, also, McCormick on Evidence §§87, 97 and 106. Another example would be when the allegedly privileged communication has been previously disclosed. See In re Southeast Baking Corp., 212 B.R. 386, 392 (S.D. Fla. 1997). And just as there is a rule, there are exceptions to the rule.
Though privileges are at the basis of our legal system, courts have not allowed parties to use them as a sword—and sometimes, not even as a shield.
Among the exceptions to the attorney/ client privilege are the crime-fraud exception, which provides that communications made between an attorney and his client, for the purpose of furthering the commission of a future or present crime or fraud, are not protected from disclosure by the attorney-client privilege. United States v. Zolin, 491 U.S. 554, 563 (1989). To invoke this exception, the movant must first make a prima facie showing that a serious crime or fraud occurred, and that there is some relationship between the communication at issue and the prima facie violation. See In re Miller, 247 B.R. 704, 711 (Bankr. N.D. Ohio 2000).
Another exception that finds particular relevance in bankruptcy proceedings is the reliance on the advice-of-counsel exception. Specifically, "where the advice of counsel is used as the basis of a defense in litigation, fairness requires an implication that the privilege has been waived as to all relevant privileged communications." See In re Snell, 232 B.R 684, 685 (S.D. Ohio 1999). Thus, in a §727 discharge dispute, when a trustee asserts that the debtor intentionally misrepresented assets, and the debtor asserts he did not act intentionally but relied on his counsel's advice, he has made such communication a material issue in the proceeding, thereby prohibiting the assertion of the attorney/client privilege. Id.
Similarly, communications made to counsel containing financial information are not necessarily privileged if the information is used to formulate a petition or to complete bankruptcy schedules. In re French, 162 B.R. 541 (Bankr. D. S.D. 1994). In French, the FHA sought to convert a chapter 12 bankruptcy to a chapter 7 bankruptcy based on alleged misrepresentations in the debtor's bankruptcy petition and schedules. To demonstrate this fraud, the FHA sought to depose the debtor attorney's paralegal regarding communications with the debtor concerning his assets. The court held that communications for the purpose of assembling a bankruptcy petition and related schedules is not privileged, reasoning that information in such communications is given for the purpose of publication in a public record with the court; thus, there is no expectation of confidentiality. See French, 162 B.R. at 546-48.
Thus, the attorney/client privilege is not impervious even where a trustee does not obtain the ability to waive the privilege. Though privileges are at the basis of our legal system, courts have not allowed parties to use them as a sword—and sometimes, not even as a shield.
Both prior to and after filing a bankruptcy petition, debtor's counsel and a debtor have a great need to communicate. Although there is an expectation of privacy and secrecy, such communications are not necessarily privileged. In fact, depending on the communication and the nature of the issue, such communication may not be privileged at all.
As such, it is important to keep in mind the nature of the attorney/client privilege, and the potential subsequent waiver of the privilege by a third party, as well as the various exceptions to the privilege. When advising a new or potential client that "everything they say is confidential," one may want to temper such promises with the understanding that even though information is communicated between attorney and client, only the communication is privileged, not the underlying facts. See Upjohn v. United States, 449 U.S. 383, 395, 101 S.Ct. 677, 685, 66 L.Ed.2d 584, 595 (1981).