Attorney-Client Privilege Transfers to the Post-Bankruptcy Company

By: Melissa Schneer
St. John's Law Student
American Bankruptcy Institute Law Review Staff

Recently, in Schleicher v. Wendt,[1] a magistrate judge in Indiana held that a post-bankruptcy corporation that acquired substantially all of the pre-bankruptcy corporation’s business operations also acquired the pre-bankruptcy corporation’s right to assert the attorney-client privilege.[2]  Schleicher involved a class action against four senior executives of a company, based on that company’s decline into bankruptcy.[3] The plaintiffs moved to compel the production of thousands of documents, which the defendants claimed were privileged.[4] The parties disputed whether control of the pre-bankruptcy corporation (the “Old Corporation”) — accompanied by the attorney-client privilege — passed through bankruptcy proceedings to the post-bankruptcy corporation (the “New Corporation”).[5] The court noted that the reorganized New Corporation did not obtain every aspect of the Old Corporation.[6] The New Corporation, however, did acquire all of the Old Corporation’s assets, sources of revenue and expense, and management as part of the reorganization.[7] As a result, the court opined that the New Corporation essentially gained control over the Old Corporation’s business operations.[8] Consequently, the court held that the New Corporation acquired the Old Corporation’s right to assert the attorney-client privilege.[9]

In Commodity Futures Trading Commission v. Weintraub,[10] the Supreme Court noted that the Bankruptcy Code is not dispositive on the issue of privilege, but rather creates “an invitation for judicial determination of privilege questions.”[11] Therefore, courts must determine which roles, within a pre-bankruptcy corporation, are most analogous to a solvent corporation’s management (or entity in control of business operations).[12]  Privilege transfers depend on “the practical consequences of the transaction at issue.”[13] The practical result of a post-bankruptcy corporation obtaining substantially all of a pre-bankruptcy corporation’s business operations is a transfer of control, and essentially, a mere continuation of business, albeit under new management. Therefore, the authority to assert or waive the attorney-client privilege simply transfers, along with control over operations, to new management.[14]  “[W]hen control of a corporation passes to new management, the authority to assert and waive the corporation's attorney-client privilege passes as well.”[15] The Schleicher court noted that the power to assert or waive a corporation's attorney-client privilege is an “incident of control” of the corporation.[16] Therefore, as in Schleicher, when a post-bankruptcy corporation acquires most of the pre-bankruptcy corporation’s control over business operations, it also acquires the pre-bankruptcy corporation’s attorney-client privilege.[17]

It is unsurprising that the management of the New Corporation in Schleicher asserted the attorney-client privilege because the company’s management essentially did not change throughout bankruptcy. The issue of attorney-client privilege, however, becomes more of a concern when the new company plans on replacing the old company’s current management. In those circumstances, pre-bankruptcy management, in an effort to protect confidential discussions, may attempt to contract against attorney-client waivers as part of bankruptcy acquisitions. As a result, merger negotiations in bankruptcy could become more complicated and take more time to consummate.