Deciding When Trustee May Waive Individual Debtors Attorney-Client Privilege

By: Rebecca Leaf

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

 

Adopting a middle ground approach, the Florida bankruptcy court in In re Courtney,

[1]

held that a trustee could waive an individual debtor’s attorney-client privilege based on balancing of benefits and harms.

[2]

   The court rejected the view that had been adopted in an earlier Florida bankruptcy case, that the debtor’s attorney-client privilege automatically passes, as a matter of law, from debtor to trustee in a chapter 7 bankruptcy proceeding.

[3]

  In this case, the trustee wanted the power to waive the debtor's privilege and direct the law firm representing the debtor to turn over all files that it kept in connection with its representation of the debtor in a wrongful death action brought against the debtor.

[4]

  In allowing the records to be turned over to the trustee, the court weighed the harm to the debtor against the benefits to the bankruptcy estate; rather than applying a blanket rule that all attorney client-privileged materials pass from debtor to trustee.

[5]

The court criticized the earlier Florida case of In re Smith,

[6]

where the court adopted a categorical rule that the debtor’s privilege passes by operation of law to the bankruptcy trustee.

[7]

  Instead, the Courtney court adopted the balancing test of In re Bazemore.

[8]

  In Bazemore, the court balanced the harm to the debtor as a result of waiving attorney-client privilege, against the benefit to the bankruptcy estate, in deciding whether the trustee could waive the debtor's privilege.

[9]


The trustee’s request was based on section 542, which governs turnover of a debtor's property to the estate.

[10]

  Specifically, section 542(e) enables a court to require an attorney holding information relating to the debtor's property to turn over information to the trustee.

[11]

  The extent to which attorney-client privilege can be asserted against a bankruptcy trustee is unclear.

[12]

  In the corporate context, the Supreme Court has held that the trustee in bankruptcy has the power to waive the corporation's attorney-client privilege with respect to pre-bankruptcy communications.

[13]

  However, the Supreme Court was careful to note that it was not announcing a rule for cases involving individual debtors.

[14]

  Thus, in the case of the individual debtor, the lower courts have adopted three different approaches to deciding if the trustee has the power to waive attorney-client privilege: (1) trustees, as a matter of law, can waive attorney-client privilege; (2) trustees can never waive attorney-client privilege on the debtor's behalf; and (3) the trustee's power to waive the attorney-client privilege turns on balancing the harm to the debtor against the benefit to the estate.

[15]


 

Courtney adopts the balancing approach,

[16]

which provides some protection to the debtor's confidentiality rights, while allowing the trustee to exercise the duties provided by the Bankruptcy Code.

[17]

  Proponents of the balancing approach argue that it considers the best interests of both the debtor and trustee.

[18]

  However, the case-by-case approach has been criticized for providing no consistent method of analysis for determining who controls a debtor's attorney-client privilege.

[19]

  The attorney-client privilege serves the vital function of encouraging full and frank communications between attorneys and their clients.

[20]

  If debtors fear that a trustee might waive his or her privilege, a debtor might not fully disclose facts to the attorney and thwart the attorney's ability to zealously represent the client.

[21]

  On the other hand, public policy supports the trustee's need to make a fair assessment of the bankruptcy estate.

[22]



[1]

In re Courtney, 372 B.R. 519 (Bankr. M.D. Fla. 2007).

[2] Id. at 521.

[3]

Id.

[4]

Id. at 520.

[5]

Id. at 521 ("The Court would like to note . . . that it disagrees with the assertion that the attorney-client privilege always passes as a matter of law from the debtor to the trustee.").

[6] In re Smith, 24 B.R. 3 (Bankr. S.D. Fla. 1982).

[7] Id. at 5.

[8]

In re Bazemore, 216 B.R. 1020 (Bankr. S.D. Ga. 1998).

[9]

Id. at 1024 ("The inquiry requires balancing the interests of a full and frank discussion in the attorney-client relationship . . . the harm to the debtor . . . with the trustee's duty to maximize the value of the debtor's estate . . . ").

[10] 11 U.S.C. § 542 (2006).

[11]

11 U.S.C. § 542(e) ("[T]he court may order an attorney, accountant, or other person that holds recorded information . . . relating to debtor's property or financial affairs, to turn over or disclose such recorded information to the trustee.").

[12]

See 5 Collier on Bankruptcy, ¶ 542.06, at 542-21 (15th ed. revised 1997).

[13] Commodity Futures Trading Comm. v. Weintraub, 471 U.S. 343, 353, 358 (1986).

[14]

  Id. at 356 ("But our holding today has no bearing on the problem of individual bankruptcy . . . ").  See Ralph McCullough Et Al., Trustees: The Ability to Waive the Debtor's Attorney-Client Privilege, 106 Comm. L.J. 1, 4 (2001).

[15] See McCullough, supra note 14, at 4.

[16] In re Courtney, 521 (positing most practical approach is striking balance between harm to debtor and benefit to estate).  See McCullough, supra note 14, at 5.

[17]

See McCullough, supra note 14, at 5.

[18]

See id. at 23.

[19]

See Julianna M. Thomas, Note, Fifteen Years After Weintraub: Who Controls the Individual's Attorney-Client Privilege in Bankruptcy?, 80 B.U. L. Rev. 635, 667 (2000) (noting that case-by-case balancing test makes predictability impossible); cf. Upjohn Co. v. United States, 449 U.S. 383, 393 (1981) ("An uncertain privilege, or one which . . .  results in widely varying applicants by the courts, is little better than no privilege at all.").

[20]

See Thomas, supra note 19, at 639.

[21]

See McCullough, supra note 14, at 10 (noting waiver of privilege "[R]isks hindering attorney-client communications").

[22] See id.