The Insolvency Effect on Attorney-Client Privilege

By: Anna Piszczatowski

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

In In re: HH Liquidation,[1] a bankruptcy court in Delaware protected the debtor’s attorney-client privilege[2] and held that an official committee of unsecured creditors was not entitled to debtors’ privileged documents without demonstrating insolvency.[3] The debtors, the Haggen family, ran a profitable business in the grocery store industry for a few short years.[4] In 2011, the Haggens sold an 80% interest to Comvest Group Holdings, LLC (“CGH”) and closed almost half of their stores over the course of four years.[5] Shortly thereafter, the Haggens filed for bankruptcy and an official committee of unsecured creditors was appointed by the United States Trustee to represent the unsecured creditors.[6]

The Committee filed an extensive complaint on behalf of the Haggens’ estates, charging the Haggens with 78 counts of fraudulent activity.[7] In connection with the complaint, the Committee requested documents from the Haggens and CGH in connection with these claims.[8] However, the Haggens and CGH withheld their documents, invoking the attorney-client privilege and work-product doctrine.[9] The court found that the ultimate question was whether the debtors were insolvent when the alleged privileged communications took place.[10] The court did not decide the question of insolvency; rather, it analyzed whether the privilege applied and declared that the Committee must prove insolvency to waive the privilege.[11]

Prior to filing for bankruptcy, a debtor controls the attorney-client privilege. Upon a bankruptcy filing, other entities may assert control over the debtor’s attorney-client privilege.[12] The leading case on this issue is Commodity Futures Trading Commission v. Weintraub, where the Supreme Court ruled that a chapter 7 trustee of a corporation has the power to waive the attorney-client privilege.[13] Other courts have held that a committee may control the privilege if the debtor was insolvent at the time of the privileged communication.[14]

Ultimately, insolvency is crucial in determining whether a debtor maintains the right to the attorney-client privilege. The HH Liquidation court followed the rulings of other bankruptcy courts, upholding debtor’s right to control the privilege unless the debtor was insolvent at the time of the privileged communication.[15] Similar to the criminal courts’ assertion of “innocent until proven guilty,” the standard in bankruptcy cases involving the attorney-client privilege seems to be “solvent until proven insolvent,” leaving the burden of proof on the committee. Since the attorney-client privilege has been enjoyed by any who enter the legal system since the foundation of law, it is important to ensure debtors enjoy the same privilege as anyone else. However, as with most legal standards, exceptions do arise. A client may not invoke the privilege in furtherance of fraudulent activity;[16] similarly, debtors should not be able to invoke the privilege when a committee is seeking to protect the interests of the unsecured creditors, which were harmed as a result of debtors’ business judgments.

[1] Official Comm. of Unsecured Creditors of HH Liquidation, LLC v. Comvest Grp. Holdings, LLC (In re HH Liquidation, LLC), 571 B.R. 97, 104 (Bankr. D. Del. 2017).

[2] Teleglobe Communications v. BCE, Inc. (In re Teleglobe Communications Corp.), 493 F.3d 345, 359 (3d Cir. 2007).

[3] In re HH Liquidation, LLC, 571 B.R. at 104.

[4] See id. at 99.

[5] See id.

[6] See id.

[7] See id.

[8] In re HH Liquidation, LLC, 571 B.R. at 100.

[9] See id.

[10] See id. at 104.

[11] See id.

[12] See id. at 102.

[13] Trading Comm’n v. Weintraub, 471 U.S. 343, 353-54 (1985).

[14] North Am. Catholic Education Prog. Foundation, Inc. v. Gheewalla, 930 A.2d 92, 103 (Del. 2007).

[15] In re HH Liquidation, LLC, 571 B.R. at 104.

[16] Julianna M. Thomas, Fifteen Years After Weintraub: Who Controls the Individual’s Attorney-Client Privilege, 80 B.U. L. Rev. 635, 640 (2000).