The Privilege Is All Mine: What Happens To A Corporation’s Attorney-...

07/29/13

It’s well-established that a corporation has an attorney-client privilege and can assert it to keep communications between the corporation and its attorneys confidential. When a corporation is solvent, its officers and directors maintain the right to assert — or waive — the attorney-client privilege on behalf of the corporation, and control who has access to privileged communications.

The Attorney-Client Privilege In Bankruptcy. This raises a question: what happens if the corporation files bankruptcy? The answer depends on the type of bankruptcy filed and whether a bankruptcy trustee is appointed.

  • Chapter 11 Case. In a Chapter 11 reorganization bankruptcy, the corporation generally remains as a "debtor in possession," unless a trustee is appointed. As a debtor in possession, the corporation’s board of directors and management remain in control – literally "in possession" — of the company’s assets. Courts have held that this control extends to the continued right to assert, or waive, the corporation’s attorney-client privilege.
  • Chapter 7 Bankruptcy. In a Chapter 7 liquidation bankruptcy, a Chapter 7 trustee is appointed and the debtor corporation’s board and management is removed from control. The U.S. Supreme Court held in CFTC v. Weintraub, 471 U.S. 373 (1985), that it’s the Chapter 7 trustee alone who controls the ability to assert, or waive, the corporation’s attorney-client privilege. This means that the Chapter 7 trustee is given access to all of the corporation’s attorney-client privileged communications prior to bankruptcy.
  • Chapter 11 Trustee. The answer is less clear in the relatively few Chapter 11 cases in which the court appoints a Chapter 11 trustee. Several courts, however, have extended the Supreme Court’s decision in Weintraub and held that the appointed Chapter 11 trustee, like a Chapter 7 trustee, takes control of the debtor’s assets and therefore has authority to assert or waive the corporation’s attorney-client privilege and to access privileged communications.

Access To Attorney-Client Privileged Communications. It’s important for officers, directors, and attorneys for corporations to remember that the attorney-client privilege belongs to the corporation. Anyone who later gains control of the corporation will have access to its attorney-client privileged communications.

  • While nothing new, for solvent companies this means that, for example, future officers and directors will have access to attorney-client communications that took place in the past between corporate counsel and former officers and directors. The same is true when a corporation is acquired through a merger; the new ownership and management takes control of the corporation — and also of its past and present attorney-client privileged communications.
  • Likewise, when a corporation files bankruptcy, a bankruptcy trustee, certainly a Chapter 7  trustee and probably a Chapter 11 trustee, will be given similar access to the corporation’s attorney-client communications. This is true even if the trustee wants access to use previously privileged communications, as they sometimes will do, to bring causes of action against former officers and directors or others.

Conclusion. The attorney-client privilege is an essential part of the attorney-client relationship, fostering the ability of a corporation to get the full benefit of its counsel’s legal advice. While not always obvious, the privilege is held by the corporation, not specific officers or directors. Companies that file Chapter 11 bankruptcy and remain as a debtor in possession generally do not turn over the corporation’s attorney-client privilege to a third party. However, if the corporation files or ends up in a Chapter 7 bankruptcy, or perhaps has a Chapter 11 trustee appointed, control of the corporation, and its attorney-client privileged communications, may well end up in the hands of the bankruptcy trustee. 

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