On May 8, 2017, Judge Gross ruled on a Motion to Compel Production of Documents in the Haggen bankruptcy.  Judge Gross’ opinion (the “Opinion”) addresses the conflict when a party is acting on another’s behalf and that entity claims “the oldest of the common law privileges”.  Opinion at *5.  A copy of the Opinion is available here.

In the Haggen bankruptcy, the Committee, the Debtors and the Defendants entered into stipulations granting the Committee derivative standing to bring an adversary proceeding against Defendants.  The Committee served discovery on the Debtors and the Debtors withheld nearly 1,000 documents on the basis of attorney-client privilege and attorney work-product doctrine.  The issue is as stated by Judge Gross: “[T]he Committee is acting on behalf of the Debtors. Yet it does not have access to all of Debtors’ documents which are or may be relevant to the matters it raises in the Complaint.”  Opinion at *5.

In the Opinion, Judge Gross analyzed three key precedents related to the issue of whether the Committee, acting in place of the conflicted Debtors, could obtain discovery from the Debtors:  Teleglobe Communications v. BCE, Inc. (In re Teleglobe Communications Corp.), 493 F. 3d 345 (3d Cir. 2007); Garner v. Wolfinbarger, 403 F. 2d 1093 (5th Cir. 1970) (“Garner”); and Commodity Futures Trading Comm’n v. Weintraub, 471 U.S. 343 (1985) (“Weintraub”).

Judge Gross’s analysis under Weintraub begins on page 6.  He concludes that “the Committee, suing on behalf of the Debtors, does not have access to privileged documents. The foregoing is true even though the Debtors are not operating and the Committee’s recovery, if any, may be on behalf of the estate as a whole. Weintraub therefore applies to chapter 7 trustees but not to Committees.”  Opinion at *8-9.

The discussion of Garner begins on page 9.  Judge Gross determined that if the Committee could show “cause” as to why the attorney-client privilege should be breached.  However, the finding of Garner was limited by Teleglobe.  The Teleglobe discussion begins on page 10.  In Teleglobe, the Third Circuit “added to the joint representation issue this: were the debtors insolvent or in the zone of insolvency when the privileged communication occurred?”  Opinion at *11.  Judge Gross ends his discussion of piercing the attorney-client privilege by denying the relief sought and stating that “If Debtors were insolvent at the time of the communications, the Committee must prove that they were. Perhaps the Committee will be able to prove insolvency at a later date but for now the Committee raises only conjecture and no proof.”  Opinion at *12.

To summarize, Judge Gross concludes that “Weintraub does not apply to the Committee but only to chapter 7 trustees; that Garner affords relief but only on a finding of insolvency; and that it is Teleglobe which requires insolvency without which there is no fiduciary duty owed to creditors.”  Opinion at *13

Judge Gross very quickly reviewed the arguments on the work-product doctrine, finding that as described by the Debtors and Defendants, documents withheld on the basis of the work product doctrine shall be produced, subject to the Debtors proving that they prepared the withheld documents in anticipation of litigation.  Opinion at *13.

John Bird is a bankruptcy attorney with the law firm of Fox Rothschild LLP.  John is admitted in Delaware and regularly practices before the United States Bankruptcy Court for the District of Delaware. You can reach John at (302) 622-4263 or at jbird@foxrothschild.com.