United States: Delaware Bankruptcy Court Rules That Liquidation Trustee Controls The Privilege Of Board Of Directors' Special Committee

A Delaware bankruptcy court has held that a special committee's advisors cannot withhold privileged documents from a liquidation trustee appointed pursuant to a chapter 11 plan. This decision serves as an important reminder that a bankruptcy trustee, including a trustee appointed to manage a liquidating trust established pursuant to a chapter 11 plan, may have exclusive control over a company's privilege and that executives, board members, and their advisors may be unable to withhold documents from the trustee. Importantly, this decision highlights that even a company's establishment of a special, independent committee with its own advisors may not be effective in shielding otherwise privileged communications from disclosure.

I. Background

In In re Old BPSUSH Inc.,1 a company's board of directors formed an audit committee (the "Audit Committee"), which investigated questions surrounding senior management's financial reporting. The Audit Committee retained separate legal counsel, and its legal counsel retained financial advisors.2 The Audit Committee's advisors reviewed millions of documents, conducted multiple interviews, and generated a substantial amount of work product.3

The company subsequently filed bankruptcy.4 In bankruptcy, the company confirmed a chapter 11 plan that created a liquidation trust and vested the trust with all of the company's "rights, titles, and interests in any Privileges," which the plan defined to include "any privilege or immunity" of the company.5 After the chapter 11 plan was confirmed and a trust was established, the liquidation trustee filed a motion to compel the Audit Committee's legal and financial advisors to turn over all records related to the investigation.6

The Audit Committee's advisors objected to the trustee's motion, arguing that the Audit Committee "was organized as an independent body, created and governed by a separate charter, with the right and power to engage independent counsel with separate attorney-client privileges and other protections"; therefore, the advisors argued that the liquidation trustee did not acquire the Audit Committee's privileges.7 Accordingly, the advisors withheld attorney notes of employee interviews, draft memoranda, the financial advisors' internal analytics and work papers, and communications/emails with Audit Committee members.8

II. Bankruptcy Court's Analysis

The Delaware bankruptcy court began its analysis by recognizing the longstanding principle established by the Supreme Court in Commodity Futures Trading Commission v. Weintraub, which held that a "trustee of a corporation in bankruptcy has the power to waive the corporation's attorney-client privilege with respect to prebankruptcy communications."9

The Audit Committee's advisors attempted to distinguish Weintraub, relying primarily on a Southern District of New York decision in In re BCE West, L.P. In BCE West, the court held, under similar circumstances, that a trustee appointed pursuant to a chapter 11 plan could not access privileged documents held by the advisors of a special committee appointed by the company's board of directors.10 The BCE West court reasoned that "it is counterintuitive to think that while the Board permitted the Special Committee to retain its own counsel, the Special Committee would not have the benefit of the attorney-client privilege inherent in that relationship or that the Board of Directors or management, instead of the Special Committee, would have control of such privilege."11 Accordingly, the BCE West court determined that the special committee was a "separate and distinct group" from the remainder of the board of directors and that the trustee did not control the privilege."12

The Delaware bankruptcy court disagreed with BCE West and instead followed a subsequent Southern District of New York case, Krys v. Paul, Weiss, Rifkind, Wharton, & Garrison LLP (In re China Medical Technologies), which addressed a similar situation and refused to follow BCE West.13 In China Medical, the court considered whether a foreign representative in a chapter 15 bankruptcy could obtain documents related to an internal investigation conducted by the foreign debtor's audit committee.14 The court first determined that an audit committee is not completely separate from the board of directors; rather, it is a committee of the board and a "critical component of the company's management infrastructure."15 The court also discussed the policy considerations in Weintraub and that "corporate management is deposed in favor of the trustee, and there is no longer a need to insulate committee-counsel communications from managerial intrusion."16 Based on these considerations, the China Medical court rejected BCE West and held that the foreign representative controlled the audit committee's privilege.

The Delaware bankruptcy court agreed with the China Medical court's reasoning that "it is appropriate to extend the Supreme Court's analysis in Weintraub and recognize that the trustee appointed as the representative of a corporate debtor controls the privileges belonging to the independent committee established by the corporate debtor."17 Accordingly, the court held that the liquidation trustee controlled the Audit Committee's privileges and that its advisors were required to turn over all documents, communications, and work product, including any "draft factual memoranda and draft legal memoranda," but excluding the legal advisor's "firm documents intended for internal law office review and use."18

III. Implications of Decision

It remains to be seen whether other courts will likewise reject BCE West and instead follow China Medical and Old BPSUSH. Although there does not appear to be much case law specifically addressing the issue, China Medical and Old BPSUSH serve as a warning that a special committee's documents and communications may very well be discoverable by a trustee (including a trustee of a liquidating trust created pursuant to a chapter 11 plan) and/or company representative in bankruptcy. Therefore, members of a company's board of directors, special committee, management, and all outside advisors should assume that any communications and work product will be discoverable by and subject to the exclusive control of a trustee if the company ultimately files for bankruptcy. More broadly, Old BPSUSH serves as a reminder, particularly to companies in financial distress, that communications assumed by the parties to be protected by privilege may ultimately be discoverable by a bankruptcy trustee.

Footnotes

1 In re Old BPSUSH Inc., 2019 WL 2563442, at *1 (Bankr. D. Del. June 20, 2019).

2 Id.

3 Id.

4 Id.

5 Id. at *4.

6 Id. at *1.

7 Id. at *2.

8 Id. at *8.

9 Id. at *4 (quoting Commodity Futures Trading Comm'n v. Weintraub, 471 U.S. 343, 358 (1985)).

10 In re BCE W., L.P., 2000 WL 1239117, at *3 (S.D.N.Y. Aug. 31, 2000).

11 Id. at *2.

12 Id.

13 See Krys v. Paul, Weiss, Rifkind, Wharton, & Garrison LLP (In re China Med. Techs.), 539 B.R. 643, 654-55 (S.D.N.Y. 2015).

14 Id. at 646.

15 Id. at 655.

16 Id. at 656.

17 In re Old BPSUSH Inc., 2019 WL 2563442, at *6.

18 Id. at *7. The court recognized that an exception applies to "documents intended for internal law office review and use" because lawyers must "be able to set down their thoughts privately in order to assure effective and appropriate representation," and such documents "are unlikely to be of any significant usefulness to the client or to a successor attorney." Id. (quoting Sage Realty Corp. v. Proskauer Rose Goetz & Mendelsohn, L.L.P., 91 N.Y.2d 30, 37-38 (1997)).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions