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The Delaware Bankruptcy Insider is a premier blog designed to bring its readers a comprehensive analysis of the latest Delaware corporate bankruptcy news and rulings. Brought to you by Ashby & Geddes, P.A.
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- Delaware Bankruptcy Court’s Local Rules For 2019 Now Effective
Creditors Committee Suing on Behalf of Estates Is Unable to Invade Debtors’ Attorney-Client Privilege Without a Showing of Insolvency
Official Comm. of Unsecured Creditors of HH Liquidation, LLC v. Comvest Grp. Holdings, LLC (In re HH Liquidation, LLC), No. 16-51204 (KG), 2017 WL 1906585 (Bankr. D. Del. May 8, 2017)
This adversary proceeding was commenced derivatively by an Official Committee of Unsecured Creditors (the “Committee”) against the Haggen, Inc. debtors’ officers, directors, and non-debtor affiliates (collectively, the “Defendants”) for, among other things, fraud and fraudulent transfers. During the course of discovery, the Committee filed a motion to compel production of over 2,000 documents withheld by the debtors and the Defendants based on attorney-client privilege (the “AC Privileged Documents”). Importantly, one law firm jointly represented the debtors and the Defendants at the time of the communications. While the Honorable Kevin Gross of the Delaware Bankruptcy Court recognized the odd scenario presented, one in which the Committee was suing non-debtor entities on behalf of the debtor but was without access to the very documents the debtor would use if pursuing the action, the Court would not compel the production of the AC Privileged Documents.
Without case law squarely on point, the Committee was forced to urge the Court to extend and apply authority governing chapter 7 trustee and shareholder actions. In the first instance, the Committee argued for an extension of the Weintraub decision, in which the United States Supreme Court ruled that a chapter 7 trustee of a corporation controls the corporation’s attorney-client privilege as to communications before the bankruptcy proceeding. See Commodity Futures Trading Comm’n v. Weintraub, 471 U.S. 343, 353-56 (1985) (explaining that, similar to management of a debtor-in-possession, a chapter 7 trustee has the fiduciary obligation to exercise control of the privilege to treat all parties fairly). However, unlike the chapter 7 trustee in Weintraub, creditors’ committees are not fiduciaries to the entirety of estate constituents. While priority creditors might benefit from the Committee’s suit, it only owes duties to the debtor’s unsecured creditors. Therefore, the Court was unwilling to apply the Weintraub decision and allow the Committee access to the AC Privileged Documents.
The Committee next argued for the application of Garner v. Wolfinbarger, 430 F.2d 1093 (5th Cir. 1970), which allows shareholders to invade a corporation’s privilege to prove breaches of fiduciary duty if they can show good cause. While the Court determined that the Committee satisfied the various “indicia” of good cause set forth by the court in Garner, this was insufficient for the relief sought. The Court, citing the decision of the Third Circuit Court of Appeals in Teleglobe Commc’ns Corp. v. BCE, Inc. (In re Teleglobe Commc’ns Corp.), 493 F.3d 345 (3d Cir. 2007), explained that the Garner doctrine could not be applied to invade the debtors’ privilege until the Committee proved that the debtors were insolvent at the time of the confidential communications such that the debtors and the Defendants owed fiduciary duties to creditors. See North Am. Catholic Education Prog. Foundation, Inc. v. Gheewalla, 930 A.2d 92, 103 (Del. 2007).