Bankruptcy, Corporate Criminal Investigations and Waiver of the Attorney-Client Privilege
An excellent article from Legal Times, “Dead Companies Can Tell Tales,” examines how the attorney-client privilege in a corporate context survives the bankruptcy or receivership of the corporation. The article concludes that prosecutors possess considerable freedom to seek privileged information.
The article references the “Filip Memorandum,” which was a revision by Deputy AG Mark Filip to the “McNulty Memorandum” of 2006, which provides guidance to DOJ prosecutors in investigating and charging corporations (which dates back to 1999, when it was originally authored by then-Deputy AG Eric Holder and was known as the “Holder Memorandum”). The Filip Memorandum was the result of concerns over prosecutors’ extracting attorney-client privilege waivers from corporations and preventing corporations from paying officers’ and employees’ legal fees under threat of indictment. The Filip Memorandum sets forth DOJ policy in determining whether to indict a business entity, and the memorandum’s policies and factors to be considered are set forth in the United States Attorney’s Manual (USAM). In regard to the attorney-client privilege, USAM 9-28.710 asserts that “waiving the attorney-client and work product protections has never been a prerequisite under the Department's prosecution guidelines for a corporation to be viewed as cooperative.” The policy nevertheless states that “Everyone agrees that a corporation may freely waive its own privileges if it chooses to do so; indeed, such waivers occur routinely when corporations are victimized by their employees or others, conduct an internal investigation, and then disclose the details of the investigation to law enforcement officials in an effort to seek prosecution of the offenders.”
Therefore, while it is no longer DOJ policy to request waivers of the attorney-client privilege, a corporation may still voluntarily do so. The risk of such a “voluntary” waiver of the privilege may be increased when a corporation is in bankruptcy, and an independent trustee or receiver, or the successor management, are dealing with a criminal investigation and requests by the government, as well as their own investigation of potential criminal activity by the debtor corporation. The article cites the Supreme Court’s decision in CFTC v. Weintraub, 471 U.S. 343 (1985), in which the Court held that the trustee of a corporation in bankruptcy has the power to waive the corporation's attorney-client privilege with respect to pre-bankruptcy communications, id. at 354.
Consequently, the article advises attorneys representing officers or employees of corporations in bankruptcy to advise their clients of the risk that any privilege of their pre-bankruptcy communications to corporate counsel could be waived by the trustee or receiver and the communications disclosed to the government. There is also some question as to whether a bankrupt corporation implicates the Filip Memorandum or USAM 9-28.710 at all, since they do not mention bankrupt or dissolved corporation. The policies would also be inapplicable where the government intends to prosecute individuals instead of the corporation. Beyond the constraints of the Filip Memorandum, prosecutors are free to seek waivers of the privilege. Furthermore, trustees or receivers possess a duty to maximize recovery for corporate shareholders, and not to former officers or employees, and may be readily persuaded to give such waivers.
The authors note that Weintraub waivers have been used by receivers to waive the attorney-client privilege to order outside counsel for a corporation to produce its pre-litigation file, CFTC v. Standard Forex (E.D.N.Y. 1995), and to waive attorney-client and work product protection over the objection of a former corporation officer facing criminal charges, United States v. Shapiro (S.D.N.Y. 2007). The issue has also arisen in at least one proceeding in this Circuit, In re Pearlman, 381 B.R. 903 (Bkrtcy.M.D.Fla. 2007). The debtor in Pearlman and various corporations controlled by him filed for bankruptcy, and the trustee obtained a discovery order from the bankruptcy court and served subpoenas on several outside attorneys and law firms to produce documents. Id. at 905. Pearlman was also indicted by a grand jury in the Southern District of Florida. Id. at 906. Counsel produced some documents in response to the subpoenas, but asserted that other documents were protected by the attorney-client privilege. Id. at 907. The court held that documents relating to some of the entities were not subject to production unless the privilege was waived by the trustee. Id. The court continued to hold “[t]he privilege passed to, is controlled by, and may be waived by the Trustee to the extent an attorney-client privilege exists with respect to any of the Pearlman Entities.” Id. at 909 (citing Weintraub, at 358). It concluded that the documents and information were subject to turnover provided that the trustee waived the entities’ privilege. Id.
However, in regard to documents and information relating to counsel’s representation of Pearlman, the court stated that:
The issue of whether a bankruptcy trustee controls the attorney-client privilege as to an individual debtor has been addressed by various federal courts. The majority of courts employ a balancing test whereby the specific facts of a case are evaluated and the benefits of granting access to the privilege are balanced against the risk of harm to the debtor. The Court adopts the balancing test.
Id. at 907. It continued to observe that:
The Supreme Court did not address in Weintraub whether a bankruptcy trustee controls the attorney-privilege as to an individual debtor. Weintraub, 471 U.S. at 356, 105 S.Ct. 1986 (“But our holding today has no bearing on the problem of individual bankruptcy, which we have no reason to address in this case.”)
Id. at 910. It concluded that:
The majority of courts employ a balancing test whereby the specific facts of a case are evaluated and balanced, including the risk of harm to the debtor versus the benefit to the estate. Foster v. Hill (In re Foster), 188 F.3d 1259, 1268-69 (10th Cir.1999); In re Courtney, 372 B.R. 519, 521 (Bankr.M.D.Fla.2007); In re Bame, 251 B.R. 367, 377 (Bankr.D.Minn. 2000); In re Bazemore, 216 B.R. 1020, 1024 (Bankr.S.D.Ga.1998). The Court, based upon the weight of the case law and the facts and circumstances of this case, adopts the balancing test.
Id. This balancing test balances the harm to the individual debtor and to the attorney-client privilege with the trustee's need for information in light of the particular circumstances. Foster, at 1268.
Pearlman’s balancing test only appears to apply to former officers or employees who are also debtors in a bankruptcy proceeding. Non-debtor former officers or employees must beware of the risk that Weintraub waivers may be sought by the government and granted by the trustee or receiver, and that privileged information may be disclosed. The authors advise practitioners to gain an understanding of the substance of prior privileged communications which may be disclosed. Second, they caution counsel to be alert to any potential Weintraub waiver sought by the prosecution or trustee so that the defense can attempt to intervene and oppose the waiver, likely arguing that their client’s interest in the privilege outweighs any need of the trustee or the government for the waiver, as indicated by Pearlman. Given that a trustee or receiver is typically held to have a great need for any documents or information in carrying out his or her duties, this will likely be a losing proposition, but one worth trying nevertheless.
