Commodity Futures Trading Com'n v. Weintraub, 82-2420

• Decision Date: 18 April 1984
• Docket Number: No. 82-2420,82-2420
• Citation: 722 F.2d 338
• Parties: , 9 Collier Bankr.Cas.2d 923, 11 Bankr.Ct.Dec. 428, Bankr. L. Rep. P 69,495, Bankr. L. Rep. P 69,751, 14 Fed. R. Evid. Serv. 1015, 14 Fed. R. Evid. Serv. 1881 COMMODITY FUTURES TRADING COMMISSION, Petitioner-Appellee, v. Gary WEINTRAUB, Respondent, and Frank H. McGhee and Andrew McGhee, Intervening Respondents-Appellants.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 338

722 F.2d 338

40 Fed.R.Serv.2d 87, 9 Collier Bankr.Cas.2d 923,

11 Bankr.Ct.Dec. 428, Bankr. L. Rep. P 69,495,

Bankr. L. Rep. P 69,751,

14 Fed. R. Evid. Serv. 1015,

14 Fed. R. Evid. Serv. 1881

COMMODITY FUTURES TRADING COMMISSION, Petitioner-Appellee, v. Gary WEINTRAUB, Respondent, and Frank H. McGhee and Andrew McGhee, Intervening Respondents-Appellants.

No. 82-2420.

United States Court of Appeals, Seventh Circuit.

Argued April 8, 1983.

Decided March 19, 1984.

Rehearing and Rehearing En Banc Denied April 18, 1984.

Helen G. Blechman, Deputy Gen. Counsel, C.F.T.C., Washington, D.C., for petitioner.

David A. Epstein, Jann, Carroll, Sain & Dolin, Chicago, Ill., for intervening respondent.

Before PELL and COFFEY, Circuit Judges, and WEIGEL, District Judge. ^*

WEIGEL, District Judge.

Two individuals, both officers and shareholders in a bankrupt corporation, appeal from an order of the United States District Court for the Northern District of Illinois, Eastern Division, pursuant to 28 U.S.C. Sec. 1291. The district court, by minute order, affirmed a United States Magistrate's order that the trustee in bankruptcy of the bankrupt firm had the authority to waive the corporation's attorney-client privilege, as to "all communications or information ... occurring or arising on or before" the date the petition in bankruptcy was filed. ¹ For the reasons set out below, we reverse.

I

Chicago Discount Commodity Brokers, Inc. ("CDCB") was a discount commodity brokerage house registered with the Community Futures Trading Commission (the "Commission") as a futures commission merchant. On October 27, 1980, the Commission filed a complaint against CDCB in the United States District Court for the Northern District of Illinois alleging violations of the Commodity Exchange Act, 7 U.S.C. Sec. 6d(2) (Supp. III 1979). Also, on October 27, 1980, a consent decree was entered into, which provided, inter alia, for an immediate freeze on corporate assets, the appointment of a receiver, and that the Commission would be permitted to investigate CDCB's operations. The district court appointed John K. Notz ("Notz") of the Chicago law firm of Gardner, Carton & Douglas as equity receiver.

On November 4, 1980, Notz, as receiver, filed a voluntary petition in bankruptcy on behalf of CDCB. In re Chicago Discount Commodity Brokers, Inc., No. 80 B 14472 (Bankr.N.D.Ill.). The petition sought relief under Subchapter IV of Chapter 7 of the Bankruptcy Reform Act of 1978, 11 U.S.C. Secs. 761-766 (1979), which provides for liquidation of bankrupt commodity brokers. The bankruptcy court initially appointed Notz as First Interim Trustee and, later, Permanent Trustee of CDCB.

On January 28, 1981, the Commission served an administrative subpoena duces tecum upon respondent, Gary Weintraub ("Weintraub"), in connection with its investigation of CDCB. Weintraub formerly had represented CDCB as one of its attorneys. Weintraub appeared for deposition on February 26 and 27, 1981, and, on August 26, 1981, answering approximately 800 questions in all. However, he refused to answer 23 other questions, asserting the attorney-client privilege. On December 15, 1981, the Commission filed a motion to compel answers to those 23 questions. Nevertheless, on March 11, 1982, Notz, as trustee in bankruptcy, waived the attorney-client privilege on behalf of CDCB, as to "any communications or information occurring or arising on or before October 27, 1980." ²

On April 26, 1982, a United States Magistrate granted the Commission's motion to compel answers and directed Weintraub to appear within thirty days of the date of the order to respond to the Commission's questions. The Magistrate concluded that, although Weintraub had properly asserted the privilege, that privilege was subsequently waived by Notz. On May 6, 1982, Weintraub filed an objection to the Magistrate's order. The district court upheld that order on June 9, 1982.

On June 30, 1982, the district court granted Frank and Andrew McGhee (the "McGhees") leave to intervene in the Commission's action against Weintraub. In addition to being CDCB shareholders, both McGhees are corporate officers. Frank McGhee is president of CDCB, and until October 21, 1980, Andrew McGhee was an officer and director of the corporation. ³

On July 27, 1982, the district court clarified its June 9, 1982, order and ruled that "[r]espondent shall respond to specific questions at issue without asserting an attorney-client privilege on behalf of Chicago Discount Commodity Brokers, Inc." On September 21, 1982, the McGhees moved the district court for a stay of the July 27, 1982, order, pending appeal of that order. The district court denied the motion. On October 18, 1982, this Court denied an appeal from the denial of the motion for stay. In addition, on November 4, 1982, this Court denied the McGhees' motion for reconsideration of the October 18 decision. ⁴

The instant appeal is from the district court's July 27, 1982, order directing Weintraub to respond to the Commission's inquiries without asserting the attorney-client privilege on behalf of CDCB.

II

Whether the trustee of a bankrupt corporation may waive the attorney-client privilege on behalf of the corporation is a question of first impression in this Court. We undertake first to set out the purposes of the attorney-client privilege, and the application of the privilege in the corporate context.

Federal Rule of Evidence 501 governs the use of all privileges in the federal courts. The rule provides that "the privilege of a witness ... shall be governed by the principles of the common law as they may be interpreted by the courts of the United States in light of reason and experience." On numerous occasions, the Supreme Court has spoken on the purpose of the attorney-client privilege. See, e.g., Upjohn Co. v. United States, 449 U.S. 383, 101 S.Ct. 677, 66 L.Ed.2d 584 (1981); Trammel v. United States, 445 U.S. 40, 100 S.Ct. 906, 63 L.Ed.2d 186 (1980); Fisher v. United States, 425 U.S. 391, 96 S.Ct. 1569, 48 L.Ed.2d 39 (1976); Hunt v. Blackburn, 128 U.S. 464, 9 S.Ct. 125, 32 L.Ed. 488 (1888). The purpose of the attorney-client privilege is "to encourage full and frank communication between attorneys and their clients and thereby promote broader public interest in the observance of law and administration of justice." See Upjohn Co. v. United States, 449 U.S. at 389, 101 S.Ct. at 682. The privilege "rests on the need for the advocate and counselor to know all that relates to the client's reasons for seeking representation if the professional mission is to be carried out." See Trammel v. United States, 445 U.S. at 51, 100 S.Ct. at 912. The privilege thus exists to promote full disclosure by the client, and to foster a relationship of trust between attorney and client. The assumption underlying the privilege is that "the benefits derived from encouraging communications outweigh the costs of keeping information from other parties." See Note, "Attorney-Client Privilege for Corporate Clients: The Control Group Test", 84 Harv.L.Rev. 424, 425 (1970).

That the attorney-client privilege adheres to corporations as well as to individuals is not subject to dispute. See Radiant Burners, Inc. v. American Gas Ass'n., 320 F.2d 314, 323 (7th Cir.), cert. denied, 375 U.S. 929, 84 S.Ct. 330, 11 L.Ed.2d 262 (1963). Of course, as an artificial entity, the corporation cannot speak for itself, but must rely on its officers and agents for exercise of the attorney-client privilege. See Upjohn Co. v. United States, 449 U.S. at 390-91, 101 S.Ct. at 683.

A related question is whether the corporate attorney-client privilege exists after the corporation enters bankruptcy. A number of courts have agreed that a corporation entering bankruptcy retains the attorney-client privilege. See In re O.P.M. Leasing Services, Inc., 670 F.2d 383, 385 (2d Cir.1982); People's Bank v. Brown, 112 F. 652, 654 (3d Cir.1902). However, in this case, the parties disagree as to who may waive the attorney-client privilege on behalf of the bankrupt corporation. Appellants argue that they, as officers and shareholders, have sole authority to waive. Appellee, on the other hand, contends that only the trustee in bankruptcy of the debtor corporation can waive.

On the issue as to whether a trustee in bankruptcy may waive the corporate attorney-client privilege, only two appellate decisions have come to our attention. Relied upon by appellee, they are In re O.P.M. Leasing Services, Inc., 670 F.2d 383, and Citibank, N.A. v. Andros, 666 F.2d 1192 (8th Cir.1982). In both of these cases, the court upheld the trustee's power to waive the attorney-client privilege on behalf of the corporation.

In O.P.M. Leasing, O.P.M. Leasing Services, Inc. ("O.P.M.") was a computer leasing and financing concern that filed a voluntary petition for reorganization under Chapter 11 of the Bankruptcy Reform Act, 11 U.S.C. Secs. 101 et seq. Shortly after this Chapter 11 proceedings was commenced, O.P.M.'s president and vice president, who composed the entirety of the corporation's board of directors, resigned. In the course of the reorganization proceeding, the trustee in bankruptcy waived O.P.M.'s attorney-client privilege, pursuant to a request by the United States Attorney for the Southern District of New York. ⁵ The then former president and vice president opposed the waiver, claiming that only the former president could rightly waive the bankrupt's privilege. The bankruptcy court rejected this argument, holding that the trustee in bankruptcy succeeded to the right of the corporation to assert or waive the attorney-client privilege. The United States District Court for the Southern District of New York affirmed.

On appeal, the Second Circuit also affirmed. Its conclusion, however, was expressly premised upon "the crucial fact ... that there has been no board of directors of O.P.M. in existence during the tenure of the trustee." O.P.M. Leasing, 670 F.2d at...