In re Equaphor Inc.
| Decision Date | 14 May 2012 |
| Docket Number | Case No. 10-20490-BFK |
| Court | U.S. Bankruptcy Court — Eastern District of Virginia |
| Parties | In re: EQUAPHOR INCORPORATED Debtor |
This matter comes before the Court on the Trustee's Motion (Docket No. 116) to Compel the Turnover of the files of Whiteford Taylor & Preston, LLP (hereinafter, "WTP"), former counsel for the Debtor, Equiphor Incorporated ("Equiphor," or the "Debtor"). WTP filed an Objection to the Motion (Docket No. 122), as did three Individual Defendants, Molly Hale, J.B. Doherty and Edward C. Spiva (Docket Nos. 119, 120 and 121). For the reasons stated below, the Motion will be granted.
The basic facts are not in dispute. WTP has acted as corporate counsel for the Debtor since May 2007. WTP's Objection to Trustee's Motion, Docket No. 122, p. 2. WTP has maintained a general corporate representation file, known as Matter No. 00001. Id.
On August 13, 2010, two shareholders of the Debtor filed a Derivative Action Complaint in the Chancery Court in Delaware (Bamber, et al. v. Dechman, et al.) (hereinafter, the "Derivative Action"). Id. at 3. The lawsuit was filed by the law firms of Rosenthal, Monhait & Goddess, P.A., and Shapiro Haber & Urmy, LLP on behalf of the derivative shareholder plaintiffs.
WTP was engaged to represent the interests of three of the individual Defendants, Molly Hale, J.B. Doherty, and Edward C. Spiva (the "Individual Defendants"). Ms. Hale is alleged tobe the former full time Controller of Equiphor, as well as a Director of the company. WTP Objection, Docket No. 122, Exh. A, ¶ 9. Mr. Doherty is identified as a Director of the company. Id. at ¶ 10. Mr. Spiva is identified as having been a Director of the Company until February 26, 2010. Id. at ¶ 11.1
WTP also was engaged to represent the Debtor, which had been named as a "Nominal Defendant," in the Complaint. Id. at ¶ 12. For the joint representation of the Individual Defendants and the Debtor, WTP opened a second file, Matter No. 00002. WTP's Objection, p. 1. The Debtor paid WTP a retainer of $15,000 for the representation of the Individual Defendants, as well as for its own representation. Id. at p. 3. On September 2, 2010, WTP entered its appearance in the derivative action on behalf of the Individual Defendants and on behalf of the Debtor. Trustee's Memorandum in Support, Docket No. 117, Exh. A.
On December 16, 2010, Equiphor filed a voluntary petition under Chapter 7 in this Court. Docket No. 1. Mr. McCarthy is the duly appointed Chapter 7 Trustee. On October 3, 2011, the Court approved, as special litigation counsel for the Trustee, the employment of Shapiro Haber & Urmy LLP, and Rosenthal, Monhait & Goddess, P.A., pursuant to Bankruptcy Code Section 327(e), under a contingent fee retainer arrangement. Docket No. 108.
On January 18, 2012, WTP filed a Motion with the Delaware Chancery Court, seeking to withdraw as counsel for the Individual Defendants. That Motion was granted on January 27, 2012. WTP's Objection, Docket No. 122, p. 3.
The Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334 and the Order of Reference of the U.S. District Court for the Eastern District of Virginia, dated August 15, 1984. This is a core proceeding under 28 U.S.C. § 157(b)(2)(E) ().2
The Court has reviewed the Trustee's Motion to Compel Turnover (Docket No. 116), the Objections of WTP (Docket No. 122), the Objections of the three Individual Defendants (Docket Nos. 119, 120, and 121), and the Reply Memorandum of the Trustee (Docket No. 123). The Court also has heard the arguments of the parties. The matter is ripe for decision.
Section 542(e) of the Code provides as follows:
Subject to any applicable privilege, after notice and a hearing, the court may order an attorney, accountant, or other person that holds recorded information, including books, documents, records, and papers, relating to the debtor's property or financial affairs, to turn over or disclose such recorded information to the trustee.
11 U.S.C. § 542(e) (emphasis added).
The question here is the meaning of the term "any applicable privilege." Specifically, the Court must address the issue of the attorney-client privilege in the context of the common interest privilege, discussed below.3
Any discussion of the attorney-client privilege in the context of a corporate Chapter 7 bankruptcy case must start with the Supreme Court's opinion in Commodity Futures Trading Comm'n v. Weintraub, 471 U.S. 343 (1985). In Weintraub, a unanimous Court held that the Chapter 7 Trustee controls, and is able to waive, the attorney-client privilege as to pre- bankruptcy communications between the Debtor and its counsel.4 Although Weintraub did not involve the joint representation of officers and directors along with the corporation, two of the corporation's officers (Frank McGhee and Andrew McGhee) objected to the Trustee's intended waiver of the corporation's attorney-client privilege. The Court held that the Trustee had the power to waive the privilege over the objections of former management, noting:
[T]he rule suggested by respondents - that the debtor's directors have this power - would frustrate an important goal of the bankruptcy laws. In seeking to maximize the value of the estate, the trustee must investigate the conduct of prior management to uncover and assert causes of action against the debtor's officers and directors. See generally 11 U.S.C. §§ 704(4), 547, 548. It would often be extremely difficult to conduct this inquiry if the former management were allowed to control the corporation's attorney-client privilege and therefore to control access to the corporation's legal files. To the extent that management had wrongfully diverted or appropriated corporate assets, it could use the privilege as a shield against the trustee's efforts to identify those assets. The Code's goal of uncovering insider fraud would be substantially defeated if the debtor's directors were to retain the one management power that might effectively thwart an investigation into their own conduct.
Weintraub, 471 U.S. at 353-54.
The Supreme Court, therefore, came down squarely in favor of a turnover of the corporation's legal files to the Chapter 7 Trustee, notwithstanding the objections of former management. Id. at 358. As noted, however, Weintraub did not involve the joint representation of officers and directors, together with the corporation. To address this issue, the Court turns to the common interest privilege.
The common interest privilege, also known as the joint defense privilege, is universally accepted. See Edna Selan Epstein, The Attorney-Client Privilege and Work Product Doctrine 196-220 (4th ed. 2001). Where parties are jointly represented, "both have a right to all communications either may have had with the attorney, as well as a right to the attorney's files." Id. at p. 197. The problem, of course, is where there is a falling out among the jointly represented parties, as here.
The Restatement (Third) of Law Governing Lawyers states the rule as follows:
Unless the co-clients have agreed otherwise, a communication described in Subsection (1) [] is not privileged as between the co-clients in a subsequent adverse proceeding between them.
Restatement (Third) of the Law Governing Lawyers, § 75 (2000). As the Third Circuit noted:
The great caveat of the joint-client privilege is that it only protects communications from compelled disclosure to parties outside the joint representation. When former co-clients sue one another, the default rule is that all communications made in the course of the joint representation are discoverable. DEL. R. EVID. § 502(d)(6); RESTATEMENT (THIRD) OF THE LAW GOVERNING LAWYERS, § 75(2). This rule has two bases: (1) the presumed intent of the parties, and (2) the lawyer's fiduciary obligation of candor to both of the parties. Id. § 75 cmt. d.
Teleglobe Commc'ns Corp. v. BCE, Inc. (In re Teleglobe Commc'ns Corp.), 493 F.3d 345, 366 (3rd Cir. 2007). See also In re Mirant Corp., 326 B.R. 646, 649 (Bankr. N.D. Tex. 2005) ().
WTP and the Individual Defendants place great reliance on the fact that the corporation is named as a "nominal defendant" in the shareholders' Complaint. In doing so, WTP and the Individual Defendants imply that the interests of the Individual Defendants are entitled to greater weight than those of the Debtor (and now, its creditors). However, while the Debtor may have been named as a nominal defendant, there is no such thing as a nominal client of a law firm. Further, there is no support in the case law for a "nominal defendant exception" to the principle that all clients are entitled to an attorney's files. The corporation's status as a nominal defendant is of no consequence in considering the common interest privilege of the parties.
WTP and the Individual Defendants also rely on the Third Circuit's decision in In re Bevill, Bresler & Schulman Asset Management Corp., 805 F.2d 120 (3d Cir. 1986). The Court first notes that the Bevill, Bresler decision preceded the Third Circuit's decision in Teleglobe by nine years, and the Court finds the Third Circuit's decision in Teleglobe to be a more comprehensive discussion of the topic of joint representation. The Court also notes that the decision in Bevill, Bresler involved counsel engaged by the corporation, not a true joint representation situation, as in this case. Moreover, the Third Circuit in Bevill, Bresler ultimately held that the privilege was that of the corporation, and that the position taken by the officers was ...
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