In re Federal Copper of Tennessee, Inc.

• Decision Date: 19 February 1982
• Docket Number: Bankruptcy No. 79-10069.
• Citation: 19 BR 177
• Parties: In re FEDERAL COPPER OF TENNESSEE, INC., Debtor.
• Court: U.S. Bankruptcy Court — Middle District of Tennessee

19 B.R. 177 (1982)

In re FEDERAL COPPER OF TENNESSEE, INC., Debtor.

Bankruptcy No. 79-10069.

United States Bankruptcy Court, M.D. Tennessee.

February 19, 1982.

Robert H. Waldschmidt, Steltemeier & Westbrook, Nashville, Tenn., for debtor trustee.

ORDER

GEORGE C. PAINE, II, Bankruptcy Judge.

This matter is before the court on a motion to rehear the trustee's application to compel the law firm of Steltemeier & Westbrook (hereinafter "Steltemeier") and the accounting firm of Riccardi & Phillips (hereinafter "Riccardi") to turn over to the trustee all information in their possession concerning the bankrupt, Federal Copper of Tennessee, Inc. (hereinafter "Federal Copper"). These firms insist the materials sought by the trustee are protected by the attorney-client privilege and the work product doctrine. Upon consideration of the facts presented at the hearing on December 1, 1981, stipulations, briefs of the parties and the entire record, the court finds all the items from the list of documents appended herein to be properly discoverable material with the exception of items 4, 17-19, 23-24, 30-31, 39, 42, 46, 61 and 69-70, which are protected by the work product doctrine and therefore not subject to discovery by the trustee.

On September 29, 1981, the trustee submitted an application to this court seeking to compel Steltemeier and Riccardi to turn over all records pertaining to the bankrupt corporation.¹ After a hearing on October 26, 1981, the court granted the trustee's application.

On October 29, 1981, Steltemeier and Riccardi filed a motion requesting this court to rehear the trustee's application on the basis that (1) they had not received notice of the hearing on October 26, 1981, and (2) the information contained in their files was privileged. On November 17, 1981, the court set the aforementioned motion for hearing and ordered Steltemeier and Riccardi to bring to the hearing all documents requested by the trustee or, in the alternative, a list containing a complete description of each document.

At the hearing on December 1, 1981, Steltemeier and Riccardi failed to produce either the documents requested by the trustee or a list of said documents pursuant to this court's order of November 17, 1981. A list of these documents was subsequently provided to the court by Steltemeier and Riccardi and is appended herein. Steltemeier and Riccardi have not submitted the documents themselves to this court for examination.

Steltemeier explained at the hearing that its client, Corroon & Black (hereinafter "Corroon"), was a creditor of Federal Copper and had engaged Steltemeier to determine any legal liability of Federal Copper to Corroon. Steltemeier later employed Riccardi, an accounting firm, to assist in the investigation of Federal Copper. Steltemeier represented that Corroon wished to assert the attorney-client privilege for all documentation compiled by Steltemeier in its examination of Federal Copper. Steltemeier and Riccardi contended initially that the trustee had no authority under the bankruptcy law to seek a turnover of their records and that, in any event, these records were protected by the attorney-client privilege and work product doctrine.

The trustee asserted he had authority to seek discovery of any documentation relating to the affairs of the bankrupt corporation and that no applicable privilege precluded discovery of these records. The trustee further contended that the information in the records was necessary to determine the validity of any legal claim which the bankrupt corporation had against its parent, Norval Industries, Inc. (hereinafter "Norval"). The only records of Federal Copper possessed by the trustee had been obtained from Norval, who had held them for a year prior to the trustee's request for discovery. The trustee submitted that he needed the records held by Steltemeier and Riccardi to verify the authenticity of the documentation received from Norval.

The issue is now before this court for final resolution.

This proceeding is governed by the Bankruptcy Act of 1898. Under the Act, the trustee is provided wide latitude to utilize discovery to obtain any documentation pertaining to the bankrupt's conduct or property. See, e.g., Brannon v. Gay, 527 F.2d 799, 802 (7th Cir. 1976); Freeman v. Seligson, 405 F.2d 1326, 1333 (D.C.Cir. 1968); Chereton v. United States, 286 F.2d 409, 413 (6th Cir.), cert. denied, 366 U.S. 924, 81 S.Ct. 1351, 6 L.Ed.2d 584 (1961); In re Eastern Utilities Investing Corp., 98 F.2d 620, 622 (3rd Cir. 1938); In re Samuels, 215 F. 845, 850 (2nd Cir. 1914); In re Fixen & Co., 96 F. 748, 755 (S.D.Cal.1899); In re Ratmansky, 7 B.R. 829, 833 (Bkrtcy.E.D.Pa.1980). See also 2 Collier on Bankruptcy § 21.12, at 308 (14th ed. 1976).

The discovery of documentation by the trustee is governed by Rules 205 and 734 of the Federal Rules of Bankruptcy Procedure. Rule 205 provides that, upon application of any party in interest, the court may order the examination of any person. The application should be in writing unless made during a hearing or examination or unless a local rule otherwise provides. Rule 734 of the Federal Rules of Bankruptcy Procedure, which makes Rule 34 of the Federal Rules of Civil Procedure applicable to bankruptcy proceedings, specifically regulates a party's request for the production of documents.² A party may request any documentation which is relevant to the subject matter of the pending action or reasonably calculated to uncover useful evidence. Beneficial Finance Co. of New York, Inc. v. Fontaine, 402 F.Supp. 1219, 1221 (E.D.N.Y.1975). The trustee in this case requested, both in writing and at the hearing conducted on this matter, that this court compel Steltemeier and Riccardi to turn over all records pertaining to the bankrupt corporation. Steltemeier and Riccardi were fully aware of this request and do not now question the relevancy of the documents in question. Under these circumstances, this court clearly has the power to order Steltemeier and Riccardi to turn over these documents to the trustee. See Kaye v. Spach, 302 F.2d 298, 302 (5th Cir. 1962); Ulmer v. United States, 219 F. 641, 645 (6th Cir. 1915); In re United States Graphite Co., 159 F. 300, 301 (E.D.Pa.1908).

The next question, then, is whether the records sought by the trustee are protected from discovery by either the attorney-client privilege or the work product doctrine. Federal Rule of Evidence 501, made applicable to bankruptcy proceedings by Rule 917 of the Federal Rules of Bankruptcy Procedure, defines the federal rule for privileges as follows:

"Except as otherwise required by the Constitution of the United States or provided by Act of Congress or in rules prescribed by the Supreme Court pursuant to statutory authority, the privilege of a witness, person, government, State, or political subdivision thereof shall be governed by the principles of the common law as they may be interpreted by the courts of the United States in the light of reason and experience. However, in civil actions and proceedings, with respect to an element of a claim or defense as to which State law supplies the rule of decision, the privilege of a witness, person, government, State, or political subdivision thereof shall be determined in accordance with State law."

The trustee in this case seeks the turnover of records to aid in his investigation of the bankrupt corporation pursuant to the federal law of bankruptcy. Any applicable privilege is therefore governed by federal common law. In re Blier Cedar Co., 10 B.R. 993, 998-999 (Bkrtcy.D.Me.1981); Matter of Mori, 1 B.R. 265, 266 (Bkrtcy.S.D.Fla.1979).

Steltemeier and Riccardi first rely on the attorney-client privilege to protect the documents in question from discovery by the trustee. The purpose of the attorney-client privilege under federal common law is to encourage "full and frank communication between attorneys and their clients." United States v. Boffa, 513 F.Supp. 517, 522 (D.Del.1981). See also Upjohn v. United States, 449 U.S. 383, 101 S.Ct. 677, 66 L.Ed.2d 584, 592 (1981). The privilege, however, has been narrowly construed by federal courts on the basis that its utilization "obstructs the search for truth" and "its benefits are at best indirect and speculative." United States v. Boffa, 513 F.Supp. at 522. See also Weil v. Investment/Indicators, Research and Management, Inc., 647 F.2d 18, 24 (9th Cir. 1981); Matter of Walsh, 623 F.2d 489, 493 (7th Cir.), cert. denied Walsh v. United States, 449 U.S. 994, 101 S.Ct. 531, 66 L.Ed.2d 291 (1980); Coastal States Gas Corp. v. Department of Energy, 617 F.2d 854, 862-863 (D.C.Cir.1980); In re Grand Jury Proceedings (FMC Corp.), 604 F.2d 798, 802 (3rd Cir. 1979). Accordingly, the burden of proof is on the party seeking to claim the privilege. Weil v. Investment Indicators, Research and Management, Inc., 647 F.2d at 25; United States v. Bump, 605 F.2d 548, 551 (10th Cir. 1979); In re Matter of Grand Jury Empanelled Feb. 14, 1978 (Markowitz), 603 F.2d 469, 474 (3rd Cir. 1979); United States v. Osborn, 561 F.2d 1334, 1339 (9th Cir. 1977); In re Blier Cedar Co., 10 B.R. at 997.

To meet this burden of proof, a party asserting the attorney-client privilege under the federal common law must establish that (1) the asserted holder of the privilege is or sought to become a client, (2) the person to whom the communication was made is a member of the bar or his subordinate and was acting as a lawyer in connection with the communication, (3) the communication concerns a fact of which the attorney was informed by his client without the presence of strangers, for the purpose of securing primarily either an opinion on law or legal services or assistance in some legal proceeding and not for the purpose of committing a crime or tort, and (4) the privilege has been claimed and not waived by the client. United States v. United Shoe Machinery Corp., 89 F.Supp. 357, 358 (D.Mass.1950). Accord: Diversified...