In re National Trade Corp.
| Decision Date | 05 April 1983 |
| Docket Number | Bankruptcy No. 79 B 8407. |
| Citation | 28 BR 872 |
| Court | U.S. Bankruptcy Court — Northern District of Illinois |
| Parties | In re NATIONAL TRADE CORPORATION, an Illinois corporation, Debtor. |
Richard E. Alexander, Mark J. Liss, Alexander & Zalewa, Ltd., Chicago, Ill., for Special Counsel.
James P. Chapman, Matthew J. Piers, James P. Chapman & Assoc., John Gubbins, Freeman, Atkins & Coleman, Chicago, Ill., for movants.
This cause of action comes to be heard on two motions to quash certain subpoenas, a motion for contempt or sanctions, and a motion for removal of the Special Counsel.
On December 11, 1978, Kmart Corporation (hereinafter referred to as Kmart) inadvertently sent a check for $2,000,000.00 to National Trade Corporation of Illinois (hereinafter referred to as NTC). Despite a demand for the return of this money on December 20, 1978, NTC did not return the money to Kmart. Accordingly, on January 11, 1979, Kmart filed suit in the United States District Court for the Northern District of Illinois seeking the return of this money with interest.
On September 1, 1979, NTC filed a voluntary petition under Chapter XI of the Bankruptcy Act. Leo H. Arnstein was appointed as Receiver of the debtor's estate. The bankruptcy court modified the automatic stay stemming from the bankruptcy petition on December 7, 1979, so that Kmart's action could proceed in the United States District Court. The district court granted summary judgment against NTC and on May 14, 1981, ordered that Kmart be paid $2,000,000.00 plus $574,734.34 in interest. On September 3, 1982, this court issued a memorandum opinion directing NTC to pay Kmart an additional $24,286.73 in interest on the district court's judgment.
Subsequently, Leo H. Arnstein was appointed as Trustee of the debtor's estate. On June 15, 1982, Richard E. Alexander (hereinafter referred to as Special Counsel) was appointed as Special Counsel to the Trustee "to investigate and pursue any and all causes of action the estate has against Dongkyu Hong," the former president of NTC.
On July 8, 1982, the Special Counsel served subpoenas returnable on July 20, 1982 on Mr. Arnold Kanter and Mr. Peter Flynn. On November 30, 1982, the Special Counsel also served a subpoena on Mr. Myron Cherry, through Mr. Cherry's counsel. Messrs. Cherry, Flynn and Kanter were attorneys in the law firm of Cherry, Flynn & Kanter, who represented NTC and Dongkyu Hong in the above-mentioned Kmart litigation. The subpoenas requested all documents relating to payments received from NTC and Dongkyu Hong, all documents tending to support certain allegations set forth in the counterclaims filed on behalf of NTC against Kmart, and all documents relating to any legal trust fund or other trust set up on behalf of or at the request of either NTC, Dongkyu Hong, or Mrs. Namjung Hong. Specifically, the Special Counsel was attempting to ascertain (1) whether $65,000.00 which was paid to Messrs. Cherry, Flynn and Kanter was for services rendered to NTC, Dongkyu Hong individually, or both, (2) whether Messrs. Cherry, Flynn and Kanter rendered services which could reasonably be valued at $65,000.00, (3) whether there was any factual basis in support of the extensive counterclaims filed on behalf of NTC by Messrs. Cherry, Flynn and Kanter, and (4) whether Messrs. Cherry, Flynn and Kanter advised NTC or Dongkyu Hong not to return Kmart's $2,000,000.00 check, ultimately resulting in NTC's bankruptcy.
After this court granted an extension of time in which to respond to these subpoenas, Messrs. Flynn and Kanter moved to quash the subpoenas on the grounds that the information requested was (1) privileged attorney-client communications, (2) irrelevant to the bankruptcy proceeding, and (3) not reasonably calculated to lead to any admissible evidence. Moreover, Messrs. Flynn and Kanter argue that the subpoenas seek information relevant only to a dispute between Kmart and the law firm of Cherry, Flynn & Kanter.
On December 20, 1982, the Special Counsel filed a motion to impose sanctions or in the alternative, to hold in contempt Messrs. Cherry, Flynn and Kanter for failure to comply with this court's briefing schedule on the motions to quash. On January 23, 1982, Messrs. Cherry, Flynn and Kanter filed a joint motion to remove Mr. Richard E. Alexander as Special Counsel on the grounds that he has a conflict of interest concerning the litigation herein and has exhibited a personal animosity towards the subpoenaed parties.
As a result of this chain of events, the issues to be decided by this court are: (1) whether the Special Counsel is precluded from obtaining the subpoenaed information on the basis of the attorney-client privilege or relevancy, (2) whether sanctions or a citation of contempt should be imposed for failure to comply with the subpoenas and briefing schedule, and (3) whether the Special Counsel should be removed for a conflict of interest or inappropriate behavior.
In general, under Federal Rule of Civil Procedure 45(b), a court may quash a subpoena if it is unreasonable or oppressive. See Premium Service Corp. v. Sperry & Hutchinson Co., 511 F.2d 225, 229 (9th Cir. 1975). Specifically, with regard to quashing the subpoenas on the basis of the attorney-client privilege, the power to assert or waive the privilege is possessed by the management of a corporation, not its individual officers. See Citibank v. Andros, 666 F.2d 1192, 1195 (8th Cir.1981). Since the Bankruptcy Act vests broad authority to manage the affairs of corporate debtor in its trustee, the corporation's attorney-client privilege passes with the property of the debtor's estate to the trustee. Id.; In re O.P.M. Leasing Services, Inc., 13 B.R. 64, 67 (D.C.S.D.N.Y.1981). "Once the right is vested in the trustee, the exercise or waiver of the attorney-client privilege is a matter of his sole judgment and is not subject to veto by third parties who may have conveyed information to corporate counsel prior to the filing of the petition and may possibly be affected by the trustee's determination." In re O.P.M. Leasing Services, Inc., 13 B.R. at 67. In the case at bar, on October 13, 1982, Leo H. Arnstein, Trustee, through his attorneys waived NTC's attorney-client privilege as to NTC's transactions with the law firm of Cherry, Flynn & Kanter. Consequently, this court holds that Messrs. Cherry, Flynn and Kanter cannot assert NTC's attorney-client privilege as a basis for quashing the subpoenas in question.
As to the relevancy of the information sought by the Special Counsel, "the requirement of relevance is satisfied by showing a relationship between the documents to be produced and the purpose of the investigation." In re Special November 1975 Grand Jury, 433 F.Supp. 1094, 1097 (N.D.Ill.1977). Also, relevancy involves balancing the benefit of the information against the burden of production. See Premium Services Corp. v. Sperry & Hutchinson Co., 511 F.2d at 229. In essence, Messrs. Cherry, Flynn and Kanter claim that there is no relationship between the information requested in the subpoenas and the investigation of Dongkyu Hong because...
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