In re OPM Leasing Services, Inc.

• Citation: 13 BR 64
• Decision Date: 23 July 1981
• Docket Number: No. 81 Civ. 3846.,81 Civ. 3846.
• Parties: In re O.P.M. LEASING SERVICES, INC., Debtor. Mordecai Weissman and Myron S. Goodman, Appellants.
• Court: U.S. District Court — Southern District of New York

13 B.R. 64 (1981)

In re O.P.M. LEASING SERVICES, INC., Debtor.

Mordecai Weissman and Myron S. Goodman, Appellants.

No. 81 Civ. 3846.

United States District Court, S.D. New York.

July 23, 1981.

Dreyer & Traub, Obermaier, Morvillo & Abramowitz, P.C., New York City, for appellant Mordecai Weissman; Martin I. Klein, Betty I. Braverman, Elkan Abramowitz, Gilda I. Mariani, New York City, of counsel.

Chester B. Salomon and Andrew M. Lawler, Jr., P.C., New York City, for appellant Myron S. Goodman; Dennis E. Milton, David M. Green, Alec P. Ostrow, New York City, of counsel.

Wilmer, Cutler & Pickering, Washington, D.C., for appellee James P. Hassett, Trustee of O.P.M. Leasing Services, Inc.; Arthur F. Mathews, Stephen F. Black, Stephen P. Doyle, Kathy B. Weinman, Washington, D.C., of counsel.

OPINION

EDWARD WEINFELD, District Judge.

This is an appeal from an order of Bankruptcy Judge Lifland entered on June 10, 1981 authorizing and directing the law firm of Singer, Hutner, Levine & Seeman, P.C. ("Singer Hutner") on a confidential basis and within the attorney-client privilege to communicate with and provide all information and documents in its possession concerning its past representation of the Chapter 11 debtor, O.P.M. Leasing Services, Inc. ("OPM"), to appellee James P. Hassett, the reorganization trustee. The Bankruptcy Court held that the trustee, by operation of law, succeeded to OPM's right to obtain such information and its power to assert or waive any applicable attorney-client privilege. The appeal is taken by two former officers and executives of OPM who seek a reversal of the order or, in the alternative, a remand for further consideration by the Bankruptcy Judge.

OPM was a large computer leasing and financing firm. On March 11, 1981, OPM filed a voluntary petition for reorganization under Chapter 11 of the Bankruptcy Reform Act of 1978 and initially was continued in the operation and management of its business as a debtor-in-possession. Soon thereafter, on March 24, 1981, on application of creditors who charged OPM with fraud, the Bankruptcy Court ordered the appointment of a trustee pursuant to 11 U.S.C. § 151104(a). The United States trustee was granted all the powers of a trustee under § 1106(a)¹ and the authority to operate the debtor's business pursuant to § 1108.² The trustee has continued operation of the debtor's business and at the time the order that is the subject of this appeal was entered he employed some seventy persons with a bi-weekly payroll of $70,000.

When the Chapter 11 petition was filed, OPM was a wholly-owned subsidiary of Cali Trading International Ltd. ("Cali"), a closely-held corporation. Fifty percent of Cali's shares were owned by appellant Mordecai Weissman and fifty percent by appellant Myron S. Goodman. A shareholders' agreement between these two individuals entrusted the voting rights of 100% of the Cali shares to Weissman. Weissman was the President of OPM and Goodman was its Vice President. On March 27, 1981, Weissman and Goodman each filed voluntary petitions for liquidation under Chapter 7 of the Bankruptcy Reform Act. Prior to such filings, each resigned as an officer and director of OPM and Cali. Thus, at the time the trustee was appointed, OPM was without a Board of Directors.

From 1971 to 1980, Singer Hutner served as outside general counsel to OPM and as such provided a variety of legal services including rendering legal opinions, drafting documents and negotiating agreements. An officer of Singer Hutner served as a director of OPM until August 1980. In September 1980 Singer Hutner resigned as OPM's counsel and completed the process of withdrawal in early December of that year. Singer Hutner during this time also represented Weissman and Goodman in their individual capacities. This representation ended on March 27, 1981, when each filed his voluntary petition under Chapter 7. The legal services allegedly rendered to the individuals, which were unrelated to the corporation, concerned estate planning for Weissman and Goodman, their ownership of a majority interest in a bank in Louisiana and the sale of that interest.

By letter dated April 29, 1981, the trustee requested that Singer Hutner consult with him and provide him with certain information and documents relating to Singer Hutner's past representation of OPM including information and documents within the attorney-client privilege. The trustee also served Singer Hutner with a subpoena for examination and production of documents under Rule 205(e) of the Rules of Bankruptcy Procedure. The stated purpose of these requests was to obtain information on a confidential basis within the attorney-client privilege, to which the trustee asserted he was entitled as the legal representative of the debtor,³ in order to permit the trustee to carry out his statutory duties to investigate and manage the affairs of the corporation,"⁴ and to enable him as authorized by statute to "furnish . . . information concerning the estate and the estate's administration as is requested by a party-in-interest."⁵ Among interested parties was the United States Attorney for the Southern District of New York who had convened a grand jury to investigate the activities of OPM and its principals, Weissman and Goodman. The United States Attorney had served a grand jury subpoena duces tecum calling for the production of OPM records during its operation prior to filing the Chapter 11 petition and had requested the trustee to waive the attorney-client privilege in order to obtain documents required in connection with the investigation. Other interested third parties were creditors seeking information with respect to the conduct and affairs of OPM during the time Weissman and Goodman were its operating officials. The information sought relates to charges that the corporate affairs were conducted in an illegal and fraudulent manner which may warrant action against those who may have been engaged in the alleged illegal conduct.

On May 1, 1981, Singer Hutner responded to the trustee's request by indicating its willingness to cooperate with the trustee but stressing its duty to preserve the privileged confidences of its former client unless directed to reveal them by a court of competent jurisdiction. On May 6, 1981, the trustee filed with the Bankruptcy Court an application for an order requiring Singer Hutner to communicate with and provide documents to the trustee as requested. The motion was supported by creditors of OPM who made charges of fraud in its management. Appellants opposed the application, contending that the trustee did not succeed to the attorney-client privilege of the debtor and that appellant Weissman was the sole person authorized to waive the privilege. This contention, as advanced by appellants, is that Cali, as the sole stockholder of OPM, possesses the right to waive or to assert the privilege in the absence of management and that Cali's vote with respect thereto would be cast by its sole voting shareholder, Weissman. On June 10, 1981, the Bankruptcy Court granted the trustee's application.

To put the matter in proper focus, it is noted that OPM, "a corporation, like any other `client,' is entitled to the attorney-client privilege" and may waive or assert it.⁶ So, too, it is beyond dispute that the privilege rested with OPM prior to the filing of the Chapter 11 petition and the exercise or waiver of the privilege was subject to decision by its management. It is equally clear that a debtor in bankruptcy is entitled to the benefit of the attorney-client privilege.⁷ The basic issue then is who has the right to waive or assert the privilege on behalf of the debtor — the trustee or Weissman and Goodman who, at the time the trustee was appointed, no longer were directors or executives of OPM and who owned no shares in OPM. As already noted, the trustee's demand upon the former attorneys for OPM for information within the protection of the attorney-client privilege was based upon his status as the legal "representative of the estate" (§ 323) and his statutory duties 1 to investigate "any fraud, dishonesty, incompetence, mismanagement, or irregularity in the management of the affairs of the debtor" (§ 1106(a)), 2 to operate OPM's business (§ 1108), 3 to "investigate the acts, conduct, accounts, liabilities, and financial condition of the debtor, the operation of the debtor's business and the desirability of the continuance of such business, and any other matter relevant to the case or to the formulation of a plan" of reorganization (§ 1106(a)(3)), and 4 to "furnish such information concerning the estate's administration as is requested by a party in interest" unless otherwise instructed by the court (§ 704(6)).

In view of the provisions of the Bankruptcy Act referred to above which designate the trustee as the legal representative of the estate and vest in him broad powers to manage, conduct and investigate the affairs of the debtor, including authority to make information available to third parties in interest, I hold that the debtor's attorney-client privilege passes by operation of law to its trustee and that no individual officer or director prior to the appointment of the trustee has or retains any power with respect to the debtor's attorney-client privilege. 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. One who communicates with corporate counsel, including an officer, director, shareholder or employee by virtue of his or her role in the corporation, must recognize that it is the corporation, as the client, which may waive or assert the privilege. As the appellants themselves stress and as the Supreme Court has noted, the attorney-client...