In re Worldwide Wholesale Lumber, Inc.

• Citation: 392 B.R. 197
• Decision Date: 02 April 2008
• Docket Number: Bankruptcy No. 06-01499-JW.,Adversary No. 07-80008-JW.
• Court: United States Bankruptcy Courts. Fourth Circuit. U.S. Bankruptcy Court — District of South Carolina
• Parties: In re, WORLDWIDE WHOLESALE LUMBER, INC. (d/b/a Veracor Wood Products International), Debtor(s). Michelle L. Vieira, as Trustee for the Estate of Worldwide Wholesale Lumber, Inc. (d/b/a Veracor Wood Products International), Plaintiff(s), v. AGM II, LLC, Lancelot Investor Fund, L.P. d/b/a Surge Capital, Defendant(s).

392 B.R. 197

In re, WORLDWIDE WHOLESALE LUMBER, INC. (d/b/a Veracor Wood Products International), Debtor(s) Michelle L. Vieira, as Trustee for the Estate of Worldwide Wholesale Lumber, Inc. (d/b/a Veracor Wood Products International), Plaintiff(s), v. AGM II, LLC, Lancelot Investor Fund, L.P. d/b/a Surge Capital, Defendant(s).

Bankruptcy No. 06-01499-JW.

Adversary No. 07-80008-JW.

United States Bankruptcy Court, D. South Carolina.

April 2, 2008.

COPYRIGHT MATERIAL OMITTED

Worldwide Wholesale Lumber, Inc., Mt. Pleasant, SC, pro se.

Julio E. Mendoza, Jr., Suzanne Taylor Graham Grigg, Nexsen Pruet Adams Kleemeier, LLC, Columbia, SC, Richard L. Tapp, Jr., Nexsen Pruet, LLC, Charleston, SC, Plaintiff.

Charles Pelot Summerall, IV, Buist, Moore, Smythe & McGee, PA, Charleston, SC, John Robert Weiss, Duane Morris LLP, Chicago, IL, Defendant.

ORDER

JOHN E. WAITES, Bankruptcy Judge.

This matter comes before the Court upon the Motion for a Protective Order as to the Deposition Testimony of Russell Stadelman ("Motion"), filed by Michelle L. Vieira ("Trustee"), as the Chapter 7 Trustee for the Estate of Worldwide Wholesale Lumber, Inc. d/b/a Veracor Wood Products International ("Debtor"). The Trustee seeks entry of an order protecting certain communications pursuant to the attorney-client privilege. Specifically, the Trustee seeks to protect two categories of communications: (1) pre-petition communications between Russell Stadelman ("Stadelman") and the former corporate counsel for Debtor and (2) post-petition communications between Stadelman and counsel for the Trustee in this adversary proceeding.

AGM II, LLC and Lancelot Investors Fund, L.P. (collectively, "Defendants") filed a Limited Objection to the Trustee's Motion, objecting only to the application of the attorney-client privilege to the second category of communications, namely those communications between Stadelman and counsel for the Trustee. Defendants stipulated to the application of the attorney-client privilege to the pre-petition communications between Stadelman and Debtor's corporate counsel and the Trustee's right to assert such a privilege.

Pursuant to Federal Rule of Civil Procedure 52, which is made applicable to this proceeding by Federal Rule of Bankruptcy Procedure 7052, the Court makes the following Findings of Fact and Conclusions of Law:¹

FINDINGS OF FACT

1. Before the filing of the involuntary petition initiating this case on April 12, 2006, Russell Stadelman ("Stadelman") was the sole shareholder, president, and a director of Debtor.

2. On January 22, 2007, the Trustee commenced this adversary proceeding by filing the complaint against Defendant AGM II, LLC. The complaint was subsequently amended to include Defendant Lancelot Investor Fund, L.P. d/b/a Surge Capital. In this adversary proceeding, the Trustee has asserted the following causes of action against Defendants: (1) equitable subordination pursuant to 11 U.S.C. § 510; (2) reclassification; (3) avoidance of preferential payments (11 U.S.C. § 547); (4) breach of fiduciary duty to Debtor; (5) constructive trust; and (6) accounting.

3. The Trustee has retained Nexsen Pruet, LLC as special counsel to assist her in the review and analysis of potential claims the estate may have against Defendants and to pursue litigation against Defendants on those claims for the benefit of the estate.

4. Stadelman was deposed by counsel for Defendants on February 8, 2008. During the course of that deposition, Stadelman was asked several questions concerning communications he might have had with the Trustee's attorneys at Nexsen Pruet. Specifically, counsel for Defendants asked Stadelman to disclose the content of two of his conversations with the Trustee's attorneys: (1) a 45-minute telephone conversation with Suzanne Grigg and Richard Tapp in mid-January 2008, and (2) an approximately 25-minute conversation with Suzanne Grigg on February 8, 2008, prior to the deposition. The Trustee's attorneys instructed Stadelman not to answer those questions, asserting the attorney-client privilege, and Stadelman followed their instruction.²

5. At the time of Stadelman's communications with counsel for the Trustee, Stadelman was no longer president, director, or an employee of Debtor.

ISSUE

The Court is presented with the issue of whether the attorney-client privilege applies to post-petition communications between a former president and director of a debtor and counsel for the Chapter 7 trustee of that debtor.

CONCLUSIONS OF LAW

The attorney-client privilege can be asserted by both individuals and corporations and serves the function of promoting full and frank communications between attorneys and their clients. Commodity Futures Trading Commission v. Weintraub, 471 U.S. 343, 348, 105 S.Ct. 1986, 1990, 85 L.Ed.2d 372 (1985). This privilege protects both "the giving of legal advice to those who can act on it and the giving of information to the lawyer to enable him to give sound and informed advice." Hanson v. United States Agency for International Development, 372 F.3d 286, 291 (4th Cir.2004). Because this adversary proceeding involves both federal and state law claims, the federal common law of attorney-client privilege would apply. See Virmani v. Novant Health, Inc., 259 F.3d 284, 287 n. 3 (4th Cir.2001). In Hawkins v. Stables, the Fourth Circuit set forth the following test for determining the existence of the attorney-client privilege:

The privilege applies only if (1) the asserted holder of the privilege is or sought to become a client; (2) the person to whom the communication was made (a) is a member of the bar of a court, or his subordinate and (b) in connection with this communication is acting as a lawyer; (3) the communication relates to a fact of which the attorney was informed (a) by his client (b) without the presence of strangers (c) for the purpose of securing primarily either (i) an opinion on law or (ii) legal services or (iii) assistance in some legal proceeding, and not (d) for the purpose of committing a crime or tort; and (4) the privilege has been (a) claimed and (b) not waived by the client.

148 F.3d 379, 383 (4th Cir.1998). The proponent of the attorney-client privilege has the burden of demonstrating its applicability. See id.

When a corporation files a bankruptcy petition, all assets of the corporation are transferred to the bankruptcy estate, which is represented by the trustee. 11 U.S.C. §§ 323, 541. The trustee is given the power to investigate the debtor's financial affairs, to sue to recover property on behalf of the estate, and may be authorized to operate the corporate debtor's business for a period of time. Id. at 352. In other words, the trustee essentially becomes the successor management of the debtor. In Weintraub, the Supreme Court held that the trustee of a corporation in bankruptcy also acquires the power to waive the corporation's attorney-client privilege with respect to pre-petition communications. 471 U.S. at 358, 105 S.Ct. 1986. A trustee's right to assert the attorney-client privilege is a logical extension of the holding in Weintraub. See id at 357 (finding that giving the trustee control over the attorney-client privilege would give no greater chilling effect on attorney-client communications than in the case of a solvent corporation, where individual officers and directors always run the risk that successor management might waive the corporation's attorney-client privilege with respect to prior management's communications with counsel).

Defendants do not dispute that the Trustee may assert the attorney-client privilege as to pre-petition communications between Stadelman and the attorneys who represented Debtor at the time of those communications. With respect to the two conversations between Stadelman and counsel for the Trustee that occurred post-petition, Defendants argue that the Trustee cannot assert the attorney-client privilege as to these communications because Stadelman is not the client of Trustee's counsel and he was not an officer, director or employee of Debtor at the time of the communications with Trustee's counsel, so the privilege would not extend to him by virtue of his former relationship to Debtor.

In response, the Trustee asserts that under In re Allen, 106 F.3d 582, 606 (4th Cir.1997), the attorney-client privilege protects communications of former employees such as Stadelman. The Trustee further contends that extending the privilege to communications between the principal or owner of a corporate debtor and the Chapter 7 trustee's counsel is a natural application of the attorney-client privilege recognized in Weiniraub. Finally, the Trustee claims that the common interest doctrine provides protection of the communications between Stadelman and counsel for the Trustee.

I. Application of Attorney-Client Privilege to Communications with Stadelman

In In re Allen, the Fourth Circuit addressed the question of whether communications between an entity's outside counsel and the entity's former employees would fall within the scope of the attorney-client privilege.³ The Fourth Circuit concluded that the analysis applied by the Supreme Court in Upjohn v. United States to determine which employees fall within the scope of the attorney-client privilege applies equally to former employees.⁴ 106 F.3d at 606. Based on the Upjohn analysis, the Fourth Circuit stated that the privilege applies to former employees when (1) the corporation employed the employee during the time period at issue, (2) the former employee possessed relevant information, and (3) counsel communicated with the former employee at the direction of her client in order to provide legal advice or assistance to the client. Id. The Fourth Circuit further held that the privilege also applies to an attorney's investigation, when the investigation is related to the rendition of legal services. Id. at 603.

Under the facts of this case, the application of the foregoing factors...