McKinstry v. Genser (In re Black Diamond Mining Co.)

• Decision Date: 19 March 2014
• Docket Number: Civil No. 13–125–ART.
• Citation: 507 B.R. 209
• Parties: In re BLACK DIAMOND MINING COMPANY, LLC, et al., Debtors. Taft A. McKinstry, as Trustee of the BD Unsecured Creditors Trust, Plaintiff, v. Ira J. Genser, et al., Defendants.
• Court: U.S. District Court — Eastern District of Kentucky

507 B.R. 209

In re BLACK DIAMOND MINING COMPANY, LLC, et al., Debtors.Taft A. McKinstry, as Trustee of the BD Unsecured Creditors Trust, Plaintiff,

v.Ira J. Genser, et al., Defendants.

Civil No. 13–125–ART.

United States District Court,

E.D. Kentucky,

Southern Division,

Pikeville.

Signed March 19, 2014.

Ellen Arvin Kennedy, Grahmn Morgan, Mackenzie Mayes Walter, Dinsmore & Shohl LLP, Lexington, KY, for Plaintiff.

Chacey R. Ford, Jay Edward Ingle, Mary Elisabeth Naumann, Jackson Kelly PLLC, Lexington, KY, John C. Goodchild, III, Morgan, Lewis & Bockius, LLP, Chicago, IL, Shevon L. Scarafile, Morgan Lewis & Bockius LLP, Philadelphia, PA, for Defendants.

MEMORANDUM OPINION AND ORDER

AMUL R. THAPAR, District Judge.

Like a tornado, this bankruptcy case has a tendency to suck in everyone in its path. In this latest dispute, Black Diamond's lawyers at Jones Day are caught in the whirlwind. The trustee charged with pursuing claims against Black Diamond's former officers has moved for complete access to Jones Day's records regarding the company. Jones Day vigorously contests that demand, asserting work-product protection. But just as Jones Day may not invoke work-product protection directly against its own client, Black Diamond, the firm may not deny access to its client's successor-in-interest, the Trustee. The Court will thus grant the Trustee's motion for turnover.

BACKGROUND

Jones Day represented Black Diamond Mining Company, LLC, and its affiliates (collectively, “Black Diamond”) during the company's Chapter 11 restructuring. B.R. 413 at 1.¹ A comprehensive history of the restructuring appears in Sergent v. McKinstry, 472 B.R. 387, 391–95 (E.D.Ky.2012). For the purposes of this opinion, a brief portion of that history will suffice. Before Black Diamond's creditors took the company into bankruptcy, they forced it to hire Alvarez & Marsal North America, LLC (“A & M”), as a financial advisor. Id. at 392. Once in bankruptcy, Black Diamond brought on Ira Genser, a turnaround specialist from A & M, to manage the company and lead the Chapter 11 restructuring. Id. Genser in turn hired his A & M colleague, Larry Tate, as the company's Chief Financial Officer. Id. at 393. The global economic turmoil of 2008 unfortunately dashed any hopes of a successful reorganization. Id. Black Diamond accordingly shifted to liquidation. Id. A new bankruptcy plan created the BD Unsecured Creditors Trust (the “Trust”) to liquidate some of the company's assets, including any causes of action Black Diamond might have against A & M, Genser, and Tate (collectively, the “A & M Parties”). Id. at 393–94. The Bankruptcy Court also appointed Taft A. McKinstry as the Trustee and as the representative of Black Diamond's estate. Id. at 394. The Trustee then sued the A & M Parties for mismanaging Black Diamond. Id. That suit is the primary subject of this case. SeeB.R. 1–2 at 6–28 (complaint).

During discovery, the Trustee concluded that Jones Day's client file for Black Diamond would assist her case. R. 25 at 8. Jones Day attorney Charles Oellermann testified that Genser's management of Black Diamond was unwise only from the perspective of hindsight. R. 48 at 57–58. Oellermann admitted, however, that his firm had represented A & M in some matters. ²Id. at 49. The Trustee believes Oellermann's testimony “demonstrated a clear bias for the A & M Parties,” and she is confident that documents in the client file—including internal communications among Jones Day lawyers—will contradict his testimony, supporting her allegations of mismanagement. R. 25 at 11–13. Invoking attorney work-product protections, Jones Day refused to produce either the client file or internal emails regarding the firm's representation of Black Diamond. R. 26–1 at 13; see alsoB.R. 412 at 2. Rather than seek those documents via subpoena, the Trustee moved for a turnover order pursuant to 11 U.S.C. § 542(e).³SeeB.R. 399. With the exception of purely “administrative communications,” B.R. 432 at 22, the Trustee specifically requested “all recorded information of and relating to the representation of Black Diamond, including books, documents, records and papers in any format or media, and expressly including [paper and electronic copies] of internal communications,” B.R. 399 at 9.

The Bankruptcy Court denied “every facet” of the Trustee's turnover motion, B.R. 432 at 44; see alsoB.R. 417, fearing that disclosure might chill open communication among a firm's attorneys. SeeB.R. 432 at 32–33. The Trustee appealed. Since that appeal, however, the Court withdrew the reference to the Bankruptcy Court for the entire adversary proceeding below. See R. 22. To simplify the proceedings, the parties agreed to convert the Trustee's appeal into a renewed turnover motion directly before this Court, mooting the appeal. Id. at 3. The Court has jurisdiction pursuant to 28 U.S.C. § 1334(b), and now considers the Trustee's renewed motion, R. 25.

DISCUSSION

Section 542 of the Bankruptcy Code broadly authorizes turnover of a debtor's property to the trustee.⁴See11 U.S.C. § 542. Subsection 542(e) goes a bit further than the debtor's property, however, empowering courts to order turnover of relevant documents: “[s]ubject to any applicable privilege, after notice and a hearing, the court may order an attorney, accountant, or other person that holds [documents] 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). Congress specifically designed this subsection “to restrict ... the ability of accountants and attorneys to withhold information from the trustee.” CFTC v. Weintraub, 471 U.S. 343, 351, 105 S.Ct. 1986, 85 L.Ed.2d 372 (1985).

Setting aside the question of privilege for a moment, Jones Day's file regarding its representation of Black Diamond plainly falls within § 542's scope. That client file, according to most state courts, is Black Diamond's property. See Swift, Currie, McGhee & Hiers v. Henry, 276 Ga. 571, 581 S.E.2d 37, 39–40 (2003) (discussing the split of authority and adopting the majority rule); Sage Realty Corp. v. Proskauer Rose Goetz & Mendelsohn L.L.P., 91 N.Y.2d 30, 666 N.Y.S.2d 985, 689 N.E.2d 879, 881–83 (1997) (same). On that view, § 542 unquestionably would require turnover—and privilege would be irrelevant. See11 U.S.C. § 542(a) (“[A]n entity ... in possession, custody, or control ... of property that the trustee may use ... shall deliver [such property] to the trustee.”). Regardless, the Court can avoid wading into the thorny debate over precisely who owns the client file. To be subject to turnover under § 542(e), documents and records need not actually belong to the debtor; they need only relate to the debtor's property or financial affairs. In re McKenzie, 716 F.3d 404, 419 (6th Cir.2013). And that property includes intangible interests such as causes of action. Whiting Pools, 462 U.S. at 205 n. 9, 103 S.Ct. 2309;Bauer v. Commerce Union Bank, 859 F.2d 438, 440–41 (6th Cir.1988). Black Diamond's outstanding claims against its former officers, the A & M Parties, are thus its property. As such, Jones Day's client file on Black Diamond “relate[s] to” the company's property within the meaning of § 542(e) because the records and intra-firm correspondence it contains are relevant to those claims. Jones Day does not dispute this conclusion, but rather invokes as a defense § 542(e)'s opening prepositional phrase: “[s]ubject to any applicable privilege.”

Privilege indeed qualifies the Court's power under § 542(e) to order the turnover of relevant documents. Jones Day argues that the work-product doctrine is a “privilege” that obviates any duty to turn over Black Diamond's client file to the Trustee. See R. 26–1 at 19–26. The parties do not dispute that the term “privilege” as used in § 542(e) embraces work-product protection. For the sake of argument, because it makes no difference to the outcome, the Court will assume that is the correct reading of the statute.

I. Work–Product Doctrine

Federal common law defines the scope of any relevant privilege since turnover pursuant to § 542(e) is a federal right: “[q]uestions of privilege that arise in the course of the adjudication of federal rights are ‘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.’ ” United States v. Zolin, 491 U.S. 554, 562, 109 S.Ct. 2619, 105 L.Ed.2d 469 (1989) (quoting Fed.R.Evid. 501); see also In re Foster, 188 F.3d 1259, 1264–65 (10th Cir.1999) (holding federal common law governs debtor's privilege under § 542(e)). Whether work-product doctrine prevents the Court from ordering Jones Day to turn over Black Diamond's client file to the Trustee thus depends on federal law. And as the party asserting work-product protection, Jones Day bears the initial burden to show the doctrine applies.⁵United States v. Roxworthy, 457 F.3d 590, 593 (6th Cir.2006).

This is not an ordinary work-product dispute, however, because Jones Day effectively asserts protection against its former client. True, the Trust is not the full legal “successor” to Black Diamond, nor is the Trustee a fiduciary for the entire bankruptcy estate. See Holywell Corp. v. Smith, 503 U.S. 47, 55, 112 S.Ct. 1021, 117 L.Ed.2d 196 (1992) (discussing the role of a liquidating trustee of a trust created pursuant to § 1123(a)(5)(B) of the Bankruptcy Code). And neither the Trust nor the Trustee is Jones Day's client. But the Trust is the legal successor to Black Diamond's claims against the A & M Parties: “[b]ecause the claims are property of the bankruptcy estate, the Trustee is the real party in interest.” Wieburg v. GTE Sw. Inc., 272 F.3d 302, 306 (5th Cir.2001); accord Auday v. Wet Seal Retail, Inc., 698 F.3d 902, 904 (6th Cir.2012) (citing Wieburg approvingly). As the Court already noted, the Trustee is a “representative of Black Diamond's estate” according to the liquidation...