This article will discuss briefly the attorney-client privilege for corporations in Chapter 7 and Chapter 11 cases. Notice that I put the words “for corporations” in bold face here. We will here only be talking about the attorney-client privilege for corporations, not for individuals. The two scenarios are different and separate. There can be major differences between how individuals and business entities are treated, and it is critical to keep this in mind.
The attorney-client privilege is one of the most important privileges in the law, and in corporate bankruptcy cases, it can be asserted (with some qualifiers and limitations) by the corporation to keep communications between the corporation and its attorneys from being disclosed to third parties. This may become an important issue in criminal litigation or bankruptcy litigation, when issues arise that call into question the nature and content of communication between corporate officers and legal counsel.
For example, a governmental agency may want to know what a corporate officer said on one occasion or another. When a corporation is solvent and in good standing, the corporate officers retain the right to assert or waive the attorney-client privilege on behalf of the corporation. They also have the right to safeguard and control the access to any such privileged communications.
The attorney-client privilege of a corporation belongs to the corporation. It does not belong to the officers. Officers and directors may come and go, but the privilege remains. When corporate officers resign, are replaced, or otherwise leave, the new officers are going to have access to the privileged communications that took place in the past between former officers and their corporate counsel. The same is true when a company is merged into another company, or bought out by another company. In order for companies or businesses to function effectively, it is important for them to get the full benefit of their legal counsel. That benefit is fostered and cemented by knowing that communications between counsel and the corporate officers will remain confidential.
Although the corporation’s privilege may not belong individually to the officers, the officers if needed can procure their own personal counsel. They would then of course retain the full benefit of the attorney-client privilege for themselves personally.
But what happens when the corporation files for bankruptcy protection under Chapter 11 or Chapter 7? The answer is that it depends on the circumstances.
In a Chapter 11 case, the debtor is formally called a “debtor in possession”, and retains operational control of the corporation (unless a trustee is appointed, which is not typical). The continued control over the corporation by the officers normally means that the officers retain the right to possess, control, or waive the corporation’s attorney-client privilege.
In a Chapter 7 case, the filing of a corporate case means that a Chapter 7 trustee is appointed to oversee the liquidation of the corporation. The corporate officers are basically replaced by the Chapter 7 trustee. A US Supreme Court decision (CFTC v. Weintraub, 471 U.S. 373 (1985)) ruled that the privilege belongs to the Chapter 7 trustee. The Chapter 7 trustee has the right to examine the records and communications of the corporation prior to the filing of the bankruptcy.
Please note this last qualifier. After a bankruptcy case is filed, a debtor still retains attorney-client privileges vis-a-vis his bankruptcy attorney. This is necessary to protect a debtor from making statements that may expose him to liability of various types. There are some qualifiers and limitations to this rule, but it is important to distinguish between “pre” and “post” filing privileges. In Chapter 11 cases in which a trustee is appointed (rare), the answer is not entirely clear, but it is likely that an appointed Chapter 11 trustee would claim the same privileges as a Chapter 7 trustee would.
The greater protections afforded the attorney-client privilege in Chapter 11 for pre-petition communications between the corporation and its legal counsel serve as yet another reminder of the benefits and attractiveness of Chapter 11 for businesses and individuals seeking reorganization. Chapter 11 bankruptcy is extremely powerful, and carries many benefits to the individual or corporation in need of relief. It is critical to explore all possible reorganization options with a bankruptcy attorney at the early stages of problems, so that the full range of rights and privileges can be considered.