6.8 Bankrupt and Defunct Corporations

• Library: The Attorney-Client Privilege and the Work Product Doctrine: A Practitioner's Guide (Virginia CLE) (2013 Ed.)

6.8 BANKRUPT AND DEFUNCT CORPORATIONS

6.801 Introduction. Because corporations enjoy the same privilege as individuals, the law has had to deal with corporations' successors. This analysis usually focuses on transactions involving the sale of the corporation's stock or assets (discussed above). However, courts have also dealt with the privilege's ownership when corporate clients declare bankruptcy or lose their corporate existence.

6.802 Bankrupt Corporations. Ownership of the attorney-client privilege often becomes important if the corporate client files a bankruptcy petition. While courts generally find that individuals who declare bankruptcy do not forfeit the power to assert or waive their attorney-client privilege, ¹¹⁶ they generally take the opposite approach with bankrupt corporations. The person or entity that succeeds to management of the corporate client's affairs generally controls the privilege.

Courts have found that the following entities gained control of a bankrupt corporation's privilege and thus were able to either assert or waive the privilege:

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• A trustee in bankruptcy; ¹¹⁷

• A receiver for an insolvent corporation; ¹¹⁸

• A bankruptcy trustee of a bankrupt limited partnership; ¹¹⁹

• A debtor-in-possession; ¹²⁰

• A liquidating trust; ¹²¹

• A liquidator for an insurance company; ¹²²

• The FDIC as a bank receiver. ¹²³

As explained above, trustees or receivers might lose control of the privilege if they sell assets out of bankruptcy. In the meantime, however, the privilege normally rests in their hands.

For several reasons, this scenario presents risks to lawyers representing corporations teetering on the edge of bankruptcy. First, clients and lawyers seem more likely to generate potentially troublesome communications as the company looks for ways to avoid bankruptcy. This means that the substance of any immediate pre-bankruptcy communications might show wrongdoing or potential wrongdoing by the corporate client and possibly implicate the lawyer as well. Second, bankruptcy situations almost inevitably involve a trustee or a third party looking for someone to make up the short-fall in funds available to pay creditors. Thus, lawyers often find themselves in the target zone. Third, trustees usually become adverse to corporate management, at least in fulfilling their fiduciary duty to seek available assets. This means that the lawyer's corporate client winds up in the hands of an adversary. While this situation occasionally occurs with a normal change in corporate management, such as a hostile takeover or merger, in the bankruptcy context it tends to be the rule rather than the exception.

Although cases discussed above involve this scenario, they did not describe the substance of documents ultimately obtained by bankruptcy trustees. However,

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one would think that the documents must have been helpful, given the bankruptcy trustees' efforts to obtain them.

6.803 Defunct Corporations. Not surprisingly, courts dealing with the recent spate of corporate "deaths" have addressed the attorney-client privilege's applicability to communications with corporations that no longer exist.

These decisions obviously do not deal with efforts by the...