Vol. 7, No. 4, Pg. 32. Erosion of Attorney-Client Privilege by the Bankruptcy Code.

• Author: By Helen Elizabeth Burns

South Carolina Lawyer

1996.

Vol. 7, No. 4, Pg. 32.

Erosion of Attorney-Client Privilege by the Bankruptcy Code

32EROSION OF ATTORNEY-CLIENT PRIVILEGE BY THE BANKRUPTCY CODEBy Helen Elizabeth BurnsEvery lawyer is familiar with the attorney-client privilege and the benefits it bestows on the practice of law.

[W]here legal advice of any kind is sought from a professional legal advisor in his capacity as such, the communications relevant to that purpose, made in confidence by the client, are at his insistence permanently protected from disclosure by himself or by the legal advisor...

Diversified Industries v. Meredith, 572 F.2d 596, 602 (8th Cir. (1977)), quoting Wonneman v. Stratford Securities Co., 23 F.R.D. 281, 285 (S.D.N.Y. 1959). The privilege ensures that the client can make full and frank disclosure to the lawyer. The privilege is "indispensable for the purposes of private justice." Chirac v. Reinicker, 24 U.S. (11 Wheat) 280, 294 (1826).

However, in the bizarre world of the Bankruptcy Court, this privilege is severely eroded and often is nonexistent. A lawyer's files can be snatched away, the lawyer can be forced to testify against his client and his advice may be revealed regardless of any privilege claimed. This article will discuss the considerable impact of a bankruptcy proceeding on the attorney-client privilege.

Extensive disclosure is required in every bankruptcy case. If that disclosure is not complete, the debtor's communications with present and past counsel may be discoverable.

Insolvency is a most important and material fact, not only with individuals but with corporations, and with the latter as with the former, the mere fact of its existence may change radically and materially [certain] . . . rights and obligations.

McDonald v. Williams, 174 U.S. 397, 404 (1899).

To understand how the attorney-client privilege is changed by a bankruptcy proceeding, one must first realize the extent of the disclosures required of a debtor under any chapter of the Code. Immediately upon filing, the debtor must disclose in writing all of his creditors and obligations and must also list each and every asset in which he holds an interest, including potential claims against others, potential tax refunds, vehicles, all real estate, household goods, clothing, jewelry and basically every conceivable item the debtor may own.

In addition to the disclosures of current assets and debts, a debtor must respond to an extensive list of questions set out in the Statement of Financial Affairs. The questions include inquiries into debts paid, annual income, property transferred, bank accounts closed, assets liquidated and the amount of attorney's fees paid for bankruptcy and pre-bankruptcy counseling.

Accurate and thorough responses to these questions and required disclosures are encouraged by 18 U.S.C. gg 152 and 3571, which

34provide a $500,000 fine and/or five years in prison for making a false statement or concealing property. Cases are routinely reviewed for concealment of assets and bankruptcy fraud by the U.S...