Opinion ID: 158609
Heading Depth: 3
Heading Rank: 2

Heading: The Bankruptcy Court's Analysis

Text: 21 The trustee never asked the bankruptcy court to order Reinhart to turn over documents covered by the attorney-client privilege; it disavowed any such request, asking only that the court review the documents to ensure that they were indeed privileged. The court, however, did not adopt the trustee's suggested approach. Instead, it issued an opinion which, although saying several times that it was analyzing who should control the privilege on a case-specific basis, ultimately developed a broad new rule that [t]he right to assert an attorney-client privilege is acquired by the trustee in bankruptcy . . . where, as here, the trustee has become entitled to and the estate is owner of assets in the nature of a debtor's pre-petition causes of action against third parties. Foster, 217 B.R. at 635; see also id. at 638. 22 The court suggested it had undertaken a case-specific analysis, describing its conclusion as supported by . . . the nature of the claims in this case and the particular documents sought by the Trustee. Id. at 638. Its case-specific analysis, though, was limited to noting that the pre-petition suits were the estate's main assets; that they entailed good-faith affirmative claims for breach of contract, fraud, and claims on promissory notes against third persons with whom the Debtor conducted business pre-petition; and that the documents sought were strictly limited to those in [Reinhart]'s files for . . . pending civil actions . . . [and not] from [Foster]'s criminal files. Id. at 639. While those observations may have been a good start, the court failed to relate them to the actual documents withheld by reviewing those documents in camera. Moreover, while the court acknowledged Foster's argument that documents in the civil files were closely related to those in the criminal file, it treated that position as irrelevant to the attorney-client-privilege issue, noting only that its opinion separately addressed the Fifth Amendment claim. See id. at 639 n.15. Even if the Fifth Amendment did not shield Foster's exchanges with his attorneys, it does not necessarily follow that any harm from their disclosure is irrelevant to the question of who should control his attorney-client privilege. In deciding that question, the court never weighed the potential harm to Foster from disclosure of incriminating confidences. Nor did it review any specific documents or categories thereof, despite the rule that a party claiming attorney-client privilege must do so document-by-document. See United Pac. Ins., 152 F.3d at 1276 n.6. 23 While the court did not focus on specific documents in balancing the pertinent factors, it did not adopt a per se rule that a trustee may control an individual debtor's privilege in every case. Instead, its opinion as a whole seems to create a per se rule for a broad subset of all individual-debtor cases. By stating its holding in terms of a few broad features of Foster's case, it created a per se rule for all cases sharing those features. It thus essentially held that a trustee always controls an individual's privilege as to any pre-petition, good-faith, affirmative civil claim against third persons with whom the Debtor conducted business pre-petition. Id. at 639; see also id. at 635, 638. 24 In arriving at its new rule for that broad subset of individual-debtor cases, the bankruptcy court first noted the Supreme Court's warning that its analysis in Weintraub cannot apply to individual debtors. See Foster, 217 B.R. at 636-37. It then aptly summarized the rationales of courts and commentators who have concluded trustees should not control individual debtors' attorney-client privileges. See id. at 637. To let trustees do so may discourage client confidences; violate individuals' reasonable expectations that, so long as they do not abuse the privilege, they alone will decide when to waive it; and ignore the distinction that, while a trustee may control a corporate debtor as would its prebankruptcy management, a trustee can no more control an individual debtor than could someone who bought all of the debtor's assets. See id. (citing McClarty v. Gudenau, 166 B.R. 101, 102 (E.D. Mich. 1994); In re Hunt, 153 B.R. 445, 452 (Bankr. N.D. Tex. 1992); and William R. Mitchelson, Jr., Comment, Waiver of the Attorney-Client Privilege by the Trustee in Bankruptcy, 51 U. Chi. L. Rev. 1230, 1259 (1984)). 25 Despite noting those rationales, the court found support for its contrary approach in three sources: in Weintraub, in a bankruptcy-court opinion, and in the anomaly of having different rules for different debtors. See id. at 637-40. 8 None of those, however, can justify the court's apparently per se rule, which governs a large category of cases. The breadth of that rule results from the court's approach to balancing, which focused not on specific documents or facts of the case, but broad features thereof. If a court resolves a privilege dispute by a balancing analysis, it must instead focus on specific facts and documents. 26 In developing its broad approach, the bankruptcy court first cited Weintraub for an unassailable proposition, i.e., that the Court recognized a Congressional intent in § 542(e) to subject the attorney-client privilege in bankruptcy cases to judicial limitation. See id. at 638 & n.12 (citing 471 U.S. at 351 (quoting legislative history)). It next noted that Weintraub had balanced (a) the rights and needs of a trustee to fulfill his or her fiduciary duty with (b) the federal interests that would be impaired by the trustee's control of the [privilege as to] prebankruptcy communications. Id. at 638 (citing 471 U.S. at 353). It then inferred from Weintraub and legislative history that a debtor's right to invoke the attorney-client privilege in bankruptcy is subject to the particular circumstances of the case. Id. at 639. 9 As noted, however, its subsequent analysis of Foster's particular circumstances was in fact very general. 27 The bankruptcy court's policy discussion built on Weintraub to conclude that important anomalies [will] arise if individual debtors retain their privilege as to pre-petition communications while corporate debtors do not. Id. at 640. The court found it anomalous to strip the privilege from a corporation, as in Weintraub, but not from a sole proprietorship. See id. By mere happenstance of business form, it concluded, a trustee and the creditors might arbitrarily be denied critical information . . . [and thus] access to, or recovery on, their claims. Id. Foster's status as a natural person who is, unlike a corporation, subject to incarceration, is not a mere happenstance of business form. The Weintraub Court and many others have recognized the need to treat individuals and corporations differently in some if not all cases. 10 The anomaly rationale is not tenable; it would dictate a uniform rule passing any debtor's privilege to a trustee. 28 The court also relied on an opinion allowing a liquidating trustee to control the privilege of an individual chapter 11 debtor. See Whyte v. Williams (In re Williams), 152 B.R. 123, 125 26, 129 30 (Bankr. N.D. Tex. 1992). The trustee in Williams was investigating pre-petition transfers to the debtor's family. See id. at 126-28. In letting the trustee control the privilege, the court stressed the fiduciary duty to the bankruptcy estate Williams had voluntarily assumed by becoming a debtor-in-possession. See id. at 127-28. It also noted that losing control of the privilege [could] have no adverse effect on [him], although there [was] a potentially adverse effect on [his] family members. Id. at 129. It discounted the latter effect, noting bankruptcy law not only does not protect a debtor's insiders or affiliates from . . . avoidance litigation, but specifically creates causes of action to avoid transfers to insiders. Id. at 129. Williams thus relies on lack of harm to the debtor, a consent rationale based on his voluntary assumption of a fiduciary duty, and an anti-insider-fraud rationale. None of those rationales applies in this case, 11 assuming as we must the truth of Foster's untested claims about the harm of losing control of his privilege. 12 29 Accordingly, neither Williams nor Weintraub justifies the bankruptcy court's broad new rule. As noted above, the parties concur the court should have resolved Foster's claim by balancing the harm to him and to the attorney-client privilege with the trustee's need for information. See supra at 1265. The court's discussion of Weintraub suggested it would analyze Foster's claim in light of the particular circumstances of the case. Foster, 217 B.R. at 639. But it did not in fact examine specific documents or classes of documents. Nor did it balance pertinent factors, like those derived by the Bazemore court from Weintraub, with regard to the specific facts of Foster's case, instead of broad aspects thereof. See Bazemore, 216 B.R. at 1024. This court thus reverses the district court's order and remands the matter for the bankruptcy court to further proceed in a manner consistent with this opinion.