What You Know about Confidentiality and Privileges May Not Hold Up in Bankruptcy Court

The Bencher—September/October 2021

By Joseph P. Briggett, Esquire

In theory, confidentiality and privileges should be somewhat homogeneous throughout United States courts. American Bar Association Model Rule 1.6 provides the basics of maintaining client confidentiality with elegant simplicity. Attorney-client privilege is so uniformly important in law practice that its elements are second nature to most lawyers. In bankruptcy courts, however, the finer points of both these concepts have evolved in ways that might surprise non-bankruptcy lawyers.

Why is bankruptcy different? Bankruptcy reorganizations and liquidations are public proceedings in which transparency is critical. The volume of information and the number of persons to whom it is transmitted in large corporate reorganizations would dwarf that of even the most complex civil litigation. Moreover, the confidences owed to, and privileges held by, a debtor can shift when the debtor’s rights pass into a bankruptcy estate or to other fiduciaries such as a trustee. These special issues place another layer of complexity on confidentiality and privilege.

Confidentiality and privilege, of course, should not be confused. Confidentiality, in this context, is the duty owed by a lawyer to his or her client to maintain privacy of information. Model Rule 1.6 provides that “[a] lawyer shall not reveal information relating to the representation of a client unless the client gives informed consent” or “the disclosure is impliedly authorized in order to carry out the representation.” Rule 1.6 provides several other exceptions. One is key to the bankruptcy context: when disclosure is necessary to comply with law or a court order.

Attorney-client privilege, on the other hand, is the right not to disclose certain qualified attorney-client communications in response to subpoena, examination, discovery, or other disclosure demands. Attorney-client privilege is a right held by the client.

Lawyers in all disciplines struggle with the ethical tension between the duty to disclose, on the one hand, and the desire to withhold unfavorable information, on the other. The tensile stress between those forces can be particularly great in bankruptcy practice.

Various bankruptcy statutes and rules require parties to disclose information. Those duties may be different for the various role players in a bankruptcy proceeding, namely debtors, committees, trustees, and creditors. The Bankruptcy Code requires debtors to file schedules detailing all their assets, liabilities, and active contracts, along with various other filings, such as monthly operating reports and limited production of tax returns to certain entities. Creditors’ committees, which are appointed by the court to represent the interests of creditors, likewise have obligations to disclose information they obtain to the creditors whose interests they are bound to represent. Bankruptcy trustees are required by statute to furnish information regarding the estate to parties in interest and are further required to publicly file various reports and accountings with the court. When each of the foregoing (debtors, committees, and trustees) seeks compensation of their lawyers, accountants, and other professionals, they generally have to make a public written request to the court detailing what those professionals are doing to merit payment.

Of all the usual bankruptcy court role players, creditors likely bear the lowest level of disclosure obligation. If they choose to pursue recovery of their claims, however, they are generally required to publicly file information about their claim, which may include contracts and related documentation such as invoices or purchase orders.

Despite the byzantine disclosure obligations, these parties have the usual incentives to play their cards close to the chest. The debtor’s financial information may include information that exposes weaknesses in active disputes or litigation. A creditor’s proof of claim may publicly expose contracts or business data, such as an equipment vendor’s day rates, which they do not want the world to know. When debtors and creditors’ committees request payment of their attorneys, the attorneys’ invoices may contain information that tells too much about their strategies and concerns.

Mitigating Confidentiality Concerns When Bankruptcy Requires Disclosure

The Code offers practitioners some rights and procedures to deal with disclosure obligations when those obligations conflict with confidentiality concerns. Section 107 provides the general rule that all papers filed in a bankruptcy case are public. As a practical matter, utilizing PACER (Public Access to Court Electronic Records) means all those papers will be available on the internet. Section 107 contains a safety valve, where it states, “on request of a party in interest, the bankruptcy court shall, and on the bankruptcy court’s own motion, the bankruptcy court may…protect an entity with respect to a trade secret or confidential research, development, or commercial information; or protect a person with respect to scandalous or defamatory matter contained in a paper filed in a case under this title.” This relief is limited to instances in which the party seeking protection can show one of the predicate justifications for confidentiality. Perhaps the broadest and most nebulous category, “confidential commercial information,” usually requires a showing that the information would cause an unfair advantage if given to competitors and that the party seeking protection has undertaken reasonable efforts to keep such information confidential.

Under Section 107, bankruptcy counsel can resolve some of the tensions that arise between the requisites of disclosure and the desire for secrecy by obtaining relief from the court. Some bankruptcy courts are loath to seal or restrict documents under Section 107, in deference to the need for transparency in bankruptcy proceedings. For example, a series of bankruptcy court decisions have denied requests by parties who struck “no seal, no deal” agreements requiring that their agreement with a debtor not be filed publicly. In this context, courts have regularly held that when a debtor is party to an agreement, the mere fact that the counter party demands secrecy is not sufficient cause to keep the document out of the public record.

Another limitation to Section 107 is that, although it can be used to keep confidential documents out of the public record, it does not prevent other parties from obtaining the documents. Even if a document is ordered to be sealed under Section 107, a creditor or other party in interest in the case will often be entitled to obtain a copy.

Some industry-specific confidentiality issues and regulations require specialized solutions. A good example of this is health care service providers and the privacy rules contained in Health Insurance Portability and Accountability Act (HIPAA). The Bankruptcy Code requires the debtor to disclose the identities of many parties in interest, and that may include a health care provider’s patients. Without special relief from the court, a health care service provider seeking bankruptcy protection is unable to comply with both the Bankruptcy Code and applicable confidentiality laws such as HIPAA. For this reason, businesses of this type will often file a motion at the beginning of the case delineating how these disclosures should be handled, which may include relieving the debtor of the obligation to make certain disclosures, allowing documents to be filed under seal, and establishing other procedures to allow parties in interest sufficient access to information to protect their interests.

While Section 107 and related procedures provide useful tools, the chief way that bankruptcy counsel can defuse the ethical tension between disclosure and confidentiality is by advising his or her client about the duties to disclose that will arise before undertaking a course of action that will necessitate such disclosure. For debtors’ attorneys, this means fully advising their clients about the vast and serious disclosure obligations before filing a petition for bankruptcy. For creditors’ attorneys, this may entail advising the client that taking an aggressive path against their debtor adversary may later mean turning over documents in a public forum—even documents that the client would prefer not to disclose.

Privileges in Bankruptcy: A Fluid Situation

Disclosure obligations can clash with privileges just as they do with confidentiality. This problem can start at the very beginning of a case when the debtor prepares schedules of assets and liabilities. One would assume that a discussion between a debtor and debtor’s counsel regarding information to be disclosed in bankruptcy schedules is privileged. Many courts, however, have held that these discussions are not privileged. These courts reason that, because the debtor provides this information with intent to be disclosed publicly, the communications are not privileged. Moreover, some courts have extended this reasoning to communications and information even though the debtor and its lawyer ultimately decided to exclude such information from the bankruptcy schedules. There is some conflict among bankruptcy courts on this issue. To preserve the claim of privilege, counsel should ensure that prefiling communications regarding the submission of schedules are properly designated as protected by privilege and work product doctrines and know that such communications may, nonetheless, not be protected from disclosure, depending upon the jurisdiction.

The oft-stated principle that the attorney-client privilege is held by the client has a fluid character in bankruptcy. Consider the example of a corporate entity that files for bankruptcy protection under Chapter 11. After filing a Chapter 11 petition, the corporate debtor generally continues to act through its officers, and thereby retains the privilege, throughout the process. In a Chapter 7 case, on the other hand, the Bankruptcy Code dictates that a court-appointed trustee administers the estate of the debtor. In such an instance, the trustee will also control the privilege. The trustee gains access to the pre-petition attorney-client communications, and the trustee decides whether that privilege is enforced or waived. The U.S. Supreme Court has addressed this issue in the context of corporations; however, open questions remain regarding the trustee’s accession to the privilege in the case of individual debtors.

The debtor in possession will not always, however, maintain the attorney-client privilege in a Chapter 11 case. The privilege may thereafter pass to a trustee in various instances, including if the case is converted to Chapter 7, if a Chapter 11 trustee is appointed, or if a plan dictates that a liquidating trustee administer the estate’s assets.  

Practitioners of corporate and securities law will recognize another twist in the application of privileges: the fiduciary exception. One of the earliest courts to recognize a fiduciary exception was the Fifth Circuit in Garner v. Wolfinbarger, 430 F.2d 1093 (5th Cir. 1970). While it is sometimes said that the attorney-client privilege is absolute, Garner held that a corporation’s shareholders can overcome management’s assertion of the attorney-client privilege by demonstrating “good cause” for disclosure. Just as a corporation’s managers owe a high duty of trust and care to the corporation’s shareholders, a bankruptcy fiduciary (such as a debtor-in-possession, trustee, or liquidating trustee) owes similar duties to the creditors of a bankruptcy estate. Bankruptcy courts have therefore extended the reasoning of Garner to allow creditors and creditors’ committees to obtain attorney-client communications of the debtor, upon a showing of good cause. Bankruptcy courts review four broad factors when determining whether cause exists: (1) the discovering party’s stake in the fiduciary relationship; (2) the apparent merit of the claim; (3) the need of the discovering party for the information; and (4) the nature of the communication itself. Creditors and creditors’ committees in this context will argue that the debtor and its attorneys should not be able to use the privilege to shield communications that may be necessary for creditors to fully vindicate their interests and maximize recovery, particularly when malfeasance is involved. Although this argument can obviously go through many different permutations, parties should be aware that the attorney-client privilege of a debtor in bankruptcy may be more vulnerable than in other contexts.
While the attorney-client privilege may be the most frequent subject of debate, the other privileges also have their place in bankruptcy proceedings. These include spousal privilege, accountant-client privilege, and another more novel privilege: the self-critical analysis privilege. While beyond the scope of this article, bankruptcy cases frequently arise out of circumstances in which debtors have engaged in internal investigations or other self-critical analysis pre-petition. The self-critical analysis privilege may seem like a handy principle to shield confidential information; however, the only reported bankruptcy case that considered it determined that it was not applicable. In Re Roman Catholic Archbishop of Portland in Or., 335 B.R. 815 (Bankr. D. Or. 2005).

The bottom line with disclosure of confidential and privileged communications in bankruptcy courts goes back to the glaring exception to attorney-client confidentiality in Model Rule 1.6, i.e., when disclosure is necessary “to comply with other law or a court order.” You should always disclose when required by the bankruptcy rules or a bankruptcy court order. But with a little planning, you can also avoid putting your client in a situation in which he or she has to disclose things your client does not want to.

Joseph P. Briggett, Esquire is a shareholder in the firm of Lugenbuhl, Wheaton, Peck, Rankin & Hubbard in New Orleans, Louisiana, where his practice is focused on commercial litigation and complex commercial bankruptcy. He is the membership chair of the Tulane Law School American Inn of Court and a board member of the Judge Jerry A. Brown Louisiana Bankruptcy American Inn of Court.

© 2021 Joseph P. Briggett, Esquire. This article was originally published in the September/October 2021 issue of The Bencher, a bi-monthly publication of the American Inns of Court. This article, in full or in part, may not be copied, reprinted, distributed, or stored electronically in any form without the written consent of the American Inns of Court.