What Should You Know About the Rules of Evidence?

Attorney-client privilege is protected by what may be lawyers' favorite: Rule 501 of the Federal Rules of Evidence. The classic statement of the privilege provides that where legal advice is sought from a lawyer in his or her capacity as such, the communications relevant to that purpose made in confidence by the client are permanently protected from disclosure by the client or by the lawyer, unless the protection is waived (8 Wigmore, Evidence, (McNaughton Rev. 1961) sec. 2292, p. 554). Communications from attorney to client are often privileged.

The “communications” covered by the privilege include oral statements, documents and physical objects. Pre-existing, non-privileged documents are not made privileged as a result of their transfer to an attorney. The Supreme Court also held in Upjohn Co. v. United States, 449 U.S. 383 (1981), that the privilege extends to all of a corporation's employees.

The confidentiality requirement for communications is important. In a bankruptcy case, communications between members of a creditors' or equity committee and the committee's counsel are generally held to be covered by the privilege. But material prepared with the intention of public dissemination is not confidential, so the privilege does not apply; this category includes pre-petition information concerning the debtor's assets and liabilities, and information transmitted to an attorney with the intent that the information will be transmitted to a third party [S. v. White, 950 F.2d 426 (7th Cir. 1991)].

The complexities of the attorney-client privilege arise in relation to its waiver. A waiver of the privilege is most commonly accomplished either by breaching the confidentiality of the communication by disclosing it to a third party, or by an explicit waiver. In bankruptcy cases, the question arises as to how confidential a communication must remain to avoid a waiver. Generally, disclosure to a third party waives the privilege as to the whole world. Importantly, agents of the attorney and the client may be included in the protections of the privilege, but the courts are not uniform in establishing the extent of this principle. The Second Circuit first set forth this principle in U.S. v. Kovel, 296 F.2d 918, 922 (2d Cir. 1961), where the court applied the privilege to communications between an attorney and accountant that are “necessary, or at least useful, for the effective consultation between the client and the lawyer.” Citing Kovel, a fairly recent bankruptcy case, In re Tri-State Outdoor Media Group, Inc., 283 B.R. 358, 362 (M.D. Ga. 2002), held that the attorney-client privilege as well as the work-product doctrine extended to a financial expert hired by a committee's counsel, because the expert was the attorney's agent and facilitated communication between the attorney and the committee. A California district court endorsed the somewhat more restricted view that an attorney's communications with third parties “necessary to effectuate the client's consultation” are privileged, where a party such as an accountant plays the role of interpreter to enable the attorney to understand the client's financial information [U.S. v. ChevronTexaco Corp., 241 F.Supp.2d 1065, 1072 (N.D. Cal. 2002); see also U.S. v. Ackert, 169 F.3d 136, 139 (2d Cir. 1999)]. The First Circuit, assuming arguendo that it would adopt Kovel, held that the privilege would extend only to third parties that are “nearly indispensable or serve some specialized purpose in facilitating attorney-client communications.” Cavallaro v. U.S., 284 F.3d 236, 249 (1st Cir. 2002). In any case, this privilege may be countered by Fed. R. Civ. P. 26(a)(2)(B), which specifically provides for the discoverability of materials given to any expert witness who might testify at trial.

The key exception to the waiver rule is the “joint defense” or “common interest” exception, which provides that the privilege is maintained if information is communicated only to a third party with a common interest. Although this exception is most commonly known to apply to co-defendants, the exception is not so limited. In bankruptcy cases, the exception also protects communications among parties that share a “common legal interest,” namely where the parties asserting the privilege are co-parties to litigation or reasonably believe that they could be made co-parties. See, e.g., In re Megan-Racine Assocs., Inc., 189 B.R. 562 (Bankr. N.D.N.Y. 1995). This may extend even to cover communications between a debtor-in-possession and a creditors' committee where the committee is cooperating with the DIP or trustee, for example to prosecute a fraudulent conveyance action [In Re Kaiser Steel Corp., 84 B.R. 202 (Bankr. D. Colo. 1988)] or to set aside a post-petition transfer of the debtor's assets [In re Mortgage & Realty Trust, 212 B.R. 649 (Bankr. C.D. Cal. 1997)].

As for explicit waiver, when a corporation is in bankruptcy under Chapter 7 or Chapter 11, the trustee succeeds to and can unilaterally waive the corporation's attorney-client privilege as to pre-petition communications [Commodity Futures Trading Comm'n v. Weintraub, 471 U.S. 343 (1985)]. This fact can have important ramifications: the debtor's directors and officers lose control over the privilege with respect to pre-bankruptcy communications.

Attorney Work-Product Doctrine

The attorney work-product doctrine safeguards an attorney's trial preparation from an opponent's discovery attempts. Under Fed. R. Civ. P. 26(b)(3), a party may obtain discovery of documents and tangible items “prepared in anticipation of litigation for trial” by a party or its attorney only upon a showing of “substantial need.” Courts disagree about how imminent the litigation must be; while some hold that a remote possibility of litigation is insufficient to trigger the doctrine, others focus on whether the motivation for preparing the material was some potential litigation. In any case, the doctrine protects documents created in connection to the preparation of bankruptcy filings such as a plan of reorganization. Also, the rule provides particular protection to an attorney's opinions and legal theories.

Waiver of the work-product protection operates somewhat differently from a waiver of privilege. Nearly all courts recognize that “work-product protection is not as easily waived as the attorney-client privilege.” [U.S. v. Massachusetts Institute of Technology, 129 F.3d 681, 687 (1st Cir. 1997)]. Disclosure to a third party does not waive the work-product protection unless the disclosure “substantially increases the opportunity for potential adversaries to obtain the information.” [In re Circle K Corp., 1997 U.S. Dist. LEXIS 713, 731-32 (S.D.N.Y. Jan. 28, 1997)]. Generally, if information is disclosed to someone other than a co-party, the work-product doctrine is not waived unless the information has a reasonably likelihood of making its way to the adversary.

In next month's discussion, we review Settlement Offers and Affidavits.

Bankruptcy lawyers who rarely visit a courtroom may think they do not need to worry about the rules of evidence. Yet evidentiary rules can provide critical protections. In a typical case or negotiation, lawyers create and circulate tremendous amounts of information — much of which would be potentially damaging if obtained by other parties. To protect this information, bankruptcy lawyers need to be familiar with the rules of evidence and how courts have interpreted these rules. The case law interpreting these rules is not static; rather, it is constantly evolving in ways relevant to counsel who specialize in corporate insolvency. For example, a series of recent cases explored the boundaries of the attorney-client privilege, examining such questions as, if counsel for a creditors' committee hires a financial expert, is the expert's work protected?

The Federal Rules of Evidence apply to most issues that arise in bankruptcy cases, according to Rule 9017 of the Federal Rules of Bankruptcy Procedure. The following discussion focuses on four useful subjects under these rules.

Attorney-Client Privilege

Attorney-client privilege is protected by what may be lawyers' favorite: Rule 501 of the Federal Rules of Evidence. The classic statement of the privilege provides that where legal advice is sought from a lawyer in his or her capacity as such, the communications relevant to that purpose made in confidence by the client are permanently protected from disclosure by the client or by the lawyer, unless the protection is waived (8 Wigmore, Evidence, (McNaughton Rev. 1961) sec. 2292, p. 554). Communications from attorney to client are often privileged.

The “communications” covered by the privilege include oral statements, documents and physical objects. Pre-existing, non-privileged documents are not made privileged as a result of their transfer to an attorney. The Supreme Court also held in Upjohn Co. v. United States, 449 U.S. 383 (1981), that the privilege extends to all of a corporation's employees.

The confidentiality requirement for communications is important. In a bankruptcy case, communications between members of a creditors' or equity committee and the committee's counsel are generally held to be covered by the privilege. But material prepared with the intention of public dissemination is not confidential, so the privilege does not apply; this category includes pre-petition information concerning the debtor's assets and liabilities, and information transmitted to an attorney with the intent that the information will be transmitted to a third party [ S. v. White , 950 F.2d 426 (7th Cir. 1991)].

The complexities of the attorney-client privilege arise in relation to its waiver. A waiver of the privilege is most commonly accomplished either by breaching the confidentiality of the communication by disclosing it to a third party, or by an explicit waiver. In bankruptcy cases, the question arises as to how confidential a communication must remain to avoid a waiver. Generally, disclosure to a third party waives the privilege as to the whole world. Importantly, agents of the attorney and the client may be included in the protections of the privilege, but the courts are not uniform in establishing the extent of this principle. The Second Circuit first set forth this principle in U.S. v. Kovel , 296 F.2d 918, 922 (2d Cir. 1961), where the court applied the privilege to communications between an attorney and accountant that are “necessary, or at least useful, for the effective consultation between the client and the lawyer.” Citing Kovel , a fairly recent bankruptcy case, In re Tri-State Outdoor Media Group, Inc. , 283 B.R. 358, 362 (M.D. Ga. 2002), held that the attorney-client privilege as well as the work-product doctrine extended to a financial expert hired by a committee's counsel, because the expert was the attorney's agent and facilitated communication between the attorney and the committee. A California district court endorsed the somewhat more restricted view that an attorney's communications with third parties “necessary to effectuate the client's consultation” are privileged, where a party such as an accountant plays the role of interpreter to enable the attorney to understand the client's financial information [ U.S. v. ChevronTexaco Corp. , 241 F.Supp.2d 1065, 1072 (N.D. Cal. 2002); see also U.S. v. Ackert , 169 F.3d 136, 139 (2d Cir. 1999)]. The First Circuit, assuming arguendo that it would adopt Kovel , held that the privilege would extend only to third parties that are “nearly indispensable or serve some specialized purpose in facilitating attorney-client communications.” Cavallaro v. U.S. , 284 F.3d 236, 249 (1st Cir. 2002). In any case, this privilege may be countered by Fed. R. Civ. P. 26(a)(2)(B), which specifically provides for the discoverability of materials given to any expert witness who might testify at trial.

The key exception to the waiver rule is the “joint defense” or “common interest” exception, which provides that the privilege is maintained if information is communicated only to a third party with a common interest. Although this exception is most commonly known to apply to co-defendants, the exception is not so limited. In bankruptcy cases, the exception also protects communications among parties that share a “common legal interest,” namely where the parties asserting the privilege are co-parties to litigation or reasonably believe that they could be made co-parties. See, e.g., In re Megan-Racine Assocs., Inc., 189 B.R. 562 (Bankr. N.D.N.Y. 1995). This may extend even to cover communications between a debtor-in-possession and a creditors' committee where the committee is cooperating with the DIP or trustee, for example to prosecute a fraudulent conveyance action [In Re Kaiser Steel Corp., 84 B.R. 202 (Bankr. D. Colo. 1988)] or to set aside a post-petition transfer of the debtor's assets [In re Mortgage & Realty Trust, 212 B.R. 649 (Bankr. C.D. Cal. 1997)].

As for explicit waiver, when a corporation is in bankruptcy under Chapter 7 or Chapter 11, the trustee succeeds to and can unilaterally waive the corporation's attorney-client privilege as to pre-petition communications [Commodity Futures Trading Comm'n v. Weintraub , 471 U.S. 343 (1985)]. This fact can have important ramifications: the debtor's directors and officers lose control over the privilege with respect to pre-bankruptcy communications.

Attorney Work-Product Doctrine

The attorney work-product doctrine safeguards an attorney's trial preparation from an opponent's discovery attempts. Under Fed. R. Civ. P. 26(b)(3), a party may obtain discovery of documents and tangible items “prepared in anticipation of litigation for trial” by a party or its attorney only upon a showing of “substantial need.” Courts disagree about how imminent the litigation must be; while some hold that a remote possibility of litigation is insufficient to trigger the doctrine, others focus on whether the motivation for preparing the material was some potential litigation. In any case, the doctrine protects documents created in connection to the preparation of bankruptcy filings such as a plan of reorganization. Also, the rule provides particular protection to an attorney's opinions and legal theories.

Waiver of the work-product protection operates somewhat differently from a waiver of privilege. Nearly all courts recognize that “work-product protection is not as easily waived as the attorney-client privilege.” [ U.S. v. Massachusetts Institute of Technology , 129 F.3d 681, 687 (1st Cir. 1997)]. Disclosure to a third party does not waive the work-product protection unless the disclosure “substantially increases the opportunity for potential adversaries to obtain the information.” [In re Circle K Corp., 1997 U.S. Dist. LEXIS 713, 731-32 (S.D.N.Y. Jan. 28, 1997)]. Generally, if information is disclosed to someone other than a co-party, the work-product doctrine is not waived unless the information has a reasonably likelihood of making its way to the adversary.

In next month's discussion, we review Settlement Offers and Affidavits.