What Leasing Lawyers Should Know About the Rules of Evidence

Attorney-client privilege is protected by what may be lawyers' favorite rule of evidence, 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, nonprivileged 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 reasonable likelihood of making its way to the adversary.

Settlement Offers

Evidence of settlement offers made to settle a disputed claim is inadmissible under Rule 408 of the Federal Rules of Evidence. This broad provision excludes any evidence related to the furnishing or accepting of a compromise of a claim that is disputed as to validity or amount. The exclusion also covers factual statements made during the course of settlement talks.

There are several limitations to the scope of Rule 408. Pre-existing documents used during compromise negotiations remain discoverable. Also, the requirement that there be a dispute as to the claim's validity or amount means, for example, that the rule's exclusion does not apply to communications intended “to induce a creditor to settle an admittedly due amount for a lesser sum” (Fed. R. Evid. 408 Advisory Committee Note). Another important limitation is that the exclusion applies only against a party that seeks to admit the evidence “to prove liability for or invalidity of the claim or its amount.” The evidence remains admissible for any other purpose, including to dispute a contention of undue delay, to prove wrongful acts during the negotiations, or to demonstrate the nature of damages.

Courts disagree on the breadth of Rule 408's coverage, but a lawyer may take two steps to ensure that communications will be deemed inadmissible under the rule. First, the communication should be clearly identified as a compromise offer or a communication related to such an offer. Second, some courts have held that the inclusion of the words “without prejudice” in the communication promotes inadmissibility [See, e.g., S. Leo Harmonay Inc. v. Binks Mfg. Co., 597 F. Supp. 1014 (S.D.N.Y. 1985)]. This phrase, a holdover from the common law, can still carry some weight.

Affidavits

An additional rule of evidence can be useful not to protect confidential information, but to ensure that evidence submitted to a court will be deemed admissible. This is the rule on affidavits, regularly used by bankruptcy lawyers to accompany motions filed with a court. The general rule is that any witness who testifies must be made available for cross-examination, but there is an important exception pertaining to the use of affidavits. Although affidavit testimony is technically hearsay, Fed. R. Civ. P. 43(e) permits a court to rely on affidavits to hear a motion based on facts not appearing in the record [See, e.g., In re Garner, 246 B.R. 617 (B.A.P. 9th Cir. 2000); Huddleston v. Nelson Bunker Hunt Trust Estate, 102 B.R. 71 (N.D. Tex. 1989)]. Under this rule, for example, a proceeding to dismiss or convert a bankruptcy case [In re Cabral, 285 B.R. 563 (B.A.P. 1st Cir. 2002)], or to dismiss a claim [In re Garner, 246 B.R. 617 (B.A.P. 9th Cir. 2000)], may be heard based on affidavits. But lawyers must exercise caution when relying on this rule, because courts retain discretion to direct that the matter be heard on oral testimony, in which case the affidavit will be held inadmissible if the affiant is unavailable for cross-examination. In one case, an appellate court held that it was an abuse of discretion for a bankruptcy court to refuse to entertain oral testimony on a motion for summary judgment where controverted questions of fact turned on a witness's credibility [In re Bryan, 261 B.R. 240 (B.A.P. 9th Cir. 2001)]. In a situation where a bankruptcy case was reopened to determine the priority of a lien and the parties had agreed to a stipulation of facts, the bankruptcy court refused to admit an affidavit not included in the stipulation, where the affiant had not testified at trial [In re Dial Business Forms, Inc., 273 B.R. 594 (Bankr. W.D. Mo. 2002), aff'd 283 B.R. 537 (B.A.P. 8th Cir. 2002)]. Further, even when a court hears a motion based on one party's affidavit, its opponent must be allowed an opportunity to challenge that affidavit and submit its own affidavits [First Republicbank Dallas v. Gargyle Corp., 91 B.R. 398 (N.D. Tex. 1988)]. Finally, this exception does not apply beyond motion practice; witnesses whose affidavits are submitted at other stages of the case must be available for cross-examination in accordance with the rules of evidence [See, e.g., In re Roberts, 210 B.R. 325 (Bankr. N.D. Iowa 1997); In re Doser, 281 B.R. 292 (Bankr. D. Idaho 2002)].

Conclusion

The rules of evidence can further a party's interest by preventing confidential information from being used against it. Lawyers should take advantage of the rules as much as possible. This can be accomplished most easily by having a detailed knowledge of the rules of evidence and by adding text to any documents that might fall within the rules' protections. Materials lacking legal grounds for protection will be admissible regardless of catch phrases stamped on them by a lawyer, but sometimes identifying a document as “Attorney Work Product,” “Privileged and Confidential,” or “Without Prejudice” can make the difference between disclosure and protection of important documents.

This article originally appeared in The Bankruptcy Strategist, an American Lawyer Media publication.

It is an unfortunate consequence of the leasing business that leasing lawyers often become involved in bankruptcy matters. These attorneys, who rarely visit a courtroom, may think they don't 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, leasing counsel 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 has 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 discussion that follows focuses on four useful subjects under these rules.

Attorney-Client Privilege

Attorney-client privilege is protected by what may be lawyers' favorite rule of evidence, 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, nonprivileged 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 reasonable likelihood of making its way to the adversary.

Settlement Offers

Evidence of settlement offers made to settle a disputed claim is inadmissible under Rule 408 of the Federal Rules of Evidence. This broad provision excludes any evidence related to the furnishing or accepting of a compromise of a claim that is disputed as to validity or amount. The exclusion also covers factual statements made during the course of settlement talks.

There are several limitations to the scope of Rule 408. Pre-existing documents used during compromise negotiations remain discoverable. Also, the requirement that there be a dispute as to the claim's validity or amount means, for example, that the rule's exclusion does not apply to communications intended “to induce a creditor to settle an admittedly due amount for a lesser sum” (Fed. R. Evid. 408 Advisory Committee Note). Another important limitation is that the exclusion applies only against a party that seeks to admit the evidence “to prove liability for or invalidity of the claim or its amount.” The evidence remains admissible for any other purpose, including to dispute a contention of undue delay, to prove wrongful acts during the negotiations, or to demonstrate the nature of damages.

Courts disagree on the breadth of Rule 408's coverage, but a lawyer may take two steps to ensure that communications will be deemed inadmissible under the rule. First, the communication should be clearly identified as a compromise offer or a communication related to such an offer. Second, some courts have held that the inclusion of the words “without prejudice” in the communication promotes inadmissibility [ See, e.g., S. Leo Harmonay Inc. v. Binks Mfg. Co. , 597 F. Supp. 1014 (S.D.N.Y. 1985)]. This phrase, a holdover from the common law, can still carry some weight.

Affidavits

An additional rule of evidence can be useful not to protect confidential information, but to ensure that evidence submitted to a court will be deemed admissible. This is the rule on affidavits, regularly used by bankruptcy lawyers to accompany motions filed with a court. The general rule is that any witness who testifies must be made available for cross-examination, but there is an important exception pertaining to the use of affidavits. Although affidavit testimony is technically hearsay, Fed. R. Civ. P. 43(e) permits a court to rely on affidavits to hear a motion based on facts not appearing in the record [See, e.g., In re Garner, 246 B.R. 617 (B.A.P. 9th Cir. 2000); Huddleston v. Nelson Bunker Hunt Trust Estate , 102 B.R. 71 (N.D. Tex. 1989)]. Under this rule, for example, a proceeding to dismiss or convert a bankruptcy case [In re Cabral, 285 B.R. 563 (B.A.P. 1st Cir. 2002)], or to dismiss a claim [In re Garner, 246 B.R. 617 (B.A.P. 9th Cir. 2000)], may be heard based on affidavits. But lawyers must exercise caution when relying on this rule, because courts retain discretion to direct that the matter be heard on oral testimony, in which case the affidavit will be held inadmissible if the affiant is unavailable for cross-examination. In one case, an appellate court held that it was an abuse of discretion for a bankruptcy court to refuse to entertain oral testimony on a motion for summary judgment where controverted questions of fact turned on a witness's credibility [In re Bryan, 261 B.R. 240 (B.A.P. 9th Cir. 2001)]. In a situation where a bankruptcy case was reopened to determine the priority of a lien and the parties had agreed to a stipulation of facts, the bankruptcy court refused to admit an affidavit not included in the stipulation, where the affiant had not testified at trial [In re Dial Business Forms, Inc., 273 B.R. 594 (Bankr. W.D. Mo. 2002), aff'd 283 B.R. 537 (B.A.P. 8th Cir. 2002)]. Further, even when a court hears a motion based on one party's affidavit, its opponent must be allowed an opportunity to challenge that affidavit and submit its own affidavits [ First Republicbank Dallas v. Gargyle Corp. , 91 B.R. 398 (N.D. Tex. 1988)]. Finally, this exception does not apply beyond motion practice; witnesses whose affidavits are submitted at other stages of the case must be available for cross-examination in accordance with the rules of evidence [See, e.g., In re Roberts, 210 B.R. 325 (Bankr. N.D. Iowa 1997); In re Doser, 281 B.R. 292 (Bankr. D. Idaho 2002)].

Conclusion

The rules of evidence can further a party's interest by preventing confidential information from being used against it. Lawyers should take advantage of the rules as much as possible. This can be accomplished most easily by having a detailed knowledge of the rules of evidence and by adding text to any documents that might fall within the rules' protections. Materials lacking legal grounds for protection will be admissible regardless of catch phrases stamped on them by a lawyer, but sometimes identifying a document as “Attorney Work Product,” “Privileged and Confidential,” or “Without Prejudice” can make the difference between disclosure and protection of important documents.

This article originally appeared in The Bankruptcy Strategist, an American Lawyer Media publication.