Attorney-Client is a Privilege and Therefore can be Taken Away:
Corporate entities may not be able to assert the privilege under all situations.
Most business owners are aware that, on a very basic level, Attorney-Client privilege protects communications between Attorney and Client by keeping those communications confidential. There are few exceptions to this rule. In a business setting, the Attorney-Client privilege is held by a corporation’s management.
So if a corporation declares bankruptcy does the Attorney-Client privilege still exist? The simple answer is yes, it does. However, it is no longer the corporation’s management that holds the power to waive the privilege. That power is now vested in the bankruptcy trustee. The same is true if the corporation is placed into a receivership. The appointed receiver would then hold the power to waive Attorney-Client privilege.
Consequently, business owners must understand that, after bankruptcy or the initiation of receivership proceedings, their prior communications with company counsel, potentially including those involving the legal implications of the conduct at issue, may be disclosed.
Generally when a creditor attempts to collect from a defunct corporation they must attempt to “pierce the corporate veil.” There are specific criteria that a creditor must prove in order to do so. A sole shareholder or closely held corporation can perform the tasks necessary to limit the ability of a creditor to “pierce,” while still draining the corporation of assets. The ability to attach to these ill-gotten-gains would certainly encourage fair dealing and accountability. Obtaining the necessary info to “pierce” is extremely difficult. However, if a Trustee or Receiver to waives the Attorney-Client privilege it can get easier. The larger impact of this could be realized when the Wisconsin Supreme Court issues its opinion in Polsky v. Vinrich. (For More on Polsky please see Michael Rust’s Article HERE.
A bankruptcy trustee’s ability to waive privileged material was recognized by the United States Supreme Court in Commodity Futures Trading Commission v. Weintraub (1985). There, the Supreme Court held that the waiver of Attorney-Client privilege was valid, finding that it is the bankruptcy trustee who controls the corporation’s attorney-client privilege after bankruptcy proceedings are initiated.
Critically, the Court also rejected the notion that the interest against self-incrimination of former officers and directors trumps the trustee’s capacity to waive. The Court noted that the goal of uncovering insider fraud “would be substantially defeated if the debtor’s directors were to retain the one management power that might effectively thwart an investigation into their own conduct.”
Weintraub has been applied outside the bankruptcy context to authorize a receiver’s waiver of otherwise applicable corporate privileges. In CFTC v. Standard Forex (E.D.N.Y. 1995), the district court upheld a receiver’s waiver and ordered that the corporation’s former outside law firm produce its pre-litigation file. Weintraub has also been recognized in Wisconsin. In re ANR Advance Transp. Co., Inc., 302 B.R. 607 (E.D.Wis. 2003) specifically states, “Weintraub makes clear that the trustee succeeds to the rights of the directors.”
If you are currently seeking collection from a corporation “on the edge” you may still be able to collect even if that company files for bankruptcy. A Weintraub waiver provides access to communications that previously could have been deemed privileged.
Defense counsel could try to initiate legal action, however futile, to oppose the waiver or, at the very least, to attempt to limit its scope. Business owners must be aware that pre-bankruptcy or pre-receivership communications may later be used against them in their personal capacity.
If you have further questions regarding your status and rights as a creditor or are worried that your business ahs not properly been following corporate guidelines contact Gerbers Law.
