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The Attorney-client Privilege Defense In Corporate Families

There are several important and functional advantages arising from the use of the same in-house lawyer for an entire corporate family. For instance, in-house lawyers are especially familiar with the nature of the corporate family, can assist with joint public disclosures, and can supervise the compliance of the corporate family with regulatory regimes expertly. However, if a subsidiary becomes financially distressed in the corporate family, the creditors of the financially distressed company can turn to the parent corporation for recourse. In trying to advance their lawsuits, the subsidiary’s creditors may argue that different information distributed by or to in-house counsel can be identified by those creditors because the entire corporate family was represented by the same in-house lawyers. In essence, creditors may claim that while the information is shielded by the attorney-client privilege against disclosure to third parties, the privilege cannot be used to prohibit the access of such information by joint clients. Can the parent company effectively claim the right against its former member of the family in such a context? Given the common practice of using the same in-house lawyer for a corporate family, it is noteworthy that specific rules are required to protect the privilege of the attorney-client.

In Teleglobe USA, Inc. v. BCE, Inc. (In re Teleglobe Communications, Inc.), the Third Circuit recently issued clarification on this issue, where it held, among other things, that a debtor subsidiary could not violate the right of attorney-client solely because the same in-house lawyer was used by the corporate family. If, however, the in-house lawyer jointly represented the debtor subsidiary and the parent on a matter central to the case between the debtor subsidiary and the parent, Teleglobe claims that the parent could not successfully claim the right of the attorney-client, and that the parent would be required to produce to the debtor subsidiary the documents relating to that representation. Thus, the Teleglobe decision should be closely reviewed by business families using the same in-house lawyers to ensure that the attorney-client privilege is not unintentionally waived as a result of the actions of their in-house lawyers.

 

Context

In Teleglobe, the debtors (the ‘Debtors’) under Chapter 11 were wholly owned subsidiaries of Teleglobe, Inc. (‘Teleglobe’). In their bankruptcy proceedings against Bell Canada Enterprises, Inc. (‘BCE’), the parent of Teleglobe, the debtors launched a lawsuit. In their lawsuit, the debtors charged that the actions of BCE contributed to the financial distress of Teleglobe. In late 2000, BCE ordered Teleglobe to accelerate the construction of a fiber optic network called GlobeSystem, according to the Debtors, and pledged its financial support. The Debtors also reported that BCE had caused Teleglobe and its subsidiaries to borrow $2.4 billion from banks and bondholders to finance the expensive endeavor. BCE approved a $850 million equity injection for Teleglobe after those funds were depleted and announced its plan to continue funding Teleglobe. Around this time, BCE began to reassess the future of Teleglobe, based, among other things, on the decreasing confidence of BCE in GlobeSystem’s profitability. BCE decided to discontinue Teleglobe’s financing in April 2001. Teleglobe and the Debtors sued in Canada for restructuring relief within weeks, and the Debtors have filed in the U.S. for chapter 11 relief. The District of Delaware Bankruptcy Court.

The Debtors sued BCE under various claims, including violation of fiduciary duties, misrepresentation, and estoppel, based on BCE’s role in financing and eventual abandonment of Teleglobe. With respect to the debtors’ suit, the district court revoked its automatic reference to the bankruptcy court. The parties were involved in several discovery disputes over the course of the trial. The district court referred the problems of discovery to a unique master. In response to the Debtors’ motion to compel the processing of records, BCE claimed that it had created all Teleglobe-related non-privileged documents other than those representing BCE’s sole legal advice. The Debtors claimed, among other items, that the records were not covered by the attorney-client privilege as a result of the broad joint representation between BCE and Teleglobe by the in-house attorneys. Ultimately, following a camera examination of some records believed to be confidential by BCE, the special master concluded that the in-house lawyers jointly advised BCE and Teleglobe on matters relevant to the abandonment of Teleglobe. The special master then examined in camera all 800 documents on the privilege log and confirmed that the documents showed that the in-house attorneys had a large, shared representation of BCE and Teleglobe and that all documents, including those prepared exclusively for BCE by outside counsel, were discoverable. Affirmed by the district court.

 

The Co-Clients Doctrine

The Third Circuit acknowledged, on appeal, the value of in-house counsel and the need for clarification with regard to the enforcement of the rules of attorney-client-privilege in relation to in-house counsel. To that end, the court took the opportunity to clarify the related doctrines of privilege. The court clarified that when two or more clients employ the same attorney to advise them on a matter of mutual interest, the joint-client or co-client privilege that applies closely aligns with the problems raised by modern in-house counsel. Communications between co-clients and their lawyers are protected under the co-client doctrine by the privilege against parties outside the joint representation but are open in adverse litigation among the co-clients. In addition, for matters outside the joint representation, a co-client can demand the right of correspondence between himself and the joint attorney, even though the interests between the co-clients have diverged to the extent where the joint attorney has an ethical obligation to terminate the dual representation.

“In view of each entity in the corporate family as a separate client of the in-house attorneys, the court noted that “limiting the scope of a joint representation in a sophisticated way was appropriate for the members of the corporate family and the in-house attorneys; nothing needs defining the scope of a joint representation more strictly than the parties to it intended. In such cases, the court observed, the parent should be able to obtain separate representation for the subsidiary, as the maintenance of the shared representation might, in the case of adverse litigation, risk the compulsory development of documentation for its former subsidiary. Nonetheless, on issues other than those relating to spin-off, financial distress, or sale, in-house counsel may also jointly represent the subsidiary. Therefore, in-house counsel could take measures to protect the privilege of a parent company by entering into joint representations carefully only when appropriate, restricting the reach of such representations, and separating counsel on issues in which the interests of the subsidiaries are adverse to the parent.

In the present case, the Court held that while BCE and Teleglobe may have been parties to the joint representation, the lower court could not have required all the records to be generated without finding that the parties to the joint representation were BCE and the debtors. In addition, the court held that Teleglobe could not effectively waive the privilege in favor of the debtors, because without the consent of the other co-client, a co-client could not waive the privilege in favor of a third party. In addition, the court held that the fact that documents prepared by BCE’s outside counsel were transmitted by in-house counsel was of little importance to the question of privilege. The scope of any joint representation was what mattered: records within the scope of a joint representation are discoverable, while those outside the scope are not. Thus, on remand, the court ordered the district court to decide if, on a matter of mutual interest, BCE and the debtors were parties to the joint representation.

 

The Client-Attorney Fiduciary Exemption

The Debtors have argued that through the application of the fiduciary exception to the attorney-client privilege set out in Garner v. Wolfinbarger, they should be entitled to access the privileged records. The court ruled, in Garner, that:

Protection of those rights, as well as those of the company and of the public, where the corporation is in suit against the shareholders on charges of acting unlawfully against the interests of the shareholder, requires that the availability of the privilege be subject to the right of the shareholders to explain why it should not be invoked in the particular case.

Under Garner, a corporation’s shareholders can invade the attorney-client privilege upon a demonstration of good cause to show fiduciary violations by those in charge of the corporation.

The Debtors claimed that their condition was similarly influenced by the Garner exception: BCE owned the Debtors, the Debtors were insolvent, BCE had fiduciary duties to the Debtors, and the Debtors’ creditors were the primary recipients of those duties.

The Third Circuit held the view that the Garner exemption should be applied to such a case by the Delaware courts. The court, however, lacked enough knowledge to decide on the claims of the debtors. The court observed that, on remand, crucial issues to consider would be whether at the time of the privileged communications the debtors were insolvent and whether the debtors had a colorful argument of violation of the fiduciary responsibility to establish “good cause” to invade the privilege.