In re Leslie Controls, Inc., (Bankr. D. Del., Case No. 10-12199, 2010)

CASE SNAPSHOT

The Bankruptcy Court expounded on whether attorney-client and attorney work-product privileged documents remained protected from discovery under the common interest doctrine. The common interest doctrine permits counsel representing different clients with similar legal interests to share information without having to disclose that information to others. Specifically, the Bankruptcy Court addressed whether 26 communications between a Debtor and its counsel that were shared prior to the bankruptcy petition with an ad hoc committee of asbestos plaintiffs and the Debtor’s proposed future claimants’ representative remain protected from discovery under the common interest doctrine. The Delaware Bankruptcy Court held that all of the communications were protected from discovery.

FACTUAL BACKGROUND

In 2009, Leslie Controls, Inc. determined that a bankruptcy filing would be necessary in order to deal with liabilities arising from asbestos-related personal injury clams. In the hopes of creating a consensual reorganization plan, Leslie Controls began negotiating with an Ad Hoc Committee of asbestos plaintiffs and the likely future claims’ representative (FCR).

During these negotiations, Leslie Controls’ insurance coverage counsel prepared a number of documents dealing with insurance coverage issues and strategies in various bankruptcy scenarios. These documents were shared with the Ad Hoc Committee and the FCR in numerous e-mails. All of these communications were shared prior to these parties reaching agreement, and prior to the bankruptcy filing of Leslie Controls.

The insurers of the Debtor sought to obtain the subject documents as part of the discovery process. The Debtor argued that the documents were privileged, and although shared with the Ad Hoc Committee and the FCR, were protected from discovery under the common interest doctrine.

COURT ANALYSIS

The common interest doctrine expands the attorney-client privilege and attorney work-product doctrine under certain circumstances, because the sharing of such privileged communications does not constitute a waiver of the privilege. The initial question in applying the common interest doctrine is whether the underlying communications or documents are indeed privileged. If not, the common interest doctrine is not applicable. Here, the court determined, based upon a review of the documents in question, that those documents constituted privileged communications. The court held that the documents reflected “insurance coverage counsel’s legal analysis and mental impressions concerning insurance issues and strategies in anticipation of possible litigations with the Insurers in a bankruptcy proceeding and/or subsequent coverage litigation.”

Since the court held that the documents were indeed privileged, the next question is whether the common interest doctrine is applicable to the facts of the case. A party invoking the protection of the common interest doctrine must establish: (i) the communication was made by separate parties in the course of a matter of common interest; (ii) the communication was designed to further that effort; and (iii) the privilege has not otherwise been waived. The Insurers argued that the Debtor failed to meet that burden for two reasons.

First, the Insurers argued that the Debtor, the Ad Hoc Committee and the FCR only shared a commercial interest—not the requisite sharing of a legal interest. The court rejected this argument. The court held that the interest of the Debtor, the Ad Hoc Committee and the FCR at the time the documents were shared was to preserve and maximize the insurance available to pay certain asbestos claims, which the court held is “an inherently legal question.” The court reasoned that the Ad Hoc Committee and the FCR were not merely third-party bystanders; rather, they were representatives of the ultimate beneficiaries of a portion of the insurance proceeds and were working with the Debtor to maximize the insurance coverage available.

Second, the Insurers argued that the Debtor, the Ad Hoc Committee and the FCR did not share a common interest because they were adversaries on the issue of the insurance coverage, and that the documents were shared pre-petition and while the parties were negotiating an agreement on the possible terms of reorganization. The Bankruptcy Court also rejected this argument, stating that the “Insurers argue, in effect, for establishment of a per se rule that parties engaged in negotiations can never share a common interest.” The court explained that commonality must be determined on a case-by-case basis, noting, for example, that even parties in merger negotiations may share a common interest. Here, the court held that, while the Debtor, the Ad Hoc Committee and the FCR had a conflicting interest relating to the distribution of the insurance proceeds, they nevertheless shared a common interest in maximizing the asset pool, which included the insurance proceeds. The court found that this was sufficient to invoke the protections of the common interest doctrine.

PRACTICAL CONSIDERATIONS

In order to receive the protections of the common interest doctrine, it is essential for parties to ensure that they are sharing information regarding a legal, rather than a commercial, interest, and that they truly share a common interest. The protection only extends to interests that are identical; adversarial interests are not protected. Here, despite conflicting interests when it came to the separate distributions of insurance proceeds, these parties did share a common interest in maximizing the overall size of the insurance proceeds.

In sum, it is important for parties and their counsel to consider the common interest doctrine as a way of preventing the waiver of privileged documents both during and prior to litigation.