The term “frenemy” – a combination of the words friend and enemy – has emerged from modern vernacular to describe someone who is simultaneously a partner and an adversary. The term is perhaps perfectly emblematic of the restructuring process where various constituents make and break alliances in an effort to steer the restructuring process. In so doing, the lines between friend and enemy are often blurred or altered during the course of the restructuring.

Collaboration amongst frenemies in the restructuring context is often dependent upon the ability to employ the common interest privilege. The common interest privilege allows attorneys representing different clients with similar legal interests to share information without waiving attorney-client privileges. The party invoking the protection of the common interest privilege must establish: (1) the communication was made by separate parties in the course of a matter of common interest; (2) the communication was designed to further that effort; and (3) the privilege has not otherwise been waived. The common interest privilege requires that the parties share at least a substantially similar legal interest; but the parties need not be in complete accord.

Application of the common interest privilege amongst bankruptcy frenemies was recently challenged and upheld in In re Leslie Controls, Inc., 2010 Bankr. LEXIS 3177 (Bankr. D. Del. 2010). In Leslie Controls, the court held that the common interest privilege may be invoked by parties in a bankruptcy discovery dispute that share substantially similar legal interests, even if they had adversarial interests on other issues. The debtor in Leslie Controls determined that a bankruptcy filing was necessary to deal with its mounting asbestos-related liabilities. Prior to filing bankruptcy, the debtor began negotiating with an ad hoc committee of asbestos plaintiffs (the Ad Hoc Committee) and the debtor’s proposed future claimants’ representative (the FCR). During those negotiations the debtor shared with the Ad Hoc Committee and the FCR a legal memorandum prepared by the debtor’s insurance coverage counsel that analyzed potential insurance recoveries for asbestos claims under various bankruptcy scenarios. In this regard, the debtor, the Ad Hoc Committee and FCR were functioning as frenemies because they were partnering in an effort to maximize the estate’s assets, but had adversarial interests in how those assets would be allocated.

In the debtor’s subsequent bankruptcy, the debtor’s insurers (the Insurers) moved to compel production of the insurance memorandum while the debtor invoked the protection of the common interest doctrine. In upholding the debtor’s invocation of the common interest doctrine, the court first found that the debtor, the Ad Hoc Committee and the FCR shared a legal interest, not merely a commercial interest. The court found that the parties shared an interest in preserving and maximizing the insurance available to pay asbestos claims, and such interest was an “inherently legal question” because it involved analysis of the insurance documents, contracts, insurance and bankruptcy law, and required involvement of the bankruptcy court.

The court then confirmed that the common interest privilege does not require complete unity of interest among participants. The Insurers argued that the debtor, the Ad Hoc Committee and the FCR did not share a common interest in connection with the insurance proceeds because they had competing interests in allocating such proceeds. The court acknowledged the parties had competing interests in the allocation of proceeds, but rejected the Insurer’s argument by analogizing the situation to sharing a pie. To the extent the estate’s pool of assets can be considered a pie, the size of the pie and the size of the pieces are two separate issues. The court found that the debtor, the Ad Hoc Committee and FCR were in accord as to the former and adversaries as to the latter. Said another way, the parties shared a common interest in increasing the size of the estate’s pool of available assets even though they had competing interests in how to allocate such assets. The court, therefore, upheld the debtor’s invocation of the common interest privilege.

Leslie Controls affirms extension of the common interest privilege to the restructuring context, even when the parties asserting it are engaged in adversarial negotiations at the time the communications were made. In so doing, Leslie Controls is welcome comfort to parties negotiating consensual restructuring strategies. Moreover, Leslie Controls fosters the critical frenemy restructuring partnerships that often lead to increased creditor recoveries, even where future conflict amongst the parties to such partnerships is foreseeable.