Friends and Enemies: Application of the Common Interest Privilege in Bankruptcy

Contributed by Sara Coelho
Two recent decisions by bankruptcy courts shed light on the application of the common interest privilege in the context of discovery disputes arising in bankruptcy.  The common interest privilege allows parties represented by separate counsel to share information protected by the attorney-client privilege or the work product doctrine without waiving these privileges.  The contours of the common interest privilege are particularly hard to define in the context of chapter 11, where parties frequently ally with and against each other to influence the reorganization process in ways quite different from the paradigm of two defendants in litigation joining together to defend themselves against a claim.  Certain arguments against application of the privilege are prevalent in the chapter 11 context, namely that (i) the real interests shared by cooperating parties are economic as opposed to legal interests, and (ii) as adversaries competing against each other for value in the reorganized debtors (and often negotiating and litigating against each other), the parties cannot share a common legal interest.  Opinions issued in In re Leslie Controls, Inc., and In re Quigley Company, Inc. applied the privilege in a bankruptcy situation and demonstrate that the privilege can be applied to protect communications regarding reorganization strategy.
By letter issued by the court in Leslie, the United States Bankruptcy Court for the District of Delaware upheld assertions of the common interest privilege to protect from disclosure communications between counsel for the debtor and counsel representing asbestos plaintiffs who would be creditors in the debtor’s bankruptcy cases.  The communications analyzed recoveries in bankruptcy from insurance, and were sought by insurers.  The court found that the common interest privilege protects a communication if the party asserting the privilege establishes that “(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 court stated that it was insufficient for the parties to share a legal interest, but rather, they must show “‘cooperation in developing a common legal strategy.’”
The insurers argued that the common interest privilege did not apply because the debtor and the asbestos plaintiffs shared a common economic interest (generating insurance recoveries) not a legal interest, and that these parties shared information before reaching agreement on a plan, while they were negotiating as adversaries.  The Leslie court found that “‘preserv[ing] and maximiz[ing] the insurance available to pay asbestos claims’” was an “inherently legal question” requiring analysis of “insurance documents, as well as contract, insurance and bankruptcy law.”  Similarly, although the debtors and the asbestos plaintiff’s had adverse interests regarding how to allocate the debtors’ assets, they shared the goal of maximizing those assets, and the communication occurred in the pursuit of those shared legal interests.  The court rejected a per se prohibition on assertion of the privilege by parties engaged in negotiations and instead considered whether the information shared was related to matters where the parties shared a common legal interest.
By memorandum decision in Quigley, the United States Bankruptcy Court for the Southern District of New York also recognized a common interest privilege asserted by a debtor and its parent company against classes of asbestos tort claimants.  Using a test similar to that applied by the Leslie court, the Quigley court found a common legal interest where the debtor and parent shared a “common . . . overall strategy geared toward the confirmation of Quigley’s Plan,” were co-defendants in numerous lawsuits, shared insurance used to defend against the suits, were parties to a joint defense agreement regarding the defense of asbestos personal injury claims, and shared duties to maximize the value of the estate.  Although the Quigley court recognized a common interest privilege between the debtor and parent, it found many documents subject to discovery nonetheless because they were not shared on conditions bringing them within the protection of the common interest privilege, they were not protected by an underlying privilege (e.g. attorney-client privilege), or they were subject to waivers or exceptions to the underlying privilege.
By upholding the common interest privilege in the context of communications undertaken to construct a reorganization plan, and, in the case of the Leslie decision, applying the privilege even though the parties asserting it were engaged in adversarial negotiations at the time the communications were made, the Leslie and Quigley courts have demonstrated that the common interest privilege can protect information shared during bankruptcy negotiations from further disclosure.  The opinions contain welcome guidance, as clarity on which communications may be protected facilitates negotiations, and ultimately facilitates the development of consensual reorganization strategies.