Restructuring

Article Contributed by Christopher Linden
Chapter 11 cases often involve shifting alliances – the creditor that is fighting with the debtor at one point in the case could end up becoming one of the biggest supporters of the debtor’s plan later in the case.  How, then, does a court determine when the interests of parties in a chapter 11 case have become so aligned that they are entitled to assert a common interest privilege with respect to communications that could be subject to an attorney-client communication or work product privilege?  Few reported bankruptcy decisions squarely address the application of the common interest doctrine, although two bankruptcy court decisions last year in New York and Delaware helped to define the parameters of the privilege.  Now, a decision out of the Delaware bankruptcy court will provide more guidance as to when the common interest privilege attaches to information exchanged by parties during settlement negotiations.
In In re Tribune Company, et al.,  Chief Judge Carey held that the common interest doctrine, in the context of settlement negotiations, applies once the parties have “agreed upon material terms of a settlement.”  The documents and information sought in Tribune involved settlement discussions occurring during the chapter 11 case among the debtor, the creditors’ committee, and lenders about various causes of actions relating to Tribune’s prepetition LBO.  Throughout the drawn out and lengthy period that these settlement discussions were taking place, the parties exchanged privileged information and attorney work product.  Eventually, these three groups came together to propose a chapter plan (DCL Plan).
Two other competing plans also were filed, though:  the Noteholder Plan and the Bridge Lender Plan.  During discovery on the contested confirmation issues, the proponents of the Noteholder Plan moved to compel disclosure of the LBO-related communications among the proponents of the DCL Plan.  The Noteholder proponents argued that such communications were needed to test the arm’s-length nature and good faith of the settlement negotiations among the DCL Plan proponents.  Citing In re Leslie Controls, Judge Carey sided with the DCL Plan proponents and held that the common interest privilege applied.  The real issue, however, was exactly when the privilege arose.
The DCL Plan proponents argued that a common interest among the debtor, committee and lenders arose upon the filing of the plan term sheet with the bankruptcy court.  The Noteholders, however, asserted that no common interest arose among the parties until the finalized DCL Plan was actually filed with the court, which occurred about a month after the filing of the term sheet.  The Noteholders argued that the filing of the term sheet did not establish a common interest because the parties continued to negotiate after the filing, and certain terms of the settlement were changed.  In particular, the DCL Plan proponents agreed to change the Distributable Enterprise Value from the $6.1 billion reflected in the term sheet to $6.75 billion.  The court once again sided with the DCL Plan proponents, finding that “[o]nce the DCL Plan Proponents agreed upon [the] material terms of the settlement, it is reasonable to conclude that the parties might share privileged information in furtherance of their common interest of obtaining approval of the settlement through confirmation of the plan.”  Accordingly, the court established the filing of the term sheet as the date upon which the common interest privilege attached to communications between the parties.
Delineating, as the court did in Tribune, a definitive timeline as to when the common interest privilege arises in the chapter 11 context provides clarity to this emerging and often opaque issue.  Restructuring professionals’ alliances constantly evolve during the reorganization process, especially in situations like Tribune, where so much of the reorganization’s success involves the settlement of a major litigation.  Providing guidance with respect to this issue facilitates candor between the reorganization actors and encourages cooperation, both of which may lead to a more efficient reorganization process.