Who Controls an Audit Committee’s Privilege and Work Product Protection if the Company Declares Bankruptcy?

December 9, 2015

Many courts recognize that a corporation’s constituent (such as an audit committee or a group of independent directors) can own the privilege and work product protection covering the constituent’s internal corporate investigation. Under this approach, the company’s bankruptcy trustee cannot access or waive that privilege or work product protection. See, e.g., Ex parte Smith, 942 So. 2d 356 (Ala. 2006) (denying a bankruptcy trustee’s attempt to access pre-bankruptcy communications between the company’s independent directors and its Skadden Arps lawyers).

In Krys v. Paul, Weiss, Rifkind, Wharton, & Garrison LLP (In re China Medical Technologies, Inc.), 539 B.R. 643 (S.D.N.Y. 2015), Judge Abrams dealt with privilege and work product protection covering an internal corporate investigation conducted by China Medical’s Audit Committee lawyers at Paul Weiss. The court acknowledged “that the Audit Committee was ‘independent’ in some sense”— “[i]t could retain counsel, and it legitimately expected that its communications with counsel would be protected against intrusion by management.” Id. at 655. But the court held that the company’s bankruptcy changed the analysis — because depriving the bankruptcy liquidator of the privilege protection’s ownership would “thwart the statutory obligation of a trustee in bankruptcy to maximize the value of the estate by conducting investigations into a corporation’s prebankruptcy affairs.” Id. at 654. The court thus held that the company’s liquidator “now owns and can thus waive the Audit Committee’s attorney-client privilege, regardless of the Committee’s prebankruptcy independence.” Id. at 658. In contrast, the court held that the liquidator could not unilaterally waive any work product protection — because Paul Weiss either solely or jointly owned that separate protection. Id.

Constituents of a company’s board (such as an audit committee or group of independent directors) should bear in mind the possible post-bankruptcy ownership of their protected communications — remembering that the answer might be different for privileged communications and work product.