Attorneys are entrusted with a lot of sensitive information. The attorney-client privilege exists to allow clients to speak candidly with their attorneys. However, when the same attorney represents multiple parties, the privilege may not be so absolute. In the case of In re Crescent Resources, LLC, No. 09-11507 (Bankr. W.D. Tex. 7/22/11), Bankruptcy Judge Craig Gargotta was asked to decide who could access the attorney files in a billion dollar dispute. You can find the opinion here.
What Happened
Crescent Resources was a real estate development and management organization. It was formed by Duke Energy Corporation to manage and develop approximately 300,000 acres of real estate owned by Duke. Crescent grew over the years, eventually operating about 100 projects through over 120 entities. In 2006, Duke, Crescent and several real estate investment entities entered into a series of transactions where the Crescent entities pledged their assets to secure a loan from Bank of America in the amount of $1.225 billion, much of which was upstreamed to Duke.
By June 2009, the Crescent entities had filed for chapter 11 in Austin, Texas. The Court confirmed a plan which created a litigation trust. The litigation trust sued Duke Energy Corporation, et al alleging that the 2006 transaction rendered the debtors insolvent. Shortly after filing suit, Dan Bensimon, the litigation trustee, filed a motion to compel a firm named Robinson, Bradshaw & Hinton, P.A. (RBH) to turn over its files with regard to work done for the debtors. RBH responded that it had concerns about Duke's rights to keep the files confidential. After five months of procedural wrangling, the Court conducted a hearing and took the matter under advisement.
The files at issue fell into three categories: 1) pre-2006 files from the period when Crescent was a subsidiary of Duke; 2) files related to the 2006 transaction (known as Project Galaxy); and 3) files subsequent to 2006 when Crescent was no longer a Duke subsidiary.
On July 22, 2011, the Court delivered its decision. Based on stipulations, it was largely clear that Crescent was a joint client with Duke for the pre-2006 files and was the sole client for the post 2006 files. That left the Project Galaxy files. The Court ruled that the Trust was a joint client and thus entitled to use the files in its litigation with Duke.
Turnover/Burden of Proof
Section 542 has two relevant subsections relating to turnover. Sec. 542(a) provides that a person in possession of property which the trustee may use, sell or lease shall turn over such property to the trustee. On the other hand, Sec. 542(e) provides that "(s)ubject to any applicable privilege . . . an attorney, accountant, or other person that holds recorded information . . . related to the debtor's property or financial affairs" can be ordered to "turn over or disclose such recorded information to the trustee."
The Court found that the Trust had the initial burden to establish that the files "related to the debtor's property or financial affairs." At that point, the burden would shift to Duke to show that there was an attorney-client privilege between Duke and the law firm. The Court also rejected arguments from Duke that the Trust's burden had to be met by clear and convincing evidence. Instead, it found that the preponderance standard applied.
Project Galaxy
Having established this framework, the Court, following the lead of the parties, apparently assumed that the Trust had met its burden to show that the files related to the debtor's property or financial affairs. As a result, the Court spent the rest of its opinion discussing whether the Trust was "a joint or sole client, or no client at all, of RBH with respect to the Project Galaxy files." Opinion, p. 13.
Duke made an interesting argument. It suggested that RBH represented Crescent prior to Project Galaxy and after Project Galaxy, but that Crescent was not represented at all during Project Galaxy.
The Court had to analyze North Carolina law to determine whether Crescent had an attorney client relationship with RBH. North Carolina considers the question to be primarily one of fact and does not rely on formalities.
The Trust was able to bring forward some pretty good evidence. In its application to be employed in the Crescent bankruptcy case, RBH stated that it had represented Crescent since 1986. It also presented an Opinion letter in which RBH stated that it had represented Crescent and certain of its subsidiaries in connection with the execution and delivery of a credit agreement. Finally, several of the RBH lawyers stated that they had represented Crescent in $1.5 billion credit transaction.
Duke argued that it retained RBH to represent it in the transaction and that everyone but Crescent was represented by counsel. Duke presented evidence such as the engagement letter and declarations from RBH lawyers. However, the Engagement Letter stated that the firm was engaged to represent Duke Energy (or any of its subsidiaries or affiliates)." All invoices were submitted to and paid by Duke. Furthermore, RBH said that it took its direction from Duke and not Crescent and that no one at Crescent ever said that they thought they were represented by RBH.
The Court weighed several factors under North Carolina law, finding that:
1. Crescent was not represented by other counsel;
2. Crescent had been represented by RBH in the past;
3. RBH had access to Crescent's confidential information;
4. The services were billed to Duke, not Crescent;
5. RBH represented Crescent after the transaction;
6. There was no withdrawal of representation.
Weighing these factors, the Court found that RBH did, in fact, represent Crescent during the Galaxy Project transaction.
The Court relied on North Carolina law to find that "where two or more persons employ the same attorney to act for them in some business transaction, their communications to him are not ordinarily privileged inter sese." The Court also relied upon its own decision in In re Bounds, 443 B.R. 729 (Bankr. W.D. Tex. 2010), a case in which I represented the debtor subsequent to the events in the opinion.
In the end, the Court found that Crescent was a joint client and could use the files in its litigation with Duke but not otherwise.
The Court's order has been appealed and is subject to a stay pending appeal. As a result, it may be a while before the Trustee finds out what, if anything, is contained in the law firm's files. However, given the effort that Duke is taking to keep the files confidential, it may well be interesting.
I think the take away from this case is that if you are doing a billion dollar deal, make sure that everyone has their own counsel. It will be more expensive and may be more difficult, but at least your privileged will be protected.
Disclosure: My firm has engaged Dan Bensimon as a consultant and expert in several cases. Indeed, I would go so far as to say that he is a friend of the firm and an all around good guy. However, we do not represent him in the Crescent case and this post is based solely on my reading of Judge Gargotta's 39-page opinion. If you want to know as much as I do, read the opinion for yourself.
What Happened
Crescent Resources was a real estate development and management organization. It was formed by Duke Energy Corporation to manage and develop approximately 300,000 acres of real estate owned by Duke. Crescent grew over the years, eventually operating about 100 projects through over 120 entities. In 2006, Duke, Crescent and several real estate investment entities entered into a series of transactions where the Crescent entities pledged their assets to secure a loan from Bank of America in the amount of $1.225 billion, much of which was upstreamed to Duke.
By June 2009, the Crescent entities had filed for chapter 11 in Austin, Texas. The Court confirmed a plan which created a litigation trust. The litigation trust sued Duke Energy Corporation, et al alleging that the 2006 transaction rendered the debtors insolvent. Shortly after filing suit, Dan Bensimon, the litigation trustee, filed a motion to compel a firm named Robinson, Bradshaw & Hinton, P.A. (RBH) to turn over its files with regard to work done for the debtors. RBH responded that it had concerns about Duke's rights to keep the files confidential. After five months of procedural wrangling, the Court conducted a hearing and took the matter under advisement.
The files at issue fell into three categories: 1) pre-2006 files from the period when Crescent was a subsidiary of Duke; 2) files related to the 2006 transaction (known as Project Galaxy); and 3) files subsequent to 2006 when Crescent was no longer a Duke subsidiary.
On July 22, 2011, the Court delivered its decision. Based on stipulations, it was largely clear that Crescent was a joint client with Duke for the pre-2006 files and was the sole client for the post 2006 files. That left the Project Galaxy files. The Court ruled that the Trust was a joint client and thus entitled to use the files in its litigation with Duke.
Turnover/Burden of Proof
Section 542 has two relevant subsections relating to turnover. Sec. 542(a) provides that a person in possession of property which the trustee may use, sell or lease shall turn over such property to the trustee. On the other hand, Sec. 542(e) provides that "(s)ubject to any applicable privilege . . . an attorney, accountant, or other person that holds recorded information . . . related to the debtor's property or financial affairs" can be ordered to "turn over or disclose such recorded information to the trustee."
The Court found that the Trust had the initial burden to establish that the files "related to the debtor's property or financial affairs." At that point, the burden would shift to Duke to show that there was an attorney-client privilege between Duke and the law firm. The Court also rejected arguments from Duke that the Trust's burden had to be met by clear and convincing evidence. Instead, it found that the preponderance standard applied.
Project Galaxy
Having established this framework, the Court, following the lead of the parties, apparently assumed that the Trust had met its burden to show that the files related to the debtor's property or financial affairs. As a result, the Court spent the rest of its opinion discussing whether the Trust was "a joint or sole client, or no client at all, of RBH with respect to the Project Galaxy files." Opinion, p. 13.
Duke made an interesting argument. It suggested that RBH represented Crescent prior to Project Galaxy and after Project Galaxy, but that Crescent was not represented at all during Project Galaxy.
The Trust argues that RBH represented Crescent Resources, while Duke would have the Court believe that RBH jointly represented Crescent Resources before the 2006 Duke Transaction and after the 2006 Duke Transaction, but not during the 2006 Duke Transaction. Duke further alleges that Crescent Resources was not represented by counsel at all during the 2006 Duke Transaction.Opinion, p. 14.
The Court had to analyze North Carolina law to determine whether Crescent had an attorney client relationship with RBH. North Carolina considers the question to be primarily one of fact and does not rely on formalities.
The Trust was able to bring forward some pretty good evidence. In its application to be employed in the Crescent bankruptcy case, RBH stated that it had represented Crescent since 1986. It also presented an Opinion letter in which RBH stated that it had represented Crescent and certain of its subsidiaries in connection with the execution and delivery of a credit agreement. Finally, several of the RBH lawyers stated that they had represented Crescent in $1.5 billion credit transaction.
Duke argued that it retained RBH to represent it in the transaction and that everyone but Crescent was represented by counsel. Duke presented evidence such as the engagement letter and declarations from RBH lawyers. However, the Engagement Letter stated that the firm was engaged to represent Duke Energy (or any of its subsidiaries or affiliates)." All invoices were submitted to and paid by Duke. Furthermore, RBH said that it took its direction from Duke and not Crescent and that no one at Crescent ever said that they thought they were represented by RBH.
The Court weighed several factors under North Carolina law, finding that:
1. Crescent was not represented by other counsel;
2. Crescent had been represented by RBH in the past;
3. RBH had access to Crescent's confidential information;
4. The services were billed to Duke, not Crescent;
5. RBH represented Crescent after the transaction;
6. There was no withdrawal of representation.
Weighing these factors, the Court found that RBH did, in fact, represent Crescent during the Galaxy Project transaction.
The Court relied on North Carolina law to find that "where two or more persons employ the same attorney to act for them in some business transaction, their communications to him are not ordinarily privileged inter sese." The Court also relied upon its own decision in In re Bounds, 443 B.R. 729 (Bankr. W.D. Tex. 2010), a case in which I represented the debtor subsequent to the events in the opinion.
In the end, the Court found that Crescent was a joint client and could use the files in its litigation with Duke but not otherwise.
The Court's order has been appealed and is subject to a stay pending appeal. As a result, it may be a while before the Trustee finds out what, if anything, is contained in the law firm's files. However, given the effort that Duke is taking to keep the files confidential, it may well be interesting.
I think the take away from this case is that if you are doing a billion dollar deal, make sure that everyone has their own counsel. It will be more expensive and may be more difficult, but at least your privileged will be protected.
Disclosure: My firm has engaged Dan Bensimon as a consultant and expert in several cases. Indeed, I would go so far as to say that he is a friend of the firm and an all around good guy. However, we do not represent him in the Crescent case and this post is based solely on my reading of Judge Gargotta's 39-page opinion. If you want to know as much as I do, read the opinion for yourself.
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