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Common Interest Doctrine Protects Prepetition Negotiations

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In Leslie Controls, Inc., Bankr. Case No. 10-12199 (CSS), 2010 WL 3767805, (Bankr. D. Del. Sept. 21, 2010), the United States Bankruptcy Court for the District of Delaware (the “Court”) concluded that the “common interest doctrine” protected prepetition communications among Leslie Controls, Inc. (the “Debtor”), an ad hoc committee of asbestos plaintiffs (the “Ad Hoc Committee”) and the Debtor’s proposed future claimants’ representative (the “FCR”) from document production sought by Century Indemnity Company and Fireman’s Fund Insurance Company (collectively, the “Insurers”). The communications at issue were negotiations which occurred primarily prior to the parties reaching an agreement on the terms of a consensual plan of reorganization. The documents at the center of the privileged dispute included a memorandum prepared by the Debtor’s insurance coverage counsel providing advice with respect to the effect of the Insurers’ likely position on insurance recoveries under various bankruptcy scenarios, and related e-mails which referenced the privileged material in the memorandum.

After reaching a preliminary and necessary conclusion that the information contained within the communications at issue was in fact privileged, the Court analyzed the “common interest doctrine” and addressed the issue as to whether the Debtor had waived the privilege by sharing the information with the Ad Hoc Committee and the FCR. The Court noted that the common interest doctrine “allows attorneys representing different clients with similar legal interests to share information without having to disclose it to others.” In arriving at its conclusion that the common interest doctrine protection applied under the circumstances, the Court found that the Debtor had established 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 had not otherwise been waived.

While the Court agreed with the Insurers that the party seeking to invoke the common interest doctrine must present evidence that a legal interest is implicated, the Court did not agree that the parties’ common interest was merely a commercial interest. Instead, the Court concluded that the parties efforts in seeking to maximize insurance proceeds available to pay asbestos claims was an inherently legal question that involved an analysis of insurance documents, as well as contract, insurance and bankruptcy law.

The Court also rejected the Insurers attempt at establishing a per se rule that parties engaged in negotiations can never share a common interest. Rather, the Court found it more appropriate to measure commonality on a case by case basis. In this case the Court found that the Debtor, the Ad Hoc Committee and the FCR each desired to obtain the largest share of assets as possible and, therefore, shared a common interest to maximize the asset pool which included the insurance proceeds. The Court noted, however, that the parties working together to maximize the size of the pie is different from the parties seeking to increase their respective piece of the pie. The parties are in accord as to the former and adversaries as to the latter. In concluding that the Debtor had met its burden of establishing the applicability of the “common interest doctrine”, the Court concluded that the documents at issue sought by the Insurers were protected from discovery.

A copy of the Opinion can be found here.

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