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Judge Gross Decides that Creditor Committee’s Derivative Standing to Sue on Behalf of Debtors Does Not Entitle it to Debtors’ Attorney-Client Communications Without Showing Insolvency

By Charlene D. Davis

On May 8, 2017,  Judge Kevin Gross of the United States Bankruptcy Court for the District of Delaware (the “Court”), issued an opinion and order denying in part and granting in part  a motion by the unsecured creditors committee (the “Committee”) to compel production of documents that  Debtor Haggen, Inc., et al. (the “Debtors”) and Defendants Comvest Group Holdings, LLC et al. (the “Comvest Defendants”) withheld on the basis of attorney client and work product privilege. Official Committee of Unsecured Creditors of HH Liquidation, LLC, et al. v. Comvest Group Holdings, LLC, et al., Adv. No. 16-51204(KG) (In re HH Liquidation, LLC et al.,  Case no. 15-11874 (KG).  Noting that the decision “is not an easy one”, the Court declined to compel production of documents claimed to be protected by that attorney client privilege (without prejudice) but required production of  documents claimed to be protected by the work product privilege.

The Debtors filed voluntary petitions with the Court on September 8, 2015 (the “Petition Date”); approximately 7 months after acquiring146 supermarkets from Albertson’s.  At the time of the acquisitions, the Comvest Defendants owned an 80% interest in the Debtors.   Following the Petition Date, the U.S. Trustee appointed the Committee and on January 14 and April 29, 2016, the Committee, the Debtors and the Defendants (as hereinafter defined) entered into stipulations, approved by the Court, granting the Committee derivative standing to bring an adversary proceeding against the Defendants, but reserving rights to assert privilege.

On September 7, 2016, the Committee filed a complaint and objection to claims naming the Comvest Defendants, non-debtor affiliates of the Debtors and officers and directors of the Debtors as defendants (the “Defendants”).   In the Complaint, the Committee alleged that certain actions of the Defendants following the Albertson store acquisitions, led to the Debtors voluntary bankruptcy petitions.    The Committee’s requested production of documents; to which the Defendants and the Debtors objected, withholding production of, approximately 1900 and 1000 documents, respectively.  The objections were based on assertions of attorney client and work product privilege.   The Debtor’s privilege objections were premised on the joint representation of the Debtors and the Comvest Defendants by the  law firm of Akerman, LLP.

The Committee moved to compel production of the documents.  The Debtors and Defendants opposed the motion.   The Court denied the motion with regard to attorney-client privileged documents, concluding that the Committee was not entitled to the documents because (1) unlike a chapter 7 trustee (see Commodities Futures Trading Comm’n v. Weintraub, 471 U.S. 343 (1985) the Committee does not have fiduciary duties to the estate, even when suing derivatively on behalf of the Debtors and 2) although the Committee had established cause to invade the privilege, Third Circuit precedent (see Teleglobe Communications  v. BCE, Inc. (In re: Teleglobe Communications Corp.), 493 F3d 345 (2007)) also requires a showing that the Debtor was insolvent at the time of the privileged communications/product.  The Court observed that the Committee had failed to establish the Debtors’ insolvency at the relevant times but noted that it might do so later in the proceeding.  In granting the motion with regard to work product privileged documents, the Court concluded that the documents were not produced in anticipation of litigation.  Thus they were not shielded from production by work product privilege.

 

A copy of the Court’s opinion is available here.

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