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Delaware Bankruptcy Law Update: In re Leslie Controls, Inc.

September 24, 2010

Delaware Bankruptcy Court holds that the “common interest doctrine” protects privileged communications that the Debtor shared with pre-petition Ad Hoc Committee.

Earlier this week, in In re Leslie Controls, Inc., Case No. 10-12199 (CSS) (Bankr. D. Del. Sept. 21, 2010), the United States Bankruptcy Court for the District of Delaware issued an opinion confirming that the “common interest doctrine” protected from production in subsequent litigation privileged communications between the Debtor and its counsel that were shared pre-petition with an ad hoc committee of asbestos plaintiffs (the “Ad Hoc Committee”) and the Debtor’s proposed future claimants’ representative (the “FCR”).

The primary communication at issue was a memorandum prepared by the Debtor’s insurance counsel providing advice on potential insurance recoveries under various bankruptcy scenarios. Other documents at issue included emails deriving information from the memorandum. The privileged communications were shared pre-petition with the Ad Hoc Committee and the FCR in the hopes of developing a consensual plan of reorganization. The insurance companies (“Insurers”) moved to compel the Debtor to produce the communications, arguing that the privilege was waived when the documents were shared with the Ad Hoc Committee and the FCR. In response, the Debtor invoked the protection of the common interest doctrine.

The common interest doctrine allows attorneys representing different clients with similar legal interests to share otherwise privileged communications without waiving the privilege. “The doctrine is only applicable if the underlying privilege has been established. The party invoking the protection of the ‘common interest doctrine’ must establish: (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 has not otherwise been waived.” Opn. at 2.

The Insurers argued that the “common interest doctrine” should not apply because the common interest shared by the Debtor and the Ad Hoc Committee and FCR, if any, was a commercial interest—maximizing insurance coverage—and not a legal interest. The Court disagreed, holding that this was a legal question and therefore the parties had a common legal interest because the communications involved an analysis of the insurance documents, contracts, and insurance and bankruptcy law, and required the involvement of the bankruptcy court. The Court also disagreed with the Insurers’ argument that the Debtor, the Ad Hoc Committee and the FCR were adverse to one another with respect to the communications. Rather, they shared a common interest—to maximize insurance proceeds under various bankruptcy scenarios. While they were adverse on the issue of allocation of those proceeds, that is a separate issue: the “size of the pie and the size of the pieces are two separate questions.” Opn. at 10. The information contained in the communications and shared pre-petition with the Ad Hoc Committee and the FCR directly related to a matter of common interest—the size of the asset pool—and therefore was protected. The fact that the parties were adverse on other issues did not eviscerate application of the common interest doctrine.

The Leslie Controls opinion provides much-needed guidance in confirming that privileged communications that a debtor shares with a committee may remain privileged under the common interest doctrine if the remaining factors of the common interest test are met. It did so despite the absence of a formal or written common interest agreement. While Leslie Controls concerned a pre-petition Ad Hoc Committee, debtors frequently share communications with official committees post-petition—sometimes (but not always) after entering into a common interest agreement, a non-disclosure agreement, or both. Though many attorneys have assumed that the common interest doctrine would attach to such communications, often debtors have shared their privileged communications with some trepidation given the paucity of case law on the subject. Because there appears to be little, if any, reason to provide less protection when documents are shared post-petition with an official committee, the Leslie Controls opinion should provide some comfort to debtors who determine to share privileged communications with an official committee to further their common legal interests.