Bankruptcy Litigation Committee

ABI Committee News

 

The Attorney-Client Privilege Within Corporate Families: Learning from Teleglobe

In Teleglobe USA Inc. v. BCE, Inc. (In re Teleglobe Comm’ns Corp.), 493 F.3d 345 (3d Cir. 2007), the Third Circuit addressed in detail Delaware law concerning the attorney-client privilege in the context of affiliated corporations. The underlying litigation involved a familiar situation—one where a dispute arose between once-affiliated corporations, thus putting their pre-dispute dealings under a microscope and opening up the possibility of discovery of predispute communications with counsel. According to the Third Circuit, the privilege is not lost merely because the affiliates use the same counsel on unrelated matters. Rather, the adverse litigation exception must be analyzed in light of the entities involved in the joint representation and the scope of that representation. The Teleglobe decision addresses the discoverability of documents in this context, and in so doing highlights important considerations for counsel involved with advising entities within a corporate family.

The Teleglobe Dispute: A Parent’s Decision to Cut off Its Subsidiary

Teleglobe involved litigation concerning the decision of a parent corporation, BCE, Inc. (BCE) to stop funding the operations of one of its subsidiaries, Teleglobe. BCE’s decision led to the bankruptcy filings of Teleglobe and its wholly owned subsidiaries in Canada under the Arrangement Act, and by the subsidiaries (but not Teleglobe itself) in Delaware. In the Delaware bankruptcy proceedings, Teleglobe’s subsidiaries (the debtors) brought an adversary proceeding against BCE on a variety of legal theories, all of which were based upon BCE’s decision to stop funding the operations of the debtors’ parent, Teleglobe.

The Discovery Dispute

The discovery dispute began during the Rule 2004 investigation by the debtors and the creditors’ committee concerning the possibility of suing BCE over the failure of Teleglobe and the debtors. In response to a motion to compel the production of documents related to BCE’s reassessment of its plans for Teleglobe, BCE contended that “the documents were privileged because BCE’s attorneys consulted with attorneys, officers, or employees of Teleglobe, Inc. or its subsidiaries to discuss or provide legal advice in matters where BCE and Teleglobe, Inc. (or its subsidiaries) shared a common legal interest.” Id. at 354. BCE argued that the privilege would continue to apply until the debtors sued BCE.

At a subsequent bankruptcy court hearing, but before the suit was filed, BCE agreed to produce the common interest documents to the debtors. The bankruptcy court entered an order reflecting that agreement.

After the debtors filed suit, the district court withdrew the reference. When issues again arose concerning the scope of BCE’s document production, the district court referred the discovery dispute to a special master who, after conducting an in camera review of documents on BCE’s privilege log, found that the documents “revealed a broad legal representation of both BCE and Teleglobe by BCE’s in-house attorneys relating to Teleglobe’s restructuring alternatives.’” Id. at 357. The special master further found that all the logged documents had been disclosed to BCE’s in-house counsel, which rendered them discoverable by the debtors by virtue of the joint representation of BCE and Teleglobe. The district court affirmed the special master’s decision, and BCE appealed.

Privilege in the Multi-Party Context

The attorney-client privilege protects from disclosure confidential communications between attorneys and clients that are made for the purpose of obtaining or providing legal assistance. This facially simple concept becomes complex in practice, even in the relatively straightforward situation where a single client or entity is involved.  Where communications are had among or shared with multiple persons, the privilege determination becomes more difficult due in part to the disclosure rule, which provides that a client waives the confidentiality of an otherwise privileged communication by sharing it with a third party. Much of the Teleglobe decision is dedicated to a detailed discussion of the principles applicable to the sharing of otherwise privileged information.

The Co-client Privilege

When two or more persons jointly consult an attorney concerning the same matter, the persons are considered to be co-clients (also referred to as joint clients). A co-client relationship arises based on the intent of the parties, and the parties’ intentions and expectations determine the scope of the relationship. Any client in a co-client relationship may waive the attorney-client privilege concerning its own communications; however, a party may not waive other co-clients’ communications without the consent of the other co-clients.

Where former co-clients become adverse in litigation, communications made during and within the scope of the joint representation become discoverable by the former co-clients but remain privileged with respect to third parties. The Third Circuit considered, but ultimately rejected, BCE’s argument that this so-called adverse litigation exception should not apply in the parent-subsidiary context.

The Third Circuit also addressed the impact of continued joint representation even after the co-clients have become adverse. In such a situation, the attorney representing the co-clients should end the joint representation. When the attorney fails to do so, and instead continues to represent the co-clients with divergent interests, communications with the attorney are generally considered to retain their privileged status (under the so-called Eureka principle, Eureka Inv. Corp. v. Chicago Title Ins. Co., 743 F. 2d 932 (D.C. Cir. 1984)) notwithstanding the attorney’s ethical issues related to the continued representation.

The Common-Interest Privilege

In contrast to the co-client privilege, which arises when common counsel represents multiple clients, the common-interest privilege generally protects communications among counsel for different clients with similar legal interests. Because the privilege only applies when multiple clients are each represented by their own counsel, the Teleglobe court emphasized that it did not apply to the communications at issue, which were held between multiple entities but with the same counsel.

The Basis for Privilege between Affiliated Corporations

Against the backdrop of these general principles, the Third Circuit analyzed the co-client and common-interest privileges in the context of affiliated corporations. It noted, as a threshold matter, that “courts almost universally hold that intra-group information sharing does not implicate the disclosure rule. This result is unquestionably correct.” Teleglobe, 493 F. 3d at 369. The court addressed the three different rationales adopted by other courts for maintaining privilege notwithstanding the sharing of communications within a corporate group—the corporate family as a single client, the common-interest privilege and the co-client privilege.

In addressing the notion that the corporate family constitutes a single client, the court noted that while the argument has superficial appeal, doing so would fail to respect the fundamental principle of the separate nature of corporations under Delaware law. The court therefore held that “absent some compelling reason to disregard entity separateness, in the typical case courts should treat the various members of the corporate group as the separate corporations they are and not as one client.” Id. at 372.

The court also rejected the common-interest privilege because, according to the court, it only applies when separate counsel represents multiple parties.

The Third Circuit thus concluded that the co-client privilege was the only viable basis for maintaining the privilege. The court reasoned that only that privilege gives effect to the separate nature of the entities while recognizing the reality that in-house counsel represents each of them.

The Decision: Insufficient Factual Findings to Require Disclosure

The debtors argued that issue waiver, judicial admission, judicial estoppel and implied prospective waiver of the privilege supported the district court’s order. The Third Circuit disagreed.

Regarding issue waiver, the court noted that BCE had argued before the special master that its in-house lawyers had never represented the debtors (as distinguished from Teleglobe) on matters related to Teleglobe’s restructuring. The court also refused to conclude that BCE judicially admitted the existence of a joint representation that included the debtors because BCE’s statements in that regard “were never unequivocal.” Id. at 377. Similarly, judicial estoppel did not apply because BCE never conceded that there was in fact a joint-client relationship between BCE and the debtors. Instead, BCE had said only that there might have been such a representation. Finally, the court declined to hold that BCE’s agreement to produce all common-interest documents waived the privilege. Because privilege waivers are narrowly construed, the court held that BCE had only agreed to produce what BCE itself understood to be common-interest documents rather than the broad category as determined by the special master.

The court concluded that production of the otherwise privileged documents would require finding that BCE was a co-client of the debtors and that the documents sought fall within the scope of the representation. Because the special master made no such findings, the court reversed and remanded for further proceedings on the privilege issues.

Lessons Learned: The Teachings of Teleglobe

Teleglobe provides helpful guidance on attorney-client privilege issues in the corporate family context. As Teleglobe instructs, “it is important for in-house counsel in the first instance to be clear about the scope of parent-subsidiary joint representations.” Id. at 383. Narrowly defining the scope and parties to any joint representations and obtaining separate counsel on matters in which the parent and subsidiaries are potentially adverse will lessen the risk that important communications can be discovered and used against the parent. Litigators should also be mindful of the importance of the corporate form when assessing privilege issues, as the failure to do so could result in an inadvertent waiver of the privilege.