When the Reorganized Debtor and a Liquidating Trust Share the Privilege
By Michael Enright
What happens to the debtor’s attorney/client privilege when it confirms a reorganization plan that restructures its affairs and assigns some of its causes of action to a liquidating trust, then subsequently forfeits its status as a Delaware corporation? In In re KiOR, Inc., Case No. 14-12514 (Bankr. D. Del. Oct. 19, 2020), the court analyzed these privilege and related issues within a complex factual context. The debtor’s corporate history took a number of turns post-confirmation and eventually its corporate status was forfeited by the state of Delaware. Although the opposing litigants argued that the debtor could no longer have the benefit of an attorney/client privilege due to the forfeiture, the court held that the subsequent reinstatement of the corporation’s status, as permitted by applicable law, allowed the corporation to maintain whatever privilege to which it was entitled notwithstanding the forfeiture. The court also carefully reviewed the language of the plan and the proceedings that led to confirmation, in order to construe the treatment of the privilege as intended by the parties and the court, and concluded that a shared privilege was intended between the reorganized debtor and the liquidating trust. Finally, the court held that in the case of such a shared privilege, the consent of both parties to the shared privilege was needed to effectuate a waiver of the privilege, so each of the joint privilege holders effectively held veto power over a waiver. Anyone considering drafting language in a plan and a liquidating trust that allocates the respective parties’ rights regarding the debtor’s attorney/client privilege post-confirmation might want to start by reading through this decision and considering carefully the prospect for unexpected developments among the parties going forward.