November 02, 2020

MONTH-IN-BRIEF: Bankruptcy & Finance

Janet M. Nadile, Taryn Darling

Bankruptcy Law

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.

Janet M. Nadile

Counsel; Simpson, Thacher & Bartlett LLP

Janet M. Nadile is Counsel at Simpson, Thacher & Bartlett LLP.  Her practice focuses on a broad array of commercial law with an emphasis on issues regarding Articles 8 and 9 of the Uniform Commercial Code.  She advises lenders and borrowers on all aspects of drafting and negotiating collateral security documents in a wide variety of secured transactions, including credit facilities, asset based lending, secured bond transactions, project finance and funds finance.  She also advises on all matters involving collateral subject to the UCC and other statutes, frequently for the technology, media, telecommunications, automotive, healthcare and natural resources industries.  Janet created and conducts the Firm-wide CLE seminars on various aspects of secured lending.

Taryn Darling

Board Member, William H. Dwyer Inns of Court

Taryn began her career as a bankruptcy lawyer almost ten years ago. Her practice includes reorganization, insolvency, receivership, work-outs, and bankruptcy and all related litigation. Taryn has litigated at the trial level and appellate level on behalf of her clients in a number of adversary proceedings and in consumer protection litigation. Taryn’s clients include individuals, business owners, and closely held corporations and businesses. Her breadth of experience in the area of bankruptcy and insolvency enables her to take a preventive approach when clients come to her at the outset of a problem. Taryn develops creative solutions to mitigate the impact or consequences when it becomes clear that a bankruptcy or receivership is the best course of action.