Summary:
Three venture capital firms (“the Movants”) provided secured debt financing to Taproot and owned a controlling interest in Taproot. In December of 2009, Taproot entered into a contract to sell its assets to Neusoft, with The Hina Group (“THG”) acting as a broker. In May 2010, THG brought suit against Taproot and the Movants, seeking to recover the unpaid broker fees. Taproot was represented by both Wyrick Robbins and Sheppard Mullin and the Movants were represented by DLA Piper. The lawsuit was dismissed as to the Movants for lack of personal jurisdiction, but remained active until stayed by the voluntary Chapter 7 bankruptcy filed by Taproot on July 7, 2011.
The Chapter 7 Trustee then alleged that the movants caused Taproot to enter a sale of assets transaction and transferred the proceeds to themselves at the expense of the unsecured creditors. The Trustee filed a motion under seal seeking approval of a joint prosecution agreement in which THG agreed to finance and manage the investigation and prosecution of potential claims against the movants and to employ THG’s attorney as the trustee’s special counsel. Following approval of these motions, the Trustee requested that Wyrick Robbins and Shepard Mullin provide all files and records relating to Taproot. The Movants objected to production of the requested material related to the THG litigation, claiming that the sought materials were protected by the joint defense privilege.
11 U.S.C. § 542(e) provides that “[s]ubject to any applicable privilege, after notice and a hearing, the court may order an attorney, accountant, or other person that holds recorded information . . . relating to the debtor’s property or financial affairs, to turn over or disclose such recorded information to the trustee.” Because the communications at issue took place in defense of the THG lawsuit in California, the court looked there for the applicable standard. California does not recognize privileges except as provided by statute and has rejected the idea that the common interest doctrine is an extension of the attorney client privilege, instead characterizing the “disclosure in confidence of a communication that is protected by [attorney-client privilege] . . . when disclosure is reasonably necessary for the accomplishment of the purpose for which the lawyer . . . was consulted, is not waiver of the privilege.” Cal. Evid. Code § 912(d). The parties involved must reasonably expect that the communication exchanged will remain confidential and the disclosure must also be reasonably necessary for the purpose for which the lawyer was consulted. The statutory joint client privilege does not apply in this case, however, since Taproot and the Movants were not joint clients, instead each having separate legal counsel. Further, even if Taproot and the Movants had been joint clients, section 962 of the California Evidence Code precludes either party from claiming a privilege in civil litigation between the joint clients. Accordingly, the Trustee was allowed access to the documents, subject to in camera review by the Bankruptcy Court prior to disclosure to special counsel for the Trustee.
For a copy of the opinion, please see:
Taproot Systems, Inc.- Joint Client Privilege.pdf
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