Summary:
The Western District of North Carolina has denied DBMP LLC leave to take an interlocutory appeal from Bankruptcy Judge Ashley Austin Edwards’ extensive rulings requiring production of hundreds of documents in the long-running DBMP asbestos bankruptcy.
The District Court did not decide whether Judge Edwards ultimately got the difficult attorney-client privilege and “at-issue waiver” questions right. Instead, it concluded that stopping the bankruptcy litigation yet again for an immediate appeal would not materially advance the ultimate resolution of either the adversary proceedings or the Chapter 11 case.
And after more than six years of bankruptcy litigation—and more than five years spent litigating privilege disputes—the District Court was plainly ready for the case to move forward.
As the Court put it rather directly, DBMP says that it needs clarity regarding the applicable privilege standard, but after the Bankruptcy Court's “yearslong thoughtfully executed process,” DBMP already has a clear answer:
“It just doesn't like the ruling.”
The District Court therefore denied leave to appeal.
The DBMP Privilege Dispute
DBMP's Chapter 11 followed CertainTeed's 2019 corporate restructuring—the now familiar “Texas Two-Step”—which divided the business between DBMP, which received the asbestos liabilities, and New CertainTeed. New CertainTeed simultaneously entered into an uncapped Funding Agreement obligating it to fund DBMP's asbestos liabilities and the costs of its Chapter 11 case, including a potential § 524(g) trust.
Three related adversary proceedings challenge aspects of that restructuring through claims seeking:
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substantive consolidation of DBMP and New CertainTeed;
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avoidance of allegedly fraudulent transfers; and
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damages for breach of fiduciary duty, aiding and abetting, and civil conspiracy.
Discovery eventually generated disputes over more than 4,000 documents claimed to be protected by attorney-client privilege or work product. A court-appointed discovery referee spent years reviewing those disputes, followed by Judge Edwards' own de novo, in camera review of more than 3,000 documents.
Judge Edwards ultimately found that a limited at-issue waiver had occurred, that some materials were not privileged at all, and that approximately 2,518 documents remained protected. The original order required production of 573 documents in whole or in part. After DBMP agreed to produce some documents and obtained reconsideration as to others, approximately 450 documents remained in dispute.
I previously discussed that underlying decision here:
Bankr. W.D.N.C.: Official Committee of Asbestos Personal Injury Claimants v. DBMP — Attorney-Client Privilege Issues in Bankruptcy (North Carolina Bankruptcy Expert)
The Unsettled Question of “At-Issue” Waiver
The privilege problem is genuinely difficult.
Judge Edwards recognized that the Fourth Circuit has never squarely established the test for when a litigant implicitly waives privilege by placing its state of mind “at issue.” Courts elsewhere divide principally between the broader approach associated with Hearn v. Rhay and the much narrower Third Circuit approach in Rhone-Poulenc Rorer Inc. v. Home Indemnity Co.
Rather than adopt either rule wholesale, Judge Edwards developed a more fact-specific middle ground.
A legal state-of-mind assertion may waive privilege where there is a sufficient nexus between that assertion and counsel's advice, but waiver also depends upon considerations of fairness, including how central the assertion is to the dispute and whether piercing privilege is necessary for the opposing party to rebut it.
Applying that standard, the Bankruptcy Court found limited waiver regarding the defendants' subjective states of mind concerning:
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the Funding Agreement;
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the restructuring's overall effect on asbestos claimants; and
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the inclusion of Millwork & Panel within DBMP.
But Judge Edwards rejected the much broader waiver sought by the claimants.
DBMP wanted the District Court to adopt the narrower Rhone-Poulenc approach and also challenged the Bankruptcy Court's treatment of certain drafts intended eventually to be communicated to third parties.
A Stay Pending Appeal Was One Thing. Getting the Appeal Was Another.
This ruling is particularly interesting because Judge Edwards had previously stayed her privilege order pending appellate review, recognizing the obvious problem that once privileged information is disclosed, it cannot realistically be forgotten.
I discussed that decision here:
Bankr. W.D.N.C.: DBMP Gets Stay Pending Appeal on Privilege Waiver Ruling in Texas Two-Step Litigation (North Carolina Bankruptcy Expert)
That earlier ruling was an important reminder that preserving the status quo while appellate relief is sought can sometimes be essential.
But there is a difference between obtaining a stay while asking for appellate review and establishing a right to an interlocutory appeal itself.
Under 28 U.S.C. § 158(a)(3), district courts may hear interlocutory bankruptcy appeals only with leave. Because the statute does not specify the standard, courts generally borrow from § 1292(b), asking whether:
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there is a controlling question of law;
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there is substantial ground for disagreement about that question; and
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immediate appellate review would materially advance the ultimate termination of the litigation.
All three requirements must be satisfied, and the Fourth Circuit has instructed that interlocutory appeals are to be used sparingly.
There Certainly Is a Substantial Difference of Opinion
DBMP had little difficulty with the second factor.
The District Court described the law governing at-issue waiver as “divergent, unsettled and [not] decided in the Fourth Circuit.”
Judge Edwards' own privilege opinion devoted more than forty pages to navigating the competing approaches.
Accordingly, the District Court found the substantial-difference-of-opinion requirement “obviously satisfied.”
That is significant in its own right.
North Carolina bankruptcy practitioners now have an express acknowledgment from the District Court that the governing Fourth Circuit law on implied “at-issue” waiver remains unsettled.
But Is It Really a “Controlling” Question?
That was more complicated.
DBMP characterized the issue as a pure legal question: What test governs at-issue waiver?
The claimants responded that determining the governing test is only the beginning. Someone would still have to apply that test document-by-document to hundreds of communications, and resolving the privilege question would not itself resolve the fraudulent-transfer, substantive-consolidation, or fiduciary-duty claims.
The District Court found merit on both sides.
It rejected the idea that an issue must resolve the entire case before it can be “controlling”—otherwise privilege questions could virtually never qualify for interlocutory review.
But it also rejected DBMP's suggestion that merely identifying the governing legal test was enough.
Even adoption of DBMP's preferred Rhone-Poulenc standard might not resolve the privilege dispute because the parties disagree about what Rhone-Poulenc itself requires and how it applies to these documents.
Ultimately, however, the District Court did not need to answer that question.
The Fatal Problem: An Appeal Would Not End This Case Any Faster
The third requirement doomed DBMP's request.
An interlocutory appeal must materially advance the ultimate termination of the litigation.
The District Court concluded that this one would not.
DBMP argued that resolving privilege now would improve discovery and perhaps facilitate settlement. But the Court pointed out that an appellate decision could just as readily make settlement less likely by emboldening whichever party prevailed.
And even a District Court ruling would probably not end the fight. The losing side could seek review by the Fourth Circuit and potentially the Supreme Court, particularly given the existing disagreement among other courts.
Nor had DBMP shown that the disputed documents would actually change the ultimate merits of the case.
As the District Court emphasized:
Discovery is not admissibility.
Even if DBMP must produce these communications, the Bankruptcy Court could ultimately conclude that the restructuring was lawful, that DBMP was solvent because of the Funding Agreement, or otherwise rule for DBMP without the disputed communications mattering much at all.
So after enormous expenditures of judicial and party resources, the District Court refused to insert another appellate detour:
the Bankruptcy Court and the parties have spent tremendous time and expense reaching a point where discovery can finally be completed and the merits decided.
DBMP's motion for leave to appeal was therefore DENIED.
This Comes After Reconsideration Didn't Change Much Either
DBMP had already asked Judge Edwards to reconsider the privilege decision.
That produced clarification, including recognition that findings made during earlier preliminary-injunction proceedings did not have formal preclusive effect, together with adjustments to the privilege classification of some documents.
But the basic architecture of the original ruling survived.
I discussed that opinion here:
Bankr. W.D.N.C.: Official Committee of Asbestos Personal Injury Claimants v. DBMP III — Clarification of Prior Orders and Rejection of “Preclusive Effect” Arguments, Retention of the Texas Two-Step Findings Intact (North Carolina Bankruptcy Expert)
And All of This Is Occurring Against the Larger DBMP Fight
The privilege battle is, of course, only one front in a much larger fight over DBMP's use of bankruptcy to resolve CertainTeed's asbestos liabilities.
Earlier this year, the Fourth Circuit upheld the refusal to lift the automatic stay for asbestos claimants seeking to return to state-court litigation.
That decision—and Judge King's forceful dissent—was discussed here:
4th Cir.: Herlihy v. DBMP — Fourth Circuit Upholds Stay in DBMP “Texas Two-Step” Asbestos Bankruptcy (North Carolina Bankruptcy Expert)
And the earlier District Court decision was discussed here:
W.D.N.C.: Herlihy v. DBMP — Relief from the Automatic Stay Requires Both Bad Faith and Objective Futility (North Carolina Bankruptcy Expert)
Commentary:
There is more here for ordinary bankruptcy practitioners than the sheer scale of DBMP might initially suggest.
First, an unsettled and important legal question is not enough for an interlocutory appeal.
DBMP actually established perhaps the hardest-looking part of the test: everyone agrees that Fourth Circuit law concerning at-issue waiver is unsettled.
That still did not get DBMP through the courthouse door.
For a § 158(a)(3) appeal, lawyers need to explain concretely how deciding the issue now, rather than after final judgment, will shorten or materially alter the litigation.
“Clarity would be useful” isn't enough.
Second, this decision creates an interesting companion to Judge Edwards' earlier stay-pending-appeal opinion.
The two rulings are not inconsistent.
Judge Edwards essentially said:
If an appeal occurs, disclosure should wait because privilege cannot later be restored.
The District Court has now said:
But that does not mean an immediate appeal should occur in the first place.
That distinction is useful well beyond mass-tort Chapter 11 cases.
Third, the decision is another reminder that discovery disputes—even extraordinarily important ones involving attorney-client privilege—usually do not justify stopping a bankruptcy case in its tracks.
Bankruptcy is already unusually vulnerable to procedural delay. Assets depreciate. Witnesses disappear. Debtors and creditors run out of money. And, in asbestos cases in particular, claimants literally may not live long enough to see the case conclude.
At some point, appellate perfection has to yield to actually deciding the case.
Finally, there is the District Court's wonderfully concise response to DBMP's demand for greater clarity:
DBMP already received an answer. “It just doesn't like the ruling.”
That is a useful appellate lesson in sixteen pages.
A disagreement with the Bankruptcy Court—even over an admittedly unsettled issue of law—is not itself an exceptional circumstance warranting an interlocutory appeal.
Sometimes the proper course really is to preserve the objection, finish the case, and appeal later.
To read a copy of the transcript, please see:
To read a copy of the transcript, please see:
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