KEVIN J. CAREY, Bankruptcy Judge.
Theseus Strategy Group LLC, as trustee (the "Liquidation Trustee") of the Old PSG Wind Down Liquidation Trust (the "Trust") filed a motion pursuant to Bankruptcy Code § 542 (the "Motion") for entry of an order: (i) compelling Richards Kibbe & Orbe LLP ("RKO") and AlixPartners, LLP ("AlixPartners") to turn over certain documents, records, and information related to the investigation conducted by RKO and Alix Partners on behalf of the Debtors' former audit committee (the "Audit Committee"); and (ii) finding that all rights, titles, and interests in any privilege or immunity applicable to the documents, records, and information (collectively, the "Privileges") that remain in effect are controlled exclusively by the Liquidation Trustee.
For the reasons set forth herein, the Motion will be granted, in part, and denied, in part.
The relevant facts generally are not in dispute.
On August 9, 2016, the Audit Committee for Performance Sports Group Ltd engaged RKO as independent counsel in connection with an internal investigation relating to certain issues raised by the Debtors' external auditor, KPMG LLP ("KPMG"), concerning whether the Debtors' senior financial management could be relied upon with respect to financial reporting and certifications (the "Investigation").
In connection with the Investigation, RKO and AlixPartners (i) collected approximately 4.5 million unique documents; (ii) reviewed approximately 122,000 unique documents; (iii) collected approximately 6.6 terabytes of data; (iv) conducted document collection interviews of at least nine former employees (including the president, CFO, controller, finance director, and internal audit manager); (v) conducted live witness interviews of at least five former employees (including CFO, controller, finance director, and internal audit manager); (vi) performed various analytics (including general ledger analytics, transaction sampling, and testing); and (vii) engaged in regular communication with the Audit Committee related to the investigation (collectively, the "Investigation Records").
On October 31, 2016, the Debtors filed voluntary petitions for relief under chapter 11 of the Bankruptcy Code. Each of the Debtors also filed for protection from their creditors under Canada's Companies' Creditors Arrangement Act ("CCAA") in the Ontario Superior Court of Justice (Commercial List). According to the Debtors, a significant cause of the bankruptcy filing was their inability to file timely the fiscal year 2016 annual report and audited financial statements, which ultimately resulted in a default under the Debtors' secured debt facilities.
After approximately seven months of conducting the Investigation, in March 2017, RKO and AlixPartners made a presentation to the Audit Committee and the Securities Exchange Commission (the "SEC"). The Debtors paid approximately $6.3 million to RKO and AlixPartners for work performed in connection with the Investigation.
On December 20, 2017, this Court entered its Findings of Fact, Conclusions of Law, and Order Confirming First Amended Joint Chapter 11 Plan of Liquidation of Old BPSUSH Inc. and Its Affiliated Debtors (D.I. 1566) (the "Confirmation Order"), confirmed the First Amended Joint Chapter 11 Plan of Liquidation of Old BPSUSH Inc. and Its Affiliated Debtors (D.I. 1473) (the "Plan"), and approved the formation of the Trust and the Old PSG Wind Down Liquidation Trust Agreement (D.I. 1532) (the "Liquidation Trust Agreement").
On December 21, 2017 (the "Effective Date"), the Trust was established and all of the Debtors' assets (including the Debtors'"Retained Causes of Action") were vested jointly in the Reorganized Debtors and the Liquidation Trust.
The Plan defined the "Retained Causes of Action" to include all of the Debtors' causes of action as of the Effective Date of the Plan, including, but not limited to, "any and all causes of action against any party relating to or arising from the Debtors' failure to file their Annual Report for the fiscal year ended May 31, 2016 or alleged irregularities in the Debtors' sales practices."
After the Effective Date, the Liquidation Trustee requested access to RKO/AlixPartners' Investigation Records. RKO claims it has provided the Liquidation Trustee with "all non-privileged factual information" requested by the Liquidation Trustee, and that the remaining materials sought by the Trustee are subject to the work product privilege.
The Liquidation Trustee argues that the Privileges automatically vested jointly in the Reorganized Debtors and the Liquidation Trust on the Effective Date, and the Liquidation Trustee, in its capacity as Litigation Representative, was vested with exclusive powers and authority to assert or waive any such Privileges.
The Liquidating Trustee argues that RKO should turnover the Investigation Records pursuant to Bankruptcy Code § 542(e), which 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, including books, documents, records, and papers, relating to the debtor's property or financial affairs, to turn over or disclose such recorded information to the trustee."
Bankruptcy Code § 1123(b)(3) provides that a plan may provide for "(A) the settlement or adjustment of any claim or interest belonging to the debtor or to the estate; or (B) the retention and enforcement by the debtor, by the trustee or by a representative of the estate appointed for such purpose, of any such claim or interest."
When, as in this case, section 542 claims are expressly preserved in a confirmed plan, such claims may be pursued post-confirmation by the estate representative appointed for such purpose.
RKO asserts that it has cooperated as fully as possible with the Liquidation Trustee's turnover request by providing the Liquidation Trustee with all of the non-privileged factual information that RKO and AlixPartners uncovered in their investigation on behalf of the Audit Committee. The Liquidation Trustee, however, claims that confirmation of the Plan vested him with the authority to control all Privileges of the Audit Committee and, therefore, he asks that the entire Investigation Record — including privileged documents — be turned over. The transcript of the confirmation hearing shows that the parties discussed this issue as follows:
The parties left this issue open for another day, and it appears that day has arrived.
In Commodity Futures Trading Commission v. Weintraub, the United States Supreme Court held that the "trustee of a corporation in bankruptcy has the power to waive the corporation's attorney-client privilege with respect to prebankruptcy communications."
The Weintraub Court also noted (and the parties agreed) that "when control of a corporation passes to new management, the authority to assert and waive the corporation's attorney-client privilege passes as well." Once a bankruptcy case is filed, "[t]he actor whose duties most closely resemble those of management should control the privilege in bankruptcy, unless such a result interferes with policies underlying the bankruptcy laws."
RKO distinguishes the present situation — involving an independent Audit Committee — from the facts in Weintraub. RKO notes that the Debtors' board of directors granted certain powers to the Audit Committee, including the authority to engage independent counsel, and, therefore, asserts that the Debtor, PSG, was never RKO's client. RKO relies on BCE West, L.P., a decision by the United States District Court for the Southern District of New York (the "SDNY Court"), which observed that "[i]t is counterintuitive to think that while the Board permitted the Special Committee to retain its own counsel, the Special Committee would not have the benefit of the attorney-client privilege inherent in that relationship or that the Board of Directors or management, instead of the Special Committee, would have control of such privilege."
The Liquidation Trustee, however, argues that a 2015 decision by the SDNY Court, considering the same issue, declined to follow BCE West. In China Medical, the bankruptcy court recognized a Cayman Islands liquidation proceeding as a foreign main proceeding pursuant to chapter 15 of the Bankruptcy Code.
The China Medical Court noted that Weintraub did not squarely address this issue, but determined that many considerations in Weintraub apply. The court disagreed that an independent audit committee's status was analogous to that of an individual, deciding, instead, that the committee was established by the debtor's board of directors "and, thus, [was] a critical component of [the debtor's] management infrastructure."
I agree with the China Medical Court's reasoning that it is appropriate to extend the Supreme Court's analysis in Weintraub and recognize that the trustee appointed as the representative of a corporate debtor controls the privileges belonging to the independent committee established by the corporate debtor. Therefore, in the present case, I conclude that upon confirmation, the Plan transferred control of the former Audit Committee's Privileges to the Liquidation Trustee.
Deciding that the Liquidation Trustee controls the Audit Committee's Privileges, however, does not fully resolve this matter. RKO asserts that it has not turned over Investigation Records that are subject to protection under the work product doctrine, not the attorney-client privilege. The China Medical Court decided that counsel could assert the work product doctrine, and the liquidator could not "waive the protection unilaterally."
The work product doctrine is governed by Fed. R. Civ. P. 26(b)(3) and `shelters the mental processes of the attorney, providing a privileged area within which he can analyze and prepare his client's case.'"
"There is no question that both the client and the attorney have an interest in work-product material, . . . [t]hus as a general rule, even if the client does not invoke work-product protection, the attorney may do so."
The Supreme Court described the essential nature of the work product doctrine, in part, as follows: "[i]n performing his various duties, it is essential that a lawyer work with a certain degree of privacy, free from unnecessary intrusion by opposing parties and their counsel."
The Liquidation Trustee asserts that, for the same reasons he now controls the Audit Committee Privileges, he has stepped into the shoes of RKO's former client, and RKO cannot assert the work product doctrine against him. I agree that — consistent with the reasoning stated above based on Weintraub and China Medical, including discussion about the aligned goals of the Audit Committee and the Liquidation Trustee, as well as the policies underlying the Bankruptcy Code — upon confirmation, the Liquidation Trustee now has stepped into the shoes of the Audit Committee as RKO's former client.
What remains, then, is to determine whether RKO must turn over all of the Investigation Record to the Litigation Trustee. RKO relies upon Sage Realty Corp. to assert that it may withhold items that are "firm documents intended for internal law office review and use."
The Court of Chancery of Delaware has observed that there is a split in authority regarding an attorney's duty to release files to a client or former client.
The minority of jurisdictions follow the "end product" approach, which "distinguishes between the lawyer's external work product, which the client has a right to obtain, and the lawyer's internal work product, which the client does not have any right to receive."
The Delaware Court of Chancery determined that the "cases applying the entire-file approach are more persuasive and consistent with other aspects of Delaware law governing the attorney-client relationship."
In the Objection to the Liquidation Trustee's Motion, RKO asserted that the following Investigation Records were privileged and withheld: (i) attorney notes of employee interviews, (ii) internal analytics or work papers by AlixPartners, and (iii) communications/emails with individual Audit Committee members. After the first hearing on the Motion, at the Court's direction, the parties met and exchanged information about the employee interviews.
In accordance with TradingScreen and Sage Realty, I conclude that RKO must produce the entirety of the Investigation Records to the Litigation Trustee, except for those items that are firm documents intended for internal law office review and use. Only the documents characterized as counsel's mental impressions fall within that category. The draft factual memoranda and draft legal memoranda must be turned over as part of the entire file, even if those documents were circulated only within the firm. Moreover, the communications between counsel and the individual Audit Committee members also do not fall within the internal document exception and must be turned over to the Litigation Trustee.
For the reasons set forth above, I conclude that (i) control of the Audit Committee's Privileges transferred to the Liquidation Trustee upon confirmation of the Plan, (ii) RKO may not assert protection of the work product doctrine against the Litigation Trustee, and (iii) RKO must turn over the entirety of the Investigation Records to the Litigation Trustee, except internal firm documents. Accordingly, RKO need not turn over documents consisting of counsel's mental impressions that are intended only for internal review, but RKO must turn over draft factual memoranda, draft legal memoranda, and communications between RKO and the individual Audit Committee members.
An appropriate order follows.