Attorney-Client Privilege in Bankruptcy: Unpleasant New Ruling Narrows Its Scope

07 Mar Attorney-Client Privilege in Bankruptcy: Unpleasant New Ruling Narrows Its Scope

There are only a handful of court cases discussing how, or perhaps even whether, the attorney-client privilege applies in a bankruptcy case. A North Carolina bankruptcy court recently considered this question, and it confirmed what many have feared: the attorney-client privilege in bankruptcy is narrow in scope, and it may hardly exist at all.

Taylor v. Wolbert, Adv. No. 09-3177 (Bky.W.D.N.C. Feb. 17, 2010), involved a married couple who filed chapter 7 bankruptcy. After investigating the debtors’ pre-bankruptcy conduct, the trustee filed an action seeking denial of the debtors’ bankruptcy discharge. The trustee alleged that the debtors had failed to disclose in their bankruptcy petition all their assets, and that they had failed to disclose pre-bankruptcy transfers of property.

The debtors and their bankruptcy attorney responded that the omissions were unintentional and inadvertant oversights, or were clerical errors committed by their attorney. The trustee then sought to examine the bankruptcy attorney and his paralegal under oath about the discussions they had with the debtors about the preparation of the bankruptcy petition. The question before the court was whether the attorney-client privilege should prevent the trustee from examining the bankruptcy attorney and his paralegal.

The court observed that there are few decsions on this point, but those that exist generally state that the privilege does not extend to matters intended to be disclosed in a public document such as a bankruptcy petition. However, the court also noted that many of the matters discussed with a bankruptcy lawyer go beyond the matters to be disclosed in the bankruptcy petition.

The court held that that the trustee would be able examine the attorney and his paralegal, but the ground for the court’s ruling was not that the privilege was waived due to the “public document” exception. Instead, the court held that the attorney-client privilege had been waived by the debtors, through their assertion that they had disclosed the assets and transfers to their attorney, and that it was their attorney who had failed to list those items in the bankruptcy petition.

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Craig Andresen is a Minnesota bankruptcy attorney who represents both consumers and small business owners in chapter 7 and chapter 13 cases. With thirty years experience, Mr. Andresen is a frequent speaker on the topics of stopping mortgage foreclosures, and stripping off second mortgages in chapter 13. His office is located in Bloomington just across the street from the Mall of America. Call his office at (952) 831-1995 for a free consultation about protecting your rights using bankruptcy.
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