30 Sep Attorney-Client Privilege Doesn’t Apply in Chapter 7, Florida Bankruptcy Court Rules
A Florida bankruptcy court ruling just made it harder for a debtor to claim that the things she tells her bankruptcy lawyer are protected by the attorney-client privilege. In re Smith Cutuli, No. 11-35256-BKC-AJC (Bky.S.D.Fla. Sept. 13, 2013), held that upon the filing of a chapter 7 case, ownership ofthe debtor’s attorney-client privilege passes to the chapter 7 trustee.
Without this privilege, any papers, notes, worksheets, or other information given by the debtor to her bankruptcy lawyer, along with the content of any conversations she may have had with her lawyer, are fair game for the chapter 7 trustee, and could become public knowledge.
Of course, everyone relies on the expectation that when seeking a lawyer’s advice about any legal matter, including bankruptcy, the attorney-client privilege protects against disclosure by the lawyer, or the client, of the discussions had with the lawyer. With some exceptions, this also protects any of the papers or other information gathered by the lawyer in connection with the case.
While the attorney-client privilege applies in all types of legal matters, it has had a checkered history in bankruptcy cases. Most practitioners agree that bankruptcy courts will uphold the privilege on behalf bankruptcy debtors, but add that there are asome reported court decisions to the contrary.
In fact,a careful reading of cases denying the attorney-client privilege in bankruptcy reveals that most involve claims that the privilege was somehow waived by the debtor, or that the debtor engaged in fraudulent or even criminal activity. Under longstanding federal court precedent, such actions negate the attorney-client privilege.
In re Smith Cutuli is just such a case. The debtor filed chapter 7 in Floridaon September 12, 2011. Among other things, the bankruptcy court found that she transferred over $2,000,000 to her husband’s bank accounts three weeks later. The debtor had also been involved in complex litigation prior to her bankruptcy filing in Napa County, California. The California court had alsofound that there was a civil conspiracy between the debtor and others to commit fraud and hide assets.
While the bankruptcy court in Smith Cutulidid holdthat the debtor’s attorney-client privilege passed to the chapter 7 trustee upon the filing bankruptcy, as is the rule in cases with this unfortunate holding, the debtor had committed multiple “bad acts” and there was a history of contentious litigation involving the debtor in other courts.
The Smith Cutuli case should be viewed as a warning that while the attorney-client privilege is alive and well in bankruptcy, and has plenty of well reasoned case law to support its vitality, canny bankruptcy trustees may be willing to ask courts to strip the privilege from debtors in some cases.
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