Restructuring

Contributed by Charles Persons
Whether an item is discoverable can be one of the most highly litigated issues in adversary proceedings, for good reason.  The duty to disclose information relevant to the litigation—codified by Rule 26 of the Federal Rules of Civil Procedure and made applicable to the adversary proceedings and contested matters by the Federal Rules of Bankruptcy Procedure—requires parties to disclose requested documents to opposing counsel, including damning evidence with the potential to swing the outcome of a hearing.  But the duty to disclose is not absolute, and attorneys often function as evidentiary gatekeepers, ensuring that disclosed items do not run afoul of the privilege protections afforded to clients and attorneys.  As e-discovery has exponentially increased the number of potentially-discoverable documents, litigators in all disciplines are spending more and more time focusing on what is discoverable and what is protected from discovery, all while recognizing that being forced to disclose the proverbial “smoking gun” may turn their client’s fortune instantly.
In short, nothing sends a bankruptcy litigator into ‘gut-check’ mode faster than a new opinion with the potential to expand what constitutes discoverable evidence in an adversary proceeding.  The recent joint decision reached in the United States Bankruptcy Court for the District of Delaware in Burtch v. Luminescent Sys., Inc., Astronics Advanced Electronic Sys. Corp. is no exception.  In her decision, Judge Walrath held that Delaware Local Bankruptcy Rule 9019-5, which states that a document prepared in the course of mediation may not be introduced as evidence at trial, does not per se prohibit the discovery of such documents, stating “Local Rule 9019-5 provides no basis for the court to grant a protective order related to the mediation, nor does it protect any documents from discovery.”  Though the court eventually granted the defendants’ protective order by finding the documents in question were protected under the attorney work product privilege, it did so only after determining that the trustee had not demonstrated a “substantial need” for the documents. 
The question before the court initially arose out of a pair of preference actions initiated against the defendants by the chapter 7 trustee in the case.  Pursuant to a pretrial order, the parties were directed to go to mediation, which was ultimately unsuccessful.  After the failed mediation, the parties conducted discovery, during which the defendants prepared a privilege log asserting that two non-party affidavits and related documents, gathered in anticipation of the mediation, were protected by the attorney work product doctrine and a mediation privilege. The trustee disagreed, and the defendants sought a protective order to prevent discovery of the affidavits and related materials, which included emails and draft affidavits exchanged between the defendants’ attorneys and the two former employees of the debtor.  The trustee objected, stating hewished to use the documents for impeachment purposes at depositions or trial.
Delaware Local Bankruptcy Rule 9019-5 provides that “[n]o person may rely on or introduce as evidence in an arbitral, judicial or other proceeding, evidence pertaining to any aspect of the mediation effort, including but not limited to: . . . (E) documents prepared for the purpose of, in the course of, or pursuant to the mediation.”  Further, the debtors’ counsel noted that while the local rule is clear that information otherwise discoverable in evidence does not become exempt from discovery merely because it is used by a party in mediation, it had never actually used the affidavits or related materials in the mediation, as the materials were never turned over to the mediator.  The defendants argued that the local rule, in conjunction with Federal Rule of Civil Procedure 16(c)(2)(I), gave the court the authority to issue a protective order and create a broader mediation privilege to cover all documents created in anticipation of the mediation but not necessarily used in the mediation. 
The court disagreed, noting that although information gathered in preparation of mediation would not be admissible as evidence under Local Rule 9019-5, a document need not be admissible at trial to be discoverable under Rule 26 of the Federal Rules of Civil Procedure.  In so ruling, the court refused to expand its mediation privilege doctrine from a narrow privilege that prevented the admission into evidence of documents used to prepare for mediation or used in mediation to a privilege that prevented discovery of all documents created in anticipation of mediation but not necessarily used in the mediation.
Turning to the attorney work product doctrine, the court explained the three elements it was required to determine so as to find the attorney work product doctrine applied to the documents at issue: (i) whether the document was created in anticipation of litigation; (ii) whether the documents were ordinary or opinion work product; and (iii) based on the type of work product, whether the party seeking discovery has overcome the attorney work product protection.  The court held that a document created in the midst of litigation as part of the overall litigation met the first element of the attorney work product.  However, the court found it “unlikely” that the defendants’ attorneys included the type of opinion work product—documents that contain “‘an attorney’s legal strategy, his intended lines of proof, his evaluation of the strengths and weaknesses of the case, and the inference he draws from interviews with witnesses’” (citing Sporck v. Peil, 759 F.2d 312, 316 (3d Cir. 1985))—that provides heightened protections against discovery in emails between the attorneys and outside, third-party witnesses.  As such, the court found the attorney work product in question was ordinary work product, and thus discoverable if the trustee was capable of showing a “substantial need” for the documents and that the evidence could not be otherwise obtained with “undue hardship.”  In the court’s opinion, the trustee failed to demonstrate a substantial need for the documents beyond impeachment purposes, which was insufficient in the Third Circuit to overcome the attorney work product protection.  The court never addressed the trustee’s contention, made in its objection to the motion for the protective order, that intentional communication by debtors’ counsel with third parties was a waiver of the work‑product privilege.
The defendants’ narrow victory can hardly be considered too comforting for attorneys hoping their mediation-related documents are immune to discovery.  The court’s ruling opens the possibility to the discovery of ordinary work product, prepared for mediation, with a showing of substantial need and that the documents cannot be otherwise obtained without undue hardship.  Such ramifications could be far-reaching, as the court’s decision essentially removes a potential layer of protection for all mediation-related documents that are prepared for mediation but never used in mediation.  Regardless, the decision should give pause to attorneys preparing for mediation in the Bankruptcy Court of the District of Delaware even if they do not intend to use those documents at the mediation, and serves as a reminder that documents prepared in anticipation of mediation may become litigation fodder in more ways than one.