Bankruptcy Case Alert: Maxus Energy Corporation, et al.
Two recent decisions from Chief Judge Christopher Sontchi in Maxus Energy serve as a cautionary tale about the potential waiver of privilege when individuals are officers or directors of both the debtor and its non-debtor parent.
In Maxus, the liquidating trust (the “Trust”) brought an action against the debtor’s corporate parent (“YPF”) and sought the production of documents that YPF had shared prepetition with individuals who simultaneously served as employees of YPF and its debtor subsidiary (“Maxus”). According to Judge Sontchi, YPF failed to show that these individuals received the documents solely in their capacity as YPF employees, and thus, privilege was waived.
YPF produced the documents but then sought to claw back two of them, arguing that the YPF employee who received them was a director of Maxus, not an employee. Judge Sontchi rejected this as a distinction without a difference: the individual was still a fiduciary of Maxus.
One of the documents that YPF sought to claw back was an “Executive Summary” of a separate memo that had itself never been shared with Maxus. The Trust sought production of the memo on a theory of subject-matter waiver, based on YPF's disclosure of the Executive Summary to the Maxus employee. YPF responded that production would be premature because it was seeking interlocutory appeal of the prior ruling. After reviewing the documents in camera, Judge Sontchi found subject-matter waiver. The Executive Summary was taken virtually word for word from the memo, and the memo elaborated on the facts and issues in the Executive Summary. Judge Sontchi also ruled that production was not premature: there was no assurance that the interlocutory appeal would be allowed, and YPF could claw the memo back if the court were reversed.
In short, as shown in Maxus Energy, counsel would do well to be mindful of the privilege pitfalls that may await in a bankruptcy case when corporate executives are shared across multiple entities prepetition.