Krys v. Paul, Weiss, Rifkind, Wharton, & Garrison LLP (In re China Med. Techs., Inc.)

539 B.R. 643

In re CHINA MEDICAL TECHNOLOGIES, INC.

Kenneth M. Krys, the Foreign Representative of China Medical Technologies, Inc., Appellant

v.Paul, Weiss, Rifkind, Wharton, & Garrison LLP, and AlixPartners, LLP, Appellees.

Bankruptcy No. 12–BR–13736 REG.

Civil No. 15–CV–0167 RA.

United States District Court, S.D. New York.

Signed Sept. 30, 2015.

Jack B. Gordon, Lewis Baach Kaufmann Middlemiss, New York, N.Y., Eric L. Lewis, Lewis Baach PLLC, Washington, D.C., for Appellant.

Robert A. Atkins, Daniel John Toal, Stephen J. Shimshak, Robert Neil Kravitz, Paul, Weiss, Rifkind, Wharton & Garrison LLP, New York, N.Y., for Appellees.

OPINION & ORDER

RONNIE ABRAMS, District Judge.

Appellant Kenneth M. Krys appeals from an order of the Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”) sustaining the claims of attorney-client privilege and work product protection asserted by Appellees Paul, Weiss, Rifkind, Wharton & Garrison LLP (“Paul Weiss”) and AlixPartners, LLP. For the reasons that follow, the order of the Bankruptcy Court is reversed.

BACKGROUND¹

China Medical Technologies, Inc. (CMED) is a holding company organized under the laws of the Cayman Islands. In June 2012, the indenture trustee on CMED's notes filed a winding-up petition before the Grand Court of the Cayman Islands seeking CMED's liquidation. The Grand Court granted the indenture trustee's petition, and appointed Appellant as CMED's Cayman Islands Liquidator. See Appellant's App. (“AA”) 34–46 (the “Winding Up Order”). In October 2012, the Bankruptcy Court recognized the Cayman Islands liquidation proceeding as a foreign main proceeding pursuant to Chapter 15 of the United States Bankruptcy Code. See AA 55–58. Appellant acts as CMED's foreign representative (the “Foreign Representative”) in the Chapter 15 proceeding.

In this capacity, Appellant sought an order from the Bankruptcy Court authorizing the issuance of subpoenas to Appellees pursuant to Fed. R. Bankr. P. 2004. Specifically, Appellant sought documents and records related to an internal investigation conducted by Appellees, preliquidation, on behalf of CMED's audit committee (the “Audit Committee”). The Bankruptcy Court granted Appellant's request, see AA 72–74, and Appellees largely complied with the subpoenas, refusing to turn over only those documents that they argue are protected by attorney-client privilege and the work product doctrine (collectively, the “Privileges”). Appellant challenged this withholding, arguing that as CMED's Liquidator, he controlled and thus could waive the Privileges.

In a December 1, 2014 bench decision (the “Opinion”), the Bankruptcy Court ruled, first, that United States law governs the Privileges and, second, that under United States law the Privileges are owned by the Audit Committee and thus did not devolve to the Liquidator.See Dkt. 189 (“Op.”), 12–BR–13736 (REG) (Bankr.S.D.N.Y. Dec. 1, 2014). Appellant seeks this Court's review of both determinations. In addition to the parties' briefing, the Court heard oral argument in this case on September 17, 2015.

STANDARD OF REVIEW

The Court has jurisdiction over this appeal pursuant to 28 U.S.C. § 158(a)(1). The Court reviews the Bankruptcy Court's findings of fact for clear error and its legal conclusions de novo. Overbaugh v. Household Bank N.A. (In re Overbaugh ), 559 F.3d 125, 129 (2d Cir.2009) (per curiam). Mixed questions of law and fact are also subject to de novo review. Babitt v. Vebeliunas (In re Vebeliunas ), 332 F.3d 85, 90 (2d Cir.2003).

DISCUSSION

Appellant raises two issues on appeal. First, he argues that the Bankruptcy Court improperly relied upon United States law—and not that of the Cayman Islands—in determining that the Audit Committee controlled the Privileges and that they thus did not devolve to him in bankruptcy. See Br. 15–27. Under Cayman law, he asserts, any privilege that attached to the Audit Committee's communications with Appellees was CMED's privilege, and, in any event, any independent privilege of the Audit Committee devolved to him in bankruptcy. Id. 23–27. Second, he argues that he now owns and can thus waive the Privileges even under United States law. Id. 27–42.

I. Choice of Law

This appeal raises complicated and difficult choice of law questions, many of which turn on the particular manner in which the issues disputed by the parties are framed. The Bankruptcy Court framed this dispute as determinable solely under the substantive law of privilege and applied the “touch base” doctrine, a federal choice of law rule, to the question of whether United States or Cayman Islands privilege law should govern. See Op. 6–12. Finding that United States law should govern, it applied this law to the question of which entity owns the Privileges: CMED or its Audit Committee. See id. 12–18. Adopting the reasoning of In re BCE West, L.P., No. M–8–85, 2000 WL 1239117 (S.D.N.Y. Aug. 31, 2000), a case it found to be “closely on point,” the Bankruptcy Court determined both that the Audit Committee, a purportedly independent committee authorized by CMED's Board of Directors to retain counsel, owns the Privileges, and that they did not devolve to Appellant, as CMED's Liquidator, in bankruptcy. See Op. 12–18.

Appellant asserts that the Bankruptcy Court's choice of law analysis was flawed. His contentions at oral argument diverged from those articulated in his briefing, however. The Court addresses both arguments in turn.

In his briefing, Appellant argues that the Bankruptcy Court misapplied the “touch base” doctrine. See Br. 19–23. The Cayman Islands, he contends, is the nation with the “predominant interest” in this proceeding, not the United States, and so its law of privilege should govern. See id. He also argues that the Bankruptcy Court erred by framing this case solely in terms of privilege. See id. 16–19. Even if United States law controls questions of privilege, he asserts, these questions of privilege turn on underlying issues of corporate law, which should, under the choice of law analysis he argues is proper, be decided pursuant to Cayman law. See id.; Reply 3 (“[T]he [internal affairs doctrine] should have governed the ‘threshold issues' in this matter even if privilege issues are themselves governed by U.S. law.”).

Understanding the precise contours of Appellant's argument in this respect is difficult. Although he does not use this term in his briefing, his theory appears to rely on the concept of dépeçage, pursuant to which courts conduct a separate choice of law analysis as to each disputed issue. See Corporacion Venezolana de Fomento v. Vintero Sales Corp., 629 F.2d 786, 794 n. 8 (2d Cir.1980). In his briefing, Appellant urges the Court to distinguish the question of which law—United States or Cayman—governs the application of the Privileges from what he asserts is the separate question of which law governs the underlying status of the Audit Committee. See Br. 17 (“Even if U.S. law governs application of the Privileges, Cayman law is relevant to, and should control, the underlying substantive issues.”). It is this second question that he contends is answerable only “with reference to the legal structure of the entity in question,” id. 18, and which purportedly turns on two predicate issues, each of which is governed not by the substantive law of privilege, but by the substantive law of corporations: First, is the question of “whether the Audit Committee was separate and distinct from CMED and its Board.” Id. 16. Second, is the question of what “effect the Cayman Winding Up Order [had] on the internal structures of CMED.” Id.

To these predicate issues of corporate law, Appellant argues, the Bankruptcy Court should have applied the internal affairs doctrine, id. 16–19, a choice of law rule pursuant to which questions regarding the internal affairs of corporations are decided under the substantive law of the place of incorporation. See, e.g., Edgar v. MITE Corp., 457 U.S. 624, 645, 102 S.Ct. 2629, 73 L.Ed.2d 269 (1982) (“The internal affairs doctrine is a conflict of laws principle which recognizes that only one State should have the authority to regulate a corporation's internal affairs—matters peculiar to the relationships among or between the corporation and its current officers, directors, and shareholders—because otherwise a corporation could be faced with conflicting demands.”). Because CMED is incorporated in the Cayman Islands, Appellant asserts that the proper application of the internal affairs doctrine would have required any corporate issues in this proceeding to be decided under Cayman law.

At oral argument, however, Appellant made a different argument. He instead urged a position that is, at least conceptually, far simpler, arguing that this case is determinable solely as a matter of corporate law and need not implicate questions of privilege at all. What the Bankruptcy Court and Appellees frame as issues of privilege, Appellant now argues are exclusively issues of corporate law: the relationship between the Audit Committee and CMED, and whether, under Cayman law, both pre-liquidation and in bankruptcy, the Audit Committee or CMED's Board of Directors owned the documents produced by Appellees. If Appellant owns the documents under Cayman law, so the argument goes, there is no need to reach the question of privilege in the first place. In framing this case as determinable solely as a matter of corporate law, Appellant now argues that the only choice of law rule the Bankruptcy Court should have applied is the internal affairs doctrine, which he contends points to Cayman law as the rule of decision—not the “touch base” doctrine.

The Court addresses each of Appellant's contentions below, but first outlines those portions of the Bankruptcy Court's Opinion not formally before the Court on appeal, or with which the parties otherwise agree.

A. The Unchallenged Portions of the Bankruptcy Court Opinion

Both parties agree that “[t]he Federal Rules of Evidence ... apply in cases...