Official Comm. Unsecured Creditors of HH Liquidation, LLC v. Comvest Grp. Holdings, LLC (In re HH Liquidation, LLC)

571 B.R. 97

IN RE: HH LIQUIDATION, LLC, et al., Reorganized Debtor.

Official Committee of Unsecured Creditors of HH Liquidation, LLC, et al., Plaintiffs,

v.Comvest Group Holdings, LLC, Comvest Investment Partners III, L.P., Comvest Investment Partners IV, L.P., Comvest Haggen Holdings III, LLC, Comvest Haggen Holdings IV, LLC, Comvest Advisors, LLC, Haggen Property Holdings, LLC, Haggen Property South, LLC, Haggen Property North, LLC, Haggen Property Holdings II, LLC, Haggen SLB, LLC, John Caple, Cecilio Rodriguez, Michael Niegsch, John Clougher, Blake Barnett, William Shaner and Derrick Anderson, Defendants.

Case No. 15–11874(KG)

Adv. No. 16–51204(KG)

United States Bankruptcy Court, D. Delaware.

Signed May 8, 2017

Ian J. Bambrick, Robert F. Poppiti, Jr., Young Conaway Stargatt & Taylor, LLP, Wilmington, DE, for Reorganized Debtor.

Beth E. Levine, Pachulski Stang Ziehl & Jones LLP, New York, NY, Colin R. Robinson, Bradford J. Sandler, Pachulski Stang Ziehl & Jones LLP, Wilmington, DE, for Plaintiffs.

Mark L. Desgrosseilliers, Kevin J. Mangan, Womble Carlyle Sandridge & Rice, LLP, Wilmington, DE, Stephen C. Hackney, Richard U.S. Howell, Jeffery Lula, Brendan Ryan, Kirkland & Ellis LLP, Chicago, IL, Philip J. Mohr, Womble Carlyle Sandridge & Rice, PLLC, Greensboro, NC, for Defendants.

OPINION

KEVIN GROSS, U.S.B.J.

The Court is addressing the Motion to Compel Production of Documents by Debtors (the "Motion"), which the Official Committee of Unsecured Creditors (the "Committee") filed to gain access to documents withheld on the basis of the attorney-client privilege and/or the attorney work-product doctrine (the "Objections"). It is tempting for the Court to grant the Motion. As discussed within, the Committee is asserting the claims in this adversary proceeding "on behalf of Debtors' estates" against defendants who possess the documents the Committee seeks from the Debtors. The problem, however, with granting the Motion is that the cases do not support it and the Objections assert important and fundamental rights. Accordingly, as the Court will discuss, the Court will deny the Motion as it relates to the attorney-client privilege, and will grant the Motion for the documents withheld for work product purposes.

Jurisdiction

The Court has jurisdiction over the Motion pursuant to 28 U.S.C. §§ 157 and 1334. Venue is proper pursuant to 28 U.S.C. § 1409(a).

Background¹

Haggen, Inc. ("Haggen") began business in 1933 as a single grocery store. By 2011, Haggen owned and operated 30 grocery stores in Washington and Oregon. The family run business was profitable. In 2011, the Haggen family sold an 80% interest in Haggen to Comvest Group Holdings, LLC ("CGH") and retained 20%. Over the next four years, Haggen closed stores and at the end of 2014 operated 18 grocery stores and one pharmacy.

In 2014–15, Haggen purchased 146 Albertson's supermarkets which shortly thereafter resulted in Debtors' bankruptcy. The Debtors filed voluntary petitions with the Court on September 8, 2015. On September 21, 2015, the Office of the United States Trustee appointed the Committee to represent the interests of all of Debtors' unsecured creditors.

The Committee, the Debtors and the Defendants entered into stipulations on January 14, 2016, and April 29, 2016, granting the Committee derivative standing to bring an adversary proceeding against Defendants. The Court approved the standing stipulations by Orders, entered on January 15, 2016, and May 2, 2016. D.I.'s 1235 and 1858.

The standing stipulations provided, in part, that: (1) the Committee was entitled to bring any and all claims or causes of action "on behalf of the Debtors' estates," and (2) the Debtors and the Defendants reserved "the right to assert any objection (including but not limited to privilege objections)." D.I. 1235, ¶¶ 2 and 4.

Thereafter the Committee filed the Complaint and Objection to Claims (the "Complaint") on September 7, 2016. The Committee served the Complaint which names as defendants CGH and affiliates, non-debtor affiliates of the Debtors, and officers and directors (collectively, the "Defendants").

The Complaint is 142 pages in length, plus attachments. In very summary terms, in the Complaint the Committee alleges that Debtors acquired the 146 supermarkets from Albertson's and then took valuable real estate assets for themselves and charged Debtors high rental fees. The Committee has plead the alleged facts thoroughly in 153 paragraphs and charges the Defendants in 78 counts with, among other matters, fraud and fraudulent transfers. The Defendants answered the Complaint.

The Committee alleges that the Debtors have no business or employees. Debtors have either sold or shut down substantially all of their assets.

The Committee served document requests and interrogatories on the Debtors and the Defendants. The Defendants withheld over 1,000 responsive documents based on attorney-client privilege, and 890 documents based on the attorney work-product doctrine, and did not answer certain interrogatories. The Debtors withheld nearly 1,000 documents on the basis of attorney-client privilege and attorney work-product doctrine.

The Objections are premised on the fact that the law firm of Akerman, LLP ("Akerman") represented both the Debtors and the Defendants, i.e., Akerman had a joint representation with the Debtors and the Defendants. Those parties cite to the joint representation by Akerman as a reason that the Debtors' interrogatory answers and withheld documents are subject to privilege.

The last set of germane facts relates to the Debtors' financial condition at the time of the transactions about which the Committee complains. The Committee does not dispute these facts. When the transaction with Albertson's occurred, the Debtors had the following assets:

• More than $100 million cash

• More than $200 million line of credit

• Complete ownership in companies owning real estate interests.

Therefore, the Debtors had use of or access to $300 million plus the value of the real estate interests. Yet, Debtors fall into bankruptcy was sudden and rapid. It was only seven months from the Albertson's transaction to the Chapter 11 filing.

Analysis

The Motion is an important one. On the one hand, the Committee is acting on behalf of the Debtors. Yet it does not have access to all of Debtors' documents which are or may be relevant to the matters it raises in the Complaint. On the other hand, the Objections place "the oldest of the common law privileges" squarely before the Court. Teleglobe Communications v. BCE, Inc. (In re Teleglobe Communications Corp. ), 493 F.3d 345, 359 (3d Cir. 2007). The Supreme Court has written that the attorney-client privilege "encourage[s] full and frank communication between attorneys and their clients and thereby promote[s] broader public interests in the observance of law and administration of justice." Further, "advice or advocacy depends upon the lawyer's being fully informed by the client." Upjohn Co. v. United States , 449 U.S. 383, 389, 101 S.Ct. 677, 66 L.Ed.2d 584 (1981).

The decision is not an easy one. The Committee has brought the adversary proceeding on behalf of the Debtors, and the Debtors are not parties. The question then becomes, why shouldn't the Committee have access to the documents that are in the Debtors' possession and, as well, the Defendants' possession? If the Debtors were not conflicted and had brought the adversary proceeding, they would have the use in the litigation of the documents the Committee seeks. These are documents that the Debtors are withholding.

The Court does not have to look far to find an answer. There are three cases that the Committee on the one hand and/or the Debtors and the Defendants rely on. The cases are In re Teleglobe ; Garner v. Wolfinbarger , 430 F.2d 1093 (5th Cir. 1970) (" Garner "); and Commodity Futures Trading Comm'n v. Weintraub , 471 U.S. 343, 105 S.Ct. 1986, 85 L.Ed.2d 372 (1985) ( " Weintraub ").

Weintraub

In Weintraub , the Supreme Court addressed whether a chapter 7 trustee of a corporation has the power to waive the corporation's attorney-client privilege as to communications held before the bankruptcy case. The Supreme Court ruled that the trustee had that authority, and stated:

In seeking to maximize the value of the estate, the trustee must investigate the conduct of prior management to uncover and assert causes of action against the debtor's officers and directors. See generally 11 U.S.C. §§ 704(4), 547, 548. It would often be extremely difficult to conduct this inquiry if the former management were allowed to control the corporation's attorney-client privilege and therefore to control access to the corporation's legal files To the extent that management had wrongfully diverted or appropriated corporate assets, it could use the privilege as a shield against the trustee's efforts to identify those assets. The Code's goal of uncovering insider fraud would be substantially defeated if the debtor's directors were to retain the one management power that might effectively thwart an investigation into their own conduct.

Respondents contend that the trustee can adequately investigate fraud without controlling the corporation's attorney-client privilege. They point out that the privilege does not shield the disclosure of communications relating to the planning or commission of ongoing fraud, crimes, and ordinary torts .... [Citations omitted.]

The problem, however, is making the threshold showing of fraud necessary to defeat the privilege. ... Without control over the privilege, the trustee might not be able to discover hidden assets or looting schemes, and therefore might not be able to make the necessary showing. [Citations omitted.]

Weintraub , 471 U.S. at 353–54, 105 S.Ct. 1986. The Supreme Court also went on to write:

Respondents also ignore that if a debtor remains in possession—that is, if a trustee is not appointed—the debtor's directors bear essentially the same fiduciary obligation to creditors and

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