Yesterday (September 12, 2012) the Bankruptcy Court for the Southern District of Texas provided an excellent lesson on the need to know what sauce is going into the stew that governs privileged communications in bankruptcy proceedings.[1]

The Bankruptcy Court in In re Rodriguez was faced with 2,000 documents delivered to chambers for in camera inspection in connection with a discovery dispute. The Trustee and certain Petitioning Creditors (and their lawyers) had exchanged all those documents believing that they were subject to the “common interest privilege,” but their adversaries in litigation didn’t see it that way. The determining factor was which law (or sauce) would apply:  Texas law or federal common law.

By way of background, the “common interest privilege” (or, more accurately, the “common interest doctrine,” because there really is no privilege involved) generally provides as follows: There will be no waiver of an existing privilege, such as the attorney-client privilege, when two or more parties share the privileged material, provided that: (a) the parties exchanging the  privileged material share a common legal interest, as opposed to a mere business interest; (b) the documents and communications are shared in furtherance of the common legal interest; (c) the sharing of the privileged material takes place at a time when there is a reasonable anticipation of litigation; and (d) the parties reasonably expect that the shared documents and communications will remain confidential. At least that is the federal common law.

But Texas puts a different ingredient into its common interest doctrine. Tex. R. Evid. 503(b)1)(C) provides that the common interest doctrine applies only in a “pending action.” In fact, in Texas, the “common interest doctrine” is known as the “allied litigant doctrine” because of the added element of a “pending action.”

The Bankruptcy Court, applying the Texas statute , determined that only those documents exchanged after the date of filing the adversary proceeding could be claimed as privileged. All of the rest of the exchanged privileged material must be produced in the litigation.

One might think that federal common law ought to apply in a bankruptcy proceeding, especially because parties often find it necessary to exchange privileged material prior to filing an adversary proceeding. But the Bankruptcy Court found that Rule 501 of the Federal Rules of Evidence provided the choice of law rule, directing the Court to Texas law. Rule 501 states that where state law supplies the “rule of decision,” privilege issues will be determined by state law, not federal law. And because the adversary proceeding was solely a state law claim, Texas law answered the question.[2]

Lesson Learned:  Privilege Depends on Where You are Eating.