Common Bankruptcy Practice Waives Attorney-Client Privileges: A Cautionary Tale

By Amanda Schlitz
Amanda Schlitz focuses her practice on bankruptcy litigation at the Minneapolis office of Stinson Leonard Street (http://stinsonleonardmerger.com/). Providing practical and strategic advice on complex bankruptcy issues, Amanda represents banks, committees, secured lenders, publicly and privately held companies, insurance companies, equipment lessors, and commercial landlords. Amanda also advises clients on a variety of distressed asset transactions, claims trading matters and bankruptcy-related acquisitions and investments. Contact Amanda at (612) 335- 1943 or amanda.schlitz@stinsonleonard.com.

Preparing a proof of claim is usually a simple, but necessary, task. A proof of claim is a written statement filed in a bankruptcy case setting forth the basis and amount of a creditor’s claim. It must be prepared using, or at least must substantially conform to, the official proof of claim form. Often, filing a proof of claim is necessary for the creditor to receive any distribution in the bankruptcy case. Federal Rule of Bankruptcy Procedure 3001 sets forth the content which a proof of claim must contain and the documentation that should be attached. This rule was recently amended to increase the information a creditor is required to provide; however, it is not difficult for a creditor to comply with the basic rules for filing a claim. So long as the proof of claim was executed and filed in accordance with the rules, the claim constitutes prima facie evidence of the validity, and the amount of the claim.

Rule 3001(b) provides that the proof of claim must be executed by the creditor or the creditor’s authorized agent. This rule contemplates that an attorney may sign the proof of claim on behalf of the creditor, and often, attorneys will do so. However, a recent case from the U.S. Bankruptcy Court for the Southern District of Texas provides a cautionary tale for this practice – signing a proof of claim on behalf of a client may open up the client (and the attorney) to significant exposure.

Schmidt v. Rodriguez (In re Rodriguez) involved a complex factual and procedural background stemming from a long, protracted dispute over several parcels of land. 2013 WL 2450925 (Bankr. S.D. Tex. Jun. 5, 2013). Discovery disputes had been prevalent throughout the bankruptcy litigation. The creditors filed proofs of claim alleging substantial damages based on that land dispute, and the attorney for the creditors signed and filed those claims. The proofs of claim contained certain factual assertions by the attorney: (1) personal knowledge that the debtor was liable to the creditors for bad faith trespass and other torts; and (2) personal knowledge that the creditors suffered damages in the amounts asserted. Id. at *5. The attorney was deposed and questioned as to the basis for his factual assertions. He objected and refused to answer over 100 questions on the grounds that it was necessary to protect the attorney-client or work product privilege. A motion to compel was then brought before the court.

The bankruptcy court explained that signing a proof of claim “is an assertion of personal knowledge of the facts alleged in the proof of claim.” Rodriguez, 2013 WL 2450925, at *3 (Bankr. S.D. Tex. Jun. 5, 2013). The official proof of claim form requires the creditor – or the creditor’s agent – to state “under penalty of perjury that the information provided in this claim is true and correct to the best of my knowledge, information and reasonable belief.” The court explained that while that is the same standard governing complaints, there is an important distinction between filing a proof of claim and a complaint. A complaint “is not prima facie evidence of the facts asserted therein.” Id. at *3.

The bankruptcy court compared the signing of a proof of claim to the execution of an affidavit touching on the merits of the litigation – like such an affidavit, the proof of claim constitutes evidence going toward the merits. So, upon signing the proof of claim, the attorney was no longer just the attorney – he was a fact witness to the factual assertions made in the claim. Rodriguez, 2013 WL 2450925, at *6 (Bankr. S.D. Tex. Jun. 5, 2013). “As a result, questions which would normally be an improper intrusion into areas protected by . . . privilege may now be proper questions seeking the basis for factual assertions made by a fact witness.” Id. Of course, the privilege belongs to the creditors – not the attorney. However, the creditors consented to their attorney signing and filing the proofs of claim. This consent, the court held, constituted the waiver of that privilege. Id. at *3 n.8.

While this case is not binding in Minnesota, it demonstrates the importance of taking a closer look at the practice of signing proofs of claim. Courts in Minnesota (and elsewhere) may view the analysis in Rodriguez as persuasive. Accordingly, counsel should carefully consider who the appropriate person is to sign a proof of claim and reconsider the risky practice of signing a proof of claim on behalf of the client.