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Chancery Finds the Common Interest Doctrine Shields Communications Between a Bankruptcy Litigation Trust and its Largest Unsecured Creditor

RCS Creditor Trust v. Schorsch, C.A. No. 2017-0178-SG (Del. Ch. Mar. 20, 2020). 

The common interest doctrine shields communications with a third-party from disclosure when the common interest invoked by the party asserting the privilege is in furtherance of a joint legal strategy or objective with the third-party, and not simply for a commercial purpose.

In RCS Creditor Trust, the plaintiff litigation trust was established under a bankruptcy reorganization plan to pursue claims on behalf of creditors in the bankruptcy. The litigation trust asserted breach of fiduciary duty claims against defendants in a Court of Chancery action. In discovery, the litigation trust withheld communications between the trust’s counsel and the trust’s largest unsecured creditor and controller (and its counsel) on the grounds of privilege. Defendants moved to compel disclosure of these communications.

The Court of Chancery held that the communications were protected from disclosure as privileged communications under Delaware’s common interest doctrine. The Court explained that the litigation trust’s inherent purpose was to maximize the value of legal claims on behalf of creditors under the bankruptcy reorganization plan, and thus, practically, all of its communications have a legal nexus. And, as the largest unsecured creditor and controller of the litigation trust, the creditor had a sufficient joint legal interest in collaborating and sharing communications with the trust in connection with the prosecution of claims to qualify for protection under the common interest doctrine.

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