Commodity Futures Trading Commission v. Weintraub

PETITIONER: Commodity Futures Trading Commission
RESPONDENT: Gary Weintraub, Frank H. McGhee, Andrew McGhee
LOCATION: Commodity Futures Trading Commission

DOCKET NO.: 84-261
DECIDED BY: Burger Court (1981-1986)
LOWER COURT: United States Court of Appeals for the Seventh Circuit

CITATION: 471 US 343 (1985)
GRANTED: Oct 29, 1984
ARGUED: Mar 19, 1985
DECIDED: Apr 29, 1985

ADVOCATES:
Bruce M. Kuhlik - for the petitioner
Bruce Neil Kuhlik - on behalf of respondents
David A. Epstein - for the respondent

Facts of the case

The Commodity Futures Trading Commission (the Commission) filed a complaint against the Chicago Discount Commodity Brokers (CDCB), alleging violations of the Commodity Exchange Act. CDCB was going through bankruptcy at the time and a trustee was appointed At a deposition related to the Commission's lawsuit, Gary Weintraub, CDCB's former counsel, refused to answer certain questions, citing attorney-client privilege. The Commission obtained a waiver of attorney-client privilege from the CDCB's bankruptcy trustee. The district court directed Weintraub to answer the questions, but the U.S. Court of Appeals for the Seventh Circuit reversed, holding that a bankruptcy trustee does not have the power to waive attorney-client privilege for communications that occurred before the filing of the bankruptcy petition.

Question

Does the trustee of a corporation in bankruptcy have the power to waive that corporation's attorney-client privilege with respect to communications that took place before the bankruptcy petition was filed?

Media for Commodity Futures Trading Commission v. Weintraub

Audio Transcription for Oral Argument - March 19, 1985 in Commodity Futures Trading Commission v. Weintraub

Warren E. Burger:

Mr. Kuhlik, I think you may proceed whenever you're ready.

Bruce Neil Kuhlik:

Mr. Chief Justice, and may it please the Court:

The question in this case is who is the proper party to control the attorney-client privilege of a corporation in bankruptcy.

Our position is straightforward: Control over the privilege rests with the corporation's management.

The bankruptcy trustee manages the debtor corporation and therefore the trustee must have the power to assert or waive the corporation's privilege.

This case arises out of the demise of a commodity brokerage firm, Chicago Discount Commodity Brokers.

Over a period of time, the firm's President, Frank McGhee, who is one of the Respondents in this Court, had embezzled several million dollars in customer funds.

And by the fall of 1980 the firm's finances were in such disarray that the Commodities Futures Trading Commission filed a complaint in federal court alleging various violations of the Commodities Exchange Act, and the same day that the complaint was filed the brokerage firm, through Frank McGhee, who was at that time its sole remaining officer and director, entered into a consent decree with the Commission that provided for the appointment of a receiver.

John Notz was appointed the receiver and he immediately took control of the firm's operations.

It quickly became clear to him that really the best course for the firm was to file for bankruptcy and, pursuant to an express authorization in the consent decree, he filed a voluntary petition for liquidation under subchapter IV of chapter 7 of the bankruptcy code.

Now, subchapter IV of chapter 7 is the only bankruptcy avenue available to commodity brokers.

They cannot go into reorganization.

Congress had two concerns when it set forth that requirement.

The first is with the customers of a commodity broker, whose funds are primarily at risk.

They are the people that put up the margin payments and the deposits, and it's typically that money that is lost in a commodity brokerage bankruptcy.

Congress was also concerned that the bankruptcy of one commodity broker not have a ripple effect through the complex and interdependent commodity markets and thereby cause problems throughout the futures markets.

So under these special provisions the trustee, who was Mr. Notz, came in and he operated the commodity brokerage business with a view toward liquidating it and closing out its contracts in an orderly fashion as quickly as possible.

Pursuant to Section 766 of the code, the trustee in a commodity broker bankruptcy must identify contracts that may be transferred to solvent commodity brokers, he must seek customer instructions, he must make and meet margin payments daily, he must be prepared to accept or to deliver commodities in contracts that cannot be closed out before their closing dates.

Sandra Day O'Connor:

Mr. Kuhlik, I'm curious about how this process would work.

Assuming that you are correct ultimately that a trustee in bankruptcy has the power to waive the privilege for the corporation, is that limited in any way?

In other words, is that qualified by a power to waive it if it will somehow benefit the estate?

And if so, is it somehow necessary that the trustee would find out first what it is that's going to be waived before making that decision, and how would that be accomplished?

Bruce Neil Kuhlik:

You ask a number of questions, Justice O'Connor.

The trustee in a bankruptcy is a fiduciary who has a responsibility to all of the parties in interest in the proceeding: the creditors, the shareholders, the debtor corporation.

And it is open to any party at any time to challenge the actions of the trustee as not being in the best interests of the estate.

In fact, it's a fairly common occurrence.

People are doing it all the time.

So in a sense, the rule we are asking for is a presumptive one.

We feel that the trustee is the best person in the first instance to make this cut.

He is obviously in a better position in this case than Frank McGhee.