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In Re Protron Digital Corporation, et al. v. Ya Hsin Industrial Co.

April 27, 2011


The opinion of the court was delivered by: Cormac J. Carney United States District Judge




Appellant Citron & Deutsch ("Citron"), a law corporation, filed this appeal from a June 2, 2010 order (the "Order") of the United States Bankruptcy Court for the Central District of California compelling Citron to turn over certain documents to Appellee Ya Hsin Industrial Co., Ltd. ("Ya Hsin") and making findings concerning the attorney-client privilege and work product protection. For the reasons explained below, the Court DISMISSES Citron's appeal because 28 U.S.C. § 158(a) does not provide jurisdiction to decide it.


Ya Hsin is the largest secured creditor of Protron Digital Corporation and Spectroniq Digital, Inc. (collectively "Debtors"). See Joint Excerpts of Record on Appeal ("JER") 124, 145. In 2007, Ya Hsin filed suit against Debtors in California state court alleging that Debtors breached a sales agreement.

Citron is a law firm that provided legal services to the Debtors beginning in June 2006 and prior to their bankruptcy. See Appellant's Opening Br. at 7, 14. A portion of Citron's work included defending the Debtors in the suit brought by Ya Hsin. Id. at 14. Citron also provided services to Leo Chen, a former officer of Debtors, "related solely to his personal matters, including estate planning, financial planning, and real estate acquisitions." Id. at 7.

In Ya Hsin's state court action against the Debtors, the state court initially appointed a receiver (the "Receiver"), Douglas Wilson, in 2007 to have limited responsibilities with respect to proceeds from the sale of the Debtor's consumer electronic goods. JER 165. Through subsequent orders, the state court expanded the Receiver's responsibilities such that the Receiver was overseeing all of the Debtors' affairs. JER 165. On June 6, 2008, the Receiver filed voluntary petitions on behalf of the Debtors for relief under Chapter 11 of the Bankruptcy Code. JER 165. At that time, the Debtors "were no longer conducting business operations, except for limited customer service and associated parts sales." JER 165.

Pursuant to a settlement, Ya Hsin received $2,512,500 from the Debtors in partial satisfaction of its total $115,772,186 claim against the Debtors' estate. JER 145. The Joint Chapter 11 Plan of Liquidation (the "Plan") approved by the Bankruptcy Court further empowered Ya Hsin to step into the shoes of the Debtors with respect to (1) pursuing litigation claims available to the Debtors and (2) disposing of certain remaining assets. Indeed, the Plan provided that:

Ya Hsin, on behalf of Debtors' and Liquidating Debtor's estates, will retain and have the exclusive right to prosecute the Litigation Claims. . . . [And] Ya Hsin shall have the right, in its sole and absolute discretion, to decide whether to sell or otherwise dispose of any Remaining Assets and Litigation Claims. Any proceeds derived from the sale or disposition of such assets will be distributed as provided in this Plan.

JER 153. The Plan defined Litigation Claims as "all claims, torts, demands, actions or causes of action of any kind or nature whatsoever, whether known or unknown, that Debtors or their Estate may have, except to the extent that such rights, claims, and causes of action are expressly released in this Plan." JER 136. Remaining Assets are "all of the Liquid Assets and Discovered Assets, excluding Litigation Claims, the Administrative Expense Reserve, and the $150,000 to be used to fund payments to Class 4 under the Plan, remaining in the Estate on the Effective Date." JER 138.

Ya Hsin has already filed an adversary case against Citron alleging it is liable to the Debtors' estate for legal malpractice and breach of fiduciary duty among other claims.*fn1 See JER 532--46. On April 28, 2010, Ya Hsin filed a motion with the Bankruptcy Court asking that court to compel Citron to turn over to Ya Hsin "any and all documents and things pertaining to their representation of the Debtors pursuant to 11 U.S.C. § 542(e)."*fn2 JER 331. In addition, Ya Hsin requested that the Bankruptcy Court find that (1) Ya Hsin held the Debtors' attorney-client privilege with respect to all work performed for Debtors and jointly for Debtors and Mr. Chen and (2) the work product protection did not apply to preclude such disclosure. JER 331.

On June 2, 2010, the Bankruptcy Court granted Ya Hsin's motion. The Order first found that Ya Hsin held the Debtors' attorney-client privilege for "all documents, communications and other things created by or delivered to [Citron], regardless of when such items were created or delivered" and whether Citron performed that legal work on behalf of Debtors alone or Debtors and Mr. Chen jointly.*fn3 JER 521--22; see also JER 522 (explaining that the Order related to "all of [Citron]'s records related to its representation of the Debtors, both with respect to Debtors-only representation(s) or in cases where [Mr.] Chen and the Debtors (or either of them) were jointly represented by [Citron]"). According to the Bankruptcy Court, this finding was warranted because the Receiver obtained and held the Debtors' attorney-client privilege after being appointed to control the Debtors, and the Receivers, in turn, transferred the privilege to Ya Hsin pursuant to the Plan whereby "Ya Hsin assumed control of the Debtors from the Receiver" and was empowered to pursue all of Debtors' potential litigation claims. JER 521. In short, the Bankruptcy Court found that the Receiver and then Ya Hsin had stepped into the Debtors' shoes with respect to the attorney-client privilege. With respect to the work product protection, the Order concluded that it was "inapplicable to the case at bar because Ya Hsin is the successor-client to the Debtors." JER 522. Accordingly, the Bankruptcy Court, pursuant to 11 U.S.C. § 542(e), ordered Citron and other attorneys that had performed legal work for the Debtors to "deliver their entire files, all documents and other things related to their representation of the Debtors (including electronically stored information) to Ya Hsin within 15 days of the date of the entry" of the Order. JER 522-- 23.

On June 16, 2010, Citron filed a notice of appeal. On appeal, Citron contends that the Bankruptcy Court's Order was erroneous because Ya Hsin does not control the Debtors' attorney-client privilege ...

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