New Rules Amendment to Shield Draft Expert Reports — Significant Impact Expected on Practice With Financial Advisors in Chapter 11 Cases

November 23, 2010

Amendment to Take Effect December 1, 2010

On December 1, 2010, an amendment to Rule 26(b) of the Federal Rules of Civil Procedure will take effect that may have considerable impact on practice in large chapter 11 cases. The amendment will apply in adversary proceedings in bankruptcy courts pursuant to Fed. R. Bankr. P. 7026. The amendment will not automatically apply in plan contests (the area where it is likely to most significantly change practice), nor in other “contested matters,” but it is likely to be imposed by bankruptcy courts in individual cases.

The proposed amendment to Rule 26(b) will significantly change trial practice with regard to experts, including financial advisors who give valuation and other evidence in chapter 11 cases. The amendment extends “work-product” protections (which are generally, but not always, impermeable) to the drafts of the written reports of testifying expert witnesses and communications with their retaining counsel, subject to limited exceptions. The text of proposed new subparagraphs (b)(4)(B) and (b)(4)(C) is attached below.

The amendments are designed to address problems in current practice, in which interaction between lawyers and testifying experts is broadly discoverable:

Experience . . . has shown that lawyers and experts take elaborate steps to avoid creating any discoverable record and at the same time take elaborate steps to attempt to discover the other side’s drafts and communications. The artificial and wasteful discovery-avoidance practices include lawyers hiring two sets of experts — one for consultation, to do the work and develop the opinions, and one to provide the testimony — to avoid creating a discoverable record of the collaborative interaction with the experts. . . . These steps add to the costs and burdens of discovery.

September 2009 Report of the Judicial Conference (“Report”) at 11-12. The amendment will not alter disclosure requirements for so-called “reliance materials” under Rule 26(a)(2)(B)(ii):

[D]iscovery is not limited for the areas important to learning the strengths and weaknesses of an expert’s opinion. . . . [C]ommunications between lawyer and expert about the following are open to discovery: (1) compensation for the expert’s study or testimony; (2) facts or data provided by the lawyer that the expert considered in forming opinions; and (3) assumptions provided to the expert by the lawyer that the expert relied upon in forming an opinion.

Report at 12-13.

For chapter 11 practitioners, this rule change should simplify many of the logistics that, in current practice, lead to “mutual nonaggression pacts” (through which parties by contract agree not to seek discovery of drafts), or elaborate and expensive workarounds to avoid inquiry into the process by which the opinions were formed. In many cases, it may no longer be necessary for a creditor group to engage separate experts, one as an advisor and another as a testifying expert.

Nevertheless, the rule may present traps for the unwary. Only draft reports and communications with counsel are protected. In chapter 11 cases, financial advisors may undertake many roles, including the giving of advice to clients and negotiations with adversaries. Those activities may generate inconsistencies with valuation opinions. The amendment does not expressly protect such undertakings from disclosure. In short, while the amendment will provide considerable latitude and cost savings, it will not sanitize from discovery all financial advisor activities. Institutions, counsel and financial advisors must be careful in fashioning the scope of work of testifying experts that are also financial advisors.

Professionals must not assume that the rule change will apply generally in chapter 11 cases. The architecture of the procedural rules is such that, outside the theater of  “adversary proceedings” — for example, in plan confirmation disputes, motions for relief from stay and other contested matters — the expert disclosure rules (including the new amendment) will apply only where the court specifically orders. In practice, disclosure in these situations occurs by an agreement of the parties subject to court approval. Practitioners should therefore be mindful that the work-product protections of the new amendment do not automatically apply in contested matters. However, the amendment will likely become the standard against which parties negotiate the terms of expert disclosure and discovery.

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Text of Proposed Amendment to Rule 26(b)(4)(B) and (b)(4)(C):

(B) Trial-Preparation Protection for Draft Reports or Disclosures. Rules 26(b)(3)(A) and (B) protect drafts of any report or disclosure required under Rule 26(a)(2), regardless of the form in which the draft is recorded.

(C) Trial-Preparation Protection for Communications Between a Party’s Attorney and Expert Witnesses. Rules 26(b)(3)(A) and (B) protect communications between the party’s attorney and any witness required to provide a report under Rule 26(a)(2)(B), regardless of the form of the communications, except to the extent that the communications:

(i) relate to compensation for the expert’s study or testimony;
(ii) identify facts or data that the party’s attorney provided and that the expert considered in forming the opinions to be expressed; or
(iii) identify assumptions that the party’s attorney provided and that the expert relied on in forming the opinions to be expressed.


For more information about the subject matter of this alert, please contact the lawyers listed below:

Julia Frost-Davies, Partner, Financial Restructuring, 617.951.8422

Andrew J. Gallo, Partner, Financial Institutions Litigation, 617.951.8117

This article was originally published by Bingham McCutchen LLP.