Blackjewel L.L.C. and Lone Mountain Processing, LLC

BRNJAMIN A. KAHN

UNITED STATES BANKRUPTCY JUDGE

Dated: August 15th, 2025

UNITED STATES BANKRUPTCY COURT

SOUTHERN DISTRICT OF WEST VIRGINIA

HUNTINGTON DIVISION

In re: ) Chapter 11

)

Blackjewel, L.L.Cc., et al.,1} ) Case No. 19-30289

)

Former Debtors. ) (Jointly Administered)

OPINION GRANTING IN PART AND DENYING IN PART THE DEPARTMENT OF

LABOR’ S MOTION TO COMPEL DISCOVERY

This case came before the Court for hearing on the Motion to

Compel filed by the Secretary of the United States Department of

Labor (“DOL”) on May 30, 2025, ECF No. 3972 (“Motion”), the

Response in Opposition to the Motion filed by the Liquidation

Trustee of the Blackjewel Liquidation Trust, LLC (“Trust”) on July

1 The former debtors in these chapter 11 cases and the last four digits of each

debtor’s taxpayer identification number are as follows: Blackjewel, LLC (0823);

Blackjewel Holdings LLC (4745); Revelation Energy Holdings, LLC (8795);

Revelation Management Corporation (8908); Revelation Energy, LLC (4605);

Dominion Coal Corporation (2957); Harold Keene Coal Co. LLC (6749); Vansant

Coal Corporation (2785); Lone Mountain Processing, LLC (0457); Powell Mountain

Energy, LLC (1024); and Cumberland River Coal LLC (2213) (collectively,

“Debtors”). The mailing address for each Debtor is located at 999 17th Street,

Suite 700, Denver, Colorado 80202, Attn: David J. Beckman, Trustee.

7, 2025, ECF No. 3981 (“Response”), and the Reply in Support of

the Motion filed by the DOL on July 14, 2025. ECF No. 3982

(“Reply”). At the conclusion of the hearing, the Court took this

matter under advisement. For the reasons stated herein, the Court

will grant the Motion in part and deny the Motion in part.

FACTUAL BACKGROUND

I. The Prior Health Plan

Debtors filed voluntary petitions for relief under chapter 11

of title 11 on July 1, 2019, and July 24, 2019. ECF No. 1 &

309.2 Debtors’ “core business was mining and processing

metallurgical, thermal and other specialty and industrial

coals.” ECF No. 2500, at 17. At the time of the initial filing,

Debtors intended to operate their businesses and manage their

properties as debtors and debtors in possession under §§ 1107 and

1108. See ECF No. 2, at 3. As of the petition date, Debtors

employed approximately 1,700 employees (600 in the “Western

Division” and 1,100 in the “Eastern Division”). ECF No. 14, ¶¶ 7

& 8. Debtors unexpectedly could not secure debtor-in-possession

financing at the outset of the case, and suspended operations and

furloughed almost all employees on the petition date. ECF No.

2500, at 27. From the July 1 petition date through approximately

August 24, 2019, Debtors attempted to find financing that would

2 For purposes of this opinion and order, the Court will refer to July 1, 2019,

as the petition date.

permit them to restart operations and attempt a rehabilitation,

but these efforts were unsuccessful, and, unable to restart

operations, Debtors promptly sought to liquidate all their assets.

See ECF No. 3887, at 14. To assist with this wind-down and

liquidation, Debtors returned 192 of the furloughed employees.

Id.

At the time of filing, Debtors contracted with various

insurance companies to provide health and supplemental insurance

to their employees. ECF No. 3887, at 12. United Healthcare

Services, Inc. (“UHSI”) served as the third-party administrator

for Debtors’ self-funded health plan (the “Prior Health Plan”).

Id. Under the Prior Health Plan, Debtors self-funded a bank

account from which UHSI paid employees’ insurance premiums and

medical expense claims. ECF No. 2639, ¶ 2. Prior to the failure

to obtain financing for operations and contemporaneous with the

filing of the original petitions, Debtors filed a motion seeking

approval to continue operating the Prior Health Plan in the

ordinary course of business, ECF No. 6, which motion was granted

on August 8, 2019. ECF No. 626.

On July 9, 2019, due to Debtors’ inability to fund the account

as necessary to satisfy certain medical expense claims arising

under the Prior Health Plan, UHSI suspended the payment and

processing of claims arising after that date under the Prior Health

Plan. ECF No. 2639, ¶ 5. On July 17, 2019, this hold was extended

to stop the payment and processing of all claims arising under the

Prior Health Plan regardless of the date of service of the claim.

Id. ¶ 6.3 Soon thereafter, on August 25, 2019, Debtors filed a

motion seeking approval to terminate the Prior Health Plan

effective August 31, 2019, ECF No. 879, which motion was granted

on August 30, 2019. ECF No. 968.4

II. The DOL’s Claims

On July 3, 2019, the Court entered an Order providing for the

joint administration of the chapter 11 cases of certain Debtors,

including Blackjewel, LLC and Revelation Energy, LLC. ECF No. 60.

This order provides that all further filings and docket entries

shall be made in the chapter 11 case of Blackjewel, LLC, but all

proofs of claim must be filed in the specific case to which they

apply. Id. ¶¶ 3 & 5. On August 8, 2019, the DOL filed on behalf

of the Prior Health Plan itself a proof of claim in the case of

Revelation Energy, LLC, POC No. 210, as well as a proof of claim

in the case of Blackjewel, LLC, POC No. 208. Each claim is for an

3 The claim hold did not stop the processing and payment of claims submitted

before the July 17th extension or the payment of claims for prescription drug

benefits. ECF No. 2639, ¶ 6.

4 This order authorized Debtors to enter a new plan, which was not self-funded,

to provide health insurance for returning employees. ECF No. 968. Debtors

contracted with UHSI for new health insurance coverage for their current

employees and their dependents, effective September 1, 2019 (the “New Health

Plan”). ECF No. 3887, ¶ 12. On October 24, 2019, Debtors filed a motion

seeking approval to terminate the New Health Plan, ECF No. 1275, which motion

was granted by the Court on November 21, 2019. ECF No. 1456. Debtors timely

paid all premiums under the New Health Plan. ECF No. 3887, ¶ 12. Debtors did

not contract for any further health or supplemental insurance coverage for their

employees after the termination of the New Health Plan. Id. ¶ 14.

unliquidated amount and states that the basis of the claim is

“money due to ERISA covered 401(k) plan;” however, the attachment

to each proof of claim explains that the claim is actually

regarding money due to the Blackjewel, LLC Health Care Plan and

the Revelation Energy, LLC Health Care Plan, respectively. POC

Nos. 210 & 208. Neither claim asserts entitlement to

administrative priority, instead, each states that it should be

“accorded unsecured priority treatment to the extent permitted in

accordance with § 507(a)(5).” Id. The attachment to each proof

of claim further states that the DOL was in the process of

investigating potential ERISA violations and that the DOL would

amend or withdraw each proof of claim upon completion of its

investigation. Id. On November 1, 2019, in the Revelation Energy,

LLC case, the DOL filed on behalf of the Prior Health Plan, an

amendment to POC No. 210, asserting a priority claim under §

507(a)(5) in the amount of $3,290,622.89 for contributions to an

employee benefit plan and a general unsecured claim in the amount

of $473,246.85. Id. This amendment states that the DOL initiated

an investigation into potential ERISA violations and determined

that Debtor failed to pay participant medical claims under the

Prior Health Plan and such failure “may or may not constitute a

violation actionable” under ERISA. POC No. 1327. On April 16,

2021, the DOL amended POC No. 1327, increasing the priority claim

amount to $4,656,339.17 and the general unsecured claim to

$892,311.73. POC No. 1625. The amendment again states that the

DOL initiated an investigation into potential ERISA violations and

determined that Debtor failed to pay participant medical claims

under the Prior Health Plan and such failure “may or may not

constitute a violation actionable” under ERISA. Id.5

III. The DOL’s Request for Administrative Priority

On October 4, 2019, the Court entered an Order which, inter

alia, set a bar date of November 4, 2019, for the filing of requests

for allowance of administrative expense claims, ECF No. 1188, at

3-4,6 which deadline was extended to November 12, 2019, by

stipulation. ECF No. 1383. The DOL timely filed on the bar date

a request for an unliquidated administrative expense claim “for

any and all unpaid amounts resulting from the postpetition

operation of the Debtors’ ERISA Plans, including any damages

arising from their operation subsequent to the Petition Date.”

ECF No. 1352, ¶ 10. In this request, the DOL stated that there

were approximately $7,500,000.00 in unpaid claims for postpetition

5 This amendment states that $446,717.88 of the liquidated amount represents

525 claims that were for dates of service prior to August 1, 2018. POC No.

1625.

6 The order provides that: “Each party asserting a request for allowance of

Administrative Claims arising between the Petition Date and October 14, 2019

(excluding claims for (a) fees and expenses of professionals retained in these

proceedings, and (b) payables arising from postpetition goods or services

provided to the Debtors in the ordinary course of business) must file an

Administrative Claim Request with the Court . . . before November 4, 2019.”

ECF No. 1188, at 3-4.

services asserted against the Prior Health Plan. Id. ¶ 7.7 On

May 19, 2020, the DOL amended its administrative claim request to

indicate that the amount of postpetition claims against the Prior

Health Plan had increased to approximately $9,500,000.00. ECF No.

1986, ¶ 3. The DOL stated that the purpose of this amendment was

“to reflect this approximate two million dollar increase in

postpetition claims being asserted against the [Prior Health

Plan].” Id. ¶ 4. On January 20, 2021, the DOL amended its

administrative claim request again, to indicate that the amount of

postpetition claims against the Prior Health had increased to

almost $13,000,000.00, including “likely duplicative claims.” ECF

No. 2852, ¶ 4. The DOL stated that this amendment was filed “to

reflect such approximately $3,500,000.00 increased amount.” Id.

¶ 5. On April 15, 2021, the DOL filed its final request for

payment of an administrative expense claim in the amount of

“$14,052,175.23 plus unbilled amounts.” ECF No. 3265, ¶ 5 (the

“DOL Claim”). The form used for the request provides that

“Documentation Supporting the Claim Must be Attached Hereto.” Id.

¶ 6. The request did not include any attachments. See id. The

7 In its original application, the DOL stated that the amount of postpetition

administrative expense obligations arising under the Prior Health Plan were

undetermined and until the unpaid claims were processed to determine the amount

of benefits payable and to distinguish the claims of Debtors’ employees from

non-debtor employees, it was not possible to determine which of these claims

constitute administrative expense obligations of Debtors. ECF No. 1352, ¶¶ 8

& 9. Still, as a “protective measure,” the DOL filed its request for an

unliquidated administrative claim for any and all unpaid amounts resulting from

the postpetition operation of the plans. Id. ¶ 10.

request describes the nature of the claim as “Post-petition claims

covered by the [Prior Health Plan].” Id. ¶ 3. None of the DOL’s

requests or amendments state that the basis for administrative

expense priority of the DOL Claim is an ERISA violation. See ECF

Nos. 1352, 1986, 2852 & 3265.

III. Confirmation

On October 21, 2020, Debtors filed an Amended Chapter 11 Plan

and First Amended Disclosure Statement. ECF Nos. 2499 & 2500

(“Plan” and “Disclosure Statement,” respectively). The DOL

objected to confirmation of the Plan because, among other reasons,

the Plan, by failing to account for how distributions would be

made from Debtors’ health plan following its termination, did not

provide treatment for the DOL Claim. ECF No. 2641, at 4-5. On

March 22, 2021, with the support of the DOL, the Court confirmed

the Plan and approved the Disclosure Statement as amended to obtain

the support and consent of the DOL. ECF No. 3147. The resolution

supported by the DOL is reflected in paragraphs 24 to 29 of the

Confirmation Order, creating a procedure by which the Trust and

UHSI are to review and make distributions on certain unadjudicated

claims under the Prior Health Plan. Id. ¶¶ 24-29.

IV. The Trust’s Objection the DOL Claim

On January 12, 2023, the Court entered an Order Approving

Certain Claim Objection Procedures and Related Claim Hearing

Procedures (the “Procedures Order”), authorizing the Trust to

object to claims on an omnibus basis on grounds beyond those

enumerated in Fed. R. Bankr. P. 3007(d) and establishing

streamlined hearing procedures to efficiently resolve the Trust’s

omnibus objections. ECF No. 3705. On May 28, 2024, the Trust

filed the Thirteenth Omnibus Objection, seeking, in part, a

reduction of the administrative expense request of the DOL from

$14,052,175.23 to $144,214.80, and a reclassification of the

remainder as a general unsecured claim. ECF No. 3887, at 21. On

September 9, 2024, the DOL filed a response to the Trust’s

objection, arguing that the objection should be denied because (1)

it violates the Procedures Order; (2) no benefit to the bankruptcy

estate needs to be shown for a claim to have administrative expense

priority when the claim arises from a violation of the law;8 and

(3) even if a benefit to the estate is required, it fails to

recognize the value provided to the estate by UHSI’s postpetition

operation of the Prior Health Plan. ECF No. 3912. On September

20, 2024, the Trust filed a reply in support of its objection.

ECF No. 3913.

V. Hearing on the Trust’s Objection

The Court held a hearing on the Trust’s objection, ECF No.

8 The response states that no benefit to the estate needs to be shown to

establish administrative expense priority of the DOL Claim because “Debtors

apparently violated ERISA.” ECF No. 3912, at 10. This is the first instance

in which the DOL states that the basis for administrative expense priority of

its claim is an allegation that Debtors’ violated ERISA.

3918, and for the reasons set forth on the record at the hearing,

including that the terms of the Confirmed Plan superseded the

omnibus objection procedures with respect to the DOL, adjourned

the hearing to a later date and directed the parties to file a

status report detailing the processes by which the parties intend

to proceed in determining the amount by which the DOL Claim is to

be reduced and providing an estimation of how long this process

will take. ECF No. 3916. On October 25, 2024, the parties filed

such status report, providing that in lieu of proceeding as set

forth in paragraph 26 of the Confirmation Order, the parties would

instead conduct a six-month discovery process concerning only

issues relevant to determining whether any portion of the DOL Claim

was entitled to administrative priority. ECF No. 3924, ¶ 5. On

December 5, 2024, the Court entered a Joint Scheduling Order

providing the DOL and the Trust until May 23, 2025, to conduct and

complete this discovery, and setting an evidentiary hearing to

adjudicate the proper classification of the DOL Claim on July 17,

2025. ECF No. 3951.9

9 The Joint Scheduling Order provides:

The Parties shall have until and including May 23, 2025, to conduct

and complete discovery concerning the administrative expense status

of the DOL’s claims . . . including, but not limited to, whether a

benefit to the estate is required to be shown for granting

administrative expense status for the DOL Claims and including

others matters concerning the administrative expense classification

of the DOL Claims other than the amount of the DOL Claims.

ECF No. 3951, ¶ 2.

VI. Current Motion

On May 30, 2025, the DOL filed the current Motion seeking an

order compelling the Trust to comply with Requests for Production

of Documents numbers 5, 7, and 10 and to produce certain documents

and communications listed in the Trust’s privilege log for in

camera review to allow the Court to assess the Trust’s asserted

privileges and the application of the ERISA fiduciary exception.

ECF No. 3972. On July 7, 2025, the Trust filed the Response to

the DOL’s Motion, stating, inter alia, that it has produced all

non-privileged, responsive communications that are relevant to the

administrative expense status classification dispute, the ERISA

fiduciary exception is inapplicable, in camera review is not

necessary, and none of the communications and documents identified

in the privilege log should be produced. ECF No. 3981. On July

14, 2025, the DOL filed its Reply in support of the Motion. ECF

No. 3982.

DISCUSSION

If a party from whom discovery is sought responds by serving

objections to the requests or responds in a way that the requesting

party considers evasive or incomplete, the validity of the

objections and the adequacy of the responses may be tested through

a motion to compel discovery. Fed. R. Civ. P. 37(a)(3)(B) & (4),

made applicable by Fed. R. Bankr. P. 7037. The requesting party

has the burden of proving that the responses are incomplete, false,

or inadequate. Cont’l Ins. Co. v. McGraw, 110 F.R.D. 679, 682 (D.

Colo. 1986) (citing Daiflon, Inc. v. Allied Chem. Corp., 534 F.2d

221 (10th Cir. 1976)). When deciding a motion to compel, the court

should consider whether the discovery sought is relevant and

proportional to the needs of the case. Fed. R. Civ. P. 26(b)(1),

made applicable by Fed. R. Civ. P. 7026.

A motion to compel will be denied to the extent materials

sought are privileged. Fed. R. Civ. P. 26(b)(1); see also Conant

v. McCoffey, No. C 97-0139 FMS, 1998 WL 164946, at *2 (N.D. Cal.

Mar. 16, 1998) (“To succeed on its motion to compel, the [movant]

must show that the information sought is relevant, and that it

does not fall under the various privileges plaintiffs have

asserted.”). The party resisting discovery based on privilege

bears the burden of proving that the asserted privilege

applies. See, e.g., In re Horowitz, 482 F.2d 72, 82 (2d Cir. 1973)

(citing United States v. Kovel, 296 F.2d 918, 923 (2d Cir. 1961)).

When a party withholds discovery based on attorney-client

privilege or work product doctrine, that party is required to

produce a privilege log that satisfies the requirements of Fed. R.

Civ. P. 26(b)(5)(A)(ii) (providing that a privilege log must

“describe the nature of the documents, communications, or tangible

things not produced or disclosed—and do so in a manner that,

without revealing information itself privileged or protected, will

enable other parties to assess the claim”). “Privilege is a matter

of both ‘the context and content’ of the disputed

documents.” Tatum v. R.J. Reynolds Tobacco Co., No.

1:02CV373, 2008 WL 11355417, at *2 (M.D.N.C. Jan. 11, 2008)

(quoting United States v. Mett, 178 F.3d 1058, 1064 (9th Cir.

1999)).

Courts may conduct in camera review of materials before ruling

on motions to compel that are opposed based on privilege. See,

e.g., United States v. Zolin, 491 U.S. 554, 572 (1989). To be

granted in camera review, the movant must present “‘a factual basis

adequate to support a good faith belief by a reasonable person’ .

. . that in camera review of the materials may reveal evidence to

establish the claim that the . . . exception applies.” Id.

(quoting Caldwell v. Dist. Ct. In & For City & Cnty. of Denver,

644 P.2d 26, 33 (Colo. 1982)). Once the movant makes this showing,

“whether to engage in an in camera review is a matter of the

Court’s discretion.” Peters v. Aetna Inc., No. 1:15-CV-00109-

MR, 2018 WL 3616923, at *10 (W.D.N.C. July 27, 2018) (citing Zolin,

491 U.S. at 572).

I. The DOL’s requests for production of documents are overbroad.

In order to determine both the relevancy and the

proportionality of the discovery requests, the Court first must

consider the extent to which the requested discovery affects any

potential administrative priority to which the claim may be

entitled. See Fed. R. Civ. P. 26(b)(1). The purpose of discovery

in this case is solely to determine the administrative priority of

the DOL Claim. See ECF No. 3951, ¶ 2. An administrative expense

is “the actual, necessary costs and expenses of preserving the

estate.” 11 U.S.C. § 503(b)(1)(A). Because of the presumption

that the assets of a bankruptcy estate will be equally distributed,

administrative priority is narrowly construed. Ford Motor Credit

Co. v. Dobbins, 35 F.3d 860, 865 (4th Cir. 1994). To qualify as

an actual and necessary administrative expense, “(1) the expense

and right to payment arise after the filing of bankruptcy, and (2)

the consideration supporting the right to payment provides some

benefit to the estate.” In re Midway Airlines Corp., 406 F.3d

229, 237 (4th Cir. 2005) (two requirements: (1) expense arises

after petition; and (2) the consideration supporting the right to

payment provides some benefit to the estate). “The focal point of

the allowance of a priority is to prevent unjust enrichment of the

estate, not to compensate the creditor for its loss.” In re Globe

Metallurgical, Inc., 312 B.R. 34, 40 (Bankr. S.D.N.Y. 2004) (citing

In re R.H. Macy & Co., Inc., 170 B.R. 69, 78 (Bankr. S.D.N.Y.

1994)). The party claiming administrative priority has the burden

of demonstrating entitlement to such priority by a preponderance

of the evidence. In re Liberty Fibers Corp., 383 B.R. 713, 717

(Bankr. E.D. Tenn. 2008) (citing In re HNRC Dissolution Co., 343

B.R. 839, 843 (Bankr. E.D. Ky. 2006)). The claimant must also

show that the benefit is more than a speculative or potential

benefit. In re Kmart Corp., 290 B.R. 614, 621 (Bankr. N.D. Ill.

2003)) (citing In re Lickman, 273 B.R. 691, 704 (Bankr. M.D. Fla.

2002)).

In this case, the parties do not dispute that the health plan

claims of Debtors’ employees who returned post-petition are

entitled to administrative priority. See ECF No. 3887, at 19-21.

However, the DOL Claim includes postpetition health plan claims of

furloughed employees who did not return to work. See ECF No. 3912.

The DOL contends that the health plan claims of furloughed

employees are also entitled to administrative priority because no

benefit to the estate needs to be shown when a claim arises from

a violation of the law and, alternatively, even if a benefit to

the estate needs to be shown, that requirement is met because the

continued operation of the Prior Health Plan for furloughed

employees provided substantial value to Debtors’ estates. Id.

A. The DOL must demonstrate a benefit to the estate to

entitle the claims of the furloughed employees to

administrative expense priority.

The Court first will consider whether the claims of the

furloughed employees are entitled to priority because they

allegedly were caused by the plan administrator’s failure to give

sufficient notice of termination of the Prior Health Plan in

violation of ERISA. In Reading Co. v. Brown, 391 U.S. 471 (1968),

the Supreme Court established an exception to the requirement that

an expense confer a benefit to the bankruptcy estate to be entitled

to administrative expense priority. In Reading, the Court held

that the fire damage claim, caused by postpetition tortious

negligence of the receiver, was an “actual and necessary cost” of

operating the debtor’s business despite not providing a benefit to

the estate. Reading, 391 U.S. at 485. The Court explained that

“actual and necessary costs” “should include costs ordinarily

incident to operation of a business, and not be limited to costs

without which rehabilitation would be impossible.” Id. at 483.10

“The Court reasoned that its decision allocates the burden of the

tort damages arising from the operation of the debtor post-petition

to the pre-petition creditors, who are the intended beneficiaries

of the debtor’s rehabilitation.” In re Sunarhauserman, Inc., 126

F.3d 811, 816 (6th Cir. 1997) (citing Reading, 391 U.S. at 482-

83).

As recognized in Reading itself, the exception finds its

purchase in the operating costs of a business and the costs of

rehabilitation, rather than liquidation. Reading, 391 U.S. at

483. Courts therefore have limited the exception to instances in

which the purported victims’ claims arise out of postpetition

business operations, holding that the exception does not apply in

non-operating, liquidating cases. In re Lister-Petter Americas,

10 “Rehabilitation” refers to a debtor’s ability “to restore the viability of

its business,” and “is a more demanding standard than reorganization,” which

can include a liquidation as occurred in this case. In re Paterno, 511 B.R.

62, 68 (Bankr. M.D.N.C. 2014).

Inc., No. 15-10502, 2020 WL 598433, at *5 n.36-38 (Bankr. D. Kan.

Feb. 6, 2020) (and accompanying text) (“[a]t least three circuit

courts of appeal have drawn the operating-liquidating distinction,

denying Reading treatment to victims of liquidating trustee

mishaps”) (citing In re Hemingway Transp., Inc., 954 F.2d 1, 6-7

(1st Cir. 1992); In re Res. Tech. Corp., 662 F.3d 472, 476-77 (7th

Cir. 2011) (rejecting the application of Reading in a liquidating

case during which the debtor “was not operating in any meaningful

sense,” and finding that “the policy against permitting bankrupt

firms to externalize the costs of their torts—depends on whether

the bankrupt firm is operating, not which part of the Bankruptcy

Code (that is, whether Chapter 7 or Chapter 11) it is operating

under”); and In re Abercrombie, 139 F.3d 755, 758 (9th Cir. 1998)

(refusing to extend Reading, and observing that it applies only in

operating cases because the costs of rehabilitation of a debtor’s

business benefit creditors).

In this case, none of the disputed claims of former employees

under the Prior Health Plan relate to Debtors’ limited postpetition

wind-down in connection with the rapid liquidation of Debtors’

assets. All the claims under the New Health Plan for workers who

returned have been paid, ECF No. 3887, ¶ 12, and the Trust does

not dispute that the unpaid benefits for returning employees under

the Prior Health Plan are entitled to priority. See ECF No. 3887,

at 19-21. Therefore, unlike the tort claims in Reading, there is

no connection between any limited post-petition operations and the

former employee claims, and courts have not extended the Reading

exception in these circumstances. This Court similarly will not

expand Reading in contradiction of the intended narrow application

of administrative priority.

B. The benefit to the estate provided by the furloughed

employees must be actual and not speculative.

Absent the Reading exception, “[a] postpetition expense may

only qualify as an actual, necessary expense of preserving the

estate to the extent that the incurring of such expense conferred

some concrete benefit upon the estate.” In re Right Time Foods,

Inc., 262 B.R. 882, 884 (Bankr. M.D. Fla. 2001) (citing In re

Subscription Television of Greater Atlanta, 789 F.2d 1530, 1532

(11th Cir. 1986)). “‘[T]he mere potential of benefit to

the estate is insufficient for the claim to acquire status as

an administrative expense.’” Ford Motor, 35 F.3d at 866 (quoting

In re ICS Cybernetics, Inc., 111 B.R. 32, 36 (Bankr. N.D.N.Y.

1989)). As the Eleventh Circuit put it:

That which is actually utilized by a trustee in the

operation of a debtor's business is a necessary cost and

expense of preserving the estate and should be accorded

the priority of an administrative expense. That which

is thought to have some potential benefit, in that it

makes a business more likely salable, may be a benefit

but is too speculative to be allowed as an “actual,

necessary cost and expense of preserving the estate.”

Subscription Television, 789 F.2d at 1532; see also Right Time

Foods, 262 B.R. 882 (holding that costs of maintaining health

coverage were not actual, necessary costs or expenses of preserving

the estate because the debtor did not employ anyone during the

period when those costs accrued).

In this case, the DOL argues that continued operation of the

Prior Health Plan provided a benefit to the estate because it gave

the furloughed employees an incentive to remain with the company

which made the company more attractive to potential buyers. ECF

No. 3912, at 20.11 This argument is speculative and insufficient

to confer an actual benefit on the estate. The fact that potential

purchasers may have valued continued healthcare benefits to

furloughed employees and made such benefits a requisite to their

offers does not constitute an actual benefit to the estate. This

is true even if the offers of such potential purchasers may have

facilitated higher offers from actual purchasers who imposed no

such requirement because such attenuated benefit is too

speculative to constitute an actual benefit. An actual benefit to

the estate only exists if the actual purchasers made continued

11 The DOL cites In re ES2 Sports & Leisure, LLC, 519 B.R. 476, 482 (Bankr.

M.D.N.C. 2014), for the proposition that a potential benefit when negotiating

with a purchaser is sufficient to confer administrative priority. ECF No. 3912,

at 17. The DOL’s reliance on ES2 is misplaced. In that case, the court denied

administrative priority because the use of the equipment did not actually

benefit the estate, and there was no evidence “that the potential availability

of the Equipment was beneficial to the Estate when negotiating with the

purchaser.” The court was not discussing the potential benefit, it was

discussing the potential availability. If the lease for the equipment in that

case were a true lease, any assumption and assignment of the lease would have

been subject to court approval after notice and hearing. The fact that

assumption and assignment was subject to court approval made the leased

equipment potentially available. But, as the court stated, in order to confer

administrative priority, the record would have had to demonstrate that its

potential availability was beneficial in the negotiations with the purchaser.

healthcare benefits to furloughed employees a condition of their

consummation of a purchase. At the hearing on the Motion, the DOL

conceded that none of the asset purchase agreements approved in

this case contained such a requirement or warranty by the estates.

Thus, to the extent that the requests for production seek documents

and communications related to the negotiations of potential

purchasers, or documents and communications related to actual

purchasers that do not discuss continued health benefits to

furloughed employees, the requests are overly broad. Even if

relevant, the request must be “proportional to the needs of the

case, considering the importance of the issues at stake in the

action, the amount in controversy, . . . the parties’ resources,

the importance of the discovery in resolving the issues, and

whether the burden or expense of the proposed discovery outweighs

its likely benefit.” Fed. R. Civ. P. 26(b)(1). Despite the

absence of any provision in the applicable asset purchase

agreements for Debtors to retain furloughed employees, the Court

nevertheless will permit discovery related to the communications

with actual purchasers as provided herein.

C. The DOL’s requests for production of documents will be

allowed to the extent relevant to a determination of the

benefit to the estates.

Having determined that the Reading exception does not apply,

and that only the portion of health care benefits that actually

benefited Debtors’ estates might be entitled to priority, the Court

will address the breadth and burden of the disputed requests.

i. Request for Production of Documents No. 5

Request 5 seeks all communications with UHSI regarding the

Prior Health Plan [excluding invoices for payment] for the period

from June 1, 2019, through March 31, 2021. ECF No. 3972, at 6.

The DOL contends that the putative benefit to the estates of

maintaining the health care plan was to keep furloughed employees

available for potential purchasers, thereby making the assets

potentially more attractive to purchasers. ECF No. 3912, at 20.

As discussed above, this speculative benefit is insufficient. The

DOL further contends that Debtors must have additional responsive

documents because in its August 25, 2019 Motion to terminate the

Prior Health Plan, ECF No. 879, Debtors referenced pre-termination

communications with the third-party plan administrator regarding

giving furloughed employees notice of termination. Id. at 11-12.12

This theory necessarily terminates on the date the Prior Health

Plan was terminated. Thus, the Court will compel the Trust to

produce all responsive non-privileged13 documents in its custody

and control for the period from July 1, 2019, through August 31,

2019, that refer to maintaining the Prior Health Plan or

12 The cited communication likely is relevant only to the DOL’s theory for

application of the Reading exception, which the Court has determined does not

apply in this liquidating case. Nevertheless, the burden of producing

communications with UHSI regarding maintaining the plan or plan termination

during such a short time frame should not be substantial.

13 The Court discusses the extent of privilege below.

terminating the Prior Health Plan.

ii. Request for Production of Documents No. 7

Request 7 seeks all documents exchanged and/or communications

between Debtors and any potential or actual purchasers of assets

of Debtors for the period from July 1, 2019, through September 17,

2019. ECF No. 3972, at 6. The DOL contends that communications

between the Trust and the potential and actual purchasers of

Debtors’ assets will indicate whether continuing to provide health

insurance for furloughed employees was a benefit to the bankruptcy

estate. Id. at 10. However, this request is overbroad to the

extent that it seeks documents and communications between Debtors

and potential purchasers who did not consummate sales with the

estates. As explained above a mere potential benefit to the

estates is insufficient to confer administrative expense priority.

Therefore, the Court will compel the Trust to produce all

responsive non-privileged documents exchanged and communications

in its custody and control: (1) between Debtors and actual

purchasers of estate assets; (2) which exchanges and

communications occurred between July 1, 2019, and August 31, 2019;

and (3) which discuss or relate to continuing to provide healthcare

benefits to furloughed employees.

iii. Request for Production of Documents No. 10

Request 10 seeks documents and/or communications discussing

the furloughing of Debtors’ employees for the period from June 1,

2019, through March 31, 2021. ECF No. 3972, at 12. This request

is overly broad to the extent that it seeks communications for the

period after the Prior Health Plan was terminated on August 31,

2019, or seeks either internal discussions of potential value or

communications with potential purchasers. Even if Debtors’

management thought there might be value in maintaining the Prior

Health Care Plan before August 31, 2019, that internal speculation

or hope does not confer an actual benefit to the estate. Globe

Metallurgical, 312 B.R. at 40 (“focal point of the allowance of a

priority is to prevent unjust enrichment of the estate,” not the

damage to the claimant). Therefore, the Court will compel the

Trust to produce all responsive non-privileged documents and

communications: (1) for the period from June 1, 2019, through

August 31, 2019; and (2) which discuss or are related to

maintaining the Prior Health Plan in connection with a transaction

or contemplated transaction with any actual purchaser of assets

from the estates.

II. The ERISA fiduciary exception to the attorney-client

privilege is inapplicable to the documents sought by the

DOL.

The DOL contends that the Trust’s privilege log is

insufficient to allow the DOL to assess: the relevancy of the

documents, whether there is adequate basis for the privilege

asserted, and whether the ERISA fiduciary exception applies. ECF

No. 3972, at 16. Therefore, the DOL requests an in camera review

of the documents listed on the privilege log. Id. The Trust

contends that the privilege log contains a clear description of

the communication or document at issue without disclosing

privileged information, the ERISA fiduciary exception is

inapplicable, in camera review is unnecessary, and none of the

documents identified on the privilege log should be produced. ECF

No. 3981, at 15.

“[T]he attorney-client privilege is, perhaps, the most sacred

of all legally recognized privileges.” United States v. Bauer,

132 F.3d 504, 510 (9th Cir. 1997). However, “[b]ecause it impedes

full and free discovery of the truth, the attorney-client privilege

is strictly construed.” Weil v. Inv./Indicators, Rsch. & Mgmt.,

Inc., 647 F.2d 18, 24 (9th Cir. 1981). Courts recognize a limited

exception to attorney-client privilege in the context of fiduciary

relationships. “Rooted in the common law of trusts, the fiduciary

exception is based on the rationale that the benefit of any legal

advice obtained by a trustee regarding matters of trust

administration runs to the beneficiaries.” Solis v. Food Emps.

Lab. Rels. Ass'n, 644 F.3d 221, 226 (4th Cir. 2011). The exception

developed in the context of corporate derivative actions, in which

courts found that a corporation could not invoke attorney-client

privilege against shareholders in suits brought by the

shareholders against the corporation for breaches of fiduciary

duty. See, e.g., Garner v. Wolfinbarger, 430 F.2d 1093 (5th Cir.

1970).

The fiduciary exception also has been applied in the context

of ERISA enforcement actions: “‘where an ERISA trustee seeks an

attorney’s advice on a matter of plan administration and where the

advice clearly does not implicate the trustee in any personal

capacity, the trustee cannot invoke the attorney-client privilege

against the plan beneficiaries.’” Solis, 644 F.3d at 227 (quoting

Mett, 178 F.3d at 1064).14 This exception does not apply to

“communications between ERISA fiduciaries and plan attorneys

regarding non-fiduciary matters, such as adopting, amending, or

terminating an ERISA plan.” Id. at 228 (citing Bland v. Fiatallis

N. Am., Inc., 401 F.3d 779, 787-88 (7th Cir. 2005)); see also In

re Jafroodi, No. 9:19-BK-11918-MB, 2023 WL 4289523, at *15 (Bankr.

C.D. Cal. June 30, 2023) (“The exception simply provides that

trustees owe a fiduciary duty to plan beneficiaries and may not

hide behind the attorney-client privilege when beneficiaries sue

the trustee for malfeasance and request discovery in furtherance

of such a lawsuit.”) (emphasis added).

A review of the caselaw does not present any case in which a

court has applied the ERISA fiduciary exception to a CRO/Debtor in

14 The Solis Court said in dicta that “there is no legitimate basis on which to

distinguish between [the attorney-client privilege and the work product

doctrine] in the application of the fiduciary exception in the ERISA context.”

644 F.3d at 233.

Possession, who is managing bankruptcy estates and an ERISA plan

through a third-party administrator. See OHI Asset (CT) Lender,

LLC v. Woodland Manor Improvement Ass'n by & through Shine, No. CA

09-219 ML, 2010 WL 11693554, at *3 (D.R.I. Aug. 13, 2010) (noting

that the fiduciary exception appears to have been applied only in

traditional trusteeship situations or in an ERISA context but not

in the context of a court-appointed trustee, a court-appointed

receiver, or a court-appointed bankruptcy trustee);15 see also

Solis, 644 F.3d at 227 (collecting cases recognizing the exception

to assertions of attorney-client privilege by ERISA fiduciaries in

the context of ERISA enforcement actions).

Even if the fiduciary exception might apply to an operating

debtor in possession who is acting as a plan fiduciary, it does

not apply in this liquidating case. The fiduciary exception is

grounded in the premise that, when performing fiduciary functions,

the beneficiary, rather than the fiduciary, is the ultimate client

who is entitled to claim privilege. Petz v. Ethan Allen, Inc.,

113 F.R.D. 494, 497 (D. Conn. 1985) (collecting cases). The agreed

topic for discovery in this case is solely what amount, if any, of

the DOL Claim is entitled to administrative priority. ECF No.

15 The OHI Court reasoned that the rationale of the fiduciary exception, that

the trustee is not the real client, but rather a representative of the

beneficiaries, is not persuasive when the interests of the beneficiaries are

diverse and in conflict. 2010 WL 11693554, at *3-4 (“the fiduciary exception

ceases to apply once the interests of the parties have diverged”) (collecting

cases).

3951, ¶ 2. Since the Reading exception does not apply, this issue

is limited to a determination of the extent of any actual benefit

to the estates in maintaining health benefits for furloughed

employees under the Prior Health Plan. Determination of

administrative priority is not an ERISA enforcement action or a

claim for damages under ERISA, and any putative breach of ERISA is

not relevant to the priority determination for the reasons stated

above. Entitlement to administrative expense priority arises

under the Bankruptcy Code, not ERISA. Thus, whether Debtors or

the Trust upheld any respective fiduciary duties or complied with

ERISA is not relevant to determining what portion, if any, of the

DOL Claim provided an actual benefit to the estates and might be

entitled to administrative priority. Unlike cases in which the

fiduciary exception applies, the priority of the DOL Claim is not

based on any putative breach of fiduciary duty to the

beneficiaries. The DOL has not provided any authority applying

the ERISA fiduciary exception outside of this context,16 and this

case is inapposite to those in which courts have applied the ERISA

fiduciary exception where discovery is sought in furtherance of a

claim based on such a breach of fiduciary duty or other ERISA

16 Moreover, even if the ERISA fiduciary exception were applicable to the

circumstances of this case, the exception would not apply to the type of

communications that are relevant to this dispute because legal advice regarding

whether to continue to provide coverage to furloughed employees in connection

with termination of the Prior Health Plan is a non-fiduciary matter to which

the ERISA exception does not apply. See Solis, 644 F.3d at 228.

violation. Therefore, the ERISA fiduciary exception is

inapplicable.17

NOW, THEREFORE, IT IS HEREBY ORDERED, ADJUDGED, and DECREED

as follows:

1. Within 30 days of entry of this Order, unless otherwise

extended by stipulation in writing (which writing may include

electronic mail) between the parties or by further order of the

Court, the Trust must: (a) produce all non-privileged documents

responsive to the requests for production as provided herein; (b)

produce a transmittal letter describing to which requests each

document is responsive; and (c) with respect to any responsive

documents the Trust withholds based on a claim of privilege, the

Trust must produce an updated privilege log that satisfies the

content and specificity requirements of Fed. R. Civ. P.

17 The DOL requests that the Court conduct an in camera review of Revised Log

Documents 1, 2, 3, 24-26, 28, 29, 43, 44, 45, 48, 50, 58, 60, 62, 107-110, 112,

165, 166, 168-171, 177, 179, 182-185, 200, 201, 240, 241, 343, 352. ECF No.

3972, at 16-24. The DOL’s stated basis for this review is solely to determine

whether the documents fall within the fiduciary exception, or with respect to

the documents described as “draft former employee update notice[s],” whether

the notice process constituted a breach of ERISA, not whether the description

is sufficient to determine relevancy with respect to any actual benefit to the

estates or to assess privilege. With respect to document 335, the Court is

unable to determine whether it would be responsive to the requests as compelled

herein and will reserve any ruling on that document to the extent that it is

responsive, and the claim of privilege remains. In any event, the Court has

determined that the fiduciary exception does not apply in this case, and any

putative breach of ERISA with respect to the notices is not relevant to the

priority of the DOL Claim for the reasons stated herein in. Therefore, the

Court will not conduct an in camera review or compel production of the other

listed documents at this time. If any of the affected documents are identified

as responsive to the responses compelled in this order but again withheld on

the assertion of privilege, the Court will consider then whether the privilege

applies and whether to conduct an in camera review.

26(b)(5)(A)(ii);

2. The DOL shall have 30 days after service of any updated

privilege log to object to any claim of privilege asserted in the

updated privilege log, or to the sufficiency of the updated

privilege log;

3. The DOL shall have until 30 days after the deadline for

production established in this Order to seek enforcement of this

Order.

[END OF DOCUMENT]

Parties to be Served

19-30289

All parties of record via CM/ECF