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Media Alerts - In re: Grand Jury John Doe 1, John Doe 2, ABC Corp.-3rd Circuit
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December 12, 2012
  In re: Grand Jury John Doe 1, John Doe 2, ABC Corp.-3rd Circuit
Headline: Crime-fraud exception strips attorney-client privilege from documents held by former counsel of corporation targeted by grand jury

Area of Law: Privileges

Issues Presented: Whether the documents and testimonies used by ABC Corp. to get legal advice from counsel are protected by the attorney-client and work product privileges?

Brief Summary: The Third Circuit determined whether it had jurisdiction to hear two separate disclosure orders. The first disclosure order was for ABC Corp, LaCheen, Wittels, & Greenberg, LLP, and Blank Rome, LLP for communications and work product that were not privileged. The second disclosure order was for ABC's former in-house counsel for communications and work product that were not privileged. The Third Circuit found that it lacked jurisdiction to hear the first disclosure because ABC had not disobeyed the orders and had not been held in contempt. The Third Circuit found that it had jurisdiction to hear the second order and affirmed the District Court's application of the crime-fraud exception and determination that the documents sought from ABC's former in-house counsel were not privileged. Judge Vanaskie filed a separate opinion, concurring in part and dissenting in part.

Significance (if any):

Extended Summary: ABC Corp. ("ABC") is appealing the district court's disclosure order to ABC, LaCheen, Wittels, & Greenberg, LLP ("LaCheen"), and Blank Rome, LLP ("Blank Rome") in March 2012 ("March Order"), and the second order to ABC's former in-house counsel in June 2012 ("June Order") for communications and work product that were not privileged. The Third Circuit states that disclosure orders cannot be appealed until the privilege holder disobeys the court's disclosure order, be held in contempt, and appeals the contempt order.
John Doe 1, John Doe 2, and ABC are under investigation for engaging in fraudulent business practices in order to evade income taxes. ABC was formed in 2004 and dissolved in 2005. John Doe 1 was ABC's president and his son, John Doe 2 had ties to ABC. ABC engaged in the business of buying companies with cash accounts and large tax liabilities, which were then transferred to one of two limited liability companies that fraudulently got rid of the large tax liabilities. The cash from these companies were then transferred to John Doe 1, John Doe 2, and their relatives.
In December 2010, a grand jury issued a subpoena to ABC requesting records between ABC and the limited liability companies. A law firm that represented ABC turned over documents that were not privileged but retained those subject to privilege. John Doe 1 and ABC are now represented by LaCheen and John Doe 2 is represented by Blank Rome. The documents that were held by ABC's former counsel are now held by Blank Rome. After this transfer, ABC asserted that the government did not properly issue a subpoena. The government then reissued a subpoena and Blank Rome produced documents for the Government except for the documents on the privilege log. The Government then filed a motion to enforce subpoena, in order to get Blank Rome, LaCheen, and ABC to disclose most of the privileged documents arguing that the crime-fraud exception trumped the attorney-client and work-product privilege. The March Order required that Blank Rome, LaCheen, and ABC disclose most of the documents because the crime-fraud exception barred the attorney-client privilege but the District Court did not address whether the subpoena service was sufficient.
ABC, John Doe 1, and John Doe 2 filed an appeal, which was dismissed by the Third Circuit. The Third Circuit held that because ABC had not defied the disclosure order, the Court lacked appellate jurisdiction. The Third Circuit let Blank Rome and the Government determine which way they would want to pursue the contempt appeal. However, both sides could not come up with a solution and the government proceeded with its order. ABC, John Doe 1, and John Doe 2 and filed a petition to the Third Circuit for a rehearing on whether the Third Circuit lacked jurisdiction to hear the appeal.
The June Order was issued to ABC's former in-house counsel. The subpoenas requested documents and testimony in the attorneys' capacity as in-house counsel and as a custodian of records. The attorneys refused to turn over the documents asserting attorney-client and work-product privileges. The District Court ruled in the June Order that certain documents fell under the crime-fraud exception and did not qualify for the attorney-client privilege. ABC filed an appeal and the District Court ordered a stay.
The Third Circuit first considered the appellants' standing. It determined that ABC was the proper party to assert the attorney-client and work-product privilege in regards to the grand jury subpoenas. However, John Doe 1 and John Doe 2 do not have standing to oppose the grand jury subpoenas, because the documents are not privileged to them.
The Third Circuit then determined that it could not hear the March Order because ABC had not yet been held in contempt. The Third Circuit referred to United States v. Ryan which held that in order for a party to appeal a disclosure order, the party must refuse the court order, be held in contempt, and appeal the contempt order. Perlman v. United States added an exception where an appeal would be allowed if the disclosure order was directed at a disinterested third party because the disinterested party would more than likely no obey the disclosure order.
Before the Third Circuit could hear an appeal, ABC or its representatives would have to ignore the March Order, be held in contempt, and appeal the contempt order. The Third Circuit noted that the documents were in ABC's legal control even though they were in physical possession by Blank Rome. Blank Rome would be able to transfer the documents back to ABC without being held in contempt. The Government wanted the documents to be transferred to ABC's representative, who would be willing to suffer contempt sanctions but ABC wanted Blank Rome to transfer the documents to ABC, a defunct company. The Third Circuit determined that the person who asserted privilege over the documents, be it ABC or its representative, would be the person willing to be held in contempt and that the law firms should not be the target of any sanctions. The Court would not have jurisdiction to hear the March Order until a contempt order was issued and violated.
Then, the Third Circuit determined that it had jurisdiction to hear the June Order and affirmed the District Court's June Order. Here, ABC did not have the option of being held in contempt because the subpoena and disclosure order were directed at ABC's former in-house attorneys, who were now disinterested parties. The Third Circuit first considered the attorney-client privilege and the work-product privilege noting that the privilege was not absolute as in the case of crime-fraud. The question became what proof was required in order to assert the crime-fraud exception. The Third Circuit approved the Seventh Circuit's reasonable basis standard. A party meets its burden of overcoming the attorney-client privilege when "there is a reasonable basis to suspect that the privilege holder was committing or intending to commit a crime or fraud and [the privileged communications or work product] were used in furtherance of the alleged crime or fraud." The court rejected ABC Corporation's argument that it should apply a preponderance of the evidence standard. Applying this standard, the Third Circuit affirmed the District Court's finding that there was a reasonable basis to believe that ABC willfully evaded paying federal income taxes, defrauded the U.S. of federal incomes taxes, and used the legal advice from its three former in-house lawyers to further its fraud scheme. The attorney-client privilege did not apply because of the crime-fraud exception. In this case, ABC's purpose was to evade taxes and to divert large sums of money to John Doe 1, John Doe 2, and their relatives.
The Third Circuit reviewed the documents that ABC argued were privileged and held that the documents were not privileged because the client, ABC, intended to use the privileged material in furtherance of the criminal scheme. The court declined to consider ABC's argument that the crime-fraud exception could not apply to the work-product document unless the attorneys knew of the criminal scheme, noting that the former in-house counsel had not appealed the June Order.
Finally, the court reviewed and upheld the District Court's rulings on several specific documents, including opinion letters and emails, holding that the lower court correctly determined that the crime-fraud exception stripped the documents of the privilege protection.
Judge Vanaskie filed a separate opinion concurring in part and dissenting in part.
To read the full opinion, please visit "><br ">http://...../op...21697p2.pdf

Panel (if known): Ambro, Hardiman, and Vanaskie, Circuit Judges

Argument Date: October 9, 2012

Argument Location:

Date of Issued Opinion: December 11, 2012

Docket Number: Nos. 12-1697 & 12-2878

Decided: Dismissed the March Order for lack of jurisdiction, dismissed the appeals of John Doe 1 and John Doe 2 for lack of standing, and affirmed the June Order

Case Alert Author: Kathleen D. Tran

Counsel: Stephen R. LaCheen, Esq. of LaCheen Wittels & Greenberg; Ian M. Comisky, Esq. & Matthew D. Lee, Esq., Blank Rome - Counsel for ABC Corp.
Frank P. Cihlar, Esq., Gregory V. Davis, Esq., S. Robert Lyons, Esq., Alexander P. Robbins, Esq. of the United States Department of Justice, Tax Division; Karen L. Grigsby, Esq., Patrick J. Murray, Esq. of the Office of the United States Attorney; David I. Sharfstein, Esq. of the United States Department of Justice - Counsel for the Appellee

Author of Opinion: Judge Ambro

Circuit: 3rd Circuit

Case Alert Circuit Supervisor: Susan L. DeJarnatt

Edited: 12/12/2012 at 01:57 PM by Susan DeJarnatt

    Posted By: Susan DeJarnatt @ 12/12/2012 01:43 PM     3rd Circuit  

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