Court Addresses Attorney-Client Privilege in Suit Against Tax Shelter Promoters

In Green v. Beer, 2010 U.S. Dist. LEXIS 87484 (SDNY 8/24/10) (involving a taxpayer suit against tax shelter promoters, Judge Kimba Wood addressed objections a magistrate's determination of discovery issues involving the attorney-client privilege. The issues resolved by Judge Wood are.

1. Waiver by Disclosure to Third Parties.

The general rule is that disclosure to third parties waives the privilege. That took care of the plaintiff's disclosures to financial advisers that the defendants wanted to see (I suppose, to address whether plaintiffs really relied on defendants). However, one set of disclosures fit an exception -- a disclosure to an agent assisting in the flow of communications between the attorney and the client. The circumstance was:

In contrast, Daniel Green, the son of the Green Plaintiffs, received email communications from counsel, which he then provided to his parents. He explained in his affidavit that his technical assistance was necessary for his parents to timely receive the email communications from counsel:

My parents are not proficient in the use [of] electronic mail and, due to the time-sensitive nature of these communications, it was necessary for these communications to be delivered to my email address to ensure a timely receipt. My parents regularly rely on me to send and receive emails for them.

Important to the Court's resolution of the issue was the New York Statute on the issue which provides (Section 4548 of the New York Civil Practice Law and Rules):

No communication . . . shall lose its privileged character for the sole reason that it is communicated by electronic means or because persons necessary for the delivery or facilitation of such electronic communication may have access to the content of the communication.

Perhaps some readers have focused on this type of issue in a federal proceeding, and most particularly a tax case. Would the New York statutory wrinkle on the attorney client privilege be relevant? Federal issue cases in federal courts (specifically federal tax cases) look to the general common law attorney client privilege without local state embellishments. See FRE 501; see also Rule 502 (providing limitations on when disclosure constitutes waiver of the privilege). Ultimately, Judge Wood held that the privilege had not been waived because, as a matter of fact under the circumstances, the defendant was an important agent to assist in communications, citing inter alia, Kovel (United States v. Kovel, 296 F.2d 918, 921 (2d Cir. 1961)) and Adlman (United States v. Adlman, 68 F.3d. 1495, 1499 (2d Cir. 1995))

2.  Waiver By Asserting Reliance on Defendants.

a.  At the Inception.  Even as to communications made to the attorney otherwise within the scope of the privilege, courts have held that a party may waive the privilege by affirmatively claiming reliance on the lawyer in defense of a claim against that party-client. This is often seen in tax criminal and civil tax cases where, as a defense to a criminal or civil penalty, the client as a party asserts that he or she relied upon his or her lawyer and therefore should not be subject to the penalty. In the tax cases of which I am aware, this claim operates as a waiver of the attorney-client privilege. In Green, however, the plaintiffs were not affirmatively alleging reliance on their lawyers present at the creation. Rather, they were asserting that they relied upon the defendants (the tax shelter promoters/enablers). I suppose that is an implied representation that they were not relying upon their lawyers.  The defendants wanted to test the plaintiffs claim by seeing what plaintiffs told their lawyers, what advice they received and whether, therefore, they really relied upon the defendants as they claim. The magistrate judge held that the plaintiffs had not waived the privilege, and the district court sustained the magistrate's holding. The district court did acknowledge that there are conflicting holdings within the district, but "To the extent that there is a split in the case law, however, the magistrate judge's order cannot be considered clearly erroneous or contrary to law." (see fn. 3.) (I just wonder whether Is this the right context to be applying the clearly erroneous or contrary to law standard.)

b. In Settling with the IRS.  The magistrate found any attorney-client communications related to the settlement with the IRS irrelevant to the issues presented.  In a short holding, the district court affirmed.