Opinion
7045-19 12364-20 12379-20
03-13-2024
PICAYUNE PEARL AGGREGATES, LLC, PICAYUNE PEARL AGGREGATES INVESTORS, LLC, TAX MATTERS PARTNER, ET AL., Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER
Courtney D. Jones Judge
Pending before the Court is respondent's Motion to Compel Production of Documents (Motion to Compel) (Doc. 88). Respondent seeks production of certain documents responsive to his Request for Production of Documents. Respondent asserts that, even if the documents are privileged, petitioner waived the attorney-client privilege by disclosing the documents to third parties. Petitioner objects to disclosure of the documents on the grounds that the various communications are protected by the common interest doctrine or the attorney-client privilege. (Doc. 93).
All document references are to the docket record of the lead case (Docket No. 7045-19) in the consolidated group.
Following a "quick peek" process and after concessions by each side (see Docs. 127, 131), 96 emails and approximately 120 attachments to those emails remain in dispute. (Doc. 131). On February 2, 2024, the Court ordered that petitioner submit the documents for in camera review. (Doc. 132). Having now received the documents and the parties' respective positions, the Court will grant respondent's Motion to Compel.
Background
We state the following background facts solely for the purpose of determining whether a waiver of privilege occurred, but not as findings of fact in this case. See Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520 (1992), aff'd, 17 F.3d 965 (7th Cir. 1994).
This case involves a claimed charitable contribution stemming from a 2015 donation by Picayune Pearl Aggregates, LLC (PPA) of property located in Hancock County, Mississippi. On December 11, 2014, PPA was organized as a Delaware limited liability company. On December 22, 2015, PPA adopted its Amended and Restated Limited Liability Company Agreement (Amended PPA Agreement).
Per the Amended PPA Agreement, Keyway Management, LLC (Keyway Management) was appointed as PPA's manager. Keyway Management was managed by a board of managers comprised of:
• David Hall;
• Christopher H. Drossos;
• Stephen Kevin Bowen;
• Jeffrey B. Bartlam; and
• Steven W. Reints.
The Amended PPA Agreement specifically provides that "no Member (who is not also a Manager) shall have the right to participate in the management of [PPA], or have any authority to bind [PPA] in any manner, except as otherwise specifically provided herein, or as may be expressly delegated in writing to the Member by the Manager." Further, the Amended PPA Agreement specifically stated that "[a]ll aspects of [PPA's] management shall be vested in its manager(s)" and that the manager has "the full, exclusive, and complete authority, power, and discretion to control the business, affairs, and properties of [PPA]." The Amended PPA Agreement also grants managers the right to consult with legal counsel on behalf of PPA.
Petitioner Picayune Pearl Aggregates Investors, LLC (PPAI) was also organized as a Delaware limited liability company on December 11, 2014. Picayune Pearl Manager, LLC (PPAI Manager) acted as PPAI's initial manager. The principals for PPAI Manager (as well as ForEverGreen Group, LLC) were Mr. Hall, Aaron Crosby, and Mr. Drossos. Per the Amended PPA Agreement, PPAI held a 95 percent ownership interest in PPA as of December 22, 2015.
On November 10, 2015, PPAI adopted its Limited Liability Company Agreement (PPAI Agreement). Per the PPAI Agreement, Keyway Management was appointed as PPAI's manager. The PPAI Agreement specifically stated that only managers could bind PPAI, and the manager is authorized to enter into transactions for PPAI.
Petitioner also asserts that Sean O'Toole with Clearvoyance Consulting, LLC provided consulting services for PPA and PPAI in this matter. Further, according to petitioner, "Ken Honeyman with BlackLine Resources, LLC shared common business and legal interests with PPA in this matter." (Doc. 93 at p. 4).
Finally, petitioner submitted an engagement letter dated June 5, 2018, which states that the law firm of Baker, Donelson, Bearman, Caldwell, & Berkowitz, PC was retained to represent Keyway Management, PPA, and PPAI with respect to an audit conducted by the Internal Revenue Service (IRS). However, no engagement letter was provided that relates to the period covering the disputed documents, from approximately August 2015 through March 2016.
Discussion
Proceedings in the Tax Court are conducted in accordance with the Federal Rules of Evidence. See § 7453; Rule 143. Federal common law governs the attorney-client privilege when courts adjudicate issues of federal law. Willy v. Admin. Rev. Bd., 423 F.3d 483, 495 (5th Cir. 2005); see also Fed. R. Evid. 501, 1101(c); United States v. Zolin, 491 U.S. 554, 562 (1989); AD Inv. 2000 Fund LLC v. Commissioner, 142 T.C. 248, 254 (2014). The parties appear to agree that an appeal in this case would lie in the United States Court of Appeals for the Fifth Circuit. (See Docs. 88 at pg. 10, 93 at p. 16.) Therefore, the Court applies the jurisprudence articulated by the Fifth Circuit. See § 7482(b).
The party asserting a privilege has the burden to establish the relationship and the privileged nature of the communication. Hodges, Grant & Kaufmann v. U.S. Gov't, Dep't of the Treasury, I.R.S., 768 F.2d 719, 720 (5th Cir. 1985); see also Johnston v. Commissioner, 119 T.C. 27, 34 (2002), aff'd, 461 F.3d 1162 (9th Cir. 2006). And the burden is not discharged by mere conclusory or ipse dixit assertions. In re Bonanno, 344 F.2d 830, 833 (2d Cir. 1965). Rather, the attorney-client privilege applies to communications made in confidence (1) by a client to an attorney for the purpose of obtaining legal advice and (2) by an attorney to a client, where the communication contains legal advice or reveals confidential information relating to such advice. Upjohn Co. v. United States, 449 U.S. 383, 390 (1981); Bernardo v. Commissioner, 104 T.C. 677, 682 (1995).
Moreover, because the attorney-client privilege is an "obstacle to truthseeking," see In re LTV Sec. Litig., 89 F.R.D. 595, 606 (N.D. Tex. 1981) (citing Garner v. Wolfinbarger, 430 F.2d 1093, 1100-01 (5th Cir. 1970)), application of the doctrine is strictly construed, see Fu Inv. Co. v. Commissioner, 104 T.C. 408, 415 (1995). Further, a privilege may be waived with respect to materials that are disclosed to third parties. See Nguyen v. Excel Corp., 197 F.3d 200, 204-08 (5th Cir. 1999); Moore v. Commissioner, T.C. Memo. 2004-259, 2004 WL 2580601, at *5.
Petitioner argues that each disputed communication is privileged based on: (1) the common interest doctrine; or (2) the attorney-client privilege applicable to direct or indirect partners. We will address each argument in turn.
I. Common Interest Doctrine
The common interest legal doctrine is not itself a privilege, but merely extends a recognized privilege-often the attorney-client privilege-to communications with parties with a common legal interest. In re Santa Fe Int'l Corp., 272 F.3d 705, 710- 11 (5th Cir. 2001). Thus, when an attorney-client privileged communication is shared with a third person who has a common legal interest with respect to the subject matter of the communication, the privilege is not waived. Id. But, as with the attorney-client privilege, the common interest legal doctrine must be narrowly construed to effectuate necessary consultation between legal advisers and clients. Id. at 710.
The Fifth Circuit has explained that two types of communications are protected under the common legal interest privilege: (1) communications between co-defendants in actual litigation and their counsel; and (2) communications between potential co-defendants and their counsel. BCR Safeguard Holding, L.L.C. v. Morgan Stanley Real Est. Advisor, Inc., 614 Fed.Appx. 690, 703 (5th Cir. 2015). The Fifth Circuit has not extended the common legal interest privilege to generalized shared business interests. See In re Santa Fe Int'l Corp., 272 F.3d at 713. Rather, the rule is limited to parties with a common legal interest in litigation or where there is a "palpable threat of litigation at the time of the communication." Id. at 711; see also In re Auclair, 961 F.2d 65, 69 (5th Cir. 1992).
Here, petitioner asserts that because the IRS was "aggressively auditing so-called syndicated conservation easement transactions and substantially similar transactions" then the threat of litigation was palpable and the common interest doctrine applies. (See Doc. 93 at p. 17). But the common interest doctrine applies where the threat of litigation is actually palpable, not where "a mere awareness that one's questionable conduct might some day result in litigation." In re Santa Fe Int'l Corp., 272 F.3d at 711.
As we noted in our Order dated February 24, 2022, the disputed documents in this case were prepared well before the IRS even issued a Notice of Beginning of Administrative Proceeding on May 24, 2018. (Doc. 69 at pp. 3-4 n.5). Thus, it is difficult to conceive that litigation was actually palpable at the time the communications at issue were created. Petitioner's awareness that the transaction might result in litigation because of "aggressive enforcement" is insufficient for the common interest doctrine to apply here. Accordingly, petitioner has not met its burden of establishing that a privilege attaches to the disputed communications based on the common interest doctrine.
II. Whether the "Direct" or "Indirect" Partners Formed an Attorney-Client Relationship
The application of the attorney-client privilege is a question of fact that involves a "highly fact-specific" inquiry. Equal Emp. Opportunity Comm'n v. BDO USA, L.L.P., 876 F.3d 690, 695 (5th Cir. 2017) (citation omitted). "The attorney-client relationship can be formed by explicit agreement of the parties or may arise by implication from the parties' actions." Banc One Cap. Partners Corp. v. Kneipper, 67 F.3d 1187, 1198 (5th Cir. 1995). However, courts will not impute a contractual attorney-client relationship absent a sufficient showing of intent. Id. at 1198-99.
The Fifth Circuit-examining Mississippi law-has stated that a partnership represents an entity rather than individual partners, unless the circumstances demonstrate otherwise. Hopper v. Frank, 16 F.3d 92, 95 (5th Cir. 1994). In Hopper, the court determined that there was no attorney-client relationship between a firm and the partners because the partners did not pay any fees to the law firm, and the engagement letters stated that the partnership (not the partners) were the client. Id. at 95-97.
As set forth above, PPA and PPAI are Delaware limited liability companies. Although the parties seem to agree that Fifth Circuit law applies to the attorney-client privilege dispute, neither party has addressed what law applies to the evaluation of whether an attorney-client relationship was formed. See, e.g., Moore, T.C. Memo. 2004-259, 2004 WL 2580601, at *3-4 (applying Georgia law when determining who holds the privilege for a Georgia limited liability company). Nevertheless, we need not reach this issue because we find that petitioner has not presented sufficient evidence to meet its burden demonstrating that the disputed documents were protected by an applicable privilege.
Both parties rely upon the Court's decision in Moore v. Commissioner, T.C. Memo. 2004-259, 2004 WL 2580601. There, the Court relied upon state law to determine that the limited liability company-organized under the laws of Georgia- was a separate legal entity from its members. Id. at *3. We ultimately held that the authority to assert or waive the limited liability company's privilege rested with its management. Id. at *4. Further, waivers can be "found by implication from client conduct that is inconsistent with any reasonable claim of confidentiality and that would make maintenance of the privilege unfair." Id. at *5.
Here, petitioner argues that any emails involving Keyway Management's board of managers (including Mr. Hall, Mr. Drossos, Mr. Bowen, Mr. Bartlam, and Mr. Reints) or PPAI Manager's prior manager (Aaron Crosby) are protected by the attorney-client privilege. (Doc. 93 at pp. 12-13). Petitioner also argues that any communications between PPA's counsel and PPA's direct or indirect partners are also protected by the attorney-client privilege. (Doc. 93 at pp. 14-15).
Simply put, petitioner has not presented sufficient evidence for the Court to determine whether an attorney-client relationship was formed between petitioner's attorneys and any of the direct or indirect partners. Petitioner has not presented an engagement letter that covers the period at issue, any evidence of who paid fees to counsel, or even an affidavit explaining the purported attorney-client relationship between the various parties, including the direct and indirect partners.
Petitioner did, however, present amended agreements for PPA and PPAI. Based on those agreements, PPA and PPAI could only be bound by managers. In the absence of further evidence or legal analysis from petitioner, the agreements do not appear to extend the attorney-client privilege to partners of the partnership. Rather, it appears that only the managers of PPA or PPAI could hold the privilege. But, in the absence of additional details from petitioner, it is unclear who even held the attorney-client relationship with the attorneys on the disputed communications.
Moreover, none of the cases cited by petitioner support the proposition that layers upon layers of business relationships extend the attorney-client relationship. As noted by respondent, petitioner would have the Court treat individuals with multiple layers of legal entities separating them from the partnership as covered by the attorney-client privilege. Petitioner has presented no evidence or case law to support such a blanket assertion of the attorney-client privilege, which must be strictly construed. See Fu Inv. Co., 104 T.C. at 415. Accordingly, petitioner has not met its burden of establishing that the disputed communications are protected by attorney-client privilege, including that the purported privilege attaches to all partners or indirect partners of PPA.
In the Status Report, the privilege log lists "TPP" or "Tax Practitioners Privilege" for two documents, identified as Privilege Log Documents 574 and 575. (See Doc. 131, Ex. A p. 5). However, this argument was not set forth in the parties' briefing, nor has petitioner provided a legal basis for a "consultant" being covered by the tax practitioner's privilege. Accordingly, we find that petitioner has waived this argument.
In short, petitioner's conclusory assertions of privilege are insufficient to meet the burden of establishing that the attorney-client privilege exists, and to the extent it does, that the attorney-client privilege has not been waived by inclusion of third-party individuals who do not hold the applicable privilege.
We have considered all of the arguments made by the parties, and to the extent not mentioned above, we conclude that they are moot, irrelevant, or without merit.
Upon due consideration, it is
ORDERED that respondent's Motion to Compel Production of Documents (Doc. 88) is granted as set forth herein. Petitioner shall make the remaining 96 disputed documents (and attachments) identified in Exhibit A to the Joint Status Report (Doc. 131) available to respondent by March 22, 2024.