Opinion
02 Civ. 9297 (WHP) (JCF)
October 8, 2003
MEMORANDUM AND ORDER
This case concerns the plaintiffs' claims for broker's fees in connection with several real estate transactions. The plaintiffs have moved pursuant to Rule 37 of the Federal Rules of Civil Procedure to compel the defendants to produce a wide array of documents. The requested documents fall into two broad categories.
First, the plaintiffs seek documents that the defendants have withheld on the basis of the attorney-client privilege but which were transmitted to third parties. The plaintiffs argue that dissemination to persons outside the attorney-client relationship waives the privilege. They also contend that some of the documents concern business rather than legal advice and are therefore not privileged. Finally, the plaintiffs suggest that any legal advice being provided was in furtherance of a tax evasion scheme and therefore falls within the crime/fraud exception to the privilege.
The defendants contend that the documents at issue all relate to legal advice and come within the privilege. They argue that tax avoidance is not criminal and that the plaintiffs have failed to demonstrate the applicability of the crime/fraud exception. They further maintain that the privilege has not been waived because the third parties to whom the documents were disseminated are the "functional equivalent" of the defendants' own employees.
The second group of documents that the plaintiffs seek is itemized in the Plaintiffs' Second Set of Document Requests. The defendants objected to these requests on the grounds of burden and relevance, apparently because the demands are not directed specifically to the real estate transactions that are the subject of this action. In their reply papers, the plaintiffs articulated for the first time the grounds on which they believe these requests to be relevant.
No final ruling can be made with respect to the plaintiffs' motion until the parties provide additional information.
A. Attorney-Client Documents
The basis for subject matter jurisdiction in this case is diversity of citizenship. Since it appears that New York law will control the substantive claims, New York privilege law will also dictate the outcome of the plaintiffs' motion. See Fed.R.Evid. 501.
Under New York law, the voluntary disclosure of a privileged communication to a third party waives the privilege. See National Education Training Group. Inc. v. Skillsoft Corp., No. M8-85, 1999 WL 378337, at *3 (S.D.N.Y. June 10, 1999). However, "New York courts have recognized a narrow exception to this rule where privileged communications are shared with the client's agent." Id. In order to utilize this agency exception and avoid waiver, the party asserting the privilege must meet a two-pronged test. First, it must demonstrate that the client had a "reasonable expectation of privacy under the circumstances." Id. at *4 (quoting People v. Osorio, 75 N.Y.2d 80, 84, 550 N.Y.S.2d 612, 615 (1989)). Though a formal agency relationship is not required, the relationship between the client and the third party must be sufficiently close that the clients' subjective expectation of confidentiality is reasonable. See National Education Training Group, 1999 WL 378337, at *4. Second, the client "must establish that disclosure to a third party . . . was necessary for the client to obtain informed legal advice." Id. (citations omitted). "[T]he `necessity' element means more than just useful and convenient, but rather requires that the involvement of the third party be nearly indispensable or serve some specialized purpose in facilitating the attorney-client communications."Id.
In this case, the defendants have not yet established either element. The affidavits describing the relationship between the defendants and the third parties are rather conclusory. For example, David Birns of the accounting firm of Cohen Arnold Co. is only alleged to have been a "close adviser" of the defendants for a number of years and to have provided "essential services" on the transactions at issue. (Declaration of Maurice Moses Benady dated Aug. 11, 2003, ¶¶ 12, 13; Declaration of David Birns dated Aug. 11, 2003, ¶¶ 3, 4). While the defendants may have had a subjective expectation that Mr. Birns would keep attorney-client communications confidential, it is far from clear that such an expectation would have been reasonable. The defendants have not submitted any written agreement defining Mr. Birns' role. There is no indication that Mr. Birns' firm had a relationship with the defendants more intimate than that between a vendor and a purchaser of services. Nor is there any information regarding the number of other clients Mr. Birns and his firm have a similar relationship with. Such details are critical to an evaluation of the reasonableness of the defendants' expectation of confidentiality with respect to each of the third parties.
Similarly, the defendants have provided virtually no information concerning why some nine individuals other than the defendants themselves were indispensable to the defendants' attorney-client communications. To some extent, I may be able to glean this from an in camera review of the documents withheld. However, it is also important for the defendants to explain on an individual-by-individual and document-by-document basis why each third party played a critical role, not just in the transaction, but in the attorney-client communication. The mere fact that it is more efficient to keep consultants in the loop by including them in attorney-client communications is not enough to avoid waiver of the privilege.
An in camera review will also permit me to assess whether the advice provided in the subject documents is legal rather than business advice and to determine whether there is any merit to the plaintiffs' claim that the crime/fraud exception applies. Again, the defendants are invited to provide any commentary on specific documents to facilitate my review.
B. Document Request
On its face, the Plaintiffs' Second Set of Document Requests gives no hint as to the relevance of the requested information. Nor did the plaintiffs set out their theories in their moving papers. Rather, they first described the basis for their requests in their reply papers. The defendants are therefore entitled to rebut the plaintiffs' specific assertions of relevance and may do so at the same time that they supplement their submissions with respect to the documents withheld on grounds of privilege.
Conclusion
The plaintiffs' motion to compel discovery is held in abeyance pending the submission of the additional information described above. By October 24, 2003, the defendants shall submit for in camera review the documents withheld and shall provide any further explanation that supports their claim of privilege. A copy of that submission, but not of the documents themselves, shall be served on plaintiffs' counsel. Defendants shall also address the plaintiffs' arguments with respect to the relevance of the documents sought in Plaintiffs' Second Set of Document Requests. By October 31, 2003, the plaintiffs shall reply to the defendants' submissions.