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upholding claim of attorney-client privilege based upon detailed declaration describing 10 documents at issue and demonstrating elements of privilege
Summary of this case from In re CV Therapeutics, Inc.Opinion
No. C 00-0833 SI
February 6, 2001
ORDER GRANTING PETITION TO QUASH IRS SUMMONSES AND DENYING GOVERNMENT'S MOTION TO ENFORCE
On February 2, 2001, the Court heard argument on the petition quash the government's motion to enforce to the summonses. Having carefully considered the arguments of the parties and the papers submitted, the Court GRANTS the petition and DENIES the govrenment's motion for the reasons set forth below.
BACKGROUND
Henry T. Segerstrom ("Segerstrom") filed an Estate Tax Return on February 27, 1998 to settle tax liability on his late mother's estate, the Estate of Nellie Ruth Segerstrom ("Mrs. Segerstrom"). Amended Petition to Quash ¶ 11. Part of the estate included Segerstrom Properties LLC ("Segerstrom Properties"), of which Segerstrom is a co-trustee. Id. On August 15, 2000, pursuant to an examination of the tax return, the Internal Revenue Service ("IRS") issued four summonses to Robert Sullivan ("Sullivan") and George Montgomery ("Montgomery") to produce documents relating to the formation, operation, or valuation of Segerstrom Properties. Motion to Enforce 4. Sullivan and Montgomery were attorneys at the law firm Pillsbury, Madison Sutro ("Pillsbury"), which represented Mrs. Segerstrom and members of her family, including petitioner, for estate planning purposes. Declaration of Robert E. Sullivan ("Sullivan Decl.") (Mar. 2000) ¶ 2. Pillsbury rendered services "in connection with the formation of limited liability companies to hold assets previously held by the Segerstroms." Id. The firm also represented the companies that were formed. Id.
Sullivan and Montgomery refused to produce certain documents to the IRS, claiming the protection of the attorney-client privilege. Ten documents are at issue, numbered 42, 51, 59, 66, 69, 74, 78, 80, 81, and 84 on a privilege log provided by the attorneys. See Sullivan Decl. (Jan. 2001) ¶¶ 4-11. Segerstrom has filed a petition before this Court to quash the IRS summonses, and the government has filed a motion to enforce the summonses.
LEGAL STANDARD
The Internal Revenue Code authorizes the IRS to issue summonses to third parties to testify and produce records for purposes of ascertaining the correctness of a tax return or determining the tax liability of any person. See 26 U.S.C.A. §§ 7602 and 7609; United States v. Derr, 968 F.2d 943, 945 (9th Cir. 1992). District courts have jurisdiction to review petitions to quash a summons and to order its enforcement. See 26 U.S.C.A. §§ 7604(a) and 7609(h)(1) (West 2000).
To enforce a summons, the IRS must establish a prima facie case: (1) that there is a legitimate purpose for the investigation; (2) that the material sought in the summons is relevant to that purpose; (3) that the material sought is not already within the possession of the IRS; and (4) that those administrative steps which are required by the Internal Revenue Code have been taken. United States v. Powell, 379 U.S. 48, 57-58, 85 S.Ct. 248, 255 (1964). Once the government establishes its prima facie case, the party moving to quash the summons carries the burden of disproving the existence of a valid purpose or that enforcement of the summons would be an abuse of the court's process. Powell, 379 U.S. at 58.
IRS summonses are "subject to the traditional privileges and limitations, including the attorney-client privilege." Upjohn Co. v. United States, 449 U.S. 383, 398, 101 S.Ct. 677, 686 (1981). The burden of proving the protection of the attorney-client privilege lies with the party attempting to invoke the privilege to resist enforcement of the summonses. Powell, 379 U.S. at 58, 85 S.Ct. at 255.
DISCUSSION
Segerstrom bases his petition to quash the summonses on the attorney-client privilege. The party seeking to invoke privilege carries the burden of presenting sufficient facts proving to a reasonable certainty that the elements of an attorney-client privilege exist. United States v. Abrahams, 905 F.2d 1276, 1283 (9th Cir. 1990); In re Sealed Case, 737 F.2d 94, 99 (D.C. Cir. 1984). The essential elements giving rise to attorney-client privilege are as follows:
(1) Where legal advice of any kind is sought (2) from a professional legal advisor in his capacity as such, (3) the communications relating to that purpose, (4) made in confidence (5) by the client, (6) are at his instance permanently protected (7) from disclosure by himself or by the legal advisor, (8) unless the protection be waived.In re Fischel, 557 F.2d 209, 211 (9th Cir. 1977) (quoting 8 Wigmore Evidence § 2292 at 554 (McNaughton rev. 1961)).
The privilege extends to cover both the substance of the client's confidential communications and the attorney's advice in response thereto. In re. Fischel, 557 F.2d at 211. All other communications from the attorney to the client are protected if the attorney's communications would reveal confidential client communications. In re Sealed Case, 737 F.2d 94, 99 (D.C. Cir. 1984). Furthermore, confidential communications passing through persons acting as the attorney or client's agent are also covered by the privilege. United States v. Kovel, 296 F.2d 918, 921 (2nd Cir. 1961). The privilege also covers papers prepared by the attorney or by a third party at the attorney's request for the purpose of advising the client, insofar as the papers are based on and would tend to reveal the client's confidential communications. Id. (citing United States v. Judson, 322 F.2d 460 (9th Cir. 1963)).
The government asserts three arguments why the attorney-client privilege does not protect the ten documents at issue here: (A) all the documents are related to securing business advice, not legal advice, (B) privilege was waived with respect to documents 42, 66, 69, 80, 81 and 84 due to the presence of third parties, and © all the documents contain factual information, not confidential communications.
A. Business or Legal Advice
According to the government, the ten documents at issue relate to business advice given by Sullivan and Montgomery, and therefore are not protected under attorney-client privilege. Motion to Enforce 8.
The attorney-client privilege protects only communications made in the course of seeking legal advice from a professional legal adviser in his or her capacity as such. Olender v. United States, 210 F.2d 795, 806 (9th Cir. 1954). However, "[a] client is entitled to hire a lawyer, and have his secrets kept, for legal advice regarding the client's business affairs." United States v. Chen, 99 F.3d 1495, 1501 (9th Cir. 1996). "Where the general purpose concerns legal rights and obligations, a particular incidental transaction would receive protection, though in itself it were merely commercial in nature." Id. (citation omitted). Legal advice is not involved "when the facts show that the lawyer was `employed without reference to his knowledge and discretion in law.'"Id. (citation omitted). The attorney-client privilege still applies, however, where business advice is simply incorporated into legal advice.Western Trails, Inc. v. Camp Coast to Coast, 139 F.R.D. 4, 8 (D.D.C. 1991).
Sullivan and Montgomery represented petitioner and his mother for estate planning purposes, which included helping the Segerstroms form Segerstrom Properties and representing it thereafter. Sullivan Decl. (Mar. 2000) ¶¶ 2 and 4(a) (recounting Segerstrom's request on September 28, 1995 for "legal advice concerning limited liability companies, partnerships and estate planning"). By contrast, the government stated only that it "believe[d] that the 10 documents sought in the summonses relate to business not legal advice." Motion to Enforce 8.
Upon review of Sullivan's declaration describing the ten documents at issue, the Court finds that all the documents fall within the Pillsbury firm's representation of the Segerstroms for purposes of rendering legal advice and assistance in estate planning. The government's argument that these documents relate to business advice fails on the facts presented.
B. Waiver of Privilege Due to Third Party Presence
The government argues that six of the documents at issue — nos. 42, 66, 69, 80, 81 and 84 — indicate the presence of third parties to attorney-client communications, thereby waiving any privilege to those documents. Motion to Enforce 8. The attorney-client privilege covers communications between the attorney, the client, or their agents, so long as the communications were intended to be confidential and made in rendering legal advice. See Adlman, 68 F.3d at 1499; United States v. Bell, 1994 WL 665295, *5 (N.D. Cal. 1994).
1) Document 42
Document 42 is a page of handwritten notes by Montgomery summarizing a telephone conversation between Montgomery, Mark Heim ("Heim"), and petitioner. Sullivan Decl. (Mar. 2000) ¶ 4(e). Heim is Chief Financial Officer of C.J. Segerstrom Sons, a general partnership that manages part of the Segerstrom "family business." Id. Heim also "acted as a financial and tax adviser" to Mrs. Segerstrom. Id. The telephone conversation "concern[ed] confidential estate planning issues for the Segerstrom family." Sullivan Del. (Jan. 2001) ¶ 4. These facts indicate that Heim was present to assist Mrs. Segerstrom obtain legal advice from Montgomery. "What is vital to the privilege is that the communication be made in confidence for the purpose of obtaining legal advice from the lawyer." Adlman, 68 F.3d at 1499; see also Kovel, 296 F.2d at 922 ("[T]he presence of an accountant . . . while the client is relating a complicated tax story to the lawyer, ought not destroy the privilege. . . ."). Heim's presence did not waive the privilege.
2) Documents 66, 80, 81, and 84
Document 66, 80, 81, and 84 involve communications between Sullivan, Heim, Christine Talarides ("Talarides"), Susan Adams ("Adams"), and Greg Morrow ("Morrow"). According to Sullivan, these documents contain confidential financial calculations that were prepared at his request to assist him in rendering advice to the Segerstrom family concerning formation of Segerstrom Properties. Sullivan Decl. (Jan. 2001) ¶ 11.
Talarides is an associate attorney with Pillsbury and was working for Sullivan in connection with the documents. Sullivan Decl. (Mar. 2000) ¶ 4 (bbbb). Her presence did not effect any waiver of privilege. Adams is Heim's assistant at C.J. Segerstrom Sons, and provided financial advice and services to petitioner and his mother. Sullivan Decl. (Mar. 2000) ¶ 4 (nnn); Oppo. to Motion to Enforce 7. Morrow is an independent accountant who advised members of the Segerstrom family, including petitioner and Mrs. Segerstrom. Sullivan Decl. (Mar. 2000) ¶ 4 (gg).
Based on the described roles of these third party agents of the attorney and clients and the nature of the documents, the Court finds that the communications were intended to be in confidence and made to assist Sullivan at his request to render legal services for the Segerstroms. No facts have been presented to contradict this conclusion. Accordingly, the Court finds that privilege was not waived with respect to these documents.
3) Document 69
Document 69 is a letter from Sullivan to Heim requesting "confidential information on the valuation of various partnership interests held by the Segerstrom family" for the purpose of rendering legal advice to the Segerstrom family. Sullivan Decl. (Jan. 2001) ¶ 5. Again, this communication was from an attorney to an agent of the client requesting confidential information for purposes of giving legal advice. No privilege was waived.
As the foregoing discussion demonstrates, communications between third parties and the attorneys were rendered at the attorneys' request to assist in providing legal services to the clients. There has been no waiver of privilege.
C. Non-Privileged Facts
The government argues that the documents it seeks are not covered under attorney-client privilege because they contain valuations and financial information concerning assets owned by Segerstrom Properties. Reply 2. The attorney-client privilege does not extend beyond the substance of the client's confidential communications. In re. Fischel, 557 F.2d at 211. Thus, the privilege does not protect communications that "report or comment on information coming from [third parties] or from public documents, or are summaries of conferences held with or in the presence of others." Carey-Canada, Inc. v. California Union Ins. Co., 118 F.RD. 242, 248 n. 15 (D.C.C. 1986). For example, an attorney's summary of a client's business transactions with third parties is generally not privileged. See In re Fischel, 557 F.2d at 212. However, the privilege does apply where, in addition to reflecting facts received from third parties, the communication is "so interwoven with the privileged communications that disclosure of the former leads to disclosure of the latter." Id.; see also Western Trails, 139 F.R.D. at 10.
Here, all the documents at issue involve communications between the attorneys, the clients, or their agents. No third parties were involved. The Court therefore shall focus on the nature of the information contained in the documents.
1) Absence of Non-Privileged Facts
Document 42 is a summary of a telephone conversation between Sullivan, Mrs. Segerstrom, and her agent. Sullivan Decl. (Mar. 2000) ¶ 4 (¶)(e). Document 80 contains an attorney's comments on various legal documents for Segerstrom Properties. Id. at 4 ¶(bbbb). Document 84 includes documents that Heim revised based on and reflecting legal advice given by an attorney. Id. at ¶ 4 (ffff). None of these documents appears to contain non-privileged facts. These documents are therefore privileged.
2) Non-Privileged Facts Mixed with Legal Advice
Document 59 contains "draft legal documents" relating to contributions by Mrs. Segerstrom to Segerstrom Properties. Id. at ¶ 4 (ggg). Similarly, document 78 contains comments made by Sullivan concerning several charts showing the ownership of properties held by the Segerstrom family. Id. at ¶ 4 (zzz). Document 81 is a letter requesting legal advice on "revised calculations" of the ownership interests in various Segerstrom business entities. Id. at ¶ 4 (cccc). Standing alone, the contributions, charts, and revised calculations of ownership interests may be non-privileged information relating to the clients or their business dealings. However, the contributions appear in draft legal documents prepared by an attorney, the charts are the subject of an attorney's legal comments, and the revised calculations accompanied a request for legal advice. Documents 59, 78, and 81, and the information contained therein, are privileged because privileged communications are so interwoven with non-privileged information that disclosure of the latter necessarily discloses the former. See In re Fischel, 557 F.2d at 212.
3) Estimates and Calculations
Document 51 is a series of charts showing transfers of assets to Segerstrom Properties and related financial information. Sullivan Decl. (Mar. 2000) ¶ 4 (yy). Document 66 contains valuation of assets contributed to Segerstrom Properties. Id. at ¶ 4 (nnn). Document 74 contains estimates of the value of certain assets contributed to Segerstrom Properties and a schedule of assets transferred to Henry T. Segerstrom Properties, LLC. Id. at ¶ 4 (vvv). According to Sullivan, these documents contain or consist of financial calculations or estimates that were done by agents of the Segerstroms, at the request of Sullivan to assist him in rendering legal advice. Suppl. Sullivan Decl. ¶ 3. These documents are therefore privileged because they contain information about the client that was transmitted in confidence by agents of the clients for the purpose of obtaining legal advice.
CONCLUSION
Based on the foregoing analysis and conclusions, the Court need not reach petitioner's arguments that the summonses are not relevant to the IRS' investigation of Mrs. Segerstrom's estate. See Oppo. to Motion to Enforce 10-12. Accordingly, the Court GRANTS the petition to quash the IRS summonses, and DENIES the government's motion to enforce the summonses.
IT IS SO ORDERED.