Opinion
No. C-02-5184 RMW
June 19, 2003
ORDER DENYING PETITION TO ENFORCE INTERNAL REVENUE SERVICE SUMMONS [Re Docket No. 1]
On October 25, 2002 petitioners United States of America and Dan Sutherland, (collectively "Government") filed a petition to enforce an Internal Revenue Service ("IRS") summons against respondent Geoffrey Braun. On March 13, 2003 this court issued an order to show cause as to why the summons should not be enforced. On May 14, 2003 respondent filed a response to the order to show cause and a sealed declaration of Geoffrey Braun. On May 22, 2003 petitioners filed a reply. On June 6, 2003 the court held a hearing on its order to show cause. On June 4, 2003 respondent filed a sealed supplementary declaration of Geoffrey Braun. After reviewing the papers submitted by the parties, including an in camera review of respondent's sealed declarations, and hearing the parties arguments, the court denies the Government's petition to enforce an IRS summons against Braun.
I. BACKGROUND
Dan Sutherland, a Revenue Agent with the IRS, is conducting an examination of Ray Williams' federal income tax liabilities. During 1996, the Mountain View police Department conducted a criminal investigation relating to a charge of grand theft of electronic parts and equipment from Silicon Graphics, Inc., and the sale of those goods to a buyer at Ocean Electronics. During their investigation the police uncovered documents and information linking the names of Ray Williams and Arthur Coronado to 3-D Computers, a business which the police identified as a vendor of electronic parts and equipment to Ocean Electronics. Sutherland is investigating Williams' tax obligations to determine if he received money selling electronic parts or equipment which he did not report on his tax returns.In a declaration obtained by the Goverment, Coronado, an alleged business partner of Williams, testified that he sold electronic inventories to Ocean Electronics on behalf of Williams and Louis De Rosa. Coronado testified that Williams would designate the place for him to pick up parts, De Rosa or Williams would provide Coronado with the parts at the designated place, and that Coronado would then deliver the parts to Ocean Electronics in return for a signed invoice and a check or cash payment. Coronado further explained that he would cash any checks at a bank account opened in his name and deliver the cash and paperwork to Williams.
Coronado was charged by the Government with knowingly structuring transactions to evade reporting requirements in violation of 31 U.S.C. § 5324(a)(3) and entered a plea of guilty to the charge. During the prosecution of the criminal structuring matter, Coronado was represented by attorney Carleen Arlidge. Coronado testified that he believes Williams and De Rosa paid for Alridge to represent him. After Coronado waived the attorney client privilege, Sutherland obtained documents from Arlidge revealing that attorney Geoffrey Braun paid Arlidege $7,000 in cash and $500 in a traveler's check to represent Coronado.
On or about May 6, 2002, Sutherland served on Braun a summons demanding production of information and records relating to the retainer of Arlidge for representation of Coronado in April of 1998. Specifically Sutherland seeks the name and address of Braun's client and the amount and means received Braun from his client for the purpose of retaining Arlidge. Braun refuses to provide this information on the ground that it is protected by the attorney-client privilege.
II. ANALYSIS
The respondent argues that the information sought by the Government — the identity of and amount and method of fees paid by Braun's client — is protected by the attorney client privilege. The petitioners argue, alternatively, that the information the Government seeks is not privileged or that, regardless, the information must be disclosed under the crime-fraud exception to the attorney-client privilege.In federal court the application of attorney-client privilege is governed by federal common law. United States v. Hodge and Zweig, 548 f.2d 1347, 1352 (9th Cir. 1977). The burden is on the party asserting the attorney-client privilege to demonstrate how the information sought fits within it. In re Grand Jury Subpoenas (Hirsch), 803 F.2d 493, 496 (9th Cir. 1986).
The attorney-client privilege protects confidential disclosures made by a client to an attorney in order to obtain legal advice. Id. (citingFisher v. United States, 425 U.S. 391, 403 (1976)). "The privilege allows an attorney to avoid what would otherwise be a professional dilemma of cautioning a client against disclosure and rendering perhaps ill-informed legal advice or of learning all the details of situation and perhaps increasing the perils to the client of disclosure." Id. However, the privilege does not permit an attorney to conduct his client's business affairs in secret. Id.
A. Application of Attorney-Client Privilege to Information Sought
Generally, the identity of an attorney's client and the nature of the fee arrangement between an attorney and his client are not privileged and, where needed, must be disclosed. Id.; In re Osterhoudt, 722 F.2d 591, 592 (9th Cir. 1983). The fact of representation and the associated fee arrangement are only incidental to the existence of the attorney-client relationship and, therefore, do not normally involve communications arising from that relationship. Hirsch, 803 F.2d at 496; In re Osterhoudt, 722 F.2d at 593. However, a narrow exception to the general rule of disclosure exists.
An attorney may invoke the privilege to protect the identity of a client or information regarding a client's fee arrangements if disclosure would convey information which ordinarily would be conceded to be part of the usual privileged communication between attorney and client.Ralls v. United States, 52 F.3d 223, 225 (9th Cir. 1995) (quotations omitted). It is important to note that the application of privilege is not triggered by the fact that the disclosure of the client's identity and the fee arrangements may incriminate the client. Id.; Tornay v. United States, 840 F.2d 1424, 1428 (9th Cir. 1988) (fact that amount and method of payment of attorney's fees might incriminate client did not trigger attorney-client privilege). Rather, the privilege is invoked where disclosure of the client'd identity and fee information would infringe upon a privileged communication. In re Osterhoudt, 722 F.2d at 593.
The seminal Ninth Circuit case on this exception is Baird v. Koerner, 279 F.2d 623 (9th Cir. 1960). In Baird several clients had engaged a lawyer for advice in tax matters and, on the attorney's recommendation, anonymously tendered to the IRS, through the attorney, sums due for unpaid taxes. 279 F.2d at 632. The IRS then sought the identity of the clients even though no government investigation was pending into their tax liabilities. Id. The court held that the attorney-client privilege applied because each client's identity showed an acknowledgment of guilt on the part of the client of the very offense for which the attorney was employed. Id. at 633.
This exception was applied to the identity of an anonymous fee-payer inRalls v. United States, 52 F.3d 223 (9th Cir. 1995). In Ralls an unidentified client paid his attorney to represent another party who was arrested for attempting to transport a large amount of cocain across state lines. 52 F.3d at 225. The Government issued a grand jury subpoena to the attorney, seeking to discover the name of the fee-paying client, the amount of money paid, the method of payment, and any retainer agreement. Id. The court quashed the subpoena after a review of a sealed affidavit filed by the attorney. The sealed affidavit revealed that the unidentified client sought the attorney's advice regarding his involvement in and liability for the crime for which the other party was arrested. Id. at 226. The court found that revealing the client's identity would also reveal the confidential purpose for which he consulted an attorney and his confidential communications to the attorney, holding that the "fee arrangement and the fee-payer's identity are inextricably intertwined with confidential communications and fall within the attorney client privilege." Id.
However, "the attorney-client relationship is not genuine where its only purpose is to gain confidentiality for the client or to use the lawyer as a mere conduit for the payment of money. Hirsch, 803 F.2d at 499. In Hirsch, for example, the court denied the application of the attorney-client privilege to protect the identity of an unidentified fee-payer where the goal of the purported attorney-client relationship was not to secure personal legal services but solely to provide the client with a shield of confidentiality, to provide a conduit for the anonymous payment of another's attorney fees. Id. Similarly in Vingelli v. United States, the Second Circuit held that the attorney client privilege did not protect the identify of an anonymous fee-payer where "the client's communication with the attorney would not become apparent merely upon disclosure of his or her identity." 992 F.2d 449, 453. In that case, the fee-payer had not sought the attorney's advice regarding the underlying criminal matter but only about the ramifications of lending money to and having contacts with a criminal defendant. Id.
The main issue before this court, then, is whether Braun's client disclosed confidential information that will, necessarily, be revealed should his identity become known or whether Braun's client merely sought to use Braun as a conduit for anonymous payment of Coronado's legal fees. In the sealed affidavit Braun testifies that his client, with whom he had a pre-existing relationship, consulted with him and disclosed confidential information potentially related to the conduct for which Coronado was being investigated. During this consultation Braun's client sought to obtain legal representation for Coronado. As a result of this consultation, Braun obtained and paid for the services of Arlidge for the representation of Coronado. This situation is identical to the situation in Ralls. The client's confidential reasons for consulting with Braun are intertwined with the fact of representation. Disclosure of the identity of Braun's client will reveal the nature of the client's confidential communications to Braun during their consultation. Therefore, the information the Government seeks is protected by the attorney-client privilege.
B. Application of Crime or Fraud Exception
Petitioners also argue that should the attorney-client privilege attach to the identity of Braun's client, the crime-fraud exception applies and requires disclosure. Petitioners contend that in obtaining an attorney to represent Coronado, Braun's client engaged in conduct in furtherance of a criminal conspiracy. Respondent counters that the Government has failed to put forth sufficient evidence that ongoing or future criminal activity was intended.
It is well established that, "[t]he protection afforded by the attorney-client privilege does not extend to any communication in furtherance of intended, or present, continuing illegality.'" In re Grand Jury Proceedings, 87 F.3d 377, 381 (9th Cir. 1996) (quoting United States v. Hodge Zweig, 548 F.2d 1347, 1354 (9th Cir. 1977)). Known as the crime-fraud exception, this exception to the attorney-client privilege requires disclosure of otherwise privileged communications "made for the purpose of getting advice for the commission of a fraud or crime." Id. The crime-fraud exception applies even where the attorney is completely unaware that his advice is sought in furtherance of such an improper purpose. Id.. However, "the exception does not sweep so broadly that it discourages clients from making full disclosure to their attorneys of past wrongdoings, in order that the client may obtain the aid of persons having knowledge of the law and skilled in its practice." Id. (emphasis in original) (quotations omitted).
The government has the burden of providing sufficient justification for invoking the crime-fraud exception. United States v. Chen, 99 F.3d 1495, 1503 (9th Cir. 1996). To trigger the crime-fraud exception, there are two steps. First the government must satisfy the judge that there is a "factual basis adequate to support a good faith belief by a reasonable person that in camera review of the materials may reveal evidence to establish the claim that the -crime-fraud exception apples." Id. Then, the otherwise privileged material may be submitted for in camera examination. Id. Second, based on the materials presented to the court, the government must make a prima facie showing that the communications were in furtherance of an intended or present illegality and there is some relationship between the communications and the illegality. Id. Mere allegations or suspicion by the government are insufficient. Id. But proof beyond a reasonable doubt is not necessary. Id. The test is whether there is "reasonable cause to believe that the attorney's services were utilized in furtherance of the ongoing unlawful scheme." Id. Reasonable cause is more than suspicion but less than a preponderance of the evidence. Id.
At least one court in the Ninth Circuit found the crime-fraud exception applied in a situation where one member of an alleged conspiracy paid the legal fees of others who had been investigated, charged and had plead guilty to charges related to that conspiracy. United States v. Hodge and Zweig, 548 F.2d 1347, 1354-55 (9th Cir. 1977). In Hodge and Zweig, the Government instigated a federal grand jury investigation of a group of individuals suspected to be involved in a conspiracy to import drugs.Id. at 1350. Several of those individuals were charged with and plead guilty to charges of conspiracy to import marijuana. Id. In the indictment, the Government alleged that as part of the conspiracy, the conspirators had agreed to provide bail and legal services for participants who were apprehended by law enforcement officials in the course of the criminal activity. Id. During the investigation and prosecution of the conspiracy charges, all of these individuals were represented by the same attorneys, Hodge and Zweig. Id. Concurrent to the criminal investigation, the IRS was engaged in a tax investigation against one of these individuals. Id. at 1349. The IRS issued a summons directed to Hodge and Zweig, individually and as a law partnership. Id. The summons directed the attorneys to produce various business records pertaining to this one individual including records of payments received from this individual for services rendered to the other conspirators. Id. After the court determined that this information was protected by the attorney-client privilege, the court then turned to the issue of whether the crime-fraud exception applied. Id. at 1354. In its determination the court relied on the fact that
as an integral part of the conspiracy the participants agreed to furnish bail and legal expenses for conspirators who might be apprehended by law enforcement officials. Presumably, such an agreement was designed to hinder any criminal drug prosecution arising out of the conspiracy; as such, the agreement constituted part of the consideration for engaging in the conspiratorial activity.Id. at 1354-55. Because the Government put forward evidence that this aspect of the conspiracy was ongoing during the course of Hodge and Zweig's representation of the members or the conspiracy, the crime-fraud exception applied and disclosure of the privileged information was required. Id. at 1355; accord In re Grand Jury Proceedings (Pavlick), 680 F.2d 1026, 1028 (5th Cir. 1982) (crime-fraud exception applied to identity of anonymous fee payer where there was evidence that conspirators understood that they would be "taken care of" if arrested).
In this case, the petitioners have met their initial burden and have put forward sufficient non-privileged evidence to justify the court reviewing in camera the confidential communications between Braun and his client. The petitioners have offered the declaration of Coronado in which Coronado testifies that
17. Before I went to jail, I asked both Darosa and ray Williams for findancial held. Their reponse to me was that they had paid for my attorney and that was sufficient help, and that any additional help would have to come from Darosa.
From this testimony, it is reasonable to infer that the confidential communications between Braun and his client might reveal information indicating that, as in Hodge and Zweig, as part of the underlying conspiracy to defraud, Coronado, Williams, and De Rosa agreed to provide each other with legal services.
However, petitioners fail on the second step. Petitioners have not provided reasonable cause to believe that such an agreement actually existed, explicitly or implicitly, between Coronado and his alleged conspirators or, more importantly, that Braun's client engaged Braun's services in order to further such a scheme. Braun's sealed decelerations do not indicate that the hiring of Arlidge to represent Coronado were the fruits of or consideration for Coronado's involvement in a criminal conspiracy. These declarations provide only that Braun's client sought to ensure Coronado had representation for defending against charges related to an entirely completed course of conduct. Therefore, because petitioners have failed to meet their burden, the crime-fraud exception does not apply.