U.S. v. Adlman, 95-2 USTC

The Court of Appeals for the 2nd Circuit has affirmed a district court decision finding the attorney-client privilege inapplicable, and enforcing an IRS summons directed to Sequa Corporation (Sequa), to produce a memorandum prepared by Arthur Anderson (AA) at the request of a Adlman, an officer and attorney of Sequa, in connection with a corporate reorganization.  U.S. v. Adlman, 95-2 USTC.

Sequa argued unsuccessfully that the memorandum was privileged since Adlman, acting as attorney, had sought the advice of AA concerning the proposed reorganization.  AA had been Sequa’s accountant and auditor at the time.

Most of the documentation which Sequa had provided in court consisted of contemporaneous affidavits of Adlman and other officers of Sequa, as well as persons at AA, which purportedly corroborated Adlman’s contention that he, acting as Sequa’s attorney, was “not an expert in the highly complex corporate reorganization provisions of the tax code” and had consulted with AA in order to “interpret” those Code provisions.

Sheehen, who prepared the memo for AA, also insisted that Adlman was “using the AA Memo to help him evaluate the transaction and to assist him in giving legal advice to Sequa’s management.” Sequa thus contended that AA’s advice came within the attorney-client privilege under US v. Kovel, 296 F.2d 918 (2d Cir. 1961), because it was rendered to Adlman to assist him in giving legal advice to his client Sequa.

The district court determined, however,  that Sequa had failed to meet its burden of establishing the attorney-client privilege. The court found that the objective evidence contradicted Sequa’s claim of privilege, since Sequa had not produced  “contemporaneous evidence,” such as a separate retainer agreement, distinguishing this memo from other work which AA had performed.

Judge Leval, writing for the unanimous appellate panel concurred, stating that the purpose of the privilege is to encourage clients to be candid in order that the attorney is sufficiently well-informed to provide sound legal advice. The court did allow that in “certain circumstances…the privilege for communication with attorneys can extend to shield communications to others in order to assist  the attorney in understanding their client’s financial information.”

Noting that the party claiming the benefit of the privilege has the burden of proving it, the appeals court found Sequa’s argument susceptible to “competing” interpretations. The evidence, “in many respects” supported the conclusion that Sequa had consulted AA for tax advice, and not that Adlman had consulted AA for “help… [in] furnish[ing] legal advice.”

Also damaging to Sequa was the fact that AA appeared to have assumed the role of tax advisor in its letters to Sequa, one point offering to “discuss all related matters with a view toward…prompt implementation [of the restructuring plan].” The court’s opinion seems to imply that the attorney must play a significant role in the final decision in order to claim the privilege.

The Adlman decision may not herald the demise of the privilege where an attorney seeks sophisticated advice from an tax accountant. It might mean, however, that an attorney seeking to invoke the privilege would be well advised to draft his own memorandum in which he could discuss the advice of the accountant, and thereby imbue upon his transaction his own legal expertise. After Adlman, a separate retainer agreement for the specific matter for which confidentiality is sought also seems essential.

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