UNITED STATES of America, Petitioner-Appellee, v. Monroe ADLMAN, as Officer and Representative of Sequa Corporation, Respondent-Appellant.
No. 236, Docket 96-6095.
United States Court of Appeals, Second Circuit.
Decided Feb. 13, 1998.
134 F.3d 1194
Before KEARSE, LEVAL, and CABRANES, Circuit Judges.
William J. Hoffman, Assistant United States Attorney, (Mary Jo White, United States Attorney for the Southern District of New York, Steven M. Haber, Assistant United States Attorney, New York City, of Counsel), for Petitioner-Appellee.
LEVAL, Circuit Judge:
This appeal concerns the proper interpretation of
The district court ruled that the document sought by the IRS in this case did not fall within the scope of
Background
Sequa Corporation is an aerospace manufacturer with annual revenues of nearly $2 billion. Prior to 1989, Atlantic Research Corporation (“ARC“) and Chromalloy Gas Turbine Corporation (“Chromalloy“) were wholly-owned Sequa subsidiaries. Appellant Monroe Adlman is an attorney and Vice President for Taxes at Sequa.
In the spring of 1989, Sequa contemplated merging Chromalloy and ARC. The contemplated merger was expected to produce an enormous loss and tax refund, which Adlman expected would be challenged by the IRS and would result in litigation. Adlman asked Paul Sheahen, an accountant and lawyer at Arthur Andersen & Co. (“Arthur Andersen“), to evaluate the tax implications of the proposed restructuring. Sheahen did so and set forth his study in a memorandum (the “Memorandum“). He submitted the Memorandum in draft form to Adlman in August 1989. After further consultation, on September 5, 1989, Sheahen sent Adlman the final version. The Memorandum was a 58-page detailed legal analysis of likely IRS challenges to the reorganization and the resulting tax refund claim; it contained discussion of statutory provisions, IRS regulations, legislative history, and prior judicial and IRS rulings relevant to the claim. It proposed possible legal theories or strategies for Sequa to adopt in response, recommended preferred methods of structuring the transaction, and made predictions about the likely outcome of litigation.
Sequa decided to go ahead with the restructuring, which was completed in December 1989 in essentially the form recommended by Arthur Andersen. Sequa sold 93% of its stock in ARC to Chromalloy for $167.4 million, and the remaining 7% to Bankers Trust for $12.6 million. The reorganization resulted in a $289 million loss. Sequa claimed the loss on its 1989 return and carried it back to offset 1986 capital gains, thereby generating a claim for a refund of $35 million.
In an ensuing audit of Sequa‘s 1986-1989 tax returns, the IRS requested a number of documents concerning the restructuring transaction. Sequa acknowledged the existence of the Memorandum, but cited work-product privilege as grounds for declining to
When Adlman declined to comply, the IRS instituted an action in the United States District Court for the Southern District of New York to enforce the subpoena. Adlman defended on the grounds that the Memorandum was protected by both the attorney-client and work-product privileges. The district court (Knapp, J.) in its first decision rejected Adlman‘s claim that the Memorandum was protected by attorney-client privilege, finding that Adlman had not consulted Arthur Andersen in order to obtain assistance in furnishing legal advice to Sequa. United States v. Adlman, M-18-304, 1994 WL 191869, at *2 (S.D.N.Y. May 16, 1994). It rejected Adlman‘s claim of work-product privilege because the Memorandum was prepared for litigation based on actions or events that had not yet occurred at the time of its creation. Id. at *3. The court granted the IRS‘s petition to enforce the summons.
On appeal, we affirmed denial of Adlman‘s claim of attorney-client privilege. United States v. Adlman, 68 F.3d 1495 (2d Cir.1995). We vacated the district court‘s enforcement order, however, because the district court had evaluated Adlman‘s claim of work-product privilege under the wrong standard. Although the non-occurrence of events giving rise to litigation prior to preparation of the documents is a factor to be considered, we explained, it does not necessarily preclude application of work-product privilege. See id. at 1501. For example, where a party faces the choice of whether to engage in a particular course of conduct virtually certain to result in litigation and prepares documents analyzing whether to engage in the conduct based on its assessment of the likely result of the anticipated litigation, we concluded that the preparatory documents should receive protection under
On remand, Adlman argued that the Memorandum was protected by
The district court again rejected the claim of work-product privilege, concluding that the Memorandum was not prepared in anticipation of litigation. M-18-304, 1996 WL 84502, at *1 (S.D.N.Y. Feb. 27, 1996). Adlman appeals.
Discussion
The work-product doctrine, codified for the federal courts in
This case involves a question of first impression in this circuit: whether
I.
In Hickman v. Taylor, 329 U.S. 495, 67 S.Ct. 385, 91 L.Ed. 451 (1947), the Supreme Court held that notes taken by the defendant‘s attorney during interviews with witnesses to the event that eventually gave rise to the lawsuit in the case were not discoverable by the plaintiff. 329 U.S. at 510, 67 S.Ct. at 393. As the Court explained,
In performing his various duties, . . . it is essential that a lawyer work with a certain degree of privacy, free from unnecessary intrusion by opposing parties and their counsel. Proper preparation of a client‘s case demands that he . . . prepare his legal theories and plan his strategy without undue and needless interference.
Id. at 510-11, 67 S.Ct. at 393.
Were the attorney‘s work accessible to an adversary, the Hickman court cautioned, “much of what is now put down in writing would remain unwritten” for fear that the attorney‘s work would redound to the benefit of the opposing party. Id. at 511, 67 S.Ct. at 393-94. Legal advice might be marred by “[i]nefficiency, unfairness and sharp practices,” and the “effect on the legal profession would be demoralizing.” Id. at 511, 67 S.Ct. at 394. Neither the interests of clients nor the cause of justice would be served, the court observed, if work product were freely discoverable. Id.
The Supreme Court has reaffirmed the “strong public policy” underlying the work-product privilege in the decades since Hickman. See United States v. Nobles, 422 U.S. 225, 236, 95 S.Ct. 2160, 2169, 45 L.Ed.2d 141 (1975); Upjohn Co. v. United States, 449 U.S. 383, 398, 101 S.Ct. 677, 687, 66 L.Ed.2d 584 (1981). It has also made clear that documents that “tend[] to reveal the attorney‘s mental process“—described by commentators as “opinion work product,” see Special Project, The Work Product Doctrine, 68 Cornell L.Rev. 760, 817 (1983)—receive special protection not accorded to factual material. Upjohn, 449 U.S. at 399, 101 S.Ct. at 687. Special treatment for opinion work product is justified because, “[a]t its core, the work-product doctrine shelters the mental processes of the attorney, providing a privileged area within which he can analyze and prepare his client‘s case.” Nobles, 422 U.S. at 238, 95 S.Ct. at 2170.
II.
The first problem we face is to determine the meaning of the phrase prepared “in anticipation of litigation.” The phrase has never been interpreted by our circuit; furthermore, courts and commentators have expressed a range of views as to its meaning. It is universally agreed that a document whose purpose is to assist in preparation for litigation is within the scope of the Rule and thus eligible to receive protection if the other conditions of protection prescribed by the Rule are met. The issue is less clear, however, as to documents which, although prepared because of expected litigation, are intended to inform a business decision influenced by
1. “Primarily to assist in” litigation.
The “primarily to assist in litigation” formulation is exemplified by a line of cases from the United States Court of Appeals for the Fifth Circuit. In United States v. Davis, 636 F.2d 1028 (5th Cir.), cert. denied, 454 U.S. 862, 102 S.Ct. 320, 70 L.Ed.2d 162 (1981), the Fifth Circuit denied protection to documents made in the course of preparation of a tax return. This result was well justified as there was no showing whatsoever of anticipation of litigation. In what might be characterized as a dictum, or in any event a statement going far beyond the issues raised in the case, the court asserted that the Rule applies only if the “primary motivating purpose behind the creation of the document was to aid in possible future litigation.” Id. at 1040.
Then, in United States v. El Paso Co., 682 F.2d 530 (5th Cir.1982), cert. denied, 466 U.S. 944, 104 S.Ct. 1927, 80 L.Ed.2d 473 (1984), a large public corporation sought to shield documents that analyzed prospective liabilities that might result from litigation with the IRS over its tax returns. The documents were prepared not to assist in litigation but to establish and justify appropriate reserves in El Paso‘s financial statements. Treating the Davis dictum as law, the Fifth Circuit held that because the “primary motivating force [behind the preparation of the documents was] not to ready El Paso for litigation” but rather “to bring its financial books into conformity with generally accepted auditing principles,” id. at 543, and because the documents’ liability analysis was “only a means to a business end,” id., the documents were not prepared “in anticipation of litigation” within the meaning of the Rule and enjoyed no work-product protection. The El Paso requirement that the document be prepared to aid in litigation was then applied by a Fifth Circuit judge writing for the Temporary Emergency Court of Appeals in United States v. Gulf Oil Corp., 760 F.2d 292, 296-97 (Temp.Emer.Ct.App.1985).3
We believe that a requirement that documents be produced primarily or exclusively to assist in litigation in order to be protected is at odds with the text and the policies of the Rule. Nowhere does
The text of
In addition, the Rule takes pains to grant special protection to the type of materials at issue in this case—documents setting forth legal analysis. While the Rule generally withholds protection for documents prepared in anticipation of litigation if the adverse party shows “substantial need” for their disclosure and inability to obtain their equivalent by other means, even where the party seeking disclosure has made such a showing the Rule directs that “the court shall protect against disclosure of the mental impressions, conclusions, opinions, or legal theories of . . . [a party or its representative] concerning the litigation.”
Admittedly, there are fragmentary references in the caption to the Rule and in its commentary that can be read to lend support to a contrary interpretation. The caption, for example, refers to “Trial Preparation,” and the Advisory Committee Notes make occasional reference to “trial preparation materials.” We attach small importance to those references. Given that the text of the Rule (and of the commentary) expressly goes beyond documents “prepared for trial” to encompass also those documents “prepared in anticipation of litigation,” we cannot read the references in the caption and commentary as overriding the text of the Rule. See United States v. Minker, 350 U.S. 179, 185, 76 S.Ct. 281, 285, 100 L.Ed. 185 (1956); Whitehouse v. United States District Court, 53 F.3d 1349, 1358 n. 12 (1st Cir.1995).
In addition to the plain language of the Rule, the policies underlying the work-product doctrine suggest strongly that work-product protection should not be denied to a document that analyzes expected litigation merely because it is prepared to assist in a business decision. Framing the inquiry as whether the primary or exclusive purpose of the document was to assist in litigation threatens to deny protection to documents that implicate key concerns underlying the work-product doctrine.
The problem is aptly illustrated by several hypothetical fact situations likely to recur:
(i) A company contemplating a transaction recognizes that the transaction will result in litigation; whether to undertake the transaction and, if so, how to proceed with the transaction, may well be influenced by the company‘s evaluation of the likelihood of success in litigation. Thus, a memorandum may be prepared in expectation of litigation with the primary purpose of helping the company decide whether to undertake the contemplated transaction. An example would be a publisher contemplating publication of a book where the publisher has received a threat of suit from a competitor purporting to hold exclusive publication rights. The publisher commissions its attorneys to prepare an evaluation of the likelihood of success in the litigation, which includes the attorneys’ evaluation of various legal strategies that might be pursued. If the publisher decides to go ahead with publication and is sued, under the “primarily to assist in litigation” formulation the study will likely be disclosed to the opposing lawyers because its principal purpose was not to assist in litigation but to inform the business decision whether to publish. We can see no reason under the words or policies of the Rule why such a document should not be protected. See United States v. Adlman, 68 F.3d at 1501.
(ii) A company is engaged in, or contemplates, some kind of partnership, merger, joint undertaking, or business association with another company; the other company reasonably requests that the company fur
(iii) A business entity prepares financial statements to assist its executives, stockholders, prospective investors, business partners, and others in evaluating future courses of action. Financial statements include reserves for projected litigation. The company‘s independent auditor requests a memorandum prepared by the company‘s attorneys estimating the likelihood of success in litigation and an accompanying analysis of the company‘s legal strategies and options to assist it in estimating what should be reserved for litigation losses.
In each scenario, the company involved would require legal analysis that falls squarely within Hickman‘s area of primary concern—analysis that candidly discusses the attorney‘s litigation strategies, appraisal of likelihood of success, and perhaps the feasibility of reasonable settlement. The interpretation of
We perceive nothing in the policies underlying the work-product doctrine or the text of the Rule itself that would justify subjecting a litigant to this array of undesirable choices. The protection of the Rule should be accorded to such studies in these circumstances. See United States v. Adlman, 68 F.3d at 1501 (“[T]here is no rule that bars application of work-product protection to documents created prior to the event giving rise to litigation.“). We see no basis for adopting a test under which an attorney‘s assessment of the likely outcome of litigation is freely available to his litigation adversary merely because the document was created for a business purpose rather than for litigation assistance. The fact that a document‘s purpose is business-related appears irrelevant to the question whether it should be protected under
We note that in Delaney, Migdail & Young, Chartered v. IRS, 826 F.2d 124 (D.C.Cir.1987), the IRS successfully argued against the very position it here advocates. The D.C. Circuit sustained the IRS‘s claim of work-product privilege in circumstances where the claim would have failed under the test applied by the Fifth Circuit and advocated by the IRS on this appeal. The documents sought in Delaney were prepared by IRS attorneys for a business purpose—to help the IRS decide whether to adopt a proposed system of statistical sampling for its corporate audit program for large accounts. However, the study was prepared because of expected litigation which would result from adoption of the program; it analyzed expected legal challenges to the use of the proposed program, potential defenses available to the agency, and the likely outcome. Based on the preparatory study, the IRS concluded that the proposed statistical sampling program presented an acceptable legal risk and authorized it. The court refused discovery with the observation that the party requesting discovery was
seeking the agency‘s attorneys’ assessment of the program‘s legal vulnerabilities in order to make sure it does not miss anything in crafting its legal case against the program. This is precisely the type of discovery the [Supreme] Court refused to permit in Hickman v. Taylor.
Id. at 127 (emphasis added) (footnote omitted). The Seventh Circuit has also considered and rejected the contention that documents automatically fall outside the scope of the work-product doctrine when they are prepared for purposes other than assistance in litigation. See In re Special September 1978 Grand Jury (II), 640 F.2d 49, 61-62 (7th Cir.1980).5
Similarly, several district courts have rejected the contention that
The few commentators to have specifically addressed whether the work-product doctrine should apply to documents analyzing
2. Prepared “because of” litigation.
The formulation of the work-product rule used by the Wright & Miller treatise, and cited by the Third, Fourth, Seventh, Eighth and D.C. Circuits, is that documents should be deemed prepared “in anticipation of litigation,” and thus within the scope of the Rule, if “in light of the nature of the document and the factual situation in the particular case, the document can fairly be said to have been prepared or obtained because of the prospect of litigation.” Charles Alan Wright, Arthur R. Miller, and Richard L. Marcus, 8 Federal Practice & Procedure § 2024, at 343 (1994) (emphasis added). See In re Grand Jury Proceedings, 604 F.2d 798, 803 (3d Cir.1979); National Union Fire Ins. Co. v. Murray Sheet Metal Co., Inc., 967 F.2d 980, 984 (4th Cir.1992); Binks Mfg. Co. v. National Presto Indus., Inc., 709 F.2d 1109, 1118-19 (7th Cir.1983); Simon v. G.D. Searle & Co., 816 F.2d 397, 401 (8th Cir.), cert. denied, 484 U.S. 917, 108 S.Ct. 268, 98 L.Ed.2d 225 (1987); Senate of Puerto Rico v. United States Dep‘t of Justice, 823 F.2d 574, 586 n. 42 (D.C.Cir.1987).
The Wright & Miller “because of” formulation accords with the plain language of
Conversely, it should be emphasized that the “because of” formulation that we adopt here withholds protection from documents that are prepared in the ordinary course of business or that would have been created in essentially similar form irrespective of the litigation. It is well established that work-product privilege does not apply to such documents. See
Furthermore, although a finding under this test that a document is prepared because of the prospect of litigation warrants application of
In short, we find that the Wright & Miller “because of” test appropriately focuses on both what should be eligible for the Rule‘s protection and what should not. We believe this is the proper test to determine whether a document was prepared “in anticipation of litigation” and is thus eligible for protection depending on the further findings required by the Rule.
III.
We cannot determine from the district court‘s opinion what test it followed in concluding that the Memorandum was ineligible for protection.
There are indications that the district court may have followed the “primarily to assist in litigation” test, which we here reject. At one point the opinion asserted that “the court must determine whether the party seeking [work-product protection] has shown that the ‘documents were prepared principally or exclusively to assist in anticipated or ongoing litigation.’ United States v. Construction Products Research Inc., [73 F.3d 464, 473 (2d Cir.), cert. denied, — U.S. —, 117 S.Ct. 294, 136 L.Ed.2d 213 (1996)].” (emphasis added by district court).6 Then, in stating its conclusion, the court said, “The primary purpose [of the Memorandum] was not to prepare for litigation; the primary purpose was to decide whether or not to go through with a multimillion dollar transaction.” These passages suggest the district court may have employed the test we reject.
On the other hand, the tenor of the discussion in the court‘s opinion suggests it may have focussed properly on the question whether the Memorandum studying the tax implications of the contemplated restructuring would have been prepared in substantially similar form regardless whether litigation was contemplated, and thus was not prepared “because of” the expected litigation.
We remand with instructions to the district court to reconsider the issue under the Wright & Miller test of whether “the document can fairly be said to have been pre
If the district court concludes that substantially the same Memorandum would have been prepared in any event—as part of the ordinary course of business of undertaking the restructuring—then the court should conclude the Memorandum was not prepared because of the expected litigation and should adhere to its prior ruling denying the protection of the Rule.
On the other hand, if the court finds the Memorandum would not have been prepared but for Sequa‘s anticipation of litigation with the IRS over the losses generated by the restructuring, then judgment should be entered in favor of Sequa.
The IRS contends that even if the Memorandum qualifies as work product, it has made a sufficient showing of substantial need and unavailability so as to overcome the qualified protection accorded by
The IRS claims necessity for the Memorandum on the ground that it will provide insight into Sequa‘s subjective motivation for engaging in corporate restructuring and is thus relevant to determining whether the transaction was motivated by a legitimate business purpose. See, e.g., Kirchman v. Commissioner, 862 F.2d 1486, 1492 (11th Cir.1989); Rice‘s Toyota World, Inc. v. Commissioner, 752 F.2d 89, 91-92 (4th Cir.1985). In camera review of the Memorandum shows that it does not reflect the motives of Sequa‘s executives, but rather the legal analysis of its accountants. While the Memorandum unquestionably presupposes a desire to achieve a favorable tax result, such a desire is in no way incompatible with the existence of a “legitimate non-tax business reason” for its choice. Newman v. Commissioner, 902 F.2d 159, 163 (2d Cir.1990); see also Frank Lyon Co. v. United States, 435 U.S. 561, 580, 98 S.Ct. 1291, 1302, 55 L.Ed.2d 550 (1978) (“The fact that favorable tax consequences were taken into account . . . on entering into [a] transaction is no reason for disallowing those consequences” where the transaction has a legitimate business purpose.). The Memorandum, being the technical and legal analysis of outside accountants, and not the reflections of decisionmakers at Sequa, simply does not address or reflect Sequa‘s business reason for the proposed restructuring.
Moreover, the IRS has made no showing, beyond bare assertion, that the relevant information in the Memorandum is unavailable by other means. This falls far short of the heightened showing mandated by Upjohn.7
In short, the enforceability of the IRS summons for the Memorandum will turn on whether it (or substantially the same document) would have been prepared irrespective of the anticipated litigation and therefore was not prepared because of it.
Conclusion
The order enforcing the IRS summons is vacated, and the matter is remanded to the district court for further findings under the standard prescribed in this ruling.
KEARSE, Circuit Judge, dissenting:
I respectfully dissent. It does not appear to me that the district court applied an erroneous standard in this case. Accordingly, I would affirm.
The attorney work product privilege accords limited protection for materials that were “prepared in anticipation of litigation or for trial.” See
This does not mean, as suggested by the majority opinion ante at 1199-1201, 1202-03, that such materials will normally be discoverable. Documents in which a party‘s attorney assesses the legal advisability of contemplated business transactions, including the possibility and efficacy of litigation if the client elects to proceed with the transaction, will normally be protected from discovery by the attorney-client privilege, so long as the client meets the usual requirements of, inter alia, maintaining confidentiality and showing that it was seeking legal advice. The assertion of attorney-client privilege in the present case was rejected only because the client had failed to make any record that distinguished the present consultation of its accounting firm from its normal business consultations. See United States v. Adlman, 68 F.3d 1495, 1499-1500 (2d Cir.1995).
I disagree with the majority‘s expansion of the work-product privilege to afford protection to documents not prepared in anticipation of litigation but instead prepared in order to permit the client to determine whether to undertake a business transaction, where there will be no anticipation of litigation unless the transaction is undertaken.
Notes
Judge Kearse also argues that work product protection is unnecessary because protection will generally be accorded by the attorney-client privilege. No doubt in many instances this will be true, but it is irrelevant. Where true, the issue is moot. In other circumstances, however, the attorney-client privilege may be unavailable for a number of reasons. For example, as suggested
First, the district court‘s quotation of the passage from Construction Products was incomplete, and the omitted portion makes clear that our opinion does not support that interpretation. On turning to the issue of work product privilege in Construction Products, we said, “To invoke the privilege a party generally must show that the documents were prepared principally or exclusively to assist in anticipated or ongoing litigation.” 73 F.3d at 473 (emphasis added). In quoting the passage, the district court omitted the word “generally.” The omitted word is of great significance, for it indicates that the court was not enunciating a categorical rule but rather describing the conventional circumstances in which work product privilege applies.
In the vast majority of cases, work product protection is sought for documents that were prepared to assist in the conduct of the litigation. Use of the word “generally” implies, however, that there exist circumstances in which the requirements of proof are different. The statement cannot stand as authority for the proposition that, whenever
Second, the part of the quoted passage on which the district court relied was unrelated to the issues in dispute. We denied work product protection in Construction Products because the applicant‘s privilege log “simply [did] not provide enough information to support the privilege claim, particularly in the glaring absence of any supporting affidavits or other documentation.” Id. at 474. The question whether documents prepared because of anticipated litigation but intended to inform a business decision are covered by the Rule was not at issue. Accordingly, the observation on which the district court may have relied was pure dictum. Construction Products simply does not address the question here presented.