In Re Grand Jury Subpoena ABC Co.

NOT PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
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No. 16-3479
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In re: GRAND JURY SUBPOENA
ABC Company,
Appellant
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On Appeal from the United States District Court
for the Middle District of Pennsylvania
District Court No. 3-16-mc-00222
District Judge: The Honorable Malachy E. Mannion
Submitted Pursuant to Third Circuit L.A.R. 34.1(a)
March 23, 2017
Before: SMITH, Chief Judge, JORDAN, and ROTH, Circuit Judges
(Filed: June 16, 2017)
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OPINION *
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SMITH, Chief Judge.
*
This disposition is not an opinion of the full court and pursuant to I.O.P. 5.7 does
not constitute binding precedent.
This case involves the application of the crime-fraud exception to the
attorney-client and work-product privileges in the context of an ongoing grand jury
investigation. ABC Company retained Law Firm to perform legal services related
to ABC Company’s administrative appeal of a Management and Occupancy
Review (“MOR”) conducted by the Department of Housing and Urban
Development (“HUD”). 1 As part of its appeal, ABC Company submitted a
response (“MOR Response”) to HUD. The grand jury issued a subpoena broadly
seeking Law Firm’s communications, documents, and member identities related to
Law Firm’s representation of ABC Company in the MOR appeal. ABC Company
filed a motion to quash the subpoena, asserting attorney-client and work-product
privileges. The District Court concluded that the crime-fraud exception to those
privileges applied and denied ABC Company’s motion to quash. Because the
record fails to provide a “reasonable basis” to support application of the crime-
fraud exception, we will vacate the District Court’s denial of the motion to quash
and remand for further proceedings consistent with this opinion.
1
We use pseudonyms to refer to the grand jury subjects to protect the secrecy of
the grand jury investigation and the anonymity of its subjects.
2
I
In September 2013, HUD performed a MOR at an apartment complex
operated by ABC Company to assess the overall quality of management services
provided by ABC Company. HUD provided ABC Company with a report on the
results of the MOR in October 2013, and the report contained an overall rating of
“Unsatisfactory.” Of particular note, the MOR report observed,
The security cameras at buildings 308 and 328 were not functioning
and the wiring was disconnected from the computer. In addition,
Management stated that the security camera system as a whole, was
not working. Management is in the process of obtaining a contractor
to make necessary repairs and is obtaining bids to upgrade the
security system for all buildings.
JA73.
After receiving the results of the MOR, ABC Company retained Law Firm
to assist with responding to the MOR report. ABC Company, not Law Firm, then
sent a response to HUD contesting the results of the MOR. Countering the MOR
report’s observation about the security cameras, ABC Company rejoined:
The statement of this condition is not accurate. The camera systems
in Buildings 308 and 328 were working, and the wiring was not
disconnected from [the] computer. The cameras, recording
equipment and computer were not viewed by HUD during the MOR;
HUD was accompanied by Management at all times. Secondly, it is a
wireless system and does not have wires to be disconnected. In
addition, Management never made a statement that the security
camera system [was] not working.
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JA93. This section of the MOR Response relating to the security cameras also
included an unsigned letter titled “CCTV System.” JA108. The letter stated, “As
per our conversation this morning regarding the cameras at buildings 308 (400)
and 328 (600). Both buildings were recording when we visited them with the
police in August of 2013.” Id. According to an affidavit filed by ABC Company
lawyers (produced after a review of Law Firm’s communications), ABC Company
did not send this letter to Law Firm prior to submitting the MOR Response to
HUD.
On March 10, 2016, a grand jury issued a subpoena seeking fee
arrangements, communications, documents, and Law Firm member identities
related to Law Firm’s work assisting ABC Company. On June 2, 2016, ABC
Company filed a sealed motion to quash directed at the subpoena. Briefing on the
motion from the Government suggested that HUD’s Office of Inspector General
(“OIG”) performed an investigation of ABC Company’s MOR Response.
According to the Government’s brief, the OIG investigation revealed that the
MOR Response “contained numerous misleading and false statements.” JA58.
Also through its brief, the Government claimed that the OIG investigation
included an interview with the purported author of the “CCTV System” letter, in
which the author “indicated that he did not author the letter submitted in the MOR
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[Response], nor authorize anyone to prepare such a letter to be included
therewith.” JA59. The Government’s brief finally stated that the investigation
determined that ABC Company used Law Firm “in order to assist it in the
preparation of the MOR response submitted to HUD.” Id.
Based on those assertions in the Government’s brief, the District Court
concluded that a reasonable basis existed “to suspect that [ABC Company] used
the legal advice and the work-product it obtained from [Law Firm] regarding its
response to further its criminal scheme to dupe HUD’s auditors . . . .” JA15. It
therefore held the crime-fraud exception applied to the privileges claimed by ABC
Company and denied ABC Company’s motion to quash.
II
The District Court had jurisdiction under 18 U.S.C. § 3231 because this case
involves an offense against the laws of the United States.
“When a district court orders a witness—whether a party to an underlying
litigation, a subject or target of a grand jury investigation, or a complete stranger to
the proceedings—to testify or produce documents, its order generally is not
considered an immediately appealable ‘final decision[ ]’ under § 1291.” In re
Grand Jury, 705 F.3d 133, 142 (3d Cir. 2012) (alteration in original). Under
Perlman v. United States, 247 U.S. 7 (1918), however, “a privilege holder may
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immediately appeal an adverse disclosure order when the privileged information is
controlled by a ‘disinterested third party who is likely to disclose that information
rather than be held in contempt for the sake of an immediate appeal.’” In re Grand
Jury Subpoena, 745 F.3d 681, 686–87 (3d Cir. 2014) (quoting In re Grand Jury,
705 F.3d at 138). Here, Law Firm is a disinterested third-party controlling ABC
Company’s privileged information, and the District Court ordered disclosure of
that information. Under the Perlman exception, we therefore have appellate
jurisdiction pursuant to 28 U.S.C. § 1291.
III
“We review legal conclusions—such as the amount of proof required to
apply the crime-fraud exception—de novo.” In re Grand Jury, 705 F.3d at 153
n.18 (citing In re Impounded, 241 F.3d 308, 312 (3d Cir. 2001)). “We review the
District Court’s decision that ‘there is sufficient evidence of a crime or fraud to
waive the attorney-client privilege’ [or the work-product privilege] for ‘abuse of
discretion.’” Id. at 155 (quoting In re Impounded, 241 F.3d at 318). Finally, the
factual determinations underlying the District Court’s decision regarding
application of the crime-fraud exception are reviewed for clear error. See id.
(citing In re Impounded, 241 F.3d at 312).
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IV
ABC Company has invoked two privileges in response to the grand jury’s
subpoena: attorney-client and work-product. “The attorney-client privilege
protects from disclosure confidential communications made between attorneys and
clients for the purpose of obtaining or providing legal assistance to the client.” Id.
at 151 (citing In re Teleglobe Commc’ns Corp., 493 F.3d 345, 359 (3d Cir. 2007)).
By comparison, the work-product privilege “protects from discovery materials
prepared or collected by an attorney ‘in the course of preparation for possible
litigation.’” In re Grand Jury Investigation, 599 F.2d 1224, 1228 (3d Cir. 1979)
(quoting Hickman v. Taylor, 329 U.S. 495, 505 (1947)).
Those privileges, though, are not absolute. In re Grand Jury, 705 F.3d at
151. One exception to both privileges is the crime-fraud exception. See United
States v. Zolin, 491 U.S. 554, 562–63 (1989) (observing that the attorney-client
privilege “ceases to operate at a certain point, namely, where the desired advice
refers not to prior wrongdoing, but to future wrongdoing” (alterations and citations
omitted)); In re Grand Jury Proceedings, 604 F.2d 798, 802 (3d Cir. 1979) (“The
work product privilege is perverted if it is used to further illegal activities . . . .”).
“[A] party seeking to apply the crime-fraud exception must demonstrate that
there is a reasonable basis to suspect (1) that the privilege holder was committing
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or intending to commit a crime or fraud, and (2) that the attorney-client
communication or attorney work product was used in furtherance of that alleged
crime or fraud.” In re Grand Jury, 705 F.3d at 155. “The ‘reasonable basis’
standard is intended to be reasonably demanding; neither speculation nor evidence
that shows only a distant likelihood of corruption is enough.” Id. at 153 (quoting
In re Grand Jury Proceedings, 417 F.3d 18, 23 (1st Cir. 2005)). “At the same
time, the party opposing the privilege is not required to introduce evidence
sufficient to support a verdict of crime or fraud or even to show that it is more
likely than not that the crime or fraud occurred.” Id. at 153–54. Nevertheless,
“there must be ‘prima facie evidence that [the application of the exception] has
some foundation in fact.’” Id. at 151–52 (emphasis added) (quoting Clark v.
United States, 289 U.S. 1, 15 (1933)). “A ‘prima facie showing’ requires
presentation of ‘evidence which, if believed by the fact-finder, would be sufficient
to support a finding that the elements of the crime-fraud exception were met.’” In
re Grand Jury Subpoena, 223 F.3d 213, 217 (3d Cir. 2000) (quoting Haines v.
Liggett Grp. Inc., 975 F.2d 81, 95–96 (3d Cir. 1992)).
To satisfy its burden of providing a “reasonable basis” to apply the crime-
fraud exception, the Government offered three pieces of “evidence” in its brief.
First, the Government alleges the purported author of the letter submitted with the
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MOR Response testified that he neither wrote the letter nor authorized anyone to
prepare such a letter. Second, the Government states the MOR Response
contained other, unspecified misleading and false statements. Third, the
Government asserted that ABC Company hired Law Firm to assist it in preparing
the MOR Response. The District Court concluded that those assertions were
sufficient to support application of the crime-fraud exception. We disagree.
On this record, the Government’s evidence falls short of providing a
“reasonable basis” to apply the crime-fraud exception. As noted, a request for the
application of the crime-fraud exception must have “some foundation in fact.” In
re Grand Jury, 705 F.3d at 151–52 (quoting Clark, 289 U.S. at 15). A “general,
unsubstantiated allegation” is not sufficient “to overcome the protection afforded
by” the attorney-client or work-product privileges. In re Grand Jury Investigation,
599 F.2d 1224, 1232 (3d Cir. 1979). The Government, therefore, may not rely on
bare assertions in its brief as “evidence” to apply the crime-fraud exception to
ABC Company’s privileges asserted over Law Firm’s materials. See In re Grand
Jury Subpoena, 223 F.3d at 217 (application of the crime-fraud exception requires
factual finding supported by sufficient “evidence”); see also In re Grand Jury
Subpoena, 419 F.3d 329, 336 (5th Cir. 2005) (“Allegations in pleadings are not
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evidence and are not sufficient to make a prima facie showing that the crime-fraud
exception applies.”).
Even if unsupported arguments by counsel qualified as “evidence,” the
Government’s assertions have other weaknesses. A vague allegation that the
MOR Response contains unspecified false statements fails to meet the “reasonably
demanding” evidentiary standard we must apply. In re Grand Jury, 705 F.3d at
153. Given the limited record here, we also question whether Law Firm’s advice
was used in furtherance of submitting the fraudulent letter. The Government
submits that, because the allegedly fraudulent letter was attached to the MOR
Response and Law Firm assisted in the preparation of the MOR Response, the
Law Firm’s advice was used in furtherance of the crime or fraud. ABC Company,
though, did not send the letter to Law Firm prior to submitting the MOR Response
to HUD, and there is no evidence as to how Law Firm assisted ABC Company
with the MOR Response. See In re Grand Jury Subpoena, 745 F.3d at 693 (“The
advice cannot merely relate to the crime or fraud.”). Regardless, because we
conclude the Government’s assertions in its brief fail to provide an adequate
factual basis to apply the crime-fraud exception, we need not decide whether those
assertions—if properly founded in fact—would support application of the
exception.
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On remand, the Government should nevertheless have leave to provide a
sufficient factual basis to support application of the crime-fraud exception. That
evidence may take various forms, including ex parte affidavits, In re Grand Jury
Subpoena, 223 F.3d at 219, or redacted copies of documents, In re Grand Jury,
705 F.3d at 139. It must, though, be more than was presented here. In addition,
the Government may request the District Court to perform an in camera review of
Law Firm’s privileged documents upon “a showing of 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
applies.” In re Grand Jury Subpoena, 745 F.3d at 688 (quoting Zolin, 491 U.S. at
572). In short, various methods for providing a factual basis to apply the crime-
fraud exception are available if the Government chooses to invoke the exception
on remand.
V
For the reasons stated above, we will vacate the District Court’s denial of
ABC Company’s motion to quash and remand for further proceedings consistent
with this opinion.
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