As the result of the Ninth Circuit's decision in United States v. Bauer,³ the U.S. Courts of Appeals are seemingly now divided over the extent to which the attorney-client privilege applies in bankruptcy cases. In Bauer, the court held that the privilege protected the attorney's explanation to his client of the mandatory duty to disclose all property in his bankruptcy schedules, and the perjury implications of providing false information. The U.S. Court of Appeals for the Seventh Circuit and other courts have reached contrary conclusions. s

The Ninth Circuit's holding perhaps presents the most significant problem for federal prosecutors seeking to combat the efforts of dishonest debtors or creditors. Bankruptcy crimes are specific intent crimes, and the government has the burden of proving that a defendant charged with bankruptcy fraud—concealing assets, or making false representations—did so "knowingly and fraudulently."⁴ The fact that a debtor or creditor was specifically told of his duty to make complete and honest disclosures—and the consequences he or she might face for not doing so—can be crucial evidence. Of course, the same problem presents itself when parties in a civil bankruptcy are seeking to prove fraud in connection with a debt or the bankruptcy case. Thus, the Bauer decision has potentially wide-ranging ramifications.

This article discusses and critiques the Ninth Circuit's decision, particularly in comparison with the law of other jurisdictions.

Contours of the Attorney-Client Privilege

Federal Rule of Evidence 501, applicable in bankruptcy cases,⁵ establishes that federal law controls the scope and availability of any claim of privilege that a party may exercise. In full, the rule states:

Except as otherwise required by the Constitution of the United States or provided by Act of Congress, or in rules prescribed by the Supreme Court pursuant to statutory authority, the privilege of a witness, person, government, state, or political subdivision thereof shall be governed by the principles of the common law as they may be interpreted by the courts of the United States in the light of reason and experience.⁶ (emphasis added).

Consequently, neither state statutes nor state Supreme Court rules can control the evidentiary privileges available to a defendant in federal bankruptcy cases,⁷ or federal district court cases where a party seeks testimony of conversations between debtors or creditors and their counsel.

The mandate of Federal Rule of Evidence 501 makes clear that a debtor is only entitled to claim discussions with his or her attorney as privileged if federal law supports such a claim. Accordingly, those persons who seek to invoke the privilege on the witness stand, during a deposition,⁸ in response to interrogatories⁹ or during a 2004 exam¹⁰—or who seek to prevent their attorneys from answering questions about confidential matters—should consider whether federal law, not state law, supports their claim.

Under federal common law, the attorney-client privilege only applies if the following conditions exist:

(1) the asserted holder of the privilege is or sought to become a client;

(2) the person to whom the confidential communication was made (a) is a member of the bar of a court, or his subordinate and (b) in connection with the communication is acting as a lawyer;

(3) the confidential communication relates to a fact of which the attorney was informed (a) by his client, (b) without the presence of strangers, (c) for the purpose of securing primarily either (i) an opinion on law, (ii) legal services or (iii) assistance in some legal proceeding, and not (d) for the purpose of committing a crime or tort; and

(4) the privilege has been (a) claimed and (b) not waived by the client.¹¹

In bankruptcy cases, the question of whether a communication is privileged often depends on whether the information involved is confidential.

There can be little doubt that the federal attorney-client privilege is limited to communications of a confidential nature. The U.S. Supreme Court made this quite clear in its recent decision in Swidler & Berlin v. United States,¹² in which it was called on to decide whether the Office of Independent Counsel could force the attorneys for the late Vince Foster to testify about matters he discussed with them prior to his death. Before reaching the ultimate issue of whether the attorney-client privilege survives a client's death (the court held that it does), Chief Justice Rehnquist's majority opinion discussed the scope of the privilege. Specifically, he observed that "the attorney-client privilege is one of the oldest recognized privileges for confidential communications."¹³

Bankruptcy Law and the Duty to Disclose

Federal prosecutors and other third parties should not be allowed free access to confidential information that passes between an attorney and his client. However, not all attorney-client discussions can factually or legally be characterized as privileged. For example, numerous federal rules impose upon debtors the duty to disclose their assets and liabilities, and thus it is difficult to argue that discussions about the existence of such assets, or the duty to disclose them, are confidential.

As a matter of federal law, pre-petition information concerning a debtor's assets and liabilities is simply not confidential information. The full disclosure of this information is required by Federal Rule of Bankruptcy Procedure 1007(b), which reads in relevant part as follows:

...the debtor...shall file schedules of assets and liabilities, a schedule of current income and expenditures, a schedule of executory contracts and unexpired leases, and a statement of financial affairs, prepared as prescribed by the appropriate official forms.¹⁴

To help ensure the truthfulness of the petitions and schedules, the debtor is required to verify the accuracy of them by unsworn declaration.¹⁵ Title 18 of the U.S. Code makes it a criminal offense for a debtor to provide false information in these documents.¹⁶ There is little doubt that a debtor must reveal the information requested in the schedules and statements of financial affairs—and that a debtor's attorney has a professional responsibility to explain the disclosure requirements to his client.

Because all of the debtor's assets and liabilities on the date of filing are property of the bankruptcy estate,¹⁷ every debtor is obligated to disclose this information. Consequently, any discussions between the debtor and counsel about assets that had to be disclosed relate to public information and cannot be characterized as confidential deliberations.

United States v. White

In 1991, the Seventh Circuit Court of Appeals addressed the question of whether information used in preparing the debtor's petition and schedules could be characterized as confidential in U.S. v. White.¹⁸ In White, the debtor's petition was prepared by a paralegal employed by his attorney, though the attorney did review the documents. After the government began investigating the debtor for failing to disclose assets in his bankruptcy case,¹⁹ the local U.S. Attorney contacted the debtor's attorney for information. The attorney agreed to share non-privileged information about how the petitions and schedules were prepared. The information gathered was used in a successful criminal prosecution of the debtor. On appeal, the Seventh Circuit addressed the propriety of the disclosures.

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Should the Ninth Circuit continue to follow Bauer, the best tactic for prosecutors and civil adversaries to use to elicit the truth about allegedly false disclosures by debtors or creditors is to focus on the information conveyed to the attorney by the client for purposes of dissemination to the public.

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The White court explained that the attorney-client privilege is to be narrowly interpreted because it is in "derogation of the search for truth." Consequently, the burden of proving every element of the attorney-client privilege falls on the party seeking to invoke it.²⁰ The claim of privilege cannot be a blanket claim—it must be made and sustained on a question-by-question or document-by-document basis.²¹ After setting forth the aforementioned principals of law, the court next discussed how the attorney-client privilege applied in bankruptcy cases.

The White court stated that "information...transmitted to an attorney with the intent that the information will be transmitted to a third party...is not confidential."²² The court rejected, as a matter of law, the debtor's claim of confidentiality: "When information is disclosed for the purpose of assembly into a bankruptcy petition and supporting schedules, there is no intent for the information to be held in confidence because the information is to be disclosed on documents publicly filed with the bankruptcy court."²³ Insofar as the information was not confidential, it was not subject to the attorney-client privilege. Accordingly, the debtor's attempt to challenge the use of evidence on grounds of confidentiality was rejected and his conviction was affirmed.²⁴

Footnote 2 of the White case also provides useful clarification related to the issue of what is and is not confidential. The court noted that information not contained in a debtor's petitions and schedules is actually a "lack of communication" and not a "confidential communication." Thus, there is no rule prohibiting an attorney from discussing what he or she has not been told by the client.

In re French

At least one court has granted a government creditor's motion to compel discovery of information over a debtor's invocation of the attorney-client privilege. In In re French,²⁵ the bankruptcy court for the District of South Dakota ordered a paralegal employed by debtor's counsel to answer questions about what she had been told about the debtor's assets when she assisted him in preparing the schedules.²⁶ The debtor's schedules failed to disclose that he had $50,000 in the bank on the date of filing.²⁷ When questioned about this omission at a 2004 Exam, he blamed the omission on the paralegal. When the government took the paralegal's deposition,²⁸ she refused to answer questions about how the schedules were prepared on the grounds of attorney-client privilege. The government filed a motion to compel her to answer the questions.

The court permitted the discovery for two reasons: 1) The court held that the information was not privileged because the debtor was required to disclose such data; and 2) even if it was confidential, the debtor had implicitly waived the privilege by attacking the assistance rendered by the paralegal and her employer. The debtor was later convicted of four bankruptcy crimes²⁹ and had his chapter 12 case converted to a chapter 7 due to fraud.

Though both White and French deal with the confidentiality of information contained in a debtor's schedules, the rule of law they espouse is not so limited. Arguably, the full scope of information that should be disclosed in monthly reports required by the U.S. Trustee or in a reorganization plan are also within the scope of the White/French analysis.

United States v. Bauer

In United States v. Bauer,³⁰ the Ninth Circuit reversed a defendant's bankruptcy fraud conviction because it considered the privilege to have been violated when the prosecutor elicited testimony from the debtor-defendant's attorney about advice "recommending disclosure of all assets on petition and explaining perjury implication of falsifying petition."³¹ At issue was not what confidential information the client told his attorney, but what information the attorney conveyed to his client.

When Bauer filed chapter 11, he listed assets of $532,000 and liabilities of $960,588.³² According to the records, he consulted his attorney 12 times during the case. The case was later converted to a chapter 7, in which Bauer received a discharge. After learning that several assets had not been disclosed, and that others had been transferred to family members within a year of the chapter 11 filing, the trustee referred the case to the Federal Bureau of Investigation (FBI) for criminal investigation. The investigation revealed that Bauer had, prior to filing, transferred a van, a lease and ownership of various life insurance policies. Bauer had requested the maximum possible loans on the policies, and then deposited the funds in a bank account under his grandson's name. He also failed to disclose $22,000 in personal property, a substantial collection of firearms and an $11,000 Rolex watch. He was indicted on charges of bankruptcy fraud. The criminal trial boiled down to a classic dispute over intent: The debtor did not dispute that these assets should have been disclosed. He blamed their omission on his ignorance, mistake and stupidity.

The prosecution called Bauer's bankruptcy attorney as its final witness, over pre-trial and at-trial defense objections. The attorney testified about the information he gave Bauer concerning the disclosure requirements and potential penalty of perjury.³³ Bauer was convicted. On appeal, the Ninth Circuit reversed on the grounds that the case was tainted by the improper introduction of privileged information.

The court declined to follow Seventh Circuit's decision in White because Bauer's case did not involve the disclosure of documentary evidence used in the preparation of the schedules, but instead consisted of oral statements given by the attorney to the client. Further, the court did not consider the attorney's explanations of the requirements of bankruptcy law to be "the mere passing along [of] public legal information in furtherance of his obligation as an officer of the court."³⁴ Instead, the court considered the attorney's explanation of the duty to disclose to be "legal advice." "Legal advice" concerning confidential disclosures is, of course, privileged. Insofar as the court considered the prosecution a closed case but for the introduction of the attorney's testimony, the case was remanded for a new trial or other appropriate disposition.³⁵

Critique of Bauer

At best, the Ninth Circuit's decision in Bauer can be charitably characterized as an exercise in strained logic. The published record does not support the conclusion that the statements at issue related to advice given in response to confidential communications from a client. The attorney testified that he conveyed to his client the disclosure requirements that all debtors must make and the penalty for intentionally giving inaccurate data. There was no indication that this information was given in response to a single word from Bauer. Indeed, most debtors' counsel have a boilerplate lecture they give their clients about these matters, which seems to be what the attorney did in this case. The court seems to be flat wrong on the facts.

The legal analysis employed is not much more accurate. Insofar as the Federal Rules of Bankruptcy Procedure, which are promulgated by the U.S. Supreme Court,³⁶ require debtors to file the schedules and statement of financial affairs, and to verify the information in them under oath,³⁷ it is difficult to fathom how the attorney was not acting as a conduit of information. The attorneys' comments were an explanation of—and not an opinion as to—the debtor's unquestionable duties. The instructions to Official Form 6, Schedule B explain that debtors are to "list all personal property of the debtor of whatever kind." Further, Official Form 6 requires that the schedules contain a written warning about the potential penalty of perjury on the signature page that is identical in substance to the information conveyed to Bauer by his attorney. The statements at issue in the case were simply the efforts of one attorney to point out to his client the obligations imposed by, and explained on, the very schedules Bauer signed. This data cannot be fairly characterized as confidential nor an "opinion on law." There is no room for difference of opinion as to what information a debtor must disclose—the Code and Rules demand total and honest disclosure. The attorney was reciting the undisputed rules exactly as they are written in the books and set forth on the very forms that Bauer verified under oath to have read and accurately completed.

Should the Ninth Circuit continue to follow Bauer, the best tactic for prosecutors and civil adversaries to use to elicit the truth about allegedly false disclosures by debtors or creditors is to focus on the information conveyed to the attorney by the client for purposes of dissemination to the public. Even the Bauer court seemed to suggest that this information is not confidential.

Conclusion

The attorney-client privilege is important and should be interpreted to protect confidential communications between a lawyer and the people he or she serves. However, it should not be interpreted to allow dishonest debtors or creditors to shield all communications between themselves and their counsel. Because it allows a debtor-defendant to use the privilege as a sword and not just a shield, the Bauer decision was wrongly decided. Members of the bench and bar would be better advised to follow the well-reasoned analyses set forth in United States v. White and In re French.

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Footnotes

¹ This topic was originally discussed in Breaking the Code of Silence: Piercing The Attorney-Client Privilege During Bankruptcy Fraud Investigations, 15-March Am. Bankr.Inst. J. 10 (1996). (Return to text)

² Coordinator, Bankruptcy Fraud Task Force; Adjunct Professor of Law, University of South Dakota School of Law. The views expressed in this article are solely those of the author and should not be attributed to any other person or entity associated with him. (Return to text)

³ 132 F.3d 504 (9th Cir. 1997). (Return to text)

⁴ See, e.g., 18 U.S.C. §152(1)-152(9) (knowingly and fraudulently), §153(a) (knowingly and fraudulently) and §154 (knowingly). (Return to text)

⁵ In full, Federal Rule of Evidence 101 provides that "[t]hese rules govern proceedings in the courts of the United States and before United States bankruptcy judges and United States magistrates, to the extent and with the exceptions stated in rule 1101." (Return to text)

⁶ Fed. R. Evid. 501. Federal common law, and not state law, governs the existence and scope of the attorney-client privilege when federal law is involved. U.S. v. Zolin, 491 U.S. 554(1989). (Return to text)

⁷ State law may apply if the matter is an adversary proceeding that solely involves a state law cause of action. (Return to text)

⁸ Fed. R. Bankr. P. 9014 (contested matters), 7030 (depositions), Fed. R. Civ. P. 30 (depositions). (Return to text)

⁹ Fed. R. Bankr. P. 9014 (contested matters). Fed. R. Civ. P. 7033, Fed. R. Civ. P. 33. (Return to text)

¹⁰ Fed. R. Bankr. P. 2004. (Return to text)

¹¹ Diversified Industries Inc. v. Meredith, 572 F.2d 596, 601 - 02 (8th Cir. 1977); In re Campbell Sixty Six Express Inc., 84 B.R.632, 633 (Bankr. W.D. Mo. 1988) (holding federal law governs the extent to which confidential communications are within the scope of the attorney-client privilege). See, also, United States v. (Under Seal), 748 F.2d 871, 874 - 75 (4th Cir.1984) (discussing federal privilege). (Return to text)

¹² ___ U.S. ___, 118 S.Ct. 2081, ___ L.Ed.2d ___ (1998). (Return to text)

¹³ Id. (Emphasis added). (Return to text)

¹⁴ (Emphasis added). See, also, Fed. R. Bankr. P. 9009 (Forms) and OFFICIAL FORM No. 6 (schedules of assets). (Return to text)

¹⁵ Federal Rule of Bankruptcy Procedure 1008, citing 28 U.S.C. §1746, Federal Rule of Bankruptcy Procedure 1008 mandates that "[a]ll petitions, lists, schedules, statements and amendments thereto shall be verified or contain an unsworn declaration as provided by 28 U.S.C. §1746." (Return to text)

¹⁶ 18 U.S.C. §1001, 18 U.S.C. §152(2) & (3), 18 U.S.C. §157(3). (Return to text)

¹⁷ 11 U.S.C. §541. (Return to text)

¹⁸ 950 F.2d 426 (7th Cir. 1991). (Return to text)

¹⁹ The assets involved "included an investment in stock, asecurity interest in Twin Flags Trucking protecting a $10,000 loan, a mortgage on Mr. White's real estate...and two large individual life insurance policies..." Id. at 428. (Return to text)

²⁰ 950 F.2d at 430. (Return to text)

²¹ Id. (Return to text)

²² Id. at 430 (citing U.S. v. Lawless, 709 F.2d 485, 487 (7th Cir.1983). (Return to text)

²³ Id. (Return to text)

²⁴ In a non-bankruptcy context, the Eighth Circuit also has held that the attorney-client privilege does not attach to discussions related to information a client intends his attorney to report in public documents. In United States v. Cote, 456 F.2d 142 (8th Cir. 1972), the issue before the court was whether the Internal Revenue Service could enforce a summons against an attorney and accountant employed by taxpayers. The court held that "by filing amended returns the taxpayers communicated at least in part the substance of that information to the government, and they must now disclose the detail underlying the reported data." The court noted that such a waiver applied "not only to the transmitted data but also as to the details underlying that information." 456 F.2d at 144-45. This analysis is consistent with the rules set forth in White. (Return to text)

²⁵ 162 B.R. 541 (Bankr. D.S.D. 1994). (Return to text)

²⁶ The author served as counsel for the United States in this bankruptcy case. (Return to text)

²⁷ 162 B.R. at 543. (Return to text)

²⁸ The court earlier ruled that a 2004 exam was not the appropriate discovery tool to elicit the information. In re French, 145 B.R. at 992-93 (Bankr. D.S.D. 1993). (Return to text)

²⁹ United States v. French, 46 F.3d 710, 714 (8th Cir. 1995). (Return to text)

³⁰ 132 F.3d 504 (9th Cir. 1997). (Return to text)

³¹ 132 F.3d at 505. (Return to text)

³² 132 F.3d at 506. (Return to text)

³³ 132 F.3d at 506-507. (Return to text)

³⁴ 132 F.3d at 508. (Return to text)

³⁵ 132 F.3d at 512. (Return to text)

³⁶ 28 U.S.C. §2075. (Return to text)

³⁷ Fed. R. Bankr. P. 1007(b)(1) (debtor shall file schedules and astatement of financial affairs), Fed. R. Bank. P. 1008 (petitions, schedules, and statements must be verified under oath, as provided in 28 U.S.C. §1746). (Return to text)