In re Blier Cedar Co., Inc., Bankruptcy No. BK78-159ND

• Decision Date: 14 May 1981
• Docket Number: Bankruptcy No. BK78-159ND,179-00023,Adv. No. 80-19.,and 180-10010
• Parties: In re BLIER CEDAR COMPANY, INC., Debtor. Rudolph J. Blier and Emma D. Blier, Alleged Debtors.
• Court: U.S. Bankruptcy Court — District of Maine

10 B.R. 993 (1981)

In re BLIER CEDAR COMPANY, INC., Debtor Rudolph J. Blier and Emma D. Blier, Alleged Debtors.

Bankruptcy Nos. BK78-159ND, 179-00023, and 180-10010, Adv. No. 80-19.

United States Bankruptcy Court, D. Maine.

May 14, 1981.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Bruce A. Coggeshall, Portland, Maine, for Blier Cedar.

Richard E. Poulos, Portland, Maine, trustee.

Duane D. Fitzgerald, Bath, Maine, for parent.

Gregory A. Tselikis, Charles Miller, Portland, Maine, for Emma and Rudolph Blier.

Kenneth Snitger, Portland, Maine, for Rudolph Blier.

MEMORANDUM OPINION

CONRAD K. CYR, Bankruptcy Judge.

A subpoena duces tecum issued against Philip Parent, Esquire for the production of certain documents in connection with a scheduled examination under Bankruptcy Rule 205(a) concerning a real estate foreclosure by Louis Bornstein on property belonging to Rudolph and Emma Blier the Bliers, husband and wife, and the trustee in bankruptcy of Blier Cedar Company Blier Cedar, Richard E. Poulos, Esquire trustee. Parent represented Blier Cedar and the Bliers, but not Bornstein, in connection with the subject real estate transaction. Parent sought a protective order pending an opportunity on the part of the court to determine any claim of attorney/client privilege.¹ At the conclusion of the hearing held on the motion for a protective order, no former client having claimed the privilege,² the court notified all alleged former clients, as well as Bornstein,³ of the documentary demands of the trustee. Ultimately, only the Bliers claimed the privilege. They did so by joint affidavit,⁴ as clients of Parent both in their individual capacities and as representatives of Blier Cedar.⁵ The court conducted an in camera inspection of the twenty seven subpoenaed documents because Parent's testimony and the Bliers' joint affidavit were insufficient to enable the court to determine their claims of privilege.⁶

From its inception until its incorporation in 1964, Rudolph J. Blier operated Blier Cedar as a sole proprietorship engaged in the manufacture of wood fences. After incorporation and until its adjudication as a bankrupt on October 19, 1979, the Bliers, as its officers and sole stockholders, operated the business of Blier Cedar, expanding into the production of white cedar shingles. Working capital was borrowed from Bornstein during this period, on the strength of real estate mortgages. During 1971, Emma D. Blier requested Parent to prepare an abstract of all real estate in the name of Blier Cedar, the Bliers, Emma D. Blier, and/or Rudolph J. Blier, a project finally completed in March, 1976. The abstracts revealed certain defects in title concerning which Rudolph J. Blier met with Parent in 1974. In particular, certain record encumbrances, including various Bornstein mortgages and a second mortgage of Maine Sugar Industries, Inc. MSI, were discussed. Rudolph J. Blier requested Parent to prepare documents necessary to enable Bornstein to foreclose on a parcel of real estate in the name of Blier Cedar and on other real estate held by the Bliers as individuals. Foreclosure notices were duly recorded. There was no redemption and record title vested in Bornstein during March, 1976. Blier Cedar filed its Chapter XI petition on August 9, 1978. On July 19, 1979, Richard E. Poulos, Esquire was appointed receiver and continued to operate the business until the adjudication in bankruptcy of Blier Cedar on October 19, 1979. Poulos later qualified as trustee in bankruptcy of Blier Cedar. Shortly thereafter, the trustee filed an involuntary chapter 7 petition against Rudolph J. Blier, followed by one against Emma D. Blier.

The trustee seeks to invalidate the real estate transfers to Bornstein by demonstrating that the Bliers permitted the foreclosures so as to expunge the MSI second mortgage, as well as to hinder, delay and defraud existing and future creditors.

The characterization of documents as privileged because the contents may have emanated directly or indirectly from confidential communications between clients and their attorney is not determinative of a claim of privilege. The claim of privilege is confirmed only if the client can convince the court that the subject communication satisfies each element of the privilege and does not come within an exception. See United States v. Osborn, 561 F.2d 1334, 1339 (9th Cir. 1977); United States v. Gurtner, 474 F.2d 297, 298 (9th Cir. 1973).

The manner in which the present claim of privilege comes before the court substantially complicates the determination as to the appropriate choice-of-law rule. A claim of attorney/client privilege arising in a discovery proceeding conducted in a bankruptcy case is governed by Federal Rule of Evidence 501,⁷ which expressly states that the principles of federal common law govern claims of privilege, except in civil actions where state substantive law supplies the rule of decision, in which case privilege is determined in accordance with state law. In re Grand Jury Impaneled January 21, 1975, 541 F.2d 373, 379 (3d Cir. 1976); Lewis v. United States, 517 F.2d 236, 237 (9th Cir. 1975).

The trustee sought to examine Parent pursuant to Bankruptcy Rule 205(a) concerning the acts, conduct and property of the bankrupt, Blier Cedar. Rule 205(a) examinations are nonadversarial proceedings aimed at discovering evidence upon which may be based future causes of action. As a function of the Federal Bankruptcy Act, the Rule 205(a) examination is governed by bankruptcy law rather than state substantive law. See Bankr.R. 726 & 917. Therefore, if the subpoena duces tecum had issued pursuant to Rule 205 alone, the federal common law rule of privilege would apply.

The present claim of privilege is raised also in connection with discovery being conducted by the trustee under Fed.R. Civ.P. 26 in the involuntary chapter 7 proceedings pending against Rudolph J. Blier⁸ and against Emma D. Blier,⁹ but need be considered only in connection with the Blier Cedar and Emma D. Blier proceedings.¹⁰ Emma D. Blier is charged with "generally not paying her debts as they become due,"¹¹ including the debt asserted by the trustee to be due Blier Cedar by Emma D. Blier by virtue of the Bornstein transaction. The Bornstein transfer is alleged to have been fraudulent under Maine law, a matter as to which Maine substantive law is controlling. The Maine Rules of Evidence would ordinarily provide the rule of decision as to the claims of privilege raised in connection with the Emma D. Blier proceedings. See Fed.Rule Evid. 501.

Congress did not intend dual application of conflicting rules¹² where a federal question and a pendant state question are presented in a single action, see Perrignon v. Bergen Brunswig Corp., 77 F.R.D. 455, 458-59 (N.D.Cal.1978), but rather contemplated application of the rule favoring reception of the evidence. Sen.Rep.No. 93-1277, 93rd Cong., 2d Sess. at 12, n. 16 reprinted in U.S.Code Cong. & Admin.News (1974), 7051 at 7059, n. 16. The congressional intent favoring reception of the evidence comports with the doctrine of attorney/client privilege, which confines its application to the narrowest possible circumstances consistent with permitting a client to seek advice through the revelation of confidential information. See Fisher v. United States, 425 U.S. 391, 96 S.Ct. 1569, 48 L.Ed.2d 39 (1976); In re Horowitz, 482 F.2d 72 (2d Cir. 1973), cert. denied, 414 U.S. 867, 94 S.Ct. 64, 38 L.Ed.2d 86, rehearing denied, 414 U.S. 1052, 94 S.Ct. 556, 38 L.Ed.2d 340. Under the present circumstances, the federal common law provides the rule of decision determining these claims of privilege. See Fisher v. United States, supra; Perrignon v. Bergen Brunswig Corp., supra.

United States v. United Shoe Machinery Corporation, 89 F.Supp. 357, 358-59 (D.Mass.1950) describes the essential elements of a sufficient claim of the attorney/client privilege.¹³

1. The asserted holder of the privilege is or sought to become a client;

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

3. The 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 permanently, either (1) an opinion of law, (2) legal services, or (3) assistance in some legal proceeding, (d) and not for the purpose of committing a crime or tort; and

4. Privilege has been (a) claimed, and (b) not waived by the client.

A sufficient showing must be made by the claimant that each essential element of the doctrine of privilege is satisfied. United States v. Gurtner, 474 F.2d 297, 298 (9th Cir. 1973). See United States v. Osborn, 561 F.2d 1334, 1339 (9th Cir. 1977).

The privilege is predicated upon the existence of an attorney and client relationship. See United States v. United Shoe Machinery Corp., supra. Cf. United States v. Landof, 591 F.2d 36, 39 (9th Cir. 1978) no showing lawyer acting qua attorney, therefore no privilege. The affidavits of both the clients and their attorney attesting to the fact that the Bliers were clients of Parent sufficiently demonstrate the existence of an attorney and client relationship.

The trustee contests the claims of privilege principally on the ground that the documents pertain to the perpetration of a fraud. Furtherance of a crime or civil fraud is unlawful and vitiates the attorney/client privilege. United States v. United Shoe Machinery Corp., 89 F.Supp. 357, 358-59 (D.Mass.1950). See 8 Wigmore on Evidence § 2298 (McNaughton Rev. 1961). More than a mere allegation of the commission of an unlawful act is required to vitiate the privilege, Clark v. United States, 289 U.S. 1, 14, 53 S.Ct. 465, 469, 77 L.Ed. 993 (1933); Union Camp Corporation v. Lewis, 385 F.2d 143, 144 (4th Cir. 1967), but establishment of a prima facie case that the underlying...