State ex rel. Medical Assurance of West Virginia, Inc. v. Recht

• Decision Date: 30 May 2003
• Docket Number: No. 30840.,30840.
• Citation: 583 S.E.2d 80,213 W. Va. 457
• Parties: State of West Virginia ex rel. Medical Assurance of West Virginia, Inc. v. The Honorable Arthur M. Recht, Judge of the Circuit Court of Ohio County, the Estate of Marjorie I. Verba, by Sally Jo Nolan, Executrix.
• Court: West Virginia Supreme Court

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State of West Virginia ex rel. Medical Assurance of West Virginia, Inc. v. The Honorable Arthur M. Recht, Judge of the Circuit Court of Ohio County, the Estate of Marjorie I. Verba, by Sally Jo Nolan, Executrix.

No. 30840.

Supreme Court of West Virginia.

Field May 30, 2003.

Davis, J., concurring:

I wish to make it clear that, not only do I concur in the majority's disposition of this case, "I agree entirely with Justice [Maynard's] analysis of the legal issues presented here and with his application of them to the facts of this case." Woodall v. International Bhd. of Elec. Workers, 192 W. Va. 673, 678, 453 S.E.2d 656, 661 (Cleckley, J., concurring). I have chosen to write separately on the crime-fraud exception to the attorney-client privilege as it is an issue that I believe trial courts will be confronting now that the Court has made clear that the attorney-client privilege and work product rule¹ can be asserted in third-party insurance bad faith cases. Justice Maynard's opinion identified the issue in footnote 11, when he stated that "fraud is not alleged in the instant case." Nevertheless, it is my belief that the crime-fraud exception will, in fact, be a recurring matter in insurance bad faith claims. Consequently, I write separately to explore its contours.

1. THE CRIME-FRAUD EXCEPTION IN GENERAL

In the early decision of State v. Douglas, 20 W. Va. 770, this Court "indicated that the attorney-client privilege was justified on the 'grounds of public policy, because greater mischiefs would probably result from requiring or permitting . . . [disclosures], than from wholly rejecting them.'" Franklin D. Cleckley, A Modest Proposal: A Psychotherapist-Patient Privilege for West Virginia, 93 W. Va. L. Rev. 1, 33 (quoting Douglas, 20 W. Va. at 780). Although public policy demands clothing communications between an attorney and his/her client with a privilege, "it is [well] settled under modern authority that the [attorney-client] privilege does not extend to communications between attorney and client where the client's purpose is the furtherance of a future intended crime or fraud." 1 Kenneth S. Broun et al., McCormick on Evidence § 95, at 380 (John W. Strong ed., 5th ed. 1999) (footnote omitted). Thus, "[o]ne of the more important exceptions to the attorney-client privilege is the 'crime-fraud' exception." Grassmueck v. Ogden Murphy Wallace, 213 F.R.D. 567, 572 (W.D. Wash. 2003). Under this exception "if such communications were made in order to perpetrate a [crime or] fraud on justice, they are not privileged[.]" Syl. pt. 2, in part, Thomas v. Jones, 105 W. Va. 46, 141 S.E. 434. As noted by Justice Cardozo, "[a] client who consults an attorney for advice that will serve him in the commission of a [crime or] fraud will have no help from the law." Clark v. United States, 289 U.S. 1, 15, 53 S. Ct. 465, 469, 77 L. Ed. 993. See also In re Grand Jury Investigation, 772 N.E.2d 9, 21 (Mass. 2002) ("No public interest is served by permitting a client to use the attorney-client privilege to help him or her break the law.").

Courts have recognized that "[t]he crime-fraud exception to the attorney-client privilege is predicated on the recognition that where the attorney-client relationship advances the criminal enterprise or fraud, the reasons supporting the privilege fail." People v. Paasche, 525 N.W.2d 914, 917 (Mich. Ct. App. 1994). "It is the purpose of the crime-fraud exception to the attorney-client privilege to assure that the 'seal of secrecy' between lawyer and client does not extend to communications 'made for the purpose of getting advice for the commission of a fraud' or crime." United States v. Zolin, 491 U.S. 554, 563, 109 S. Ct. 2619, 2626, 105 L. Ed. 2d 469 (citations omitted). See also In re Grand Jury Proceedings, 183 F.3d 71, 76-77 (1st Cir. 1999) ("[W]e exclude from the privilege communications made in furtherance of crime or fraud because the costs to truth-seeking outweigh the justice-enhancing effects of complete and candid attorney-client conversations."); United States v. Jacobs, 117 F.3d 82, 87 (2d Cir. 1997) ("The crime-fraud exception removes the privilege from those attorney-client communications that are 'relate[d] to client communications in furtherance of contemplated or ongoing criminal or fraudulent conduct.'"); In re Grand Jury Proceedings, 87 F.3d 377, 381 (9th Cir. 1996) ("While there is a societal interest in enabling clients to obtain complete and accurate legal advice . . . there is no such interest when the client consults the attorney to further the commission of a crime or fraud.").

The crime-fraud "exception applies even if the attorney is unaware of the client's criminal or fraudulent intent, and applies of course where the attorney knows of the forbidden goal." Ocean Spray Cranberries, Inc. v. Holt Cargo Sys., Inc., 785 A. 2d 955, 959 (N.J. Super. Ct. Law Div. 2000). See also United States v. Hodge & Zweig, 548 F.2d 1347, 1354 (9^th Cir. 1977) ("The crime or fraud exception applies even where the attorney is completely unaware that his advice is sought in furtherance of such an improper purpose."); Freedom Trust v. Chubb Group of Ins. Cos., 38 F. Supp. 2d 1170, 1171 (C.D. Cal. 1999) ("[T]he lawyer does not have to be aware of the fraud for the crime-fraud exception to apply."); In re National Mortg. Equity Corp. Mortg. Pool Certificates Litig., 116 F.R.D. 297, 300 (C.D.Cal. 1987) ("[T]he party seeking disclosure need not show that the attorney knowingly participated in the crime or fraud."). Thus, "[t]he determining factor is not the attorney's intention or actions; for purposes of analyzing the crime-fraud exception, the attorney's conduct and motive is irrelevant." In re Grand Jury Investigation, 772 N.E.2d 9, 25 (Mass. 2002). Further, "[t]he client need not succeed in committing the intended crime or fraud in order to forfeit the attorney-client privilege. The dispositive question is whether the attorney-client communications are part of the client's effort to commit a crime or perpetrate a fraud." First Union Nat'l Bank v. Turney, 824 So. 2d 172, 187 (Fla. Dist. Ct. App. 2001)

Generally,

under the crime/fraud exception to the lawyer-client privilege, "fraud" would include the commission and/or attempted commission of fraud on the court or on a third person, as well as common law fraud and criminal fraud. The crime/fraud exception comes into play when a prospective client seeks the assistance of an attorney in order to make a false statement or statements of material fact or law to a third person or the court for personal advantage.

Volcanic Gardens Mgmt. Co. v. Paxson, 847 S.W.2d 343, 348 (Tex. Ct. App. 1993). With regard to the "fraud on the court" component of the crime-fraud exception, we stated in dicta in Kessel v. Leavitt, 204 W. Va. 95, 511 S.E.2d 720, that "only a crime or a fraud upon the court will suffice to overcome the attorney-client privilege." Kessel, 204 W. Va. at 183, 511 S.E.2d at 808. This discussion was limited to the specific factual context under consideration in that case, which involved fraud upon the court, and was based upon the observation that "'[m]ost of the decisions fashioning a fraud exception have dealt with a client's use of an unwitting attorney to carry out a scheme to fraudulently or criminally subvert the normal progress of litigation[.]'" 1 Franklin D. Cleckley, Handbook on Evidence for West Virginia Lawyers § 5-4(E)(6)(a) (quoting In re Doe, 662 F.2d 1073 (4^th Cir. 1981)). In light of the narrow circumstances under which the crime-fraud exception was placed in issue in Kessel, our decision therein should not be interpreted as limiting the crime-fraud exception to only that of fraud upon the court.

2. DIVERSITY IN THE SCOPE OF THE FRAUD EXCEPTION

An issue that has resulted in little uniformity among courts involves the scope of the "fraud" component of the crime-fraud exception. As one court has observed, "[t]he word 'fraud' could be given its ordinary meaning, that is, common-law civil fraud. On the other hand, 'fraud' might mean any tort which involves some element of planning." Milroy v. Hanson, 902 F. Supp. 1029, 1032-33 (D. Neb. 1995). The diversity in the scope of the fraud exception is most easily demonstrated by reviewing how courts have treated the term. For example, one court has held that "'[a]cts constituting fraud are as broad and as varied as the human mind can invent. Deception and deceit in any form universally connote fraud. Public policy demands that the 'fraud' exception to the attorney-client privilege . . . be given the broadest interpretation.'" Fellerman v. Bradley, 493 A.2d 1239, 1245 (N.J. 1985) (quoting In Re Callan, 300 A.2d 868 (N.J. Super. Ct. Ch. Div. 1973), rev'd on other grounds, 331 A.2d 612 (N.J. 1975)).While the Fellerman court interpreted the term "fraud" as almost boundless, other courts have been more cautious. In State v. Doster, 284 S.E.2d 218, 220 (S.C. 1981), the South Carolina Supreme Court explained that "the privilege does not extend to communications in furtherance of criminal, tortious or fraudulent conduct."

In United Services Automobile Ass'n v. Werley, 526 P.2d 28 (Alaska 1974), the Alaska Supreme Court adopted a broad view of the fraud exception. Werley stated that the attorney-client privilege does not apply when there is evidence that "an insurer through its attorney engage[d] in a bad faith attempt to defeat, or at least reduce, the rightful claim of its insured[.]" Werley, 526 P.2d at 33. Thus, under Werley mere evidence of bad-faith can defeat the attorney-client privilege. But see Freedom Trust v. Chubb Group of Ins. Cos., 38 F.Supp.2d 1170, 1173 (C.D.Cal. 1999) ("[T]here is no persuasive reason to include bad faith in the fraud exception to the lawyer-client privilege."). Indeed, in the context of the exception, there are nearly as many definitions for the term "fraud" as there are courts tackling the issue. See, e.g., In re Sealed Case, 754 F.2d 395,...