Adlman court holds work-product doctrine is inapplicable to pretransaction memoranda.

In Adlman, 68 F3d 1495 (1995), aff'g in part and vac'g in part DC N.Y, 1994, the Second Circuit denied a claim of attorney-client privilege asserted as a defense against an IRS summons that sought memoranda prepared by an accounting firm discussing tax implications of a corporate client's pending restructuring. The appeals court remanded to the district court the issue of whether the work-product doctrine applied. On remand, the district court held that the work-product doctrine does not apply (DC N.Y, 2/27/96).

Monroe Adlman, an attorney and the vice president of taxes for Sequa Corp., asserted the attorney-client privilege and the work-product doctrine in an attempt to defeat an IRS summons seeking pretransaction tax planning memoranda prepared by the company's accountants related to a proposed corporate restructuring. The district court held that neither of the evidentiary privileges applied. The Court of Appeals affirmed that the attorney-client privilege did not apply on the facts presented; most of Sequa's evidence consisted of self-serving affidavits of the executives and advisers involved in a transaction that took place four years before the creation of the affidavits. Adlman had argued that the attorney-client privilege applied to his communication with the accounting firm because the firm was assisting him in rendering legal advice to the corporation that employed him; see Kovel, 296 F2d 918 (2d Cir. 1961). Notably, the Adlman court accepted without discussion the argument that in-house counsel can invoke the Kovel privilege to the same extent as an outside attorney. The court also provided insight on the appropriate structure of client representations that would perfect the privilege. The court stressed that in Sequa's case, there was "virtually no contemporaneous documentation," such as separate billing or engagement, that would distinguish the business and tax services Sequa's accountants rendered in connection with the merger from the accounting and auditing services they generally rendered.

The Court of Appeals remanded to the district court for further consideration of the work-product doctrine issue. Sequa had contended that the documents at issue were prepared in reasonable anticipation of litigation, because the transaction was unprecedented, the corporation was subject to annual IRS audits, and the transaction to which the documents related would generate a substantial loss. According to Sequa, these facts led to a reasonable anticipation of litigation with respect to issues raised by the memoranda. Initially, the district court had held that, because the documents were prepared prior to the transaction, the work-product doctrine could not apply to them. On appeal, the Second Circuit held that pretransaction documents can be subject to the work-product doctrine, provided they are prepared in reasonable anticipation of litigation.

On remand, the district court revisited the work-product issue as it related to these documents. The court stated that, in determining whether the work-product doctrine applies, "the court must determine whether the party seeking its application has shown that the 'documents were prepared principally or exclusively to assist in anticipated or ongoing litigation."'The district court concluded that these documents failed to meet that test. Although the documents addressed issues that might be encountered in litigation, "the fact that information in the documents could also be helpful in preparing for litigation does not mean these documents fall under the work-product privilege. The primary purpose of these documents was not to prepare for litigation; the primary purpose was to decide whether or not to go through with a multi-million dollar transaction." The court applied a primary purpose test to the documents and held that the primary purpose behind the creation of the documents was not in relation to any anticipated litigation; therefore, the work-product doctrine did not apply. Accordingly, unless this decision is overturned on another appeal, Sequa will be required to turn over the documents.

FROM RON BUCH, JR., J.D., LL.M., WASHINGTON, D.C.