Schaeffler v. United States of America
Filing
54
OPINION AND ORDER: For these reasons, we find that the EY Tax Memo, as well as the related responsive documents, would have been produced in the same form irrespective of any concern about litigation. Accordingly, these documents are not protected from disclosure under the work product doctrine. For the foregoing reasons, we deny the petition to quash. SO ORDERED. (Signed by Magistrate Judge Gabriel W. Gorenstein on 5/28/2014) (ama)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
---------------------------------------------------------------X
GEORG F. W. SCHAEFFLER et al.,
:
Petitioners,
:
OPINION AND ORDER
-v.-
:
13 Civ. 4864 (GWG)
UNITED STATES OF AMERICA.,
:
Respondent.
:
---------------------------------------------------------------X
GABRIEL W. GORENSTEIN, UNITED STATES MAGISTRATE JUDGE
APPEARANCES:
Justin Kattan, M. Todd Welty, Mark P. Thomas, Dentons US LLP, New York, New York, for
petitioners
Rebecca S. Tinio, Assistant United States Attorney, Preet Bharara, United States Attorney, New
York, New York, for respondent.
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
---------------------------------------------------------------X
GEORG F. W. SCHAEFFLER et al.,
:
Petitioners,
:
OPINION AND ORDER
-v.-
:
13 Civ. 4864 (GWG)
UNITED STATES OF AMERICA.,
:
Respondent.
:
---------------------------------------------------------------X
GABRIEL W. GORENSTEIN, UNITED STATES MAGISTRATE JUDGE
As part of its investigation into the federal tax liability of Georg F.W. Schaeffler, the
Internal Revenue Service (“IRS”) served an administrative summons on Schaeffler’s accountant,
Ernst & Young. Schaeffler, together with a number of entities he controls, have now petitioned
to quash the summons on the ground that it calls for privileged materials The United States
Government has opposed the petition. The parties consented to disposition of this matter by a
United States Magistrate Judge pursuant to 28 U.S.C. § 636(c). For the reasons stated below, we
deny the petition to quash.
I.
BACKGROUND
A.
Schaeffler’s Acquisition of Continental AG
Schaeffler owns 80% of INA-Holding Schaeffler GmbH & Co. KG (“IHO”), which is
itself an indirect owner of Schaeffler Holding GmbH & Co. KG (“SH-KG”), and is also the sole
owner of Schaeffler Holding, LP (“Schaeffler LP”) (collectively the “Schaeffler Group”). See
Declaration of Georg F. W. Schaeffler in Support of Schaeffler’s Petition to Quash Summons,
dated May 16, 2013 (annexed as Ex. B to Petition to Quash Internal Revenue Service Summons,
filed July 12, 2013 (Docket # 1) (“Pet.”)) (“Schaeffler Decl.”), ¶ 4. The Schaeffler Group is
1
headquartered in Herzogenaurach, Germany, and is involved in the business of manufacturing
and distributing bearings and other automotive and industrial components. Id.
On July 30, 2008, the Schaeffler Group made a tender offer to buy shares of Continental
AG (“Conti”), a German supplier of automotive and industrial parts. Id. ¶¶ 5-6. The Schaeffler
Group had expected to limit its acquisition to less than 50% of Conti’s outstanding shares. Id.
¶ 6. However, as a result of the stock market downturn in September 2008, a majority of Conti
shareholders accepted the tender offer for € 70-75 per share, and the Schaeffler Group ended up
amassing 89.9% of Conti’s outstanding shares. Id. The cost of this acquisition was € 11 billion.
Id. ¶ 7. From August 27, 2008, to February 24, 2009, the market value of Conti shares
plummeted from approximately € 74 to € 11. Id. ¶ 6.
The Schaeffler Group’s acquisition was funded by a consortium of banks (the “Bank
Consortium”), which had pledged to finance the Schaeffler tender offer pursuant to a July 12,
2008 loan agreement. Id. ¶ 7; Declaration of Klaus Rosenfeld in Support of Schaeffler’s Petition
to Quash Summons, dated May 16, 2013 (annexed as Ex. C to Pet.) (“Rosenfeld Decl.”), ¶ 5.
Given the unexpected result of the tender offer and the dire economic conditions at that time, the
Schaeffler Group had “significant solvency concerns” about its ability to service the debt to the
Bank Consortium. See Schaeffler Decl. ¶ 7. Accordingly, the Schaeffler Group recognized the
need to undertake substantial debt refinancing and corporate restructuring measures. Id. ¶ 5;
Rosenfeld Decl. ¶ 5.
B.
Ernst & Young and Dentons’ Representation of Schaeffler
Because the Schaeffler Group viewed the tax issues raised by the Conti acquisition and
the planned refinancing and restructuring to be unusually complex, it did not use its internal tax
department but instead hired outside tax and legal advisors at Dentons US LLP (“Dentons”) and
2
Ernst & Young LLP. Schaeffler Decl. ¶ 10; Rosenfeld Decl. ¶ 9; Declaration of Harald Dewert
in Support of Schaeffler’s Petition to Quash Summons, dated May 13, 2013 (annexed as Ex. D to
Pet.) (“Dewert Decl.”), ¶ 6. Schaeffler’s corporate lawyers at Allen & Overy also advised the
Schaeffler Group regarding these issues. Schaeffler Decl. ¶ 11. Ernst & Young provided tax
advice “on the various U.S. tax implications of the Schaeffler Group’s proposed refinancing and
restructuring related to the unanticipated consequences resulting from the Schaeffler Group’s
acquisition of Continental AG.” Declaration of John Martinkat in Support of Schaeffler’s
Petition to Quash Summons, dated May 16, 2013 (annexed as Ex. F to Pet.) (“Martinkat Decl.”),
¶ 3. Specifically, “EY prepared tax memoranda and other tax analysis that identified potential
U.S. tax consequences of the refinancing and restructuring, and identified and analyzed possible
IRS challenges to the Schaeffler Group’s tax treatment of the transactions at issue.” Id. ¶ 4.
John Martinkat, a partner at Ernst & Young, describes one such document, which we will refer
to as the “EY Tax Memo.” He states that this memorandum contained “EY’s analysis and
advice concerning the U.S. federal tax treatment of various aspects of the Schaeffler Group’s
2009 and 2010 restructuring and refinancing, including an analysis of the possible challenges by
the IRS [discussing] in detail the statutory provisions, Treasury regulations, judicial decisions,
and IRS rulings relevant to various aspects of the transactions.” Id. ¶ 8. The Court has
examined this document in camera as is discussed in section II.B.3 below.
Dentons similarly “provided Schaeffler with U.S. tax and legal advice . . . in oral and
written form, to assist Schaeffler in evaluating the likely tax consequences of the refinancing and
restructuring, to assess the arguments the IRS would likely make in any dispute of Schaeffler’s
tax treatment of the transactions, and to weigh the potential risks Schaeffler would face if the tax
consequences of the transactions were litigated or otherwise challenged by the IRS.”
3
Declaration of Marc Teitelbaum in Support of Schaeffler’s Petition to Quash Summons, dated
May 17, 2013 (annexed as Ex. H to Pet.) (“Teitelbaum Decl.”), ¶ 12. Specifically, Dentons gave
legal advice on the following issues: “controlled foreign corporation (‘CFC’) U.S. tax principles;
significant troubled company issues; German bank regulatory issues; the Conti debt covenant
restrictions; German creditors’ rights, securities, and merger and acquisition laws; and the
differences between U.S. and German legal forms and tax law.” Id. ¶ 6.
Schaeffler sought the outside tax and legal advisors at Ernst & Young and Dentons
because he believed that “(1) acquiring an indirect majority ownership interest in Conti, a large
non-U.S. corporation, and (2) the obviously necessary refinancing of the Conti stock acquisition
debt and associated corporate restructuring would have significant U.S. tax and reporting
implications.” Schaeffler Decl. ¶ 8. Furthermore, “[d]ue to the magnitude of the restructuring,
the complexity of the U.S. tax issues, and the material amounts potentially at issue, [Schaeffler]
expected, from the earliest planning stages of the refinancing and restructuring, that an IRS audit
and possible dispute over at least some of the tax consequences was very likely, if not
inevitable.” Id. ¶ 19. This view was shared by his employees, see Dewert Decl. ¶ 8; Declaration
of Klaus Deissenberger in Support of Schaeffler’s Petition to Quash Summons, dated May 14,
2013 (annexed as Ex. E to Pet.), ¶ 7, and his tax and legal advisors, see Martinkat Decl. ¶ 7;
Teitelbaum Decl. ¶ 11.
Schaeffler asserts that “[b]ut for” this expectation that the refinancing and restructuring
measures would have “significant U.S. tax and reporting implications” and that the IRS would
“examine these events closely,” neither Dentons nor Ernst & Young “would have been engaged”
for their services. Schaeffler Decl. ¶¶ 8, 10. Schaeffler’s belief that the IRS would challenge his
2009 and 2010 tax returns was reinforced by the fact that he had recently been subjected to IRS
4
audits. See Schaeffler Decl. ¶ 25. Schaeffler’s 2001 and 2004 amended U.S. federal income tax
returns had been examined by the IRS in the 2007-08 time period. Id.; accord Declaration of M.
Todd Welty in Support of Schaeffler’s Petition to Quash Summons, dated July 7, 2013 (annexed
as Ex. I to Pet.) (“Welty Decl.”), ¶ 5. In 2009, the IRS began examinations of Schaeffler’s 2006,
2007, and 2008 returns. Schaeffler Decl. ¶ 25. Schaeffler believed that “audits of [his] 2009 and
2010 tax returns were essentially inevitable.” Id.
Throughout 2008 and 2009, Dentons and Ernst & Young tax and legal advisors worked
together with the Schaeffler Group both to “devise a viable debt refinancing and restructuring”
plan, Teitelbaum Decl. ¶ 8, and to evaluate the likely tax implications of such measures, id. ¶¶ 913. Schaeffler treated the communications with Dentons and Ernst & Young as “confidential.”
See id. ¶ 15; see also Rosenfeld Decl. ¶ 10; Dewert Decl. ¶ 9. The advisors at Dentons and Ernst
& Young have also asserted that they maintained the confidentiality of these communications.
See Martinkat Decl. ¶ 12; Teitelbaum Decl. ¶ 12. Eventually, “[d]ue to the magnitude and
complexity of the issues . . . and because of the anticipated audit and the potential controversy
with the IRS,” Schaeffler sought a private letter ruling from the IRS. Teitelbaum Decl. ¶ 14; see
generally 26 C.F.R. § 601.201. On August 6, 2010, the IRS ruled in favor of Schaeffler’s
proposed core tax treatment of the refinancing and restructuring measures. See Welty Decl. ¶ 8.
C.
Communications Between Schaeffler and the Bank Consortium
By all accounts, the Schaeffler Group, Ernst & Young, and Dentons worked closely with
the Bank Consortium not only in effectuating the refinancing and restructuring but also in
analyzing the tax consequences of the Conti acquisition. The Bank Consortium was represented
by Linklaters LLP. See Declaration of Stephen B. Land in Support of Schaeffler’s Petition to
Quash Summons, dated May 17, 2013 (annexed as Ex. G to Pet.) (“Land Decl.”), ¶ 4. Stephen
5
Land, a Linklaters partner who worked on the assignment, explained that the Bank Consortium
“was concerned about the U.S. tax implications of any debt refinancing and restructuring plan,
since the resulting tax consequences could materially affect the Schaeffler Group’s net cash flow
and assets that would otherwise be available to repay the [Consortium’s] debt.” Id. ¶ 5. Early in
the refinancing negotiations, Schaeffler and the Bank Consortium reached an agreement, which
they have referred to as the “Ringfencing provisions,” under which the Bank Consortium
subordinated its claims for repayment of Schaeffler’s debt to the payment of Schaeffler’s
personal tax liabilities. See Teitelbaum Decl. ¶ 16; Schaeffler Decl. ¶ 13. The Ringfencing
provisions allowed Schaeffler to prioritize up to € 885 million of his personal tax liabilities over
repayment of the debt owed to the Bank Consortium. Rosenfeld Decl. ¶ 8. The Bank
Consortium also agreed to provide an additional line of credit to pay Schaeffler’s tax liabilities
up to € 250 million. Teitelbaum Decl. ¶ 19. The Ringfencing provisions required “Schaeffler to
notify the Bank Consortium of a material audit or investigation” by the IRS and to “permit the
Bank Consortium the opportunity to advise on any proposed action — including contesting or
settling the tax dispute — before proceeding.” Schaeffler Decl. ¶ 14.
The Schaeffler Group and the Bank Consortium agreed to share legal analyses addressing
the potential tax implications regarding the restructuring and refinancing measures. Rosenfeld
Decl. ¶ 12. To this end, they signed an agreement, referred to as the Attorney Client Privilege
(“ACP”) Agreement, in which they expressed their desire to “share privileged, protected, and
confidential documents and their analyses without waiving those privileges, protections, or the
confidentiality of the information.” Id. ¶¶ 12-13. Rosenfeld states that “the ACP Agreement
was an important prerequisite for sharing the tax advice with the Bank Consortium,” id. ¶ 15,
and that he has “no reason to believe that the parties to the ACP Agreement, in fact, have not
6
maintained through the present time, the confidentiality of all information shared pursuant to the
ACP Agreement,” id. ¶ 16. Although the ACP Agreement has not been made part of the record,
Teitelbaum asserts that it “provides that information exchanged or otherwise communicated
pursuant to the ACP Agreement that is protected from disclosure by U.S. privileges or
protection, including, but not limited to, the attorney-client privilege, work-product doctrine, and
the tax practitioner privilege of I.R.C. § 7525, will remain privileged and protected under the
common legal interest doctrine, joint defense doctrine, or other available privileges and
protections.” Teitelbaum Decl. ¶ 22.
Following execution of the ACP Agreement, the Schaeffler Group shared with the Bank
Consortium certain documents containing tax advice. See Land Decl. ¶ 9; Teitelbaum Decl.
¶ 21. It is these documents, which were created by Ernst & Young and disclosed by Schaeffler
to outside parties, that the Government has asked Ernst & Young to produce. See IRS Summons
to Ernst & Young, dated June 25, 2013 (annexed as Ex. A to Pet.) (“IRS Summons”). Out of the
approximately 10,000 responsive Ernst & Young documents, petitioners have described only the
EY Tax Memo, which they allege analyzed “numerous legal issues, cases, and tax authorities,
discusse[d] theories the IRS may advance to challenge the transactions, and note[d] the strengths
and weaknesses of Schaeffer’s tax and legal positions.” Teitelbaum Decl. ¶ 23.
D.
The IRS Audit of Schaeffler’s 2009 and 2010 Tax Returns
Notwithstanding the IRS’s private letter ruling in 2010 approving Schaeffler’s proposed
core tax treatment of the restructuring and refinancing measures, see Welty Decl. ¶ 8, the IRS
began to examine Schaeffler’s 2009 and 2010 federal income tax returns in 2012, id. ¶ 11. On
July 26, 2012, the IRS sent Schaeffler a letter stating it intended to audit Schaeffler’s personal
tax returns as well as the Schaeffler Group’s returns for the 2009 and 2010 taxable years. Id.
7
Official audit notices were then sent to Schaeffler and the Schaeffler Group on August 15, 2012.
Id. ¶ 12.
When the IRS issued an Information Document Request (“IDR”) to Schaeffler in
September 2012, Schaeffler invoked “all privileges and protections that exist under U.S. law —
including, but not limited to, the attorney-client privilege, the work product doctrine, 26 U.S.C.
§ 7525, and the common interest doctrine — to prevent the disclosure of any privileged and
protected information, including, but not limited to, tax opinions.” Id. ¶ 13. On October 19,
2012, Schaeffler’s counsel met with the IRS to discuss “the withdrawal or narrowing of the
scope of [the IDR] . . . in order to avoid a costly and time-consuming privilege fight,” but the
“IRS refused to withdraw or narrow the scope of [the IDR].” Id. ¶ 15. On November 8, 2012,
the IRS issued a second IDR requesting “[a]ll tax opinions and tax analysis that discuss the U.S.
tax consequences of any and all steps of [Schaeffler’s] restructuring.” Id. ¶ 16.
Through July 2013, the IRS issued 86 IDRs requesting information regarding
Schaeffler’s 2009 and 2010 tax returns, and Schaeffler has in response produced tens of
thousands of pages of documents. Id. ¶ 17. In petitioners’ view, “Schaeffler has provided the
IRS with voluminous factual and reporting information necessary to conduct the examinations of
the 2009 and 2010 tax returns . . . [including] the operative refinancing and sales agreements,
transaction documents and corporate chronologies related to the refinancing and restructuring,
legal and tax organizational charts, detailed tax calculations with specific instructions and
references to the returns under exam, financial data, and valuation reports used to prepare the tax
returns under audit.” Id. ¶ 18.
8
E.
The Instant Motion to Quash
On June 25, 2013, the IRS issued an administrative summons to Ernst & Young. Id.
¶ 26; see also Declaration of Paul Doerr, filed Nov. 26, 2013 (Docket # 20) (“Doerr Decl.”), ¶ 5.
In relevant part, the IRS Summons commanded Ernst & Young to: “Provide all documents
created by Ernst & Young, including but not limited to legal opinions, analysis and appraisals,
that were provided to parties outside the Schaeffler Group, that relate to (1) the debt
restructuring of Schaeffler Group’s approximately €11 billion debt for the purchase of
Continental AG or (2) the restructuring of the Schaeffler entities in conjunction with the debt
restructuring.” IRS Summons (emphasis in original).
On July 12, 2013, petitioners filed this action pursuant to 26 U.S.C. § 7609(b)(2) to quash
the IRS Summons on the ground that “it seeks ‘legal opinions’ and other confidential advice that
are protected from disclosure by both the work product doctrine and the attorney-client privilege,
as extended to EY pursuant to the tax practitioner privilege of 26 U.S.C. § 7525.” Pet. at 1-2;
see also Amended Petition to Quash Internal Revenue Service Summons, filed Nov. 8, 2013
(Docket # 14) (“Am. Pet.”). Later, petitioners submitted a privilege log.1 The parties filed briefs
and other documents regarding the merits of the petition.2 At the request of the Court, see Order,
1
See Notice of Filing of Volumes 1 to 4 of the Privilege Log, filed Nov. 6, 2013 (Docket
# 12); Notice of Filing of Volumes 5 to 8 of the Privilege Log, filed Nov. 22, 2013 (Docket
# 17); Notice of Filing of Volume 9 of the Privilege Log, filed Dec. 20, 2013 (Docket # 24);
Notice of Filing of Volume 10 of the Privilege Log, filed Dec. 30, 2013 (Docket # 27); see also
Notice of Filing of Amended Volumes 1-10 of the Privilege Log, filed Jan. 17, 2014 (Docket
# 32).
2
See Memorandum of Law in Opposition to Petition to Quash and in Support of
Summary Enforcement, filed Nov. 25, 2013 (Docket # 18) (“Opp. Mem.”); Doerr Decl;
Memorandum of Law in Reply to Respondent’s Answer, filed Dec. 18, 2013 (Docket # 23)
(“Pet. Reply”); Supplemental Declaration of M. Todd Welty in Support of Schaeffler’s Petition
to Quash Summons, dated Dec. 12, 2013 (attached to Pet. Reply); Second Supplemental
9
dated Apr. 16, 2014 (Docket # 45), petitioners submitted a copy of the EY Tax Memo for in
camera inspection. That memorandum, together with its cover letter, have been filed under seal.
See Ernst & Young Tax Memorandum, filed under seal on May 8, 2014 (Docket # 53).
II.
DISCUSSION
A.
Attorney-Client/ Tax Practitioner Privilege
Petitioners argue that the Ernst & Young documents are privileged and that no waiver of
this privilege occurred when they provided the documents to the Bank Consortium because
petitioners and the Bank Consortium had a common legal interest. See Am. Pet. ¶¶ 49-59.
1.
Governing Law
26 U.S.C. § 7525(a)(1) provides that
With respect to tax advice, the same common law protections of confidentiality which
apply to a communication between a taxpayer and an attorney shall also apply to a
communication between a taxpayer and any federally authorized tax practitioner to the
extent the communication would be considered a privileged communication if it were
between a taxpayer and an attorney.
The scope of this privilege — commonly referred to as “the tax practitioner privilege” — is
essentially “coterminous” with the attorney-client privilege. Evergreen Trading, LLC ex rel.
Nussdorf, 80 Fed. Cl. 122, 135 (Fed. Cl. 2007); see also Valero Energy Corp. v. United States,
569 F.3d 626, 630 (7th Cir. 2009) (“This privilege is no broader than the existing attorney-client
privilege. It merely extends the veil of confidentiality to federally authorized tax practitioners
Declaration of Marc Teitelbaum in Support of Schaeffler’s Petition to Quash Summons, dated
Nov. 25, 2013 (attached to Notice of Filing of Declarations in Support of Schaeffler’s Petition to
Quash Summons, filed Jan. 17, 2014 (Docket # 33) (“Supp. Decl. Notice”)); Declaration of Dr.
Walter Uebelhoer in Support of Schaeffler’s Petition to Quash Summons, dated Jan. 17, 2014
(attached to Supp. Decl. Notice); Reply Memorandum of Law in Further Opposition to Petition
to Quash and in Further Support of Summary Enforcement, filed Feb. 10, 2014 (Docket # 40);
Supplemental Declaration of Paul Doerr, dated Jan. 21, 2014 (Docket # 42).
10
who have long been able to practice before the IRS . . . to the same extent communications
would be privileged if they were between a taxpayer and an attorney.”) (internal citations and
punctuation omitted). Additionally, it has been found that waiver of the tax practitioner
privilege occurs “on the same terms” as waiver of the attorney-client privilege. See Salem Fin.,
Inc. v. United States, 102 Fed. Cl. 793, 798 (Fed. Cl. 2012) (citation omitted); Evergreen
Trading, 80 Fed. Cl. at 135. Accordingly, in applying the tax practitioner privilege, we look to
the law governing attorney-client privilege. See United States v. BDO Seidman, 337 F.3d 802,
810 (7th Cir. 2003) (“Because the scope of the tax practitioner-client privilege depends on the
scope of the common law protections of confidential attorney-client communications, we must
look to the body of common law interpreting the attorney-client privilege to interpret the § 7525
privilege.”); United States v. KPMG LLP, 316 F. Supp. 2d 30, 35 (D.D.C. 2004) (“Following as
it must the text of § 7525, this Court addresses any claims of § 7525 privilege in the same
manner as it does for the attorney-client privilege.”).
In cases such as this where claims are based on federal statutes, the attorney-client
privilege is governed by federal common law. See, e.g., Curto v. Med. World Commc’n, Inc.,
783 F. Supp. 2d 373, 378 (E.D.N.Y. 2011); Crosby v. City of New York, 269 F.R.D. 267, 274
(S.D.N.Y. 2010); Lego v. Stratos Lightwave, Inc., 224 F.R.D. 576, 578 (S.D.N.Y. 2004). Under
federal common law, “[t]he attorney-client privilege protects communications (1) between a
client and his or her attorney (2) that are intended to be, and in fact were, kept confidential (3)
for the purpose of obtaining or providing legal advice.” United States v. Mejia, 655 F.3d 126,
132 (2d Cir. 2011) (citing In re Cnty. of Erie, 473 F.3d 413, 419 (2d Cir. 2007)); accord United
States v. Ghavami, 882 F. Supp. 2d 532, 536 (S.D.N.Y. 2012) (citations omitted). “The purpose
of the privilege is to encourage clients to make full disclosure to their attorneys,” and thus, “the
11
privilege protects communications between a client and an attorney, not communications that
prove important to an attorney’s legal advice to a client.” United States v. Ackert, 169 F.3d 136,
139 (2d Cir. 1999) (quotation marks and citation omitted); accord Stryker Corp. v. Intermedics
Orthopedics, Inc., 145 F.R.D. 298, 301 (E.D.N.Y. 1992). Courts acknowledge that “[w]hile the
privilege confers important social benefits, it also exacts significant costs [because] [i]t runs
counter to the ordinary judicial interest in the disclosure of all relevant evidence.” Application
of Sarrio, S.A., 119 F.3d 143, 147 (2d Cir. 1997) (citation omitted); accord In re Bairnco Corp.
Secs. Litig., 148 F.R.D. 91, 96 (S.D.N.Y. 1993) (noting that “the attorney-client privilege both
advances and impedes the administration of justice”). Accordingly, courts apply the attorneyclient privilege “only where necessary to achieve its purpose” and “construe the privilege
narrowly because it renders relevant information undiscoverable.” Mejia, 655 F.3d at 132
(quotation marks and citations omitted).
“It is axiomatic that the burden is on a party claiming the protection of a privilege to
establish those facts that are the essential elements of the privileged relationship, . . . a burden
not discharged by mere conclusory or ipse dixit assertions.” In re Grand Jury Subpoena Dated
Jan. 4, 1984, 750 F.2d 223, 224-25 (2d Cir. 1984) (quotation marks and internal citation
omitted); accord Ghavami, 882 F. Supp. 2d at 536. The party invoking the privilege also has the
burden to show that the privilege has not been waived. See Hollis v. O’Driscoll, 2013 WL
2896860, at *1 (S.D.N.Y. June 11, 2013) (citing Denney v. Jenkens & Gilchrist, 362 F. Supp. 2d
407, 412 (S.D.N.Y. 2004)); accord United States v. Finazzo, 2013 WL 619572, at *6 (E.D.N.Y.
Feb. 19, 2013).
In general, the attorney-client privilege is waived when “the client voluntarily discloses
the documents to a third party.” Fifty-Six Hope Road Music Ltd. v. UMG Recordings, Inc.,
12
2010 WL 343490, at *1 (S.D.N.Y. Feb. 1, 2010); see also In re Horowitz, 482 F.2d 72, 81 (2d
Cir. 1973) (“We deem it clear that subsequent disclosure to a third party by the party of a
communication with his attorney eliminates whatever privilege the communication may have
originally possessed . . . .”); United States v. Kerik, 531 F. Supp. 2d 610, 617 (S.D.N.Y. 2008)
(“Where attorney-client communications are disclosed for reasons other than obtaining legal
advice to a third party at the direction of the client there is no expectation of privacy or
confidentiality, and thus, the client cannot assert the privilege.”). However, such a disclosure
does not waive the attorney-client privilege when it is made between “parties [who] are
represented by separate counsel but engage[d] in a common legal enterprise.” See Bank
Brussels Lambert v. Credit Lyonnais (Suisse) S.A., 160 F.R.D. 437, 447 (S.D.N.Y. 1995). Often
referred to as the “common interest” rule or “joint defense privilege,” this rule is not in fact a
separate privilege but rather “an extension of the attorney client privilege.” United States v.
Schwimmer, 892 F.2d 237, 243 (2d Cir. 1989) (citation and internal quotation marks omitted).
The rule
serves to protect the confidentiality of communications passing from one party to
the attorney for another party where a joint defense effort or strategy has been
decided upon and undertaken by the parties and their respective counsel . . . .
Only those communications made in the course of an ongoing common enterprise
and intended to further the enterprise are protected . . . . The need to protect the
free flow of information from client to attorney logically exists whenever multiple
clients share a common interest about a legal matter, . . . and it is therefore
unnecessary . . . for the attorney representing the communicating party to be
present when the communication is made to the other party’s attorney.
Id. at 243-44 (citations and internal quotation marks omitted).
To obtain the benefit of the common interest rule, the party claiming the protection of
attorney-client privilege must demonstrate “that the parties communicating: (1) have a common
legal, rather than commercial, interest; and (2) the disclosures are made in the course of
13
formulating a common legal strategy.” Ghavami, 882 F. Supp. 2d at 537-38 (quoting Sokol v.
Wyeth, Inc., 2008 WL 3166662, at *5 (S.D.N.Y. Aug. 4, 2008)); accord Allied Irish Banks,
P.L.C. v. Bank of Am., N.A., 252 F.R.D. 163, 171 (S.D.N.Y. 2008); HSH Nordbank AG N.Y.
Branch v. Swerdlow, 259 F.R.D. 64, 71 (S.D.N.Y. 2009); Gulf Islands Leasing, Inc. v.
Bombardier Capital, Inc., 215 F.R.D. 466, 471 (S.D.N.Y. 2003).3 This showing must be based
on competent evidence, such as affidavits, deposition testimony or other admissible evidence.
Gulf Islands, 215 F.R.D. at 472; accord Chevron Corp. v. Donziger, 296 F.R.D. 168, 203
(S.D.N.Y. 2013).
Because the common interest rule requires the common interest to be legal, and not
merely commercial, it “does not encompass a joint business strategy which happens to include as
one of its elements a concern about litigation.” Bank Brussels Lambert, 160 F.R.D. at 447.
“Although the distinction between a common legal, as opposed to commercial, interest is
somewhat murky, a common legal interest has been defined as one in which the parties have
been, or may potentially become, co-parties to a litigation . . . or have formed a coordinated legal
strategy.” In re Subpoena Duces Tecum Served on N.Y. Marine and Gen. Ins. Co, 1997 WL
599399, at *4 (S.D.N.Y. Sept. 26, 1997) (citations and internal punctuation omitted).
While courts have traditionally taken the view that the common legal interest must be
“identical,” see Terra Nova, 211 F. Supp. 2d at 496; Denney, 362 F. Supp. 2d at 415, recently
3
Although we cite exclusively to federal cases in determining the privilege issues, we in
some instances cite to federal cases interpreting New York law in light of the fact that New York
state law on attorney-client privilege is “generally similar to accepted federal doctrine.” Bank of
Am., N.A. v. Terra Nova Ins. Co. Ltd., 211 F. Supp. 2d 493, 495 (S.D.N.Y. 2002); see also HSH
Nordbank, 259 F.R.D. at 71 n. 8 (“Because ‘New York courts applying the common interest rule
to civil proceedings have often looked to federal case law for guidance,’ both New York and
federal case law are instructive here.”) (quoting Allied Irish Banks, P.L.C., 252 F.R.D. at 170).
14
some courts have held that the common legal interest need only be “nearly identical,”
Egiazaryan v. Zalmayev, 290 F.R.D. 421, 434 (S.D.N.Y. 2013); United States v. Doe, 429 F.3d
450, 453 (3rd Cir. 2005); F.D.I.C. v. Ogden Corp., 202 F.3d 454, 461 (1st Cir. 2000).
2.
Analysis
Although the Government seems to argue that the requested documents were not
privileged because the documents were not “intended to be . . . kept confidential,” see Opp.
Mem. at 17, we need not consider this issue because we find that, to the extent that any privilege
existed, petitioners waived the privilege when they shared the documents with the Bank
Consortium.
In support of their position that the common interest rule applies to the disclosure to the
Bank Consortium, petitioners assert that the Bank Consortium and Schaeffler shared a
“predominately legal interest” in the “U.S. tax implications of any debt refinancing and
restructuring plan.” Am. Pet. ¶ 55 (quoting Land Decl. ¶ 5). Petitioners contend that “[b]ecause
the Bank Consortium — under the unique circumstances of Schaeffler’s Conti stock acquisition,
refinancing, and restructuring — essentially agreed to fund Mr. Schaeffler’s taxes, Schaeffler
and the Bank Consortium shared a common legal interest in the taxes and tax advice.” Id. (citing
declarations). They argue that “given the certainty of an IRS audit, Schaeffler and the Bank
Consortium were completely aligned in correctly assessing the U.S. tax implications and risks of
the refinancing and restructuring of Schaeffler, complying with all U.S. tax laws and regulations
in the most tax-efficient manner, minimizing potential tax liabilities, planning to defend any IRS
challenge, evaluating potential IRS audit outcomes, and, if necessary, preparing to contest in
good faith any proposed tax adjustment.” Id. (citing declarations). In petitioners’ view,
“[n]otwithstanding the obvious economic consequences of a tax liability, a common interest in
15
taxes is legal, not economic.” Id. ¶ 54 (citing Terra Nova, 211 F. Supp. 2d at 498).
We accept that the Bank Consortium needed to understand in the greatest possible depth
the risks to which it was subjecting itself by funding Schaeffler’s personal tax liability. As
Stephen Land, who represented the Bank Consortium during the negotiations with Schaeffler,
put it: “the [Consortium] was concerned about the U.S. tax implications of any debt refinancing
and restructuring plan, since the resulting tax consequences could materially affect the Schaeffler
Group’s net cash flow and assets that would otherwise be available to repay the [Consortium’s]
debt.” Land Decl. ¶ 5. But as the Consortium’s own attorney concedes, the reason why the
Consortium needed access to Schaeffler’s tax information was to assess its own “credit
exposure.” Id. ¶ 7. The Consortium worried that if there were substantial federal tax
adjustments, this could lead to the “insolvency of all parties.” Teitelbaum Decl. ¶ 15.
In light of these facts, we have no doubt that the Bank Consortium had an enormous
stake in the tax consequences of Schaeffler’s refinancing and restructuring decisions. It is also
clear that predicting how the tax authorities would treat the transactions presented complex legal
issues and thus required sophisticated legal analysis. But the two parties’ shared interest in
Schaeffler’s tax liability was, in the end, an economic one: namely, a desire that the transactions
receive favorable tax treatment from the federal tax authorities so that the Schaeffler Group
could service its debt to the Bank Consortium. To be sure, this common economic interest
depended on the resolution of legal issues regarding tax treatment. But this does not equate to a
common “legal” interest as that term is used in case law.
The classic situation where parties share a common legal interest is where they are or
may “potentially become, co-parties to a litigation.” In re Subpoena Duces Tecum Served on
N.Y. Marine and Gen. Ins. Co, 1997 WL 599399, at *4. Case law has also suggested that the
16
rule may apply where parties are formulating “a coordinated legal strategy.” Id. (citing Bank
Brussels Lambert, 160 F.R.D. at 448). But the rule does not encompass the situation where
parties enter into a “joint business strategy which happens to include as one of its elements a
concern about litigation.” Bank Brussels Lambert, 160 F.R.D. at 447. That is essentially the
situation in this case: a loan agreement between two parties where the result of future litigation is
of concern to both sides because it will affect the debtor’s ability to perform, but where the
litigation does not involve the creditor and will work no change in the creditor’s legal status.
None of the cases petitioners cite suggest that the common interest rule applies here.
United States v. United Techs. Corp., 979 F. Supp. 108 (D. Conn. 1997), found that where
members of a consortium shared tax advice to minimize the tax liability of their jointly owned
company, they shared a common legal interest. Id. at 112. However, in that situation, unlike in
this case, the parties sharing the tax information were each facing tax liabilities for any
deficiency. Id. Similarly, in United States v. BDO Seidman, LLP, 492 F.3d 806, (7th Cir.
2007), the parties who invoked the common interest rule were “joint venturers” who were
“making sure that they could defend their [tax shelter] product against potential IRS enforcement
actions.” Id. at 816. Thus, in both United Techs Corp. and BDO Seidman, the parties who
shared the privileged information were in essentially the same legal position vis-à-vis the IRS as
the entities who received the information. Here by contrast, Schaeffler and the Bank Consortium
stood in very different positions vis-à-vis the IRS. Schaeffler owed a legal obligation to the
United States to pay the tax liability resulting from the restructuring transactions while the Bank
Consortium had no such obligation. The Bank Consortium, by contrast, was merely Schaeffler’s
creditor. Although we accept that the Bank Consortium ardently desired to minimize
Schaeffler’s tax liabilities and to see him prevail in any dispute with the IRS, “[a] shared desire
17
to succeed in an action does not . . . rise to the level of a common legal interest.” Johnson
Matthey, Inc. v. Research Corp., 2002 WL 1728566, at *6 (S.D.N.Y. July 24, 2002); see also
Terra Nova, 211 F. Supp. 2d at 496 (“The mere fact that the parties were working together to
achieve a commercial goal cannot by itself result in an identity of interest between the parties.”);
Shamis v. Ambassador Factors Corp., 34 F. Supp. 2d 879, 893 (S.D.N.Y. 1999) (“Although [the
entities asserting a common interest] would both benefit from a judgment in favor of the
plaintiff, they do not share identical legal interests. Indeed, sharing a desire to succeed in an
action does not create a common interest.”) (internal quotation marks omitted).
The decision in Gulf Islands Leasing, Inc. v. Bombardier Capital, Inc., 215 F.R.D. 466
(S.D.N.Y. 2003), is instructive on this point. Gulf Islands involved an agreement where an
entity called Gulf Islands Leasing leased a fractional interest in an aircraft from Bombardier
Aerospace. A company affiliated with Bombardier Aerospace, Bombardier Capital, financed the
lease. Litigation ultimately arose between Gulf Islands Leasing and Bombardier Aerospace.
Bombardier Aerospace claimed as privileged documents it had shared with Bombardier Capital,
invoking the common interest rule. Bombardier Capital alleged that “its common legal interest
with Bombardier Aerospace was the interest both companies had in Gulf not breaching any of
the various agreements.” Id. at 472. The Court acknowledged that although Bombardier Capital
may have had “a desire to ensure that the sums owed by Gulf to Bombardier Capital under its
own agreements were paid,” this was insufficient to invoke the common interest rule because
“[a] concern to ensure the payment of money is commercial in nature and does not qualify for
protection under the common interest rule.” Id. at 472-73. Additionally, the Court held that “to
the extent that the asserted interest could be construed to encompass a desire for Bombardier
Aerospace to reach a favorable outcome in the litigation with Gulf, it is also insufficient to
18
invoke the common interest rule [because] [a] concern shared by parties regarding litigation does
not establish by itself that the parties held a common legal interest.” Id. at 473. Furthermore,
the Court indicated that even if Bombardier Capital and Bombardier Aerospace had a
“coordinated legal strategy” with respect to Bombardier Aerospace’s litigation with Gulf, “such
a coordinated legal strategy is insufficient where there is only a common commercial interest
and no identity of legal interests.” Id.
Here, Schaeffler’s reliance on the common interest rule fails for largely the same reasons.
As was true for Bombardier Capital in Gulf Islands, it is not enough that the Bank Consortium
had a desire for Schaeffler to succeed in a dispute with the IRS. What is lacking is any common
legal stake in Schaeffler’s putative litigation with the IRS. If the Bank Consortium could have
been named as a co-defendant in the anticipated dispute with the IRS, the result would
undoubtedly be different. But only the Consortium’s economic interests were in jeopardy. See
generally In re F.T.C., 2001 WL 396522, at *5 (S.D.N.Y. Apr. 19, 2001) (finding that although
the relevant individuals shared legal advice and were “concerned about the consequences of
failing to comply with applicable law and regulations[,] . . . this is simply not enough to
transform their mutual commercial interest in the [business endeavor] into a coordinated legal
strategy”); see also Walsh v. Northrop Grumman Corp., 165 F.R.D. 16, 19 (E.D.N.Y. 1996)
(finding only a common commercial and not legal interest where the relevant entities were
merely “developing a business strategy one of whose components was to avoid litigation if
possible”).
Another case cited by petitioners, Bank of Am., N.A. v. Terra Nova Ins. Co. Ltd.,
similarly suggests that the common interest rule does not apply to Schaeffler’s disclosures to the
Bank Consortium. In Terra Nova, the plaintiff asserted that it had a common legal interest with
19
another party in “structuring and effectuating a credit agreement that was appropriately
supported by reinsurance policies.” 211 F. Supp. 2d at 497. Terra Nova found that the common
interest rule did not apply, stating that “[t]he mere fact that the parties were working together to
achieve a commercial goal cannot by itself result in an identity of interest between the parties.”
Id. The Court noted that “[i]t [was] of no moment that the parties may have been developing a
business deal that included as a component the desire to avoid litigation . . . [because] such a
desire does not transform their common interest and enterprise into a legal, as opposed to
commercial, matter.” Id. (internal punctuation and citation omitted).
The fact that Schaeffler and the Bank Consortium signed the ACP Agreement before
sharing any documents does not affect our finding that the common interest rule does not apply.
The ACP Agreement merely “memorialized the parties’ common legal interest and provided that
privileged information exchanged or otherwise communicated pursuant to the agreement would
be protected from disclosure . . . .” Land Decl. ¶ 8. While a written agreement like this can be
relevant to “demonstrat[ing] actual cooperation toward a common legal goal,” In re
Rivastigmine Patent Litig., 2005 WL 2319005, at *4 (S.D.N.Y. Sept. 22, 2005), the mere
assertion of a common legal interest in a written agreement cannot create such an interest. What
matters is whether there exists in actuality a common legal interest between the contracting
parties. Additionally, it is well-established that “a private agreement or promise of protection
cannot by itself bar non-signatories from access to documents if they are otherwise
discoverable.” In re Subpoena Duces Tecum Served on N.Y. Marine and Gen. Ins. Co, 1997
WL 599399, at *4 n. 3; see also SR Intern. Bus. Ins. Co. Ltd. v. World Trade Center Props. LLC,
2002 WL 1455346, at *5 (S.D.N.Y. July 3, 2002) (“[T]he fact that private parties agree that
something is privileged does not make it so.”); Baxter Travenol Labs., Inc. v. Abbott Labs., 1987
20
WL 12919, at *2 (N.D. Ill. June 19, 1987) (finding that where the parties had entered into
disclosure agreements in which they agreed to keep confidential the disclosed documents, this
was “not sufficient to establish a community of interest”). In other words, if no common legal
interest had previously existed, Schaeffler and the Bank Consortium could not create such an
interest by fiat.
In sum, we conclude that common interest rule does not apply, and thus, any attorneyclient or tax practitioner privilege that attached to the documents was waived when Schaeffler
shared them with the Bank Consortium.
B.
Work Product Doctrine
Petitioners argue in the alternative that the documents requested by the IRS Summons are
protected under the work product doctrine. See Am. Pet. ¶¶ 28-48; Pet. Reply at 2-7.
1.
Governing Law
Federal law governs the applicability of the work product doctrine in all actions in
federal court. Allied Irish Banks, P.L.C., 252 F.R.D. at 173; accord Weber v. Paduano, 2003
WL 161340, at *3 (S.D.N.Y. Jan. 22, 2003). The work product doctrine is codified in part in
Federal Rule of Civil Procedure Rule 26(b)(3), which provides that a party is not entitled to
obtain discovery of “documents and tangible things that are prepared in anticipation of litigation
or for trial by or for another party or its representative” unless the party shows substantial need
and an inability to obtain the substantial equivalent to the documents without undue hardship.
The purpose of the work product rule is “to preserve a zone of privacy in which a lawyer can
prepare and develop legal theories and strategy ‘with an eye toward litigation,’ free from
unnecessary intrusion by his adversaries.” United States v. Adlman, 134 F.3d 1194, 1196 (2d
Cir. 1998) (quoting Hickman v. Taylor, 329 U.S. 495, 510–11 (1947)). The work product
21
doctrine protects materials prepared not only by attorneys but also by their agents. Costabile v.
Westchester, N.Y., 254 F.R.D. 160, 164 (S.D.N.Y. 2008) (citing cases). The party asserting
work product protection “bears the burden of establishing its applicability to the case at hand.”
In re Grand Jury Subpoenas Dated Mar. 19, 2002 & Aug. 2, 2002, 318 F.3d 379, 384 (2d Cir.
2003) (citing cases). That party must show “that material it seeks to protect (1) was prepared in
anticipation of litigation and (2) was prepared by or for a party, or by his representative.” Koch
v. Greenberg, 2012 WL 1449186, at *5 (S.D.N.Y. Apr. 13, 2012) (citing In re Grand Jury
Subpoenas Dated Mar. 19, 2002 & Aug. 2, 2002, 318 F.3d at 383–84).
Because the work product protection arises only for materials “prepared in anticipation of
litigation,” the doctrine is not satisfied merely by a showing that the material was prepared at the
behest of a lawyer or was provided to a lawyer. Rather, the materials must result from the
conduct of “investigative or analytical tasks to aid counsel in preparing for litigation.”
Costabile, 254 F.R.D. at 164 (citation omitted). Additionally, the Second Circuit has interpreted
the “in anticipation of litigation” requirement as asking whether “in light of the nature of the
document and the factual situation in the particular case, the document can fairly be said to have
been prepared or obtained because of the prospect of litigation.” Adlman, 134 F.3d at 1202
(internal quotation marks and citation omitted) (emphasis in original). Thus, the work product
protection does not apply to “documents that are prepared in the ordinary course of business or
that would have been created in essentially similar form irrespective of the litigation . . . [e]ven if
such documents might also help in preparation for litigation.” Id. In determining whether the
work product doctrine applies, a court must ask “not merely whether [the party invoking the
privilege] contemplated litigation when it generated the materials at issue, but rather whether
these materials ‘would have been prepared in essentially similar form irrespective of litigation.’”
22
Allied Irish Banks v. Bank of Am., N.A., 240 F.R.D. 96, 106 (S.D.N.Y. 2007) (quoting Adlman,
134 F.3d at 1204).
A party invoking the work product doctrine need not have anticipated the specific
litigation in which the protection is actually invoked. See Garrett v. Metro. Life Ins. Co., 1996
WL 325725, at *4 (S.D.N.Y. June 12, 1996) (“[A] document does not have to be created in
anticipation of the current litigation.”); Bruce v. Christian, 113 F.R.D. 554, 561 (S.D.N.Y. 1986)
(“The fact that the memoranda were not prepared for the present litigation is not determinative,
for the Supreme Court has noted that ‘the literal language of the Rule [26(b)(3)] protects
materials prepared for any litigation or trial as long as they were prepared by or for a party to the
subsequent litigation.’”) (quoting F.T.C. v. Grolier, Inc., 462 U.S. 19, 26 (1983)). Thus, we
reject the Government’s contention that invocation of the work product doctrine requires
petitioners to show that they “anticipated . . . a specific litigation over a future IRS summons to
EY relating to the Conti stock acquisition.” Opp. Mem. at 15.
2.
Waiver of Work Product Protection
Before addressing the merits of whether the documents at issue are subject to work
product protection, we first examine whether any such protection was waived when Schaeffler
provided the Ernst & Young documents to the Bank Consortium. As a general rule, work
product protection is waived only “when the disclosure is to an adversary or materially increases
the likelihood of disclosure to an adversary.” Kingsway Fin. Servs., Inc. v. PricewaterhouseCoopers LLP, 2008 WL 4452134, at *10 (S.D.N.Y. Oct. 2, 2008) (citations and internal
quotation marks omitted); accord In re Steinhardt Partners, L.P., 9 F.3d 230, 235 (2d Cir. 1993).
The proponent of the work product protection bears the burden of showing that the protection
has not been waived. See Allied Irish Banks, P.L.C., 240 F.R.D. at 105.
23
Here, petitioners provided the EY Tax Memo and other responsive Ernst & Young
documents to the Bank Consortium in furtherance of the refinancing negotiations. See Martinkat
Decl. ¶ 10; Teitelbaum Decl. ¶ 21-23; Land Decl. ¶ 9. The Government contends that this
disclosure constituted a waiver of any applicable work product protection because “the legal
interests of Schaeffler are not necessarily identical to those of the Bank Consortium (indeed, one
could easily imagine a scenario in which the Bank Consortium became an adversary of the
Schaeffler Group), and the Petition does not establish that they are.” Opp. Mem. at 21 n. 4. As
an initial matter, the Government’s argument misses the mark because there is no requirement
that the disclosing and receiving parties have “identical” legal interests in order to avoid a work
product protection waiver. Moreover, we find that under the applicable test, there was no work
product waiver in these circumstances.
In support of its argument, the Government cites various cases in which it was found that
work product protection had been waived where a document had been disclosed to a nonadversarial third party. Two of these cases involve disclosures to the Government and thus are
not remotely similar to the situation presented here. For example, in In re Terrorist Attacks on
Sept. 11, 2001, 293 F.R.D. 539 (S.D.N.Y. 2013), the court found that the plaintiff had waived its
work product protection when it disclosed its protected information to the Government because
this led the information to be widely available to the public, including the plaintiff’s adversaries,
by way of the Freedom of Information Act. Id. at 544. Similarly, in Bank of Am., N.A. v. Terra
Nova Ins. Co., 212 F.R.D. 166 (S.D.N.Y. 2002), this Court held that a company’s work product
protection had been waived when its officer provided the protected information and documents
to governmental authorities because “[w]hen material is disclosed to a law enforcement agency
without any agreement regarding confidentiality, there is a strong potential that the material may
24
ultimately become public and thus available to an adversary.” Id. at 173. A third case, Medinol,
Ltd. v. Boston Scientific Corp., 214 F.R.D. 113 (S.D.N.Y. 2002), found that a company waived
its work product protection when it provided its documents to an auditor. Id. at 116-17. The
Medinol court based this conclusion on the fact that the auditor was entirely independent from
the company. Id. at 116 (likening auditor to a “public watchdog” and stating that “in order for
auditors to properly do their job, they must not share common interests with the company they
audit”) (emphasis omitted).
Here, the documents were disclosed in furtherance of Schaeffler and the Bank
Consortium’s common commercial desire to avoid Schaeffler’s default and insolvency. See
Teitelbaum Decl. ¶ 15; Land Decl. ¶¶ 5-7. Accordingly, both Schaeffler and the Bank
Consortium had an incentive to withhold the details of their refinancing negotiations from
Schaeffler’s potential adversaries, including the IRS. In the cases cited by the Government,
there was no showing that the parties who received the protected information had any common
interest or any incentive to keep the shared information from the disclosing parties’ adversaries.
Another important difference in our case is that petitioners were keenly aware of the risk
of disclosing the confidential tax information to third parties and took measures to ensure that no
other outside parties would see the confidential documents. Before sharing the Ernst & Young
documents, petitioners entered into the ACP Agreement with the Bank Consortium which
imposed on both parties “a legal obligation to maintain the confidentiality of the
communications shared pursuant to the ACP Agreement.” Schaeffler Decl. ¶ 22. By
contractually obligating the Bank Consortium to preserve the confidentiality of the Ernst &
Young documents, petitioners lessened the possibility that their adversaries, including the IRS,
would obtain the confidential information. This is in contrast to the situation in Terra Nova,
25
where the court found that because the disclosing party had “made no effort to seek confidential
treatment of the information” it had failed to show that “maintaining the secrecy of the
[protected information] was of any importance to it.” 212 F.R.D. at 173.
Accordingly, because petitioners and the Bank Consortium had similar interests at the
time in which the disclosures were made and because the Bank Consortium was contractually
required to keep the disclosed information confidential, petitioners’ disclosure of the Ernst &
Young documents did not “materially increase[ ] the likelihood of disclosure to an adversary.”
See Kingsway Fin. Servs., Inc., 2008 WL 4452134, at *10.
Furthermore, it makes no difference that, as the Government puts it, “one could easily
imagine a scenario in which the Bank Consortium became an adversary of the Schaeffler
Group.” Opp. Mem. at 21 n. 4. The mere possibility that a dispute may arise at some point in
the future between the disclosing party and the receiving party is insufficient to create a waiver
of the work product protection. See Ghavami, 882 F. Supp. 2d at 541 (“[T]here is always some
danger that the recipient of work product is, or will later become, an informant. But that cannot
constitute a ‘substantial risk’ that the work product would be disclosed to the adversary. If it did,
the exception would swallow the rule, and the distinction between waiver of the attorney-client
privilege and waiver of work product would be rendered a nullity.”); accord United States v.
Deloitte LLP, 610 F.3d 129, 140 (D.C. Cir. 2010) (“[T]he possibility of a future dispute between
[the disclosing party] and [the receiving party] does not render [the receiving party] a potential
adversary for the present purpose. If it did, any voluntary disclosure would constitute waiver.”)
Therefore, petitioners have shown that, to the extent that the Ernst & Young documents
had any work product protection, this protection was not waived when petitioners shared the
documents with the Bank Consortium.
26
3.
Merits of the Work Product Protection Claim
Turning to the merits of the work product protection claim, petitioners have asserted that
the work product doctrine protects each of the approximately 10,000 responsive documents that
Ernst & Young prepared in furtherance of the restructuring and refinancing measures. See Am.
Pet. ¶ 9. However, the only document petitioners describe in any detail is the “EY Tax Memo,”
which appears on petitioners’ privilege log more than a hundred times in various forms. A 321page draft of this memorandum, which has been provided to the Court for in camera review,
expounds on the transactional steps that Ernst & Young proposed for the refinancing and
restructuring. The memorandum contains numerous appendices that provide detailed legal
analysis of the federal tax issues implicated by each step. This legal analysis makes reference to
statutes, IRS regulations, IRS private letter rulings, other administrative materials, and case law.
In many instances, the memorandum asserts that there is no law clearly on point and thus uses
language such as “although not free from doubt,” “the better view is that,” “it may be argued,”
and “it is not inconceivable that the IRS could assert.” Additionally, in explaining its
recommendations for handling particular aspects of the restructuring and refinancing measures,
the memorandum considers at great length the arguments and counter-arguments that could be
made by Schaeffler and the IRS with regard to the appropriate tax treatment of these measures.
While there is copious citation to relevant legal authority, the memorandum does not specifically
refer to litigation — for example, by discussing what actions peculiar to the litigation process
Schaeffler or the IRS might take or what settlement strategies might be considered. Rather, the
memorandum contains detailed and thorough legal analysis as to the propriety of the planned
measures and advocates what specific transactional steps should be taken.
Inasmuch as this is the only document that is described in any detail by petitioners, we
27
assume that the other documents listed on the privilege log are no more deserving of work
product protection and thus that the EY Tax Memo represents Schaeffler’s best case for
application of the doctrine. We will also accept that Schaeffler believed that litigation was
highly probable in light of the significant and difficult tax issues that were raised by the planned
refinancing and restructuring. Accordingly, the Court is called upon to make the factual
determination required by Adlman: whether this memorandum and the related documents
“would have been created in essentially similar form” had litigation not been anticipated. 134
F.3d at 1202. While we have described this as a factual determination, in reality it is a
counterfactual determination because it requires the Court to imagine what “would have”
happened in a world where Schaeffler did not anticipate litigation as to the restructuring and
refinancing transactions but everything else was exactly the same — in other words, Schaeffler
still found himself acquiring the unexpectedly large share of Conti stock and still needed to
engage in a refinancing and restructuring arrangement that would comply with federal tax laws.
An unstated premise of Schaeffler’s argument in this petition is that there was no reason
for him to engage in the detailed and complex process of resolving the “complicated and
unusual” tax issues that surrounded the transaction other than to prepare for litigation. If he
intends to make such an argument, it would require this Court to find that Schaeffler had no
interest in complying with federal tax laws except to the extent it assisted him in the event there
were an audit and subsequent litigation. However, Schaeffler has not contended — nor do we
have any reason to find— that he makes efforts to comply with federal tax laws only in
situations where he fears being sued. Accordingly, we assume a scenario under which Schaeffler
is a legitimate businessperson who has a desire to operate his companies in accordance with the
law and in accordance with his legal duties, including any fiduciary duty he owes to
28
shareholders.
Under this assumption, the first question the Court must consider is whether Schaeffler
would have sought out the type of tax advice provided by Ernst & Young about the transaction
had he not been concerned about an audit or litigation with the IRS. Schaeffler’s submissions
make clear that the Conti acquisition, as well as the ensuing refinancing and restructuring
measures, were enormously complex transactions that required significant legal assistance.
Schaeffler states that “[a]lthough tax issues at Schaeffler are typically handled directly by our
internal tax department and with the assistance of outside tax advisors, the extraordinary U.S. tax
issues were distinctly complicated and unusual, and would plainly require the efforts of a large
group of advisors.” Schaeffler Decl. ¶ 10. Similarly, Dewert states that “[a]lthough U.S. tax and
legal advisers were often engaged to advise Schaeffler on U.S. tax issues, the issues implicated
by the acquisition were of far greater magnitude and significance than typical . . . [and thus] a
significant number of U.S. tax advisers were working to address these issues.” Dewert Decl. ¶ 6.
Additionally, the evidence from Schaeffler in this petition recognizes that, as one of the Bank
Consortium’s attorneys put it, there were a number of “complex” and “novel” federal tax issues
“inherently” implicated in completing these transactions. Land Decl. ¶ 4. Indeed, the
“magnitude of the financial obligations and corporate restructuring” that Schaeffler
contemplated would by itself “require an effort of a very large group of tax advisors to work
through the various issues.” Teitelbaum Decl. ¶ 6. Thus, the complexity of the tax issues
surrounding the relevant transactions engendered the need to hire outside attorneys and advisors
as well as the need to generate the lengthy and detailed analysis contained in the EY Tax Memo.
Furthermore, any sophisticated businessperson engaging in a complex financial transaction will
naturally wish to obtain advice on the relevant tax laws so that the transaction can be structured
29
in such a way as to receive the most favorable tax treatment possible. In other words, even in the
absence of anticipated litigation, a businessperson would likely seek out the sort of tax advice
that Ernst & Young provided to ensure that advantageous tax strategies are employed to their
fullest potential. Accordingly, given our assumption that Schaeffler is a rational businessperson
who routinely makes efforts to comply with the law, we find that, even had he not anticipated an
audit or litigation with the IRS, he still would have had to obtain the type of legal assistance
provided by Ernst & Young to carry out the refinancing and restructuring transactions in an
appropriate manner.
As to whether Ernst & Young’s advice would have been different in content or form had
it known that no audit or litigation would ensue, petitioners have presented no facts suggesting
that Ernst & Young would have acted any differently. To the contrary, as petitioners recognize,
see Letter from M. Todd Welty, dated May 2, 2014 (Docket # 52) (“Welty Letter”), there exists
legal authority demanding that tax practitioners not allow the possibility that a tax return will
remain unaudited to affect the advice they give. Treasury Department Circular 230 states:
In evaluating the significant Federal tax issues addressed in [a tax opinion], the
practitioner must not take into account the possibility that a tax return will not be
audited, that an issue will not be raised on audit, or that an issue will be resolved
through settlement if raised.
Circular 230, § 10.35(c)(3)(iii). Similarly, a Treasury regulation regarding tax shelters states that
in reaching conclusions regarding whether a particular tax position would more likely than not
be sustained on its merits,
the possibility that the position will not be challenged by the Internal Revenue
Service (IRS) (for example, because the taxpayer’s return may not be audited or
because the issue may not be raised on audit) is not to be taken into account.
26 C.F.R. § 1.6694-2(b). In other words, when tax practitioners give advice to clients, they must
30
ignore the actual possibility of an audit — and, by extension, litigation — in opining on the tax
implications of a transaction. Thus, when providing legal advice on the tax treatment of the
restructuring and refinancing transactions, the Ernst & Young advisors had a responsibility to
consider in full the relevant legal issues regardless of whether they anticipated an audit and
ensuing litigation with the IRS.
It is of no significance that the EY Tax Memo may be characterized as providing an
“opinion of the risks and probable outcome of litigation or other adversarial proceedings against
the IRS in relation to the 2009 and 2010 refinancing and reorganization.” Teitelbaum Decl. ¶ 23.
It is a truism that the way in which attorneys give advice regarding the legality of proposed
actions is to consider the governing legal authorities and to analyze those authorities in the
context of how they would be considered by a court hearing a hypothetical dispute. Indeed, the
American Institute for Certified Public Accountants Statements on Standards for Tax Services
No. 1 — an authority relied upon by petitioners, see Welty Letter at 1 — states that “[a] member
should not recommend a tax return position or prepare or sign a tax return taking a position
unless the member has a good-faith belief that the position has at least a realistic possibility of
being sustained administratively or judicially on its merits if challenged.” Tax Return Positions,
Statements on Standards for Tax Services No. 1, § 5(a) (Am. Inst. of Certified Pub. Accountants
2009). Petitioners themselves note that tax advisors must base their advice on some “realistic
possibility that the position would be sustained on its merits.” Welty Letter at 1.
Therefore, the fact that the EY Tax Memo weighs the chances of success in court for
certain tax positions does not indicate that the document would have been created differently
absent the anticipated litigation. Ernst & Young had an independent responsibility to engage in
such legal analysis in order to advise Schaeffler on what transactional steps he should take. In
31
other words, to give proper advice about the tax implications of the transactions, Ernst & Young
necessarily had to posit what the IRS might argue in the context of litigation and to make
judgments about who would win or lose on an issue if it were decided in a court. Thus, it is not
surprising that the EY Tax Memo contains phrases such as “the [IRS] may argue that” or “if the
IRS were to assert.” See id. at 4. But the mere fact that such phrases are used in a document
does not mean that the same document would not have been created absent the anticipation of
litigation. The Court has examined language of this type as used in the EY Tax Memo and has
found no instance in which such phrases indicate that the authors are describing any particular
anticipated litigation. Rather, these phrases are used in the same manner as they would be used
in any memorandum rendering legal advice.
Thus, we conclude that had Schaeffler’s tax advisors been asked to opine on the legal
implications of the transactions with the knowledge that an audit or litigation would not occur,
they “would have” used the same methodology to render tax advice: that is, a close analysis of
the relevant legal authorities to determine how various tax positions would be tested in the
crucible of litigation.
For these reasons, we find that the EY Tax Memo, as well as the related responsive
documents, would have been produced in the same form irrespective of any concern about
litigation. Accordingly, these documents are not protected from disclosure under the work
product doctrine.
32
III.
CONCLUSION
For the foregoing reasons, we deny the petition to quash.4
SO ORDERED.
Dated: May 28, 2014
New York, New York
______________________________
GABRIEL W. GORENSTEIN
United States Magistrate Judge
4
Petitioners have sent a letter to the Court requesting a “hearing” on their petition, citing
as authority 26 U.S.C. § 7604. See Letter Request for Hearing, dated Apr. 22, 2014 (Docket
# 46). That request is denied because this action is not a petition to enforce a summons, which is
governed by 26 U.S.C. § 7604. Rather, it is a petition to quash, which is governed by a different
provision, 26 U.S.C. § 7609(b)(2), as petitioners’ own pleading recognizes. See Am. Pet. ¶ 5. In
any event, petitioners have not made any showing suggesting that a hearing is required. See U.S.
v. Noall, 587 F.2d 123, 127 (2d Cir. 1978) (hearing under section 7604 not required where
taxpayer “could have proffered appropriate affidavits”); U.S. v. Morgan Guaranty Trust Co., 572
F.2d 36, 42 (2d Cir. 1978) (no hearing required where “petitioners made no showing sufficient to
call for an evidentiary hearing”); see also U.S. v. Tiffany Fine Arts, Inc., 718 F.2d 7, 14 (2d Cir.
1983) (“Unless a taxpayer opposing enforcement of a summons makes a substantial preliminary
showing of an alleged abuse, neither an evidentiary hearing nor limited discovery need be
ordered by the district court.”) (citation and internal quotation marks omitted).
33
III.
CONCLUSION
For the foregoing reasons, we deny the petition to quash.4
SO ORDERED.
Dated: May 28, 2014
New York, New York
4 Petitioners have sent a letter to the Court requesting a "hearing" on their petition, citing
as authority 26 U.S.C. § 7604. See Letter Request for Hearing, dated Apr. 22, 2014 (Docket
# 46). That request is denied because this action is not a petition to enforce a summons, which is
governed by 26 U.S.C. § 7604. Rather, it is a petition to quash, which is governed by a different
provision, 26 U.S.c. § 7609(b)(2), as petitioners' own pleading recognizes. See Am. Pet. ~ 5. In
any event, petitioners have not made any showing suggesting that a hearing is required. See U.S.
v. NoaH, 587 F.2d 123, 127 (2d Cir. 1978) (hearing under section 7604 not required where
taxpayer "could have proffered appropriate affidavits"); U.S. v. Morgan Guaranty Trust Co., 572
F.2d 36, 42 (2d Cir. 1978) (no hearing required where "petitioners made no showing sufficient to
call for an evidentiary hearing"); see also U.S. v. Tiffany Fine Arts, Inc., 718 F.2d 7, 14 (2d Cir.
1983) ("Unless a taxpayer opposing enforcement ofa summons makes a substantial preliminary
showing of an alleged abuse, neither an evidentiary hearing nor limited discovery need be
ordered by the district court.") (citation and internal quotation marks omitted).
33
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