Lawyer’s Advice on “Exemption Planning” Not Protected by Attorney-Client Privilege, 8th Circuit Appeals Court Says

06 Sep Lawyer’s Advice on “Exemption Planning” Not Protected by Attorney-Client Privilege, 8th Circuit Appeals Court Says

The U.S. Court of Appeals recently held that a bankruptcy attorney could be compelled to testify against his own clients in a case involving the conversion of nonexempt assets into exempt assets, a process commonly known as “exemption planning.” This case, In re Grand Jury Proceedings, 609 F.3d 909 (8th Cir. July 1, 2010), involved both the assertion of the attorney-client privilege and the attorney work product privilege, in an FBIcriminal investigation into whether the debtors had committed bankruptcy fraud.

The debtors G.S. and F.S. were Iowa residents who met with an experienced bankruptcy attorney, J.P., for the purpose of obtainingadvice about filing bankruptcy in 2001. (The parties are identified only by intials in the court’s opinion due to grand jury secrecy rules.) At that time, G.S. and F.S. had substantial nonexempt assets which would have been subject to sale by the bankruptcy trustee to pay their creditors. These assets included household furnishings, jewelry, stock holdings, and $300,000 owed to them for the sale of a business, payable over the next seven years.

The attorney warned his clients in writing about the dangers of entering into sham sales transactions with relatives, by which the items sold before the bankruptcy would be recovered by the debtors from their relatives at the same prices after the bankruptcy was finished. The attorney also warned against selling furniture to G.S.’s father and then keeping the furniture in the debtors’ home, due the unseemly nature of such a transaction. The attorney similarly warned against involving G.S.’s father in a transaction involving a loan in which nonexempt stock would be pledged as collateral. However, the attorney did facilitate this loan from G.S.’s father.

In 2003, about one year after the transactions had been completed, the debtors moved to Florida and filed bankruptcy there with a different attorney. Theyapparently received no further advice or assistance from the Iowa attorney. After the bankruptcy was discharged, the debtors moved back to Iowa and repurchased the assets at the same prices for which the assets had been sold to their relatives.

When the FBI opened its criminal bankruptcy fraud investigation of G.S. and F.S., it sought documents and testimony from the original attorney for use before the federal grand jury. The U.S. district courtruled that neither the attorney-client privilege or the attorney work product privilege applied, and G.S., F.S., and the attorney appealed.

The appeals court agreed with the district court. It held that the crime-fraud exception to the attorney-client privilege allowed the attorney to be questioned about his bankruptcy exemption planning advice to G.S. and F.S. The debtors’ conduct in transferring nearly all their nonexempt property, worth hundreds of thousands of dollars,to a close relative, and then reacquiring it later through possible “secret agreements,” distinguished their conduct from permissible bankruptcy planning. Because this conduct could amount to bankruptcy fraud, the court ruled that the privilege did not apply.

The appeals court further ruled that the original attorney’s work product was not protected by the attorney work product privilege. This was because there was evidence that the attorney knew about the debtors’ plans to commit bankruptcy fraud, andbecause there was probable cause to believe the attorney was complicit in the fraud, based upon his facilitation of the loan from G.S.’s father. The court stated that the attorney “either knew or was wilfully blind to the fact that his clients were entering into sham transactions with relatives so that they could later retrieve their original assets after discharging their debts.”

One of the appeals court judges filed a partial dissent, expressing his view that the attorney had only advised the debtors about routine exemption planning, and that therefore the attorney work product privilege should apply to prevent the attorney from having to testify about his thoughts, opinions, and other aspects of his work product in the case.

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Craig W. Andresen is a consumer bankruptcy lawyer in Bloomington, Minnesota, with 22 years’ experience in consumer and small business bankruptcy cases. He is the Minnesota chair of the National Association of Consumer Bankruptcy Attorneys, and is a member of the Minnesota State Bar Association’s Bankruptcy Section. Mr. Andresen lectures often on the topic of consumer bankruptcy at local and national legal seminars.
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