Are Client Files in the Possession of Asset Protection Planning Lawyers Subject to Discovery?

Clients visit Michigan asset protection planning attorneys for a variety of reasons. Some have no creditor issues whatsoever but wish to be prophylactic regarding future unknown creditors. Others are enmeshed in severe financial distress and are desperate to find ways to salvage assets. Most of my clients are honest and reputable persons with legitimate legal inquiries. However, on occasion, a crook will show up seeking information regarding not only how to shield assets from creditors but how to hide assets. Regardless of the circumstances, the client expects that communications between client and attorney will be confidential and protected from forced disclosure. Indeed, the attorney-client privilege is one of the oldest of the privileges for confidential communications.

If a third party seeks to obtain client documents in the possession of the attorney or to force the attorney to testify about the client, the client has the right to invoke the privilege. However there is an exception to the attorney-client privilege commonly referred to as the “crime-fraud exception.” For the crime-fraud exception to apply the third party must show that the attorney’s services were utilized in the furtherance of a crime or fraud.

It is therefore not surprising that asset protection lawyer Martin S. Finn, an attorney and CPA with the law firm of Lavell & Finn, received a subpoena from the SEC seeking the files of David Smith and his wife, Lynn, alleged perpetrators of a massive Ponzi scheme. The SEC alleged that the consultations with Finn were in furtherance of their scheme to fraudulently move assets out of the reach of creditors. In response to the Smith’s invoking attorney client privilege the SEC countered with the crime fraud exception. The matter is currently under review.

Recently an assignee for the benefit of creditors sought the records of a client of my law firm claiming that the crime-fraud exception applied. Without any facts to justify it the assignee claimed that this firm assisted the client in concealing or hiding assets. When the matter was argued before the bankruptcy court, the judge was not persuaded that the assignee had made the required showing that the firm had been used for the commission of crime. The judge denied the assignee’s request.

Several things are clear. If there is no element of a crime having taken place, the attorney client privilege is fully intact. If the client has committed a crime which is related to the information sought the third party may be able to access the information under the crime fraud exception provided it can demonstrate that the client consulted the attorney for advice that would assist the client in the commission of a crime or fraud. By the way, the lawyer may be totally clueless about the client’s intentions. Giving legitimate business advice is perfectly permissible and expected; the use of that advice by the client to perpetrate a crime is a whole other matter.

ADVICE TO ASSET PROTECTION LAWYERS: BE SURE TO ADVISE YOUR NEW CLIENT THAT IF THE ADVICE YOU PROVIDE IS UTILIZED BY THE CLIENT IN THE COMMISSION OF A FRAUD OR CRIME, THE ATTORNEY-CLIENT PRIVILEGE MAY NOT BE AVAILABLE TO PROTECT YOUR COMMUNICATIONS.