United States v. Chen

Brief Fact Summary.

Chen (Defendant), an importer of goods from Asia, was accused of tax fraud through his corporation Sunrider Corporation and TF Chen Products, Inc.  The Government (Plaintiff) sought to prosecute Defendant using information and affidavits provided by Defendant’s sister and former Sunrider comptroller.  The Plaintiff also sought the testimony of Defendant’s attorneys based on the crime-fraud exception to the attorney-client privilege

Synopsis of Rule of Law.

The crime-fraud exception applies to the attorney-client privilege even where no wrongdoing or guilty knowledge exists on the part of the attorney

Facts.

Chen (Defendant) owns Sunrider Corporation and operates TF Chen Products, Inc., a Sunrider subsidiary.  Sunrider imported goods from Asia and paid tariffs on the actual cost of the goods.  Sunrider’s comptroller, Jau Hwa (Chen’s sister), then prepared false invoices on a Hong Kong affiliate’s letterhead showing the goods costing considerably more than they actually did.  Sunrider paid income tax on the profit, which was the difference between the sale price of the goods and the fake costs.  Defendant became concerned that the Internal Revenue Service (IRS) and U.S. Customs would communicate and learn about the difference in the cost of the goods shown on the tariff invoices versus the fake invoices.  Customs allows importers to disclose underpaid tariffs without penalty or interest before Custom learns independently of the underpayments.  Chen (Defendant) consulted his attorneys who advised him to file a Customs disclosure.  This disclosure was actually fraudulent because Sunrider was not underpaying the tariffs, but instead, was not paying appropriate income tax.  The attorneys were unaware of the alleged income tax evasion scheme.  Jau Hwa left Sunrider and provided the Government (Plaintiff) with various incriminating documents.  She also informed the authorities about the alleged tax evasion scheme.  The Plaintiff indicted Defendant for conspiracy, tax evasion, and other crimes.  The Plaintiff subpoenaed Defendant’s attorneys to testify about the disclosure statement and their knowledge of the fraudulent scheme, but the attorneys moved to quash based on attorney-client privilege.  The trial judge denied the motion based on the crime-fraud exception to the attorney-client privilege, even though the judge found no evidence the attorneys were aware of the alleged scheme, as long as the testimony was limited.  The attorneys appealed

Issue.

Does the crime-fraud exception apply to the attorney-client privilege even where no wrongdoing or guilty knowledge exists on the part of the attorney?

Held.

(Kleinfeld, J.)  Yes.  The crime-fraud exception applies to the attorney-client privilege even where no wrongdoing or guilty knowledge exists on the part of the attorney.  Clients will be afraid to tell their attorneys about all of their actions if the attorneys can be forced to inform the government.  The attorney-client privilege is crucial to full representation.  That privilege cannot, however, protect clients from ongoing or future criminal conduct.  The Government (Plaintiff) here argues the privilege does not apply when the attorneys are acting as “spokespersons†for a company, Sunrider, rather than legal advisors.  The attorneys here were not spokespersons such as when the attorney does not provide legal advice, but the rebuttable presumption exists when the attorney is retained to provide legal advice.  In this case, Defendant retained the attorneys to provide advice about the Customs disclosure.  In addition, contrary to the Plaintiff’s argument, Hwa did not have authority to waive the attorney-client privilege held by Sunrider because she was a former employee and was not given authority by any current officers or management.  The Plaintiff then has to demonstrate the crime-fraud exception applies without Hwa’s information or affidavit.  The Plaintiff must show a factual basis to support a good-faith belief that an in camera review of the evidence will show that the crime-fraud exception applies.  Then the judge may accept in camera review.  The Plaintiff skipped these steps and submitted Hwa’s evidence to the judge.  However, even without Hwa’s evidence, the Plaintiff can make out a prima facie case that the crime-fraud exception applies.  The facts outside of Hwa’s disclosure of confidential information would lead a reasonable person to believe Defendant may have sought legal counsel to further a crime.  The attorneys in this case were innocent of the tax evasion scheme and had no knowledge of wrongdoing, however, the client knew and the attorney-client privilege is the client’s.  The client waived the privilege.  Affirmed

Discussion.

The client has the right to affirm or waive the attorney-client privilege.  When a client engages in wrongful or deceitful behavior, he has implicitly waived that trust relationship with the attorney.  In the same way when a client threatens harm to a third party, a deceitful client has waived the right to further confidentiality.  The attorney may not have an affirmative duty to inform authorities as in the threat of a harm situation, but the attorneys cannot withhold the criminal information based on the privilege when learning of the client’s wrongdoing.