Carlos J. Cuevas
Carlos J. Cuevas ()

Fraudulent conveyance litigation is an important component of bankruptcy. An unscrupulous debtor might attempt to shield his or her assets by engaging in an intentional fraudulent conveyance. An intentional fraudulent conveyance is defined as a transfer made by a debtor, whether voluntarily or involuntarily, made with actual intent to hinder, delay, or defraud any present or future creditors. See 11 U.S.C. §548(a)(1); N.Y. Debt. Cred. Law §276.

An important issue that arises in intentional fraudulent conveyance litigation is the application of the crime-fraud exception to the attorney-client privilege. A client might structure an intentional fraudulent conveyance in such a manner that he or she needs the assistance of an attorney to effectuate the intentional fraudulent conveyance because a component of the intentional fraudulent conveyance might relate to the commencement of a legal proceeding, the preparation of a trust or the preparation of a transaction. The attorney might not be aware of the client’s intentional fraudulent conveyance because the client has concealed his or her true intent on retaining the attorney’s legal services. Ordinarily a bankruptcy trustee is not entitled to delve into communications between a debtor and his or her attorney because of the attorney-client privilege. However, as set forth herein, the crime-fraud exception to the attorney-client privilege provides a basis for a bankruptcy trustee to examine counsel for a debtor who has provided legal services related to the effectuation of an intentional fraudulent conveyance.

The attorney-client privilege safeguards confidential communications between attorneys and their clients. In re Asia Global Crossing, 322 B.R. 247, 255 (Bankr. S.D.N.Y. 2005).

The attorney-client privilege is intended to encourage clients to be forthcoming and candid with their attorneys so that the attorney is sufficiently well-informed to provide sound legal advice. Enron Broadband Services, L.P. v. Travelers Casualty and Surety Company of America (In re Enron), 349 B.R. 115, 126 (Bankr. S.D.N.Y. 2006). The attorney-client privilege can be asserted in discovery in bankruptcy cases whether in the context of a deposition or pursuant to a Federal Rule of Bankruptcy Procedure 2004 examination. In re Bakalis, 199 B.R. 443, 447-48 (Bankr. E.D.N.Y. 1996); Fed. R. Evid. 501.

An exception to the attorney-client privilege is the crime-fraud exception to the attorney-client privilege. Neither the attorney-client privilege nor the attorney work-product doctrine protect communications made in furtherance of a crime or fraud. See In re Grand Jury Subpoena Duces Tecum Dated Sept. 15, 1983, 731 F.2d 1032, 1038 (2d Cir. 1984). The following comments have been made concerning crime-fraud exception to the attorney-client privilege:

“A party wishing to invoke the crime-fraud exception must demonstrate that there is a factual basis for a showing of probable cause to believe that a fraud or crime has been committed and that the communications in question were in furtherance of the fraud or crime.” United States v. Jacobs, 117 F.3d 82, 87 (2d Cir. 1997). “First, the proposed factual basis must strike ‘a prudent person’ as constituting ‘a reasonable basis to suspect the perpetration or attempted perpetration of a crime or fraud, and that the communications were in furtherance thereof.’” Id. (quoting In re John Doe, 13 F.3d 633, 637 (2d Cir. 1994)). It is not sufficient to show that the privileged material “might provide evidence of a crime or fraud.” In re Richard Roe, Inc. 168 F.3d 69, 71 (2d Cir. 1999). Rather, the communication itself must have been in furtherance of a fraud or crime and must have been intended to facilitate the fraud or crime. Jacobs, 117 F.3d at 88 (quoting United States v. White, 887 F.2d 267, 271 (D.C. Cir. 1989) (Ruth Bader Ginsburg, J.)). It is not necessary to show that the attorney was aware of the improper purpose. In re Grand Jury, 731 F.2d 1032, 1038 (2d Cir. 1984).

Shahinian v. Tankian, 242 F.R.D. 255, 258 (S.D.N.Y. 2007).

The crime-fraud exception requires a demonstration by the party invoking it sufficient to establish that a prudent person would have a reasonable basis to suspect the perpetration or attempted perpetration of a crime or fraud, and that the communications were in furtherance of the crime or fraud. Specialty Minerals v. Pluess-Staufer AG, 220 F.R.D. 41, 42 (S.D.N.Y. 2004).

The crime-fraud exception to the attorney-client privilege is applicable in bankruptcy cases. E.g., Ft. Myers Historic L.P. v. Economou (In re In re Economou), 362 B.R. 893, 897-98 (Bankr. N.D. Ill. 2007); In re Enron, 349 B.R. at 127-29 (Bankr. S.D.N.Y. 2006). The crime-fraud exception to the attorney-client privilege has been applied in bankruptcy cases in the context of intentional fraudulent conveyances. E.g., Riggs National Bank v. Andrews (In re Andrews), 186 B.R. 219 (Bankr. E.D. Va. 1995); In re Warner, 87 B.R. 199 (Bankr. M.D. Fla. 1988).

In In re Cutuli, 2013 WL 5236711 (Bankr. S.D. Fla. 2013) the court held that the crime-fraud exception to the attorney-client privilege was applicable. The court ruled that the lawyer’s services were used during a period relevant to a fraudulent scheme involving the debtor, and it stated:

Whether The Andersen Firm was aware of the reasons the Debtor and Greg Cutuli used their services is not relevant to the application of the crime-fraud exception and this Court makes no finding on that issue. The fact that The Andersen Firm’s services were used during (and prior to) a scheme involving the commission of multiple acts of fraud related to the information obtained through said services is sufficient. Therefore, the Court overrules The Andersen Firm’s objections to the subpoena under the crime-fraud exception to the attorney-client privilege.

Id. at 6.

Similarly, in Anderson v. Vereen (In re Vereen), 1999 WL 33485642 **2-3 (Bankr. D.S.C. 1999) the court held that the crime-fraud exception was applicable in the context of an intentional fraudulent conveyance adversary proceeding, and it stated:

Finally, the attorney-client privilege will not protect communications between the Debtor, the Trust, the Partnership, Five Star and Sutton since such communications involved fraudulent transfers and, therefore, fall within the crime-fraud exception to the attorney-client privilege. This Court in Anderson v. Simchon (In re Southern Textile Knitters), Case No. 98-07203-W, Adversary No. 99-80026 (Bankr. D.S.C. Aug. 3, 1999), recognized that the most well known exception to the attorney-client privilege is the crime-fraud exception. In order to invoke the crime-fraud exception, the trustee must make a prime facie case by demonstrating one or more “badges of fraud is present.” Simchon; In re Andrews, 186 B.R. 219 (Bankr. E.D. Va. 1995).

Id. at *2. The court found that most of the badges of fraud were present:

Here, the Plaintiff has demonstrated not just one, but most of these badges of fraud and has, therefore, made his prima facie case. The following badges of fraud were established by the Debtor’s own testimony at his §341 examination: (1) the Debtor transferred assets to entities he controlled; (2) the Debtor had over $6,000,000.00 in assets before the transfers and only $12,500.00 in assets after the transfers; (3) the Debtor had a positive net worth before the transfers and a negative net worth after the transfers; (4) the Debtor has continued to receive the income from the transferred assets after the transfers; and (5) the transfers were made to protect the Debtor’s assets from the potential judgment in the wrongful death action pending against the Debtor.

Id. at 3.

Another relevant case is In re Campbell, 248 B.R. 435 (Bankr. M.D. Fla. 2000). There, also, the court ruled that the crime-fraud exception applied. The court stated:

Prior to filing for bankruptcy, Debtor made various transfers with Cook and Cook’s firm serving as Debtor’s legal counsel. First Union alleges that through these transfers non-exempt assets were converted to exempt assets with the intent to hinder, delay or defraud First Union. If such intent is found, assets transferred may not be entitled to exempt status.

While the Court makes no findings as to Debtor’s intent at this point, the Court does find that First Union raises sufficient inference that these transfers may have been fraudulent. Debtor’s counsel presented argument in attempt to negate traditional badges of fraud. See Warner, 87 B.R. at 202-03. However, the Court finds First Union’s factual showing sufficient to invoke the crime-fraud exception to the attorney-client privilege. Accordingly, First Union is entitled to production of documents that might evidence a fraudulent scheme. (footnote omitted).

Id. at 440.

The preceding discussion reflects that the party asserting the crime-fraud exception to the attorney-client privilege must prove a prima facie case that an intentional fraudulent conveyance has occurred. The party seeking to invoke the crime-fraud exception to the attorney-client privilege must also establish that there is a nexus between the intentional fraudulent conveyance and legal services provided by the attorney. It is irrelevant that the attorney was unaware that the debtor was attempting to effectuate an intentional fraudulent conveyance. Thus, it is possible for a plaintiff in an intentional fraudulent conveyance adversary proceeding to invoke the crime-fraud exception to the attorney-client privilege.