2010 Decisions

Opinions of the United

States Court of Appeals

for the Third Circuit

7-1-2010

USA v. Steven Trenk

Precedential or Non-Precedential: Non-Precedential

Docket No. 09-2486

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NOT PRECEDENTIAL

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

 

No. 09-2486

 

UNITED STATES OF AMERICA

v.

STEVEN TRENK, 

President, Gold Crown Insurance Ltd., 

Successor in Interest to Techtron Inc. & Subs.,

Successor in Interest To Techtron Holdings, Inc. & Subs, 

 Appellant

 

APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF NEW JERSEY

(D.C. Civil No. 06-cv-01004)

District Judge: Honorable Mary L. Cooper

 

Submitted Under Third Circuit LAR 34.1(a)

June 30, 2010

 

Before: SLOVITER, BARRY and HARDIMAN, Circuit Judges

(Opinion Filed: July 01, 2010)

 

OPINION

 

BARRY, Circuit Judge

At issue on this appeal is whether the District Court erred in granting the Internal
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Revenue Service’s (the “IRS”) petition to enforce a summons for the production of

certain documents pursuant to the crime-fraud exception to the attorney-client privilege. 

We will remand the matter to the District Court with instructions to provide appellant

Steven Trenk with an opportunity to argue against the application of the crime-fraud

exception.

BACKGROUND

On August 26, 2005, the IRS issued a summons to Trenk, president of Gold Crown

Insurance, Ltd., the corporate successor to TechTron Holdings, Inc. (“TechTron”), in

furtherance of its examination to determine TechTron’s federal income tax liability for

the taxable year ending December 31, 2000. The IRS alleged that TechTron received

$5.2 million in litigation settlement proceeds, which it transferred to a wholly-owned

subsidiary in exchange for a demand note for $5.2 million from the subsidiary. TechTron

then transferred the demand note to an attorney’s trust account, and on its corporate

income tax return “reported the $5.2 million and deducted $5.2 million, effectively

eliminating” that amount from taxable income. (App. at 59.) The IRS claims that this

was an “abusive tax avoidance scheme” that enabled TechTron to avoid paying taxes on

the settlement proceeds while still maintaining control over those funds. (Id. at 78.) The

summons instructed Trenk to appear for a hearing to give testimony and to produce

various documents and data.

On March 3, 2006, the government filed a petition to enforce the summons. In
 We use the same identification letters used before the District Court. 1

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response, Trenk maintained that he was not in possession of any documents responsive to

the summons “with the exception of the [four] documents which are being withheld as

privileged.” (Id. at 120.) He proposed that “the Court review the [four] documents

[being withheld] in camera to determine whether they should be disclosed to the

Government.” (D.N.J. Docket, 06-cv-01004, Doc. No. 9 at 25.) On November 20, 2006,

the District Court enforced the summons. With respect to the four documents withheld

under Trenk’s “blanket assertion” of privilege, App. at 132, it ordered that Trenk “set up

an in camera review of the aforementioned four documents” so that he would be able to

explain ex parte why the documents should not be produced, id. at 132, 147. The Court

added that if he failed to arrange the review, “the opportunity to do so will be deemed

waived, and . . . the Court, on petitioner’s application, will direct that the aforementioned

documents be produced immediately.” (Id. at 147.)

By letter dated December 7, 2006, Trenk’s attorney submitted the four documents

(Documents A-D ) for in camera inspection and referred the District Court to a 1

previously submitted memorandum setting out Trenk’s arguments why the documents

should not be disclosed. On January 22, 2007, the Court granted Trenk’s partial motion

for reconsideration, thereby reversing its previous order enforcing the summons, but the

effect of that ruling on the Court’s earlier instructions to Trenk to arrange for in camera

review of the four documents was unclear. 
 Although it was the District Court’s intention to “address all relevant . . . attorney- 2

client privilege issues” at the hearing, that topic was not explored in detail and the crimefraud exception was not discussed. (App. at 27, 272, 502-05.)

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Trenk never arranged for ex parte review, and he maintains that the District Court

never expected that he do so in light of its action on the motion for reconsideration. In

March and April 2007, the Court scheduled an evidentiary hearing to address whether

Trenk was in possession of relevant documents. After the first day of the hearing, 2

Trenk’s attorney identified seven other “privileged documents which may arguably be

within the scope of the summons,” App. at 554, and asked, by letter dated April 20, that

the Court review these documents (Docs. E-K) “in camera along with the original four

documents,” id. at 555. On February 26, 2009, the Court found that the crime-fraud

exception applied to Documents A through K and ordered Trenk to produce them. 

DISCUSSION

Trenk timely appealed the District Court’s order with respect to the production of

Documents D through K. He argues that he was denied the opportunity to refute the

application of the crime-fraud exception, and that, in any event, the exception should not

be applied to Documents G, H, I and J, which were prepared after the relevant tax return

was filed. 

A. Jurisdiction and Standard of Review

 The District Court had jurisdiction pursuant to 26 U.S.C. § 7604, and our

jurisdiction on appeal is based on 28 U.S.C. § 1291. Our review of the legal issues
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associated with the application of the crime-fraud exception is plenary, and “[o]nce the

court determines there is sufficient evidence of a crime or fraud to waive the attorneyclient privilege, we review its judgment for abuse of discretion.” In re Impounded, 241

F.3d 308, 312, 318 (3d Cir. 2001). 

B. The Crime-Fraud Exception to the Attorney-Client Privilege

The attorney-client privilege protects confidences so as to “encourage full and

frank communication between attorneys and their clients and thereby promote . . . the

observance of law and administration of justice.” United States v. Zolin, 491 U.S. 554,

562 (1989) (quoting Upjohn Co. v. United States, 449 U.S. 383, 389 (1981)). Where the

client abuses the privilege by using the attorney’s counsel to facilitate a future or

continuing crime or fraud, however, “the privilege can be overridden.” In re Grand Jury

Investigation, No. 06-1474, 445 F.3d 266, 274 (3d Cir. 2006). The party seeking to apply

the crime-fraud exception must “make a prima facie showing that (1) the client was

committing or intending to commit a fraud or crime, and (2) the attorney-client

communications were in furtherance of that alleged crime or fraud.” In re Grand Jury

Subpoena, 223 F.3d 213, 217 (3d Cir. 2000) (internal citations omitted). 

In Zolin, the Supreme Court held that district courts could “conduct an in camera

review of allegedly privileged communications to determine whether those

communications fall within the crime-fraud exception.” 491 U.S. at 565. It explained

that before doing so, “the judge should require a showing of a factual basis adequate to
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support a good faith belief . . . that in camera review of the materials may reveal evidence

to establish . . . that the crime-fraud exception applies.” Id. at 572 (internal quotations

and citation omitted). This is not an issue where – as in Trenk’s case – the party invoking

the privilege freely submits the documents for in camera review. 

We have subsequently explained, however, that whether to apply the crime-fraud

exception is a separate, more demanding undertaking: “If the party seeking to apply the

exception has made its initial showing, then a more formal procedure is required than that

entitling plaintiff to in camera review.” Haines v. Liggett Group Inc., 975 F.2d 81, 96-97

(3d Cir. 1992). In terms of process, this means that “where a fact finder undertakes to

weigh evidence in a proceeding seeking an exception to the privilege, the party invoking

the privilege has the absolute right to be heard by testimony and argument.” Id. at 97. 

C. The Lack of Hearing

Trenk argues that the District Court erred by not providing him with an

opportunity to address the crime-fraud exception, which the Court applied, without

notice, in its February 26, 2009 order. We agree that although the documents were

properly before the Court for in camera inspection, the Court should not have applied an

exception that “break[s] the seal of a highly protected privilege” without first notifying

Trenk and providing him with an opportunity for argument. See id. at 96.

At first blush, it is tempting to conclude that Trenk had his chance for argument

but waived it. In its November 20, 2006 order, the District Court provided Trenk the
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opportunity to argue ex parte at an in camera hearing why the documents should be

protected from disclosure. It explained that if Trenk did not arrange for in camera

review, the chance to do so would be waived and he would be ordered to produce the

documents. Trenk submitted Documents A through D by letter for the Court to review,

and nothing more. He later sent a second letter, explaining that he found additional

responsive documents, Documents E through K, which he asked that the Court review “in

camera along with the original four documents.” (App. at 555.) 

It is not sufficiently clear from the record before us, however, that Trenk had the

opportunity to appear before the District Court ex parte to argue for his position. In

granting Trenk’s partial motion for reconsideration on January 22, 2007, the Court –

reasonably so – appears to have abandoned its initial plan to use in camera review to

decide whether the documents should be produced and, instead, elected to defer ruling on

the issue until after an evidentiary hearing. But the subsequent hearing that took place

was primarily for “the limited purpose of allowing the Court to . . . make an express

determination on whether Trenk was in possession or control of the requested

documents.” (Id. at 27.) The Court then, in its February 26, 2009 order, applied the

crime-fraud exception without having heard from Trenk on the subject. In doing so, “the

party invoking the [attorney-client] privilege,” was denied his “absolute right to be heard

by testimony and argument.” See Haines, 975 F.2d at 97. Although it was assuredly

unintended, this outcome is troubling when dealing, as we are, with an “ancient and
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valuable privilege.” United States v. Doe, 429 F.3d 450, 453 (3d Cir. 2005).

One further point is worth mentioning. It is abundantly clear that between the time

when the District Court first instructed Trenk to arrange for in camera review in its

November 20, 2006 order and when it partially vacated that order on January 22, 2007,

Trenk expected that – even if it were granted – his motion for reconsideration would have

no impact on the Court’s November 20 instructions. His December 7, 2006 letter asking

the Court to review Documents A through D states that “[t]he outcome of the

[reconsideration] motion will have no effect on whether the allegedly privileged

documents should be produced.” (App. at 536.) Rather than arrange to be present for an

in camera review, he quite literally “mailed it in.” It is unclear, however, whether the

Court was under the same impression about the impact of his motion, explaining at a

hearing on March 27, 2007 that “the motion for reconsideration overshadowed” the

privilege dispute and so it “didn’t make the [in camera] review.” (Id. at 272.) Thus, on

this record, we cannot say that Trenk was given the opportunity required by Haines to

argue against the application of the crime-fraud exception. Although the practice of

making documents available for in camera inspection “is well established in the federal

courts,” Zolin, 491 U.S. at 569, it does not deprive the party invoking the privilege of the

opportunity to contest the application of the crime-fraud exception, Haines, 975 F.3d at
 The government claims that Trenk failed to show that the documents at issue are 3

privileged. The District Court initially ruled on the crime-fraud exception without

developing this issue, and so we are unable to consider it on appeal. 

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96-97; see In re Grand Jury Subpoena, 223 F.3d at 218. 

3

D. The Documents Prepared After Filing

Trenk argues that the crime-fraud exception should not apply to those documents –

G, H, I, and J – that were prepared after the relevant tax return was filed, because tax

violations are completed when the contested tax return is filed. The District Court

rejected this argument, finding instead that the alleged fraud was in seeking to avoid

taxation of the settlement not just during the 2000 tax year, but also “in each subsequent

year.” (App. at 30.) In its view, “the fraud alleged . . . is ongoing so long as [TechTron]

avoids paying taxes on the income.” (Id.) We agree; indeed, there is little value in filing

a fraudulent tax return if the impropriety will be disclosed shortly thereafter. We also

agree that the cases Trenk cites – United States v. Habig, 390 U.S. 222 (1968) and

Sansone v. United States, 380 U.S. 343 (1965) – are distinguishable. In those cases, the

asserted wrongdoing was filing the fraudulent tax returns; however, it is TechTron’s

allegedly on-going efforts to eliminate the litigation settlement from taxable income that

are at issue here. To the extent that the Court, on remand, determines that the crime-fraud

exception applies, Documents G, H, I, and J would not be protected based on the date of

their preparation.
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CONCLUSION

For the reasons above, we will remand this matter to the District Court so that

Trenk may have an opportunity to present arguments against the application of the crimefraud exception to Documents D through K.