Opinion ID: 409318
Heading Depth: 1
Heading Rank: 4

Heading: the accountant-client privilege in the federal court

Text: 17 Georgia state courts recognize a broad accountant-client privilege. 14 In this case, we are asked whether a federal bankruptcy court should afford a privilege cloaking the workpapers of a Georgia accountant relating to a Georgia client. 18 Rule 727 of the Rules of Bankruptcy Procedure provides that the Federal Rules of Civil Procedure will govern the scope of discovery in federal bankruptcy proceedings. Rule 26(b)(1) of the Federal Rules of Civil Procedure provides that parties may obtain discovery regarding any matter, not privileged  (emphasis added). The meaning of the term privileged under Rule 26(b) (1) is determined by reference to the Federal Rules of Evidence. 8 C. Wright, A. Miller & F. Elliot, Federal Practice & Procedure § 2016 (Supp.1981). Thus, we must determine whether an accountant's client-related workpapers should be privileged under the terms of the Federal Rules of Evidence. 19 Federal Rule of Evidence 501 sets forth the rules of evidentiary privilege as they are to be applied in federal courts. Rule 501 provides that: 20 (T)he privilege of a witness, person, government, State, or political subdivision thereof shall be governed by the principles of the common law as they may be interpreted by the courts of the United States in the light of reason and experience. However, in civil actions and proceedings, with respect to an element of a claim or defense as to which State law supplies the rule of decision, the privilege of a witness, person, government, State, or political subdivision thereof shall be determined in accordance with State law. 21 Fed.R.Evid. 501. 22 In light of Rule 501, the appellant has advanced a three-tiered argument in support of its claim to an accountant-client privilege. First, the appellant contends that because the allegedly privileged material might be used as an element of proof with respect to an element of a claim as defense as to which State law supplies the rule of decision, Federal Rule of Evidence 501 requires that Georgia's accountant-client privilege be applied. In the alternative, the appellant suggests that even if the federal court is not required to apply the Georgia rule, this Court should recognize the accountant-client privilege as a matter of federal law in the light of reason and experience. Finally, the appellant argues that even if we reject the notion of a federal common law accountant-client privilege, this Court should adopt a rule requiring federal courts to apply their forum states' rules of evidentiary privilege as a matter of comity. We shall address each of these arguments in turn. 23
24 Federal Rule of Evidence 501 provides that federal courts are to apply state rules of evidentiary privilege with respect to an element of a claim or defense as to which State law supplies the rule of decision. Thus, in order to determine whether the requested documents are privileged under Rule 501, we must determine whether the requested documents relate to an element of a claim or defense as to which state law supplies the rule of decision. The District Court held that because the bankruptcy proceeding did not yet involve state claims, the Bankruptcy Court was not required to apply Georgia's accountant-client privilege. We agree. 25 International Horizons asserted a privilege at the very outset of this bankruptcy action. We are told that related adversary proceedings involving parties to this appeal are now pending in various state and federal courts. However, no such claims are currently joined with the bankruptcy actions now before us. At this juncture in the proceedings, the sole questions before the bankruptcy tribunal relate to traditional questions of federal bankruptcy law: Should the debtor be adjudicated bankrupt? What is the current financial condition of the debtor? What are its assets? Where are its assets? Is current management fit to remain in possession and control of the assets? As the District Court recognized, it is not yet clear what claims or defenses might eventually arise in this litigation. Perhaps there will be claims involving questions of state law, 15 perhaps not. However, it is clear at this point that this is a federal law proceeding and that the Bankruptcy Court is not required to apply the Georgia accountant-client privilege. To rule otherwise would be to deny creditors and bankruptcy courts access to the source of information and records most relevant and necessary to their investigation of the acts, conducts, assets, liabilities and financial condition of the debtor. 11 U.S.C. § 1103(c)2. 26
27 Federal Rule of Evidence 501 does not purport to enumerate a finite list of evidentiary privileges that are to be recognized in federal courts. Instead, the rule provides that in federal law proceedings, the privilege of a witness ... shall be governed by the principles of the common law as they may be interpreted by the courts of the United States in the light of reason and experience. Fed.R.Evid. 501. Rule 501 clearly provides federal courts with the statutory power to recognize new or novel evidentiary privileges. 16 However, there has been a notable hostility on the part of the (federal) judiciary to ... new privileges. In re Dinnan, 661 F.2d 426, 430 (5th Cir. 1981). This is because privileges contravene the fundamental principle that the public ... has a right to every man's evidence. Trammel v. United States, 445 U.S. 40, 100 S.Ct. 906, 912, 63 L.Ed.2d 186 (1980). (E)xceptions to the demand for every man's evidence are not lightly created nor expansively construed, for they are in derogation of the search for truth. United States v. Nixon, 418 U.S. 683, 94 S.Ct. 3090, 3108, 41 L.Ed.2d 1039 (1974). Therefore, the rule in this Circuit is that a new privilege should only be recognized where there is a compelling justification. In re Dinnan, 661 F.2d 426, 430 (5th Cir. 1981). 17 28 The Supreme Court has expressly disapproved of the so-called accountant-client privilege, stating that no confidential accountant-client privilege exists under federal law, and no state-created privilege has been recognized in federal cases. Couch v. United States, 409 U.S. 322, 93 S.Ct. 611, 619, 34 L.Ed.2d 548 (1973). Since Couch, the notion that the federal courts should recognize a general accountant-client privilege has been consistently rejected. See, e.g., United States v. El Paso, 682 F.2d 530, 540 (5th Cir. 1982) reh'g en banc denied, 688 F.2d 840; Thompson v. General Nutrition Corp., 671 F.2d 100, 103-104 (3d Cir. 1982); United States v. Davis, 636 F.2d 1028, 1043 (5th Cir. 1981). We find no compelling justification for a departure from these precedents. Accordingly, we conclude that there is no accountant-client privilege as a matter of federal common law. 29 C. Should a Federal Court Apply a Forum State's Rules of Evidentiary Privilege as a Matter of Comity? 30 Because this bankruptcy court action did not yet involve claims or defenses as to which state law supplied the rule of decision, the Bankruptcy Court was not required to apply Georgia's accountant-client privilege. Fed.R.Evid. 501. We have also found that there is no federal common law accountant-client privilege, Couch v. United States, supra. However, International Horizons has made one final argument that should be addressed: the appellant contends that the Bankruptcy Court should have applied Georgia's accountant-client privilege as a matter of comity. Thus, we are asked whether the fact that the courts of (Georgia) would recognize the privilege itself creates good reason for respecting the privilege in federal court, regardless of our independent judgment of its intrinsic desirability. ACLU v. Finch, 638 F.2d 1336, 1343 (5th Cir. 1981). 31 There is indeed authority for the proposition that federal courts should recognize state evidentiary privileges where this can be done at no substantial cost to federal policies. See Lora v. Board of Education, 74 F.R.D. 565, 576 (E.D.N.Y.1977); United States v. King, 73 F.R.D. 103, 105 (S.D.N.Y.1975). Accord, ACLU v. Finch, 638 F.2d 1336, 1342-45 (5th Cir. 1981). 32 We recognize that Georgia's legislature has decided that the accountant-client relationship needs the protection of an evidentiary privilege and that federal refusal to acknowledge this privilege might tend to undermine Georgia's policy of encouraging accountant-client candor. 18 However, recognition of the accountant-client privilege in bankruptcy proceedings would substantially thwart an important federal interest. A creditors committee is empowered by federal law to investigate the acts, conduct, assets, liabilities, and financial condition of the debtor, the operation of the debtor's business and the desirability of the continuance of such business. 11 U.S.C. § 1103(c)2. Application of an accountant-client privilege in federal bankruptcy proceedings would deny courts and creditors access to a vital source of information relating to a debtor's assets and liabilities. Thus, recognition of an accountant-client privilege in federal bankruptcy proceedings would completely undermine the important federal interest in providing bankruptcy courts and creditors with complete and accurate information regarding a debtor's financial condition. 33 It is true that Georgia may find it difficult to foster candor and confidential communications among its accountants and clients if other courts refuse to follow the State's rules of evidentiary privilege. However, Georgia would face this problem even if we were to extend the accountant-client privilege to federal bankruptcy proceedings, for Georgia's rules of evidentiary privilege might not be followed in the courts of neighboring states and will not be followed in federal criminal proceedings. See Fed.R.Evid. 501. 34 Thus, refusal to adopt Georgia's accountant-client privilege in federal bankruptcy proceedings would not, in and of itself undermine the State's policy of encouraging accountant-client candor. However, recognition of the privilege would significantly undermine the important federal interest in assuring complete and accurate disclosure in federal bankruptcy proceedings. Therefore, we must conclude that considerations of comity do not require us to embrace Georgia's accountant-client privilege. ACLU v. Finch, 638 F.2d 1336, 1342 (5th Cir. 1981) (comity does not require federal courts to follow Mississippi rules of evidentiary privilege). 19