The Accountant–Client Privilege in MDL Proceedings

There is no federal common-law accountant–client privilege. Couch v. United States, 409 U.S. 322 (1973). Some, but not all, states recognize an accountant–client privilege, but the privilege’s scope and application vary.

In diversity-jurisdiction actions, federal courts apply the privilege law as dictated by the conflict-of-laws rules of the forum state. For an example of how these issues become tangled, see my post discussing a federal court aaccountantpplying Georgia’s accountant–client privilege to a Texas party and his North Carolina-based accountant.

Matters become even trickier when the Judicial Panel on Multidistrict Litigation consolidates several federal-court cases into a single MDL court. Convoluted choice-of-law issues arise, particularly regarding application of state-created evidentiary privileges.

Kelly J. Balkin identifies and discusses these complicated issues in her excellent law-review article, The Accountant–Client Privilege in Multidistrict Litigation: An Efficient Federal Common Law Solution, 69 U. Miami L. Rev. 833 (2015). In this article, available here , Ms. Balkin summarizes in a straight-forward manner the state and federal conflict-of-laws issues with respect to evidentiary privileges, and then proposes that MDL courts apply a blanket accountant–client privilege in MDL proceedings where at least one party had relied on the privilege in its accountant dealings.

This article is worth reading for understanding the federal and state conflict-of-laws rules in applying evidentiary privileges in general, as well as for those litigants confronting trouble applying a state-law privilege when a MDL court assumes control of multiple, related actions. And you will also find helpful another article, cited by Ms. Balkin, titled The Application of Conflict of Laws to Evidentiary Privileges, and available here.

My thanks to Kelly Balkin and The University of Miami Law Review for permission to re-publish this first-rate article in this post.

Lack of Privilege Log Waives Accountant–Client Privilege 1

A Tennessee federal court ruled that a defendant’s failure to provide a privilege log waived its state-law accountant–client privilege.  In this diversity case, the court ruled that the procedural privilege-log rule governs waiver even though the defendant asserted a substantive state-law privilege.  Etheredge v. Etheredge, 2013 WL 4084642 (M.D. Tenn. Aug. 12, 2013).

The Etheredge case involved a minority shareholder asserting various state-law claims pertaining to the corporation’s financial mismanagement.  The minority shareholder subpoenaed Slide1records from the corporation’s accountants, but the corporate defendant filed a motion to quash, claiming that Tennessee’s accountant–client privilege, Tenn. Code Ann. § 62-1-116, barred production.

But the corporate defendant did not complete and serve a privilege log with the motion to quash.  The court held that FRCP 26(b)(5)(A)(ii) requires a party objecting to discovery to provide a privilege log to permit the opposing party—and the court—to determine the appropriateness of the privilege claim.  And, here, the corporate defendant did not provide a privilege log.

The Court ruled that the corporation’s failure to provide a privilege log with its motion to quash equaled a failure to comply with Rule 26(b)(5)(A)(ii).  And the failure to provide a privilege log constituted a waiver of its privilege objections, including the state-law accountant–client privilege.  The Court denied the motion to quash and ordered the accountant’s documents produced.

PoP Analysis.  The Etheredge decision represents another situation where the failure to provide a privilege log—or an adequate privilege log—resulted in privilege waiver.  The case raises a few interesting points.  First, the court ruled that failure to comply with Rule 26(b)(5)(A)(ii) results in automatic waiver rather than providing the corporate defendant with an opportunity to cure the deficiency.  Some courts provide parties with a second chance, particularly when a privilege log is simply inadequate rather than non-existent; the Etheredge case provided no second chance.  Second, this case involved a subpoena to a third party rather than a party-to-party document request, which shows that courts will impose the privilege log requirement to parties asserting privilege objections to a subpoena.  See FRCP 45(d)(2)(A)(ii).  And third, the case shows that federal procedure rules will control privilege waiver even where state substantive privilege law provides the rule of decision.

For an analysis of properly meeting the privilege log requirements, see my article, Ignoring Privilege Log Obligations May Prove Costly, accessible here.

Georgia on My Mind. Court Applies Georgia’s Accountant-Client Privilege to Texas Accountant and his North Carolina Client 2

A Georgia federal court, sitting in diversity, applied Georgia’s accountant-client privilege to documents exchanged between a Texas accountant and his North Carolina client.  Slide1The documents would not have been privileged under Texas or North Carolina law because neither state has an accountant-client privilege.  But the federal court applied the forum (Georgia) state’s privilege law with little meaningful conflict of law analysis, resulting in a potential windfall for the North Carolina plaintiff and hardship on the Georgia defendant.  Christenbury v. Locke Lord Bissell & Liddell, LLP, 285 F.R.D. 675 (N.D. Ga. 2012).

Georgia by way of North Carolina and Texas

The Christenbury case involves a professional negligence claim against an Atlanta attorney regarding tax advice provided to a North Carolina client.  The attorney moved for production of documents exchanged between the client and his Texas accountant, whom the client retained post transaction to assist in tax-return preparation.  The North Carolina client argued that Georgia’s accountant-client privilege statute protected the documents from discovery, while the defendant attorney argued that Georgia’s privilege law did not apply because the client’s communications with his accountant occurred entirely outside of Georgia.

Georgia on the Court’s Mind

The all-time great hit, Georgia on My Mind, popularized by Ray Charles, contains these lyrics:

Other arms reach out to me
Other eyes smile tenderly
Still in peaceful
dreams I see
The road leads back to you

Perhaps the Court had this tune in mind when it ruled that Georgia’s accountant-client privilege applied to the North Carolina client’s communications with his Texas accountant.  The court reviewed Georgia’s privilege, contained in a state statute, and noted that it contained no geographic boundaries.  And the court found that Georgia’s public policy of protecting communications between an accountant and her client conflicts with Texas and North Carolina’s failure to recognize the privilege. And finally, the court relied upon a Maryland federal court’s decision to apply Maryland’s accountant-client privilege to a New York accountant and his New York client. Hare v. Family Publications Serv., Inc., 334 F. Supp. 953 (D. Md. 1971).

PoP Analysis

This case highlights the important conflict of privilege law analysis that many lawyers and courts choose to ignore.  This conflict issue appears to be a matter of first impression in Georgia; and while the court may have correctly predicted Georgia law, one may question the court’s analysis in reaching this decision.  Did this client, residing in a state (North Carolina) that does not recogize the accountant-client privilege, expect that his communications with an accountant residing in another state (Texas) does that also not recognize the privilege were privileged? Hard to believe that was a legitimate expectation.

The court, sitting in diversity, properly applied Georgia law to this question, but this application of law must include Georgia’s conflict of laws rules.  The court failed to discuss whether Georgia’s conflict of laws rules warranted application of the forum law from the old territorial approach of the First Restatement of Conflicts of Laws, or whether Georgia’s conflict of privilege laws embraced the most significant relationship test outlined in the Second Restatement.  Georgia recently rejected the Second Restatement‘s choice of law analysis in the torts arena, see Dowis v. Mud Slingers, 621 S.E.2d 413 (Ga. 2005), and perhaps this decision would have persuaded the court to predict that Georgia courts would do the same in the privilege arena.  But the analysis was never performed.

One may also question the court’s reliance upon the Maryland federal-court decision’s in Hare.  The court stated that Georgia courts find persuasive federal courts’ decisions interpreting federal civil rules.  But evidentiary privileges are substantive, not procedural, law and are controlled at the federal level by federal common law under Fed. R. Evid. 501 rather than the federal rules of civil procedure.  Moreover, the Hare court, sitting in diversity, applied state law rather than federal.

In sum, perhaps a Georgia court would take the territorial approach and apply its own accountant-client privilege to communications between out-of-state accountants and their clients, but the Christenbury court’s analysis in reaching this decision may be questioned.  For a detailed analysis of how conflict of laws rules apply to evidentiary privileges, check out my chapter in Evidentiary Privileges for Corporate Counsel.  And in the meantime, enjoy classic Ray Charles’s rendition of Georgia on my Mind.