Court Rejects Privilege for “Reserve Amount” Set by In-House Claims Counsel

If an insurance company may have to pay a claim, it typically sets aside a sum of money—the reserve—to fund that claim if and when payment becomes necessary. And if the company’s in-house claims counsel decides the reserve amount, the question arises whether the attorney–client privilege or work-product doctrine protects that decision from discovery.

The Arizona federal court, applying federal law, rejected a surety company’s privilege and work-product arguments, and ordered it to disclose its reserve amount to its adversary. The court made this ruling even though the company’s Senior Claims Counsel “solely” set the amount “in his capacity as legal counsel.” Western Surety Co. v. United States, 2018 WL 6788665 (D. Ariz. Dec. 26, 2018). You may read the decision here. More…

Deck the Halls with Boughs of Kovel 1

Over the last quarter of 2018 and leading into this holiday season, several courts have issued decisions applying the Kovel Doctrine in a variety of settings. So, this seems like an excellent time to review the doctrine, explain it, and see how courts have recently applied it, including in settings involving adult children, public-relations consultants, investment bankers, and accountants.

What is the Kovel Doctrine?

Louis Kovel was, as we Southerners would say, a revenuer. He worked as an IRS agent but, in 1943, became employed as an accountant with Kamerman & Kamerman, a NY tax law firm. When a federal grand jury began investigating a man named Hopps for tax improprieties, Hopps sought counsel from the Kamerman firm, and specifically met with the non-lawyer, former revenuer Kovel.

Kovel was later subpoenaed to provide grand-jury testimony against Hopps, but refused to answer any questions on grounds that the attorney–client privilege protected his discussions  with Hopps.  Remember, there is no federal accountant–client privilege, so the attorney–client privilege was his only avenue for relief.

The district judge bluntly rejected Kovel’s privilege argument, omnisciently stating:

  “You don’t have to give me authority on [the privilege]”;

  “I’m not going to listen” to Kovel; and

   “There is no privilege to this man at all.”

And when Kovel refused the judge’s order to disclose his communications with Hopps, the judge held him in criminal contempt and sentenced him to a year in jail.

Poor Kovel.

The judge let Kovel out of jail after 4 days so that he could appeal to the Second Circuit, and so he did. Legendary judge Henry J. Friendly authored what became the seminal decision on More…

Well, That Backfired. A Privilege-Waiver Tale for Internal Investigations and In-House Counsel

We know that typically a company waives the privilege covering an internal-investigation memo if it discloses that memo to a government agency.  One company nevertheless wanted it both ways, so it created a second memo summarizing (the favorable) part of an in-house lawyer’s privileged internal-investigation memo, and disclosed the second memo to the feds.  Did this circumnavigation attempt avoid privilege waiver for the internal-investigation memo?

A Missouri federal court found that disclosing the second memo waived the privilege over the in-house lawyer’s memo, and ordered partial disclosure.  Sherman v. Berkadia Commercial Mortgage, LLC, 2018 WL 4300322 (E.D. Mo. Sept. 10, 2018).  You may read the opinion here.

Read This One, Not That One

When an allegation arose that Berkadia falsely certified to HUD that it complied with all HUD regulations, Berkadia retained outside counsel to conduct an internal investigation.  Based on outside counsel’s employee interviews, Berkadia’s in-house counsel drafted a memo about the investigation and underlying events.

Berkadia then prepared a second memo that summarized outside counsel’s investigation. This second memo discusssed some—but not all—details of the investigation findings, and Berkadia decided to disclose this second memo to HUD.

But I Want to Read That One

In an employee’s anti-retaliation lawsuit under the False Claims Act, the employee claimed that Berkadia’s disclosure of the second memo actually waived the privilege over the in-house lawyer’s memo summarizing the internal investigation.  He wanted the privileged memorandum to show that Berkadia had information contradicting its HUD disclosures.

Ruling—The Fairness Doctrine

The court read the in-house lawyer’s memo in camera, and agreed that it met the privilege elements: it contained communications between Berkadia’s in-house lawyer and employees, and was marked “confidential” and “subject to attorney-client privilege.”

The court referenced the at-issue waiver doctrine, which holds that one waives the privilege when it places the subject matter of the privileged communications at issue in the lawsuit.  A “closely related” concept is the fairness doctrine, which states that “a party should not be able to make use of privileged information as a sword when it is advantageous for the privilege holder[,] and then as a shield.”

The court applied this fairness doctrine to thwart Berkadia’s attempt to use the HUD-produced memo but withhold the in-house lawyer’s memo—from which the HUD memo derived—from the employee.  The court found that Berkadia waived the privilege over the in-house lawyer’s memo, and ordered the company to produce the sections that disclosed interviews with Berkadia’s employees.

PoP Analysis

While the company appropriately handled the in-house lawyer’s memo from a privilege perspective, its attempt to “disclose the memo without disclosing it” backfired.  The moral of the story is that disclosing privileged information to government entities typically waives the privilege.

While there are some instances of companies avoiding privilege waiver by entering into a NDA with the governmental entity, as discussed here and here, those situations are rare and companies must proceed with caution.  The “memo about the memo” idea was apparently not cautious enough.