Bankr. L. Rep. P 77,588, 48 Fed. R. Evid. Serv. 524, 97 Cal. Daily Op. Serv. 9549, 97 Daily Journal D.A.R. 15,303 United States of America v. Leonhard Bauer

Citation: 132 F.3d 504Docket: 97-10046

Court: Court of Appeals for the Ninth Circuit; December 21, 1997; Federal Appellate Court

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Leonhard Bauer appeals his conviction for making false statements on his bankruptcy petition and omitting assets, violating 18 U.S.C. §§ 152(3) and 152(7). The appeal arises from a U.S. District Court ruling in California, with the Ninth Circuit Court considering the case. Bauer filed for Chapter 11 bankruptcy in October 1990, listing assets of $532,000 and liabilities of $960,588, while being represented by attorney Kenneth N. Rivera. Following a trustee's discovery of undisclosed assets and transfers made within a year of the bankruptcy filing, the case was referred to the FBI for criminal investigation.

Key findings included Bauer transferring ownership of a van and a car to his daughters shortly before filing, as well as transferring a life insurance policy to his wife. Additionally, Bauer failed to report various valuable assets, including a handgun, gold jewelry, and a Rolex watch, in his bankruptcy petition. A grand jury indicted him in October 1995. 

The crux of the case hinged on Bauer's intent, with the government calling Rivera to testify against Bauer, which was contested by Bauer. The Ninth Circuit found that allowing Rivera to testify violated Bauer's attorney-client privilege and concluded that this error was not harmless, leading to the reversal of Bauer's conviction.

Prior to filing his bankruptcy petition, Bauer received advice from his attorney, Rivera, regarding the duty to disclose all property and the implications of falsifying a bankruptcy petition, which includes signing under penalty of perjury. Rivera confirmed that they reviewed a document detailing Bauer's estate and discussed the legal obligations related to the bankruptcy process. Following legal proceedings, Bauer was found guilty on two counts and sentenced to one year in prison, three years of supervised release, and ordered to pay restitution totaling $88,385.64. 

The main legal issue revolves around whether Rivera's statements to Bauer about disclosure duties and perjury implications are protected by attorney-client privilege. The party claiming the privilege bears the burden of proof, and this court conducts a de novo review of both the relationship and the privileged nature of the communications. The district court ruled that Rivera's advice fell outside the privilege, reasoning that it pertained to his role as an officer of the court rather than as an attorney-client relationship. This ruling was deemed incorrect, as attorney-client privilege protects both client disclosures and attorney responses when seeking legal advice. The government pointed to three Ninth Circuit cases to support its position, but these cases were found to be distinguishable from the current situation.

In United States v. Freeman, the Ninth Circuit ruled that an attorney's communication to a client about a sentencing date is not protected by attorney-client privilege because it does not constitute a confidential communication; the attorney merely acted as a messenger conveying public information. This principle was reiterated in United States v. Gray, where the court concluded that an attorney could testify about informing a client of a hearing date without breaching privilege. Similarly, in McKay v. Commissioner, the court determined that an attorney's testimony about delivering an IRS notice to a client was not privileged since it involved the conveyance of public information. These cases illustrate that communications regarding public information, such as court dates or tax notices, do not fall under the protection of attorney-client privilege because they do not involve confidential advice. In contrast, Bauer's case differs significantly as the attorney, Rivera, provided legal advice during the preparation of Bauer's bankruptcy petition, which is inherently confidential and not merely an act of relaying public information.

Not all communications between attorney and client are privileged, with certain exceptions such as client identity, fee amount, and case-related payments. However, Rivera's discussions with Bauer regarding the legal obligations of filing a bankruptcy petition are classified as legal advice and thus protected by attorney-client privilege. The Government presents two arguments against this privilege: first, that Bauer's situation is similar to cases where client-provided documentary information for tax returns is not privileged, as this information is intended for public filing. However, this rationale does not apply, as Rivera's testimony pertains solely to oral legal advice rather than documentary information for the bankruptcy petition. 

Second, the Government contends that Rivera's statements fall under the crime-fraud exception to attorney-client privilege, which applies to communications made to facilitate a crime or fraud. To invoke this exception, the Government must show a prima facie case that the communications were linked to illegal actions. In this instance, there is no reasonable basis to conclude that Rivera's advice was used by Bauer to further any fraudulent scheme, as Rivera advised Bauer to be truthful about his assets, which Bauer ignored. Thus, there is no causal link between Rivera's advice and Bauer's actions, leading to the conclusion that the crime-fraud exception does not apply.

Admitting Rivera's statements regarding legal advice to Bauer was deemed an error, but Bauer's conviction may still be upheld if the error is found to be harmless. The Government is required to demonstrate that the error did not substantially influence the verdict, as violations of attorney-client privilege are not considered errors of constitutional magnitude. The attorney-client privilege is emphasized as a foundational element of the legal system, essential for encouraging candid communication between clients and attorneys, thus serving public interests in justice. The privilege allows clients to fully disclose past wrongdoings without fear of repercussions. Given the significance of this privilege, a meticulous review of the Government's evidence is warranted to ascertain if it provides a fair assurance that the verdict was unaffected by the privilege violation. Bauer's defense centered on his lack of criminal intent, admitting errors in reporting assets without disputing the facts. There is a stark contrast in how Bauer and the Government perceive the strength of the evidence regarding his intent, necessitating a thorough analysis of the evidence presented by the Government to ascertain its impact on the jury's decision.

The evidence presented by the Government to prove Bauer's intent to commit bankruptcy fraud is largely circumstantial and weak. Key points of evidence include: 1) State Farm theft-loss inventory forms with undisclosed assets; 2) Bauer's request for a confidentiality agreement with State Farm; 3) omissions of assets from his bankruptcy petition; 4) opportunities to disclose additional assets that he did not take; 5) a residential loan application indicating a net worth of $600,000; 6) an insurance policy from which Bauer took a cash loan, later transferring the policy to his wife; and 7) Bauer's acknowledgment of understanding community property concepts. This collection of evidence does not convincingly establish fraudulent intent and could also support Bauer’s defense of ignorance or mistake.

The Government's strategy of highlighting Bauer's actions to suggest criminal intent raises only a general inference without strong backing. The two additional pieces of evidence presented—Bauer's timing of illegal property transfers before filing for bankruptcy and testimony from his former bookkeeper, Margaret Greenlaw, regarding his statements about transferring ownership of his vehicles—arguably support the Government's theory but are not definitive. Greenlaw's testimony, when interpreted literally, suggests Bauer may have believed he could transfer property before filing, reinforcing the defense of ignorance.

However, testimony from Bauer's attorney, which breached attorney-client privilege, significantly undermined Bauer's defense. The attorney's statements indicated that Bauer had been informed of the bankruptcy rules and the necessity to disclose all assets. This testimony, combined with evidence of Bauer's disregard for his attorney's advice, led the jury to conclude that Bauer possessed the intent to commit fraud, resulting in his conviction.

The Government considered Rivera's testimony crucial to its case against Bauer, dedicating significant resources to present it during the trial, including a substantial portion of its trial brief to support its admissibility. Rivera was positioned as the Government's key witness, intended to leave a strong impression on the jury. In closing arguments, the Government highlighted Rivera's testimony, noting that Bauer was informed by his attorney about signing under penalty of perjury, countering potential defenses regarding his understanding. The Government's later assertion on appeal that other evidence of Bauer's intent was overwhelming contradicts its prior emphasis on Rivera's testimony. The court found that the admission of Rivera's testimony violated Bauer's attorney-client privilege, a significant breach, though not a constitutional error. This violation, coupled with the testimony's strong rebuttal of Bauer's defense and the Government's weak evidence of intent, led to the conclusion that the jury's verdict was likely influenced by the error. Consequently, Bauer's conviction is reversed.

The court has reversed and remanded the case for a new trial or suitable resolution. Bauer has been incarcerated since July 16, 1997. Both parties concur that the district court's reliance on United States v. Laurins, 857 F.2d 529 (9th Cir.1988), was misplaced, as it pertained to the crime-fraud exception rather than the current issue at hand. The applicable standard of review for establishing the prima facie application of the crime-fraud exception remains ambiguous in this circuit, but it is unnecessary to resolve this ambiguity here, as the exception does not pertain to this case's circumstances. Federal common law governs the application of attorney-client privilege in federal law cases. The Government's assertion that Bauer's stepson's testimony supports the claim that Bauer was aware of the unlawful asset transfer is inaccurate; the stepson's testimony merely indicated Bauer's intention to transfer a car to his daughter, with no evidence regarding Bauer's understanding of bankruptcy laws. Given the reversal of Bauer's conviction related to attorney-client privilege, other claims, including ineffective assistance of counsel and alleged errors in the restitution order, are rendered moot.