Wells v. THB America, LLC (In re Clements Manufacturing Liquidation Co.)

OPINION REGARDING THE ACCOUNTANT-CLIENT PRIVILEGE ASSERTED BY DEFENDANTS IN OPPOSING THE CHAPTER 7 TRUSTEE’S MOTION TO COMPEL THOMAS J. TUCKER, Bankruptcy Judge. 1. Introduction This opinion concerns Michigan’s accountant-client privilege statute, Mich. Comp. Laws Ann. § 339.732. The Plaintiff Chapter 7 Trustee seeks discovery of an accountant’s work papers relating to a Defendant’s 2008 tax returns, and correspondence between the Defendant and its accountant about those tax returns. The Defendant claims that all of the documents are privileged. For the reasons stated in this opinion, the Court rules in favor of the Trustee, in part, as described below. II. Background These consolidated adversary proceedings came before the Court for a hearing on June 27, 2012, on the Chapter 7 Trustee’s motion entitled “Trustee’s Motion to Compel Responses to Interrogatories and Production of Documents and Request of Sanctions” (the “Motion”).1 As stated during the hearing and in the Order filed after the hearing, on June 27, 2012,2 the Court has ruled on all aspects of the Motion except the claim of accountant-client privilege asserted by Defendants THB America, LLC (“THB”) and Tianhai Electric North America (“TENA”). The parties argued the privilege issue during the June 27 hearing, and in the June 27 Order, the Court permitted the parties to file post-hearing briefs. Defendants timely filed a brief on July 6, 2012. The Trustee had [402] until July 11, 2012 to file a post-hearing brief, but did not do so. The Court has considered all of the oral and written arguments of the parties. As described in the Trustee’s Motion and by Trustee’s counsel during the June 27 hearing, the Trustee seeks an order compelling Clayton & McKervy, P.C., the accountants who prepared Defendant THB’s 2008 tax returns, to produce copies of all of its work papers relating to THB’s 2008 tax returns, and copies of all correspondence between Clayton & McKervy and THB relating to the 2008 tax returns.3 In response to a subpoena served by the Trustee,4 Clayton & McKervy has refused to provide such documents without a court order or the consent of THB. THB has refused to consent, and argues that such documents are protected by an accountant-client privilege established by Michigan statute, specifically Mich. Comp. Laws Ann. § 339.732(1). The Trustee argues that the documents are not privileged. III. Applicable law As the parties correctly agree, Michigan law governs the question of privilege in these consolidated adversary proceedings. The parties cite Fed.R.Evid. 501,5 which states in pertinent part that “in a civil case, state law governs privilege regarding a claim or defense for which state law supplies the rule of decision.” The parties involved in this privilege contest do not dispute that Michigan law supplies the rule of decision for the claims and defenses in these consolidated adversary proceedings, so Michigan law governs the issue of privilege. Under Michigan law there is a statutory accountant-client privilege. With exceptions not applicable here,6 the privilege protects the following information from disclosure without the client’s permission: • “information relative to and in connection with an examination or audit of, or report on, books, records, or accounts that the [licensed certified public accountant] or a person employed by the [licensed certified public accountant] was employed to make” and • “the information derived from or as the result of professional service rendered by a certified public accountant.” See Mich. Comp. Laws Ann. § 339.732(1). The full text of this statutory subsection is this: Except by written permission of the client or the heir, successor, or personal representative of the client to whom the information pertains, a licensee, or a person employed by a licensee, shall not disclose or divulge and shall not be required to disclose or divulge information relative to and in connection with an examination or audit of, or report on, books, records, or accounts that the licensee or a person employed by the licensee was employed to make. Except as otherwise provided in this section, the information derived from or as the result of professional service [403] rendered by a certified public accountant is confidential and privileged. Id. (emphasis added). Because this statutory privilege is in derogation of the common law, it must be strictly construed: [U]nder the common law, no privilege attaches to transactions between an accountant and his client and, like many statutes which are enacted in derogation of the common law, statutes establishing an accountant-client privilege have been strictly construed with a number of limitations and restrictions being placed on the scope of the privilege. People v. Safiedine, 163 Mich.App. 25, 414 N.W.2d 143, 145 (1987).7 The Michigan Court of Appeals has held, in both published and unpublished opinions,8 that “[t]he purpose behind the accountant-client privilege ... is to protect from disclosure the substance of the information conveyed by the client to the accountant.” People v. Paasche, 207 Mich.App. 698, 525 N.W.2d 914, 918 (1995); see also People v. Safiedine, 414 N.W.2d at 146 (same); In re Martin, 1998 WL 1988880, at *3 (unpublished) (quoting People v. Paasche, supra)9 Of these cases, the unpublished case went even further, and held that “the statute applies only to confidential information passed from client to accountant.” In re Martin, 1998 WL 1988880, at *3 (emphasis added). IV. Discussion The Trustee makes two basic arguments. First, the Trustee argues that the Michigan privilege statute does not apply to the accountant’s work papers or the correspondence at issue, because the Trustee is seeking only work papers and correspondence relating to THB’s 2008 tax returns. Because it is limited to documents concerning tax returns, the Trustee argues, the document request does not seek documents relating to “an examination or audit of, or report on, books, records, or [404] accounts” of THB, within the meaning of § 339.732(1). The Court must reject this argument. First, the Trustee’s reading of the statute is not supported by any case law, and it is too narrow. The statutory phrase quoted above is broad enough to cover the documents at issue, even under a strict construction. Second, the Trustee’s argument ignores the last sentence in the privilege statute, which is clearly broad enough to cover information relating to an accountant’s work on a client’s tax returns. That sentence in § 339.732(1) says that “the information derived from or as the result of professional service rendered by a certified public accountant is confidential and privileged.” The Trustee’s second argument is that the few Michigan cases interpreting the privilege statute have limited it to protecting only confidential information communicated from the client to the accountant. While the statutory wording, quoted above, certainly could support a broader reading than this, the Court must agree with the Trustee, based on the Michigan cases discussed in part III of this opinion. The Court thus holds that the Michigan privilege statute, Mich. Comp. Laws Ann. § 339.732(1), protects only the substance of confidential information communicated by the client to the accountant. The accountant’s work papers relating to THB’s 2008 tax returns may contain privileged information subject to protection (e.g., by redaction), but the work papers likely also contain information that is not privileged. Similarly, correspondence between THB and its accountant regarding the 2008 tax returns may be privileged in part — ie., to the extent it reveals the substance of confidential information communicated by THB to the accountant — but it may also contain information that is not privileged. On the present record, the Court cannot rule in more detail about the precise extent to which the documents in question are privileged. None of the documents have been produced to the Trustee yet (even with redactions). Nor has a privilege log been prepared and provided to the Trustee. And none of the documents have been presented for an in camera review by the Court. The Court will require that Defendants follow the first two of these steps, and later, if necessary, the Court may conduct an in camera review. V. Conclusion The Court will enter an order consistent with this opinion. Footnotes [1] Docket # 83 filed in Adv. Pro. No. 10-6123. [2] Docket # 88 filed in Adv. Pro. No. 10-6123. [3] See Trustee's Brief in Support of the Motion (Docket # 83 at pdf. p. 11). [4] It appears that a copy of the subpoena served on Clayton & McKervy was filed with this Court on March 8, 2012 (Docket # 76 in Adv. Pro. No. 10-6123). [5] The Federal Rules of Evidence apply in bankruptcy court cases and adversary proceedings. See Fed.R.Evid. 101(a); 1101(a); 1101(b); and Fed.R.Bankr.P. 9017. [6] The exceptions in the statute to the privilege are stated in Mich. Comp. Laws Ann. § 339.732(2). The Trustee does not argue that any of these exceptions apply here. [7] In Safiedine, the Michigan Court of Appeals applied an earlier version of the current accountant-client privilege statute, namely, former Mich. Comp. Laws Ann. § 339.713. In 1997, that earlier version was repealed and replaced by the current statute, Mich. Comp. Laws Ann. § 339.732. See Punches v. Martin (In re Martin), No. 204854, 1998 WL 1988880 at *2 (Mich.Ct.App. November 17, 1998) (unpublished). The earlier version of the statute was the same as the current statute, in all ways that are material to this case. The earlier version, § 339.713, provided, in pertinent part: Except by written permission of the client, individual, firm, or corporation or the heir, successor, or personal representative of the employer, a certified public accountant, or a person employed by a certified public accountant, shall not disclose or divulge, nor be required to disclose or divulge information relative to and in connection with an examination or audit of, or report on, any books, records, or accounts which the certified public accountant or a person employed by the certified public accountant was employed to make. The information derived from or as the result of professional service shall be considered confidential and privileged. Id. (emphasis added); see also People v. Safiedine, 414 N.W.2d at 145 (quoting the earlier statute). [8] Under Mich. Ct. R. 7.215(C)(1), an unpublished opinion of the Michigan Court of Appeals "is not precedentially binding under the rule of stare decisis.” Nonetheless, such an unpublished opinion may be cited by parties, presumably as persuasive but non-binding authority, since the rule goes on to state that "[a] party who cites an unpublished opinion must provide a copy of the opinion to the court and to opposing parties with the brief or other paper in which the citation appears.” [9] All of these cases were applying the former version of the statute, but the current statute is in all material respects the same as the former version. See discussion in footnote 7 of this opinion.