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Tri-State Hospital Supply Corp. v. United States

September 25, 2006

TRI-STATE HOSPITAL SUPPLY CORPORATION, PLAINTIFF,
v.
UNITED STATES OF AMERICA, DEFENDANT.



The opinion of the court was delivered by: John M. Facciola United States Magistrate Judge

MEMORANDUM OPINION

This case was referred to me by Judge Kennedy for resolution of all non-dispositive motions. Currently pending before me are the following three motions: (1) Plaintiff Tri-State Hospital Supply Corporation's Motion Requesting Magistrate Judge Facciola to Reconsider Portions of the December 16, 2005 Order Regarding Plaintiff's Motion to Compel; (2) Plaintiff Tri-State Hospital Supply Corporation's Motion to Compel a Complete Response to Plaintiff's Third Request for Production of Documents; and (3) Plaintiff's Motion to Compel Discovery Regarding Audits by the Internal Revenue Service. For the reasons stated herein, plaintiff's motion for reconsideration will be denied, its motion to compel a complete response to its third request for production of documents will be granted in part and denied in part, and its motion to compel discovery relating to Internal Revenue Service ("IRS") audits will be granted in part and denied in part.

BACKGROUND

Tri-State Hospital Supply Corporation ("Tri-State") is a corporation that sells hospital supplies in the United States. In the past, Tri-State imported surgical equipment from suppliers in Pakistan and received rebates on those purchases. In reporting its receipt of those purchases to the United States Customs Service, now called the United States Customs and Border Protection ("Customs"), Tri-State declared the price reflected on the purchase invoices, not the price it paid after taking into account the rebates.

In the 1990s, Customs investigated Tri-State, both criminally and civilly, for allegedly falsifying forms submitted to Customs. As a result, Customs issued civil penalty notices against Tri-State and referred the matter to the Department of Justice ("DOJ") for collection of those penalties. In 1996, DOJ brought a collection suit against Tri-State in the United States Court of International Trade, alleging fraud, negligence, and gross negligence. The fraud count was dropped by DOJ during trial; the gross negligence count was dismissed pursuant to Tri-State's motion for judgment as a matter of law; and the ordinary negligence count went to the jury, which returned a verdict in Tri-State's favor. Subsequently, Tri-State filed the present civil action against the government, alleging abuse of process and malicious prosecution.

DISCUSSION

A. Motion for Reconsideration of December 16, 2005 Order

On August 31, 2004, Tri-State filed a Motion to Compel Responses to Plaintiff's First Set of Interrogatories, First Request for Production of Documents, Second Request for Production of Documents, and Second Request for Admissions seeking, among other things, the production of documents for which the government had asserted the attorney-client, work product, deliberative process, and law enforcement privileges. In relevant part, plaintiff argued that the attorney-client privilege and the work product doctrine did not apply because the documents were created in furtherance of a crime or fraud. Upon consideration of Tri-State's motion and the related filings, I granted the motion in part and denied the motion in part, ordering the government to submit the documents it claimed to be privileged for in camera review. Tri-State Hosp. Supply Corp. v. United States, 226 F.R.D. 118, 133-40 (D.D.C. 2005). In response to my order, the government submitted two sets of documents with corresponding privilege logs: twenty-three documents from Customs and 224 documents from DOJ. Tri-State Hosp. Supply Corp. v. United States, No. 00-1643, 2005 WL 3447890, at *1 (D.D.C. Dec. 16, 2005). After reviewing the Customs and DOJ documents in camera, I sustained the government's claim of privilege for some of the documents and overruled it for others. Id. With regard to the "crime-fraud" exception to the attorney-client privilege and the work product doctrine, I found that there was nothing in the documents that tended to show that they were made or used in furtherance of a crime or fraud. Tri-State Hosp. Supply Corp., 2005 WL 3447890, at *5-7. Tri-State now moves me to reconsider my "crime-fraud" determination.

Although the attorney-client privilege is usually absolute, the privilege cannot be used to shield communications made for the purpose of committing a crime or fraud. This exception, known as the crime-fraud exception, applies when the following two conditions are satisfied: (1) the client made or received the otherwise privileged communication with the intent to further an unlawful or fraudulent act, and (2) the client has carried out the crime or fraud. In re Sealed Case, 107 F.3d 46, 49 (D.C. Cir. 1997) (citations omitted). "To invoke the 'crime-fraud' exception to the privilege . . . more is necessary than mere allegations of wrongdoing or simply naming the attorney as a defendant in the litigation." Coleman v. Am. Broad. Co., Inc., 106 F.R.D. 201, 207 (D.D.C. 1985). "To drive the privilege away, there must be 'something to give colour to the charge;' there must be 'prima facie evidence that it has some foundation in fact.'" Id. at 203 (quoting Clark v. United States, 289 U.S. 1, 15 (1933)). This burden does not have to be established entirely with independent evidence -- the documents themselves are commonly the best evidence available. United States v. Zolin, 491 U.S. 554, 567 (1989).

In limited situations, courts have expanded the crime-fraud exception to include communications made in furtherance of an intentional tort or other misconduct. See, e.g., In re Sealed Case, 754 F.2d 395, 399 (D.C. Cir. 1985) (characterizing the exception as applying to "crime, fraud or other misconduct"); Diamond v. Stratton, 95 F.R.D. 503, 505 (S.D.N.Y. 1982) (expanding the crime-fraud exception to communications in furtherance of the intentional infliction of emotional distress). Tri-State does not argue that the government committed a crime or fraud, but rather that the communications were made in furtherance of its abuse of the civil litigation process and malicious prosecution.

With regard to the work product doctrine, work product protection can be overcome by a showing that the client used the attorney to further a crime or fraud. In re Sealed Case, 107 F.3d 46, 51 (D.C. Cir. 1997) (citing In re Sealed Case, 676 F.2d 793, 811-12 (D.C. Cir. 1982)). Unlike the attorney-client privilege, the focus of the work produce doctrine is on the client's general intent in consulting with the lawyer or in using the materials the lawyer prepared, not on the client's intent with regard to an individual communication. In re Sealed Case, 107 F.3d at 51. In determining whether the exception applies, courts make a two-step inquiry: "First, there must be a prima facie showing of a violation sufficiently serious to defeat the work product privilege. Second, the court must find some valid relationship between the work product [at issue] and the prima facie violation." In re Sealed Case, 676 F.2d at 814-15. The relevant question is: "Did the client consult the lawyer or use the material for the purpose of committing a crime or fraud?" In re Sealed Case, 107 F.3d at 51. The crime-fraud exception to the work product privilege is not limited to criminal or fraudulent conduct, but may also encompass other "misconduct fundamentally inconsistent with the basic premises of the adversary system." In re Sealed Case, 676 F.2d at 812.

Tri-State's argument in moving me to reconsider my crime-fraud determination can be summed up in the following passage from its reply brief:

[A]lthough the documents at issue may not explicitly show wrongdoing by the government on their face, the omission of critical facts in those documents demonstrates the government's misconduct. Internal government documents that ostensibly provide a candid evaluation of Tri-State's liability but omit exculpatory facts known to Customs are compelling evidence of government misconduct. Such documents show that the government was maliciously prosecuting Tri-State without regard for the facts.

Plaintiff Tri-State Hospital Supply Corporation's Reply in Support of its Motion Requesting Magistrate Judge Facciola to Reconsider Portions of the December 16, 2005 Order Regarding Plaintiff's Motion to Compel at 1-2. In its motion to compel, Tri-State discussed several examples of facts that the omission of which would suggest a fraudulent intent on the part of the government. With these examples in mind, Tri-State asked that I re-review the documents for which I sustained the government's assertion of attorney-client privilege and work product protection.

In response to Tri-State's request, I have re-reviewed the documents, this time in light of Tri-State's argument that the omission of certain information would evidence misconduct warranting the application of the crime-fraud exception. Again, I find nothing in the documents to support the application of the crime-fraud exception. Tri-State's assumption that the documents for which I sustained attorney-client privilege and work product protection provide such thorough descriptions of the basis for Customs' and the Department of Justice's initiation of proceedings against Tri-State that the omission of certain information would evidence a fraudulent intent is wrong. Rather, most of the documents at issue simply constitute discrete communications between the attorney and client regarding issues such as how to respond to discovery requests and the exchanging of draft briefs. These are hardly documents that would be expected to contain the allegedly exculpatory evidence that Tri-State relies on in moving me to reconsider my prior order. Moreover, my review of the documents revealed exactly the opposite of what Tri-State contends. Specifically, I did ...


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