                                                            NOT PRECEDENTIAL

                    UNITED STATES COURT OF APPEALS
                         FOR THE THIRD CIRCUIT
                              _____________

                                   No. 16-3479
                                  _____________

                        In re: GRAND JURY SUBPOENA

                                        ABC Company,
                                                Appellant
                                  _____________


                 On Appeal from the United States District Court
                       for the Middle District of Pennsylvania
                          District Court No. 3-16-mc-00222
                District Judge: The Honorable Malachy E. Mannion

                Submitted Pursuant to Third Circuit L.A.R. 34.1(a)
                                March 23, 2017

       Before: SMITH, Chief Judge, JORDAN, and ROTH, Circuit Judges

                               (Filed: June 16, 2017)
                             _____________________

                                    OPINION *
                             _____________________

SMITH, Chief Judge.




*
 This disposition is not an opinion of the full court and pursuant to I.O.P. 5.7 does
not constitute binding precedent.
      This case involves the application of the crime-fraud exception to the

attorney-client and work-product privileges in the context of an ongoing grand jury

investigation. ABC Company retained Law Firm to perform legal services related

to ABC Company’s administrative appeal of a Management and Occupancy

Review (“MOR”) conducted by the Department of Housing and Urban

Development (“HUD”). 1 As part of its appeal, ABC Company submitted a

response (“MOR Response”) to HUD. The grand jury issued a subpoena broadly

seeking Law Firm’s communications, documents, and member identities related to

Law Firm’s representation of ABC Company in the MOR appeal. ABC Company

filed a motion to quash the subpoena, asserting attorney-client and work-product

privileges. The District Court concluded that the crime-fraud exception to those

privileges applied and denied ABC Company’s motion to quash. Because the

record fails to provide a “reasonable basis” to support application of the crime-

fraud exception, we will vacate the District Court’s denial of the motion to quash

and remand for further proceedings consistent with this opinion.




1
  We use pseudonyms to refer to the grand jury subjects to protect the secrecy of
the grand jury investigation and the anonymity of its subjects.
                                          2
                                         I

        In September 2013, HUD performed a MOR at an apartment complex

operated by ABC Company to assess the overall quality of management services

provided by ABC Company. HUD provided ABC Company with a report on the

results of the MOR in October 2013, and the report contained an overall rating of

“Unsatisfactory.” Of particular note, the MOR report observed,

        The security cameras at buildings 308 and 328 were not functioning
        and the wiring was disconnected from the computer. In addition,
        Management stated that the security camera system as a whole, was
        not working. Management is in the process of obtaining a contractor
        to make necessary repairs and is obtaining bids to upgrade the
        security system for all buildings.

JA73.

        After receiving the results of the MOR, ABC Company retained Law Firm

to assist with responding to the MOR report. ABC Company, not Law Firm, then

sent a response to HUD contesting the results of the MOR. Countering the MOR

report’s observation about the security cameras, ABC Company rejoined:

        The statement of this condition is not accurate. The camera systems
        in Buildings 308 and 328 were working, and the wiring was not
        disconnected from [the] computer.          The cameras, recording
        equipment and computer were not viewed by HUD during the MOR;
        HUD was accompanied by Management at all times. Secondly, it is a
        wireless system and does not have wires to be disconnected. In
        addition, Management never made a statement that the security
        camera system [was] not working.

                                        3
JA93. This section of the MOR Response relating to the security cameras also

included an unsigned letter titled “CCTV System.” JA108. The letter stated, “As

per our conversation this morning regarding the cameras at buildings 308 (400)

and 328 (600). Both buildings were recording when we visited them with the

police in August of 2013.” Id. According to an affidavit filed by ABC Company

lawyers (produced after a review of Law Firm’s communications), ABC Company

did not send this letter to Law Firm prior to submitting the MOR Response to

HUD.

       On March 10, 2016, a grand jury issued a subpoena seeking fee

arrangements, communications, documents, and Law Firm member identities

related to Law Firm’s work assisting ABC Company. On June 2, 2016, ABC

Company filed a sealed motion to quash directed at the subpoena. Briefing on the

motion from the Government suggested that HUD’s Office of Inspector General

(“OIG”) performed an investigation of ABC Company’s MOR Response.

According to the Government’s brief, the OIG investigation revealed that the

MOR Response “contained numerous misleading and false statements.” JA58.

Also through its brief, the Government claimed that the OIG investigation

included an interview with the purported author of the “CCTV System” letter, in

which the author “indicated that he did not author the letter submitted in the MOR

                                        4
[Response], nor authorize anyone to prepare such a letter to be included

therewith.” JA59. The Government’s brief finally stated that the investigation

determined that ABC Company used Law Firm “in order to assist it in the

preparation of the MOR response submitted to HUD.” Id.

      Based on those assertions in the Government’s brief, the District Court

concluded that a reasonable basis existed “to suspect that [ABC Company] used

the legal advice and the work-product it obtained from [Law Firm] regarding its

response to further its criminal scheme to dupe HUD’s auditors . . . .” JA15. It

therefore held the crime-fraud exception applied to the privileges claimed by ABC

Company and denied ABC Company’s motion to quash.

                                           II

      The District Court had jurisdiction under 18 U.S.C. § 3231 because this case

involves an offense against the laws of the United States.

      “When a district court orders a witness—whether a party to an underlying

litigation, a subject or target of a grand jury investigation, or a complete stranger to

the proceedings—to testify or produce documents, its order generally is not

considered an immediately appealable ‘final decision[ ]’ under § 1291.” In re

Grand Jury, 705 F.3d 133, 142 (3d Cir. 2012) (alteration in original). Under

Perlman v. United States, 247 U.S. 7 (1918), however, “a privilege holder may

                                           5
immediately appeal an adverse disclosure order when the privileged information is

controlled by a ‘disinterested third party who is likely to disclose that information

rather than be held in contempt for the sake of an immediate appeal.’” In re Grand

Jury Subpoena, 745 F.3d 681, 686–87 (3d Cir. 2014) (quoting In re Grand Jury,

705 F.3d at 138). Here, Law Firm is a disinterested third-party controlling ABC

Company’s privileged information, and the District Court ordered disclosure of

that information. Under the Perlman exception, we therefore have appellate

jurisdiction pursuant to 28 U.S.C. § 1291.

                                          III

      “We review legal conclusions—such as the amount of proof required to

apply the crime-fraud exception—de novo.” In re Grand Jury, 705 F.3d at 153

n.18 (citing In re Impounded, 241 F.3d 308, 312 (3d Cir. 2001)). “We review the

District Court’s decision that ‘there is sufficient evidence of a crime or fraud to

waive the attorney-client privilege’ [or the work-product privilege] for ‘abuse of

discretion.’” Id. at 155 (quoting In re Impounded, 241 F.3d at 318). Finally, the

factual determinations underlying the District Court’s decision regarding

application of the crime-fraud exception are reviewed for clear error. See id.

(citing In re Impounded, 241 F.3d at 312).



                                           6
                                            IV

       ABC Company has invoked two privileges in response to the grand jury’s

subpoena: attorney-client and work-product. “The attorney-client privilege

protects from disclosure confidential communications made between attorneys and

clients for the purpose of obtaining or providing legal assistance to the client.” Id.

at 151 (citing In re Teleglobe Commc’ns Corp., 493 F.3d 345, 359 (3d Cir. 2007)).

By comparison, the work-product privilege “protects from discovery materials

prepared or collected by an attorney ‘in the course of preparation for possible

litigation.’” In re Grand Jury Investigation, 599 F.2d 1224, 1228 (3d Cir. 1979)

(quoting Hickman v. Taylor, 329 U.S. 495, 505 (1947)).

       Those privileges, though, are not absolute. In re Grand Jury, 705 F.3d at

151. One exception to both privileges is the crime-fraud exception. See United

States v. Zolin, 491 U.S. 554, 562–63 (1989) (observing that the attorney-client

privilege “ceases to operate at a certain point, namely, where the desired advice

refers not to prior wrongdoing, but to future wrongdoing” (alterations and citations

omitted)); In re Grand Jury Proceedings, 604 F.2d 798, 802 (3d Cir. 1979) (“The

work product privilege is perverted if it is used to further illegal activities . . . .”).

       “[A] party seeking to apply the crime-fraud exception must demonstrate that

there is a reasonable basis to suspect (1) that the privilege holder was committing

                                             7
or intending to commit a crime or fraud, and (2) that the attorney-client

communication or attorney work product was used in furtherance of that alleged

crime or fraud.” In re Grand Jury, 705 F.3d at 155. “The ‘reasonable basis’

standard is intended to be reasonably demanding; neither speculation nor evidence

that shows only a distant likelihood of corruption is enough.” Id. at 153 (quoting

In re Grand Jury Proceedings, 417 F.3d 18, 23 (1st Cir. 2005)). “At the same

time, the party opposing the privilege is not required to introduce evidence

sufficient to support a verdict of crime or fraud or even to show that it is more

likely than not that the crime or fraud occurred.” Id. at 153–54. Nevertheless,

“there must be ‘prima facie evidence that [the application of the exception] has

some foundation in fact.’” Id. at 151–52 (emphasis added) (quoting Clark v.

United States, 289 U.S. 1, 15 (1933)). “A ‘prima facie showing’ requires

presentation of ‘evidence which, if believed by the fact-finder, would be sufficient

to support a finding that the elements of the crime-fraud exception were met.’” In

re Grand Jury Subpoena, 223 F.3d 213, 217 (3d Cir. 2000) (quoting Haines v.

Liggett Grp. Inc., 975 F.2d 81, 95–96 (3d Cir. 1992)).

      To satisfy its burden of providing a “reasonable basis” to apply the crime-

fraud exception, the Government offered three pieces of “evidence” in its brief.

First, the Government alleges the purported author of the letter submitted with the

                                          8
MOR Response testified that he neither wrote the letter nor authorized anyone to

prepare such a letter. Second, the Government states the MOR Response

contained other, unspecified misleading and false statements. Third, the

Government asserted that ABC Company hired Law Firm to assist it in preparing

the MOR Response. The District Court concluded that those assertions were

sufficient to support application of the crime-fraud exception. We disagree.

      On this record, the Government’s evidence falls short of providing a

“reasonable basis” to apply the crime-fraud exception. As noted, a request for the

application of the crime-fraud exception must have “some foundation in fact.” In

re Grand Jury, 705 F.3d at 151–52 (quoting Clark, 289 U.S. at 15). A “general,

unsubstantiated allegation” is not sufficient “to overcome the protection afforded

by” the attorney-client or work-product privileges. In re Grand Jury Investigation,

599 F.2d 1224, 1232 (3d Cir. 1979). The Government, therefore, may not rely on

bare assertions in its brief as “evidence” to apply the crime-fraud exception to

ABC Company’s privileges asserted over Law Firm’s materials. See In re Grand

Jury Subpoena, 223 F.3d at 217 (application of the crime-fraud exception requires

factual finding supported by sufficient “evidence”); see also In re Grand Jury

Subpoena, 419 F.3d 329, 336 (5th Cir. 2005) (“Allegations in pleadings are not



                                          9
evidence and are not sufficient to make a prima facie showing that the crime-fraud

exception applies.”).

      Even if unsupported arguments by counsel qualified as “evidence,” the

Government’s assertions have other weaknesses. A vague allegation that the

MOR Response contains unspecified false statements fails to meet the “reasonably

demanding” evidentiary standard we must apply. In re Grand Jury, 705 F.3d at

153. Given the limited record here, we also question whether Law Firm’s advice

was used in furtherance of submitting the fraudulent letter. The Government

submits that, because the allegedly fraudulent letter was attached to the MOR

Response and Law Firm assisted in the preparation of the MOR Response, the

Law Firm’s advice was used in furtherance of the crime or fraud. ABC Company,

though, did not send the letter to Law Firm prior to submitting the MOR Response

to HUD, and there is no evidence as to how Law Firm assisted ABC Company

with the MOR Response. See In re Grand Jury Subpoena, 745 F.3d at 693 (“The

advice cannot merely relate to the crime or fraud.”). Regardless, because we

conclude the Government’s assertions in its brief fail to provide an adequate

factual basis to apply the crime-fraud exception, we need not decide whether those

assertions—if properly founded in fact—would support application of the

exception.

                                        10
      On remand, the Government should nevertheless have leave to provide a

sufficient factual basis to support application of the crime-fraud exception. That

evidence may take various forms, including ex parte affidavits, In re Grand Jury

Subpoena, 223 F.3d at 219, or redacted copies of documents, In re Grand Jury,

705 F.3d at 139. It must, though, be more than was presented here. In addition,

the Government may request the District Court to perform an in camera review of

Law Firm’s privileged documents upon “a showing of a factual basis adequate to

support a good faith belief by a reasonable person that in camera review of the

materials may reveal evidence to establish the claim that the crime-fraud exception

applies.” In re Grand Jury Subpoena, 745 F.3d at 688 (quoting Zolin, 491 U.S. at

572). In short, various methods for providing a factual basis to apply the crime-

fraud exception are available if the Government chooses to invoke the exception

on remand.

                                         V

      For the reasons stated above, we will vacate the District Court’s denial of

ABC Company’s motion to quash and remand for further proceedings consistent

with this opinion.




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