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U.S. v. SIDLEY AUSTIN BROWN & WOOD LLP

April 15, 2004.

UNITED STATES OF AMERICA, Petitioner,
v.
SIDLEY AUSTIN BROWN & WOOD LLP, Respondent



The opinion of the court was delivered by: MATHEW KENNELLY, District Judge

MEMORANDUM OPINION AND ORDER

This case arises from an Internal Revenue Service investigation into the organization and sale of tax shelters by a former partner of Sidley Austin Brown & Wood (hereinafter "SAB&W") during his tenure at Brown & Wood, one of the predecessor firms to SAB&W. The United States has sought enforcement of a summons served on SAB&W to obtain the names of former clients of the firm. Forty-six of SAB&W's former clients, known collectively as the "Does," have moved to intervene so that they can argue that their identities are protected from disclosure by the attorney-client privilege.*fn1 The Court must decide whether to permit the Does to intervene. Procedural Background

On December 29, 2003 the Government sought enforcement of a John Doe summons served October 15, 2003 on SAB&W to obtain the names of taxpayers who "during any part of the period January 1, 1996 through October 15, 2003, participated in a transaction which was or later became a `listed transaction' or other `potentially abusive tax shelter' organized or sold by the law firm of Sidley Austin Brown & Wood LLP and its predecessor, Brown & Wood LLP." Summons (dated Oct. 15, 2003). The Court entered an order, after making a modification to meet an objection by the Government, directing SAB&W to provide notice of the summons to former clients "who received opinions from Brown & Wood LLP or respondent with respect to the transactions identified" in an attached appendix. Order of Jan. 12, 2004, ¶ 1. The Court gave SAB&W's former clients until January 23, 2004 to advise SAB&W of their intention to assert that their identities were protected by the attorney-client privilege, id. ¶ 2, and until February 19, 2004 to file a motion to be heard by the Court. Id. ¶ 7.

  The Government and SAB&W petitioned the Court in early February to enter an agreed order that, among other things, modified the schedule set on January 12. Under this order, which the Court signed on February 6, 2004, SAB&W was to send notice by February 7 to "all persons: . . . (b) who objected to the January 13 Order on the grounds that they did not fall within the scope of Appendix A thereto, but who, during any part of the period January 1, 1996 through October 15, 2003, participated in a transaction which was or later became a `listed transaction' or other `potentially abusive tax shelter' with respect to which petitioner or Brown & Wood LLP was paid a fee." Order of Feb. 6, 2004, ¶ 1. The agreed order gave SAB&W's former clients until February 13, 2004 to inform SAB&W that they objected to the disclosure of their identities. Id. ¶ 2. The Government had until February 17, 2004 to move the Court to order SAB&W to produce the names of any objecting clients. Id. ¶ 6. The Court gave the clients whose identities SAB&W withheld until February 27, 2004 to seek to intervene in the enforcement action. Id. ¶ 7.

  SAB&W disclosed the names of several hundred former clients whose identities SAB&W believes to be responsive to the summons. However, it withheld the names of approximately 100 former clients who objected to the disclosure of their identities. SAB&W Resp. to Mot. to Enforce ¶ 2. Forty-six of those former clients seek to intervene so that they can argue that (1) the attorney-client privilege bars SAB&W from disclosing their names and (2) their names are not responsive to the summons.

  Analysis

  The Federal Rules of Civil Procedure provide four separate bases for intervention by a nonparty. Two bases for intervention are "of right" and two are "permissive." Rule 24(a) gives a nonparty the right to intervene when either (1) "a statute of the United States confers an unconditional right to intervene," or (2) "the applicant claims an interest relating to the property or transaction" at issue and "disposition of the action may as a practical matter impair or impede the applicant's ability to protect that interest, unless the applicant's interest is adequately represented by existing parties." Rule 24(b) states that the Court has discretionary authority to permit a nonparty to intervene when either (1) "a statute of the United States confers a conditional right to intervene," or (2) "an applicant's claim or defense and the main action have a question of law or fact in common." When considering whether to grant a motion for permissive intervention, the Court must "consider whether the intervention will unduly delay or prejudice the adjudication of the rights of the original parties." Fed.R.Civ.P. 24(b). The Does maintain that they have a right to intervene as of right, but they argue in the alternative that if they do not have a right to intervene, the Court should exercise its discretion and allow them to intervene under Fed.R.Civ.P. 24(b).

 1. Intervention as of right

  a. Intervention under Rule 24(a)(1)

  Several of the Does argue that the statute governing third-party summonses gives them an unconditional right to intervene and, therefore, provides the statutory predicate necessary to intervene as of right under Rule 24(a)(1). The Does rely on 26 U.S.C. § 7609(b)(1), which states that "[n]ot withstanding any other law or rule of law, any person who is entitled to notice of a summons under subsection (a) shall have the right to intervene in any proceeding with respect to the enforcement of such summons under section 7604." The Does find support for their reading of § 7609(b)(1) in a Sixth Circuit decision, stating that "once an enforcement action is begun, the Doe may intervene and challenge enforcement of the summons." United States v. Ritchie, 15 F.3d 592, 597 (6th Cir. 1994). But the Sixth Circuit did not support its statement with either citations or analysis — and it did not refer to 26 U.S.C. § 7609(b)(1), although it did refer to other subparts of § 7609 for the proposition that John Does do not have the right to either "intervene in the hearing on the summons's issuance" or "file a motion to quash the summons once it has been issued." Id. (citing §§ 7609(h)(2) and (b)(2)(A)). The Court declines to follow Ritchie because we believe it is contrary to the plain language of the statute and, therefore, wrongly decided.

  Section 7609(b)(1) gives those entitled to notice under § 7609(a) a right to intervene, thus whether a John Doe has a right to intervene depends on whether or not he is entitled to notice. Section 7609(a) states that "any person (other than the person summoned) who is identified in the summons" is entitled to notice of the third-party summons. The Katten Does argue that although they are not identified by name in the summons, § 7609(a) does not specifically state that the person must be identified by name. However, when the statute is read as a whole, it is clear that the term "identified" in § 7609(a) means "named." A subpart outlining additional requirements for John Doe summonses defines such a summons as "[a]ny summons described in subsection (c)(1) which does not identify the person with respect to whose liability the summons is issued." 26 U.S.C. § 7609(f) (emphasis added). Inherently, then, a John Doe is not identified in a John Doe summons and, accordingly, he is not entitled to notice of the summons' issuance. The parties agree that the summons at issue is a John Doe summons. Therefore, § 7609(b)(1) does not give SAB&W's former clients a statutory basis for intervention as a matter of right under Rule 24(a)(1).

  The Court can perceive a good policy argument for allowing intervention by a John Doe even if he is not entitled to notice under the statute. The purpose of intervention in this context is to ensure that the party who has a real interest at stake can intervene to raise appropriate challenges to the IRS summons. The recipient of a summons does not always have the incentive to challenge the summons, as this case may well illustrate: there is some indication that SAB&W's desire to distance itself from the practices of a partner of one of its predecessor firms has led the firm to forego potential objections to the summons. But the Court cannot read into § 7609 a right that is contrary to the plain language of the statute. Therefore, the Court concludes that the Does do not have a right to intervene under Rule 24(a)(1). b. Intervention under Rule 24(a)(2)

  To intervene as of right under Rule 24(a)(2), the Does must prove that (1) their application was timely; (2) they "have an interest relating to the subject matter of the action"; (3) there is a risk that their interests "will be impaired by the action's disposition"; and (4) their interests are not represented by the Government or SAB&W. Vollmer v. Publishers Clearing House, 248 F.3d 698, 705 (7th Cir. 2001). "[T]he lack of one element requires that the motion to intervene be denied." Id. There is no dispute as to the timeliness of the Does' motions or that any interest they may have will not be adequately represented by the existing parties and may be impaired if the summons is enforced. However, the Government claims the Does have failed to prove that they have a "`direct, significant, legally protectable'" interest as required by the Seventh Circuit to intervene as of right. See Security Ins. Co. of Hartford v. Schipporeit, 69 F.3d 1377, 1380 (7th Cir. 1995) (quoting American Nat'l Bank v. City of Chicago, 865 F.2d 144, 146 (7th Cir. 1989)).

  The Supreme Court has recognized two legally protectable interests that may provide a basis for a taxpayer to intervene under Rule 24(a)(2) in an IRS summons enforcement proceeding: a privilege or a claim of abuse of process. Donaldson v. United States, 400 U.S. 517, 531 (1971) (citation omitted). The Does contend that Donaldson is not good law because it was superseded by the enactment of § 7609. As discussed above, § 7609 provides the statutory predicate for those entitled to notice of a third-party summons to intervene as of right under Rule 24(a)(1). By enacting § 7609, Congress gave a group of people who previously could only attempt to intervene under Rule 24(a)(2) grounds for intervening under Rule 24(a)(1). But § 7609 did not alter the grounds for intervention as of right under Rule 24(a)(2), which is the section addressed by the Supreme Court in Donaldson. Thus, the Court looks to Donaldson for guidance on the question of intervention under Rule 24(a)(2). The Court's reliance on Donaldson is supported by the Seventh Circuit's recent statement that ...


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