Carvallaro v. United States

United States Court of Appeals
For the First Circuit
____________________

No. 01-2237

WILLIAM CAVALLARO; PATRICIA CAVALLARO,

Petitioners, Appellants,

v.

UNITED STATES,

Respondent, Appellee.
____________________

APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS

[Hon. Patti B. Saris, U.S. District Judge]
____________________

Before

Torruella, Circuit Judge,
Stahl, Senior Circuit Judge,
and Lynch, Circuit Judge.
____________________

William H. Paine with whom Mary B. Strother and Hale and Dorr
LLP were on brief for appellants.
Edward T. Perelmuter, Attorney, Tax Division, Department of
Justice, with whom Eileen J. O'Connor, Assistant Attorney General,
Richard Farber, Attorney, Tax Division, Department of Justice, and
Michael J. Sullivan, United States Attorney, of counsel, were on
brief for appellee.
____________________

April 1, 2002
____________________
 LYNCH, Circuit Judge. This case raises important

questions about the scope of the attorney-client privilege.

William and Patricia Cavallaro ("Cavallaros") owned Knight Tool

Co., Inc., founded in 1976. Their adult sons owned Camelot

Systems, Inc., created in 1987. The Cavallaros and their sons

merged their respective corporations in 1995 and, on July 1, 1996,

the merged entity sold for approximately $97 million.

Subsequently, the Internal Revenue Service began an investigation

into the Cavallaros' correct estate and gift tax ("transfer tax")

liabilities. The IRS suspected that the parties might have
undervalued the Cavallaros' Knight company and overvalued the sons'

Camelot company to disguise a gift to the sons in the form of post-
merger stock.
In the course of this investigation, the IRS served a

summons on Ernst & Young, an accounting firm that Camelot had
retained in June of 1994. The summons requested that Ernst & Young
produce "all records" in its possession regarding any work it did

between 1984 and 1995 for the Cavallaros, their sons, and their
respective corporations. The Cavallaros moved to quash the summons
as overly broad and calling for privileged materials. They argued

that the documents in Ernst & Young's possession were protected by
the attorney-client privilege because the documents were created
by, or provided to, Ernst & Young in the course of the efforts of

the law firm Hale and Dorr to provide legal advice; particularly,
advice sought in 1994 and 1995 concerning transfer tax and merger

issues arising from the close relationship between Camelot and

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Knight. The IRS counterclaimed for enforcement of the summons. On

July 27, 2001, the district court denied the Cavallaros' petition

to quash and allowed the government's motion to enforce the
summons. Cavallaro v. United States, 153 F. Supp. 2d 52 (D. Mass.

2001). Subsequently, the district court granted the Cavallaros'

motion for stay pending appeal, thereby permitting the Cavallaros
to continue to refrain from disclosing the documents that they

allege are privileged.

As in the district court proceedings, three categories of

documents requested by the IRS are at issue: (1) documents

pertaining to the December 19, 1994, meeting -- between the

Cavallaros, their sons, a Camelot accountant, accountants from

Ernst & Young, and at least one lawyer from Hale and Dorr --
addressing transfer tax issues; (2) subsequent transfer tax

communications arising from the December 19 meeting; and (3)

documents related to communications addressing the 1995 merger of
Knight and Camelot. All of the requested documents are in Ernst &

Young's possession. They are all documents either created by Ernst

& Young or transmitted to Ernst & Young, not documents preserved

solely in Hale and Dorr's files.

On appeal, as in the district court, the Cavallaros argue

that these documents are privileged under United States v. Kovel,

296 F.2d 918 (2d Cir. 1961), despite having been either created by

or disclosed to Ernst & Young, because Ernst & Young aided Hale and

Dorr in providing legal advice. They also argue that the documents

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fall within the common-interest exception to the rule that

disclosure to a third party waives the attorney-client privilege.

Assuming arguendo that this circuit would adopt the Kovel

rule, we conclude that the documents are not privileged. We follow

somewhat different reasoning than the district court. We need not

decide whether, in all instances, the attorney or client (as
opposed to some third party) must hire the accountant in order to

sustain a privilege under Kovel. Kovel requires that to sustain a

privilege an accountant must be "necessary, or at least highly

useful, for the effective consultation between the client and the

lawyer which the privilege is designed to permit." 296 F.2d at

922. Here, no party hired Ernst & Young for this purpose.

Therefore, the attorney-client privilege did not extend to the
documents in question under the Kovel doctrine. Having found that

the documents were not covered by the attorney-client privilege, we

also conclude that they cannot fall within the common-interest
exception, which presumes a valid underlying privilege in the first

place. Consequently, we do not reach the district court's
conclusion that "[u]nder the strict confines of the common-interest

doctrine, the lack of representation for [the sons and Camelot]

vitiates any claim to a privilege," Cavallaro, 153 F. Supp. 2d at

61, because Ernst & Young was providing accounting services and so

the Kovel extension of the privilege is inapplicable to the

summoned documents, all of which were created by or disclosed to

Ernst & Young.

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 I.

The following facts are undisputed except where otherwise

noted. In 1976, the Cavallaros formed Knight Tool Co., Inc., to

manufacture tools to be used by companies such as McDonnell

Douglas, Polaroid, and Raytheon to assemble their products. Seven

years later, in 1983, William Cavallaro and one of his three sons,

Kenneth, developed a rudimentary glue-dispensing machine, which,

for several years, was commercially unsuccessful due, at least in

part, to difficulty in marketing the machine.

In 1987, the Cavallaros formed a new company, Camelot
Systems, Inc., to give the Cavallaros' three sons an opportunity to

pursue the glue-dispensing machine business. In addition to paying
its own employees, Knight paid the salaries of Camelot's employees.
The three sons were named as Camelot's sole shareholders and,

although Knight continued to make the glue-dispensing machines,
Camelot became the machines' only distributor. Knight was
Camelot's biggest supplier. In fact, Camelot's only business was

selling glue-dispensing machines and accessories manufactured by
Knight. The sons, working at Camelot, completely redesigned the
Knight glue-dispensing machine and developed several new models of

the machine. As a result, Camelot became a lucrative business.
In 1992, the Cavallaros contacted attorney Louis Hamel
Jr. Hamel was a long-time senior partner at the Hale and Dorr law

firm, specializing in trusts and estates, exempt organizations, and
pensions. He, along with other Hale and Dorr attorneys,

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periodically counseled the Cavallaros regarding Knight corporate

matters.

The Cavallaros again contacted Hamel, in October 1994,
this time for help with estate and retirement planning. Hamel

considered, among other things, potential transfer tax issues

arising in the context of the close business and family
relationships between Knight and Camelot. Between December 19,

1994, and December 31, 1995, Hale and Dorr provided legal advice to

Knight and the Cavallaros, acting on Knight's behalf, with respect

to the merger of Knight into Camelot. Hale and Dorr advised the

Cavallaros on, among other things, the drafting of affidavits

purporting to establish the pre-merger values of Knight and

Camelot.
While the Cavallaros were receiving legal advice from

Hale and Dorr, their sons, as agents of Camelot, had begun

receiving tax planning advice from Ernst & Young. Camelot began
meeting with Ernst & Young in June of 1994. On November 16, 1994,

Ernst & Young documented its relationship with Camelot in a letter

of engagement, stating that Ernst & Young would be providing a

"Review of Corporate Structure and Recommendations," a "Tax

Checkup," and "Transfer Planning." The letter, addressed to David

Frac, Camelot's Chief Financial Officer, further stated that "[a]ll

advice and other services we provide pursuant to this engagement

are solely for the benefit of Camelot . . . and not for the benefit

of anyone other than the corporation and its shareholders." Frac

signed the letter and returned it to Ernst & Young.

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 A draft of the invoice, however, for Ernst & Young's

services rendered through December 31, 1994, which explicitly

included tax services rendered pursuant to the November 14
engagement letter, refers to services rendered to both Camelot and

Knight. It was addressed and mailed to Mrs. Cavallaro at Knight.

In addition, Lawrence Goodman, of Ernst & Young, testified in his
October 27, 2000, deposition that, in 1994, he was involved in

providing tax advice to Camelot, Knight, and the Cavallaros. He

also testified that around November or December of 1995, an Ernst

& Young employee began providing services to both Camelot and

Knight. The district court, nonetheless, concluded that "the

undisputed evidence is that Ernst & Young was paid by, and worked

solely for, Camelot and its shareholders." Cavallaro, 153 F. Supp.

2d at 58.

On December 15, 1994, Ernst & Young sent a letter to

William Cavallaro recommending the merger of Knight and Camelot and
suggesting a strategy for minimizing transfer tax liability. Ernst

& Young understood that the Cavallaros and their sons would

consider selling their respective companies, and proceeded to

explain how the parties might structure the corporate relationship

in order to facilitate a transfer of some of the proceeds from such

a sale from the Cavallaros to their children while minimizing tax

liability. Ernst & Young stated that the letter would "serve as

the discussion document" for an upcoming meeting between Ernst &

Young, Hale and Dorr, the Cavallaros, their sons, Kevin McGillivary

(an accountant working for Camelot), and David Frac of Camelot.

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 The letter explained that the IRS would scrutinize the

pre-merger values of Knight and Camelot to determine the proper

allocation of the post-merger sale proceeds between the Cavallaros
and their sons. The pre-merger values were important because they

would be the benchmark for determining whether the Cavallaros had

disguised a gift to their sons in the form of post-merger stock
and, if so, the size of that gift and the resulting transfer tax

liability. Ernst & Young stated that the pre-merger profit

disparity between Knight and Camelot did not reflect the true

values of the companies:

The current structure and resulting profit split does not
seem to reflect the economic reality of the business
arrangement. If one were to combine the entities, as
currently structured, approximately 70% of the profit is
earned by the Company that bears no risk with respect to
product development, has no employees, does not bear any
costs of sales, does not service or provide any warranty
coverage on the product or own any of the technology. In
a normal distributor relationship . . . . this
arrangement does not exist.

The IRS, Ernst & Young said, would likely attribute most of the

value of the post-merger corporation to the Cavallaros, which would

defeat the tax saving goal of allocating most of the profits of the
pre-merger corporations to their sons. The letter stated that

"[b]ased on the facts that exist today, it would be hard to justify

Camelot taking more than a small amount of the allocated proceeds"

from a sale of the businesses. More specifically, Ernst & Young

suggested that, upon merger, as much as 85% of the shares of the

merged entity would go to the Cavallaros, with only 15% of the

shares going to their sons.

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 It appears that the Cavallaros desired a post-merger

distribution more favorable to their sons, but that a post-merger

redistribution would create significant transfer tax liability.
Ernst & Young proposed a solution. Ernst & Young recommended a

"two step approach" to "eliminate[ ] the exposure related to

reallocation of income." Step one was to merge Knight and Camelot.
Step two "involve[d] the gifting of stock in the merged entity by

[the Cavallaros] to [their sons] in the amounts that would result

in the desired ownership split." Ernst & Young recommended that

the gifting be done using a Grantor Retained Annuity Trust. This

gifting was necessary, according to Ernst & Young, because of the

real pre-merger distribution of assets, which heavily favored

Knight and the Cavallaros and disfavored Camelot and the sons.
Prior to December 19, 1994, the parties agree that Ernst

& Young and Hale and Dorr were not working together or in a

coordinated fashion, even if each firm knew that the other was
somehow involved in advising the Cavallaros, their sons, or the

companies. On December 19, the Cavallaros, their sons, a Camelot

accountant, accountants from Ernst & Young, and at least one lawyer

from Hale and Dorr met as planned. This meeting is important to

the case because the Cavallaros assert that, at this meeting,

"Ernst & Young began assisting Hale and Dorr with respect to

providing advice on transfer tax issues." The Cavallaros say that

Ernst & Young continued in this role, as an assistant to Hale and

Dorr, through 1995. At the meeting, neither Camelot nor the sons

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were represented by an attorney; Hale and Dorr represented only the

Cavallaros.

It is unclear what happened next. As the IRS has stated,
this is, at least in part, what they are attempting to investigate

by way of the challenged subpoena. What we do know is that the

Cavallaros did not follow Ernst & Young's December 15, 1994,
recommendations. Instead, on May 23, 1995, Mr. Cavallaro and one

of his sons signed affidavits that were at odds with Ernst &

Young's conclusion that "it would be very hard to justify Camelot

taking more than a small amount of the allocated proceeds" from a

sale of the businesses. Hale and Dorr, not Ernst & Young, prepared

these affidavits. In these two separate, but nearly identical

affidavits, Mr. Cavallaro and his son stated that Knight had
transferred, for no compensation, its glue-dispensing machine

technology to Camelot when Camelot was formed in 1987. They stated

that, at the time of the transfer, the technology "had no
ascertainable value," "had no reasonable prospect of realizing a

profit," and was "no more than a promising but raw idea." They

stated that Camelot "entirely redesigned the original dispensing

product." Knight and Camelot then supplemented these affidavits

with a confirmatory bill of sale, also dated May 23, 1995,

purporting to confirm the previously undocumented gift from Knight

to Camelot. The Cavallaros say that Hale and Dorr had prepared

drafts of all of these documents before the December 19, 1994,

meeting.

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 This claimed, undocumented transfer was important to the

pre-merger valuation of the companies and hence to the correct

post-merger distribution of shares. On December 31, 1995, Knight
merged into Camelot. As part of the merger, the Cavallaros

received 19% of Camelot's stock. This allocation was based on

Ernst & Young's December 31, 1995, valuation of the companies,
which reflected the alleged, but undocumented, technology transfer.

Ernst & Young's December 1995 valuation, attributing most of the

value of the post-merger corporation to Camelot, was at odds with

its 1994 suggestion that Camelot shares would form only a small

part of the post-merger corporation's value. On July 1, 1996, the

merged corporation was sold for approximately $97 million. The

1995 merger, based on the 1995 valuation, resulted in a
distribution of assets to the Cavallaros' sons that substantially

reduced the Cavallaros' transfer tax liabilities.

Suspicious of these circumstances, the IRS began a tax
fraud investigation into the Cavallaros' correct federal tax

liabilities for the years 1987 through 1996. The investigation

focused on whether the Cavallaros had manufactured a prior gift to

their children, through the use of the alleged technology transfer,

to avoid transfer taxes. The IRS sought to determine whether

Knight was undervalued and whether Camelot was overvalued at the

time of the merger because, if this were the case, then the

Cavallaros would have disguised a gift to their sons in the form of

post-merger stock.

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 As part of this investigation, the IRS, on December 7,

1999, issued a third-party recordkeeping summons to Ernst & Young.1

The summons began by requesting "[a]ll records relating to [Ernst
& Young's] engagements with William, Patricia, Paul, Kenneth, or

James Cavallaro[ ], Knight Tool . . . or Camelot Systems . . . at

any time from 1984 through 1995." The IRS issued the summons
because, in response to a prior summons it had issued in the

investigation, it had obtained a copy of the December 15, 1994,

Ernst & Young letter, which it believed "to be materially

inconsistent with subsequent sworn statements made [by] William

Cavallaro and a subsequent valuation rendered by Ernst & Young."

The IRS stated that the 1994 valuation "sets forth a pre-merger

analysis which is materially inconsistent with a subsequent
valuation rendered by Ernst & Young . . . . [and] materially at

odds with sworn statements submitted by William Cavallaro."

The Cavallaros moved to quash the summons as overly broad
and calling for privileged materials. They argued that the

summoned documents are privileged because Ernst & Young helped Hale

1
The IRS issued its summons under the authority granted by
26 U.S.C. § 7602 (1994 & Supp. V 1999). That section states that

[f]or the purpose of . . . determining the liability of
any person for any internal revenue tax . . . the
Secretary is authorized -- (1) To examine any books,
papers, records, or other data which may be relevant or
material to such inquiry; [and] (2) To summon the person
. . . to appear before the Secretary . . . to produce
such books, papers, records, or other data, and to give
such testimony, under oath, as may be relevant or
material to such inquiry.

Id. § 7602(a) (1994).

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and Dorr provide legal advice beginning on December 19, 1994. They

also argued that the documents fall within the common-interest

rule.
Subsequently, the Cavallaros provided the IRS with a

substantial number of documents, including excerpts from the

diaries of Ernst & Young employees who worked for Knight or Camelot
and what the Cavallaros say are nearly all of Knight's and

Camelot's accounting records. This dispute is over those remaining

documents that the Cavallaros have refused to produce.

The IRS counterclaimed for enforcement of the summons.

On September 19, 2000, the district court heard arguments and

authorized the IRS to depose Lawrence Goodman, a senior manager in

Ernst & Young's tax department, primarily to determine whether any
additional documents existed relating to Ernst & Young's work for

the Cavallaros, their sons, and the two companies. Fed. R. Civ. P.

30(b)(6). After the deposition, Hale and Dorr provided the IRS
with an amended privilege log and a letter stating the reasons why

it believed each of the documents in the log to be privileged.

On July 27, 2001, the district court denied the

Cavallaros' petition to quash and allowed the government's motion

to enforce the summons. Cavallaro, 153 F. Supp. 2d 52. The

district court noted that the communications in question -- that

is, those documents that the Cavallaros continued to assert were

privileged -- fell into three categories: "(1) notes from the

December 19, 1994 meeting addressing transfer tax issues; (2)

follow-up communications arising from the Dec. 19th meeting; and

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(3) subsequent communications addressing the merger of the two

companies." Id. at 56. These same categories of documents remain

at issue.2
The district court reasoned that the documents were not

privileged under Kovel, 296 F.2d 918, because the Cavallaros had

failed to demonstrate that one of the key elements of a Kovel

privilege was met: that is, the Cavallaros had not shown that Ernst

& Young's role was to facilitate communications, between the

Cavallaros and Hale and Dorr, made for the purpose of obtaining

legal advice. Cavallaro, 153 F. Supp. 2d at 58. The "case does

not fit into the Kovel paradigm," the district court held, because

Ernst & Young, at all times, acted as an agent of Camelot and the

sons, not as an agent of Hale and Dorr or the Cavallaros. Id. at
59.

As to the common-interest argument, the district court

concluded that, at the December 19, 1994, meeting, and going
forward, Hale and Dorr represented only the Cavallaros, and

possibly Knight, but not the sons or Camelot. Id. at 61.

Therefore, the district court held that, "[u]nder the strict

2
With respect to the notes from the December 19 meeting
and any follow-up communications arising from this meeting, the
Cavallaros state that they have already produced all of the
requested documents that Ernst & Young created. They say that all
of the transfer tax documents still claimed as privileged were
either created by Hale and Dorr or sent to Hale and Dorr by other
accountants working for the family or their businesses, with one
exception: a letter from David Frac of Camelot to Lawrence Goodman,
an Ernst & Young senior manager, regarding preparation for a
meeting with Hale and Dorr. With respect to category (3), the
merger, the Cavallaros say that several of the documents still
withheld were created by Ernst & Young.

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confines of the common-interest doctrine, the lack of

representation for the remaining parties vitiates any claim to a

privilege." Id. "[B]ecause only one party to this purported
common-interest arrangement was represented by counsel," the

district court held, "there is no valid claim of privilege under

the common-interest doctrine." Id. at 62.3

II.

"On an appeal respecting a privilege claim, the standard

of review depends on the issue." United States v. Mass. Inst. of

Tech., 129 F.3d 681, 683 (1st Cir. 1997). We review district court
rulings on questions of law de novo; we review district court fact

findings for clear error; and we review "discretionary judgments
such as evidentiary rulings" for abuse of discretion. Id. Here
the parties contest the formulation of both the Kovel doctrine and

the common-interest doctrine, legal questions which we review de
novo. The parties also contest the district court's findings of
fact. Indeed, the Cavallaros assert that "the District Court found

no facts," a claim which is an overstatement.
Neither the United States Constitution, nor any federal
statute, nor any Supreme Court rule governs the proper scope of the

attorney-client privilege in this case. Nor does state law provide
the rule of decision. Fed. R. Evid. 501 states that in such cases,
the issue "shall be governed by the principles of the common law as

3
The district court did not address the government's
argument that the documents fall under the crime-fraud exception.
Cavallaro, 153 F. Supp. 2d at 58 n.3.

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they may be interpreted by the courts of the United States in the

light of reason and experience."

Before discussing exceptions to the attorney-client
privilege, and exceptions to those exceptions, we first lay out the

essential elements of the privilege, as described by Wigmore and

previously endorsed by this court:
(1) Where legal advice of any kind is sought (2) from a
professional legal adviser in his capacity as such, (3)
the communications relating to that purpose, (4) made in
confidence (5) by the client, (6) are at his instance
permanently protected (7) from disclosure by himself or
by the legal adviser, (8) except the protection be
waived.

8 J.H. Wigmore, Evidence § 2292, at 554 (McNaughton rev. 1961),

quoted in Mass. Inst. of Tech., 129 F.3d at 684.

The rationale for the privilege is that safeguarding
communications between attorney and client encourages disclosures

by the client to the lawyer that facilitate the client's compliance

with the law and better enable the client to present legitimate
arguments should litigation arise. Mass. Inst. of Tech., 129 F.3d

at 684. The privilege is well established; indeed, it "first

appeared in the sixteenth century," P.R. Rice, Attorney-Client

Privilege in the United States § 1:1, at 6 (2d ed. 1999), and it is

"the oldest of the privileges for confidential communications known

to the common law," Upjohn Co. v. United States, 449 U.S. 383, 389

(1981); see also Wigmore, supra, § 2290, at 542. We note, but do

not rely on, the doctrine of construing the privilege narrowly,

which has particular force in the context of IRS investigations

given the "congressional policy choice in favor of disclosure of

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all information relevant to a legitimate IRS inquiry."4 United

States v. Arthur Young & Co., 465 U.S. 805, 816 (1984). Even in

other contexts, there is a more general reason for construing the
attorney-client privilege narrowly: the belief that "[t]he

investigation of truth and the enforcement of testimonial duty

demand the restriction, not the expansion, of these privileges."
Wigmore, supra, § 2192, at 73; see also In re Grand Jury Subpoena,

274 F.3d 563, 571 (1st Cir. 2001) ("[T]he privilege applies only to

the extent necessary to achieve its underlying goal of ensuring

effective representation through open communication between lawyer

and client.").

In contrast to the attorney-client privilege, "no

confidential accountant-client privilege exists under federal
law."5 Couch v. United States, 409 U.S. 322, 335 (1973), quoted in

Arthur Young, 465 U.S. at 817; see also United States v. Arthur

Andersen & Co., 623 F.2d 725, 729 (1st Cir. 1980) (declining to
depart from Couch's general rule). The parties to this litigation

4
"As a tool of discovery, the § 7602 summons is critical
to the investigative and enforcement functions of the IRS." United
States v. Arthur Young & Co., 465 U.S. 805, 814 (1984). While
§ 7602 is "subject to the traditional privileges," United States v.
Euge, 444 U.S. 707, 714 (1980), we are cautious of "recognizing
exceptions to the broad summons authority of the IRS or in
fashioning new privileges that would curtail disclosure under
§ 7602" absent clear congressional directions. Arthur Young, 465
U.S. at 816-17.
5
In 1998, Congress established a limited privilege for
accountant-client communications. Pub. L. No. 105-206, title III,
§ 3411, 112 Stat. 685, 751 (codified at 26 U.S.C. § 7525 (Supp. V
1999)). The privilege, however, applies only to communications
occurring after July 22, 1998. Id. § 3411(c). Because all of the
communications at issue occurred before this date, neither party
argues that the statutory privilege applies here.

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recognize as much, but agree, correctly, that accountant-client

communications are privileged if they meet the traditional

requirements of the attorney-client privilege. With this
foundation laid, we turn to the Cavallaros' privilege claims.

The Cavallaros argue that the attorney-client privilege

protects the three categories of subpoenaed documents, all of which
are in Ernst & Young's possession. For a communication to be

covered by the attorney-client privilege, the communication must be

made in confidence. Wigmore, supra, § 2292, at 554. Another

requirement is that the privilege not be waived. Id. The presence

of third parties during an attorney-client communication is often

sufficient to undermine the "made in confidence" requirement, 3

Weinstein's Federal Evidence § 503.15[3] (J.M. McLaughlin, ed., 2d
ed. 2002), or to waive the privilege, E.S. Epstein, The Attorney-

Client Privilege and the Work-Product Doctrine 168-69, 189 (4th ed.

2001).
Here, however, the Cavallaros invoke two doctrines to

support their claim that disclosing the subpoenaed documents to
Ernst & Young neither undermined the confidentiality requirement

nor waived the privilege. First, they say that the documents were

all created or received by Ernst & Young after it began to assist

Hale and Dorr in rendering legal advice and so the documents fall

under the Kovel doctrine, which they characterize as holding that

the presence of some third parties that are "necessary, or at least

highly useful," to facilitating attorney-client communication does

not destroy the privilege. 296 F.2d at 922. Second, they say that

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the documents fall within what they call the "common-interest

privilege." The Cavallaros bear the burden of establishing that

the attorney-client privilege is a defense to the enforcement of
the IRS's summons, but, if the privilege is established, the

government bears the burden of showing that the privilege is

defeated by an exception. Fed. Deposit Ins. Corp. v. Ogden Corp.,

202 F.3d 454, 460 (1st Cir. 2000).

A. Kovel

Generally, disclosing attorney-client communications to

a third party undermines the privilege. United States v. Ackert,
169 F.3d 136, 139 (2d Cir. 1999) (stating that "the attorney-client

privilege generally applies only to communications between the
attorney and the client"); Weinstein's Federal Evidence, supra, at

§ 503.15[3]; Epstein, supra, at 168-69, 189. An exception to this

general rule exists for third parties employed to assist a lawyer
in rendering legal advice. Sup. Ct. Standard 503; Weinstein's

Federal Evidence, supra, at §§ 503.12[3][a] and [4][b]. In Kovel,

the Second Circuit held that, because "the complexities of modern
existence prevent attorneys from effectively handling clients'
affairs without the help of others," the attorney-client

"'privilege must include all the persons who act as the attorney's
agents.'" 296 F.2d at 921 (quoting Wigmore, supra, § 2301, at

583).6

6
We will assume arguendo that this circuit would adopt the
Kovel test or a similar standard, as so many other circuits have
done, but we need not decide the question. E.g., United States v.
Bornstein, 977 F.2d 112, 116-17 (4th Cir. 1992); United States v.

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 This logic applies to accountants: "[T]he presence of an

accountant, whether hired by the lawyer or by the client, while the

client is relating a complicated tax story to the lawyer, ought not
destroy the privilege" when "the accountant is necessary, or at

least highly useful, for the effective consultation between the

client and the lawyer which the privilege is designed to permit."
Id. at 922. The communication, however, must be made "for the

purpose of obtaining legal advice from the lawyer." Id. "If what

is sought is not legal advice but only accounting service . . . ,

or if the advice sought is the accountant's rather than the

lawyer's, no privilege exists." Id.; see also United States v.

Adlman, 68 F.3d 1495, 1500 (2d Cir. 1995).

The district court concluded that "Kovel requires that
either the Cavallaros, Knight, or Hale and Dorr hired Ernst & Young

for the purpose of facilitating a legal communication with Hale and

Dorr." Cavallaro, 153 F. Supp. 2d at 57. It said that the
Cavallaros must show that "Ernst & Young was an agent of Hale and

Dorr, Knight or the Cavallaros." Id. at 58. We know that such a

showing is not sufficient to sustain the privilege: as the district

court recognized, an attorney, merely by placing an accountant on

her payroll, does not, by this action alone, render communications

El Paso Co., 682 F.2d 530, 541 (5th Cir. 1982); In re Grand Jury
Proceedings, 220 F.3d 568, 571 (7th Cir. 2000); United States v.
Cote, 456 F.2d 142, 144 (8th Cir. 1972); United States v. Judson,
322 F.2d 460, 462-63 (9th Cir. 1963); Fed. Trade Comm'n v. TRW,
Inc., 628 F.2d 207, 212 (D.C. Cir. 1980). See also Sup. Ct.
Standard 503(b) and 503(a)(3).

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between the attorney's client and the accountant privileged.7 Id.

at 57; Kovel, 296 F.2d at 921. We need not reach the question of

whether such a showing is necessary. That is, we need not
determine whether, in all instances, the attorney or client (as

opposed to some third party) must hire the accountant in order to

sustain a privilege under Kovel.

Here, the record does not show that any party hired Ernst

& Young to assist Hale and Dorr in providing legal advice, and we

note that the agency relationship between the parties is relevant

to, but not dispositive of, this question. Kovel requires that to

sustain a privilege an accountant must be "necessary, or at least

highly useful, for the effective consultation between the client

and the lawyer which the privilege is designed to permit." Kovel,
296 F.2d at 922. This requirement resolves the Kovel dispute

because the evidence shows that Ernst & Young was not employed for

this purpose.
Whether Hale and Dorr, as opposed to the Cavallaros or

their sons, hired Ernst & Young is, as the district court
recognized, probative when considering whether Ernst & Young was

employed to help Hale and Dorr render legal advice. Typically,

"[a]gents of an attorney are . . . retained by or at the discretion

of the attorney and under the attorney's supervision." Rice,

7
Accordingly, were the Cavallaros to show that they
employed Ernst & Young, or that Knight or Hale and Dorr did so,
this alone would be insufficient to bring the disputed
communications within Kovel. See United States v. Gurtner, 474
F.2d 297, 299 (9th Cir. 1973) (stating that not all consultations
with accountants, acting as attorneys' agents, are privileged).

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supra, § 3:5, at 30. Here, the bulk of the evidence supports the

claim that, at the December 1994 meeting, and going forward, Ernst

& Young acted as an agent for the sons or Camelot, but not for Hale
and Dorr, the Cavallaros, or Knight.

No one disputes that Camelot initially hired Ernst &

Young. Only one month prior to the December 1994 meeting, Ernst &
Young sent Camelot a letter of engagement stating that "[a]ll

advice and other services we provide pursuant to this engagement

are solely for the benefit of Camelot . . . and are not for the

benefit of anyone other than the corporation and its shareholders."

Camelot's CFO, David Frac, signed the letter and returned it to

Ernst & Young. Everyone also agrees that Camelot hired Ernst &

Young to provide financial advice, not to assist any lawyers.
Prior to the December 1994 meeting, Ernst & Young was not in any

way coordinating its accounting advice with Hale and Dorr's legal

advice.
The Cavallaros say that things changed at the December

1994 meeting. At that meeting, they say, it was "clear to all

parties" that "Ernst & Young began assisting Hale and Dorr with

respect to providing advice on transfer tax issues." They claim

that Ernst & Young continued in this role, as an assistant to Hale

and Dorr on transfer tax and, later, merger issues, through 1995.

More specifically, the Cavallaros argue that Ernst & Young assisted

Hale and Dorr in providing legal advice, and improved that advice,

by, "[a]mong other things, . . . review[ing] the factual basis of

Hale and Dorr's analysis to help determine whether it was

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consistent with the accounting records that Ernst & Young had

reviewed." The district court properly rejected the argument.

The district court found that "[t]he Cavallaros have not
produced any contemporaneous documentation to suggest that, as of

December 19, 1994, Ernst & Young's professional relationship with

the Cavallaro parents changed in a way that would trigger a
privilege." Cavallaro, 153 F. Supp. 2d at 59. The Cavallaros urge

that the district court overlooked some evidence. First, that the

bill for Ernst & Young's services rendered through December 31,

1994, refers to services rendered to both Camelot and Knight.

Second, that Ernst & Young mailed this bill to Mrs. Cavallaro at

Knight. Third, that Lawrence Goodman testified that, in 1994,

Ernst & Young was involved in providing tax advice to Camelot,
Knight, and the Cavallaros. The district court did not mention

this evidence, but it does not change the outcome here. None of it

is "contemporaneous documentation" of the relationship between the
parties at the meeting. The bill was presumably drafted after

services were rendered. The parties never formally commemorated

this purportedly changed relationship. Mr. Goodman's statement was

made after the fact, in the midst of litigation, with little

support in the contemporaneous record. The district court did not

clearly err when it found as it did.

But all of this is slightly off-topic. The agency

question aside, the evidence is strong that Ernst & Young acted to

provide accounting advice rather than to assist Hale and Dorr in

providing legal advice. Cf. United States v. Judson, 322 F.2d 460,

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462-63 (9th Cir. 1963) (Kovel exception covers documents created by

an accountant at an attorney's request for the purpose of advising

and defending the client). Prior to the December 1994 meeting,
Ernst & Young provided accounting advice to Camelot independent of

Hale and Dorr. After that meeting, the evidence supports the

conclusion that Ernst & Young and Hale and Dorr continued to work
on their respective, separate tracks, albeit in a more coordinated

way.

We are skeptical of the Cavallaros' claim that Ernst &

Young was present to assist attorney Hamel of Hale and Dorr, who

was a senior partner of over twenty years' experience, and a

specialist in trusts and estates, including, necessarily,

consequent tax advice. Recognizing that an attorney's experience
alone is not prima facie evidence that an accountant was not

"necessary, or at least highly useful," Kovel, 296 F.2d at 922, to

the lawyer in providing legal assistance, we note that when a party
hires an accountant to provide accounting advice, and only later

hires an attorney to provide legal advice, it is particularly
important for the party to show that the accountant later acted as

an agent necessary to the lawyer in providing legal advice. See

Rice, supra, § 3:5, at 33-34 (noting that "when the client has

previously employed the agent independent of the attorney-client

relationship, to perform the same services that he will perform for

the attorney[,]. . . . [t]his creates a risk that the agent's

retention by the attorney is simply a subterfuge"); id. at 35 n.66

(citing Swarthmore Radiation Oncology, Inc. v. Lapes, No. 92-3055,

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1994 U.S. Dist. LEXIS 1970, at *9-12 (E.D. Pa. Feb. 18, 1994)).

The Cavallaros have failed to make a sufficient showing here.

Contrary to the Cavallaros' assertion that a mere finding
that an account was "useful" is all that is required under Kovel,

"[t]he available case law indicates that the 'necessity' element

means more than just useful and convenient. The involvement of the
third party must be nearly indispensable or serve some specialized

purpose in facilitating the attorney-client communications. Mere

convenience is not sufficient." Epstein, supra, at 187. The

Cavallaros' claim that Ernst & Young "had the capacity to benefit

the quality of the legal advice that Hale and Dorr would render"

and that, "[a]mong other things," Ernst & Young double-checked Hale

and Dorr's legal advice to make sure "it was consistent with the
accounting records that Ernst & Young had reviewed" is not enough

to show that Ernst & Young was necessary, or at least highly

useful, in facilitating Hale and Dorr's provision of legal advice.
That ends the matter.

B. Common Interest

The common-interest doctrine is typically understood to
apply "[w]hen two or more clients consult or retain an attorney on

particular matters of common interest." Weinstein's Federal

Evidence, supra, § 503.21[1]; Wigmore, supra, § 2312, at 603-09.
In such a situation, "the communications between each of them and

the attorney are privileged against third parties." Weinstein's

Federal Evidence, supra, § 503.21[1]; see also In re Grand Jury

Subpoena, 274 F.3d at 573; Fed. Deposit Ins. Corp., 202 F.3d at

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461. Similarly, the "privilege applies to communications made by

the client or the client's 'lawyer to a lawyer representing another

in a matter of common interest.'" Weinstein's Federal Evidence,
supra, § 503.21[2] (quoting Sup. Ct. Standard 503(b)(3)).

Whether one refers to either or both of these instances

as "common interest," "joint defense," "joint client," or "allied
lawyer" doctrines does not change the outcome of this case. The

common-interest doctrine, like the rule announced in Kovel, is "not

an independent basis for privilege, but an exception to the general

rule that the attorney-client privilege is waived when privileged

information is disclosed to a third party." Epstein, supra, at

196.

Our resolution of the Cavallaros' Kovel argument resolves
their common-interest claim as well. Although the district court

directed its inquiry toward the alignment of interests between all

of the parties in the case and then decided that, "[e]ven if there
were a sufficient commonality of interest, . . . . [u]nder the

strict confines of the common-interest doctrine, the lack of

representation for [the sons and Camelot] vitiates any claim to a

privilege," 153 F. Supp. 2d at 60, we do not need to reach these

issues.

Ernst & Young was not covered by the attorney-client

relationship between Hale and Dorr and its clients. Even if the

Cavallaros, their sons, and their respective companies all had an

exact unanimity of interest, it would not render communications

created by or shared with Ernst & Young privileged when Ernst &

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Young was providing accounting services, not facilitating

communication of legal advice between Hale and Dorr and its

clients.
The common-interest doctrine prevents clients from

waiving the attorney-client privilege when attorney-client

communications are shared with a third person who has a common
legal interest with respect to these communications, for instance,

a codefendant. The doctrine does not extend to prevent waiver when

an accountant, not within the Kovel doctrine, is made privy to the

attorney-client communications. In such an instance, the

accountant does not share an interest in receiving legal advice

from the lawyer and cannot logically be said to have an interest in

common with the represented party or parties. Under Kovel, we know
that when a client, a lawyer, and an accountant are present, the

accountant's presence will destroy the privilege if the accountant

is not "necessary, or at least highly useful, for the effective
consultation between the client and the lawyer." 296 F.2d at 922.

It follows that the client -- in this case the Cavallaros -- cannot

resurrect the privilege by adding another party (their sons) and

that party's accountant to the mix. This is true even if the sons

share a common interest with the parents. To hold otherwise would

be to create a loophole in Kovel whereby the privilege is

undermined when a client and his attorney disclose information to

an accountant who is not "necessary, or at least highly useful, for

the effective consultation between the client and the lawyer," 296

F.2d at 922, but the privilege is preserved when the client brings

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another party with a common interest on board and that other

party's accountant is present.

The Cavallaros' argument that every party to the
communication need not have his own lawyer in order for the common-

interest doctrine to apply, although relevant to the district

court's reasoning, is in the end beside the point, whether or not
the argument is valid. Our conclusion that the documents are not

privileged under Kovel resolves the common-interest claim because

the common-interest rule presumes a valid underlying privilege.

There is no valid underlying privilege here because, by having

discussions with, and disclosing the documents to, Ernst & Young,

an accounting firm not necessary to permit Hale and Dorr to

communicate legal advice to its client, the Cavallaros either
waived the attorney-client privilege or undermined the privilege's

confidentiality requirement. One cannot create a privilege, where

previously there was none, simply by introducing a third party
(with or without a common interest) into the circle within which

documents are shared.

III.

For these reasons, the district court's judgment, denying

the Cavallaros' motion to quash the summons and allowing the United
States's motion to enforce the summons, is affirmed.

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