Government Seeks Law Firm Compliance With Subpoena in Tax Case

UNITED STATES OF AMERICA,
Plaintiff,
v.
MOSHE LAX, individually, as an executor of the Chaim Lax Estate, as a trustee of the Chaim Lax Family Trust, and as a trustee of the GAMA Trust; ZLATY SCHWARTZ, individually, as executor of the Chaim Lax Estate, as trustee of the Chaim Lax Family Trust, and as a trustee of the GAMA Trust; SHAINDY LAX; JUDITH LAX; J.L., a minor; 299 HEWES STREET REALTY CORP; 307 HEWES STREET REALTY CORP; JBAM REALTY LLC, a/k/a JBAM REALTY 2 LLC; BEN ZION JACOBOWITZ; TOBY JACOBOWITZ; SL HOLDINGS I, LLC; SL HOLDINGS II, LLC; SL HOLDINGS III, LLC; SL HOLDINGS IV, LLC; SL HOLDINGS V, LLC; DIAMOND DYNAMICS LLC; KGK JEWELRY LLC; CONGREGATION BAIS YEHUDAH D'GANITCH; LX HOLDINGS LLC; MORRIS SCHLAGER; GITTY SCHLAGER; JOSEPH GREEN; HANNAH GREEN; HENNY GREEN; and HERSHI GREEN,
Defendants.

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF NEW YORK

Dist. Judge I. Leo Glasser

Mag. Judge Peggy Kuo

BRIEF IN SUPPORT OF THE UNITED STATES' MOTION TO COMPEL MELTZER, LIPPE, GOLDSTEIN & BREITSTONE, LLP'S COMPLIANCE WITH THE MARCH 12, 2021 MINUTE ORDER AND WITH THE UNITED STATES' SUBPOENA

The United States seeks an order compelling Meltzer, Lippe, Goldstein & Breitstone, LLP (“Meltzer Lippe”) to testify in response to the United States' Fed.R.Civ.P. 30(b)(6) subpoena. Despite our best efforts to work cooperatively with Meltzer Lippe, it refuses to provide dates and identify a witness for a 30(b)(6) deposition. Meltzer Lippe is an important witness. The firm designed and promoted the $40 million purported estate planning transaction here. Defendant Schwartz relies on the firm's advice as her primary defense in this litigation. Schwartz also claims that she couldn't get information about the Estate and other matters. Much of this information Meltzer Lippe could have provided. Because Meltzer Lippe is integral to this litigation, we now seek an order to compel Melzer Lippe's compliance with our subpoena and the Court's Minute Order.

BACKGROUND

A. The suit generally

In 2007, Chaim Lax, helped by Meltzer Lippe, transferred millions of dollars of real estate to a family trust in exchange for a self-cancelling installment note that would cancel at his death (hereinafter “SCIN”). Shortly before the transaction, Mr. Lax was diagnosed with advanced stomach cancer, which has a very low survival rate. Mr. Lax also knew he was facing significant federal tax liabilities. The United States alleges that the SCIN was a fraudulent attempt by Meltzer Lippe and Chaim Lax to shelter Mr. Lax's assets from the IRS.

Mr. Lax died in 2008. Following Mr. Lax's death, Meltzer Lippe served as counsel to the Estate Executors. We allege that the Executors, with assistance from professionals, including Meltzer Lippe, fraudulently transferred Estate assets, making the Estate insolvent and unable to pay its federal tax liabilities. Meltzer Lippe also represented the Executors in the United States Tax Court, in which the court made a deficiency determination about a portion of the liability at issue in the United States' Motion for Partial Summary Judgment. ECF No. 188.

B. The present discovery dispute.

The United States served Meltzer Lippe with a 30(b)(6) deposition subpoena. Meltzer Lippe objected to the subpoena, claiming that it imposed an undue burden, that no one at the firm knows anything about the topics, and that the testimony is privileged. Rather than make a designee available, Meltzer Lippe has engaged in protracted obstructionism, interfering with the parties' ability to complete discovery. Meltzer Lippe claimed that it would facilitate a remote deposition of Joseph Katz, who retired from the firm in 2006, if the United States withdrew its subpoena. Despite many discussions, we were unable to resolve matters. Meltzer Lippe and the United States filed a joint letter brief seeking assistance from the Court. ECF No. 218.

By the March 12, 2021 Minute Order, Magistrate Judge Kuo ordered Meltzer Lippe to work cooperatively with the parties to resolve disputes relating to the United States' subpoena, including agreeing to a deposition schedule. Instead, Meltzer Lippe unsuccessfully appealed the Minute Order, continuing to make the same unsupported arguments. ECF No. 221. Judge Glasser denied Meltzer Lippe's objections. ECF No. 228.

Meanwhile, we prepared written questions for Meltzer Lippe, Zlaty Schwartz, and Moshe Lax to review. We also identified which documents we might use relating to each topic area. Our discussions with Meltzer Lippe again were not fruitful. Meltzer Lippe continued to refuse to provide any potential deposition dates. Meltzer Lippe did not facilitate the Katz deposition. See Larson Decl. Ex. A, Katz Deposition Transcript (“Katz Tr.”) at p.93 ln.14 - p.94 ln.6.

Defendant Schwartz sought and received authorization to serve Katz with a deposition subpoena by email. April 26, 2021 Minute Order. The parties deposed Katz. He was unable to answer many factual questions because he retired from Meltzer Lippe a year before the $40 million “transaction” here occurred. Katz Tr at p.19 ln.7 - 23. Much of the testimony we seek relates to events after his retirement. Decl. ¶ 4. Katz suggested that Michael Shaffer, a current Meltzer Lippe attorney, handled Lax matters after his retirement and would have that information. Katz Tr at p.40 ln.2 - 20.

The parties have continued discussions with Meltzer Lippe, but the firm continues to refuse to provide deposition dates or identify a witness.

ARGUMENT

Courts have broad discretion to require compliance with a court order. See Perfect Fit Indus., Inc. v. Acme Quilting Co., Inc., 673 F.2d 53, 56–57 (2d Cir.1981). Like a court order, Rule 45 subpoenas operate as enforceable mandates of the court. See Bd. of Governors of Fed. Rsrv. System v. Pharaon, 140 F.R.D. 634, 641–42 (S.D.N.Y.1991). Defiance of an order or Rule 45 subpoena can result in contempt sanctions. Fed.R.Civ.P. 45(e). Without question, Meltzer Lippe is defying the United States' subpoena and the Court's March 12, 2021 Minute Order.

As the moving party, we bear the initial burden of proving the discovery is relevant, and Meltzer Lippe bears the burden of proving the discovery is in fact privileged or work product, unduly burdensome, expensive, or both. See Fireman's Fund Ins. Co. v. Great Am. Ins. Co. of N.Y., 284 F.R.D. 132, 135 (S.D.N.Y. 2012).

A. Meltzer Lippe is at the heart of the issues, claims, and defenses in this case; it has readily available documents; and it billed over $200,000 for its work. An ordinary Rule 30(b)(6) deposition does not impose an undue burden.

To determine whether a subpoena imposes an undue burden, “courts weigh the burden to the subpoenaed party against the value of the information to the serving party by considering factors such as relevance, the need of the party for the documents or testimony, the breadth of the document request, the time period covered by it, the particularity with which the documents are described and the burden imposed.” Citizens Union of City of New York v. Attorney Gen. of New York, 269 F. Supp. 3d 124, 138 (S.D.N.Y. 2017). Undue burden cannot be established by inconvenience alone. See Kirshner v. Klemons, 2005 WL 1214330, at *2 (S.D.N.Y. May 19, 2005). Instead, the withholding party must provide evidence by affidavit or otherwise that would enable a court to evaluate the scope of any alleged inconvenience, much less conclude that the burden imposed is undue. Kirshner, 2005 WL 1214330, at *2; Aristocrat Leisure Ltd. v. Deutsche Bank Tr. Co. Americas, 262 F.R.D. 293, 300 (S.D.N.Y. 2009). “General and conclusory objections as to relevance, overbreadth, or burden are insufficient to exclude discovery of requested information.” Lindsey v. Butler, 2017 WL 4157362, at *3 (S.D.N.Y. 2017).

1. Meltzer Lippe's actions, inactions, and advice are at the heart of this suit.

Without question, the subpoena seeks relevant testimony. Meltzer Lippe developed the $40 million-dollar purported estate planning transaction at issue in our suit. See ECF No. 143-14. The firm represented the Estate and Executors (both defendants here) in the probate proceeding, before the IRS, and in the Tax Court litigation. We seek testimony about Estate administration, IRS audits of Lax entities, and the $40 million SCIN transaction which we allege was done to avoid federal tax liabilities.

As for the SCIN transaction, the Note itself claims that the transaction was “negotiated.” Decl. ¶ 5, Ex. C at p. 26. The Purchase Agreement claims the property transferred was valued based on the current market values. Id. at p. 4. And it claims that the interest rate incorporates a premium because Chaim Lax might not survive to receive all payments under the note terms. Id. at p. 26-27. Katz testified that, while he conceptually discussed the SCIN, current Meltzer Lippe attorneys put the transaction together. Katz Tr at p.40 ln.2 - 20; p.47 ln.5 - p.48 ln.8. Katz didn't know how the interest rate was determined. Id. at p. 45 ln.21 - p.47 ln.4. He also didn't know how the properties were valued or whether valuations were done. Id. at p.42 ln.3 - p.43. ln.3. He knew very little about the transaction details. Id. at p.40 ln.2 - p. 48. Ln.24.

Defendant Schwartz identified four Meltzer Lippe attorneys as deponents. ECF Nos. 147, 160. Schwartz has relied on Katz's affidavit and Meltzer Lippe's advice and actions in various filings, ECF No. 143, and supporting documents. ECF No. 202. Schwartz relies on Meltzer Lippe's advice as a defense to the claims against her. ECF No. 122, First and Fifth Defenses. See also ECF No. 223-1 at 20. And in opposing summary judgment, Schwartz has questioned Meltzer Lippe's actions and inactions. See ECF No. 202.

Meltzer Lippe represented the Estate and the Executors in Surrogate's Court. And it represented the Estate in Tax Court. Finally, defendants and Meltzer Lippe itself have produced or claimed privilege over hundreds of documents prepared by or sent to or from Meltzer Lippe employees relating to matters at issue in this litigation. Decl. ¶ 6, Ex. D and ¶ 7.

Meltzer Lippe was at the heart of the $40 million SCIN transaction, and a defendant is relying on its advice as a defense. Any suggestion that it is an irrelevant witness is baseless.

2. Any claim of undue burden is hyperbole — this 30(b)(6) subpoena is unremarkable.

Meltzer Lippe's claim that, because it has already responded to a document subpoena, preparing a witness to testify is an undue burden, is equally meritless. It has yet to explain, with precision, the basis for its claim, when it has documents and witnesses at its disposal from which to prepare.

Fed.R.Civ.P. 30(b)(6) requires the firm to designate an individual or individuals who “must testify about information known or reasonably available to the organization.” See Reilly v. Natwest Markets Grp., Inc., 181 F.3d 253, 268 (2d Cir.1999). The corporation must prepare the designee so that they may give knowledgeable answers. Meyer Corp. U.S. v. Alfay Designs, Inc., 2012 WL 3536987 at *8 (E.D.N.Y. 2012) (quoting Spanski Enterprises, Inc. v. Telewizja Polska, S.A., 2009 WL 3270794 at *3 (S.D.N.Y. 2009)). The responding party must “prepare the designee 'to the extent matters are reasonably available, whether from documents, past employees, or other sources.'” Rahman v. Smith & Wollensky Rest. Grp., Inc., 2009 WL 773344, at *1 (S.D.N.Y. 2009).

Meltzer Lippe attorneys Joseph Katz and Michael Schaeffer, the attorneys who worked on these matters, appear on the firm's website today. Decl. ¶ 8, Ex. E. and ¶ 9, Ex F. Both are active members of the New York Bar. Decl. ¶ 10, Ex. G. and ¶ 11, Ex H. Mr. Schaffer, a current partner, was personally involved in matters covered by our subpoena and appears throughout Meltzer Lippe's own privilege log. Decl. ¶ 6, Ex. D. Indeed, Meltzer Lippe produced hundreds of documents in response to our document subpoena with which it could prepare a witness or witnesses. Decl. ¶ 7.

To prevail, Meltzer Lippe must provide compelling evidence of the actual manner and extent of the purported burden and the probable negative consequences of compliance — a high hurdle here given the firm's easy access to information. Lindsey v. Butler, at *3. Meltzer Lippe's evidence must relate to the anticipated burden of preparing a witness. It cannot rely on its unsubstantiated claims about responding to a document subpoena. Id.

When earlier pressed by Magistrate Kuo to identify information necessary to prepare for the deposition, Meltzer Lippe's counsel admitted, “I don't know the full cast of players . . . I didn't work on this.” ECF No. 223-1 at 16. In response to more questions, the firm's counsel again admitted, “I don't know . . . All I know is Chaim Lax would've been [a client]. Moshe Lax . . . may have been one of them. I don't know who else. Again, I'm not a — this is not a matter I worked on.” Id. at 17. Unsubstantiated claims of burden inconvenience are simply insufficient to establish undue burden. Croom v. Western Conn. State Univ., at 17. That Meltzer Lippe must prepare a witness, when it has the necessary information in its possession or readily available, is simply not an undue burden.

3. “No One Remembers Any of This” does not excuse compliance.

Meltzer Lippe may be under the mistaken impression that personal knowledge is required of a Rule 30(b)(6) designee. Rule 30(b)(6) requires a corporate deponent to “make available 'such number of persons as will” be able “to give complete, knowledgeable and binding answers'” on its behalf. Reilly, 181 F.3d at 268. The designee need not have personal knowledge; the corporation has an obligation to prepare its designee to testify. Spanski Enters. v. Telewizja Polska, S.A., 2009 U.S. Dist. LEXIS 95288, at *8 (S.D.N.Y. Oct. 13, 2009). See also Black Horse Lane Assoc., L.P. v. Dow Chem. Corp., 228 F.3d 275, 300-12 (3rd Cir. 2000) (affirming sanctions for failure to prepare 30(b)(6) designee who lacked personal knowledge) citing Resol. Tr. Corp. v. Southern Union Co., 985 F.2d 196, 196-97 (5th Cir.1993) (affirming sanctions where designee was unprepared despite authoring documents relating to the deposition topics).

And assuming personal knowledge is required, any argument by Meltzer Lippe is contradicted by its own privilege log and the documents produced in this case. Michael Schaffer is a current partner. See https://www.meltzerlippe.com/attorneys/michael-j-schaffer/. His name appears nearly 300 times on Meltzer Lippe's own privilege log. Decl. ¶ 6, Ex. D. Many of these entries appear to be emails with attachments. Id. The log does not separately identify the attachments, although presumably these too are in Meltzer Lippe's possession. Michael Schaffer is also the author or recipient of nearly 100 documents produced in this case. See Decl. ¶ 12. Mr. Schaffer or another designee can review these materials and consult with Mr. Katz, and Meltzer Lippe can discuss any concerns with us. With this information at its fingertips, Meltzer Lippe's claims of undue burden are simply unsupportable.

4. The subpoena is not intended to seek privileged communications, and regardless, any privilege has been waived.

Meltzer Lippe's objection that the subpoena seeks only privileged materials and that it will instruct its designee to not answer potentially privileged questions is meritless. First, the deposition topics request much information that is not privileged, such as facts and communication among adversaries. To that point, the parties have stipulated that many topics do not impinge on privileged communications. See ECF No. 236 (parties' stipulation that communications with third parties on: concerns of the Estate Executors, conflicts between the Executors, Executors' refusal to sign documents, payment of Estate-related expenses, distribution of Estate assets, claims that the Executors did not receive information relating to the Estate, among other things are not privileged).

Moreover, the privilege holders (or derivative holders) are parties and can assert privilege as they see fit. Failure to assert privilege results in waiver of any privilege or protection. Loguidice v. McTiernan, 2018 WL 4011584, at *2 (N.D.N.Y. 2018) quoting In re County of Erie, 546 F.3d 222, 228 (2d Cir. 2008)

Meltzer Lippe claims that it will refuse to answer any question that might call for privileged communications. But privilege belongs to the client, and Meltzer Lippe has no basis to obstruct discovery. In re von Bulow, 828 F.2d 94, 101 (2d Cir. 1987) (“the client alone controls the privilege and may or may not choose to divulge his own secrets”). The clients — whether the Estate, the Executors, the decedent, or any of the entities — are all parties and have asserted privilege as they saw fit during discovery. Defendant Moshe Lax must attend all attorney and law firm depositions. April 17, 2021 Minute Order. Further, those parties have already agreed that certain subjects do not implicate the privilege. ECF No. 236.

Meltzer Lippe may claim that it has privilege of its own to assert. That is questionable at best. We are not seeking or interested in any facts for which Meltzer Lippe is the privilege holder. Apart from a Fifth Amendment claim, we simply cannot imagine how Meltzer Lippe has a valid privilege claim of its own. If Meltzer Lippe disclosed the allegedly confidential material outside the firm, it is no longer confidential, and thus not privileged.

Any attempt by Meltzer Lippe to interfere with the deposition by claiming a privilege belonging to a party it does not represent is also improper. The privilege belongs to the client; it is not Meltzer Lippe's to assert.

5. Defendant Zlaty Schwartz relies on advice of counsel as a defense; those topics are therefore not privileged.

Defendant Schwartz has waived any privilege on Meltzer Lippe's advice. See ECF No. 223-1 at 20 (counsel for Mrs. Schwartz describing the extent of her waiver). She relies on Meltzer Lippe's advice as the basis for her First and Fifth Defenses in her Answer. ECF No. 122. She also states, in response to an interrogatory seeking any basis for challenging the tax liabilities at issue, that she relied on accountants and lawyers “who planned the estate” and who evaluated the Estate's federal tax liabilities. Finally, in her motion to dismiss, she relies on the testimony of Joseph Katz, a Meltzer Lippe partner, to establish that “the estate plan had been discussed and was in the process of being implemented in February 2007,” and that “LX Holdings was formed in anticipation of this estate plan as early as 2005.” Affidavit of Joseph Katz, ECF No. 143-14. See also ECF Nos. 143-15.

By disclosing privileged communications and affirmatively relying on privileged communications to support claims and defenses, a client waives privilege on the topics and areas of communication placed at issue. A defendant cannot assert advice of counsel as a defense but then expect that such communications will remain privileged. United States v. Bilzerian, 926 F.2d 1285, 1292 (2d Cir. 1991). A party may not use privilege as both “a shield and a sword”: i.e., it may not selectively disclose only those communications that benefit its position. In re Grand Jury Proceedings, 219 F.3d 175, 182–83 (2d Cir. 2000). Courts repeatedly find implied waiver and permit cross-examination or discovery on the advice received. Id. (citing Joy v. North, 692 F.2d 880, 893–94 (2d Cir.1982)); In re Steinhardt Partners, L.P., 9 F.3d 230, 235 (2d Cir.1993). Because Schwartz has affirmatively elected to rely on Meltzer Lippe's advice, that advice is no longer privileged.

6. Schwartz may waive attorney-client privilege about communications she solely had with Meltzer Lippe, over the objection of co-executor Lax.

When two clients are represented by the same attorney, one of the clients may waive the attorney-client privilege to the extent of that client's own communications with the joint attorney. See Restatement (Third) of the Law Governing Lawyers § 75 (2000); In re Teleglobe Communications Corp., 493 F.3d 345, 363 (3rd Cir. 2007) (citing Third Restatement); cf. United States v. Agnello, 135 F. Supp. 2d 380, 383 (E.D.N.Y. 2001) (“A client who is part of a joint defense arrangement is entitled to waive the privilege for his own statements, and his co-defendants cannot preclude him from doing so.”); In re Grand Jury Subpoena, 274 F.3d 563, 572 (1st Cir. 2001) (“Even when [common interest] rule applies, however, a party always remains free to disclose his own communications.”).

The Third Restatement states that “(1) If two or more persons are jointly represented by the same lawyer in a matter, a communication of either co-client that otherwise qualifies as privileged under §§ 68-72 and related to matters of common interest is privileged as against third persons, and any co-client may invoke the privilege, unless it has been waived by the client who made the communication.” Id. (emphasis added).

Schwartz and Moshe Lax were co-executors. If Schwartz wishes to waive privilege about her communications with Meltzer Lippe outside Lax's presence, she may do so. Indeed, without the ability of Schwartz to waive privilege over such communications, the United States would be unable to obtain discovery related to Schwartz's “reliance of counsel” defense. And Lax could prevent Schwartz from obtaining testimony to prove her case.

CONCLUSION

For these reasons, Meltzer Lippe should be ordered to comply with the United States' subpoena and the March 12, 2021 Minute Order. A proposed order is submitted herewith.

DAVID A. HUBBERT
Acting Assistant Attorney General

KARI M. LARSON
Senior Litigation Counsel
Tax Division
U.S. Department of Justice
P.O. Box 403
Washington, D.C. 20044
202-532-3728 (v)
202-307-2504 (f)
Kari.M.Larson@usdoj.gov

PHILIP L. BEDNAR
STEPHANIE W. CHERNOFF
ALI GADELHAK
SAMUEL P. JONES
Trial Attorneys, Tax Division
U.S. Department of Justice
P.O. Box 55
Washington, D.C. 20044
P: 202-307-6415 (plb), 202-307-2251 (swc), 202-307-0854 (ag), 202-616-9085 (spj)
F: 202-514-5238 (plb, swc, ag, spj)
Philip.L.Bednar@usdoj.gov
Stephanie.W.Chernoff@usdoj.gov
Ali.Gadelhak@usdoj.gov
Samuel.P.Jones@usdoj.gov 
Counsel for Plaintiff United States of America