The Pennsylvania Supreme Court has overruled the Commonwealth Court’s opinion in “Redacted v. Redacted” and allowed the state Attorney General to proceed against several charities and their officers using information allegedly disclosed by the charity’s attorney in violation of her obligation to preserve confidentiality. The Supreme Court has said that evidence should be admitted in the case “based on established evidentiary principles and not the broader Code of Professional Conduct.”
The Supreme Court’s order also overruled the Commonwealth Court’s order limiting the participation of two top attorneys handling the case for the state and required the Commonwealth Court “to prepare an opinion setting forth its rationale in implementing a blanket seal in connection with the underlying litigation (as opposed to redacting or sealing only documents which reveal specific attorney-client confidences.)” (Commonwealth v. New Foundations, Inc., No. 145 MAP 2014, 6/15/15.)
The decision came to light only after the Commonwealth Court filed a order in December unsealing documents filed in the case on or after June 15, 2015 and overruling the defendants’ preliminary objections to the Attorney General’s amended complaint. (Commonwealth v. New Foundations, Inc., No. 36 M.D. 2014, 12/10/15.)
The case caused quite a stir in Pennsylvania legal circles when the Supreme Court let it be known that it was considering whether a lawyer for a charitable organization who believes that charitable assets are being improperly diverted could disclose the information to the Attorney General “as parens patriae for the public to whom the charity and its counsel owe a fiduciary duty?” (See Nonprofit Issues, February, 2015.) At the time, the context of the question, along with the identity of the parties, the counsel, and the issues involved, were all kept secret.
Additional information came to light when the Supreme Court unsealed portions of the parties’ briefs and it became clear that the issue was not whether the attorney could disclose confidential information, but whether the Attorney General could use such information in prosecuting the charity and its officers and directors. (See Nonprofit Issues, March, 2015.) The information now unsealed, including the opinion of the Commonwealth Court in April 2014 with only limited redactions, gives a more complete view of the circumstances and the issues.
The underlying case involves charges of unlawful diversion of charitable assets at a group of nonprofits founded and run by Allen Ertel, a former Democratic member of Congress and candidate for governor of Pennsylvania, his wife and family members. The agencies provide services, predominately funded by the state, for persons with disabilities, foster care, and other social services. (Ertel died in November.) The lead agency is known as Firetree, Inc., in Williamsport. The complaint alleges breach of fiduciary duty under the Nonprofit Corporation Law and misrepresentations under the Solicitation of Funds for Charitable Purposes Act.
According to the initial opinion by the Commonwealth Court, the in-house counsel for Firetree became concerned about improper action. Her attorney called the Attorney General to say that they had information that the Attorney General would be interested in investigating. In response to a request, the attorney for the in-house counsel supplied a memo describing the alleged improprieties.
The Attorney General’s office opened an investigative file and reviewed the public Form 990 tax returns “as per standard procedure.” Concerned that unrelated nonprofit corporations had overlapping board members and engaged in related-party transactions, an investigator prepared investigative subpoenas that were sent to Firetree and related entities. The in-house attorney requested an extension of time to respond, but then called to say that she had been terminated.
The in-house attorney’s lawyer subsequently sent to the Attorney General’s office a copy of a whistleblower complaint that the in-house attorney had filed in Lycoming County. The complaint contained attachments spelling out the lawyer’s concerns. (That case was subsequently sealed also.)
Believing that the Commonwealth’s complaint was based on information covered by attorney-client or work-product privilege, attorneys for the defendants deposed Heather Vance-Rittman, the Deputy Attorney General assigned to the case, and then filed preliminary objections seeking dismissal of the complaint. If the Court did not dismiss the case, they asked for disqualification of Vance-Rittman and Mark Pacella, the Chief Deputy Attorney General, who had also consulted on the case. The defendants contended that they had been irrevocably tainted by the in-house counsel’s improper disclosures.
The Commonwealth Court analyzed the issue under Rule 1.6 of the Rules of Professional Conduct, which prohibits disclosure of confidential information except in very limited circumstances and said such circumstances were not present in this case. It also denied a claim by the Attorney General that disclosure was permitted under the “crime-fraud” exception where the attorney’s services are being or had been used by the client to commit a criminal or fraudulent act. The Court said there was no allegation that the in-house counsel’s services were being used to commit an illegal act.
The Court specifically rejected the argument that the counsel had a fiduciary duty to disclose the information because the corporations were charities.
The defendants asked the Court to apply the “fruit-of-the-poisoned-tree” doctrine to dismiss the case because it was based on the counsel’s improper disclosures. The Court refused to dismiss the case, but did disqualify Vance-Rittman and Pacella from further participation in the case. “This measure is necessary to absolve the irrevocable taint which would otherwise color this litigation,” it said.
In an unsigned per curiam order, the Supreme Court, “having discerned multiple material errors” in the Commonwealth Court’s opinion, vacated the order and remanded the case for proceedings consistent with its own order.
Among the points the Supreme Court made were:
· The Commonwealth Court incorrectly indicated that the in-house attorney also represented the corporation’s officers and directors.
· It “inappropriately conflated an attorney’s ethical obligations with evidentiary privilege.”
· It “questionably couched information as attorney ‘work-product’ when much of the relevant information seems to have nothing to do with preparation for litigation on behalf of the former client.”
· The Commonwealth Court stated that the attorney had not set forth a single instance of her services being used to commit wrongdoing when various accusations indicate that multiple such instances occurred.
· It inappropriately relied on cases involving private litigants in substantially restricting the Attorney General from proceeding, in a parens patriae capacity, to redress asserted violations of the law impacting on the public interest.
· It erroneously applied a remedial fruit-of-the-poisonous-tree approach, as against the Attorney General, to a lawyer’s purported ethical violations.
The Court asked the Attorney General to file an amended complaint “eliminating the specific and direct connection between the present litigation and the whistleblower litigation pending in Lycoming County.” It said, however, that the Attorney General is not required “to screen any attorneys or agents from her office from the litigation or to disassociate the litigation entirely from the plaintiff in that [whistleblower] action and/or materials or documents which she may have provided.”
“To the degree that provisions of this Order are beyond the matters affirmatively raised by the parties to this appeal,” the Supreme Court said, “this Court invokes its King’s Bench powers, in view of the severity of the Attorney General’s allegation that non-profit organizations soliciting and accepting contributions from the public engaged in a prolonged course of conduct entailing unlawfully diverting corporate assets and resources to serve the interests of insider individuals.”
YOU NEED TO KNOW
The initial question first made public in this case is significantly different from the issue actually being litigated. Although the Supreme Court’s decision is clear that the Attorney General may use information that may have been disclosed improperly, subject only to evidentiary rules on admissibility and not the Rules of Professional Conduct, there is not much reasoning set out in its order. There is a suggestion that the mis-use of charitable funds creates a special interest in the Attorney General, but there is no statement that this creates a special rule for charities.