UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT
decided: March 7, 1975.
UNITED STATES OF AMERICA AND JAMES W. BLUM, SPECIAL AGENT, INTERNAL REVENUE SERVICE,
MAHADY & MAHADY, A PARTNERSHIP, AND HENRY J. MAHADY, AS A PARTNER OF MAHADY AND MAHADY, APPELLANTS
APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF PENNSYLVANIA D.C. Civil Action No. 73-1049.
Kalodner, Gibbons and Weis, Circuit Judges.
Opinion OF THE COURT
KALODNER, Circuit Judge.
Were the Fifth Amendment rights of the appellant Henry J. Mahady ("Mahady") violated when the district court ordered him to comply with an Internal Revenue Service summons directing him to give testimony and produce records with respect to all financial transactions of his law partnership with a corporate client under investigation as to its tax liabilities?
The instant appeal presents the stated question. Its background facts may be summarized as follows:
On October 12, 1973, Special Agent James W. Blum of the Internal Revenue Service, in the course of his investigation of the tax liabilities of Euthenics Systems Corporation ("Euthenics"), issued a summons*fn1 on the law partnership of Mahady & Mahady, and its surviving partner Mahady to appear October 26, 1973 and
"Give Testimony and Produce Records Regarding All Financial Transactions with Euthenics Systems Corporation and/or its Officers or Agents. The Records are To Include But Are Not Limited To: (a) Details of Work Performed (b) Books of Original Entry Regarding the Recording of Monies Received (c) Correspondence with the Company, Its Agents or Officers." (Appendix, at 6A).
On December 7, 1973, Blum filed a petition for enforcement of the summons in the district court*fn2 alleging its noncompliance.
On December 10, 1973, the district court issued a rule to show cause ordering appellants to appear December 21, 1973. Mahady appeared before Blum on December 21, 1973. He then failed to provide Blum with the summoned records and further refused to answer Blum's questions relating to his or his partnership's dealings with Euthenics and/or its predecessor Michael J. Baker, Inc., asserting his Fifth Amendment privilege against self-incrimination and the attorney-client privilege.
The questions which Mahady refused to answer are set forth in the margin.*fn3 They dealt in particular with (1) the receipt by the Mahady partnership of a $2,000.00 personal check of Michael Baker, Jr., dated April 13, 1971, for "services rendered," which was accompanied by Baker's written request that he be sent a bill for his "records"; (2) the Mahady partnership's April 15, 1971 billing of Baker for $2,000.00 for "legal services"; and (3) the deposit by the Mahady partnership of the Baker check in the account of "Citizens for Paul Mahady."
On March 19, 1974, the district court held a hearing on its rule to show cause why the summons should not be enforced. It was developed at this hearing that Euthenics had by letter advised Mahady that it did not desire him to assert the attorney-client relationship. Mahady, however, adhered to his Fifth Amendment ground for his refusal to answer Blum's questions respecting his or his partnership's dealings with Euthenics and its predecessor Baker, Inc.
On July 3, 1974, the district court filed an Order directing Mahady to produce his partnership's records in accordance with the Internal Revenue Service summons, and to "testify fully in all matters relevant thereto." The instant appeal followed on July 18, 1974.
On review of the record we are of the opinion that the Order of the district court must be affirmed insofar as it directs production of the partnership records, and reversed as to its command to Mahady to "testify fully in all matters relevant thereto."
Bellis v. United States, 417 U.S. 85, 40 L. Ed. 2d 678, 94 S. Ct. 2179 (1974), aff'g In re Grand Jury Investigation, 483 F.2d 961 (3d Cir. 1973), is dispositive of the production of records issue. Bellis squarely ruled that a partner in a small law firm cannot invoke his personal privilege against self-incrimination to justify his refusal to comply with a subpoena requiring production of the partnership's financial books and records, since the partnership, though small, has an institutional identity, and a partner holds the records in a representative, and not a personal, capacity.
In rejecting Bellis' contention that "he has a substantial and direct ownership interest in the partnership records, and does not hold them in a representative capacity," the Court said in relevant part at pages 97-98:
". . . We believe it is fair to say that petitioner is holding the subpoenaed partnership records in a representative capacity. The documents which petitioner has been ordered to produce are merely the financial books and records of the partnership. . . Petitioner has no direct ownership interest in the records; rather, under state law, they are partnership property, and petitioner's interest in partnership property is a derivative interest subject to significant limitations. See Ellis v. Ellis, 415 Pa. 412, 415-416, 203 A.2d 547, 549-550 (1964)." (footnotes omitted).
The Court stressed in Bellis at 89-90, its "consistent view that the privilege against compulsory self-incrimination should be ' limited to its historic function of protecting only the natural individual from compulsory incrimination through his own testimony or personal records.'" as held in United States v. White, 322 U.S. 694, 701, 88 L. Ed. 1542, 64 S. Ct. 1248 (1944). (emphasis supplied).
In doing so it further said at page 90:
"White is only one of the many cases to emphasize that the Fifth Amendment privilege is a purely personal one, most recent among them being the Court's decision last Term in Couch v. United States, 409 U.S. at 327-328."
Mahady seeks to distinguish Bellis on the ground that the instant case involves "a small family partnership" of four brothers, while Bellis involved a partnership of three non-related individuals. In so doing, Mahady cites the following statement in Bellis at page 101:
"This might be a different case if it involved a small family partnership, see United States v. Slutsky, 352 F. Supp. 1105 (SDNY 1972); In re Subpoena Duces Tecum, 81 F. Supp. at 421 . . ." [81 F. Supp. 418 (N.D. Cal. 1948)].
Whatever the full import of the quoted statement may be we do not think it applicable in the present context.
What has been said brings us to our holding that the district court's Order must be reversed insofar as it commands Mahady to appear and "testify fully in all the matters relevant" to the partnership records.
The command was premised on the district court's holding in its "Memorandum and Order" that "The Fifth Amendment privilege against self-incrimination is not available to Henry J. Mahady, who is not the object of investigation or prosecution, U.S. v. Fisher, 500 F.2d 683 (3rd Cir. 1974)."*fn4 (emphasis supplied).
The district court erred in its stated holding. Fisher, which it cited in support, affords it no nourishment.*fn5
The Supreme Court has specifically held that the privilege against self-incrimination may be invoked by a compelled witness in any proceeding when his answers to questions "might incriminate him in future criminal proceedings." Lefkowitz v. Turley, 414 U.S. 70, 38 L. Ed. 2d 274, 94 S. Ct. 316 (1973).
In so holding the Court said at page 77:
"The Fifth Amendment provides that no person 'shall be compelled in any criminal case to be a witness against himself.' The Amendment not only protects the individual against being involuntarily called as a witness against himself in a criminal prosecution but also privileges him not to answer official questions put to him in any other proceeding, civil or criminal, formal or informal, where the answers might incriminate him in future criminal proceedings." (emphasis supplied).
It is also settled that "the privilege afforded not only extends to answers that would in themselves support a conviction under a federal criminal statute but likewise embraces those which would furnish a link in the chain of evidence needed to prosecute the claimant for a federal crime." Hoffman v. United States, 341 U.S. 479, 486, 95 L. Ed. 1118, 71 S. Ct. 814 (1951) (emphasis supplied); cited and applied in Malloy v. Hogan, 378 U.S. 1, 11, 12 L. Ed. 2d 653, 84 S. Ct. 1489 (1954), and In re U.S. Hoffman Can Corp., 373 F.2d 622, 628 (3d Cir. 1967).
Hoffman v. United States, supra, also held while the privilege "must be confined to instances where the witness has reasonable cause to apprehend danger from a direct answer," and "his say-so does not of itself establish the hazard of incrimination," it is the initial responsibility of the court "to say whether his silence is justified . . ., and to require him to answer if 'it clearly appears to the court that he is mistaken.'" 341 U.S. at 486.
Hoffman cautioned that "if the witness, upon interposing his claim, were required to prove the hazard in the sense in which a claim is usually required to be established in court, he would be compelled to surrender the very protection which the privilege is designed to guarantee," and "to sustain the privilege, it need only be evident from the implications of the question, in the setting in which it is asked, that a responsive answer to the question or an explanation of why it cannot be answered might be dangerous because injurious disclosure could result." 341 U.S. at 486-487.
Hoffman stressed that the self-incrimination privilege " must be accorded liberal construction in favor of the right it was intended to secure." 341 U.S. at 486. (emphasis supplied).
We, too, have, in prior decisions, stressed that "a heavy duty rests on the judge before whom the privilege is invoked,"*fn6 and "the trial court should not deem itself to be 'a mere keeper of the ring' in the tradition of the English civil law."*fn7
The sum of the Government's position here is that "the burden of establishing the validity of the privilege is on the person claiming the privilege," and that Mahady failed below to establish "some viable nexus between the questions asked and the incrimination which might follow."
Hoffman negates the Government's contention that Mahady had "the burden of establishing the validity" of his privilege claim. As earlier stated, it imposes on the court the initial responsibility "to say whether his silence is justified." Hoffman further specifically cautioned that "if the witness . . . were required to prove the hazard . . he would be compelled to surrender the very protection which the privilege is designed to guarantee."
The record in the instant case establishes out of the Government's own mouth, as it were, the possibility of incriminating answers to the questions asked of Mahady.
The Government, at the March 19, 1974 hearing on its rule to show cause why the IRS summons should not be enforced, conceded (1) the aim of the summons was to ascertain whether Euthenics had taken a "justifiable deduction" with respect to the $2,000.00 check given to the Mahady partnership for "legal services" which was deposited in the account of the "Citizens for Paul Mahady" account; and (2) in the event the deduction was "not justifiable" it was conceivable that "further proceedings would be held of a criminal nature." (N.T. page 10, March 19, 1974 hearing).
It merits notation that the Government in urging that Mahady should be compelled to testify, said with respect to Mahady's privilege claim:
"If it should in fact turn out that Mr. Mahady is required to -- if he is ordered to testify, if he does in fact incriminate himself in some manner, there is always the option of suppressing any evidence that should be derived from that enforced testimony, if it does in fact violate his Fifth Amendment privilege." (N.T. page 9, March 19, 1974 hearing).
The foregoing statement implies the sub-conscious recognition of the Government of the possibility of self-incrimination in Mahady's replies to the questions asked.
The district court, at the March 19, 1974 hearing, clearly indicated its view that there was ample basis for Mahady's invocation of his privilege albeit it later decided that the privilege did not inure to Mahady because he "is not the object of investigation or prosecution."
In indicating its view as to Mahady's claim of privilege the district court said:
"Now, but under the whole setting here, if a witness claims a privilege on the basis that there may be a tendency to incriminate him, then the reason itself is established because the very purpose of the Government's investigation indicates that indeed if the Government prevails and gets what it wants and its suspicions are verified, then it's reasonable to assume that Mr. Mahady may have been involved in a factitious transaction." (N.T. page 42, March 19, 1974 hearing).
We are in accord with the district court's stated view as to the validity of Mahady's privilege claim, and regret that it did not give it effect in its disposition.
Critical questions put to Mahady, if answered, could possibly "furnish a link in the chain of evidence" in a criminal prosecution for violation of federal revenue laws.*fn8
It may be noted parenthetically that the Government does not here contend that Mahady was barred from claiming his privilege on the ground assigned by the district court, viz., he was "not the object of investigation or prosecution."
For the reasons stated the Order of the district court will be affirmed insofar as it commands production of the Mahady partnership records, and reversed and vacated insofar as it commands Henry J. Mahady to "testify fully in all the matters relevant thereto," and the cause remanded with directions to proceed in accordance with this Opinion.