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Gannet v. First National State Bank of New Jersey

UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT


argued: October 5, 1976.

HERBERT M. GANNET, APPELLANT,
v.
FIRST NATIONAL STATE BANK OF NEW JERSEY; UNITED STATES OF AMERICA AND CARL E. REICHELT, SPECIAL AGENT OF INTERNAL REVENUE SERVICE, V. FIRST NATIONAL STATE BANK, HERBERT M. GANNET, INTERVENOR IN D.C., APPELLANT

APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW JERSEY (D.C. Civil No. 75-2028) (D.C. Civil No. 76-124).

Biggs, Van Dusen and Rosenn, Circuit Judges.

Author: Van Dusen

VAN DUSEN, Circuit Judge.

This is an appeal by intervenor Herbert M. Gannet from a district court enforcement order*fn1 directing the First National State Bank of New Jersey to comply with an Internal Revenue Service summons requesting the identity of the purchaser of two cashier's checks, and the sources of the funds used to purchase those checks.*fn2 The question presented here is whether the attorney-client privilege protects this information from disclosure, since the cashier's checks were deposited in an attorney's trust account to facilitate anonymous transmission to the IRS in payment of a tax deficiency of an unknown taxpayer. We hold that it does not.

Since the facts of this case have been set forth in detail in United States v. First National State Bank of New Jersey, Herbert M. Gannet, Intervenor-Appellant, 540 F.2d 619, (3d Cir., 1976),*fn3 we need not restate them here, and proceed directly to consideration of the issues raised on this appeal.

I

The instant case is similar to that of Schulze v. Rayunec, 350 F.2d 666 (7th Cir. 1965). There, Boughner, a tax attorney, was retained to represent a taxpayer who wished to remain anonymous, and delivered a cashier's check for $215,499.95 to the Internal Revenue Service without disclosing the taxpayer's identity. As in this case, when the IRS received the check, a special agent attempted to summon from the issuing bank information calculated to reveal the purchaser's identity. Upon the bank's refusal to comply, the IRS petitioned the district court for enforcement of the summons, and the attorney intervened. Boughner sought to invoke the attorney-client privilege, claiming that the bank had acted as his agent, and that he had forwarded the check in the course of offering confidential legal services to a client.

The Seventh Circuit was not persuaded that the privilege applied, and noted that "Boughner personally did not acquire any rights concerning the bank's books and records," 350 F.2d at 668, by purchasing a cashier's check on behalf of an anonymous client. The court added that the bank

". . . was not hired or employed to render any confidential service. The communication, if any, of the client's name was not made in order to enable the bank to aid Boughner in giving any legal advice. In fact, it was not absolutely necessary to disclose the client's name. Boughner could have purchased the cashier's check by currency, although a currency transaction involving $215,000 would, undoubtedly, have been quite unusual."

350 F.2d at 668.

The court held that bank records pertaining to the cashier's check which the intervenor transmitted to the IRS were not "clothed with the attorney-client privilege." Id.*fn4

This result is supported by subsequent developments in the law. The Bank Secrecy Act of 1970 (Act), 12 U.S.C. § 1829b,*fn5 requires that all federally insured banks maintain records of bank account transactions. The rationale, as § 1829b(a)(2) expressly recognizes, is the usefulness of such records in "criminal, tax, or regulatory investigations or proceedings."

The Supreme Court, implicitly following Schulze v. Rayunec, supra, held the record-keeping requirements of this Act constitutional in California Bankers Assn. v. Shultz, 416 U.S. 21, 39 L. Ed. 2d 812, 94 S. Ct. 1494 (1974), noting that

"banks are . . . not . . . neutrals in transactions involving negotiable instruments, but parties to the instruments with a substantial stake in their continued availability and acceptance . . . ."

416 U.S. at 48-49.

Last term, the Supreme Court upheld the constitutionality of the disclosure of information recorded by banks under the Act in United States v. Miller, 425 U.S. 435, 96 S. Ct. 1619, 48 L. Ed. 2d 71, 44 U.S.L.W. 4528 (1976). Miller urged that he had a Fourth Amendment interest in the records kept by banks, as copies of personal records made available to the banks for a limited purpose. However, the Supreme Court, after considering the standards enunciated in Katz v. United States, 389 U.S. 347, 353, 19 L. Ed. 2d 576, 88 S. Ct. 507 (1967), and Couch v. United States, 409 U.S. 322, 335, 34 L. Ed. 2d 548, 93 S. Ct. 611 (1973), found no legitimate expectation of privacy in the contents of records maintained by the banks under the mandate of the Act, using this language at 442 of 425 U.S.:

". . . checks are not confidential communications but negotiable instruments to be used in commercial transactions. All of the documents obtained including financial statements and deposit slips, contain only information voluntarily conveyed to banks and exposed to their employees in the ordinary course of business. The lack of any legitimate expectation of privacy concerning the information kept in bank records was assumed by Congress in enacting the Bank Secrecy Act, the expressed purpose of which is to require records to be maintained because they 'have a high degree of usefulness in criminal, tax, regulatory investigations and proceedings.' . . .

"The depositor takes the risk, in revealing his affairs to another, that the information will be conveyed by that person to the government."

II

The intervenor, Gannet would distinguish this case on the basis that state law*fn6 suggests that records in any way derived from an attorney's trust account are protected by the attorney-client privilege. The support for this view is a state requirement that attorneys maintain trust accounts in which to hold separate clients' funds.

However, as Gannet has stated correctly in his brief in United States v. First National State Bank of New Jersey, Herbert M. Gannet, Intervenor-Appellant (No. 76-1261), supra at 8, which he incorporated in his brief filed in these appeals and "made a part hereof by reference" (page 7):

"It is uncontroverted that since the adoption of the Federal Rules of Evidence on July 1, 1975, the resolution of the foregoing question [Does the attorney-client privilege extend, under the facts presented, to the identity of the client?] is governed by Federal common law and not State law. See Rule 501 and U.S. v. Osborn, 409 F. Supp. 406, 75-2 U.S. Tax Cas. (CCH) P9865 (D. Ore. 1975)."*fn7

The Conference Committee Notes to Federal Rule of Evidence 501 (House Report No. 93-1597 on P.L. 53-595) state:

"In nondiversity jurisdiction civil cases, federal privilege law will generally apply. In those situations where a federal court adopts or incorporates state law to fill interstices or gaps in federal statutory phrases, the court generally will apply federal privilege law. As Justice Jackson has said:

"A federal court sitting in a nondiversity case such as this does not sit as a local tribunal. In some cases it may see fit for special reasons to give the law of a particular state highly persuasive or even controlling effect, but in the last analysis its decision turns upon the law of the United States, not that of any state.

" D'Oench, Duhme & Co. v. Federal Deposit Insurance Corp., 315 U.S. 447, 471 [86 L. Ed. 956, 62 S. Ct. 676] (1942) (Jackson, J., concurring). When a federal court chooses to absorb state law, it is applying the state law as a matter of federal common law. Thus state law does not supply the rule of decision (even though the federal court may apply a rule derived from state decisions), and state privilege law would not apply."

Since this action is a "nondiversity jurisdiction civil case," we conclude that the New Jersey Supreme Court Rule 1:21-6 is inapplicable. In our estimation, federal law provides no basis for a finding that the attorney-client privilege applies here.

We find further support for our view in the Bank Secrecy Act of 1970, which indicates a strong congressional interest in making records of bank transactions available for use in criminal, tax, and regulatory investigations and proceedings. No mention is made in that statute of any exceptions to either compilation or dissemination of the information recorded and maintained. As noted above, the Supreme Court, in California Bankers Ass'n and Miller held the Act constitutional, finding that information voluntarily disclosed carries no legitimate expectation of privacy. In the instant case, there is no suggestion that the information sought to be protected was disclosed other than voluntarily.

We hold that the attorney-client privilege is not applicable to bank records merely because they derive from transactions involving an attorney's trust account. To hold otherwise would be to deny effect to the congressional purpose in enacting this legislation by allowing attorneys the discretion to insulate certain transactions from investigation by employing their trust accounts. Such a course would contradict both case law and statute.

III

We have considered the other issue*fn8 raised by the intervenor-defendant, whether the Internal Revenue Service summons was issued in bad faith and constitutes an abuse of the district court's process, and find it without merit.*fn9

IV

Having determined that bank records kept in accordance with the Bank Secrecy Act of 1970 are not clothed with the attorney-client privilege merely because they derive from an attorney's trust account maintained at the bank, we will affirm (a) the December 1, 1975, district court order (D. N.J. Civil 75-2028) denying injunctive relief (see note 2 above), and (b) the February 23, 1976, district court order (D. N.J. Civil 76-124; see note 1 above).


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