Petition — Gannet v. First National State Bank
Supreme Court brief1977
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IN THE
Supreme Court of the United States <
Ocroper TeRM, 1976
No.
——~ 76-1269
HERBERT M. GANNET,
Petitioner,
vs.
FIRST NATIONAL STATE BANK OF NEW JERSEY,
Respondent.
UNITED STATES OF AMERICA and
CARL E. REICHELT, Special Agent
of Internal Revenue Service,
Respondent,
vs.
FIRST NATIONAL STATE BANK
HERBERT M. GANNET, Intervenor in D.C.,
Petitioner.
PeritioN FOR Writ or CERTIORARI TO THE UNITED States Court
Or APPEALS FOR THE THIRD CIRCUIT
PETITION FOR WRIT OF CERTIORARI
HERBERT M. GANNET,
Counsel for Petitioner,
1180 Raymond Boulevard,
Newark, New Jersey 07102
Of Counsel
KENNETH S. APFEL
‘NJ. Appellate Printing Co., Inc., South Plainfield, New Jersey (201) 753-0200
TABLE OF CONTENTS
I CD eke cacics th vaewanssesntacweuunates 2
IE i aad nn savuedcnnavaweudecenencueans 2
I 60s ok anabes cou suceeasaieen 2
Statutes, Federal Rules and Regulations Involved ...._ 3
SE ce glen CALS CU AEE RAMS Oh CKO 4
Reasons for Granting the Writ .................... 8
IS oc. eens COC a bes pa Pe een 22
Cases CITED:
Baird v. Koerner,
279 F.2d 623 (9th Cir. 1960) ...... 8, 9, 10, 12, 14
Donaldson v. United States,
ee ee ee ES pn cnccaeweauucs 8, 18, 20
Fisher v. United States,
fF, renee moi ean 9
Gannet v. First National State Bank of New Jersey,
Superior Court of New Jersey, unreported deci-
sion Docket No. C-2783-75 (1976) ...... 11, 13, 15
In re Grand Jury Proceeding,
517 F.2d 666 (5th Cir. 1975) .............. 8, 12
McFee v. United States,
206 F.2d 872 (9th Cir. 1953) vacated 348 US.
905 (1955) aff'd on rehearing 221 F.2d 807 (9th
Cir. 1955), cert. denied 350 U.S. 825 (1955) .. 10, 11
Nardone v. United States,
308 U.S. 338 (1939) ................0000 00. 16
Reisman v. Caplin,
ee es GP CD 6 vcescicscesssvscvnce’ 18, 20
TABLE OF CONTENTS
Cases CITED:
Schulze v. Rayunec,
350 F.2d 666 (7th Cir. 1965) cert. denied 382
I I SiS TS SN a ee ae 12, 13
Tillotson v. Boughner,
350 F.2d 668 (7th Cir. 1965) .............. 8, 12,15
United States v. La Salle National Bank,
76-1 USTC 99407 (N.D. Ill. 1976) ............ 18
United States v. McCarthy,
514 F.2d 368 (Sed Cis. 1975) ................ 20
United States v. Miller,
es eau e bebe s eas ees 13, 17
United States v. Osborn,
409 F. Supp. 406 (D. Ore. 1975) .............. 14
United States v. Powell,
879 U.S. 48 (1964) ............ cece cece eee 18
United States v. Tratner,
511 F.2d 248 (7th Cir. 1975) ............ 8, 15, 16
STATUTES CITED:
Internal Revenue Code of 1954:
oe et ae ee ee 3, 4, 8, 17
EI On ee nL MERE E A? Dee 3, 5
Bank Secrecy Act of 1970:
12 U.S.C. Section 1829b ............ 3, 4, 8, 12, 17
MISCELLANEOUS:
Rules Governing the Courts of the State of New Jersey,
fae 3, 8, 11, 13, 14, 15, 17
TABLE OF CONTENTS
APPENDIX
OPINIONS:
United States Court of Appeals for the Third
Circuit Nos. 75-2362 and 76-1234 ............ la
United States Court of Appeals for the Third
nce ee seeuveeee 12a
United States District Court for the District of
New Jersey Nos. 75-2028 and 76-124 .......... 27a
RS er ee ee ee ee eee 28a
Transcript of February 23, 1976 .............. 39a
Internal Revenue Code of 1954
ec eseuens 43a
gee bile 43a
Bank Secrecy Act of 1970
CS 45a
Rules Governing the Courts of the State of New Jersey
eS eS ra 48a
Gannet v. First National State Bank of New Jersey
a 5la
EE vas su Gvsldse centsoesccens 53a
IN THE
SUPREME COURT OF THE UNITED STATES
Ocroser TERM, 1976
No.
HERBERT M. GANNET,
Petitioner,
DS.
FIRST NATIONAL STATE BANK OF NEW JERSEY,
Respondent.
UNITED STATES OF AMERICA and
CARL E. REICHELT, Special Agent
of Internal Revenue Service,
Respondent,
vs.
FIRST NATIONAL STATE BANK
HERBERT M. GANNET, Intervenor in D.C.,
Petitioner.
PETITION FOR A Writ Or CERTIORARI TO THE
UniTep STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
The Petitioner prays that a Writ of Certiorari issue to
review the judgments of the United States Court of Appeals
for the Third Circuit entered in the above case on Decem-
ber 27, 1976.
2 Question Presented
OPINIONS BELOW
The original orders and decision of the District Court
for the State of New Jersey (No. 75-2028) are reported in
410 F. Supp. 585 (App. 27a). The opinion of the Court of
Appeals for the Third Circuit in No. 76-1261 is officially
reported in 540 F.2d 619 (App. 12a) which reversed and
remanded the contempt and confinement orders of the
District Court. The decision of the Court below in the
instant case is not officially reported, but is unofficially re-
ported at U.S. Court of Appeals, Third Circuit, Nos. 75-
2362, 76-1234, filed December 27, 1976 ( App. la).
JURISDICTION
The Judgment of the Court of Appeals for the Third
Circuit was made and entered on December 27, 1976 and
copies thereof are appended to this Petition in the Ap-
pendix at la. The jurisdiction of this Court is invoked
under 28 U.S.C. 1254(1).
QUESTIONS PRESENTED
In a District Court enforcement order of February 23,
1976, Civil 76-124 (D.N.J.) First National State Bank of
New Jersey was ordered to comply with an Internal Rev-
enue Service summons requesting the name, address and
social security number of the purchaser of two cashiers
checks and all documentation relative to the source of the
funds used to purchase those checks. The cashiers checks
had been deposited into a New Jersey attorney's trust ac-
count from which a check was drawn to effect an anony-
mous transmission to the Internal Revenue Service in pay-
ment of a tax liability of an unidentified taxpayer. The
District Court ordered that the bank must comply with
Statutes, Federal Rules and Regulations Involved 3
the summons and provide the requested information re-
garding the purchaser of said checks. The Court of Ap-
peals affirmed said order. The questions presented are:
1. Where unusual circumstances are present, does the
Attorney-Client privilege protect the identity of Petitioner's
unidentified client.
2. Assuming that the Attorney-Client privilege exists,
is the information obtained from a New Jersey attorney's
trust account, which he is required to maintain by the rules
of the highest court of the State in which he practices, in-
cluded within the scope of the privilege.
3. Does the District Court have an obligation to in-
quire into the nature and extent of the existence of the
Attorney-Client privilege asserted by the intervenor- attor-
ney on behalf of his unidentified client.
4. Do the requirements of the Bank Secrecy Act of
1970 relating to disclosure of information to government
agencies include a New Jersey attorney's trust account
which he is required to maintain by the rules of the highest
court of the State in which he is admitted to practice law.
5. If an Internal Revenue Service summons is not is-
sued in good faith, is the proceeding brought by the In-
ternal Revenue Service to enforce such summons improper
because it is an abuse of the District Court’s process.
STATUTES, FEDERAL RULES AND
REGULATIONS INVOLVED
The pertinent portions of the Bank Secrecy Act of
1970, 12 U.S.C. Section 1829b, the New Jersey Supreme
Court Rule 1:21-6, and Internal Revenue Code Sections
7602 and 7604 are set forth in the Appendix at page 43a
through 50a.
STATEMENT
This Petition involves a summons issued under Internal
Revenue Code Section 7602 and the inspection of bank
iecords maintained under the Bank Secrecy Act of 1970,
12 U.S.C. Section 1829b. The taxpayer involved engaged
the Petitioner as his attorney to provide legal services
and advice with respect to a federal income tax problem.
As a result of substantial legal services rendered to the
said client, Petitioner made certain recommendations which
included the arrangement for a voluntary mailing of a sum
of money to the Internal Revenue Service. Such voluntary
payment was effectuated through the use of the Petitioner's
attorney s trust account.
In an effort to comply with the client's requirement
that the client's identity remain confidential, Petitioner re-
tained Herbert L. Zuckerman for the purposes of trans-
mitting monies to the Internal Revenue Service.
The Internal Revenue Service traced the funds from
Mr. Zuckerman to the Petitioner's attorney's trust account.
On October 3, 1975, First National State Bank of New
Jersey (hereinafter referred to as the “Bank”) was served
with an Internal Revenue Service summons under Section
7602 of the Internal Revenue Code requiring it to produce:
(A) “All negotiable instruments and deposit slips
which relate to the source of the funds used for the issuance
of check No. 1186 drawn on the account of Herbert M.
Gannet Trust Account dated November 4, 1974 in the
amount of $142,497.81. The check was made payable to
Herbert L. Zuckerman.”
(B) “Monthly bank statements, and all deposit tickets
in the amount of $1,000.00 or above, covering the period
of October 1, 1974 through November 4, 1974.”
Statement 5
On October 31, 1975, the Petitioner was advised by
the Bank that it complied in part with the aforesaid sum-
mons in that it provided copies of two cashier's checks
deposited into petitioner's attorney's trust account drawn
on itself, Nos. 39649 and 39651 in the amounts of
$65,182.66 and $77,315.15 respectively, both dated October
31, 1974 and made payable to the Petitioner.
On November 3, 1975, the Petitioner served a written
demand on the Bank to refuse to furnish any additional
information regarding the trust account to the Internal
Revenue Service, and to advise the Internal Revenue Serv-
ice that the Bank refuses to produce such information.
On November 19, 1975, the Bank was served with
another Internal Revenue summons, the summons which
led to an action in the District Court under Internal Rev-
enue Code Section 7604 requiring it to produce informa-
tion which emanated from the Bank's compliance in part
with the first summons previously referred to regarding
the name, address and social security number of the pur-
chaser of cashier's checks Nos. 39649 and 39651 and all
documentation relative to the source of the funds used to
purchase said checks.
At the hearing on the application for enforcement of
the aforesaid summons, held on February 23, 1976, the
United States District Court allowed the Petitioner to in-
tervene as a party Defendant and consolidated therewith
the action instituted by the Petitioner against the Bank in
Civil Action No. 75-2028. For the reasons stated in the
transcript of the hearing held on February 23, 1976, Dis-
trict Court ordered the Bank to comply with said summons
on March 1, 1976. The Petitioner's timely application to
that Court for a stay pending appeal of the enforcement
order was denied. The denial was stayed until such time
as a panel of the Circuit Court of Appeals for the Third
Circuit could rule on the Petitioner's Motion for a stay
6 Statement
pending appeal. On March 8, 1976, the panel of the Court
of Appeals declined to stay the enforcement order. Peti-
tioners application to the Honorable William J. Brennan
of the United States Supreme Court for a stay of the en-
forcement order was denied on March 9, 1976.
Although the appeal was still pending in this case, on
March 19, 1976, the Honorable Vincent P. Buinno of the
United States District Court, without notice to Petitioner,
turned over to the Government, the documents requested
in the summons involved herein. Said documents had pre-
viously been turned over to the Court by the Bank under
seal in Civil Action No. 75-2028. Petitioner's appeal in that
case was docketed in the Court of Appeals for the Third
Circuit as No. 75-2362 and because the legal issues and
facts in that case are identical to the facts in the instant
case, the Court of Appeals for the Third Circuit has con-
solidated the two cases for disposition. The said Court of
Appeals held that the orders of the District Court should
be enforced, such decision leading to this appeal under
28 U.S.C. 1254(1).
It is the Petitioner's contention that the enforcement
order of the District Court is in error for the following
reasons:
1. The Attorney-Client privilege protects the identity
of Petitioner's client;
2. That the Attorney-Client privilege protects the dis-
closure of information sought in the summons;
3. The District Court is obligated to inquire into the
nature of the services performed by the Petitioner for his
unidentified client to determine whether the information
contained in his trust account was integrally related to the
legal advice given and services rendered to his client and
'
Statement 7
therefore, whether such information is within the Attorney-
Client privilege.
4. The Bank Secrecy Act of 1970, upon which the
Court of Appeals for the Third Circuit relied in allowing
the Bank to disclose such information, was not intended
to encompass Petitioner's attorney’s trust account; and
5. The summons was not issued in good faith and
therefore, the enforcement proceedings were improper be-
cause it was an abuse of the District Court's process.
REASONS FOR GRANTING THE WRIT
The decision below should be reviewed because it
represents a conflict with other Courts of Appeals regard-
ing the extent to which the Attorney-Client privilege en-
compasses the right of an attorney to keep confidential his
client's identity. The decision of the Third Circuit in the
instant case conflicts with that of the Ninth Circuit in
Baird v. Koerner, 279 F.2d 623 (9th Cir. 1960), the Seventh
Circuit in Tillotson v. Boughner, 350 F.2d 663 (7th Cir.
1965) and the 5th Cir. In re Grand Jury Proceedings, 517
F.2d 666 (5th Cir. 1975).
The District Court for the District of New Jersey did
not inquire into the nature and extent of the services per-
formed by the Petitioner on behalf of his client to ascertain
whether the information contained in Petitioner's trust ac-
count was an integral part of the legal advice given and
therefore, within the protection of the Attorney-Client priv-
ilege. Due to such failure, the decision of the District
Court and that of the Court of Appeals for the Third Cir-
cuit should be reversed, in accordance with United States
v. Tratner, 511 F.2d 248 (7th Cir. 1975).
It is also contended that the Third Circuit incorrectly
interpreted Section 1829b of the Bank Secrecy Act of 1970
(App. 45a) to apply to an attorney's trust account required
to be maintained under New Jersey Supreme Court Rule
1:21-6 (App. 48a).
Petitioner further contends that the Thisel Circuit's de-
cision allows an abuse of the District Court’s process by
allowing the Internal Revenue Service to issue a summons
under Section 7602 of the Internal Revenue Code (App.
43a) in a criminal investigation. Such a summons is con-
trary to this Court’s decision in Donaldson v. United States,
400 U.S. 517 (1971).
Reasons for Granting the Writ 9
For any one or more of the aforementioned reasons,
this Court should grant review.
1. From the statement of the case, it is obvious that
any disclosure of the source of the payment to the Internal
Revenue Service which includes the identity of the client
who initiated the payment of the funds on the advice of
counsel would yield « probative link in an existing chain
of inculpatory events which would violate Petitioner's un-
identified client’s Fifth Amendment rights. The payment
amounts to an admission of prior underpayment of taxes.
The identity of the client will supply the last link of events
by which the Petitioner's unidentified client will be subject
to the penal sanctions of the Internal Revenue Code. There-
fore, such information is within the Attorney-Client priv-
ilege due to the unusual circumstances described herein.
If a client had related certain facts to his attorney
and had asked said attorney for his opinion as to whether
additional taxes were due and what procedures should be
followed, the recommendation of the attorney would be
within the Attorney-Client privilege. As a result of the
normal workings of the attorney's office, several of his em-
ployees and agents may have access to and be involved in
accumulating information to render the attorney's opinion.
Under such circumstances, neither the attorney nor his em-
ployees or agents could be required to state the information
given to said attorney in confidence by his client and his
response thereto. (Baird v. Koerner, supra).
In Fisher v. United States, 96 S.Ct. 1569 (1976), the
Court, in arriving at its decision, analyzed the Attorney-
Client privilege and stated:
“Confidential disclosures by a client to an attorney
made in order to obtain legal assistance are privileged.
8 Wigmore, Evidence, Section 2291, supra; McCormick
10 Reasons for Granting the Writ
Evidence, Section 87 et seq. The purpose of the privi-
lege is to encourage clients to make full disclosure to
their attorneys. 8 Wigmore, Evidence, Section 2291
and 2306 at 590, supra; McCormick Evidence, Section
87 page 175, Section 91 page 192; Baird v. Koerner,
279 F.2d 623 (CA9, 1960); Modern Woodmen of Amer-
ica v. Watkins, 32 F.2d 352, (CA5, 1943); Pritchard v.
United States, 181 F.2d 326 (CA6) affd 339 U.S. 974;
Schwimer v. United States, 232 F.2d 280 (CA6, 1964. )”
Petitioner contends that this Court has implicitly ap-
proved the determination of Baird v. Koerner, supra, that
the name of the client, under similar fact circumstances
presented herein, falls within the Attorney-Client privilege.
To otherwise hold, would effectively destroy the privi-
lege as it relates to the identity of an attorney’s client, and
potentially to other privileged communications. The natu-
ral consequences of such a conclusion is that any taxpayer
who has underpaid his taxes in the past, will be precluded
from correcting such error for fear that his identity will
be disclosed and prosecution will follow. While the Fed-
eral Government has an obligation and right to protect its
sources of revenue and its laws, such obligation is secon-
dary to a taxpayer's right to fully and freely communicate
with an attorney in seeking legal advice. Such a client
should be free from the concern that his disclosures to an
attorney and the implementation of the attorney's recom-
mendation will not be confidential.
In McFee v. United States, 206 F.2d 872 (9th Cir.
1953), vacated 348 U.S. 905 (1955), aff'd on rehearing 221
F.2d 807 (9th Cir. 1955), cert. den. 350 U.S. 825 (1955),
the Court held that attorneys who had purchased cashiers
checks for a taxpayer could not invoke the Attorney-Client
privilege since they were mere transmitters of funds and
had not performed substantial legal services. Additionally,
there was no evidence that the taxpayer had requested
that the attorney keep his identification confidential. As
Reasons for Granting the Writ 11
such, McFee v. United States, supra, is inapposite to the
instant case.
Furthermore, in Gannet tv. First National State Bank
of New Jersey, (Superior Court of New Jersey, Docket No.
C-283-75, unreported decision) (App. 5la) an Order to
Show Cause and a Temporary Restraining Order return-
able on March 26, 1976 was entered against the First Na-
tional State Bank of New Jersey to preclude it from giving
the information requested in the Internal Revenue Service
summons dated November 19, 1975. The order was entered
because compliance with such summons would violate New
Jersey Supreme Court Rule 1:21-6(f) as a breach of the
Attorney-Client privilege which, according to the Superior
Court of New Jersey, protects the information contained
in the attorney's trust account from disclosure.
Prior to the return date of the aforesaid Order to Show
Cause, the United States District Court without notice to
Petitioner, turned over to the Government the documents
requested in the summons involved herein. Said docu-
ments had previously been deposited with that Court under
Seal in Civil Action No. 75-2028. On the return date of
the Order to Show Cause, in Superior Court of New Jersey,
Chancery Division (unreported decision, transcript T-396-
75, p. 5); the Petitioner, during his oral presentation,
stated (App. 55a):
“I'd like this Court to make a definitive statement or
judgment on what our rules of the court mean in terms
of Rule 1:21-6 as to whether or not my attorney's trust
account is part of the privileged communications as dis-
closed in the Rule.”
The Court responded:
“Mr. Gannet, I wouldn't have given vou the original
temporary restraining order if I did not think the rules
of the Court meant what they say.”
12 Reasons for Granting the Writ
The New Jersey Superior Court interpreted the Su-
preme Court Rules of the State of New Jersey, which re-
quire an attorney to maintain a trust account, to mean that
such account is within the Attorney-Client privilege, and
an attorney may restrain a bank from turning over informa-
tion relating to said account to anyone.
Notwithstanding the fact that the Bank Secrecy Act
of 1970 (12 U.S.C. Section 1829b ) expressly recognizes the
usefulness of bank records in tax investigations, there is no
indication or inference of an intention to curtail the exist-
ing Attorney-Client privilege. Petitioner submits that the
disclosure of the records of his trust account, which is re-
quired to be maintained by the rules of the highest court
of the State in which he practices, to the Internal Revenue
Service so it can ascertain the identity of a client who
deposited funds with the Petitioner as an integral part of
the legal services rendered for such client is a violation of
the Attorney-Client privilege under the unusual circum-
stances present in this case.
As previously noted in Baird v. Koerner, supra, Tillot-
son v. Boughner, supra, and In re Grand Jury Proceedings,
supra, Attorney-Client privilege extends to the client's
identity. To allow the Government to obtain the client's
identity through a subpoena of the attorney's trust account
records, which is a vital and required part of an Attorney-
Client relationship, allows the Government to do indirectly
what is specifically prohibited from doing directly; obtain-
ing the identity of a client when such identity is within the
Attorney-Client privilege.
In Schulze v. Rayunec, 350 F.2d 666 (7th Cir. 1965),
cert. den. 382 U.S. 919, relied on by the Third Circuit, it
was held that the Attorney-Client privilege did not encom-
pass bank records which involved the purchase of cashiers
checks on behalf of the unidentified client. The Court
held that a mere debtor-creditor relationship was estab-
lished upon the purchase of such cashiers checks.
Reasons for Granting the Writ 13
The difference between Schulze v. Rayunec, supra,
and the present case are significant. In the former, the
attorney was a mere transmitter of funds and did not per-
form substantial legal services for the unidentified client.
Furthermore, there was no evidence that the attorney was
required by the rules of the highest court of the State
where he practices law to maintain a trust account. In the
instant case there are both substantial legal services per-
formed as part of the legal advice given the unidentified
client and the requirement of the rules of the highest court
in the State where Petitioner practices law that a trust ac-
count be maintained. These facts justify the conclusion
that the records were part of the total legal services per-
formed and that therefore, there was more than a mere
debtor-creditor relationship.
The relationship which existed was that of principal-
agent. The attorney, as required by Supreme Court Rule
1:21-6, used the bank for the purpose of handling his un-
identified client's fund in the performance of legal services
and advice for his clients. The records of such an agent.
which are integrally part of the work product of the at-
torney, are within the Attorney-Client privilege. The con-
fidentiality of this relationship was upheld by the Superior
Court of New Jersey in Gannet v. First National State Bank
of New Jersey, supra.
In United States v. Miller, 96 S.Ct. 1619 (1976), this
Court held the taxpayer had no Fourth Amendment interest
in bank records, and that there was “no legitimate ‘expec-
tation of privacy’ in their contents.” The Court, however,
carefully noted:
“All documents obtained, including financial state-
ments and deposit slips, contain only information vol-
untarily conveyed to the bank and exposed to their
employees in the ordinary course of business.” (Em-
phasis supplied. )
14 Reasons for Granting the Writ
This is clearly different than the situation where the
Petitioner has rendered substantial legal services to his
client and where he is required to maintain a trust account
into which all funds received on behalf of his clients must
be deposited if the attorney is to remain a member of the
bar in good standing of the State in which he practices.
There is no voluntary conveyance to the Bank. There
is also a reasonable expectation of privacy and confiden-
tiality of such records under the New Jersey Supreme Court
Rule 1:21-6(f) where it states, in relation to the trust ac-
count records:
“When so produced (before the Ethics Committee
or at the direction of the Supreme Court of New
Jersey,) all such records shall remain confidential ex-
cept for the purposes of the particular proceeding and
their contents shall not be disclosed by anyone in such
a way as to violate the Attorney-Client privilege.”
(Emphasis supplied. )
The Court below held that since this was a civil case
involving nondiversity jurisdiction, the New Jersey Su-
preme Court Rule 1:21-6 was inapplicable. It determined
that Federal law provided no basis for finding that an At-
torney-Client privilege existed in this case. While it is
incontroverted that the question of the privilege is gov-
erned by Federal law (United States v. Osborn, 409 F.
Supp. 406 (D. Ore. 1975) and Federal Rules of Evidence
501), in Baird v. Koerner, supra, the Court stated:
“And because the attorney is created by State law,
and differs from State to State, so the nature and extent
of the privilege that exists between the Attorney-Client
varies, we find in Corpus Juris Secundum, 35 C.J.S.
Fed. Court Section 131(b) the general rule stated, ‘On
the question of privileged communications the Feder!
Courts follow the law of the State of the forum’.”
Reasons for Granting the Writ 15
Therefore, the extent and nature of the privilege is
determined by reference to State law. The New Jersey
Supreme Court Rule which requires an attorney to main-
tain a trust account, sets forth rules regarding disclosure
of the information contained in such accounts (1:21-6(f) ),
and states that the information shall not be disclosed by
anyone so as to violate the Attorney-Client privilege. This
rule must be considered in the determination of the extent
of the privilege. As previously mentioned, the Superior
Court of New Jersey, in Gannet v. First National State
Bank of New Jersey, supra, which interpreted the Supreme
Court Rule 1:21-6(f), held that this rule prevented the
Bank from disclosing information contained in the attor-
ney’s trvt account to the Internal Revenue Service.
3. In United States v. Tratner, supra, the Court of
Appeals in considering an attorney's refusal to exhibit the
yee’s name on a check drawn on his escrow account re-
manded the case to the District Court for findings as to
“(1) whether it (the check and information concern-
ing the account) was integrally related to the giving
of legal advice; (2) whether it was a business deal-
ing or merely an attempt at concealment so unrelated
to the giving of legal services as not to be protected
by the Attorney-Client privilege, and (3) whether
it was, in any event, a sham transaction.”
By remanding the case to the lower Court, the Seventh
Circuit not only reaffirmed its opinion in Tillotson v.
Boughner, supra, but found that information in an at-
torney’s trust account which is integrally related to the
giving of legal advice is protected by the Attorney-Client
privilege.
In accordance with the foregoing, Petitioner respect-
fully submits that the District Court in the instant case
should not have initially ruled that the information con-
tained in the trust account was not protected by the Attor-
16 Reasons for Granting the Writ
ney-Client privilege without first holding an in camera
hearing in order to determine whether the information
contained therein was integrally related to the performance
of legal services by Petitioner for his unidentified client.
As a result of the failure to hold such a hearing, this Court
should reverse and remand the instant case to the District
Court for findings with respect to whether the information
contained in Petitioners trust account was, as Petitioner
contends, integrally related to the giving of legal advice.
(In accordance with United States v. Tratner, supra. )
The Government's knowledge of the information
sought in the summons involved herein emanated from the
Government's previous circumvention, invasion and viola-
tion of the Attorney-Client privilege by way of a summons
served on the Bank and the Bank's unilateral partial com-
pliance therewith prior to notifying the Petitioner. If this
Court holds that the specific information in the attorney's
trust account, which is integrally related to the giving of
legal advice and services, is protected by the Attorney-
Client privilege, the rule of admissibility of derivative evi-
dence, the fruit of the poisonous tree doctrine, as enunci-
ated in Nardone’ v. United States, 308 U.S. 338 (1939) is
equally applicable in the instant case to prohibit the dis-
closure of the information which is sought in the summons
involved herein.
It should also be recalled that prior to the date that
the District Court turned over to the Government the doc-
uments requested in the summons involved herein, Peti-
tioner applied for and received a Temporary Restraining
Order enjoining the Bank from complying with the sum-
mons. As discussed previously, the Superior Court of New
Jersey ruled that the information contained in an attorney's
trust account is included within the Attorney-Client privi-
lege. For the aforementioned reasons, Petitioner contends
Reasons for Granting the Writ 17
that the decision of the Court of Appeals should be re-
versed.
4. Section 1829b of the Bank Secrecy Act of 1970 was
intended to be an aid in tax investigations. However,
Petitioner submits that it was never intended to infringe
upon the Attorney-Client privilege or to be used to obtain
bank records of an attorney's trust account which was re-
quired to be maintained by the rules of the highest court
of the State where such attorney practices.
There has been no case which allowed the Govern-
ment to obtain bank records of an attorney's trust account.
The cases which have allowed the Government to obtain
bank records have involved records of the taxpayer or a
third party which were voluntarily given to the bank,
(United States v. Miller, supra,) or where there was a mere
debtor-creditor relationship (Schulze v. Rayunec, supra).
The present case differs significantly in that the records
maintained at the Bank were required by the Supreme
Court Rule 1:21-6, and there was an expectation of privacy
and confidentiality from such records since they were part
of the attorney's records and part of the services he per-
formed on behalf of a client (United States v. Miller,
supra ).
It is well settled that under unusual circumstances, a
client's identity may be withheld by an attorney. It is con-
tended that such circumstances are present in the instant
case, that the information sought is an integral part of the
attorneys advice to a client, and as such is within the
Attorney-Client privilege. The Bank Secrecy Act of 1970
was not intended to curtail an existing Attorney-Client
privilege.
5. Petitioner further contends that the issuance of the
summons under Section 7602 of the Internal Revenue Code
18 Reasons for Granting the Writ
was improper and an abuse of the District Court's process.
In United States v. Powell, 379 U.S. 48 (1964) this Court,
when referring to an abuse of the process of the Court,
states:
“Such an abuse would take place if the summons
had been issued for an improper purpose, such as to
harass the taxpayer or to put pressure on him to settle a
collateral dispute or for any other purpose reflecting on
the good faith of the particular investigation.”
This decision was amplified in Reisman v. Caplin, 375
U.S. 440 (1963) and Donaldson v. United States, supra,
where the Supreme Court defined the good faith require-
ment to exclude the purpose of obtaining evidence in a
criminal prosecution.
In United States v. La Salle National Bank, unofficially
reported at 76-1 USTC par. 9407 (N.D. Ill. 1976), the
enforcement of two Internal Revenue Service's summons
issued upon La Salle National Bank were denied. At a
hearing, evidence was introduced which established that
at the time the summons was issued, a special agent was
assigned to investigate the possible tax liabilities of an
individual taxpayer (Gattuso) and that his investigation
had not been concluded. The special agent testified that
he had not yet determined whether to recommend crim-
inal prosecution in this particular case. The evidence re-
vealed that the special agent was the only agent assigned
to this investigation and that no Revenue agent was work-
ing in conjunction with him. The Court stated:
“The recommendation for criminal prosecution is
certainly the event which definitely determines the
focus of the Internal Revenue Service upon criminal
prosecution as the end and goal of its investigation. It
is apparent, however, that this focus and determination
Reasons for Granting the Writ 19
may be arrived at, under certain circumstances, before
the actual recommendation for criminal prosecution has
been made. In the event such focus and determina-
tion has been arrived at at the time of the issuance of
the Internal Revenue summons, the fact that it pre-
cedes the formal recommendation for criminal prose-
cution is not relevant. An Internal Revenue summons
under such circumstances is not issued in good faith.
“The Supreme Court in the Donaldson case, supra,
leaves no doubt that it regards as inappropriate the
issuance of an Internal Revenue summons in an“. . . in-
vestigation solely for criminal purposes.’ Donaldson
v. United States, 400 U.S. 517, at 553.
“It is apparent from the evidence that special agent,
John F. Olivero, in his investigative activities had
focused upon the possible criminal activities of John
Gattuso, and was conducting his investigation solely
for the purpose of unearthing evidence of criminal con-
duct of Mr. Gattuso.”
The sole purpose of the summons issued in the instant
case is to supply the necessary link (the identity of the
taxpayer) in the chain of a criminal investigation of such
taxpayer. Support for the foregoing can be readily seen
from the testimony of the special agent at the hearing
in the District Court on February 23, 1976. Page 86 of
the transcript (App. 39a-40a) of that hearing indicates
that the agent stated that the sole purpose of his investi-
gation was to determine the violations of any criminal sec-
tions of the Internal Revenue Code. Furthermore, on
pages 82 and 87 (App. 39a, App. 40a-App. 41a) the agent
also testified that the purpose of his investigation was to
determine the identity of the taxpayer, and the District
Court so found.
In an effort to ascertain whether the nature of the
special agent's investigation was criminal, Petitioner re-
20 Reasons for Granting the Writ
quested all writings assigning the case to the special agent,
all interoffice memorandum or interoffice directions con-
cerning how this case was to proceed and function of
the special agent. This request was denied (App. 42a).
It is the Petitioner's contention and the record sup-
ports the position that the summons involved herein was
issued in aid of a criminal investigation, and, therefore,
was not issued in good faith. This Court has recognized
in United States v. McCarthy, 514 F.2d 368 (3rd Cir. 1975)
that the summons must be issued in aid of a civil investi-
gation in order to support the good faith requirement of
Donaldson v. United States, supra, and Reisman v. Cap-
lin, supra. Since this civil purpose is lacking and the sole
purpose is a criminal investigation, the issuance of the
summons is an abuse of the District Court’s process as a
step in a criminal investigation.
6. The issues presented by this case are of great and
recurring significance in the administration of the Internal
Revenue Laws, the collection of its revenue, and the ability
of an attorney to render to a client legal services and
advice without fear that his communications will be sub-
ject to Governmental subpoena.
The important nature of these issues is evidenced by
the fact that if the Government prevails, it will preclude
all taxpayers who have underpaid their taxes in the past
and wish to correct such errors from doing so,for fear of
discovery, prosecution, and the assertion of civil or criminal
fraud penalties, all stemming from disclosure of identity
through confidential communications to an attorney. Ad-
ditionally, such a determination would taint all Attorney-
Client relationships due to the client's justified fear that
a communication given to an attorney may be subject to
disclosure. This would prevent full and free access to an
Reasons for Granting the Writ 21
attorney, and deprive clients of full and complete legal
advice.
The issues of the extent to which the Bank Secrecy
Act of 1970 will be allowed to encroach upon the At-
torney-Client privilege, if allowed at all, and the con-
fidentiality of an attorney's trust account required to be
maintained by the rules of the highest court of the State
where the attorney practices are serious questions of pub-
lic policy.
The effect of the decision below, if unreversed, upon
the workings of the Internal Revenue Service, the con-
fidentiality of dealings between an attorney and his client,
and the limitations of the Bank Secrecy Act of 1970 make
this case particularly appropriate for the exercise of this
Court’s discretionary jurisdiction.
92 UNITED STATES COURT OF APPEALS
For the Third Circuit
CONCLUSION No. 75.2962
For the reasons set forth above, it is respectfully
submitted that this Petition for a Writ of Certiorari be HERBERT M. GANNET,
granted. Appellant,
v.
Respectfully submitted, | FIRST NATIONAL STATE BANK OF NEW JERSEY
/s/ Herbert M. Gannet (D.C. Civil No. 75-2028)
HERBERT M. GANNET
Counsel for Petitioner No. 76-1234
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.
(D.C. Civil No. 76-124)
Appeal From the United States District Court for the
District of New Jersey
Argued October 5, 1976
Before Biggs, Van Dusen an Rosenn, Circuit Judges
Herbert M. Gannet, Esq., pro se
Harvey R. Poe, Esq.,
Newark, New Jersey,
Attorneys for Appellant
la
2a Opinion
John J. Francis, Jr., Esq.,
Shanley & Fisher,
Newark, New Jersey,
Attorneys for Appellee First National
State Bank of New Jersey
Scott P. Crampton, Assistant Attorney General;
Gilbert E. Andrews, Carleton D. Powell,
and Daniel F. Ross, Attorneys, Tax Division,
U.S. Department of Justice,
Washington, D.C.,
Attorneys for Appellees United States of America
and Carl E. Reichelt
Of Counsel:
Jonathan L. Goldstein, U.S. Attorney;
George E. Mitttelholzer, Assistant U.S. Attorney;
Newark, New Jersey
Franzblau, Falkin & DiMarzio, P.S..,
Newark, New Jersey,
Attorneys for New Jersey State Bar
Association, Amicus Curiae
OPINION OF THE COURT
(Filed December 27, 1976)
Van Dusen, Circuit Judge.
This is an appeal by intervenor Herbert M. Gannet from
a district court enforcement order' directing the First
National State Bank of New Jersey to comply with an In-
ternal Revenue Service summons requesting the identity
of the purchaser of two cashier’s checks, and the sources of
1. This order of February 23, 1976, in Civil 76-124 (D. N.J.) appears at
27a. The notice of appeal challenging the order was filed February 26, 1976,
appears at 30a and was docketed at our No. 76-1234 on February 27, 1976.
Opinion 3a
the funds used to purchase those checks.* The question
presented here is whether the attorney-client privilege
protects this information from disclosure, since the cash-
iers checks were deposited in an attorneys trust ac-
count 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, — F.2d
—, No. 76-1261 (3rd Cir., July 28, 1976),° 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 cashiers check for
$215,499.95 to the Internal Revenue Service without dis-
closing the taxpayer’s identity. As in this case, when the
IRS received the check, a special agent attempted to sum-
mon from the issuing bank information calculated to reveal
the purchaser's identity. Upon the bank's refusal to com-
ply, the IRS petitioned the district court for enforcement
2. This summons dated November 19, 1975, appears at 7a. After issuance
of this summons, Gannet commenced Civil Action 75-2028 seeking to enjoin
the bank from complying with this summons. When this application for
injunctive relief was denied on December 1, 1975 (lla), Gannet appealed at
our No. 75-2362. On April 8, 1976, this court entered an order granting a
consent motion for leave to consolidate the appeals at Nos. 75-2362 and
76-1234 as a single proceeding.
3. See also Gannet v. First National State Bank of New Jersey, 410 F.
Supp. 585 (D. N.J. 1976), constituting the district court opinion in support
of its ruling which was reversed at our No. 76-1261 by the July 28, 1976,
opinion. (See note 7 of the July 1976 opinion.) It is noted that all parties
agree that these appeals are not moot. See United States v. Friedman, 532
F.2d 928, 931 (3d Cir 1976). There is every indication that the Government
will continue to seek bank records in this case.
4a Opinion
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 for-
warded the check in the course of offering confidential
legal services to a client.
The Seventh Circuit was not persuaded that the priv-
ilege 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 emploved to render any confiden-
tial 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 un-
usual.”
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.*
This result is supported by subsequent developments in
the law. The Bank Secrecy Act of 1970 (Act), 12 U.S.C.
§ 1829b,” requires that all federally insured banks main-
4. This court has stated in at least two opinions that absent unusual cir-
cumstances the identity of the client does not come within the attorney-client
privilege. See In re Semel, 411 F.2d 195, 197 (3d Cir. 1969); Mauch v.
Commissioner of Internal Revenue, 113 F.2d 555, 556-57 (3d Cir. 1940).
5. P.L. 91-508, 84 Stat. 1114, includes this language in §101 (see 12
U.S.C. §1829b):
Opinion 5a
tain records of bank account transactions. The rationale,
as § 1829(a)(2) expressly recognizes, is the usefulness of
“Retention of records by insured banks
“.. . (a)(1) The Congress finds that adequate records maintained by
insured banks have a high degree of usefulness in criminal, tax, and
regulatory investigations and proceedings. The Congress further finds that
microfilm or other reproductions and other records made by banks of
checks, as well as records kept by banks of the identity of persons main-
taining or authorized to act with respect to accounts therein, have been of
particular value in this respect.
“(2) It is the purpose of this section to require the maintenance of
appropriate types of records by insured banks in the United States where
such records have a high degree of usefulness in criminal, tax, or regu-
latory investigations or proceedings.
“(b) Where the Secretary of the Treasury (referred to in this section
as the ‘Secretary’) determines that the maintenance of appropriate types
of records and other evidence by insured banks has a high degree of
usefulness in criminal, tax, or regulatory investigations or proceedings, he
shall prescribe regulations to carry out the purpose of this section.
“(c) Each insured bank shall maintain such records and other evidence,
in such form as the Secretary shall require, of the identity of each person
having an account in the United States with the bank and of each indi-
vidual authorized to sign checks, make withdrawals, or otherwise act with
respect to any such account. The Secretary may make such exemptions
from any requirement otherwise imposed under this subsection as are con-
sistent with the purposes of this section.
“(d) Each insured bank shall make, to the extent that the regulations
of the Secretary so require—
“(1) a microfilm or other reproduction of each check, draft, or
similar instrument drawn on it and presented to it for payment; and
“(2) a record of each check, draft, or similar instrument received
by it for deposit or colle tion, together with an identification of the party
for whose account it is to be deposited or collected, unless the bank
has already made a record of the party's identity pursuant to sub-
section (c),
“(e) Whenever any individual engages (whether as principal, agent,
or bailee) in any transaction with an insured bank which is required to be
reported or recorded under the Currency and tyor Transactions Re-
porting Act, the bank shall require and retain such evidence of the identity
of that individual as the Secretary may prescribe as appropriate under the
circumstances.
“(f) In addition to or in lieu of the records and evidence otherwise
referred to in this section, each insured bank shall maintain such records
and evidence as the Secretary may prescribe to carry out the purposes of
this section.
“(g) Any type of record or evidence required under this section shall
be retained for such period as the Secretary may prescribe for the type in
question. Any seed | so prescribed shall not exceed six years unless the
Secretary determines, having regard for the purposes of this section, but
a — period is necessary in the case of a particular type of record or
evidence.
6a Opinion
such records in “criminal, tax, or regulatory investigations
or proceedings.”
The Supreme Court, implicitly following Shulze ov.
Rayunec, supra, held the record-breaking requirements of
this Act constitutional in California Bankers Assn. v.
Schultz, 416 U.S. 21 (1974), noting that
“{bjanks are ... not ... neutrals in transactions in-
volving negotiable instruments, but parties to the in-
struments with a substantial stake in their continued
availability and acceptance. . . .”
416 U.S. at 48-49.
Last term, the Supreme Court upheld the constitu-
tionality of the disclosure of information recorded by
banks under the Act in United States v. Miller, 44 U.S.L.W.
4528 (April 21, 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 con-
sidering the standards enunciated in Katz v. United States,
389 U.S. 347, 353 (1967), and Couch v. United States, 409
U.S. 322, 335 (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 4530
of 44 U.S.L.W.:
. checks are not confidential communications, but
negotiable instruments to be used in commercial trans-
actions. All of the documents obtained including finan-
cial statements and deposit slips, contain only informa-
tion voluntarily conveyed to banks and exposed to their
employees in the ordinary course of business. The lack
“(h) The Secretary shall include in his annual report to the Congress
information on his implementation of the authority conferred by this sec-
tion and any similar authority with respect to record-keeping or reporting
requir ments conferred by other provisions of law.”
Opinion Ta
of any legitimate expectation of privacy concerning the
information kept in bank records was assumed by Con-
gress in enacting the Bank Secrecy Act, the expressed
purpose of which is to require records to be main-
tained because they ‘have a high degree of usefulness
in criminal, tax, regulatory investigations and proceed-
ings. ...
“The depositor takes the risk, in revealing his affairs
to another, that the information will be conveyed by
that person to the government.”
Il.
The intervenor, Gannet, would distinguish this case on
the basis that state law® suggests that records in any way
6. Gannet relies u New Jersey Supreme Court Rule 1:21-6 which in-
cludes the following ge:
“Recordkeeping; Sharing of Fees; Examination of Records
“(a) Required Bank Accounts. All attorneys who practice in this State
shall maintain in a financial institution in New Jersey, in their own name,
or in the name of a partnership of atto , or in the name of the attorney
or partnership of attorneys by whom they are employed:
“(1) @ trustee account or accounts, separate from their business and
personal accounts and from any accounts which they may maintain in the
capacity of executor, ian, trustee or receiver, into which trustee
account or accounts all funds entrusted to their care shall be deposited; and
“(2) a business account into which all funds received for professional
services shall be deposited.
“The names of the institutions in which such accounts are maintained
and identification numbers of each account shall be recorded on the re-
— form filed with the annual payment, pursuant to R. 1:28-2, to the
lients’ Security Fund of the Bar of New Jersey. Such information shall
be available for use in accordance with paragraph (f) of this rule.
“(b) Required Bookkeeping Records. Al! attorneys and _partnershi
of attorneys who practice in this State shall maintain for 7 years after t
events which they record:
“(1) the records of all its in yrrer ~y ‘4 accounts
specified in (a) this rule of any other bank account
which Ady Ee their practice of law; and
“(2) a ledger book or similar record for all trustee accounts, showing
the source of all funds deposited in such accounts, the names of all persons
for whom the funds were held, the amount of such funds, the charges or
withdrawals from such accounts, and the names of all persons to whom
such funds were disbursed; and
8a Opinion
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 ac-
counts 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 Fe-
deral 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,
75-2 USTC § 9865 (D. Ore. 1975).”’
“(4) copies of all statements to clients showing the disbursement of
funds to them or on their behalf; and
“(5) copies of all bills rendered to clients; and
“(6) copies of all records showing payments to attorneys, investigators
or other persons, not in their regular employ, for services rendered or
performed.
“All attorneys who practice in this State shall make accurate entries
of all financial transactions in their records of receipts and disbursements,
in their trustee accounts, in their ledger books and similar records, and in
any other books of account kept by them in the regular course of their
practice, which entries shall be made at or near the time of the act,
condition or event recorded.
“(f) Availability of Records. Any of the Records required to be kept
by this rule shall be produced in response to a subpoena duces tecum is-
sued pursuant to R. 1:20-6 in connection with a complaint or investigation
vending before an ethics committee appointed pursuant to R. 1:20 or shall
produced at the direction of the Supreme Court before any person
designated by it. When so produced, all such records shall remain con-
fidential except for the purposes of the particular proceeding and their
contents shall not be disclosed by anyone in such a way as to violate the
attorney-client privilege.”
See Gannet v. First National State Bank of New Jersey, supra note 3, at
5358-89.
7. Federal Rule of Evidence 501 provides:
“Except as otherwise required by the Constitution of the United States
or provided by Act of Congress or in rules prescribed by the Supreme
Court pursuant to statutory authority, the privilege of a witness, person,
Opinion 9a
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 priv-
ilege 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 cular state hi or even con-
trohing eect but inv the last analysis ts 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 (1942) (Jackson J., concur-
ring). 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 pro-
vides no basis for a finding that the attorney-client priv-
ilege applies here.
Ei pamcie of tho cxtmen low w Gey ony bs etespeted by Go oowre
of the United States in the light of reason _ ee =
y+ thanpng hy ty are alo of doctden, Go poe
of a witness, person, government, State, or political subdivision thereof
shall be determined in accordance with State law.”
10a Opinion
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 volun-
tarily disclosed carries no legitimate expectation of privacy.
In the instant case, there is no suggestion that the in-
formation sought to be protected was disclosed other than
voluntarily.
We hold that the attorney-client privilege is not ap-
plicable 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 pur-
pose in enacting this legislation by allowing attorneys the
discretion to insulate certain transactions from investiga-
tion by employing their trust accounts. Such a course
would contradict both case law and statute.
Ill.
We have considered the other issue * raised by the in-
tervenor-defendant, whether the Internal Revenue Service
8. We recognize that intervenor-defendant has adopted the portion of his
brief in United States v. First National State Bank of New Jersey, Herbert M.
Gannet, Intervenor-Appellant, No. 76-1261 (3d Cir.; see Opinion of July 28,
1976) directed toward the question of whether an attorney might be compelled
to divulge the identity of his client, or whether a client's identity is protected
hy attorney-client privilege. Intervenor-defendant Gannet thereby raises again
here precisely the same issue which was before this court in the above-
mentioned case. At that time, a panel of this court found that the Govern-
ment was without the statutory authority in the bank summons enforcement
proceeding to ask Gannet the four questions related to discovering his client's
contempt for refusing to answer lthose] questions. In disposing of this
appeal on the threshold issue of statutory power, we [did] not reach and
hence [expressed] no opinion concerning Gannet's claim of attorney-client
privilege.” Since this court removed the threat of Gannet’s being com-
pelled to answer questions relating to his client's identity, this issue was
resolved, in appellant's favor, and does not concern us here.
Opinion lla
summons was issued in bad faith and constitutes an abuse
of the district court's process, and find it without merit.’
IV.
Having determined that bank records kept in accord-
ance with the Bank Secrecy Act of 1970 are not clothed
with the attorney-client privilege merely because they de-
rive 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 ).
A True Copy:
Teste:
for the Third Circuit,
Clerk of the United States
Court of Appeals
9. The burden of showing an improper purpose in issuing an Internal
Revenue Service summons is on the taxpayer, Donaldson v. United States,
400 U.S. 517 (1971). And, as stated in United States v. Fisher, 500 F.2d 683,
687 (3d Cir. 1974), aff'd, 44 U.S.L.W. 4515 (Apr. 21, 1976):
“It is now well settled that the possibility that criminal prosecution as well
as civil liabilities may arise from a tax investigation is not a sufficient
ground for refusing to enforce a summons issued under Section 7062 in
good faith and prior to a recommendation for prosecution.”
Here, as in Fisher, 500 F.2d at 688, it appears that the intervenor-defendant
would have us hold that the burden of showing improper purpose is met
merely by showing that a Special Agent of the Service's Intelligence Division
was the person assigned to the case. The record reveals that Special Agent
Reichelt was assigned to determine the are the anonymous taxpayer
alone. Appendix at 134a, 140a. There is no basis whatsoever for a finding
of abuse of process. See also United States v. Friedman, 532 F.2d 928, 932
(3d Cir. 1976); United States v. Lafko, 520 F.2d 622, 624-25 (3d Cir.
1975); United States v. McCarthy, 514 F.2d 368, 373-76 (3d Cir. 1975).
7
12a
UNITED STATES COURT OF APPEALS
For the Third Circuit
No. 76-1261
UNITED STATES OF AMERICA and
CARL E. REICHELT,
Special Agent of Internal Revenue Service,
Petitioners-Appellees,
vs.
FIRST NATIONAL STATE BANK OF NEW JERSEY,
Respondent,
vs.
HERBERT M. GANNET,
Intervenor-Appellant.
(D.C. Civil No. 76-124)
On Appeal from Order of the United States District
Court for the District of New Jersey
Argued March 25, 1976
Before: SEITZ, Chief Judge, ROSENN and GARTH,
Circuit Judges
Opinion 13a
OPINION OF THE COURT
(Filed July 28, 1976)
Scott P. Crampton, Esq.
Assistant Attorney General
Gilbert E. Andrews, Esq.
Robest E. Lindsay, Esq. —
Daniel F. Ross, Esq.
Attorneys, Tax Division, Department of Justice,
Washington, D.C. 20530
Of Counsel:
Jonathan L. Goldstein, Esq.
United States Attorney
George E. Mittelholzer, Esq.
Assistant United States Attorney
Attorneys for Petitioners-Appellees
Herbert M. Gannet, Esq.
Harvey R. Poe, Esq.
1180 Raymond Boulevard
Newark, New Jersey 07102
Attorneys for Intervenor-Appellant
GARTH, Circuit Judge
This case presents us with the question of whether an
intervening party in an administrative summons enforce-
ment proceeding may be held in civil contempt for refus-
ing to answer questions which range beyond the scope of
the proceeding. We hold that the Internal Revenue Ser-
vice (IRS), the administrative agency involved, lacked the
statutory power to require answers to questions which were
unrelated to the enforcement of the summons and that
therefore the district court erred in imposing a civil con-
tempt sanction.
14a Opinion
1.
~ In November, 1974, the Internal Revenue Service Cen-
ter in Holtsville, New York received a cashier's check issued
by the National Newark & Essex Bank from Herbert L.
Zuckerman, an attorney. As the accompanying letter ex-
plained, Zuckerman forwarded this check in the amount
of $142,497.81 to the Internal Revenue Service on behalf
of a taxpayer whose name was unknown to him but who
owed taxes and interest for prior years. Zuckerman wrote
that the taxpayer was paying these moneys on the recom-
mendation of counsel.
Upon receipt of this check and letter the IRS com-
menced an investigation to determine the identity of the
unnamed taxpayer. See United States v. Bisceglia, 420
U.S. 141 (1975). The first stage of the inquiry resulted
in information that the source of the funds for the cashier's
check was a check drawn on the Herbert M. Gannet Trust
Account at First National State Bank of N.J. (Bank) pay-
able to Zuckerman in the amount of $142,497.81. There-
after, on October 3, 1975, pursuant to 26 U S.C. § 7602,'
the IRS served a summons on the Bank seeking informa-
1. 26 U.S.C §7602 provides:
For the purpose of ascertaining the correctness of any return, making
a return where none has been made, determining the liability of any
person for any internal revenue tax or the liability at law or in equity
of any transferee or fiduciary of any person in respect of any internal
revenue tax, or collecting any such liability, the Secretary or his delegate
is authorized—
(1) To examine any books, papers, records, or other data which
may be relevant or material to such inquiry;
(2) To summon the person liable for tax or required to perform the
act, or any officer or employee of such person, or any person having
possession, custody, or care of books of account containing entries
relating to the business of the person liable for tax or required to per-
form the act, or any other person the Secretary or his delegate may
deem proper, to appear before the Secretary or his delegate at a time
and place named in the summons and to produce such books, papers,
records or other data, and to give such testimony, under oath, as mav
he relevant or material to such inquiry; and :
(3) To take such testimony of the person concerned, under oath,
as may be relevant or material to such inquiry.
Opinion 15a
tion concerning the Herbert M. Gannet Trust Account.
This summons sought all negotiable instruments and de-
posit slips relating to the source of funds used for the is-
suance of the $142,497.81 check as well as monthly bank
statements for this trust account.
Apparently, appellant Gannet, an attorney, had been
consulted by the unnamed taxpayer about a potential tax
liability for past years. Legal advice had evidently been
imparted to the taxpayer-client, and based upon that ad-
vice, a decision was made to pay the tax deficiencies plus
interest in a manner which was designed to protect the
taxpayer's identity. We can further assume that Zucker-
man, who wrote to IRS and forwarded the cashier’s check,
was engaged to assist in this endeavor of shielding the
taxpayer's identity from disclosure.
In response to the summons the Bank furnished the IRS
with two cashiers’ checks that had been deposited in the
Gannet Trust Account. These checks had been pur-
chased at the Bank’s Port Newark branch office on Octo-
ber 31, 1974 in the amounts of $65,182.66 and $77,315.15
(totalling $142,497.81).
The Bank then informed Gannet that it had furnished
the above information to the IRS in compliance with the
summons. Gannet served written notice on the Bank
directing it not to provide any further information con-
cerning his Trust Account.
As the IRS investigation continued a second IRS sum-
mons was served on the Bank on November 19, 1975. This
summons required the Bank to:
Furnish information as set forth below which pertains
to the purchase of cashier's checks numbered 39649 and
39651 in the respective amounts of $65,182.66 and $77,-
315.15 dated October 31, 1974 which were purchased
at the Port Newark Office:
16a Opinion
1. Name, address and social security number of the
purchaser of the above-described cashier's checks.
2. All documentation relative to the source of funds
used to purchase the above-described checks.
After the Bank notified Gannet of this second attempt to
obtain information, Gannet commenced Civil Action No.
75-2028 in which he sought to enjoin the Bank from com-
plying with the November 19, 1975 summons. This ap-
plication for injunctive relief was denied by the district
court.”
The government then filed a complaint in the U.S. Dis-
trict Court for the District of New Jersey to enforce the
summons which had issued on November 19, 1975, This
latter complaint, based upon 26 U.S.C. §§7402(b),* 7604
(a),* alleged that the IRS was engaged in an investigation
to determine the federal tax liabilities of an unknown tax-
payer and that the Bank “is in possession and control of
papers and documents concerning the above-described
investigation.” The IRS asserted that the information
sought in the summons was not within its possession and
that
2. However, this Court, on Gannet’s application, enjoined the Bank from
complying with the November 19, 1975 summons pending appeal in Civil
Action No. 75-2028 or government enforcement of the summons.
3. 26 U.S.C. §7402(b) provides:
(b) To enforce summons.—If any person is summoned under the
internal revenue laws to appear, to testify, or to produce books, papers,
or other data, the district court of the United States for the district in
which such person resides or may be found shall have jurisdiction by
appropriate process to compel such attendance, testimony, or production
ot books, papers, or other data.
4. 26 U.S.C. §7604(a) provides:
(a) Jurisdiction of district court—If any person is summoned under
the internal revenue laws to appear, to testify, or to produce books, papers,
records, or other data, the United States district court for the district
in which such person resides or is found shall have jurisdiction by ap-
—- process to compel such attendance, testimony, or production of
S, papers, records, or other data.
—
=
Opinion 17a
[i]t was and is now essential to the determination
of the correct tax liability of John Doe, for the years
1968 through 1974, inclusive, that the defendant be
required to appear and to produce the documents,
records and other information sought in the summons
and to give testimony regarding those documents and
records. . . .
On January 22, 1976 the district court ordered that the
Bank show cause why it should not be compelled to obey
the IRS summons. This order to show cause stated:
All motions and issues raised by the pleadings will
be considered on the return date of this order. Only
those issues raised in motion or brought into contro-
versy by the responsive pleadings and supported by
Affidavit(s) will be considered at the return of this
order... .
Thereafter Gannet moved to intervene in the enfo. ce-
ment proceeding as a defendant in order to oppose enforce-
mnt of the IRS summons against the Bank. His proposed
Answer to the government’s complaint alleged that “the
documents, records and other information sought in the
summons are protected from being produced by the at-
torney-client privilege.”
On February 23, 1976, the parties appeared before the
district court for the enforcement hearing. The district
court first granted Gannet’s motion for intervention and
then ordered the enforcement proceeding consolidated
with Gannet’s earlier suit for injunctive relief (Civil Action
No. 75-2028). Next the court had the parties address
Gannet’s claim of attorney-client privilege set forth in
his Answer. Gannet argued that the records of his Trust
Account at the Bank, the subject of the first IRS summons
of October 3, 1975, were shielded from disclosure with
18a Opinion
respect to the unnamed taxpayer. He also contended that
since the November 19, 1975 summons before the court
was based upon privileged information that had been
improperly taken from the records of his Trust Account,
the district court should deny enforcement of _ this
latter summons. In response, the government argued that
the materials sought by the summons were bank records
which were not privileged from disclosure.
F ollowing the arguments of counsel the government
called Gannet to testify at the enforcement hearing.
Gannet was asked the following questions:
“Mr. Gannet, will you please tell the court whether
or not—or if you purchased cashier’s checks number
39649 and 39651 in the respective amounts of $65,-
182.66 and $77,315.15 on October 31st, 1974 from
National State Bank.”
“Mr. Gannet, what was used to purchase the two
cashier's checks in question, and I may amplify my
question—. . . Currency, Treasury bills, Certificate
of Deposit, whatever?”
“Mr. Gannet, can you tell whether you know what
medium of exchange was used to purchase these
checks?”
“Mr. Gannet, I must ask you, since yo uhave inter-
vened in this case you obviously did not intervene
in this case you obviously did not intervene on your
own behalf, but you intervened on behalf of some
other party, and for that reason I ask you who you
represent, who is the real party in interest on whose
behalf you have intervened?”
Gannet objected to these questions on two grounds:
(1) that the line of questioning was “entirely irrelevant
ee
RR a eh Oa
Opinion 19a
to the proceedings on the summons now in question” and
(2) that the questions sought to evoke answers protected
by the attorney-client privilege. The district court over-
ruled both objections and ordered Gannet to answer. Gan-
net refused.
Immediately thereafter, on February 23, 1976, the dis-
trict court granted enforcement of the summons against
the Bank. Gannet appealed from this order at No. 76-1234.
On February 27, 1976 the district court summarily
ordered Gannet confined pursuant to 28 U.S.C. §1826(a)’
until such time as he answered the government's ques-
tions. This confinement order was stayed pending an ap-
plication to this Court for a stay of the enforcement order
of February 23, 197U. Gannet also filed a notice of appeal
from the confinement order at No. 76-1261, which is the
appeal with which we are here concerned.
On March 8, 1976 this Court denied Gannet’s motion
for a stay pending appeal of the district court's February
23, 1976 order which enforced compliance with the IRS
summons. Subsequently, the Bank’s records required by
the summons were delivered to IRS. On March 11, 1976,
this Court granted Gannet’s motion for a stay pending
appeal of the confinement order of February 27, 1976.
5. 18 U.S.C. §1826(a) states:
(a) Whenever a witness in any proceeding before or ancillary to any
court or grand jury of the United States refuses without just cause
shown to comply with an order of the court to testify or provide other
information, including any book, paper, document, record, recording or
other material, the court, upon mab tote. or when such refusal is duly
brought to its attention, may summarily order his confinement at a
suitable place until such time as the witness is willing to give such
testimony or provide such information. No period of such confinement
shall exceed the life of—
(1) the court proceeding, or
(2) the term of the grand jury, including extensions, before which
such refusal to comply with the court order occurred, but in no event
shall such confinement exceed eighteen months.
6. The appeal from the district court's February 23, 1976 enforcement
order is still pending before this Court at No. 76-1234 even though the
Bank has furnished the materials sought.
20a Opinion
Thus Gannet has not yet commenced serving the civil con-
tempt sentence which had been imposed on February 27,
1976. It is only the appeal from the order of confinement
that is now before us.”
The parties initially joined issue on the question of
whether Gannet, asserting an attorney-client privilege,
properly refused to answer the four questions which the
government asked during the enforcement proceeding. In
its opinion the district court focused exclusively upon that
issue.’ However, Gannet had also objected to the ques-
tions asserting their irrelevancy to the proceedings then
under way. In an addendum to his brief in this Court,
Gannet argued that the questions posed were not relevant
to the enforcement of the IRS summons. In reply the
government urged that a witness has no right to object to
questions on the ground of relevancy, but that in any case
the particular questions here were relevant to the enforce-
ment proceeding.”
Gannet's objection to relevancy brought into issue the
power and authority of the IRS in this enforcement pro-
ceeding to question him on matters unrelated to the en-
Ga. As indicated, when the district court entered its order on February
27, 1976, it directed that Gannet be confined until such time as he responded
to the question that had been asked of him. The implementation of that
order was stayed pending an application by Gannet to this Court. We have
serious doubts as to whether the district court could have imposed any
effective civil contempt sanctions under 28 U.S.C. §1826 as the order recites,
or even under its inherent power, see Shillitani v. United States, 384 U.S.
364, 370 (1966), after enforcement of the summons had been granted.
However, because of the nature of the particular proceeding, the con-
ti ning effect of the February 27th order and both the district court's and
our stay of that order which forestalled any incarceration, we do not pursue
this issue, noting that it has never been raised, briefed, nor presented to us
by the parties.
7. 410 F. Supp. 585 (D. N.J. 1976).
7a. In making its argument the government relied upon Nelson v. United
States, 201 U.S. 92 (1906); People’s Bank v. Brown, 112 Fed. 652 (3d Cir.
1902); Marcus v. United States, 310 F.2d 143, 147 n. 2 (3d Cir. 1962),
cert. denied, 372 U.S. 944 (1963). We reject that argument for the rea-
sons discyssed in text, infra.
Opinion 21a
forcement of the Bank summons. Since this objection
raised a threshold question as to the power of the IRS, it
must necessarily be resolved before we can reach any sub-
ordinate issue including that of an asserted attorney-client
privilege. We therefore turn to a consideration of the
authority under which the IRS can compel discovery and
whether that authority was exceeded in this case.
Ii.
Congress has provided the Internal Revenue Service with
elaborate investigative powers to determine the tax lia-
bility of any taxpayer. Under §7602 of the Internal Rev-
enue Code of 1954, 26 U.S.C. §7602, the IRS is authorized
[flor the purpose of ascertaining the correctness of
any return, making a return where none has been
made, determining the liability of any person for any
internal revenue tax. . . . [t]o summon .. . any other
person the Secretary or his delegate may deem proper,
to appear before the Secretary or his delegate . . . 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.
Where there has been noncompliance with a summons
seeking testimony or the production of evidence, the IRS
may seek judicial enforcement. The Internal Revenue
Code provides that a federal district court “shall have juris-
diction by appropriate process to compel such attendance,
testimony, or production of books, papers, or other data.”
See notes 3, 4, supra.
The judicial proceeding provided for the enforcement of
an IRS summons is no mere rubber stamp approval. See
In re Grand Jury Proceedings, 486 F.2d 85, 90 (3d Cir.
1973) (Schofield I). An enforcement action is “an ad-
versary proceeding affording a judicial determination of
22a Opinion
the challenges to the summons and giving complete pro-
tection to the witness.” Reisman v. Caplin, 375 U.S. 440,
446 (1964); Donaldson v. United States, 400 U.S. 517
(1971). At such a judicial hearing, United States v.
McCarthy, 514 F.2d 368, 372 (3d Cir. 1975) requires that
the IRS must be prepared to make a preliminary showing
in support of its summons—
(1) That the investigation has a legitimate purpose
and that the inquiry may be relevant to that purpose,
(2) that the information sought is not already within
the government's possession and (3) that the steps re-
quired by the Internal Revenue Code have been
followed. . . .
The burden then shifts to the party named in the sum-
mons to establish any defenses or to prove that enforce-
ment would constitute “an abuse of the court's process.”
United States v. Powell, 379 U.S. 48, 58 (1964). Thus the
entire enforcement proceeding from its inception through
hearing is strictly limited to the narrow issue of whether
the summons is to be enforced.
Here the IRS summons to the Bank sought information
concerning the cashier's checks purchased at its Port
Newark branch office. In support of the summons en-
forcement complaint, which was directed only against the
Bank and not Gannet, Special Agent Reichelt submitted
an affidavit which satisfied the McCarthy requirements
(see p. 11, supra), averring among other facts that the
contents of the Bank records in question were not in the
possession of IRS and that they were “essential to the in-
vestigation.’ Thus, IRS carried its initial burden with
respect to enforcement of the summons against the Bank.
United States v. McCarthy, supra.
s. Enforcement will be denied, for example, where it is established that
the material is sought for use in a criminal prosecution or where the
information is held to be protected by the attorney-client privilege. Reisman
v. Caplin, 375 U.S. at 449. '
Opinion 3 23a
In response the Bank and Gannet asserted various de-
fenses, all of which opposed judicial enforcement of the
IRS summons to the Bank. Thus the only issue before
the district court was whether or not the November 19,
1975 Bank summons seeking certain Bank records was to
be enforced. :
However, during the enforcement hearing the govern-
ment called Gannet as a witness and commenced a line of
questioning that neither supported enforcement of the
summons nor rebutted any defenses raised against en-
forcement. While these questions were undoubtedly rele-
vant to the overall IRS investigation vf the unknown tax-
payer, they were completely irrelevant to the single issue .
before the court—whether the November 19, 1975 sum-
mons to the Bank should be judicially enforced. In effect,
the government, by this means, sought to convert a narrow
and limited enforcement proceeding into-a general investi-
gative proceeding. We know of no authority which grants
the IRS an unlimited commission to interrogate witnesses
under oath on matters unrelated to enforcement of the
summons then before the court.
As previously discussed, Congress has empowered IRS
to carry on its investigative functions through the issuance
of administrative summonses. Judicial involvement only
arises where there has been noncompliance with a sum-
mons. The judicial enforcement proceeding that follows
is strictly limited to granting or denying enforcement of
the terms of the specific summons. To permit inquiry into
areas unrelated to the enforcement of the summons, as was
the situation with respect to the questions asked of Gannet
here, violates this Congressionally mandated procedure.
As we have observed, no summons has ever been issued
to Gannet. Consequently, Gannet has not had the oppor-
tunity to comply with or to contest a summons seeking
24a Opinion
information of his own knowledge and of his own actions.
Furthermore, the government has not been obliged to
satisfy the McCarthy requirements in a summons enforce-
ment proceeding as they may relate to information sought
to be elicited from Gannet. Finally, and most importantly
here, only after a summons had issued to Gannet and had
been judicially enforced against him would Gannet’s re-
fusal to comply or testify subject him to the possibility of
civil contempt. In our view, the government exceeded its
statutory powers under §§7602, 7402(a), and 7604(a) by
utilizing the summons enforcement proceeding with re-
spect to the Bank as an investigative tool to pry informa-
tion from Gannet.
IV.
Having concluded that the government was without
statutory authority in the Bank summons enforcement pro-
ceeding to ask Gannet the four questions at issue here (see
p.6, supra), we must reverse the district court’s order which
adjudged Gannet in contempt for refusing to answer these
questions. In disposing of this appeal on the threshold
issue of statutory power, we do not reach and hence ex-
press no opinion concerning Gannet’s claim of attorney-
client privilege.
We will reverse and remand to the district court with
the direction that the contempt and confinement order of
February 27, 1976 be vacated, a which time our stay pend-
ing appeal will terminate.
TO THE CLERK:
Please file the foregoing opinion.
/s/
Circuit Judge
es
Opinion 25a
SEITZ, Chief Judge, dissenting.
It is important to keep in mind that the confinement
order presently before us arose during statutory proceed-
ings initiated by the I.R.S. to secure judicial enforcement
of a summons directed solely to the Bank. At the court
hearing, the intervenor-appellant, as a witness, refused to
answer certain questions and his refusal resulted in a con-
tempt order which finally eventuated in the confinement
order now on appeal.
Given the setting in which they were asked, I must pre-
sume that the questions posed to the intervenor-appellant
sought to elicit evidence which would aid the court in de-
termining whether to enforce the summons against the
Bank. However, despite the intervenor-appellant'’s refusal
to answer, the court proceeded to enter a final order direct-
ing the Bank to comply with the summons. Since the
relief sought against the Bank, i.e., enforcement of the
summons, has been obtained, the underlying contempt
order is, in my view, no longer viable.
The purpose of civil contempt is wholly remedial. It is
designed to coerce compliance with the lawful orders of
the court, rather than vindicate the court's authority. Uni-
versal Athletic Sales Co. v. Salkeld, 511 F.2d 904 (3d Cir.
1975), cert. denied 423 U.S. 863 (1975). However, once
enforcement of the summons had been obtained, the testi-
mony of the intervenor-appellant became unnecessary.
Consequently, the contempt order and its implementing
confinement order can now serve no proper remedial pur-
pose. I would therefore dismiss this appeal as moot.
26a Opinion
JUDGMENT
This cause came on to be heard on the record from the
United States District Court for the District of New Jersey
and was argued by counsel.
On consideration whereof, it is now here ordered and
adjudged by this Court that the judgment of the District
Court, entered February 27, 1976, be, and the same is
hereby reversed and the cause is remanded to the district
court with the direction that the contempt and confine-
ment order of February 27, 1976 be vacated, at which time
our stay pending appeal will terminate. Costs are taxed
against the appellees.
ATTEST:
/s/ Thomas
THOMAS
Clerk
July 28, 1976
27a
UNITED STATES DISTRICT COURT FOR THE
DISTRICT OF NEW JERSEY
NOS. 75-2028 AND 76-124
Approved for Publication
UNITED STATES DISTRICT COURT
For the District of New Jersey
Civil 75-2028
HERBERT M. GANNET,
Plaintiff,
vs.
FIRST NATIONAL STATE BANK OF N_.J.,
Defendant.
Civil 76-124
UNITED STATES OF AMERICA and
CARL E. REICHELT, Special Agent
of the International Revenue Service,
Plaintiff,
wos.
FIRST NATIONAL STATE BANK OF N.,J.,
Defendant,
os .
HERBERT M. GANNET,
Intervenor.
28a Opinion
Appearances:
HARVEY R. POE, ESQ. ( Newark, N.J. ) for Gannet
SHANLEY & FISHER, ESQS. (Newark, N.J.) by John
J. Francis, Jr., Esq. and Charles M. Costenbader, Esq.
for First National State Bank of N.].
JONATHAN L. GOLDSTEIN, ESQ., U.S. Attorney
(Newark, N.J.) by Z. Lance Samay, Esq. William
Robertson, Esq., and Andrew M. Higgins, Esq., As-
sistant U.S. Attorneys and by Gerald C. Miller, Esq.,
(Washington, D.C.), Tax Division, Dept. of Justice,
for United States of America and Reichelt.
OPINION
(Filed March 1976)
BIUNNO, J.
In this case, some of the facts are not in dispute; others
are assumed for the purpose of this determination.
The undisputed facts are as follow. In the due course
of the mails, the Internal Revenue Service Center (IRS)
at Holtsville, N.Y., received a certified letter from Herbert
L. Zuckerman, Esq., a Newark attorney, dated November
4, 1974. The letter enclosed a cashier's check, number
488562, issued by National Newark & Essex Bank, pay-
able to IRS, for $142,497.81. ;
The letter said that the check represented additional
amounts due from “a taxpayer for past years;” that Mr.
Zuckerman did not know the taxpayers name, and that
the aggregate additional amount, “together with interest
-_
computed to November 5, 1974” totalled the amount of
the check.
> —T — ere Y
Opinion 29a
It further said that Zuckerman was informed that tax-
payer was not aware of any investigation in process by
IRS, and that taxpayer's attorney had concluded that ad-
ditional taxes were due and recommended that payment
be made. Finally, it asked that the check be deposited in
the Deposit Fund Account of the Treasury of the United
Statts, or in such other account as appropriate “for un-
identified collections.”
An IRS official, informed of the letter and checks,
instructed a special agent to try to find out who the tax-
payer was. The first stage of inquiry produced informa-
tion that the source of the funds for the cashier's check
was a check, No. 1186, drawn by Herbert M. Gannet
Trust Account at First National State Bank of N.J. (FNSB)
to Zuckerman, dated November 4, 1974, in the amount of
$142,497.81.
On October 3, 1975, IRS issued an administrative sum-
mons (26 U.S.C. §7602) to FNSB asking for all negotiable
instruments and deposit tickets relating to the source of
the funds used for the Gannet/Zuckerman check, as well
as monthly bank statements and deposit tickets for $1,000
or more for the period October | through November 4,
1974, in the Gannet account.
This inquiry produced the information that two
cashier's checks were deposited in the Gannet account,
these having been purchased at FNSB’s Port Newark
branch office on October 31, 1974, in the amounts of
$65,182.66 and $77,315.15 (total, $142,497.81).
On November 19, 1975, IRS issued another administra-
tive summons to FNSB, returnable December 2, 1975,
asking for the name, address and social security number
of the purchaser of the cashier's checks, and for all docu-
mentation relative to the source of the funds used to
purchase the checks.
30a Opinion
Meanwhile, and about October 31, 1975, FNSB informed
Gannet of the first summons and that it had furnished the
two cashier's checks to IRS. On about November 3, 1975,
Gannet served a written demand on’ FNSB that it not
“furnish any further information on his trust account
to IRS, and that it advise IRS that it would refuse to
furnish such further information.
When the second summons was served on November
19, 1975, FNSB informed Gannet of it, although it was
not directed to Gannet’s trust account, and Gannet filed
in this court the first of the two pending actions, Civil No.
75-2038. With the filing of the complaint, Gannet sought
an order to show cause why FNSB should not be enjoined
from obeying the summons, along with a temporary
restraint.
This application was heard November 26, 1975 on
informal notice to FNSB and, at the court’s direction, to
IRS, which appeared amicus curiae.
The assumed facts are that some individual, partner-
ship or corporation consulted Gannet about a potential
tax liability for past years. Presumably, calculations
were made of deficiencies and of interest thereon for the
years involved. Presumably legal advice was given in
respect to taxpayer's obligations, in respect to civil and
criminal statutes of limitations, and in respect to avail-
able options for dealing with the matter. Presumably,
the taxpayer chose to make a voluntary payment of defi-
ciencies and interest in a way calculated to avoid dis-
closing his identity. Presumably, it was conceived to be
desirable for Gannet to engage Zuckerman to write the
letter to IRS and to obtain and forward the cashier's
check.
These assumed facts are fairly evident from what was
done by the taxpayer, by Gannet and by Zuckerman in
Opinion 3la
dealings with third parties. The taxpayer, or someone
acting for him, dealt with someone at the Port Newark
Office of FNSB to purchase two cashier's checks on Octo-
ber 31, 1974. The checks were deposited in Gannet's
trust account, and he drew a check to Zuckerman for their
total. liat check was used by Zuckerman to buy a
cashier's check in the same amount, and this check he
sent to IRS with his letter of November 4, 1974, making
the disclosures noted above.
The argument for Gannet in the first case was grounded
on the attorney-client privilege, F.Ev.Rule 501, and on
N.J. Court Rule R.1:21-6, requiring all attorneys to estab-
lish and maintain trust accounts for clients’ funds, separate
and apart from other bank accounts.
The order to show cause and interim restraint were
denied, first on the ground that disclosure of the identity
of the client does not come within the scope of the
privilege, and second that the administrative summons
was directed to third-party records, i.e., FNSB records,
and did not call on the attorney to make any disclosure.
An appeal was taken, but while it was pending the
second suit was filed, this by IRS against FNSB, to compel
compliance with the summons. An order to show cause
why the summons should not be ordered enforced was
issued, returnable February 23, 1976, with a schedule for
filing answers and briefs, and for an opportunity to Gan-
net to apply for intervention.
At the hearing, Gannet was allowed to intervene in the
second case, and both cases were ordered consolidated for
all purposes. This places before the court all parties in
interest except the taxpayer, whose interests are repre-
sented by Gannet, and permits dealing effectively with the
merits.
32a Opinion
During the hearing, Gannet was called to the stand by
the United States. After stating that he was a member of
the bar of New Jersey and of this court, he was asked, in
substance, the following questions, with the results indi-
cated:
Q. 1: Did you purchase the two cashier's checks at
the Port Newark Office of FNSB? (not answered )
Q. 2: What was used to buy the two cashier's
checks, currency, treasury bills certificate of deposit
or whatever? (not answered )
Q. 3: Do you know what medium of exchange was
used to purchase these checks? (Not answered )
Q. 4: Are you the taxpayer for whom the check
was sent to IRS? A: No
Q. 5: Who is the real party in interest for whom
vou acted? (Not answered )
In respect to each question not answered, an objection
was made and overruled. The witness’ attention was
directed to 28 U.S.C. §1826 and its provision that when-
ever a witness refuses, without just cause, to comply with
an order to testify, the court may summarily order his
confinement in a suitable place until such time as the
witness is willing to testify as ordered. Gannet was so
ordered, and on his refusal to testify (grounded on the
attorney-client privilege) he was summarily ordered to
be confined.
Basically, three questions of law are presented:
(1) May Gannet be required to disclose the identity
of his client, or is that information within the scope of
the attorney-client privilege?
Opinion 33a
(2) Is information embodied in bank records brought
within the scope of the attorney-client privilege by reason
of the provisions of N.J. Court Rule, R.1:1-21-6?
(3) Is the information sought by the present summons,
i.e., bank records and bank testimony about the purchase
of the two cashier's checks and the source of the funds
used, within the scope of the attorney-client privilege?
Disposition of the first question is governed by F.Ev.
Rule 501, which provides, in pertinent part, that “the
privilege of a witness . . . shall be governed by the prin-
ciples of the common law as they may be interpreted by
the courts of the United States in the light of reason and
experience.” There is one exception, namely when other-
wise required by the U.S. Constitution, or by Act of
Congress or in rules prescribed by the Supreme Court
under statutory authority. That exception does not apply
here. The second exception is that in civil matters, where
State law supplies the rule of decision on an element of
a claim or defense, then the privilege is determined by
State law. That exception does not apply here since
this matter solely relates to federal taxes.
In the original version approved by the Supreme Court
on November 20, 1972, Rule 503 dealt explicitly with the
attorney-client privilege. Neither the text of the rule nor
the note of the Advisory Committee addressed the ques-
tion here involved. The same is true of the Senate, House
and Conference Committee Reports on P.L. 93-595, which
was enacted as the Federal Rules of Evidence. (Senate
Report No. 93-1277; House Report No. 93-650; Conference
Report No. 93-1597).
Two decisions in this circuit do deal with the specific
question. In re Semel, 411 F.2d 195, at 197 (CA 3, 1969);
Mauch v. C.1.R., 113 F.2d 555 at 556-7 (CA 3, 1940).
34a Opinion
The same result has been reached in New Jersey, a com-
mon law state. State v. Toscano, 18 N.J. 418, at 424-5
(1953); In re Richardson, 31 N.J. 391 at 396-401 (1960).
These decisions, from this internal discussion, analysis and
precedents cited, appear to reflect the overwhelming
weight of authority. See also, Annotation, 16 A.L.R. 3d.
1047; 15 A.L.R. Fed. 771. The privilege does not embrace
the client's identity.
The second question must be answered with the con-
clusion that R.1:21-6 does not affect the result. In the
first place, the provisions of that Rule are the equivalent
of a State statute, in execution of the authority placed in
the Supreme Court of New Jersey by N.J. Const. 1947,
Art. 6, §2 par. 3, dealing with “admission to the practice
of law and the discipline of persons admitted” Since
State law does not supply the rule of decision for any ele-
ment of the claim or defense in this case, it cannot apply,
F.Ev.Rule 501.
Beyond that, even if State law applied, the rule relied
on does not say what Gannet claims. R.1:21-6(a) requires
New Jersey attorneys to keep separate accounts in a
financial institution in New Jersey (1) for the deposit of
all funds entrusted to their care, called a “trustee account,”
and (2) a business account for the deposit of all funds
received for professional services.
R.1:21-6(b) separately requires the keeping of records
by attorneys, for a period of 7 years, showing deposits
and withdrawals in the bank accounts; ledgers for all
trustee accounts showing the sources of funds deposited,
the persons for whom held, the amounts, the charges
or withdrawals and to whom paid; copies of all retainer
and compensation agreements; copies of statements to
clients showing disbursements to or for them; copies of
Opinion 35a
bills to clients; and copies of records showing payments
to other attorneys and others, not in their regular employ,
for services rendered or performed.
R.1:21-6(f), on which Gannet relies, directs that “any
of the records required to be kept” by the rule are to
be produced on subpoena duces tecum in an ethics com-
mittee matter or before the Supreme Court; and “when
so produced” all such records shall “remain confidential”
and shall not be disclosed in a way that would violate
the attorney-client privilege.
This provision does not apply to the bank account, but
to the records called for by R.1:21-6(b). It does not
create any privilege; it requires disclosure in ethics pro-
ceedings and says that despite such disclosure whatever
was privileged is to remain privileged. In this respect it
reflects the principle of N.J.Ev.Rule 37, namely that “a
disclosure which is itself privileged or otherwise protected
by the common law, statutes or rules of court of this State,
or by lawful contact, shall not constitute a waiver under
this section.” See also, the last sentence of proposed F.
Ev.Rule 511 (1972), not adopted.
The answer to the third question clearly is that no
privilege is involved. Schulze v. Rayunec, 350 F.2d 666,
at 668-9 (CA 7, 1965), the companion case to Tillotson,
mentioned below, dealing with an IRS summons to produce
bank records. These are obviously third-party disclosures
which are not part of a “confidential communication be-
tween attorney and client.” Also pertinent is Harris v.
U.S., 413 F.2d 316, at 320 (CA 9, 1960), holding that
when an attorney acts as a transmitter of funds, he stands
in the same position as a banker, and no confidential
relationship arises; and also SEC v. First Security, etc.,
447 F.2d 166 at 167 (CA 10, 1971) and cases there cited.
36a Opinion
When the unidentified taxpayer went to the Port New-
ark office of FNSB to arrange to buy the two cashier's
checks which are the subject of the summons, the trans-
action and any conversation that took place could not
have been a privileged communication between attorney
and client.
IRS has a perfectly lawful objective in seeking out by
investigation the identity of the undisclosed taxpayer. On
the civil side alone, it is entitled to verify that the amount
paid for taxes and interest is the correct amount; it may
be entiled to claim civil penalties as well. And it is
entitled to check these and other questions without delay
to avoid the ar of the statute of limitations for any tax-
able year, which normally arises on April 15 of each year.
Gannet's major argument rests on two federal deci-
sions: Baird v. Koerner, 279 F.2d 623, 95 ALR 2d 303
(CA 9, 1960); and Tillotson v. Boughner, 350 F.2d 663
(CA 7, 1965). Both cases involved a situation in which
an attorney sent IRS a cashier's check on behalf of an
unidentified client to pay a tax obligation. In both cases,
an IRS summons was issued to the attorney calling on him
to disclose the client's identity.
In Baird, the Court of Appeals conceived that the point
was governed by California law, which it determined to
embrace the identity of the client within the privilege.
In Tillotson, the Court of Appeals noted that Illinois law
was silent on the point, and relied on Baird as reflecting
federal law (which it did not).
Baird cannot apply because of F.Ev.Rule 501. Tillotson
was in error, overlooking the fact that Baird was grounded
on California law. Neither case is controlling here, since
the Court of Appeals for the Third Circuit has ruled the
other way (and in accordance with the weight of au-
thority ) in both Semel and Mauch, supra.
Opinion 37a
The application for an order directing FNSB_ to
respond to the summons is granted, and no stay pending
appeal will be allowed except as may be ordered by the
Court of Appeals. Gannet is ordered to be confined until
he is ready to answer the questions he refused to answer;
that confinement is stayed until the Court of Appeals grants
or denies a stay on the order enforcing the summons. The
motion to quash the summons is denied.
In the first of these consolidated cases, the court directed
FNSB, as a condition of stay pending application to the
Court of Appeals, that it deposit with the court in a
sealed envelope, such documentation in response to the
summons as it had gathered by 4 PM of Monday, Decem-
ber 1, 1975.
At the hearing of February 23, 1976, the court stated
that it would continue to hold these sealed papers until
the Court of Appeals had either granted or denied a stay
pending appeal of the order to enforce the summons. That
stay having been denied on March 8, 1976, the sealed
papers will now be turned over to IRS.
Since these payers may or may not provide the name
of the taxpayer, IRS may apply ex parte for a bench war-
rant for Gannet’s arrest and confinement until he is ready
to answer the questions listed above. On the return of
the warrant and before confinement, he will be given
another opportunity to answer. F
The stay of the confinement which was granted was to
last only until the Court of Appeals had acted on the
motion for stay of the order enforcing the summons.
Since that motion has been denied, the confinement order
is now in full force and effect.
/s/ Vincent P. Biunno,
U.S.D.]J.
Original to Clerk
xc: All counsel
38a Opinion
SUPPLEMENT TO OPINION
Since filing the above opinion, the Court has learned
that on March 11, 1976, by a divided vote, the Court of
Appeals granted a stay of the Order of Summary Confine-
ment pending disposition of the Appeal, and until the
further Order of the Court. Consequently, application
for a bench warrant will not be entertained at this time.
39a
TRANSCRIPT OF
FEBRUARY 23, 1976
(Transcript commencing at 82-4 )
Q In the case where there is an investigation for fraud
actually initiated, which is not this case you say, what
is your function then?
A Would you repeat the question again?
Q In the case where there is an actual investigation
underway, who makes the decision that there should be
an investigation? Do you make that or some superior?
A A superior makes the determination.
Q_ What is his title?
A Usually the Croun Manager.
Q Group Manager, and there has been no such direc-
tion in this case?
A In this instant case my Group Manager has re-
quested me to obtain the identification of this taxpayer.
Q And that is all?
A That is all.
Q Assume you have the identification of the taxpayer
and you were instructed to conduct an investigation. What
would you do to conduct that? In a general way, what
sort of things do you do?
A We have to check the taxpayer's filing records, see
if there were returns on file for the particular tax-
(Transcript commencing at 86-1)
Q When do you request it?
4
40a Transcript
>
If there is an on-going investigation.
Q What does the revenue agent do in the normal case?
A He is responsible for the computation of the taxes.
Q You are not responsible for the computation of taxes?
A No, I am not.
Q In fact, your purpose is to determine the violation of
any criminal section of the Internal Revenue Code?
A. That is correct.
Q That is your sole purpose, correct?
A That is correct.
MR. POE: Your Honor, that I believe satisfies the re-
quirement I mentioned before, good faith.
THE COURT: You are not talking about the good
faith of the witness, but the good faith of the IRS, and the
IRS has a letter and a check, and it has assigned the deter-
mination of who that check relates to to a special agent of
the Intelligence Division. Once he learns who that is, as he
testified, if there is any calculation or computation needed
he will call in a revenue agent. He can’t do that because
there is nothing for the revenue agent to look at at this
time. I cont see that proves the lack of good (Tr. p. 87)
faith at all. It falls short of it and I so find.
MR. POE: I believe you put the burden on us to prove
something that the Third Circuit has said is the Govern-
ment's burden to prove.
MR. FRANCIS: May I ask some questions if Mr. Poe
has finished?
CROSS-EXAMINATION BY MR. FRANCIS:
Q_ Is it your testimony that your only purpose in this
matter is to determine the identity of the taxpayer?
Transcript 4la
A That is correct at this point.
Q And these were the only instructions given you by
your Group Manager?
A That is correct.
What is the name of your Group Manager?
Charles C. Rapa.
Did he give you those instructions in writing?
No.
When did he give you those instructions?
November of '74.
Q Is there any memorandum or any writing at all which
defines your role or responsibility, your function in this
oan?
case’
THE COURT: In this case?
MR. FRANCIS: In this case.
> © - © }- ©
( Transcript commencing at 94-1 )
THE COURT: You are not the taxpayer.
MR. GANNET: We would like to have a copy of the
subpoena originally issued to the National Newark & Essex
Bank. We would like to have a copy of all writings assign-
ing the inquiry to the agent who preceded Mr. Reichelt as
well as the record of all written assignments of this case to
Mr. Reichelt. We would like to have a copy of any inter-
office memorandum or inter-office directions in terms of how
this case was to proceed and what the function of each
special agent assigned to the Intelligence Division was in
this particular case, and we would like to have a copy of
i
42a Transcript
any reports, recommendations or other writings advising
the supervisor or Group Manager as to the findings of Mr.
Reichelt as well as the findings of the Intelligence Agent
of the Special Intelligence Division that preceded Mr. Rei-
chelt in this case, and I do make the request of this Court
to order this witness to produce these records.
MR. FRANCIS: I join in that request.
THE COURT: That request is denied. Insofar as this
is an inquiry, the so-called two pronged test of Donaldson,
it seems to be quite obvious that the Government has ab-
solutely nothing it could inquire into at this point except
the identity of the taxpayer. There is nothing else to do.
Now the question which it is suggested the Court has to
decide is whether the summons was issued for the sole
43a
INTERNAL REVENUE CODE OF 1954
SECTIONS 7602 AND 7604
SEC. 7602. EXAMINATION OF BOOKS AND
WITNESSES.
For the purpose of ascertaining the correctness of any re-
turn, making a return where none has been made, deter-
mining the liability of any person for any internal revenue
tax or the liability at law or in equity of any transferee or
fiduciary of any person in respect of any internal revenue
tax, or collecting any such liability, the Secretary is author-
ized—.
(1)To examine any books, papers, records, or other
data which may be relevant or material to such inquiry;
(2) To summon the person liable for tax or required
to perform the act, or any officer or employee of such
person, or any person having possession, custody, or
care of books of account containing entries relating to
the business of the person liable for tax or required to
perform the act, or any other person the Secretary may
deem proper, to appear before the Secretary at a time
and place named in the summons and 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; and
(3) To take such testimony of the person concerned,
under oath, as may be relevant or material to such in-
quiry.
SEC. 7604. ENFORCEMENT OF SUMMONS.
(a) JurispicTion or Districr Court.—If any person is
summoned under the internal revenue laws to appear, to
44a Internal Revenue Code of 1954
testify, or to produce books, papers, records, or other data,
the United States district court for the district in which
such person resides or is found shall have jurisdiction by
appropriate process to compel such attendance, testimony,
or production of books, papers, records, or other data.
(b) ENrorceEMENT.—Whenever any person summoned
under section 6420(e)(2), 6421(f)(2), 6424(d)(2),
6427(f)(2), or 7602 neglects or refuses to obey such sum-
mons, or to produce books, papers, records, or other data,
or to give testimony, as required, the Secretary may apply
to the judge of the district court or to a United States com-
missioner for the district within which the person so sum-
moned resides or is found for an attachment against him
as for a contempt. It shall be the duty of the judge or
commissioner to hear the application, and, if satisfactory
proof is made, to issue an attachment, directed to some
proper officer, for the arrest of such person, and upon his
being brought before him to proceed to a hearing of the
case; and upon such hearing the judge or the United States
commissioner shall have power to make such order as he
shall deem proper, not inconsistent with the law for the
punishment of contempts, to enforce obedience to the re-
quirements of the summons and to punish such person for
his default or disobedience.
45a
BANK SECRECY ACT OF 1970
12 U.S.C. SECTION 1829b
§1829b. Retention of records by insured banks—Congres-
sional findings and declaration of purpose.
(a)(1) The Congress finds that adequate records main-
tained by insured banks have a high degree of usefulness
in criminal, tax, and regulatory investigations and proceed-
ings. The Congress further finds that microfilm or other
reproductions and other records made by banks of checks,
as well as records kept by banks of the identity of persons
maintaining or authorized to act with respect to accounts
therein, have been of particlar value in this respect.
(2) It is the purpose of this section to require the main-
tenance of appropriate types of records by insured banks
in the United States where such records have a high degree
of usefulness in criminal, tax, cr regulatory investigations
or proceedings.
Rules and regulations
(b) Where the Secretary of the Treasury (referred to in
this section as the “Secretary” ) determines that the main-
tenance of appropriate types of records and other evidence
by insured banks has a high degree of usefulness in crim-
inal, tax, or regulatory investigations or proceedings, he
shall prescribe regulations to carry out the purposes of this
section.
Identity of persons having accounts and persons
authorized to act with respect to such accounts;
exemptions
(c) Each insured bank shall maintain such records and
other evidence, in such form as the Secretarv shall require
46a Bank Secrecy Act of 1970
of the identity of each person having an account in the
United States with the bank and of each individual author-
ized to sign checks, make withdrawals, or otherwise act with
respect to any such account. The Secretary may make such
exemptions from any requirement otherwise imposed under
this subsection as are consistent with the purposes of this
section.
Reproduction of checks, drafts, and other instruments;
record of transactions; identity of party
(d) Each insured bank shall make, to the extent that the
regulations of the Secretary so require—
(1) a microfilm or other reproduction of each check,
draft, or similar instrument drawn on it and presented
to it for payment; and
(2) a record of each check, draft, or similar instru-
ment received by it for deposit or collection, together
with an identification of the party for whose account it
is to be deposited or collected, unless the bank has
already made a record of the party's identity pursuant
to subsection (c) of this section.
Identity of persons making transactions reportable
under the Currency and Foreign Transactions
Reporting Act
(e) Whenever any individual engages (whether as princi-
pal, agent, or bailee) in any transaction with an insured
bank which is required to be reported or recorded under the
Currency and Foreign Transactions Reporting Act, the bank
shall require and retain such evidence of the identity of
that individual as the Secretary may prescribe as appropri-
ate under the circumstances.
Bank Secrecy Act of 1970 47a
Additions to or substitutes for required records
(f) In addition to or in lieu of the records and evidence
otherwise referred to in this section, each insured bank shall
maintain such records and evidence as the Secretary may
prescribe to carry out the purposes of this section.
Retention period
(g) Any type of record or evidence required under this
section shall be retained for such period as the Secretary
may prescribe for the type in question. Any period so pre-
scribed shall not exceed six years unless the Secretary deter-
mines, having regard for the purposes of this section, that
a longer period is necessary in the case of a particular type
of record or evidence.
Report to Congress by Secretary of the Treasury
(h) The Secretary shall include in his annual report to
the Congress information on his implementation of the an-
thority with respect to recordkeeping or reporting requir-
ments conferred by other provisions of law.
48a
RULES GOVERNING THE COURTS OF THE
STATE OF NEW JERSEY RULE 1:21-6
1:21-6. Recordkeeping; Sharing of Fees; Examination of
Records
(a) Required Bank Accounts. All attorneys who prac-
tice in this State shall maintain in a financial institution in
New Jersey, in their own name, or in the name of a partner-
ship of attorneys, or in the name of the attorney or partner-
ship of attorneys by whom they are employed:
(1) a trustee account or accounts, separate from their
business and personal accounts and from any accounts
which they may maintain in the capacity of executor, guar-
dian, trustee or receiver into which trustee account or ac-
counts all funds entrusted to their care shall be deposited;
and
(2) a business account into which all funds received for
professional services shall be deposited.
The names of the institutions in which such accounts are
maintained and identification numbers of each account
shall be recorded on the reporting form filed with the an-
nual payment, pursuant to R. 1:28-2, to the Clients’ Security
Fund of the Bar of New Jersey. Such information shall be
available for use in accordance with paragraph (f) of this
rule.
(b) Required Bookkeeping Records. All attorneys and
partnerships of attorneys who practice in this State shall
maintain for 7 years after the events which they record:
(1) the records of all deposits in and withdrawals from
the accounts specified in paragraph (a) of this rule and of
any other bank account which concerns or affects their prac-
tice of law; and
Rules Governing the Courts of the 49a
State of New Jersey
(2) a ledger book or similar record for all trustee ac-
counts, showing the source of all funds deposited in such
accounts, the names of all persons for whom the funds were
held, the amount of such funds, the charges or withdrawals
from such accounts, and the names of all persons to whom
such funds were disbursed; and
(3) copies of all retainer and compensation agreements
with clients; and
(4) copics of all statements to clients showing the dis-
bursement of funds to them or on their behalf; and
(5) copies of all bills rendered to clients; and
(6) copies of all records showing payments to attorneys,
investigators or other persons, not in their regular employ,
for services rendered or performed.
All attorneys who practice in this State shall make accu-
ra e entries of all financial transactions in their records of
receipts and disbursements, in their trustee accounts, in
their ledger books and similar records, and in any other
books of account kept by them in the regular course of
their practice, which entries shall be made at or near the
time of the act, condition or event recorded.
(c) Partnership Dissolutions. Upon the dissolution of
any partnership of attorneys the former partners shall make
appropriate arrangements for the maintenance by one of
them or by a successor firm of the records specified in para-
graph (b) of this rule.
(d) Members, Associates and Employees of Out-of-State
Firms. All attorneys who practice in this State who are
members of a firm, or associates or employees of a firm or
attorney, practicing outside the State.
50a Rules Governing the Courts of the
State of New Jersey
(1) shal] not share with such firm or attorneys any fee
for legal services rendered in this State if payment to such
firm or attorney is prohibited by DR 2-107 of the Disciplin-
ary Rules of the Code of Professional Responsibility; and
(2) shall maintain and preserve for 7 years separate
records of the fees received and expenses incurred in their
practice of law in this State.
(e) Attorneys Associated with Out-of-State Attorneys.
All attorneys who practiced in this Sate shal] maintain and
preserve for 7 years a record of all fees received and ex-
penses incurred in connection with any matter in which
they were associated with an attorney of another state.
(f) Availability of Records. Any of the records required
to be kept by this rule shall be produced in response to a
subpoena duces tecum issued pursuant to R. 1:20-6 in con-
nection with a complaint or investigation pending before an
ethics committee appointed pursuant to R. 1:20 or shall be
produced at the direction of the Supreme Court before any
person designated by it. When so produced, all such rec-
ords shall remain confidential except for the purposes of
the particular proceeding and their contents shall not be
disclosed by anyone in such a way as to violate the attorney-
client privilege.
(g) Disciplinary Action. Any attorney who does not
maintain and keep or cause to be maintained and kept the
accounts and records as specified and required by this rule,
or who does not produce any such records pursuant to
paragraph (f) of this rule, shall be subject to disciplinary
proceedings.
5la
ORDER TO SHOW CAUSE AND
TEMPORARY RESTRAINING ORDER
(Filed March 15, 1976)
Upon the Verified Complaint and the Affidavit of Herbert
M. Gannet, Esq. annexed hereto, it is on this 15th day of
March, 1976
ORDERED that the Defendant, First National State
Bank of New Jersey show cause before this Court on the
26th day of March, 1976, at nine o'clock a.m. or as soon
thereafter as counsel can be heard, why a preliminary in-
junction should not issue herein enjoining the Defendant,
First National State Bank of New Jersey, its officers, direc-
tors, agents, servants, employees and attorneys and all
persons in active concert and participation with them,
from delivering to the Internal Revenue Service any and
all information requested in the Internal Revenue Service
Summons dated November 19, 1975, a copy of which is
annexed hereto as Exhibit A, and from testifying with
respect to any and all of the documents requested therein;
and
It appearing to the Court that the Summons requests in-
fcrmation and documentation that emanates from Plaintiff's
Trust Account which he is required to maintain at a finan-
cial institution in the State of New Jersey under R. 1.21-6
of the Rules Governing the Courts of New Jersey; and
It appearing according to the allegations of Plaintiff's
Complaint that if Defendant were to comply with the In-
ternal Revenue Service Summons, such compliance would
violate R. 1.21-6(f) because such compliance would violate
the attorney-client privilege which protects the informa-
tion in such Trust Account; and
It appearing that unless Defendant is restrained by Order
of this Court from complying with the Internal Revenue
52a Order to Show Cause
Service Summons, that immediate and irreparable injury,
loss or damage will result to Plaintiff insofar as the attorney-
client privilege has been claimed; and it is further
ORDERED that the Defendant, First National State
Bank of New Jersey, its officers, directors, agents, servants,
employees and attorneys and all persons in active concert
and participation with them be and they hereby are re-
strained from complying with the Internal Revenue Service
Summons pending the return day of this Order to Show
Cause; and it is further
ORDERED that this Order expire on March 26, 1976
unless the order for good cause shown is extended, or
unless the Defendant consents that it may be extended
for a longer period; and it is further
ORDERED that service of this Order to Show Cause, to-
gether with a copy of the papers hereto annexed be served
on Defendant on or before the 16th day of March, 1976, at
ten oclock a.m., be deemed sufficient service.
/s/ Irwin I. Kimmelman
IRWIN IL. KIMMELMAN
J.S.C.
Defendant may move to modify or discharge this tem-
porary restraint on 2 days notice. This order is entered
solely for the purpose of preserving the status quo between
the parties pending a hearing.
53a
TRANSCRIPT T-396-75
(Filed March 29, 1976)
Transcript commencing at p. (2).
COURT: About ten days ago I entered an order restrain-
ing the First National State Bank from divulging certain
information concerning certain aspects of Mr. Gannets
lawyer s trust account.
Unbeknownst to me at that time, although known to
Mr. Gannet and not represented to me, the bank had al-
ready given that information to Federal Judge Biunno in
confidence.
I should have been notified to that effect but I wasn't.
It then appears that Judge Biunno, acting upon ex parte
application of the U.S. Attorneys Office and in the face of
an appeal concerning the validity of his order directing
disclosure, nevertheless, went ahead and turned over the
material to the U.S. Attorneys Office.
MR. GANNET: That is right.
COURT: I am not here as a judge of one jurisdiction
to start questing or criticizing a ruling of a judge of an-
other jurisdiction but it certainly seems to me that rather
than an ex parte turnover there should have been notice
and perhaps my original order in this case may not have
been a restraining order against the bank had I known
that (Tr. p. 3) the bank had already turned the records
over by Court order to Judge Biunno.
I just don't know.
MR. GANNET: May I address myself to that?
COURT: Nor do I know what reasons motivated Judge
Biunno for doing what he did. All right. He did what
he did and he, obviously, was cognizant of my order but
he felt that he had no grounds to adhere to it because it
dda | Transcript
didn't bind him and he already had the records at the
time I entered the injunction.
So what more is there? The case is moot.
MR. GANNET: If-your Honor please, the records that
were originally turned over to Judge Biunno were turned
over to him under seal with my understanding and I think
Mr. Francis understanding that they would be returned
to the bank in the event the enforcement order was upheld
on appeal or in the event a stay was not granted by a
three-judge panel.
There was never any indication nor any understanding
that the records would not be turned back to the bank.
(4) Tr. p. COURT: Mr. Gannet, the bank didn’t do any-
thing wrong since the date of my order; not a thing. They
just staved where they were. They had the injunction and
they obeyed the injunction but it was beyond their power
at this point and I have nothing further to do. I can't
proceed.
MR. GANNET: Well, there are two other points I'd
like this Court to consider. Number one, the bank may
have additional information or testimony available by its
officers who would be questioned or subpoenaed by the
Internal Revenue Service.
Number two, the Internal Revenue Service who was
present in your Court at the time that the temporary re-
‘training order was granted pending this appeal—two at-
orneys for the government were sitting in your Chambers
and notwithstanding your order the following day they
stated to the newspapers that they would ignore your
order and they made demand upon Judge Biunno for the
turning over of those records.
Transcript 55a
COURT: And, the newspapers put in that the Internal
Revenue representative said we intend to ignore (Tr. p. 5)
Judge Kimmelman’s order.
MR. GANNET: That is their decision.
COURT: I don't have jurisdiction over them.
MR. GANNET: I appreciate that, your Honor. You
do have jurisdiction over the First National State Bank. I
am still proceeding with the appeal in the third circuit
notwithstanding the fact that Judge Biunno turned over the
records in spite of the fact that the appeal is pending. I
would like to have this Court continue the stay; continue
the restraint against the bank and at least until the third
circuit issues its result.
I'd also like to have this Court make a definitive state-
ment or judgment on what our rules of court mean in
terms of Rule 121-6 as to whether or not my attorney's
trust account is part of the privileged communications as
disclosed in that Rule.
COURT: Mr. Gannet, I wouldn't have given you the
original temporary restraining order if I didn’t think the
Rules of Court meant what they say.
MR. GANNET: Judge Biunno found otherwise, your
Honor, and this is one of the problems I will have (Tr. p. 6)
in presenting this case in the third circuit.
COURT: That is why we have upper courts. No one
says that we are infallible.
MR. GANNET: I would ask the Court to continue
this stay, your Honor, for those reasons.
COURT: What about that, Mr. Francis, that the bank
officers now should be restrained from testifying as to
these transactions?
36a Transcript
MR. FRANCIS: If your Honor please, it seems to me
that this Court's decision or ruling on trust records might
be very interesting but purely an academic exercise. The
documents have been produced by the United States Dis-
trict Court. There isn’t a rise left for this Court to operate
on.
Any order this Court entered would, in effect, be a
nullity.
COURT: I am afraid so, Mr. Gannet, the matter is now
moot. It has been mooted by circumstances over which
we have no control and your redress, if any, lies in another
forum. I am very sorrder.
The order to show cause is discharged.
CERTIFICA’ iON
I, MARYANN SMYTHE do hereby certify that the fore-
going is a true and accurate transcript of my stenographic
notes of the proceedings.
/s/ Maryann Smythe
MARYANN SMYTHE, C:S.R.
An Official Court Reporter
DATED: March 28, 1976
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.