705 F.2d 924 (7th Cir. 1983), 80-2360, National Acceptance Co. of America v. Bathalter

Docket Nº:80-2360.
Citation:705 F.2d 924
Party Name:NATIONAL ACCEPTANCE COMPANY OF AMERICA, Plaintiff-Appellee, v. Joseph S. BATHALTER, Jr., Defendant-Appellant.
Case Date:April 20, 1983
Court:United States Courts of Appeals, Court of Appeals for the Seventh Circuit

Page 924

705 F.2d 924 (7th Cir. 1983)

NATIONAL ACCEPTANCE COMPANY OF AMERICA, Plaintiff-Appellee,

v.

Joseph S. BATHALTER, Jr., Defendant-Appellant.

No. 80-2360.

United States Court of Appeals, Seventh Circuit

April 20, 1983

Argued Feb. 20, 1981.

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Marvin J. Rosenblum, Chicago, Ill., for defendant-appellant.

James C. Murray, Jr., Steven M. Rasher, Donald E. Egan, Chicago, Ill., for plaintiff-appellee.

Before CUMMINGS, Chief Judge, PELL, Circuit Judge, and FAIRCHILD, Senior Circuit Judge.

FAIRCHILD, Senior Circuit Judge.

This case presents the question whether a civil defendant's assertion of his Fifth Amendment privilege against self-incrimination in answer to averments in the plaintiff's complaint may properly be deemed an admission of those averments pursuant to F.R.Civ.P. 8(d). 1 The district court held it could and granted judgment on the pleadings in favor of the plaintiff. We reverse.

I

Plaintiff National Acceptance Company of America (NAC) is a commercial finance corporation domiciled in Delaware and based in Chicago. Its detailed complaint alleges that defendant Joseph S. Bathalter, a former loan officer of NAC in Chicago, 2 engaged in a large-scale scheme of making loans to companies in which he or two "co-conspirators" had an interest; making loans to non-credit-worthy companies which then bought equipment from, or otherwise transferred loan funds to the controlled ones; and taking direct kickbacks on many of the loans. NAC charges breach of fiduciary

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duty, fraud and unjust enrichment, and requests damages in the amount of its net losses on the loans--approximately $8.6 million. 3 Defendant Bathalter's answer admitted the complaint's jurisdictional allegations, pleaded lack of knowledge to an allegation describing NAC, and in response to the remaining allegations stated:

The subject matter of the complaint has been the basis for at least one [grand jury] investigation conducted by the U.S. Attorney for the Northern District of Illinois, Eastern Division. Exercising his rights under the Fifth Amendment to the Constitution of the United States, defendant respectfully declines to answer any of the remaining allegations of the complaint on the ground that his answers might tend to incriminate him. Defendant further respectfully requests that such declination have the same procedural effect under Rule 8(d), F.R.Civ.P., as if he specifically denied said allegations.

NAC moved to strike the answer on the ground it failed to comply with the pleading requirement of F.R.Civ.P. 8(b) and 8(d). Alternatively, NAC moved for judgment on the pleadings on the ground that since Bathalter did not admit, deny, or plead lack of knowledge pursuant to Rule 8(b), the allegations to which he asserted the Fifth Amendment were deemed admitted pursuant to Rule 8(d) leaving no unresolved issues.

The district court, after giving Bathalter time to reconsider his position and file an amended answer (which the defendant declined to do), applied Rule 8(d) and granted NAC's motion for judgment on the pleadings. The court then held a hearing on damages and granted final judgment to NAC in the amount of $8,646,211.83. This appeal followed.

II

There is no question that the language of Rule 8 requires exactly the result reached by the district court. Unless a defendant is without sufficient knowledge to form a belief as to the truth of an allegation, he is required to admit or deny the averments of the complaint. If he does not deny the averments, they are deemed admitted. Bathalter did not deny the allegations of NAC's complaint, nor (with the one exception mentioned) did he state that he lacked the knowledge or information sufficient to form a belief as to the truth of those allegations. The result would be, under strict application of Rule 8, that the allegations were admitted and that an entry of judgment on the pleadings was the next logical step. The question facing us here is whether the literal language of Rule 8 must give way in order to protect the defendant's constitutional right to avoid self-incrimination.

Though by its terms applicable only in criminal proceedings, the Fifth Amendment privilege against self-incrimination 4 has long been held to extend to compelling answers by parties or witnesses in civil litigation. "[The privilege] applies alike to civil and criminal proceedings, wherever the answer might tend to subject to criminal responsibility him who gives it." McCarthy v. Arndstein, 266 U.S. 34, 40, 45 S.Ct. 16, 17, 69 L.Ed. 158 (1924).

Thus, in a civil case, the Fifth Amendment does not privilege from disclosure facts which simply would tend to establish civil liability but does protect witnesses

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from being required to make disclosures, otherwise compellable in the trial court's contempt power, which could incriminate them in a later criminal prosecution. 8 Wigmore on Evidence Sec. 2254 (McNaughton rev. 1961) and discussion therein. Of course, validity of the assertion hinges not on the witness's say so alone: the trial judge must determine whether the witness's silence is justified. Hoffman v. United States, 341 U.S. 479, 486, 71 S.Ct. 814, 818, 95 L.Ed. 1118 (1951). 5 Still, we have recently held that "it is only when there is but a fanciful possibility of prosecution that a claim of Fifth Amendment privilege is not well taken." In Re Folding Carton Antitrust Litigation, 609 F.2d 867, 871 (7th Cir.1979). The privilege protects persons against being forced to make incriminating disclosures at any stage of the proceeding if they could not be compelled to make such disclosures as a witness at trial. It therefore applies not only at trial but also at the discovery stage, United States v. Kordel, 397 U.S. 1, 90 S.Ct. 763, 25 L.Ed.2d 1 (1970) (answers to interrogatories), In Re Folding Carton, supra (answers to deposition questions) and to the pleading stage, In Re Sterling Harris Ford, Inc., 315 F.2d 277, 279 (7th Cir.), cert. denied sub nom. Silverstein v. Phelps, 375 U.S. 814, 84 S.Ct. 46, 11 L.Ed.2d 50 (1963). Thus, since NAC did not take issue with the propriety of claiming the privilege, the district court correctly assumed it could not compel Bathalter to respond.

The Fifth Amendment privilege against self-incrimination was deemed incorporated into the Fourteenth Amendment, and thus made applicable against the states, in 1964. Malloy v. Hogan, 378 U.S. 1, 84 S.Ct. 1489, 12 L.Ed.2d 653. In the twelve years following that decision, the Supreme Court addressed the applicability of the privilege in noncriminal matters at least six times. Spevack v. Klein, 385 U.S. 511, 87 S.Ct. 625, 17 L.Ed.2d 574 (1967); Garrity v. New Jersey, 385 U.S. 493, 87 S.Ct. 616, 17 L.Ed.2d 562 (1967); Gardner v. Broderick, 392 U.S. 273, 88 S.Ct. 1913, 20 L.Ed.2d 1082 (1968); Uniformed Sanitation Men Ass'n Inc. v. Commissioner of Sanitation, 392 U.S. 280, 88 S.Ct. 1917, 20 L.Ed.2d 1089 (1968); Lefkowitz v. Turley, 414 U.S. 70, 94 S.Ct. 316, 38 L.Ed.2d 274 (1973); Baxter v. Palmigiano, 425 U.S. 308, 96 S.Ct. 1551, 47 L.Ed.2d 810 (1976). Although none of these decisions involved private parties in a civil lawsuit they nevertheless provide the foundation for our decision here.

Spevack v. Klein, 385 U.S. 511, 87 S.Ct. 625, 17 L.Ed.2d 574 (1967), involved an attorney who was disbarred because of his invocation of the Fifth Amendment privilege against self-incrimination at a disciplinary hearing. Its companion case, Garrity v. New Jersey, 385 U.S. 493, 87 S.Ct. 616, 17 L.Ed.2d 562, considered whether a policeman's testimony at a disciplinary proceeding, compelled by the threat of discharge, could be used in a subsequent criminal proceeding. In Spevack, the Court noted that the Fifth Amendment secured a privilege "to remain silent unless [the concerned party] chooses to speak in the unfettered exercise of his own will, and to suffer no penalty ... for such silence." 385 U.S. at 514,

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87 S.Ct. at 628 (quoting Malloy v. Hogan, 378 U.S. 1, 8, 84 S.Ct. 1489, 1493, 12 L.Ed.2d 653 (1964)). A "penalty" was described as "the imposition of any sanction which makes assertion of the Fifth Amendment privilege 'costly.' " Id. 385 U.S. at 515, 87 S.Ct. at 628 (citing Griffin v. California, 380 U.S. 609, 614, 85 S.Ct. 1229, 1233, 14 L.Ed.2d 106). Disbarment and the accompanying losses were such a costly sanction, and could not be imposed for refusal to produce records and testify. Consistently, in Garrity, the Court held that statements elicited as a result of compelling a choice between incrimination and the loss of a job could not be used in a subsequent criminal proceeding.

The holdings of Spevack and Garrity were reaffirmed in the next two cases, Gardner v. Broderick, 392 U.S. 273, 88 S.Ct. 1913, 20 L.Ed.2d 1082 (1968), and Uniformed Sanitation Men Ass'n v. Commissioner, 392 U.S. 280, 88 S.Ct. 1917, 20 L.Ed.2d 1089 (1968). Both cases involved public employees who had been discharged for refusing to waive the privilege when called to testify during official investigations. The Court held the discharges unlawful. In doing so, however, the Court suggested that public employees did not have an absolute right to refuse to answer potentially incriminating questions. The Court noted that the state, in its role as employer, could insist on full disclosure of matters specifically and narrowly related to job performance and could discharge those refusing to disclose. Statements made under this threat would be "immunized" by Garrity. The discharges in the cases before it were impermissible only because the state could not act simultaneously as prosecutor as well as employer, i.e. by insisting not only that its employees answer questions but also that those answers be made available for use against them in any subsequent criminal proceeding.

Five years later the Supreme Court again affirmed that the threat of adverse economic consequences cannot be used to compel a...

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