In re French, Bankruptcy No. 4-90-7203.

• Decision Date: 23 May 1991
• Docket Number: Bankruptcy No. 4-90-7203.
• Citation: In re French, 127 B.R. 434 (Bankr. Minn. 1991)
• Parties: In re Thomas D. FRENCH and Cheryl L. French, Debtors.
• Court: U.S. Bankruptcy Court — District of Minnesota

127 B.R. 434 (1991)

In re Thomas D. FRENCH and Cheryl L. French, Debtors.

Bankruptcy No. 4-90-7203.

United States Bankruptcy Court, D. Minnesota.

May 23, 1991.

G. Martin Johnson, Johnson and Wentzell, Ltd., Minneapolis, Minn., Douglas Thomson, Thomson and Ellis, Ltd., St. Paul, Minn., for debtors.

Andrew J. Schmid, Office of U.S. Trustee, Minneapolis, Minn., for U.S. Trustee.

Roylene Champeaux, Asst. U.S. Atty., Minneapolis, Minn., for ASCS.

Robert L. Kalenda, St. Cloud, Minn., for Creditors' Committee.

MEMORANDUM ORDER

NANCY C. DREHER, Bankruptcy Judge.

The above-entitled matter came on for hearing before the undersigned on the 15th day of March, 1991 on the United States Trustee's motion to convert or to dismiss this Chapter 11 case for failure to answer questions at the meeting of creditors held pursuant to 11 U.S.C. § 341. The appearances were as follows: Andrew Schmid for the United States Trustee; Roylene Champeaux for the United States acting through the Agriculture Stabilization and Conservation Service ("ASCS"); Robert Kalenda for the Unsecured Creditors' Committee (the "Committee"); Frank Miske, III ("Miske"), an unsecured creditor, pro se; and G. Martin Johnson and Douglas Thomson for the Debtors. This Court has jurisdiction over the parties to and the subject matter of this case pursuant to 28 U.S.C. §§ 157 and 1334, and Local Rule 103. Moreover, this Court may hear and finally adjudicate this motion because its subject matter renders such adjudication a "core" proceeding pursuant to 28 U.S.C. § 157(b)(2)(A).

I. FACTS AND PROCEDURAL HISTORY

The meeting of creditors was first convened on January 29, 1991. Mr. French refused to answer a series of innocuous, preliminary questions based on the privilege against self-incrimination guaranteed by the Fifth Amendment to the United States Constitution. The United States Trustee suspended the meeting of creditors and moved to convert or to dismiss the Debtors' case. At the initial hearing on said motion, held February 14, 1991, I enquired whether the Debtors had sought immunity under part V of title 18 of the United States Code, 18 U.S.C. § 6001 et seq., as provided in section 344 of the Bankruptcy Code, 11 U.S.C. § 344. Counsel for ASCS indicated that the United States Attorney had declined to seek such immunity on behalf of the Debtors. I then informed the parties that a blanket assertion of the Fifth Amendment was impermissible, and that I would require the Debtors to assert their privilege to each question which would require a potentially self-incriminating answer.

On March 15, 1991, the parties reconvened and completed the examination of the Debtors, except that Mr. French continued to assert the Fifth Amendment privilege regarding six questions he refused to answer:

1. By counsel for ASCS: "Mr. French, how did you come to owe money to Peterson\'s Feed Mill?"

2. By counsel for the Committee: "Did you transact business transactions through any of these banks or bank accounts that we have just discussed?"

3. By Miske: "And then the other thing that I am wondering if you could tell me exactly how the account became closed at the First National Bank in Anoka?"

4. By Miske: "Was the closing of the account something of your doing or theirs?"

5. By Miske: "Did you receive cash back from this account when it was closed?"

6. By Miske: "Have you cashed any checks through any party, or do you have any parties cashing checks for you so as to show up through your account?"

I held a continued hearing on the United States Trustee's motion following the conclusion of the examination. I indicated that in determining the propriety of the asserted privilege I was inclined to follow the procedure outlined in the Connelly decision. The Connelly court held that the debtor should be required to explain under oath in camera or by affidavit, either of which would become a sealed record, "the underlying factual basis for his Fifth Amendment Claim." In re Connelly, 59 B.R. 421, 445 (Bkrtcy.N.D.Ill.1986). Debtors' counsel objected to this procedure, arguing that the taking of such evidence would be unwarranted because Mr. French currently faces criminal charges. I took the Debtors' objection under advisement.

The record has been supplemented by a transcript of the examination of the Debtors at the meeting of creditors and by a copy of the criminal complaint against Mr. French. Mr. French has been charged with felony theft by swindle and misdemeanor purchase of grain without a license.

The Debtors operate, inter alia, a grain hauling business. The complaint alleges that a long-time customer contracted with the Debtors' business to haul several shipments of grain to an elevator for storage in October and November of 1990, but instead Mr. French sold the grain without authorization to Peterson Feed Mill at below market prices and retained the proceeds. The complaint also mentions that other farmers have reported that Mr. French defrauded them of proceeds from grain sales.

II. DISCUSSION

Section 343 of the Bankruptcy Code requires a debtor to "submit to examination under oath at the meeting of creditors under section 341(a) of this title." 11 U.S.C. § 343. The debtor, however, may refuse to answer questions posed during the meeting of creditors based on a valid assertion of the Fifth Amendment privilege against self-incrimination. In re Connelly, 59 B.R. at 430; In re Hulon, 92 B.R. 670, 673 (Bkrtcy.N.D.Tex.1988). If immunity is not granted¹ and the bankruptcy court determines that the assertion of privilege was valid, the debtor cannot be denied discharge for failing to answer questions. 11 U.S.C. § 727(a)(6). Mr. French has not been granted immunity, and therefore I must decide whether his assertion of the Fifth Amendment privilege was proper.

Mr. French's assertion of the privilege raises three issues for determination. First, I must decide whether the record is sufficient to decide the propriety of Mr. French's assertion of the Fifth Amendment privilege without requiring him to give testimony regarding the basis for such assertion. Second, if I conclude that the record is sufficient, I must decide whether the privilege was properly asserted against each of the six questions not answered. Third, I must decide whether Mr. French has waived his privilege against answering the ASCS' question regarding the debt to Peterson Feed Mill because the Debtors' schedules listed Peterson Feed Mill as having an equitable mortgage against the Debtors' business assets.

A. Requirement of Testimony

The Connelly court concluded that without the debtor's testimony under oath, the court could not determine whether answering certain questions posed "a real danger of incrimination, not a remote and speculative possibility." In re Connelly, 59 B.R. at 445. But in Hoffman v. United States, the leading case on this issue, the Supreme Court warned that requiring such an evidentiary record might vitiate the witness' Fifth Amendment privilege:

If the witness, upon interposing his claim, were required to prove the hazard in the sense in which a claim is usually required to be established in court, he would be compelled to surrender the very protection which the privilege is designed to guarantee. To sustain the privilege, it need only be evident from the implications of the question, in the setting in which it is asked, that a responsive answer to the question or an explanation of why it cannot be answered might be dangerous because injurious disclosure could result. The trial judge in appraising the claim "must be governed as much by his personal perception of the peculiarities of the case as by the facts actually in evidence."

Hoffman v. United States, 341 U.S. 479, 486-87, 71 S.Ct. 814, 818, 95 L.Ed. 1118 (1951) (emphasis added) (citations omitted) (quoting Ex parte Irvine, 74 F. 954, 960 (C.C.S.D.Ohio 1896)). To avoid forcing the witness to risk self-incrimination in order to assert the privilege, potential incrimination is generally shown by argument of counsel:

In practice, the invoker\'s attorney need only sketch a scenario of how a possible but still unknown response might provide direct or circumstantial evidence of criminal conduct or clues leading to evidence of criminal conduct.

Heidt, The Conjurer's Circle — The Fifth Amendment Privilege in Civil Cases, 91 Yale L.J. 1062, 1073 (1982).

In peculiar situations, courts have nonetheless required such an evidentiary record (and devised prophylactic measures such as submission of an affidavit or in camera testimony along with a sealed record) where relying on argument alone would result in an overly broad application of the privilege. The Connelly court, however, adopts these extreme cases as the general rule where a debtor in a bankruptcy case refuses to answer questions at the meeting of creditors.

In Martin-Trigona v. Gouletas, an unusual case relied on by the Connelly court, a judgment debtor charged with theft, forgery and mail fraud refused to answer questions posed by the judgment creditor in a supplementary proceeding to discover the debtor's assets.² Martin-Trigona v. Gouletas, 634 F.2d 354, 359 (7th Cir.) (per curiam), cert. denied, 449 U.S. 1025, 101 S.Ct. 593, 66 L.Ed.2d 486 (1980). In Martin-Trigona, the trial court concluded that it could not surmise how the debtor would risk self-incrimination by answering, or by explaining his refusal to answer, certain questions posed to him. For example, the debtor refused to answer questions regarding his place of birth, his present address, and the existence of litigation to which he was a party. The court of appeals held that the trial court acted properly by requiring an explanation for the refusal to answer such questions:

Clearly some additional explanation was called for and the district court correctly concluded that Trigona could safely offer additional explanation without risking incrimination from the explanation itself.

Id. at 361.

But the court of appeals in ...