State ex rel. Brant v. Bank of America, 86,280.

• Decision Date: 28 September 2001
• Docket Number: No. 86,280.,86,280.
• Citation: 272 Kan. 182,31 P.3d 952
• Parties: STATE OF KANSAS, ex. rel. DAVID R. BRANT, SECURITIES COMMISSIONER OF KANSAS, Appellee, v. BANK OF AMERICA, TOPEKA, KANSAS, Appellant.
• Court: Kansas Supreme Court

272 Kan. 182

31 P.3d 952

STATE OF KANSAS, ex. rel. DAVID R. BRANT, SECURITIES COMMISSIONER OF KANSAS, Appellee, v. BANK OF AMERICA, TOPEKA, KANSAS, Appellant.

No. 86,280.

Supreme Court of Kansas.

Opinion filed September 28, 2001.

Elizabeth Drill Nay, of Lewis, Rice & Fingersh, L.C., of Kansas City, Missouri, argued the cause, and Thomas M. Martin and Scott A. Wissel, of the same firm, were with her on the briefs for appellant.

James W. Clark, special assistant attorney general, office of the Kansas Securities Commissioner, argued the cause and was on the brief for appellee.

The opinion of the court was delivered by

SIX, J.:

This first impression case arises from the defendant Bank of America's (Bank) refusal to comply with subpoenas seeking customer records issued by David R. Brant, Securities Commissioner of Kansas (Commissioner). Each subpoena specifically ordered the Bank not to notify the customer of the subpoena. The Bank refused to honor the subpoenas and to comply with the confidentiality requirement. The Commissioner filed an application under K.S.A. 17-1265(d) (refusal to obey a subpoena) and K.S.A. 50-1009(b) (application for court order) for an order to enforce the subpoenas and to prohibit the Bank from notifying its customers.

The district court held that: (1) the Bank's customers have no reasonable expectation of privacy in their bank records and (2) the Commissioner, under his statutory power to conduct private investigations, had the authority to prohibit the Bank from notifying its customers of the subpoenas. The district court granted the Commissioner's application and restrained the Bank from notifying its customers of the subpoenas. The Bank now appeals.

Our jurisdiction is under K.S.A. 20-3018(c) (a transfer from the Court of Appeals on our own motion).

The issues are whether the district court erred in ruling that: (1) the Commissioner has the authority under K.S.A. 17-1265(a)(1) to issue a subpoena that prohibits the Bank from informing its customers of the subpoena, and (2) the Bank's customers have no reasonable expectation of privacy in their bank records and, thus, were not entitled to receive notice that their bank records were subpoenaed.

The Bank also contends that the district court's application of K.S.A. 17-1265(a)(1) is unconstitutional because the Commissioner's conduct imposed a prior restraint on speech (an alleged violation of the Bank's rights under the First Amendment and § 11 of the Kansas Constitution Bill of Rights). We do not reach the contention. The prior restraint argument was not presented to the district court. Generally, where constitutional grounds for reversal are asserted for the first time on appeal, they are not properly before us for review. Ruddick v. Boeing Co., 263 Kan. 494, 498, 949 P.2d 1132 (1997).

Finding no error, we affirm.

FACTS

The Commissioner issued and served on the Bank subpoenas duces tecum for records of three different bank accounts. The first subpoena requested originals or authenticated copies of specified checks and wire transfers, and copies of the account application and signature card for the purchasers or issuers of the specified transactions. Each subpoena included the following confidentiality clause:

"This subpoena is issued in connection with a law enforcement investigation. Therefore, the existence of this subpoena and any testimony or documents produced pursuant to it are to remain confidential and shall not be disclosed to any third party, including the account holder or customer who is the subject of the subpoena, unless prior written approval is obtained from the Kansas Securities Commissioner or the issuer of this subpoena."

The second subpoena requested copies of the signature card and all monthly statements from May 1998 through August 1999 for that account. The third subpoena, issued under K.S.A. 50-1009(a)(13) of the Kansas Loan Broker's Act, requested originals and authenticated copies of a specified check.

The Bank has a privacy policy that it provides to its customers and publishes on its internet web site. The policy says, in part:

"If we receive a subpoena or similar legal process demanding release of any information about you, we will generally attempt to notify you (unless we believe we are prohibited from doing so). Except as required by law or as described above, we do not share information with other parties, including government agencies." (Emphasis added.)

There was no evidence presented to the district court suggesting that the customers whose accounts were the subject of the three subpoenas ever saw the text or relied upon it when opening an account with the Bank.

The Bank explained its privacy policy regarding subpoenas in a letter to the Commissioner:

"We recognize that state law does not mandate that a financial institution notify its customers when served with a subpoena seeking the customer's bank records. However, we are not aware of any prohibition under state law against notifying the customer. If you are aware of court cases, attorney general opinions, or other authority specifically prohibiting disclosure of subpoenas, please share them with us."

The Commissioner did not respond to the Bank's letter. The Bank informed the Commissioner that within 20 days it intended to forward copies of the subpoenas to its customers whose records were subpoenaed. The Commissioner filed an unsealed application in the district court listing the accounts by name and applied for an order requiring production of the documents. The Bank informed the district court that it had no objection to honoring the subpoenas, but it insisted on notifying its customers. The district court said: "The exact nature of the investigation, the manner in which the records are needed for the investigation, whether the records relate to targets of the investigation and other information about the investigation are not known."

The Commissioner admitted that the sole authority for imposing confidentiality requirements on the Bank was the use of the term "private investigations" in K.S.A. 17-1265(a)(1).

DISCUSSION

Our task is to decide, based on the facts here, whether the legislature intended the Commissioner, under K.S.A. 17-1265(a)(1), to have the authority to tell the Bank that it cannot inform its customer that the Commissioner has subpoenaed the customer's bank records. Stated another way, may a K.S.A. 17-1265(a)(1) private investigation be considered a confidential investigation so that the customer is not informed by the Bank of the subpoena?

We first consider the Bank's contention that the district court erred in finding that the Commissioner had the authority to conduct confidential investigations. At issue here is the meaning of K.S.A. 17-1265(a)(1). We have unlimited review over questions of statutory interpretation. Hamilton v. State Farm Fire & Cas. Co., 263 Kan. 875, 879, 953 P.2d 1027 (1998).

A threshold observation is that a court may not enforce a subpoena that exceeds the authority of the administrative agency issuing the subpoena. See Atchison, T. & S.F. Rly. Co. v. Lopez, 216 Kan. 108, 114-15, 531 P.2d 455 (1975). Generally, administrative agencies such as the Commissioner, as creatures of statute, may only act within the scope of authority granted by authorizing statutes. Legislative Coordinating Council v. Stanley, 264 Kan. 690, 706, 957 P.2d 379 (1998). The Commissioner's authority to issue subpoenas is granted by K.S.A. 17-1265, which says in part:

"(a) The commissioner may: (1) Make public or private investigations within or outside of this state as necessary to determine whether any registration should be granted, denied or revoked or whether any person has violated or is about to violate any provision of this act or any rule or order hereunder, or to aid in the enforcement of this act or in the prescribing of forms or adoption of rules and regulations....

....

"(c) For the purpose of any investigation or proceeding under this act, the commissioner or any officer designated by the commissioner may administer oaths and affirmations, subpoena witnesses, compel their attendance, take evidence, and require the production of any books, papers, correspondence, memoranda, agreements, or other documents or records which the commissioner deems relevant or material to the inquiry." (Emphasis added.)

K.S.A. 17-1265(a)(1) is similar to § 407 of the Uniform Securities Act of 1956 (Investigations and Subpoenas). The Commissioner also receives investigative authority under K.S.A. 50-1009, a provision of the Loan Brokers' Act.

The district court interpreted the phrase "commissioner may ... [m]ake public or private investigations" in K.S.A. 17-1265(a)(1) as a grant of authority to the Commissioner to conduct private investigations and to impose a requirement of confidentiality. The district court relied upon SEC v. Jerry T. O'Brien, Inc., 467 U.S. 735, 81 L. Ed.2d 615, 104 S. Ct. 2720 (1984). O'Brien plays a leading role in our resolution of the controversy here.

In O'Brien, the United States Supreme Court faced the question of whether the Securities and Exchange Commission (S.E.C.) was obligated to advise the target of an investigation that subpoenas had been issued to third parties. Those under investigation sought an injunction against the subpoenas. No statute addressed the issue. However, an S.E.C. regulation required all formal investigative proceedings to be nonpublic, unless otherwise ordered. O'Brien recognized that this rulemaking was within the authority of the S.E.C., which had been given broad power to issue subpoenas. That power, coupled with the S.E.C.'s rulemaking authority, was sufficient to empower the S.E.C. to conduct private investigations with no notice to those targeted by the investigation of the subpoenas being issued to third parties. 467 U.S. at 743-47.

Also, O'Brien addressed the issue of whether there was an entitlement to notice in order to preserve the ability...