Silence might be “golden,” but it will not always be in an individual’s best interest to remain silent in matters that are being adjudicated in civil court. Bankruptcy proceedings are not the most common situation where attorneys encounter witnesses exercising the Fifth Amendment privilege against self-incrimination, but it is wrong to assume that only defendants in criminal cases plead the Fifth. Despite the relatively small number of occurrences where a debtor decides to invoke the Fifth Amendment privilege against self-incrimination, bankruptcy practitioners and trustees should be aware of the consequences that might arise when a witness claims this privilege. Asserting the Fifth Amendment can significantly affect the outcome of the bankruptcy proceeding for both parties involved.
The Fifth Amendment of the United States Constitution establishes the privilege against self-incrimination:
No person shall be held to answer for a capital, or otherwise infamous crime, unless on a presentment or indictment of a Grand Jury, except in cases arising in the land or naval forces, or in the Militia, when in actual service in time of War or public danger; nor shall any person be subject for the same offence to be twice put in jeopardy of life or limb; nor shall be compelled in any criminal case to be a witness against himself, nor be deprived of life, liberty, or property, without due process of law; nor shall private property be taken for public use, without just compensation.
U.S. Const. amend. V (emphasis added).
The Fifth Amendment privilege may be asserted in any proceeding—criminal, civil, administrative, judicial, investigatory, or adjudicatory—to protect a witness from being compelled to answer questions that might be incriminatory in nature. The privilege may be invoked when (1) compelled disclosure arises that is (2) found to be testimonial and (3) incriminatory. In re Connelly, 59 B.R. 421, 431 (Bankr. N.D. Ill. 1986). Individuals exercising the privilege in civil proceedings do not enjoy the same protections afforded by individuals in criminal proceedings. Timothy R. Tarvin, “The Privilege Against Self-Incrimination in Bankruptcy and the Plight of the Debtor,” 44 Seton Hall L. Rev. 47 (2014). In criminal proceedings, the Fifth Amendment right requires “knowing and intelligent waiver,” while in civil proceedings, knowing and intelligent waiver is not required and might be inferred from prior unwarned conduct or testimony. Id. An individual may assert the privilege as long as it is done in a timely manner. This requires that an individual invoke the privilege directly after the question is asked. Craig Gaumer & Charles Nail, “Truth or Consequences: The Dilemma of Asserting the Fifth Amendment Privilege Against Self-Incrimination in Bankruptcy Proceedings,” 76 Neb. L. Rev. 497 (1997). Further, a witness cannot assert a blanket privilege during oral testimony; the witness must assert the privilege specifically after each question is asked. Id. The debtor bears the burden of showing that there is a real danger of incrimination, In re Morganroth, 718 F.2d 161, 167 (6th Cir. 1983), or that information will provide a link in the chain of information needed for prosecution, In re French, 127 B.R. 434, 440 (Bankr. D. Minn. 1991). In In re Morganroth, the court found that to meet this standard of establishing reasonable cause to fear prosecution
a witness must supply personal statements under oath or provide evidence with respect to each question propounded to him to indicate the nature of the criminal charge which provides the basis for his fear of prosecution and, if necessary to complement non-testimonial evidence, personal statements under oath, to meet the standard for establishing reasonable cause to fear prosecution. . . .
718 F.2d at 169–70.
This allows a court to determine whether the invocation is proper under each circumstance.
The privilege against self-incrimination may also be waived or forfeited by a witness if the witness is granted immunity from being criminally prosecuted or when the witness voluntarily answers incriminating questions. Id.
A witness who has given some testimony in a noncriminal case may nevertheless stop at any point and claim the privilege, provided that none of the answers already given have amounted to an admission of guilt. When the witness partially testifies as to matters that could be self-incriminating, however, the witness may be held to have waived the privilege and must make complete disclosure as to other related matters which do not appreciably increase the risk of self-incrimination.
3 Collier on Bankruptcy ¶ 344.03 [b] (16th ed. 2011).
Also, if a witness fails to assert or selectively and inconsistently asserts the privilege, it is forfeited:
Whether the Fifth Amendment privilege has been waived is a fact-intensive inquiry and will be considered on a case-by-case basis. . . . Before precluding a witness from invoking his Fifth Amendment right against self-crimination after the witness has provided voluntary testimony in the same proceeding, a court must find that (1) the question seeks details about incriminating facts to which the individual has already testified and (2) the witness’ answer to the particular question posed would not tend to incriminate him.
Allan B. Diamond & Erin E. Jones, “Avoiding Litigation Pitfalls: An Introduction to the Fifth Amendment Privilege Against Self-Incrimination in Bankruptcy Proceedings,” 27 APR Am. Bankr. Inst. J. 20 (2008).
The Fifth Amendment Right: Unique Issues in the Bankruptcy Context
The Fifth Amendment privilege against self-incrimination may be asserted in bankruptcy proceedings. Some unique issues arise when a witness invokes the privilege in the bankruptcy context. These issues center around invoking the Fifth Amendment privilege, waiving the privilege, and the consequences a debtor might face for asserting the privilege. A claim of the privilege can delay or prevent the administration of a bankruptcy estate. 2008 Emerging Issues 3181, Fifth Amendment Privilege in Bankruptcy Proceedings. It can also lead to a variety of consequences, including a stay of the case or even dismissal. Id. However, if a debtor fails to assert the privilege, it is waived and the answers given to incriminating questions can be used against the debtor in civil and criminal proceedings. The debtor might be sentenced to serve time in jail for providing these responses. Id.
Situations in a bankruptcy proceeding where the debtor is likely to invoke the Fifth Amendment privilege. Several situations exist where the debtor is most likely to invoke the Fifth Amendment privilege against self-incrimination. These situations include a section 341 meeting of creditors, during discovery, and in discharge actions. Practitioners should remember that a witness’s waiver of the privilege in one proceeding is not necessarily a waiver of the privilege in a separate proceeding. Id.
At a section 341 creditors’ meeting, the bankruptcy trustee will ask the debtor about property values and past financial transactions. A debtor cannot use the privilege as a basis to refuse to attend the section 341 creditors’ meeting or refuse to provide the required schedules and statement of financial affairs. 2008 Emerging Issues, supra. In In re Nam, 245 B.R. 216 (Bankr. E.D. 2000), the bankruptcy court concluded that the debtor had not testified to incriminating facts during a creditors’ meeting. The court held that the debtor’s testimony in a creditors’ meeting did not waive the privilege, which the debtor later claimed when responding to interrogatories. This case illustrates the importance of determining whether the section 341 meeting and the adversary proceeding are two phases of one proceeding or separate proceedings. 2008 Emerging Issues, supra. This makes a difference in deciding whether the privilege has been consistently asserted or is considered waived.
In the instance of a section 341 creditors’ meeting, a debtor might fail to cooperate by not providing the financial records to the trustee. “[A] debtor may not refuse on the basis that the books, papers, and records contain potentially incriminating evidence. Because the creation of the documents was not compelled, their incriminating content cannot be the basis for a valid Fifth Amendment claim.” 3 Collier on Bankruptcy ¶ 344.03 [a] (16th ed. 2011). A debtor who seeks discharge of the bankruptcy petition must provide the trustee with “enough information to ascertain the debtor’s financial condition and track his financial dealings with substantial completeness and accuracy for a reasonable period past to present.” In re Heraud, 410 B.R. 569 (E.D. Mich. 2009). If a debtor fails to provide the requested documents, a court will likely not grant discharge of the debts.
A debtor may assert the privilege in discovery and discharge actions if the debtor has not been granted immunity and as long as the debtor invokes it for every question asked in a consistent manner. In Fisher v. United States, 425 U.S. 391, 410 (1976), the Supreme Court held that incriminating contents in documents were not privileged because the documents were created voluntarily. Nevertheless, the Court concluded that even the act of producing incriminating documents may be enough to be considered testimonial to require Fifth Amendment protection. Id.
Using the privilege in depositions and in discharge actions is more accepted in Chapter 7 consumer cases compared with Chapter 13 proceedings. A Chapter 13 proceeding requires that the debtor’s plan be submitted in good faith, which is problematic to debtors invoking the privilege against self-incrimination. Tarvin, supra. The court in In re Girdaukas noted:
A debtor may assert the Fifth Amendment privilege in a bankruptcy proceeding. Absent a grant of immunity, a debtor can assert the privilege, refuse to testify, and still retain the right to a chapter 7 discharge under § 727(a)(6), and it has been held that these rights granted under § 727(a)(6) are also available to the debtor under § 727(a)(5). The fact that Fifth Amendment rights are specifically granted to the debtor in a chapter 7 case, however, does not necessarily mean that the debtor can safely claim them in the context of a chapter 13 case. Those sections are only applicable to a case under chapter 7.
It is questionable whether a debtor can ever obtain confirmation of a chapter 13 plan while claiming the Fifth Amendment privilege. If the debtor has the burden of proof on the issue of good faith and refuses to testify, it will be very difficult for him to meet that burden.
92 B.R. 373, 376 (Bankr. E.D. Wis. 1988) (citations omitted).
In effect, asserting the privilege in discovery and discharge actions justifies a refusal to prove information that was otherwise relevant to the administration of the estate. Id. In Bank One of Cleveland, N.A. v. Abbe, 916 F.2d 1067 (6th Cir. 1990), the appellate court concluded that the district court erred in entering default judgments against the defendants, who refused to answer in the discovery process because they had asserted their Fifth Amendment privilege. The court noted, “A person who seeks, on Fifth Amendment grounds, to avoid sanctions otherwise imposable for disobeying a court’s order to give evidence must show how the requested discovery will be incriminating.” If a defendant properly asserts the Fifth Amendment to avoid answering discovery requests, the court may not enter a default judgment against the defendant. Id. However, when a debtor asserts the Fifth Amendment privilege in refusing to respond to discovery requests, a court may draw the inference that any testimony the debtor would have offered would be against the debtor’s interests. In re Hanson, 225 B.R. 366 (Bankr. W.D. Mich. 1998).
Adverse inferences. A court may draw an adverse inference regarding specific facts from a witness’s refusal to answer a question after claiming the privilege. Gaumer, supra. The Supreme Court established in Baxter v. Palmigiano, 425 U.S. 308 (1976),that “the Fifth Amendment does not forbid adverse inferences against parties to civil actions when they refuse to testify in response to probative evidence offered against them.” This allows a court to determine whether the testimony that the witness would have given was against the witness’s own interests. In In re LiButti, 178 F.3d 114, 120 (2d Cir. N.Y. 1999), the United States Court of Appeals for the Second Circuit noted, “silence when one would be expected to speak is a powerful persuader.”
A party can request that a court draw an adverse inference when a witness invokes the privilege, but the inference alone does not meet the party’s burden of proof. Gaumer, supra. In United States v. Rylander, the Supreme Court noted:
[W]hile the assertion of the Fifth Amendment privilege against compulsory self-incrimination may be a valid ground upon which a witness . . . declines to answer questions, it has never been thought to be in itself a substitute for evidence that would assist in meeting a burden of production.
460 U.S. 752, 758 (1983).
An adverse inference is not an admission of fact; rather, it is dependent on the circumstances of the case. Gaumer, supra. To determine the adverse inference’s level of trustworthiness, a court should consider whether it is corroborated by independent and admissible evidence. Id. For example, if no evidence of fraud is presented, an adverse inference does not establish fraud on its own. After a party establishes a prima facie case, an adverse inference causes the burden of producing evidence to shift to the individual seeking invocation of the Fifth Amendment. Id. The bankruptcy court may infer that the individual invoking the Fifth Amendment is unable to deny the other party’s allegations, if that individual remains silent in the face of the facts that are established by the other party. Id.
Drawing an adverse inference against the witness can have a detrimental effect for the individual. If a court determines that an adverse inference is supported by independent evidence, one effect is denial of discharge. For example, if a debtor refuses to produce documents in the debtor’s possession, an adverse inference arises to show that the documents would have been harmful to the debtor. A court could then deny the debtor’s discharge on the basis that the debtor was concealing records. In In re Gregg, 510 B.R. 614 (Bankr. W.D. Mo. 2014), the court drew adverse inferences from the debtor’s refusal to testify, which was not forbidden by the Fifth Amendment. The court found that the debtor transferred parcels of real estate to other entities two years prior to filing the case with actual intent to hinder, delay, or defraud creditors. Id. As a result, the court denied the debtor’s discharge.
Corporations. While a corporation is a “person” for many purposes, such as determining who is eligible to file a Chapter 7 or Chapter 11 petition, a corporation is not a “person” entitled to claim the Fifth Amendment’s privilege against self-incrimination. Braswell v. United States, 487 U.S. 99, 105 (1988); Bellis v. United States, 417 U.S. 85, 88 (1974); Slone-Stiver v. Broock (In re Tower Metal Alloy Co.), 200 B.R. 598, 605–6 (Bankr. S.D. Ohio 1996). “[F]or purposes of the Fifth Amendment, corporations and other collective entities are treated differently from individuals . . .” Braswell, 487 U.S.at 104, in that a corporation has no Fifth Amendment privilege. Normally, “a representative of a corporation ‘[cannot] resist [a] subpoena for corporate documents on the ground that the act of production might tend to incriminate him.” In re Caucus Distributions, Inc., 106 B.R. 890, 896 (Bankr. E.D. Va. 1989) (quoting Braswell v. United States, 487 U.S. 99 (1988)); In re Two Grand Jury Subpoena Duces Tecum, 769 F.2d 52, 56 (2d Cir. 1985). This is so because the custodian of corporate records holds those documents in a representative capacity rather than a personal capacity. Braswell, 487 U.S. at 117.
However, this is not to say that a corporate officer may never assert the Fifth Amendment. “There is a distinction between individuals acting as corporate officers and individuals in their personal capacity; in their personal capacity they may be entitled to invoke the privilege against self-incrimination.” In re Marine Power & Equip. Co., 67 B.R. 643, 649 (W.D. Wash. 1986). In certain limited circumstances, when the testimony would be self-incriminating, the individual has a personal Fifth Amendment privilege to refuse to comply with a subpoena requesting production of documents. In re Two Grand Jury Subpoena Duces Tecum, 769 F.2d at 57. In such situations, the officer must explain “some nexus between the risk of criminal prosecution and the information requested.” In re ICS Cybernetics, Inc., 107 B.R. 821, 829 (Bankr. N.D.N.Y. 1989). This privilege, however, only protects a person against being incriminated by his or her own compelled testimonial communications; it does not protect the individual from being incriminated by a third party’s testimonial act of producing records. Id. Upon being served with discovery requests, a corporation is “obliged to appoint agents who can, without fear of self-incrimination, furnish such requested information as is available” to the corporation. In re Tower Metal Alloy Co., 188 B.R. 954, 957 (Bankr. S.D. Ohio 1995). If the corporation has no existing employee that can produce the records without self-incrimination, then the corporation may be required to supply an entirely new agent who has no previous connection with the corporation that could place him or her in a position where the testimonial act would be self-incriminating to produce the records. In re Two Grand Jury Subpoena Duces Tecum, 769 F.2d at 58. There is simply no situation in which the Fifth Amendment prevents a corporation from producing corporate records because a corporation itself has no Fifth Amendment privilege. Id.
Additional consequences to asserting the Fifth Amendment privilege. A court also could dismiss the case for cause, deny discharge, or determine that a particular creditor’s claim against a debtor is non-dischargeable. Gaumer, supra. In In re Asbury, Bankr. No. 08-21989 (Adversary No. 09-02012), 2011 WL 44911 (W.D. Mo. 2011), the court relied on a debtor’s assertion of the Fifth Amendment as to false statements regarding assets in determining that the Chapter 7 debts were non-dischargeable. As with denying a debtor’s discharge, many grounds for finding a particular debt non-dischargeable include matters in which a debtor’s testimony might prove self-incriminating. In re Hanson, 225 B.R. 366 (Bankr. W.D. Mich. 1998).
Further, a court could deny the confirmation of the debtor’s bankruptcy plan in Chapters 11, 12, and 13, strike or bar evidence presented by a debtor, or hold a debtor could in contempt for refusing to testify after being ordered to do so by the court. Gaumer, supra. Finally, a debtor might be found in contempt of court or imprisoned if the debtor refuses to testify after a grant of immunity or inconsistently asserts the privilege by disobeying a court order. Tarvin, supra. All of these consequences should be taken into account by the debtor’s counsel when determining whether the debtor should assert the Fifth Amendment privilege against self-incrimination. Knowledge of these consequences is beneficial to creditors’ counsel during litigation as well.
Granting Immunity as a Method to Require Testimony
A court may grant immunity to compel a debtor to testify. If a witness refuses to testify in a court proceeding and invokes the privilege against self-incrimination, an Assistant United States Attorney must first receive permission from the U.S. Attorney to refer the matter to an Assistant Attorney General and then must obtain approval of the Assistant Attorney General for the Criminal Division or the Assistant Attorney General for the Department of Justice responsible for the case. Tarvin, supra. The Assistant U.S. Attorney is then permitted to file a motion in district court, requesting an order that immunity will be granted to the debtor related to specific testimony. Id.
Several types of immunity exist. Transactional immunity is a grant of immunity that protects the witness from any exposure to criminal liability relating to a particular transaction. Id. Use and derivative use immunity are the most common forms extended in bankruptcy proceedings when debtors invoke the Fifth Amendment privilege against self-incrimination. Use immunity is provided by the court order previously described and means that the witness is protected only from the “use” of the witness’s testimony in any criminal proceeding. Id. Derivative use immunity prevents the state from using evidence derived from the witness’s testimony. Id. This protects the actual testimony plus the “fruits” of the immunized testimony. Id.
If a court grants use and derivative use immunity, a debtor cannot refuse to testify. If the debtor still refuses to testify, he or she will face sanctions for “contempt, including incarceration and denial of discharge (when the witness is an individual debtor).” Gaumer, supra 5. Use and derivative use immunity do not provide the same degree of protection as transactional immunity and do not fully protect the debtor from criminal punishment, civil liability, or a denial of discharge. Tarvin, supra. In Kastigar v. United States, , 406 U.S. 441 (U.S. 1972), the Supreme Court held that immunity from use and derivative use is coextensive with the scope of the privilege against self-incrimination found in the Fifth Amendment.
Realistically, immunity is granted only in a small number of cases. Id. If immunity is not granted, a debtor may invoke the Fifth Amendment privilege and retain the right to discharge. Id.
Although situations where a witness asserts the Fifth Amendment privilege against self-incrimination might be less prevalent in bankruptcy proceedings, understanding the nature and the consequences of the privilege is essential for bankruptcy practitioners and trustees alike. In advising a debtor on whether or not to invoke the Fifth Amendment privilege, counsel should recognize that silence does not always amount to a “golden” outcome, and creditors’ counsel should consider the pitfalls and benefits of a debtor’s assertion of the privilege.
Keywords: bankruptcy and insolvency litigation, distressed assets, section 363, Article 9, stalking horse, bid protections