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United States v. A Residence Located at 218 Third Street

decided: October 31, 1986.

UNITED STATES OF AMERICA, PLAINTIFF-APPELLEE,
v.
A RESIDENCE LOCATED AT 218 THIRD STREET, NEW GLARUS, WISCONSIN, DEFENDANT, APPEAL OF DAVID R. LEWALLEN; UNITED STATES OF AMERICA, PLAINTIFF-APPELLEE, V. ONE SAFE DEPOSIT BOX LOCATED AT THE BANK OF SHOREWOOD HILLS, 810 SHOREWOOD BLVD., MADISON, WISCONSIN, DEFENDANT, APPEAL OF DAVID R. LEWALLEN



Appeals from the United States District Court for the Western District of Wisconsin, Nos. 84 M 191 and 84 M 194 -- Barbara B. Crabb, Judge.

Author: Cummings

Before BAUER, Chief Judge, CUMMINGS, Circuit Judge, and ESCHBACH, Senior Circuit Judge.

CUMMINGS, Circuit Judge. This appeal comes to us from the district court's denial of a motion by David Lewallen ("movant") to order the government to return certain seized property to him. The movant based his motion on two theories: (1) the search warrants used to seize his property were based on false statements by the affiant in violation of the standard set forth by the Supreme Court in Franks v. Delaware, 438 U.S. 154, 57 L. Ed. 2d 667, 98 S. Ct. 2674 ; and (2) the procedure used to seize movant's bank records violated 12 U.S.C. § 3420, which is a section of the Right to Financial Privacy Act of 1978 (12 U.S.C. §§ 3401 et seq.) (the "Act"). For the reasons set forth below, we affirm the decision below but remand for consideration of an issue not yet considered by the district court.

I

On November 13, 1984, a warrant was issued for the search of a residence located at 218 Third Street, New Glarus, Wisconsin. On November 14, 1984, a warrant was issued for the search of a safe deposit box at the Bank of Shorewood Hill, Madison, Wisconsin. These warrants, both of which were executed on November 14, 1984, were each based in part on the affidavit of Special Agent George Paul of the Internal Revenue Service. These searches were part of an investigation of movant regarding possible violations of several drug possession statutes (21 U.S.C. §§ 841, 843, 844, and 846), as well as several tax evasion statutes (26 U.S.C. §§ 7201, 7203, and 7206). These violations were connected since the movant allegedly failed to report taxable income realized from the sale of illegal drugs.

Agent Paul, as part of his affidavit, related how he had concluded that movant failed to file a tax return for 1983 by the deadline of October 15, 1984. This late deadline resulted from several extensions that movant had received from the Internal Revenue Service. On November 6, 1984, Agent Paul had contacted the Criminal Investigation Branch of the Internal Revenue Service Center at Kansas City, Missouri, to cause a search to be made to determine whether movant had filed a tax return for 1983. On that same day, Agent Paul received confirmation from the Center that movant had not filed a tax return for 1983 by October 15, 1984, as required, and that the return had still not been filed. This information formed the basis for Agent Paul's subsequent conclusion in the affidavit that movant had willfully failed to file his tax return for 1983 in violation of 26 U.S.C. § 7203.

However, movant in fact did file his return on or before October 15, 1984, and the government admits this. Moreover, the testimony of Mark Frank casts some doubt as to whether the Center actually told Agent Paul that movant's return was not timely filed, or if the Center did so, whether Agent Paul was justified in relying on this information. Frank telephoned the Internal Revenue Service Information Center and the Internal Revenue Service Public Affairs Department and inquired how long it would take to verify the date on which a tax return had been filed. He was told that it takes a minimum of four weeks for a return to pass through the system and appear on the computer. Frank's testimony implies that if movant had filed his return between October 10, 1984, and October 15, 1984, as he apparently did, then it would still not show up in the Center's computers on November 6, 1984, the date on which Agent Paul made his inquiry.

Movant bases his challenge to the Government's seizure of his property on the Supreme Court case of Franks v. Delaware, 438 U.S. 154, 57 L. Ed. 2d 667, 98 S. Ct. 2674 . Franks teaches that where a movant establishes by a preponderance of the evidence that (1) a factual statement made in an affidavit supporting a warrant is false; (2) the affiant made the false statement either knowingly and intentionally, or with reckless disregard for the truth; and (3) without the false statement the remainder of the affidavit is insufficient to establish probable cause, then the search warrant must be voided. Franks, 438 U.S. at 155-156; United States v. Malsom, 779 F.2d 1228, 1235 (7th Cir. 1985); Olson v. Tyler, 771 F.2d 277, 281 (7th Cir. 1985); United States v. Williams, 737 F.2d 594, 602 (7th Cir. 1984), certiorari denied, 470 U.S. 1003, 84 L. Ed. 2d 377, 105 S. Ct. 1354, 105 S. Ct. 1355 . As noted above, both parties acknowledge that the statement that movant had not filed his tax return by October 15, 1984, is false. There is also little dispute that without this false statement, the remainder of the affidavit fails to establish probable cause that movant violated 26 U.S.C. § 7203 with respect to the tax year 1983. The sole dispute between the parties on this issue is whether Agent Paul made this statement in his affidavit with reckless disregard for the truth.

The standard of reckless disregard for the truth used in evaluating a challenge to a search warrant under Franks is analogous to the standard used in the context of First Amendment cases involving libel initially articulated by the Supreme Court in the landmark case of New York Times Co. v. Sullivan, 376 U.S. 254, 11 L. Ed. 2d 686, 84 S. Ct. 710 . Williams, 737 F.2d at 602. Therefore, cases subsequent to New York Times which flesh out the meaning of "reckless disregard for the truth" in the First Amendment context are relevant to understanding the meaning of the same phrase in the Franks context. Accordingly, an affiant acted with reckless disregard for the truth where he "'in fact entertained serious doubts as to the truth of his' allegations." Williams, 737 F.2d at 602, quoting St. Amant v. Thompson, 390 U.S. 727, 731, 20 L. Ed. 2d 262, 88 S. Ct. 1323 (a Supreme Court case applying the New York Times standard); United States v. Pritchard, 745 F.2d 1112, 1116 (7th Cir. 1984), certiorari denied, 474 U.S. 1085, 106 S. Ct. 860, 88 L. Ed. 2d 899 . Reckless disregard for the truth may also be proved inferentially "from circumstances evincing 'obvious reasons to doubt the veracity' of the allegation." Williams, 737 F.2d at 602, quoting St. Amant, 390 U.S. at 732; Pritchard, 745 F.2d at 1116. Mere negligence by the affiant does not constitute reckless disregard for the truth. Williams, 737 F.2d at 602; see also United States v. Costello, 610 F. Supp. 1450, 1460 (N.D. Ill. 1985).

An important factor in deciding this issue is the appropriate standard for us to apply in reviewing the district court's finding that the affiant did not make this statement with reckless disregard for the truth. The government urges, and movant does not dispute, that this finding by the district court cannot be disturbed unless it is clearly erroneous, and we have indeed applied the clearly erroneous standard in prior cases applying Franks. Malsom, 779 F.2d at 1236; Williams, 737 F.2d at 602. However, both parties have neglected to discuss the impact, if any, of recent developments in the standard of review of the analogous reckless disregard for the truth finding in the First Amendment context. The Supreme Court has recently held that in reviewing a lower court's finding that a party made a statement with reckless disregard for the truth, "appellate judges must exercise independent judgment and determine whether the record establishes [reckless disregard for the truth] with convincing clarity." Bose Corp. v. Consumers Union of U.S., Inc., 466 U.S. 485, 514, 80 L. Ed. 2d 502, 104 S. Ct. 1949 . Since cases construing the reckless disregard for the truth standard in the First Amendment context are relevant to an understanding of the contours of the analogous standard in the Franks context, it could be argued that a change in the standard of review for the reckless disregard for the truth finding in the First Amendment context should likewise affect the standard of review for the analogous finding in the Franks context. To be sure, the analogy here is not perfect, since some of the reasons why the Supreme Court modified the standard of review in Bose were solely because of concerns unique to the First Amendment. In particular, the Supreme Court relied in part on the policy of making an independent examination of the record in First Amendment cases, Bose, 466 U.S. at 498-499, and the special constitutional values protected by the reckless disregard standard, Bose, 466 U.S. at 502. However, the Supreme Court also relied on the fact that the reckless disregard for the truth standard requires "the evolutionary process of common-law adjudication" in order to be fully revealed, Bose, 466 U.S. at 502, which applies with equal force to the reckless disregard for the truth standard in the Franks context. Also, this standard in the Franks context likewise protects important constitutional values -- the necessity of demonstrating probable cause for a search warrant to be issued. Nevertheless, since the parties failed to raise this issue, we continue to follow Seventh Circuit precedent and apply the clearly erroneous standard to the district court's finding that the affiant did not act with reckless disregard for the truth.

Given the legal standard and standard of review articulated above, we must affirm the district court's finding that Agent Paul did not act with reckless disregard for the truth. The key reason for this conclusion is that movant, who has the burden of proof, did not offer any direct evidence about Agent Paul's state of mind with respect to his conclusion in the affidavit that movant did not file a 1983 tax return. The government offered no evidence whatsoever, and movant's evidence, at most, shows that the Internal Revenue Service could not locate on November 6, 1984, a tax return filed between October 10, 1984, and October 15, 1984. This evidence does not show that Agent Paul in fact had serious doubts as to the ability of the Internal Revenue Service to locate a return filed three weeks earlier. See Pritchard, 745 F.2d at 1116; Williams, 737 F.2d at 602. Admittedly, one could infer that an experienced agent such as Agent Paul would be aware of the difficulties of locating a recently field return and hence would be aware of the possible unreliability of the information that he received. But although reckless disregard for the truth may be proved inferentially, such a showing requires that movant demonstrate that affiant had obvious reasons to doubt the veracity of the information received. Pritchard, 745 F.2d at 1116; Williams, 737 F.2d at 602. It was not clearly erroneous for the district court to conclude that Agent Paul lacked such reasons.

The only remaining possibility for finding in movant's favor is that Agent Paul simply did not receive the information from the Internal Revenue Service that he said he did. However, there is no reason to select this inference over the inference that he did receive this information. Therefore, both search warrants survive movant's Franks challenge.

II

Movant also claims that the government violated 12 U.S.C. § 3420 which is part of the Act. In order to evaluate this claim, we must more thoroughly examine the facts surrounding the issuance of the ...


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