United States of America, Appellant, v. Gary R. Mcdaniel, Appellee, 482 F.2d 305 (8th Cir. 1973)

We have for consideration the government's appeals from judgments entered after an evidentiary hearing held on remand as directed by this court on defendant's appeals from his convictions. See United States v. McDaniel, 449 F.2d 832 (8th Cir. 1971), cert. denied, 405 U.S. 992, 92 S. Ct. 1264, 31 L. Ed. 2d 460 (1972). The judgments from which appeals are now taken vacated the earlier judgments of conviction, dismissed the indictments, ordered McDaniel discharged, and his bond exonerated. The factual circumstances warrant detailed explication.

Defendant Gary McDaniel^*  was, prior to these proceedings, President of the First Western State Bank in Minot, North Dakota. That bank and McDaniel apparently were for some time engaged in irregular and illegal activities involving the bank assets. These irregularities were first discovered on or about May 12, 1969, by state bank examiners who were soon followed by examiners for the Federal Deposit Insurance Corporation. Consequently, state prosecutorial authorities began investigating the political machinations of the bank and its officers as possible violations of North Dakota's Corrupt Practices Act, 3 N.D.C.C Sec. 16-20-01 et seq.; and the United States Attorney for the District of North Dakota began investigating the personal maneuverings of the bank officers for the purpose of determining whether federal criminal statutes had been violated.

On September 23, 1969, defendant, who was then residing in the state of Minnesota, was subpoenaed to appear before a federal grand jury at Fargo, North Dakota, on October 7, 1969. He appeared, but claimed his privilege against self-incrimination, and gave no testimony. McDaniel went from the grand jury room to the United States Attorney's office, where the local sheriff immediately served upon him a subpoena to appear before a state grand jury at Minot, North Dakota, on October 15, 1969.

Prior to his appearance before the state grand jury, defendant sought, in exchange for his testimony, immunity from prosecution under 6 N.D.C.C. Sec. 31-01-09 (Supp.1971), which was denied, Defendant's attorney then discovered 3 N.D.C.C. Sec. 16-20-10, which provides in pertinent part:

"No person shall be excused from attending and testifying . . . before any court upon any investigation . . . for a violation of . . . section 16-20-08, upon the ground that the testimony or evidence, documentary or otherwise, required of him may tend to incriminate . . . him. No person shall be prosecuted nor subjected to any penalty or forfeiture for or on account of any transaction, matter or thing concerning which he may testify or produce evidence . . . .

McDaniel's attorney realized that this statute automatically conferred transactional immunity upon any witness subpoenaed to testify in an investigation under the North Dakota Corrupt Practices Act, and accordingly he advised McDaniel to appear before the state grand jury and fully divulge all his illegal actions.

That the state prosecutors were unaware of this automatic immunity statute is evidenced by the fact that they subpoenaed all potential defendants, thereby immunizing every suspect except the bank itself, and by the fact that they expressly granted immunity to one grand jury witness under the more recent statute, Sec. 31-01-09.

In any event, McDaniel appeared at the state grand jury and gave self-incriminating testimony filling three volumes of transcript. On November 6, 1969, the United States Attorney requested a copy of McDaniel's testimony from an Assistant State Attorney General, which he received the late afternoon of November 20. Since the United States Attorney too apparently was unaware that McDaniel's testimony was protected by a statutory grant of immunity, he read the three volumes of transcript and then returned them the next morning.

Thereafter, on December 8, 1969, McDaniel was indicted by the state on fifteen counts of violating the Corrupt Practices Act, one count of embezzlement, and three counts of making false entries.

Federal indictments were returned on February 4 and July 31, 1970. The four counts of the initial federal indictment dealt with the purchase of the Ranger Bar, a cocktail lounge. Three of these counts charged that McDaniel had violated 18 U.S.C. § 656 in that he had embezzled and misapplied $56,637.20 to finance the transaction by issuing cashier's checks from the bank in that amount without repaying the bank. The fourth count charged a violation of 18 U.S.C. § 1005, alleging that, to cover the issuance of the cashier's checks, McDaniel had made a false entry in the bank records showing as an asset a nonexistent deposit with another bank.

The seven counts of the second federal indictment dealt with miscellaneous schemes. In four counts, McDaniel was charged with embezzling and misapplying $44,716.90 by issuing two checks without repaying the bank, converting a third check to his personal use, and issuing a fourth on a fundless account, all in violation of Sec. 656, supra. The final three counts alleged that McDaniel had further violated Sec. 1005 by making three separate false entries of fictitious deposits by the bank to show assets to cover the sums embezzled.

McDaniel sought to have all state and federal indictments quashed on the ground that the Fifth Amendment precluded his prosecution for transactions touched upon by his immunized state grand jury testimony. The state court, Judge Coyne, accepted the argument that Sec. 16-20-10 conferred transactional immunity and quashed the state indictment; but the federal court, Judge Register, declined to quash the federal indictments. Consequently, McDaniel was tried in federal court in two trials, convicted on all eleven counts, and sentenced to five years imprisonment on one conviction and concurrent terms of three and two years on the others.

McDaniel then appealed to this court, and at oral argument on that appeal the United States Attorney conceded that he had read McDaniel's state grand jury testimony on the evening of November 20, 1969. This court held that the United States Attorney's reading of McDaniel's state grand jury testimony "constitutes a prima facie 'use"' of it, and therefore, if that testimony was given under a grant of immunity, and if it related to the subject matter of the federal prosecutions, McDaniel could not be prosecuted for those transactions. United States v. McDaniel, supra. Accordingly, the cause was remanded to the district court for an evidentiary hearing to determine whether McDaniel had testified under a grant of immunity, 449 F.2d at 840, and, if so, whether the testimony related to the subject matter of the federal prosecution. 449 F.2d at 841.

After conducting the mandated evidentiary hearing, Judge Benson answered both propounded questions affirmatively and therefore, in accordance with his conception of our opinion, vacated the convictions and quashed the indictments. 352 F. Supp. 585.

However, Judge Benson's task at the evidentiary hearing was complicated by the intervening decision of the Supreme Court in Kastigar v. United States, 406 U.S. 441, 92 S. Ct. 1653, 32 L. Ed. 2d 212 (1972).

This court's prior opinion in McDaniel I, authored by Judge Gibson, had interpreted the pre-Kastigar decisions of the Supreme Court to establish a double standard with respect to the constitutionality of statutes which grant immunity to witnesses in order to compel testimony. First, this court determined that Counselman v. Hitchcock, 142 U.S. 547, 12 S. Ct. 195, 35 L. Ed. 1110 (1892), applied full transactional immunity when the federal government was both the questioning sovereign and the prosecuting sovereign, thereby preventing federal prosecution for any crime relating to the subject matter of the compelled testimony. If, on the other hand, the questioning sovereign were the state, Murphy v. Waterfront Commission, 378 U.S. 52, 84 S. Ct. 1594, 12 L. Ed. 2d 678 (1964), governed, and the federal government was permitted to prosecute the witness for crimes related to his testimony, so long as there was no use of the compelled testimony or its fruits. Thus we ruled that, in interjurisdictional cases, the Fifth Amendment required no more than use and derivative use immunity, even while single jurisdictions were bound by full transactional immunity.

By means of this analysis, it was determined that under ordinary circumstances McDaniel would only be entitled to use immunity, since his grand jury testimony had been compelled by the state, and the federal government was acting as prosecutor. However, because the United States Attorney had read the three-volume transcript of McDaniel's testimony, our court felt forced to conclude that the federal government was in the same position as if it were the questioning sovereign, and that therefore transactional immunity applied. The only question then remaining was whether McDaniel had in fact testified before the state grand jury under a grant of immunity to matters related to the prosecution, and, as seen, that caused the remand.

In Kastigar, of course, the Supreme Court held that use and derivative use immunity is constitutionally sufficient to compel testimony over a claim of Fifth Amendment privilege even in cases in which the federal government is both questioner and prosecutor. Accordingly, at the evidentiary hearing in this case, the government sought to open a third issue by seeking to prove under the Kastigar guidelines that it had independent sources for the evidence it used to convict McDaniel. For this purpose, it offered into evidence F.B.I. reports based upon an investigation of McDaniel that had been received by the United States Attorney's office prior to McDaniel's testimony. But McDaniel's counsel objected to this evidence on the ground that this court's mandate did not allow the trial court to explore that issue. The district court sustained this objection, and excluded the reports from evidence, admitting them only as an offer of proof. Nevertheless, in his memorandum dismissing the indictments, the district judge observed that could he apply Kastigar his result would differ:

"On the basis of the government's offer of proof in the McDaniel evidentiary hearing, this Court finds that the government had, prior to the grand jury testimony, all the evidence used in the McDaniel prosecution, and further finds that evidence was derived from legitimate sources wholly independent of the compelled testimony. This evidence consists of comprehensive investigative Federal Bureau of Investigation reports. See Government's Offer of Proof, Exhibits 36-41 inclusive."

It is with this extensive and complicated factual background that we consider the government's three contentions on appeal: (1) that McDaniel's testimony was not given under a grant of immunity; (2) that the testimony did not relate to the subject matter of the federal prosecution; and, alternatively, (3) that the United States did not "use" that testimony to convict McDaniel.

First the government contests Judge Benson's conclusion of law that when McDaniel testified before the state grand jury pursuant to a subpoena, he was automatically granted immunity by Sec. 16-20-10. The government's position tacitly concedes that, ordinarily, the statute automatically confers immunity on any witness subpoenaed to testify upon an investigation of violations of Sec. 16-20-08, but contends that since McDaniel seized this opportunity to gain absolution of his wrongs, he waived the immunity. The essence of this argument is the contention that unless McDaniel first invoked the Fifth Amendment and then was told that Sec. 16-20-10 granted him immunity, he was acting voluntarily and thus waived the statutory protection. But the Supreme Court has held precisely to the contrary in a case involving a federal statute worded similarly to Sec. 16-20-10. See United States v. Monia, 317 U.S. 424, 430, 63 S. Ct. 409, 87 L. Ed. 376 (1943). Accord, State v. Hennessey, 195 Or. 355, 245 P.2d 875, 881 (1952) (en banc). Furthermore, it is not contended that McDaniel lost the privilege as to any portion of his testimony by volunteering nonresponsive confessions in an attempt to acquire immunity for crimes not under inquiry. Cf. United States v. Wilmington Chemical Corp., 254 F. Supp. 92 (N.D. Ill. 1966). Accordingly, we find no error in Judge Benson's conclusion that McDaniel's testimony was covered by a grant of immunity.

The government's second contention faults Judge Benson's finding of fact that McDaniel's testimony "related to" the federal prosecution. However, this inquiry, which was mandated by this court's earlier remand, is, in light of Kastigar, no longer germane. Because we held transactional immunity to be required by the Fifth Amendment, it was necessary under our earlier opinion to inquire whether the indictment had to be quashed on grounds that the testimony "related to" the transaction giving rise to the prosecution. But under Kastigar, that no longer is a basis for quashing the indictment. The question under Kastigar is not whether the testimony relates to the charges,¹  but whether the prosecution has "used" the testimony in prosecuting those charges. It is to that dispositive question that we turn.