Federal Deposit Insurance Company v. Ching et al

Filing 225

ORDER signed by District Judge Kimberly J. Mueller on 10/28/2016 ORDERING The parties' motions in limine are resolved to the extent set forth in this order. This order resolves ECF Nos. 158 , 161 , 165 and 167 . (Reader, L)

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UNITED STATES DISTRICT COURT

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EASTERN DISTRICT OF CALIFORNIA

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FEDERAL DEPOSIT INSURANCE
CORPORATION AS RECEIVER FOR
BUTTE COMMUNITY BANK,
Plaintiff,

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ORDER

v.

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No. 2:13-cv-01710-KJM-EFB

ROBERT CHING, et al.,
Defendants.

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On October 7, 2016, the court heard argument on the parties’ motions in limine

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filed in anticipation of the October 31, 2016 trial date. Tony Burt and Jean-Paul Cart appeared

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for the Federal Deposit Insurance Corporation (FDIC), acting as receiver (FDIC-R) for Butte

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Community Bank (the Bank). Kevin Hughes appeared for defendants, Robert Ching, Eugene

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Even, Donald Leforce, Luther McLaughlin, Robert Morgan, James Richards, Gary Strauss,

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Hubert Townsend, John Coger, and Keith Robbins (collectively, defendants). At hearing, the

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court issued tentative bench orders, requested some additional information, and took certain

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matters under submission. On October 14, 2016, the court issued an order confirming and

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clarifying its bench orders, issuing some additional orders, and clarifying what issues remain

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under submission. Order October 14, 2016, ECF No. 202. The court now resolves four more of

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the parties’ motions in limine, and clarifies which of the remaining motions remain to be

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addressed during trial.

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I.

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NATURE OF RULINGS ON IN LIMINE MOTIONS
As always, the court issues its rulings on motions in limine based on the record

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currently before the court. Each ruling is made without prejudice and is subject to proper

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renewal, in whole or in part, during trial. If a party wishes to contest a pre-trial ruling, it must do

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so through a proper motion or objection, or otherwise forfeit appeal on such grounds. See Fed. R.

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Evid. 103(a); Tennison v. Circus Circus Enters., Inc., 244 F.3d 684, 689 (9th Cir. 2001) (“Where

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a district court makes a tentative in limine ruling excluding evidence, the exclusion of that

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evidence may only be challenged on appeal if the aggrieved party attempts to offer such evidence

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at trial.”) (alteration, citation and quotation omitted).

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II.

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A. Plaintiff’s Motion in Limine Three (ECF No. 158)

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PLAINTIFF’S MOTIONS IN LIMINE

Plaintiff moves to exclude as irrelevant and prejudicial evidence or argument

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regarding regulatory reports of examination issued after May 5, 2008, and testimony relating to

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those reports by FDIC examiner Mary Viereck. Specifically, plaintiff seeks to exclude the entire

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Report of Examination (Report) the FDIC acting in its corporate capacity (FDIC-C) issued in

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March 2009. Plaintiff seeks to exclude the Report in light of statements it contains by Ms.

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Viereck that (1) Bank management “performed due diligence” before issuing the dividend, and

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(2) the Bank was “well-capitalized” at the end of 2008.

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At hearing, the court allowed supplemental briefing on the issue of whether Ms.

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Viereck’s statements in the Report qualify as party opponent admissions and therefore are not

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hearsay under Federal Rule of Evidence 801(d). Rule 801(d) defines as non-hearsay a statement

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“made by a person whom the party authorized to make a statement on the subject.” Fed. R. Evid.

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801(d)(2)(C). After carefully reviewing the parties’ supplemental briefings and the relevant case

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law, the court is persuaded that the FDIC-C and the FDIC-R are two distinct legal entities, and

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statements by the agent of one do not constitute party admissions by an agent of the other. See
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Bullion Servs., Inc. v. Valley State Bank, 50 F.3d 705, 709 (9th Cir. 1995) (“[b]ecause the FDIC

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Corporate and Receiver perform two different functions and protect wholly different interests,

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courts have been careful to keep the rights and liabilities of these two entities legally separate”).

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Because the FDIC-C and FDIC-R are separate legal entities, the FDIC-R is not responsible for the

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actions of the FDIC-C, and vice versa. FDIC v. Bernstein, 944 F.2d 101, 106 (2nd Cir. 1991).

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Given this distinction, the FDIC-R did not authorize the FDIC-C or its examiner to make any

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statements regarding the Bank’s failure. Therefore, reports of examination issued by the FDIC-C

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are not excepted from the rule against hearsay as party admissions.

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Defendants argue even if the reports of examination issued by the FDIC-C, or

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statements by the FDIC-C’s examiner concerning those reports, are not party admissions, they are

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excepted from the rule against hearsay as they constitute a “public record or report” under Federal

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Rule of Evidence 803(8). Rule 803(8) excepts from hearsay “a record or statement of a public

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office” if it sets out “factual findings from a legally authorized investigation.” Fed. R. Evid.

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803(8). Defendants cite no authority in support of their argument other than the rule. On the one

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hand, the primary report at issue was made by Ms. Viereck, an examiner appointed by the Board

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of Directors of the FDIC-C acting in the course of her official duties, and there is nothing before

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the court suggesting the report’s contents are not trustworthy.

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But whether or not the report qualifies as a public record, questions remain

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regarding its relevance. Defendants suggest that only a very small portion of the report can come

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in to avoid the taking of unnecessary time. Plaintiff has the better argument when it insists that if

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any portion of the report is admitted, the full report should be introduced.

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On balance, the court DENIES this motion. It appears that reports of examination

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issued by the FDIC-C are relevant to whether defendants exercised due care in maintaining the

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Bank’s capitalization at an adequate level, and are not barred by the rule against hearsay under the

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public records exception.

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B. Plaintiff’s Motion in Limine Six (ECF No. 161)

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The FDIC moves to exclude: (1) testimony and statements of Denna McGhee, a

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former financial analyst for Howe Barnes Hoefer & Arnett, because she was not disclosed as a
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potential trial witness during discovery; (2) a purported resolution of the Board of Directors of the

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Bank and the Bank’s holding company, Community Valley Bancorp (CVB), authorizing the May

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2008 dividend but was not produced until November 10, 2015; (3) documents related to

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defendants’ claim for offsets based on voluntary relinquishments; (4) two brokerage account

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statements not produced until April 27, 2016; and (5) all other non-impeachment documents

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defendants intend to use at trial that were not timely produced or disclosed.

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The Federal Rules of Civil Procedure require timely disclosures of the witnesses

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and documents a party intends to rely on to support its claims or defenses. Fed. R. Civ. P.

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26(a)(1)(A)(i)-(ii). When a party fails to provide the required disclosures, that party “is not

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allowed to use that information or witness to supply evidence on a motion, at a hearing, or at a

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trial, unless the failure was substantially justified or is harmless.” Fed. R. Civ. P. 37(c)(1).

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In its October 14, 2016 order, the court ordered defendants to allow the FDIC-R to

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depose Mrs. McGhee to avoid any unfair prejudice that may result from allowing her to testify at

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trial. Order October 14, 2016, ECF No. 202 at 6. Also in that order, the court denied plaintiff’s

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motion to exclude the resolution purportedly authorizing the May 5, 2008 dividend at issue. ECF

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No. 202 at 7. The court now rules on the outstanding issues relative to this motion.

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1. Exhibit A-143

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Plaintiff moves to exclude from trial Exhibit A-143, which purports to show

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defendant McLaughlin purchased additional shares of stock in CVB after the May 5, 2008

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dividend. Plaintiff claims this evidence was not introduced until April 27, 2016, well after the

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amended discovery cutoff of November 13, 2015.

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The court DENIES this motion as to Exhibit A-143. Defendants have submitted

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emails that were sent to plaintiff on June 4, 2015, which identify and attach documents

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confirming defendant McLaughlin’s purchase of CVB stocks from December 1, 2006 through

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August 20, 2010. Kim Decl. ¶ 4 & Ex. B, ECF No. 174. Plaintiff has not rebutted defendants’

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showing.

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2. Exhibit A-154

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Plaintiff moves to exclude from trial Exhibit A-154, which is a

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statement reflecting defendant Robbins’ 2009 CVB stock purchases. Plaintiff claims this

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evidence was also not introduced until April 27, 2016, after the amended discovery date of

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November 13, 2015. While defendants admit this evidence was not produced until after the

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discovery cutoff, they argue their failure to produce was harmless error because plaintiff was

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aware of the document’s existence as a result of Robbins’ declaration filed on March 27, 2014.

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The court GRANTS this motion as to Exhibit A-154. The court finds nothing in

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Robbins’ declaration regarding the purchase of additional stock after the May 5, 2008 dividend to
put plaintiff on notice of the document now at issue. Robbins Decl. ¶ 20, ECF No. 20.

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3. Exhibits J and A-157

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Plaintiff moves to exclude from trial Exhibits J and A-157, which concern a

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Bank Amended and Restated Director Fee Agreement and a Surrender and Death Benefit Report,

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respectively. Plaintiff claims these documents were not produced until April 5, 2016, well after

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the close of discovery. Defendants concede these documents were not produced until after the

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discovery cutoff, but argue the documents were not responsive to any of plaintiff’s document

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requests. It appears to the court that defendants produced these documents as part of their

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supplemental initial disclosures in late March 2016, to support their affirmative defense of

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“offsets.”

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The court GRANTS this motion as to Exhibits J and A-157 in part. The court

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previously has precluded the use of defendants’ reliance on an “offset” affirmative defense; to the

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extent defendants seek to introduce these documents for that purpose, they are barred. Order May

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27, 2016, ECF 168 at 23. At the same time, the court has not located anything in the record that

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indicates plaintiffs specifically requested all documents relating to defendants’ “offset”

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affirmative defense, and therefore defendants did not fail to timely produce them. Heftman Decl.

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¶ 7 & Ex. C, ECF No. 103. The documents at issue may be admissible to support defendants’

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argument that they acted in good faith to maintain the Bank’s capitalization at an adequate level.

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4. Exhibit A-82
Plaintiff moves to exclude from trial Exhibit A-82, which is a February 11,

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2008 e-mail from defendant Leforce, on the grounds that it was not produced until April 27, 2016,

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well after the amended discovery cutoff of November 13, 2015.

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The court DENIES this motion as to Exhibit A-82. Defendants have identified a

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cover letter in the record sent by defendants to plaintiff on July 7, 2015, before the amended

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discovery cutoff, stating that a disk of defendant Leforce’s documents is enclosed. Defendants

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aver the disc includes the February 2008 e-mail. Kim Decl. ¶ 5 & Ex. C, ECF No. 174. Plaintiff

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has not rebutted this showing.

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5. Exhibits S, A-158, and A-159
Plaintiff moves to exclude from trial Exhibits S, A-158, and A-159, comprising

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documents relating to defendant Robbins’ benefits, on the grounds that plaintiff could not locate

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these documents in defendants’ prior productions.

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The court DENIES this motion as to Exhibits S, A-158, and A-159. Defendants

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have identified an email in the record that shows defendants provided these documents to plaintiff

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on October 27, 2015, before the November 13, 2015 amended discovery cutoff. Kim Decl. ¶ 6 &

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Ex. D, ECF No. 174. Plaintiff has not rebutted this showing.

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6. Exhibits A-166, A-167, A-168, and A-169

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Plaintiff moves to exclude from trial Exhibits A-166, A-167, A-168, and A-169,

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which are proofs of claim defendants submitted to the FDIC-R dated November 2010 , and the

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FDIC-R’s corresponding claim denials, dated December 2010. Plaintiff argues these documents

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were not produced until April 5, 2016, well after the November 13, 2015 amended discovery

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completion date. Defendants argue these documents were not responsive to any of plaintiff’s

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discovery requests, and that they support defendants’ position in opposition to plaintiff’s

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administrative exhaustion claim.

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The court GRANTS this motion as to Exhibits A-166, A-167, A-168, and A-169.

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The court has already ruled that defendants’ affirmative defenses of offset and unjust enrichment

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are not “claims” that are subject to exhaustion through an administrative claims process. Order
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May 27, 2016, ECF No. 168 at 19. As such, these documents are no longer relevant, and the

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court need not address the timeliness of the production of this evidence.

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C. Plaintiff’s Motion in Limine Ten (ECF No. 165)

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The FDIC moves to exclude evidence or argument related to the March 26, 2013

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tax settlement between CVB and the FDIC-R, which released CVB and its representatives from

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all claims. The court has granted plaintiff’s summary judgment motion on defendants’

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affirmative defense of release. Order May 27, 2016, EFC No. 168 at 13. However, defendants

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argue the FDIC-R’s full release of CVB “for no consideration” is relevant to whether the FDIC-R

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views CVB as being “at fault” for the $8.8 million dividend, and should be admitted for that

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purpose. Opp’n, ECF No. 178. Defendants also argue the release is probative of plaintiff’s

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credibility when plaintiff claims the Bank suffered injury as a result of the dividend. Id.

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At hearing, the court asked the parties whether this evidenced was barred under the

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settlement privilege provisions of Federal Rule of Evidence 408. Plaintiff now argues that Rule

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408 prohibits defendants from using the settlement to prove or disprove the validity or amount of

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a disputed claim, namely defendants’ liability as directors and officers of the Bank. Pl.’s Br.,

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ECF No. 201 at 8. Defendants concede evidence of the settlement is not admissible to prove or

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disprove the amount of a disputed claim, but argue Rule 408 does not bar a party from using a

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settlement agreement to prove the fact of the settlement or the scope of the release. Defs.’ Br.,

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ECF No. 199 at 4. Therefore, defendants argue, Rule 408 would not bar them from using the

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agreement to establish their release from liability for acts they took in their capacity as directors

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of CVB.

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After reviewing the parties’ supplemental briefing and relevant case law, the court

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finds that introducing evidence of the March 26, 2013 settlement agreement would violate one of

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the primary purposes underlying Rule 408, i.e., to encourage the amicable resolution of disputes.

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More fundamentally, in conducting a Rule 403 analysis, the court finds the minimal probative

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value of any information that might come in through admission of the settlement is substantially

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outweighed by the danger of unfair prejudice, confusing the issue, and misleading the jury. See

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LaserDynamics, Inc. v. Quanta Computer, Inc., 694 F.3d 51, 78 (Fed. Cir. 2012) (finding the
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district court abused its discretion in admitting settlement agreement under Rule 403, as

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probative value was greatly outweighed by risk of unfair prejudice, confusion of issues, and

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misleading the jury).

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The court GRANTS this motion.
D. Plaintiff’s Motion in Limine Twelve (ECF No. 167)
The FDIC moves to exclude any testimony by defendants’ expert witness Joe A.

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Hargett on the following topics: (1) opinion regarding regulatory action taken in 2013 that would

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have authorized the May 5, 2008 dividend at issue; (2) hypotheticals for different dividend

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amounts other than the $8.8 million dividend; (3) opinion regarding regulators’ attitudes/practices

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not based on any methodology or expertise; (4) opinion on the Bank’s liquidity after May 2008,

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(5) opinion regarding the market and its impact on bank failures; (6) historical information on the

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Bank’s income, and (7) calculations of net income and retained earnings that are not in dispute.

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At hearing, the parties agreed to file a stipulation as to what they agree Mr. Hargett

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may cover in his testimony. The court also noted that defendants had not addressed topics (3),

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(4), and (5) in their opposition, and asked for clarification as to whether defendants opposed the

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exclusion of that evidence. Defendants’ counsel suggested they did oppose.

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The parties stipulate that Mr. Hargett will not testify to opinions stated in Section

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XI, “The Impact of the April 2009 Memorandum of Understanding” in his written report, but are

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unable to reach any further stipulation. Joint Stip., ECF No. 210. The court approves the

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stipulation and rules below on the remaining aspects of this motion.

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1. 2013 Regulatory Action
Plaintiff moves to exclude Mr. Hargett’s opinion testimony that the May 5, 2008

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Dividend would have been permitted under capital rules adopted by the FDIC in 2013 on the

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grounds that such evidence is irrelevant and not probative of defendants’ alleged negligence or

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self-serving actions. Defendants argue that, because one of the central issues in this case is

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whether defendants maintained the Bank at an “adequately capitalized” level, evidence the Bank

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would not have been restricted from issuing the dividend under the FDIC’s heightened

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capitalization ratio is relevant to that issue.
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The court GRANTS this motion to exclude Mr. Hargett’s opinion testimony that

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the May 5, 2008 dividend would have been permissible under regulations adopted by the FDIC in

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2013. The relevance of showing defendants’ conduct would have been permissible under a

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regulation enacted five years later, without retroactive effect, is substantially outweighed by the

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danger of prejudicing the plaintiffs and misleading the jury.

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2. Hypothetical Dividend Amounts

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Plaintiff moves to exclude Mr. Hargett’s opinion testimony regarding alternative

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dividend amounts and their effect on the Bank’s capital ratios on the grounds that these

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hypothetical scenarios bear no connection to the factual record and were not considered by

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defendants when they authorized the May 5, 2008 dividend. Defendants argue these hypothetical

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scenarios will provide the jury with helpful reference points to determine whether defendants

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maintained the Bank at an “adequately capitalized” level.

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The court DENIES this motion to exclude Mr. Hargett’s opinion testimony

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regarding alternative dividend amounts. The court finds that, assuming the proper foundation is

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laid, the proposed hypotheticals could provide the jury with context to assist them in determining

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whether defendants acted negligently in authorizing the dividend, and if so, to what degree. See

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United States v. Latysheva, 162 Fed. App’x 720, 726 (9th Cir. 2006) (finding district court did not

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abuse its discretion by allowing expert testimony in response to hypothetical questions that

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assumed facts sufficiently placed into evidence); Taylor v. Burlington Northern R. Co.¸787 F.2d

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1309 1317 (9th Cir. 1986) (“the form of a hypothetical question is left to the broad discretion of

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the trial court”) (citation omitted); see also United States v. Romo, 413 F.3d 1044, 1050 (9th Cir.

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2005) (witness's response to a hypothetical question based on experience, was a classic example

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of expert testimony).

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3.

Regulators’ Attitudes and Practices
Plaintiff moves to exclude Mr. Hargett’s opinion testimony regarding the opinions

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and attitudes various federal bank regulators had regarding, among other things, potential asset

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growth at multiple banks. Plaintiff claims Mr. Hargett lacks any expertise to offer these opinions,

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that his opinions regarding any reports of examination issued after the May 5, 2008 dividend are

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not based on any expert methodology, and that these opinions are irrelevant.

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As noted, defendants did not articulate any opposition to the exclusion of this topic

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in their opposition motion, nor have they now provided any supplemental briefing as to why these

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opinions should not be excluded. The court GRANTS this motion, as unopposed.

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4. The Bank’s Post 2008 Liquidity

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Plaintiff moves to exclude Mr. Hargett’s opinion testimony regarding the Bank’s

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liquidity beyond May 31, 2008 on the grounds that this opinion was not adequately disclosed in

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his expert report, nor is it based on any proven methodology.

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Here again, defendants did not oppose the exclusion of this testimony in their

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opposition motion, nor have they provided any supplemental briefing. The court GRANTS this

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motion, as unopposed.

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5. Impact of the Market on Bank Failures

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Plaintiff moves to exclude Mr. Hargett’s opinion testimony regarding the nature or

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timing of the economic decline and its impact on banks between 2008 and 2010. Plaintiff argues

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Mr. Hargett’s testimony on this issue is inadmissible because he performed no analysis to

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substantiate his opinion, he draws no causal connection to the bank failures referenced in his

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report, and his report did not disclose any opinion regarding when real estate or financial markets

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declined.

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Here as well, the court GRANTS this motion as unopposed.
6. The Bank’s Financial Data from 2002 to 2007
Plaintiff moves to exclude Mr. Hargett’s compilation of the Bank’s financial

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information for a seven-year period ending December 31, 2007, on the grounds that he offers no

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qualitative opinion about what the data indicates regarding defendants’ supervision of the Bank.

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Defendants argue this information is helpful to the jury because it provides context for

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defendants’ assessment of the Bank’s capital needs. Plaintiff does not challenge the accuracy of

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the compilation.

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The court DENIES this motion to exclude the Bank’s financial data from 2002 to

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2007. The court is persuaded that the compilation prepared by Mr. Hargett, in and of itself, is

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relevant as background information regarding the Bank and the context surrounding defendants’

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decision to authorize the May 5, 2008 dividend.

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7. Calculations of Net Income and Retained Earnings

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Plaintiff moves to exclude Mr. Hargett’s opinion that the May 5, 2008 dividend

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conformed to California Corporations Code § 316 by not exceeding retained earnings as of March

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31, 2008 or net income less dividends over the preceding three years. Plaintiff argues its claims

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for negligence, gross negligence, and breach of fiduciary duties are grounded in defendants’ lack

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of diligence and disregard of prevailing economic conditions, not whether the May 5, 2008

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dividend satisfied § 316 and other provisions of the California Corporations Code. Defendants

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argue their consultation with the Bank’s outside accounting firm to ensure that the dividend

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complied with § 316 is evidence of defendants’ exercise of care.

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The court DENIES this motion to exclude calculations of net income and retained

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earnings, with clarification. The court has already ruled that a director may be negligent and

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therefore liable under California Corporations Code § 309, even if he or she complied with the

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specific statutes defining impermissible dividends. Order July 27, 2015, ECF No. 86 at 12.

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However, the court will allow defendants to offer evidence that might be used to argue

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compliance with § 316 and, therefore, defendants’ exercise of due care. The court will not allow

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Mr. Hargett to offer a legal conclusion. The court also will be prepared to offer a limiting

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instruction at the appropriate time, clarifying that compliance with the statute, if proven, is not

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determinative of the question of defendants’ liability stemming from the authorization of the May

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5, 2008 dividend.

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III.

CONCLUSION
The parties’ motions in limine are resolved to the extent set forth above. This

order resolves ECF Nos. 158, 161, 165 and 167.
SO ORDERED.
DATED: October 28, 2016.

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UNITED STATES DISTRICT JUDGE

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