Consumer Financial Protection Bureau v. National Collegiate Master Student Loan Trust et al

Filing 181

MEMORANDUM ORDER regarding discovery dispute. All Withheld Documents dated September 18, 2017 and prior shall be produced on or before 5/31/2019. SEE MEMORANDUM ORDER FOR COMPLETE DETAILS. Signed by Judge Maryellen Noreika on 5/17/2019. (dlw)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF DELAWARE
CONSUMER FINANCIAL PROTECTION
BUREAU
Plaintiff,
v.
THE NATIONAL COLLEGIATE MASTER
STUDENT TRUST, et al.,
Defendant.

)
)
)
)
)
)
)
)
)
)
)

C.A. No. 17-1323 (MN)

MEMORANDUM ORDER
On April 4, 2019, the Court held a discovery teleconference, during which the Responding
Non-Parties 1 and McCarter & English, LLP (“McCarter”) argued that 1601 documents withheld
(“the Withheld Documents”) from intervenors on the basis of attorney-client privilege belonging
to the Trusts and work product immunity should be protected from discovery. At the conclusion
of that teleconference, and absent objection from the Responding Non-Parties and McCarter, the
Court ordered production of the Withheld Documents to Owner-Trustee Wilmington Trust
Corporation. The Court also asked for copies of the documents to be submitted in camera and
invited other intervenors to submit supplemental briefing relating to the fiduciary exception to the
attorney-client privilege and the work-product doctrine. The Court received submissions from:
the Objecting Noteholders (“Noteholders”); Ambac Assurance Corporation (“Ambac”); U.S. Bank
National Association (“U.S. Bank”), in its capacity as Indenture Trustee; and, GSS Data Services,
Inc. (“GSS”). (D.I. 162, 163, 164, & 165). Three of those submissions did not dispute that the

1

The Responding Non-Parties are: VCG Securities, LLC; VCG Owners Trust, NC Owners
LLC, NC Residual Owners Trust, Pathmark Associates, LLC, and CeCe & Co. Ltd., LCC.
(D.I. 147)

documents are privileged but each argued that the intervenor submitting the document is entitled
to the documents under the fiduciary exception. 2 Responding Non-Parties and McCarter disagree.
(D.I. 176, 177). For the reasons discussed below, the Court finds that certain of the Withheld
Documents should be produced to the Noteholders and Ambac, but should not be produced to
U.S. Bank.
The attorney-client privilege is intended to encourage “full and frank communication
between attorneys and their clients.” Upjohn Co. v. United States, 449 U.S. 383, 389, 101 S.Ct.
677, 66 L.Ed.2d 584 (1981). The privilege, however, is not absolute, and courts have found that
it “is to be strictly confined within the narrowest possible limits consistent with the logic of its
principle.” United States v. Aramony, 88 F.3d 1369, 1389 (4th Cir. 1996) (internal citations and
quotation marks omitted); United States v. McFadden & Co. P’ship, No. 88-2285, 1989 WL
47285, at *2 (W.D. Pa. Jan. 5, 1989) (quoting United States v. (Under Seal), 748 F.2d 871, 875
(4th Cir. 1984)). One such limit exists in the context of fiduciary relationships. “Rooted in the
common law of trusts, the fiduciary exception is based on the rationale that the benefit of any legal
advice obtained by a trustee regarding matters of trust administration runs to the beneficiaries.”
Solis v. Food Employers Labor Relations Ass’n, 644 F.3d 221, 226 (4th Cir. 2011). Consequently,
“trustees . . . cannot subordinate the fiduciary obligations owed to the beneficiaries to their own
private interests under the guise of attorney-client privilege.” Id. at 226-27 (quoting Riggs Nat’l
Bank of Washington, D.C. v. Zimmer, 355 A.2d 709, 714 (Del. Ch. 1976)).

2

GSS stated that it “takes no position at this point on the question of whether the ‘fiduciary
exception’ applies to the Administrator with respect to the Withheld Documents, or
whether the Administrator has any other basis to obtain the Withheld Documents” and thus
the Court will accept, at this time, that the documents may be withheld from GSS.
(D.I. 165).
2

The questions currently before the Court are (1) whether the intervenors seeking disclosure
are properly “beneficiaries” of the Defendant Trusts, and, if so, (2) whether they fall under the
fiduciary exception to attorney-client privilege.
Under Delaware law, “[f]or a party to be deemed a third-party beneficiary to a contract,
(i) the contracting parties must have been intended that the third party beneficiary benefit from the
contract, (ii) the benefit must have been intended as a gift or in satisfaction of a preexisting
obligation to that person, and (iii) the intent to benefit the third party must be a material part of the
parties’ purpose in entering the contract.” Arrowood Indem. Co. v. Hartford Fire Insu. Co.,
774 F. Supp. 2d 636, 658 (D. Del. 2011). One of the trust agreements submitted to the Court by
Responding Non-Parties 3 states that “[t]he purpose of the Trust is . . . [t]o acquire a pool of Student
Loans, to execute the Indenture and to issue the Notes.” (D.I. 177, Ex. 1 § 2.03(a)(i)). That
agreement, moreover, states “that for so long as any of the Notes are outstanding or any amounts
are owed to the Indenture Trustee or the Note Issuer, the Noteholders and the Note Issuer are third
party beneficiaries hereof.” (Id. § 14.04). Additionally, the “Indenture” submitted by Responding
Non-Parties informs that each Trust “hereby Grants to the Indenture Trustee . . . all the Issuer’s
right, title and interest in and to” all of the Trusts’ assets for the benefit of the Noteholders and
Ambac. (D.I. 177, Ex. 2 at 1-2). In light of the language in the documents governing the trusts
and indentures, and the fact that the notes remain outstanding, the Court finds that the Responding
Non-Parties’ argument that the Responding Non-Parties are the sole beneficiary is unavailing. To
the contrary, the Noteholders and Ambac are third-party beneficiaries of the Trusts. The Court,

3

The Court understands this agreement to be representative of the other agreements relevant
to the action.
3

however, does not find that U.S. Bank, as the Indenture Trustee, is a beneficiary of these Trusts,
and U.S. Bank makes no argument that this is the case. 4
As beneficiaries of the Trusts, the Court finds that the Noteholders and Ambac are entitled
to privileged communications and work product on behalf of the Trusts under the fiduciary
exception. In Riggs National Bank v. Zimmer, 355 A.2d 709 (Del. Ch. 1976) – which the United
States Supreme Court has called the “leading American case on the fiduciary exception,” see
United States v. Jicarilla Apache Nation, 564 U.S. 162, 171 (2011) – the Delaware Court of
Chancery held that beneficiaries of a trust are entitled to otherwise privileged materials prepared
for representatives of a trust in connection with matters of trust administration, and for which the
trustees had paid using trust assets. In determining whether the beneficiaries should have access
to privileged documents, the Court examined who stood as counsel’s “real clients.” Riggs, 355
A.2d at 712-13. The “real client” analysis requires the Court to determine whether (i) the content
of the advice was for the benefit of the trust, (ii) the advice was paid for with assets of the trust,
and (iii) no adversarial proceeding against trustees or trust representatives was pending, requiring
their own personal legal advice. See Wachtel v. Health Net, Inc., 482 F.3d 225, 232 (3d Cir. 2007)
(citing Riggs, 355 A.2d at 711). Here, Responding Non-Parties themselves allege that the legal
advice provided by Chaitman and McCarter was for the benefit of the Trusts, not the owners
themselves. (D.I. 147 at 1-2 (“The Trusts retained Chaitman, and through Chaitman, McCarter
and other law firms.”)). Moreover, the record shows that the legal advice was paid for by – or
payment has been sought from – the Trusts themselves, not Responding Non-Parties. (See e.g.,
D.I. 79 (McCarter Motion to Withdraw as Counsel) ¶ 2-3 (“Defendants retained [McCarter] to

4

Because U.S. Bank is not a beneficiary, Responding Non-Parties and McCarter may
properly withhold documents from U.S. Bank on the basis of a privilege belonging to the
Trusts.
4

represent Defendants in connection with the underlying investigation” and “Defendants apparently
have been unable to pay the substantial legal fees owed to [McCarter], despite agreement from
Defendants that such legal fees were incurred and are owed to Counsel.”). Thus, the Court finds
that the “real client” of Chaitman, McCarter, and any other firms engaged in the negotiation of the
Proposed Consent Judgment, was the Trusts themselves and therefore the beneficiaries thereof.
Though McCarter and the Responding Non-Parties argue that the Noteholders and Ambac
have not met the “good cause” criteria outlined in a Fifth Circuit case, that case, unlike the instant
one, addressed a corporation-shareholder situation. See Garner v. Wolfinbarger, 430 F.3d 1093,
1101-02 (5th Cir. 1970).
The Court finds that the Noteholders and Ambac, as third-party beneficiaries of the Trusts,
are entitled to those materials withheld from production on the basis of privileges belonging to the
Trusts. Because, however, the Court’s November 29, 2018 order bifurcated consideration of the
Proposed Consent Judgment (“PCJ”), and limited phase one thereof to the issues of “[w]hether the
law firm of McCarter & English had the authority to execute the Proposed Consent Judgment on
behalf of the Defendants under the Trust Related Agreements and applicable law” and “[w]hether
– authority aside – it was improper or (in violation of the Trust Related Agreements) for McCarter
& English to enter into the [PCJ]” (D.I. 99), the Court will limit the production of documents to
those that preceded the filing of this action and the PCJ on September 18, 2017.
THEREFORE, IT IS HEREBY ORDERED this 17th day of May 2019 that on or before
May 31, 2019, the Responding Non-Parties (as defined supra, n.1) and McCarter & English, LLP
shall produce all Withheld Documents dated September 18, 2017 and prior.

The Honorable Maryellen Noreika
United States District Judge

5