Federal Deposit Insurance Corporation v The Coleman Law Firm et al
Filing
85
MEMORANDUM Opinion and Order Signed by the Honorable Arlander Keys on 10/8/2013. Mailed notice(ac, )
IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
FEDERAL DEPOSIT INSURANCE
CORPORATION, as receiver for
GEORGE WASHINGTON SAVINGS
BANK,
Plaintiff,
v
THE COLEMAN LAW FIRM and
KEVIN FLYNN & ASSOCIATES,
Defendants.
)
)
) No. 11 cv 8823
)
) Judge Thomas M. Durkin
)
) Magistrate Judge Arlander Keys
)
)
)
)
)
MEMORANDUM OPINION AND ORDER
Pending before the Court is Plaintiff Federal Deposit
Insurance Corporation as Receiver for George Washington Savings
Bank’s (“FDIC-R”) motion for protective order [#70] and motion
for entry of confidentiality order [#67].
Background1
The FDIC-R, as receiver of George Washington Savings Bank
(“GWSB”), sued to recover payments made to The Coleman Law Firm
(“Coleman”) and Kevin Flynn & Associates (“Flynn”) (collectively
“Defendants”) pursuant to Defendants’ advance payment retainer
1
The applicable briefs to the motions discussed throughout this Memorandum
Opinion and Order are cited as follows: Plaintiff’s Motion for Entry of
Confidentiality Order [#67]: Conf. Mot.; Defendants’ Response in Opposition to
the Motion for Entry of Confidentiality Order [#79]: Conf. Resp.; Plaintiff’s
Reply in Opposition to Defendants’ Response to the Motion for Entry of
Confidentiality Order [#81]: Conf. Reply; Plaintiff’s Memorandum in Support of
the Motion for Protective Order [#72]: Pro. Or. Mem.; Defendants’ Response in
Opposition to Plaintiff’s Motion for Protective Order [#80]: Pro. Or. Resp.;
Plaintiff’s Reply in Opposition to Defendants’ Response to the Motion for
Protective Order [#82]: Pro. Or. Reply.
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agreements with certain former officers and directors of GWSB,
alleging that those payments violated 12 U.S.C. § 1828(k)(3)
(“Section 1828(k)(3)”). In relevant part, Section 1828(k)(3)
provides:
No insured depository institution . . . may prepay . . .
legal expense of any institution-affiliated party if such
payment is made –
(A)
in contemplation of the insolvency of such institution
or . . . after the commission of an act of insolvency;
and
(B)
with a view to, or has the result of –
(i)
preventing the proper application of the assets of the
institution to creditors; or
(ii) preferring one creditor over another.
12 U.S.C. § 1828(k)(3).
The Defendants are law firms who currently represent various
former officers and directors of GWSB (collectively, “clients”)
with respect to all matters arising out of the clients’ roles as
former officers and directors of GWSB.
The District Court has ruled on Defendants’ motion to
dismiss [#26] and Plaintiff’s motion for judgement on the
pleadings [#60]. The issue remaining in this case is whether GWSB
made the challenged prepayments “in contemplation of insolvency.”
[#60, p. 8]. In its ruling on the motion for judgement on the
pleadings, the District Court noted that the parties dispute “the
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details of the interactions between FDIC Corporate (“FDIC-C”) and
the Bank in the months leading up to the Bank’s failure.” [#60,
p. 5].
Plaintiff’s Motion for a Protective Order
Plaintiff argues that the discovery propounded by Defendants
improperly disregards the District Court’s prior rulings and
seeks production of documents and information that have no
bearing on the remaining issue before the Court. Plaintiff FDIC-R
requests that the Court enter an order: (i) prohibiting
Defendants from propounding and/or pursuing discovery into
matters rendered irrelevant and/or immaterial by prior rulings in
this cause; and (ii) striking Defendants pending discovery
regarding such matters, thereby relieving FDIC-R of any duty to
respond to discovery regarding irrelevant and/or immaterial
matters. The Court declines to make such a global ruling
regarding the discovery, as it foresees that the parties will
continue to dispute the meaning of such a ruling. Therefore, the
Court addresses Plaintiff’s specific objections to Defendants’
discovery requests in turn below.
Time Frame
GWSB made the challenged prepayments to Defendants Coleman
and Flynn on November 20, 2009 and December 2, 2009,
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respectively. Defendants’ document requests and interrogatories
request production of documents and information from November 1,
2007 forward. Plaintiff argues that this time frame is overly
broad and requests that discovery be limited to 6 months prior to
the challenged prepayments. Plaintiff argues that the events
occurring after GWSB made the challenged prepayments are not
relevant to whether GWSB, at the time it made the prepayments,
knew or should have known it soon would be unable to pay its
debts and placed into receivership. Pro. Or. Mem. at p. 6.
Defendants argue that the FDIC-R’s attempt to limit
discovery to the six-month time frame before the payments and
foreclose discovery from the FDIC-R itself should be rejected on
the merits. Pro. Or. Resp. at p. 6. Defendants argue that
“Evidence about GWSB’s financial condition and how it was
operating in the months preceding receivership is clearly
relevant to the issue of what its directors knew or should have
known and whether suspension of ordinary operations was imminent
on December 2, 2009.” Id. at p. 7. They also argue that “such
information does not become any less relevant to the objective
component of the test merely because the documents reflecting it
were not created until after the receivership began.” Id.
Defendants request discovery for a time period from November,
4
2007 – two years before the month in which advance payment
retainer was paid -until the present.
As the clients’ contemplation of insolvency is an unresolved
issue in this case, the financial condition of the bank is
relevant to this issue, and thus, the information and documents
regarding this issue are discoverable. However, the Court limits
these requests to one year prior to the challenged prepayment, so
information and documents as of November, 2008 are to be
produced. In addition, in an abundance of caution, given the wide
scope of discovery, Plaintiff is also to produce documents and
information concerning the financial condition of GWSB up until
the date of the receivership, February 19, 2010, given other
limitations discussed below. The Court understands Plaintiff’s
argument that these documents would not have been considered by
the directors and officers of GWSB in contemplation of
insolvency, but Defendants argue that these documents include
data and information that the directors and officers had prior to
the prepayments.
Documents and Information Originating from FDIC-R
Defendants’ document requests and interrogatories request
production of documents and information originated by FDIC-R.
Plaintiff argues that FDIC-R did not come into existence until
February 19, 2010, the day GWSB was seized, closed and placed
5
into receivership, which date was approximately three months
after GWSB made the challenged prepayments to Defendants Coleman
and Flynn. Therefore, Plaintiff argues that any documents or
information originated by the FDIC-R are irrelevant and should
not be produced, since they would not have any bearing on what
GWSB was contemplating when it made the November 20, 2009 and
December 2, 2009 prepayments to Defendants. Therefore, Plaintiff
requests that this Court enter an order prohibiting Defendants
from seeking documents and information originated by FDIC-R. As
discussed above, documents regarding the financial condition
prior to February 19, 2010 are to be produced.
However,
Defendants do not make a strong argument that the documents after
that date, including those originating from the FDIC-R, would be
relevant to the thought process of the officers and directors of
GWSB in making the prepayments. As Plaintiff stated, “Internal
communications and analysis of bank financials by parties other
than GWSB’s directors and officers – which GWSB’s directors and
officers did not have either before or after authorizing the
challenged prepayments – is not relevant to show what they were
contemplating when they authorized the challenged prepayments.”
Pro. Or. Reply at p. 11. The Court agrees.
Documents and Information originating from FDIC-C
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Plaintiff argues that, since the issue left to be determined
is whether GWSB made the challenged prepayments in contemplation
of insolvency, documents and information GWSB’s directors and
officers were never aware of or became aware of only after GWSB
made the November 20, 2009 and December 2, 2009 prepayments to
Defendants have no bearing on the issue before this Court and
thus should not be discoverable. Therefore, Plaintiff requests
that the Court prohibit Defendants from seeking documents and
information regarding: (i) communications between FDIC and IDFPR
regarding matters other than meetings with GWSB prior to December
2, 2009 (see e.g., Ex. E No. 9; Ex. F No. 7); and (ii) FDIC-C’s
and FDIC-R’s internal files regarding matters other than meetings
with GWSB prior to December 2, 2009 (see e.g., Pro. Or. Mem. at
Ex. E Nos. 10-13, 41-42, 69 and 70; Ex. F No. 7).
In response, Defendants argue that “nothing is more relevant
to the financial condition of GWSB and what its directors and
officers should be charged with knowing/contemplating than what
GWSB’s regulators were discussing or analyzing with respect to
those very issues.” Pro. Or. Resp. at pp. 12-13. The Court
disagrees. If the officers and directors did not know what was
being contemplated by the FDIC-C regarding the condition of GWSB,
then that information is not relevant to the issue of their
contemplation, and thus not discoverable.
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Irrelevant or Immaterial Matters
Plaintiff objects to many other discovery requests as
irrelevant or immaterial, because they are outside the scope of
contemplation of insolvency. Defendants respond that they will
have to defend their clients’ actual and constructive knowledge
of GWSB’s financial condition, operations and whether suspension
of its regular business was imminent, and thus need this
information. Pro. Or. Resp. at p. 2-3. Defendants argue that
GWSB’s actual financial condition in the months leading up to the
receivership is the best source of information as to what the
directors and officers knew or should have known and been
contemplating. Pro. Or. Resp. at pp. 8-9.
First, Plaintiff argues that the Court should strike
Defendants’ demands for documents and information regarding: (i)
GWSB’s actual inability to satisfy its financial obligations to
creditors or depositors as they came due (see e.g., Pro. Or. Mem.
at Ex. E at Nos. 5, 14-17 and 33-38; Ex. F at No. 7); and (ii)
GWSB’s actual liabilities, deposits, accounts payable and assets
(see Pro. Or. Mem. at Ex. E at Nos. 18-32), as these documents
and information are not material to the unresolved issue in this
case of contemplation of insolvency. The Court will allow these
discovery requests limited to the dates set forth above –
November 2008 through February 19, 2010.
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Next, Plaintiff requests that this Court strike Defendants’
demands for documents and information regarding GWSB’s efforts to
raise capital in response to the IDFPR’s December 4, 2009 Cease
and Desist Order. See e.g., Pro. Or. Mem. at Ex. E at No. 43 (See
Doc. Req. Nos. 1-2, 4-8, 10, 41, 43-45, 60-65; Coleman Interrog.
Nos. 4-5, 8-9, 11, 18; Flynn Interrog. Nos. 3, 5.). Plaintiff
argues that the Cease and Desist Order post-dated GWSB’s
prepayments to Defendants Coleman and Flynn and, therefore, had
no impact on what GWSB was contemplating when it made those
prepayments, and accordingly, GWSB’s subsequent response to the
Cease and Desist Order, which is even farther removed from the
issue before this Court, is clearly irrelevant. The Court agrees.
Defendants’ demands for documents and information regarding
GWSB’s efforts to raise capital in response to the IDFPR’s
December 4, 2009 Cease and Desist Order are stricken.
Plaintiff also requests that the Court strike Defendants’
demands for documents and information regarding: (i) creditor
and/or depositor demands for payment following GWSB’s closure and
payments made as a result of such demands or GWSB’s closure (see
e.g., Pro. Or. Mem. at Ex. E at Nos. 46-48; Ex. F at Nos. 12 and
13); and (ii) amounts paid or received pursuant to the February
19, 2010 Purchase and Assumption Agreement with First Merit Bank,
N.A. See Pro. Or. Mem. at Ex. E at No. 49; Ex. F at No. 15. The
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Court finds this information irrelevant to the unresolved issue
in this case and strikes these discovery requests.
Plaintiff requests that the Court strike Defendants’ demands
for documents and information regarding legal services Defendants
provided to the directors and officers of GWSB. See e.g., Pro.
Or. Mem. at Ex. E at No. 50. Plaintiff argues that the nature of
such services clearly has no bearing on whether GWSB made the
challenged prepayments in contemplation of insolvency. Defendants
respond that the information will go to their intent in hiring
Coleman and Flynn. The Court will allow these discovery requests.
Plaintiff is to answer.
Plaintiff requests that the Court strike Defendants’ demands
for documents and information regarding requests that the FDIC
approved: (i) payments banks other than GWSB made to Defendant
Coleman; (ii) advance payment retainer agreements involving banks
other than GWSB; and (iii) payments for legal services provided
by persons other than the Defendants. See e.g., Pro. Or. Mem. at
Ex. E at Nos. 51-54; Ex. F at Nos. 14 and 20. Plaintiff argues
that the FDIC’s approval (or disapproval) relative to such
matters plainly has no bearing on the issue at hand.
Defendants respond that Plaintiff’s argument ignores the
“ought to have known” component of the “in contemplation of
insolvency” test as evidence that the FDIC approves payments by
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“critically undercapitalized” banks is certainly relevant to
whether GWSB’s officers and directors should have been
contemplating insolvency based on GWSB’s “critically
undercapitalized” financial condition. Pro. Or. Resp. at p. 12.
In its reply brief, Plaintiff points to previous decisions in
this case in which the Court has already corrected Defendants on
their use of “undercapitalized” v. “insolvent,” and finding that
there are no equitable defenses to Section 1828(k)(3). Pro. Or.
Reply at pp. 9-10. The Court finds that Plaintiff should not have
to bear the burden and expense of engaging in discovery regarding
the approval of unrelated cases in which other banks received
approval of prepayments for legal services. Defendants do not
show how this information is relevant to this case.
Finally, Plaintiff argues that the Court should strike
Defendants’ demands for documents and information regarding
allegations of the Complaint that have no bearing on whether GWSB
made the challenged prepayments in contemplation of insolvency.
See e.g., Pro. Or. Mem. at Ex. E at Nos. 55-59 and 68-70; Pro.
Or. Mem. at Ex. F at Nos. 3, 16 and 17. As explained specifically
in Plaintiff’s reply brief on page 13, these specific requests
seek information that the Court has ruled on. This Court has
reviewed the previous rulings of the District Court and finds
that the information requested in these discovery requests has
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been dealt with by the Court. [#26 and #60].
Therefore, those
requests and interrogatories are stricken.
II.
Motion for Entry of Confidentiality Order
In the FDIC-R’s motion for confidentiality order, the FDIC-R
seeks entry of a confidentiality order pursuant to which
Defendants must turn over certain records they obtained from
their clients, each of whom is a former director and/or officer
of GWSB. The parties agree that discovery in this matter will
entail the disclosure of certain sensitive and proprietary
information and that a confidentiality order should be entered in
this case. The parties have agreed to all portions of the
proposed Confidentiality Order attached to the motion as exhibit
A, except paragraph 2. Defendants object to paragraph 2 to the
extent it seeks to compel the return of the copies of documents
in their possession.
In paragraph 2 of Plaintiff’s proposed confidentiality
order, Defendants must turn over to Plaintiff documents Coleman
and Flynn obtained from or through their clients, each of whom is
a former director and/or officer of GWSB, specifically “(i)
documents or any portion of a document that belonged to GWSB; and
(ii) documents that Coleman and Flynn’s client(s) acquired due to
his/her/their former role as a director and/or officer of GWSB
(collectively, “Bank Documents”).” Conf. Mot. at p. 2.
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Plaintiff
argues that these documents contain privileged information, and
pursuant to Section 1821(d)(2)(A) of the Federal Deposit
Insurance Act, these documents “belong exclusively to FDIC-R” and
were “improperly obtained.”
Conf. Reply at p. 1.
Plaintiff
argues that, upon the termination of their status as directors
and/or officers of GWSB, Coleman and Flynn’s clients had no right
to retain GWSB’s confidential documents or disclose GWSB’s
confidential documents to Coleman and Flynn or any other persons.
Conf. Mot. at p. 5. Pursuant to Section 1821 (d)(2)(A), on the
day the FDIC was appointed Receiver of GWSB (i.e., February 19,
2010), FDIC-R succeeded to, among other things:
(i) all rights, titles, powers, and privileges of the insured
depository institution, and of any stockholder, member,
accountholder, depositor, officer, or director of such
institution with respect to the institution and the assets of
the institution; and
(ii) title to the books, records, and assets of any previous
conservator or other legal custodian of such institution.
12 U.S.C. § 1821(d)(2)(A)
Defendants respond that “because all of the preexisting
documents were, in the Defendants’ view, responsive to one or
more of the FDIC’s document requests, the Defendants
appropriately produced all of those preexisting documents to the
FDIC and made others available for inspection and copying.” Conf.
Resp. at p. 2. Defendants argue that the Bank Documents that
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Plaintiff requests that they “relinquish control of” are
“essential to their defense” in this litigation. Id.
Defendants also argue that it would be a burden to give the
Bank Documents to the FDIC-R and request the relevant documents
back in discovery, and reason that, allowing the Defendants to
retain copies of such documents currently in their possession
under the terms of a protective order that requires safe-keeping
and return at the conclusion of this case, does no harm to the
FDIC’s ostensible rights. Conf. Resp. at p. 7. In the reply
brief, Plaintiff argues that most, if not all, of the disputed
documents have nothing to do with the limited issue remaining in
this case and that, “as former officers and directors of GWSB,
Defendants’ clients had fiduciary duties to GWSB, which precluded
them from retaining, copying or disclosing GWSB’s confidential
information.” Conf. Reply at pp. 2, 6. The Court does not find
Defendants’ arguments as a defense to Section 1821 of the Federal
Deposit Insurance Act. The Bank Documents are the property of
FDIC-R and should be returned.
Therefore, the Court will adopt
the proposed Confidentiality Order with Plaintiff’s version of
paragraph 2.
Defendants also assert that they are entitled to retain the
disputed GWSB Bank Documents, because they may need them to
persuade FDIC-R not to file a future lawsuit against their
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clients seeking damages wholly unrelated to the prepayments
challenged in this case. Conf. Resp. at pp. 7-8. This argument is
unpersuasive. The relevant documents in any future litigation can
be requested through the formal discovery process in that case.
Finally, Defendants argue that Plaintiff’s definition of
Bank Documents is ill-conceived and unworkable. The Court sees
this argument as a red herring, as Defendants are in the position
to know which documents their clients received while in their
position as officers and/or directors of GWSB and which documents
belong to GWSB. If after the Court enters the Confidentiality
Order, Defendants have valid questions regarding the status of a
specific document or group of documents as Bank Document or not,
the parties are to meet and confer regarding those specific
documents to determine if they should be turned over. The Court
reminds both sides that these communications should be had in
good faith and are not to be used to delay this litigation or
cause the other side any additional burden.
CONCLUSION
For the aforementioned reasons set forth, Plaintiff’s motion
for entry of the confidentiality order is granted, and
Plaintiff’s motion for protective order is granted in part and
denied in part as discussed above. Plaintiff is to respond to the
outstanding discovery requests addressed in this opinion within
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14 days. The Court will enter the Confidentiality Order and the
parties are to agree on a reasonable date for the turnover of the
Bank Documents. The parties should be prepared to inform the
Court as to the deadline for turnover of the Bank Documents at
the October 18, 2013 status hearing.
DATE: October 8, 2013
ENTER:
________________________
ARLANDER KEYS
United States Magistrate Judge
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