The Federal Deposit Insurance Corporation v. Belongia Shapiro & Franklin, LLP

Filing 20

MEMORANDUM Opinion and Order, Signed by the Honorable Matthew F. Kennelly on 11/19/2012. (ea, )

IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION

FEDERAL DEPOSIT INSURANCE
CORP., as receiver of Citizens Bank
and Trust Co. of Chicago,
Plaintiff,
vs.
BELONGIA SHAPIRO & FRANKLIN, LLP,
Defendant.

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Case No. 12 C 2889

MEMORANDUM OPINION AND ORDER
MATTHEW F. KENNELLY, District Judge:
The Federal Deposit Insurance Corporation (FDIC), in its capacity as receiver for
a failed bank, Citizens Bank and Trust Company of Chicago (Citizens), has petitioned
the Court to enforce an administrative subpoena issued to a law firm that represented
the bank, Belongia, Shapiro & Franklin, LLP (BSF). For the reasons stated below, the
Court grants the FDIC’s petition in part and denies it in part.
Facts
In April 2010, the Illinois Department of Financial and Professional Regulation
closed Citizens after determining that the bank was operating in an unsafe and unsound
condition due to its poor asset quality and weak management. The FDIC was then
appointed as receiver of Citizens. As receiver, the FDIC is authorized to take over the
failed institution’s assets, preserve and conserve those assets, and collect any money
due to the institution. 12 U.S.C. § 1821(d)(2)(B)(i). In conjunction with the agency’s

authority as receiver to marshal the failed institution’s assets, it has the power to issue
administrative subpoenas. 12 U.S.C § 1821(d)(2)(I)(i).
In its capacity as receiver, the FDIC initiated an investigation into possible
wrongdoing by professionals that provided legal services to Citizens, including BSF. In
particular, the FDIC is investigating legal opinions in which BSF advised the bank to
indemnify or pay the legal fees of Citizens personnel in three lawsuits. The three
lawsuits are: Jennifer Farafas v. Citizens Bank & Trust Co. (“Farafas”); Stephen P.
Koppel v. Citizens Bank & Trust Co. (“Koppel”); and In the Matter of Robert Michael,
George Michael, individually and as institution affiliated parties of Citizens Bank and
Trust Co. (“In re Michael”). Citizens relied on BSF’s legal advice and ended up paying
almost $1 million in connection with the lawsuits.
The Farafas and Koppel matters were lawsuits against Citizens and certain of its
directors. In those matters, BSF provided legal advice to Citizens as an institution. In
re Michael was an administrative enforcement action by the FDIC in which it alleged
that Robert and George Michael, who were directors of Citizens, had participated in
unsound banking practices and sought to remove them from banking and impose civil
fines upon them. In that matter, BSF is alleged to have initially advised Citizens on the
issue of the Michaels’ legal fees. About a year later, BSF represented Robert and
George Michael in seeking reconsideration of an administrative law judge’s
recommendation to impose civil fines and remove them from banking.
The FDIC issued a subpoena duces tecum to BSF in September 2011 for all
documents and communications in its possession related to the Farafas, Koppel, and In
re Michael cases. Specifically, the FDIC requested: 1) professional liability insurance

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policies that may have been in effect for BSF’s benefit from January 1, 2000 to the
present; 2) documents sufficient to identify all claims filed or payments received under
any such insurance policy; 3) pleadings filed in administrative or judicial forums against
BSF; 4) documents referring or relating to the expectation of indemnification for any
potential liability with respect to BSF’s activities at Citizens Bank; 5) copies of all
litigation or settlement documents to which BSF is now or has been a party; 6) all
documents and communications concerning the Farafas lawsuit; 7) all documents and
communications concerning the Koppel lawsuit, and 8) all documents and
communications concerning the In re Michael proceeding. In requests 9-13, the FDIC
asked for all communications to or from Citizens Bank, Robert Michael, George
Michael, Nicholas Tanglis (another director of Citizens), and BSF concerning the
lawsuits referenced in requests 6-8. The FDIC has made clear in its filings in the
present matter that it is primarily concerned with the opinion letters that BSF issued in
connection with the three lawsuits and with documents and communications pertaining
to those opinion letters.
In response to the FDIC’s subpoena, BSF produced a letter containing BSF’s
legal opinion that Citizens should indemnify all Board members involved in the Farafas
case and documents related to the firm’s representation of Citizens and Robert Michael
in the Koppel case. BSF also produced pleadings, correspondence, and research
materials pertaining to Farafas, as well as pleadings, discovery documents,
invoices/receipts, notes, corporate information, and research materials pertaining to
Koppel. BSF asserted the attorney-client privilege over most of the documents related
to In re Michael.

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In conjunction with the filing of its response brief in the present subpoena
enforcement proceeding, BSF produced additional documents. These include e-mails
and attachments pertaining to the Farafas and Koppel cases. BSF also produced some
documents concerning In re Michael that it says are not subject to the work product or
attorney-client privileges. In addition, BSF provided a privilege log for e-mails and
attachments pertaining to In re Michael that BSF contends are subject to the work
product and/or attorney-client privilege.
BSF concedes that the FDIC now “stands in the shoes” of Citizens Bank and
thus holds all the rights and privileges that belonged to the bank previously, including
the bank’s attorney-client privilege relating to its communications with BSF. BSF
contends, however, that it is still entitled to withhold documents that are subject to the
Michaels’ attorney-client privilege.
BSF maintains that it has now produced all responsive documents concerning
the Farafas and Koppel matters and that it has appropriately withheld as privileged
documents regarding In re Michael. The FDIC contends that BSF’s document
production is not complete. First, the FDIC points out that aside from the production of
a single insurance policy, BSF did not address requests 1 through 5 in the subpoena.
Second, the FDIC says that the documents BSF has produced concerning Farafas and
Koppel consist mostly of “court pleadings and documents previously provided to the
FDIC” (Pl.’s Reply at 4) and that BSF has not produced documents that were created in
connection with the legal opinions that the FDIC has targeted. The FDIC notes in
particular that documents such as drafts of the legal opinions, research memoranda on
the issue of indemnification of bank directors, related correspondence, and attorney

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notes and analysis are missing from the records BSF has produced. The FDIC also
says that BSF has produced no documents and communications related to the legal
opinion it issued to Citizens in connection with In re Michael (indeed, BSF appears not
to even acknowledge that it issued an opinion regarding that matter). Finally, the FDIC
argues that the attorney-client privilege does not apply to documents relating to In re
Michael because of the joint-client exception and the common-interest doctrine. In its
reply, the FDIC asks the Court to: (a) order BSF to produce all documents responsive
to requests 1 through 5; (b) order BSF to produce all documents responsive to requests
6 through 8 or certify that it has already done so; and (c) if the Court determines the
Michaels’ attorney-client privilege applies, make a finding that the privilege log provided
by BSF is improper.
Discussion
1.

Requests 1 through 5
BSF did not address items 1 through 5 in its response brief. It has provided only

a single document to the FDIC in response to these requests, namely a single
malpractice insurance policy. It is conceivable that this is the only document that BSF
has that is responsive to these requests. If so, however, BSF must certify that is the
case. The Court directs BSF to comply in full with requests 1 through 5 or certify that it
has already done so.
2.

Requests 6 and 7
It appears to the Court that BSF’s production of documents concerning the

Farafas and Koppel matters may be incomplete. The primary focus of this aspect of the
FDIC’s subpoena consists of the legal opinions that BSF provided to Citizens in

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connection with these two cases. BSF has conceded that the FDIC holds the bank’s
attorney-client privilege with respect to the opinions that it issued in these three matters.
But although BSF emphasizes the quantity of documents it produced in response to
requests 6 and 7, it does not address the fact that it has produced no communications,
memos, or research relating to the preparation of the firm’s indemnification opinions.
Nor does BSF address the FDIC’s request for a certification.
Given this record, the Court can only conclude that further steps are required to
make certain that BSF has produced all documents it has that are responsive to
requests 6 and 7, including the related communications covered by requests 9 through
13. The Court therefore directs BSF to produce all documents responsive to these
requests, or if no additional documents exist, to certify that it has produced everything it
has that is responsive to these requests.
3.

Request 8
a.

The February 2009 legal opinion issued to Citizens

BSF likewise has failed to address the FDIC’s claim of incomplete production of
documents relating to the law firm’s opinion letter regarding payment of the legal fees
for the Michaels in the In re Michael matter. Indeed, as the Court noted earlier, BSF
does not appear to acknowledge that it issued a legal opinion concerning In re Michael.
The FDIC contends that BSF issued the legal opinion concerning In re Michael in
February 2009. Based on the record before the Court, at that time, BSF was
representing Citizens, not the individual officers. Thus any attorney-client or workproduct privilege that might have applied now belongs at this point to the FDIC, just as
is the case with regard to the Farafas and Koppel opinion letters. For this reason, the

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Court orders BSF to produce all documents related to this legal opinion, including the
related communications detailed in requests 9 through 13.
b.

Documents relating to BSF’s representation of the Michaels

As indicated earlier, In re Michael was an administrative enforcement action by
the FDIC in which it alleged that the Michaels had participated in unsound practices at
Citizens Bank, breached fiduciary duties to the bank, and disregarded the safety and
soundness of the bank. As indicated above, it appears that BSF initially gave legal
advice to Citizens, in February 2009, to pay the Michaels’ legal fees up to the amount of
$200,000. About a year later, in February 2010, BSF represented the Michaels on a
request to reconsider an administrative decision that was adverse to them. BSF has
asserted the work product and attorney-client privileges in connection with its work
representing the Michaels, contending that because the firm did not represent Citizens,
there is no corporate attorney-client privilege for the FDIC now to hold.
The FDIC argues in its reply brief that it is entitled to documents regarding BSF’s
2010 representation of the Michaels based on the joint-client exception to the attorneyclient privilege and the common interest doctrine. The joint-client exception applies
when a lawyer represents multiple clients who have a common interest, where there
were sufficient connections between the law firm and the third party in the course of
representation to give rise to the belief of joint representation. See FDIC v. Ogden
Corp., 202 F.3d 454, 461 (1st Cir. 2000) (Massachusetts law). The common interest
exception applies when an attorney acts for the common legal goals of two parties,
even if only one party has a formal representation agreement with the attorney. Waste
Mgmt., Inc. v. Int’l Surplus Lines Ins. Co., 144 Ill. 2d 178, 193-95, 579 N.E.2d 322, 328-

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29 (1991); Dexia Credit Local v. Rogan, 231 F.R.D. 287, 294-95 (N.D. Ill. 2005) (Illinois
law). In both of these situations, the privilege falls away when there is a dispute
between the two clients or the two parties with common interests that is within the scope
of the attorney’s representation. See, e.g., Dexia Credit Local, 231 F.R.D. at 295.
The FDIC has failed to establish the applicability of either exception. There is no
indication that BSF concurrently represented Citizens and the Michaels in the In re
Michaels matter. Rather, the record reflects that after BSF issued its legal opinion to
Citizens in February 2009 regarding payment of the Michaels’ legal fees, another law
firm represented the Michaels in the administrative proceeding. BSF did not get
involved again until a year later, and at that point it represented only the two individuals
– the bank does not appear to have been a party to the administrative proceeding. The
FDIC cites no authority to support the proposition that the joint-client or common interest
exceptions apply when a lawyer represents two clients not concurrently, but seriatim.
The FDIC appears to contend that Citizens’ payment of the Michaels’ legal fees
in the In re Michaels matter somehow entitles Citizens (and now the FDIC) to invade the
Michaels’ attorney-client privilege in that proceeding. The FDIC cites no authority for
this proposition. Arrangements in which a corporation indemnifies officers and other
personnel for legal fees are relatively common – as are arrangements in which, for
example, one relative pays another relative’s legal fees. There is no basis to conclude
that payment of legal fees alone – which is all the FDIC has shown – entitles the payor
to be privy to the client’s communications with his lawyer. The fact that Citizens might
have been persuaded that it was in its interest to pay the Michaels’ fees, or that the

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Michaels had been acting (in the underlying matters) in the bank’s interest, does not
change this.
The Michaels’ privileges extend, however, only to communications during the
course of their attorney-client relationship with BSF in connection with the In re Michaels
matter, which BSF says did not begin until February 2010. For this reason, the
communications that BSF has identified on its privilege log that predate its
representation of the individuals are not subject to their attorney-client or work product
privileges and therefore must be produced.
Finally, the Court rejects the FDIC’s contention that BSF’s privilege log does not
provide adequate descriptions of the documents to establish the applicability of the
privileges that BSF cites. The Court has reviewed the log, which is attached to the
FDIC’s reply as Exhibit 4. The Court finds the descriptions listed there sufficient with
respect to the documents that the Court has concluded BSF may withhold – specifically,
the documents relating to its representation of the Michaels as individuals in connection
with the motion for reconsideration in the In re Michaels administrative matter.
Conclusion
For the reasons stated above, the Court grants the FDIC’s petition to enforce the
subpoena in part and denies it in part. Respondent is directed to do the following within
twenty-one days of this order:
(a)

produce all documents responsive to requests 1 through 5 of the

subpoena or certify that it has already done so;

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(b)

produce all documents responsive to requests 6 and 7 of the subpoena

and requests 9 through 13 to the extent they relate to requests 6 and 7, or certify
that it has already done so; and
(c)

with regard to request 8 of the subpoena, produce all documents

responsive to the request relating to any legal opinion that respondent issued to
Citizens Bank concerning indemnification of the individual respondents in In re
Michaels, as well as documents responsive to requests 9 through 13 to the
extent they relate to that opinion.
The Court otherwise denies the FDIC’s petition.

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MATTHEW F. KENNELLY
United States District Judge
Date: November 19, 2012

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