Bank of America, National Association v. Wells Fargo Bank, N.A.
Filing
160
ORDER: Before the Court is Bank of America's motion to compel responses to Subpoena Duces Tecum and Subpoenas Ad Testificandum by non-party Spring Hill Capital Partners, LLC (dkts. 113 and 121 ). The Court finds the theories advanced by Bank of America to enforce these subpoenas are not persuasive and, therefore, sustains the objections to them by Spring Hill. Bank of America's motion is hereby denied. Signed by the Honorable Susan E. Cox on 8/12/2014. Mailed notice (np, )
IN THE UNITED STATES DISTRICT COURT FOR THE
NORTHERN DISTRICT OF ILLINOIS
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Plaintiff,
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v.
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LASALLE COMMERCIAL MORTGAGE )
SECURITIES, INC., SERIES 2006-MF4 )
TRUST, acting by and through its Master )
and Special Servicer, MIDLAND LOAN
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SERVICES, a division of PNC Bank,
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National Association and whose Trustee is )
WELLS FARGO BANK, N.A..,
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Defendants.
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BANK OF AMERICA, NATIONAL
ASSOCIATION, as successor by merger
to LASALLE BANK NATIONAL
ASSOCIATION,
Case No: 12 C 9612
District Judge John Z. Lee
Magistrate Judge Susan E. Cox
LASALLE COMMERCIAL MORTGAGE
SECURITIES, INC., SERIES 2006-MF4
TRUST, acting by and through its Master
And Special Servicer, MIDLAND LOAN
SERVICES, a division of PNC Bank,
National Association, and whose Trustee
is WELLS FARGO BANK, N.A.,
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Plaintiff,
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v.
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BANK OF AMERICA, NATIONAL
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ASSOCIATION, as successor in interest to )
LaSalle Bank National Association,
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Defendant.
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Case No: 13 C 5605
District Judge John Z. Lee
Magistrate Judge Susan E. Cox
(Consolidated with Case No.
12 C 09612 for Purposes of Discovery)
1
ORDER
Before the Court is Bank of America’s motion to compel responses to Subpoena Duces
Tecum and Subpoenas Ad Testificandum by non-party Spring Hill Capital Partners, LLC [dkts. 113
and 121]. The Court finds the theories advanced by Bank of America to enforce these subpoenas
are not persuasive and, therefore, sustains the objections to them by Spring Hill. Bank of
America’s motion is hereby denied.
STATEMENT
The two cases which give rise to the instant motion arise out of a dispute concerning the
sale and securitization of mortgage loans. The movant, Bank of America “(BOA”), is the successor
in interest to LaSalle Bank National Association (“LaSalle”), which is alleged to have breached
various representations and warranties contained in a Mortgage Loan Purchase Agreement
(“MLPA”). Under this agreement, executed in December 2006, LaSalle Bank agreed to sell a pool
of residential mortgages loans to LaSalle Commercial Mortgage Securities (“LaSalle
Commercial’). These parties, along with Midland Loan Services (“Midland”), as the Master
Servicer for these loans, and Wells Fargo Bank, as Trustee of the LaSalle Commercial Mortgage
Trust 2006-MF4 (the “Trust”), had entered into a separate Pooling and Servicing Agreement
(“PSA”). In that agreement the mortgage loans were transferred to the Trust, which then issued
certificates to investors, thereby securitizing the mortgage loans.
Whether BOA breached its warranties and representations in 2006 (when the transaction
closed) is at the heart of the two pending actions: one, an action by BOA that it did not, in fact, do
so, and one by Midland, in its capacity as Master Servicer, in which it claims BOA breached the
MLPA and demands that BOA repurchase all of the loans. (This Second Amended Complaint is
the subject of a pending motion to dismiss.)
2
About two months before the close of discovery in this case, BOA served several
subpoenas on Spring Hill Capital Partners, LLC. Although a non-party to the actions, Spring Hill
is not a stranger to this litigation. Spring Hill is the only certificate holder for the loans in question
and, unlike Midland who is the named plaintiff by virtue of its role as Master Servicer for the
Trust, Spring Hill is the party who will benefit if a material breach of the MLPA is established and
BOA has to repurchase the loans. Not surprisingly, then, Spring Hill, which acquired its interest in
the certificates in 2011, has closely monitored the instant litigation and undoubtedly communicated
with the plaintiff, Midland. (However, communications between these two entities about the
allegations of this lawsuit are not at issue in this motion.)
It is Spring Hill’s objection to the subpoenas that forms the basis of this dispute. BOA has
served three subpoenas ad testificandum and one subpoena duces tecum. After a round of
negotiation, BOA has narrowed the time frame of the subpoena to January 1, 2011 to the present.
The subject matters it seeks include non-privileged testimony/documents and internal
communications/analyses and its communications with parties other than Midland regarding:
1.
the quality or value of the MF4 Loans or Mortgaged Properties;
2.
La Salle’s origination, underwriting, appraisal, and/or closing practices generally
or with respect to MF4 Loans;
3.
sending the Repurchase Demand or commencing the Repurchase Action;
4.
allegations in the Repurchase Demand or Repurchase Action Complaint supporting
the alleged breaches of the representations and warranties in the MLPA;
5.
Spring Hill’s interpretation of the RW’s in the MLPA and the repurchase provisions
of the PSA and MLPA;
6.
the prices at which Spring Hill acquired, or the amounts paid by Spring Hill to
acquire, the MF4 Certificates;
7.
Spring Hill’s investigation, evaluation, analysis or due diligence with respect to its
investment in the MF Certificates; and
8.
Spring Hill’s evaluation of its actual or potential profits or losses in connection with
its investment in MF4 Certificates.
3
Spring Hill objects to producing any of this information, although it is apparently willing to
produce those documents that it reviewed prior to investing in the MF4 certificates and documents
it reviewed as part of its “investment surveillance.” The basis for the objection is that the
subpoenas place an undue burden on Spring Hill to comply because the information sought has
little to no relevance to the claims asserted in this case. Spring Hill argues that its decision to invest
in this transaction in 2011, as well as any of its internal analysis about the underlying loans either
before or after they purchased the securities, do not bear on the allegations Midland has made in
the Complaint, which charge that LaSalle breached several warranties and representations back in
2006 when it pooled these particular mortgage loans and sold them to LaSalle Commercial.
LaSalle Commercial then, in turn, transferred them to the Trust, which securitized the investment
by issuing certificates now held by Spring Hill. Spring Hill contends that its analysis of its
investment does not inform on the question of whether there was a breach at the time the
transaction closed, which it contends is the time frame relevant to the analysis. Accordingly, it
argues that the subpoenas place an undue burden on it to comply. 1
The Federal Rules of Civil Procedure provide that parties “may obtain discovery regarding
any nonprivileged matter that is relevant to any party’s claim or defense.” 2 Relevance is not
confined to evidence that is admissible, but allows discovery if it is “reasonably calculated to lead
to the discovery of admissible evidence. 3 Although this definition is expansive, it has its limits. As
the Comments to the Rules state, Rule 26 allows the court to “confine discovery to the claims and
defenses in the pleadings, and signals to the parties that they have no entitlement to discovery to
1
Although the instant motion is styled as a motion to compel, it is actually a motion to enforce a subpoena issued
under Rule 45 of the Federal Rules of Civil Procedure. Accordingly, the Court will construe Spring Hill’s objection as
a motion to quash the subpoenas in question.
2
Fed. R. Civ. P. 26(b)(1).
3
Id.
4
develop new claims or defenses that are not already identified in the pleadings.” 4 Thus, a court can
limit discovery to those matters raised in the pleadings. 5
But this dispute also is governed by Rule 45 because, regardless of its status as an investor
here, Spring Hill is indisputably a non-party. As many courts have held, that non-party status is a
significant factor to be considered in determining whether the burden imposed by a subpoena is
undue. 6 Thus, in determining whether the recipient of a subpoena is being subjected to “undue
burden,” the court considers a number of factors, including “the person’s status as a non-party, the
relevance of the discovery sought, the subpoenaing party’s need for the documents, the breadth of
the request, and the burden imposed on the subpoena.” 7
In this case, although Spring Hill also contends that the documents would be difficult for it
to access and would reveal proprietary information, its primary argument is that the information is
irrelevant because the issue of whether LaSalle breached representations and warranties will be
determined at the time of securitization (2006) and not when it acquired its investment in the
certificate (2011). 8 BOA does not dispute that the time frame to determine whether a breach
occurred under New York law is when the loans were securitized. Nonetheless, it offers a number
of theories as to why Spring Hill’s internal documents are relevant. BOA first argues “postclosing” information is relevant because the district judge here ordered Midland to produce its
post-closing loan servicing guidelines. But we do not read the ruling to say this. The narrow issue
before District Judge Lee in that discovery dispute was whether there was a basis under the PSA
for BOA to contend that Midland failed to mitigate its damages. Midland claimed that the
4
Fed. R. Civ. P. 26 (b), 2000 Amendment Committee’s Notes.
Murata Mg. Co., Ltd. v. Bet Fuse, 442 F.Supp.2d 934, 944-45 (N.D. Ill. 2006).
6
See, e.g., Robinson v. Morgan Stanley, No. 06 C 5158, 2010 WL 1005736 at *2-3 (N.D. Ill. March 17, 2011).
7
Parker v. Four Seasons Hotel, Ltd., 291 F.R.D. 181, 188 (N.D. Ill.2013), quoting last Atlantis Capital, LLC v. AGS
Specialist Partners, No. 04 C 0397, O5 C 5600, 05 C 5671, 2013 WL 182792 at *1 (N.D. Ill. Jan, 17, 2013).
8
See, e.g., Assured Guar. Mun. Corp. v. Flagstar Bank, FSB, 920 F.Supp.2d 475 509 (S.D.N.Y. 2013); see also,Wells
Fargo Bank, N.A. v. Bank of Am., N.A., No. 10 Civ. 9584 (JPO), 2013 WL 1285289, at *10-11 (S.D.N.Y. Mar. 28,
2013).
5
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Purchase Price remedy provided for in the PSA did not allow for a reduction based on proof that
Midland failed to service the loans in question consistent with its own obligations in the PSA. The
Court found that because Midland’s potential failure to service the loans as required by the PSA
could negatively impact the value of Purchase Price, its servicing of the loans in question was
relevant to the issue of damages. As the Court noted, “the timing of a purported breach is distinct
from the magnitude of damages that Bank of American would have to pay, once a breach is
proven.” This ruling, therefore, allows BOA to discover post-closing information from Midland
regarding its failure to mitigate damages as a loan servicer, but does not shed any light on whether
an investor, which obtained the loan certificates five years after the agreements were executed (and
when the alleged breach occurred), should produce documents concerning its analysis and
monitoring of the investment in question.
Of course, as BOA points out, courts frequently find a basis to permit post-closing
discovery between parties in a breach of contract suit and the Court agrees that a temporal line in
the sand is not appropriate if the discovery sought is likely to lead to admissible evidence. But
none of the cases cited by BOA in support of this very basic proposition create a basis for a finding
that the particular evidence it seeks here is relevant. In Cerabio LLC v. Wright Medical
Technology, the Seventh Circuit held that the pre-closing discussion between the parties to the
underlying contract at issue was relevant to the issue of what constituted a reasonable time for
contract and that post-closing conversations could be admitted to show the agreement had been
modified. 9 Spring Hill is neither a party to any of the agreements here nor have these defenses
been raised here. Shields Enterprises v. First Chicago Corporation, another case cited by BOA, is
also clearly distinguishable. 10 The former minority shareholder in a company (CBSI), which sold
9
410 F.3d 981 (7th Cir. 2004).
No. 86 C 10213, 1988 WL 142200 (N.D. Ill. Dec 28, 1988).
10
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computerized billing services for cellular telephone systems, sued the majority shareholders
alleging that they coerced him to sell his stock in CBSI at a grossly undervalued price when CBSI
was sold to Cincinnati Bell. 11 Documents relating to a third party cellular telephone billing service
also acquired by Bell were deemed relevant because that third party company’s value was used as
a benchmark when CBSI’s value was assessed. 12 Thus, even though Bell purchased the third party
after the transaction at issue in the litigation, the worth of that entity was an issue in the case. By
contrast, any valuation of Spring Hill’s own investment in the certificate five years after closing
has nothing to do with whether the alleged warranties and representations were breached at closing
or the value of the certificates at closing.
BOA makes a variety of different arguments about the relevance of this information. The
first, and superficially the most appealing, is that Spring Hill’s potential knowledge of the alleged
breach and failure to give prompt notice as defined by the operative agreement might support
BOA’s potential defense in this case. Indeed, the cases cited by BOA state that documents relevant
to this defense are discoverable in a repurchase case when the issue of prompt notice is raised as a
defense. The cases it cites clearly hold that such post-closing analyses are relevant when done by a
party to the agreement or its agent. 13 The Court would have no difficulty finding that Midland’s
own analyses might be relevant here. But Spring Hill has not brought this action. Assuming that
there is information in Spring Hill’s possession relevant to this defense, such information could not
be asserted as a defense against Midland unless Midland had knowledge of it. This Court assumes
that BOA has not been prevented from thoroughly exploring this topic with Midland, including
11
Shields Enterprises, No. 86 C 10213, 1988 WL 142200 at *1.
Id. at 4.
13
See Bank of N.Y. Mellon Tr. Co., Nat’l Ass’n v. Morgan Stanley Mortg. Cap., Inc., No. 11 C 0505, 2013 WL
3146824 at 22 (S.D.N.Y., June 19, 2013)(reopening discovery to allow the plaintiff trustee to disclose communications
that touched on the subject of defendant’s alleged breach); see also Mastr. Adjustable Rate Mortgs, Tr. 2006-OA2 v.
UBS Real Est. Sec. Inc., 2014 WL 25709 (S.D.N.Y., Jan. 2, 2014)(requiring the defendant to produce certain postclosing documents because they were created pursuant to the defendant’s contractual duty to review the loans).
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obtaining documents in its possession from Spring Hill which discuss these issues with Midland.
Moreover, the Notice provision in the PSA relied upon by BOA (2.03 (b)) for this defense
explicitly states that the failure to give such notice does not relieve BOA of its obligations to
repurchase under the MLPA. “Notwithstanding anything contained in this Agreement or the
Mortgage Loan Purchase Agreement, no delay in either the discovery a Defect or Breach or delay
on the part of any party to this Agreement in providing notice of such Defect or Breach shall
relieve the Mortgage Loan Seller of its obligation to repurchase if it is otherwise required to do so
under the Mortgage Loan Purchase Agreement and/or this Agreement.” 14
The second argument which BOA makes is that Spring Hill’s assessments of and
communications concerning the loans and LaSalle’s underwriting practices in general are relevant
to the issue of whether in fact they met “industry standards” or are consistent with the custom and
practice in the industry. But the issue framed in the Second Amended Complaint is not whether
LaSalle’s loan programs met “industry standards” but, whether, at the time that the securitization
occurred,
LaSalle
breached
specific
representations
and
warranties.
Spring
Hill’s
analyses/monitoring of its own investment five years later do not inform on this question. And the
cases that BOA cites in support of this argument are clearly distinguishable from the case at bar. 15
The same can be said of BOA’s third contention which is that it is entitled to know what
Spring Hill believes different terms in the agreements mean. BOA does not cite a specific section
of the operative agreements, which it contends are ambiguous and about which discovery
14
Pooling and Servicing Agreement §2.03 (b), BOA Mt. to Compel, dkt. 113-5.
Abrams v. Van Kampen Funds, Inc., No. 01 C 7538, 2005 WL 88973 at *21 (N.D. Ill., Jan. 13, 2005) (addressing
motions in limine in a securities fraud action, where defendant sought to exclude from evidence criticism of its
valuation procedures done by the SEC, the regulatory agency charged with monitoring the defendant); see also Preis v.
New Eng. Life Ins. Co., No. 07 C 582, 2009 WL 1530994 (W.D. LA, May 28, 2009)(evaluating an affidavit in support
of a motion for summary judgment from plaintiff’s insurance broker regarding the insurance company’s intent to
honor the original underwriting commitment based on his history of working with the company); see also Western
Ind., Inc. v. Newcor Canada Ltd., 739 F.2d 1198 (7th Cir. 1984)(discussing trial evidence – whether to exclude
testimony – regarding trade custom in the welding business).
15
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concerning these terms’ meaning is necessary. But, accepting at face value that there will be
disputed contractual provisions, the notion that this entitles BOA to obtain discovery from a third
party that acquired the certificates several years after the documents were executed, rather than
from the parties that negotiated and closed this transaction, does not make sense. Spring Hill’s
post-closing opinions of what the agreements mean are no more relevant about what they actually
mean than those of any other potential investor or other player in the securitization game. Further,
its reasons for acquiring this investment and its opinions of its performance are not likely to lead to
admissible evidence about whether, five years earlier, BOA breached its warranties and
representations when these loans were securitized. BOA has not cited a single case in which a
party was permitted to seek this kind of lay opinion evidence from a non-party by way of
subpoena.
Nor are Spring Hill’s opinions of the allegations made by Midland in the Second
Amended Complaint - or its view of Midland’s decision to seek the Repurchase Demand - likely to
lead to admissible evidence which will prove or disprove those allegations or whether, as BOA
contends, Midland’s Repurchase Demand was inadequate. (BOA does not articulate this purported
defense other than to mention it in passing in its reply brief.) To the extent that Spring Hill
communicated its views on either subject to Midland (and Midland was influenced thereby), those
communications already have been explored in party discovery from Midland.
Finally, BOA makes a very general argument that the discovery is relevant to
“impeachment.” BOA claims that it is entitled to know whether Spring Hill’s opinions and views
about this transaction differ from Midland’s. Regarding the first contention, assuming that Spring
Hill’s internal analyses about the case differ from Midland’s, that contrary view does not impugn
Midland’s credibility unless Midland knew that view, agreed with it and filed the lawsuit anyway.
9
In that case, documents and testimony obtained from Midland would reveal this. Spring Hill’s
credibility as the investor five years after the alleged breach of warranties occurred is not at issue
in this case. BOA has not suggested that Midland possessed an improper motive for the lawsuit. 16
In conclusion, the theories advanced by BOA to enforce these subpoenas are not persuasive
and the Court sustains the objections to them by Spring Hill. The Court notes, however, that an
answer and affirmative defenses to the Second Amended Complaint have not been filed. That
pleading may give rise to additional bases for relevance not currently before the Court.
ENTER:
DATED: August 12, 2014
/s/ Susan E. Cox___________
Susan E. Cox
United States Magistrate Judge
16
In the only case cited by BOA in support of a subpoena aimed at obtaining information about the motive of the law
suit from a third party, the defendants specifically alleged that the plaintiffs had brought the action in bad faith to
revoke defendants charter to form a new union conference, which would benefit the third parties to whom the
subpoenas were directed. See Int’l Brotherhood of Teamster v. Eastern Conf. of Teamsters et al., 162 F.R.D. 25
(S.D.N.Y. 1995). There is no such contention here. BOA has not articulated any specific reason to believe this action
was brought in bad faith or motivated by Spring Hill’s bad faith.
10
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