Federal Deposit Insurance Corporation v. Crowe Horwath LLP
Filing
113
MEMORANDUM Opinion and Order signed by the Honorable Edmond E. Chang on 6/25/2018: For the reasons discussed in the Opinion, Crowe's motion to compel 73 is granted in part and denied in part. 1. By 07/23/2018, the FDIC-R (and/or FDIC-C) must c onduct a relevancy review and identify and produce all documents authored by, or sent to or from Shirley Langford, Leslee Martin, and Jon Peterson, on the topics detailed in the Opinion. 2. By 07/23/2018, the FDIC-R must conduct a relevancy review of every document it obtained from a third-party during its pre-litigation investigation, excepting documents obtained from third-parties who have already produced or have agreed to produce all requested documents in response to Crowe's third-part y subpoenas. The details of the review and the deadline are subject to conferral between the FDIC-R and Crowe. 3. By 06/29/2018, the FDIC-R shall upload the unredacted deposition transcripts and the transcript of Owens' deposition under seal and ex parte, and highlight in yellow the parts that were redacted so the Court can conduct an in camera review. 4. By 07/13/2018, the FDIC-R shall file, under seal and ex parte, the settlement negotiations and communications leading up to the two settl ement agreements that have been provided to Crowe. 5. By 07/16/2018, the FDIC-R shall to produce to Crowe communications and documents related to potential claims against third parties that are not related to settlement, negotiations, or compromise t o the extent they exist, unless the FDIC-R believes that the records are protected by another privilege, in which case the FDIC-R must provide a privilege log to Crowe by the same deadline. In order to allow the parties to review this Opinion and confer as necessary, the status hearing of 06/25/2018 is reset to 07/10/2018 at 10:30 a.m. Again, any counsel may participate by phone; notify the courtroom deputy by 2 p.m. of the prior business day. Emailed notice(eec)
UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
FEDERAL DEPOSIT INSURANCE
CORPORATION, as Receiver for
Valley Bank,
Plaintiff,
v.
CROWE HORWATH LLP,
Defendant.
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No. 17 CV 04384
Judge Edmond E. Chang
MEMORANDUM OPINION AND ORDER
Plaintiff Federal Deposit Insurance Corporation (FDIC-R), as receiver for
Valley Bank (Valley), filed this lawsuit against Crowe Horwath LLP, alleging
accounting malpractice, gross negligence, and negligent misrepresentation.1 R. 1,
Compl.2 The claims arise out of Valley’s loss of around $21 million, allegedly caused
by Crowe’s malpractice in auditing the consolidated financial statements of Valley’s
holding company, River Valley Bancorp, Inc. (RVBI) in 2010 and 2011. Id. ¶ 1. The
parties are in the midst of fact discovery. See R. 69, 02/16/2018 Minute Entry. Crowe
has moved to compel four categories of documents from the FDIC-R: (1) all documents
from the FDIC, in its corporate capacity (FDIC-C), related to Valley Bank in the
FDIC-R’s possession, and to obtain all other documents related to Valley Bank in the
1This
Court has subject matter jurisdiction under 12 U.S.C. § 1819(b)(2)(A) (“[A]ll
suits of a civil nature at common law or in equity to which the [FDIC], in any capacity, is a
party shall be deemed to arise under the laws of the United States.”) and 28 U.S.C. § 1331.
2Citations to the record are noted as “R.” followed by the docket number and the page
or paragraph number.
FDIC-C’s possession, conduct a relevance review, and produce those that are relevant
to this case; (2) documents collected from third parties as part of the FDIC-R’s prelitigation investigation; (3) unredacted versions of administrative deposition
transcripts for all witnesses deposed as part of the FDIC-R’s pre-litigation
investigation; and (4) documents related to settlements or potential claims against
third parties in connection with losses incurred by Valley Bank or related entities. R.
73, Def.’s Mot. Compel at 1-2. The FDIC-R, as well as the FDIC-C and non-party
objectors William Gabelmann and Gabelmann & Associates, P.C. (the latter two will
be referred to collectively as Gabelmann), argue that the documents are protected by
various privileges and agency regulations. R. 93, Pl.’s Resp. Br.; R. 92, FDIC-C’s Resp.
Br.; R. 91, Gabelmann Resp. Br. For the reasons discussed below, Crowe’s motion to
compel is granted in part and denied in part.
I. Background
The FDIC-R brings accounting malpractice and negligence claims against
Crowe arising out of Crowe’s audits on the consolidated financial statements of Valley
Bank and its holding company, RVBI. Compl. at 21-25. Before Valley failed in 2014,
the FDIC-C and other regulators performed routine examinations of the bank. Id. ¶¶
17, 24. The FDIC-C regulators eventually discovered that Valley’s CEO had engaged
in a scheme between 2011 and 2013 to hide the bank’s true financial condition, which
caused Valley losses totaling around $21 million. Id. ¶¶ 1-3. After this scheme was
discovered, the Illinois Department of Financial and Professional Regulation closed
Valley in 2014 and appointed the FDIC-R as its receiver. Id. ¶¶ 8, 14. As receiver of
2
a failed bank, the FDIC-R has the power to sue in any court of law, and by operation
of law succeeded to all rights, titles, and privileges of Valley. Id. ¶ 8 (citing 12 U.S.C.
§§ 1819, 1821). In this role, the FDIC-R filed this lawsuit against Crowe. Id. The
Complaint alleges that Crowe was negligent in carrying out its audits and that it
improperly issued unqualified audit opinions on Valley’s financial statements for the
years 2010 and 2011. Id. ¶ 7.
The parties have engaged in extensive discovery, but have reached an impasse
on the four categories of documents listed above. With regard to the first category of
FDIC-C documents, Crowe sought FDIC-C documents that are in the possession,
custody, or control of the FDIC-R. R. 83, Exh. 6 at 4. When the FDIC-R refused to
produce the documents, Crowe sought them from the FDIC-C by subpoena under Rule
45, R. 83, Exh. 4, and pursuant to 12 C.F.R. § 309.6, R. 92, Exh. 1. The FDIC-C
identified five sub-categories of responsive documents: (1) communications between
Valley Bank and the FDIC-C; (2) “bank records obtained during the examination
process”; (3) documents relating to compliance and regulatory orders; (4) “internal
work papers and notes created by FDIC bank examiners”; and (5) “internal
communications within FDIC-C.” R. 83, Exh. 10 at 1. The FDIC-C produced
documents from sub-categories (1) through (3), so Crowe’s motion to compel applies
only to sub-categories (4) and (5). The FDIC-R and the FDIC-C contend that the
documents are protected by the bank examination privilege, and that the Court must
evaluate the FDIC-C’s assertion of the privilege under the Administrative Procedure
Act’s “arbitrary and capricious” standard. FDIC-C’s Resp. Br. at 8-10; Pl.’s Resp. Br.
3
at 2. As discussed below, the APA does not apply to Crowe’s requests, and although
the bank examination privilege applies to all of the documents in Category 1(4)-(5),
Crowe has shown good cause to override the privilege as to a further subset of the
documents.
The remaining three categories of documents are all documents obtained or
created as part of the FDIC-R’s investigation of potential claims arising out of Valley’s
failure: third-party documents, deposition transcripts, and settlement materials. R.
83, Def.’s Br. at 5-7. The FDIC-R argues that these documents are all protected by
12 C.F.R. § 308.147, Pl.’s Resp. Br. at 10, while Crowe contends that the Federal
Rules of Civil Procedure and the Mandatory Initial Discovery Pilot Project Standing
Order (Standing Order) override the regulation, Def.’s Br. at 15-17. Crowe is correct,
so the FDIC-R must file, under seal and ex parte, unredacted versions of the
deposition transcripts and certain settlement discussions sought by Crowe, so that
the Court may conduct an in camera review. On the third-party documents that the
FDIC-R obtained during its pre-litigation investigation, the FDIC-R must conduct a
relevance review and produce all relevant documents not already produced
independently by any third-party to Crowe. This includes Gabelmann’s documents,
because Iowa law controls his correspondence with Valley and its holding company,
RVBI, and Iowa’s accounting privilege contains an exception for court proceedings.
See Iowa Code § 542.17.
4
II. Standard of Review
Federal Rule of Civil Procedure 26(b)(1) states that “[p]arties may obtain
discovery regarding any nonprivileged matter that is relevant to any party’s claim or
defense and proportional to the needs of the case, considering the importance of the
issues at stake in the action, the amount in controversy, the parties’ relative access
to relevant information, the parties’ resources, the importance of the discovery in
resolving the issues, and whether the burden or expense of the proposed discovery
outweighs its likely benefit.” Requests for discovery are relevant if there is any
possibility that the information sought may be relevant to the subject matter of the
action. Rubin v. Islamic Republic of Iran, 349 F.Supp.2d 1108, 1111 (N.D. Ill. 2004).
A party claiming that otherwise discoverable information is privileged must
“expressly make
the
claim
and
describe
the
nature
of
the documents,
communications, or tangible things in a manner that will enable other parties to
assess the claim.” Fed. R. Civ. P. 26(b)(5)(A) (cleaned up);3 see also Fed. R. Civ. P.
45(e)(2)(A). This means that the burden rests upon the party objecting to disclosure
to show why the information is privileged. See Kodish v. Oakbrook Terrace Fire Prot.
Dist., 235 F.R.D. 447, 450 (N.D. Ill. 2006). Finally, district courts have broad
discretion when ruling on discovery-related issues, including motions to compel
brought under Rule 37(a). See Peals v. Terre Haute Police Dep’t, 535 F.3d 621, 629
(7th Cir. 2008); see also Fed. R. Civ. P. 37(a).
3This
opinion uses (cleaned up) to indicate that internal quotation marks, alterations,
and citations have been omitted from quotations. See, e.g., United States v. Reyes, 866 F.3d
316, 321 (5th Cir. 2017).
5
III. Analysis
As noted above, Crowe seeks four categories of documents from the FDIC-R
and/or third parties. The Court addresses each in turn.
A. Category 1: FDIC-C Documents
Crowe first contends that the FDIC-R should be compelled to produce all FDICC documents related to Valley in the FDIC-R’s possession, and to obtain all other
Valley-related documents in the FDIC-C’s possession, conduct a relevance review,
and produce all documents relevant to the case. Def.’s Br. at 8. The FDIC-C produced
the first three of five subcategories of documents, leaving two contested subcategories
subject to Crowe’s motion to compel: (4) “internal work papers and notes created by
FDIC bank examiners” and (5) “internal communications within the FDIC-C.” FDICC’s Resp. Br. at 2; R. 86, 04/19/2018 Minute Entry.
1. 12 U.S.C. § 1821(o)
Crowe argues that under 12 U.S.C. § 1821(o), the FDIC-R has legal
“possession” over these documents and thus is obligated under the Federal Rules of
Civil Procedure and the Standing Order to obtain them from the FDIC-C if necessary,
and to produce all relevant documents. Def.’s Br. at 8. Section 1821(o) generally
authorizes FDIC receivers to obtain FDIC-C records: “whenever the [FDIC] has been
appointed as receiver for an insured depository institution, the appropriate Federal
banking agency shall make available all supervisory records to the receiver which
may be used by the receiver in any manner the receiver determines to be
appropriate.” § 1821(o). Against this, both the FDIC-R and FDIC-C cite § 1821(t),
6
which provides that a covered agency, including the FDIC-C, does not waive any
privilege by transferring that information to another covered agency, including the
FDIC-R, meaning that the bank examination privilege still applies. The FDIC-R and
FDIC-C also argue that this Court should apply the APA’s “arbitrary and capricious”
standard to the FDIC-C’s decision to withhold the documents pursuant to the
privilege. Pl.’s Resp. Br. at 8-10; FDIC-C’s Br. at 10, 21.
But § 1821(t), which preserves applicable privileges, is irrelevant to the issue
at hand: Crowe does not contend that either FDIC entity has waived the bank
examination privilege (although Crowe does argue that it simply does not apply). R.
97, Def.’s Reply to FDIC at 2-3. So to the extent the FDIC-C actually did provide
documents to the FDIC-R, whether the bank examination privilege protects those
documents is analyzed the same way regardless of the FDIC-R’s possession of them.4
As to any documents within Category 1(4)-(5) that the FDIC-C has not provided
to the FDIC-R, Crowe’s argument premised on § 1821(o) is overbroad. It is true that
§ 1821(o) commands that federal banking agencies “shall make available all
supervisory records to the receiver.” But reading this section as Crowe proposes
would mean that any time the FDIC-R is a party to litigation, every document,
including internal correspondence and memoranda, of every federal banking agency
4Crowe
did not submit a Part 309 request to the FDIC-R, and neither FDIC entity
argues that any document in the FDIC-R’s possession is governed by the APA. So
discoverable records in the FDIC-R’s possession are subject to Rules 26(b) and 34. What’s
more, as discussed later in this Opinion, the Federal Rules of Civil Procedure trump agency
regulations, including § 309.6, so the FDIC-C’s claim of privilege over FDIC-C’s documents—
whether or not they are in the FDIC-R’s possession—is not subject to 5 U.S.C. § 706’s
arbitrary and capricious standard.
7
(not only the FDIC-C, but also the Office of the Comptroller of Currency, among
others), is no longer is protected by the comprehensive framework of the APA, but
rather is subject to discovery under the Federal Rules just the same as any document
belonging to each of the parties. It is one thing when the FDIC-R has exercised its
discretion and obtained or viewed an agency’s documents under § 1821(o). But it is
quite another to deem all banking-agency documents as in effect in the FDIC-R’s
possession even if the FDIC-R did not exercise its discretionary authority under
§ 1821(o).5 Indeed, that interpretation would essentially vanquish the FDIC-R’s
discretion under § 1821(o), a strange outcome in light of the provision’s grant of
discretion to the FDIC-R. This situation is far afield from the usual discovery disputes
in which a client, be it a client of an attorney or a patient of a doctor, “controls” the
attorney-client file or patient medical records. So to the extent that the FDIC-R has
not viewed or obtained any documents responsive to Category 1(4)-(5),6 they are not
5To
be sure, there are district court decisions holding that any federal agency
documents are considered to be in the FDIC-R’s possession under § 1821(o). See, e.g., F.D.I.C.
v. Berling, 2015 WL 3777408, at *2 (D. Colo. June 16, 2015); F.D.I.C. v. Bayer, 2015 WL
12830467, at *2 (M.D. Fla. Feb. 25, 2015); F.D.I.C. v. Dosland, 2014 WL 1347118, at *5 (N.D.
Iowa Apr. 4, 2014); F.D.I.C. v. Appleton, 2012 WL 12887400, at *6 (C.D. Cal. Aug. 27, 2012);
Resolution Tr. Corp. v. Deloitte & Touche, 145 F.R.D. 108, 111 (D. Colo. 1992); Comeau v.
Rupp, 810 F. Supp. 1127, 1166 (D. Kan. 1992). But those opinions are not binding, and no
Circuit courts have addressed the issue.
6The record is not completely clear on whether the FDIC-R has viewed or obtained all
responsive FDIC-C documents. The correspondence between Crowe and the FDIC entities
attached to the parties’ briefs suggests that the FDIC-R has all responsive documents in its
possession, or did at one point, which would be enough to consider the FDIC-R to have
exercised its discretion to “control” documents under § 1821 and make them subject to the
Standing Order or Rule 34. See R. 83, Exh. 10 at 1 (“The FDIC as Receiver for Valley Bank
(“FDIC-R”) reviewed a number of boxes of documents that were previously compiled by the
FDIC examiners as part of the agency’s supervision of Valley Bank. The boxes contained the
five categories of documents described in the FDIC-R’s Second Supplement to Mandatory
Initial Response to No. 3” including Category 1(4)-(5).); id., Exh. 7 at 2 (“Until recently,
[FDIC-R] had viewed a very limited number of FDIC-C documents. … Approximately two
8
subject to production pursuant to the Standing Order or any Rule 34 request Crowe
makes to the FDIC-R.
2. 12 C.F.R. § 309.6
Moving on, the next question is what to do about potentially responsive FDICC documents that the FDIC-R has neither viewed nor ever had in its possession. The
FDIC-C argues that its assertion of the bank examination privilege should be
evaluated under the APA, whereas Crowe says that the Federal Rules of Civil
Procedure apply. The Court agrees with Crowe that the Federal Rules govern.
The FDIC-C relies on Edwards v. U.S. Dep’t of Justice, 43 F.3d 312 (7th Cir.
1994), to argue that the APA governs when a litigant seeks to obtain documents from
a non-party federal government agency, even when the dispute is presented to the
Court in the form of a motion to compel. FDIC-C’s Br. at 8. But Edwards is
distinguishable in a key way: the case originated in state court, and the litigant
sought Department of Justice records pursuant to a state-court issued subpoena,
which the Department resisted pursuant to an agency regulation. Edwards, 43 F.3d
at 314. When the litigant moved to compel a response to the subpoena, the Justice
Department removed the case to federal court under 28 U.S.C. § 1442, so the federal
district court’s jurisdiction over enforcing the subpoena was derivative of the state
court’s jurisdiction. Id. The Seventh Circuit held that the Department had not waived
its sovereign immunity in state court, so the district court lacked “jurisdiction to
weeks ago, [FDIC-R] reviewed and obtained copies of certain additional examiner documents.
…”). But the parties’ briefs leave open the question that there may be at least some FDIC-C
documents that may be responsive that have never been in the FDIC-R’s possession. Def.’s
Br. at 8; FDIC-C’s Resp. Br. at 2.
9
compel the delivery of the [requested information] once the regulatory authority had
denied the request.” Id. at 317. Because the district court was barred from directly
enforcing the subpoena, the Seventh Circuit held that the proper course was to recast
the state court litigant’s motion to compel as an administrative request under the
APA, which meant that the APA’s “arbitrary and capricious” standard applied to the
agency’s decision to withhold the records. Id. at 314-15.
But the case at hand was originally filed in federal court, not state court, and
Crowe sought documents from the FDIC-C pursuant to a federal subpoena under
Rule 45.7 This Court has original jurisdiction over this case pursuant to 12 U.S.C.
§ 1819(b)(2)(A) and 28 U.S.C. § 1331, rather than derivative jurisdiction under
28 U.S.C. § 1442. So the holding in Edwards does not apply. There is a Circuit split
over how to treat Rule 45 subpoenas when they are directed at a federal agency. The
split centers on whether the APA’s general provision authorizing judicial review of
agency actions, 5 U.S.C. § 702, represents a waiver of sovereign immunity that is
limited to the arbitrary and capricious review found in § 706. Section 702 allows
persons who are aggrieved by agency action to seek judicial review, and the statute
opens the federal courthouse doors for injunctive relief: “An action in a court of the
United States seeking relief other than money damages and stating a claim that an
agency or an officer or employee thereof acted or failed to act in an official capacity …
shall not be dismissed nor relief therein be denied on the ground that it is against the
7Crowe
also issued a Rule 309 request, R. 92, Exh. 1, but simply because Crowe
covered its bases when attempting to obtain the information from the FDIC-C does not make
its Rule 45 subpoena moot.
10
United States … .” 5 U.S.C. § 702. There is nothing in § 702 that limits the waiver of
sovereign immunity to actions under § 706. Compare Linder v. Calero-Portocarrero,
251 F.3d 178, 180 (D.C. Cir. 2001) (holding that § 702 effectuates a waiver of
sovereign immunity as to Rule 45 subpoenas, so the Federal Rules apply); Exxon
Shipping Co. v. U.S. Dep’t of Interior, 34 F.3d 774, 778-89 (9th Cir. 1994) (holding
sovereign immunity is not a bar to compelling the testimony of non-party federal
officers under Rules 26 and 45, because Congress waived sovereign immunity as to
all actions that seek “relief other than money damages” in § 702) with COMSAT Corp.
v. Nat’l Sci. Found., 190 F.3d 269, 277 (4th Cir. 1999) (applying the APA’s arbitrary
and capricious standard to non-party federal agency’s refusal to comply with a Rule
45 subpoena, because § 702 is part of the APA); E.P.A. v. Gen. Elec. Co., 197 F.3d 592,
598 (2d Cir. 1999), opinion amended on reh’g, 212 F.3d 689 (2d Cir. 2000) (same);
Moore v. Armour Pharm. Co., 927 F.2d 1194, 1197 (11th Cir. 1991) (applying APA’s
arbitrary and capricious standard to Rule 45 subpoena served on non-party federal
agency without analyzing whether the agency had waived its sovereign immunity).
The Seventh Circuit has not specifically addressed the issue, but like the D.C.
and Ninth Circuits, has held that § 702 constitutes a waiver of sovereign immunity
over federal agencies and the waiver is not limited by 5 U.S.C. § 706 (which sets forth
the arbitrary and capricious standard) to actions brought under the APA. See
Michigan v. U.S. Army Corps of Engineers, 667 F.3d 765, 775 (7th Cir. 2011) (“[T]he
waiver in § 702 is not limited to claims brought pursuant to the review provisions
contained in the APA itself. The waiver applies when any federal statute authorizes
11
review of agency action, as well as in cases involving constitutional challenges and
other claims arising under federal law.”); see also Czerkies v. Dep’t of Labor, 73 F.3d
1435, 1438 (7th Cir. 1996) (en banc) (“The Administrative Procedure Act waives the
federal government’s sovereign immunity from actions seeking judicial review of
federal administrative decisions, provided the action is not one for ‘money
damages.’”). Seventh Circuit precedent is thus more in line with the decisions of the
D.C. Circuit and the Ninth Circuit than the other Circuits that have addressed the
issue. Because a refusal to comply with a subpoena under Rule 45 is not an action for
“money damages,” § 702 strips the FDIC-C of its sovereign immunity, thereby giving
federal courts the authority to enforce Rule 45 subpoenas served on federal agencies.
See Houston Bus. Journal, Inc. v. Office of Comptroller of Currency, U.S. Dep’t of
Treasury, 86 F.3d 1208, 1212 (D.C. Cir. 1996). That is why Edwards is different: the
state court subpoena there actually was quashed and was treated as nothing more
than a request to the federal agency, 43 F.3d at 316-17, whereas here the FDIC-C
faces a Rule 45 subpoena.8 Because this case originated in federal court, the FDIC-C
waived its sovereign immunity under 5 U.S.C. § 702. So this Court will review the
8It
is true that other decisions in this District have held that, under Edwards, district
courts should review discovery requests to non-party federal agencies under the APA
standard of review even when the case originated in federal court. See Estate of Belbachir v.
United States, 2010 WL 3239444, at *3 (N.D. Ill. Aug. 13, 2010) (relying on Edwards to review
non-party federal agency’s refusal to comply with subpoena issued in federal court under the
APA rather than the Federal Rules); Barnett v. Illinois State Bd., 2002 WL 1560013, at *1
n.1, *2 (N.D. Ill. July 2, 2002) (holding that it is irrelevant that Edwards did not consider
whether Rule 45 rather than the APA should apply because “the Edwards opinion is simply
too broadly worded to leave room for such factual nit-picking. Edwards unequivocally held
that a federal agency’s refusal to comply with a subpoena, at least when done ‘pursuant to
valid agency regulations,’ is to be reviewed under the APA.”). As discussed earlier, however,
the distinction between a state court subpoena and a Rule 45 subpoena distinguishes
Edwards.
12
FDIC-C’s refusal to comply with Crowe’s subpoena under the Federal Rules rather
than the APA.
3. Bank Examination Privilege
i. The Privilege Applies
Now that the standard of review is established, the Court must determine
whether the bank examination privilege9 applies to Category 1(4)-(5) of the FDIC-C’s
records. R. 83, Exh. 10 (letter from the FDIC-C asserting the bank examination
privilege over “internal work papers and notes created by FDIC bank examiners” and
“internal communications within the FDIC-C.”). The bank examination privilege
“shields from discovery only agency opinions or recommendations; it does not protect
purely factual material.” In re Subpoena Served Upon Comptroller of Currency, &
Sec’y of Bd. of Governors of Fed. Reserve Sys., 967 F.2d 630, 634 (D.C. Cir. 1992); see
also In re Bankers Tr. Co., 61 F.3d 465, 471 (6th Cir. 1995). The agency has the burden
of showing that the requested documents are protected. Schreiber v. Soc’y for Sav.
Bancorp, Inc., 11 F.3d 217, 220 (D.C. Cir. 1993). If the agency fails to establish the
privilege applies to the subpoenaed material, then it must produce the documents.
Id.
9Although
neither the Seventh Circuit nor the Supreme Court has explicitly
recognized the bank examination privilege, the bank examination privilege is really a subset
of the deliberative process privilege. In re Bankers Trust Co., 61 F.3d 465, 471 (6th Cir. 1995);
In re Bank One Sec. Litig., First Chicago S’holder Claims, 209 F.R.D. 418, 426 (N.D. Ill. 2002);
cf. United States v. Farley, 11 F.3d 1385, 1389 (7th Cir. 1993) (generally recognizing the
deliberative process privilege).
13
Crowe contends that the FDIC-C has simply asserted a “conclusory and
blanket claim of the privilege” and points out that neither FDIC entity has provided
a privilege log justifying the withholding of the documents. Def.’s Br. at 11-12. The
FDIC entities argue that they provided sufficient descriptions of the withheld
documents (“internal work papers and notes created by FDIC bank examiners” and
“internal communications within the FDIC-C”). FDIC-C’s Resp. Br. at 17 n.3; R. 83.
Exh. 10. FDIC-C also argues that creating a privilege log is not required and would
be unduly burdensome on a non-party. Id. It is true that when evaluating whether
the bank examination privilege applies, courts often require more from the agency,
and sometimes courts conduct an in camera review of the contested documents. See,
e.g., Schreiber, 11 F.3d at 221 (holding a “conclusory affidavit asserting that any
factual portion of the document cannot be separated from the evaluative portion” was
insufficient to assert the bank examination privilege and collecting cases to note that
often an in camera inspection is common, but not necessary, for determining when
the privilege applies); see also In re Bank One, 209 F.R.D. at 427 (the parties asserting
the privilege “submitted privilege logs as well as documents for in camera review”).
But sometimes deciding a privilege dispute does not require the make-work of
a document-by-document privilege log, so long as asserting categories of documents
subject to the privilege is clear enough. See Manufacturers Collection Co., LLC v.
Precision Airmotive, LLC, 2014 WL 2558888, at *3 (N.D. Tex. June 6, 2014) (holding
a document-by-document listing to be unduly burdensome and of no material benefit
where party was asserting the work-product, attorney-client, and joint-deference
14
privileges); Vasudevan Software, Inc. v. Microstrategy Inc., 2012 WL 5637611, at *7
(N.D. Cal. Nov. 15, 2012) (allowing party asserting attorney-client and work-product
privileges over requested communications between it and its counsel to “provide
categorical logs, essentially grouping documents by type and indicating how each of
those categories is privileged”); Orbit One Commc’ns, Inc. v. Numerex Corp., 255
F.R.D. 98, 109 (S.D.N.Y. 2008) (allowing a categorical rather than itemized privilege
log, but requiring the producing party to “justify its assertion of privilege with regard
to each category, and the description of each category must provide sufficient
information for [the compelling party] to assess any potential objections to the
assertions of attorney-client privilege.”); S.E.C. v. Thrasher, 1996 WL 125661, at *12 (S.D.N.Y. Mar. 20, 1996) (holding a categorical privilege log to be sufficient when
the party moving to compel sought “production of all communications between
defense counsel concerning the lawsuit [because] on its face this demand seeks
wholesale production of documents ordinarily covered” by several privileges).10
Here, the two categories of documents identified by the FDIC-C in its March
20 letter, R. 92, Exh. 4 at 1, make clear that the documents at issue—internal work
papers and notes, and internal communications—constitute the kinds of materials
10Both
the FDIC-C and Crowe cite to Lawrence E. Jaffe Pension Plan v. Household
Int’l, Inc., 239 F.R.D. 508, 515 (N.D. Ill. 2006), in support of their respective arguments about
the level of detail required for the FDIC-C’s assertion of privilege. FDIC-C’s Resp. Br. at 17
n.3; Def.’s Reply to FDIC at 4-5. But Lawrence is not particularly helpful to either side.
Although the FDIC-C is mostly correct in asserting that Lawrence held that “letters and/or
briefs asserting formal claims of” deliberative process privilege” was sufficient, Crowe is also
correct in pointing out that not all letters and/or briefs sufficed: only those that “specifically
identif[ied] and describe[d] the documents” subject to the privilege and offered “precise and
certain reasons for preserving the confidentiality of the documents in question” properly
invoked the privilege. Lawrence, 239 F.R.D. at 515-16.
15
that at least some courts have held are “clearly protect[ed] from disclosure.” Principe
v. Crossland Sav., FSB, 149 F.R.D. 444, 450 (E.D.N.Y. 1993) (“The privilege clearly
protects from disclosure analyses, opinions and recommendations contained in
internal agency documents relating to bank examinations, and courts will continue
to withhold from discovery information which is not primarily factual.”); Delozier v.
First Nat. Bank of Gatlinburg, 113 F.R.D. 522, 527 (E.D. Tenn. 1986) (holding
discovery should “not inject itself into the internal, deliberative, decision-making
processes of government”). The scope of the bank examination privilege, coupled with
how the categories are described, render a detailed privilege log less important than
the typical privilege dispute. What’s more, the contested documents comprise the
FDIC-C’s internal communications, work papers, and notes, and thus are not the
source of independent historical facts. Instead, to the extent that the records contain
factual information, those facts were provided from outside sources—which have been
produced to Crowe—including bank examination reports. Pl.’s Resp. Br. at 4-5. So
there is no way that the records in Category 1(4)-(5) contain solely factual matter not
protected by the privilege, and any historical facts in them are already available to
Crowe. All in all, then, FDIC-C’s identification of the two-subcategories of withheld
documents in its March 20 letter, R. 92, Exh. 4 at 1, even absent a detailed privilege
log, is sufficient to satisfy the Court that the bank examination privilege properly
applies to those records, even without conducting an in camera review. But that is
not the end of the inquiry.
16
ii. Good Cause to Override the Privilege
The next question is whether Crowe has demonstrated good cause to overcome
the privilege that applies to the documents in Category 1(4)-(5). In re Bank One, 209
F.R.D. at 427 (citing In re Bankers Trust, 61 F.3d at 471). Courts have found that “the
privilege may be overridden where necessary to promote the paramount interest in
having justice done between litigants.” In re Subpoena, 967 F.2d at 634 (cleaned up).
The court must balance the competing interests of the party seeking the documents
and the interests of the federal agency to determine whether good cause exists. Id.
Courts must consider at least the following five things: “(1) the relevance of the
evidence sought to be protected; (2) the availability of other evidence; (3) the
‘seriousness’ of the litigation and the issues involved; (4) the role of the government
in the litigation; and (5) the possibility of future timidity by government employees
who will be forced to recognize that their secrets are violable.” Id (quoting In re
Franklin Nat. Bank Sec. Litig., 478 F. Supp. 577, 583 (E.D.N.Y. 1979)). These factors
are not exhaustive, but are “a floor upon which to balance sufficiently the competing
interests of the parties and the federal agency.” In re Bankers Trust, 61 F.3d at 472.
On the first factor—relevancy—Crowe argues that the records are relevant to
(1) whether FDIC-C examiners in fact relied on Crowe’s unqualified opinion, which
goes to the causation element; and (2) whether FDIC-C examiners had any knowledge
of Henson’s scheme earlier than June 2013, which again goes to causation, as well as
to damages. Def.’s Br. at 13. At least one court in this District has held that the
relevance factor weighs in favor of the party seeking to compel disclosure when there
17
is at least the possibility that the subject documents may give insight into “damages
and loss causation.” F.D.I.C. v. Giancola, 2015 WL 5559599, at *5 (N.D. Ill. Sept. 18,
2015). But it is unlikely that all FDIC-C internal correspondence and work papers or
notes pertaining to Valley are relevant to causation or damages—especially given
that the breadth of work that the FDIC-C performed as to Valley surely greatly
exceeds what is relevant to this specific case.
The FDIC-R, however, has identified three FDIC-C examiners—Shirley
Langford, Leslee Martin, and Jon Peterson—who likely have relevant information to
the parties’ claims or defenses. R. 83, Exh. 1 at 5. In light of their identification as
witnesses with relevant information, it would be unfair for Crowe to be disabled from
testing pertinent assertions that these three examiners might make during a
deposition (or at trial) without reviewing records generated or reviewed by those
examiners. The relevancy is thus strongest for documents authored by, or sent to or
from, these three examiners specifically concerning (1) Crowe’s unqualified audit
opinions on Valley’s financial statements; and (2) any evidence of events or conduct
that contributed to or caused Valley’s losses between 2011 and 2013, including but
not necessarily limited to Valley’s inadequate internal controls, Valley’s lack of formal
process for identifying loans that should have been classified as troubled debt
restructurings, Valley’s engagement in Bank-financed sales of its troubled private
label-mortgage backed securities to related parties, Henson’s failure to record loan
losses, and Henson’s manipulation of Valley’s Allowance of Loan and Lease Losses.
This limitation on the relevant documents hopefully will alleviate some of the burden
18
on the FDIC-C, because it can summarily exclude documents not generated or
reviewed by those examiners.
The other four factors either support overriding the bank examination
privilege as to these documents,11 or do not weigh in favor of maintaining the privilege
strongly enough to negate the fairness problem. On factor two (availability of other
evidence), although it is true Crowe has received the historical factual information
on which the FDIC-C regulators acted or corresponded, the knowledge and opinions
of the three examiners on Valley’s loan portfolio, the charge-offs to certain loans, and
the uncovering of Henson’s scheme have independent relevancy on causation and
damages. R. 83, Exh. 1 at 5. Moving on, the third factor weighs in favor of overriding
the privilege: there is no doubt as to the seriousness of the litigation, in light of the
FDIC-R’s allegation that damages are around $21 million; also, Crowe’s professional
reputation is also implicated by the allegations. See Def.’s Br. at 14; FDIC-C’s Br. at
18; see also Giancola, 2015 WL 5559599, at *1, 6 (holding that an action involving
tens of millions of dollars in alleged damages and alleging claims of negligence, gross
negligence, and breach of fiduciary duty, indicate that the litigation is serious). The
fourth factor also weighs in favor of overcoming the privilege: although the FDIC-C
is not a party to the litigation, another government entity, the FDIC-R, is, so the
government plays a considerable role in the litigation. See Giancola, 2015 WL
5559599, at *6 (holding this element weighs in favor of overriding the privilege where
11Because
the Court has determined that internal FDIC-C communications, work
product, and notes not involving the three identified FDIC-C examiners are not relevant to
the parties’ claims or defenses, it is unnecessary to go through the remaining four factors as
to those documents.
19
the FDIC-R is a party to the litigation and that “an element of unfairness would enter
if the government could further its defense against these claims by concealing
relevant evidence behind the screen of government privilege”). Finally, the fifth factor
(possible future government timidity) does weigh against overcoming the privilege,
but not enough to prevent disclosure of the records. It is true that some government
examiners might be more restrained about drafting internal correspondence or
memoranda in the future, knowing that the documents might become discoverable.
See Bank One, 209 F.R.D. at 428. But the other four factors—and the necessity of
maintaining fairness in the litigation—support overriding the privilege, and the
confidentiality protective order will help alleviate the concern about the chilling
effect. See Schreiber, 11 F.3d at 222; Giancola, 2015 WL 5559599, at *6 (“The fact of
disclosure in this case does not necessarily translate into future disclosures, as each
case involves a fresh consideration of the facts at issue and the factors militating for
or against the application of privilege. FDIC–R does not explain how the disclosure
of the [document] would stymie the candor of FDIC staff deliberations in the future.”).
In sum, the FDIC-R and/or the FDIC-C12 must identify and produce the
documents described above by July 23, 2018.
12Although
the discovery obligation is strongest for the FDIC-R, as a party to the
litigation, for documents the FDIC-R has not viewed or obtained from the FDIC-C, under
Rule 45 the FDIC-C has the same obligation to identify and produce relevant documents. Of
course under § 1821(o), the FDIC-R can obtain all FDIC-C documents, although as discussed
above, it is within the FDIC-R’s discretion not to exercise its rights under § 1821(o). The
Court’s analysis of the bank examination privilege applies equally to all requested documents
within Category 1(4)-(5), whether or not they are in the FDIC-R’s possession, because the
standard of review is the same under the Standing Order, Rule 34, and Rule 45. That said,
it may be more efficient for the FDIC-C to provide its records to the FDIC-R, so that the
FDIC-R can conduct just one review as directed above. If the FDIC-C prefers to conduct its
20
B. 12 C.F.R. § 308.147
Crowe seeks to compel three other categories of documents being withheld by
the FDIC-R: (1) third-party document productions made to the FDIC-R in the course
of its pre-litigation investigation of Valley Bank; (2) unredacted deposition
transcripts; and (3) documents related to settlements or potential claims against
third parties in connection with losses incurred by Valley Bank. Def.’s Br. at 2. The
FDIC-R argues that these materials are “confidential investigative information” that
are “protected from disclosure under the confidentiality provisions of 12 C.F.R.
§ 308.147.” R. 83, Exh. 3 at 1. The federal regulation on which the FDIC-R relies
states that “[i]nformation and documents obtained by the FDIC in the course of such
investigations shall not be disclosed, except as provided in part 309 of this chapter
and as otherwise required by law.” 12 C.F.R. § 308.147 (emphasis added). Although
the Seventh Circuit has not directly addressed the issue, many other Circuits have
convincingly held that federal regulations do not trump the Federal Rules of Civil
Procedure. See, e.g., Commonwealth of Puerto Rico v. United States, 490 F.3d 50, 6162 (1st Cir. 2007) (agency regulations promulgated under 5 U.S.C. § 301 “are only
procedural, and do not create a substantive entitlement to withhold information”);
Houston Bus. Journal, Inc., 86 F.3d at 1212 (noting that to the extent the agency’s
regulations conflict with the Rules of Civil Procedure, those regulations “exceed[] the
[agency’s] authority under the Housekeeping Statute”); Exxon Shipping Co., 34 F.3d
at 780 (“Section 301 does not create an independent privilege to withhold government
own search pursuant to this holding, then so be it: the Court leaves the method of search and
production to the FDIC entities, so long as it does not cause undue delay.
21
information or shield federal employees from valid subpoenas. Rather, district courts
should apply the federal rules of discovery when deciding on discovery requests made
against government agencies, whether or not the United States is a party to the
underlying action.”); see also Hoffman v. BLR Grp. of Am., Inc., 2009 WL 10689505,
at *2 (S.D. Ill. Jan. 12, 2009) (noting the lack of Seventh Circuit precedent and citing
cases from other circuits holding that agency regulations do not override a federal
agency’s discovery obligations).
What’s more, § 308.147 specifically states that FDIC-R investigatory materials
are protected from disclosure except “as otherwise required by law.” The Federal
Rules of Civil Procedure are another source of law, and require production of “nonprivileged material that is relevant to any party’s claim or defense.” Fed. R. Civ. P.
26(b)(1); see also Standing Order at 1; §§ A.2, B.3. Not only is it well-established that
agency regulations cannot abrogate the Federal Rules, but the regulation at issue
also contains language stating that it does not override other laws.13 Section 308.147
does not protect the FDIC-R’s investigatory materials sought in Categories 2-4 from
discovery under the Federal Rules.
C. Category 2
In light of the inapplicability of 12 C.F.R. § 308.147, the FDIC-R must conduct
a relevancy review and produce the requested documents that are relevant to the
13It
is true the only court that has addressed the issue specifically as to § 308.147
denied a motion to compel, holding that the FDIC’s investigatory materials were protected
by the regulation and did not have to be produced pursuant to the Federal Rules. F.D.I.C. v.
Brudnicki, 291 F.R.D. 669, 678 (N.D. Fla. 2013). But the court did not engage in any
substantive analysis of the interplay between the agency regulation and the Federal Rules,
and the opinion is not binding.
22
claims and defenses in this litigation, pursuant to the Standing Order and the
Federal Rules of Civil Procedure. The parties disagree over whether the FDIC-R has
already conceded that nearly all the third-party materials it collected are responsive
to Crowe’s document requests and are relevant to the litigation. Def.’s Br. at 18; Pl.’s
Resp. Br. at 13; Def.’s Reply to FDIC at 9-10. Whatever was said before, it is quite
possible that the FDIC-R’s pre-litigation investigation was broader than the claims it
elected to bring in the current litigation, so to the extent third-party materials are
not relevant to the claims and defenses at issue, the FDIC-R does not have to produce
them. But as the party in possession of the documents, the FDIC-R has the burden of
conducting a relevancy review and producing responsive documents to Crowe.
The FDIC-R’s contention that reviewing these materials would “place[]
unnecessary burden on the FDIC-R” is misplaced. R. 83, Exh. 5 at 2; see also id., Exh.
7 at 1. Simply because the FDIC-R obtained a plethora of documents during its
investigation does not relieve it of its obligation to produce relevant documents in the
course of litigation. See, e.g., United States v. DISH Network, L.L.C., 2010 WL
5463101, at *4 (C.D. Ill. Dec. 29, 2010) (“Just because materials are voluminous or
difficult to compile, they are not unduly burdensome. If they are relevant, they
are discoverable subject to the proportionality test of Rule 26(b)(2)(iii). … [T]he party
opposing discovery[] must prove that discovery violates the proportionality test.”);
Appleton, 2012 WL 12887400, at *2 (“Generalized objections that a discovery request
is burdensome without resort to specific reasons is insufficient to justify a refusal to
respond. Moreover, the mere fact that responding to a discovery request will require
23
the objecting party to expend considerable time, effort and expense consulting,
reviewing and analyzing huge volumes of documents and information is an
insufficient basis to object to a relevant discovery request.”) (cleaned up); see also
Cappetta v. GC Servs. Ltd. P’ship, 2008 WL 5377934, at *3 (E.D. Va. Dec. 24, 2008)
(same); Burns v. Imagine Films Entm’t, Inc., 164 F.R.D. 589, 593 (W.D.N.Y. 1996)
(same).
Perhaps the parties can agree on search terms to alleviate the FDIC-R’s
burden, but if not, the FDIC-R must conduct a relevancy review of every document it
obtained from a third-party14 during the investigation. The production must be made
by July 23, 2018. If the FDIC-R needs more time to conduct this review, then of course
it may file an extension motion as needed. To the extent that a third-party has
already produced, or has agreed to produce, all requested documents in response to
Crowe’s third-party subpoenas, see Pl.’s Br. at 14; R. 83, Exh. 17 at 4 (RMS McGladrey
has agreed to produce all responsive documents), the FDIC-R does not need to conduct
a relevancy review of the documents in its possession collected from that third-party.
1. Illinois Accountant’s Privilege
Gabelmann contends that the records sought by Crowe from Gabelmann are
protected by the Illinois Accountant’s Privilege, 225 ILCS 450/27. The parties agree
that under Federal Rule of Civil Procedure 501 and O’Melveny & Myers v. F.D.I.C.,
512 U.S. 79, 83-89 (1994), state law controls Gabelmann’s assertion of any accounting
14This
includes documents obtained from Gabelmann. See Section III.C.1 for a
discussion about why the Illinois Accountant’s Privilege does not apply to documents sought
from Gabelmann.
24
privilege. But the parties disagree about whether Illinois or Iowa law controls.
Gabelmann Resp. Br. at 3; R. 98, Def.’s Reply to Gablemann at 1-2; R. 103,
Gabelmann Sur-Reply at 1.
Under the Erie doctrine, a federal court applies the forum state’s choice-of-law
rules to determine which state’s privilege law applies. Auto-Owners Ins. Co. v.
Websolv Computing, Inc., 580 F.3d 543, 547 (7th Cir. 2009). Illinois courts have
adopted the Restatement (Second) of Conflict of Laws § 139, which looks to the law of
the state that has the most significant relationship with the allegedly privileged
communications to determine whether they are privileged. Sterling Fin. Mgmt., L.P.
v. UBS PaineWebber, Inc., 782 N.E.2d 895, 904 (Ill. App. 2002). “The state which has
the most significant relationship with a communication will usually be the state
where the communication took place,” although if there was a prior relationship
between the parties, the “state of most significant relationship will be that where the
relationship was centered.” Restatement (Second) of Conflict of Laws § 139(1),
Comment e (1971). As explained next, the Court concludes that Iowa, not Illinois, has
the most significant relationship to the relevant communications.
Gabelmann argues that because he was a licensed CPA in Illinois, allowed to
operate in Illinois under the trade name “Gabelmann & Associates, P.C.,” and
because Valley was located in Illinois, Illinois has the most significant relationship to
the communications. Gabelmann Resp. Br. at 3-4; Gabelmann Sur-Reply at 4. But
the connections to Iowa are much more substantial: at the relevant time, Gabelmann
was an accounting firm licensed in Iowa with its only office located in Iowa, and,
25
importantly, Gablemann’s audit client was in fact not Valley, but RVBI—Valley’s
holding company—which is located in Iowa. See, e.g., R. 98, Exh. A at FDIC-R-VALCRW-0018438.002, .004 (Gabelmann’s proposal for service to RVBI is addressed to
RVBI’s Audit Committee, c/o Catherine Carber, Controller, with an address in Iowa
and states that Gabelmann “primarily serves the local Quad City Area from its office
located … in Bettendorf, Iowa”); id., Exh. B (Gabelmann’s 2012 engagement letter
addressed to RVBI’s Audit Committee in Iowa); id., Exh. C at FDIC-R-VAL-CRW0018021.002 (Gabelmann’s independent audit report for the 2012 financial
statements is addressed to the “Board of Directors, [RVBI] and Subsidiaries,
Davenport, Iowa,” and bears a legend at the bottom of the page that shows
Gabelmann’s address in Iowa); id., Exh. D (CPA license showing Gabelmann’s Iowa
address). Gabelmann’s engagement letter with RVBI, an Iowa corporate entity,
directed him to perform audits on its subsidiaries, including Valley Bank in Illinois.
So Gabelmann did not engage directly with Valley, the Illinois entity.
What’s more, Gabelmann’s communications with his client, RVBI, were
centered in Iowa, because RVBI’s executive management and accounting and
financial reporting functions were centralized in an Iowa office. So too with his
communications with Valley, because generally the same individuals in Iowa ran
Valley. See, e.g., R. 98, Exh. E (Valley’s Controller states Gabelmann was coming to
the Iowa office to work on planning the audit, where the bank’s Controller was
located). Simply because Gabelmann was licensed as an accountant in Illinois and
26
could do business there do not overcome the Iowa-based communications and the
centrality of Iowa to the relationship.15
Gabelmann also argues that Illinois public policy should trump the law of the
state with the most significant relationship. Gabelmann relies on Restatement
(Second) of Conflict of Laws § 139(1), which says that evidence ordinarily not
privileged under the law of the state with the most significant relationship sometimes
still will be covered by privilege if “the admission of such evidence would be contrary
to the strong public policy of the forum.” See also id., Comment c (“The evidence will
not, however, be admitted in those rare instances where its admission would be
contrary to the strong public policy of the forum. Such a situation may occasionally
arise when the state of the forum, although it is not the state which has the most
significant relationship with the communication, does have a substantial relationship
to the parties and the transaction and a real interest in the outcome of the case.”).
Gabelmann relies heavily on Sterling Financial, in which the Illinois Appellate Court
held that, although the attorney-client privilege would have prevented disclosure
under New York law, Illinois public policy supported disclosure. Sterling Financial,
782 N.E.3d at 904-05. But Sterling Financial actually points to the opposite of what
Gabelmann is arguing: information privileged in New York was trumped by “Illinois’s
15The
only case Gabelmann cites in support of his assertion that Illinois has the most
significant relationship to the communications is PepsiCo., Inc. v. Baird Kurtz & Dobson LLP,
305 F.3d 813, 814-816 (8th Cir. 2002), in which the Eight Circuit analyzed the Illinois
accountant’s privilege as applied to information obtained by an accountant located in
Missouri from a plant located across the border in Illinois. But the Eighth Circuit did not
engage in any analysis about why it applied Illinois law, and did not discuss the nature or
location of the communications, so the opinion does not offer much guidance here.
27
strong policy favoring discoverability.” Id. at 904. Here, Gabelmann argues that an
Illinois public policy favoring non-disclosure should trump Iowa’s policy of
discoverability. Gabelmann Sur-Reply at 2-4. It is true that the existence of the
Illinois Accountant’s Privilege demonstrates that the Illinois “legislature has
determined public policy trumps the truth-seeking function of litigation in certain
circumstances.” Brunton v. Kruger, 32 N.E.3d 567, 578 (Ill. 2015). But as Sterling
Financial noted, Illinois also has a “strong policy favoring discoverability.” 782
N.E.3d at 904-05; see also Brunton, 32 N.E.3d at 579 (“[P]rivileges are not to be
expansively construed because they are exceptions to the general duty to disclose
during discovery.”) (internal citation omitted). What’s more, Comment c to § 139(1)
specifically states that it is “rare” for the forum’s public policy against admission to
override the law of the state with the most significant relationship favoring
admission. Restatement (Second) of Conflict of Laws § 139(1), Comment c (1971). This
is not that rare case.
Finally, Gabelmann contends that there is no real conflict of law because it is
unclear what triggers Iowa’s exception to the accountant-client privilege. Gabelmann
Sur-Reply at 4-5 (citing Bridgeview Health Care Ctr., Ltd. v. State Farm Fire & Cas.
Co., 10 N.E.3d 902, 909 (Ill. 2014) (holding a choice-of-law determination is required
only when the moving party has established an actual, rather than a potential,
conflict between state laws)). Iowa Code § 542.17 states that the accountant’s
privilege “shall not be construed … as prohibiting disclosures in a court proceeding.”
Although the Court, like Gabelmann, has been unable to find any cases analyzing
28
this exception, its plain language makes clear that the privilege does not protect
otherwise privileged information in a court proceeding, which certainly encompasses
a subpoena issued in the current litigation. Gabelmann Sur-Reply at 4.
So Iowa law applies. The Iowa accountant’s privilege does not protect the
documents in a court proceeding, so Gabelmann’s records are not shielded from
Crowe’s Rule 34 discovery request to the FDIC-R or from the Rule 45 subpoena to
Gabelmann. As to who should review and produce the documents, the burden falls on
the FDIC-R. Yes, Crowe issued a Rule 45 subpoena to Gabelmann, but Crowe did so
only because the FDIC-R refused to turn over the records pursuant to Crowe’s Rule
34 request for production. R. 83, Exh. 6 at 2. So it is the FDIC-R’s, not Gabelmann’s,
burden to conduct a relevancy review as discussed earlier in this Opinion, and to
produce the relevant documents responsive to Crowe’s request.
D. Category 3
Crowe seeks to compel the FDIC-R to produce unredacted versions of
administrative deposition transcripts for all witnesses deposed as part of the FDICR’s pre-litigation investigation. Def.’s Br. at 6-7. The parties disagree over whether
the FDIC-R redacted only irrelevant material or whether it sufficiently justified its
redactions. Def.’s Br. at 19-20; Pl.’s Resp. Br. at 16. Crowe also seeks the deposition
transcript of Michael Owen, a partner at Perkins Coie, which the FDIC-R is
withholding on the basis of attorney-client privilege, although the transcript was not
included on a privilege log. Def.’s Br. at 20-21. The parties dispute whether the
attorney-client privilege properly applies. Id.; Pl.’s Br. at 16.
29
On the threshold issue, the Court agrees with the FDIC-R that it provided
enough information in its privilege logs detailing the subject matter of the redacted
testimony to avoid an order that the FDIC-R produce the documents in their entirety.
Pl.’s Resp. Br. at 16-17; R. 83, Exh. 8 at Att. A; contra EEOC v. Dolgencorp, LLC,
2015 WL 2148394, at *2 (N.D. Ill. May 5, 2015) (granting motion to compel production
of unredacted documents because “what constitutes relevant information is often a
matter of judgment, and even irrelevant information within a document that contains
relevant information may be highly useful to providing context for the relevant
information”) (cleaned up). But some of the redactions do raise enough of a question
that the Court will require an in camera review of the redacted portions of the
transcripts, and will require an in camera review of Owens’s transcript. By June 29,
2018, the FDIC-R shall upload the unredacted transcripts and the transcript of
Owens’s deposition, under seal and ex parte, and highlight in yellow the parts that
were redacted so the Court can conduct the in camera review.
E. Category 4
Lastly, Crowe seeks to compel production of documents related to settlements
or potential claims against third-parties in connection with losses incurred by Valley
or related entities. Def.’s Br. at 21. First, Crowe argues that communications and
documents related to potential claims against third-parties that are not related to
settlement, negotiations, or compromise are not protected by Federal Rule of
Evidence 408. That is correct. And the documents are relevant to damages, so this is
not merely “a fishing expedition,” especially in light of the Court’s understanding of
30
Crowe’s theory of defense as discussed earlier in this Opinion. See In re Dairy
Farmers of Am., Inc. Cheese Antitrust Litig., 801 F.3d 758, 766 (7th Cir. 2015). The
FDIC-R must produce those records, redacted as necessary, by July 16, 2018 (to the
extent they exist).
But to the extent that Crowe seeks documents for the purpose of demonstrating
that the FDIC-R took the position during negotiations with others that Henson or
another third-party was to blame for Valley’s losses, those documents are
inadmissible under Rule 408(a) because that evidence would be offered to disprove
Crowe’s liability. What’s more, Crowe’s request seeks communications from the
attorneys for the settling parties, which almost certainly is inadmissible as attorney
work product material. Still, some of the requested documents might be admissible,
despite Rule 408(b), for another purpose, such as proving witness bias (for instance,
a communication proposing to reduce Henson’s fine in exchange for cooperation
against Crowe). As Crowe points out, three of the fact witnesses to be deposed—Larry
Henson, Michael Henson, and Robert Fick—entered into a settlement agreement
with the FDIC-R, which provides that they will “cooperate fully” with the FDIC-R in
any subsequent litigation related to the bank. Def.’s Reply to FDIC at 14, R. 83, Exh.
19 at 7. That statement is enough to at least raise a question of potential bias.
The FDIC-R’s contention that courts within this District have drawn a line
between allowing discovery of settlement agreements and restricting discovery of
settlement discussions, Pl.’s Resp. Br. at 18-19 (citing White v. Kenneth Warren &
Son, Ltd., 203 F.R.D. 364, 368-69 (N.D. Ill. 2001); Pfizer Inc. v. Apotex Inc., 731 F.
31
Supp. 2d 754, 764 (N.D. Ill. 2010)), is not exactly on point. That line only exists when
the party seeking to compel production seeks the documents for a purpose that is
impermissible under Rule 408; they may be admitted “for another purpose, such as
proving a witness’s bias or prejudice.” See Clark v. Experian Info. Sols., Inc., 2006 WL
626820, at *2-3 (N.D. Ill. Jan. 6, 2006), opinion approved, 2006 WL 931677 (N.D. Ill.
Apr. 10, 2006) (noting that to obtain information that would be inadmissible under
Rule 408, the proponent of discovery must demonstrate that it is admissible for
another purpose or show how discovery of the item might lead to other admissible
information. The Court emphasizes that “such a showing is required only to obtain
information that would be inadmissible because of Rule 408.”); see also Noble Roman’s
Inc. v. B & MP, LLC, 2017 WL 1163866, at *8 (N.D. Ill. Mar. 29, 2017) (“Rule 408 does
not create any category of documents that is off limits from discovery, but rather
creates a narrow exclusion from admissibility as evidence.”) (cleaned up). So at least
some of the negotiations and correspondence might be admissible under Rule 408(b)
for the purpose of showing witness bias.
To figure this out, by July 13, 2018, the FDIC-R shall file, under seal and ex
parte, the settlement negotiations and communications leading up to the two
settlement agreements that have been provided to Crowe. The Court will conduct an
in camera review to determine its discoverability.
IV. Conclusion
For the reasons discussed above, Crowe’s motion to compel is granted in part
and denied in part. First, by July 23, 2018, the FDIC-R (and/or FDIC-C) must conduct
32
a relevancy review and identify and produce all documents authored by, or sent to or
from Shirley Langford, Leslee Martin, and Jon Peterson, concerning (1) Crowe’s
unqualified audit opinions on Valley’s financial statements; and (2) any evidence of
events or conduct that contributed to or caused Valley’s losses between 2011 and
2013, including but not necessarily limited to Valley’s inadequate internal controls,
Valley’s lack of formal process for identifying loans that should have been classified
as troubled debt restructurings, Valley’s engagement in Bank-financed sales of its
troubled private label-mortgage backed securities to related parties, Henson’s failure
to record loan losses, and Henson’s manipulation of Valley’s Allowance of Loan and
Lease Losses.
Second, by July 23, 2018, the FDIC-R must conduct a relevancy review of every
document it obtained from a third-party during its pre-litigation investigation,
excepting documents obtained from third-parties who have already produced or have
agreed to produce all requested documents in response to Crowe’s third-party
subpoenas. The details of the review and the deadline are subject to conferral between
the FDIC-R and Crowe.
Third, by June 29, 2018, the FDIC-R shall upload the unredacted deposition
transcripts and the transcript of Owens’s deposition under seal and ex parte, and
highlight in yellow the parts that were redacted so the Court can conduct an in
camera review.
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Fourth, by July 13, 2018, the FDIC-R shall file, under seal and ex parte, the
settlement negotiations and communications leading up to the two settlement
agreements that have been provided to Crowe.
Finally, by July 16, 2018, the FDIC-R shall to produce to Crowe
communications and documents related to potential claims against third parties that
are not related to settlement, negotiations, or compromise to the extent they exist,
unless the FDIC-R believes that the records are protected by another privilege, in
which case the FDIC-R must provide a privilege log to Crowe by the same deadline.
In order to allow the parties to review this Opinion and confer as necessary,
the status hearing of June 25, 2018 is reset to July 10, 2018 at 10:30 a.m.
ENTERED:
s/Edmond E. Chang
Honorable Edmond E. Chang
United States District Judge
DATE: June 25, 2018
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