FARES PAWN, LLC et al v. STATE OF INDIANA, DEPARTMENT OF FINANCIAL INSTITUTIONS, CONSUMER CREDIT DIVISION et al

Filing 52

ORDER granting 22 Motion to Compel. Defendants are ORDERED to provide all documents that were withheld within fifteen (15) days of the date of this Order. Defendants are also ORDERED to promptly make available Schroeder for a new deposition in order to respond to the questions that he was previously instructed not to answer. Signed by Magistrate Judge William G. Hussmann, Jr., on 8/17/2012. (NRN)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF INDIANA
EVANSVILLE DIVISION
FARES PAWN, LLC AND
WILLIAM K. SAALWAECHTER,
Plaintiffs,
v.
STATE OF INDIANA,
DEPARTMENT OF FINANCIAL
INSTITUTIONS, CONSUMER
CREDIT DIVISION, JOHN
SCHROEDER, IN HIS
INDIVIDUAL AND OFFICIAL
CAPACITY AS AN EMPLOYEE
WITH THE DEPARTMENT OF
FINANCIAL INSTITUTIONS,
AND MARK TARPEY, IN HIS
INDIVIDUAL AND OFFICIAL
CAPACITY AS AN EMPLOYEE
WITH THE CONSUMER CREDIT
DIVISION OF THE
DEPARTMENT OF FINANCIAL
INSTITUTIONS, AND DAVID H.
MILLS, IN HIS INDIVIDUAL AND
OFFICIAL CAPACITY AS AN
EMPLOYEE WITH THE
CONSUMER CREDIT DIVISION
OF THE DEPARTMENT OF
FINANCIAL INSTITUTIONS,
Defendants.

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3:11-cv-136-RLY-WGH

ENTRY ON PLAINTIFFS’ MOTION FOR AN ORDER
COMPELLING DISCOVERY
This matter is before the Honorable William G. Hussmann, Jr., United
States Magistrate Judge, on Plaintiff’s Motion for an Order Compelling
Discovery, filed April 18, 2012. (Docket Nos. 22-23). Defendants filed their

Memorandum in Opposition to Plaintiffs’ Motion to Compel on June 11, 2012.
(Docket No. 36). Plaintiffs filed their Reply Brief on June 20, 2012. (Docket
No. 39). The court ordered the documents to be produced for in camera review,
and they were provided to the court on July 20, 2012.
I. Background and Procedural History
This lawsuit arises out of Plaintiffs’ claim that Defendants wrongfully
denied Plaintiffs’ Pawn License Application. Defendants consist of: (1) the
State of Indiana; (2) Department of Financial Institutions (“DFI”); (3) John
Schroeder (“Schroeder”), general counsel and Deputy Director of the Consumer
Credit Division of DFI; (4) Mark Tarpey (“Tarpey”), the Division Supervisor for
the Consumer Credit Division of DFI; and (5) David H. Mills (“Mills”), the
Executive Director of DFI (collectively, “Defendants”). (Complaint ¶ 4-7).
On March 30, 2009, Plaintiff, William Saalwaechter, the owner of Fares
Pawn, LLC (“Fares Pawn”, “Plaintiffs”) applied for a pawn license to operate a
pawn shop at 1432 North Fares Avenue in Evansville, Indiana. (Id. ¶ 8). On
May 28, 2009, Evansville Pawn and Fares Pawn (the entity that was then
operating a pawn shop at that location) entered into an agreement for the
transition of the pawns at the location. (Id. ¶ 11). On July 28, 2009, Tarpey
sent Saalwaechter a letter, which Saalwaechter alleges demonstrated that
Tarpey and Schroeder had prejudged Fares Pawn’s application of the pawn
license. (Id. ¶ 13). Plaintiffs allege that DFI, Tarpey, and Schroeder contacted
the Bureau of Alcohol, Tobacco, Firearms, and Explosives (“ATF”) in an attempt

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to stop Fares Pawn and/or Saalwaechter from obtaining a permit to sell
firearms at this location. (Id. ¶ 14).
On August 25, 2009, following an official interview with Saalwaechter
concerning the Fares Pawn application, Tarpey stated that nothing in the
interview had changed the DFI’s notion that Fares Pawn would not be granted
a pawn license. (Id. ¶ 16). The DFI board was then scheduled to hear
Saalwaechter’s pawn license application on October 8, 2009. (Complaint ¶ 19).
The day before the DFI board met, Tarpey sent a memorandum to the DFI
board listing only the negative aspects of the Fares Pawn application. (Id. ¶
20). Also, on the day before the board met, Schroeder and Tarpey drafted a
denial letter from the DFI board denying Fares Pawn’s license. (Id. at ¶ 22).
On October 9, 2009, following the DFI board meeting, Fares Pawn’s license
application was denied. (Id. at ¶ 23). Plaintiffs pursued an appeal through the
administrative process. On June 24, 2010, a Memorandum of Understanding
(MOU) was approved for Fares Pawn to receive a conditional pawn license. (Id.
¶ 25). Subsequently, Fares Pawn voluntarily dismissed its administrative
appeal.
Plaintiffs served a Tort Claim Notice on Defendants on July 3, 2010.
(Complaint ¶ 27; see also Motion to Compel at Ex. J). Plaintiffs contend that
Schroeder, Tarpey, and Mills denied them their Due Process and Equal
Protection rights protected by the Fourteenth Amendment. (Id. ¶¶ 29, 36).
Plaintiffs also raise a claim of intentional infliction of emotional distress against

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the State of Indiana and the DFI. (Id. ¶ 44). Finally, Plaintiffs claim
interference with business relationship as to the State of Indiana and the DFI.
(Id. ¶ 51).
Plaintiffs filed this Motion to Compel seeking the disclosure of certain
information concerning their pawn license application. (Plaintiffs’ Brief in
Support of Motion to Compel at 2-4). Defendants object to the disclosure of
this information, arguing that it is protected by the attorney-client privilege, the
attorney work product doctrine, and the deliberative process doctrine;
Defendants have also provided a privilege log. (Id. at 4; see also Plaintiffs’
Motion to Compel at Ex. C ). Having read the arguments of the parties and the
relevant legal authorities and having conducted in camera review, the
Magistrate Judge concludes that Plaintiffs’ Motion for an Order Compelling
Discovery must be GRANTED.
II. Discussion
A. Is this court precluded from ruling on the Motion to Compel
under the doctrine of administrative collateral estoppel?
As an initial matter, this Magistrate Judge must resolve whether a prior
decision by an administrative law judge (“ALJ”) within the DFI regarding the
discoverability of evidence sought by Plaintiffs should preclude this court from
ruling on the discoverability of the same evidence. The Supreme Court has
held that “when a state agency ‘acting in a judicial capacity . . . resolves
disputed issues of fact properly before it which the parties have had an
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adequate opportunity to litigate,’ . . . federal courts must give the agency’s factfinding the same preclusive effect to which it would be entitled in the State’s
courts.” Univ. of Tenn. v. Elliott, 478 U.S. 788, 799 (1986) (emphasis added).
To determine whether Indiana administrative decisions are to have
preclusive effect, this court must look to the following four-part test: “(1)
whether the issues sought to be estopped were within the statutory jurisdiction
of the agency; (2) whether the agency was siting in a judicial capacity; (3)
whether both parties had a fair opportunity to litigate the issues; and (4)
whether the decision of the administrative tribunal could be appealed to a
judicial tribunal.” Flowers v. Carson, 917 F.Supp. 614, 621 (S.D. Ind. 1996)
(citing McClanahan v. Remington Freight Lines, 517 N.E.2d 390, 394 (Ind.
1988)). In this instance, the decision of the ALJ does not have preclusive effect
because the issue sought to be estopped was not within the statutory
jurisdiction of the DFI.
In order for an ALJ’s decision to have a preclusive effect, the issues
resolved by the ALJ must be within the statutory jurisdiction of the agency.
Flowers, 917 F.Supp. at 621. Indiana administrative law generally does allow
an ALJ to issue discovery orders. IND. CODE § 4-21.5-3-22. However, whether
or not any particular evidence before an ALJ is or is not subject to discovery is
not an issue within the DFI’s statutory jurisdiction. The DFI’s jurisdiction
includes the approval of a pawn license. The discoverability of evidence is
merely a secondary issue that may come up from time to time during a hearing

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before the DFI, but is not within the DFI’s jurisdiction. This is because the
decision as to whether certain documents may be discoverable or admitted into
evidence in the course of an administrative hearing is a matter of “procedure”
and is not the finding of “fact” that is material to the outcome of the case before
the administrative body. Even if the ALJ’s determination of the applicability of
a privilege could be considered a “factual” finding, the documents tendered
here do not meet the test established for such protection.
This court is, therefore, not bound by the decision of the ALJ, and the
Magistrate Judge must make a new, independent decision concerning whether
the evidence sought in Plaintiffs’ Motion to Compel is discoverable. Because
this court is not bound by the prior decision of the ALJ, it must determine if
each document sought by Plaintiffs is protected by one of the three privileges
Defendants have asserted.
B. Deliberative Process
First, Defendants suggest that many of the documents are protected
because they were part of the DFI’s deliberative process in denying Plaintiffs a
pawn license. The deliberative process privilege protects communications of a
government entity that is part of the department’s decision-making process in
adopting policies. Enviro Tech Int’l, Inc. v. E.P.A., 371 F.3d 370, 374 (7th Cir.
2004). Moreover, the privilege “should be invoked only in the context of
communications designed to directly contribute to the formulation of important
public policy.” Anderson v. Marion Cnty. Sheriff’s Dept., 220 F.R.D. 555, 560-61

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(S.D. Ind. 2004) (emphasis in original) (citing Soto v. City of Concord, 162 F.R.D.
603, 612 (N.D. Cal. 1995)). Further, the privilege should be applied as narrowly
as consistent with efficient government operations. United States v. Farley, 11
F.3d 1385, 1389 (7th Cir. 1993). If an agency seeks to apply deliberative process
as a privilege, it has the burden of showing that the documents must fall within
the privilege.
The deliberative process privilege extends only to such pre-decision
communications that, if exposed, would cause a detriment to the decisionmaking process of the agency. Farley, 11 F.3d at 1389. To fall within the
privilege, the documents must be both “pre-decisional” and “deliberative.”
K.L. v. Edgar, 964 F. Supp. 1206, 1208 (N.D. Ill. 1997); Enviro Tech Int’l, 371
F.3d at 375. The “pre-decisional” requirement means that the documents are
created before the adoption of an agency policy. K.L., 964 F. Supp. at 1208;
Enviro Tech Int’l, 371 F.3d at 375; Gingerich v. City of Elkhart Probation, 237
F.R.D. 532 (N.D. Ind. 2011). In order to be “deliberative,” the documents must
actually be related to and reflect the consultative process by which policies are
conceived. K.L., 964 F. Supp. at 1208; Enviro Tech Int’l, 371 F.3d at 375. The
protection does not extend to “factual or objective material or to documents that
the agency adopts as its position on an issue.” K.L., 964 F. Supp. at 1208. “To
be considered ‘deliberative’ a document should reflect policy or decision-making
process, rather than purely factual or investigative matters.” S.E.C. v. Sentinel

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Mgmt. Group, Inc., 2010 WL 4977220 at *3 (N.D. Ill. 2010) (internal citations and
quotations omitted).
The Defendants’ principal argument is that the Seventh Circuit has not
required deliberative process privileged documents to fit into such a strict
category. Defendants’ documents involve the investigation of matters to
determine whether or not to grant Fares Pawn a pawn license on this specific
occasion. They are documenting matters of investigation, not discussing the
policy-making process. The documents are not the opinions of decision-makers
in creating pawn license policy.
In addition, it is important to note that “the privilege was fashioned in
cases where the governmental decision-making process is collateral to the
plaintiff’s suit; if the plaintiff’s cause of action is directed at the government’s
intent, however, it makes no sense to permit the government to use the privilege
as a shield.” Anderson, 220 F.R.D. at 560. Plaintiffs’ cause of action in this case
is directed at Defendants’ intent. Defendants, therefore, cannot use the privilege
as a shield against claims of governmental intent.
Upon in camera review, the Magistrate Judge concludes that only two
documents arguably fall within the deliberative process privilege: (1) an October
2, 2009 Memorandum from John J. Schroeder to the Members of the Indiana
DFI (“Board”) (Document 45-1 pages 1-5); and (2) a June 18, 2010 Memorandum
from Schroeder to the Board (Document 45 pages 4-6). However, these
memoranda, like the other materials sought to be protected, are more similar to

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the factual or objective matters relating to an agency’s intent in a specific case,
which the Anderson court ruled were not protected by the deliberative process
exception, than being a “predecisional policy discussion.” Enviro Tech Int’l, 371
F.3d at 375. A review of these memoranda and other materials shows that they
specifically addressed Plaintiff’s application only. They do not compare Plaintiff’s
application with other applications or discuss how the granting or denying of a
pawn license to Fares Pawn would fit into DFI’s overarching policy framework.
Similarly absent are any discussions of statutes, regulations, past Board
decisions, or case law. Finally, the documents contain substantial recitation of
factual determinations relevant only to Plaintiff’s application. These factintensive, particularized findings are at the heart of this particular litigation
rather than part of a broader policy discussion, and DFI therefore cannot claim
protection of the documents under the deliberative process privilege in this case.
C. Attorney-Client Privilege
Next, Defendants seek to avoid disclosure of certain documents by
asserting that they are protected by the attorney-client privilege. The purpose of
the attorney-client privilege is “to encourage full and frank communication
between attorneys and their clients and thereby promote broader public
interests in the observance of law and administration of justice.” Upjohn Co. v.
U.S., 449 U.S. 383, 394-99 (1981). However, communications between a
corporate attorney and any of the corporation’s employees is protected by the
attorney-client privilege only when the communications to the attorney are for

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the purpose of providing legal advice to the corporation. Upjohn Co. v. U.S., 449
U.S. at 389. The privilege only protects disclosure of communications; it does
not protect disclosure of any underlying facts. Id. at 396.
The Seventh Circuit has embraced the following test for determining if the
attorney-client privilege applies to a particular communication:
(1) Where legal advice of any kind is sought; (2) from a professional
legal adviser in his capacity as such; (3) the communications
relating to that purpose; (4) made in confidence; (5) by the client;
(6) are at his instance permanently protected; (7) from disclosure
by himself or by the legal adviser; (8) except the protection be
waived.
U.S. v. Evans, 113 F.3d 1457, 1461 (7th Cir. 1997). The party wishing to invoke
the privilege has the burden of proving all of these essential elements. Id.
Furthermore, because the attorney-client privilege is in derogation of the search
for the truth, it must be construed narrowly. Id. When a corporate officer also
acts as general counsel, wearing “two hats,” the nature of his communications
must be closely scrutinized to separate business communications from legal
communications, as the attorney-client privilege is narrow. BPI Energy, Inc. v.
IEC (Montgomery), LLC, 2008 WL 4225843 (S.D. Ill. 2008) Hence, only
communications involving legal advice are privileged; “communications made by
and to a corporate in-house counsel with respect to business matters,
management decisions, or business advice are not protected by the privilege.”
Welch v. Eli Lilly & Co., 2009 WL 700199 at *12 (S.D. Ind. 2009). When the
parties involve an organization with in-house counsel, communications between

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the general counsel and an organizational employee are protected only when the
employee is seeking legal advice on behalf of the entity. Upjohn, 449 U.S. at 394.
The privilege does not apply where the legal advice is incidental to business
advice. Allendale Mut. Ins. Co. v. Bull Data Systems, Inc., 152 F.R.D. 132, 137
(N.D. Ill. 1993).
In this case, the documents Plaintiffs seek to compel were not made by
Schroeder wearing his legal advisor “hat.” The attorney-client privilege needs to
be narrowly construed as to whether the documents were made by Defendants
seeking legal advice from Schroeder. Documents that were not drafted by
Schroeder are not protected under the work product doctrine because Schroeder
is unclear as to whether he was acting in his capacity as Deputy Director or
general counsel.
Simply communicating with in-house counsel is not enough to assert
attorney-client privilege. In Schroeder’s affidavit he himself was unclear as to
whether the documents were drafted by him or emailed or carbon copied to him
as general counsel or Deputy Director. The privilege, therefore, does not apply
because Schroeder was not sure whether the documents intended to seek legal
advice or whether the documents were incidental to business advice.
D. Attorney Work Product
While the attorney-client privilege does not protect the documents created
by the DFI concerning their investigation, these documents could still be

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protected by the attorney work product doctrine. The DFI asserts that the
documents created as a result of investigating Fares Pawn’s application and
qualifications are such attorney work product.
Rule 26(b)(3) of the Federal Rules of Civil Procedure governs the disclosure
of “work product.” It protects from disclosure: (1) documents and other tangible
things; (2) produced in anticipation of litigation or for trial; (3) by or for another
party or its representative. FED. R. CIV. P. 26(b)(3). “The threshold determination
is whether the documents sought to be protected were prepared in anticipation
of litigation or for trial.” U.S. v. Cinergy Corp., 2008 WL 5424007 at *1 (S.D. Ind.
2008) (internal citations and quotations omitted). The Seventh Circuit has
explained that “[t]he mere fact that litigation does eventually ensue does not, by
itself, cloak material . . . with the work product privilege; the privilege is not that
broad.” Binks Mfg. Co. v. National Presto Industries, Inc., 709 F.2d 1109, 1118
(7th Cir. 1983).
Consequently, we must ask “whether, in light of the nature of the
document and the factual situation in the particular case, the document can
fairly be said to have been prepared or obtained because of the prospect of
litigation.” Id. at 1118-19 (internal citations and quotations omitted). A
distinction must be made between precautionary documents created in the
normal course of business for the remote prospect of litigation and those
documents which are prepared because an articulable claim, likely to lead to

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litigation, has arisen. Sandra T.E. v. South Berwyn School Dist. 100, 600 F.3d
612, 622 (7th Cir. 2010). It is the burden of the party seeking to oppose
production of the documents to demonstrate that the work product privilege
shields the documents at issue from discovery. See Cummins, Inc. v. Ace
American Ins. Co., 2011 WL 1655916, at *5 (S.D. Ind. May 2, 2011).
Here, the documents Defendants are seeking to protect were not made in
anticipation of litigation. Fares Pawn applied for a pawn license on March 30,
2009. The review of the application denial took place on October 21, 2009.
Further, Plaintiffs served Defendants a Tort Claim Notice on July 3, 2010.
Documents created before the filing of the Tort Claim Notice cannot be said to
have been created in anticipation of litigation; they were merely documents
created during the pawn license application process. Therefore, the documents
are not protected under the work product doctrine. Because all documents that
Defendants seek protected were created before the Tort Claim Notice was filed,
none was created in anticipation of litigation.
III. Conclusion
For the reasons outlined above, Plaintiffs’ Motion for an Order Compelling
Discovery is GRANTED. Defendants are ORDERED to provide all documents
that were withheld within fifteen (15) days of the date of this Order. Defendants
are also ORDERED to promptly make available Schroeder for a new deposition

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in order to respond to the questions that he was previously instructed not to
answer.
SO ORDERED the 17th day of August, 2012.

__________________________
William G. Hussmann, Jr.
United States Magistrate Judge
Southern District of Indiana

Copies to:
James D. Johnson
RUDOLPH FINE PORTER & JOHNSON
[e-mail]
Stacy K. Newton
RUDOLPH FINE PORTER & JOHNSON
[e-mail]
Kate E. Shelby
INDIANA ATTORNEY GENERAL
[e-mail]

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