SBAV LP v. Porter Bancorp, Inc. et al
Filing
197
MEMORANDUM OPINION & ORDER by Senior Judge Thomas B. Russell on 3/30/2015; re 185 Response to Objections filed by SBAV LP, 179 Order on Motion for Hearing, 181 Objection, filed by Porter Bancorp, Inc., 189 Reply filed by Porter Bancorp, Inc. cc:counsel (KJA)
UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF KENTUCKY
LOUISVILLE DIVISION
CIVIL ACTION NO. 3:13-CV-00710-TBR
SBAV LP
Plaintiff,
v.
PORTER BANCORP, INC.,
J. CHESTER PORTER, and
MARIA L. BOUVETTE
Defendants.
MEMORANDUM OPINION AND ORDER
This matter comes before the Court upon Defendant Porter Bancorp, Inc.’s (“Bancorp”)
objection, (Docket No. 181), to the Court’s previously entered order, (Docket No. 179). Plaintiff SBAV
LP (“SBAV”) has responded, (Docket No. 185), and Bancorp has replied, (Docket No. 189). Fully
briefed, this matter stands ripe for adjudication. For the reasons set forth below, the Court will overrule
Bancorp’s objection and will affirm the Magistrate Judge’s order of January 16, 2015.
Factual Background
The instant lawsuit involves SBAV, a limited partnership; Bancorp, a publicly traded bank
holding company; PBI Bank, Bancorp’s wholly-owned subsidiary; Porter, chairman of the board of
Bancorp and PBI; and Bouvette, president and chief executive officer of both companies. Beginning in
2010, Bancorp endeavored to raise $30 million in new capital in compliance with federal and state
requirements. For the first wave of fundraising efforts, Bouvette and Porter reached out to Sandler O’Neil
& Partners, LP (“Sandler”), a New York investment bank, to identify potential investors. As a result of
Sandler’s efforts, five investors acquired Bancorp securities as part of a private placement, which closed
on June 30, 2010. The private placement yielded $27 million in proceeds. (Docket No. 92-1 at 3.)
Neither SBAV nor its controlling investment advisor firm, the Clinton Group, Inc. (“Clinton”)
participated in this private placement.
1
Before the private placement closed, however, SBAV and Bancorp were introduced. Between
July 1, 2010, and July 23, 2010, SBAV and Bancorp representatives considered a potential investment
relationship. As SBAV conducted its due diligence, it engaged in a series of meetings, discussions, and
correspondence with various PBI officials.
Bancorp also allowed SBAV to access a “virtual due
diligence room,” which included financial information reflecting the status of accounts as of June 30,
2010. SBAV alleges that Bouvette, Porter, and others described a stable bank that actively targeted
problem loans, had adequate reserves against its balances, and enjoyed regulatory approval. (Docket No.
31 at ¶ 25.) According to SBAV, these assurances echoed PBI’s SEC filings, including its Annual Report
for the Fiscal Year Ended December 31, 2009 (“2009 Form 10-K”) and Quarterly Report for the Period
Ended March 31, 2010 (“IQ 2010 Form 10-Q”). SBAV understood these documents to confirm
Bouvette’s and Porter’s representations that the Bank had fully complied with certain regulatory
restrictions instituted by the Federal Deposit Insurance Corporation (FDIC) and the Kentucky Department
of Financial Institutions (KDFI) in early 2010. These restrictions followed bank examinations conducted
by the two agencies in September 2009 and November 2009.
Certain provisions of the November 2009 report were included in a Memorandum of
Understanding (MOU) that the Bank entered into with the FDIC and the KDFI in April 2010. (See
Docket No. 148, Motion to Compel, Exhibit A, MOU of April 20, 2010.) According to SBAV, the Bank
insisted that it had fully complied with the regulators’ concerns that were addressed in the document,
which it disclosed to SBAV. These concerns involved various unsatisfactory practice and conditions,
including the accuracy of the Bank’s loan review, its lending policies, credit relationships, risk on loans
and asset classification, and the adequacy of its allowance for loan and lease losses. The Bank also
provided SBAV with a draft of its next quarterly progress report; SBAV now contends that this report
was “incomplete and misleading.” (Docket No. 148, Motion to Compel, at 7, citing Exhibit B, email of
Bouvette dated July 16, 2010.)
2
On July 13, 2010, SBAV’s investment manager met with Bouvette, Porter, and other Bancorp
executives. Ten days later, SBAV entered into a Letter Agreement with Bancorp, agreeing to invest $5
million on the same terms as the initial investments. (Docket No. 31 at ¶ 28.)
Only one day before SBAV’s investment closed, on July 22, 2010, Bancorp allegedly received a
comment letter from the Securities and Exchange Commission (SEC) requesting that the company
provide various financial data. SBAV did not receive a copy of the letter until one week later, on July 30,
2010. SBAV contends that Defendants actively withheld disclosure of the SEC’s comment letter in an
effort to close the deal before SBAV could learn of the SEC’s ongoing investigation. (Docket No. 31 at ¶
39-41.) Nevertheless, SBAV made a second investment three months later, on September 27, 2010.
(Docket No. 31 at¶ 30.)
PBI’s regulatory troubles intensified after the SBAV deal was finalized. The FDIC and the KDFI
issued a Joint Examination Report of PBI on January 3, 2011. As a result of the Joint Report, the two
agencies issued a Notice of Charges and of Hearing alleging various unsound banking practices and
regulatory violations that remained resolved after the MOU was issued in April 2010. (Docket No. 31 at
¶ 44-45.)
The agencies entered a Consent Order against the Bank on June 24, 2011, requiring a
management review and mandating that the Bank reform its internal and financial controls in order to
correct the violations. (Docket No. 31 at ¶¶ 47-62.) PBI also confronted regulatory scrutiny from the
Federal Reserve Bank, which imposed a binding agreement on Porter Bancorp that limited its ability to
issue dividends or raise capital without approval. (Docket No. 31 at ¶¶ 44, 48.) According to SBAV, the
violations identified in the consent order and the Federal Reserve Agreement were also addressed in the
MOU—the same issues that the Bank had assured SBAV were being addressed in July 2010.
Although PBI began to implement the mandated reforms, its financial losses increased throughout
2011, totaling over $100 million since the initial investment. (Docket No. 101 at 13.) Its share price
plunged from $11.50 per share in July 2010 to less than $1.00 at the time SBAV filed the instant action.
(Docket No. 101 at 13.)
3
In this action, SBAV contends that the financial conditions of Bancorp and PBI were not
accurately communicated prior to SBAV’S investment.
Specifically, SBAV contends that Defendants
misrepresented the adequacy of PBI’s financial and disclosure controls; mischaracterized the problem
loans within its portfolio and maintained inadequate reserves against losses for non-performing loans;
misrepresented the value of the loans and other assets on its books; and misrepresented the degree to
which regulators maintained confidence in its financial soundness. (Docket No. 101 at 7.) According to
SBAV, Defendants’ misrepresentations ultimately caused SBAV to lose its entire $5 million investment.
Its Amended Complaint alleges negligent misrepresentation, breach of contract, and violation of
Kentucky securities laws in connection with Bancorp’s 2010 raise of capital from SBAV. (Docket No.
31.) It seeks to recover damages exceeding $4,500,000.00 in the instant action. (Docket No. 101 at 13.)
Legal Standard
Pursuant to Federal Rule of Civil Procedure 72(a), a district judge “must consider timely
objections and modify or set aside any part of the [magistrate judge’s non-dispositive ] order that is
clearly erroneous or is contrary to law.” See also 28 U.S.C. § 636(b)(1)(A) (“A judge of the court may
reconsider any pretrial matter under this subparagraph (A) where it has been shown that the magistrate
judge’s order is clearly erroneous or contrary to law.”); United States v. Curtis, 237 F.3d 598, 603 (6th
Cir. 2001) (“A district court shall apply a ‘clearly erroneous or contrary to law’ standard of review for the
‘nondispositive’ preliminary measures of § 636(b)(1)(A).”). This standard of review is limited in nature.
Massey v. City of Ferndale, 7 F.3d 506, 509 (6th Cir. 1993).
Under the clearly erroneous standard, a court reviewing a magistrate
judge’s order should not ask whether the finding is the best or the only
conclusion that can be drawn from the evidence. Further, this standard
does not permit the reviewing court to substitute its own conclusion for
that of the magistrate judge. Rather, the clearly erroneous standard only
requires the reviewing court to determine if there is any evidence to
support the magistrate judge’s finding and that the finding was
reasonable.
4
Brownlow v. Gen. Motors Corp., No. 3:05-CV-00414, 2007 WL 2712925, at *3 (W.D. Ky. Sept. 13,
2007) (citing Heights Cmty. Congress v. Hilltop Realty, Inc., 774 F.2d 135, 140 (6th Cir. 1985)).
Analysis
The objection now before the Court concerns Magistrate Judge Whalin’s order of January 16,
2015, which, in pertinent part, compelled Bancorp to answer interrogatories and respond to requests for
information and for production of documents related to bank examinations conducted by the FDIC and
the Federal Reserve. Specifically, the conflict arises from Interrogatories 12 and 13 and Document
Request Nos. 9 and 10, which provide as follows:
INTERROGATORY NO. 12:
Identify all examinations by
governmental bodies or regulatory agencies (including the Federal
Reserve, FDIC, KDFI, or SEC) conducted on Porter Bancorp or PBI
Bank. For each such examination, identify:
The dates the examination took place, including the date any final
examination report was issued;
The five people who had the most substantial communications on
Your behalf with the examining agency, including a description of
each person’s role in the examination;
The five people from the agency who had the most substantial
communications with You, including their roles in the examination;
The date, time, place, subject matter, and participants in all
communications or interviews related to the examination;
The types of documents submitted by You to the examining agency;
and
The types of documents submitted by You to the examining agency.
INTERROGATORY NO. 13: Identify all investigations, enforcement
proceedings, or administrative proceedings conducted by governmental
bodies or regulatory agencies (including the Federal Reserve, FDIC,
KDFI, or SEC) of Porter Bancorp or PBI Bank. For each such
investigation, or proceeding, please identify:
The dates the investigation or proceeding took place, including the
date any final order from such investigation or proceeding was
issued by the agency;
The five people who had the most substantial communications on
Your behalf with the agency, including a description of each
person’s role in the investigation or proceeding;
5
The five people from the agency who had the most substantial
communications with You, including their role in the investigation or
proceeding;
The date, time, place, subject matter, and participants in all
communications related to the investigation or proceeding;
The types of documents submitted by You to the agency conducting
the investigation or proceeding; and
Any agreements made between You and the agency conducting the
investigation or proceeding.
DOCUMENT REQUEST NO. 9:
All documents concerning
examinations conducted of Porter Bancorp or PBI Bank by any
governmental body or regulatory agency, including the Federal Reserve,
FDIC, KDFI and SEC, including (a) all communications concerning each
examination, (b) all documents or communications submitted by You to
the examining agency, and all drafts thereof, (c) all written discovery
requests You received in connection with such examinations, and Your
objections, response, and agreements regarding such request, and (d) for
each examination which has been concluded, (i) any final report, finding,
or agreement arising out of the examination, and (ii) all documents
concerning compliance with the final report, finding, or agreement.
DOCUMENT REQUEST NO. 10:
All documents concerning
investigations for enforcement or administrative proceedings taken
against Porter Bancorp or PBI Bank by governmental bodies or
regulatory agencies, including the Federal Reserve, FDIC, KDFI and
SEC, including (a) all communications concerning such investigation or
proceedings; (b) all Your submission to the body or agency conducting
the investigation or proceedings, and all drafts thereof, (c) all written
discovery requests you received in connection with such investigation or
proceeding, and Your objections, responses, and agreements regarding
such request, (d) any agreements made between You and the agency
conducting the investigation or proceeding, and (e) all documents
concerning compliance with the investigation or proceeding, including
letters, plans, statements, studies, notifications and progress reports.
(Docket No. 148, Exhibit J, Document Requests; Exhibit 5, Interrogatories.)
Magistrate Judge Whalin’s order granted SBAV’s motion to compel concerning these
interrogatories and discovery requests. (See Docket No. 79.) In the instant objection, Bancorp asserts
three bases for its objection to Judge Whalin’s order. First, it contends that Magistrate Judge Whalin
erroneously concluded that state law governs questions of privilege in this case rather than the federal
6
bank examination privilege upon which Bancorp relies. Bancorp next contests the Magistrate Judge’s
determination that even if the federal bank examination privilege applies, good cause nonetheless requires
production. Finally, Bancorp argues that the Order flouts federal regulations designed to afford the FDIC
and the Federal Reserve notice of the discovery requests and an opportunity to intervene. The Court will
address each of Bancorp’s arguments in turn.
I.
Does the federal bank examination privilege apply?
Bancorp first objects to the Magistrate Judge’s conclusion that state law governs questions of
privilege in this case. Bancorp instead points to the federal bank examination privilege, which it contends
shields the contested documents from disclosure. This federal privilege emanates from general principles
that protect government deliberations.
See Principe v. Crossland Sav., FSB, 149 F.R.D. 444, 447
(E.D.N.Y. 1993) (explaining that “effective and efficient governmental decision making requires a free
flow of ideas among government officials and . . . inhibitions will result if officials know that their
communications may be revealed to outsiders.”) (internal quotations omitted). Similar objectives inform
the bank examination privilege: in an effort to promote candor between federal agencies and the banks
they regulate, the privilege protects agency opinions and recommendations and banks’ responses thereto.
In re Bankers Trust Co., 61 F.3d 465, 471 (6th Cir. 1995). As the Sixth Circuit has noted,
Bank safety and soundness supervision is an iterative process of
comment by the regulators and response by the bank. The success of the
supervision therefore depends vitally upon the quality of
communications between the regulated banking firm and the bank
regulatory agency. . . . Because bank supervision is relatively informal
and more or less continuous, so too must be the flow of communication
between the bank and the regulatory agency. Bank management must be
open and forthcoming in response to the inquiries of bank examiners, and
the examiners must in turn be frank in expressing their concerns about
the bank. These conditions simply could not be met as well if
communications between the bank and its regulators were not privileged.
Id. (quoting In re Subpoena Served Upon the Comptroller of the Currency, and the Sec’y of the Bd. of
Governors of the Fed. Reserve Sys. (In re Subpoena), 967 F.2d 630, 634 (D.C. Cir. 1992).
7
Importantly, no such provision exists under Kentucky law.
Instead, Kentucky’s bank
examination statute provides, in pertinent part:
(1) Reports of examination, and correspondence that relates to the report
of examination, of a bank or trust company shall be considered
confidential information. No officer or director of a bank or trust
company, employee of the department, or employee of a state or
federal regulatory authority shall release any information contained
in the examination, except when:
(a) Required in a proper legal proceeding in which a
subpoena
and
protective
order
ensuring
confidentiality has been issued by a court of
competent jurisdiction[.]
KRS § 286.3-470(1)(a). Although the statute specifies that bank examination materials are confidential, it
does not render them privileged. So long as an adequate protective order has been issued, the materials
may be lawfully disclosed pursuant to court order.1
At the outset, the Magistrate Judge considered whether the federal bank examination privilege or
Kentucky’s bank examination statute governed the parties’ discovery dispute. The Magistrate Judge
looked to Federal Rule of Evidence 501, which addresses whether state or federal law governs claims of
privilege raised in the federal courts.
Rule 501 generally dictates that federal common law governs
claims of privilege in federal court; however, “in a civil case, state law governs privilege regarding a
claim or defense for which state law supplies the rule of decision.” Fed. R. Evid. 501. See also Jewell v.
Holzer Hosp. Found., Inc., 899 F.2d 1507, 1513 (6th Cir. 1990) (“[I]n any civil action, state law governs
privilege regarding a claim or defense for which state law supplies the rule of decision.”).
Where federal jurisdiction is premised upon diversity and each of the claims arises under
Kentucky law, Kentucky law “supplies the rule of decision.” See Erie R.R. Co. v. Tompkins, 304 U.S. 64
1
The Court has entered an appropriate protective order in the instant case. (See Docket No. 104.) This protective
order provides that “information protected from disclosure by statute or regulation or other law” cannot be used or
disclosed “for any purpose whatsoever other than the evaluation, prosecution ,defense, appeal, or settlement of this
Litigation.” At §§ 4(1), 5(a). Designated documents may be shared with only certain persons, many of whom must
first agree to the terms of the Protective Order. Id. § 5(b). Any confidential materials must be filed under seal, and
such materials must be either returned to the party that produced them or certified destroyed at the end of the
litigation. Id. §§ 6, 16(b). The Court notes that Bancorp allege that the protective order is insufficient, its remedy is
to seek modification rather than to refuse production of relevant documents. See Principe, 149 F.R.D at 450.
8
(1983). Adhering to the Rule’s plain language, then, the Magistrate Judge determined that Kentucky law
governs the matter of privilege, rendering the bank examination documents confidential but not
privileged. Accordingly, the Magistrate Judge concluded that because the statutory requirements were
satisfied, the Bank was required to produce the requested information.
The Court agrees with the Magistrate Judge’s conclusion. District courts within the Sixth Circuit
have applied Rule 501’s principle—that is, that state law governs privilege where state law supplies the
rule of decision—in a broad spectrum of cases. See, e.g., Jewell., 899 F.2d at 1513 (“In a civil case
involving claims based on state law, the existence of . . . [the physician-patient] privilege is to be
determined in accordance with state, not federal, law”); Politt v. Mobay Chem. Corp., 95 F.R.D. 101, 104
(S.D. Ohio 1982) (applying Rule 501 in a products liability action between diverse parties and
determining that Ohio law governed the disputed physician-patient privilege); Union Planters Nat’l Bank
of Memphis v. ABC Records, Inc., 82 F.R.D. 472, 473 (W.D. Tenn. 1979) (applying Tennessee
substantive law to resolve a question of attorney-client privilege).
Particularly relevant here, district courts have applied Rule 501 when analyzing assertions of the
bank examination privilege. Judge Whalin relied upon Michigan First Credit Union v. Cumis Insurance
Society, Inc., a diversity case wherein a district court reversed a magistrate judge’s application of the bank
examination privilege. Like Kentucky, Michigan law renders bank examination reports confidential but
not privileged. When a foreign insurance company sought to compel a credit union (“MFCU”) to
produce its examination reports, the Michigan Office of Financial and Insurance Services (“OFIS”)
argued against such disclosure. Although the magistrate judge applied the federal bank examination
privilege, the district court rejected this reasoning.
The magistrate judge’s ruling that the federal bank examination privilege
applies to the [bank examination reports and related documents] is
contrary to law. In diversity actions where the plaintiff seeks recovery
under state law, as here, the question of privilege is governed by state
law, and federal common law does not apply. . . . The magistrate judge’s
reasoning for granting a protective order under Rule 26(c) was premised
in part on the erroneous application of the federal common law bank
examination privilege and a resulting undue burden upon OFIS and
9
MFCU in distinguishing and disclosing factual materials within the OFIS
Reports not covered by the federal privilege. Whether the OFIS Reports
and MFCU Replies are privileged documents, however, is a question that
must be decided under Michigan law.
Mich. First Credit Union, 2007 WL 789041, at *3 (citations omitted).
Magistrate Judge Moyer also looked to In re Powell, wherein a federal bankruptcy court considered
an adversarial proceeding raised by a trustee against a bank. 277 B.R. 61, 64 (Bkrtcy. D. Vt. 1998).
When the trustee sought the production of various audits and reviews, the bank and the FDIC objected,
arguing that these documents were shielded by the federal bank examination privilege. Id. The court
rejected this argument. Despite the FDIC’s involvement in the case, the court held that because state law
claims were at issue, the state’s law of privilege also applied. Id. at 64 (citing Fed. R. Evid. 501).
Bancorp objects to the Magistrate Judge’s reasoning upon a number of bases. It first notes that
the Federal Reserve’s regulations provide that although the KDFI and the FDIC conducted a joint
examination that yielded the 2011 report, the FDIC retained ownership of the document. Bancorp
therefore contends that because the FDIC owns the documents, federal law must apply. However, the
Sixth Circuit has explained that “legal ownership of the document is not determinative” in such cases. In
re Bankers Trust Co., 61 F.3d at 469. Federal Rule of Civil Procedure 34(a) permits any party to serve on
another party a request to produce designated documents that are “in the possession, custody, or control”
of the responding party. Fed. R. Civ. P. 34(a). A party is deemed to possess documents if it has actual
possession, custody, or control, or the legal right to demand the documents. In re Bankers Trust, 61 F.3d
at 469. Accordingly, so long as Bancorp possesses the documents at issue, they fall within Rule 34’s
scope, even if the federal agency retains ownership or even restricts disclosure. Id. (citing Resolution
Trust Corp. v. Deloitte & Touche, 145 F.R.D. 108, 110 (D. Colo. 1992) (“Rule 34, which focuses on a
party’s ability to obtain documents on demand . . . is not affected by the [federal agency’s] retention of
ownership or its unilaterally imposed restrictions on disclosure.”)). Any relevant documents in Bancorp’s
possession are therefore discoverable under Rule 34.
10
Bancorp further contends that applying state law would undermine the federal interest at play. It
submits that the Supreme Court has instructed federal courts to apply uniform standards under
circumstances that implicate uniquely federal interests. See Senior Unsecured Creditors’ Comm. of First
RepublicBank Corp. v. F.D.I.C., 749 F. Supp. 758, 769-70 (N.D. Tex. 1990) (explaining that “the rights
and obligations of the FDIC relating to its role as guardian of the deposit insurance fund and as receiver
for failed institutions is an area of uniquely federal interest.”). Bancorp insists that if the Court finds that
Kentucky law governs the disclosure of federal agency records and reports, no uniform federal standard
could exist unless the state statute were preempted by the federal common law.
Whatever the merits of Bancorp’s preemption argument, the Court cannot say that the Magistrate
Judge’s rejection of it was contrary to law in light of the precedents cited above—neither of which have
been criticized on this ground by any published federal case. This silence is revealing, suggesting that
any perceived threats to uniformity have not resulted in the chaos that Bancorp anticipates.
As noted in the Magistrate Judge’s order, Bancorp suggests that in the future, the Kentucky
Supreme Court may recognize a bank examination privilege similar to the federal common law privilege.
Bancorp cited Tibbs v. Bunnell, 2012-SC-000603-MR, 2014 WL 4115912 (Ky. Aug. 21, 2014), in which
the court interpreted the scope of a federal statutory privilege arising under the Patient Safety and Quality
Improvement Act, acknowledging the remarkably broad work product privilege that it created.2 As
Magistrate Judge Moyer noted, however, Tibbs is not yet a final opinion and may not be cited as authority
in Kentucky courts. What is more, Tibbs interpreted a statutory privilege; it did not address federal
common law. Leaving those concerns aside, were the Kentucky Supreme Court to confront the question
now before this Court, adopting Bancorp’s reasoning would effectively abandon the language of the
Commonwealth’s confidentiality statute.
Kentucky’s highest court is unlikely to endorse such an
outcome. See Williams v. Vulcan-Hart Corp., 136 F.R.D. 457, 460 (W.D. Ky. 1991) (“It has consistently
been the expressed policy of the Kentucky Supreme Court to decline to recognize a privilege where it has
2
The PSQIA specified that its work product privilege applies “[n]otwithstanding any other provision of . . . state . . .
law to declare that patient safety work product would be privileged and not ‘subject to discovery’ in connection with
a . . . state . . . civil, criminal or administrative proceeding. . . .” 42 U.S.C. § 299b-22(a)(2).
11
not been expressed in the general laws of evidence existing in the state or in legislative enactment, except
in the most compelling situations.”).
For these reasons, Magistrate Judge Moyer’s determination that state law governed the privilege
analysis was not clearly erroneous. The Court agrees that pursuant to Federal Rule of Evidence 501,
Kentucky’s confidentiality statute applies; therefore, the Court need not disturb the Magistrate Judge’s
order as to this point.
II.
Would the good cause exception override the federal privilege?
Magistrate Judge Moyer further concluded that even if federal law governed the privilege
analysis, good cause would nonetheless overcome Bancorp’s assertion, leaving Bancorp obligated to
disclose the information at issue. The Court agrees. The bank examination privilege is qualified, rather
than absolute: it does not protect purely factual matters, which fall beyond the privilege’s scope and must
be produced if relevant. In re Bankers Trust Co, 61 F.3d at 471 (citing In re Subpoena, 967 F.2d at 634;
Schrieber, 11 F.3d at 220).
Given this fundamental limitation, the Court agrees with the Magistrate Judge that the bank
would be required to fully respond to Interrogatories 12 and 13, which seek purely factual information:
when the examination and investigation occurred, the identifies of individuals involved with such
proceedings, the logistical details of any communications or interviews, and the types of documents that
were exchanged between the Bank and the agency. Accordingly, the Court agrees that application of the
federal common law bank examination privilege would not defeat discovery of the information sought by
these two interrogatories.
Turning to Document Requests 9 and 10, the Magistrate Judge explained that certain
communications concerning Bancorp’s regulatory examinations likely contained deliberative opinions,
which are generally privileged. However, even deliberative opinions are not protected by the privilege if
12
good cause exists to override it. Id. A court weighing the existence of good cause must evaluate at least
five factors, including:
(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 there secrets are violable.
Id. (citing Schreiber, 11 F.3d at 220); In re Subpoena, 967 F.2d at 634). Examining each of the factors,
the Magistrate Judge concluded that SBAV demonstrated good cause to override the federal common law
privilege. Although Bancorp insists that the Magistrate Judge’s analysis was flawed on all fronts, the
Court must disagree.
The first three factors warrant little discussion. The information that SBAV seeks is certainly
relevant; Bancorp itself has repeatedly referenced it, allegedly during negotiations with SBAV and
certainly throughout the instant litigation. SBAV emphasizes that it requires specific reports to evaluate
the accuracy of Bancorp’s previous representations and to determine whether Bancorp withheld material
information. Although Bancorp contends that this information may be gleaned from other documents, it
fails tospecify which documents would accomplish this.
Accordingly, the Magistrate Judge’s
determination that the information sought was relevant and accessible only through the records sought
was sound. See, e.g., In re Franklin Nat’l Secs. Litig., 478 F. Supp. 577, 586 (E.D.N.Y. 1979) (“The
Examination Reports provide a unique and objective contemporaneous chronicle of the financial decline
of [the bank]; no satisfactory substitute exists.”). And while Bancorp takes issue with the contention that
the litigation is serious, at the heart of this case are allegations that Bancorp raised large amounts of
capital through duplicity and deceit. While the Court makes no judgment as to the merits of SBAV’s
claims, it cannot be said that they are less than serious.
As to the fourth factor, which concerns the Government’s role in the litigation, the Magistrate
Judge noted that the lawsuit does not involve an action raised by a federal regulatory agency, nor has such
13
an agency attempted to intervene in the instant lawsuit in order to assert or protect a fundamental interest.
In the following section, the Court will more fully consider Bancorp’s argument that SBAV was obligated
to notify various federal agencies of its requests for the allegedly protected materials. It will suffice to
say here that the Court agrees with the Magistrate Judge’s conclusion that SBAV was not so obligated.
Finally, Bancorp contends that this perceived attack on the bank examination privilege will give
both examiners and bank employees pause during the frank discussions that the examination process
entails, second-guessing their ability to speak candidly. The Court perceives no such chilling effect. All
discovery disputes that arise under similar facts implicate the important public interest in confidentiality
and candor between regulators and banks. If this factor were always dispositive, the privilege would be
absolute rather than qualified; however, under some circumstances, the public’s interest in the production
of evidence overcomes its interest in preserving candor in bank examinations.
See Wultz v. Bank of
China Ltd. at 9. This is one such case. The Court anticipates that the parties’ robust protective order will
adequately safeguard forthrightness in their future communications. In light of that restriction, and given
the strength of the four factors discussed above, the final factor is not determinative.
Because the Court finds no fault with the Magistrate Judge’s analysis regarding the good cause
exception, it will overrule Bancorp’s objection on this point.
III. Was SBAV required to exhaust administrative remedies?
Finally, Bancorp challenges the Magistrate Judge’s conclusion that SBAV was not required to
exhaust administrative remedies before resorting to legal process in its effort to obtain the disputed
documents. Pursuant to the “Housekeeping Statute” at 5 U.S.C. § 301, the federal agencies involved have
promulgated administrative regulations governing the release of non-public information. Taking their
name from the Supreme Court decision that validated such administrative procedures, they are known
asTouhy regulations. See United States ex rel. Touhy v. Ragen, 340 U.S. 462 (1951).
Bancorp first points to 12 C.F.R. § 309.6(b)(8)(i), which provides, in pertinent part:
14
Third parties seeking disclosure of exempt records or testimony in
litigation to which the FDIC is not a party shall submit a request for
discretionary disclosure directly to the General Counsel. Such request
shall specify the information sought with reasonably particularity and
shall be accompanied by a statement with supporting documentation
showing in detail the relevance of such exempt information to the
litigation, justifying good cause for disclosure, and a commitment to be
bound by a protective order. Failure to exhaust such administrative
request prior to service of a subpoena or other legal process may, in the
General Counsel’s discretion, serve as a basis for objection to such
subpoena or legal process.
See also 12 C.F.R. § 261.22 (governing other disclosure of confidential supervisory information).
Federal regulation imposes comparable procedures for requests for disclosure from the Federal Reserve.
See 12 C.F.R. § 261.22(b)(1) (“Any person . . . seeking access to confidential supervisory information . . .
for use in litigation before a court, board, commission, or agency, shall file a written request with the
General Counsel of the Board.”).
Although Bancorp maintained that SBAV was obligated to exhaust this administrative process,
the Magistrate Judge rejected this conclusion. The Court agrees. In In re Bankers Trust, the Sixth Circuit
dictated the appropriate course when administrative regulations are at odds with the Federal Rules of
Civil Procedure. The court explained that a federal agency’s regulation should be enforced if based upon
a permissible construction of its enabling statute; however, such statutes generally do not permit agencies
to promulgate regulations that directly contravene the Federal Rules. 61 F.3d at 469-70. The court
reasoned that Congress did not empower the agency at issue to establish regulations directing a party to
deliberately disobey a court order, subpoena, or other judicial mechanism requiring the production of
information. Therefore, the court held that regulatory language that requires a party to continually decline
to disclose such information “exceeds the congressional delegation of authority and cannot be recognized
by this court.” Id. at 471. Pursuant to In re Bankers Trust, the Court is convinced that the discovery
order at issue is a legitimate exercise of the Court’s Rule 34 jurisdiction.
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Moreover, the Court notes that other federal regulations require one who has custody of agency
records to notify the agency of any legal process requiring their production. See 12 C.F.R. § 309.7(b)
(requiring such notice for FDIC documents); 12 C.F.R. § 261.23(a) (imposing the same requirement for
Federal Reserve records). The Sixth Circuit also acknowledged that it is “advisable if not necessary for a
party in litigation that possesses ‘confidential supervisory information’ to inform the Federal Reserve of
any requests for production so the Federal Reserve will have notice and the opportunity to intervene and
protect any interests, arguments, or concerns it may have.” In re Bankers Trust, 61 F.3d at 470, n.6.
Given the Court’s limited review here, it need not reach the applicability of such guidance here.
However, the Court recognizes the dearth of information on the record concerning whether Bancorp has
notified federal regulators of SBAV’s requests and the Court’s order compelling production. Although
Bancorp protests the absence of the FDIC and the Federal Reserve from the instant litigation, the Court
agrees with the Magistrate Judge that this absence is not attributable solely to SBAV.
Conclusion and Order
The Court having considered Defendant Porter Bancorp, Inc.’s objections to the Magistrate
Judge’s order compelling production of bank examination documents, as well as Plaintiff SBAV LP’s
response thereto, IT IS HEREBY ORDERED that Porter Bancorp, Inc.’s objections, (Docket No. 181),
are DENIED. The Magistrate Judge’s January 16, 2015, Order is AFFIRMED in its entirety.
March 30, 2015
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