Federal Housing Finance Agency as Conservator for the Federal National Mortgage Association et al v. UBS Americas Inc. et al
Filing
488
OPINION AND ORDER denying the UBS Defendants' application to require the Federal Housing Finanace Agency to pay either $250,000 or at least $85,000 of the cost incurred in identifying certain files produced by third parties. (Signed by Judge Denise L. Cote on 3/26/2013) (gr)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
------------------------------------------X
:
FEDERAL HOUSING FINANCE AGENCY, etc.,
:
Plaintiff,
:
-v:
:
UBS AMERICAS, INC., et al.,
:
Defendants.
:
:
------------------------------------------X
11 Civ. 5201 (DLC)
OPINION & ORDER
APPEARANCES:
For the plaintiff:
Philippe Z. Selendy
Kathleen M. Sullivan
Adam M. Abensohn
Manisha M. Sheth
Jordan A. Goldstein
Quinn Emanuel Urquhart & Sullivan, LLP
51 Madison Avenue, 22nd Floor
New York, New York 10010-1601
For defendants:
Jay B. Kasner
Scott D. Musoff
Robert A. Fumerton
Skadden, Arps, Slate, Meagher & Flom LLP
Four Times Square
New York, New York 10036
DENISE COTE, District Judge:
The UBS Defendants 1 in this action have moved to require the
Federal Housing Finance Agency (“FHFA”) to pay either $250,000
1
The defendants are UBS Americas, Inc., UBS Real Estate
Securities, Inc., UBS Securities, LLC, Mortgage Asset
Securitization Transactions, Inc., David Martin, Per Dyrvik,
Hugh Corcoran, and Peter Slagowitz.
1
or at least $85,000 of the cost incurred in identifying certain
files produced by third parties.
For the following reasons, the
application is denied.
BACKGROUND
This action (the “UBS Action”) is one of sixteen actions
filed by FHFA in this district.
The litigation of these sixteen
actions is being coordinated and supervised by this Court. 2
In
these actions FHFA, serving as conservator for the Federal
National Mortgage Association (“Fannie Mae”) and the Federal
Home Loan Mortgage Corporation (“Freddie Mac”) (collectively,
the “GSEs”), has sued many banks and related entities and
individuals in connection with the packaging, marketing and sale
of residential mortgage-backed securities that the GSEs
purchased in the period from 2005 to 2007.
FHFA has identified
essentially three misrepresentations that it alleges the
defendants made about the securities.
See FHFA v. UBS Americas
Inc., 858 F. Supp. 2d 306 (S.D.N.Y. 2012).
One of those three
misrepresentations is at issue here: the defendants’
representations that the underlying mortgage loans complied with
certain underwriting guidelines and standards.
2
Id. at 330.
One of the sixteen actions, FHFA v. General Electric Co., et
al., 11 Civ. 7048 (DLC), has been resolved.
2
All parties agree that the trials of this component of
FHFA’s case will require a comparison of the loan files and the
underwriting guidelines for loans associated with the securities
that FHFA purchased.
The supporting loan groups for the
relevant securities in these sixteen actions include over
1,100,000 individual home mortgages.
At initial conferences, the Court urged the parties to
litigate these actions on the basis of an agreed upon sample
from each securitization.
FHFA agreed and made a proposal for
statistical sampling of the loans.
For example, there are
approximately 44,000 loans in the supporting loan groups in the
UBS Action, and FHFA has selected a sample of 2,400 loans. 3
Although at one point it appeared that the defendants might
agree to that approach, ultimately the defendants refused.
Instead, they insisted that each of the loan files for the home
mortgages (“Loan Files”) and its associated underwriting
guidelines (“Guidelines”) had to be obtained.
In the face of
the defendants’ insistence that all Loan Files and Guidelines be
obtained, FHFA reserved its right to offer evidence from Loan
Files outside its sample.
Reluctantly, the Court ruled on June
13, 2012 that, given the parties’ failure to reach agreement, it
3
Originally, FHFA suggested a sample of only 1,060 loans for the
UBS Action.
3
would not attempt to require these cases to be litigated from a
sample of loans in each securitization.
As a consequence, the defendants undertook a massive and
expensive effort to locate all of the over 1,100,000 Loan Files
and associated Guidelines for the loans that constitute the
supporting loan groups for each of the securities purchased from
the defendants by the GSEs.
The documents have come from
defendants’ files, 4 from FHFA, and from scores of third parties.
FHFA has assisted in the effort, but the brunt of the work has
been borne by the defendants.
In the UBS Action alone, Loan
Files have been sought from sixty entities.
The sixteen actions have been divided into four tranches
for trial and organized as a pyramid.
member:
2014.
the UBS Action.
The first tranche has one
It will proceed to trial in January
The second tranche has two members, who will proceed to
trial separately in June 2014.
These two actions represent the
largest losses experienced by the GSEs.
The third tranche has
three members, who will each proceed to trial in September 2014.
The remaining cases, which are the lawsuits in which the
smallest damages are sought, are in the fourth tranche and will
be tried in January 2015.
4
In some instances, defendants have located Loan Files and
Guidelines within their own files that must be produced in
actions in which they are not named as defendants.
4
The defendants in the three cases that comprise the first
and second tranches requested that FHFA be required to disclose
the results of its factual re-underwriting review evaluating
compliance with underwriting guidelines for each of its sample
loans far in advance of the scheduled exchange of expert
reports.
Over the objection of FHFA, the Court agreed.
As a
result, FHFA and the defendants in those three actions agreed to
give priority to the production and identification of the Loan
Files and Guidelines for FHFA’s sample loans, to try to reach
agreement that the assembled documents were the best
representation of those Loan Files and Guidelines that the
parties have been able to recreate, and to negotiate a worksheet
that FHFA would use to identify the underwriting deficiencies. 5
The parties also agreed to a schedule by which FHFA would
identify its perceived deficiencies in this aspect of the
underwriting process and by which these defendants would reply.
UBS was required to complete, or at least substantially
5
The defendants in tranches three and four have also been
instructed to give priority to production of the loans from
FHFA’s samples and to attempt to reach agreement that the
produced Loan Files and Guidelines are “the best representation
of the Loan File and Guidelines existing at the time of the
loan’s origination that the parties have been able to recreate
as of the time of such agreement.”
5
complete, its production of the Loan Files for FHFA’s sample
loans by December 17, 2012.
On November 6, 2012, the UBS Defendants informed the Court
that some of the Loan Files produced by third parties would
require “cracking.”
While it is often possible to identify
which Loan Files in the hands of a third party are associated
with a particular securitization and constitute one of FHFA’s
sample loans by using identifying file numbers and other
information, that is not always the case.
For example, a loan
in the FHFA sample may be identified only by a loan originator’s
loan identification number, but the Loan File may be in the
possession of the loan servicer and only be associated with the
servicer’s loan identification number.
When identifying numbers
cannot confirm that the correct Loan File has been produced,
Loan Files must be “cracked” open to obtain identifying
information, such as a borrower’s address.
With that
information, the Loan File can be identified as a member of
FHFA’s sample.
On November 15, the UBS Defendants advised the Court that
approximately 10,000 third party Loan Files would need to be
cracked.
UBS also asked that FHFA be required to bear half the
cost of the cracking process.
FHFA was skeptical that cracking
was necessary and offered to work with UBS and the third parties
6
to avoid it if possible.
On November 19, the Court denied UBS’s
request that FHFA be required to share the cost of any cracking.
On December 3, FHFA admitted that cracking would be
necessary since some third parties produced documents “in a
manner that makes it impossible . . . to match loan files in
those productions to our samples without opening the files.”
The difficulty involved 7,400 Loan Files from various third
parties and 8,400 from Ocwen Loan Servicing, LLP (“Ocwen”).
On
December 14, the Court ordered UBS to bear the costs of cracking
third party Loan Files to determine if those files are part of
FHFA’s sample.
On December 17, UBS submitted an affidavit from a Senior
Managing Director within FTI Consulting indicating that it would
take the firm eight weeks beginning January 7 -- or until March
4 -- to identify the 15,800 Loan Files by cracking them open.
It estimated the cost as between $940,000 and $1.8 million,
depending on the whether an optical character recognition search
or manual review process were used.
UBS renewed its request
that FHFA be required to bear half the cost.
At a conference
that day, the Court expressed skepticism that the cracking would
be so time consuming and costly.
FHFA represented that it could
do the cracking far faster and less expensively, but that it was
still talking with Ocwen to see if the cracking process could be
7
avoided for its 8,400 files.
The Court granted UBS’s request
that it be allowed to brief the issue of sharing with FHFA the
costs of the cracking process, and ordered the parties to confer
so that the sample’s Loan Files could be identified as quickly
as possible.
As the Court noted, however, UBS was to bear the
burden of any cracking of Loan Files pending the Court’s
decision on the motion.
By December 18, FHFA was able to tell UBS that its vendor
could crack the group of 7,400 unidentified Loan Files by
December 31 at a cost of just $210,000.
that process being undertaken.
UBS promptly agreed to
On December 27, FHFA advised UBS
that “[d]espite both parties’ efforts, we have not received
information that allows us to identify the Loan Files produced
by Ocwen without a manual examination.”
FHFA’s vendor estimated
that the examination of the Ocwen files could be completed by
January 7 at a cost of $220,000.
The next day, UBS provided
FHFA with a spreadsheet containing information that UBS claimed
would allow FHFA to identify a portion of the Loan Files without
cracking, and asked for more time for Ocwen to provide
information that could identify the remainder of the Loan Files.
FHFA responded that in its view the spreadsheet did not contain
information sufficient to render cracking unnecessary for any
portion of the Loan Files, and asked UBS whether it had a
8
different understanding.
FHFA received no response, and two
days later, on December 31, it began cracking the Ocwen files
itself, without waiting for an agreement from UBS.
On January 7, 2013, FHFA’s vendor finished cracking the
Ocwen files, at a final cost of approximately $85,000.
Cracking
was thus completed on both sets of files on the date on which
UBS’s vendor proposed to begin cracking.
The total cost of
cracking both sets of files ended up being approximately
$250,000, far less than the $940,000 to $1.8 million UBS’s
vendor estimated the task would cost.
FHFA provided UBS with spreadsheets generated by the
cracking process on January 5 and 7.
From that data, FHFA
advised UBS on January 11 that of the 15,500 Loan Files that had
been cracked, it was able to identify 275 Loan Files as matching
loans in FHFA’s sample.
UBS filed the instant motion on January 8.
FHFA filed its
opposition on January 23, and UBS filed a reply on January 30.
DISCUSSION
UBS contends that FHFA should pay the $250,000 associated
with cracking the two sets of Loan Files to identify which of
those files are associated with FHFA’s sample loans.
essentially two arguments for this cost shifting.
9
UBS makes
First, it
characterizes the work as “litigation costs” and the creation of
“work product” rather than costs associated with the production
of discovery materials, and argues that each party must in the
ordinary course bear its own litigation costs.
Second, it
argues that FHFA unilaterally decided to crack the 8,400 Ocwen
files, and must as a result bear at least that cost.
UBS is of course correct that the “American Rule” normally
requires each party to bear its own litigation costs.
Alyeska
Pipeline Serv. Co. v. Wilderness Soc’y, 421 U.S. 240, 247
(1975).
On the other hand, the traditional “presumption is that
the responding party must bear the expense of complying with
Oppenheimer Fund, Inc. v. Sanders, 437
discovery requests.”
U.S. 340, 358 (1978).
This distinction is also at the heart of
the amount of discretion granted to district courts to allocate
such costs.
While the American Rule forbids a district court
from shifting the parties’ litigation costs absent express
statutory authority, W. Va. Univ. Hosps., Inc. v. Casey, 499
U.S. 83, 86-87 (1991), Congress has provided that authority in
several provisions of the Federal Rules.
See 28 U.S.C. §§ 2072-
74 (authorizing promulgation of Rules); Oliveri v. Thompson, 803
F.2d 1265, 1271, 1274 (2d Cir. 1986) (Rule 11 among exceptions
to American Rule).
Rule 26(c), in particular, authorizes
federal courts to shift the costs of discovery “for good cause.”
10
See Oppenheimer Fund, 437 U.S. at 358.
The propriety of placing
the cost of the cracking exercise on UBS therefore hinges, in
large part, on whether cracking the Loan Files is properly
characterized as part of document production or a litigation
expense like attorney work product.
Attorney work product is generally not discoverable, and
the scope of what constitutes work product is closely tied to
policy considerations surrounding discoverability.
See United
States v. Adlman, 134 F.3d 1194, 1196 (2d Cir. 1998) (protection
of work product “is intended to preserve a zone of privacy in
which a lawyer can prepare and develop legal theories and
strategy”); In re Steinhardt Partners, L.P., 9 F.3d 230, 234 (2d
Cir. 1993) (“The logic behind the work product doctrine is that
opposing counsel should not enjoy free access to an attorney’s
thought processes.”).
Thus work product is usually defined by
reference to the “thoughts” and judgment of an attorney.
See
United States v. Nobles, 422 U.S. 225, 238 (1975) (“At its core,
the work product doctrine shelters the mental processes of the
attorney, providing a privileged area within which he can
analyze and prepare his client’s case”.).
Work product has been
described as including “preparing legal theories, planning
litigation strategies and trial tactics, and sifting through
information.”
Steinhardt Partners, 9 F.3d at 234 (citing
11
Hickman v. Taylor, 329 U.S. 495, 510-11 (1947)).
Work product
protection is codified in the federal rules, which do not allow
discovery of “documents and tangible things that are prepared in
anticipation of litigation or for trial by or for another party
or its representative.”
Fed. R. Civ. P. 26(b)(3)(A).
Cracking does not qualify as work product.
Cracking is
simply opening a Loan File and retrieving information that
allows the Loan File to be identified.
The end result of the
cracking process may be a spreadsheet containing the resulting
information, which typically includes such uncontroversial data
as the loan number, the borrower’s name and address, and the
amount of the loan.
Cracking is therefore more like a kind of
transcription, albeit time-consuming and costly transcription,
than the thought processes or analysis of an attorney.
See
Steinhardt Partners, 9 F.3d at 234; Riddell Sports Inc. v.
Brooks, 158 F.R.D. 555, 559 (S.D.N.Y. 1994) (“[T]he collection
of evidence, without any creative or analytic input by an
attorney or his agent, does not qualify as work product.”).
Nor does cracking qualify as work prepared by or for FHFA
or its agent, such that it falls within the definition of work
product in Rule 26.
The cracking at issue here was conducted by
FHFA’s outside vendor for the benefit of both parties.
As a
result, FHFA provided the spreadsheets to UBS as soon as the
12
cracking task was completed.
For this very reason, there is
also no suggestion that the fact that the task was performed by
an agent for the plaintiff as opposed to an agent for the
defendant should bear on the analysis.
ministerial act.
Cracking is a simple,
In this case, because it was performed by the
plaintiff’s agent, it was done more cheaply and quickly, and UBS
does not question the reliability of the results.
Cracking is more properly seen as part of the cost of
document production.
In responding to a typical document
request, a party must sift through documents so that it can
identify and produce those documents being requested.
See
Rothman v. Emory Univ., 123 F.3d 446, 455 (7th Cir. 1997)
(producing party ordinarily has an “obligation to sort through
the documents and produce only those responsive to [the opposing
party’s] request”).
In this case, FHFA elected to try its case
based on a sample set of loans, a restricted subset of the large
number of loans contained in the supporting loan groups for each
securitization.
To determine which Loan Files in fact
corresponded to the sample loans, it proved necessary in this
instance to crack open some of the Loan Files themselves and
extract certain information from them.
Indeed, both parties
must be able to identify the Loan Files in FHFA’s sample in
order to begin the reunderwriting process, which is where the
13
true analysis of the Loan Files begins.
Because in this
instance it proved a necessary step in identifying what was
being produced, cracking is part of the cost of production, not
work product.
Of course, the set of Loan Files being produced is not
limited to FHFA’s sample, because defendants refused to consent
to try this case on the basis of a sample.
This decision
provided at least some of the impetus for requiring defendants
to bear the cost of this production and cracking exercise.
Plaintiffs initially sought production of only the Loan Files
corresponding to loans in their sample, a set of some 2,400
loans out of a total of roughly 44,000 loans in the
securitizations at issue in the UBS Action.
It was defendants’
refusal to agree to try the case on the basis of a sample that
necessitated production of all Loan Files, and vastly increased
the burden on the parties and third parties. 6
Furthermore, the
extent to which UBS will decide to rely on loans outside the
sample in rebutting FHFA’s proof, or in presenting its
6
Although UBS complains that defendants are “bearing virtually
all of the costs associated with the production of third party
loan files”, it does not ask in this motion that FHFA be
required to share those costs generally. As the Court has
explained, “we are in this very expensive, burdensome document
production, which has enormous ramifications for your clients,
the defendants, the plaintiffs, and now third parties. And the
defendants will bear the cost of that.”
14
affirmative defenses, remains to be seen.
Placing the cost of
any future cracking that may be necessary on UBS therefore
serves to help keep costs in check for all parties.
The cases cited by UBS do indicate that courts should be
hesitant to force a party to create and produce new evidence for
the benefit of its adversary.
See, e.g., Paramount Pictures
Corp. v. Replay TV, CV 01-9358 (FMC), 2002 WL 32151632, at *2-3
(C.D. Cal May 30, 2002) (company not required to produce
customer-use data that had never been collected); Alexander v.
FBI, 194 F.R.D. 305, 310 (D.D.C. 2000) (FBI not required to
produce list that did not exist).
The mere transcription
involved in cracking, however, is not closely analogous.
See
Riddell Sports, 158 F.R.D. at 559 (“[S]ince the mere assembly of
evidence by one party is not work product, its adversary will be
able to obtain that evidence . . . [and] is not thereby liable
for the opposing counsel’s fees for time expended in collecting
the evidence.”).
Cracking is necessary to identify the Loan
Files that are being produced, based on criteria over which
there is no dispute and on information that is in existence and
is in fact contained in the Loan File itself.
Cracking is also
both beneficial and necessary for both FHFA and UBS.
As the
parties have made clear, the defendants have an equal (if not
greater) interest in ensuring the completeness and accuracy of
15
the Loan Files.
Cracking is part of that process, and its
benefits accrue to the defendants as well as FHFA.
UBS argues that even if it is required to bear the cost of
cracking generally, it should not be required to bear the cost
of cracking the Ocwen files, because FHFA “unilaterally” decided
to ask its vendor to crack those files without waiting for
permission from UBS.
UBS suggests that, at the time FHFA asked
its vendor to crack the Ocwen files, UBS was still waiting for
additional information from Ocwen that might render cracking
unnecessary.
This information was to arrive via a spreadsheet
on January 2; it never arrived because UBS instructed Ocwen to
abandon its efforts when it learned that FHFA’s vendor had
already started cracking.
FHFA, on the other hand, argues that
even if the information had been produced, it would not have
been sufficient to render cracking unnecessary.
It should be remembered that cracking the Ocwen files was
completed by FHFA’s vendor at a considerable savings in time and
money to UBS.
It should also be remembered that UBS had been on
notice of the need for cracking long before December 31, 2012,
when FHFA began cracking the Ocwen files.
On November 15, the
Court ordered FHFA and UBS to work together to see whether
providing additional information to the servicers would render
cracking unnecessary, and on November 19, the Court ordered UBS
16
to bear the cost of cracking if this effort did not succeed.
On
December 17, UBS was again ordered to undertake the cracking
process, with the issue of which party would ultimately pay
being reserved for this briefing.
In short, UBS had ample time
to confer with Ocwen to determine whether it could provide
information that would render cracking unnecessary, and no
reason to expect that it could delay cracking indefinitely by
withholding its consent.
There is thus no reason to treat the
cracking of the Ocwen files differently from the non-Ocwen
files.
Finally, it should be noted that UBS does not contend that
the cost associated with the cracking of the 15,800 Loan Files
is unreasonable.
The entire exercise was completed on the day
UBS’s vendor was prepared to begin, having taken less than three
weeks instead of the eight weeks UBS estimated it would take.
And it was done for a fraction of the cost: $250,000 instead of
$940,000 to $1.8 million.
Had UBS been required to shoulder
just half of that cost, it would have paid between $470,000 and
$900,000, and its work with the sample loans would have been
delayed by two months.
17
CONCLUSION
The UBS Defendants’ January 8, 2013, motion to require FHFA
to bear the financial burden associated with cracking is
therefore denied.
SO ORDERED:
Dated:
New York, New York
March 26, 2013
18
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