Royal Park Investments SA/NV v. U.S. Bank National Association

Filing 332

MEMORANDUM AND ORDER denying 179 Motion for Sanctions. The defendant in this action, U.S. Bank National Association ("U.S. Bank"), has moved pursuant to Rule 37 (b) of the Federal Rules of Civil Procedure to preclude the plaintiff, Roya l Park Investments SA/NV ("Royal Park"), from introducing proof of damages as a sanction for failing to comply with a discovery order. U.S. Bank also seeks an order precluding Royal Park from serving as a class representative in this case. (As further set forth in this Order.) For the reasons discussed, U.S. Bank's motion for sanctions (Docket no. 179) is denied, as is Royal Park's application for an award of attorneys' fees. (Signed by Magistrate Judge James C. Francis on 10/19/2017) Copies Sent By Chambers. (cf)

Association, 319 F.R.D. 122, 124-26 (S.D.N.Y. 2016), and will not
be repeated here.

In that motion, U.S. Bank argued that Royal

Park’s claims should be dismissed because it had failed to produce
documents (the “Assignor documents”) within the possession of
entities

(the

“Assignors”)

from

which

Royal

Park

assignment of the claims it asserts in this action.
26.
in

had

taken

Id. at 125-

Those claims arise out of U.S. Bank’s obligations as trustee
connection

with

trust

certificates

(the

“Certificates”)

consisting of residential mortgage backed securities that the
Assignors transferred to Royal Park.

Id. at 124-25.

I accepted

many of U.S. Bank’s contentions in the first sanctions motion,
finding that Royal Bank had violated my prior order compelling the
production of Assignor documents and that it had done so willfully.
Id. at 126-27.

However, I also determined that sanctions were not

appropriate because U.S. Bank had failed to demonstrate that it
had been prejudiced.

Id. at 129-32.

Nevertheless, I left the

door open for U.S. Bank to show prejudice in at least one respect.
I noted that
U.S. Bank argues that it needs Assignor documents that
have not yet been produced in order to rebut Royal Park’s
claimed damages. The defendant’s theory is that some or
all of the damages that Royal Park now claims were
incurred prior to any breach by U.S. Bank and therefore
could not have been caused by such a breach.
Id. at 131.

Yet, I found that “[a]s convincing as this argument

may be, it does not yet warrant foreclosing Royal Park’s damages

2

evidence altogether.

Neither party has proffered evidence from a

damages expert suggesting that the missing documentation is or is
not essential to a damages analysis.”

Id.

Accordingly, I denied

U.S. Bank’s motion with the caveat that it could be renewed at
such time as U.S. Bank could demonstrate prejudice.

Id. at 132.

On March 3, 2017, the defendant reinstituted its motion.
Shortly thereafter, Royal Park sought to stay briefing on the basis
that it was about to produce valuation documents obtained from
Fortis Bank SA/NV (“Fortis”), the principal Assignor, as well as
from its own files.
2017, at 1).

(Letter of Darryl J. Alvarado dated March 9,

While I declined to issue an open-ended stay, I did

provide a substantial extension of the schedule. (Text Order dated
March 15, 2017).

Briefing is now complete.

Analysis
U.S. Bank relies principally on declarations submitted by
their expert witness, Christopher M. James, Ph.D.

In his initial

declaration, Dr. James concludes:
Fortis took billions of Euros of impairment on the
portfolio of assets it transferred to Royal Park in May
2009 (the “Transferred Assets”).
While publicly
available Fortis documents reveal that Fortis incurred
massive losses on the Transferred Assets, they do not
reflect individual security-specific impairments taken
by Fortis.
These impairments reflect contemporaneous
evidence of actual losses incurred by Fortis. Because
such impairments and other declines in fair value have
significant real-world impact and are important evidence
of loss of value before any alleged breaches by U.S.
Bank, the Valuation Documents are essential to assess

3

the validity of Royal Park’s
respect to the Assigned Claims.

claimed

damages

with

(Declaration of Christopher M. James dated March 3, 2017 (“James
3/3/17 Decl.”), attached as Exh. A to Declaration of Tera M. Heintz
dated March 3, 2017, ¶ 14). 1

Dr. James observes that one document

produced by Royal Park, a Purchase and Sale Agreement, shows that
three of the Certificates at issue were transferred in June 2008
for a “clean price” of “0.00,” purporting to represent “the fair
market value of the Securities as of the Trade Date.”

(James

3/3/17 Decl., ¶ 27). According to Dr. James, “Documents reflecting
these impairments show that there was no good-faith basis to
believe that a market participant would have bought or sold certain
of the Certificates at issue for any amount of money before the
alleged breaches by [U.S. Bank].”

(James 3/3/17 Decl., ¶ 27).

Further, Dr. James opines that “[t]here is no comparable
substitute

for

Fortis’s

contemporaneous

Valuation

Documents,

particularly given the market uncertainty during the relevant time
period and lack of available trading data and third party pricing

1

Throughout this decision, I have occasionally alluded to
documents that the parties marked as confidential. I have serious
doubts whether such a designation was appropriate in the first
place, as the transactions took place years ago, and the
information does not appear to have any current commercial value.
More importantly, the information was presented as part of an
application to the Court and serves as the predicate for a judicial
determination.
As such, it is presumptively subject to public
access, and there is no apparent basis for rebutting that
presumption.
See Lugosch v. Pyramid Co. of Onondaga, 435 F.3d
110, 119-20 (2d Cir. 2006).
4

information.”

(James 3/3/17 Decl., ¶ 14).

And he argues that

“trading and third party pricing data, even if available, are
insufficient to assess damages as they do not contain sufficient
information to disentangle loss in value due to the allegations as
opposed

to

unrelated

conditions.”
As

noted

subsequent

to

factors

such

as

worsening

economic

produced

valuation

documents

(James 3/3/17 Decl., ¶ 14).
above,
U.S.

Royal

Bank’s

Park
motion

and

to

Dr.

James’

initial

declaration, and depositions of Fortis witnesses were then taken
as well. Accordingly, in connection with U.S. Bank’s reply papers,
Dr. James issued a second declaration in which he states:
Fortis witnesses have . . . confirmed that the
impairments (losses) recorded by Fortis for which some
documents have now been produced likely totaled hundreds
of millions of dollars and were recorded by Fortis before
U.S. Bank is alleged to have breached any contract or
otherwise acted improperly. . . .
While
confirming
the
fact,
importance,
and
magnitude of these losses, Fortis witnesses have been
unable to confirm the specific impairment loss figures
applicable to the Certificates. Fortis witnesses have,
however, confirmed the existence of several categories
of still-unproduced Fortis documents that would both
confirm the specific losses taken and likely show
additional impairment losses on the 28 Certificates.
Specifically, Fortis witnesses discussed the existence
of: (1) documents regarding impairments taken by Fortis
in the fourth quarter of 2008 and first quarter of 2009;
(2) documents showing the final impairment figures
recorded in the books and records of the Fortis
affiliates that owned the At-Issue Assets; (3) documents
specifying the rationale for those impairment figures
and
reflecting
independent
auditor
and
market
valuations; and (4) documents modeling the values of the
Certificates underlying CDOs.
5

(Declaration of Christopher M. James dated Aug. 25, 2017 (“James
8/25/17 Decl.”), ¶ 3).
Royal Park’s expert, W. Scott Dalrymple, takes issue with Dr.
James’ conclusions.

First, he questions the significance to a

damages calculation of valuing a Certificate at zero:
Even if Fortis had valued the Certificates at zero prior
to any alleged breach, one cannot simply conclude that
the values of the Certificates would have remained at
zero “but for” the alleged breaches. . . . [T]he value
of a financial instrument can fluctuate over time.
Therefore, there is no basis for concluding that a
Certificate that is marketed at zero cannot increase in
value based on subsequent developments.
(Declaration of W. Scott Dalrymple dated May 12, 2017 (“Dalrymple
5/12/17 Decl.”), attached as Exh. 1 to Declaration of Darryl J.
Alvarado dated May 12, 2017, ¶ 8).

Second, he argues that Fortis’

valuations of the Certificates are no more authoritative than those
of any pricing service performing similar calculations, such as
Interactive

Data

Corporation

(“IDC”),

whose

valuations

are

publicly available, or indeed, of any other private investor like
JPMorgan. (Dalrymple 5/12/17 Decl., ¶¶ 12, 14). Moreover, Fortis’
own valuations would themselves have incorporated data from other
entities like IDC.
Dalrymple

contends

(Dalrymple 5/12/17 Decl., ¶ 13).
that

a

reliable

damages

Third, Mr.

analysis

will

ultimately rely on data from a variety of sources, so that the
absence

of

particular

Fortis

documents

(Dalrymple 5/12/17 Decl., ¶ 17).
6

would

be

immaterial.

Some of Mr. Dalrymple’s contentions are unconvincing.

For

example, while he treats Fortis’ taking an impairment as one
viewpoint among many, it seems axiomatic that the more data points
that

are

available,

the

more

calculation is likely to be.

reliable

the

ultimate

damage

And I am not persuaded that Fortis’

valuation is no more accurate than that of any other entity engaged
in the same exercise; as owner of the asset, it may well have had
more incentive and perhaps more ability to obtain the relevant
information.

It certainly had an incentive to be accurate, since

it was operating in a highly regulated legal environment, and any
write-down of its assets would have real world consequences,
including by reducing its ability to raise capital and diminishing
shareholder equity.

(James 3/3/17 Decl., ¶¶ 30-34).

Finally,

even if the valuing of a particular Certificate at zero does not
mean

that

it

has

no

value

whatsoever,

the

magnitude

of

an

impairment is highly relevant to any damages calculation.
Nevertheless, the issue here is not whether there is some
additional
calculation;
information

information
it
so

is

that

whether

necessary

to

would
Royal
that

be
Park

helpful

process

suffered prejudice warranting preclusion.

a

damages

failed

has

in

to

produce

that

U.S.

Bank

has

See Distefano v. Law

Offices of Barbara H. Katsos, PC, No. 11 CV 2893, 2017 WL 1968278,
at *27 (E.D.N.Y. May 11, 2017) (denying adverse inference where
“there is some indication that the missing information has been
7

(or could be) obtained from other sources, which weighs against
finding prejudice here”); F.D.I.C. v. Horn, No. 12 CV 5958, 2015
WL

1529824,

at

*16

(E.D.N.Y.

March

31,

2015)

(same);

SJS

Distribution Systems, Inc. v. Sam’s East, Inc., No. 11 CV 1229,
2013 WL 5596010, at *5 (E.D.N.Y. Oct. 11, 2013) (denying preclusion
where other evidence remained available); Cedar Petrochemicals,
Inc. v. Dongbu Hannong Chemical Co., 769 F. Supp. 2d 269, 293
(S.D.N.Y.

2011)

(denying

spoliation

sanctions

where

“other

evidence” available); Field Day, LLC v. County of Suffolk, No. 04
CV 2202, 2010 WL 1286622, at *14 (E.D.N.Y. March 25, 2010) (denying
preclusion where “it is unclear that Plaintiffs suffered any
prejudice as destroyed documents apparently have been otherwise
obtained”); Golia v. Leslie Fay Co., No. 01 Civ. 1111, 2003 WL
21878788, at *10 (S.D.N.Y. Aug. 7, 2003) (finding that “misconduct
has not robbed [the opposing party] of the only evidence on which
they could base their case”). 2
U.S. Bank has not demonstrated prejudice.

Dr. James himself

has prepared estimated valuations for fifteen Certificates beyond
those that were written down to zero.
26-28 & tbl. 2).

(James 8/25/17 Decl., ¶¶

In doing so, he relied on a variety of sources,

including Fortis documents and prices quoted by IDS and Bloomberg.

2

Although the cases cited here by and large deal with
sanctions for the spoliation of evidence, the concept of prejudice
is no different when sanctions are sought in response to the
failure to comply with a discovery order.
8

(James 8/25/17 Decl., ¶ 28 & nn.44-45 & tbl. 2 nn.3-4).

Far from

being definitive, the Fortis documents are sometimes in conflict
with each other and with information obtained from independent
sources.

(James 8/25/17 Decl., ¶ 28 & tbl. 2 nn.4, 6 (finding

“[f]or some Certificates, different Fortis documents supported
substantially

different

potential

impairment

“[t]here is conflicting Fortis documentation”)).

estimates”

and

The process that

Dr. James followed demonstrates that the goal of the valuation
analysis (and, ultimately, of a damages calculation) is not to
achieve scientific certainty, which is not possible in the context
of

valuing

financial

instruments,

but

to

arrive

at

the

most

defensible judgment under the circumstances, something he has been
able to do with the information provided.
To be sure, Dr. James found it “more challenging to determine
likely impairments for the remaining six Certificates, as there
was limited information in the documents produced by Royal Park
about the impairments taken for Q3 2008, but no apparently reliable
information available sufficient to support estimates for Q4 2008
and Q1 2009.”

(James 8/25/17 Decl., ¶ 29).

According to Dr.

James,
Although some documents produced by Royal Park suggested
possible
impairment
figures
for
five
of
these
Certificates for Q4 2008 and/or Q1 2009, those documents
(a) conflicted with other documents that suggested
substantially different impairment figures for the same
time periods; or (b) contained figures whose sources

9

were not identified and could not be substantiated; or
(c) both.
(James

8/25/17

Decl.,

¶

29).

This

information

gap

sufficient, however, to provide a basis for sanctions.

is

not

First, it

is not apparent how the data for these Certificates differs from
that available for the others which, according to Dr. James, was
also inconsistent, but which was adequate for him to conduct an
analysis.

Second, Royal Park does appear to have produced final

impairment figures through the end of 2008.

(Exhs. 3-5 attached

to Declaration of Darryl J. Alvarado dated Sept. 8, 2017 (“Alvarado
9/8/17 Decl.”), attached as Exh. B to Letter of Darryl J. Alvarado
dated Sept. 8, 2017).

Third, any impairments taken for Q1 2009

are of limited relevance, since (1) “the scope of the [Q1 2009]
impairment exercise [was] limited to the retained portfolio,” that
is, assets that Fortis had not sold to Royal Park and which,
therefore, are not at issue here (Exh. 12 attached to Alvarado
9/8/17 Decl., at 1), and (2) any losses suffered by Fortis were
realized as of August 31, 2008, since, according to the terms of
the transfer to Royal Park, any change in value after that date
would be to the benefit or detriment of Royal Park.

(Exh. 9

attached to Alvarado 9/8/17 Decl., at 173).
Apart from the issue of documentation for the Q4 2008 and Q1
2009 periods, U.S. Bank raises two additional concerns.

First, it

contends that without additional valuation documents, it cannot

10

ascertain the cause for the loss of value of the Certificates,
something that is sure to be a contested issue.
Decl., ¶¶ 14, 22).

(James 3/3/17

While U.S. Bank has demonstrated a reasonable

basis for seeking information about when the Certificates lost
value, it has not explained how information exclusively in the
possession of Royal Park or the Assignors would shed light on why
any such losses occurred.

It is likely that causation will be

proven through statistical analysis, not by reference to comments
in an email authored by an employee of a Fortis affiliate.
Second, U.S. Bank complains that many of the documents that
Royal Park has produced could not be authenticated.

This is not

surprising given the lapse of time since they were created.

But,

in any event, the solution for this problem rests with the Court’s
application of evidentiary principles at trial, not with the
imposition of a preclusion order.

U.S. Bank’s motion to preclude

Royal Park from introducing evidence of damages is therefore
denied.
U.S. Bank’s application to preclude Royal Park from serving
as class representative is also denied.

Even if there were a basis

for such relief, it would be inappropriate for me to grant it while
a motion for class certification is pending before the Court.
Royal Park’s application for an award of attorneys’ fees is
denied as well.

The production of Assignor documents pursuant to

my Order has been tardy and, ultimately, incomplete.
11

While there