The Federal Deposit Insurance Corporation, et al v. Killinger et al

Filing 69

REPLY, filed by Plaintiff The Federal Deposit Insurance Corporation, TO RESPONSE to 63 MOTION for Protective Order (Barton, Walter)

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The Honorable Marsha J. Pechman

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UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF WASHINGTON

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)
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THE FEDERAL DEPOSIT INSURANCE
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CORPORATION, as RECEIVER of
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WASHINGTON MUTUAL BANK,
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Plaintiff,
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v.
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KERRY K. KILLINGER, STEPHEN J.
ROTELLA, DAVID C. SCHNEIDER, LINDA )
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C. KILLINGER, and ESTHER T. ROTELLA, )
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Defendants.
)
______________________________________ )

Case No.: 2:11-cv-00459-MJP
PLAINTIFF FDIC’S REPLY IN SUPPORT
OF ITS MOTION FOR PROTECTIVE
ORDER
Noted on Motion Calendar:
August 26, 2011

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PLAINTIFF FDIC’S REPLY IN SUPPORT OF
MOTION FOR PROTECTIVE ORDER
No. 2:11-cv-00459-MJP
#813168 v1 / 44469-001

Law Offices

KARR TUTTLE CAMPBELL
A Professional Service Corporation
1201 Third Avenue, Suite 2900, Seattle, Washington 98101-3028
Telephone [phone], Facsimile [phone]

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Plaintiff Federal Deposit Insurance Corporation, as Receiver of Washington Mutual Bank

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(“FDIC”), hereby submits this Reply in Support of Its Motion for Protective Order, as follows.1

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I.

O’Melveny Did Not Abrogate the “No Duty” Rule.

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The Defendants incorrectly assert that the Supreme Court’s decision in O’Melveny &

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Myers v. FDIC, 512 U.S. 79, 86 (1994), abrogated the “no duty” rule for either the pre-

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receivership conduct of federal regulators or the FDIC’s post-receivership conduct.

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A.

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Defendants seem intent on litigating the regulators’ pre-receivership conduct regarding

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O’Melveny Did Not Affect the “No Duty” Rule for Pre-Receivership Conduct
by Federal Regulators.

WaMu. But the “no-duty” rule continues to apply to such pre-receivership conduct. “Courts
have uniformly held that claims or defenses based on pre-receivership actions of regulators are
legally insufficient.” Grant Thornton, LLP v. FDIC, 535 F. Supp. 2d 676, 722 (S.D.W.Va. 2007)
(collecting cases), rev’d on other grounds, 530 F.3d 280 (4th Cir. 2008); see, e.g., FDIC v. Raffa,
935 F. Supp. 119, 124 (D. Conn. July 20, 1995) (“Whether pre- or post-bank failure, the FDIC’s
duty is owed, not to bank directors or officers, but to the insurance fund it is charged with
protecting and to the banking public.”). Indeed, even one of the post-O’Melveny cases cited by
Defendants in their Joint Opposition acknowledged the continuing viability of the “no duty” rule
for regulators’ pre-receivership conduct.

See FDIC v. Ornstein, 73 F. Supp. 2d 277, 281

(E.D.N.Y. 1999) (striking affirmative defense based on pre-receivership conduct of regulators
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The Defendants assert that the FDIC attempted to “evade the rules” by not complying with the format of
Local Civil Rule 37’s expedited discovery dispute procedure. Any such lack of compliance was
inadvertent and the FDIC’s counsel apologizes if that format should have been followed. Because the
oral agreement at the July 20, 2011 status conference to use CR 37 was not included by any of the parties
in the revised Joint Status Report, was not included in the Scheduling Order, and was not raised in the
multiple meet-and-confer discussions with defense counsel, the FDIC’s counsel inadvertently did not
focus on it. The FDIC notes that, on its face, CR 37 provides an alternative procedure for motions to
compel under CR 7(d)(3), but not clearly for a motion for protective order under CR 7(d)(2). In any
event, the record reflects that the parties met and conferred in the utmost good faith and resolved most of
their discovery disputes, but that the issue presented by the FDIC’s motion requires the Court’s review.
The FDIC did put Defendants on notice that it might file a Motion for Protective Order. (See B. Stewart
Decl., Ex. C, Aug. 8, 2011, H. Pietrkowski Ltr. at 3 (“the FDIC stands on its objections regarding
discovery of confidential regulatory documents and communications and reserves the right to file a
motion for protective order on this issue unless you can produce binding precedent to the contrary.”)
(emphasis added).
PLAINTIFF FDIC’S REPLY IN SUPPORT OF
MOTION FOR PROTECTIVE ORDER - 1
No. 2:11-cv-00459-MJP
#813168 v1 / 44469-001

Law Offices

KARR TUTTLE CAMPBELL
A Professional Service Corporation
1201 Third Avenue, Suite 2900, Seattle, Washington 98101-3028
Telephone [phone], Facsimile [phone]

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and noting that, “[P]re-conservatorship conduct of federal banking regulators cannot be attacked

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by directors.”) (quoting RTC v. Sands, 863 F. Supp. 365, 372-73 (N.D. Tex. 1994)).

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Most of Defendants’ other cited cases either were aimed solely at post-receivership

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conduct or failed to reach any conclusion about O’Melveny’s impact on the “no duty” rule for

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pre-receivership conduct. See RTC v. Mass. Mut. Life Ins. Co., 93 F. Supp. 2d 300, 302, 304-05

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(W.D.N.Y. 2000) (discussing O’Melveny’s impact only on post-receivership conduct); FDIC v.

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Gladstone, 44 F. Supp. 2d 81, 90-91 (D. Mass. 1999) (distinction between the RTC as regulator

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and as receiver remains “undisturbed by O’Melveny”) (citation omitted); RTC v. Baker, No. CIV

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A. 93-0093, 1994 WL 637359, at *3 (E.D. Pa. Nov. 14, 1994) (noting split in case law as to

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application of O’Melveny). “Given the fact that O’Melveny did not address the issue of pre-

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receivership conduct by regulators,” Grant Thornton, 535 F. Supp. 2d at 724, O’Melveny did not

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affect the “no duty” rule as applied to federal regulators while the bank was still operational.

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B.

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The Weight of Authority and Better Reasoned Cases Hold that the “No
Duty” Rule for Post-Receivership Conduct Remains Viable After
O’Melveny.

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As Defendants point out, some district courts have held that O’Melveny abrogated the “no

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duty” rule with respect to the FDIC’s post-receivership conduct. However, these cases are

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poorly reasoned and do not reflect the majority view that O’Melveny – which did not involve

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regulator conduct but bank officer conduct imputed to the FDIC – did not address whether state

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law defenses could be raised against the FDIC for its discretionary post-receivership actions.

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See, e.g., FDIC v. Healey, 991 F. Supp. 53, 61 (D. Conn. 1998); Raffa, 935 F. Supp. at 125.

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Defendants take issue with the FDIC’s citation to Raffa, asserting that it was “effectively

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reversed” by FDIC v. Haines, 3 F. Supp. 2d 155, 159 (D. Conn. 1997). But they fail to mention

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that Haines itself was “effectively reversed” the next year, when the court in Healey determined

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that Haines was wrong and Raffa was right all along. Healey, 991 F. Supp. at 60-62. More

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specifically, Healey found that Haines overlooked the fact that O’Melveny never addressed

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whether the “no duty” rule should apply to the FDIC’s post-receivership conduct. Similarly,

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Haines failed to assess whether FIRREA’s statutory provisions involving the FDIC’s broad

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PLAINTIFF FDIC’S REPLY IN SUPPORT OF
MOTION FOR PROTECTIVE ORDER - 2
No. 2:11-cv-00459-MJP
#813168 v1 / 44469-001

Law Offices

KARR TUTTLE CAMPBELL
A Professional Service Corporation
1201 Third Avenue, Suite 2900, Seattle, Washington 98101-3028
Telephone [phone], Facsimile [phone]

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discretionary powers as receiver of a failed bank presented a “significant conflict” with state law

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affirmative defenses that merited application of the “no duty” rule. Id. A number of other courts

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have reached a similar conclusion that O’Melveny did not abrogate the “no duty” rule for the

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FDIC’s post-receivership conduct. See, e.g., RTC v. Gravee, No. 94 C 4589, 1995 WL 599056,

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at *2-3 (N.D. Ill. Oct. 5, 1995) (collecting numerous post-O’Melveny cases and holding that “the

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majority rule is the better one”); RTC v. Edie, Civ. No. 94-772 (DRD), 1994 WL 744672, at *3

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(D.N.J. Oct. 4, 1994) (“O’Melveny’s narrow holding leaves the no duty rule undisturbed.”). And

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in FDIC v. Liebert, 871 F. Supp. 370 (C.D. Cal. 1994), on which Defendants heavily rely, the

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court admitted that “the heavy majority position is that the ‘no duty’ rule applies to post-

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FIRREA suits” and that it was “[r]ejecting the majority trend of District Court authority.” Id. at

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373.

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II.

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Discovery of Regulators’ Internal Documents and Communications is Precluded by
the “No Duty” Rule.
Defendants cite to the magistrate judge’s opinion in FDIC v. Schoenberger, No. CIV. A.

No. 89-2756, 1990 WL 52863 (E.D. La. Apr. 24, 1990), for the proposition that, “in cases where
discovery was at issue, the FDIC’s argument [regarding the ‘no duty’ rule] has been rejected.”
(Joint Opp’n at 12.) Defendants fail to inform the Court, however, that the district court in that
case reversed the relevant portion of the magistrate judge’s ruling and held that the defendants
were “not entitled to discovery of all post-closing documents” because they only would be
“relevant to prove defendants’ affirmative defenses such as failure to mitigate damages” and “the
great weight of the authority leads the Court to conclude that the FSLIC owed no such duty to
defendants.” FDIC v. Schoenberger, No. CIV. A. No. 89-2756, 1990 WL 130641, at *2 (E.D.
La. Aug. 30, 1990). The Schoenberger court also cited two other federal court decisions –
FSLIC v. Roy, No. CIV JFM-87-1227, 1988 WL 96570, at *2 (D. Md. June 28, 1988), and Vogel
v. Grissom, No. CA3-89-467-D (N.D. Tex. May 3, 1989) – that similarly limited defendants’
discovery based on the “no duty” rule as applied to federal regulators’ post-receivership conduct.

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PLAINTIFF FDIC’S REPLY IN SUPPORT OF
MOTION FOR PROTECTIVE ORDER - 3
No. 2:11-cv-00459-MJP
#813168 v1 / 44469-001

Law Offices

KARR TUTTLE CAMPBELL
A Professional Service Corporation
1201 Third Avenue, Suite 2900, Seattle, Washington 98101-3028
Telephone [phone], Facsimile [phone]

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See also Sands, 863 F. Supp. at 375 (limiting the scope of defendants’ discovery against the

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FDIC as a result of striking defendants’ affirmative defenses under the “no duty” rule).2

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The only exception to discovery that the district court in Schoenberger allowed was

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based on the FDIC’s agreement that defendants were entitled to certain loan information related

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to damages. Schoenberger, 1990 WL 130641, at *2. This is true here as well; the FDIC has not

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objected to production of relevant causation and damages information, such as documents

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reflecting “the value of the home loans sold to JPMC [JP Morgan Chase].” (See, e.g., B. Stewart

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Decl., Ex. A, FDIC’s Resps. & Objs. to Killingers’ First Request for Production, at General

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Objection 6; Id., Ex. F, Aug. 15, 2011 Pietrkowski Meet-and-Confer Ltr. at 2 n.2.)

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III.

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Defendants’ clear strategy is to try to put the conduct of WaMu’s regulators at the

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Defendants Seek Internal Regulatory Documents to Put the FDIC and OTS on
Trial, and Not For Some Legitimate Purpose.

forefront of this litigation. Defendants Rotella and Schneider attack the FDIC in the opening
sentence of their Motion to Dismiss, calling this lawsuit “a pure public relations stunt designed to
deflect criticism away from the FDIC, which has been—and continues to be—under fire for its
regulatory failures with respect to WaMu.” Defendant Killinger’s broad discovery requests
confirmed the Defendants’ improper strategy of putting the conduct of WaMu’s regulators front
and center, and Defendants’ Joint Opposition further confirms the tactic. Indeed, Defendants
state that they seek regulatory documents “to show the FDIC’s [supposed] hindsight bias,” which,
under the no-duty rule, is wholly irrelevant. (Joint Opp’n at 6.) The Joint Opposition also refers
to the alleged “premature seizure” of WaMu, which again is not relevant to any issues in this case
since it is not for the Court or trier of fact to second guess the timing or wisdom of the regulatory
decision to close WaMu.
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The two other cases cited by Defendants that refused to limit discovery against the FDIC failed to
address the “no duty” case law discussed in this motion. Rather, they relied on FDIC v. Jenkins, 888 F.2d
1537, 1546 (11th Cir. 1989), which held that the FDIC was not entitled to absolute priority over
shareholders in the collection of assets. See In re Sunrise Secs. Litig., 138 F.R.D. 60, 62-63 & n.4 (E.D.
Pa. 1991); FDIC v. Cherry, Bekaert & Holland, 131 F.R.D. 202, 203-04 (M.D. Fla. 1990). Not only are
these cases poorly reasoned, the Cherry decision was rejected by Schoenberger, 1990 WL 130641, at *4,
and the court in Sunrise subsequently decided that it would strike a number of affirmative defenses
because of the “no duty” rule. See In re Sunrise Secs. Litig., 818 F. Supp. 830 (E.D. Pa. 1993).
PLAINTIFF FDIC’S REPLY IN SUPPORT OF
MOTION FOR PROTECTIVE ORDER - 4
No. 2:11-cv-00459-MJP
#813168 v1 / 44469-001

Law Offices

KARR TUTTLE CAMPBELL
A Professional Service Corporation
1201 Third Avenue, Suite 2900, Seattle, Washington 98101-3028
Telephone [phone], Facsimile [phone]

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Defendants suggest that their primary goal is to use regulatory evidence not to criticize

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the regulators, but to show that the regulators approved or acquiesced in their conduct. But, as

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discussed on pages 9-10 of the FDIC’s Motion for Protective Order, such “acquiescence”

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evidence might simply mean that the regulator was unduly lax or ill-informed, and the

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introduction of such evidence would open a Pandora’s box concerning the basis for regulators’

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statements and their probative value. Such a “mini-trial” on regulator performance is exactly

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what is prohibited by the “no-duty rule.”

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The Defendants further claim that internal regulatory documents, in particular related to

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the seizure of WaMu, are relevant to causation and damages issues. But as explained above,

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they fail to inform the Court that the FDIC has agreed to provide documents reflecting “the value

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of the home loans sold to JPMC [JP Morgan Chase].” As to their theory that the alleged

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“premature seizure” of WaMu caused the losses, the Complaint seeks damages for the billions of

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dollars of losses suffered by WaMu before the Bank was seized. Moreover, Defendants cite no

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cases that allow them to challenge the regulatory decision to seize WaMu; again, this would be a

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sideshow that would distract from the real issues in the case. The Defendants also suggest that

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regulatory documents might be relevant to the issue of whether the losses were caused by

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“external market factors.” Assuming arguendo this is even a proper defense here – given that a

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central allegation is that the Defendants failed to adequately prepare the Bank for weakened

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market conditions – they do not explain how internal regulatory documents might be relevant to

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the issue, at least without having a mini-trial regarding FDIC’s statements about the market

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factors.

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Finally, Defendants incorrectly argue that the FDIC has “put the requested information at

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issue” by alleging in its complaint that Defendants failed to follow regulatory guidance on non-

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traditional mortgage products. (Joint Opp’n at 6-7, citing FDIC v. Wise, 139 F.R.D. 168 (D. Colo.

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1991).) But this public guidance was published for the entire industry, and was not specifically

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directed at WaMu. The FDIC’s Complaint contains no allegations about specific regulatory

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criticisms of or statements to the Defendants or other WaMu personnel, and thus no door has

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been opened to that subject. Wise is easily distinguishable on that basis, since the FDIC’s
PLAINTIFF FDIC’S REPLY IN SUPPORT OF
MOTION FOR PROTECTIVE ORDER - 5
No. 2:11-cv-00459-MJP
#813168 v1 / 44469-001

Law Offices

KARR TUTTLE CAMPBELL
A Professional Service Corporation
1201 Third Avenue, Suite 2900, Seattle, Washington 98101-3028
Telephone [phone], Facsimile [phone]

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amended complaint in that case had made repeated allegations concerning the actions,

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knowledge, and beliefs of regulators in connection with the specific institution at issue and the

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defendants’ alleged misleading and deceptive behavior toward the regulators of that institution.

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See S.E.C. v. Nacchio, 2009 WL 211511, at *4 (D. Colo. Jan. 29, 2009) (distinguishing Wise on

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that basis). Moreover, without conceding their relevance or admissibility, the FDIC is producing

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all documents it seized upon WaMu’s closure, including regulatory materials found in WaMu’s

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files, and Defendants will have access to substantial additional regulatory materials previously

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produced by the OTS.3

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Defendants’ litigation strategy regarding WaMu’s regulators threatens to create an

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enormously costly, time-consuming and irrelevant sideshow in violation of the “no-duty rule,”

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which precludes bank officials from placing regulatory conduct at issue as a defense in bank

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officer mismanagement cases. A protective order is necessary to prevent Defendants from

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expanding the scope of discovery to support their prohibited strategy, thus placing an undue

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burden on the FDIC and distracting all parties from the real issues in the case.
For all the reasons stated herein and in the FDIC’s Motion for Protective Order, the

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Motion should be granted.

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Contrary to Defendants’ wildly incorrect assertions, the FDIC is not making available to Defendants "a
subset of the documents that [the FDIC] seized from WaMu" or attempting to "shield its documents from
coming to light," nor did the FDIC "make up its mind" to give Defendants only documents that the FDIC
“thought were relevant to its theory of the case” and no other documents. (Joint Opp’n at 5.) Instead, as
Defendants well know, without conceding relevance or admissibility, the FDIC is making available to
Defendants all of the documents the FDIC obtained from WaMu upon WaMu’s closure. (See FDIC’s
Motion for Protective Order, fn 3.) Moreover, the OTS has agreed that all regulatory documents already
produced to Defendants in the WaMu consolidated securities class actions can be made available to the
parties for use in this case. Thus, the FDIC’s Motion is designed to limit additional wholly irrelevant
discovery and to avoid protracted proceedings focused on what the majority of courts have agreed is not
relevant: a trial, not of the conduct of the defendants, but of WaMu’s regulators.
PLAINTIFF FDIC’S REPLY IN SUPPORT OF
MOTION FOR PROTECTIVE ORDER - 6
No. 2:11-cv-00459-MJP
#813168 v1 / 44469-001

Law Offices

KARR TUTTLE CAMPBELL
A Professional Service Corporation
1201 Third Avenue, Suite 2900, Seattle, Washington 98101-3028
Telephone [phone], Facsimile [phone]

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Dated: August 26, 2011.

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Respectfully submitted,
FEDERAL DEPOSIT INSURANCE
CORPORATION, as Receiver for
WASHINGTON MUTUAL BANK, Plaintiff

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s/ Henry Pietrkowski
One of Its Attorneys

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Barry S. Rosen (admitted pro hac vice)
Duane F. Sigelko (admitted pro hac vice)
Mark S. Hersh (admitted pro hac vice)
Henry Pietrkowski (admitted pro hac vice)
James A. Rolfes (admitted pro hac vice)

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REED SMITH LLP
10 South Wacker Drive
Suite 4000
Chicago, IL 60606
[phone]

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Bruce E. Larson, WSBA #6209
Walter E. Barton, WSBA #26408
Dennis H. Walters, WSBA #9444

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KARR TUTTLE CAMPBELL
1201 Third Avenue, Suite 2900
Seattle, WA 98101
Telephone: [phone]
[e-mail]

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Leonard J. DePasquale (admitted pro hac vice)
Counsel, Federal Deposit Insurance Corporation
3501 North Fairfax Drive, VS-B-7058
Arlington, VA 22226
[phone]

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PLAINTIFF FDIC’S REPLY IN SUPPORT OF
MOTION FOR PROTECTIVE ORDER
No. 2:11-cv-00459-MJP
#813168 v1 / 44469-001

Law Offices

KARR TUTTLE CAMPBELL
A Professional Service Corporation
1201 Third Avenue, Suite 2900, Seattle, Washington 98101-3028
Telephone [phone], Facsimile [phone]

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CERTIFICATE OF SERVICE
I hereby certify that on August 26, 2011, the foregoing was electronically filed with the
Clerk of the Court using the CM/ECF system which will send notification of such filing to all

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counsel of record who receive CM/ECF notification, and that the remaining parties shall be
served in accordance with the Federal Rules of Civil Procedure.

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s/ Walter E. Barton
WSBA #26408
KARR TUTTLE CAMPBELL
Of Attorneys for Plaintiff
1201 Third Avenue, Ste. 2900
Seattle WA 98101
Telephone: [phone]
Fax: [phone]
E-mail: [e-mail]

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PLAINTIFF FDIC’S REPLY IN SUPPORT OF
MOTION FOR PROTECTIVE ORDER
No. 2:11-cv-00459-MJP
#813168 v1 / 44469-001

Law Offices

KARR TUTTLE CAMPBELL
A Professional Service Corporation
1201 Third Avenue, Suite 2900, Seattle, Washington 98101-3028
Telephone [phone], Facsimile [phone]