First American Title Insurance Company v. Westbury Bank

Filing 49

ORDER signed by Magistrate Judge Aaron E Goodstein on 8/29/2014 denying without prejudice 37 Motion in Limine; granting 30 Motion to Compel. (cc: all counsel) (djo)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF WISCONSIN
FIRST AMERICAN TITLE INSURANCE COMPANY,
Plaintiff,
v.

Case No. 12-CV-1210

WESTBURY BANK,
Defendant.

ORDER GRANTING PLAINTIFF’S MOTION TO COMPEL AND
DENYING WITHOUT PREJUDICE DEFENDANT’S MOTION IN LIMINE
I.

Facts and Procedural History
New Horizon Title, LLC engaged in an extensive fraud that resulted in more than $3.5

million in losses for which First American Title Insurance Company was ultimately responsible.
In the present action, First American alleges that New Horizon’s bank, Westbury Bank, bears
some responsibility for these losses because it permitted New Horizon to continue the fraud
despite warning signs that something was amiss, such as the fact that an account New Horizon
referred to as its escrow account was overdrawn more than a thousand times, and New Horizon
had bounced 348 checks for a total of $60 million. First Am. Title Ins. Co. v. Westbury Bank,
2013 U.S. Dist. LEXIS 54969, 1-3 (E.D. Wis. Apr. 17, 2013).
In an effort to support its assertion that Westbury was well-aware of these irregularities,
First American seeks information related to certain fraud alerts that Westbury may have received
related to the accounts of New Horizon and certain related individuals. This includes information

automatically generated by software that Westbury utilizes to monitor transactions for fraud.
Westbury has not complied with this discovery demand on the basis that it believes it is barred
from disclosing such information under the Bank Secrecy Act (BSA) and the Annuzio-Wylie
Anti-Money Laundering Act (AML) and their implementing regulations. Thus, the parties turned
to the court to resolve their dispute, with First American filing a motion to compel, (Docket No.
30), Westbury opposing the motion, and Westbury responding with its own motion in limine
seeking to exclude certain evidence, (Docket No. 37). The pleadings on these motions are closed
and each is ready for resolution.
II.

Applicable Law
National banks are required to file a suspicious activity report (SAR) to report certain

suspicious activity to a person or agency designated by the Secretary of the Treasury. 31 U.S.C.
§ 5318(g)(1); 12 C.F.R. § 21.11. However, banks are prohibited from disclosing a SAR
or any information that would reveal the existence of a SAR. Any national bank,
and any director, officer, employee, or agent of any national bank that is
subpoenaed or otherwise requested to disclose a SAR, or any information that
would reveal the existence of a SAR, shall decline to produce the SAR or such
information, citing this section and 31 U.S.C. 5318(g)(2)(A)(i)….
12 C.F.R. § 21.11(k)(1)(i). This prohibition does not include “[t]he underlying facts,
transactions, and documents upon which a SAR is based….” 12 C.F.R. § 21.11(k)(1)(ii)(2). The
privilege is unqualified and cannot be waived. Gregory v. Bank One, Ind., N.A., 200 F. Supp. 2d
1000, 1002 (S.D. Ind. 2002). There is no dispute that the information sought is otherwise
discoverable under Rule 26. The question before this court is limited to whether the SAR
privilege bars disclosure of the information the plaintiff seeks.

2

The policies underlying the SAR privilege are multifaceted. Regulators concluded that
confidentiality fostered timely and candid reporting by banks. 75 Fed. Reg. 75,576 at 75,578. If a
customer could not find out the bank made a report, the bank and its employees should not be
concerned to forego making a report out of fear that doing so would interfere with the bank’s
relationship with its customer, lead to civil liability in the form of something such as a claim of
defamation, or result in retaliation in any form, including violence from a criminal organization
the bank’s report served to disrupt. See 75 Fed. Reg. at 75,578; Whitney Nat'l Bank v. Karam,
306 F. Supp. 2d 678, 680 (S.D. Tex. 2004) (granting protective order barring disclosure of SARs
in customer’s defamation action against bank). Relatedly, “disclosure of a SAR could harm the
privacy interests of innocent people whose names may be mentioned.” Whitney, 306 F. Supp. 2d
at 680 (citing Cotton v. Privatebank & Trust Co., 235 F. Supp. 2d 809, 815 (N.D. Ill. 2002); Weil
v. Long Island Sav. Bank, 195 F. Supp. 2d 383, 388 (E.D.N.Y. 2001)); see also 75 Fed. Reg. at
75,578. Finally, confidentiality protects the integrity of investigations in that it prevented targets
from learning they were being investigated or from individuals learning the means and methods
banks utilized to detect fraud so as to better avoid detection. See 75 Fed. Reg. at 75,578; Cotton
v. Privatebank & Trust Co., 235 F. Supp. 2d 809, 815 (N.D. Ill. 2002).
The defendant contends that the information the plaintiff seeks is “information that would
reveal the existence of a SAR” and thus is protected from disclosure under 12 C.F.R.
§ 21.11(k)(1)(i). In the plaintiff’s view, the information sought is, at most, “documents upon
which a SAR is based,” 12 C.F.R. § 21.11(k)(1)(ii)(2), and thus discoverable. The line between
documents that would reveal the existence of a SAR and a document upon which a SAR is based
is often unclear and courts have disagreed as to where that line falls.

3

Courts have differentiated documents depending upon the reason the record was initially
created. If it was created in the ordinary course of business, it is discoverable like any other
business record. Cotton, 235 F. Supp. 2d at 815. If, however, the record was produced solely
with respect to the bank’s obligation to submit a SAR, it is privileged. Id. The Court of Appeals
of Washington relied upon the line drawn in Cotton to conclude that any internal report or
information used to investigative methods are “undiscoverable supporting documentation.”
Norton v. U.S. Bank, NA, 324 P.3d 693, 699 (Wash. Ct. App. 2014); see also United States v.
LaCost, 2011 U.S. Dist. LEXIS 43681 (C.D. Ill. Apr. 22, 2011) (relying upon Cotton dichotomy
to find that SAR privilege barred criminal defendant from obtaining bank “incident reports that
led to the filing of an SAR and other documents related to the filing of SARs” because “they
would disclose whether an SAR has been prepared or filed”).
III.

Analysis
The relevant regulation bars only disclosure of information that “would” reveal the

existence of an SAR; it does not prohibit disclosure of information that “could” or “might”
reveal the existence. This suggests the review of the document must be able to discern with
effective certainty the existence of a SAR. This is the only way to read subsections 12 C.F.R.
§ 21.11(k)(1)(i) and (ii)(A)(2) consistently. “The underlying facts, transactions, and documents
upon which a SAR is based,” 12 C.F.R. § 21.11(k)(1)(ii)(2), are subject to disclosure. Simply
because such facts may demonstrate that a bank was aware of a fraud that fit the requirements of
a SAR, and a reasonable inference could be drawn that a bank will generally comply with federal
regulations, this does not mean such information “would” reveal that the bank filed a SAR. No
court has interpreted the privilege as barring a party from obtaining such ordinary factual
discovery, despite the inferences that might be drawn.

4

Not all means or methods a bank may use to detect fraud or other financial irregularity
are privileged simply because they might culminate in a SAR. “In most cases … the disclosure
of supporting documentation would not reveal the filing of an SAR, and such documentation
cannot be shielded from otherwise appropriate discovery simply because it has some connection
to an SAR.” Weil, 195 F. Supp. 2d at 389; see also Wiand v. Wells Fargo Bank, N.A., 981 F.
Supp. 2d 1214, 1217 (M.D. Fla. 2013) (noting that courts have held “the SAR privilege does not
shield from discovery reports, memoranda, or underlying transactional documents generated by a
bank’s internal investigation procedures”); United States v. Holihan, 248 F. Supp. 2d 179, 187
(W.D.N.Y. 2003) (“[A]ny supporting documentation which would not reveal either the fact that
an SAR was filed or its contents cannot be shielded from otherwise appropriate discovery based
solely on its connection to an SAR.”); Gregory, 200 F. Supp. 2d at 1002 (“The Rule’s
requirement of confidentiality applies only to the SARs themselves and the information
contained therein, but not to their supporting documentation.”).
Although a bank may undertake “an internal investigation in anticipation of filing a SAR,
it is also a standard business practice for banks to investigate suspicious activity.” Freedman &
Gersten, LLP v. Bank of Am., N.A., 2010 U.S. Dist. LEXIS 130167, 10 (D.N.J. Dec. 8, 2010).
Simply stated, detecting fraud is a part of a bank’s ordinary course of business. Thus, documents
generated as part of this standard business practice of investigating potential fraud or other
irregularities are discoverable. This remains true even if this fraud investigation parallels the
process of preparing a SAR.
Turning specifically to the plaintiff’s motion to compel, the plaintiff states it “does not
seek any SAR or other documents or communications between the Bank and law enforcement or
other banking authorities.” (Docket No. 33 at 14.) However, request number 12 of the plaintiff’s

5

First Request for Production of Documents seeks “each and every suspicious activity report
(“SAR”) issued by Westbury Bank….” (Docket No. 32-1 at 4.) Other requests appear to seek
more factual documents of the type subject to disclosure.
Based upon the submissions of the parties, the court is hard-pressed to determine which
side of the line any particular request falls. Accordingly, the court is willing to grant the
plaintiff’s motion to compel, but only to the extent that it comports with the law, as set forth
herein. The privilege is limited to the SAR itself and “information that would reveal the
existence of a SAR.” Accordingly, any explicit statement as to whether or not a SAR was or was
not filed is privileged. Such privileged information contained in an otherwise discoverable
document shall be redacted. See In re Whitley, 2011 Bankr. LEXIS 4793 (Bankr. M.D.N.C. Dec.
13, 2011). But information that, with the aid of supposition or speculation, might tend to suggest
to a knowledgeable reviewer whether a SAR was filed, is not privileged.
Therefore, within 14 days of the date of this order, the plaintiff shall resubmit its
Requests for Production of Documents to the defendant. The defendant shall respond within 30
days.
Similarly, the plaintiff shall resubmit all appropriate questions that it requests the defendant’s
employee, Lisa Wentworth, answer from her May 19, 2014 deposition.
The defendant or its employees shall not include information in any produced documents nor
answer questions that would indicate whether a SAR was or was not made. If the defendant has good
cause to believe that fully complying with any of the revised documents requests would result in
disclosure of documents that fall on the non-disclosure side of the line, it should respond with a
specific, detailed objection. The plaintiff may then, if the matter remains unresolved after attempting
to resolve the dispute in good faith as is required under Civ. L.R. 37, promptly file a supplemental
motion to compel.

6

IV.

Motion in Limine

Finally, the court turns to the defendant’s motion in limine seeking to exclude evidence
relative to its compliance with BSA and AML regulations. (Docket No. 37.) The court concludes
that this motion is premature, the admissibility of evidence being a matter for trial rather than
discovery. Therefore, the motion is denied without prejudice.
IT IS THEREFORE ORDERED that the plaintiff’s motion to compel, (Docket No.
30), is granted as set forth in this order. The defendant is directed to produce documents and Lisa
Wentworth is directed to answer questions in accordance with the standards set forth herein.
IT IS FURTHER ORDERED that the defendant’s motion in limine, (Docket No. 37), is
denied without prejudice.
Dated at Milwaukee, Wisconsin this 29th day of August, 2014.

AARON E. GOODSTEIN
U.S. Magistrate Judge

7