Union Bank of California v. Superior Court

• Citation: 130 Cal.App.4th 378,29 Cal.Rptr.3d 894
• Decision Date: 17 June 2005
• Docket Number: No. A107553.,A107553.
• Court: California Court of Appeals
• Parties: UNION BANK OF CALIFORNIA, N.A., Petitioner, v. The SUPERIOR COURT of Alameda County, Respondent; Grafton Partners, L.P., et al., Real Parties in Interest.

29 Cal.Rptr.3d 894

130 Cal.App.4th 378

UNION BANK OF CALIFORNIA, N.A., Petitioner, v. The SUPERIOR COURT of Alameda County, Respondent;

Grafton Partners, L.P., et al., Real Parties in Interest.

No. A107553.

Court of Appeal, First District, Division 3.

June 17, 2005.

Nixon Peabody LLP, Paul J. Hall, Eric K. Larson and James D. Griffioen, San Francisco, for Petitioner.

Ernest C. Barrett, III and Manpreet Singh, Washington, DC, for Office of the Comptroller of the Currency, as Amicus Curiae on behalf of Petitioner.

No appearance for Respondent.

Bartko, Zankel, Tarrant & Miller, John J. Bartko and Christopher J. Hunt, San Francisco, for Real Parties in Interest.

McGUINESS, P.J.

National banks are required to file a suspicious activity report (SAR) with the federal government whenever they detect a known or suspected violation of federal law or a suspicious transaction related to money laundering. (12 C.F.R. § 21.11(a) (2005).) SAR's are confidential. (12 C.F.R. § 21.11(k) (2005).) Under federal law, national banks that are subpoenaed or otherwise requested to produce a SAR are prohibited from producing the SAR or providing information that would disclose whether a SAR has been prepared or filed. (Ibid.)

In this writ proceeding, petitioner Union Bank of California, N.A. (Union Bank) challenges a trial court order compelling production of Union Bank's internal suspicious activity reports, which Union Bank claims are generated as part of its procedure for preparing SAR's and complying with federal reporting requirements. The trial court reasoned the internal forms comprise "supporting documentation" generated in the ordinary course of business and are therefore not subject to the unqualified privilege preventing disclosure of SAR's or their contents. We disagree and grant a writ of mandate.

FACTUAL AND PROCEDURAL BACKGROUND

The action below arises from a Ponzi scheme disguised as a successful national mortgage lending business that purportedly "bilked $330 million from more than 160 individual investors" during its brief lifespan. The plaintiffs allege that two individuals set up PinnFund USA, Inc. (PinnFund), as a mortgage company to originate, purchase, and sell sub-prime mortgage loans. One of the individuals behind the Ponzi scheme also formed and operated three business entities, Grafton Partners, L.P. (Grafton), Allied Capital Partners, L.P. (Allied), and Six Sigma LLC (Six Sigma), to generate and collect investment dollars to fuel the operation. Contracts between each of these entities and PinnFund required all investor funds to be placed in a trust account to be used for the sole and exclusive purpose of funding loans. According to the complaint, the trust account was not used to fund loans but was instead used to pay fictional returns to earlier investors as well as to pay phony commissions and fees that enriched the two principals.

The lawsuit centers on the conduct of Union Bank, which opened and operated the PinnFund trust account that was allegedly looted. Real parties in interest Grafton, Allied, and Six Sigma, through their trustee in bankruptcy, along with several individuals acting on their own behalf and on behalf of a putative class of defrauded investors (collectively referred to as Grafton Partners),¹ filed suit against Union Bank, alleging fraud, conspiracy, aiding and abetting, and negligent misrepresentation. Grafton Partners contends, among other things, that Union Bank was complicit in the operation of the Ponzi scheme by allowing PinnFund to set up a "sham" trust account that was used to transfer millions of dollars to offshore accounts. Grafton Partners alleges the investors' losses would not have been as great and the Ponzi scheme would have been uncovered earlier if Union Bank had taken steps to halt the illegal operation of the trust account and fulfilled its obligation to report suspicious activity to the federal government.

In an apparent attempt to learn whether Union Bank had filed SAR's reporting suspicious activity associated with the Pinn-Fund trust account, Grafton Partners initially sought permission from the federal government to allow Union Bank to produce certain SAR's it had filed during the relevant time frame.² The Office of the Comptroller of the Currency (OCC), the agency responsible for regulating national banks such as Union Bank, denied the request based upon a determination that SAR's and their contents are confidential under federal law.

During discovery Grafton Partners learned that Union Bank has in place internal procedures and forms to identify, register, and describe what might constitute suspicious activity. In particular, Union Bank has an internal form referred to as a "Form 00244" Suspicious Activity Report (Form 244), which is filled out by bank personnel to report suspicious activities. According to Union Bank, the sole purpose of the Form 244 is to aid the bank in complying with its obligation under federal law to report suspicious activity and file SAR's.

Upon learning of Union Bank's internal suspicious activity report, Grafton Partners requested that Union Bank produce any Form 244 relating to PinnFund. Grafton Partners also served interrogatories requesting that Union Bank identify any suspicious activity it noticed with respect to the PinnFund trust account and identify all documents, including Form 244's, concerning the suspicious activity. Grafton Partners specifically excluded SAR's from the scope of its discovery requests. Union Bank objected to the discovery requests and refused to produce or identify its Form 244's, asserting the request was an improper attempt to circumvent the OCC's ruling precluding disclosure of SAR's, the Form 244's were privileged communications related to the SAR's, disclosure of the Form 244's would tend to disclose whether a SAR had been filed, and Grafton Partners' request was barred by the privilege relating to SAR's afforded under federal law. Grafton Partners moved to compel further responses to a number of discovery requests, including those that sought the Form 244's or information relating to the forms.

The trial court initially granted the motion to compel in part, ordering Union Bank to produce documents and further responses relating to the Form 244's.³ The court noted, however, that if "Union Bank failed to notify the appropriate federal authorities of this motion, then the federal authorities may intervene ... and request reconsideration of this order."

Union Bank filed a motion for reconsideration in anticipation of the filing of a brief by the OCC (Office of the Comptroller of the Currency). The OCC subsequently filed an amicus curiae brief in the trial court in support of Union Bank's request for reconsideration. The OCC urged the trial court to protect from discovery not just the SAR's but also the process of preparing a SAR — including the Form 244's utilized by Union Bank as well as documents generated by a financial institution as part of its internal process for filing SAR's as required by federal law. According to the OCC, to permit disclosure of the Form 244's would "conflict with federal law and would undermine public policy aimed at uncovering and reporting potential criminal activity. . . ."

Upon reconsideration, the trial court affirmed its decision and ordered production of the Form 244's as well as further responses to all requests concerning the Form 244's. The trial court held the "SAR privilege covers draft SARs, the SARs themselves, and any communications concerning a SAR," but it found "no support for the proposition that all reports of suspected or possible violations or discussion that might lead to the preparation or filing of a SAR are protected by the SAR privilege."

The trial court found the "Form 224s [sic] were not part of Union Bank's process of drafting and filing SARs" and instead described them as "routine bank forms" used by Union Bank for "internal bank purposes as well as for initiating investigations that might lead to a SAR." The court also concluded that disclosure of the Form 244's would not inform anyone whether a SAR had been prepared or filed, because although 93 percent of Form 244's result in a filed SAR, some SAR's were prepared without a corresponding Form 244, and "one cannot tell whether a SAR has been filed just by looking [at] a 244."

Acknowledging that OCC's opposition to the motion to compel suggests there are substantial grounds for difference of opinion regarding the limits of the SAR privilege, the trial court found the issue appropriate for interlocutory appellate review.⁴ Union Bank thereafter filed this petition seeking a writ of mandate.⁵ Pending resolution of the petition, we stayed the trial court's orders to the extent they compel the production of Form 244's or otherwise direct Union Bank to respond to discovery requests concerning Forms 244's. We issued an order to show cause and granted OCC's request to file an amicus curiae brief.

DISCUSSION

1. Propriety and scope of review

Although writ review of discovery rulings is generally disfavored, interlocutory review by writ is the only adequate remedy when, as here, a court compels the disclosure of documents or information that may be subject to a privilege, because "once privileged matter has been disclosed there is no way to undo the harm which consists in the very disclosure." (Raytheon Co. v. Superior Court (1989) 208 Cal.App.3d 683, 686, 256 Cal.Rptr. 425.) The scope of the socalled SAR privilege is an issue of first impression in the California courts, and, as the trial court recognized, there are substantial grounds for difference of opinion on the issue. Under these circumstances, interlocutory writ review is appropriate. (See OXY Resources California LLC v. Superior Court (2004) 115 Cal.App.4th 874, 886, 9 Cal.Rptr.3d 621.)

Appellate review of discovery rulings is governed by the abuse of discretion standard. "Where there is a basis for the trial court's...