Fed. Deposit Ins. Corp. v. Crowe Horwath LLP
| Decision Date | 25 June 2018 |
| Docket Number | No. 17 CV 04384,17 CV 04384 |
| Parties | FEDERAL DEPOSIT INSURANCE CORPORATION, as Receiver for Valley Bank, Plaintiff, v. CROWE HORWATH LLP, Defendant. |
| Court | U.S. District Court — Northern District of Illinois |
MEMORANDUM OPINION AND ORDER
Plaintiff Federal Deposit Insurance Corporation (FDIC-R), as receiver for Valley Bank (Valley), filed this lawsuit against Crowe Horwath LLP, alleging accounting malpractice, gross negligence, and negligent misrepresentation.1 R. 1, Compl.2 The claims arise out of Valley's loss of around $21 million, allegedly caused by Crowe's malpractice in auditing the consolidated financial statements of Valley's holding company, River Valley Bancorp, Inc. (RVBI) in 2010 and 2011. Id. ¶ 1. The parties are in the midst of fact discovery. See R. 69, 02/16/2018 Minute Entry. Crowe has moved to compel four categories of documents from the FDIC-R: (1) all documents from the FDIC, in its corporate capacity (FDIC-C), related to Valley Bank in the FDIC-R's possession, and to obtain all other documents related to Valley Bank in theFDIC-C's possession, conduct a relevance review, and produce those that are relevant to this case; (2) documents collected from third parties as part of the FDIC-R's pre-litigation investigation; (3) unredacted versions of administrative deposition transcripts for all witnesses deposed as part of the FDIC-R's pre-litigation investigation; and (4) documents related to settlements or potential claims against third parties in connection with losses incurred by Valley Bank or related entities. R. 73, Def.'s Mot. Compel at 1-2. The FDIC-R, as well as the FDIC-C and non-party objectors William Gabelmann and Gabelmann & Associates, P.C. (the latter two will be referred to collectively as Gabelmann), argue that the documents are protected by various privileges and agency regulations. R. 93, Pl.'s Resp. Br.; R. 92, FDIC-C's Resp. Br.; R. 91, Gabelmann Resp. Br. For the reasons discussed below, Crowe's motion to compel is granted in part and denied in part.
The FDIC-R brings accounting malpractice and negligence claims against Crowe arising out of Crowe's audits on the consolidated financial statements of Valley Bank and its holding company, RVBI. Compl. at 21-25. Before Valley failed in 2014, the FDIC-C and other regulators performed routine examinations of the bank. Id. ¶¶ 17, 24. The FDIC-C regulators eventually discovered that Valley's CEO had engaged in a scheme between 2011 and 2013 to hide the bank's true financial condition, which caused Valley losses totaling around $21 million. Id. ¶¶ 1-3. After this scheme was discovered, the Illinois Department of Financial and Professional Regulation closed Valley in 2014 and appointed the FDIC-R as its receiver. Id. ¶¶ 8, 14. As receiver ofa failed bank, the FDIC-R has the power to sue in any court of law, and by operation of law succeeded to all rights, titles, and privileges of Valley. Id. ¶ 8 (citing 12 U.S.C. §§ 1819, 1821). In this role, the FDIC-R filed this lawsuit against Crowe. Id. The Complaint alleges that Crowe was negligent in carrying out its audits and that it improperly issued unqualified audit opinions on Valley's financial statements for the years 2010 and 2011. Id. ¶ 7.
The parties have engaged in extensive discovery, but have reached an impasse on the four categories of documents listed above. With regard to the first category of FDIC-C documents, Crowe sought FDIC-C documents that are in the possession, custody, or control of the FDIC-R. R. 83, Exh. 6 at 4. When the FDIC-R refused to produce the documents, Crowe sought them from the FDIC-C by subpoena under Rule 45, R. 83, Exh. 4, and pursuant to 12 C.F.R. § 309.6, R. 92, Exh. 1. The FDIC-C identified five sub-categories of responsive documents: (1) communications between Valley Bank and the FDIC-C; (2) "bank records obtained during the examination process"; (3) documents relating to compliance and regulatory orders; (4) "internal work papers and notes created by FDIC bank examiners"; and (5) "internal communications within FDIC-C." R. 83, Exh. 10 at 1. The FDIC-C produced documents from sub-categories (1) through (3), so Crowe's motion to compel applies only to sub-categories (4) and (5). The FDIC-R and the FDIC-C contend that the documents are protected by the bank examination privilege, and that the Court must evaluate the FDIC-C's assertion of the privilege under the Administrative Procedure Act's "arbitrary and capricious" standard. FDIC-C's Resp. Br. at 8-10; Pl.'s Resp. Br.at 2. As discussed below, the APA does not apply to Crowe's requests, and although the bank examination privilege applies to all of the documents in Category 1(4)-(5), Crowe has shown good cause to override the privilege as to a further subset of the documents.
The remaining three categories of documents are all documents obtained or created as part of the FDIC-R's investigation of potential claims arising out of Valley's failure: third-party documents, deposition transcripts, and settlement materials. R. 83, Def.'s Br. at 5-7. The FDIC-R argues that these documents are all protected by 12 C.F.R. § 308.147, Pl.'s Resp. Br. at 10, while Crowe contends that the Federal Rules of Civil Procedure and the Mandatory Initial Discovery Pilot Project Standing Order (Standing Order) override the regulation, Def.'s Br. at 15-17. Crowe is correct, so the FDIC-R must file, under seal and ex parte, unredacted versions of the deposition transcripts and certain settlement discussions sought by Crowe, so that the Court may conduct an in camera review. On the third-party documents that the FDIC-R obtained during its pre-litigation investigation, the FDIC-R must conduct a relevance review and produce all relevant documents not already produced independently by any third-party to Crowe. This includes Gabelmann's documents, because Iowa law controls his correspondence with Valley and its holding company, RVBI, and Iowa's accounting privilege contains an exception for court proceedings. See Iowa Code § 542.17.
Federal Rule of Civil Procedure 26(b)(1) states that "[p]arties may obtain discovery regarding any nonprivileged matter that is relevant to any party's claim or defense and proportional to the needs of the case, considering the importance of the issues at stake in the action, the amount in controversy, the parties' relative access to relevant information, the parties' resources, the importance of the discovery in resolving the issues, and whether the burden or expense of the proposed discovery outweighs its likely benefit." Requests for discovery are relevant if there is any possibility that the information sought may be relevant to the subject matter of the action. Rubin v. Islamic Republic of Iran, 349 F.Supp.2d 1108, 1111 (N.D. Ill. 2004).
A party claiming that otherwise discoverable information is privileged must "expressly make the claim and describe the nature of the documents, communications, or tangible things in a manner that will enable other parties to assess the claim." Fed. R. Civ. P. 26(b)(5)(A) (cleaned up);3 see also Fed. R. Civ. P. 45(e)(2)(A). This means that the burden rests upon the party objecting to disclosure to show why the information is privileged. See Kodish v. Oakbrook Terrace Fire Prot. Dist., 235 F.R.D. 447, 450 (N.D. Ill. 2006). Finally, district courts have broad discretion when ruling on discovery-related issues, including motions to compel brought under Rule 37(a). See Peals v. Terre Haute Police Dep't, 535 F.3d 621, 629 (7th Cir. 2008); see also Fed. R. Civ. P. 37(a).
As noted above, Crowe seeks four categories of documents from the FDIC-R and/or third parties. The Court addresses each in turn.
Crowe first contends that the FDIC-R should be compelled to produce all FDIC-C documents related to Valley in the FDIC-R's possession, and to obtain all other Valley-related documents in the FDIC-C's possession, conduct a relevance review, and produce all documents relevant to the case. Def.'s Br. at 8. The FDIC-C produced the first three of five subcategories of documents, leaving two contested subcategories subject to Crowe's motion to compel: (4) "internal work papers and notes created by FDIC bank examiners" and (5) "internal communications within the FDIC-C." FDIC-C's Resp. Br. at 2; R. 86, 04/19/2018 Minute Entry.
Crowe argues that under 12 U.S.C. § 1821(o), the FDIC-R has legal "possession" over these documents and thus is obligated under the Federal Rules of Civil Procedure and the Standing Order to obtain them from the FDIC-C if necessary, and to produce all relevant documents. Def.'s Br. at 8. Section 1821(o) generally authorizes FDIC receivers to obtain FDIC-C records: "whenever the [FDIC] has been appointed as receiver for an insured depository institution, the appropriate Federal banking agency shall make available all supervisory records to the receiver which may be used by the receiver in any manner the receiver determines to be appropriate." § 1821(o). Against this, both the FDIC-R and FDIC-C cite § 1821(t),which provides that a covered agency, including the FDIC-C, does not waive any privilege by transferring that information to another covered agency, including the FDIC-R, meaning that the bank examination privilege still applies. The FDIC-R and FDIC-C also argue that this Court should apply the APA's "arbitrary and capricious" standard to the FDIC-C's decision to withhold the documents pursuant to the privilege. Pl.'s Resp. Br. at 8-10; FDIC-C's Br. at 10, 21.
But § 1821(t), which preserves applicable privileges, is irrelevant to the issue at hand: Crowe does not contend that either FDIC entity has waived the bank examination privilege (although Crowe does argue that it simply does not apply). R. 97, Def.'s Reply to FDIC at 2-3. So to the extent the FDIC-C actually did provide documents to the FDIC-R, whether the bank...
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