In re Franklin Nat. Bank Securities Lit.

CourtUnited States District Courts. 2nd Circuit. United States District Court (Eastern District of New York)
Citation478 F. Supp. 577
Decision Date03 August 1979

WEINSTEIN, District Judge.

The Federal Deposit Insurance Corporation (FDIC) seeks to compel the Office of the Comptroller of the Currency (OCC) to produce Examination Reports resulting from OCC's periodic examinations of Franklin National Bank and various OCC summaries and analyses of these reports. Federal Rules of Civil Procedure, Rules 34 and 37(a). A claim of official information privilege is upheld with respect to the summaries and analyses of the reports, but denied with respect to the reports themselves.

I. Background
A. Posture of the Litigation

This complex litigation followed the financial collapse of the Franklin National Bank (FNB). See generally In re Franklin Nat'l. Bank Securities Litigation, 73 F.R.D. 25 (E.D.N.Y.1976); H.R.Rep. No. 94-1669 (Adequacy of the Office of the Comptroller of the Currency's Supervision of Franklin National Bank), 94th Cong., 2d Sess. (1976); Frank Wille, "The FDIC and Franklin National Bank: A Report to the Congress and all FDIC-Insured Banks," presented before the 81st Annual Convention of the Savings Banks Association of New York State, Boca Raton, Florida, November 23, 1974. A brief outline of the primary claims raised in the consolidated actions will help set this discovery motion in context.

Various Bankers Blanket Bonds insured both FNB and its parent holding company, Franklin New York Corporation (FNYC), against any loss through dishonest or fraudulent acts of employees of either corporation. Both the FDIC, in its capacity as the receiver of FNB, and the Trustee in Bankruptcy of FNYC, have filed suit seeking recovery on those bonds. See Federal Deposit Insurance Corp. v. National Surety Corp., 425 F.Supp. 200 (E.D.N.Y.1977). Concurrently, both the FDIC and the Trustee have filed complaints against various officers and directors of FNB and FNYC. The FDIC and the Trustee have also sued Ernst & Ernst, the auditors of FNB and FNYC, claiming negligent auditing procedures. Overlapping claims have been made by a class of stockholders of FNYC. See In re Franklin National Bank, 381 F.Supp. 1390 (E.D.N.Y.1974), aff'd. in part, rev'd. in part, rem'd., 574 F.2d 662 (2d Cir. 1978), clarified, 599 F.2d 1109, (2d Cir. 1979). Finally, the primary defendants have all asserted third party claims against the OCC, the FDIC and the Federal Reserve Board, based upon their regulation of FNB. See In re Franklin National Bank Securities Litigation, 445 F.Supp. 723 (E.D.N.Y.1978), supplemental opinion 449 F.Supp. 574 (E.D. N.Y.1978). In addition to these and other civil actions now before us, criminal actions are pending against various officers and directors of FNB in the United States District Court for the Southern District of New York.

B. Documents at Issue
1. Examination Reports

The primary documents at issue are the reports produced during the OCC's periodic examination of Franklin National Bank. Pursuant to statutory directive, the OCC examined FNB fifteen times from 1963 to 1974. 12 U.S.C. § 481.

Each examination is supervised by an examiner in charge and conducted by a team of national bank examiners and Assistant National Bank Examiners. The examiners seek to "determine the condition and performance of banks, the quality of their operations, the capacity of management, and compliance with Federal laws." H.R.Rep. No. 94-1669 (Adequacy of the Office of the Comptroller of the Currency's Supervision of Franklin National Bank), 94th Cong., 2d Sess. 10 (1976). On bank premises the examiners inspect bank documents, interview bank employees, officers and directors, and observe bank operations; the examination focuses upon the quality of the bank's assets, the sufficiency of internal controls, the adequacy of capital structure and the soundness of management's policies.

Reports of Examination collect and evaluate the findings. Each report contains two sections, the open section ("white pages") and the closed section ("yellow pages"). The open section compiles the basic data of the report; it includes, for example, a Consolidated Statement of Condition, the examiner's comments and observations, and financial data supporting the figures on the consolidated income statement. The only evaluative or analytical material in the open section is found in the "Page 2 Comments," the examiner's "Comments on Matters Requiring Attention." The closed confidential section evaluates these basic findings and data; it includes "the examiner's evaluation of the condition, management, earnings, capital, internal controls, ownership and future prospects of the bank." H.R.Rep. No. 94-1669, (Adequacy of the Office of the Comptroller of the Currency's Supervision of Franklin National Bank), 94th Cong., 2d Sess. 11 (1976).

2. Summaries and Analyses of the Reports

The other documents covered by OCC's claim of official information privilege are primarily summaries and analyses of the Examination Reports prepared by various officials within the OCC.

a. Gerzema Review Memoranda

After the Examination Reports had been prepared by the examiners who had visited the premises of FNB, an Assistant Chief National Bank Examiner at the Washington office would prepare a summarizing review memorandum. This Assistant Chief never actually conducted visits or interviews, but simply highlighted and analyzed trends for intra-office purposes. Beginning in 1967, Larry T. Gerzema prepared these intra-office FNB summaries.

b. Shockey to Shockey Memoranda

After the failure of FNB, John E. Shockey, the Comptroller's Chief Counsel, requested that John W. Shockey, the senior in-house National Bank Examiner, review the OCC's past monitoring of the bank's condition. The memoranda prepared by John W. Shockey analyze the Examination Reports of FNB and suggest improvements in the agency's examination and reporting procedures. They were intended solely for the internal use of the OCC.

c. The Rosenthal Committee Preparation Memoranda

A subcommittee of the House of Representative's Committee on Government Operations, the Rosenthal Committee, conducted hearings investigating the adequacy of the OCC's regulation of FNB. In preparation for the Comptroller's testimony the OCC staff prepared memoranda containing drafts for the Comptroller's opening statement, suggesting materials for the Comptroller to review before testifying and proposing answers to possible questions from the committee.

C. Discovery to Date

The OCC has, for the most part, made the open sections of the Examination Reports fully available to the other parties. The sole exception relevant to the issues addressed here is the redaction of some of the "Page 2 Comments," containing the examiner's "Comments on Matters Requiring Attention." Although the OCC has also produced the confidential sections of the Reports, they have been made available in stringently censored form. Eliminated are the examiner's evaluations, interpretations and opinions. The OCC has also refused to produce either the "Shockey to Shockey Memoranda" or the "Rosenthal Committee Preparation Memoranda" and has heavily cut the "Gerzema Review Memoranda."

II. Official Information Privilege

Rule 509 of the Proposed Rules of Evidence promulgated by the Supreme Court summarized the existing case law defining the scope of the official information privilege. Although Congress eliminated Rule 509, together with the other specific rules of privilege, it never rejected the concept it embodied. See, e. g., Hearings Before the Comm. on the Judiciary, United States Senate, 93rd Cong., 2d Sess. on Federal Rules of Evidence 49-50 (1974). As Congressman Hungate, Chairman of the House Judiciary Subcommittee, put it explaining the Conference Report on the floor, the intent was "to leave the Federal Law of Privileges where we found it." Cong.Rec. H 12254 (daily ed. Dec. 18, 1974). Thus, under Rule 501 of the Federal Rules of Evidence, providing that privileges "shall be governed by the principles of the common law as they may be interpreted by the courts of the United States in the light of reason and experience," Proposed Rule 509 "remains a useful guide and standard." United States v. Fatico, 441 F.Supp. 1285, 1298 (E.D.N.Y. 1977), rev'd. on other grounds, 579 F.2d 707 (2d Cir. 1978).

Under subsection (b) of Proposed Rule 509 the "government has a privilege to refuse to give evidence . . . upon a showing of reasonable likelihood of danger that the evidence will disclose . . . official information as defined in this rule." Subsection (a)(2) defines intragovernmental opinions as one type of official information:

information within the custody or control of a department or agency of the government the disclosure of which is shown to be contrary to the public interest and which consists of: (A) intragovernmental opinions or recommendations submitted for consideration in the performance of decisional or policy-making functions.
. . .

The documents at issue here are claimed to be privileged solely because they are such intragovernmental communications. No claim has been made that discovery must be denied because the documents contain privileged military, e. g., United States v. Reynolds, 345 U.S. 1, 73 S.Ct. 528, 97 L.Ed. 727 (1953); Totten v. United States, 92 U.S. 105, 23 L.Ed. 605 (1875), or diplomatic information, e. g., Republic of China v. National Union Fire Insurance Co., 142 F.Supp. 551 (D.Md.1956); United States v. Burr, 25 Fed. Cas. p. 30, No. 14692d (C.C.D.Va.1807). See generally Zagel, The State Secrets Privilege, 50 Minn.L.Rev. 875 (1966); Note, National Security and the Amended Freedom of Information Act, 85 Yale L.J. 401 (1976); Note, National Security and the Public's Right to Know: A New Role for the Courts Under the Freedom of Information Act, 123 U.Pa.L.Rev. 1438 (1975). Because demands for the production of reports prepared by bank...

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