Subpoena Served Upon Comptroller of Currency, and Secretary of Bd. of Governors of Federal Reserve System, In re

• Decision Date: 26 June 1992
• Docket Number: Nos. 91-5427,91-5428,s. 91-5427
• Citation: 967 F.2d 630,296 U.S.App.D.C. 263
• Parties: , 61 USLW 2046 In re SUBPOENA SERVED UPON the COMPTROLLER OF the CURRENCY, AND the SECRETARY OF the BOARD OF GOVERNORS OF the FEDERAL RESERVE SYSTEM.
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 630

967 F.2d 630

296 U.S.App.D.C. 263, 61 USLW 2046

In re SUBPOENA SERVED UPON the COMPTROLLER OF the CURRENCY,

AND the SECRETARY OF the BOARD OF GOVERNORS OF the

FEDERAL RESERVE SYSTEM.

Nos. 91-5427, 91-5428.

United States Court of Appeals, District of Columbia Circuit.

Argued March 17, 1992.

Decided June 26, 1992.

Peter R. Maier, Atty., Dept. of Justice, with whom Stuart M. Gerson, Asst. Atty. Gen., Jay B. Stephens, U.S. Atty., and Anthony J. Steinmeyer, were on the brief, for appellants in both cases.

Robert M. Kornreich, with whom Robert J. Berg, was on the brief, for appellees in both cases. Jerry S. Cohen also entered an appearance for appellees.

S. Michael Levin, Scott B. Schreiber, Roger P. Fendrich, and Andrew T. Karron, were on the joint brief, for amici curiae Fleet/Norstar Financial Group Inc., The American Bankers Ass'n, The Ass'n of Bank Holding Companies, and The New York Clearing House Ass'n. Patricia A. Dean, John J. Gill, Michael F. Crotty, and John L. Warden, also entered appearances for amici curiae.

Before RUTH BADER GINSBURG, BUCKLEY, and D.H. GINSBURG, Circuit Judges.

Opinion for the Court filed by Circuit Judge D.H. GINSBURG.

D.H. GINSBURG, Circuit Judge:

The plaintiffs-appellees filed a shareholders' class action and a derivative suit against a bank holding company (BHC). They subpoenaed from the appellants, the Office of the Comptroller of the Currency (OCC) and the Secretary of the Board of Governors of the Federal Reserve System (Board), (1) certain bank examination reports prepared by those agencies and provided to the BHC subject to a regulation requiring that they be kept confidential, and (2) the bank examiners' notes and memoranda of interviews with bank personnel. The two agencies objected to production of the reports, claiming deliberative process and bank examination privileges from disclosure. The district court ordered the agencies to give the plaintiffs copies of (1) such documents as, in the course of their supervisory activities, they had given to the BHC, and (2) the factual portions of their interview notes and memoranda.

We affirm the district court's order insofar as it requires the agencies to produce the factual portions of their interview notes and memoranda. we hold that the district court erred, however, insofar as it relied in any way upon the agencies' having given the remaining documents to the BHC, and in failing clearly to weigh the legal considerations relevant to application of the bank examination privilege. Therefore, we remand that portion of the case to the district court for further proceedings.

I. BACKGROUND

The plaintiffs sued Fleet/Norstar Financial Group, Inc., a multi-bank holding company, and some of its officers in the United States District Court for the District of Rhode Island. The plaintiffs allege that between September 11, 1989 and April 3, 1990 the defendants, in order to inflate the price of Fleet common stock, conspired to issue a series of false and misleading statements about Fleet's financial condition, in violation of the Securities and Exchange Act of 1934 and of the common law against negligent misrepresentation.

Specifically, the plaintiffs allege that Fleet officers knowingly or recklessly made unduly optimistic statements about Fleet's nonperforming assets and reserve for loan losses. In this vein, they claim that:

By the summer of 1989, defendant[s] ... were aware that the New England real estate market was in a major downturn and that this real estate downturn would be prolonged and severe. Nevertheless, [they] continued to repeat [their] theme of Fleet/Norstar's insulation from the New England market's woes.

According to the plaintiffs, Fleet knew or should have known that its loan classification and appraisal policies were inconsistent with applicable regulatory standards, that the BHC "would be subject to a comprehensive, definitive, and coordinated examination by bank regulators in early 1990," and therefore that the regulators would require it to increase both its accounting for nonperforming assets and its loan loss reserve. They allege further that for the first quarter of 1990, Fleet reported more than twice as much in nonperforming loans and leases than in the previous quarter, and took a large write off; and in the second quarter of 1990, Fleet again reported a significant increase in nonperforming assets.

The plaintiffs sought to discover from Fleet all documents relating to its investigation or examination by any federal bank regulatory agency pertaining to the period from September 11, 1989 to April 3, 1990. They specifically asked Fleet for all (1) bank examination reports prepared by the appellant agencies, (2) cease-and-desist orders received from the agencies, (3) agency documents indicating a determination that Fleet had engaged in "unsafe or unsound" practices, (4) correspondence between the regulators and Fleet concerning its financial condition, (5) agency documents adversely classifying Fleet assets, (6) agency reports mentioning Fleet that were prepared for congressional hearings or investigations, and (7) all of Fleet's Reports of Condition and Income. According to the plaintiffs, these documents represent "a unique and objective contemporaneous chronicle of the true financial status of Fleet/Norstar and defendants' knowledge, and are directly related to the charges that defendants misleadingly described the bank's financial condition in violation of the federal securities laws."

Fleet refused to produce any such documents on the ground that federal law prohibits the disclosure of confidential supervisory information without the authorization of the relevant bank regulatory agency. See 12 C.F.R. §§ 4.15-4.19 (OCC); §§ 261.11-261.14 (Board). When the district court denied the plaintiffs' motion to compel production, the plaintiffs asked the OCC and the Board directly for access to the records. The agencies refused, asserting that the records are protected by the deliberative process and bank examination privileges. The plaintiffs then served the agencies with subpoenas for the disputed documents, and ultimately brought this enforcement action in the United States District Court for the District of Columbia.

The district court granted in part and denied in part plaintiffs' motion. Stating that it "wouldn't turn these over if [the agencies] didn't give it [sic] to the banks," the court found that the "plaintiffs' demonstrated need to use the documents which the OCC [or the Board] provided to Fleet/Norstar ... outweighs [the agencies'] interest in preserving the confidentiality of such documents." Accordingly, the court ordered production of all the requested bank examination reports and related communications between the agencies and Fleet relating to the period from September 11, 1989 to April 3, 1990 "insofar as those documents were made available to Fleet/Norstar by the OCC [and the Board]." In addition, the court ordered the agencies to turn over the factual portions of certain intra-agency documents they had never shared with Fleet, namely memoranda and notes "detailing interviews held by OCC [or Board] examiners with Fleet/Norstar employees or directors."

The Government appealed. See In re Multi-Piece Rim Products Liability Litig., 653 F.2d 671, 676 (D.C.Cir.1981) ("Since the litigation was in the district court solely for purposes of the discovery motion, the court's disposition of that motion [is] an appealable final judgment"). We stayed the order of the district court pending resolution of the appeal.

II. ANALYSIS

Ordinarily, we review only for arbitrariness a district court ruling on a subpoena for the production of documentary evidence. See United States v. Nixon, 418 U.S. 683, 702, 94 S.Ct. 3090, 3104-05, 41 L.Ed.2d 1039 (1974). A discovery order is not entitled to deference, however, if it rests upon a misapprehension of the relevant legal standard or is unsupported by the record. See In re Sealed Case (Government Records), 950 F.2d 736, 738 (D.C.Cir.1991).

The agencies argue that the district court erred as a matter of law insofar as it ordered production of the disputed documents simply "because [the] OCC and the Board had provided them to Fleet/Norstar ... as part of the regulatory process." The agencies insist that they do not waive the qualified privilege for bank supervisory information merely by sharing it with the bank to which it pertains. The district court's contrary holding, they claim, "reflects a fundamental misconception about the process of bank regulation." Alternatively, the agencies contend that in deciding to order production of the privileged documents the district court improperly balanced the relevant factors.

In opposition to the agencies, the plaintiffs argue that the bank examination reports are "essentially factual in purpose and nature." Therefore, they claim, being relevant the reports are discoverable pursuant to Fed.R.Civ.P. 26, in the discretion of the district court, and "a balancing test was not required."

Before resolving the issues thus presented, we note by way of background that the courts have long recognized that the report of a bank examiner is protected by a qualified privilege. See, e.g., Bank of America Nat'l Trust & Sav. Ass'n v. Douglas, 105 F.2d 100, 104-06 (D.C.Cir.1939) ("by unbroken custom reports of bank examiners have been regarded as privileged"); In re Franklin Nat'l Bank Securities Litig., 478 F.Supp. 577, 580-82 (E.D.N.Y.1979). That privilege has been referred to variously as an aspect of the privilege for "official information," see Delozier v. First Nat'l Bank of Gatlinburg, 113 F.R.D. 522, 525 (E.D.Tenn.1986), or "intragovernmental opinions," see Lundy v. Interfirst, Corp., 105 F.R.D. 499, 502 (D.D.C.1985), or even of the "deliberative process privilege." See Seafirst Corp. v. Jenkins, 644 F.Supp. 1160, 1163 (W.D.Wash.1986).

However denominated, the bank examination privilege is firmly rooted...