U.S. Bank Nat'l Ass'n v. GreenPoint Mortg. Funding, Inc.

• Decision Date: 28 February 2012
• Citation: 939 N.Y.S.2d 395,94 A.D.3d 58,2012 N.Y. Slip Op. 01515
• Parties: U.S. BANK NATIONAL ASSOCIATION, etc., Plaintiff–Appellant,Syncora Guarantee, Inc., etc., et al., Plaintiffs, v. GREENPOINT MORTGAGE FUNDING, INC., Defendant–Respondent.
• Court: New York Supreme Court — Appellate Division

2012 N.Y. Slip Op. 01515

939 N.Y.S.2d 395

94 A.D.3d 58

U.S. BANK NATIONAL ASSOCIATION, etc., Plaintiff–Appellant,Syncora Guarantee, Inc., etc., et al., Plaintiffs,

v.GREENPOINT MORTGAGE FUNDING, INC., Defendant–Respondent.

Supreme Court, Appellate Division, First Department, New York.

Feb. 28, 2012.

Plaintiff appeals from the order of the Supreme Court, New York County (Bernard J. Fried, J.), entered October 13, 2010, and April 13, 2010, which, insofar as appealed from, required plaintiff to bear the cost incurred in the production of discovery.Nixon Peabody LLP, New York (Constance M. Boland of counsel), for appellant.

LeClairRyan, A Professional Corporation, New York (Michael T. Conway of counsel), and BuckleySandler LLP, New York (Matthew P. Previn of counsel), for respondent.

DAVID B. SAXE, J.P., JOHN W. SWEENY, JR., ROLANDO T. ACOSTA, LELAND G. DEGRASSE and SHEILA ABDUS–SALAAM, JJ.

ACOSTA, J.,

This case requires us to determine which party is to incur the cost of searching for, retrieving and producing both electronically stored information and physical documents that have been requested as part of the discovery process. Consistent with this Court's recent decision in Voom HD Holdings LLC v. Echostar Satellite LLC, ––– A.D.3d ––––, 939 N.Y.S.2d 321, [2012], which adopted the standards articulated by Zubulake v. UBS Warburg LLC, 220 F.R.D. 212 [S.D.N.Y.2003] in the context of preservation and spoliation, we are persuaded that Zubulake should be the rule in this Department, requiring the producing party to bear the cost of production to be modified by the IAS court in the exercise of its discretion on a proper motion by the producing party. Accordingly, the matter is remanded to the motion court for further proceedings.

Background

The complaint alleges that prior to August 2007, when its operations were allegedly shut down, defendant GreenPoint Mortgage Funding, Inc. was in the mortgage loan origination business, specializing in what were called “no-doc” and “low-doc” loans, i.e., mortgages for individuals with little to no documentation of income and assets. GreenPoint securitized these loans by pooling them into a trust and then offering for sale notes that were secured by and to be paid down by the cash flow received from the underlying loans.

In accordance with these practices, from 2005 to 2006, GreenPoint sold notes on approximately 30,000 residential mortgages it had securitized, valued at $1.83 billion, to non-party GMAC Mortgage Corporation. Subsequently, GMAC assigned these notes to Lehman Brothers Bank; which, in turn, subsequently assigned them to its parent company, Lehman Brothers Holding; which, in turn, assigned the notes to an affiliated special purpose entity, the Structured Asset Securities Corporation; which, in turn, assigned them to plaintiff-appellant herein, U.S. Bank, NA, as the Indenture Trustee for the benefit of the insurers and noteholders of GreenPoint Mortgage Funding Trust 2006–HE1, Home Equity Loan Asset–Backed Notes, Series 2006–HE1. In addition, certain payments of the notes were guaranteed by two insurance companies, Syncora Guarantee, formerly known as XL Capital Assurance, Inc., and CIFG Assurance North America (CIFG).

According to U.S. Bank, less than two years after the transaction closed, approximately $530 million worth of the loans had been completely charged off as a total loss, or were severely delinquent. U.S. Bank now acts for the benefit of the noteholders and the insurers, which have been making payments to the noteholders.

The Litigation

U.S. Bank, by summons and complaint dated February 5, 2009, brought this action against GreenPoint for what it alleged were “gross violations” of the representations and warranties regarding the attributes of the loans and the policies and practices under which the loans were originated, underwritten and serviced. U.S. Bank further alleged that in its original agreement to sell the loans, GreenPoint promised it would cure any breaches of its representations and warranties that materially and adversely affected the value of the loans by repurchasing and replacing the non-complying loans at agreed-to prices. U.S. Bank also alleged that GreenPoint agreed that if the breaches were severe enough, GreenPoint would buy back all 30,000 mortgages.¹

Discovery Motion

Concurrently with its original complaint in February 2009, U.S. Bank served its first request for the production of documents. In response, GreenPoint did not produce documents, but rather, on April 28, 2009, submitted a letter to the court pursuant to rules 11, 14 and 24 of the Rules of the Commercial Division of the Supreme Court (22 NYCRR § 202.70), as well as CPLR 3214(b) and 3103, seeking a ruling on whether discovery should be stayed pending the motion to dismiss, whether or not a protective order should issue governing the confidentiality and scope of disclosure, and whether production should be conditioned on U.S. Bank's confirmation it would pay the cost of production. GreenPoint advised the court that it had attempted to resolve these issues with U.S. Bank, but to no avail. U.S. Bank did not respond to GreenPoint's letter.

By notice of motion dated December 11, 2009, GreenPoint moved to stay discovery and for a protective order conditioning production of discovery on compliance with a proposed discovery protocol that provided, among other things, that each party would pay for its own discovery requests (i.e., U.S. Bank would pay the costs associated with its requests to GreenPoint and GreenPoint would pay the costs associated with its request to U.S. Bank) and that U.S. Bank would pay for GreenPoint's pre-production attorney review time for the purposes of privilege and confidentiality assertions.

In opposition, U.S. Bank argued that the merits of its allegations in this action, the relevance of its document request, and the likely asymmetry between GreenPoint's document production to it and U.S. Bank's likely document production to Greenpoint militated in favor of denying the motion. U.S. Bank contended that because it was injured by a widespread pattern of GreenPoint's misrepresentations and warranties and its violations of its underwriting guidelines and practices concerning the 30,000 underlying loans, the anticipated document discovery from GreenPoint was expected to be vast, as were the resulting costs. U.S. Bank noted that the costs of production could run into the millions of dollars.

Orders on Appeal

In an order entered April 13, 2010, the motion court denied GreenPoint's request for a protective order approving its discovery protocol. However, in so doing, it endorsed GreenPoint's contention that “the well-settled rule in New York State” was that the “party seeking discovery bears the costs incurred in its production” and stated that it would not deviate from this rule in the instant action. The court, however, rejected GreenPoint's request that the party seeking discovery also bear the cost of compensating the attorneys engaged by the producing party to determine whether the demanded documents are responsive and not privileged.

Subsequently, U.S. Bank's counsel wrote to the court seeking clarification of the April 13 order, seeking an order that specifically directed the requesting party to pay the reasonable costs of the producing party (excluding attorneys' fees)—counsel wanted to make sure that for purposes of pursuing an appeal, it was deemed an aggrieved party. The court held a conference on September 28, 2010, wherein it reiterated that in this state, the party requesting discovery bears the costs incurred in its production and that the parties were not required to pay each other's attorneys' fees. The court noted that its ruling did not preclude either party from making any further application regarding the allocation of discovery costs at such later date if it becomes clear that such application is meritorious.

We disagree with the motion court's conclusion that the requesting party bears the cost of discovery that is responsive to its document requests. Rather, it is the producing party that is to bear the cost of the searching for, retrieving, and producing documents, including electronically stored information.

Analysis

The question of which party is responsible for the cost of searching for, retrieving and producing discovery has become unsettled because of the high cost of locating and producing electronically stored information (ESI). The CPLR is silent on the topic. Moreover, while our courts have attempted to provide working guidelines directing how parties and counsel should prepare for discovery, including ESI, these guidelines generally abstain from recommendations concerning the issue of cost allocation. Even the Rules of the Commercial Division for Supreme Court, Nassau County, previously recognized by this Court as the most sophisticated rules concerning discovery, including ESI, in the state ( see, Tener v. Cremer, 89 A.D.3d 75, 931 N.Y.S.2d 552 [2011] ), are largely silent on the issue of cost allocation, merely noting that the law in New York on cost shifting is “still developing” and referring counsel to decisions of the Nassau County Commercial Division (Commercial Division, Nassau County, Guidelines for Discovery of ESI, Section V, Costs).

Indeed, the courts that have spoken on the issue of cost allocation have not done so with one voice. For example, at least one court has held that the requesting party should bear the entire cost of searching for, retrieving and producing discovery that included ESI ( see e.g. Lipco Elec Corp. v. ASG Consulting Corp., 4 Misc.3d 1019[A], 2004 N.Y. Slip Op. 50967[U], 2004 WL 1949062 [2004] ). This Court has previously acknowledged the requestor's obligation to pay for discovery and ESI costs ( see e.g. Response Personnel, Inc. v. Aschenbrenner, 77 A.D.3d 518, 909 N.Y.S.2d 433 [2010] ), but has allowed for an exception requiring the producer to pay where the cost of ESI...