Whitney Nat. Bank v. Karam, CIV.A. H-02-2250.

• Decision Date: 20 February 2004
• Docket Number: No. CIV.A. H-02-2250.,CIV.A. H-02-2250.
• Parties: WHITNEY NATIONAL BANK, Plaintiff, v. Jerome KARAM, Tom Trammell, David Ranostaj, Defendants.
• Court: U.S. District Court — Southern District of Texas

306 F.Supp.2d 678

WHITNEY NATIONAL BANK, Plaintiff, v. Jerome KARAM, Tom Trammell, David Ranostaj, Defendants.

No. CIV.A. H-02-2250.

United States District Court, S.D. Texas, Houston Division.

February 20, 2004.

Yasmin Islam Atasi, Winstead Sechrest et al., Teresa Letson Schneider, Winstead Sechrest & Minick, Houston, TX, William T. Finn, Carver Darden et al., New Orleans, LA, for Whitney National Bank, plaintiff.

Arnold Anderson Vickery, Arnold Anderson et al., Houston, TX, Michael Reese Davis, Sharp Henry et al., Baton Rouge, LA, Russell" Rusty" Hardin, Jr., Rusty Hardin and Associates, Thomas Duncan Kennedy, Johnson Findel et al., Houston, TX, for defendants.

David Ranostaj, Friendswood, TX, pro se.

Timothy M. McDaniel, McDaniel & Allen, Houston, TX, for movant.

MEMORANDUM AND OPINION GRANTING PLAINTIFF AND THIRD-PARTY DEFENDANTS' MOTION FOR PROTECTION

ROSENTHAL, District Judge.

Defendants, counterclaimants, and third-party claimants Jerome Karam and Tom Trammell (together, "defendants") have alleged that Whitney National Bank and its employees, John C. Hope, III, Louis Dubos, and Phillip Whitham (collectively, the "Whitney Bank Parties") defamed them by accusing them of illegal lending activity. Defendants seek discovery into the information the Whitney Bank Parties provided to government agencies and officials, including the FBI or the Department of Justice, concerning suspected illegal conduct on the part of Karam or Trammell. The Whitney Bank Parties move for protection against such discovery. (Docket Entry No. 66). The Whitney Bank Parties specifically ask for protection against discovery into whether they made any criminal referrals or filed any suspicious activity reports ("SARs") to or with any law enforcement or governmental agencies pertaining to any of the facts made the basis of this suit. (Id., ¶ 3). The Whitney Bank Parties also seek protection against discovery into information exchanged between the Whitney Bank Parties and any governmental agency or entity pertaining to this lawsuit or to the facts made the basis of this lawsuit. (Id.). The Office of the Comptroller of the Currency (OCC) has filed an amicus curiae brief in support of the protective order. (Docket Entry No. 67). The United States has similarly moved for a protective order. (Docket Entry No. 60).

In response, Karam acknowledges that he could not properly obtain from the Whitney Bank Parties any SARs that they might have filed. (Docket Entry No. 69, p. 2). Karam asks that any other contacts between the Whitney Bank Parties and government agencies or officials pertaining to this lawsuit or to the facts made the basis of this lawsuit be produced in discovery. (Id.).

This court has carefully considered the motions for protection, the related briefs the response, the record, and the applicable law. Based on that review, this court GRANTS the motions for protection against discovery into any SARs filing and into communications and information exchanged between the Whitney Bank Parties and law enforcement or governmental officials or agencies pertaining to suspected illegal activities relating to or arising out of defendants' activities and transactions at Whitney Bank made the basis of this suit and any preliminary, preparatory, follow-up, or related communications. The reasons are set out below.

In 1992, Congress passed the Annunzio-Wylie Act, which gave the Secretary of the Treasury the power to require banks and other financial institutions to report suspicious transactions to the appropriate authorities and contained other provisions with respect to the mandatory or voluntary disclosure of suspicious activities. In order to encourage financial institutions to report possible criminal activity, the Act gave financial institutions and their officers, employees, and agents immunity from suit based on their having reported or disclosed a possible crime. 31 U.S.C. § 5318(g)(3). The regulations that the Secretary of the Treasury promulgated under the statute specifically require SARs to be filed whenever a financial institution detects "any known or suspected Federal criminal violation, or pattern of criminal violations, committed or attempted against the bank or involving a transaction or transactions conducted through the bank ... where the bank believes that it was either an actual or potential victim of a criminal violation, or series of criminal violations, or that the bank was used to facilitate a criminal transaction," and (1) a bank insider was involved; (2) over $5,000 was involved, and the bank can identify a suspect; (3) over $25,000 was involved, but the bank cannot identify a suspect; or (4) over $5,000, as well as potential money laundering or violations of the Bank Secrecy Act, were involved. 12 C.F.R. § 21.11(c). A financial institution must file a SAR within thirty days after it first detects certain facts that lead it to suspect such a criminal violation and, in some situations, must immediately notify its regulator and appropriate law enforcement agencies by telephone, in addition to filing a SAR. 12 C.F.R. § 21.11(d).

The Second Circuit has held that "[t]he plain language of the safe harbor provision describes an unqualified privilege," one that "does not limit protection to disclosures based on a good faith belief that a violation has occurred." Lee v. Bankers Trust Co., 166 F.3d 540, 544-45 (2d Cir.1999). The Eleventh Circuit reached a different conclusion in Lopez v. First Union Nat'l Bank, 129 F.3d 1186, 1195 (11th Cir.1997), finding a good faith belief requirement in the language of the statute. Since Lopez was decided, it has been the subject of significant criticism. See, e.g., Gregory v. Bank One Corp., 200 F.Supp.2d 1000, 1003 (S.D.Ind.2002); Stoutt v. Banco Popular de Puerto Rico, 158 F.Supp.2d 167, 175 (D.P.R.2001). Courts have noted that the disclosure of a SAR could compromise an ongoing law enforcement investigation, provide information to a criminal wishing to evade detection, or reveal the methods by which banks are able to detect suspicious activity. See, e.g., Cotton v. PrivateBank and Trust Co., 235 F.Supp.2d 809, 815 (N.D.Ill.2002); Youngblood v. Comm'r, 2000 WL 852449, *11-12 (C.D.Cal.2000). Courts have also observed that a bank may be reluctant to prepare a SAR if it believed that its cooperation may cause customers to retaliate. See, e.g., Cotton, 235 F.Supp.2d at 815. Courts have also expressed concern that the disclosure of a SAR could harm the privacy interests of innocent people whose names may be mentioned. See, e.g., id.; Weil v. Long Island Savs. Bank, 195 F.Supp.2d 383, 388 (E.D.N.Y.2001) ("the production of SARs by a bank in response to a subpoena would invariably increase the likelihood that the person involved in the transaction would discover or be notified that the SARs had been filed") (internal citations and quotations omitted). Since Lopez, the same court has held that a bank that discloses account records under a facially valid subpoena is immune from any lawsuit arising from its disclosures. Coronado v. Bank Atlantic Bancorp, Inc., 222 F.3d 1315, 1322 (11th Cir.2000).

The statute was amended expressly to prohibit a financial institution from disclosing the existence of SARs or other report of a suspicious transaction to a government agency. As amended, 31 U.S.C. § 5318(g) states as follows:

(g) Reporting of suspicious transactions. —

(1) In general. — The Secretary may require any financial institution, and any director, officer, employee, or agent of any financial institution, to report any suspicious transaction relevant to a possible violation of law or regulation.

(2) Notification prohibited. —

(A) In general. — If a financial institution or any director, officer, employee, or agent of any financial institution, voluntarily or pursuant to this section or any other authority, reports a suspicious transaction to a government agency —

(i) the financial institution, director, officer, employee, or agent may not notify any person involved in the transaction that the transaction has been reported; and

(ii) no officer or employee of the Federal Government or of any State, local, tribal, or territorial government within the United States, who has any knowledge that such report was made may disclose to any person involved in the transaction that the transaction has been reported, other than as necessary to fulfill...