Court Opinion

ID: 2806439
Source: CourtListenerOpinion
Date Created: 2015-06-09 14:02:28.81571+00
Date Added: 2024-06-11T12:07:15.081676
License: Public Domain

UNITED STATES DISTRICT COURT
                   FOR THE DISTRICT OF COLUMBIA

THE COLONIAL BANCGROUP, INC.,
As post-confirmation debtor,
and KEVIN O'HALLORAN, as plan
trustee acting for and on
behalf of the debtor,

          Plaintiffs,

     v.

PRICEWATERHOUSECOOPERS LLP,           Civil Action No. 15-mc-201 (GK)
A United States limited               Civil Action No. 15-mc-213 (GK)
liability partnership; CROWE
HORWATH LLP, a United States
limited liability partnership

          Defendants.

FEDERAL DEPOSIT INSURANCE
CORPORATION as receiver for
COLONIAL BANK

          Plaintiff

    v.

PRICEWATERHOUSECOOPERS, LLP
and CROWE HORWATH, LLP,

          Defendants.

                          MEMORANDUM OPINION

    The   Board   of    Governors    of   the   Federal   Reserve   System

("Board"), the Federal Deposit Insurance Corporation ("FDIC"), and

the Office of the Comptroller of the Currency ("OCC")          have asked

this Court to quash third party subpoenas served in connection

                                    -1-
with litigation pending in the Middle District of Alabama 1                       (the

"Alabama Actions").

        On February 13, 2015, the OCC filed a Motion to Quash ("OCC

Motion")    [15-mc-201, Dkt. No. 1] with this Court, and on February

19, 2015, the FDIC and Board filed a related Motion to Quash ("FDIC

Motion")      [15-mc-213,    Dkt.     No.      1] .     On     March      9,    2015,

PricewaterhouseCoopers      LLP     ("PwC")    filed     its   Opposition        ("PwC

Opp'n")    [15-mc-201, Dkt. No. 11] to the OCC Motion. On March 10,

2015,    Crowe Horwath LLP    ("Crowe")       filed its Opposition             ("Crowe

Opp'n")    [15-201, Dkt. No. 14; 15-mc-213, Dkt. No. 6]                  to both the

OCC and FDIC Motions. On March 26, 2015, the OCC filed its Reply

("OCC Reply")    [15-mc-201, Dkt. No. 16] and the FDIC and Board filed

their Reply     ("FDIC Reply")      [15-mc-213,       Dkt.   No.   9].   Crowe also

filed a Sur-Reply ("Crowe Sur-Reply")            [15-mc-201, Dkt. No. 22] on

May 27, 2015.

        Upon consideration of the Motions, Oppositions, Reply, Sur-

Reply, the entire record herein, and for the reasons stated below,

the OCC's Motion to Quash is granted in part and denied in part,

and the FDIC's Motion to Quash is granted.

1 The cases, which have been consolidated, are Colonial BancGroup,
Inc., et al. v. PricewaterhouseCoopers LLP & Crowe Horwath LLP,
Civ. No. 2:11-cv-00746-WKW (M.D. Ala.)       and Federal Deposit
Insurance Corporation v.     PricewaterhouseCoopers LLP & Crowe
Horwath LLP, Civ. No. 2:12-cv-00957-WKW (M.D. Ala.).
                                      -2-
I .   BACKGROUND

      The Alabama Actions involve claims stemming from the 2009

failure of Colonial Bank, Montgomery, AL ("Colonial" or "Bank"),

asserted      by    the    FDIC   as    Receiver         ("FDIC-R")    against      Crowe,

Colonial' s    former       internal    auditor,    and PwC,      Colonial' s       former

outside    auditor         (collectively,     "Defendants").          OCC    Mot.   at   2.

Colonial's failure was caused in part by a multi-year fraud in its

Mortgage Warehouse Lending Division ("MWLD"). The FDIC-R alleges,

inter alia, that the Defendants breached their professional duties

by failing to discover the fraud. Id. The Board, FDIC, and OCC are

not parties to the Alabama Actions.

      On November 26, 2014, Defendants served a subpoena duces tecum

on the OCC         (the "Document Subpoena")       2 •    See OCC Mot. , Exhibit D.

The Document Subpoena contains thirteen requests,                           which can be

summarized as follows:

      •   Request 1 relates to OCC's supervision of Colonial;

      •   Request 2 relates to Colonial's internal audit function;

      •   Request      3   relates     to   internal      audit   work      performed by

          Crowe;

      •   Request 4 relates to external audit work performed by PwC;

      •   Request 5 relates to Colonial's charter change;

2 Subpoenas duces tecum were also served on the Board and FDIC,
but the Board and FDIC have not moved· to quash them, and they are
not at issue here. Crowe Opp'n at 5.
                                            -3-
        •   Request 6 relates to Taylor Bean & Whitaker Mortgage Corp.

             ("TBW") and Ocala Funding LLC;

        •   Request        7    is     for       identification         of   OCC   employees        who

            examined Colonial;

        •· Request         8    relates          to     Colonial's      activity       after    OCC's

            supervision ended;

        •   Request 9 relates to documents the OCC produced or received

            in litigation in connection with Colonial or TBW;

        •   Requests           10-12       are     for       internal    and    draft       documents

            relating           to    the     Interagency          Policy       Statement       on   the

            Internal Audit Function and Its Outsourcing, dated March

            17, 2003 (the "Interagency Policy Statement"); and

        •   Request        13       relates        to    the     FDIC    Off ice      of     Inspector

            General's Material Loss Review ("MLR") of Colonial.

        In addition to the Document Subpoena, on February 4,                                     2015,

Defendant Crowe served subpoenas ad testif icandum on four banking

regulators          (the       "Deposition            Subpoenas") :     Arthur     Lindo       (Senior

Associate Director for Policy, Division of Banking Supervision &

Regulation,         Board) ,        Doreen Eberley             (Director,      Di vision of Risk

Management          Supervision,             FDIC) ,     Jennifer       Kelly      (Senior     Deputy

Comptroller and Chief National Bank Examiner,                                  OCC),       and Judith

Dupre       (FDIC    employee          and       Executive       Secretary       of    the    Federal

                                                       -4-
Financial Institutions Examination Council). OCC Mot., Ex. E; FDIC

Mot., Ex. 1.

        The OCC has only moved to quash Requests 1-7 and 10-12, and

therefore Requests 8-9 and 13 are not at issue here. See OCC Mot.

at 5,    n.   1.   After the Motions to Quash were filed,              Defendants

narrowed their Interagency Policy Statement requests to exclude

all    documents    pre-dating   the   promulgation      of    the    Interagency

Policy Statement. Crowe Opp'n at 4-5, 24. In addition, Crowe is no

longer pursuing Ms. Dupre's deposition in light of her declaration

that she does not know any relevant facts. Crowe Opp'n at 31.

II.    Analysis

        "The quashing of a subpoena is an extraordinary measure, and

is    usually inappropriate      absent      extraordinary circumstances.       A

court should be loath to quash a subpoena if other protection of

less absolute character is possible.             Consequently,       the movant's

burden is greater for a motion to quash than if she were seeking

more limited protection." U.S. Dep't of the Treasury v.                   Pension

Benefit Guar.       Corp.,. 301 F.R.D. 20,   25   (D.D.C.   2014)    (internal

citation omitted) . The OCC,       FDIC,      and Board have the burden of

demonstrating that they are entitled to this extraordinary relief.

Id.

       A party "may obtain discovery regarding any nonpri vileged

matter that is relevant to any party's claim or defense .                     [or

which]   appears reasonably calculated to lead to the discovery of

                                       -5-
admissible evidence."           Fed.   R.   Ci v.    P.   2 6 (b) ( 1) .    " [T] he general

policy favoring broad discovery is particularly applicable where

        the court making the relevance determination has jurisdiction

only over the discovery dispute,                  and hence has less familiarity

with the intricacies of the governing substantive law than does

the     court      overseeing   the    underlying         litigation."         Jewish    War

Veterans of the United States of Am., Inc. v. Gates, 506 F. Supp. 2d
30, 42       (D.D.C. 2007).

        A.        The Document Subpoenas

             1.        Requests 1-7

        The OCC argues that Requests 1-7 should be quashed because

the documents sought are not relevant. See OCC Mot. at 11-18. The

OCC states that Defendants seek the documents to "shield themselves

from liability based on [] pre-receivership conduct of the OCC or

another       prudential     regulator."      OCC     Mot.     at     12.     It   is   well-

established that a defendant in an FDIC-R action cannot raise an

affirmative defense based on the pre-receivership conduct of a

banking regulator, and therefore, the OCC argues, Requests 1-7 are

legally irrelevant. See id.; Grant Thornton, LLP v. FDIC, 535 F.

Supp.    2d 676,      722   (S.D.W. Va.     2007),    rev'd on other grounds sub

nom.    Ellis v.      Grant Thornton LLP,           530 F.3d 280           (4th Cir.    2008)

(collecting cases and concluding that                     "[c] ourts have uniformly

held that claims or defenses based upon pre-receivership actions

of regulators are legally insufficient")

                                            -6-
       Defendants respond that they are not seeking the documents to

shield themselves       from liability or to show that the OCC owed

Colonial a duty. Rather, they are seeking the documents in order

to respond to the Alabama plaintiffs' arguments that the fraud was

easy to catch and that the accountants were negligent in not doing

so. Crowe Opp'n at 8.

       While the OCC has no responsibility for auditing banks,                      it

has an enormous amount of responsibility for the supervision and

monitoring of banks. PwC contends that the documents generated by

and within the OCC are relevant because they "would reflect real-

time observations, analyses, and assessments of bank management,

the MWLD, risk factors, controls, audits, and other aspects of the

bank   that   relate    directly    to    the   claims    and   defenses      in   the

[Alabama Actions] , or at least reasonably could lead to information

bearing on the issues in the [Alabama Actions]." PwC Opp'n at 11.

       Construing     relevance    liberally for     purposes       of   discovery,

Food Lion,    Inc. v. United Food & Comm'l Workers Int'l Union, 103
F.3d 1007, 1012 (D.C. Cir. 1997), the Court concludes that Requests

1-7 are all relevant.

       Relevance is not the end of the inquiry though. The "undue

burden" standard of Federal Rule of Civil Procedure 45 "requires

district courts supervising discovery to be generally sensitive to

the costs imposed on third parties." Watts v.                   S. E. C.,   482 F.3d
501,   509    (D.C.    Cir.   2007).     Federal   Rule    of    Civil      Procedure

                                         -7-
26 (b) (1) - (2)    requires district           courts to    consider a        number of

factors pertaining to the question of undue burden,                            including:

whether the discovery is "unreasonably cumulative or duplicative";

whether the discovery sought is "obtainable from some other source

that is more convenient, less burdensome, or less expensive"; and

whether "the burden or expense of the proposed discovery outweighs

its likely benefit, taking into account the needs of the case, the

amount in controversy, the parties' resources, the importance of

the issues at stake in the litigation, and the importance of the

proposed discovery in resolving the issues." Fed. R. Civ. Pro. 26;

Watts, 482 F.3d at 509.

        The OCC has offered to provide . a breadth of documents to

Defendants,        and   contends      that     these   documents      are    "more   than

sufficient to meet the Defendants' needs" with regard to Requests

1-7. The OCC argues that any further production would be an undue

burden. OCC Mot. at 18.

        The OCC has offered to produce a                  copy of its         "Transition

Binder,"     which       it    compiled       and    provided    to    Colonial's         new

regulators         "to   give       them   an       up-to-date   and     comprehensive

understanding of the OCC's conclusions regarding                       [Colonial]     from

the time of the last completed OCC examination until the time of

[Colonial] Bank's transition to the state charter." OCC Reply at

8, n.    8. The OCC has also offered to not object to the FDIC-R's

production     of    all      OCC   supervisory       correspondence         that   was    in

                                              -8-
Colonial' s   possession,      as   well   as   to   supplement      any ·advisory

correspondence that is missing from Colonial's records.                   See id.

The supervisory correspondence includes "the OCC's completed ROEs,

Supervisory     Letters,       emails,       and     any     other     supervisory

correspondence that the OCC routinely provided to Colonial during

the time it was under the OCC's supervision." Id.

      According    to    the   OCC,    these       documents    constitute     "the

entirety of the OCC's considered conclusions and assessments of

Colonial covering the duration of the OCC's supervision of the

institution." OCC Mot. at 20. Defendants argue that the remaining

documents,    such as work papers,         records of meetings,         and email

exchanges are relevant. PwC Opp'n at 12.

      The documents Defendants seek in addition to those already

offered by the OCC are likely to be "unreasonably cumulative or

duplicative,"     and,   taking     into account      "the     importance of    the

proposed discovery in resolving the issues," the burden and expense

of the proposed discovery outweighs its likely benefit.                    Fed. R.

Civ. Pro. 26(b) (2) (C).

      Therefore,   the OCC's Motion to Quash the Document Subpoena

with regard to Requests 1-7 is granted to the extent Defendants

seek documents beyond those already offered by the OCC. The OCC

shall provide the "Transition Binder" to Defendants and produce

all   correspondence with Colonial           that    occurred over the OCC' s

secure email server for the relevant time period,                    as defined in

                                       -9-
the Document Subpoena. 3 In addition, the OCC shall not object to

the     FDIC-R's         production   of    all    OCC    supervisory      documents       in

Colonial's possession.

              2.         Requests 10-12

        The        OCC   also   argues     that    information         relating    to     the

Interagency Policy Statement (Requests 10-12) 4 is irrelevant. OCC

Mot.    at     16-18.     Defendants     counter that       the    Interagency Policy

Statement and related documents are relevant to defining the scope

and nature of Defendants' duty to Colonial. Crowe Opp'n at 15-17.

        The Court agrees that while the Interagency Policy Statement

is     itself       relevant,   Defendants        are    seeking   a    broad     range    of

documents related to it, many of which have little or no relevance

to the Alabama Actions or Defendants'                     duty of care.         Defendants

clearly explain how the Interagency Policy Statement itself is

relevant, but put forward very little explanation as to why the

3 In its Sur-Reply, Crowe states that the OCC used a secure email
program to correspond with Colonial during OCC's supervision of
Colonial, and that these emails are either not available in the
FDIC-R's production or are not easily accessible. See Crowe Sur-
Reply at 2. Given the difficulties in identifying, accessing, and
authenticating the emails sent over the OCC's secure server, the
Court cannot feel confident that the documents produced by the
FDIC-R constitute the "the entirety of the OCC's considered
conclusions and assessments of Colonial," OCC Mot. at 20, unless
the OCC produces the correspondence sent using the secure email
program.
4 As noted previously, Defendants narrowed their requests so they

now   seek   only   "post-decisional  documents   concerning  the
implementation and interpretation df the Interagency Policy
Statement." Crowe Opp'n at 26.
                                            -10-
related documents they seek are relevant. See Crowe Opp'n at 15-

20.

      The OCC's position is that all relevant documents regarding

the Interagency Policy Statement are publicly available, including

the   Interagency           Policy    Statement       itself,    published      guidance

regarding internal and external audits,                     news releases,      and the

Comptroller's Handbook:              Internal and External Audits.            OCC Reply

at 11. The OCC states that there is no non-public OCC guidance

with respect to the Interagency Policy Statement, nor have there

been any OCC amendments or modifications to the Interagency Policy

Statement since its issuance. Id. at 11.

      Given the attenuated relevance of any non-public Interagency

Policy Statement documents, and the burden in producing them, OCC's

Motion to Quash Requests 10-12 is granted.

      B.       The Deposition Subpoenas

      In       addition      to     documents,       Defendant      Crowe    seeks    the

deposition testimony of three officials.                     It is undisputed that

Crowe did not submit administrative requests to the Board, FDIC,

or OCC prior to serving the Deposition Subpoenas, as required by

the regulations of each respective agency.                      See United States ex

rel. Touhy v. Ragen,              340 U.S. 462,   468   (1951)   (discovery from a

non-party federal agency is subject to the regulations promulgated

by that agency); 12 C.F.R.              §    4.31 et seq.       (OCC regulations); 12

C.F.R.     §   261.22 (b)    (Board regulations); 12 C.F.R.             •§   309.6   (FDIC

                                             -11-
regulations).            Crowe's     explanation          for   this    failure          is    that,

because the agencies said they would never agree to any depositions

concerning         the    Interagency Policy              Statement,     sending         a    formal

letter "seemed an exercise in inevitable futility." Crowe Opp'n at

31.

       The     agencies'        requirements           to    submit     an    administrative

request for information prior to seeking relief from the court are

clear. Counsel cannot independently decide that it need not comply

with     the     regulations         simply       because       it     will    be    a         losing

proposition.

       The Supreme Court has long recognized the general rule that

a party must exhaust· its administrative remedies before seeking

relief from federal courts. See McCarthy v. Madigan, 503 U.S. 140,

144-45       (1992).     The exhaustion doctrine serves the interests of

judicial economy, by offering an agency the opportunity to correct

its    own     errors     and   to    develop        an     administrative         record,        and

separation of powers, by assuring that courts do not unduly intrude

into the operations of executive branch administrative agencies.

Id.

       While Crowe suggests that a party's failure to comply with

Touhy is       not     always      fatal   to    a     subpoena,      it provides             limited

support      for     this   proposition.          See       Crowe    Opp'n    at    31        (citing

Forstmann Leff Assocs. v. American Brands, 1991 WL 168002, at *2

(S.D.N.Y. Aug. 16, 1991)); OCC Reply at 13. In any case, Crowe has

                                                -12-
not   presented exceptional   circumstances   that   would warrant   an

exception to the requirement that it exhaust its administrative

remedies.

      In light of Crowe's failure to comply with the OCC, FDIC, and

Board's administrative requirements, the OCC and FDIC's Motions to

Quash are granted with regard to the three Deposition Subpoenas.

Because the Motions are quashed on other grounds, the Court need

not determine whether the proposed deponents are protected under

the high government official doctrine at this time.

III. Conclusion

      For the foregoing reasons, Defendant's Motion to Quash

shall be granted in part and denied in part. An Order shall

accompany this Memorandum Opinion.

June 8, 2015
                                                               Judge

Copies to: attorneys on record via ECF

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