An Examination of the Bank-Examination Privilege (II): Burden-Shifting and Good Cause

Abstract

This post is the second in a three-part series.  In An Examination of the Bank-Examination Privilege (I): Overview of an Enigma, I provided an overview of the privilege and discussed its origin and scope. In this second installment, I discuss how requesting parties may override the privilege and the burden-shifting that courts employ.  And in An Examination of the Bank-Examination Privilege (III): Putting it All Together, I discuss a case that puts all these issues together so that we see how the privilege works.

Conflict of Laws

An important, threshold question in a dispute over the production of bank-examination materials is whether federal or state privilege law supplies the rule of decision. While few courts have addressed this issue with respect to the bank-examination privilege, courts provide guidance through their rulings on application of other evidentiary privileges.

Federal Rule of Evidence 501 dictates that, in cases based on federal-question jurisdiction, the federal common-law bank-examination privilege governs the discovery of bank-examination materials whether created by a federal or state banking regulatory agency.  In diversity cases, however, federal courts apply the privilege dictated by the conflict-of-privilege-laws rules of the home state. So, in a diversity case, a state bank-examination privilege—assuming there is one—governs whether a federal regulatory agency must produce bank-examination materials. For examples of this application, check out the rulings in First-Citizens Bank & Tr. Co. v. SJ Pharm., LLC, No. 1:16-CV-00706-ELR, 2016 WL 9383313 (N.D. Ga. Dec. 21, 2016) and United States ex rel. Fisher v. Ocwen Loan Servicing, LLC, 2016 WL 3172774 (E.D. Tex. June 7, 2016).

If it feels odd that a state bank-examination privilege could at any time govern whether a federal banking regulatory agency must disclose bank-examination materials, you are not alone.  For some further discussion, and perhaps commiseration, see Eric Epstein’s educational article, Why the Bank Examination Privilege Doesn’t Work as Intended, 35 Yale J. Regulation Bulletin 17 (2017).

Exhaustion of Administrative Remedies

The bank-examination privilege belongs to the regulatory agency that created the opinions and recommendations that a requesting party seeks in discovery.  While the regulated bank may possess many of these documents—such as communications with the regulating agency or through receipt of a bank-examination report—the bank does not own and cannot assert the privilege.  Rather, if a bank receives a subpoena or document request seeking bank-examination materials, the bank should notify the regulatory agency owning the privilege to permit it an opportunity to object, including intervening in the lawsuit for the purpose of objecting.

Regulatory agencies, however, have formalized processes for those who seek their information. The question arises whether a party seeking bank-examination materials must first exhaust its administrative remedies before seeking the materials through court process or civil-procedure discovery rules.  In other words, must a party first follow the agency’s procedures, referred to as Touhy regulations, for requesting the information and then take the issue to court if the agency declines production?  Or may a litigation party subpoena the documents directly from the agency?

Courts around the country are split on this issue.  Some require the party to exhaust administrative remedies before asking the court to intervene in any dispute.  For a good example, read Judge Scheindlin’s opinion in Wultz v. Bank of China, Ltd, F. Supp. 3d 272 (S.D.N.Y. 2013), which I discussed in this post.  Other courts, led by the Sixth Circuit, hold that federal discovery rules trump the administrative regulations, and regulatory agencies should answer the subpoena through production or objection. In re Bankers Trust Co., 61 F.3d 465 (6th Cir. 1995).  The court in Newton v. American Debt Servs., 2014 WL 252743 (N.D. Cal. May 13, 2014) correctly frames the issue and explains why, in its view, civil-procedure rules should trump an agency’s regulations.

Burden-Shifting

The bank-examination privilege involves a burden-shifting analysis to reach a final outcome over the discoverability of bank-examination materials. Let’s assume that a party adverse to a bank in a federal-question case either (1) asks the bank to produce protected material and the regulatory agency intervenes, or (2) subpoenas protected material directly from the agency.  In either situation, the agency must decide whether to assert the privilege and, if so, identify those documents containing opinions, conclusions, and recommendations.

If the agency proves that the withheld documents contain agency opinions, recommendations, or conclusions, then it has proven that the bank-examination privilege precludes them from discovery.  But the analysis does not end because the burden then shifts to the requesting party to show there is good cause to override the privilege.

Qualified Privilege

The bank-examination privilege is a qualified one, meaning that the party seeking bank-examination materials may overcome a valid privilege assertion upon a showing of good cause. To determine whether a party proves good-cause for overriding the privilege, courts borrow the five-factor analysis used to determine whether to override the deliberative-process privilege.  While these factors are not necessarily exclusive, courts balance and weigh these questions:

1. The relevance of the information sought to the issues in the case. Obviously the more relevant bank-examination materials are to the claims or defense in the lawsuit the more likely the court should override the privilege. While relevance appears to be broad, the requesting party must show specific relevance rather than some abstract connection to the case.
2. Whether alternative evidence is available from other sources. Applying this factor, courts will focus on what the party really needs to support a claim or defense and assess whether similar evidence from other sources supplies sufficient proof. A regulatory may assert that the bank’s own internal records suffice as a good substitute for deliberative materials, but this is not always true when information in a bank-examination report supports an essential part of the requesting party’s claim.
3. The seriousness of the litigation. For this factor, courts assess whether the litigation is sufficiently serious to warrant disclosure. While all lawsuits are serious to some degree, courts, for example, see lawsuits between private litigants as less serious than lawsuits regarding a bank’s failure or that has some other, greater public interest.
4. The role of the government in the litigation. If the privilege-owning regulatory agency is a third-party to the litigation and intervenes solely to assert and defend the privilege, then the court is likely to disfavor disclosure. On the other hand, if the government is a party, then the court will favor disclosure.
5. Whether disclosure will have a chilling effect on the regulatory agency’s internal communications assessing a bank’s condition and operations that could undermine the quality of bank examinations. One court noted that the production of bank-examination materials “may ruffle some feathers, raise some hackles, and rub some the wrong way,” but favored disclosure because it was in the public interest. Wal-Mart Puerto Rico, Inc. v. Zaragoz-Gomez, 152 F. Supp. 3d 67 (D.P.R. 2016). And to the extent that disclosure may cause some “future timidity” of agency personnel to communicate freely, courts often issue protective orders limiting dissemination of bank-examination reports to ameliorate this concern.

A court’s decision to permit, disallow, or restrict disclosure following application of these factors is not terribly precedential.  Each assessment requires a fresh balancing of these factors.  Indeed, a court may apply the factors and order disclosure of some bank-examination materials but not others.

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Having examined the bank-examination privilege concepts in broad terms, let’s see how it works in An Examination of the Bank-Examination Privilege (III): Putting it All Together.

Sources

I recommend reading the following materials for a closer and more detailed review of the bank-examination privilege.  Eric B. Epstein, et al., The Bank Examination Privilege, (Am. Bar Ass’n 2017); Randall I. Marmor, Obtaining Bank Examination and Suspicious Activity Reports in the Investigation of Financial Institution Bond Claims, 39 Tort Trial & Ins. Practice L.J. 947 (2004); Lisa Chalidze, Discovery of Bank Examination Reports and Use of Bank Examiner Privilege or Bank Examination Privilege in Federal Civil Proceedings, 151 A.L.R. Fed. 643 (1999); Eric B. Epstein, Why the Bank Examination Privilege Doesn’t Work as Intended, 35 Yale J. Regulation Bulletin 17 (2017); Eric B. Epstein, David A. Scheffel, and Nicholas A.J. Viletstra, Ten Key Points about the Bank Examination Privilege, Bus. L. Today, at 1 (Am. Bar Ass’n, Feb. 2017); In re United States, 678 Fed. Appx. 981 (Fed. Cir. 2017); In re Bankers Trust Co., 61 F.3d 465 (6th Cir. 1995); In re Subpoena Served Upon the Comptroller of the Currency, and Secretary of the Bd. of Governors of the Fed. Reserve Sys., 967 F.2d 630 (D.C. Cir. 1992); Southeast Pa. Transp. Auth. v. Orrstown Fin. Servs., Inc., 367 F. Supp. 3d 267 (M.D. Pa. 2019); Erhart v. BofI Holding, Inc., 2018 WL 5994417 (S.D. Cal. Nov. 15, 2018); In re Wilmington Tr. Sec. Litig., 2016 WL 9753979 (D. Del. Aug. 16, 2016); Wal-Mart Puerto Rico, Inc. v. Zaragoz-Gomez, 152 F. Supp. 3d 67 (D.P.R. 2016); United States ex rel. Fisher v. Ocwen Loan Servicing, LLC, 2016 WL 3172774 (E.D. Tex. June 7, 2016); Fed. Home Loan Mortgage Corp. v. Deloitte & Touche, LLP, 2015 WL 12766388 (S.D. Fla. Aug. 4, 2015); Lutzeier v. Citigroup Inc., 2015 WL 7306443 (E.D. Mo. Nov. 19, 2015); Wultz v. Bank of China, Ltd., 61 F. Supp. 3d 272 (S.D.N.Y. 2013); Federal Housing Finance Agency v. JPMorgan Chase & Co., 978 F. Supp. 2d 267 (S.D.N.Y. 2013).