Colonial Bancgroup, Inc v. Pricewaterhousecoopsers LLP

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
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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.).
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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.
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• 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
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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
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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")
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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
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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
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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
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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.
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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
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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
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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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