03 Civ. 9797 (RWS).
November 18, 2004
KATHRYN MARY RYAN, ESQ., RICHARD A. DePALMA, ESQ., Of Counsel, COUDERT BROTHERS, New York, NY, Attorneys for Plaintiff,
JOHN R. RIDDLE, ESQ., MICHAEL R. KEELEY, ESQ., Of Counsel, STRASBURGER PRICE, Dallas, TX, JOHN J. CLARKE, JR., ESQ., Of Counsel, PIPER RUDNICK, New York, NY, Attorneys for Defendants.
The defendants St. Paul Mercury Insurance Company and St. Paul Fire and Marine Insurance Company (collectively "St. Paul") have moved under Rule 12(c), Fed.R.Civ.P., to dismiss the second cause of action in the complaint of plaintiff Bank of China, New York Branch ("Bank of China" or the "Bank") and to compel answers to interrogatories and production of documents under Fed.R.Civ.P. 37. For the reasons set forth below, the motion to dismiss the second cause of action is denied, and the motion to compel answer to interrogatories and production of documents is granted in part and denied in part.
The second cause of action seeks damages from St. Paul for an alleged breach of the implied covenant of good faith and fair dealing. (Compl. ¶¶ 104-109.)
On December 10, 2003, the Bank filed its complaint alleging breach of an insurance contract pursuant to which St. Paul is allegedly obligated to indemnify the Bank for losses suffered, among other things, through employee dishonesty, forgery, and alteration of presentment documents. (Compl. ¶ 1.) The insurance contract at issue in this action, Standard Form No. 24 Financial Institution Bond (the "Bond"), was allegedly issued by St. Paul on June 18, 1995. (Compl. ¶ 8.) The losses at issue in the present litigation, for which St. Paul has allegedly refused to provide indemnification (Compl. ¶ 12), were allegedly caused by the dishonest and fraudulent acts of Bank employees Patrick Young ("Young") and Simon Jian ("Jian"). (Compl. ¶¶ 8, 17.) St. Paul has disputed the Bank's indemnification claim, alleging that it has no duty to provide indemnification because, inter alia, the Bank failed to give timely notice of the claim as required by the Bond. (Answer ¶¶ 133-35.)
The Bank has alleged that Young and Jian, while acting as the Bank's account officers for certain Bank clients — including NBM L.L.C. ("NBM"), Yang Mei Corporation ("Yang Mei"), and National Budget Merchandise, Inc. ("Budget") — colluded with John Chou ("Chou") and Sherry Liu ("Liu"), who are husband and wife and the principals of NBM and Yang Mei. This collusion was allegedly for the purpose of obtaining fraudulent loans, advances and/or credit from the Bank for NBM and Yang Mei.
In connection with the transactions at issue in this case, the Bank initiated a related action in this district alleging fraud and RICO violations by Chou, Liu, NBM, Yang Mei, Budget, Young, and others. That action — captioned Bank of China, New York Branch v. NBM L.L.C., et al., No. 01 Civ. 0815 (DC) (the "NBM Action") — is pending before the Honorable Denny Chin. The NBM Action is scheduled for a new trial on November 8, 2004, following remand from the United States Court of Appeals for the Second Circuit.
At a preliminary pretrial conference on April 7, 2004, discovery was allowed through the use of interrogatories tailored to the specific issues in the case. The parties have attempted, without complete success, to resolve their differences concerning the relief sought by the instant motion, which was marked submitted on August 18, 2004.
Discussion A. The Motion To Dismiss Is Denied As Moot
On August 9, 2004, Coudert Brothers LLP ("Coudert"), counsel for the Bank, forwarded a copy of a proposed first amended complaint (the "FAC") to counsel for defendants. The FAC eliminated the second cause of action and it incorporated into the contract claim certain factual allegations relating to the previously alleged breach of an implied covenant of good faith and fair dealing. (See FAC ¶¶ 103-06.) On August 10, 2004, counsel for St. Paul offered to withdraw its motion to dismiss the complaint in exchange for the Bank's agreement to remove paragraphs 103 through 106 from the FAC.
Leave is granted to the Bank to file the proposed FAC. "[L]eave to amend a pleading `shall be freely given when justice so requires.'" Bank of New York v. Sasson, 786 F. Supp. 349, 352 (S.D.N.Y. 1992) (quoting Banco Para El Comercio Exterior De Cuba v. First Nat'l City Bank, 744 F.2d 237, 243 (2d Cir. 1981)).
Where, as here, there will be no surprise, delay or prejudice to any party, amendment of pleading "shall be freely given."Crespedes v. Coughlin, 956 F. Supp. 454, 478-79 (S.D.N.Y. 1997); PI, Inc. v. Quality Prods., Inc., 907 F. Supp. 752, 764 (S.D.N.Y. 1995); AIU Ins. Co. v. Mitsui O.S.K. Lines, 897 F. Supp. 724, 726 (S.D.N.Y. 1995).
Whether grounds exist to dismiss the FAC in whole or in part will be determined in the even that an appropriate motion to dismiss is subsequently made. However, the Court's decision to grant the Bank leave to file the FAC moots the present motion to dismiss.
B. The Interrogatories May Be Answered Initially By Document Production
Defendants seeks to compel the Bank to answer Interrogatories 2, 7, 12, 14, and 15. Pursuant to Fed.R.Civ.P. 37(a)(2)(B), the Court may compel a party to answer interrogatories submitted pursuant to Fed R. Civ. P. 33. A showing that a given answer to an interrogatory is evasive or incomplete is good grounds for a motion to compel. Fed.R.Civ.P. 37(a)(3); Beard v. Braustein, 914 F.2d 434, 446 (3rd Cir. 1990). A party may move for an order compelling answers to interrogatories after the answering party has objected to them. Fed R. Civ. P. 33(b)(5).
1. Interrogatory No. 2
Defendant's Interrogatory Number 2 provides as follows:
Please identify the total amount of the loss you allege that you have sustained from the acts of Patrick Young and/or Simon Jian and/or any of the Debtors, and explain the method you have used to calculate the loss, including an identification of (a) each loan and loan number upon which you allege you sustained a loss; (b) the original amount of each such loan, the date of the original extension of credit, the date of and terms of each renewal or extension of the credit, the amounts paid on the loan (if any), and the balance outstanding on each loan (specifying both the principal and interest components, if applicable), (c) any recoveries through collateral or otherwise you have made, and (d) the Insuring Agreement of the Bond under which you seek coverage for the alleged loss.
The definitions section of St. Paul's Interrogatories defines the "Debtors" to include Chou, Liu, NBM, Yang Mei, National and any other businesses controlled or connected to Chou and/or Liu.
In the first instance, the Bank may answer this interrogatory by providing documents maintained in the ordinary course of its business. However, a blanket production of exhibits from the NBM Action does not constitute an appropriate answer. Rather, for each document produced pursuant to Interrogatory Number 2, the Bank will state the categories in the Interrogatory to which the document is responsive. After this response, leave is granted to St. Paul to move to for any further answers.
2. Interrogatory No. 7
Defendant's Interrogatory Number 7 provides as follows: Please explain how, why and in what manner the Bank became "increasingly cautious" in its dealing with John Chou and Sherry Liu, as stated in Paragraph 78 of the Bank's Original Complaint in this matter.
Paragraph 78 of the Bank's complaint alleges as follows:
In the Fall of 1999, the Bank became increasingly cautious in its dealings with Chou and Liu because of discrepancies in representations made and documents presented in connection with the NBM and Yang Mei credit facilities. Therefore, in September of 1999, the Bank suspended NBM's discount loans, and subsequently set forth detailed requirements for future NBM "discount" transactions. In November of 1999, the Bank resumed the NBM "discount loan" business and charged the LC Department with its supervision.
The Bank may answer Interrogatory Number 7 by submitting documents relating to those actions described in Paragraph 78 of the complaint that the Bank allegedly took in September 1999 in response to its concerns about Chou and Liu. Any additional evidentiary detail can be elicited via deposition. See PkFinans Int'l Corp. v. IBJ Schroder Leasing Corp., No. 96 Civ. 1816 (SAS), 1996 U.S. Dist. LEXIS 17375, at *14 (S.D.N.Y. Nov. 21, 1996), or by further answers if necessary.
3. Interrogatory No. 12
Interrogatory Number 12 provides as follows:
Please explain in detail the facts surrounding the Bank's suspension of discount loans to NBM, including when and why these loans were suspended, and when and why they were reinstated.
The Bank argues that it has produced all the documents relating to the actions described in Interrogatory Number 12 (see Opp. Memo at p. 7), a statement not controverted by St. Paul. No further answer is required by the instant motion.
4. Interrogatory No. 14
Interrogatory Number 14 provides as follows:
Please identify and describe the approval process for "discount loans" and/or for letters of credit which Simon Jian was required to follow for extensions of credit to John Chou and/or Sherry Liu, including the committees to which he reported and the members of those committees, for the relevant time periods.
The Bank argues that it has answered this interrogatory by identifying the relevant committees and their members. The Bank will also produce its business records reflecting the relevant actions performed in the course of the approval process. No further answer will be required at this time.
5. Interrogatory No. 15
Interrogatory No. 15 provides as follows:
Please identify the Bank employees or officers, other than Young and Jian, from whom any of the Debtors sought credit or loan approvals, and/or with whom any of the Debtors maintained business or personal relationships, from January 1, 1991 through January 1, 2001."
The Bank argues that the documents already produced provide the requested information with respect to loan and credit approvals. The Bank shall produce any other documents reflecting business relationships between the Bank and the Debtors.
C. Requests for Documents
St. Paul seeks an order compelling the Bank (1) to produce all documents withheld on the basis of privilege, and (2) to amend its responses to the requests for production to clarify whether all responsive documents were produced.
1. Requests for Production Nos. 11 15
Requests for Production Numbers 11 and 15, which seek production of the personnel files of Young and Jian, are appropriate and the documents shall be produced subject to a confidentiality agreement between the parties. (Reed Decl. Ex. 3 at 9,11). 2. Documents Relating to Suspicious Activity Reports Filed by the Bank with the U.S. Office of the Comptroller of the Currency
Requests for Production Number 11 seeks "[a]ny documents concerning or constituting personnel files kept or maintained by You concerning Patrick Young, including any internal disciplinary actions taken against Mr. Young by You." Request for Production Number 15 requests all such documents concerning Jian.
St. Paul has sought the production of documents relating to the investigations and reports prepared by the Bank in connection with the activities of Young and Jian. With respect to Suspicious Activity Reports ("SARs") filed by the Bank with the U.S. Office of the Comptroller of the Currency ("OCC"), the Bank has lodged the following objection:
A national bank must file an SAR when it suspects one of its customers or employees of engaging in criminal activity or having committed a crime.
Plaintiff further objects to this request as seeking information protected from disclosure by the attorney-client privilege, the attorney work product doctrine, or other privileges, including privileges promulgated by the OCC in the United States Code of Federal Regulations.
In the foregoing passage, the Bank referred to 12 CFR § 4.36, which prohibits "disclosure of non-public OCC information without the prior written permission of the OCC[.]" As provided by 12 CFR § 4.32, SARs are considered "non-public OCC information," and therefore cannot be disclosed without the OCC's prior consent. Furthermore, courts of this circuit have recognized a qualified bank examination privilege. See Merchants Bank v. Vescio, 205 B.R. 37, 42 (D. Vt. 1997); Lee v. FDIC, 923 F. Supp. 451, 458-59 (S.D.N.Y. 1996); Principe v. Crossland Sav., FSB, 149 F.R.D. 444, 447-48 (E.D.N.Y. 1993). As stated by the Merchants Bank court:
The bank examination privilege is a qualified privilege that "accords agency opinions and recommendations and banks' responses thereto protection from disclosure." [Citation omitted.] It arises out of the practical need for openness and honesty between bank examiners and the banks they regulate, and is intended to protect the integrity of the regulatory process by privileging such communications.Merchants Bank, 205 B.R. at 42 (quoting In re Bankers Trust Co., 61 F.3d 465, 470 (6th Cir. 1995)). This qualified privilege belongs to the regulatory authority and not to the banks that it regulates. Id.
Opinions and other deliberative processes are protected by the privilege; purely factual material is not. Id. But even with respect to deliberative materials, the privilege is not absolute.Id. Rather, it can be defeated, for example, where necessary to promote "the paramount interest of the Government in having justice done between the litigants." Id. (quoting In re Subpoena Served upon Comptroller of Currency, 967 F.2d 630, 634 (D.C. Cir. 1992)). To determine whether the privilege should be defeated, courts have examined the following factors: (1) the relevance of the evidence sought to be protected; (2) the availability of other evidence; (3) the "seriousness" of the litigation and the issues involved; (4) the role of the government in the litigation; and (5) the possibility of future timidity by government employees who will be forced to recognize that their secrets are voluble. Id. In order to perform this balancing test, some courts have elected to examine disputed documents in camera. Id.
The Bank has stated that it filed a SAR relating to NBM with the OCC on or about January 3, 2000. (Riddle Decl. ¶ 7.) The Bank has further stated that in response to the OCC's requirement that the Bank engage an auditing firm to investigate certain matters, Price Water house Coopers ("PWC") was chosen "to investigate, among other things, the relationship between Young, NBM, Yang Mei and their principals." (Id.) Pursuant to this investigation, PWC issued interim reports dated June 20, 2000 and November 9, 2002, and a final report dated April 20, 2001 (the "PWC Reports"). The Bank has stated that it filed additional SARs on or about June 16 and 17 of 2000, relating to Young, NBM and Yang Mei. (Id.) Eventually, the Bank agreed to the entry of a consent decree and to payment of a $10 million fine due to its "numerous unsafe and unsound banking practices." (Riddle Decl. Ex. 5.)
The parties are in dispute as to whether the bank examination privilege has been waived by the OCC. On July 19, 2004, the OCC advised St. Paul:
Your request for the SARs and related correspondence is denied. As described in greater detail in OCC Interpretive Letter No. 978 dated December 4, 2003, the public policy against disclosure of a SAR is very strong. Under 31 U.S.C. § 5318(g)(2), a SAR is confidential. Regulations issued by the OCC and the Financial Crimes Enforcement Network prohibit anyone asked to disclose a SAR from producing it or providing any information that would disclose that a SAR has been prepared or filed. 12 C.F.R. § 21.11(k); 31 C.F.R. § 103.18(e). The federal courts, including those in New York State, have been virtually unanimous in protecting SARs from discovery. See Lee v. Bankers Trust Co., 166 F.3d 540, 544 (2d Cir. 1999) ("[E]ven in a suit for damages based on disclosures allegedly made in an SAR, a financial institution cannot reveal what disclosures it made in an SAR, or even whether it filed an SAR at all."); U.S. v. Holihan, 248 F. Supp. 2d 179, 186-87 (W.D.N.Y. 2003); Weill v. Long Island Sav. Bank, 195 F. Supp. 2d 383, 387-88 (E.D.N.Y. 2001).
Moreover, the statute and regulations protect more than just the SAR. A recent decision held that a bank may not product documents in discovery evidencing:
• the existence or contents of a SAR;
• communications pertaining to the filing of a SAR or its contents;
• communications with government authorities that led to the filing of a SAR or in preparation for the filing of a SAR;
• communications that follow the filing of a SAR intending to explain or clarify the SAR;
• the existence or content of oral communications to authorities regarding suspected or possible violations of laws or regulations that did not lead to the filing of a SAR.Whitney Nat'l Bank v. Karam, 306 F. Supp. 2d 678, 682-83 (S.D. Tex. 2004).
On the other hand, documents created by the bank in the ordinary course of business are discoverable unless the bank has a privilege of its own. Put differently, the facts giving rise to the filing of a SAR are discoverable if those facts are available in, e.g., a document created in the ordinary course of the bank's business.
(Riddle Decl. ex. 17).
As stated by the OCC and upheld by the courts, the facts giving rise to the filing of a SAR are discoverable if those facts are available in a document created in the ordinary course of the Bank's business. However, the Bank is precluded from stating whether certain facts are contained in the SARs themselves. See Lee v. Bankers Trust Co., 166 F.3d 540, 544 (2d Cir. 1999);U.S. v. Holihan, 248 F. Supp. 2d 179, 186-87 (W.D.N.Y. 2003);Weill v. Long Island Sav. Bank, 195 F. Supp. 2d 383, 387-88 (E.D.N.Y. 2001).
In its July 19, 2004 letter, the OCC stated that it would permit the Bank to produce to St. Paul the PWC Reports in their entirety pursuant to a protective order, and that the Bank and PWC are free to assert their own claims of privilege and objections concerning the relevance of the PWC Reports. (Riddle Decl. Ex. 17 at 2.) The Bank has not objected to the disclosure of these reports on the basis either relevance or the personal and confidential nature of the information contained therein.
St. Paul's discovery requests relating to the PWC Reports are limited to information concerning Young, Jian, and the defendants in the NBM action. St. Paul has failed to demonstrate that other information contained in the PWC Reports — e.g., information relating to other Bank employees, other Bank customers, and other transactions not related to this action or the NBM action — is either relevant to this action or reasonably calculated to lead to the discovery of admissible evidence. Therefore, discovery of such information is denied. See, e.g., Bottaro v. Hatton Associates, 96 F.R.D. 158, 160 (S.D.N.Y. 1982) (denying motion to compel because movant failed to show how sought materials could lead to discovery of admissible evidence).
3. Requests for Production Nos. 32, 33 34
St. Paul's Requests for Production Numbers 32, 33 and 34 seek documents evidencing statements by Young, Jian, or any other Bank employee relating to loans to any of the Debtors. Request for Production Number 32 seeks "[a]ll documents reflecting witness interviews, discussions, depositions, or testimony of any kind provided by Patrick Young relating to loans to any of the Debtors, including specifically notes or memos memorializing of summarizing such events." Requests for Production Numbers 33 and 34, which are substantially similar to the preceding request, seek, respectively, all such documents for Jian and all other Bank employees.
Interviews conducted by the OCC are covered by the bank examination privilege. The Bank has stated that it has previously produced all trial and deposition transcripts from the NBM action. Notes or memoranda memorializing or summarizing such events from the Bank's counsel are presumably protected from disclosure by the attorney-client and work-product privileges expressed in an appropriate privilege log.
As described above, the bank examination privilege can be overridden in the interest of justice if the government has a prevailing interest in ensuring that justice is done in private litigation. This principle was concisely stated by the District of Columbia Circuit Court of Appeals as follows:
"[T]he paramount interest of the Government in having justice done between litigants in Federal courts militates in favor of requiring a great effort on its part to produce any documents relevant to a fair termination of th[e] litigation.'Northrop Corp. v. McDonnell Douglas Corp., 751 F.2d 395, 407 (D.C. Cir. 1984) (quoting Westinghouse Elec. Corp. v. Burlington, 351 F.2d 762, 767 (D.C. Cir. 1965)).
Discovery in this litigation may obviate the need to address this issue, and St. Paul is granted leave to renew its application to override the privilege at an appropriate later stage.
The motion to dismiss the complaint is denied as moot in view of the leave granted to the Bank to file its First Amended Complaint. The motion of St. Paul to compel answers to its interrogatories and to compel document production is granted in part and denied in part as set forth above.
It is so ordered.