First Horizon Nat'l Corp. v. Houston Cas. Co.
First Horizon Nat'l Corp. v. Houston Cas. Co.
2016 WL 5867268 (W.D. Tenn. 2016)
October 5, 2016
Vescovo, Diane K., United States Magistrate Judge
Summary
The court found that the insurance policies had a provision for ESI, but it was not relevant to the dispute at hand. The court granted the defendants' motion to compel in part and denied it in part, finding that the plaintiffs had complied with the insurance policies and were entitled to coverage for the settlement.
FIRST HORIZON NATIONAL CORPORATION and First Tennessee Bank National Association, Plaintiffs,
v.
HOUSTON CASUALTY COMPANY, Federal Insurance Company, Xl Specialty Insurance Company, Alterra America Insurance Company, AXIS Insurance Company, National Union Fire Insurance Co. of Pittsburgh, PA, RSUI Indemnity Company, and Everest Indemnity Insurance Co., Defendants
v.
HOUSTON CASUALTY COMPANY, Federal Insurance Company, Xl Specialty Insurance Company, Alterra America Insurance Company, AXIS Insurance Company, National Union Fire Insurance Co. of Pittsburgh, PA, RSUI Indemnity Company, and Everest Indemnity Insurance Co., Defendants
No. 2:15-cv-2235-SHL-dkv
United States District Court, W.D. Tennessee, WESTERN SECTION
Signed October 05, 2016
Counsel
Thomas Lang Wiseman, William McDowell Patterson, Wiseman Bray PLLC, Memphis, TN, John Christopher Toro, Kristen A. Lynn, Nicholas Griffin Hill, Shelby S. Guilbert, Jr., Anthony P. Tatum, King & Spalding LLP, Atlanta, GA, for Plaintiffs.Charles C. Lemley, Matthew W. Beato, William E. Smith, IV, Wiley Rein, LLP, Lisa Katherine Swartzfager, Hogan Lovells US LLP, Joseph Anselm Bailey, III, Douglas Martin Mangel, Shipman & Goodwin LLP, Washington, DC, Justin Nicholas Joy, William H. Haltom, Jr., Lewis Thomason, P.C., Daniel Warren Van Horn, Butler Snow LLP, Ronald L. Harper, Jeffrey E. Nicoson, Leitner Williams Dooley & Napolitan, Byron Norman Brown, Glen G. Reid, Jr., Wyatt Tarrant & Combs, LLP, Memphis, TN, David Newmann, Hogan Lovells US LLP, Philadelphia, PA, Alexis J. Rogoski, James Theodore Sandnes, James Robert Steel, III, Skarzynski Black LLC, New York, NY, Cary J. Economou, Lilian M. Khanjian, Michael F. Perlis, Locke Lord LLP, Los Angeles, CA, Norman Adam Dietrich, II, Scott R. Brown, Frost Brown Todd LLC, Nashville, TN, Matthew I. Schiffhauer, Paul T. Curley, Patrick Stoltz, Kaufman Borgeest & Ryan LLP, Valhalla, NY, Bryan William Petrilla, Michael John Smith, Stewart Berntiel Rebar & Smith, Blue Bell, PA, for Defendants.
Vescovo, Diane K., United States Magistrate Judge
ORDER GRANTING IN PART AND DENYING IN PART THE DEFENDANTS' MOTION TO COMPEL
*1 Before the court is the July 14, 2016 motion of the defendant Houston Casualty Company (“HCC”), joined by defendants Federal insurance Company, AXIS Insurance Company, Alterra America Insurance Company, Everest National Insurance Company, National Union Fire Insurance Co. of Pittsburgh, PA, RSUI Indemnity Company, and XL Specialty Insurance Company (collectively “the Defendants”), to compel the plaintiffs First Horizon National Corporation (“First Horizon”) and First Tennessee Bank National Association (“First Tennessee”) (collectively “the Plaintiffs”) to produce certain allegedly non-privileged documents and a document-by-document privilege log. (ECF Nos. 173, 195, 196.) The Plaintiffs filed a response in opposition on August 1, 2016. (ECF No. 186.) HCC thereafter filed a reply on August 15, 2016 in which the remaining defendants joined. (ECF Nos. 193, 195, 196.)
The motion was referred to the United States Magistrate Judge for determination, (ECF No. 176), and a hearing was held on August 22, 2016.[1] For the reasons stated herein, the Defendants' motion to compel is granted in part and denied in part.
I. PROCEDURAL AND FACTUAL BACKGROUND
This is an insurance coverage dispute in which the Plaintiffs seek coverage from the defendant insurers for a $212.5 million dollar settlement with DOJ and HUD of a claim of violation of the False Claims Act relating to errors and omissions in underwriting and origination of HUD mortgage loans. In defense, the Defendants contend, inter alia, that the claim is “interrelated” to an earlier claim made by First Tennessee and thus barred under a later policy and that First Tennessee failed to timely notify the Defendants of the claim.
For the period of August 1, 2013 through July 31, 2014, First Tennessee, a banking institution which is a wholly owned subsidiary of First Horizon, purchased a primary claims-made insurance policy from HCC[2] and seven excess follow-form policies from the seven other insurance companies named as defendants in this lawsuit. (Sec. Am. Compl. ¶¶ 7, 29, ECF No. 103.) As part of the primary insurance coverage with HCC, First Tennessee was covered for “Financial Institution Professional Liability,” (“FIPL”). The insuring provision in the HCC policy states in relevant part:
The Insurer will pay, to or on behalf of the Insureds, Loss arising from Claims first made against them during the Policy Period or the Discovery Period (if applicable) for Wrongful Acts committed or allegedly committed by an Insured or by any person for whose Wrongful Acts an Insured is legally responsible.
(Id. ¶¶ 31, 32)(bolded terms are bolded in original to indicate defined terms). The HCC policy further states that the insured must give the insurer “written notice of any Claim as soon as practicable after the [insured's] risk manager or general counsel becomes aware of such Claim.” (HCC Primary Insurance Policy 23, ECF No. 103-2.) In addition, if the insured files a Notice of Circumstance with the insurers when it “first become[s] aware of any circumstance which may reasonably be expected to give rise to a Claim[,]” then the Claim will relate back to the date that the Notice of Circumstance was filed. (Id.) The HCC policy has a provision entitled “Interrelationship of Claims” which states that:
*2 All Claims all eging, arising out of, based upon or attributable to the same facts, circumstances, situations, transactions or events or to a series of related facts, circumstances, situations, transactions or events will be considered to be a single Claim and will be considered to have been made at the time the earliest such Claim was made.
In 2012, the DOJ and HUD initiated an investigation of the Fair Housing Administration loan-origination services provided by First Tennessee as a Direct Endorsement Lender (“DOJ/HUD Investigation”). (Sec. Am. Compl. ¶ 44, ECF No. 103.) The DOJ/HUD Investigation focused on whether First Tennessee had committed errors and omissions related to quality-control deficiencies for HUD loans, underwriting, origination of HUD loans, and self-reporting requirements for HUD loans, thus violating the False Claims Act. (Id.)
In its 2012 Annual Report, filed on February 27, 2013, First Tennessee disclosed the ongoing investigation to its shareholders stating that it was “cooperating with the [DOJ] and [HUD] in a civil investigation regarding compliance with requirements relating to certain FHA-guaranteed loans.” (Id. at ¶ 45.) In its 2013 Annual Report, filed on February 27, 2014, First Tennessee again disclosed the ongoing investigation to its shareholders, stating that:
No demand or claim has been made of [First Tennessee]. The investigation could lead to a demand under the federal False Claims Act and the federal Financial Institutions Reform, Recovery, and Enforcement Act of 1989 .... [First Tennessee] has established no liability for this matter and is not able to estimate a range of reasonably possible loss due to significant uncertainties regarding: the absence of any specific demand or claim ....”
On May 20, 2014, First Tennessee made a presentation to the insurers and disclosed that it “had an initial meeting with HUD and DOJ in [the second quarter of 2013]; discussions [were] continuing as to various factual matters; and HUD and DOJ could seek treble and special damages under the False Claim Acts and other laws.” (Id. ¶ 48.) On May 27, 2014, First Tennessee reported the DOJ/HUD Investigation to the defendant insurers as a “notice of circumstances that may give rise to a claim” under the policies. (Id. ¶ 49.)
On December 17, 2014, the DOJ met with First Tennessee and made a written demand on First Tennessee in the form of a presentation deck outlining, among other things, that:
(1) [ ] the DOJ's investigation was substantially complete; (2) the DOJ's allegations with respect to First Tennessee's alleged wrongful acts in failing to comply with material FHA and HUD residential-mortgage guidelines and requirements; (3) that the DOJ is currently “seeking suit authority”; and (4) that the DOJ plans to file suit against First Tennessee unless it receives a “serious settlement offer from [First Tennessee] by the end of January 2015.”
(Id. ¶ 51.) First Tennessee alleges that this is the first time a “Claim” was made pursuant to the policies (hereinafter “HUD Claim”).[3] (Id.) First Tennessee engaged in settlement discussions with the DOJ and, on April 2, 2015, reached an agreement in principle to settle the HUD Claim for $212.5 million. (Id. ¶ 53.) On June 1, 2015, First Tennessee and the DOJ executed a written Settlement Agreement, and First Tennessee paid the entire settlement amount. (Id. ¶ 54.)
*3 In February, March, and April, 2015, First Tennessee corresponded with each insurer to seek coverage under the 2013-2014 policies up to the $75 million limit. (Id. ¶¶ 61, 58.) The insurers denied First Tennessee's demand for coverage under the policies. (Id. ¶ 63.) The Plaintiffs filed this complaint on April 9, 2015, seeking full payment from all insurers under the respective policies. (ECF No. 1.) In their second amended complaint, the Plaintiffs assert the following counts: (1) breach of contract, (2) declaratory judgment, and (3) bad faith refusal to pay under Tenn. Code Ann. § 56-7-105. (Sec. Am. Comp. ¶¶ 74-91, ECF No. 103.)
The Defendants have raised two primary defenses. First, the Defendants maintain that the HUD Claim is interrelated to a Federal Housing Finance Agency claim asserted against First Tennessee in the 2009-10 policy period (“FHFA Claim”). (Pls.' Mot. to Compel 2, ECF No. 153-1.) The FHFA Claim relied upon a HUD investigation known as Operation Watchdog or Officer of Inspector General Review (“OIG Review”). (Defs.' Resp. 1, ECF No. 160.) On May 12, 2014, the Plaintiffs entered into a $55 million settlement agreement with five of the defendant insurers regarding the FHFA Claim – HCC, Federal, XL, National, and Everest. (Defs.' Resp. 1, ECF No. 160.) Those five insurers obtained broad releases. In their answers to the second amended complaint, these five defendant insurers filed counterclaims alleging that First Horizon breached this settlement agreement. (See HCC's Counterclaims 22-38, ECF No. 118; ECF Nos. 115, 121, 123, 125.) The Defendants also argue that the instant HUD Claim is related to a prior False Claims Act claim known as the Hastings Action, which, according to the Defendants, also alleged misrepresentations about some of the exact FHA loans at issue in the instant HUD Claim. (See Defs.' Motion to Compel 3, ECF No. 173-1.)
Second, the Defendants contend that “First Horizon deliberately hid the ball and failed to give notice of the FHA Claim until well-after First Horizon learned the United States first asserted the Claim.” (Defs.' Resp. to Pls.' Mot. to Compel 2, ECF No. 160.) The Defendants argue that although First Tennessee seeks coverage under the 2013-14 policies, it actually had knowledge of a “Claim” as defined in the policy when it received subpoenas and a Civil Investigation Demand from the DOJ in 2012 and thus the HUD Claim is untimely and barred under the 2013-14 policies. (Id.) The Defendants also maintain that First Tennessee failed to report two prior “written demands,” one in May 2013 and the other in April 2014, which constitute “Claims” within the meaning of the policies. (Defs.' Motion to Compel 2-3, ECF No. 173-1; Defs.' Resp. to Pls.' Mot. to Compel 2, ECF No. 160.) The first alleged written demand consists of a confidential communication dated May 16, 2013 in which the DOJ, U.S. Attorney's Office, and HUD informed First Horizon of the ongoing investigation, First Tennessee's liability under the False Claims Act, the results and findings to date, and an overview of the damages and potential penalties. (See Ex. A to Alterra's Mem. in Supp. of Mot. to Dismiss, ECF No. 109.) This communication stated that First Horizon's theoretical damages could be up to $1.19 billion, that the investigation was still ongoing, and that the United States would continue settlement discussions if First Tennessee was interested. (Id. at 34-35.) The second written demand according to the Defendants was a liquidated $610 million settlement demand made in April of 2014 to which First Horizon omitted any reference in its May 27, 2014 Notice of Circumstances letter. (Defs.' Motion to Compel 3, ECF No. 173-1; Defs.' Resp. to Pls.' Mot. to Compel 2, ECF No. 160.)
*4 On November 3, 2015, the Defendants served a Joint First Set of Requests for Production upon the Plaintiffs. (ECF No. 186-2.) The Defendants sought, among others, “any and all communications” regarding: (1) the HUD investigation that resulted in the FHA claim for which First Tennessee is seeking coverage; (2) the FHFA Action; and (3) the OIG Review a/k/a Operation Watchdog. (Insurers' Joint Req. for Produc. 11, 18, 24, ECF No. 186-2.) The Defendants also sought all communications regarding:
Other Mortgage Underwriting Misrepresentation Claims ... other than the FHA Claim, the FHFA Action, and Operation Watchdog, that alleges, arises out of, is based upon, is attributable to, is Related to, or in any way involves directly or indirectly any assertion that First Horizon made representations regarding mortgage loan underwriting concerning the time period from January 1, 2005 to the present, whether or not such matter was reported to the Insurers.
(Id. at Req. for Produc. 30 & p. 5.) On December 15, 2015, the Defendants also served Rule 45 subpoenas on five law firms that represented First Horizon in the connection with the above matters seeking the same information. (ECF No. 186-3.)
In response to the requests, on June 15, 2016, First Tennessee produced a six-page categorical log that grouped thousands of documents created over the course of five years into one of nine categories. (ECF No. 173-4.) The law firms of Steptoe & Johnson LLP (“Steptoe”) and K&L Gates LLP (“K&L Gates”) provided similar categorical logs. (ECF Nos. 173-6, 173-7.) The remaining three law firms stated that they would not produce any documents in response to the subpoenas. (ECF Nos. 186-6, 186-7, 186-8.) On July 25, 2016, First Tennessee supplemented its production and produced a document-by-document privilege log for: (1) communications between First Tennessee and Marsh, its insurance broker; (2) communications between First Tennessee and KPMG, its auditing firm; (3) communications with its in-house counsel relating to annual insurance renewals; and (4) documents relating to the OIG Review. (ECF No. 186-17; Pls.' Resp. 6, ECF No. 186.)
After the Defendants objected to the Plaintiffs' production, the parties continued to meet and confer with little success. The Defendants filed the instant motion to compel on July 14, 2016, asking the court to compel production of: (1) a document-by-document privilege log for 5,941 emails withheld as privileged; (2) unredacted litigation reports prepared for First Tennessee's Board of Directors; (3) communications between First Tennessee and KPMG; and (4) documents relating to the OIG review. (ECF No. 173-1.)
II. ANALYSIS
A. Document-by-Document Privilege Log
The categorical privilege log provided by First Tennessee contains nine categories of communications which group thousands of documents created over the course of five years dating back to July 2010. The communications include dozens of authors and recipients and lumps together documents concerning many matters into broad categories. The Plaintiffs take the position that their privilege log indexing withheld documents by category is sufficient because preparing a document-by-document privilege log would be an undue burden and the additional information to be gleaned from a more detailed log would not be of no material benefit to the Defendants. The Defendants insist that the Plaintiffs should be required to produce a document-by-document privilege log instead of a categorical log.
The party raising a privilege has the burden of establishing the existence of the privilege. Fed. R. Civ. P. 26(b)(5); First Horizon Nat'l Corp. v. Certain Underwriters at Lloyd's, No. 211CV02608SHMDKV, 2013 WL 11090763 at *6 (W.D. Tenn. Feb. 27, 2013)(citing In re Grand Jury Investigation No. 83-2-35, 723 F.2d 447, 450 (6th Cir. 1983)). A party withholding information on the grounds of attorney-client privilege must comply with the requirements of Rule 26(b)(5)(A) of the Federal Rules of Civil Procedure. While the rule itself is not precise in what a party must do to claim attorney-client privilege, it does provide certain guidance. Fed. R. Civ. P. 26(b)(5)(A) states:
*5 When a party withholds information otherwise discoverable by claiming that the information is privileged or subject to protection as trial-preparation material, the party must: (i) expressly make the claim; and (ii) describe the nature of the documents, communications, or tangible things not produced or disclosed B and do so in a manner that, without revealing information itself privileged or protected, will enable other parties to assess the claim.
Id. This court has previously held that to comply with Rule 26, the privilege log should contain the date and time of the document, the type of communication, the author, the addressee(s), identification of the recipients, the privilege asserted, and an explanation of the privilege claimed. Order Granting in Part and Denying in Part Pls.' Mot. to Compel 3, Nozinich v. Johnson & Johnson, Inc., Case No. 09-2105 (W.D. Tenn. Feb. 22, 2011), ECF No. 61; see also United States v. Life Care Centers of Am., Inc., No. 1:08-CV-251, 2015 WL 10987073, at *11 (E.D. Tenn. Aug. 31, 2015), report and recommendation adopted, No. 1:08-CV-251, 2015 WL 10987032 (E.D. Tenn. Sept. 22, 2015)(citation omitted)(“To comply with Rule 26, a privilege log should identify each document, the date of said document, the individuals who were parties to the communications, and a sufficient description to enable evaluation of the claim.”). The log “must be sufficiently detailed so that the court can judge the propriety of assertion of the privilege.” Glidden Co. v. Jandernoa, 173 F.R.D. 459, 476 (W.D. Mich. 1997)(citing Fed. R. Civ. P. 26(b)(5)); see also First Horizon, 2013 WL 11090763, at *6; Ypsilanti Cmty. Utilities Auth. v. Meadwestvaco Air Sys. LLC, No. CIV.A. 07-CV-15280, 2009 WL 3614997, at *4 (E.D. Mich. Oct. 27, 2009)(stating that the log must be specific and “[b]oiler plate descriptions and allegations of protection or privilege will not suffice). In essence, all claims of privilege must be made on a “document by document” basis and “blanket” claims are impermissible. Clark Const. Grp., Inc. v. City of Memphis, No. 01-2780 B/AN, 2005 WL 6187896, at *3 (W.D. Tenn. Feb. 9, 2005)(citation omitted).
Courts have allowed categorical logging when a document-by-document log would be unduly burdensome or when “the additional information to be gleaned from a more detailed log would be of no material benefit to the discovering party in assessing whether the privilege claim is well grounded.” S.E.C. v. Thrasher, No. 92 CIV. 6987 (JFK), 1996 WL 125661, at *1 (S.D.N.Y. Mar. 20, 1996). In Thrasher, the court stated that documents created during the pending litigation “are ordinarily covered by the work-product rule [and] ... very probably by the attorney-client privilege.” Id. Moreover, the documents in question were “extremely voluminous” and “a document-by-document listing would be a long and fairly expensive project for counsel to undertake.” Id. Given these facts, as well as the fact that the requesting party made no effort to explain what benefit it would gain from a detailed document-by-document log, the court permitted a categorical log. Id. at *1-2.
Similarly, in First Horizon Nat'l Corp. v. Certain Underwriters at Lloyd's, No. 211CV02608SHMDKV, 2013 WL 11090763 (W.D. Tenn. Feb. 27, 2013), this court permitted use of categorical privilege logs for documents created after the coverage litigation was filed provided that the producing party identified the time period encompassed by the withheld documents, listed the individuals who authored or received the documents, and represented by counsel that all of the documents were prepared in anticipation of litigation. Id. at *7. The court noted that post-coverage suit documents are “at best marginally probative of the insurer's decision to deny coverage and whether such decision was made in bad faith.” Id. at *3 (quotation and internal quotation marks omitted).
*6 Here, the Plaintiffs seek to categorially log all documents, not just those created after the filing of this complaint on April 9, 2015.[4] Unlike documents created after the filing of the complaint, which are at best marginally probative, documents created prior to April 9, 2015 are relevant to the instant litigation. With respect to these documents, the Plaintiffs have not shown that they would bear an undue burden in creating a standard privilege log and the Defendants have shown that a document-by-document log would be of material benefit.
As to undue burden, the Plaintiffs must “establish[ ] undue burden with specificity ... [and] articulate explicitly why production of an itemized and descriptive privilege log is unduly burdensome.” Bethea v. Merchants Commercial Bank, No. 11-51, 2012 WL 5359536, at *2 (D.V.I. Oct. 31, 2012)(citing other cases holding the same). Here, the Plaintiffs assert that production of a document-by-document privilege log would cost them $150,000 and take three to four weeks. (Pls.' Resp. 1-2, ECF No. 186.) Given the amount in controversy of at least $75 million,[5] the Plaintiffs' estimated cost of production of a document-by-document log does not constitute undue burden. In addition, under Federal Rule of Civil Procedure 26(b)(1), considering, inter alia, the importance of the issues and the importance of the discovery in solving the issues, the amount in controversy, and the Plaintiffs' resources, the expense of producing a document-by-document privilege log is proportional to the needs of this case.
Further, the Defendants have shown that a document-by-document log would be of material benefit to them in assessing whether the privilege claim is well grounded. The documents listed in the nine categories may not involve lawyers or may involve lawyers but contain non-privileged communications of fact. See Navigators Management Co., Inc. v. St. Paul Fire & Marine Ins, No. 4:06CV1772 SNLJ, 2009 WL 465586, at *3 (E.D. Mo. 2009)(stating that there is no “attorney-client privilege over facts conveyed to [the company] by attorneys which the attorneys learned from an independent source” (citations omitted)). The documents listed in the nine categories may have been prepared in the ordinary course of business. See 360 Const. Co. v. Atsalis Bros. Painting Co., 280 F.R.D. 347, 353 (E.D. Mich. 2012)(stating that the party claiming protection bears the burden to “show[ ] that anticipated litigation was the driving force behind the preparation of each requested document” (quotation and internal quotation marks omitted)). Here, for instance, it is unclear why First Tennessee asserts work-product protection for documents going back to 2010 when the DOJ began its investigation in 2012. (See ECF No. 173-4.) Or, the documents listed in the nine categories may fall within an exception to the asserted privilege. As this court has previously noted, Tennessee recognizes the “sword and shield,” “offensive use,” and “at issue” exceptions to the attorney-client privilege and work-product protection. First Horizon Nat'l Corp. v. Certain Underwriters at Lloyd's, No. 211CV02608SHMDKV, 2013 WL 11934936, at *5-6 (W.D. Tenn. Oct. 17, 2013). As to the “at issue” exception, where timely notice is a condition precedent to coverage, this exception provides that the insured waives any privilege or protection for documents that could “establish[ ] when it was reasonably on notice of potential liability and thus obliged to notify its insurer.” Century 21, Inc. v. Diamond State Ins. Co., No. 03 CIV. 5163(GEL), 2006 WL 2355323, at *3 (S.D.N.Y. Aug. 10, 2006). Without a document-by-document log, the Defendants cannot analyze which documents in First Tennessee's privilege log might fall within this or other exceptions.
*7 Even if the court were to allow a categorical logging of these documents, the information provided by First Tennessee would still be too minimal and vague and would prevent the court from evaluating the privilege claimed. See Nationwide Mut. Fire Ins. Co. v. Kelt, Inc., No. 6:14-CV-749-ORL-41, 2015 WL 1470971, at *8 (M.D. Fla. Mar. 31, 2015)(stating that category described as: “All internal [party] correspondence, correspondence between [party] and [its counsel] and other documents in its file” was “far too vague and generalized”); Neelon v. Krueger, No. 12-cv-11198-IT, 2015 WL 1037992, at *3 (D. Mass. 2015)(stating that the categorical privilege log lacked sufficient details where, inter alia, the log identified the categories of withheld documents in broad strokes such as “communications” and failed to explain how the privilege would apply to the involved parties); McNamee v. Clemens, No. 09 CV 1647 SJ, 2013 WL 6572899, at *3 (E.D.N.Y. Sept. 18, 2013)(stating that “broad classes of documents with exceedingly general and unhelpful descriptions” are impermissible in categorical logs); Franco-Gonzalez v. Holder, No. CV 10-2211-DMGDTBX, 2013 WL 8116823, at *6 (C.D. Cal. May 3, 2013)(stating that even in categorical logs, “the detail offered cannot be so minimal as to prevent the court from evaluating the privilege claimed”).
In sum, in the absence of a document-by-document log, the court or the Defendants cannot assess whether the privilege claim is well grounded. For these reasons, the Defendants' motion to compel production of a document-by-document privilege log is granted.
B. Litigation Reports Prepared for First Tennessee's Board of Directors
In the November 3, 2015 requests for production served upon the Plaintiffs, the Defendants requested copies of “[a]ny and all ... documents ... relating to any meeting of Your board of directors ... that Relate to the FHA claim.” (See Ex. 17 at 11, ECF No. 173-19.) In response, the Plaintiffs produced redacted litigation reports prepared quarterly for First Tennessee's Board of Directors by First Tennessee's general counsel in conjunction with its outside legal counsel. (See Decl. of Franklin ¶¶ 2-3, ECF No. 186-28.) In an email dated May 18, 2016, HCC noted that the Plaintiffs had inconsistently redacted section headings of the litigation reports and asked it to unredact the documents uniformly. (Ex. 11 at 17-18, ECF No. 173-14.) Two days later, on May 20, 2016, the Plaintiffs responded that they would not unredact any material. (Id. at 13.) On June 10, 2016, HCC again expressed concern regarding the inconsistency of the reductions. (Id. at 2.) On June 14, 2016, the Plaintiffs stated that they made a replacement production of the litigation reports in order to claw back the original documents to uniformly redact the headings in all the litigation reports that were produced. (Id. at 1.) The Protective Order entered on January 7, 2016 states that any claw back request must occur “within a reasonable time, not to exceed ten days after the discovery of such inadvertent disclosure.” (Protective Order ¶ 17, ECF No. 129.)
The Defendants first argue that the Plaintiffs discovered the inadvertent disclosure at the very latest on May 20, 2016, but they did not send a claw back request until June 14, 2016, twenty-five days later, in violation of the Protective Order's 10-day time period. (Defs.' Motion to Compel 16, ECF No. 173-1.) The Defendants further argue that because the Plaintiffs made selective reductions of section headings in the litigation reports, they have waived any claims to protection with respect to the redactions they made to the entire documents. (Id. at 17.) The Defendants request in camera review of the entire unredacted documents to determine if the Plaintiffs' selective reductions are inappropriate. (Id.)
Like Federal Rule of Evidence 502(b), Tennessee Rule of Evidence 502(b) provides that a party that makes an inadvertent disclosure of privileged material does not waive privilege so long as the party “promptly [takes] reasonable steps to rectify the error.” See also Bd. of Trustee, Sheet Metal Workers' Nat'l Pension Fund v. Palladium Equity Partners, LLC, 722 F. Supp. 2d 845, 849-50 (E.D. Mich. 2010). Here, the parties exchanged emails on May 20 and June 10, 2016 regarding the litigation reports produced to the Defendants and the Plaintiffs officially sought claw back on June 14, 2016. Given that the parties were continuing to meet and confer regarding the issue, the court finds that the Plaintiffs' claw back of the inadvertent disclosures was reasonable. Moreover, in light of the Plaintiffs' representation at the hearing that the section headings of the various litigation reports are identical to one another, this issue becomes inconsequential.
*8 Because the court finds that the claw back is reasonable, the Defendants' second argument is unavailing. Even if the delay in claw back of the inadvertent disclosure of the section headings constitutes a waiver of the privilege, there is no ground to find that such a waiver applies to the entire document. Therefore, the Defendants' motion to compel disclosure of the Plaintiffs' redacted litigation reports is denied.
C. Communications between First Tennessee and KPMG
According to First Tennessee's June 15, 2016 categorical privilege log, the Plaintiffs withheld correspondence between First Tennessee and KPMG, First Tennessee's outside auditor, on the bases of attorney-client privilege, work-product doctrine, joint defense privilege, and common interest privilege. (ECF No. 173-4.) First Tennessee later agreed to log the documents individually. In its supplemental July 25, 2016 document-by-document privilege log, the Plaintiffs listed 45 documents being withheld and also asserted Tennessee's accountant-client privilege as to these documents. (ECF No. 186-17.)
The Defendants first argue that the Plaintiffs have waived the accountant-client privilege because they failed to assert the accountant-client privilege in the first log they produced. As a general rule, when a party fails to assert a privilege on its privilege log, the privilege is waived. Graff v. Haverhill N. Coke Co., No. 1:09-CV-670, 2012 WL 5495514, at *8 (S.D. Ohio Nov. 13, 2012). Only after the Defendants' motion to compel was filed did the Plaintiffs produce a second log in which they asserted for the first time that the accountant-client privilege applies to the withheld documents. The Plaintiffs have offered no explanation for their prior failure to assert the accountant-client privilege, and, thus, they have waived the accountant-client privilege for the documents at issue here. See id. (holding that the attorney-client privilege was waived because the defendants offered no explanation for their prior failures to assert the privilege).
Even assuming that the accountant-client privilege is not waived, it is inapplicable here. In diversity actions, such as the instant case, Rule 501 of the Federal Rules of Evidence requires that the state law of privileges applies. Bowman v. Interstate Realty Corp., No. 2:15-MC-00024-STA, 2015 WL 5797748, at *2 (W.D. Tenn. Oct. 1, 2015); Royal Surplus Lines Ins. v. Sofamor Danek Grp., 190 F.R.D. 463, 467 (W.D. Tenn. 1999). Tennessee's accountant-client privilege provides:
[Certified public accountants] shall not divulge, nor shall they in any manner be required to divulge, any information that is communicated to them or obtained by them by the reason of the confidential nature of their employment. The information shall be deemed confidential; provided, however, that nothing in this subsection (a) shall be construed as prohibiting the disclosure of information required to be disclosed by the standards of the public accounting profession in reporting on the examination of financial statements ....
Tenn. Code Ann. § 62-1-116. “The purpose of the accountant-client privilege is to insure an atmosphere wherein the client will transmit all relevant information to his accountant without fear of any future disclosure in subsequent litigation.” Fed. Ins. Co. v. Arthur Anderson & Co., 816 S.W.2d 328, 331 (Tenn. 1991). Tennessee's accountant-client privilege “applies only to confidential information ... [and] to come within the terms of the statute the information must have been communicated to the accountant in a confidential setting arising from the employment.” Fed. Ins. Co. v. Arthur Andersen & Co., No. 89-380-II, 1990 WL 73924, at *2 (Tenn. Ct. App. June 6, 1990).
*9 In the present case, the Plaintiffs have not shown that KPMG performed any other service for First Tennessee other than serving as its outside auditor. “[T]here is a difference between disclosure to accountants who have been retained by a lawyer to understand technical aspects of a case and whose interests are therefore allied with the client, and outside auditors who, in order to be effective, must have interests that are independent of and not always aligned with those of the company.” Medinol, Ltd. v. Boston Sci. Corp., 214 F.R.D. 113, 114-116 (S.D.N.Y. 2002). As the Supreme Court has noted, outside auditors have a “public responsibility transcending any employment relationship with the client ... [and] owe[ ] ultimate allegiance to the corporation's creditors and stockholders, as well as to investing public.” United States v. Arthur Young & Co., 465 U.S. 805, 817-18 (1984). Thus, information provided to outside auditors in order to prepare and disseminate accurate audit reports are not confidential.
Given that KPMG's undisputed sole role was that of an outside auditor of First Tennessee, the communications with KPMG cannot be deemed confidential. See In re Hillsborough Holdings Corp., 132 B.R. 478, 481 (Bankr. M.D. Fla. 1991)(discussing Florida's accountant-client privilege statute that is similar to Tennessee's and finding that communications with auditors are not made in confidence because the client expects such communication to be disclosed to third parties); see also Brunton v. Kruger, 8 N.E.3d 536, 543 (Ill. App. Ct. 2014)(stating that because audit reports are often incorporated into annual reports, the client has a lesser expectation of confidentiality). In fact, Tenn. Code Ann. § 62-1-116 provides that the accountant-client privilege does not extend to “the disclosure of information required to be disclosed by the standards of the public accounting profession in reporting on the examination of financial statements.” Therefore, the court finds that the accountant-client privilege is not applicable to the documents withheld by the Plaintiffs.
Even if the withheld communications were attorney-client privileged communications or work product, the Defendants argue that First Tennessee's disclosure of confidential and privileged information to KPMG, an independent auditor of a public company, waived the attorney-client privilege and any work-product protection. “As a general rule, the attorney-client privilege is waived by voluntary disclosure of private communications by an individual or corporation to third parties.” In re Columbia/HCA Healthcare Corp. Billing Practices Litig., 293 F.3d 289, 294 (6th Cir. 2002)(quoting In re Grand Jury Proceedings October 12, 1995, 78 F.3d 251, 254 (6th Cir. 1996)). “[T]he work product protection differs slightly from waiver of attorney-client privilege in that the original disclosure must be to an ‘adversary’ in order to find initial waiver.” Id. at 306 n.28 (adopting First Circuit rule).
The Defendants rely on In re King Pharmaceuticals, Inc. Securities Litigation, 2:03-CV-77, 2005 WL 8142328 (E.D. Tenn. Sept. 21, 2005), in support of their position. In King Pharmaceuticals, the court noted that courts are split on whether an outside auditor is an adversary such that disclosure to the auditor would constitute a waiver of any privilege. Id. at *3. Ultimately, the King Pharmaceuticals court held that the work-product protection is inapplicable for documents disclosed to auditors of publicly-held corporations. Id.; see also Medinol, 214 F.R.D. at 115 (stating that disclosure to outside auditors waives the work-product protection or common interest privilege); In re Pfizer Inc. Sec. Litig., No. 90 CIV. 1260, 1993 WL 561125, at *7 (S.D.N.Y. 1993)(stating that there is no “attorney-client privilege for any documents that [are] provided to [an] independent auditor”). The King Pharmaceuticals court reasoned that “[a]s a publicly-held corporation, [the plaintiff] was obliged to furnish to its independent auditor of all information that would enable [the auditor] to render truthful and accurate earnings and financial statements.” King Pharm., 2005 WL 8142328, at *3.
*10 The Plaintiffs rely on the Sixth Circuit case of New Phoenix Sunrise Corp. v. C.I.R., 408 Fed.Appx. 908 (6th Cir. 2010), an appeal from a tax court ruling, decided five years after King Pharmaceuticals, for the proposition that a client's disclosure of confidential and privileged information to its auditors does not waive the attorney-client privilege or the work-product protection. (Pls.' Resp. 18-19, ECF No. 186.) In New Phoenix, the plaintiff disclosed a document to its accountants which the court found was subject to the attorney-client privilege. New Phoenix, 408 Fed.Appx. at 919. Citing United States v. Deloitte LLP, 610 F.3d 129, 139-41 (D.C. Cir. 2010), the New Phoenix court determined in one sentence without further discussion that the disclosure by New Phoenix to its accountants of a tax opinion letter prepared by its attorneys did not waive the attorney-client privilege. Id. Ultimately, the New Phoenix court ordered production based on the “at issue” exception to the privilege, i.e., the court held that the plaintiff had waived its privilege by putting the subject matter of the document at issue. Id.
New Phoenix is an unpublished opinion, and while unpublished opinions may be instructive or helpful, they are not binding precedent except as to the parties to the action. Crump v. Lafler, 657 F.3d 393, 405 (6th Cir. 2011)(citing Sheets v. Moore, 97 F.3d 164, 167 (6th Cir. 1996)). Moreover, the court does not find New Phoenix instructive or helpful in resolving the issue before the court. As stated above, New Phoenix's holding was based on the “at issue” exception to the privilege and only vaguely referred to the rule that disclosure to auditors does not waive the attorney-client privilege by citing to the holding in United States v. Deloitte LLP, 610 F.3d 129, 139-41 (D.C. Cir. 2010). In addition, as the Defendants correctly point out, New Phoenix did not involve a publicly-held corporation's disclosure of information to independent auditors. Rather, it involved a private company disclosing a tax opinion letter from it attorney to its accountant in order to prepare its tax returns. As stated above, outside auditors “must not share common interests with the company they audit,” Medinol, 214 F.R.D. at 116; they have a “public responsibility transcending any employment relationship with the client ... [and] owe[ ] ultimate allegiance to the corporation's creditors and stockholders, as well as to investing public,” Arthur Young, 465 U.S. at 818-19.
The case of King Pharmaceuticals is the most factually similar to the instant case and provides the more comprehensive analysis of the issue. Consistent with King Pharmaceuticals, the court finds that disclosure of privileged communications to outside auditors waives both attorney-client privilege and the work-product protection. See King Pharm., 2005 WL 8142328, at *3 (citing cases from other circuits). By voluntarily disclosing documents to KPMG, the Plaintiffs waived any attorney-client privilege they had in those documents. In re Columbia, 293 F.3d at 294; see also Boyd v. Comdata Network, Inc., 88 S.W.3d 203, 213 (Tenn. Ct. App. 2002)(stating that waiver occurs where the client voluntarily divulges privileged information to third parties). As to the work-product protection, here, as in King Pharmaceuticals, the Plaintiffs have not alleged that KPMG performed any other service for them other than serving as its outside auditor. Therefore, any information provided to KPMG cannot have been furnished “in anticipation of litigation” but was furnished to KPMG in its capacity as an outside auditor. Thus, the attorney-client privilege and the attorney work-product protection are waived and the Defendants' motion to compel is granted.[6]
D. Confidential Communications with HUD OIG
*11 According to First Tennessee's June 15, 2016 privilege log, the Plaintiffs have withheld numerous documents labeled “Correspondence between First Tennessee and/or First Tennessee's outside counsel and HUD Office of the Inspector General regarding the OIG Review that are forbidden from being shown or released to any party.” (See Ex. 1 at 7, ECF No. 173-4.) The Plaintiffs state that the reason they are withholding these documents is a “HUD Office of Inspector General Confidentiality Restriction.” (Id.) Following a meet-and-confer process, the Plaintiffs subsequently produced all communications between First Tennessee and the HUD OIG concerning the OIG Review except for three letters. (Pls.' Resp. 19, ECF No. 186; July 25, 2016 Privilege Log 2-3, ECF No. 186-17.) With respect to the three documents withheld, the Plaintiffs maintain that the government has placed a restriction on the production of these documents which states:
Recipients of this draft must not show or release its contents for any purpose other than review and comment. They must safeguard it to prevent premature publication or otherwise improper disclosure of the statements or information it contains. Reproduction of this draft without consent of the Office of Inspector General is prohibited.
(July 25, 2016 Privilege Log 2, ECF No. 186-17.) The Plaintiffs do not claim these documents are privileged and do not dispute the relevancy of these documents.
“[C]onfidentiality is not a recognized basis for withholding discovery,” even when such a confidentiality restriction is imposed by a U.S. agency. Hanas v. Inner City Christian Outreach Ctr., Inc., No. CIV.A. 06-CV-10290-D, 2007 WL 551609, at *2 (E.D. Mich. Feb. 20, 2007). In the case of In re Bankers Trust Co., 61 F.3d 465, 470 (6th Cir. 1995), the Sixth Circuit held that a government agency could not override the application of the Federal Rules and prevent production of documents otherwise required under Rule 34. As previously stated by this court, any confidentiality concerns are adequately addressed by a protective order, which is already in place in this litigation. First Horizon, 2013 WL 11090763, at *8 n.7. Because the information is otherwise discoverable, the court can issue an order requiring the production of the documents. See In re Bankers Trust Co., 61 F.3d at 470 (stating that a federal agency cannot “deliberately disobey a court order, subpoena, or other judicial mechanism requiring the production of information” even when it has prescribed regulations that preclude it from disclosing such information). Therefore, because the documents requested are relevant to this litigation and they are not otherwise privileged, the Plaintiffs must produce these documents.
III. CONCLUSION
For the reasons stated herein, the Defendants' motion to compel is granted in part and denied in part. Within fourteen days of the date of this order, the Plaintiffs shall produce: (1) a document-by-document privilege log for documents predating the filing of this complaint on April 9, 2015; (2) First Tennessee's communications with KPMG; and (3) First Tennessee's confidential communications regarding the OIG Review. The Plaintiffs do not need to produce the unredacted litigation reports.
IT IS SO ORDERED this 5th day of October, 2016.
Footnotes
The court also held a hearing on July 25, 2016 on the Plaintiffs' Motion to Compel, (ECF No. 153), and has issued a separate order regarding that motion.
The HCC primary policy is a manuscript policy not a form policy, that is, the terms were negotiated by the parties.
The parties, at times, refer to the claim resulting from the DOJ/HUD Investigations as “FHA Claim.”
The Defendants concede that the Plaintiffs may categorically log documents created after April 9, 2015. (See Defs.' Motion to Compel 2 n.2, ECF No. 173-1.)
The Plaintiffs also request statutory penalties pursuant to Tenn. Code Ann. § 56-7-105 of up to $18.75 million in addition to the $75 million. (Sec. Am. Compl. ¶ 91, ECF No. 103.)
The Plaintiffs also assert that the Defendants short-circuited the meet and confer process because they filed the instant motion to compel before First Tennessee's production of its July 25, 2016 document-by-document log. (Pls.' Resp. 17, ECF No. 186.) However, the communication between the parties indicates that the Defendants disputed the application of the privilege altogether. (Ex. 14 at 8-9, ECF No. 186-15.) Therefore, contrary to the Plaintiffs' assertion, the production of the document-by-document privilege log would not have resolved the dispute without involving the court. (See Pls.' Resp. 17, ECF No. 186.)