Federal Deposit Insurance Corporation v. Crowe Horwath LLP

UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF ILLINOIS

EASTERN DIVISION

FEDERAL DEPOSIT INSURANCE )

CORPORATION, as Receiver for )

Valley Bank, )

)

Plaintiff, ) No. 17 CV 04384

)

v. ) Judge Edmond E. Chang

)

CROWE HORWATH LLP, )

)

Defendant. )

MEMORANDUM OPINION AND ORDER

Plaintiff Federal Deposit Insurance Corporation (FDIC-R), as receiver for

Valley Bank (Valley), filed this lawsuit against Crowe Horwath LLP, alleging

accounting malpractice, gross negligence, and negligent misrepresentation.1 R. 1,

Compl.2 The claims arise out of Valley’s loss of around $21 million, allegedly caused

by Crowe’s malpractice in auditing the consolidated financial statements of Valley’s

holding company, River Valley Bancorp, Inc. (RVBI) in 2010 and 2011. Id. ¶ 1. The

parties are in the midst of fact discovery. See R. 69, 02/16/2018 Minute Entry. Crowe

has moved to compel four categories of documents from the FDIC-R: (1) all documents

from the FDIC, in its corporate capacity (FDIC-C), related to Valley Bank in the

FDIC-R’s possession, and to obtain all other documents related to Valley Bank in the

1This Court has subject matter jurisdiction under 12 U.S.C. § 1819(b)(2)(A) (“[A]ll

suits of a civil nature at common law or in equity to which the [FDIC], in any capacity, is a

party shall be deemed to arise under the laws of the United States.”) and 28 U.S.C. § 1331.

2Citations to the record are noted as “R.” followed by the docket number and the page

or paragraph number.

FDIC-C’s possession, conduct a relevance review, and produce those that are relevant

to this case; (2) documents collected from third parties as part of the FDIC-R’s pre-

litigation investigation; (3) unredacted versions of administrative deposition

transcripts for all witnesses deposed as part of the FDIC-R’s pre-litigation

investigation; and (4) documents related to settlements or potential claims against

third parties in connection with losses incurred by Valley Bank or related entities. R.

73, Def.’s Mot. Compel at 1-2. The FDIC-R, as well as the FDIC-C and non-party

objectors William Gabelmann and Gabelmann & Associates, P.C. (the latter two will

be referred to collectively as Gabelmann), argue that the documents are protected by

various privileges and agency regulations. R. 93, Pl.’s Resp. Br.; R. 92, FDIC-C’s Resp.

Br.; R. 91, Gabelmann Resp. Br. For the reasons discussed below, Crowe’s motion to

compel is granted in part and denied in part.

I. Background

The FDIC-R brings accounting malpractice and negligence claims against

Crowe arising out of Crowe’s audits on the consolidated financial statements of Valley

Bank and its holding company, RVBI. Compl. at 21-25. Before Valley failed in 2014,

the FDIC-C and other regulators performed routine examinations of the bank. Id. ¶¶

17, 24. The FDIC-C regulators eventually discovered that Valley’s CEO had engaged

in a scheme between 2011 and 2013 to hide the bank’s true financial condition, which

caused Valley losses totaling around $21 million. Id. ¶¶ 1-3. After this scheme was

discovered, the Illinois Department of Financial and Professional Regulation closed

Valley in 2014 and appointed the FDIC-R as its receiver. Id. ¶¶ 8, 14. As receiver of

a failed bank, the FDIC-R has the power to sue in any court of law, and by operation

of law succeeded to all rights, titles, and privileges of Valley. Id. ¶ 8 (citing 12 U.S.C.

§§ 1819, 1821). In this role, the FDIC-R filed this lawsuit against Crowe. Id. The

Complaint alleges that Crowe was negligent in carrying out its audits and that it

improperly issued unqualified audit opinions on Valley’s financial statements for the

years 2010 and 2011. Id. ¶ 7.

The parties have engaged in extensive discovery, but have reached an impasse

on the four categories of documents listed above. With regard to the first category of

FDIC-C documents, Crowe sought FDIC-C documents that are in the possession,

custody, or control of the FDIC-R. R. 83, Exh. 6 at 4. When the FDIC-R refused to

produce the documents, Crowe sought them from the FDIC-C by subpoena under Rule

45, R. 83, Exh. 4, and pursuant to 12 C.F.R. § 309.6, R. 92, Exh. 1. The FDIC-C

identified five sub-categories of responsive documents: (1) communications between

Valley Bank and the FDIC-C; (2) “bank records obtained during the examination

process”; (3) documents relating to compliance and regulatory orders; (4) “internal

work papers and notes created by FDIC bank examiners”; and (5) “internal

communications within FDIC-C.” R. 83, Exh. 10 at 1. The FDIC-C produced

documents from sub-categories (1) through (3), so Crowe’s motion to compel applies

only to sub-categories (4) and (5). The FDIC-R and the FDIC-C contend that the

documents are protected by the bank examination privilege, and that the Court must

evaluate the FDIC-C’s assertion of the privilege under the Administrative Procedure

Act’s “arbitrary and capricious” standard. FDIC-C’s Resp. Br. at 8-10; Pl.’s Resp. Br.

at 2. As discussed below, the APA does not apply to Crowe’s requests, and although

the bank examination privilege applies to all of the documents in Category 1(4)-(5),

Crowe has shown good cause to override the privilege as to a further subset of the

documents.

The remaining three categories of documents are all documents obtained or

created as part of the FDIC-R’s investigation of potential claims arising out of Valley’s

failure: third-party documents, deposition transcripts, and settlement materials. R.

83, Def.’s Br. at 5-7. The FDIC-R argues that these documents are all protected by

12 C.F.R. § 308.147, Pl.’s Resp. Br. at 10, while Crowe contends that the Federal

Rules of Civil Procedure and the Mandatory Initial Discovery Pilot Project Standing

Order (Standing Order) override the regulation, Def.’s Br. at 15-17. Crowe is correct,

so the FDIC-R must file, under seal and ex parte, unredacted versions of the

deposition transcripts and certain settlement discussions sought by Crowe, so that

the Court may conduct an in camera review. On the third-party documents that the

FDIC-R obtained during its pre-litigation investigation, the FDIC-R must conduct a

relevance review and produce all relevant documents not already produced

independently by any third-party to Crowe. This includes Gabelmann’s documents,

because Iowa law controls his correspondence with Valley and its holding company,

RVBI, and Iowa’s accounting privilege contains an exception for court proceedings.

See Iowa Code § 542.17.

II. Standard of Review

Federal Rule of Civil Procedure 26(b)(1) states that “[p]arties may obtain

discovery regarding any nonprivileged matter that is relevant to any party’s claim or

defense and proportional to the needs of the case, considering the importance of the

issues at stake in the action, the amount in controversy, the parties’ relative access

to relevant information, the parties’ resources, the importance of the discovery in

resolving the issues, and whether the burden or expense of the proposed discovery

outweighs its likely benefit.” Requests for discovery are relevant if there is any

possibility that the information sought may be relevant to the subject matter of the

action. Rubin v. Islamic Republic of Iran, 349 F.Supp.2d 1108, 1111 (N.D. Ill. 2004).

A party claiming that otherwise discoverable information is privileged must

“expressly make the claim and describe the nature of the documents,

communications, or tangible things in a manner that will enable other parties to

assess the claim.” Fed. R. Civ. P. 26(b)(5)(A) (cleaned up);3 see also Fed. R. Civ. P.

45(e)(2)(A). This means that the burden rests upon the party objecting to disclosure

to show why the information is privileged. See Kodish v. Oakbrook Terrace Fire Prot.

Dist., 235 F.R.D. 447, 450 (N.D. Ill. 2006). Finally, district courts have broad

discretion when ruling on discovery-related issues, including motions to compel

brought under Rule 37(a). See Peals v. Terre Haute Police Dep’t, 535 F.3d 621, 629

(7th Cir. 2008); see also Fed. R. Civ. P. 37(a).

3This opinion uses (cleaned up) to indicate that internal quotation marks, alterations,

and citations have been omitted from quotations. See, e.g., United States v. Reyes, 866 F.3d

316, 321 (5th Cir. 2017).

III. Analysis

As noted above, Crowe seeks four categories of documents from the FDIC-R

and/or third parties. The Court addresses each in turn.

A. Category 1: FDIC-C Documents

Crowe first contends that the FDIC-R should be compelled to produce all FDIC-

C documents related to Valley in the FDIC-R’s possession, and to obtain all other

Valley-related documents in the FDIC-C’s possession, conduct a relevance review,

and produce all documents relevant to the case. Def.’s Br. at 8. The FDIC-C produced

the first three of five subcategories of documents, leaving two contested subcategories

subject to Crowe’s motion to compel: (4) “internal work papers and notes created by

FDIC bank examiners” and (5) “internal communications within the FDIC-C.” FDIC-

C’s Resp. Br. at 2; R. 86, 04/19/2018 Minute Entry.

1. 12 U.S.C. § 1821(o)

Crowe argues that under 12 U.S.C. § 1821(o), the FDIC-R has legal

“possession” over these documents and thus is obligated under the Federal Rules of

Civil Procedure and the Standing Order to obtain them from the FDIC-C if necessary,

and to produce all relevant documents. Def.’s Br. at 8. Section 1821(o) generally

authorizes FDIC receivers to obtain FDIC-C records: “whenever the [FDIC] has been

appointed as receiver for an insured depository institution, the appropriate Federal

banking agency shall make available all supervisory records to the receiver which

may be used by the receiver in any manner the receiver determines to be

appropriate.” § 1821(o). Against this, both the FDIC-R and FDIC-C cite § 1821(t),

which provides that a covered agency, including the FDIC-C, does not waive any

privilege by transferring that information to another covered agency, including the

FDIC-R, meaning that the bank examination privilege still applies. The FDIC-R and

FDIC-C also argue that this Court should apply the APA’s “arbitrary and capricious”

standard to the FDIC-C’s decision to withhold the documents pursuant to the

privilege. Pl.’s Resp. Br. at 8-10; FDIC-C’s Br. at 10, 21.

But § 1821(t), which preserves applicable privileges, is irrelevant to the issue

at hand: Crowe does not contend that either FDIC entity has waived the bank

examination privilege (although Crowe does argue that it simply does not apply). R.

97, Def.’s Reply to FDIC at 2-3. So to the extent the FDIC-C actually did provide

documents to the FDIC-R, whether the bank examination privilege protects those

documents is analyzed the same way regardless of the FDIC-R’s possession of them.4

As to any documents within Category 1(4)-(5) that the FDIC-C has not provided

to the FDIC-R, Crowe’s argument premised on § 1821(o) is overbroad. It is true that

§ 1821(o) commands that federal banking agencies “shall make available all

supervisory records to the receiver.” But reading this section as Crowe proposes

would mean that any time the FDIC-R is a party to litigation, every document,

including internal correspondence and memoranda, of every federal banking agency

4Crowe did not submit a Part 309 request to the FDIC-R, and neither FDIC entity

argues that any document in the FDIC-R’s possession is governed by the APA. So

discoverable records in the FDIC-R’s possession are subject to Rules 26(b) and 34. What’s

more, as discussed later in this Opinion, the Federal Rules of Civil Procedure trump agency

regulations, including § 309.6, so the FDIC-C’s claim of privilege over FDIC-C’s documents—

whether or not they are in the FDIC-R’s possession—is not subject to 5 U.S.C. § 706’s

arbitrary and capricious standard.

(not only the FDIC-C, but also the Office of the Comptroller of Currency, among

others), is no longer is protected by the comprehensive framework of the APA, but

rather is subject to discovery under the Federal Rules just the same as any document

belonging to each of the parties. It is one thing when the FDIC-R has exercised its

discretion and obtained or viewed an agency’s documents under § 1821(o). But it is

quite another to deem all banking-agency documents as in effect in the FDIC-R’s

possession even if the FDIC-R did not exercise its discretionary authority under

§ 1821(o).5 Indeed, that interpretation would essentially vanquish the FDIC-R’s

discretion under § 1821(o), a strange outcome in light of the provision’s grant of

discretion to the FDIC-R. This situation is far afield from the usual discovery disputes

in which a client, be it a client of an attorney or a patient of a doctor, “controls” the

attorney-client file or patient medical records. So to the extent that the FDIC-R has

not viewed or obtained any documents responsive to Category 1(4)-(5),6 they are not

5To be sure, there are district court decisions holding that any federal agency

documents are considered to be in the FDIC-R’s possession under § 1821(o). See, e.g., F.D.I.C.

v. Berling, 2015 WL 3777408, at *2 (D. Colo. June 16, 2015); F.D.I.C. v. Bayer, 2015 WL

12830467, at *2 (M.D. Fla. Feb. 25, 2015); F.D.I.C. v. Dosland, 2014 WL 1347118, at *5 (N.D.

Iowa Apr. 4, 2014); F.D.I.C. v. Appleton, 2012 WL 12887400, at *6 (C.D. Cal. Aug. 27, 2012);

Resolution Tr. Corp. v. Deloitte & Touche, 145 F.R.D. 108, 111 (D. Colo. 1992); Comeau v.

Rupp, 810 F. Supp. 1127, 1166 (D. Kan. 1992). But those opinions are not binding, and no

Circuit courts have addressed the issue.

6The record is not completely clear on whether the FDIC-R has viewed or obtained all

responsive FDIC-C documents. The correspondence between Crowe and the FDIC entities

attached to the parties’ briefs suggests that the FDIC-R has all responsive documents in its

possession, or did at one point, which would be enough to consider the FDIC-R to have

exercised its discretion to “control” documents under § 1821 and make them subject to the

Standing Order or Rule 34. See R. 83, Exh. 10 at 1 (“The FDIC as Receiver for Valley Bank

(“FDIC-R”) reviewed a number of boxes of documents that were previously compiled by the

FDIC examiners as part of the agency’s supervision of Valley Bank. The boxes contained the

five categories of documents described in the FDIC-R’s Second Supplement to Mandatory

Initial Response to No. 3” including Category 1(4)-(5).); id., Exh. 7 at 2 (“Until recently,

[FDIC-R] had viewed a very limited number of FDIC-C documents. … Approximately two

subject to production pursuant to the Standing Order or any Rule 34 request Crowe

makes to the FDIC-R.

2. 12 C.F.R. § 309.6

Moving on, the next question is what to do about potentially responsive FDIC-

C documents that the FDIC-R has neither viewed nor ever had in its possession. The

FDIC-C argues that its assertion of the bank examination privilege should be

evaluated under the APA, whereas Crowe says that the Federal Rules of Civil

Procedure apply. The Court agrees with Crowe that the Federal Rules govern.

The FDIC-C relies on Edwards v. U.S. Dep’t of Justice, 43 F.3d 312 (7th Cir.

1994), to argue that the APA governs when a litigant seeks to obtain documents from

a non-party federal government agency, even when the dispute is presented to the

Court in the form of a motion to compel. FDIC-C’s Br. at 8. But Edwards is

distinguishable in a key way: the case originated in state court, and the litigant

sought Department of Justice records pursuant to a state-court issued subpoena,

which the Department resisted pursuant to an agency regulation. Edwards, 43 F.3d

at 314. When the litigant moved to compel a response to the subpoena, the Justice

Department removed the case to federal court under 28 U.S.C. § 1442, so the federal

district court’s jurisdiction over enforcing the subpoena was derivative of the state

court’s jurisdiction. Id. The Seventh Circuit held that the Department had not waived

its sovereign immunity in state court, so the district court lacked “jurisdiction to

weeks ago, [FDIC-R] reviewed and obtained copies of certain additional examiner documents.

…”). But the parties’ briefs leave open the question that there may be at least some FDIC-C

documents that may be responsive that have never been in the FDIC-R’s possession. Def.’s

Br. at 8; FDIC-C’s Resp. Br. at 2.

compel the delivery of the [requested information] once the regulatory authority had

denied the request.” Id. at 317. Because the district court was barred from directly

enforcing the subpoena, the Seventh Circuit held that the proper course was to recast

the state court litigant’s motion to compel as an administrative request under the

APA, which meant that the APA’s “arbitrary and capricious” standard applied to the

agency’s decision to withhold the records. Id. at 314-15.

But the case at hand was originally filed in federal court, not state court, and

Crowe sought documents from the FDIC-C pursuant to a federal subpoena under

Rule 45.7 This Court has original jurisdiction over this case pursuant to 12 U.S.C.

§ 1819(b)(2)(A) and 28 U.S.C. § 1331, rather than derivative jurisdiction under

28 U.S.C. § 1442. So the holding in Edwards does not apply. There is a Circuit split

over how to treat Rule 45 subpoenas when they are directed at a federal agency. The

split centers on whether the APA’s general provision authorizing judicial review of

agency actions, 5 U.S.C. § 702, represents a waiver of sovereign immunity that is

limited to the arbitrary and capricious review found in § 706. Section 702 allows

persons who are aggrieved by agency action to seek judicial review, and the statute

opens the federal courthouse doors for injunctive relief: “An action in a court of the

United States seeking relief other than money damages and stating a claim that an

agency or an officer or employee thereof acted or failed to act in an official capacity …

shall not be dismissed nor relief therein be denied on the ground that it is against the

7Crowe also issued a Rule 309 request, R. 92, Exh. 1, but simply because Crowe

covered its bases when attempting to obtain the information from the FDIC-C does not make

its Rule 45 subpoena moot.

United States … .” 5 U.S.C. § 702. There is nothing in § 702 that limits the waiver of

sovereign immunity to actions under § 706. Compare Linder v. Calero-Portocarrero,

251 F.3d 178, 180 (D.C. Cir. 2001) (holding that § 702 effectuates a waiver of

sovereign immunity as to Rule 45 subpoenas, so the Federal Rules apply); Exxon

Shipping Co. v. U.S. Dep’t of Interior, 34 F.3d 774, 778-89 (9th Cir. 1994) (holding

sovereign immunity is not a bar to compelling the testimony of non-party federal

officers under Rules 26 and 45, because Congress waived sovereign immunity as to

all actions that seek “relief other than money damages” in § 702) with COMSAT Corp.

v. Nat’l Sci. Found., 190 F.3d 269, 277 (4th Cir. 1999) (applying the APA’s arbitrary

and capricious standard to non-party federal agency’s refusal to comply with a Rule

45 subpoena, because § 702 is part of the APA); E.P.A. v. Gen. Elec. Co., 197 F.3d 592,

598 (2d Cir. 1999), opinion amended on reh’g, 212 F.3d 689 (2d Cir. 2000) (same);

Moore v. Armour Pharm. Co., 927 F.2d 1194, 1197 (11th Cir. 1991) (applying APA’s

arbitrary and capricious standard to Rule 45 subpoena served on non-party federal

agency without analyzing whether the agency had waived its sovereign immunity).

The Seventh Circuit has not specifically addressed the issue, but like the D.C.

and Ninth Circuits, has held that § 702 constitutes a waiver of sovereign immunity

over federal agencies and the waiver is not limited by 5 U.S.C. § 706 (which sets forth

the arbitrary and capricious standard) to actions brought under the APA. See

Michigan v. U.S. Army Corps of Engineers, 667 F.3d 765, 775 (7th Cir. 2011) (“[T]he

waiver in § 702 is not limited to claims brought pursuant to the review provisions

contained in the APA itself. The waiver applies when any federal statute authorizes

review of agency action, as well as in cases involving constitutional challenges and

other claims arising under federal law.”); see also Czerkies v. Dep’t of Labor, 73 F.3d

1435, 1438 (7th Cir. 1996) (en banc) (“The Administrative Procedure Act waives the

federal government’s sovereign immunity from actions seeking judicial review of

federal administrative decisions, provided the action is not one for ‘money

damages.’”). Seventh Circuit precedent is thus more in line with the decisions of the

D.C. Circuit and the Ninth Circuit than the other Circuits that have addressed the

issue. Because a refusal to comply with a subpoena under Rule 45 is not an action for

“money damages,” § 702 strips the FDIC-C of its sovereign immunity, thereby giving

federal courts the authority to enforce Rule 45 subpoenas served on federal agencies.

See Houston Bus. Journal, Inc. v. Office of Comptroller of Currency, U.S. Dep’t of

Treasury, 86 F.3d 1208, 1212 (D.C. Cir. 1996). That is why Edwards is different: the

state court subpoena there actually was quashed and was treated as nothing more

than a request to the federal agency, 43 F.3d at 316-17, whereas here the FDIC-C

faces a Rule 45 subpoena.8 Because this case originated in federal court, the FDIC-C

waived its sovereign immunity under 5 U.S.C. § 702. So this Court will review the

8It is true that other decisions in this District have held that, under Edwards, district

courts should review discovery requests to non-party federal agencies under the APA

standard of review even when the case originated in federal court. See Estate of Belbachir v.

United States, 2010 WL 3239444, at *3 (N.D. Ill. Aug. 13, 2010) (relying on Edwards to review

non-party federal agency’s refusal to comply with subpoena issued in federal court under the

APA rather than the Federal Rules); Barnett v. Illinois State Bd., 2002 WL 1560013, at *1

n.1, *2 (N.D. Ill. July 2, 2002) (holding that it is irrelevant that Edwards did not consider

whether Rule 45 rather than the APA should apply because “the Edwards opinion is simply

too broadly worded to leave room for such factual nit-picking. Edwards unequivocally held

that a federal agency’s refusal to comply with a subpoena, at least when done ‘pursuant to

valid agency regulations,’ is to be reviewed under the APA.”). As discussed earlier, however,

the distinction between a state court subpoena and a Rule 45 subpoena distinguishes

Edwards.

FDIC-C’s refusal to comply with Crowe’s subpoena under the Federal Rules rather

than the APA.

3. Bank Examination Privilege

i. The Privilege Applies

Now that the standard of review is established, the Court must determine

whether the bank examination privilege9 applies to Category 1(4)-(5) of the FDIC-C’s

records. R. 83, Exh. 10 (letter from the FDIC-C asserting the bank examination

privilege over “internal work papers and notes created by FDIC bank examiners” and

“internal communications within the FDIC-C.”). The bank examination privilege

“shields from discovery only agency opinions or recommendations; it does not protect

purely factual material.” In re Subpoena Served Upon Comptroller of Currency, &

Sec’y of Bd. of Governors of Fed. Reserve Sys., 967 F.2d 630, 634 (D.C. Cir. 1992); see

also In re Bankers Tr. Co., 61 F.3d 465, 471 (6th Cir. 1995). The agency has the burden

of showing that the requested documents are protected. Schreiber v. Soc’y for Sav.

Bancorp, Inc., 11 F.3d 217, 220 (D.C. Cir. 1993). If the agency fails to establish the

privilege applies to the subpoenaed material, then it must produce the documents.

Id.

9Although neither the Seventh Circuit nor the Supreme Court has explicitly

recognized the bank examination privilege, the bank examination privilege is really a subset

of the deliberative process privilege. In re Bankers Trust Co., 61 F.3d 465, 471 (6th Cir. 1995);

In re Bank One Sec. Litig., First Chicago S’holder Claims, 209 F.R.D. 418, 426 (N.D. Ill. 2002);

cf. United States v. Farley, 11 F.3d 1385, 1389 (7th Cir. 1993) (generally recognizing the

deliberative process privilege).

Crowe contends that the FDIC-C has simply asserted a “conclusory and

blanket claim of the privilege” and points out that neither FDIC entity has provided

a privilege log justifying the withholding of the documents. Def.’s Br. at 11-12. The

FDIC entities argue that they provided sufficient descriptions of the withheld

documents (“internal work papers and notes created by FDIC bank examiners” and

“internal communications within the FDIC-C”). FDIC-C’s Resp. Br. at 17 n.3; R. 83.

Exh. 10. FDIC-C also argues that creating a privilege log is not required and would

be unduly burdensome on a non-party. Id. It is true that when evaluating whether

the bank examination privilege applies, courts often require more from the agency,

and sometimes courts conduct an in camera review of the contested documents. See,

e.g., Schreiber, 11 F.3d at 221 (holding a “conclusory affidavit asserting that any

factual portion of the document cannot be separated from the evaluative portion” was

insufficient to assert the bank examination privilege and collecting cases to note that

often an in camera inspection is common, but not necessary, for determining when

the privilege applies); see also In re Bank One, 209 F.R.D. at 427 (the parties asserting

the privilege “submitted privilege logs as well as documents for in camera review”).

But sometimes deciding a privilege dispute does not require the make-work of

a document-by-document privilege log, so long as asserting categories of documents

subject to the privilege is clear enough. See Manufacturers Collection Co., LLC v.

Precision Airmotive, LLC, 2014 WL 2558888, at *3 (N.D. Tex. June 6, 2014) (holding

a document-by-document listing to be unduly burdensome and of no material benefit

where party was asserting the work-product, attorney-client, and joint-deference

privileges); Vasudevan Software, Inc. v. Microstrategy Inc., 2012 WL 5637611, at *7

(N.D. Cal. Nov. 15, 2012) (allowing party asserting attorney-client and work-product

privileges over requested communications between it and its counsel to “provide

categorical logs, essentially grouping documents by type and indicating how each of

those categories is privileged”); Orbit One Commc’ns, Inc. v. Numerex Corp., 255

F.R.D. 98, 109 (S.D.N.Y. 2008) (allowing a categorical rather than itemized privilege

log, but requiring the producing party to “justify its assertion of privilege with regard

to each category, and the description of each category must provide sufficient

information for [the compelling party] to assess any potential objections to the

assertions of attorney-client privilege.”); S.E.C. v. Thrasher, 1996 WL 125661, at *1-

2 (S.D.N.Y. Mar. 20, 1996) (holding a categorical privilege log to be sufficient when

the party moving to compel sought “production of all communications between

defense counsel concerning the lawsuit [because] on its face this demand seeks

wholesale production of documents ordinarily covered” by several privileges).10

Here, the two categories of documents identified by the FDIC-C in its March

20 letter, R. 92, Exh. 4 at 1, make clear that the documents at issue—internal work

papers and notes, and internal communications—constitute the kinds of materials

10Both the FDIC-C and Crowe cite to Lawrence E. Jaffe Pension Plan v. Household

Int’l, Inc., 239 F.R.D. 508, 515 (N.D. Ill. 2006), in support of their respective arguments about

the level of detail required for the FDIC-C’s assertion of privilege. FDIC-C’s Resp. Br. at 17

n.3; Def.’s Reply to FDIC at 4-5. But Lawrence is not particularly helpful to either side.

Although the FDIC-C is mostly correct in asserting that Lawrence held that “letters and/or

briefs asserting formal claims of” deliberative process privilege” was sufficient, Crowe is also

correct in pointing out that not all letters and/or briefs sufficed: only those that “specifically

identif[ied] and describe[d] the documents” subject to the privilege and offered “precise and

certain reasons for preserving the confidentiality of the documents in question” properly

invoked the privilege. Lawrence, 239 F.R.D. at 515-16.

that at least some courts have held are “clearly protect[ed] from disclosure.” Principe

v. Crossland Sav., FSB, 149 F.R.D. 444, 450 (E.D.N.Y. 1993) (“The privilege clearly

protects from disclosure analyses, opinions and recommendations contained in

internal agency documents relating to bank examinations, and courts will continue

to withhold from discovery information which is not primarily factual.”); Delozier v.

First Nat. Bank of Gatlinburg, 113 F.R.D. 522, 527 (E.D. Tenn. 1986) (holding

discovery should “not inject itself into the internal, deliberative, decision-making

processes of government”). The scope of the bank examination privilege, coupled with

how the categories are described, render a detailed privilege log less important than

the typical privilege dispute. What’s more, the contested documents comprise the

FDIC-C’s internal communications, work papers, and notes, and thus are not the

source of independent historical facts. Instead, to the extent that the records contain

factual information, those facts were provided from outside sources—which have been

produced to Crowe—including bank examination reports. Pl.’s Resp. Br. at 4-5. So

there is no way that the records in Category 1(4)-(5) contain solely factual matter not

protected by the privilege, and any historical facts in them are already available to

Crowe. All in all, then, FDIC-C’s identification of the two-subcategories of withheld

documents in its March 20 letter, R. 92, Exh. 4 at 1, even absent a detailed privilege

log, is sufficient to satisfy the Court that the bank examination privilege properly

applies to those records, even without conducting an in camera review. But that is

not the end of the inquiry.

ii. Good Cause to Override the Privilege

The next question is whether Crowe has demonstrated good cause to overcome

the privilege that applies to the documents in Category 1(4)-(5). In re Bank One, 209

F.R.D. at 427 (citing In re Bankers Trust, 61 F.3d at 471). Courts have found that “the

privilege may be overridden where necessary to promote the paramount interest in

having justice done between litigants.” In re Subpoena, 967 F.2d at 634 (cleaned up).

The court must balance the competing interests of the party seeking the documents

and the interests of the federal agency to determine whether good cause exists. Id.

Courts must consider at least the following five things: “(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 violable.” Id (quoting In re

Franklin Nat. Bank Sec. Litig., 478 F. Supp. 577, 583 (E.D.N.Y. 1979)). These factors

are not exhaustive, but are “a floor upon which to balance sufficiently the competing

interests of the parties and the federal agency.” In re Bankers Trust, 61 F.3d at 472.

On the first factor—relevancy—Crowe argues that the records are relevant to

(1) whether FDIC-C examiners in fact relied on Crowe’s unqualified opinion, which

goes to the causation element; and (2) whether FDIC-C examiners had any knowledge

of Henson’s scheme earlier than June 2013, which again goes to causation, as well as

to damages. Def.’s Br. at 13. At least one court in this District has held that the

relevance factor weighs in favor of the party seeking to compel disclosure when there

is at least the possibility that the subject documents may give insight into “damages

and loss causation.” F.D.I.C. v. Giancola, 2015 WL 5559599, at *5 (N.D. Ill. Sept. 18,

2015). But it is unlikely that all FDIC-C internal correspondence and work papers or

notes pertaining to Valley are relevant to causation or damages—especially given

that the breadth of work that the FDIC-C performed as to Valley surely greatly

exceeds what is relevant to this specific case.

The FDIC-R, however, has identified three FDIC-C examiners—Shirley

Langford, Leslee Martin, and Jon Peterson—who likely have relevant information to

the parties’ claims or defenses. R. 83, Exh. 1 at 5. In light of their identification as

witnesses with relevant information, it would be unfair for Crowe to be disabled from

testing pertinent assertions that these three examiners might make during a

deposition (or at trial) without reviewing records generated or reviewed by those

examiners. The relevancy is thus strongest for documents authored by, or sent to or

from, these three examiners specifically concerning (1) Crowe’s unqualified audit

opinions on Valley’s financial statements; and (2) any evidence of events or conduct

that contributed to or caused Valley’s losses between 2011 and 2013, including but

not necessarily limited to Valley’s inadequate internal controls, Valley’s lack of formal

process for identifying loans that should have been classified as troubled debt

restructurings, Valley’s engagement in Bank-financed sales of its troubled private

label-mortgage backed securities to related parties, Henson’s failure to record loan

losses, and Henson’s manipulation of Valley’s Allowance of Loan and Lease Losses.

This limitation on the relevant documents hopefully will alleviate some of the burden

on the FDIC-C, because it can summarily exclude documents not generated or

reviewed by those examiners.

The other four factors either support overriding the bank examination

privilege as to these documents,11 or do not weigh in favor of maintaining the privilege

strongly enough to negate the fairness problem. On factor two (availability of other

evidence), although it is true Crowe has received the historical factual information

on which the FDIC-C regulators acted or corresponded, the knowledge and opinions

of the three examiners on Valley’s loan portfolio, the charge-offs to certain loans, and

the uncovering of Henson’s scheme have independent relevancy on causation and

damages. R. 83, Exh. 1 at 5. Moving on, the third factor weighs in favor of overriding

the privilege: there is no doubt as to the seriousness of the litigation, in light of the

FDIC-R’s allegation that damages are around $21 million; also, Crowe’s professional

reputation is also implicated by the allegations. See Def.’s Br. at 14; FDIC-C’s Br. at

18; see also Giancola, 2015 WL 5559599, at *1, 6 (holding that an action involving

tens of millions of dollars in alleged damages and alleging claims of negligence, gross

negligence, and breach of fiduciary duty, indicate that the litigation is serious). The

fourth factor also weighs in favor of overcoming the privilege: although the FDIC-C

is not a party to the litigation, another government entity, the FDIC-R, is, so the

government plays a considerable role in the litigation. See Giancola, 2015 WL

5559599, at *6 (holding this element weighs in favor of overriding the privilege where

11Because the Court has determined that internal FDIC-C communications, work

product, and notes not involving the three identified FDIC-C examiners are not relevant to

the parties’ claims or defenses, it is unnecessary to go through the remaining four factors as

to those documents.

the FDIC-R is a party to the litigation and that “an element of unfairness would enter

if the government could further its defense against these claims by concealing

relevant evidence behind the screen of government privilege”). Finally, the fifth factor

(possible future government timidity) does weigh against overcoming the privilege,

but not enough to prevent disclosure of the records. It is true that some government

examiners might be more restrained about drafting internal correspondence or

memoranda in the future, knowing that the documents might become discoverable.

See Bank One, 209 F.R.D. at 428. But the other four factors—and the necessity of

maintaining fairness in the litigation—support overriding the privilege, and the

confidentiality protective order will help alleviate the concern about the chilling

effect. See Schreiber, 11 F.3d at 222; Giancola, 2015 WL 5559599, at *6 (“The fact of

disclosure in this case does not necessarily translate into future disclosures, as each

case involves a fresh consideration of the facts at issue and the factors militating for

or against the application of privilege. FDIC–R does not explain how the disclosure

of the [document] would stymie the candor of FDIC staff deliberations in the future.”).

In sum, the FDIC-R and/or the FDIC-C12 must identify and produce the

documents described above by July 23, 2018.

12Although the discovery obligation is strongest for the FDIC-R, as a party to the

litigation, for documents the FDIC-R has not viewed or obtained from the FDIC-C, under

Rule 45 the FDIC-C has the same obligation to identify and produce relevant documents. Of

course under § 1821(o), the FDIC-R can obtain all FDIC-C documents, although as discussed

above, it is within the FDIC-R’s discretion not to exercise its rights under § 1821(o). The

Court’s analysis of the bank examination privilege applies equally to all requested documents

within Category 1(4)-(5), whether or not they are in the FDIC-R’s possession, because the

standard of review is the same under the Standing Order, Rule 34, and Rule 45. That said,

it may be more efficient for the FDIC-C to provide its records to the FDIC-R, so that the

FDIC-R can conduct just one review as directed above. If the FDIC-C prefers to conduct its

B. 12 C.F.R. § 308.147

Crowe seeks to compel three other categories of documents being withheld by

the FDIC-R: (1) third-party document productions made to the FDIC-R in the course

of its pre-litigation investigation of Valley Bank; (2) unredacted deposition

transcripts; and (3) documents related to settlements or potential claims against

third parties in connection with losses incurred by Valley Bank. Def.’s Br. at 2. The

FDIC-R argues that these materials are “confidential investigative information” that

are “protected from disclosure under the confidentiality provisions of 12 C.F.R.

§ 308.147.” R. 83, Exh. 3 at 1. The federal regulation on which the FDIC-R relies

states that “[i]nformation and documents obtained by the FDIC in the course of such

investigations shall not be disclosed, except as provided in part 309 of this chapter

and as otherwise required by law.” 12 C.F.R. § 308.147 (emphasis added). Although

the Seventh Circuit has not directly addressed the issue, many other Circuits have

convincingly held that federal regulations do not trump the Federal Rules of Civil

Procedure. See, e.g., Commonwealth of Puerto Rico v. United States, 490 F.3d 50, 61-

62 (1st Cir. 2007) (agency regulations promulgated under 5 U.S.C. § 301 “are only

procedural, and do not create a substantive entitlement to withhold information”);

Houston Bus. Journal, Inc., 86 F.3d at 1212 (noting that to the extent the agency’s

regulations conflict with the Rules of Civil Procedure, those regulations “exceed[] the

[agency’s] authority under the Housekeeping Statute”); Exxon Shipping Co., 34 F.3d

at 780 (“Section 301 does not create an independent privilege to withhold government

own search pursuant to this holding, then so be it: the Court leaves the method of search and

production to the FDIC entities, so long as it does not cause undue delay.

information or shield federal employees from valid subpoenas. Rather, district courts

should apply the federal rules of discovery when deciding on discovery requests made

against government agencies, whether or not the United States is a party to the

underlying action.”); see also Hoffman v. BLR Grp. of Am., Inc., 2009 WL 10689505,

at *2 (S.D. Ill. Jan. 12, 2009) (noting the lack of Seventh Circuit precedent and citing

cases from other circuits holding that agency regulations do not override a federal

agency’s discovery obligations).

What’s more, § 308.147 specifically states that FDIC-R investigatory materials

are protected from disclosure except “as otherwise required by law.” The Federal

Rules of Civil Procedure are another source of law, and require production of “non-

privileged material that is relevant to any party’s claim or defense.” Fed. R. Civ. P.

26(b)(1); see also Standing Order at 1; §§ A.2, B.3. Not only is it well-established that

agency regulations cannot abrogate the Federal Rules, but the regulation at issue

also contains language stating that it does not override other laws.13 Section 308.147

does not protect the FDIC-R’s investigatory materials sought in Categories 2-4 from

discovery under the Federal Rules.

C. Category 2

In light of the inapplicability of 12 C.F.R. § 308.147, the FDIC-R must conduct

a relevancy review and produce the requested documents that are relevant to the

13It is true the only court that has addressed the issue specifically as to § 308.147

denied a motion to compel, holding that the FDIC’s investigatory materials were protected

by the regulation and did not have to be produced pursuant to the Federal Rules. F.D.I.C. v.

Brudnicki, 291 F.R.D. 669, 678 (N.D. Fla. 2013). But the court did not engage in any

substantive analysis of the interplay between the agency regulation and the Federal Rules,

and the opinion is not binding.

claims and defenses in this litigation, pursuant to the Standing Order and the

Federal Rules of Civil Procedure. The parties disagree over whether the FDIC-R has

already conceded that nearly all the third-party materials it collected are responsive

to Crowe’s document requests and are relevant to the litigation. Def.’s Br. at 18; Pl.’s

Resp. Br. at 13; Def.’s Reply to FDIC at 9-10. Whatever was said before, it is quite

possible that the FDIC-R’s pre-litigation investigation was broader than the claims it

elected to bring in the current litigation, so to the extent third-party materials are

not relevant to the claims and defenses at issue, the FDIC-R does not have to produce

them. But as the party in possession of the documents, the FDIC-R has the burden of

conducting a relevancy review and producing responsive documents to Crowe.

The FDIC-R’s contention that reviewing these materials would “place[]

unnecessary burden on the FDIC-R” is misplaced. R. 83, Exh. 5 at 2; see also id., Exh.

7 at 1. Simply because the FDIC-R obtained a plethora of documents during its

investigation does not relieve it of its obligation to produce relevant documents in the

course of litigation. See, e.g., United States v. DISH Network, L.L.C., 2010 WL

5463101, at *4 (C.D. Ill. Dec. 29, 2010) (“Just because materials are voluminous or

difficult to compile, they are not unduly burdensome. If they are relevant, they

are discoverable subject to the proportionality test of Rule 26(b)(2)(iii). … [T]he party

opposing discovery[] must prove that discovery violates the proportionality test.”);

Appleton, 2012 WL 12887400, at *2 (“Generalized objections that a discovery request

is burdensome without resort to specific reasons is insufficient to justify a refusal to

respond. Moreover, the mere fact that responding to a discovery request will require

the objecting party to expend considerable time, effort and expense consulting,

reviewing and analyzing huge volumes of documents and information is an

insufficient basis to object to a relevant discovery request.”) (cleaned up); see also

Cappetta v. GC Servs. Ltd. P’ship, 2008 WL 5377934, at *3 (E.D. Va. Dec. 24, 2008)

(same); Burns v. Imagine Films Entm’t, Inc., 164 F.R.D. 589, 593 (W.D.N.Y. 1996)

(same).

Perhaps the parties can agree on search terms to alleviate the FDIC-R’s

burden, but if not, the FDIC-R must conduct a relevancy review of every document it

obtained from a third-party14 during the investigation. The production must be made

by July 23, 2018. If the FDIC-R needs more time to conduct this review, then of course

it may file an extension motion as needed. To the extent that a third-party has

already produced, or has agreed to produce, all requested documents in response to

Crowe’s third-party subpoenas, see Pl.’s Br. at 14; R. 83, Exh. 17 at 4 (RMS McGladrey

has agreed to produce all responsive documents), the FDIC-R does not need to conduct

a relevancy review of the documents in its possession collected from that third-party.

1. Illinois Accountant’s Privilege

Gabelmann contends that the records sought by Crowe from Gabelmann are

protected by the Illinois Accountant’s Privilege, 225 ILCS 450/27. The parties agree

that under Federal Rule of Civil Procedure 501 and O’Melveny & Myers v. F.D.I.C.,

512 U.S. 79, 83-89 (1994), state law controls Gabelmann’s assertion of any accounting

14This includes documents obtained from Gabelmann. See Section III.C.1 for a

discussion about why the Illinois Accountant’s Privilege does not apply to documents sought

from Gabelmann.

privilege. But the parties disagree about whether Illinois or Iowa law controls.

Gabelmann Resp. Br. at 3; R. 98, Def.’s Reply to Gablemann at 1-2; R. 103,

Gabelmann Sur-Reply at 1.

Under the Erie doctrine, a federal court applies the forum state’s choice-of-law

rules to determine which state’s privilege law applies. Auto-Owners Ins. Co. v.

Websolv Computing, Inc., 580 F.3d 543, 547 (7th Cir. 2009). Illinois courts have

adopted the Restatement (Second) of Conflict of Laws § 139, which looks to the law of

the state that has the most significant relationship with the allegedly privileged

communications to determine whether they are privileged. Sterling Fin. Mgmt., L.P.

v. UBS PaineWebber, Inc., 782 N.E.2d 895, 904 (Ill. App. 2002). “The state which has

the most significant relationship with a communication will usually be the state

where the communication took place,” although if there was a prior relationship

between the parties, the “state of most significant relationship will be that where the

relationship was centered.” Restatement (Second) of Conflict of Laws § 139(1),

Comment e (1971). As explained next, the Court concludes that Iowa, not Illinois, has

the most significant relationship to the relevant communications.

Gabelmann argues that because he was a licensed CPA in Illinois, allowed to

operate in Illinois under the trade name “Gabelmann & Associates, P.C.,” and

because Valley was located in Illinois, Illinois has the most significant relationship to

the communications. Gabelmann Resp. Br. at 3-4; Gabelmann Sur-Reply at 4. But

the connections to Iowa are much more substantial: at the relevant time, Gabelmann

was an accounting firm licensed in Iowa with its only office located in Iowa, and,

importantly, Gablemann’s audit client was in fact not Valley, but RVBI—Valley’s

holding company—which is located in Iowa. See, e.g., R. 98, Exh. A at FDIC-R-VAL-

CRW-0018438.002, .004 (Gabelmann’s proposal for service to RVBI is addressed to

RVBI’s Audit Committee, c/o Catherine Carber, Controller, with an address in Iowa

and states that Gabelmann “primarily serves the local Quad City Area from its office

located … in Bettendorf, Iowa”); id., Exh. B (Gabelmann’s 2012 engagement letter

addressed to RVBI’s Audit Committee in Iowa); id., Exh. C at FDIC-R-VAL-CRW-

0018021.002 (Gabelmann’s independent audit report for the 2012 financial

statements is addressed to the “Board of Directors, [RVBI] and Subsidiaries,

Davenport, Iowa,” and bears a legend at the bottom of the page that shows

Gabelmann’s address in Iowa); id., Exh. D (CPA license showing Gabelmann’s Iowa

address). Gabelmann’s engagement letter with RVBI, an Iowa corporate entity,

directed him to perform audits on its subsidiaries, including Valley Bank in Illinois.

So Gabelmann did not engage directly with Valley, the Illinois entity.

What’s more, Gabelmann’s communications with his client, RVBI, were

centered in Iowa, because RVBI’s executive management and accounting and

financial reporting functions were centralized in an Iowa office. So too with his

communications with Valley, because generally the same individuals in Iowa ran

Valley. See, e.g., R. 98, Exh. E (Valley’s Controller states Gabelmann was coming to

the Iowa office to work on planning the audit, where the bank’s Controller was

located). Simply because Gabelmann was licensed as an accountant in Illinois and

could do business there do not overcome the Iowa-based communications and the

centrality of Iowa to the relationship.15

Gabelmann also argues that Illinois public policy should trump the law of the

state with the most significant relationship. Gabelmann relies on Restatement

(Second) of Conflict of Laws § 139(1), which says that evidence ordinarily not

privileged under the law of the state with the most significant relationship sometimes

still will be covered by privilege if “the admission of such evidence would be contrary

to the strong public policy of the forum.” See also id., Comment c (“The evidence will

not, however, be admitted in those rare instances where its admission would be

contrary to the strong public policy of the forum. Such a situation may occasionally

arise when the state of the forum, although it is not the state which has the most

significant relationship with the communication, does have a substantial relationship

to the parties and the transaction and a real interest in the outcome of the case.”).

Gabelmann relies heavily on Sterling Financial, in which the Illinois Appellate Court

held that, although the attorney-client privilege would have prevented disclosure

under New York law, Illinois public policy supported disclosure. Sterling Financial,

782 N.E.3d at 904-05. But Sterling Financial actually points to the opposite of what

Gabelmann is arguing: information privileged in New York was trumped by “Illinois’s

15The only case Gabelmann cites in support of his assertion that Illinois has the most

significant relationship to the communications is PepsiCo., Inc. v. Baird Kurtz & Dobson LLP,

305 F.3d 813, 814-816 (8th Cir. 2002), in which the Eight Circuit analyzed the Illinois

accountant’s privilege as applied to information obtained by an accountant located in

Missouri from a plant located across the border in Illinois. But the Eighth Circuit did not

engage in any analysis about why it applied Illinois law, and did not discuss the nature or

location of the communications, so the opinion does not offer much guidance here.

strong policy favoring discoverability.” Id. at 904. Here, Gabelmann argues that an

Illinois public policy favoring non-disclosure should trump Iowa’s policy of

discoverability. Gabelmann Sur-Reply at 2-4. It is true that the existence of the

Illinois Accountant’s Privilege demonstrates that the Illinois “legislature has

determined public policy trumps the truth-seeking function of litigation in certain

circumstances.” Brunton v. Kruger, 32 N.E.3d 567, 578 (Ill. 2015). But as Sterling

Financial noted, Illinois also has a “strong policy favoring discoverability.” 782

N.E.3d at 904-05; see also Brunton, 32 N.E.3d at 579 (“[P]rivileges are not to be

expansively construed because they are exceptions to the general duty to disclose

during discovery.”) (internal citation omitted). What’s more, Comment c to § 139(1)

specifically states that it is “rare” for the forum’s public policy against admission to

override the law of the state with the most significant relationship favoring

admission. Restatement (Second) of Conflict of Laws § 139(1), Comment c (1971). This

is not that rare case.

Finally, Gabelmann contends that there is no real conflict of law because it is

unclear what triggers Iowa’s exception to the accountant-client privilege. Gabelmann

Sur-Reply at 4-5 (citing Bridgeview Health Care Ctr., Ltd. v. State Farm Fire & Cas.

Co., 10 N.E.3d 902, 909 (Ill. 2014) (holding a choice-of-law determination is required

only when the moving party has established an actual, rather than a potential,

conflict between state laws)). Iowa Code § 542.17 states that the accountant’s

privilege “shall not be construed … as prohibiting disclosures in a court proceeding.”

Although the Court, like Gabelmann, has been unable to find any cases analyzing

this exception, its plain language makes clear that the privilege does not protect

otherwise privileged information in a court proceeding, which certainly encompasses

a subpoena issued in the current litigation. Gabelmann Sur-Reply at 4.

So Iowa law applies. The Iowa accountant’s privilege does not protect the

documents in a court proceeding, so Gabelmann’s records are not shielded from

Crowe’s Rule 34 discovery request to the FDIC-R or from the Rule 45 subpoena to

Gabelmann. As to who should review and produce the documents, the burden falls on

the FDIC-R. Yes, Crowe issued a Rule 45 subpoena to Gabelmann, but Crowe did so

only because the FDIC-R refused to turn over the records pursuant to Crowe’s Rule

34 request for production. R. 83, Exh. 6 at 2. So it is the FDIC-R’s, not Gabelmann’s,

burden to conduct a relevancy review as discussed earlier in this Opinion, and to

produce the relevant documents responsive to Crowe’s request.

D. Category 3

Crowe seeks to compel the FDIC-R to produce unredacted versions of

administrative deposition transcripts for all witnesses deposed as part of the FDIC-

R’s pre-litigation investigation. Def.’s Br. at 6-7. The parties disagree over whether

the FDIC-R redacted only irrelevant material or whether it sufficiently justified its

redactions. Def.’s Br. at 19-20; Pl.’s Resp. Br. at 16. Crowe also seeks the deposition

transcript of Michael Owen, a partner at Perkins Coie, which the FDIC-R is

withholding on the basis of attorney-client privilege, although the transcript was not

included on a privilege log. Def.’s Br. at 20-21. The parties dispute whether the

attorney-client privilege properly applies. Id.; Pl.’s Br. at 16.

On the threshold issue, the Court agrees with the FDIC-R that it provided

enough information in its privilege logs detailing the subject matter of the redacted

testimony to avoid an order that the FDIC-R produce the documents in their entirety.

Pl.’s Resp. Br. at 16-17; R. 83, Exh. 8 at Att. A; contra EEOC v. Dolgencorp, LLC,

2015 WL 2148394, at *2 (N.D. Ill. May 5, 2015) (granting motion to compel production

of unredacted documents because “what constitutes relevant information is often a

matter of judgment, and even irrelevant information within a document that contains

relevant information may be highly useful to providing context for the relevant

information”) (cleaned up). But some of the redactions do raise enough of a question

that the Court will require an in camera review of the redacted portions of the

transcripts, and will require an in camera review of Owens’s transcript. By June 29,

2018, the FDIC-R shall upload the unredacted transcripts and the transcript of

Owens’s deposition, under seal and ex parte, and highlight in yellow the parts that

were redacted so the Court can conduct the in camera review.

E. Category 4

Lastly, Crowe seeks to compel production of documents related to settlements

or potential claims against third-parties in connection with losses incurred by Valley

or related entities. Def.’s Br. at 21. First, Crowe argues that communications and

documents related to potential claims against third-parties that are not related to

settlement, negotiations, or compromise are not protected by Federal Rule of

Evidence 408. That is correct. And the documents are relevant to damages, so this is

not merely “a fishing expedition,” especially in light of the Court’s understanding of

Crowe’s theory of defense as discussed earlier in this Opinion. See In re Dairy

Farmers of Am., Inc. Cheese Antitrust Litig., 801 F.3d 758, 766 (7th Cir. 2015). The

FDIC-R must produce those records, redacted as necessary, by July 16, 2018 (to the

extent they exist).

But to the extent that Crowe seeks documents for the purpose of demonstrating

that the FDIC-R took the position during negotiations with others that Henson or

another third-party was to blame for Valley’s losses, those documents are

inadmissible under Rule 408(a) because that evidence would be offered to disprove

Crowe’s liability. What’s more, Crowe’s request seeks communications from the

attorneys for the settling parties, which almost certainly is inadmissible as attorney

work product material. Still, some of the requested documents might be admissible,

despite Rule 408(b), for another purpose, such as proving witness bias (for instance,

a communication proposing to reduce Henson’s fine in exchange for cooperation

against Crowe). As Crowe points out, three of the fact witnesses to be deposed—Larry

Henson, Michael Henson, and Robert Fick—entered into a settlement agreement

with the FDIC-R, which provides that they will “cooperate fully” with the FDIC-R in

any subsequent litigation related to the bank. Def.’s Reply to FDIC at 14, R. 83, Exh.

19 at 7. That statement is enough to at least raise a question of potential bias.

The FDIC-R’s contention that courts within this District have drawn a line

between allowing discovery of settlement agreements and restricting discovery of

settlement discussions, Pl.’s Resp. Br. at 18-19 (citing White v. Kenneth Warren &

Son, Ltd., 203 F.R.D. 364, 368-69 (N.D. Ill. 2001); Pfizer Inc. v. Apotex Inc., 731 F.

Supp. 2d 754, 764 (N.D. Ill. 2010)), is not exactly on point. That line only exists when

the party seeking to compel production seeks the documents for a purpose that is

impermissible under Rule 408; they may be admitted “for another purpose, such as

proving a witness’s bias or prejudice.” See Clark v. Experian Info. Sols., Inc., 2006 WL

626820, at *2-3 (N.D. Ill. Jan. 6, 2006), opinion approved, 2006 WL 931677 (N.D. Ill.

Apr. 10, 2006) (noting that to obtain information that would be inadmissible under

Rule 408, the proponent of discovery must demonstrate that it is admissible for

another purpose or show how discovery of the item might lead to other admissible

information. The Court emphasizes that “such a showing is required only to obtain

information that would be inadmissible because of Rule 408.”); see also Noble Roman’s

Inc. v. B & MP, LLC, 2017 WL 1163866, at *8 (N.D. Ill. Mar. 29, 2017) (“Rule 408 does

not create any category of documents that is off limits from discovery, but rather

creates a narrow exclusion from admissibility as evidence.”) (cleaned up). So at least

some of the negotiations and correspondence might be admissible under Rule 408(b)

for the purpose of showing witness bias.

To figure this out, by July 13, 2018, the FDIC-R shall file, under seal and ex

parte, the settlement negotiations and communications leading up to the two

settlement agreements that have been provided to Crowe. The Court will conduct an

in camera review to determine its discoverability.

IV. Conclusion

For the reasons discussed above, Crowe’s motion to compel is granted in part

and denied in part. First, by July 23, 2018, the FDIC-R (and/or FDIC-C) must conduct

a relevancy review and identify and produce all documents authored by, or sent to or

from Shirley Langford, Leslee Martin, and Jon Peterson, concerning (1) Crowe’s

unqualified audit opinions on Valley’s financial statements; and (2) any evidence of

events or conduct that contributed to or caused Valley’s losses between 2011 and

2013, including but not necessarily limited to Valley’s inadequate internal controls,

Valley’s lack of formal process for identifying loans that should have been classified

as troubled debt restructurings, Valley’s engagement in Bank-financed sales of its

troubled private label-mortgage backed securities to related parties, Henson’s failure

to record loan losses, and Henson’s manipulation of Valley’s Allowance of Loan and

Lease Losses.

Second, by July 23, 2018, the FDIC-R must conduct a relevancy review of every

document it obtained from a third-party during its pre-litigation investigation,

excepting documents obtained from third-parties who have already produced or have

agreed to produce all requested documents in response to Crowe’s third-party

subpoenas. The details of the review and the deadline are subject to conferral between

the FDIC-R and Crowe.

Third, by June 29, 2018, the FDIC-R shall upload the unredacted deposition

transcripts and the transcript of Owens’s deposition under seal and ex parte, and

highlight in yellow the parts that were redacted so the Court can conduct an in

camera review.

Fourth, by July 13, 2018, the FDIC-R shall file, under seal and ex parte, the

settlement negotiations and communications leading up to the two settlement

agreements that have been provided to Crowe.

Finally, by July 16, 2018, the FDIC-R shall to produce to Crowe

communications and documents related to potential claims against third parties that

are not related to settlement, negotiations, or compromise to the extent they exist,

unless the FDIC-R believes that the records are protected by another privilege, in

which case the FDIC-R must provide a privilege log to Crowe by the same deadline.

In order to allow the parties to review this Opinion and confer as necessary,

the status hearing of June 25, 2018 is reset to July 10, 2018 at 10:30 a.m.

ENTERED:

s/Edmond E. Chang

Honorable Edmond E. Chang

United States District Judge

DATE: June 25, 2018