Subtitle: Even accused predatory lenders have to comply with some laws. In this case, with case law.
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.
First Horizon Nat'l Corp. v. Houston Cas. Co., NO. 2:15-cv-2235-SHL-dkw, 2016 WL 5867268, at *1 (W.D. Tenn. October 5, 2016) (Vescovo, Chief U.S.M.J.).
The many factors mandated by case law for a document-by-document privilege log of documents withheld during discovery were thoroughly applied in this case.
One of those factors calls for a comparison of the amount at issue with the withholding party's best estimate of the cost of producing a document-by-document privilege log, which is usually required but not always depending on such things as hardship.
In this case, the plaintiffs claiming coverage, which are the accused predatory lenders who settled with DOJ and HUD, withheld documents in response to a request for production. Basically, the requested production was of all communications regarding certain claims arising out of their representations regarding mortgage loan underwriting during a stated period of time.
The plaintiffs withheld many documents but did not provide the usual document-by-document privilege log required by case law. Rather, their first response to the requested production was to withhold about a mountain of documents with "categorical logs." They "produced a six-page categorical log that grouped thousands of documents created over the course of five years into one of nine categories." First Horizon Nat'l Corp. v. Houston Cas. Co., NO. 2:15-cv-2235-SHL-dkw, 2016 WL 5867268, at *1 (W.D. Tenn. October 5, 2016).
Then, they also "supplemented" their production and their privilege log addressing certain document-by-document communications including between them and their insurance broker, between them and their auditing firm, between them and their "in-house counsel," and a review of their operations by the HUD Office of Inspector General. Apparently, they still maintained a "categorical privilege log" for thousands of other documents they withheld under a claim of privilege:
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.
Their insurance companies, which had served the requests for production in the first place, filed a motion to compel better production and a better, document-by-document privilege log. It is not entirely clear from the opinion in this case, but the insurance companies' motion to compel apparently addressed all of the plaintiffs' privilege log. The insurance companies were particularly interested in compelling a better privilege log "for 5,941 emails withheld as privileged." First Horizon Nat'l Corp. v. Houston Cas. Co., NO. 2:15-cv-2235-SHL-dkw, 2016 WL 5867268, at *4 (W.D. Tenn. October 5, 2016).
The plaintiffs countered that for many reasons the usual law did not apply to them. They argued that they are not required, like other parties claiming privilege during discovery, to produce a document-by-document privilege log to support the claim. One of the several things the plaintiffs argued in this case was that it would be "an undue burden." Producing a line-item privilege log, as it were, would cost $150,000 and take 3 to 4 weeks, they said. First Horizon Nat'l Corp. v. Houston Cas. Co., NO. 2:15-cv-2235-SHL-dkw, 2016 WL 5867268, at *6 (W.D. Tenn. October 5, 2016).
The Court was not impressed with any of the arguments offered to support the plaintiffs' blanket assertion of privilege in this case. "Given the amount in controversy," which the Court put at $75 Million for insurance coverage here, "the Plaintiffs' estimated cost of production of a document-by-document log does not constitute undue burden." First Horizon Nat'l Corp. v. Houston Cas. Co., NO. 2:15-cv-2235-SHL-dkw, 2016 WL 5867268, at *6 (W.D. Tenn. October 5, 2016) (Vescovo, Chief U.S.M.J.).
In the end, none of the plaintiffs' arguments against compliance with the case law convinced the Court in this case. The Court granted the defendant insurance companies' motion to compel production of a document-by-document privilege log. First Horizon Nat'l Corp. v. Houston Cas. Co., NO. 2:15-cv-2235-SHL-dkw, 2016 WL 5867268, at *7 (W.D. Tenn. October 5, 2016) (Vescovo, Chief U.S.M.J.).
The lesson here is that proportionality is relative. The case law ordinarily requires a party to prepare and produce a document-by-document privilege log if that party makes the choice to withhold discovery under a claim that the documents are privileged. In a case like this one involving millions of dollars among other things, it is "proportional" to require a document-by-document privilege log that costs $150,000 and 3 to 4 weeks of time. These numbers for compliance are big but in the context of withholding documents from discovery these numbers not absolute, not to be considered alone or by themselves. Rather, these numbers are to be considered in the context of the litigation including the amount in controversy. In short, if "proportionality" is a new rule for discovery then the costs of compliance have to be considered in terms of "proportionality" too.
This case contains an education in discovery particularly in insurance coverage cases. Other rulings in First Horizon v. Houston Casualty were addressed here on October 12, 2016.
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