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Fifth Third Bancorp v. Certain Underwriters at Lloyd's

United States District Court, S.D. Ohio, Western Division

May 9, 2017

FIFTH THIRD BANCORP, et al., Plaintiffs,
v.
CERTAIN UNDERWRITERS AT LLOYD'S, et al., Defendants.

          MEMORANDUM OPINION AND ORDER [1]

          Stephanie K. Bowman United States Magistrate Judge.

         The above case initially was consolidated with a related case, RLI Insurance Company v. Fifth Third Bancorp., Case No. 1:14-cv-802, solely for purposes of discovery and pretrial proceedings. On January 9, 2017, both cases were reassigned to U.S. District Judge Timothy S. Black for all further proceedings. Although the cases were previously set for trial on different dates, (see Docs. 27, 70 in Case No. 14-802, Docs. 33, 77 in Case No. 14-869), both cases are presently set for trial on October 23, 2017.

         Currently before the undersigned are two motions filed solely in Case No. 1:14-cv-869: (1) the Underwriters' motion to compel Fifth Third to produce certain materials as to which Fifth Third has claimed attorney client and/or work product privilege; and (2) Fifth Third's motion for a protective order. Although Fifth Third has requested oral argument, the undersigned concludes that such argument is not needed and would not be beneficial to resolution of the fully briefed issues. See Whitescarver v. Sabin Robbins Paper Co., Case No. C-1-03-911, 2006 WL 2128929, at *3, 2006 U.S. Dist. LEXIS 51524, at *7 (S.D.Ohio July 27, 2006) (exercising discretion under Local Rule 7.1(b)(2) to deny request for oral argument).

         For the reasons that follow, the undersigned will partially grant the Underwriters' motion and deny Fifth Third's motion.

         I. Background

         The two related cases concern Fifth Third's attempt to collect $100 million dollars on multiple bonds that it purchased from a number of insurers, including the Defendants in this case (hereinafter “the Underwriters”). The bonds, commonly referred to as fidelity bonds, generally insure against employee dishonesty or fraud.[2] The period of coverage is July 1, 2010 through June 30, 2011. The bonds cover loss “first discovered” during the bond period, even if the dishonesty or fraud occurred long before the discovery as is alleged in this case.

         Related Case No. 1:14-cv-802 was first filed by RLI Insurance Company (“RLI”), one of the insurers participating in the subject bond policies. RLI's complaint seeks a declaratory judgment that it owes nothing on its bond. Fifth Third counterclaimed for breach of contract, seeking coverage. A month after RLI initiated its case, Fifth Third filed the above-captioned case against the Underwriters, all of whom also issued and/or participated in similar fidelity bonds.

         The disputed claims arise out of actions taken by former Fifth Third employee, Mathew Ross, while he was a loan officer employed in the bank's structured finance group. Ross resigned from Fifth Third prior to the inception of bond coverage.[3]However, Fifth Third alleges that within the bond coverage period, it discovered it had incurred losses in excess of the bond policy limits due to Ross's misconduct.

         Over a long period of time, with significant events taking place from 2007 through 2009, Ross allegedly caused Fifth Third to fund “fraudulent loan facilities” for the benefit of an individual who was Ross's undisclosed business partner (Edward Netherland), a company called InsCap Management LLC (“InsCap”), [4] and affiliated entities and persons. Specifically, Ross allegedly caused Fifth Third to fund a credit facility for use in InsCap's “Ultra” loan program, [5] resulting in the issuance of 78 Ultra loans that were used to fund the purchase of life insurance policies on wealthy individuals, with Fifth Third receiving fees and a security interest in each policy as collateral for each loan.

         All of the insurers raise similar defenses, maintaining that Fifth Third discovered Ross's misconduct and/or its losses prior to the inception of the policy period, or alternatively, at a time that otherwise excludes coverage. They allege that when Fifth Third purchased the bonds, it was already aware of significant issues with the loan program, due in part to litigation in state court that included accusations of Ross's involvement in fraud. (Case No. 14-cv-869, Doc. 93 at 11). In addition, all insurers seek to deny coverage based upon untimely notice. Though not relevant to the current discovery dispute, the insurers also appear to dispute the amount of covered loss and/or their respective maximum exposure under the various bonds.

         Fifth Third asserts that even though Ross is alleged to have acted dishonestly as long ago as 2005, Ross effectively concealed his conduct from his employer for years. Fifth Third submitted its initial Proof of Loss Statement (“Loss Statement”) on October 14, 2011. In the Loss Statement, Fifth Third alleged that “Ross and InsCap's owners and principal officers created, operated and manipulated these [Ultra] loan facilities and received undisclosed and illegal financial benefits which resulted in InsCap's owners and principal officers receiving tens of millions of dollars in fraudulent, undisclosed and illegal payments and Mathew Ross receiving at least $75, 000 in improper financial benefit.” (Case No 1:14-cv-869, Doc. 93-2 at 6). After Ross “established the LIPF II premium finance credit facility for Netherland's company, InsCap, ” Fifth Third “funded more than $100 million in premium finance loan advances between 2007 and 2009.” (Id., Doc. 93-2 at 7-8). As implemented and executed, Fifth Third characterizes the program as “riddled with fraud from its inception….” (Id. at 8) The Loss Statement reports that “Ross withheld information as to the actual extent of the fraud in early 2009, when InsCap purportedly disclosed the fraudulent activity which had occurred in connection with the LIPF II program (described as ‘ineligible fundings'). Ross continued to manipulate and conceal information with respect to the program, which caused Fifth Third to continue funding and increased its losses.” (Case No. 14-cv-869, Doc. 93-2 at 8).

         Just before the policy inception date of the subject bonds, on June 11, 2010, Fifth Third filed suit in Illinois state court to collect on a 23.5 million dollar loan against Concord (previously InsCap), Columbus Nova, and individual guarantors that related to the issuance of loans under the Ultra program. Concord filed a counterclaim, and in September 2010 Concord filed a new complaint in New York State Court, [6] alleging that Fifth Third had aided and abetted Concord's insiders in looting the assets of Concord, through conduct by Ross. (Id., Doc. 93-2 at 10).

         Fifth Third maintains that it did not learn of facts that would give rise to a fidelity bond claim until after it hired an external investigator, James Rechel, in January 2011, within the covered loss period. Fifth Third maintains that it promptly filed its Notice of Claim on February 8, 2011, immediately after discovering that a fraudulent wire transfer had been made to Ross in the amount of $75, 100 on September 12, 2008. (Doc. 93-2 at 11). Although Fifth Third seeks no damages other than those recoverable up to the policy limits of each bond, Fifth Third has included allegations that the Insurers have acted in bad faith. No separate bad faith claim is stated in the complaint, and discovery on bad faith allegations has been stayed pending resolution of the underlying breach of contract claims.[7]

         In the Court's most recent Calendar Order, discovery closes on May 15, 2017. The current dispositive motion deadline, for motions that pertain to the underlying breach of contract claims, is June 3, 2017.

         II. Analysis of the Parties' Motions

         Considering the amount in controversy, it is not surprising that discovery in the two federal cases has been contentious, with multiple prior disputes having been presented to this Court.[8] Most of the Underwriters' current motion to compel, as well as Fifth Third's counter-motion for a protective order, relates to the issue of when Fifth Third “first discovered” Ross's fraudulent conduct, or as the Underwriters put it, “what did Fifth Third know and when did it know it?” (Doc. 116 at 10).

         The Underwriters seek, as improperly withheld under the claim of privilege, additional documents in multiple broad categories: (1) any documents sent to or from Ross; (2) documents sent to or from all Discovery Agents; (3) documents concerning Fifth Third's internal investigation into the allegedly fraudulent conduct; (4) internal documents concerning Fifth Third's deliberations related to its reports to regulators about Ross's misconduct; (5) documents withheld as work product created prior to any litigation between InsCap and Fifth Third; and (6) documents that the Underwriters believe were improperly logged, and/or for which the privilege log is insufficiently specific to demonstrate any privilege.[9] In a separate motion for a protective order, Fifth Third seeks to cordon off the scope of questions directed to three attorney witnesses, also based on attorney-client and/or work product privilege.

         The burden of proof is on Fifth Third, as the party objecting to discovery, to prove that its asserted privilege applies. See generally Fed. R. Civ. P. 26(b)(5); Ross v. City of Memphis, 423 F.3d 596, 606 (6th Cir. 2005). The undersigned concludes that Fifth Third has failed to meet its burden of proof for a significant number of the referenced documents, and also has failed to meet its burden to limit the scope of the attorney-witness testimony.

         A. Focusing on When Fifth Third Discovered Its Loss

         As the insured, Fifth Third bears the burden of showing that it “first discovered” the claim within the relevant time period. See generally FDIC v. N.H. Ins. Co., 953 F.2d 478, 482-83 (9th Cir. 1991). In its Notice of Claim, Fifth Third asserts that it did not discover Ross's alleged fraud until January 30, 2011.

         The timing and extent of Fifth Third's knowledge is equally critical to the Underwriters' contention that payment is not owed because Fifth Third's Discovery Agents were “aware of” the fraud prior to purchasing the bonds. Several of the Underwriters' defenses also would preclude coverage even if Fifth Third first discovered the loss within the bond period, based upon the timing of Fifth Third's Notice and Proof of Loss, which time frames are defined by reference to the date of “discovery” of the loss. For example, the bonds required Fifth Third to provide notice at “the earliest practicable moment, not to exceed 90 days” after discovery of the loss, and to provide proof of loss within six months after discovery, “duly sworn to, with full particulars.” (See Doc. 24-1 at 33). Based upon the February 8, 2011 Notice date, the Underwriters assert that Fifth Third's claim will be barred for untimely notice if it “first discovered” its loss before November 10, 2010, and/or barred for untimely proof of loss if discovery occurred prior to January 9, 2011.[10] Last, the timing of Fifth Third's discovery is relevant to the Underwriters' assertion that a termination provision in the bonds limited (or possibly eliminated) lability under the bonds for losses caused by Ross's misconduct. Pursuant to Section 12 of the Conditions and Limitations section of the Primary Policy, coverage terminates “as soon as” any person in a defined group at Fifth Third “learns of any dishonest or fraudulent act committed by such person….”

         In short, the date of Fifth Third's discovery of its loss is crucial to Fifth Third's ability to prove its claim, as well as to the Underwriters' affirmative defenses. Given the centrality of the “discovery condition” in the bonds, this Court turns to the explicit language of that provision to resolve the pending motions.

         The language in the Insuring Agreement of the Primary Bond (the “Fidelity Insuring Agreement”) states:

This bond applies only to loss first discovered by the Chief Risk Officer, Office of Risk Management, Office of General Counsel, Internal Audit, Loan Review or any Executive Officer of the first named Insured during the Bond Period [July 1, 2010 to July 1, 2011]. Discovery occurs at the earlier of the Chief Risk Officer, Office of Risk Management, Office of General Counsel, Internal Audit, Loan Review, or Any Executive Officer of the first named Insured being aware of:
a. Facts which a reasonable person would expect to result in a loss of a type covered by this bond;
or
b. An actual or potential claim in which it is alleged that the Assured is liable to a third party,
Regardless of when the act or acts causing or contributing to such loss occurred, even though the amount of loss does not exceed the applicable Deductible Amount, or the exact amount or details of loss may not then be known.

(Doc. 24-1, page 31 of 64, Section 3).

         Although the parties have engaged in extensive discovery, the fact that Fifth Third's Discovery Agents include attorneys in its Office of General Counsel has led to many of the current conflicts concerning the scope of Fifth Third's asserted privileges.

         B. Discerning Ohio Law on Attorney-Client Privilege

         Ohio law is controlling in a diversity case on the applicability of the attorney-client privilege. Fifth Third relies almost exclusively on a single Ohio case, Jackson v. Greger, 110 Ohio St.3d 488, 854 N.E.2d 487 (Ohio 2006), which it insists controls the outcome of this discovery dispute. The Underwriters argue that Jackson is distinguishable, and rely instead almost as exclusively on a case from the Illinois Court of Appeals as persuasive authority. The undersigned finds no controlling law on point, but is persuaded that Ohio courts would conclude that most of the subject materials are outside the scope of the asserted privileges.

         In Jackson, the plaintiff had filed a legal malpractice claim against her former criminal defense attorney. Aware that his client intended to pursue a § 1983 claim relating to her arrest and conviction, the attorney nevertheless advised her to plead guilty. Plaintiff alleged that the advice was negligent and led to the dismissal of her later-filed civil rights case. In defense of the malpractice case, the criminal defense attorney sought discovery of Jackson's attorney-client communications in her civil case. Both parties believed that the common law doctrine of “implied waiver, ” set forth in Hearn v. Rhay, 68 F.R.D. 574 (E.D. Wash. 1975), applied, although they disagreed on whether the criteria for implied waiver had been met. The lower courts also relied on Hearn. However, the majority opinion in Jackson[11] found Hearn inapplicable on the facts presented. Instead, the court found Ohio's codification of its attorney-client privilege in R.C. § 2317.02 to be controlling, rejecting any “judicially created waiver to the statutorily created privilege.” In relevant part, the Ohio statute states that an attorney shall not testify “except that the attorney may testify by express consent of the client…and except that, if the client voluntarily testifies…the attorney may be compelled to testify on the same subject.” R.C. §2317.02(A)(1).

         In the decade since its publication, courts have clarified that Jackson was not intended to wipe clean the pre-existing body of common law exceptions to privilege in Ohio. See, e.g., Squire, Sanders & Dempsey, L.L.P. v. Givaudon Flowers Corp., 127 Ohio St.3d 161, 937 N.E.2d 533 (2010) (recognizing exceptions to the attorney-client privilege including the crime/fraud exception, a claim of a lack of good-faith effort to settle a case; and the joint representation or common interest exception); State v. Montgomery, 997 N.E.2d 579, ¶¶ 24-26 (Ohio Ct. App. 2013) (holding R.C. 2317.02 privilege is not absolute, recognizing “waiver” under common law where criminal defendant raises a Sixth Amendment claim of ineffective assistance of counsel in a post-conviction claim); Waite, Schneider, Bayless & Chesley LPA v. Davis, 2013 WL 4757486 (compelling attorney communications from outside counsel in fee dispute case based on importance of documents to resolution of underlying fee dispute).

         In Squire, Sanders, Justice O'Donnell (who dissented in Jackson) wrote for the majority and explicitly rejected an argument that judicially-created exceptions to the attorney-client privilege were forbidden after Jackson.[12] In Waite, Schneider, Bayless & Chesley LPA, U.S. District Judge Carr undertook an extensive analysis of Ohio law, including pre- and post-Jackson. Judge Carr held that the pre-Jackson implied waiver cases applying the Hearn test remained “relevant to understanding and interpreting the scope of the self-protection exception” that Jackson ultimately applied. Id. at 4; see alsogenerally Dinsmore ...


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