Court: District Court, N.D. Iowa; October 7, 2014; Federal District Court
The Federal Deposit Insurance Corporation (FDIC-R) initiated a lawsuit against the former officers and directors of Vantus Bank, alleging gross negligence, negligence, and breach of fiduciary duty due to imprudent investments totaling $65 million in high-risk collateralized debt obligations without proper due diligence. The third-party plaintiffs, the former officers and directors, filed a complaint against the Office of Thrift Supervision (OTS) under the Federal Tort Claims Act (FTCA), claiming that the OTS failed to fulfill its duties to Vantus Bank and its stakeholders by not adequately analyzing the bank’s investments and delaying remedial action. They seek to hold the OTS partially responsible for damages if the FDIC-R's claims succeed.
In response, the OTS filed a Motion to Dismiss, arguing that the court lacks jurisdiction due to the FTCA's 'discretionary function exception' and contending that there is no duty owed to the bank by the regulators. The court temporarily paused the litigation to allow the third-party plaintiffs to request jurisdictional discovery, which they filed on August 8, 2014. The OTS and FDIC-R opposed this request, prompting the third-party plaintiffs to file a reply. The OTS was subsequently permitted to file a surreply to address new arguments presented by the third-party plaintiffs. The briefing on the jurisdictional discovery issue was completed on September 9, 2014.
The third-party plaintiffs sought oral arguments regarding their Motion for Jurisdictional Discovery; however, the OTS indicated that it neither opposed nor supported this request, arguing that oral arguments were unnecessary. The court agreed with the OTS and, due to scheduling constraints, denied the request, considering the motion fully submitted based on written materials.
In their Motion, the plaintiffs aim to uncover whether a statute, regulation, or policy mandates specific actions or timelines for the OTS concerning Vantus Bank. They noted that the OTS first expressed concerns about Vantus Bank's investments in a June 26, 2007, letter but did not order divestment until February 13, 2008. They claim this delay impacted the liquidity of the securities and the damages asserted by the FDIC-R. Acknowledging the court's lack of FTCA jurisdiction over claims related to regulatory actions under the discretionary function exception, the plaintiffs assert they have made significant efforts to obtain discovery that could demonstrate the OTS's actions do not fall under this exception. They contend that the FDIC-R's tactics to block discovery forced them to file their Third-Party Complaint by a deadline, based on their beliefs about the OTS's noncompliance with mandatory requirements.
The plaintiffs argue that the FDIC-R and OTS are placing them in a "Catch-22" by denying factual basis for their claims while obstructing their ability to discover such facts. They believe mandatory standards likely governed the OTS's conduct and seek limited jurisdictional discovery to identify these. The plaintiffs assert that granting jurisdictional discovery is a discretionary matter for the court and reference cases where such discovery has been permitted in FTCA cases involving the discretionary function exception. Specifically, they request four categories of documents, a Rule 30(b)(6) deposition on five topics, and the deposition of an OCC employee, Mr. Anthony Jardieu, who was involved with Vantus Bank's examination. The OTS acknowledges that the discretionary function exception is central to its Motion to Dismiss the Third-Party Complaint, which lacks evidence of a non-discretionary obligation by the regulators.
The OTS contends that the third-party plaintiffs are attempting to delay the dismissal of their Third-Party Complaint by requesting additional discovery without substantiating their claims with concrete evidence. They characterize this as a 'fishing expedition' disguised as 'jurisdictional discovery,' arguing that the plaintiffs have not sufficiently shown that such discovery could yield facts establishing jurisdiction. The OTS points out that the plaintiffs have already accessed extensive documents from the FDIC-R, which failed to support their claims of non-discretionary standards governing OTS’s actions regarding Vantus Bank. The OTS asserts that regardless of whether its jurisdictional challenge is 'facial' or 'factual,' the plaintiffs have only presented vague beliefs without concrete evidence. The OTS also argues that the requests for discovery are overly broad and burdensome. The FDIC-R echoes these concerns, stating that despite the completion of document production, the plaintiffs have not identified any supporting documents from OTS. The FDIC-R warns that allowing jurisdictional discovery would unnecessarily prolong the case, given the speculative nature of the requests. In contrast, the third-party plaintiffs argue that the OTS has misapplied the standard for permitting discovery and assert that a timeline of OTS actions suggests the existence of mandatory standards that may have been violated. They claim that these standards may include informal policies and warrant a more thorough review beyond publicly available information, indicating that their discovery requests extend beyond what the FDIC-R has provided.
The OTS’s Surreply contends that the 'new materials' presented by the third-party plaintiffs do not substantiate their claims regarding mandatory standards governing the OTS's actions concerning Vantus Bank. The OTS asserts that these materials fail to demonstrate a reasonable expectation that further discovery would allow the plaintiffs to circumvent the 'discretionary function exception' to liability. Furthermore, the OTS highlights that the plaintiffs have not identified any cases opposing the precedent it cites, which supports the application of the 'discretionary function exception' in negligence claims against the United States involving bank regulators. The OTS argues that no additional discovery is warranted, as previous extensive discovery has not supported the plaintiffs’ claims. However, the OTS is open to granting the plaintiffs a reasonable extension to review the existing materials if they claim insufficient time for review. The OTS counters the plaintiffs’ suggestion that its lack of an affidavit confirming the absence of mandatory regulations implies their existence, stating that the plaintiffs have not met the burden for jurisdictional discovery.
The document also provides an overview of the 'discretionary function exception' in the context of the Federal Tort Claims Act (FTCA). It explains that while the FTCA allows for claims against the federal government for negligence, it excludes claims based on the discretionary functions of federal agencies or employees. A two-part test determines the applicability of this exception: first, whether the conduct in question is discretionary, involving judgment or choice rather than being dictated by mandatory statutes or regulations; and second, if it is discretionary, whether the decision was influenced by considerations of social, economic, or political policy.
Not all discretionary decisions are protected from legal challenge, as the purpose of the discretionary function exception is to avoid judicial second-guessing of decisions based on social, economic, and political policy. A discretionary decision qualifies for this exception if it can be analyzed under policy considerations, regardless of whether the decision-maker consciously engaged in policy balancing. This exception can serve as a basis for a motion to dismiss for lack of subject matter jurisdiction under Rule 12(b)(1) of the Federal Rules of Civil Procedure, as demonstrated by the OTS's response to the Third-Party Complaint.
Regarding jurisdictional discovery, the Eighth Circuit reviews district court rulings for abuse of discretion, emphasizing that such discovery is warranted only when essential facts are unknown or genuinely disputed. The court considers several factors when deciding on jurisdictional discovery, referring to guidance from Rule 56. A party seeking discovery must provide an affidavit detailing: the facts sought and their acquisition methods, expectations of raising a genuine issue of material fact, efforts made to obtain those facts, and reasons for unsuccessful attempts. Moreover, mere speculation about the potential of jurisdictional discovery is insufficient; a plaintiff must provide some evidence to support their claims for discovery, or a court may deny the request.
In FTCA cases, claimants are not entitled to jurisdictional discovery if the existing record indicates that such discovery is unlikely to produce necessary facts to counter a Rule 12(b)(1) motion. The Third Circuit's decision in Baer v. United States, 722 F.3d 168, serves as a notable example regarding jurisdictional discovery in discretionary function cases. In Baer, customers appealed a dismissal for lack of jurisdiction over their FTCA claim related to the SEC's failure to address Bernard Madoff's Ponzi scheme. The court clarified that claimants must demonstrate their claims fall within the FTCA’s waiver of government immunity, while the government must prove the discretionary function exception applies.
The Third Circuit upheld the denial of the customers' request for discovery on SEC internal procedures, emphasizing that they had access to a comprehensive 457-page OIG Report detailing SEC operations but failed to identify any internal regulations or policies that could counter the discretionary function exception. This reflects the principle that when extensive public documents fail to indicate the existence of internal policies, jurisdictional discovery may be rightly denied, particularly in light of available governmental investigation reports.
The court noted that plaintiffs' allegations relied on publicly accessible statutes, regulations, and congressional investigations, particularly concerning the government’s response to Hurricane Katrina. Additionally, the Fifth Circuit's ruling in Davila v. United States, 713 F.3d 248, while less directly related, also provides relevant insight on this matter.
Drivers appealed the dismissal of their Federal Tort Claims Act (FTCA) claim against federal agents for negligence in issuing a Be-On-The-Lookout (BOLO) Alert for Davila's vehicle. The plaintiffs argued that the district court wrongly denied them limited discovery to challenge the applicability of the 'discretionary function exception' to their claim. The court upheld the denial of jurisdictional discovery, emphasizing that the plaintiffs must demonstrate the necessity of such discovery and that it is not warranted if it is unlikely to yield facts necessary to oppose a Rule 12(b)(1) motion. The court noted a heightened burden in cases where the discovery aims to challenge an immunity-derived bar to suit. The plaintiffs failed to provide well-pleaded facts or evidence against the government's claim of no existing policy governing BOLOs, leading to the conclusion that the district court did not abuse its discretion.
In contrasting cases, the Loughlin v. United States decision from the D.C. Circuit Court allowed limited jurisdictional discovery concerning mandatory policies related to the discretionary function exception, but denied it regarding the nature of the discretionary act. The D.C. Circuit found this limitation erroneous, stating that plaintiffs should have the opportunity for discovery relevant to both prongs of the discretionary function exception before a ruling on a motion to dismiss for lack of subject matter jurisdiction.
Loughlin did not address the issue of jurisdictional discovery related to mandatory policies, procedures, or regulations, specifically 'prong one' evidence. The appellate court noted that while the district court erred by limiting discovery to 'prong one,' the claimants provided information relevant to 'prong two.' However, the appellate court found that the claimants failed to adequately specify their requests for additional discovery regarding the nature of the decision not to warn about munitions and contaminants. This establishes that a party seeking jurisdictional discovery must clearly articulate the information sought and demonstrate its existence beyond what is already available.
The third-party plaintiffs could have referenced Ignatiev v. United States, where the court recognized that without jurisdictional discovery, FTCA claimants could not ascertain binding mandatory policies of the Secret Service. The appellate court reversed a dismissal for lack of subject matter jurisdiction, acknowledging that internal guidelines could constitute a mandatory obligation under the FTCA and could only be revealed through discovery.
Currently, the third-party plaintiffs dispute whether there are mandatory OTS policies regarding its conduct with Vantus Bank's investments that would exempt their FTCA claims from the 'discretionary function exception.' A critical aspect is whether the existence of such policies remains unknown. Initially, the plaintiffs claimed a belief in the existence of such standards but provided only speculative assertions similar to those in Viasystems, which were deemed insufficient to warrant jurisdictional discovery. However, in their Reply, they attempted to strengthen their request based on new materials obtained from OTS files through FDIC-R discovery. Their request will be evaluated based on the 'Rule 56(d)' factors, particularly focusing on the facts sought and the methods for obtaining them.
The third-party plaintiffs are seeking discovery to identify any statutes, policies, procedures, or regulations that mandate specific actions or timelines for the Office of Thrift Supervision (OTS) regarding Vantus Bank, which is relevant to assessing the 'discretionary function exception' under the Federal Tort Claims Act (FTCA). They propose obtaining this information through additional OTS documents, a Rule 30(b)(6) deposition, and a deposition of a former OTS employee. Some limited discovery may be warranted to confirm the existence of such mandatory guidelines. The plaintiffs have made considerable efforts to obtain relevant OTS documents from the FDIC-R but suggest that these entities have not disclosed the requested information. The FDIC-R and OTS argue that no such mandatory guidelines exist. The critical issue centers on whether the plaintiffs lack alternative means to discover relevant internal policies that could impose a mandatory obligation on the OTS or if they already possess sufficient information to assess the likelihood of such policies being in place. The question is whether jurisdictional discovery could uncover material facts pertinent to subject matter jurisdiction. Despite having received over 135,000 pages of documentation from OTS, including emails and an audit report, the plaintiffs have not been able to identify any policies that would negate the discretionary function exception. Previous cases suggest that jurisdictional discovery is unwarranted if the plaintiffs' allegations rely on publicly available statutes and regulations. However, it remains possible that discovery could yield evidence of a relevant policy.
The FDIC-R and OTS contend that the necessary policies, procedures, or regulations are not solely obtainable through discovery from the OTS. The third-party plaintiffs' assertion that delays in OTS action, evidenced by emails, indicate violations of internal policies is unconvincing, particularly given the absence of any mention of such policies in those communications. The plaintiffs rely on mere assertions without demonstrating a reasonable probability for jurisdictional discovery regarding the “discretionary function exception” or to counter a Rule 12(b)(1) motion.
Despite this, the OTS holds exclusive knowledge of the existence of any mandatory internal policies, prompting a reconsideration of the information already accessible to the claimants. The appellate courts' conclusions, which suggested that claimants had sufficient information to ascertain the existence of mandatory regulations, were reasonable. However, a limited discovery process could efficiently address the issue of subject matter jurisdiction. The third-party plaintiffs deserve a clear answer on whether any mandatory internal policies exist, as the OTS has not been compelled to provide this information yet.
The proposed limited jurisdictional discovery aims to balance the need for the plaintiffs to disprove the applicability of immunity while minimizing the burdens on the OTS. The discovery may consist of no more than three requests for admissions, two requests for documents, or one two-hour telephonic deposition of a former OTS employee associated with the Vantus Bank investigation.
The third-party plaintiffs are permitted to conduct limited jurisdictional discovery regarding whether any mandatory internal policies, procedures, or regulations were applicable to the Vantus Bank investigation. This discovery is restricted to one of the following methods: up to three requests for admissions, two requests for documents, or one Rule 30(b)(6) telephonic deposition of a former OTS employee, lasting no more than two hours. The parties are required to confer and agree on the discovery method by a specified deadline. If they cannot agree by October 14, 2014, they must notify the court, which will then hold a telephonic status conference to determine the method. The third-party plaintiffs have until November 14, 2014, to respond to the OTS’s Motion to Dismiss, allowing time to complete the ordered jurisdictional discovery. The court notes that it may revisit the scope of permissible jurisdictional discovery depending on whether such discovery is warranted. Additionally, the OTS argues for dismissal of the Third-Party Complaint based on the lack of an actionable duty owed by regulators, suggesting that the plaintiffs have not adequately addressed the applicability of the "discretionary function exception." The court criticizes the OTS for not providing a clear response to the question regarding mandatory policies, which could have preempted the need for jurisdictional discovery and the Motion to Dismiss.
