Settlers' Housing Service, Inc. v. Schaumburg Bank & Trust Co. (In re Settlers' Housing Service, Inc.)

Citation: 558 B.R. 285Docket: Bankruptcy No. 13-bk-28022; Adversary No. 13-ap-1328

Court: United States Bankruptcy Court, N.D. Illinois; October 7, 2016; Us Bankruptcy; United States Bankruptcy Court

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Settlers' motion seeks a protective order to use documents produced by the Federal Deposit Insurance Corporation (FDIC) in the context of a Chapter 11 adversary proceeding. The FDIC claims these documents are privileged and has requested their return. The privilege issue arises from documents produced under subpoena by FDIC-R, the receiver for the predecessor bank that issued loans later assigned to Schaumburg Bank. FDIC-R, invoking a clawback provision from a prior protective order, previously provided hundreds of documents, but later identified and reclaimed dozens based on privilege claims. Settlers' motion specifically addresses ten documents, arguing they should be admissible at trial as they consist of emails between officers and attorneys of the predecessor bank regarding properties involved in litigation. Settlers contend the attorney-client privilege, originally held by the predecessor bank, was transferred to Schaumburg Bank and subsequently waived due to the latter's failure to assert privilege in a timely manner. Additionally, Settlers argue that the crime-fraud exception to attorney-client privilege applies. The FDIC-R maintains its right to claim privilege under 12 U.S.C. 1821(d)(2)(A), which allows it to succeed to the rights of the failed institution, yet Settlers assert that this privilege was transferred to Schaumburg Bank through a Purchase and Assumption Agreement dated March 25, 2011, which governs the interests in the properties at issue. The FDIC, as receiver, had the authority to determine the assets and liabilities to be transferred or retained.

The key issue is whether the FDIC-R transferred certain privileges protecting communications in ten specified documents from the predecessor bank to Schaumburg Bank under the P.A Agreement. Without an explicit transfer by the FDIC as receiver, the rights and privileges of the predecessor bank remained with the FDIC-R. The Settlers assert that privilege was transferred based on a definition in the P.A Agreement that outlines "Loans" and related rights held by the Failed Bank as of the Bank Closing Date. The Agreement includes a broad definition of "privileges" and states that, barring specific exclusions in sections 3.5 and 3.6, Schaumburg Bank purchased all privileges and assets from FDIC-R. This encompasses all rights, title, and interest in the assets of the Failed Bank, including subsidiaries and joint ventures, regardless of their status on the Failed Bank's books at the time of closure. Additionally, FDIC-R transferred records of the Failed Bank to Schaumburg Bank, with exceptions for certain employee-related records and those regarding assets or liabilities retained by the Receiver. Section 3.5 indicates that FDIC-R retained specific insurance policies and related financial instruments of the Failed Bank.

Interest, rights, actions, claims, or judgments retained by the FDIC-R against specified individuals and entities related to the Failed Bank are limited to those actions occurring before the Bank Closing Date. This includes claims against officers, employees, underwriters of the Failed Bank's insurance policies, shareholders, and any other parties whose actions may have contributed to the bank's losses. Claims related to the bank's financial institution bonds or other insurance policies are also included, regardless of when the claims are discovered. The FDIC-R retains certain rights of the predecessor bank, potentially allowing for claims of privileges not transferred to Schaumburg Bank.

The attorney-client privilege asserted by FDIC-R is based on Federal Rule of Evidence 501, which states that federal common law governs privilege claims, while state law applies in civil cases regarding claims or defenses dictated by state law. Although Illinois law is referenced, federal common law likely prevails. The ongoing litigation involves three claim types: objections to the allowance of the Defendant's claim under 11 U.S.C. 502(b)(1), equitable subordination under 11 U.S.C. 510, and a tortious interference claim based on post-receivership conduct. However, only the first two claims are pertinent as they relate to communications from the predecessor bank.

The objections challenge the validity of the Defendant's mortgage in relation to Illinois law, linking to the Plaintiffs' objection to the Defendant's bankruptcy claim, with jurisdiction established for resolution under federal law. Both Illinois and federal common law utilize similar principles regarding the attorney-client privilege, which is intended to promote open communication between clients and attorneys without fear of disclosure. The privilege will not be upheld unless it serves sufficiently important interests that outweigh the necessity for evidentiary disclosure.

The attorney-client privilege is a limited exception that applies when legal advice is sought from a qualified legal adviser, and the communication is made in confidence by the client with the intent to keep it confidential. Key criteria for this privilege include: 1) the pursuit of legal advice; 2) communication with a professional legal adviser; 3) confidentiality of the communications; 4) the client's initiative to protect these communications; and 5) the option for waiver. The burden of proof for establishing the privilege lies with the party claiming it. Notably, the existence of an attorney-client relationship alone does not confer privilege on all communications; each claim must be assessed individually. 

For organizations, communications between in-house counsel and employees are protected only if the employee seeks legal advice on behalf of the organization itself. Waiver of the privilege can occur through disclosure to third parties, indicating a lack of intent to keep the communication confidential. Waiver can be explicit or implied through conduct that demonstrates an intention to relinquish the right. 

In a specific case involving a Defendant Bank, a brief delay in asserting the privilege did not indicate an intention to waive it, as the Bank acted to maintain the privilege once its position was defined. However, if the "crime-fraud" exception is established, the attorney-client privilege will not protect communications made for the purpose of committing a fraud or crime.

For the crime-fraud exception to apply, two conditions must be fulfilled: a crime or fraud must have been either attempted or committed, and the communications in question must have been made to further that crime or fraud. In the relevant circuit, the party invoking this exception must provide prima facie evidence; this means presenting enough evidence to establish a foundational basis for the claim rather than proving it outright. The standard for prima facie evidence requires that it prompts further inquiry, not necessarily that it supports a verdict. Courts may conduct an in camera examination of the communications to assess their relevance to the crime or fraud. This review requires a lower evidentiary threshold, merely needing to show a good faith belief that such an inspection could reveal evidence supporting the crime-fraud exception. During the trial, the plaintiff must demonstrate some evidence of fraud before introducing otherwise privileged documents. After establishing this, the court will decide on the applicability of the crime-fraud exception and rule on the pending motion. Plaintiff's counsel must explicitly request such a ruling when they believe they have met the burden of proof for fraud during the trial.