Bancorp v. Lloyd'S, Case No. 1:14-cv-869

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

Case No. 1:14-cv-869

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF OHIO WESTERN DIVISION

May 9, 2017

Beckwith, J.

Bowman, M.J.

MEMORANDUM OPINION AND ORDER¹

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 inSeptember 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 asFifth 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...