Keeping Bank Examinations Confidential in Litigation

In a bank examination, regulators evaluate a financial institution’s compliance with applicable laws and regulations.  The process is generally non-public, and the bank examination privilege helps keep it confidential.  But questions have recently arisen about how the privilege is meant to work, and the answers to them may significantly affect financial institutions and their dealings with federal and state regulators.

In our new legal treatise, The Bank Examination Privilege, we offer a comprehensive overview of the bank examination privilege and its essential role in bank supervision.  As we point out, there are two key reasons why confidentiality is vital.  First, publicly disclosing examination reports could undermine public confidence in bank safety and soundness.  Second, a bank examination requires a candid dialogue between the bank and the examiner.  Publicizing examination records could have a chilling effect on that dialogue.

However, maintaining the confidentiality of such examinations can be difficult when a bank is involved in a lawsuit.  A party who is suing, or being sued by, a bank might want the bank’s examination records as potentially useful evidence at trial.  The specific purpose of the bank examination privilege is to shield such records in litigation.

Interestingly, federal and state laws on the privilege often differ, both in form and substance.  Under federal law, the privilege is a common-law doctrine, shielding the opinions and recommendations of bank examiners.  It is also a qualified privilege, meaning that, in some cases, a court may find good cause to override it.

By contrast, many states have codified the privilege in statutes.  Some provide absolute, categorical protection for information related to bank examinations, while others follow the contours of the federal privilege.  A small number of states permit parties to freely seek discovery in this area, provided the court issues a protective order to prevent the parties from publicly disclosing examination records.

Three key questions have recently arisen about the federal privilege.  First, which regulators are entitled to claim its protections?  Various regulatory agencies oversee different aspects of the banking and financial services industry.  In some cases, it might be unclear whether the privilege is meant to extend to a particular regulator.  In a 2013 decision, for example, a U.S. District Court in New York concluded that the privilege extends to examinations conducted by the Federal Housing Finance Agency.[1]

The second question concerns choice of law.  In pure diversity-jurisdiction cases, federal courts typically follow the general rule[2] and look to state law, rather than federal law, to determine whether bank examination records are privileged.  However, it is debatable whether this is the correct approach when a party seeks information about a bank examination conducted by a federal regulator.  Arguably, the federal privilege is so integral to federal regulation of the banking industry that, under such circumstances, the federal privilege should supersede state law.[3]  Federal courts have not yet fully resolved this issue.

The third question arises when, in a federal lawsuit, a private party subpoenas a bank’s examination records from a federal regulator.  Does the federal government’s sovereign immunity bar such a subpoena?[4]  Federal courts disagree on this issue, and this creates uncertainty about the role of the bank examination privilege.  If sovereign immunity does not bar such a subpoena, the enforceability of the subpoena may depend largely on whether the privilege shields the requested records.  But if sovereign immunity does bar such a subpoena, the applicability of the privilege may be a moot point.

The law relating to the three questions described above is evolving.  Financial institutions that are subject to regulatory examinations should monitor developments with respect to these questions and the bank examination privilege in general.  It is important for a financial institution to be mindful, when a regulatory examination is being conducted, of any possibility that the communications the institution is exchanging with its regulator may be discoverable by an adversary in subsequent litigation.

ENDNOTES

[1] Fed. Hous. Fin. Agency v. JPMorgan Chase & Co., 978 F. Supp.2d 267 (S.D.N.Y. 2013).

[2] Fed. R. Evid. 501.

[3] See, e.g., SBAV LP v. Porter Bancorp, Inc., 2015 WL 1471020 (W.D.Ky. Mar. 31, 2015) (holding that state law applied), vacated as moot based on settlement of case, 2015 WL 8004502 (Dec. 1, 2015).

[4] Wultz v. Bank of China Ltd., 61 F. Supp.3d 272, 296 (S.D.N.Y. 2013) (declining to enforce subpoena against OCC).

This post comes to us from Eric B. Epstein, David A. Scheffel, and Nicholas A.J. Vlietstra, each a partner at the New York law firm of Dorsey & Whitney LLP. Mr. Epstein also graduated from Columbia Law School and has taught Legal Practice Workshop there since 2011. The post is based on their legal treatise, The Bank Examination Privilege, which was published this month by the American Bar Association.