e-Lessons Learned

Despite feeling sorry for the Office of Federal Housing Enterprise Oversight (“OFHEO”) the D.C. Circuit Court of Appeals affirms the district court’s finding of contempt against OFHEO.

Background:

In 2003, OFHEO completed an investigation of Fannie Mae. Pursuant to this investigation, multiple private civil actions against Fannie Mae and senior executives of the company have resulted. In the summer of 2006, former CFO J. Timothy Howard and former chairman and CEO Franklin Raines subpoenaed over thirty categories of documents from OFHEO as a non-party to the litigation. Arguing that these documents should have been sought pursuant to its disclosure regulations, OFHEO moved to have the subpoenas quashed.

On November 6, 2006, the district court ruled for Raines and Howard ordering the OFHEO to comply with the discovery order within the next four months. Although OFHEO began producing documents for Raines and Howard, they requested that Raines, Howard and now Leanne Spencer (who had recently joined the cases) (“the individual defendants”), limit their requests for electronically stored information (“ESI”) to minimize the burden on OFHEO. On February 18, 2007, the individual defendants responded revising their initial requests for information to certain email communications stored on OFHEO’s network and backup tapes. Shortly thereafter, OFHEO filed a one-month extension with the court, OFHEO also stated that since ESI was not included in the original discovery order they would provide this information voluntary and outside the deadlines of the court order.

The district court granted OFHEO’s motion for an extension. However, the individual defendants argued that they had never agreed that the original order would not include ESI. As a result, the court found at a status conference in April 2007, that ESI was included in the original discovery order, and granted OFHEO an additional one-month extension to comply with the order.

During the summer of 2007, OFHEO reported to the court that all the documents requested under the February 18, 2007 letter by the individual defendants had been produced. Skeptical by the amount of documents produced, the individual defendants obtained a Rule 30(b)(6) deposition, which confirmed that OFHEO had failed to search all of the off-site disaster recovery backup tapes. As a result, in August 2007, the individual defendants moved to hold OFHEO in contempt.

The district court scheduled a contempt hearing for September 27, 2007 to address the burden that examining such tapes would impose on OFHEO. At this hearing, a stipulated order was entered by both parties, which required OFHEO to conduct searches of the disaster-recovery backup tapes and provide all responsive documents and privilege logs to the individual defendants by January 4, 2008. Pursuant to this order, the individual defendants submitted over 400 search terms, covering about 660,000 documents. OFHEO objected stating that the order limited the individual defendants to “appropriate search terms.”

On November 2, 2007, the district found that the order gave the individual defendants the sole discretion to specify search terms and imposed no limits on permissible terms. As a result, over 50 contract attorneys were hired by OFHEO and over six million dollars was spent to comply with this discovery order.

On November 29, 2007, the day before an interim deadline for production of several categories of documents, OFHEO informed the district court they would be unable to meet the deadline and asked to extend the deadline until December 21. Two days before the December 21 deadline, OFHEO informed the court that they would again be unable to comply with the extended deadline, but that they would be able to produce all non-privileged documents by the January 4, 2008 deadline, however, they would be unable to produce all the required privilege logs until February 29.

The individual defendants renewed their motions for contempt against OFHEO. On January 22, the district court granted the motions. As a sanction, the court ordered production of all documents withheld on the sale basis of the qualified deliberative process privilege and not logged by the January 4, 2008 deadline. However, the production was to be made only to counsel, and the court did not waive the privilege of OFHEO.

On Appeal:

Despite feeling sorry for OFHEO for being entangled with the mess of the mortgage companies and spending over six million dollars in effort to comply with the discovery order, the D.C. Circuit Court of Appeals found no abuse discretion by the district court and affirmed the district court’s finding of contempt and the sanctions imposed against OFHEO.

The Court held that since no extrinsic evidence was presented by OFHEO regarding the “appropriate search term” language, they had no choice but to interpret the meaning within the document itself. Based on this, the Court found that the language of the document described an obligation on OFHEO reserving full discretion to the individual defendants to specify search terms. The Court noted that OFHEO was still protected by the duty of good faith and fair dealing, however, the Court failed to find that the individual defendants had acted with bad faith.

Finally, the Court found that the district court’s issuance of sanctions against OFHEO was appropriate because it followed the district court’s finding of contempt against OFHEO and compensated the individual defendants for the delay they suffered. In addition, the Court noted that the district court protected OFHEO by only requiring production to counsel, not waiving their privilege, and by setting up a method of document recovery if documents were later held to be privileged.

While six million dollars certainly seems a bit ridiculous for a non-party to have to spend to comply with a discovery order, failing to comply with the discovery order for almost two years and asking for extensions countless times is also absurd. Additionally, the district court did not impose monetary sanctions on OFHEO, instead the court just required OFHEO produce all the documents they were sitting on. Therefore, the Court of Appeals absolutely correctly found that requiring that OFHEO produce all documents not logged as privileged by the January 4, 2008 deadline did not abuse the discretion of the district court.

Courtney is a graduate from UCLA and has since graduated from Seton Hall Law School with a concentration in intellectual property law.

Article posted on September 27, 2009 at 11:30 PM |              More... 
Tagged as: Sanctions.
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