Denied Rights? Homeowner Barred from Viewing Own PHH Loan File But US Gov Can Demand Direct Access

LIT Commentary

Why do the rules and laws not apply equally to citizens?

MOTION for Discovery regarding non-party subpoena issued to PHH Mortgage Corp. by United States of America (denied)

FEB 16, 2021 | REPUBLISHED BY LIT: AUG 17, 2023

Honorable Peggy Kuo

United States Magistrate Judge Eastern District of New York 225 Cadman Plaza East

Brooklyn, New York 11201

Re:       United States v. UBS Securities LLC, et al., No. 18-CV-6369 (RPK/PK) Dear Judge Kuo:

The United States writes, with the consent of non-party PHH Mortgage Corporation

(“PHH”), pursuant to Your Honor’s Rule of Individual Practice VI(A)(1), to seek the entry of an order authorizing the production of certain loan files in response to a Federal Rule of Civil Procedure 45 subpoena served by the government in this case on PHH.

For the reasons stated below, the governmentand non-party PHH request that the Court enter the attached proposed order governing the production of the documents described herein.

See Exhibit 1, Proposed Order.

Background:

As the Court is aware, at the outset of this case, the Court declined to include a prospective blanket waiver of state law borrower notification and consent requirements in the Protective Order governing this case.

See Minute Order, Mar. 21, 2019.

The Protective Order instead authorized, as here, any party to seek additional orders from the Court as necessary with regard to borrower privacy laws as issues arose.

Protective Order ¶ 55, ECF No. 34.

Since then, the United States has served, pursuant to Rule 45 and in accordance with the Right to Financial Privacy Act (“RFPA”) (12 U.S.C. § 3401 et seq.), a subpoena on PHH1 seeking copies of loan files for mortgages underlying the 40 residential mortgage-backed securities (“RMBS”) at issue in this case, certain of which are in the possession of PHH in its capacity as a loan servicer.

Exhibit 2, Subpoena to PHH/Ocwen, dated May 2, 2019.

In response, PHH has worked collaboratively with the United States to identify and produce the requested files.

As detailed below, PHH has determined that a number of files (approximately 300) are subject to state law borrower notice and/or consent requirements.

For this reason, prior to producing these files, PHH seeks the entry of an order, substantially in the attached form, specifically authorizing their production and the manner in which the files will be produced. 2

¹ The subpoena was initially served on Ocwen Loan Servicing, LLC (“Ocwen”). Since that time, Ocwen has merged into PHH, and PHH is the successor entity.

² The proposed order seeks to ensure that the non-party borrower information contained in loan files is subject to the safeguards of the Protective Order in this case. See Protective Order ¶ 12(a)(vii), ECF No. 34. Per this Order, borrower information may be disclosed only to limited categories of recipients; it may be used only for purposes of this litiga tion, and all borrower information must be maintained in a safe and secure location and returned or destroyed at the conclusion of the case. Id. at ¶¶ 31-53.

Federal law, the RFPA, governs the United States’ ability to obtain the loan files at issue.

Although the RFPA recognizes the importance of protecting the privacy interests of borrowers, it categorically authorizes the United States to obtain the subpoenaed loan files without notice to or the consent of the borrower and plainly preempts the state law requirements.

See 12 U.S.C. § 3413(h)(1)(A).

State law requirements, such as those at issue here, cannot be applied to the federal government to hinder a validly issued subpoena and must yield to federal law.

See, e.g., United States v. First Bank, 737 F.2d 269, 273-74 (2d Cir. 1984) (holding that the notice provision of Connecticut’s Privacy Act was preempted by federal law authorizing issuance of summons).

Moreover, PHH has indicated that complying with those state law requirements would likely result in the United States being left without loan files relevant to this case because a large portion of the remaining files are subject to state laws requiring express borrower authorization prior to their disclosure, and there is no guarantee that such authorization would ever be provided.

The government notes that Magistrate Judge Fox of the Southern District of New York recently entered an order authorizing, among others, non-party PHH to produce loan files without notice and consent.

See Mem. & Order, FDIC. v. Credit Suisse, No. 12-CV-4000 (S.D.N.Y. Feb. 3, 2021), ECF No. 240, attached hereto as Exhibit 3.

Judge Fox had similarly declined to enter a prospective blanket waiver of state borrower privacy laws in that case, but has now determined, that entry of an additional order was warranted to prevent undue delay and burden.

Id. at 10.

The Loan Files Are Relevant:

The documents at issue are plainly relevant, as the Complaint alleges that UBS violated the Financial Institutions Reform, Recovery, and Enforcement Act (“FIRREA”), 12 U.S.C. § 1833a, by knowingly making false statements to investors in connection with the issuance of 40 RMBS between 2006 and 2007.

See Compl., ECF No. 1.

The government is, among other things, in the process of re-underwriting samples of the loan files backing the 40 RMBS to provide expert testimony at trial.

This testimony would be relevant to the objective falsity of Defendants’ representations to investors that the loans securitized were underwritten in compliance with underwriting guidelines.

See id. ¶¶ 120-30.

This testimony would also rebut Defendants’ assertions that there were no misrepresentations.3

State Law Must Yield to Federal Law:

PHH has determined that approximately 300 loan files requested by the government are subject to state law borrower notice and consent requirements.

Federal law, the RFPA, authorizes the government to obtain these files without notifying or obtaining the consent of any borrowers and therefore any state law requirement preventing the production of these files must yield to an RFPA-compliant subpoena under the Supremacy Clause.

ee Hines v. Davidowitz, 312 U.S. 52, 66-67 (1941) (“[S]tates cannot, inconsistently with the purpose of Congress, conflict or interfere with, curtail or complement, the federal law, or enforce additional or auxiliary regulations.”);

Oneok, Inc. v. Learjet, Inc., 575 U.S. 373, 377 (2015) (Conflict preemption arises “where the state law stands as an obstacle to the

³ Forensic re-underwriting reviews of many of Defendants’ RMBS ha ve already been completed in other private litigation and have revealed as much as three-quarters of the loans backing these deals did not comply with underwriting guidelines in contravention to what UBS told investors. See, e.g., Fed. Hous. Fin. Agency v. UBS Americas, Inc., et al., 858 F. Supp. 2d 306, 332 (S.D.N.Y. 2012) (“FHFA’s forensic review of individual loan files, which found, for example, that out of 996 randomly selected loans included in the … securitizations, approximately 78% were not underwritten in accord with the applicable underwriting guidelines.”).

accomplishment and execution of the full purposes and objectives of Congress.” (citation and internal quotation marks omitted).

Under the RFPA, a financial institution may not “provide to any Government authority access to or copies of, or the information contained in, the financial records of any customer” unless certain procedures are followed or certain exceptions under the statute apply. 12 U.S.C. § 3403(a).

Generally, unless an exception applies, the RFPA prohibits any federal entity from obtaining access to financial records unless the customer consents or, in certain circumstances, notice is given to the borrower.

See 12 U.S.C. § 3402.

In passing the RFPA, Congress sought “to strike a balance between customers’ right of privacy and the need of law enforcement agencies to obtain financial records pursuant to legitimate investigations.”

Young v. U.S. Dep’t of Justice, No. 87-CV-8307, 1988 WL 131302, at *2 (S.D.N.Y. Nov. 28, 1988).

Section 3413(h)(1)(A) of the RFPA is an exception to the RFPA that permits the Government to subpoena customer records and information from a financial institution without notice or consent.

12 U.S.C. §3413(h)(1)(A).

This section authorizes the production of the files at issue.

See id.

It specifically authorizes the United States, as it seeks to do here, to obtain financial records “in connection with a lawful proceeding, investigation, examination, or inspection directed at a financial institution . . . or at a legal entity which is not a customer” without notice to or consent of customers. Id.

When obtaining documents pursuant to Section 3413(h), the government is required to provide a certificate “[certifying] in writing to the financial institution that it has complied with the applicable provisions of this chapter.”

See id. §§ 3403(b), 3413(h)(2).

The government has provided such a certificate to PHH.

Schedule D, Exhibit 2 at 43.

Notably, Section 3417(c) of the RFPA provides that financial institutions disclosing financial records in good-faith reliance upon this certificate “shall not be liable to the customer” under any state law.

Id. § 3417(c).

As such, federal law explicitly authorizes the United States to obtain the loan files at issue without notice to or consent from the borrowers.4

Federal courts, including the Second Circuit, have repeatedly held that state privacy laws requiring consent from non-parties (or notice to non-parties) must give way to federal laws, like the RFPA, that authorize the government to obtain information without such requirements.

Controlling authority in the Second Circuit has specifically held that a Connecticut borrower notice law is preempted where a federal statute authorized the IRS to obtain financial records without such notice.

First Bank, 737 F.2d at 272-74; see also In re Grand Jury Subpoena (Conn. Sav. Bank), 481 F. Supp. 833, 834-35 (D. Conn.1979) (Connecticut law requiring notice must yield to federal law); United States v. Wilson, 571 F. Supp. 1417, 1421 n.11 (S.D.N.Y. 1983) (“[A]ssuming

4 The RFPA is consistent with the Gramm-Leach-Bliley Act, 15 U.S.C. §§ 6801–6809 (“GLBA”), which applies to financial institutions and governs how such entities deal with the private information of individuals. The GLBA permits financial institutions to disclose borrower information without notification “to comply with a properly authorized civil, criminal, or regulatory investigation or subpoena or summons by Federal, State, or local authorities .

. . .” 15 U.S.C. § 6802(e)(8); see also Barkley v. Olympia Mortg. Co., No. 04-CV-875, 2007 WL 656250, at *20 (E.D.N.Y. Feb. 27, 2007) (noting exception and finding protective order “sufficient to protect the identities of . . . customers”).

[a] state statute would be construed to bar disclosure in the face of compliance with the RFPA, a federal court, confronted with such a conflict, is obliged to ignore the state-created barrier.”).5

The Application of State Law in Contravention of Federal Law Will Impede Discovery of Relevant Information:

PHH has informed the government that adherence to state privacy laws is likely to preclude PHH from producing loan files important to the government’s case.

PHH has determined that a substantial portion of the remaining requested loan files in its possession require express borrower authorization under state law prior to their disclosure, which may never be obtained.6

Accordingly, the United States, with the consent of non-party PHH, respectfully requests the entry of the attached proposed order to facilitate the production of certain loan files.

Respectfully submitted,

SETH D. DUCHARME                                             KURT R. ERSKINE
Acting United States Attorney                                   Acting United States Attorney
Eastern District of New York                                     Northern District of Georgia

/s/                                                                                 /s/                                            

BONNI J. PERLIN                                                    ARMEN ADZHEMYAN

MICHAEL J. CASTIGLIONE                                   AUSTIN M. HALL

RICHARD K. HAYES                                              Richard B. Russell Federal Building
EDWARD K. NEWMAN                                        75 Ted Turner Dr. SW, Suite 600
Assistant United States Attorneys                              Atlanta, GA 30303-3309
271A Cadman Plaza East                                           (404) 581-6000
Brooklyn, NY 11201-1820
(718) 254-7000

cc: All counsel of record (via ECF); Counsel for PHH (via email)

⁵ See also United States on Behalf of Agency for Int’l Dev. v. First Nat. Bank of Md., 866 F. Supp. 884, 886- 87 (D. Md. 1994) (Maryland law requiring notice must yield to federal law); S.E.C. v. Pac. Bell, 704 F. Supp. 11, 15- 16 (D.D.C. 1989) (California law requiring consent must yield to federal law).

Beyond the RFPA, courts have also held that Federal Rule 45 preempts any state law limitations on production of documents in a federal case. See Universitas Educ., LLC v. Nova Grp., Inc., 11-CV-1590, 2012 WL 5877420, at *2 (S.D.N.Y. Nov. 21, 2012) (“any limitations imposed by [state law] must yield, pursuant to the Supremacy Clause, to the lawfully issued federal subpoenas”); Spiegel v. Engagetel, No. 15-CV-1809, 2015 WL 8986932, at *5 (N.D. Ill. Dec. 16, 2015) (listing cases holding that “litigants cannot use state statutes or constitutional provisions to skirt the requirements of Rule 45”).

⁶ It is the government’s understanding that PHH is prepared to submit further specific factual information on the burden and impracticality of complying with state law notice and/or consent requirements to the extent the Court finds it necessary.

United States v. UBS Securities LLC

(1:18-cv-06369)

District Court, E.D. New York

NOV 8, 2018 (STATUTE OF LIMITATIONS?)

Re:  United States v. UBS Securities LLC, et al., No. 18-CV-6369 (MKB/PK) Dear Judge Kuo:

RESPONSE in Opposition re 16 MOTION for Discovery filed by United States of America

On November 8, 2018, the United States filed suit against Defendant UBS AG and three of its affiliates (together, “UBS”).¹

We respectfully submit this letter in response to UBS’ motion (“UBS Motion”) for immediate pre-26(f) conference discovery, or, in the alternative, to compel the United States to complete the entire 26(f) process by the week of December 17.

The motion should be denied as UBS has not made any showing of good cause to justify departing from normal discovery procedures.²

The United States is committed to a reasonable discovery planning process and believes that the parties have an obligation to conduct discovery in a manner that is practicable, i.e., according to a plan that takes into consideration relevance, proportionality with respect to the needs of the case, and discovery burdens and costs.

This obligation is all the more compelling in this case given its size and complexity, and the likelihood that discovery will involve non-parties.

Since the filing of the Complaint, the United States has diligently sought to advance the discovery process ahead of an anticipated initial scheduling conference.

The United States has proposed to exchange initial disclosures by February 1 and to meet for an initial 26(f) conference the following week. See UBS Motion, Ex. G.

The United States has also proposed a draft protective order to UBS and has consented to UBS’ request for a 90-day time period to respond to the Complaint. Id.

By way of comparison, in an RMBS case filed by the United States in this District of comparable size and scope, United States v. Barclays, the parties did not complete the 26(f) process until almost five months after the complaint was filed. See No. 16-CV-7057, ECF

¹ The Complaint (ECF 1) asserts claims under the Financial Institutions Reform, Recovery, and Enforcement Act, Pub. L. No. 101-73, 103 Stat. 498, tit. IX, § 951, codified as amended at 12 U.S.C. § 1833a (“FIRREA”). It seeks civil penalties for predicate offenses of mail fraud, wire fraud, bank fraud, and violations of 18 U.S.C. §§ 1005 and 1014. The claims arise out of UBS’ underwriting and sale of residential mortgage-backed securities (“RMBS”) issued between 2006 and 2007 as part of 40 securitizations (the “Subject Deals”) collectively comprising over $41 billion of mortgage loans.

² “Expedited discovery is not the norm,” Merrill Lynch, Pierce, Fenner & Smith, Inc. v. O’Connor, 194

F.R.D. 618, 623 (N.D. Ill. 2000); accord St. Louis Grp., Inc. v. Metals & Additives Corp., Inc., 275 F.R.D. 236, 242 (S.D. Tex. 2011) (if expedited discovery was the norm instead of the exception, “there would be no substantive purpose for Federal Rule 26(d)(1).”)

49. Nor did any party seek expedited discovery in that case. Nor were any non-party subpoenas issued until after the initial conference. See No. 16-CV-7057, ECF 49-1 at 2.

UBS Has Shown No Cause for Unplanned Immediate and Sweeping Discovery:

UBS has rejected the United States’ approach and has instead proposed to commence precipitous and sweeping discovery not framed by any articulated claim or defense in this case.³

Specifically, UBS seeks the “immediate production of all documents the Department of Justice (‘DOJ’) obtained in investigations relating to residential mortgage-backed securities,” irrespective of whether they relate to UBS.

See UBS Motion, Ex A.

UBS has also proposed immediate subpoenas to an as yet undisclosed, though apparently very large, number of non-parties, including investors who were victimized by UBS.⁴

These requests would likely encompass many millions of pages of documents the United States received from non-parties in investigations into other banks issuing RMBS without any regard to whether the documents have anything to do with UBS.

This could well lead to extensive motion practice,⁵ despite there being no scheduling order in place and no discovery plan even proposed to the Court, much less so-ordered.

Concerned about the potentially limitless scope and unwieldy nature in which such discovery could unfold, including its effect on non-parties, the United States requested a phone conference on November 16 to discuss the matter with UBS.⁶

During the call, and since then, UBS refused to discuss the reasons it is seeking such discovery and has informed the United States that it would only discuss the scope of discovery after service.

See UBS Motion, Ex. B at 3 (“the purpose of UBS’s proposal, as we explained several times during our call, is to commence discovery, not to negotiate the scope of discovery, which necessarily will follow service of the discovery requests.”).

The United States believes this approach to discovery is unjustified and will only defeat development of a reasonable discovery plan.

UBS asserts that there is something unfair in routine discovery management one-month into this case and tries to paint a picture that it is at a disadvantage because the United States investigated the matter before filing the Complaint.

But UBS has, in its possession, all of the documents it produced to the United States during the investigation, and UBS attended every single investigative interview of its current and former employees.

The United States also provided UBS with certain non-party documents in the context of settlement discussions.

Additionally, UBS was sued by many of the investors who were victimized by the Subject Deals and has obtained

³ To date, UBS has not filed a responsive pleading, which will make resolving any discovery disputes more difficult, particularly given the broad scope of demanded discovery. In Barclays, after the initial conference, the Court, in order to assist in “resolving any potential discovery disputes,” ordered each defendant to file an answer despite there being a motion to dismiss pending. See No. 16-CV-7057, ECF 56.

⁴ See UBS Motion, Ex. A (“UBS expects to serve subpoenas on numerous third-parties); Ex. B (“There is no requirement that UBS preview its non-party subpoenas for the USAOs. Because of the massive scope of the USAOs’ Complaint, non-party discovery in this case necessarily will be very broad.”).

⁵ UBS states that it will notify non-parties that it will not seek to “enforce” its subpoenas right away to try to put off the foreseeable motion practice. But Federal Rule of Civil Procedure 45 requires timely objections and motions to quash, such that non-parties will be forced to take action to protect their rights in the event early subpoenas are issued. UBS clearly anticipates seeking Court orders to “enforce” its subpoenas.

⁶ This call, initiated by the United States, is the only telephonic/in-person interaction the parties have had since the case was filed. UBS did not otherwise call the United States to discuss any issues at all prior to notifying the United States of its intention to file this motion.

discovery from them, including deposition testimony of investors.⁷

UBS has had years to study its own documents and evaluate witness testimony and does not need expedited discovery to understand whether it engaged in the conduct set forth in the Complaint.

Indeed, UBS issued a press release before the Complaint was even filed announcing that it “has been fully prepared for some time to defend itself in court.”⁸

There is no unfairness in asking UBS to commit to sober planning in this case to ensure that discovery is orderly and susceptible to management by the parties and Court.

UBS’ Spoliation Argument Is Based on Speculation:

UBS argues that discovery must commence immediately to prevent spoliation of evidence.

See UBS Motion at 2-3. In “determining whether to allow expedited discovery . . . courts in this circuit have variously applied either the four-part test derived from Notaro v. Koch, 95 F.R.D. 403, 405 (S.D.N.Y. 1982)—the elements of which track the standard for granting a preliminary injunction—or the more ‘flexible standard of reasonableness and good cause,’ Ayyash v. Bank Al-Madina, 233 F.R.D. 325, 327 (S.D.N.Y. 2005).” New York v. Griepp, No. 17-cv-3706, 2017 WL 3129764, at *1 (E.D.N.Y. July 20, 2017).

UBS has met neither standard.

It offers nothing but speculation that unidentified non-parties will discard unidentified documents at some point in the future citing unidentified document destruction policies and unidentified litigation “winding down.”

The only concrete example cited by UBS actually demonstrates that there is in fact no support for its claim.

UBS mentions the wind down of United States v. Barclays as raising the specter of spoliation.

Yet, in that matter, the United States has expressly informed the Court that it is preserving the documents in Barclays due to UBS’ demands in this case.

See No. 16-CV-7057, ECF 141.

UBS can make no showing of “good cause” to justify pre-26(f) discovery by citing any actual, as opposed to theoretical, concerns about spoliation.⁹

UBS’ Request to Compel Completion of the 26(f) Process This Week Should be Denied:

UBS alternatively asks the Court to order that the 26(f) process be completed the week of December 17 so that UBS can begin immediately serving discovery thereafter.

As borne out by the course of proceedings in Barclays, done properly, the Rule 26(f) process will be multifaceted and time consuming.

By proposing that the parties exchange initial disclosures ahead of the conference by February 1, the United States has hoped to set the table for meaningful discussions that will lead to a realistic proposed joint discovery plan.

As of now, UBS does not appear to agree to such a process.

Instead, UBS unrealistically seeks immediate discovery concerning matters that have nothing to do with this case, specifically settled cases that do not concern the 40 RMBS at issue here but rather purportedly “similar investigations” involving other banks and other RMBS.

With respect to UBS’ appendix of demands, the United States suggests that the parties discuss these and other demands for information during the 26(f) process.

⁷ See, e.g., FHFA v. UBS¸ 11-cv-5201 (S.D.N.Y.), NCUA v. UBS, No. 13-cv-6731 (S.D.N.Y.).

⁸ See     https://www.ubs.com/global/en/ubs-news/r-news-display-ndp/en-20181108-ubs-anticipates-united- states-department-of-justice-will-file-ci.html.

⁹ Indeed, all litigation involves events that happened at some point in the past. If vague and non-specific concerns about spoliation in relation to past events could justify expedited discovery, every litigant would be entitled to it.

We appreciate the Court’s time and attention to this matter.

Respectfully submitted, RICHARD P. DONOGHUE

United States Attorney Eastern District of New York

By:      /s/                                             BONNI J. PERLIN

Michael J. Castiglione
Richard K. Hayes
Assistant United States Attorneys
271A Cadman Plaza East
Brooklyn, NY 11201-1820
(718) 254-7000

Byung J. Pak
United States Attorney Northern District of Georgia

By:      /s/                                             ARMEN ADZHEMYAN

Austin M. Hall
Assistant United States Attorneys
Richard B. Russell
Federal Building 75
Ted Turner Dr. SW, Suite 600
Atlanta, GA 30303-3309
(404) 581-6000

cc: All counsel of record (via ECF)