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FDIC Won’t Face Sanction in Failed Bank Discovery

(CN) - A federal judge refused to sanction the FDIC for delaying discovery in a lawsuit against eight former directors who allegedly caused the collapse of a Florida bank.

The Panama City-based Peoples First Community Bank failed in December 2009, and shut down by the Office of Thrift Supervision.

After the Federal Deposit Insurance Corporation took over as receiver, it sued eight former directors, including now-Panama City Mayor Greg Brudnicki, alleging they had cost the bank more than $40 million by engaging in risky lending and underwriting.

The FDIC's initial complaint described 11 real estate loans that the directors had approved in violation of bank and regulatory policies.

It filed an amended complaint after U.S. District Judge Richard Smoak refused to dismiss the gross negligence claims against the directors, but ruled they were exempt from personal liability under state law.

After the defendants asked the FDIC to produce thousands of documents related to the 11 transactions, which included bank customers' and borrowers' private information, the FDIC asked for a confidentiality and nondisclosure order to protect personal and regulatory information. It claimed that, in the absence of such an order, it would waste time and resources by reviewing each document line-by-line to identify sensitive information that merited redaction.

The FDIC said it would produce 61,000 relevant documents in a first phase of discovery once the order was issued.

But the defendants challenged the proposed "blanket confidentiality," arguing that most of the loans had already been through public foreclosure actions, making the related information available to the public.

They also claimed the order would harm their ability to interview witnesses, who would have to sign confidentiality agreements, and burden the court.

What's more, the ex-officers said there is no longer a need to conceal examination and regulation information because the bank ceased to operate in December 2009.

U.S. Magistrate Judge Gary Jones ruled last week, however, that it would complicate document production and "invite abuse" if he heeded the defendants' suggestion to maintain confidentiality through an objection-and-motion provision.

Noting that the burden of document production will fall mostly on the FDIC, the judge approved a modified protective order designed to avoid unnecessary expense and time.

Jones refused to sanction the FDIC for delaying the first batch of discovery, finding that it was right to wait for a protective order and an agreement regarding the production of electronically-stored information.

The FDIC's proposed protocol involves uploading information to a database and giving the defendants private access to it, making it possible for them to search, identify and request any documents. The FDIC wants to charge 6 cents per page produced and $225 per gigabyte of data uploaded to the database, according to the June 14 order.

Jones shot down the objection from the ex-directors to the proposed protocol, which they labeled as "an inappropriate cost shifting and responsibility shifting scheme."

Finding the protocol appropriate and reasonable, Jones noted that the FDIC has already spent more than $600,000 identifying, collecting and storing all of the information on the database.

The costs the defendants will have to pay are relatively small, and most of the documents on the database are less relevant to the transactions at issue, according to the order.

Jones ruled that the FDIC must produce post-receivership documents relating to the 11 loans, which may have a bearing on the claims against the ex-directors. It does not, however, have to produce regulatory reviews outside of Peoples Bank's files.

The FDIC does not have to group and categorize the documents in response to each individual request from the defense, according to the ruling.

Jones gave the FDIC 10 days to come up with the first batch, and said all documents must be produced by Oct. 31.

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