The opinion of the court was delivered by: Karen S. Crawford United States Magistrate Judge
ORDER DENYING MOTION FOR SANCTIONS
Before the Court is a Motion for Sanctions filed by plaintiffs against defendant. [Doc. No. 318.] Plaintiffs allege defendant improperly obtained an attorney-client privileged document, refuses to return it, and intends to use it in support of its pending Summary Judgment Motion. [Doc. No. 325]. Among other things, plaintiffs seek attorney fees and costs and a ruling that the use of the document, allegedly improperly obtained, be precluded in this litigation. Having considered the parties' briefs and attached papers, and based on the following, the Court DENIES plaintiffs' request.
Fidelity National Financial ("FNF"), and its subsidiaries, Chicago Title Insurance Company and Chicago Title Company (collectively "Chicago Title") are the nation's largest title insurance and escrow service providers. [Doc. No. 327-1, (Exh. 1).] They are the plaintiffs in this case, and the insureds of National Union Fire Insurance Company of Pittsburgh ("NU"), the defendant. (Compl. ¶ 2.)
Beginning in December 2005, Chicago Title and certain of its employees were sued by victims of a Ponzi scheme perpetrated by Rollo Richard Norton. (Motion for Sanctions ("Mot.") at 2-3.) Norton was a San Diego area investment advisor who used his clients' money and identities to forge their signatures to close hundreds of fraudulent escrows at Chicago Title. (Id.) FNF thereafter submitted claims to NU under two policies: (1) a $15 million Miscellaneous Professional Liability policy ("E&O Policy") that provided coverage for third party lawsuits; and, (2) a $15 million Financial Institution Bond ("FIB"). (Id.)
NU's E&O claims adjuster and its outside E&O coverage counsel asked FNF for a legal analysis of potential liability of one of the underlying claims, the "Jr. Holdaway claim." (Mot. at 3.) In response, Chicago Title's defense counsel prepared an eight page memorandum ("the Memo"), which discussed the role of FNF's escrow officer, Suzzette Nieto, in Mr. Norton's scheme and stated that FNF's legal department had recommended Ms. Nieto's removal from Mr. Norton's escrow accounts based upon, among other things, "red flags" identified in audits of Ms. Nieto's files. (Opposition ("Opp.") at 4.) Further, the Memo allegedly contained Chicago Title's assessment of potential liability in the underlying claims. (Mot. at 4.) On or about June 27, 2007, the Memo was forwarded by FNF to NU's outside E&O coverage counsel. (Opp. at 4.) Because FNF sought to maintain the attorney-client privilege over the Memo, and presumably over other privileged documents contained in the E&O claim file, FNF labeled the Memo as privileged and asked NU to create a firewall between the investigations of the E&O and the FIB claims.*fn1 (Reply, Exh. 4.) At the time, NU had agreed to defend the lawsuits under a reservation of rights. (Mot. at 2.) Following investigation of the E&O claim, NU agreed to pay $15 million towards the defense of the underlying lawsuits and the settlement of the Holdaway lawsuit. (Opp. at 4-5.)
At the same time as FNF submitted its claim to NU under the E&O policy, it also submitted a notice of a separate claim under the FIB policy, which is the subject of the current action. NU states that despite its requests that FNF provide information and full particulars of its FIB claim, FNF failed to do so, stating that production would prejudice its defense of an underlying claim. (Opp. at 5-6.) On September 15, 2008, FNF filed this lawsuit, alleging that NU breached its agreement with regard to the FIB claim, and acted in bad faith when it refused to cover damages plaintiffs incurred in defending the underlying lawsuits. [Doc. No. 1, Exh. A.] Between October 29, 2009, and August 3, 2010, a litigation stay was instituted in this case to allow for final and complete adjudication of all underlying third-party liability actions in state court. [Doc. Nos. 136 & 146.]
Discovery commenced following the issuance of an order lifting the litigation stay. [Doc. No. 146.] FNF deposed Mike Smith and Anthony Tatulli, senior executives who supervised the E&O claim. (Opp. at 7.) FNF claimed that NU's FIB department had received the same information as the E&O department but had reached contradictory coverage positions on the two claims, which FNF contended reflected NU's "bad faith." (Id.)
On July 15, 2011, NU served its expert's report on FNF. (Opp. at 8.) The report specifically quoted from the Memo, which as stated, was produced by FNF upon request by NU during the claim process to support the E&O claim. (Id.) On February 1, 2012, over six months later, FNF objected to the use of the Memo on the basis that the document was privileged. (Id.) FNF contends that the Memo was obtained improperly from the E&O files, outside the normal course of discovery in this case. FNF thereafter filed the current Motion for Sanctions.
The issue before the Court is whether sanctions should be imposed against NU for improperly obtaining the Memo from NU's E&O department files, knowing that plaintiffs considered it to be protected by attorney-client privilege, and using it in the current litigation ...