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California Earthquake Authority v. Metropolitan West Securities

December 19, 2012


The opinion of the court was delivered by: Gregory G. Hollows United States Magistrate Judge


Before the undersigned is defendant Metropolitan West Securities, LLC's ("MetWest") motion to compel the production of documents from non-party witness the California State Treasurer's office ("STO"). Dkt. 97. The undersigned heard argument in this matter on November 8, 2012 . At hearing, and by order issued November 21, 2012, STO was directed to file a motion supporting its assertion of privilege over certain withheld documents and to further explain its production process for each of defendant's requests for which it has produced responsive documents. Dkt. 108. The discovery deadline in this case was December 3, 2012. Thus, the undersigned issues the following order subject to an extension of discovery as permitted by the District Judge and limited to the sole purpose of complying with this order.

Having considered the briefs and declarations submitted by both parties, the undersigned issues the following order.


This discovery dispute arises from litigation between CEA and defendants MetWest and Wells Fargo Bank, N.A. ("MetWest"), seeking recovery of the majority of MetWest's approximately $62 million investment of CEA funds into Mainsail, a structured investment vehicle holding residential mortgage-backed securities.*fn1 Shortly after the August 2007 purchase of the Mainsail investment, the fund encountered severe liquidity issues which resulted in its assets being frozen. More than a year later, after Mainsail went into a receivership and underwent a restructuring process, CEA recovered some of its principle investment but ultimately lost over $47 million of its original purchase.

STO was a member of plaintiff CEA's Governing Board ("the Board") since its inception.*fn2 The Board, in turn, approved CEA's Investment Guidelines and oversaw its investment practices and procedures, participated in compliance oversight, and supervised its financial performance. Dkt. 97 at 2. Further, STO presided over the Pooled Money Investment Board ("PMIB") which issued the list of commercial paper investments that CEA claims MetWest should have relied on. Id. In short, STO, through its Board representative, was involved in governing CEA and, according to defendant Met West, was in regular contact with CEA concerning its investments, audits and oversight of MetWest and of the Mainsail transaction at issue in this litigation. Consequently, Met West believes STO possesses highly relevant documents, including emails, memoranda, and audit materials, among other things, that are discoverable evidence.

MetWest served a third-party subpoena on STO on September 11, 2012, requesting all documents and correspondence arising from STO's role in CEA's investment activity. Dkt. 98 at 2. STO objected to the subpoena on general and specific grounds but nonetheless claims to have produced all documents in its possession that are responsive to the subpoena and not subject to a claim of privilege. Dkt. 101 at 4. MetWest filed a motion to compel on October 21, 2012, bringing this dispute before the undersigned. At the November 8, 2012 hearing, the court discerned two specific issues requiring further explication by the parties before a final order could issue: (1) the basis for STO's assertion of a "deliberative process privilege"; and (2) the process by which STO identified, collected, searched and produced documents responsive to MetWest's subpoena.

On November 21, 2012, STO filed its brief explaining the basis for withholding documents under the deliberative process privilege along with a declaration addressing the sufficiency of its production. Dkts. 111, 112. MetWest filed its reply on November 28, 2012. Dkt. 113. A Further Supplemental Declaration was filed by STO on November 30, 2012 which set forth, in more detail, the search it undertook in responding to the MetWest subpoena. Dkt. 114.

The court will now address each of these issues in turn. DISCUSSION

Privilege Claims

In a production chart created by STO and sent to defendants on October 22, 2012, STO lists 13 documents over which it claims a "deliberative process" privilege. See Dkt. 101-6 at 19-21. The documents are described generally as internal briefing memos, internal staff reports, internal notes, and draft documents, with more specific descriptions of the topics covered in the documents. In its brief and the accompanying declaration, STO describes the withheld documents as falling into four categories: pre and post- meeting briefing memos, briefing memos regarding on-going issues involving the CEA board; and notes prepared by the memo author in advance of finalizing a briefing memo. Dkt. 111 at 2; 112 at 2-3. STO claims that all of these documents are subject to the deliberative process privilege because releasing them to the public "would render it impossible for the STO to maintain an internal, confidential written record of its anlaysis, thoughts, and recommendations on matters that come before the CEA board." Dkt. 111 at 4. MetWest counters that STO has not met its burden of establishing that the privilege applies to these documents. Dkt. 113 at 3.

Before turning to the merits of the privilege claim, the court must decide which law to apply to the substantive privilege issue before it. MetWest applies the federal common law governing the deliberative process privilege while STO looks to California state law.

See Dkts. 113, 111. A federal court sitting in diversity will apply the state law of the forum in which it sits to substantive issues of privilege. See Fed. R. Evid. 501, Star Editorial, Inc. V. U.S. Dist. Court for the Central Dist. Of California, 7 F.3d 856, 859 (9th Cir. 1993), Theme Promotions, Inc. v. News America Marketing FSI, 546 F.3d 991, 1007 (9th Cir. 2008). Thus, in this diversity action, the substance of the deliberative process privilege will be governed by California state law. Pagano v. Oroville Hospital, 145 F.R.D. 683, 687 (E.D.Cal. 1993);*fn3 see also First Pacific Networks, Inc. v. Atlantic Mutual Ins. Co., 163 F.R.D. 574, 576 (N.D. Cal. 1995), Bank of the West v. Valley Nat'l Bank of Ariz., 132 F.R.D. 250, 251 (N.D. Cal. 1990).

There is little state law precedent relating to the deliberative process privilege and the boundaries of the privilege are not well drawn. Nonetheless, the seminal case which established the privilege sets forth the principles governing its application and provides sufficient ...

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