Opinion
Civil Action 19 Civ. 9193 (PGG) (SLC)
05-25-2023
MONTEREY BAY MILITARY HOUSING, LLC, MONTEREY BAY LAND, LLC, MEADE COMMUNITIES LLC, FORT BLISS/WHITE SANDS MISSILE RANGE HOUSING LP, RILEY COMMUNITIES LLC, FORT LEAVENWORTH FRONTIER HERITAGE COMMUNITIES, I, LLC, FORT LEAVENWORTH FRONTIER HERITAGE COMMUNITIES, II, LLC, CARLISLE/PICATINNY FAMILY HOUSING LP, BRAGG COMMUNITIES LLC, FORT DETRICK/WALTER REED ARMY MEDICAL CENTER LLC, PICERNE-FORT POLK FUNDING, LLC, RUCKER COMMUNITIES, LLC, STEWART HUNTER HOUSING LLC, SILL HOUSING, LLC, AETC HOUSING LP, AMC WEST HOUSING LP, LACKLAND FAMILY HOUSING, LLC, and VANDENBERG HOUSING LP, Plaintiffs, v. AMBAC ASSURANCE CORPORATION, JEFFERIES MORTGAGE FINANCE, INC., JEFFERIES & COMPANY INC., JEFFERIES L.L.C., JEFFERIES GROUP LLC, DANNY RAY, and CHETAN MARFATIA, Defendants.
OPINION AND ORDER
SARAH L. CAVE, UNITED STATES MAGISTRATE JUDGE.
I. INTRODUCTION
Before the Court is Jefferies'letter-motion seeking to reopen the deposition of non-party witness Mark Connor (“Mr. Connor”), an attorney and former Lieutenant Colonel in the United States Army (the “Army”) Office of General Counsel. (ECF Nos. 669 at 1 (the “Motion”); 684-1 at 12). Jefferies contends that, during Mr. Connor's April 24, 2023 deposition (the “Deposition”), the Army's counsel, Major Patrick Doyle (“Major Doyle”), improperly instructed Mr. Connor not to answer certain questions as outside the authorized scope of the Deposition. (ECF No. 669 at 1, 3). The Army, represented by the Office of the United States Attorney for the Southern District of New York, opposes the Motion. (ECF No. 675). For the reasons set forth below, the Motion is DENIED.
Jefferies Mortgage Finance, Inc.; Jefferies & Company Inc.; Jefferies L.L.C.; and Jefferies Group LLC. (ECF No. 669 at 1 n.1). The other Defendants in this action are Ambac Assurance Corporation (“Ambac”), Danny Ray (“Mr. Ray”), and Chetan Marfatia (“Mr. Marfatia”). (ECF No. 210-3).
The publicly-filed version of the Motion appears at ECF No. 670.
II. BACKGROUND
A. Factual Background
1. Prior Monterey Decisions
The factual background of this action is set out in detail in prior decisions issued by the Honorable Paul G. Gardephe and the undersigned. See Monterey Bay Mil. Hous., LLC v. Ambac Assurance Corp., No. 19 Civ. 9193 (PGG) (SLC), 2023 WL 315072 (S.D.N.Y. Jan. 19, 2023) (“Monterey Bay III”); Monterey Bay Mil. Hous., LLC v. Ambac Assurance Corp., No. 19 Civ. 9193 (PGG) (SLC), 2021 WL 4173929 (S.D.N.Y. Sept. 14, 2021) (“Monterey Bay II”); Monterey Bay Mil. Hous., LLC v. Ambac Assurance Corp., 531 F.Supp.3d 673 (S.D.N.Y. 2021) (“Monterey Bay I”).The Court incorporates those factual summaries and all defined terms.
Internal citations and quotation marks are omitted from case citations unless otherwise indicated.
2. The Army's Role
As is relevant to the Motion, the Military Housing Privatization Initiative of 1996 (“MHPI”) authorized the United States Department of Defense, including the Army, “to enter into agreements with private developers to modernize housing for military families on bases around the country.” (ECF No. 210-3 ¶ 1). Plaintiffs are the MHPI project entities dedicated to individual military bases (the “Projects”). (Id.) With respect to Army MHPI Projects, the Army partnered with a private developer, which managed the Projects. (Id. ¶ 2). For each Army MHPI Project, the Army contributed housing and equity in exchange for a “significant equity participation[,]” and possessed “consent rights to major decisions regarding the Projects, including the terms of the initial financing at issue and whether to pursue litigation such as” this action. (Id.) The Army is not, however, a party to this action. (See generally id.)
Plaintiffs are Monterey Bay Military Housing, LLC, Monterey Bay Land, LLC, Meade Communities LLC, Fort Bliss/White Sands Missile Range Housing LP, Riley Communities LLC, Fort Leavenworth Frontier Heritage Communities, I, LLC, Fort Leavenworth Frontier Heritage Communities, II, LLC, Carlisle/Picatinny Family Housing LP, Bragg Communities LLC, Fort Detrick/Walter Reed Army Medical Center LLC, Picerne-Fort Polk Funding, LLC, Rucker Communities, LLC, Stewart Hunter Housing LLC, Sill Housing, LLC, AETC Housing LP, AMC West Housing LP, Lackland Family Housing, LLC, and Vandenberg Housing LP.
3. Mr. Connor
In July 1999, Mr. Connor joined the Army's Office of General Counsel. (ECF No. 684-1 at 12). In 2000, after the attorney working on the MHPI Projects was transferred to another assignment, Mr. Connor stepped into the role of providing advice concerning with which developers the Army would partner. (Id. at 13). Mr. Connor first met Mr. Ray, who was then employed by GMAC,in connection with the Fort Meade Project in 2002 or 2003. (ECF No. 684-1 at 43, 72-73; see ECF No. 210-3 ¶ 4). Mr. Connor described Mr. Ray as having “act[ed] like” a “financial advisor” to the Projects, although he could not recall any written communication describing Mr. Ray as a “financial advisor.” (ECF No. 684-1 at 62, 69, 70-71).
Jefferies Mortgage Finance, Inc. purchased, in a bankruptcy proceeding involving GMAC's successor, Capmark, the servicing assets for Mr. Ray's military housing business, and Jefferies & Company Inc. then hired Mr. Ray and his team. Monterey Bay III, 2023 WL 315072, at *2.
On January 4, 2016, Mr. Connor sent an email to attorneys at Kirkland & Ellis LLP (“K&E”), former counsel to Plaintiffs in this action, concerning the Army's position as to motions to dismiss in the DSRF Litigation. (ECF No. 669-2 at 25 (the “Jan. 4 Email”); see ECF No. 693 at 22 (Jefferies' counsel acknowledging that the motions were “in the DSRF litigation.”)). The Court has reviewed in camera the Jan. 4 Email, which Plaintiffs have withheld as privileged, and observes that it does not reference Jefferies, either explicitly or implicitly.
The DSRF Litigation were actions that Ambac initiated against the MHPI Projects in which Ambac asserted “a requirement to cash fund collectively over $200 million in debt service reserve accounts”-the Debt Service Reserve Fund (“DSRF”)-which were funds that would act as a “buffer to Ambac's insurance in the event of Project default.” (ECF No. 210-3 ¶ 32 n.2). See Monterey Bay III, 2023 WL 315072, at *2 n.6.
No later than March 2022, Defendants had received Plaintiffs' privilege log, which Plaintiffs revised several times thereafter. (ECF Nos. 445 at 2 (referring to receipt of “Plaintiffs' Supplemental Privilege Log” on March 23, 2022); 518 at 1; 525 at 15-16). See Monterey Bay III, 2023 WL 315072, at *5 (referring to rounds of revisions of Plaintiffs' privilege logs).
During early February 2016, Mr. Connor was copied on correspondence, which Plaintiffs have withheld as privileged and some of which do mention Jefferies, concerning discovery in the DSRF Litigation. (See ECF No. 669-2 35-37 (the “Feb. 2016 Emails”)). On February 12, 2016, Mr. Connor called Mr. Ray, who was then represented by Jefferies' in-house counsel, and they spoke for approximately 40 minutes (the “Feb. 12 Call”). (ECF Nos. 669-3 at 2; 684-1 at 102; 688-1 at 2). Approximately 20 minutes later, Mr. Connor sent the following email to Mr. Ray:
Lead K&E Counsel for the Projects in the AMBAC litigation are Donna Welch and Jeff Willian.... I will alert them to expect a call from Jefferies' Counsel to discuss your availability for an interview.(ECF No. 669-3 (the “Feb. 12 Email”)). Mr. Ray informed Jefferies' counsel of the Feb. 12 Call. (ECF No. 693 at 18). Mr. Ray, accompanied by Jefferies' counsel, subsequently attended an “interview” with K&E (the “Interview”), which Jefferies' counsel “stopped” after 30-45 minutes. (Id. at 19). At some point after the Interview, Jefferies and Mr. Ray received subpoenas in the DSRF Action. (ECF No. 210-3 ¶ 32). Jefferies and Mr. Ray contend that Mr. Connor's call to Mr. Ray was improper and had Mr. Ray “known that they were planning a civil RICO action against him . . . he would have hung up the phone on Mr. Connor, and he never would have gone to that interview.” (ECF No. 693 at 20-21). The voluminous discovery in this action does not reveal any further information about what Mr. Connor and Mr. Ray discussed during the Feb. 12 Call. (Id. at 11).
B. Procedural Background
United States ex rel. Touhy v. Ragen, 340 U.S. 462 (1951). (See § III.A, infra).
On November 10, 2022, Mr. Ray served on Mr. Connor a subpoena to testify at a deposition on December 20, 2022. (ECF No. 682-1 (the “Subpoena”)). The Subpoena did not specify on which topics Mr. Connor was being asked to testify. (Id.) On November 21, 2022, Major Doyle responded to the Subpoena, stating:
Your request is denied because the timeline is unreasonable, your request does not comply with federal regulations, and Mr. Connor's testimony would likely be prohibited by attorney-client privilege. Accordingly, the Army requests that you withdraw your [S]ubpoena and submit a proper Touhy request for Mr. Connor's testimony.(ECF No. 682-2 at 1). On December 2, 2022, Mr. Ray submitted a request for Mr. Connor to participate in a deposition (the “Army Touhy Request”), proposing five topics:
1. Mr. Connor's role, responsibilities, actions, and endeavors with respect to providing commercial and business advice to the Army or Developers related to MHPI Projects, or negotiating loan-transaction terms for MHPI Projects.
2. Mr. Connor's knowledge of the military's process for selecting and approving development and financing aspects of MHPI Projects generally, and the Plaintiff MHPI
Projects specifically, including the selection and approval of debt providers and related financing terms.
3. Mr. Connor's knowledge of negotiations with Defendants GMAC, Jefferies, Ambac and their counsel regarding financing transactions for MHPI Projects.
4. Mr. Connor's knowledge regarding the roles and responsibilities of Jones Lang LaSalle and any other advisor or consultant to the Army for MHPI Projects.
5. Mr. Connor's knowledge regarding the roles and responsibilities of Defendants with respect to the Army Plaintiff MHPI Projects.(ECF No. 669-4 at 2 (the “Topics”)). On December 19, 2022, Major Doyle notified Mr. Ray that the Army Touhy Request had been approved, and authorized Mr. Connor to testify regarding the Topics “to the extent of his personal knowledge, but he may not purport to testify on behalf of the Department of the Army, or announce what is or was the policy position of the Department of the Army on any issue within the Army's jurisdiction.” (ECF No. 669-4 at 2). Major Doyle added that because “Mr. Connor is an attorney employed by the Army's Office of General Counsel[,] any question with an answer that invokes the attorney-client privilege will be objectionable.” (Id. at 3).
Jefferies has not made its own Touhy request to the Army but has served a Touhy request on the United States Department of the Air Force (the “Air Force”), seeking testimony concerning, inter alia, Defendants' “alleged wrongful acts,” GMAC's and Mr. Ray's role with respect to Air Force MHPI Projects, and preservation of relevant documents. (ECF No. 675-2 (the “Air Force Touhy Request”)).
2. Mr. Connor's Deposition
Mr. Connor's Deposition occurred on April 24, 2023. (ECF No. 684-1). Following questioning by counsel for Ambac and Mr. Ray, Jefferies' counsel also questioned Mr. Connor. (ECF No. 684-1 at 101). Mr. Connor did not remember the Feb. 12 Call but acknowledged that Jefferies was represented by counsel at that time. (ECF No. 684-1 at 101-02). When Jefferies' counsel asked whether Mr. Ray had “reach[ed] out to” Mr. Connor, Major Doyle instructed Mr. Connor not to answer on the ground that the question was outside the Topics. (ECF No. 684-1 at 103). Major Doyle similarly instructed Mr. Connor as to a series of related questions from Jefferies' counsel concerning whether Mr. Connor knew on February 12, 2016 that the Plaintiffs were contemplating filing an action against Jefferies and Mr. Ray. (ECF No. 684-1 at 103-04). Mr. Connor complied with Major Doyle's instructions and did not answer. (Id.)
3. The Motion
On April 27, 2023, Jefferies filed the Motion. (ECF No. 669). Jefferies seeks an order reopening Mr. Connor's Deposition and compelling him to answer the questions Major Doyle instructed him not to answer, including questions “regarding his obligations to preserve documents, the Army's commercial decision to authorize the filing of this lawsuit, and his discussions with Mr. Ray and/or non-privileged discussions concerning Mr. Ray and/or the Jefferies Entities.” (ECF No. 669 at 3 (the “Jefferies Topics”)). On May 2, 2023, the Army opposed the Motion, asserting that the Jefferies Topics were outside the Topics about which the Army had authorized Mr. Connor to testify, and therefore, Major Doyle properly instructed Mr. Connor not to answer. (ECF No. 675 at 2-3).
At the Court's request, the parties submitted additional exhibits and Mr. Ray filed a letter in support of the Motion attaching his phone records from February 2016. (ECF Nos. 681; 682; 682-1; 682-2; 684; 684-1; 688). Following a conference with the parties on May 12, 2023, the Court instructed Plaintiffs' counsel to submit for in camera review the Jan. 4 Email and Feb. 2016 Emails. (ECF Nos. 681; 692; 693).
The Court deemed fact discovery closed as of April 28, 2023, although some minor issues, including Mr. Connor's Deposition, remain pending. (ECF Nos. 635; 646; 674; 695).
III. DISCUSSION
A. Legal Standards
Pursuant to the federal “Housekeeping Statute,” 5 U.S.C. § 301, federal agencies may adopt procedures-referred to as “Touhy regulations” after the Supreme Court's decision-“for responding to subpoenas and other requests for testimony or documents.” United States ex rel. Pogue v. Diabetes Treatment Ctrs. of Am., Inc., 474 F.Supp.2d 75, 79 (D.D.C. 2007); accord Koopmann v. U.S. Dep't of Transp., 335 F.Supp.3d 556, 558 (S.D.N.Y. 2018). The Army's Touhy regulations, 32 C.F.R. §§ 97, et seq. (the “Regulations”), apply “[i]n response to a litigation request or demand,” 32 C.F.R. § 97.7(a), which “must describe, in writing and with specificity, the nature of the official information or witness testimony sought, its relevance to the litigation, and other pertinent details addressing the factors in § 97.8” 32 C.F.R. § 97.9(a). Those factors include whether the request: (a) “is overbroad, unduly burdensome, or otherwise inappropriate”; (b) is “improper” by seeking “information [that] is irrelevant, cumulative, or disproportional to the needs of the case”; (c) seeks privileged or otherwise protected information; (d) calls for disclosure that “would violate a statute, Executive order, regulation, or policy”; (e) would reveal classified information; or (f) would “[i]nterfere with an ongoing enforcement proceeding,” “[c]ompromise a constitutional right,” “[e]xpose an intelligence source or confidential informant,” “[d]ivulge a trade secret or similar confidential information,” or “[b]e otherwise inappropriate.” 32 C.F.R. § 97.8. Where the Army's chief legal advisor “approves the release of official information or the presentation of witness testimony,” disclosure is limited “to those matters specified in the litigation request or demand, subject to any conditions imposed by the chief legal advisor.” Id. § 97.9(f). The Regulations also instruct Army personnel to “decline to comply” with a court-ordered “disclosure that the chief legal advisor previously disapproved or has yet to approve.” Id. § 97.9(g).
Where a party believes that an agency has improperly denied a Touhy request, the party must proceed under the Administrative Procedures Act, 5 U.S.C. § 706(2) (the “APA”), pursuant to which a court shall “hold unlawful and set aside agency action, findings, and conclusions found to be arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.” Adler v. U.S. D.O.J., No. 18 Civ. 2188 (PAC), 2018 WL 4571677 at *3 (S.D.N.Y. Sept. 24, 2018) (citing 5 U.S.C. § 706(2)(A)).This standard is “highly deferential and presumes the agency's action to be valid,” Adler, 2018 WL 4571677, at *3, and the party challenging the denial must make a “strong showing that the testimony is necessary.” Bobreski v. U.S. E.P.A., 284 F.Supp.2d 67, 74 (D.D.C. 2003).
Although “[t]he Second Circuit has not yet articulated the correct standard of review for a denial of a Touhy request,” S.E.C. v. Chakrapani, No. 09 Civ. 325 (RJS), 2010 WL 2605819, at *9 (S.D.N.Y. June 29, 2010) (citing U.S. E.P.A. v. Gen. Elec. Co., 212 F.3d 689, 690 (2d Cir. 2000)), the weight of authority in this District has applied the “arbitrary and capricious” standard more often than that found in Federal Rule of Civil Procedure 45. See Adler, 2018 WL 4571677, at *4; Koopmann, 355 F.Supp.3d at 559-60; Chakrapani, 2010 WL 2605819, at *29.
B. Application
As a threshold matter, the Army is incorrect to suggest that the Motion is procedurally improper and should have been brought as a challenge under the APA. (ECF No. 675 at 1-3). The purpose of an APA challenge would be for the Court to review whether the agency's decision to object, in whole or in part, to the propriety or scope of a Touhy request was arbitrary and capricious. (See § III.A, supra). Only when the government has made a final decision not to produce documents or testimony being sought under the applicable regulations would such an APA challenge be warranted. See Wultz v. Bank of China Ltd., 61 F.Supp.3d 272, 280 (S.D.N.Y. 2013) (holding that plaintiffs “failed to exhaust their administrative remedies with respect to any documents not described in their Touhy request,” because “[t]here has been no final agency action with respect to such documents. Consequently . . . this Court lacks the power to review the [agency's] refusal to produce any documents not mentioned in plaintiffs' Touhy request.”) (citing Semon v. Stewart (In re S.E.C. ex rel. Glotzer), 374 F.3d 184 (2d Cir. 2004)); cf. Houston Bus. J., Inc. v. Off. of Comptroller of the Currency, 86 F.3d 1208, 1210-11 (D.C. Cir. 1996) (finding that agency's assertion of privilege over documents requested pursuant to Touhy was “final agency action for purposes of the [APA]”). The Motion does not challenge a final decision of the Army to object to or limit the scope of the Army Touhy Request; rather, the Motion seeks a ruling on whether the Jefferies Topics fall within the Topics and, consequently, whether Mr. Connor should have been required to answer the subject questions. (ECF Nos. 669; 688). Accordingly, the Motion itself is not procedurally improper.
Focusing on the narrow, factual question of whether the Jefferies Topics fell within the Topics about which the Army authorized Mr. Connor to testify, (ECF Nos. 669; 688), the Court finds that they did not. Jefferies' counsel focused his entire questioning of Mr. Connor on the Feb. 12 Call and the Feb. 12 Email, with the intent of proving that “Mr. Connor reached out to a person represented by counsel at a time when he was contemplating litigation against Mr. Ray and failed to disclose that was the purpose of the conversation.” (ECF No. 684-1 at 103; see Id. at 101-03). These questions did not concern “Mr. Connor's role, responsibilities, actions, and endeavors with respect to providing commercial and business advice to the Army or Developers related to MHPI Projects, or negotiating loan transaction terms for MHPI Projects,” his knowledge of the Army's “process for selecting and approving development and financing aspects of MHPI Projects”; negotiations with GMAC, Jefferies, and Ambac about the MHPI Projects' financing; or the responsibilities of Defendants or any advisors with respect to the Army MHPI Projects. (ECF No. 669-4 at 1). Rather, the questions from Jefferies' counsel relate to events in early 2016- more than five years after the Army MHPI Projects were developed-during the then-pending DSRF Litigation against Ambac. (See ECF No. 210-3 ¶ 87 (alleging that Army MHPI Projects were developed between 2002-2010)). Furthermore, Jefferies has long known about: (i) the Army's approval of the filing and funding of this litigation-because it is alleged in the SAC (see ECF Nos. 210-3 ¶ 2); (ii) the Feb. 12 Call-because Mr. Ray disclosed it to Jefferies' counsel (ECF No. 693 at 18); and (iii) the general subject matter of the Feb. 2016 Emails-because they had received Plaintiffs' privilege logs in early 2022, more than one year before Mr. Connor's Deposition and months before the Army Touhy Request was served. (See n.7, supra). Jefferies therefore had plenty of time to seek to include Mr. Connor's understanding of the purpose of the Feb. 12 Call as a topic in a Touhy request to the Army, but did not do so. Finally, even if Jefferies is correct that at the time of the Feb. 12 Call the Projects were contemplating litigation against Jefferies, Mr. Connor's knowledge of that subject was distinct, both temporally and substantively, from the Topics, all of which focused on Mr. Connor's historical knowledge of the development of the Army MHPI Projects between 2002 and 2010. The Court therefore finds that the questions from Jefferies' counsel concerning knowledge or actions of Mr. Connor, the Army, or the Projects leading up to the decision to sue Jefferies fell outside the Topics.
During the May 12 conference, Jefferies counsel acknowledged that “the complaint alleges that the Army is not a party but they did, as Your Honor knows, approve of the filing of the lawsuit and approve the funding of the lawsuit.” (ECF No. 693 at 16).
To the extent that Jefferies also sought to question Mr. Connor about his document preservation efforts (ECF No. 669 at 3), that subject was also outside the Topics. When Mr. Connor was asked about his personal document retention practices, Major Doyle objected on the ground that it was outside the scope of the Topics. (ECF No. 684-1 at 60). In the Air Force Touhy Request, Jefferies included an express topic regarding document preservation (ECF No. 675-2 at 18), demonstrating that Jefferies knew how to include that topic when it was important. No such topic was included in the Army Touhy Request, and therefore, Mr. Connor's document preservation efforts were not included in the Topics about which the Army authorized Mr. Connor to testify.
Accordingly, the Court finds that the Jefferies Topics were not included in the Topics about which the Army authorized Mr. Connor to testify, and therefore Major Doyle did not improperly instruct Mr. Connor not to answer those questions during his Deposition. Jefferies is not, however, without a remedy. As noted above under the Regulations, Jefferies may make a Touhy request to the Army asking for Mr. Connor's testimony on the Jefferies Topics. (See § III.A, supra).If the Army denies Jefferies' request, Jefferies may bring a proceeding under the APA, pursuant to which the Court would review the Army's decision not to permit Mr. Connor to testify as to the Jefferies Topics under the “arbitrary and capricious” standard. Adler, 2018 WL 4571677, at *3-4. Jefferies would bear the burden to show that such a denial was “arbitrary and capricious,” and would be required to make a “strong showing” that additional testimony from Mr. Connor is necessary. Bobreski, 284 F.Supp.2d at 74. As the Army correctly notes (ECF No. 675 at 3), if Jefferies believed, before the Deposition, that the Topics were too narrow, Jefferies could have made its own Touhy request or initiated an APA proceeding challenging the Topics. Jefferies did not do so, and instead waited until the Deposition to pose questions to Mr. Connor that fell outside the scope of the Topics. Having taken that risk, Jefferies must bear the consequences of any delay that may result.
The Court makes no finding as to the timeliness of another Touhy request to the Army, or as to any other objection the Army may have.
IV. CONCLUSION
For the reasons set forth above, the Motion is DENIED. Due to references to sealed filings, the Court issues this Opinion and Order temporarily under seal. By June 1, 2023, the parties shall submit to the Court any proposed redactions to this Opinion and Order, which the Court will take under advisement in preparing a public version to be filed on the docket.
The Clerk of the Court is respectfully directed to make this document available only to the case participants and the Court at this time and to close ECF Nos. 669 and 670.
SO ORDERED.