In Walsh Securities Inc. v. Cristo Property Management Ltd., et al., Civil Action No. 97-3496 (D.N.J. July 24, 2012), Magistrate Judge Michael A. Shipp of the District of New Jersey denied a wholesale residential mortgage lender’s efforts to compel a trio of title insurers to disclose the loss reserve amounts they had set for the lender’s claims.

Walsh Securities arose in 1997 after the lender purchased 220 mortgage loans from National Home Funding and sold them to whole loan purchasers. The lender brought a $450 million suit alleging a conspiracy to induce it to purchase mortgage loans at fraudulently inflated prices. In addition to suing the conspirators for fraud, the lender also sued three title insurance companies — Commonwealth Land Title Insurance Co. and Fidelity National Title Insurance Co. of New York, and Nations Title Insurance of New York Inc. — alleging breach of contract for failing to provide coverage under the title insurance policies and bad faith for wrongfully delaying the processing of the lender’s claims. The court subsequently dismissed the bad faith claim.

During a 30(b)(6) deposition of the insurers’ corporate representative, the representative testified that loss reserves regarding the lender’s claims had been set, but counsel for the insurers objected to further questioning, asserting that the actual amount of the loss reserves was protected from disclosure under the attorney work product doctrine.

In subsequent briefing on the discoverability of reserve amounts, the insurers also argued that the amount of the reserves was irrelevant and outside the scope of discovery as to the lender’s remaining breach of contract claims. The lender, however, argued that the reserves information was relevant to (1) its breach of contract claims and whether, for example, the insurers properly followed their own claims manual; and (2) the insurers’ states of mind and beliefs about the lender’s claims.

Rather than determining whether the reserve amounts constituted work product, the court considered whether the reserve amounts were relevant and likely to lead to the discovery of admissible evidence. Finding little guidance from the District of New Jersey on the discoverability of loss reserves, the court turned to several decisions from sister courts in Pennsylvania, which had concluded that “there is a tenuous link between loss reserves and actual liability.” Id. at 3.

It then rejected the lender’s arguments, finding that the lender had “not demonstrated that the specific amount of loss reserves is relevant to its remaining claims, particularly in light of the fact that [the lender’s] bad faith claim was summarily dismissed. ... Absent a stronger showing that links the specific amount of the loss reserves to one or more elements required to prove any of [the lender’s] remaining claims in this case, or that otherwise demonstrates that the specific amount of the loss reserves is relevant or reasonably calculated to lead to the discovery of relevant information, the Court must deny [the lender’s] application.” Id. at 4-5.

The Walsh Securities decision provides additional support for insurers seeking to exclude reserves amounts from a case. The court held that the reserves information sought was not relevant pursuant to Rule 26(b)(1) of the Federal Rules of Civil Procedure. It made this determination without needing to reach the question of whether the reserves information constituted protected attorney work product.  

Source: Law360