Who’s Paying For This? First Department Requires the Producing Party to Initially Bear the Costs of Production in U.S. Bank N.A. v. GreenPoint Mtge. Funding, Inc.

For the second time this year, New York’s First Department, Appellate Division, has adopted e-discovery standards articulated in Zubulake v. UBS Warburg LLC, 220 FRD 212 (S.D.N.Y. 2003). On January 31, 2012, the First Department’s decision in Voom H.D. Holdings LLC v. EchoStar Satellite LLC, 2012 N.Y. Slip Op. 00658 (1st Dep’t 2012) adopted the Zubulake standard concerning when a party’s preservation obligations are triggered. Read a blog posting on the Voom decision here. Most recently, on February 28, 2012 the First Department held in U.S. Bank N.A. v. GreenPoint Mtge. Funding, Inc., 2012 NY Slip Op. 01515 (1st Dep’t 2012), that, consistent with Voom’s “adopt[ion] [of] the standards articulated by [Zubulake] in the context of preservation and spoliation, [it was] persuaded that Zubulake should be the rule in this department, requiring the producing party to bear the cost of production to be modified by the IAS court in the exercise of its discretion on a proper motion by the producing party.”

The factual scenario in GreenPoint is a familiar one in the wake of the financial crisis of 2008. GreenPoint Mortgage Funding, Inc. (“GreenPoint”), a mortgage loan originator specializing in “no-doc” or “low-doc” loans, initially sold notes on approximately 30,000 residential mortgages it had securitized (then valued at $1.83 billion). After a series of assignments, the notes were assigned to U.S. Bank, NA (“U.S. Bank”), which claimed that less than two years after the initial sale, approximately $530 million worth of loans had been charged off as a total loss or were severely delinquent. In early 2009, U.S. Bank sued GreenPoint alleging, among other things, that GreenPoint committed “‘gross violations’ of the representations and warranties concerning the attributes of the loans and the policies and practices under which the loans were originated, underwritten and serviced.”

A discovery dispute quickly arose with GreenPoint affirmatively seeking a protective order stating that: (i) each party would pay for its own discovery requests; and (ii) U.S. Bank would pay for GreenPoint’s pre-production attorney review time for purposes of privilege and confidentiality assertions. U.S. Bank conceded that its anticipated document discovery from GreenPoint was expected to be “vast, as were the resulting costs,” and that it could run “into the millions of dollars.” The trial court denied GreenPoint’s request that U.S. Bank bear the cost of compensating GreenPoint’s attorneys but agreed that New York required that the party requesting discovery bear the costs (that were not attorney fees) incurred in its production. U.S. Bank appealed.

While acknowledging the lack of clarity in the New York Civil Practice Law and Rules (“CPLR”) and local court rules and the conflicting case law on the issue of cost allocation in New York State Courts, the First Department disagreed with the GreenPoint trial court’s finding, stating that:

We are now persuaded that the courts adopting the Zubulake standard are moving discovery, in all contexts, in the proper direction. Zubulake presents the most practical framework for allocating all costs in discovery, including document production and searching for, retrieving and producing ESI. As noted, Zubulake requires, consistent with the Federal Rules of Civil Procedure, the producing party to bear the initial cost of searching for, retrieving and producing discovery, but permits the shifting of costs between the parties.

(Emphasis added). The Court went on to list the seven cost shifting factors of Zubulake (see 217 F.R.D. at 322) and cautioned that motion courts “should not follow these factors as a checklist, but rather, should use them as a guide to the exercise of their discretion in determining whether or not the request constitutes an undue burden or expense on the responding party.” The Court called GreenPoint’s motion for a protective order “premature” and found that, given the undeveloped evidence in the record concerning ESI in the underlying litigation, there was “no occasion … for us to opine on the propriety of shifting costs in this matter.” The Court remanded to the trial court with a direction to GreenPoint to bear its own discovery costs, subject to reallocation on a proper showing.

Notably, the appellate court’s decision rejected GreenPoint’s citation of the purported “merits” of the “requestor pays” rule, i.e., encouraging parties to self-regulate the scope of their discovery demands and discouraging parties from placing unnecessary and oppressive costs on an opponent. In doing so, the Court cited the strong public policy of resolving disputes on their merits through fair and fulsome discovery and the risk that litigants (particularly individuals) may be deterred from bringing meritorious claims due to the high costs of discovery. Finally, the Court cited the long-standing rule in New York providing that a prevailing litigant may be able to tax expenses incurred in connection with certain disclosure as “disbursements.”

GreenPoint may prove a welcome decision to the New York practitioner, if only in the certainty it provides. Its mandate enables a practitioner to clearly advise her client as to which litigant, in the first instance, is responsible for the costs of e-discovery: the producing party is initially to incur the cost of searching for, retrieving and producing both electronically stored information and physical documents that have been requested as part of the discovery process. Until GreenPoint, New York case law had been unclear on — and oftentimes in direct conflict with — this principle.

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