U.S. Bank National Ass'n v. Greenpoint Mortgage Funding, Inc.
939 N.Y.S.2d 395, 94 A.D.3d 58 (2012)
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Rule of Law:
In New York, the party producing documents and electronically stored information (ESI) in discovery bears the initial cost of searching for, retrieving, and producing such information, subject to the trial court's discretionary power to shift these costs upon a proper motion based on the seven-factor test established in Zubulake v UBS Warburg LLC.
Facts:
- Prior to August 2007, GreenPoint Mortgage Funding, Inc. operated a mortgage loan origination business, specializing in 'no-doc' and 'low-doc' loans (mortgages with minimal documentation of income and assets).
- GreenPoint securitized these loans by pooling them into a trust and offering notes for sale that were secured by the cash flow from the underlying loans.
- From 2005 to 2006, GreenPoint sold notes on approximately 30,000 residential mortgages it had securitized, valued at $1.83 billion, to nonparty GMAC Mortgage Corporation.
- These notes were subsequently assigned through several entities, eventually reaching U.S. Bank National Association as the indenture trustee for the benefit of the insurers and noteholders.
- Less than two years after the transaction closed, approximately $530 million worth of the underlying loans had been completely charged off as a total loss or were severely delinquent.
- U.S. Bank alleges that GreenPoint made 'gross violations' of representations and warranties regarding the attributes of the loans and the policies and practices under which they were originated, underwritten, and serviced.
- U.S. Bank further alleges that GreenPoint had agreed in its original agreement to cure any material breaches of its representations and warranties by repurchasing and replacing noncomplying loans at agreed-to prices, or buying back all 30,000 mortgages if breaches were severe enough.
Procedural Posture:
- U.S. Bank National Association filed a summons and complaint against GreenPoint Mortgage Funding, Inc. in the Supreme Court, New York County (trial court), alleging "gross violations" of representations and warranties regarding mortgage loans.
- Concurrently, U.S. Bank served its first request for the production of documents on GreenPoint.
- GreenPoint, in response, submitted a letter to the Supreme Court seeking a ruling on whether discovery should be stayed, whether a protective order should issue, and whether production should be conditioned on U.S. Bank paying production costs.
- GreenPoint subsequently moved in Supreme Court to stay discovery and for a protective order, proposing a discovery protocol where each party pays its own discovery costs and U.S. Bank pays GreenPoint's preproduction attorney review time.
- The Supreme Court, New York County, denied GreenPoint's request for a protective order but ruled that the "well-settled rule in New York State" was that the party seeking discovery bears its costs, excluding attorney fees, in an order entered April 13, 2010.
- U.S. Bank's counsel sought clarification from the Supreme Court, and the court reiterated its ruling that the requesting party bears discovery costs (excluding attorneys' fees) in an order entered October 13, 2010.
- U.S. Bank, as the aggrieved party, appealed the Supreme Court's October 13, 2010 order to the Appellate Division, First Department.
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Issue:
Does the party requesting discovery or the party producing discovery bear the initial costs of searching for, retrieving, and producing documents, including electronically stored information, in New York courts?
Opinions:
Majority - Acosta, J.
No, the requesting party does not bear the cost of discovery; rather, the producing party is to bear the initial cost of searching for, retrieving, and producing documents, including electronically stored information (ESI). The Court adopted the standards articulated by Zubulake v UBS Warburg LLC, which requires the producing party to bear the initial costs, but permits cost-shifting to the requesting party in the exercise of the trial court's discretion upon a proper motion. This approach is consistent with the Federal Rules of Civil Procedure and aligns with New York's long-standing rule that expenses incurred in disclosure are paid by respective producing parties, which may then be taxed as disbursements by the prevailing litigant (Wiseman v American Motors Sales Corp.). The Court rejected the 'requestor pays' rule, citing concerns that it may deter the filing of meritorious claims and noting that the underpinning of that rule has been called into question by other courts and commentators. The Court found GreenPoint's motion for a protective order and cost-shifting to be premature, stating that GreenPoint should have first moved to limit or strike overbroad, irrelevant, or unduly burdensome discovery requests before seeking to shift costs, and lacked sufficient evidence to support its proposed fee structure.
Analysis:
This case significantly altered discovery practice in New York, particularly concerning electronically stored information (ESI), by formally adopting the Zubulake standard. By shifting the initial burden of discovery costs to the producing party, the decision aims to promote the resolution of disputes on their merits and prevent the deterrence of potentially meritorious claims, especially from individual litigants. It provides a clear, detailed framework for trial courts to consider cost-shifting, which will likely lead to more uniform application of discovery cost allocation across the state. The ruling also encourages producing parties to engage in more focused and reasonable discovery responses, as they bear the initial financial responsibility.
