In re Lifetrade Litigation

Background

The plaintiffs are investors in three funds known as the Lifetrade Funds. The funds invested in life-insurance policies that had been transferred to third-party settlement providers. The funds closed in 2012 after alleged mismanagement by Roy Smith, Lifetrade’s founder and chief executive officer, and John Marcum, a consultant.

Before the funds closed, Lifetrade entered into a $500 million credit line with a predecessor of Wells Fargo. Lifetrade later had $205 million in outstanding debt, while Wells Fargo valued its portfolio of life-insurance policies at $302 million. Lifetrade had represented to investors that the portfolio was worth $450 million. After Lifetrade could not obtain long-term financing, Wells Fargo announced that it would foreclose. In August 2012, Wells Fargo and Lifetrade negotiated a settlement with Smith and Marcum under which Wells Fargo acquired the funds’ assets.

The plaintiffs contend that the settlement was unfair because the transferred policies were worth more than the debt that was extinguished. They also allege that the Wells Fargo Defendants aided Smith’s and Marcum’s breaches of fiduciary duty.

Discovery dispute

The plaintiffs served identical notices seeking depositions of representatives of several Wells Fargo entities under Federal Rule of Civil Procedure 30(b)(6). That rule allows a party to depose an organization through one or more people who testify on the organization’s behalf about specified subjects. The notices contained 32 topics. After the parties could not resolve their objections, the Wells Fargo Defendants moved for a protective order under Rule 26(c) to limit the depositions.

The court explained that deposition topics must seek information relevant and proportional to the claims and defenses, and must describe the subjects with reasonable specificity. The court also emphasized that discovery may be limited when it is cumulative, duplicative, obtainable from a more convenient source, or more burdensome than useful.

Rulings on the deposition topics

The court held that the original notices were overbroad and redundant. The plaintiffs agreed to the defendants’ proposed Topics B, C, F, G, I, and K, so the Wells Fargo Defendants must produce witnesses on those subjects.

The court also required or permitted additional testimony on several subjects. For Topic A, witnesses must identify the relevant Wells Fargo business units and explain their relationships to one another and their leadership from 2008 through the sale of the Lifetrade portfolio. For Topic D, witnesses must identify the decisionmakers and reasons for decisions about modifying or extending the loan, declining to extend it, issuing a public-sale notice, and entering the settlement instead of conducting a public sale. The court clarified that this did not require testimony about Wells Fargo’s general business strategy for the life-settlement industry.

For Topic J, witnesses must address Wells Fargo’s knowledge of offers to purchase the Lifetrade portfolio before the 2012 settlement, including whether any offers could have covered the outstanding loan and why offers were rejected, if Wells Fargo knew. The court also required testimony about the factual basis for Wells Fargo’s defense that the plaintiffs’ own wrongdoing barred their claims. That testimony may address the debt extinguished by the settlement, the settlement’s option to purchase, net proceeds, and Lifetrade’s efforts to reacquire the policies, but it may not ask for legal conclusions.

The court granted the protective-order motion as to Topic 9 because it concerned Wells Fargo’s relationships with other life-settlement businesses and was not relevant or proportional to this case. It granted the motion as to Topic 13 because Wells Fargo’s general motives and business strategy for life settlements were not relevant to the remaining claims, and because motive was not an element of those claims. It granted the motion as to Topic 17 because the plaintiffs had not shown that the topic was relevant or proportional.

The court granted the motion as to Topic 19 because it was extraordinarily overbroad. The plaintiffs could ask fact witnesses what Wells Fargo knew about specific conduct that allegedly breached Smith’s and Marcum’s fiduciary duties, but they could not use the topic as written. The court granted the motion as to Topic 27 because it concerned Wells Fargo’s post-litigation investigation, which was primarily protected work product and privileged, and because the investigation itself was not relevant to the claims and defenses. The court found that Topic 32 was overbroad and vague except to the extent it concerned the factual basis for the defense described above.

Disposition

Judge Katharine H. Parker concluded that the Wells Fargo Defendants’ motion for a protective order was granted in part and denied in part. The depositions must proceed on Wells Fargo’s proposed topics as modified by the court. When the same witness can testify for more than one Wells Fargo entity, that witness should testify on behalf of all those entities.