United States District Court, W.D. Kentucky, Louisville Division
MEMORANDUM OPINION AND ORDER
THOMAS B. RUSSELL, Senior District Judge.
This matter comes before the Court upon Defendant Porter Bancorp, Inc.'s ("Bancorp") objection, (Docket No. 181), to the Court's previously entered order, (Docket No. 179). Plaintiff SBAV LP ("SBAV") has responded, (Docket No. 185), and Bancorp has replied, (Docket No. 189). Fully briefed, this matter stands ripe for adjudication. For the reasons set forth below, the Court will overrule Bancorp's objection and will affirm the Magistrate Judge's order of January 16, 2015.
The instant lawsuit involves SBAV, a limited partnership; Bancorp, a publicly traded bank holding company; PBI Bank, Bancorp's wholly-owned subsidiary; Porter, chairman of the board of Bancorp and PBI; and Bouvette, president and chief executive officer of both companies. Beginning in 2010, Bancorp endeavored to raise $30 million in new capital in compliance with federal and state requirements. For the first wave of fundraising efforts, Bouvette and Porter reached out to Sandler O'Neil & Partners, LP ("Sandler"), a New York investment bank, to identify potential investors. As a result of Sandler's efforts, five investors acquired Bancorp securities as part of a private placement, which closed on June 30, 2010. The private placement yielded $27 million in proceeds. (Docket No. 92-1 at 3.) Neither SBAV nor its controlling investment advisor firm, the Clinton Group, Inc. ("Clinton") participated in this private placement.
Before the private placement closed, however, SBAV and Bancorp were introduced. Between July 1, 2010, and July 23, 2010, SBAV and Bancorp representatives considered a potential investment relationship. As SBAV conducted its due diligence, it engaged in a series of meetings, discussions, and correspondence with various PBI officials. Bancorp also allowed SBAV to access a "virtual due diligence room, " which included financial information reflecting the status of accounts as of June 30, 2010. SBAV alleges that Bouvette, Porter, and others described a stable bank that actively targeted problem loans, had adequate reserves against its balances, and enjoyed regulatory approval. (Docket No. 31 at ¶ 25.) According to SBAV, these assurances echoed PBI's SEC filings, including its Annual Report for the Fiscal Year Ended December 31, 2009 ("2009 Form 10-K") and Quarterly Report for the Period Ended March 31, 2010 ("IQ 2010 Form 10-Q"). SBAV understood these documents to confirm Bouvette's and Porter's representations that the Bank had fully complied with certain regulatory restrictions instituted by the Federal Deposit Insurance Corporation (FDIC) and the Kentucky Department of Financial Institutions (KDFI) in early 2010. These restrictions followed bank examinations conducted by the two agencies in September 2009 and November 2009.
Certain provisions of the November 2009 report were included in a Memorandum of Understanding (MOU) that the Bank entered into with the FDIC and the KDFI in April 2010. ( See Docket No. 148, Motion to Compel, Exhibit A, MOU of April 20, 2010.) According to SBAV, the Bank insisted that it had fully complied with the regulators' concerns that were addressed in the document, which it disclosed to SBAV. These concerns involved various unsatisfactory practice and conditions, including the accuracy of the Bank's loan review, its lending policies, credit relationships, risk on loans and asset classification, and the adequacy of its allowance for loan and lease losses. The Bank also provided SBAV with a draft of its next quarterly progress report; SBAV now contends that this report was "incomplete and misleading." (Docket No. 148, Motion to Compel, at 7, citing Exhibit B, email of Bouvette dated July 16, 2010.)
On July 13, 2010, SBAV's investment manager met with Bouvette, Porter, and other Bancorp executives. Ten days later, SBAV entered into a Letter Agreement with Bancorp, agreeing to invest $5 million on the same terms as the initial investments. (Docket No. 31 at ¶ 28.)
Only one day before SBAV's investment closed, on July 22, 2010, Bancorp allegedly received a comment letter from the Securities and Exchange Commission (SEC) requesting that the company provide various financial data. SBAV did not receive a copy of the letter until one week later, on July 30, 2010. SBAV contends that Defendants actively withheld disclosure of the SEC's comment letter in an effort to close the deal before SBAV could learn of the SEC's ongoing investigation. (Docket No. 31 at ¶ 39-41.) Nevertheless, SBAV made a second investment three months later, on September 27, 2010. (Docket No. 31 at¶ 30.)
PBI's regulatory troubles intensified after the SBAV deal was finalized. The FDIC and the KDFI issued a Joint Examination Report of PBI on January 3, 2011. As a result of the Joint Report, the two agencies issued a Notice of Charges and of Hearing alleging various unsound banking practices and regulatory violations that remained resolved after the MOU was issued in April 2010. (Docket No. 31 at ¶ 44-45.) The agencies entered a Consent Order against the Bank on June 24, 2011, requiring a management review and mandating that the Bank reform its internal and financial controls in order to correct the violations. (Docket No. 31 at ¶¶ 47-62.) PBI also confronted regulatory scrutiny from the Federal Reserve Bank, which imposed a binding agreement on Porter Bancorp that limited its ability to issue dividends or raise capital without approval. (Docket No. 31 at ¶¶ 44, 48.) According to SBAV, the violations identified in the consent order and the Federal Reserve Agreement were also addressed in the MOU-the same issues that the Bank had assured SBAV were being addressed in July 2010.
Although PBI began to implement the mandated reforms, its financial losses increased throughout 2011, totaling over $100 million since the initial investment. (Docket No. 101 at 13.) Its share price plunged from $11.50 per share in July 2010 to less than $1.00 at the time SBAV filed the instant action. (Docket No. 101 at 13.)
In this action, SBAV contends that the financial conditions of Bancorp and PBI were not accurately communicated prior to SBAV'S investment. Specifically, SBAV contends that Defendants misrepresented the adequacy of PBI's financial and disclosure controls; mischaracterized the problem loans within its portfolio and maintained inadequate reserves against losses for non-performing loans; misrepresented the value of the loans and other assets on its books; and misrepresented the degree to which regulators maintained confidence in its financial soundness. (Docket No. 101 at 7.) According to SBAV, Defendants' misrepresentations ultimately caused SBAV to lose its entire $5 million investment. Its Amended Complaint alleges negligent misrepresentation, breach of contract, and violation of Kentucky securities laws in connection with Bancorp's 2010 raise of capital from SBAV. (Docket No. 31.) It seeks to recover damages exceeding $4, 500, 000.00 in the instant action. (Docket No. 101 at 13.)
Pursuant to Federal Rule of Civil Procedure 72(a), a district judge "must consider timely objections and modify or set aside any part of the [magistrate judge's non-dispositive ] order that is clearly erroneous or is contrary to law." See also 28 U.S.C. § 636(b)(1)(A) ("A judge of the court may reconsider any pretrial matter under this subparagraph (A) where it has been shown that the magistrate judge's order is clearly erroneous or contrary to law."); United States v. Curtis, 237 F.3d 598, 603 (6th Cir. 2001) ("A district court shall apply a clearly erroneous or contrary to law' standard of review for the nondispositive' preliminary measures of § 636(b)(1)(A)."). This standard of review is limited in nature. Massey v. City of Ferndale, 7 F.3d 506, 509 (6th Cir. 1993).
Under the clearly erroneous standard, a court reviewing a magistrate judge's order should not ask whether the finding is the best or the only conclusion that can be drawn from the evidence. Further, this standard does not permit the reviewing court to substitute its own conclusion for that of the magistrate judge. Rather, the clearly erroneous standard only requires the reviewing court to determine if there is any evidence to support the magistrate judge's finding and that the finding was reasonable.
Brownlow v. Gen. Motors Corp., No. 3:05-CV-00414, 2007 WL 2712925, at *3 (W.D. Ky. Sept. 13, 2007) (citing Heights Cmty. Congress v. Hilltop Realty, Inc., 774 F.2d 135, 140 (6th Cir. 1985)).
The objection now before the Court concerns Magistrate Judge Whalin's order of January 16, 2015, which, in pertinent part, compelled Bancorp to answer interrogatories and respond to requests for information and for production of documents related to bank examinations conducted by the FDIC and the Federal Reserve. Specifically, the conflict arises from Interrogatories 12 and 13 and Document Request Nos. 9 and 10, which provide as follows:
INTERROGATORY NO. 12: Identify all examinations by governmental bodies or regulatory agencies (including the Federal Reserve, FDIC, KDFI, or SEC) conducted on Porter Bancorp or PBI Bank. For each such examination, identify:
The dates the examination took place, including the date any final examination report was issued;
The five people who had the most substantial communications on Your behalf with the examining agency, including a description of each person's role in the examination;
The five people from the agency who had the most substantial communications with You, including ...