Plaintiffs often seek discovery on a financial institution’s policies and procedures with an eye towards using that evidence against the institution. If a financial institution’s representative or representatives did not live up to the policies and procedures, a plaintiff may argue that the institution did not live up to its fiduciary duty or the appropriate standard of care.
There is a very good argument against allowing this type of argument and admitting this type of evidence. Policies and procedures benefit the institution, the representative, the beneficiary or customer, and society in general. If financial institutions are reluctant to implement policies because they fear those policies being used against them, everyone will lose. Without policies to encourage representatives to do better, there may be worse service and performance.
Moreover, a fact finder should not judge an institution’s performance by its policies. Institutions may want to not only comply with the law and industry standards but exceed them. So, an institution’s policies and legal requirements are not necessarily the same, and one does not necessarily evidence the other. See Grassie v. Roswell Hosp. Corp., 150 N.M. 283 (N.M. Ct. App. 2010) (“The Agreement is evidence of a standard the Hospital set for itself. But a failure to follow it may or may not be negligent when viewed in the context of the entire screening process actually undertaken.”).
To supplant an objective standard with a defendant’s internal rule would create “perverse incentive[s].” Briggs v. Wash. Metro. Area Transit Auth., 481 F.3d 839, 848 (D.C. Cir. 2004). Some companies, faced with potential liability for breaches of internal policies, might abandon all internal rules or edit their “operating procedures in such a manner as to impose minimal duties.” Id. Meanwhile, businesses that “strive for excellence” and adopt internal rules and bylaws “exceed[ing] the prevailing standard” would be “unfairly penalize[d].” Titchnell v. United States, 681 F.2d 165, 173 (3d Cir. 1982). The more carefully the employer “regulate[d] the conduct of his employees,” the “more subject he [would] be to liability.” Longacre v. Yonkers Ft. Co., 236 N.Y. 119, 124 (1923).
B. Texas Courts Hold That Policies Do Not Evidence The Standard Of Care
In Texas, it is clear that a company’s policies do not evidence the standard of care. In FFE Transportation Services, Inc. v. Fulgham, the Texas Supreme Court held that internal policies and procedures do not set the standard of care:
[Defendant’s] self-imposed policy with regard to inspection of its trailers, taken alone, does not establish the standard of care that a reasonably prudent operator would follow. As a Texas court of appeals explained, a company’s internal policies “alone do not determine the governing standard of care.” Fenley v. Hospice in the Pines, 4 S.W.3d 476, 481 (Tex. App.—Beaumont 1999, pet. denied). A federal court of appeals has also held that a defendant’s internal policies do not, taken alone, establish the applicable standard of care. In Titchnell v. United States, 681 F.2d 165, 173 (3d Cir.1982), the court stated:
[I]f a health care facility, in striving to provide optimum care, promulgates guidelines for its own operations which exceed the prevailing standard, it is possible that care rendered at that facility by an individual practitioner on a given occasion may deviate from and fall below the facility’s own standard yet exceed the recognized standard of care of the medical profession at the time. A facility’s efforts to provide the best care possible should not result in liability because the care provided a patient falls below the facility’s usual degree of care, if the care provided nonetheless exceeds the standard of care required of the medical profession at the time. Such a result would unfairly penalize health care providers who strive for excellence in the delivery of health care and benefit those who choose to set their own standard of care no higher than that found as a norm in the same or similar localities at the time.
154 S.W.3d 84, 92-93 (Tex. 2006). In Fulgham, the Court determined that evidence of a company’s policies did not constitute any evidence of the standard of care. Id.
Another example is Wal-Mart Stores, Inc. v. Wright, in which the company manual established a policy of mopping up spills within a set period of time. 774 N.E.2d 891,894-95 (Ind. 2002). The Indiana Supreme Court held that the manual containing internal policies, practices, and rules represents the defendant company’s “subjective view of the standard of care” and therefore could not form the basis of a jury instruction on the objective duty of care mandated by law. Id. The court explained, “[r]ules and policies in the [Wal-Mart] Manual may have been established for any number of reasons having nothing to do with safety and ordinary care, including a desire to appear more clean and neat to attract customers, or a concern that spills may contaminate merchandise.” Id. See also Branham v. Loews Orpheum Cinemas, Inc., 31 A.D.3d 319,323,819 N.Y.S.2d 250, 255 (N.Y.A.D. 2006) (theater’s policy to check aisles every 15-20 minutes for obstructions or other impediments to movie-goers’ enjoyment of the film imposed a higher duty of care than is required under the law and patron who tripped over a child sitting in the aisle could not state a claim based on alleged violation of the policy).
A company’s policies are irrelevant where they contradict a legal duty and impose more strenuous standards. Espalin v. Children’s Med. Ctr., 27 S.W.3d 675 (Tex. App.—Dallas 2000, no pet) (hospital’s policy regarding informed consent did not preclude summary judgment where doctors, and not hospitals, owed a duty to provide informed consent).
Further, in Texas, a company’s internal policies or procedures will not create a negligence duty where none otherwise exists. Cleveland Reg’l Med. Ctr., L.P. v. Celtic Props., L.C., 323 S.W.3d 322 (Tex. App.—Beaumont 2010, pet. denied); Houston Cab Co. v. Fields, 249 S.W.3d 741, 747-48 (Tex. App.—Beaumont 2008, no pet.) (violation of independent contractor hiring policy does not show negligent entrustment); Owens v. Comerica Bank, 229 S.W.3d 544, 547 (Tex. App.—Dallas 2007, no pet.) (“The Texas Supreme Court has refused to create a standard of care or duty based upon internal policies, and the failure to follow such policies does not give rise to a cause of action in favor of customers or others.”); Entex, A Div. of Noram Energy Corp. v. Gonzalez, 94 S.W.3d 1, 10 (Tex. App.—Houston [14th Dist.] 2002, pet. denied); Rocha v. Faltys, 69 S.W.3d 315, 324 (Tex. App.—Austin 2002, no pet.) (fraternity policy did not create legal duty); Espalin v. Children’s Med. Ctr., 27 S.W.3d 675 (Tex. App.—Dallas 2000, no pet); Fenley v. Hospice in the Pines, 4 S.W.3d 476, 481 (Tex. App.—Beaumont 1999, pet. denied); Jacobs-Cathey Co. v. Cockrum, 947 S.W.2d 288, 291-92 (Tex. App.—Waco 1997, writ denied); Estate of Catlin v. Gen. Motors Corp., 936 S.W.2d 447, 451 (Tex. App.—Houston [14th Dist.] 1996, no writ); Williford Energy Co. v. Submergible Cable Servs., Inc., 895 S.W.2d 379, 386-87 (Tex. App.—Amarillo 1994, no writ).
For example, in Cox v. City of Fort Worth, the plaintiff alleged that the defendant hospital breached a duty by failing to follow its own internal policies. 762 F.Supp.2d 926 (N.D. Tex. 2010). Plaintiffs specifically claimed that the defendant allegedly failed to exercise reasonable care in implementing and enforcing its policy concerning limitations on the number of visitors each emergency-room patient was allowed, and that it particularly failed to exercise reasonable care in communicating that information to plaintiffs prior to the decedent’s arrival at the hospital. The court rejected this claim, holding: “Plaintiffs’ negligence claim, grounded on Texas Health’s alleged negligent implementation of its internal policies, thus cannot pass the first hurdle: it fails to allege a legal duty. Having alleged no duty outside of the implementation of Texas Health’s own internal policies, plaintiffs’ negligence claim fails.” Id. at 941.
Importantly, internal policies adopted by financial institutions do not create a duty toward customers. In Texas Southwestern Med. Supply v. Texas Commerce Bank—Dallas, N.A., a plaintiff asserted that a bank breached a duty of care by not following its own internal procedures and allowing a representative to endorse checks. No. 05-93-00001-CV, 1994 Tex. App. LEXIS 3747 (Tex. App.—Dallas June 2, 1994, no writ) (not designated for publication). The court held that the policies did not impact the bank’s statutory duty: “TCB’s teller procedures could not impose a legal requirement for endorsements on bearer instruments or checks payable to TCB when the code does not require it.” Id. at *10. Also, in Guerra v. Regions Bank, a party sued a bank for negligence in the bank’s opening of a joint account under his name and the name of another. 188 S.W.3d 744 (Tex. App.—Tyler 2006, no pet.). The plaintiff argued that “the risk, foreseeability, and likelihood of his injuries could have been ‘guarded against’ if Regions had followed its own banking procedures.” Id. at 747. The court of appeals disagreed, stating: “A bank’s internal policies do not determine a standard of care or duty.” Id. see also Owens v. Comerica Bank, 229 SW.3d 544 (Tex. App.—Dallas 2007, no pet.) (industry customs, like internal policies, do not create duties).
Further, in Ebenhoh v. Production Credit Ass’n of Southeast Minnesota, the plaintiffs were farmers on whom the defendant credit association foreclosed. 426 N.W.2d 490,491 (Minn. Ct. App. 1988). The farmers sued on the grounds that the association violated its own policies and standards for making sound operating loans. Id. Distinguishing the internal policies from legislatively enacted statutes and regulations, the court rejected the plaintiffs’ claim, flatly holding that internal policies create no such standard of care. Id. See also AmSouth Bank v. Tice, 923 So.2d 1060, 1067 (Ala. 2005) (Under Florida law, employee manual guidelines for tellers with respect to handling of checks were insufficient to establish any duty of care running from bank to customer separate and distinct from duty of care created under Florida’s version of Uniform Commercial Code.).
C. Are Internal Policies Discoverable?
A fiduciary may want to fight the discovery and production of its internal policies and procedures. In Texas, discovery is permitted of any unprivileged information that is relevant to the subject of the lawsuit, including inadmissible evidence, so long as the request is reasonably calculated to lead to the discovery of admissible evidence. Tex. R. Civ. P. 192.3(a); In Re American Optical Corp., 988 S.W.2d 711, 713 (Tex 1998). Information is relevant if it tends to make the existence of a fact that is of consequence to the determination of the action more or less probable than it would be without the information. Tex. R. Evid. 401; R. K. v. Ramirez, 887 S.W.2d 836, 842 (Tex. 1994). As the Texas Supreme Court stated:
The ultimate purpose of discovery is to seek the truth, so disputes may be decided by what the facts reveal, not by what facts are concealed. For this reason, discovery is not limited to information that will be admissible at trial. To increase the likelihood that all relevant evidence will be disclosed and brought before the trier of fact, the law circumscribes a significantly larger class of discoverable evidence to include anything reasonably calculated to lead to the discovery of material evidence.
Janpole v. Touchy, 673 S.W.2d 569, 573 (Tex. 1984) (internal citation omitted), overruled on other grounds, Walker v. Packer, 827 S.W.2d 833 (Tex. 1992).
A fiduciary that is faced with a request for its internal policies and procedures may file a motion for protection and seek protection from a court from the request for information. Conversely, the fidicuary may simply object, and wait for the requesting party to file a motion to compel. Tex. R. Civ. P. 215.1(b), 215.2.
The main issue will be whether the policies and procedures are relevant or will lead to the discovery of admissible evidence. Of course, the issue of admissibility is different from the issue of whether certain evidence will lead to the discovery of other evidence. Damgaard v. Avera Health, 108 F.Supp.3d 689 (D.C. Minn. June 3, 2015). Even if a court were to allow discovery into policies and procedures, that does not mean that that evidence will necessarily be admitted at trial. Id. (“Judge Mayeron opined only that the policies were discoverable, and discoverability and admissibility, of course, are entirely separate issues, with the former far broader than the latter.”).
In any event, many cases have held that policies are not relevant to the pleaded claims and should not be discovered. In one case, a plaintiff alleged conflict-of-interest allegations and wanted to see the defendant’s policies on ethical walls for separating its investment banking and analyst divisions. Xpedior Credit Trust v. Credit Suisse First Boston (USA), Inc., 309 F.Supp. 459, 464-65 S.D. N.Y. 2003). The court held that these policies were not relevant because they would not indicate if an actual conflict of interest actually arose and denied a motion to compel:
Xpedior has failed to articulate a basis upon which to conclude that this information is relevant to its claims. Even supposing that Xpedior’s damages theory is correct, DLJ’s Chinese Wall policy is in no way probative of actual conflicts of interest. If the policy strictly separates DLJ’s analyst and investment banking divisions, that says nothing about whether anyone adhered to the policy. Given that this lawsuit does not present allegations of analyst conflicts, that Xpedior admits that analyst reports are only “one avenue” for valuing the issuers, … and that the Chinese Wall policies themselves are of limited use, these documents are simply not relevant. Accordingly, CSFB is not required to produce these policies.
Id. (internal citation omitted).
In a case dealing with a medical malpractice claim, a court denied a motion to compel the production of protocols and policies because they would not likely lead to the discovery of admissible evidence. Hurdle v. Oceana Urgent Care, 49 Va. Cir. 328, 1999 Va. Cir. LEXIS 333 (Va. Cir. Ct. July 15, 1999). The court stated:
The standard of care in medical malpractice actions is established by statute, not by the private rules of a particular hospital. The plaintiff claims it is premature to decide this, citing cases allowing a custom or usage of a trade as evidence of the duty owed. Assuming, without deciding, that a breach of a custom or usage of the medical profession could be evidence of negligence in a medical malpractice action, it does not follow that the policies of a single hospital are likely to prove the custom and usage of the entire profession. Trade and professional organizations are legion in this country. They would likely be better sources of such information.
In Jones v. Bank of Am., N.A., a plaintiff sued a lender for alleged improper servicing of a home mortgage loan. No. 3:14-cv-11531, 2015 U.S. Dist. LEXIS 52214 (D.C. W.V. April 21, 2015). The district court denied the plaintiff’s motion to compel the production of policies and procedures where they were not relevant to the claims asserted:
BANA objects to producing internal guidelines, policies, and procedures based on their lack of relevancy. Plaintiffs have requested policies, procedures, and guidelines pertaining to the Escalation Management Program, loss mitigation, provision of settlement agreements, and audits of loss mitigation. Plaintiffs argue that the requests are limited in scope and relate to topics that are central to the case. Furthermore, they will show whether BANA complied with its own policies and whether it acted in good faith, or alternatively, acted unconscionably. However, the causes of action in Plaintiffs’ complaint are well-defined and unrelated to BANA’s policies, procedures, and guidelines. Plaintiffs’ breach of contract claim will depend upon the terms of the contract, and the unconscionability claims are based upon specific contacts BANA allegedly had with Plaintiffs. Neither Plaintiffs, nor BANA, argue that BANA relies on any policy, procedure, or guideline as a defense. Therefore, the undersigned agrees with BANA that the policies, procedures, and guidelines are not relevant.
Other courts allow the discovery of policies and procedures where there is an argument that such may be admissible or may lead to admissible evidence. In Swenson v. Oxford Bank & Trust, a beneficiary sued a bank for breach of fiduciary duty and sought actual and punitive damages. No. 03-C-336, 2004 U.S. Dist. LEXIS 1126 (N.D. Ill January 27, 2004). The plaintiff sought “All Trust Investment Committee minutes or other notes (unredacted), including but not limited to those involving the review and approval of the bank’s investment policies and practices…” The court granted this request, stating: “The Trust Investment Committees’s actions and communications regarding the management of the bank’s IRA accounts are relevant. They may demonstrate whether Oxford knew or should have known that the stocks contained in Swenson’s and in other customer’s IRAs contained poor investments and whether Oxford knew or should have known the accounts managed by Carl Rudolph were under diversified.” Id.
Confidentiality can also be a legitimate concern that can justify a court denying a motion to compel policies. See, e.g., Huertas v. Beard, No. 1:10-cv-10-SJM-SPB, 2012 U.S. Dist. LEXIS 105631 (W.D. Penn. July 30, 2012) (district court denied motion to compel defendant’s policies where they were confidential and would not be probative of what events actually occurred). Moreover, some courts refuse a motion to compel on policies where a witness has already testified about same in a deposition. See, e.g., Wiand v. Wells Fargo Bank, N.A., No. 8:12-CV0557-T-27EAJ, 2013 U.S. Dist. LEXIS 189999 (M.D. Fla. June 10, 2013). Even where courts may allow some discovery, the discovery must be narrow and not overly broad. See, e.g., Wiand v. Wells Fargo Bank, N.A., 2013 U.S. Dist. LEXIS at 189999; Cahaly v. Benistar Prop. Exch. Trust Co., 885 N.E.2d 800, n. 36 (Mass. S. Ct. 2008); Wright v. Suntrust Bank, No. 1:04-CV-2258-CC, 2006 U.S. Dist. LEXIS 57111 (N.D. Ga. July 21, 2006) (only policies relevant are those in year of loan).
D. Are Policies Admissible In Evidence?
Admissibility is determined by the reason(s) behind why the evidence is being offered. As stated above, there is a good argument that policies should not be admissible regarding what the standard of care is or what fiduciary duties are owed. Texas courts have affirmed trial courts’ decisions to exclude evidence of defendants’ policies. For example, in G4 Trading v. Nationsbank of Texas, N.A., a plaintiff asserted that a bank wrongfully sent a wire transfer. 937 S.W.2d 137, (Tex. App.—Houston 1996, no writ). The trial court excluded evidence concerning the bank’s procedures to authorize and amend wire transfer orders that would have required a signed form before a transfer could be executed. The court of appeals affirmed the trial court’s decision because the jury instructions at issue in the case did not require a signed form. The court held: “once the jury’s inquiry was reduced to the narrow question recited in the charge, the excluded evidence of NationsBank’s policies was irrelevant. Therefore, the trial court did not err in excluding it.” Id. Furthermore, in Gardena Mem. Hosp. v. Parashar, a trial court excluded evidence concerning a hospital’s policies, and the plaintiff challenged this ruling on appeal. No. 14-94-01024-CV, 1996 Tex. App. LEXIS 3851 *10-13 (Tex. App.—Houston [14th Dist.] August 29, 1996, writ denied) (not designated for publication). The court of appeals affirmed, holding that the evidence concerning current policies were not necessarily relevant regarding the policies in place at the time of the incident. Id. But see Jo Ann Howard & Assocs., P.C. v. Cassity, No. 4:09CV01252, 2015 U.S. Dist. LEXIS 10035 (D.C. Mo. January 29, 2015) (Under Missouri law, the court held that “Once Plaintiffs establish the standard of care, the guidelines, policies, procedures or rules of a defendant may be introduced to support negligent conduct.”).
Texas courts have similarly also held that violations of industry standards or regulations do not create legal duties and are not admissible. B-R Dredgin Co. v. Rodriguez, 564 S.W.2d 693, 697 (Tex. 1978) (Corp of Engineers Safety Manual does not set standard of care and is inadmissible); Pate v. Texline Feed Mills, Inc., 689 S.W.2d 238, 245-46 (Tex. App.—Amarillo 1985, no writ) (National Electric Safety Code does not set standard of care and is inadmissible). See also Rexrode v. American Laundry Press Co., 674 F.2d 826 (10th Cir. 1982); Mississippi Power & Light Co. v. Whitescarver, 68 F.2d 928 (5th Cir. 1934).
However, there may be other potentially valid reasons that a plaintiff would want to admit evidence of a policy. For example, in Seay v. Travelers Indem. Co., in a summary judgment appeal, a court of appeals reviewed a manual drafted, printed, and issued by the insurer for its authorized inspectors, which required that code violations be brought to the attention of its insured when discovered. 730 S.W.2d 774, (Tex. App.—Dallas 1987, no writ). The issue was whether an insurance company had a duty because it inspected a boiler, and the manual’s directive was not asserted as the source of the insurer’s duty, but rather as evidence of the purpose behind the insurer’s undertaking of the inspections. Id. at 778-79.
Additionally, another court has held that even if internal policies and procedures do not create the standard of care and do not create a negligence duty, they may still be admissible and may be considered by an expert who may opine on the standard of care and causation. See Dana Corp. v. Microtherm, Inc., No. 13-05000281-CV, 2010 Tex. App. LEXIS 408 (Tex. App.—Corpus Christi January 21, 2010, pet. granted, vacated in part by agr.). That court held:
Dana argues that Microtherm’s causation case cannot rest on Dana’s own reports and internal evaluations and policies to substitute for the needed expert testimony. However, the cases relied upon by Dana, FFE Transportation Services, Inc. v. Fulgham and Fenely v. Hospice in the Pines, do not support this proposition. They provide only that a company’s self-imposed policies do not establish the standard of care and cannot be substituted as the industry’s standard of care in determining a breach. In this case, Trillo did not use Dana’s self-imposed policies, reports, and internal evaluations to establish the standard of care. She did not substitute Dana’s quality control reports for the industry’s standard. Trillo provided expert testimony on causation. She reviewed Dana’s own reports on quality control and its internal evaluations and used information from the reports to provide support for her opinion on causation. Neither case relied upon by Dana addresses the application of internal reports, evaluations, and policies to a determination of causation. Neither case supports a conclusion that Microtherm’s expert cannot consider Dana’s 8-D correction report or the April quality control report in arriving at an opinion on causation. Whether or not corrective actions were taken at Dana’s assembly plant pursuant to a company policy which did or did not exceed the existing standard of care, the evidence established there was contamination in the assembly of the thermistors, which according to Trillo, was a producing cause of the failure of the thermistor.
Id. at *35-36. See also Flowers v. Torrence Memorial Hosp. Med. Ctr., (1994) 8 Cal.4th 992, 45; Jutzi v. County of Los Angeles, (1988) 196 Cal.App.3d 637; In re Irrevocable Inter Vivos Trust, 305 N.W.2d 755 (Minn. 1981) (expert testimony about another bank’s investment policies was admitted to prove that trustee did not breach duty).
For further example, evidence of a habit of a person or of the routine practice of an organization, whether corroborated or not and regardless of the presence of eyewitnesses, is relevant to prove that the conduct of the person or organization on a particular occasion was in conformity with the habit or routine practice. Tex. R. Evid. 406. However, “proof of custom will not be admitted to contradict a fact plainly proved by positive testimony, nor is evidence of the custom of individuals engaged in business in one locality relevant on the question of usage in another locality.” Tex. Jur. Evidence § 190. Also, “evidence of a custom is not admissible where it violates a rule of law.” Id.
It should also be noted that Texas Rule of Evidence 403 (similar to Federal Rule 403) states: “The court may exclude relevant evidence if its probative value is substantially outweighed by a danger of one or more of the following: unfair prejudice, confusing the issues, misleading the jury, undue delay, or needlessly presenting cumulative evidence.” Tex. R. Evid. 403. Courts are careful to differentiate between using internal rules as evidence and using them as standards of conduct. But this distinction may not be apparent to a lay jury, and the evidence may be confusing to them and unfairly prejudicial to the defendant.
It is important to note that evidence may be competent for one purpose, but not for another. When evidence that is admissible as to one purpose but not admissible as to another purpose is admitted, the court, upon request, shall restrict the evidence to its proper scope and instruct the jury accordingly. Tex. R. Evid. 105(a). Courts have routinely held that a trial court should instruct a jury on the limited purpose of policies and that such policies may not be used as evidence of the standard of care. Therrien v. Target Corp., 617 F.3d 1242, 1256 (10th Cir. 2010); Wal-Mart Stores v. Wright, 774 N.E.2d 891 (Ind. 2002) (internal rules “can be received into evidence with an express caution that they are merely evidentiary and not to serve as a legal standard”); Mayo v. Publix Super Mkts., Inc., 686 So. 2d 801, 802 (Fla. Dist. Ct. App. 1997) (“a party’s own internal rule does not itself fix the legal standard of care in a negligence action,” and the party “is entitled to appropriate jury instructions to that effect”); Clarke v. N.Y.C. Transit Auth., 174 A.D.2d 268, 276 (N.Y. App. Div. 1992) (“prejudicial error” to admit “the internal rules, without limiting instructions”). But where a party fails to object or request such an instruction, the court’s action in admitting the evidence without limitation shall not be a ground for complaint on appeal.
Company policies may or may not be admissible in litigation depending on the jurisdiction and the issue. In any event, they should not be admissible for the purpose of establishing the legal duty or the standard of care that a defendant owed a plaintiff.