Robert R. McCormick Found. v. Arthur J. Gallagher Risk Mgmt. Servs., Inc.

2018 IL App (2d) 170939

110 N.E.3d 1081

The ROBERT R. MCCORMICK FOUNDATION and the Cantigny Foundation, Plaintiffs-Appellants,

v.ARTHUR J. GALLAGHER RISK MANAGEMENT SERVICES, INC., Defendant-Appellee.

No. 2-17-0939 & No. 2-17-0940

Appellate Court of Illinois, Second District.

Opinion filed July 20, 2018

John R. McCambridge, David E. Schoenfeld, and Matthew C. Wolfe, of Shook, Hardy & Bacon L.L.P., of Chicago, for appellants.

John C. Ellis, of Ellis Legal P.C., and Richard J. Prendergast and Michael T. Layden, of Richard J. Prendergast, Ltd., both of Chicago, for appellee.

JUSTICE HUTCHINSON delivered the judgment of the court, with opinion.

¶ 1 These consolidated interlocutory appeals are a sequel to an appeal we decided over two years ago, Robert R. McCormick Foundation v. Arthur J. Gallagher Risk Management Services, Inc. , 2016 IL App (2d) 150303, 402 Ill.Dec. 728, 52 N.E.3d 649 ( Foundations I ). In these appeals, however, we consider the scope of attorney-client privilege and whether the trial court should have granted a renewed request for a stay.

¶ 2 Plaintiffs, the Robert R. McCormick Foundation and the Cantigny Foundation (the Foundations) sued their former insurance broker, Arthur J. Gallagher Risk Management Services, Inc. (Gallagher). The Foundations were formerly the second largest shareholder group in the Tribune Company (Tribune), a large multimedia corporation. The Foundations sold their preferred stock for some $2 billion during a leveraged buyout (LBO) of the company in 2007. Less than one year after the transaction, Tribune filed for bankruptcy protection. The buyout itself, as we noted in Foundations I , left many Tribune creditors "holding the proverbial bag." Id. ¶ 3.

¶ 3 After the LBO, in 2009, the Foundations hired Gallagher to procure for them directors' and officers' (D & O) liability insurance. Gallagher obtained $25 million in D & O coverage for the Foundations through (what was essentially) a single policy with Chubb Insurance (Chubb). The Foundations allege that in 2010 Gallagher advised that they could obtain the same coverage—"apples-to-apples"—at a reduced premium with (what was essentially) a $25 million policy from Chartis Insurance (Chartis). The Foundations purchased the Chartis policy and let the Chubb policy lapse.

¶ 4 Soon after Tribune exited bankruptcy in 2011 (see In re Tribune Co. , 464 B.R. 126 (Bankr. D. Del. 2011) ), aggrieved shareholders filed a number of federal suits across the country against more than 5000 defendants; the suits were eventually consolidated in the Southern District of New York. See In re Tribune Co. Fraudulent Conveyance Litigation , 831 F.Supp.2d 1371 (J.P.M.L. 2011). The Foundations were named as defendants in three of the suits (which remain ongoing, as we discuss below). These suits generally allege that the Foundations—through their directors and officers, and acting in concert with other "controlling shareholders"—orchestrated the LBO through actual and constructive fraud. Accordingly, the suits seek to unwind the LBO and to claw back creditors' funds.

¶ 5 Relevant here, when the Foundations tendered the suits (the LBO litigation) to Chartis under their D & O policy, Chartis denied coverage under a policy exclusion for claims "in any way relating to any purchase or sale of securities." The Foundations, asserting that Chubb would have defended and indemnified them under their former policy, sued Gallagher for breach of contract and professional negligence resulting in a loss of coverage. On Gallagher's motion for summary judgment, the trial court determined that an exclusion in the Chubb policy, too, would have barred coverage for the LBO litigation. In Foundations I , we held that the Chubb exclusion in question did not necessarily bar coverage, and we reversed the court's judgment. On remand, Gallagher tendered several affirmative defenses and the parties proceeded with discovery.

¶ 6 During discovery, Gallagher subpoenaed the Foundations and their legal counsel for, among other things, the following:

"1. Any reports or opinion letters prepared for * * * the Foundations * * * relating to the Tribune Co. or the LBO.

2. Any and all communications related to the Foundations' Director[s'] and Officers['] insurance policy or coverage.

3. Any and all communications with the Foundations related to the Tribune Bankruptcy.

4. Any and all communications with the Foundations related to the LBO Litigation."

The Foundations indicated that there were documents and electronic communications responsive to Gallagher's request (and filing a roughly 40-page privilege log (see Ill. S. Ct. R. 201(n) (eff. July 1, 2014) ) but refused to tender them, citing attorney-client privilege. The Foundations then asked the court to quash the subpoenas or, in the alternative, "stay or phase" the case until the completion of the LBO litigation. Gallagher, in turn, sought an order to compel production and opposed the Foundations' stay request.

¶ 7 After a hearing, the trial court denied the Foundations' request for a stay and ordered the Foundations to tender the requested materials. Specifically, the court noted that by suing Gallagher the Foundations had aligned Gallagher's interest with their own in the underlying litigation—that is, that Gallagher "may bear the ultimate burden of payment of the underlying claims and defense costs." Accordingly, under an exception to the attorney-client privilege, which was set forth by our supreme court in Waste Management, Inc. v. International Surplus Lines Insurance Co. , 144 Ill.2d 178, 190, 161 Ill.Dec. 774, 579 N.E.2d 322 (1991), the court found that the Foundations must tender the requested materials. The court also stated, however, that it would be willing to consider a protective order limiting Gallagher's use of any disclosure. As to the Foundations' request for a stay, the court noted that it had denied a similar request in April 2014, and it once again declined to issue a stay.

¶ 8 The Foundations appealed the trial court's denial of the stay (No. 2-17-0940). The Foundations also sought to test the trial court's discovery ruling and, in a separate order, were held in "friendly contempt," which they also appeal (No. 2-17-0939). We have jurisdiction over both matters ( Ill. S. Ct. R. 304(b)(5) (eff. Mar. 8, 2016); R. 307(a)(1) (eff. Nov. 1, 2017) ), which we have consolidated at the parties' request. Now, with some modifications, we affirm the judgment of the trial court.

¶ 9 We turn first to the trial court's contempt finding, under which we review the propriety of the underlying discovery order. See Norskog v. Pfiel , 197 Ill.2d 60, 69, 257 Ill.Dec. 899, 755 N.E.2d 1 (2001). The attorney-client privilege, of course, protects the confidences communicated between attorney and client. But that privilege, as with so many legal concepts, is not without its exceptions. Indeed, Illinois has "a strong policy of encouraging disclosure," and thus "the privilege, not the duty to disclose, * * * is the exception." Waste Management , 144 Ill.2d at 190, 161 Ill.Dec. 774, 579 N.E.2d 322. Accordingly, our task is to construe the privilege "within its narrowest possible limits." Id. We review de novo questions concerning the application of and exceptions to the privilege. Center Partners, Ltd. v. Growth Head GP, LLC , 2012 IL 113107, ¶ 65, 367 Ill.Dec. 20, 981 N.E.2d 345.

¶ 10 In Waste Management , 144 Ill.2d 178, 161 Ill.Dec. 774, 579 N.E.2d 322, our supreme court discussed two exceptions to the attorney-client privilege. The first exception relied on a "cooperation clause" in an insurance contract in that case. Id. at 192, 161 Ill.Dec. 774, 579 N.E.2d 322. Here, the parties agree that there was no cooperation clause in the Foundations' brokerage contract with Gallagher, so the first Waste Management exception is irrelevant. See, e.g. , Western States Insurance Co. v. O'Hara , 357 Ill.App.3d 509, 516, 293 Ill.Dec. 532, 828 N.E.2d 842 (2005).

¶ 11 The second Waste Management exception, however, does apply. Finding this exception "equally compelling," our supreme court held that, under the common-interest doctrine, the attorney-client privilege did not bar discovery of communications or documents, created in defense of two previously settled lawsuits, in a subsequent coverage dispute regarding one of those suits. See Waste Management , 144 Ill.2d at 193, 161 Ill.Dec. 774, 579 N.E.2d 322. Such materials are, in essence, deemed to have been prepared for the benefit of both parties, as the suit has joined their interests. See id. As our supreme court explained, the common-interest doctrine has its roots in the dual-representation doctrine—i.e. , where one lawyer represents two joined parties, such as two criminal codefendants—which is a historical exception to the attorney-client privilege. See id. at 193-94, 161 Ill.Dec. 774, 579 N.E.2d 322. However, the court made clear that this exception to the attorney-client privilege "may properly be applied where the attorney, though neither retained by nor in direct communication with the insurer, acts for the mutual benefit of both [parties]"; this is true regardless of whether the parties retained the same lawyer or even had joined interests at the time of the communication. Id. at 194, 161 Ill.Dec. 774, 579 N.E.2d 322. As the court recognized, this situation is, of course, likely to arise in coverage litigation between insurers and insureds, but it is by no means limited to that context. Id. at 193, 161 Ill.Dec. 774, 579 N.E.2d 322. Instead, the exception depends not on the nature of the parties but on the "commonality of interests" between them, or who might be "ultimately liable for payment if the plaintiffs in the underlying action received either a favorable verdict or settlement." Id. at 194-95, 161 Ill.Dec. 774, 579 N.E.2d 322.

¶ 12 The common-interest exception also has its limits. For example, while it might be said that the parties have a common interest in defeating the underlying litigation, and thus...