In a case that involved thousands of toxic tort liability cases, the Illinois Appellate Court has ruled that an industrial manufacturer must turn over documents it alleged were privileged to a company indemnifying it.
Since the 1950s, KEC has operated a facility in Mississippi that produces electrical transformers. As part of the Kuhlman Corp. sale, KEC represented that there was no soil contamination on its Mississippi property.
BorgWarner sold KEC in October 1999 to KEC Acquisition Corp (KAC). As part of that deal, KAC represented that it was compliant with environmental laws and had no material liability at its Mississippi plant. BorgWarner and Kuhlman agreed to indemnify KEC and KAC for certain environmental liabilities dating back to before the sales’ closing.
However, by April 2000, just a few months after the closing, KEC and KAC informed BorgWarner that it discovered the toxic chemical polychlorinated biphenyl (PCB) in the soil that may give rise to lawsuits. KEC and KAC told BorgWarner that they had no prior knowledge of this contamination.
Thousands of personal-injury and property-damage lawsuits related to the PCB contamination were filed starting in 2001. BorgWarner and KEC hired a Chicago law firm to defend against the tort claims.
In February 2004, in response to a subpoena in one of the tort cases in Mississippi, a KAC environmental lawyer revealed the company possessed an environmental report from 1988 soil tests showing the presence of PCB.
The Chicago lawyers withdrew from the case, and the parties took separate lawyers while defending the case together under a “Joint Defense and Confidentiality Agreement.”
In August 2010, BorgWarner and Kuhlman filed their complaint in the Circuit Court of Cook County complaining against KEC and KAC that their 1999 agreement had been breached. The plaintiffs also sought a declaration that they had no obligation to indemnify KEC and KAC in the many pending tort cases.
In the complaint filed, BorgWarner and Kuhlman alleged that KAC and KEC refused to disclose relevant information and documents related to the tort cases in violation of the parties’ contract.
KEC and KAC’s counterclaim maintained that BorgWarner breached the contract by refusing to indemnify them against the tort cases. KAC also alleged that BorgWarner falsely represented KEC’s liabilities for contamination at the time they completed the sale.
During discovery in the Cook County case, BorgWarner and Kuhlman requested the production of KEC’s and KAC’s documents regarding the contamination and underlying tort cases. The defendants refused to produce certain documents, claiming that they were protected by attorney-client privilege and the work-product doctrine.
In August 2012, a Cook County chancery associate judge ordered KEC and KAC to produce all non-privileged documents and to prepare a “privilege log” identifying the categories of any withheld documents.
KEC and KAC produced the log a month later, identifying about 40,000 documents in 28 different categories.
In February 2013, the trial judge ordered KEC and KAC to produce documents in 22 of the 28 categories, citing the defendants’ duty to cooperate under the 1999 agreement and the parties’ common interest in the underlying tort lawsuits. The Circuit Court chancery judge also found that the defendants waived privilege by putting the privileged materials at issue in their affirmative defenses and in counterclaims.
Only documents generated for KEC and KAC’s defense in the indemnifying disputes were protected. That was the chancery judge’s ruling.
In May 2013, after KEC and KAC refused to produce the documents, the judge found them in friendly direct civil contempt of court.
In a 22-page opinion written by the First District Appellate Justice Joy V. Cunningham, the appeals panel affirmed the trial judge’s ruling and vacated the contempt order.
Justice Cunningham wrote that Illinois public policy strongly favors complete disclosures in litigation and should allow privilege within narrow constraints. The panel found neither attorney-client privilege nor the work-product documents barred discovery of the requested documents. The appeals panel found that the expectation of attorney-client privilege was unreasonable, and the work-product doctrine did not apply because the documents were prepared in defense of underlying third-party adversaries. The court rejected the defendants’ argument that the 2004 joint-defense and confidentiality agreement barred disclosure of the privileged information.
Lastly, the panel vacated the contempt order, finding that the defendants’ actions were taken in good faith.
BorgWarner, Inc., et al. v. Kuhlman Electric Corp, et al., 2014 IL App (1st) 131824.
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