02-5251.051 July 14, 2005

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF ILLINOIS

EASTERN DIVISION

AMERICAN NATIONAL BANK AND TRUST )

COMPANY OF CHICAGO, as Trustee )

f/b/o Emerald Investments Limited )

Partnership, and EMERALD )

INVESTMENTS LIMITED PARTNERSHIP, )

an Illinois partnership, )

)

Plaintiffs, )

)

 v. ) No. 02 C 5251

) 

ALLMERICA FINANCIAL LIFE )

INSURANCE AND ANNUITY COMPANY, )

 )

Defendant. )

MEMORANDUM OPINION

Pending before the court is a motion by plaintiff Emerald

Investments Limited Partnership (“Emerald”) to “compel answers to

deposition questions regarding the “July Restrictions.” The motion

arises out of a dispute between the parties as to whether certain

information sought by plaintiff is protected by the attorney-client

privilege. 

A brief review of the procedural history of the case will be

helpful. The following is taken from our Memorandum Opinion of

December 11, 2003, granting partial summary judgment to Emerald. 

Plaintiff Emerald Investments Limited Partnership

(“Emerald”) is an entity that invests in annuities.

Emerald states that it has a proprietary trading strategy

that requires a high degree of flexibility in moving its

money quickly and freely among investments. 
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On March 17, 1999, Emerald invested $2.5 million in each

of two annuities (the “Annuities”), for a total of $5

million, that were issued by defendant Allmerica

Financial Life Insurance and Annuity Company

(“Allmerica”). ... The owner of the Annuities may invest

contributions in a variety of investment options in “subaccounts” managed by Kemper Gateway, primarily stock,

bond, and money market mutual funds.

The parties entered into “Kemper Annuity Contracts” (the

“Contracts”) setting forth the terms and conditions

governing the Annuities. ... Regarding transfers among

accounts, the Contracts provide, in relevant part: 

Prior to the Annuity Date, the Owner may

transfer amounts among accounts by Written or

Telephone Request to the Principal Office....

. . .

There is no charge for the first twelve

transfers per contract year. A transfer

charge of up to $25 may be imposed on each

additional transfer.

(Mem. Op. at 1-3). 

In December 2001, having concluded that Emerald was engaged in

a “market timing” strategy, Allmerica adopted a set of “Transfer

Rules” which severely limited the number of transfers that Emerald

could make to and from the international sub-accounts of its

annuity contracts. Emerald then filed this suit, alleging breach

of contract by Allmerica in that the annuity contracts contained no

provision authorizing such limitations. We granted summary

judgment to Emerald on this liability issue. 

Thereafter, at the court’s request, Emerald filed a memorandum

outlining its theory of damages. The memorandum disclosed that

Emerald would be seeking very substantial damages on the basis
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that, but for Allmerica’s breach, Emerald would have been able to

earn profits from its trading strategy into the almost indefinite

future. An expert retained by Emerald estimated the damages at

$150,000,000. 

The next development was Allmerica’s notice to Emerald that,

as of July 30, 2004, the Scudder International Funds would no

longer be available for investment by Emerald. As authority for

this Restriction, Allmerica relied upon provisions of the annuity

contracts different from those considered in our earlier summary

judgment ruling. Because transfers into and out of the

international funds are an integral part of Emerald’s trading

strategy, Allmerica argued that Emerald’s damages should be cut off

as of July 30, 2004. 

Emerald challenged the right of Allmerica to impose these

“July Restrictions,” arguing that the contractual provisions relied

on by Allmerica conferred no such authority. We disagreed,

however, and held that Emerald’s damages would be cut off as of

July 30, 2004, unless Emerald could prove that the July

Restrictions were imposed in bad faith. We held, in other words,

that the contractual provisions in question did give Allmerica

discretion to eliminate trading in the international sub-accounts,

but that the implied covenant of good faith and fair dealing

required that the discretion be exercised in good faith. 
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Emerald then filed an amended complaint, including an

allegation that the July Restrictions, which purported to be for

the protection of Allmerica’s other investors from the ill effects

of market timing, were actually imposed for the purpose of limiting

Emerald’s damages. This latter purpose, in Emerald’s view, would

amount to bad faith. That, in turn, would invalidate the

Restrictions and remove any limit on Emerald’s damage period. 

The deposition questions at issue have to do with the

communications between Allmerica’s executives and its in-house

counsel leading up to the adoption of the July Restrictions. The

Restrictions were actually drafted by in-house counsel.

Emerald wants to know what was said in communications between

counsel and corporate officers concerning the reasons for the July

Restrictions. It obviously hopes that the answers it seeks would

disclose that limiting plaintiff’s damages was the primary

motivation. 

Allmerica contends that the communications in question are

protected by the attorney-client privilege. Emerald argues that

the privilege has been waived by Allmerica’s having placed its good

faith at issue in the case. Allmerica denies that it has raised

any issue as to its good faith.

It is true that as a general proposition a party will waive

the attorney privilege when it places at issue its communications

with its attorney in connection with any claim or defense it
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raises. Emerald contends that Allmerica has done exactly that by

relying on the additional contractual provisions to impose the July

Restrictions. Because the Restrictions could only be valid if

Allmerica was exercising its contractual discretion in good faith,

Allmerica is necessarily raising the issue of good faith by relying

on the July Restrictions. Allmerica counters that it is Emerald

which has raised the issue of good faith by alleging bad faith in

the amended complaint, an allegation on which Emerald has the

burden of proof. 

We agree with Allmerica. By denying that it acted in bad

faith it has done nothing to waive the attorney-client privilege

concerning communications which might be relevant to the issue of

bad faith. Illinois law applies to privilege questions in this

diversity case, and we are satisfied that Illinois law would

support Allmerica’s position. The Illinois cases have not

articulated the “at issue” rule as clearly as some of the federal

cases, but we believe the Illinois Supreme Court, when presented

with this specific question, would follow the reasoning of the

Third Circuit in Rhone-Poulenc Rorer Inc. v. Home Indem. Co., 32

F.3d 851 (3rd Cir. 1994), considered a leading case on the subject:

There is authority for the proposition that a party can

waive the attorney client privilege by asserting claims

or defenses that put his or her attorney’s advice in

issue in the litigation. For example, a client may waive

the privilege as to certain communications with a lawyer

by filing a malpractice action against the lawyer. A

defendant may also waive the privilege by asserting

reliance on the advice of counsel as an affirmative
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defense. In an action for patent infringement, where a

party is accused of acting willfully, and where that

party asserts as an essential element of its defense that

it relied upon the advice of counsel, the party waives

the privilege regarding communications pertaining to that

advice.

 In these cases, the client has made the decision and

taken the affirmative step in the litigation to place the

advice of the attorney in issue. Courts have found that

by placing the advice in issue, the client has opened to

examination facts relating to that advice. Advice is not

in issue merely because it is relevant, and does not

necessarily become in issue merely because the attorney's

advice might affect the client's state of mind in a

relevant manner. The advice of counsel is placed in

issue where the client asserts a claim or defense, and

attempts to prove that claim or defense by disclosing or

describing an attorney client communication.

Id. at 863 (citations omitted). 

A similar ruling is found in the Seventh Circuit case of

Lorenz v. Valley Forge Ins. Co., 815 F.2d 1095 (7th Cir. 1987). The

plaintiffs alleged that the defendant insurance company had denied

their fire insurance claim in bad faith. The company had offered

to settle the claim, and one issue was whether the settlement offer

was made in bad faith. The magistrate judge found that the company

had waived its attorney-client privilege “by voluntarily injecting

its good faith in the settlement negotiations as a material issue

in the case.” Id. at 1098. The Court of Appeals reversed,

applying Indiana law. We believe the Illinois Supreme Court would

agree with the following analysis: 

To waive the attorney-client privilege by voluntarily

injecting an issue in the case, a defendant must do more

than merely deny a plaintiff’s allegations. The holder

must inject a new factual or legal issue into the case.

Most often, this occurs through the use of an affirmative

defense. See, e.g., United States v. Exxon, 94 F.R.D.
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246 (Dist. Ct. 1981) (good faith reliance on government

regulations); United States v. Mierzwicki, 500 F. Supp.

1331 (Dist. Ct. Md.1980) (reliance on advice of

attorney); Hearn v. Rhay, 68 F.R.D. 574 (E.D. Wash. 1975)

(qualified immunity). It is the nature of an affirmative

defense to raise a “matter outside the scope of

plaintiff's prima facie case.” 2A J. MOORE, MOORES

FEDERAL PRACTICE ¶ 8.19[1] (2d ed. 1984); Rice v. Grant

County Bd. of Comm'rs et al., 472 N.E.2d 213 (Ind. App.

1984).

Our examination of the record reveals that Valley Forge

did nothing more than deny the plaintiffs’ allegations

that it had failed to pay after the suit was filed and

had improperly “packaged" the punitive damages claim with

the compensatory claim. Valley Forge did not assert that

the offer to settle was made in good faith--it did not

have to. Valley Forge sought to show only that postfiling offers had been made, and, to counter any negative

inference that might be drawn from the offer to settle

both claims together, Valley Forge sought to show that

the idea to “package" the two claims had originated with

the plaintiffs’ attorney. Offering to show that a postfiling offer of settlement had been made does not inject

a new legal or factual issue into the case. The

settlement offer is merely a new form of evidence to

counter an issue injected by the plaintiffs. Similarly,

the testimony of Valley Forge’s former attorney,

regarding the origin of the decision to “package" the

offer of settlement, does not inject a new legal issue,

but is merely another method of proof. Therefore,

neither the settlement negotiations nor the testimony of

McInerey can provide a basis for finding waiver under the

“voluntary injection" doctrine. 

Id. The following Illinois cases are consistent with these

statements from Rhone-Poulenc and Lorenz: Fischel & Kahn, Ltd. v.

Van Straaten Gallery, Inc., 727 N.E.2d 240, 244-46 (Ill. 2000);

Hayes v. Burlington N. & Santa Fe Ry., 752 N.E.2d 470, 475-76 (Ill.

App. Ct. 2001); see also Dexia Credit Local v. Rogan, No. 02 C
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8288, 2004 WL 3119026, at *7-8 (N.D. Ill. Dec. 21, 2004)

(discussing Illinois law).

Emerald relies primarily on the Illinois Appellate Court

decision in Lama v. Preskill, 818 N.E.2d 443 (Ill. App. Ct. 2004),

a medical malpractice case. Plaintiff alleged negligent surgery by

the defendant physician. The suit was not filed until more than

two years after the surgery, so there was a limitations issue.

Plaintiff alleged in her complaint that she did not discover her

injury until a point in time well within the limitations period.

The trial court held that by making this allegation the plaintiff

waived any privilege as to communications with her attorney

concerning when she knew she was injured. On appeal, the majority

of the Panel agreed. There was a dissenting opinion by Justice

Bowman, however, which we think is in line with what the Illinois

Supreme Court would hold if it were presented with the question:

The case at bar is not a situation where the plaintiff

has taken the affirmative step of placing the advice of

her former attorney at issue in order to assert a claim

or defense. Rather, it is defendant who seeks to

discover plaintiff's husband's communications with Carden

[the attorney] in order to disprove plaintiff's claim.

Because plaintiff, as privilege holder, is not attempting

to prove her claim (or defense) by relying upon these

privileged communications in order to prevail, she has

not waived any attorney-client privilege with Carden.

Id. at 453.
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1/ One question we have is how to test Allmerica’s claim that a fact was

disclosed by the attorney. When the question specifically calls for what the

attorney said, the applicability of the privilege is usually fairly clear. But

here, we have only the objection of counsel to support the claim that a

particular fact was conveyed to the client by the attorney. Is there anything

analogous to a “privilege log” that could be of use in this kind of situation?

How have the cases handled the problem?

Our conclusion is that Allmerica has not waived the attorneyclient privilege in regard to any communications it had with its

attorneys concerning the subject of the July Restrictions. 

However, this does not dispose of Emerald’s motion to compel.

Emerald argues that some of the questions Allmerica’s witnesses

refused to answer were not protected by the privilege in any event,

since they merely called for factual information as distinguished

from attorney-client communications. Allmerica’s position appears

to be that when facts are communicated to the client by the

attorney, then the fact of such communication (including the timing

of it), and whether the client learned the fact, are protected by

the privilege and cannot be inquired into. The parties have

briefed this question to some extent, but we request that they give

it additional attention now that we have resolved the basic

question of waiver. The parties are requested to file crossmemoranda on the question of unprotected fact vs. privileged

confidential communication by July 29, and cross-responses by

August 19, 2005.1
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When we have read the additional memoranda we will set a date

for a status conference and perhaps oral argument on this remaining

issue. 

DATE: July 14, 2005

ENTER: _____________________________________________

John F. Grady, United States District Judge