Court Opinion

ID: 3148204
Source: CourtListenerOpinion
Date Created: 2015-10-22 18:43:33.360177+00
Date Added: 2024-06-11T12:06:25.367642
License: Public Domain

ILLINOIS OFFICIAL REPORTS
                                        Appellate Court

        MDA City Apartments LLC v. DLA Piper LLP (US), 2012 IL App (1st) 111047

Appellate Court            MDA CITY APARTMENTS LLC, Plaintiff-Appellee and Third-Party
Caption                    Defendant, v. DLA PIPER LLP (US), Defendant-Appellant and Third-
                           Party Plaintiff (Village Green Companies and Kent Maynard and
                           Associates LLC, Plaintiffs and Third-Party Defendants).

District & No.             First District, Fourth Division
                           Docket No. 1-11-1047

Filed                      March 22, 2012

Held                       In a dispute arising from defendant law firm’s representation of plaintiff
(Note: This syllabus       in connection with the construction of an apartment building, the
constitutes no part of     appellate court reversed a trial court order directing defendant to produce
the opinion of the court   certain communications with its in-house and outside counsel related to
but has been prepared      motions to disqualify defendant from representing plaintiff and plaintiff’s
by the Reporter of         legal malpractice claims against defendant, since the information plaintiff
Decisions for the          sought was protected by the attorney-client privilege and plaintiff failed
convenience of the         to show that any exception to the privilege applied.
reader.)

Decision Under             Appeal from the Circuit Court of Cook County, No. 08-L-05113; the
Review                     Hon. Daniel J. Pierce, Judge, presiding.

Judgment                   Reversed in part and vacated in part; cause remanded.
Counsel on                 Chen Nelson Roberts Ltd., of Chicago (James Roberts, John Chen, and
Appeal                     Kristi Nelson, of counsel), for appellant.

                           Meckler Bulger Tilson Marick & Pearson LLP, of Chicago (Bruce R.
                           Meckler, Christopher E. Kentra, James G. Argionis, and Jeffrey B.
                           Greenspan, of counsel), for appellee.

Panel                      JUSTICE STERBA delivered the judgment of the court, with opinion.
                           Presiding Justice Lavin and Justice Pucinski concurred in the judgment
                           and opinion.

                                             OPINION

¶1          Defendant-appellant DLA Piper LLP (DLA) represented plaintiff-appellee MDA City
        Apartments LLC (MDA) in arbitration proceedings and a declaratory judgment action against
        Walsh Construction Company (Walsh) arising from a contract dispute. Walsh filed motions
        to disqualify DLA as MDA’s counsel on conflict of interest grounds in both proceedings.
        MDA subsequently filed a legal malpractice action against DLA. During the discovery phase
        of the malpractice proceedings, DLA objected to MDA’s requests to produce
        communications between DLA attorneys and both in-house and outside counsel related to
        Walsh’s motions to disqualify and MDA’s malpractice claims against DLA, on the grounds
        that the communications were protected by attorney-client privilege. The circuit court granted
        MDA’s motion to compel and ordered DLA to produce the communications in question.
        DLA declined to comply with the production order and was held in contempt and assessed
        a $100 fine. On appeal, DLA contends that the communications in question are protected by
        the attorney-client privilege and that the fiduciary-duty exception does not apply. For the
        following reasons, we reverse the order of the circuit court and remand for further
        proceedings.

¶2                                       BACKGROUND
¶3          In 2003, MDA acquired the building located at 185 North Wabash Avenue in Chicago
        with the intent of converting it into a luxury residential apartment building with two
        commercial retail spaces on the first floor. DLA was engaged as legal counsel to represent
        MDA in connection with the acquisition and financing of the property, contract negotiations
        with the general contractor, construction issues, and certain litigation or arbitration
        proceedings involving the property. MDA retained Walsh as a preconstruction consultant in
        2003 and subsequently executed a contract with Walsh for the renovation of the property.
¶4          Disputes arose between MDA and Walsh during renovation and MDA informed DLA
        that Walsh had breached its contract in various ways. The alleged breaches included Walsh’s

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     failure to adequately staff the renovation, delays in “critical path” items such as establishing
     elevator service and failure to notify MDA of the delays, submission of poorly documented
     and unreasonable change orders, refusal to provide MDA with copies of subcontractor
     contracts, failure to adhere to quality standards, and failure to achieve substantial completion
     on time. On December 6, 2005, DLA sent MDA a memo advising MDA of its options
     regarding the withholding of payment from Walsh. The memo advised MDA of Walsh’s
     possible responses to withholding payment, and noted that Walsh’s likely response would
     be to record mechanics’ liens on the property and also allow subcontractors to record such
     liens. On December 20, 2005, DLA sent Walsh a letter on behalf of MDA, advising Walsh
     that MDA was exercising its contractual right to withhold payment. On December 21, 2005,
     Walsh recorded a mechanic’s lien on the property in the amount of $6.5 million. The lien
     was subsequently increased to $9 million.
¶5        Following additional correspondence between DLA and Walsh in an attempt to resolve
     the dispute, DLA advised Walsh on March 14, 2006, that MDA was terminating its contract
     with Walsh. On March 23, 2006, DLA sent MDA an e-mail in which DLA recommended
     filing a complaint for declaratory judgment against Walsh and an arbitration demand,
     preferably simultaneously. On March 28, 2006, Walsh initiated arbitration claims against
     MDA, seeking damages from MDA in excess of $9.5 million. On behalf of MDA, DLA filed
     a complaint for declaratory judgment against Walsh in the circuit court of Cook County
     (chancery action) on April 28, 2006.
¶6        DLA advised MDA in a letter dated June 6, 2006, that it had received courtesy notice
     from Walsh’s counsel of Walsh’s intent to file a motion to disqualify DLA as MDA’s
     counsel. The letter informed MDA that DLA suspected the basis for the motion would be the
     fact that Walsh Construction is affiliated through a purported common ownership with
     Walsh Investors, for whom DLA had done work. The letter further stated that although DLA
     had represented Walsh Investors in other transactions, neither Walsh Construction nor Walsh
     Investors had ever claimed a conflict of interest in matters in which DLA was adverse to
     Walsh Construction. The letter speculated that it was only after DLA filed the chancery
     action that Walsh made the tactical decision to raise the conflict of interest issue. The letter
     stated that DLA would vigorously defend the motion to disqualify, and, given that the basis
     for the motion was an alleged conflict involving DLA, would not charge MDA any legal fees
     incurred in connection with arguing the motion.
¶7        Walsh filed a motion to disqualify DLA as counsel in the chancery action on June 15,
     2006, and filed a similar motion in the arbitration proceedings. In addition to consulting with
     its in-house counsel, William Campbell, regarding the motions to disqualify, DLA hired the
     law firm of Quinlan & Carroll Ltd. (Quinlan) in July 2006 to represent DLA on those
     motions. Walsh also filed a motion to dismiss, or in the alternative, to stay the proceedings
     in the chancery action. On September 19, 2006, the circuit court granted the motion to stay,
     deferring a ruling on the substantive issues in the chancery action until completion of the
     arbitration proceedings. On October 16, 2006, DLA filed an arbitration demand against
     Walsh, seeking $20 million in damages. A preliminary arbitration hearing was held on
     January 2, 2007, and a scheduling order was entered on January 12, 2007, setting the
     commencement of arbitration hearings for October 1, 2007.

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¶8         In the meantime, following discovery and briefing on the motion to disqualify in the
       chancery action, the circuit court heard arguments on the motion on July 18, 2007. On
       August 6, 2007, the circuit court granted the motion to disqualify DLA from representing
       MDA in the chancery action. The circuit court found that because DLA represented Matt
       Walsh and Dan Walsh, the owners of Walsh Construction, DLA previously represented
       Walsh. The circuit court further found that because of its representation of the Walsh
       brothers, DLA had confidential information relating to the litigation strategies of Walsh that
       would impact its ability to negotiate a settlement between Walsh and MDA. On August 14,
       2007, the arbitration panel granted Walsh’s motion to disqualify in the arbitration
       proceedings. MDA retained the law firm of Sonnenschein Nath & Rosenthal LLP on August
       24, 2007, as substitute counsel for DLA.
¶9         On May 8, 2008, MDA filed a legal malpractice action against DLA. MDA’s second
       amended complaint was filed on October 22, 2009. It included counts for legal malpractice,
       fraudulent concealment, and an accounting and forfeiture of attorney fees. MDA alleged that
       DLA committed legal malpractice by providing negligent advice on the construction contract
       with Walsh and on Walsh’s performance as general contractor, by failing to disclose conflicts
       of interest, and by failing to adequately prepare for the arbitration. In its answer to the second
       amended complaint, DLA admitted that it did not advise MDA of its representations of other
       entities owned by the Walsh brothers. DLA stated that it did not believe it had any potential
       or actual conflicts of interest because its representation of other Walsh-owned entities was
       not related to MDA’s renovation of the property. In its answer, DLA also stated as an
       affirmative defense that MDA informed DLA that MDA had retained the law firm of Kent
       Maynard & Associates to represent MDA in the arbitration proceedings and the chancery
       action, and also informed DLA that its role in those proceedings would be limited.
¶ 10       During discovery, DLA produced its conflicts resolution file. MDA also deposed a
       member of DLA’s conflicts department. In addition, DLA produced a privilege log
       delineating 57 e-mail communications between DLA attorneys and Campbell from May 2006
       through July 2009, and between DLA attorneys and Quinlan from September 2006 through
       August 2007. DLA subsequently produced two of the documents listed on the privilege log.
       MDA filed a motion to compel DLA to produce the remaining 55 communications. MDA
       argued that the documents were not protected by the attorney-client privilege because of the
       fiduciary-duty exception to that privilege. DLA attached Campbell’s affidavit to its motion
       in opposition. Campbell stated that his primary responsibility was to act as in-house counsel
       to DLA and that he no longer actively represented clients of the firm. He stated that his
       communications with attorneys at DLA related to the motion to disqualify, the ruling on the
       motion to disqualify, and the threatened litigation by MDA.
¶ 11       At a hearing on the motion to compel on March 10, 2011, the circuit court stated that as
       long as an attorney represents a client, the client is entitled to communications the attorney
       has with in-house and outside counsel related to issues involving the client. On March 14,
       2011, the circuit court entered an order granting the motion to compel DLA to produce the
       55 documents for the reasons stated in open court, holding DLA in civil contempt for its
       refusal to comply, and assessing a sanction of $100 against DLA. DLA timely filed this
       appeal.

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¶ 12                                         ANALYSIS
¶ 13       DLA contends that the circuit court erred in ordering the production of communications
       with in-house and outside counsel because the communications are protected from disclosure
       by the attorney-client privilege and the fiduciary-duty exception does not apply. Discovery
       orders are generally subject to an abuse of discretion standard of review; however, we review
       the circuit court’s determination of whether a privilege applies de novo. Mueller Industries,
       Inc. v. Berkman, 399 Ill. App. 3d 456, 463 (2010).
¶ 14       The purpose of the attorney-client privilege is to encourage clients to engage in full and
       frank discussion with their attorneys without the fear of compelled disclosure of information.
       Upjohn Co. v. United States, 449 U.S. 383, 389 (1981); Waste Management, Inc. v.
       International Surplus Lines Insurance Co., 144 Ill. 2d 178, 190 (1991). However, the
       privilege has limits and must be narrowly construed. Waste Management, 144 Ill. 2d at 190.
       Under Illinois law, the attorney-client privilege protects “communications which the claimant
       either expressly made confidential or which he could reasonably believe under the
       circumstances would be understood by the attorney as such.” Id.
¶ 15       The fiduciary-duty exception to the attorney-client privilege arose in the context of trust
       law, and was based on the principle that the beneficiary of a trust had a right to the
       production of legal advice rendered to the trustee relating to the administration of the trust.
       Mueller, 399 Ill. App. 3d at 468. The theory behind the exception was that because the advice
       was obtained using the authority and funds of the trust and the beneficiary was the ultimate
       recipient of the benefit of the advice, the beneficiary was entitled to discover the
       communications between the attorney and the fiduciary. Id. The fiduciary-duty exception
       does not, however, apply to legal advice rendered concerning the personal liability of the
       fiduciary or in anticipation of adversarial legal proceedings against the fiduciary. Id. at 469.
¶ 16       As this court recently noted in Garvy v. Seyfarth Shaw LLP, 2012 IL App (1st) 110115,
       ¶ 35, Illinois has not adopted the fiduciary-duty exception to the attorney-client privilege.1
       See also Mueller, 399 Ill. App. 3d at 469. In Garvy, the client was sued as a result of advice
       allegedly given by the law firm. Garvy, 2012 IL App (1st) 110115, ¶¶ 4-8. When the client
       asked the law firm to represent him in the suit, the law firm responded by sending a letter in
       which it detailed the conflict of interest resulting from the firm’s role in providing the legal
       advice that formed the basis of the suit. Id. ¶¶ 8-11. The client retained independent counsel
       and asserted legal malpractice claims against the firm, but asked the firm to continue its
       representation of him in the underlying suit. Id. ¶ 12. The client then sought production of
       all communications between the firm and its in-house and outside counsel relating to his
       malpractice claims against the firm. Id. ¶ 15.
¶ 17       In Garvy, this court discussed a recent United States Supreme Court decision that
       examined the history of the fiduciary-duty exception to the attorney-client privilege in
       American law. Id. ¶ 35 (citing United States v. Jicarilla Apache Nation, 564 U.S. ___, 131
       S. Ct. 2313 (2011)). In Jicarilla, the Supreme Court acknowledged that the leading case on

               1
                The slip opinion in Garvy is subject to modification or correction until it has been released
       for publication.

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       the fiduciary exception is Riggs National Bank of Washington, D.C. v. Zimmer, 355 A.2d 709
       (Del. Ch. 1976), and discussed the factors considered by the Riggs court in determining the
       “real client” to whom the attorney-client privilege properly belongs. Jicarilla, 564 U.S. at
       ___, 131 S. Ct. at 2321-22. One of the factors considered was whether there were any
       adversarial proceedings pending between the fiduciary and the beneficiary at the time the
       legal advice was sought. Id. at ___, 131 S. Ct. at 2322 (citing Riggs, 335 A.2d at 712). This
       factor was important because, if adversarial proceedings were pending, it would indicate that
       the fiduciary was seeking legal advice in a personal rather than a fiduciary capacity, and the
       exception would not apply. Id. This court concluded that even if Illinois did recognize the
       fiduciary-duty exception, it would not apply where the fiduciary sought legal advice in
       connection with the client’s legal malpractice claims against the fiduciary. Garvy, 2012 IL
       App (1st) 110115, ¶ 35.
¶ 18        It is clear that the same reasoning applies to the communications sought by MDA from
       both in-house and outside counsel related to threatened litigation by MDA. The remaining
       communications sought by MDA relate to the motions to disqualify that were filed in both
       the chancery action and the arbitration proceedings in which DLA represented MDA. We
       note that there is nothing in the record to indicate that any malpractice claims had been
       asserted by MDA at the time the motions to disqualify were filed. Indeed, the motions to
       disqualify were filed in June 2006, DLA hired Quinlan in July 2006, and MDA did not file
       its legal malpractice action against DLA until May 2008.
¶ 19        In determining the “real client” to whom the attorney-client privilege properly belongs,
       the Riggs court also considered which party was the intended beneficiary of the legal advice
       sought and, most importantly, who paid for that advice. Jicarilla, 564 U.S. at ___, 131 S. Ct.
       at 2322 (citing Riggs, 335 A.2d at 712). The Riggs court noted that the issue of payment for
       the advice sought was “ ‘a strong indication of precisely who the real client[ ] [was].’ ” Id.
       (quoting Riggs, 335 A.2d at 712). The record discloses that DLA sent MDA a letter in which
       it stated that it would not charge MDA any legal fees incurred in connection with arguing the
       motion to disqualify because the motion was based on an alleged conflict involving DLA.
       Moreover, Campbell’s affidavit states that DLA hired Quinlan to represent it in its opposition
       to the motion to disqualify and Quinlan was paid by DLA. Finally, although MDA can claim
       an interest in the ultimate ruling on the motion to disqualify, the motion itself was not
       directed to the merits of MDA’s position but to the alleged conflict involving DLA and,
       therefore, DLA was the beneficiary of the advice sought. Thus, even if we were to extend
       Illinois law by adopting the fiduciary-duty exception, which we decline to do on the facts
       here, the exception would not apply to the communications in question.
¶ 20        Although MDA specifically argued in terms of the fiduciary-duty exception in the
       proceedings below, it now contends that DLA could not establish that the attorney-client
       privilege applies to the communications at issue because DLA could have had no expectation
       that communications about an existing client would be confidential. Thus, MDA contends,
       because DLA has not established that the communications at issue are privileged, MDA does
       not have the burden of establishing that an exception to the privilege applies. MDA argues
       that DLA could have no expectation of confidentiality because the rules that govern attorney
       conduct require disclosure to current clients and because one of the fiduciary duties owed by

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       an attorney is a duty to disclose all material information about its representation to the client.
¶ 21        This court considered and rejected similar arguments in Garvy, concluding that, while
       an attorney’s fiduciary duties to his client and the rules governing attorney conduct may be
       relevant to the underlying malpractice claims, they have no relevance to a determination of
       whether the attorney-client privilege applies to certain communications. Garvy, 2012 IL App
       (1st) 110115, ¶¶ 39, 41. We observed that an argument that there can never be an expectation
       of confidentiality on the part of a fiduciary based on the duties a fiduciary owes “is simply
       an attempt to avoid a discussion of the applicability of the fiduciary-duty exception by calling
       it something other than an exception, thereby rendering the exception itself meaningless.”
       Id. ¶ 39.
¶ 22        Moreover, the fact that Rules 1.4 and 1.7 of the Illinois Rules of Professional Conduct
       (Ill. Rs. Prof’l Conduct Rs. 1.4, 1.7 (eff. Jan. 1, 2010)) impose requirements to keep clients
       reasonably informed regarding issues related to their representation and prohibit
       representation involving a concurrent conflict of interest has no relevance whatsoever to the
       issue of whether an attorney can have an expectation of confidentiality. As this court noted
       in Garvy, the rules also recognize that “[a] lawyer’s confidentiality obligations do not
       preclude a lawyer from securing confidential legal advice about the lawyer’s personal
       responsibility to comply with these Rules” (emphasis added) (Ill. Rs. Prof’l Conduct R.
       1.6(b)(4) cmt. 9 (eff. Jan. 1, 2010)), and that lawyers are permitted to make confidential
       reports of ethical issues to designated firm counsel (Ill. Rs. Prof’l Conduct R. 5.1 cmt. 3 (eff.
       Jan. 1, 2010)). Garvy, 2012 IL App (1st) 110115, ¶ 40.
¶ 23        MDA also argues that under the doctrine of dual representation, DLA could not have
       reasonably expected its communications with in-house and outside counsel to be
       confidential. In Mueller, this court addressed the dual representation doctrine in the context
       of two external clients of the law firm. Mueller, 399 Ill. App. 3d at 464. The Mueller court
       held that the attorney-client privilege did not apply where one client knew that the law firm
       represented another client on matters related to its representation of him, and could not
       reasonably have expected that his communications with his attorney on those matters would
       be confidential. Id. at 465. However, the Mueller court limited its holding to communications
       related to a plumbing supply company, the interest the two clients had in common. Id. Even
       if we were to conclude that DLA representing itself is analogous to the representation of an
       external client, MDA has not explained what common interest is involved in the
       communications at issue such that DLA could have no expectation of confidentiality. DLA
       sought legal advice concerning its professional obligations to a client. It did not seek legal
       advice relating to a common interest with MDA, thus, the dual representation doctrine is not
       applicable.
¶ 24        DLA also contends that even if this court should adopt the fiduciary-duty exception and
       determine that it applies, the circuit court erred in ordering the production of communications
       after August 6, 2007, the date DLA was disqualified as MDA’s counsel. The privilege log
       includes communications dated as late as July 2009. MDA contends that the date DLA’s
       representation of MDA ended is October 30, 2007, and that the privilege log includes 14
       documents dated after that date. MDA argues that these 14 documents are discoverable under
       the crime-fraud exception to the attorney-client privilege. MDA acknowledges that the circuit

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       court did not reference the crime-fraud exception in its ruling.
¶ 25       The crime-fraud exception to the attorney-client privilege is recognized in Illinois and
       applies when a client “seeks or obtains the service of an attorney in furtherance of criminal
       or fraudulent activity.” In re Marriage of Decker, 153 Ill. 2d 298, 313 (1992). The party
       invoking the exception must show that the client knew or should have known that the
       conduct was unlawful. Id. at 314. The exception does not apply to good-faith consultations
       with an attorney about the legal implications of a proposed course of action, even if it is later
       determined that the course of action was improper. Id. Because the communication itself is
       often the only evidence of whether the exception applies (id. at 322), our supreme court has
       adopted the United States Supreme Court’s approach to establishing the crime-fraud
       exception detailed in United States v. Zolin, 491 U.S. 554 (1989) (Decker, 153 Ill. 2d at 324-
       25). Once an adequate showing has been made to support a good-faith belief “ ‘that in
       camera review of the materials may reveal evidence to establish the claim that the crime-
       fraud exception applies’ [citation],” the trial court has the discretion to conduct such an
       inspection or to defer it if the court believes unprivileged information will be presented later
       to support the exception. Id. at 324. Our supreme court further noted that, where possible,
       it would be prudent to have another trial judge conduct the inspection once the initial
       threshold has been met due to the inherent problem in having the trial court view information
       that may, in fact, be privileged. Id. at 325.
¶ 26       MDA relies on Mueller, 399 Ill. App. 3d at 471, for the proposition that an intentional
       breach of fiduciary duty is sufficient to serve as the fraud necessary to establish the crime-
       fraud exception. This reliance is misplaced. The Mueller court first determined that the
       evidence in that case suggested that the law firm assisted one client in setting up an interest
       in one of the other client’s suppliers and concealing that interest from the other client, and
       also in forming a competitor to the other client while under its employ. Id. at 470-71. Thus,
       this court’s conclusion that an intentional breach of fiduciary duty may serve as the fraud
       necessary to establish the crime-fraud exception was based not on the counts alleged in the
       complaint, but on the evidence that was presented to support the allegations in the complaint.
¶ 27       MDA’s complaint asserts that DLA breached its fiduciary duty by fraudulently
       concealing its representation of Walsh-related entities. However, the party seeking discovery
       may not simply rest on the allegations of the complaint to establish that the crime-fraud
       exception applies. Id. at 470. MDA has pointed to no corroborating evidence to support the
       allegation of fraudulent concealment. In fact, the record contains correspondence from DLA
       to MDA dated June 6, 2006, in which DLA explained that although it had represented
       Walsh-related entities in other transactions, Walsh had never claimed a conflict of interest
       with respect to other matters in which DLA was adverse to Walsh Construction. Moreover,
       MDA has not shown how communications with counsel after DLA had withdrawn from its
       representation of MDA could have been made in furtherance of fraudulent activity. Thus,
       MDA has not met its burden of showing that an in camera review of the 14 documents in
       question may reveal evidence to establish that the crime-fraud exception applies.
¶ 28       Once it has been established that the information sought is protected by the attorney-
       client privilege, the party seeking the information has the burden of establishing that the
       information is not privileged, by showing that an exception to the privilege applies. Decker,

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       153 Ill. 2d at 321. MDA has not shown that any exception to the privilege applies; thus, the
       circuit court erred in ordering the disclosure of the communications between in-house and
       outside counsel related to the motions to disqualify and MDA’s claims against DLA.
¶ 29       For the reasons stated, we reverse the circuit court’s order directing DLA to produce the
       55 documents in question. We also vacate the circuit court’s contempt order against DLA
       (see Cangelosi v. Capasso, 366 Ill. App. 3d 225, 230 (2006) (noting that “[w]here a party’s
       refusal to comply with a trial court’s order constitutes a good-faith effort to secure an
       interpretation of the two privileges in question, it is appropriate to vacate a contempt citation
       on appeal”)), and remand for further proceedings.

¶ 30       Reversed in part and vacated in part; cause remanded.

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