Illinois Official Reports
Appellate Court
BorgWarner, Inc. v. Kuhlman Electric Corp.,
2014 IL App (1st) 131824
Appellate Court BORGWARNER, INC., and KUHLMAN CORPORATION,
Caption Plaintiffs and Counterdefendants-Appellees, v. KUHLMAN
ELECTRIC CORPORATION and KEC ACQUISITION
CORPORATION, Defendants and Counterplaintiffs-Appellants.
District & No. First District, First Division
Docket No. 1-13-1824
Filed December 8, 2014
Held In a dispute arising from an indemnification agreement for toxic tort
(Note: This syllabus liability included in a merger agreement with respect to a
constitutes no part of the manufacturing site in Mississippi that plaintiffs initially had
opinion of the court but purchased and then sold to defendants, the trial court did not err in
has been prepared by the denying defendants’ motion for a protective order and requiring
Reporter of Decisions defendants to provide plaintiffs with documents pertaining to the
for the convenience of polychlorinated biphenyl contamination of the site and the lawsuits
the reader.) seeking damages from the contamination, since neither the
attorney-client privilege nor the work-product doctrine applied in the
instant case, and, therefore, the order compelling disclosure of the
documents was affirmed and the contempt order was vacated pursuant
to Supreme Court Rule 304(b) based on defendants’ good faith in
appealing the issue.
Decision Under Appeal from the Circuit Court of Cook County, No. 10-L-8893; the
Review Hon. Sanjay T. Tailor, Judge, presiding.
Judgment Affirmed in part; vacated in part.
Counsel on Latham & Watkins, LLP (Thomas J. Heiden, Mary Rose Alexander,
Appeal Michael J. Nelson, Andrew J. Mellen, and Robert C. Collins III, of
counsel), and Figliulo & Silverman, PC (James R. Figliulo, of
counsel), both of Chicago, for appellants.
Tabet, DiVito & Rothstein, LLC, of Chicago (Caesar A. Tabet, Daniel
L. Stanner, John M. Fitzgerald, Katherine M. O’Brien, and Ashley
Crettol Insalaco, of counsel), for appellees.
Panel JUSTICE CUNNINGHAM delivered the judgment of the court with
opinion.
Presiding Justice Delort and Justice Harris concurred in the judgment
and opinion.
OPINION
¶1 This appeal arises from the February 21, 2013 order entered by the circuit court of Cook
County, which denied a motion for protective order filed by defendants Kuhlman Electric
Corporation (KEC) and KEC Acquisition Corporation (KAC) to protect from disclosure
certain allegedly privileged documents requested by plaintiffs BorgWarner, Inc.
(BorgWarner), and Kuhlman Corporation (Kuhlman) and granted BorgWarner and Kuhlman’s
motion to compel KEC and KAC to produce these documents, in a dispute arising out of an
indemnification agreement for toxic tort liability. This appeal also arises from the circuit
court’s May 2, 2013 order finding KEC and KAC in direct civil contempt for refusing to
comply with the court’s February 21, 2013 order to produce the documents. On appeal, KEC
and KAC argue that the circuit court erred in denying their motion for a protective order and
requiring them to provide BorgWarner and Kuhlman with the privileged documents. For the
following reasons, we affirm in part and vacate in part the judgment of the circuit court of
Cook County.
¶2 BACKGROUND
¶3 This case involves a complex procedural background and only the most pertinent facts are
set forth in this opinion. For the past 50 years, KEC has owned and operated a manufacturing
site in Crystal Springs, Mississippi (the Crystal Springs site). In March 1999, BorgWarner
purchased Kuhlman and all of its subsidiaries, including KEC, which represented to
BorgWarner at that time that there was no contamination on its property.
¶4 Shortly thereafter, pursuant to an August 30, 1999 “Agreement and Plan of Merger” (the
merger agreement), KAC purchased KEC from BorgWarner and the sale transaction closed on
October 5, 1999. In the merger agreement, KEC represented that it was in compliance with
environmental laws and that it had no “material liability” at the Crystal Springs site. Pursuant
to the merger agreement, BorgWarner and Kuhlman agreed to indemnify KEC and KAC for
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certain preclosing environmental liabilities and to pay reasonable fees and costs in connection
with those matters. KEC and KAC in turn agreed to indemnify BorgWarner and Kuhlman for
any damages, penalties, fines and liabilities as a result of “any breach of or other default under
any covenant of [KEC] contained in this agreement.” The merger agreement provided that the
parties’ obligations would be governed by Illinois law.
¶5 On April 19, 2000, KEC and KAC sent a letter to BorgWarner and Kuhlman stating that
KEC had “become aware of facts that may give rise to claims for indemnification” based on
the discovery of polychlorinated biphenyl (PCB) contamination in the soil at the Crystal
Springs site. The April 19, 2000 letter was the first time that either KEC or KAC had given
BorgWarner or Kuhlman any indication of potential contamination at the Crystal Springs site.
KEC and KAC represented to BorgWarner and Kuhlman that they had no prior knowledge of
any environmental contamination at the Crystal Spring site. Beginning in 2001, as a result of
the PCB contamination, thousands of toxic tort lawsuits were filed against KEC, BorgWarner
and Kuhlman, seeking compensation for personal injury and property damage that were
allegedly caused by the PCB contamination at the Crystal Springs site (the underlying tort
actions). Pursuant to their duty to indemnify under the 1999 merger agreement, BorgWarner
and Kuhlman retained the law firm of Seyfarth Shaw to jointly defend them and KEC in the
underlying Mississippi tort actions. Based on KEC and KAC’s representations that they had no
prior knowledge of the contaminants at the Crystal Springs site, and subject to a reservation of
rights, BorgWarner and Kuhlman spent millions of dollars defending against the underlying
tort actions, as well as conducting clean-up and remediation activities at contaminated
properties in Mississippi. During defense of the underlying tort actions, KEC and KAC
continued to assert the position that they had no prior knowledge of the contamination.
¶6 In February 2004, in response to a subpoena issued in the underlying tort cases, KEC’s
environmental counsel, Dickinson Wright PLLC (Dickinson Wright), revealed that it
possessed an environmental report which, as a result of environmental testing performed in
1988, documented the presence of contamination at the Crystal Springs site (the Stalwart
Report). As a result of the conflict of interest created by the Stalwart Report, Seyfarth Shaw
ultimately withdrew as lead joint counsel for BorgWarner, Kuhlman, and KEC in the
underlying Mississippi tort actions, and the parties retained separate counsel while continuing
to jointly defend in the underlying tort actions. In July 2004, BorgWarner and Kuhlman
entered into a “Joint Defense and Confidentiality Agreement” (JDCA) with KEC and KAC, in
order to outline the parties’ common interest relating to the underlying Mississippi tort actions
and to reduce to writing the basis for the necessary exchange of privileged information in
furtherance of their common interest in the underlying tort actions. The 2004 JDCA stated that
the parties agreed to be bound by the JDCA as it related to all litigation brought by third parties
against them alleging personal injury and property damage associated with contamination at
the Crystal Springs site, as well as any claims by BorgWarner, Kuhlman, KEC or KAC against
insurers relating to the underlying tort actions.
¶7 In 2006, BorgWarner filed a separate lawsuit in the circuit court of Cook County against
KEC’s former attorney, Dickinson Wright, alleging fraud and legal malpractice (the Dickinson
Wright lawsuit). See BorgWarner, Inc. v. Dickinson Wright PLLC, No. 06 L 4663 (Cir. Ct.
Cook Co.). In the Dickinson Wright lawsuit, BorgWarner claimed that Dickinson Wright, with
which it had an attorney-client relationship, knew of the PCB contamination at the Crystal
Springs site as early as 1988 but concealed the information from BorgWarner. In May 2008,
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Dickinson Wright filed a third-party complaint against KEC, and KEC sought defense and
indemnification for the Dickinson Wright lawsuit from BorgWarner and Kuhlman. During the
course of discovery in the Dickinson Wright litigation, BorgWarner sought to compel
disclosure of certain KEC documents over which KEC asserted attorney-client privilege. The
Dickinson Wright court ruled that certain information sought by BorgWarner was protected
from disclosure by KEC’s privilege. In 2009, the Dickinson Wright lawsuit was dismissed
pursuant to a settlement agreement.
¶8 On August 3, 2010, BorgWarner and Kuhlman filed a five-count complaint against KEC
and KAC in the instant case. Each count related to an indemnification dispute under the 1999
merger agreement and concerned the environmental contamination at the Crystal Springs site.
In count I, BorgWarner and Kuhlman sought damages for KEC and KAC’s alleged breach of
the merger agreement and for a declaration that they have no obligation to defend or indemnify
KEC and KAC under the merger agreement for or against any expenses and liabilities incurred
by KEC in the underlying tort cases. BorgWarner and Kuhlman further sought damages for
KEC and KAC’s breach of their duties to provide full access to all environmental information
and to fully cooperate with BorgWarner and Kuhlman under the merger agreement. In counts
II to IV, BorgWarner and Kuhlman sought declaratory relief regarding the scope of the
indemnification provisions in the merger agreement. BorgWarner and Kuhlman alleged that
they had no duty to defend or indemnify KEC and KAC against claims in the underlying tort
actions relating to KEC and KAC’s intentional misconduct, willful and wanton acts or
omissions, or gross negligence, nor had a duty to defend or indemnify claims brought against
KEC and KAC for punitive damages and asbestos exposure. BorgWarner and Kuhlman also
alleged that they had no duty to defend or indemnify KEC for claims brought against KEC in
the Dickinson Wright litigation. In count V, BorgWarner and Kuhlman sought a declaration
that they were not required to defend or indemnify KEC and KAC for expenses or liabilities
incurred relating to additional groundwater plume contamination caused by solvents leaked
off-site from the Crystal Springs site. They claimed that such indemnity and defense exceeded
the “quantum and geographical boundaries” of the contamination that existed on the October
1999 closing date of the sale transaction by which KAC purchased KEC from BorgWarner.
¶9 In response, KEC and KAC asserted multiple affirmative defenses and counterclaims
against BorgWarner and Kuhlman. In the affirmative defenses, KEC argued that it worked
with BorgWarner for years to jointly defend against several thousands of underlying
Mississippi tort actions and to lessen the liability exposure of both BorgWarner and KEC to
those claims. KEC and KAC claimed that they allowed BorgWarner access to KEC’s facility,
records, employees, and counsel for the investigation and defense of those claims. They further
argued that under a separate cooperation agreement signed by the parties in 2005, BorgWarner
released any claim for recoupment of amounts already spent in the underlying tort actions.
KEC also asserted that it complied with all of the court’s discovery orders in the Dickinson
Wright litigation and that the circuit court which presided over the Dickinson Wright litigation
had exclusive jurisdiction to resolve disputes relating to those matters. In their counterclaims,
KEC and KAC alleged that BorgWarner breached the 1999 merger agreement by refusing to
indemnify them for the Crystal Springs contamination claims. They also contended that
BorgWarner breached the 2004 JDCA. Further, the counterclaims alleged that BorgWarner
and Kuhlman, at the time they still owned KEC, falsely represented to KAC that there was no
environmental contamination at the Crystal Springs site and that they would fully protect and
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indemnify KEC and KAC if contamination was present. KEC and KAC also alleged that
BorgWarner and Kuhlman acted in bad faith to increase KEC and KAC’s liability exposure,
and asserted claims for fraud, conversion, and disclosure of confidential or privileged
information. KEC and KAC also sought a declaration that the 1999 merger agreement required
BorgWarner and Kuhlman to indemnify them for all present and future claims regarding
pre-closing environmental conditions; that BorgWarner and Kuhlman had waived any and all
claims to recoup costs; that BorgWarner and Kuhlman must indemnify them for any settlement
payments made; and that BorgWarner and Kuhlman must indemnify them in the underlying
tort actions.
¶ 10 During discovery in the instant case, BorgWarner and Kuhlman requested production of all
documents regarding the environmental contamination and the underlying tort actions. In
response, KEC and KAC refused to produce certain categories of relevant documents that they
claimed were protected by the attorney-client privilege and the work-product doctrine. As a
result, BorgWarner and Kuhlman moved to compel KEC and KAC to produce the documents.
¶ 11 On June 18, 2012, KEC and KAC filed a motion for a protective order to prevent
BorgWarner and Kuhlman from obtaining documents relating to the underlying tort actions on
the grounds of attorney-client privilege and the work-product doctrine–including
communications that KEC and KAC had with their legal representatives at the law firms of
Dickinson Wright, Seyfarth Shaw and Jenner & Block LLP (Jenner & Block) relating to the
underlying Mississippi tort actions or the Crystal Springs site; the mental impressions,
conclusions, opinions and/or legal theories of KEC and KAC with their counsel at law firm
Latham & Watkins regarding the underlying tort actions; communications between KEC,
KAC, BorgWarner, Kuhlman, Seyfarth Shaw, and Dickinson Wright; documents relating to
the settlement of any claims in the underlying Mississippi tort actions; and materials withheld
by Dickinson Wright. KEC and KAC also sought to be relieved of the obligation to produce a
“privilege log” on the bases of prejudice and undue burden.
¶ 12 On August 27, 2012, the circuit court ordered KEC and KAC to produce all nonprivileged
documents identified in BorgWarner and Kuhlman’s requests for documents, and ordered
KEC and KAC to prepare a “privilege log identifying the categories of documents they are
withholding from production to [BorgWarner and Kuhlman].”
¶ 13 On September 25, 2012, KEC and KAC produced a privilege log, which identified 28
categories of approximately 40,000 documents relating to the underlying tort actions and
environmental matters.
¶ 14 On February 21, 2013, the circuit court entered an order denying in part KEC and KAC’s
motion for a protective order by finding that documents relating to the underlying
environmental matters in 22 out of the 28 categories listed on the privilege log must be
produced to BorgWarner and Kuhlman. In making its ruling, the circuit court set forth three
independent bases to require production of the 22 categories of privileged documents: (1) KEC
and KAC’s duty to cooperate under the merger agreement; (2) the parties’ common interest in
the underlying matters; and (3) KEC and KAC’s waiver of privilege by putting the privileged
materials at issue in their affirmative defenses and counterclaims against BorgWarner and
Kuhlman. The circuit court determined that any privileged communications between KEC and
KAC with their counsel “generated in preparation for the defense and prosecution of the
indemnity claims, including the present indemnity dispute,” were the only materials protected
from disclosure.
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¶ 15 On March 21, 2013, KEC and KAC filed a partial motion for reconsideration, which the
circuit court denied on April 11, 2013.
¶ 16 On April 16, 2013, after KEC and KAC refused to produce the documents as required by
the court’s February 21, 2013 order, BorgWarner and Kuhlman filed a petition for adjudication
of direct civil contempt (petition for direct civil contempt) against them.
¶ 17 On May 2, 2013, the circuit court found KEC and KAC in direct civil contempt of court for
their noncompliance of the court’s February 21, 2013 order to produce the documents, found
that they were “acting in good faith for purposes of seeking an appeal under Supreme Court
Rule 304(b),” and imposed a monetary penalty of $100. See In re Marriage of Levinson, 2013
IL App (1st) 121696, ¶ 56 (“exposing oneself” to a finding of contempt is an appropriate
method of testing the validity of a court order by making the order appealable (internal
quotation marks omitted)). On May 31, 2013, KEC and KAC filed a timely notice of appeal.
¶ 18 ANALYSIS
¶ 19 This court has jurisdiction over this appeal pursuant to Supreme Court Rule 304(b)(5),
which makes appealable, without the necessity of a special finding by the court, orders
“finding a person or entity in contempt of court which imposes a monetary or other penalty.”
Ill. S. Ct. R. 304(b)(5) (eff. Feb. 26, 2010).
¶ 20 We determine on appeal whether the circuit court erred in denying KEC and KAC’s
motion for a protective order and in requiring them to provide BorgWarner and Kuhlman with
documents in 22 of the 28 categories in KEC and KAC’s privilege log. We review this issue
de novo. See Janousek v. Slotky, 2012 IL App (1st) 113432, ¶ 13 (although discovery orders
are generally reviewed for an abuse of discretion, a trial court’s determination as to whether a
privilege exists is reviewed de novo).
¶ 21 In its February 21, 2013 order, the circuit court set forth three independent bases to require
KEC and KAC to produce documents from 22 out of 28 categories of the privilege log: (1)
KEC and KAC’s duty to cooperate under the merger agreement; (2) the parties’ common
interest in the underlying matters; and (3) KEC and KAC’s waiver of privilege by putting the
privileged materials at issue in their affirmative defenses and counterclaims against
BorgWarner and Kuhlman. We may affirm the circuit court’s ruling on any one of the three
grounds, or on any other basis in the record, regardless of whether the circuit court relied upon
that basis or whether the circuit court’s reasoning was correct. See Alpha School Bus Co. v.
Wagner, 391 Ill. App. 3d 722, 734 (2009).
¶ 22 KEC and KAC argue that the information sought by BorgWarner and Kuhlman was
protected from disclosure by the attorney-client privilege and the work-product doctrine. KEC
and KAC contend that the parties’ contractual agreements did not grant BorgWarner and
Kuhlman access to their privileged information; that the circuit court in the Dickinson Wright
litigation and in an underlying Mississippi action denied BorgWarner and Kuhlman access to
the same privileged information; and that the public policy concerns regarding the prevention
of collusion between the plaintiffs in the underlying actions, and KEC and KAC, were not
present to compel disclosure.
¶ 23 BorgWarner and Kuhlman counter that the circuit court properly ordered disclosure of the
documents in 22 of the 28 categories in KEC and KAC’s privilege log. They argue that
language in the parties’ 1999 merger agreement required KEC and KAC to produce these
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documents; that our supreme court’s decision in Waste Management, Inc. v. International
Surplus Lines Insurance Co., 144 Ill. 2d 178 (1991), required disclosure of the documents; that
interlocutory rulings by the circuit court in the Dickinson Wright lawsuit and in an underlying
Mississippi action did not control the outcome in the instant case; and that no public policy
concerns destroyed KEC and KAC’s duty to cooperate under the merger agreement.
¶ 24 Illinois Supreme Court Rule 201(b)(2) govern both the attorney-client privilege and
work-product doctrine: “All matters that are privileged against disclosure on the trial,
including privileged communications between a party or his agent and the attorney for the
party, are privileged against disclosure through any discovery procedure. Material prepared by
or for a party in preparation for trial is subject to discovery only if it does not contain or
disclose the theories, mental impressions, or litigation plans of the party’s attorney.” Ill. S. Ct.
R. 201(b)(2) (eff. Jan. 1, 2013). Our supreme court has defined the attorney-client privilege as
“where legal advice of any kind is sought from a professional legal advisor in his capacity as
such, the communications relating to that purpose, made in confidence by the client, are
protected from disclosure by himself or the legal advisor, except the protection be waived.”
Fischel & Kahn, Ltd. v. Van Straaten Gallery, Inc., 189 Ill. 2d 579, 584 (2000). The purpose of
the attorney-client privilege is to encourage clients to engage in full and frank discussion with
their attorneys without fear of being compelled to disclose that information. Id. at 584-85. The
attorney-client privilege recognizes that sound legal advice or advocacy serves public ends and
that such advice or advocacy depends upon the lawyer being fully informed by the client. Id. at
585. The work-product doctrine “provides a broader protection than the attorney-client
privilege and is designed to protect the right of an attorney to throughly [sic] prepare his case
and to preclude a less diligent adversary attorney from taking undue advantage of the former’s
efforts.” Id. at 591.
¶ 25 Our supreme court’s decision in Waste Management, Inc. governs our analysis in the case
at bar. In Waste Management, Inc., the insureds, which owned and operated hazardous waste
materials disposal sites, purchased insurance from two insurance companies. Waste
Management, Inc., 144 Ill. 2d at 185. The insurance policies provided indemnity to insureds
for defense costs arising out of any environmental claims filed against them by third parties,
subject to certain exclusions and conditions, including the insureds’ “duty to cooperate.” Id.
The “duty to cooperate” was memorialized in a “cooperation clause,” which imposed upon the
insureds “the duty to assist insurers in the conduct of suits and in enforcing any right to
contribution or indemnity against persons potentially liable to insureds.” Id. at 192. Further,
the policies provided that the insurers were entitled “to conduct any claim, in the name of
insureds, for indemnity or damages.” Id. The insureds defended and settled a lawsuit alleging
migration of toxic waste from the insureds’ waste disposal sites. Id. at 186. The insureds later
sought indemnification from the insurers for settlement and defense costs in the amount of $3
million. Id. The insurers denied coverage, claiming that the insureds had breached the
cooperation clause by failing to disclose that the insureds had previously filed and settled a
negligent design and construction claim against the prior owner of the property for $1.5
million. Id. Both the insureds and the insurers then filed declaratory judgment actions seeking
a determination of their rights and liabilities under the policies. Id. During discovery, the
insurers requested production of the insureds’ counsel’s files in the underlying environmental
litigation. Id. at 187. The insureds withheld some of the requested information, asserting
attorney-client and work-product privileges. Id. The trial court ordered production of the files
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relating to the underlying toxic tort case, but denied production of the files relating to the
negligent design case against the prior owner of the property. Id. The insureds refused to
comply with the order, and the trial court held one of the insureds’ attorneys in contempt of
court and fined him $100. Id. The appellate court held that the insurers were entitled to all of
the requested documents. Id. On appeal, our supreme court held that the attorney-client
privilege and the work-product doctrine were not applicable to bar disclosure of the files. Id. at
201. The Waste Management, Inc. court offered two reasons in finding that the attorney-client
privilege did not apply. Id. at 191. First, the court concluded that the plain language of the
insurance policies’ “cooperation clause” created “contractual obligations” requiring the
insureds to disclose to the insurers “any communications they had with defense counsel
representing them on a claim for which insurers had the ultimate duty to satisfy.” Id. at 192.
The court stated that the clause imposed a “broad duty of cooperation and is without limitation
or qualification.” Id. Accordingly, our supreme court concluded that a “fair reading” of the
insurance policies rendered any expectation of attorney-client privilege unreasonable. Id. at
192-93. Second, our supreme court found the attorney-client privilege inapplicable in light of
the “common interest” doctrine, which provides that “when an attorney acts for two different
parties who each have a common interest, communications by either party to the attorney are
not necessarily privileged in a subsequent controversy between the two parties.” Id. at 193. The
court noted that typically, the “common interest” doctrine applies where an attorney has
provided joint or simultaneous representation of the parties. Id. at 194. However, the court also
found the doctrine applicable where the attorney, although neither retained by nor in direct
communication with the insurer, acts for the mutual benefit of both the insured and the insurer.
Id. The court concluded that “[i]n a limited sense,” the insureds’ attorney represented the
insurers in the underlying environmental litigation because the insurers were ultimately liable
if the plaintiffs in the underlying action received a favorable verdict or settlement. Id. at
194-95. Because both the insurers and insureds had a “common interest” in either defeating or
settling the underlying environmental litigation, the attorney-client privilege was inapplicable.
Id. Likewise, the Waste Management, Inc. court concluded that the case did not “fit within the
parameters” of the work-product doctrine. Id. at 197. The court noted that in the typical case,
the sought-after material is generated in preparation of trial against an adversary who may seek
disclosure of his opponent’s work product. Id. at 196. However, the materials requested in
Waste Management, Inc. were prepared for the mutual benefit of the insureds and the insurers
against a third-party adversary. Id. at 198-99. In other words, because the requested materials
were not prepared in anticipation of the declaratory judgment action in which the discovery
was sought, the work-product doctrine was inapplicable. Id. The court rejected the insureds’
claim that the information requested by the insurers “may be gleaned from objective facts,
contained outside the contents of defense counsel’s files.” Id. at 199. The court pointed out that
“what [the] insurers seek to discover is *** the mental impressions and case assessment of
defense counsel” and that there is “no source, outside the files, where this information might be
obtained.” Id. The court added that, even if the work-product doctrine applied, the sought-after
materials would still be subject to disclosure pursuant to the “at issue” exception to the
doctrine, which permits discovery of work product where the sought-after material is either the
basis of the lawsuit or the defense thereof. Id. at 199-200. The court held that where, in the
underlying environmental litigation, an attorney represents the common interests of two or
more clients whose relationship later becomes adverse, and, in a subsequent action, the work
product of the attorney is at issue, the work-product doctrine is not available to bar discovery
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by one of the original parties. Id. at 200. In rejecting the application of the attorney-client and
work-product privileges, the Waste Management, Inc. court further noted that Illinois has a
strong public policy favoring complete disclosure in litigation, such that courts should be
mindful that the privilege is not without conditions and “it is the privilege, not the duty to
disclose, that is the exception.” Id. at 190. Therefore, the court noted, the privilege “ought to be
strictly confined within its narrowest possible limits.” Id.
¶ 26 Applying the principles of Waste Management, Inc. to the case at bar, we find that neither
the attorney-client privilege nor the work-product doctrine barred discovery of the requested
documents. Like the insureds in Waste Management, Inc., KEC in the instant case owned and
operated a manufacturing site on the Crystal Springs site. Pursuant to the 1999 merger
agreement, similar to the insurance policies in Waste Management, Inc., BorgWarner and
Kuhlman agreed to indemnify KEC and KAC for liabilities arising out of environmental
claims filed by third-parties concerning the Crystal Springs site–subject to certain limitations
to the right to indemnification, including KEC and KAC’s duty to cooperate with BorgWarner
and Kuhlman in connection with these matters. Specifically, section 11.5(e) of the 1999
merger agreement provides in pertinent part the following: “[KAC] will (i) notify [Kuhlman]
and [BorgWarner] promptly after becoming aware of facts which may give rise to a claim by
[KAC] in connection with any liability for [p]re-closing [e]nvironmental [m]atters relating to
the [f]acilities of [KEC] located in *** Crystal Springs, Mississippi *** and (ii) cooperate with
[Kuhlman] and [BorgWarner] in connection with such matters.” Like the insureds in Waste
Management, Inc., KEC and KAC sought indemnification from BorgWarner and Kuhlman for
millions of dollars in defense and settlement costs that incurred in the underlying tort actions.
Like Waste Management, Inc., BorgWarner and Kuhlman filed the instant lawsuit against
KEC and KAC seeking a determination of their rights and liabilities under the merger
agreement. During discovery, BorgWarner and Kuhlman requested documents and
information from KEC and KAC that were relevant to the defense of the underlying tort
actions for which KEC and KAC demanded indemnification. However, KEC and KAC
refused to provide the documents. We find that, based on the holding of Waste Management,
Inc., the plain language of the 1999 merger agreement’s “cooperation clause” created
obligations requiring KEC and KAC to disclose to BorgWarner and Kuhlman relevant
information and documents relating to the defense and settlement of the underlying tort
actions, which BorgWarner and Kuhlman had the ultimate duty to satisfy. Similar to the
“cooperation clause” in the Waste Management, Inc. insurance policies, KEC and KAC’s duty
to cooperate, as outlined in section 11.5(e) of the merger agreement, is broad and without
limitation or qualification. Thus, we find that any expectation of attorney-client privilege was
unreasonable. Likewise, because the requested materials were not prepared in anticipation of
the instant lawsuit in which the discovery was sought, but rather in defense of the underlying
tort actions against third-party adversaries, we find that the work-product doctrine was
inapplicable.
¶ 27 Nonetheless, KEC and KAC argue against disclosure of the requested documents by
claiming that the 1999 merger agreement did not grant BorgWarner and Kuhlman access to
their privileged information. They contend that nothing in the provisions of section 11 of the
merger agreement gave BorgWarner and Kuhlman a “clear, express contractual right to pierce
the privilege and obtain KEC’s attorney-client and work-product information.” Pointing to
section 11.4 of the merger agreement specifically, which is entitled “Third-Party Claims,”
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KEC and KAC note that it did not impose on KEC and KAC any obligations–not even the duty
to cooperate–but only conferred on KEC and KAC “the unfettered ability to defend against and
settle [t]hird-[p]arty [c]laims if [BorgWarner and Kuhlman] fail to timely provide a
satisfactory indemnity agreement [in writing], while still preserving KEC and KAC’s right to
receive indemnity from BorgWarner and Kuhlman.” We reject this argument. To construe
section 11.4 of the merger agreement as KEC and KAC suggest ignores the provisions under
section 11.5 setting forth limitations to KEC and KAC’s right to indemnification–limitations
such as KEC and KAC’s duty to cooperate. See Paluch v. United Parcel Service, Inc., 2014 IL
App (1st) 130621, ¶ 13 (when interpreting a contract, the court must read the entire contract in
context and construe it as a whole, viewing each provision in light of the other ones instead of
focusing on one clause or provision in isolation). As discussed, section 11.5(e), which is broad
and without limitation or qualification, imposed upon KEC and KAC an obligation to
cooperate–that is, to disclose to BorgWarner and Kuhlman relevant information relating to the
defense and settlement of the underlying tort actions for which KEC and KAC demand
indemnification. KEC and KAC neither challenged in the circuit court nor argue before this
court that section 11.5(e) does not address their duty of cooperation on the underlying claims
for which they seek indemnity.
¶ 28 KEC and KAC further dispute that section 11.5(e) of the merger agreement imposed a
broad duty to cooperate by arguing that other provisions in the merger agreement, such as
section 7.4(b), use the words “fully cooperate” in another context involving the submission of
documents to taxing and governmental authorities. Thus, KEC and KAC surmise, because the
parties chose the more limited phrase “cooperate” rather than “fully cooperate” in section
11.5(e), this showed that the parties did not intend for privileged information to be disclosed.
We reject this contention. As the circuit court correctly noted, “there is no perceptible
difference between a duty to ‘cooperate’ and a duty to ‘fully cooperate’ or provide ‘full
cooperation,’ nor do [KEC and KAC] cite any case [law] to support the distinction they draw.”
We agree with the circuit court’s assessment and reiterate that, similar to the cooperation
clause in Waste Management, Inc., the cooperation clause in the merger agreement here is
without limitation or qualification. KEC and KAC further argue that, even if the cooperation
clause under section 11.5(e) required disclosure of privileged information under certain
circumstances, no disclosure was required in the present dispute because the clause did not
require them to cooperate with BorgWarner and Kuhlman in connection with the Dickinson
Wright litigation. We do not see how this in any way advances KEC and KAC’s arguments
against disclosure. The subject of the requested materials in the instant indemnification dispute
pertained to the defense of the underlying tort actions and not the Dickinson Wright litigation.
¶ 29 KEC and KAC also argue that the 2004 JDCA, which was executed five years after the
1999 merger agreement, expressly barred disclosure of the privileged information that
BorgWarner and Kuhlman now seek. In support of their argument, KEC and KAC specifically
reference paragraphs 3 and 4 of the 2004 JDCA, which they assert show that they were not and
could not be required to disclose the privileged information. KEC and KAC argue that,
because BorgWarner and Kuhlman agreed, under the 2004 JDCA, that they could not require
KEC or KAC to disclose “the very privileged information [BorgWarner and Kuhlman] now
wrongly seek here,” BorgWarner and Kuhlman’s attempt to renege on their own “contractual
promises” should be rejected. We disagree with KEC and KAC’s misguided interpretation of
the 2004 JDCA.
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¶ 30 We find that the 2004 JDCA did not abrogate KEC and KAC’s duty to cooperate under
section 11.5(e) of the merger agreement. The 2004 JDCA was executed by BorgWarner,
Kuhlman, KEC, and KAC in order to outline the parties’ common interest relating to the
underlying Mississippi tort actions and to reduce to writing the basis for the necessary
exchange of privileged information in furtherance of their common interest in the underlying
tort actions. The preamble of the 2004 JDCA states that the parties agreed to be bound by the
JDCA as it related to all litigation brought by third parties against them alleging personal injury
and property damage associated with contamination at the Crystal Springs site, as well as any
claims by BorgWarner, Kuhlman, KEC or KAC against insurers relating to the underlying tort
actions. Paragraph 3 of the 2004 JDCA provides in relevant part that “all [p]rivileged
[i]formation or business or technical information disclosed by the parties shall be deemed
confidential”; that any privileged information “exchanged or communicated between
[BorgWarner and Kuhlman] or their counsel and KEC [and KAC] or their counsel in
connection with the [underlying tort actions] shall be deemed subject to this [a]greement”; and
that “nothing in this [a]greement shall require the [p]arties or their counsel to share any such
[p]rivilege[d] [i]nformation.” (Emphases added.) Paragraph 4 of the 2004 JDCA provides in
relevant part that “[i]n order to protect the privileged and/or protected status of the [p]rivilged
[i]nformation that will be exchanged pursuant to this [a]greement, the [p]arties and their
respective counsel agree that they will not share, make available, disclose or communicate in
any way any such [p]rivileged [i]nformation to any person or entity not a [p]arty without the
consent of the disclosing [p]arty”; that [p]rivileged [i]nformation shall be used solely for the
purpose of this [underlying tort litigation]”; and that disclosure of any privileged information
“in violation of this [a]greement will cause the [p]arties to suffer irreparable harm for which
there is not adequate legal remedy.” (Emphases added.) We find that nothing in the 2004
JDCA modified or conflicted with KEC and KAC’s duty to cooperate under section 11.5(e) of
the merger agreement. Rather, it is clear that by using the terms “nothing in this [a]greement,”
the parties were addressing their obligations under the 2004 JDCA only. (Emphasis added.)
Based on our examination of the plain language of these provisions in the 2004 JDCA, we find
that the parties agreed that all privileged information that had already been disclosed or
exchanged, or would be exchanged, between the parties shall be confidential, and that such
information is prohibited from disclosure to a third party without the consent of the disclosing
party. Because the terms of the 2004 JDCA did not abrogate KEC and KAC’s preexisting duty
to cooperate under section 11.5(e) of the merger agreement, and concerns regarding disclosure
of privileged materials to third parties were not present here, we find that KEC and KAC were
not entitled to relief on this basis. Further, we reject KEC and KAC’s argument that the circuit
court “incorrectly found the JDCA to be ambiguous.” The circuit court made no such finding.
Rather, it simply stated in the hypothetical that even if the JDCA was ambiguous, the evidence
did not warrant a different conclusion.
¶ 31 Nor do we find persuasive KEC and KAC’s assertion that BorgWarner and Kuhlman were
prohibited from gaining access to the privileged information under a separate agreement
executed by the parties in 2005–the 2005 cooperation agreement. The 2005 cooperation
agreement was entered into by the parties “in the interest of efficiency, coordination and joint
defense, *** for BorgWarner [and Kuhlman] to attempt to negotiate settlements (on an
individual and/or global basis) that resolve the [p]arties’ total liability in connection with
claims brought and which may in the future be brought for damages allegedly arising from
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alleged PCB (and/or other) contamination at or originating from KEC’s Crystal Springs ***
facility.” KEC and KAC point to various provisions in the 2005 cooperation agreement in
arguing that it did not require them to disclose privileged information to BorgWarner and
Kuhlman and that it was governed by the terms of the 2004 JDCA. This argument does not
advance KEC and KAC’s position in any way. Paragraph 5 of the 2005 cooperation agreement
specifies that “[t]his [a]greement shall not serve to modify, limit or enlarge any of the [p]arties’
rights or obligations as set forth in the [m]erger [a]greement.” We have already determined
that, pursuant to the holding in Waste Management, Inc., section 11.5(e) in the 1999 merger
agreement required KEC and KAC to disclose the requested documents and that the 2004
JDCA did not modify KEC and KAC’s duty to cooperate under the merger agreement. Thus,
the 2005 cooperation agreement, which did not modify, limit, or enlarge the parties’ rights or
obligations in the 1999 merger agreement or in the 2004 JDCA, did not extinguish KEC and
KAC’s duty to cooperate with BorgWarner and Kuhlman.
¶ 32 KEC and KAC further challenge the circuit court’s order compelling disclosure of the
requested information by arguing that two other courts–the circuit court in the Dickinson
Wright litigation and in an underlying Mississippi action–had denied BorgWarner and
Kuhlman access to the same privileged information. We find this argument to be forfeited,
where KEC and KAC, in violation of Illinois Supreme Court Rule 341(h)(7) (eff. July 1,
2008), cite no legal authority to support their argument that this court is bound by the discovery
rulings of circuit courts in other lawsuits and jurisdictions. See Sekerez v. Rush University
Medical Center, 2011 IL App (1st) 090889, ¶¶ 80-82 (failure to cite legal authority in violation
of Rule 341(h)(7) results in forfeiture of the issue). Thus, we need not address this argument
any further.
¶ 33 KEC and KAC also argue against disclosure of the requested materials, by noting that the
policy concerns underlying our supreme court’s Waste Management, Inc. decision–such as the
prevention of collusion between the insured and the injured party–were not present in the case
at bar. They contend that “extending” Waste Management, Inc.’s holding to include “standard
indemnity clauses” such as the ones at issue here would be “problematic and dangerous,” and
they cite Hartz Construction Co. v. Village of Western Springs, 2012 IL App (1st) 103108, for
support. To the extent that KEC and KAC suggest that the holding of Waste Management, Inc.
only applies to cases involving insurance companies, rather than other types of indemnitors
such as BorgWarner and Kuhlman, we reject this contention. This court in Hartz Construction
Co. has already rejected such a limitation. Hartz Construction Co., 2012 IL App (1st) 103108,
¶ 30 (parties do not have to match the classic profile of an insurer and insured for the concepts
in Waste Management, Inc. to apply). Further, we find Hartz Construction Co. to be
inapposite, where, there, the indemnity contract did not contain any express language
mandating a duty of cooperation. By contrast, the 1999 merger agreement here contains an
express duty to cooperate, similar to the cooperation clause in Waste Management, Inc. As
discussed, we find the holding in Waste Management, Inc. to be dispositive. Thus, we find that
KEC and KAC are not entitled to relief on this basis.
¶ 34 In light of our determination that the attorney-client privilege and the work-product
doctrine were inapplicable to bar production of the requested materials, we need not address
the circuit court’s other independent bases (the “common interest” doctrine and the “at issue”
waiver) for compelling disclosure. Also, it bears noting that, as the circuit court correctly found
in its February 21, 2013 order, any privileged communications and materials “generated in
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preparation for the defense and prosecution of the indemnity claims, including the present
indemnity dispute,” are protected from disclosure. (Emphasis added.) See Waste Management,
Inc., 144 Ill. 2d at 200-01 (holding that the protections under the attorney-client privilege and
work-product doctrine are nonetheless “available to bar disclosure of any communications or
materials generated in preparation for the present declaratory judgment action”).
¶ 35 Accordingly, we hold that the circuit court properly ordered disclosure of the documents
relating to the underlying environmental matters in 22 out of the 28 categories identified in
KEC and KAC’s privilege log (categories 1 through 3, 5 through 8, 11 through 21, 24, and 26
through 28). KEC and KAC posit that regardless of the outcome of this appeal, we should
vacate the circuit court’s May 2, 2013 order of contempt and the accompanying fine against
them because they acted in good faith in seeking review of the February 21, 2013 order
concerning the privileges in question. We agree with the circuit court’s assessment that KEC
and KAC were “acting in good faith for purposes of seeking an appeal under Supreme Court
Rule 304(b).” Thus, although we affirm the circuit court’s February 21, 2013 ruling, we find it
appropriate to vacate the finding of contempt and the $100 fine. See Allianz Insurance Co. v.
Guidant Corp., 373 Ill. App. 3d 652, 677 (2007) (“[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 privileges in
question, it is appropriate to vacate a contempt citation on appeal”).
¶ 36 For the foregoing reasons, we affirm the circuit court’s February 21, 2013 order
compelling KEC and KAC to disclose the requested materials to BorgWarner and Kuhlman,
but vacate the circuit court’s May 2, 2013 order of contempt and imposition of fine against
KEC and KAC.
¶ 37 Affirmed in part; vacated in part.
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