Mueller Industries v. Berkman

SUPREME COURT CASES

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State: Illinois

Court: 2nd District Appellate

Docket No: 2-09-0134 Rel

Case Date: 03/23/2010

Preview:No. 2-09-0134 Filed: 3-23-10 ______________________________________________________________________________ IN THE APPELLATE COURT OF ILLINOIS SECOND DISTRICT ______________________________________________________________________________ MUELLER INDUSTRIES, INC., and B AND K INDUSTRIES, INC., ) Appeal from the Circuit Court ) of Du Page County. ) Plaintiffs and Counterdefendants) Appellees, ) ) v. ) No. 07--L--567 ) PETER D. BERKMAN and JEFFREY A. ) BERKMAN, ) ) Defendants and Counterplaintiffs) Appellants ) ) (William O'Hagan, Greg Christopher, Robert ) Hodes, Nicholas Moss, Harvey L. Karp, ) Alexander P. Federbush, Gennaro J. Fulvio, ) Gary S. Gladstein, and Terry Hermanson, ) Honorable Counterdefendants-Appellees; Homewerks ) Hollis L. Webster, Worldwide LLC, Counterplaintiff). ) Judge, Presiding. ______________________________________________________________________________ JUSTICE SCHOSTOK delivered the opinion of the court: Peter Berkman, the former president of B&K Industries, Inc., was sued by B&K and its parent company, Mueller Industries, Inc. (collectively, Mueller), for breach of contract and breach of fiduciary duty relating to the formation of a competing company and to bribes and kickbacks that Berkman allegedly received from one of Mueller's primary suppliers. In response to Mueller's discovery requests for the production of documents, Berkman refused to produce various documents, asserting a privilege based on the fifth amendment and the attorney-client privilege. The trial court

No. 2--09--0134 rejected Berkman's assertions of privilege and granted Mueller's motion to compel production. In order to perfect an appeal, Berkman again refused to produce the documents and drew a finding of contempt. He now appeals the finding of contempt and the grant of the motion to compel. We affirm in part, reverse in part, vacate in part, and remand. BACKGROUND Berkman was one of the owners of B&K, a company that imported plumbing products from suppliers and sold the products to customers in the United States. Beginning in 1997, Berkman's attorney was David Shevitz, a partner at Katten, Muchin & Rosenman LLP (Katten). In 1998, B&K was bought by Mueller, a publicly owned manufacturer of plumbing fixtures and products. After the acquisition, Berkman continued to work for Mueller as the president of B&K. Katten, through Shevitz, continued to represent Berkman. One of B&K's primary suppliers was Xiamen Lota International Co., Ltd. (Lota), a plumbing manufacturer specializing in valves and faucets. Lota's annual sales to B&K regularly exceeded $10 million. In April 2003, Lota USA, a limited liability company, was formed to serve as Lota's sales and marketing representative in the North American market. About the same time, Berkman formed Woodland Investment Partnership (Woodland), which acquired a 10% ownership interest in Lota USA. Berkman was the managing member of Woodland. Katten, through Shevitz, assisted Berkman in forming Woodland and Lota USA and advised Berkman regarding how to structure his ownership in light of his employment contract with Mueller. Katten, through Shevitz, also began representing Mueller in 2003 in connection with several intellectual property issues, a representation that continued through April 2006. Although it is not completely clear from the record, it does not appear that

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No. 2--09--0134 Katten advised either Mueller or Berkman of any potential conflict in the dual representation. Berkman asserts that Katten billed him separately for the work that Shevitz performed for him. Berkman did not inform Mueller about his interest in Lota USA. Copies of e-mails between the principals of Lota USA and Katten, relating to agreements entered into by Lota USA, suggest efforts to avoid identifying Berkman's interest. For instance, although a March 2003 memorandum initially identified Berkman as the owner of 10% of Lota USA, a later memorandum from May 2003 identified the owner of that interest as Woodland. Similarly, Berkman's name and position as agent for Woodland were removed from a May 2005 agreement between Lota USA and Woodland. In late 2005, Mueller's previous written employment contract (which contained a non-compete agreement) with Berkman expired, and the parties entered into an open-ended employment agreement. Berkman continued to serve as the president of B&K. In March 2006, Berkman asked Shevitz to review Mueller's code of conduct that he had just received, which contained among other things provisions restricting (1) outside financial interests that might affect an employee's decisions, (2) the handling of business opportunities, and (3) competition with Mueller. About the same time, Berkman asked Shevitz to form a new limited liability company, eventually named Homewerks, to compete with Mueller. One month later, in April 2006, Berkman, ostensibly acting for Mueller, advised Katten that Mueller would be retaining a different firm for its intellectual property legal work. Katten continued to work with Berkman in setting up Homewerks and soliciting investors. In July or August 2006, Berkman resigned his position with Mueller and began working full time at Homewerks. In July 2007, Mueller sued Berkman, alleging that he had breached his employment contracts and also breached his common-law fiduciary duty to Mueller. Mueller alleged that Berkman, through

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No. 2--09--0134 his ownership interest in Lota USA, profited personally and at the expense of Mueller by acquiescing in Lota's efforts to overcharge Mueller for supplies. Mueller also alleged that Berkman received payments from Lota for his assistance in this scheme. Katten appeared on behalf of Berkman and filed an answer and counterclaim against Mueller and the individual members of its board of directors, alleging that the counterdefendants conspired to defame Berkman and interfere with Homewerks' relationships with its customers and suppliers. The parties commenced discovery. A subpoena was issued to Northern Trust, seeking documents relating to bank accounts held by Berkman and Woodland. Berkman moved to quash the subpoena. The motion was denied, and Berkman did not seek further review of that denial. Mueller also requested that Berkman produce various documents dating from August 1998 (Mueller's acquisition of B&K) through the present. Berkman initially produced about 350 pages of documents, but objected to producing any others on the ground that they were irrelevant or were protected by the attorney-client privilege. Mueller moved to compel. The documents at issue include the following: documents relating to Berkman's communications with Lota and Lota USA; documents concerning the relationship and financial arrangements between Berkman and Lota and Lota USA; documents relating to the legal advice Berkman received from Katten about his relationship with Lota USA and the creation of Homewerks, during the time that Berkman was president of B&K; documents relating to the formation and organization of Lota USA and Homewerks; and documents relating to any other "side" businesses of Berkman's. On May 7, 2008, Berkman testified in connection with an arbitration proceeding involving Lota USA and Nick Moss, a former Lota employee who began working for Mueller. Although Berkman and his attorney had spoken about the proceeding, the attorney was not present. Berkman

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No. 2--09--0134 testified, among other things,: that: his attorney advised him that it was okay to own 10% of Lota USA and that such ownership would not conflict with his obligations under his employment contract with Mueller; that he believed that he could be fired if Mueller found out about Woodland's ownership interest in Lota USA; and that he had told Moss what his attorney had told him. Berkman also testified regarding a January 2005 wire transfer from Lota to Woodland of over $313,000, which he later explained was for recruiting and business consulting services he performed for Lota. As noted, Berkman produced some documents, but objected to producing others on the ground that they were irrelevant or protected by the attorney-client privilege. In June 2008, shortly after Mueller moved to compel production of the requested documents, Katten ceased representing Berkman in the litigation and new counsel filed a substitute appearance. Berkman then responded to the motion to compel by asserting that he was entitled to decline to respond to the document production requests under the fifth amendment to the United States Constitution, although he had not objected to production on this ground in his initial discovery responses. Berkman did not identify in any manner the documents (or even the categories of documents) that he believed were protected by the fifth amendment privilege. Berkman also filed amended answers to written discovery, stating that he declined to provide any further answers to interrogatories or responses to document requests because he was "invoking his [f]ifth [a]mendment rights." The parties briefed the issues, and the trial court heard oral argument on September 24, 2008. On October 3, 2008, the trial court issued a memorandum opinion and order granting the motion to compel. As to the attorney-client privilege, the trial court held that Katten's dual representation of Berkman and Mueller destroyed any claim of privilege:

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No. 2--09--0134 "It is undisputed that Peter Berkman was a corporate officer with B&K Industries during the time that the law firm of Katten, Muchin represented both Berkman and Mueller/B&K from 2003 to 2006. Mr. Berkman cannot conceal from Plaintiffs

communications between their own officer and their own attorneys. No attorney-client privilege exists under circumstances where the law firm represents both a corporate entity and a corporate officer at the same time, and the representation is arguably adverse. Common sense dictates that the corporate officer, knowing the existence of the law firm's representation, can have no expectation of confidentiality with counsel on matters germane to the corporation." The trial court therefore held that the attorney-client privilege did not shield the documents requested. Regarding Berkman's fifth amendment claim of privilege, the trial court noted that under the "act of production" doctrine, documents may be withheld only if the act of producing those documents would itself be testimonial and incriminating. The trial court noted that Berkman's contentions in support of his argument that the fifth amendment applied were very general, and he had failed to produce any type of privilege log or make any particularized identification of how the production of each document would be testimonial or incriminating. It therefore held that Berkman had failed to make the required threshold showing that the fifth amendment privilege applied. The trial court ordered the production of the above categories of documents. Berkman moved for reconsideration, making essentially the same arguments as before, but also responding to the trial court's complaint that Berkman did not produce a privilege log of the documents he sought to shield under the fifth amendment privilege. Berkman argued that requiring him to produce a privilege log to Mueller would eviscerate the privilege, because part of what he was

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No. 2--09--0134 entitled to protect was the very existence of responsive documents. Nevertheless, Berkman tendered a new privilege log of such documents for in camera review, and also offered to allow the trial court to examine the documents themselves in camera if the privilege log was not sufficient. The trial court denied the motion for reconsideration without taking the privilege log into account, because it was not persuaded that it had made an error of law in its earlier ruling and it did not believe that the contents of the privilege log would affect that ruling. At a later hearing, the trial court stated that it was also uncomfortable that the privilege log was tendered for ex parte review and that Mueller would not have the opportunity to view it. In order to appeal the trial court's ruling, Berkman notified the trial court that it would not obey the court's order to produce the requested documents and asked to be held in contempt. On January 7, 2009, the trial court found Berkman in civil contempt of court and imposed a penalty of $1,000. Berkman filed a timely notice of appeal. ANALYSIS Berkman's appeal of the contempt order requires us to review the underlying discovery order. Cangelosi v. Capasso, 366 Ill. App. 3d 225, 227 (2006). On appeal, Berkman challenges the trial court's determination that neither the attorney-client privilege nor the fifth amendment privilege shielded the requested documents from discovery. Although discovery orders are generally reviewed for abuse of discretion, we review the trial court's determination of whether a privilege applies de novo. Cangelosi, 366 Ill. App. 3d at 227. On appeal, Berkman has not identified which privilege he believes applies to each of the five outstanding document requests. It is possible that the two privileges apply to entirely separate groups

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No. 2--09--0134 of responsive documents, or there may be some overlap. We therefore analyze the applicability of each privilege separately. A. Attorney-Client Privilege Only one of the five document production requests at issue contains an obvious request for communications between Berkman and his attorneys (the request for all documents relating to the legal advice Berkman received from Katten about his relationship with Lota USA and the creation of Homewerks, during the time that Berkman was president of B&K). However, it is possible that documents responsive to the other production requests at issue may also involve communications between Berkman and Katten. The following analysis applies to all responsive documents as to which Berkman has claimed the attorney-client privilege. Under certain circumstances, the attorney-client privilege shields communications between a lawyer and an existing or potential client from disclosure. However, as our supreme court has pointed out, this privilege has its limits and must be narrowly construed to avoid unnecessarily constricting the discovery process: " 'The purpose of the attorney-client privilege is to encourage and promote full and frank consultation between a client and legal advisor by removing the fear of compelled disclosure of information.' [Citation.] However, the privilege is not without conditions, and we are mindful that it is the privilege, and not the duty to disclose, that is the exception. [Citation.] Therefore, the privilege ought to be strictly confined within its narrowest possible limits. Further, the attorney-client privilege is limited solely to those 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. [Citations.] Finally, we note

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No. 2--09--0134 that in Illinois, we adhere to a strong policy of encouraging disclosure, with an eye toward ascertaining that truth which is essential to the proper disposition of a lawsuit." Waste Management, Inc. v. International Surplus Lines Insurance Co., 144 Ill. 2d 178, 190 (1991), quoting and citing Consolidation Coal Co. v. Bucyrus-Erie Co., 89 Ill. 2d 103, 117-18 (1982). Berkman contends that the attorney-client privilege protects many of the documents sought by Mueller. Mueller responds that the attorney-client privilege does not apply for a variety of reasons, including Katten's dual representation of both Berkman and Mueller, the fiduciary-duty exception to the privilege, and the crime-fraud exception. We discuss each exception in turn. 1. Doctrine of Dual Representation The trial court held that Katten's dual representation of both Berkman and Mueller during a time when Berkman was an officer of Mueller meant that, once the parties were adverse, neither party could have a reasonable expectation of confidentiality in its communications with Katten about any matter germane to Mueller's business. Under both Illinois law and foreign law cited by the parties, the trial court's reasoning is sound. As noted, Illinois law limits the scope of the attorney-client privilege to "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." Waste Management, 144 Ill. 2d at 190; see E. Cleary, McCormick on Evidence

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