Borgwarner, Inc. v. Kuhlman Electric Corporation
2014 IL App (1st) 131824
Ill. App. Ct.2015Background
- KEC owned a manufacturing site in Crystal Springs, MS; BorgWarner purchased KEC (via purchase of Kuhlman) in 1999 and then sold KEC to KAC later that year under a merger agreement that included indemnity and a broad duty to cooperate regarding pre-closing environmental liabilities.
- PCB contamination at the Crystal Springs site led to thousands of toxic-tort suits beginning in 2001; BorgWarner and Kuhlman defended under a reservation of rights and retained counsel, spending millions defending and remediating.
- KEC later disclosed an older environmental report (the Stalwart Report) showing contamination, creating disputes about prior knowledge and privilege over related documents.
- BorgWarner and Kuhlman sued KEC/KAC in 2010 seeking declaratory relief and damages under the merger agreement; KEC/KAC counterclaimed and asserted privilege over ~40,000 documents in discovery.
- The trial court ordered production of documents in 22 of 28 privilege-log categories, reasoning the merger agreement’s cooperation clause, common-interest doctrine, and waiver put the materials at issue; KEC/KAC refused and were held in contempt (fine $100).
- On appeal the court affirmed compelled production for the 22 categories but vacated the contempt finding and fine because KEC/KAC acted in good faith in appealing.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether attorney-client privilege bars production of documents relating to defense/settlement of underlying torts | Merger agreement’s cooperation clause requires KEC to disclose such documents to BorgWarner; privilege unreasonable | Privilege and work-product protect documents; merger/other agreements do not clearly pierce privilege | Privilege does not bar production for 22 categories: duty to cooperate made expectation of privilege unreasonable (affirmed) |
| Whether work-product doctrine shields the requested materials | Materials were created for defense of third-party claims, not in anticipation of this indemnity suit, so not protected | Work product protects counsel impressions and strategies regardless of context | Work-product inapplicable because materials were prepared jointly for defense of third-party actions, not for this declaratory action (affirmed) |
| Whether later JDCA or 2005 cooperation agreement prevented disclosure | JDCA/2005 agreements governed exchange between parties but did not modify the preexisting duty to cooperate in the merger agreement | JDCA/2005 barred disclosure of privileged info exchanged under the joint-defense arrangement | JDCA/2005 did not abrogate merger agreement duty to cooperate; they govern confidentiality among parties but cannot override the merger cooperation clause (affirmed) |
| Whether contempt sanction should stand | BorgWarner sought contempt for noncompliance | KEC argued good-faith appeal; sanction was inappropriate | Contempt vacated and fine vacated because KEC/KAC acted in good faith in seeking appellate review (vacated) |
Key Cases Cited
- Waste Management, Inc. v. International Surplus Lines Insurance Co., 144 Ill. 2d 178 (1991) (broad cooperation clause and common-interest analysis can render attorney-client and work-product privileges inapplicable where indemnitor/insurer relationship makes disclosure reasonable)
- Fischel & Kahn, Ltd. v. Van Straaten Gallery, Inc., 189 Ill. 2d 579 (2000) (definition and purpose of attorney-client privilege; privilege encourages candid client–attorney communications)
- Allianz Ins. Co. v. Guidant Corp., 373 Ill. App. 3d 652 (2007) (vacating contempt where party’s refusal to comply was a good-faith effort to obtain appellate interpretation of privilege)