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Sterling Finance Management, L.P. v. UBS Painewebber

December 20, 2002


Appeal from the Circuit Court of Cook County 97 L 11843 Honorable Allen S. Goldberg Judge Presiding.

The opinion of the court was delivered by: Justice Gallagher


Defendant, UBS PaineWebber, Inc. (Paine Webber), appeals from an order of the circuit court holding it in contempt of court for refusing to produce certain documents demanded by plaintiff, Sterling Finance Management, L.P. (Sterling), during discovery. PaineWebber was assessed a fine of $500 for its refusal to comply with the court's order. For the reasons that follow, we affirm the judgment of the trial court that the materials at issue are not protected by the attorney-client privilege. We vacate the order of contempt.


This court has jurisdiction over this appeal, which was properly filed pursuant to Illinois Supreme Court Rule 304(b)(5) (155 Ill. 2d R. 304(b)(5)). A contempt proceeding is an appropriate method for a party to test the correctness of an otherwise unreviewable pretrial discovery order. Lewis v. Family Planning Management, Inc., 306 Ill. App. 3d 918, 715 N.E.2d 743 (1999).


Only a brief summary of the nature of the underlying case is necessary for background purposes. On August 9, 1999, Sterling sued PaineWebber *fn1 for alleged misrepresentations made in connection with Sterling's purchase of mortgage-backed securities from PaineWebber. Sterling's complaint included allegations of fraudulent concealment, intentional misrepresentation, negligent misrepresentation, breach of fiduciary duty, violations of the Illinois Securities Law of 1953 (815 ILES 5/1 et seq. (West 1998)), violations of the Illinois Consumer Fraud and Deceptive Business Practices Act (815 ILES 5/505 et seq. (West 1998)), breach of a written contract, and breach of an oral agreement - all of which Sterling alleged resulted in its losing more than $15 million.

The documents and communications at issue in this appeal involve reports prepared by PaineWebber's outside counsel, New York attorney Robert Mendelson (Mendelson reports), and a memorandum with supporting papers prepared by PaineWebber's employee Terry Ann Goulard (Goulard memorandum). On January 19, 1996, PaineWebber's employee Allen Meyer, capital markets compliance counsel, retained Mr. Mendelson to conduct a review of PaineWebber's CMO (collateralized mortgage obligations) residual business. Mendelson conducted a review of the residuals desk in order to perform his analysis of legal and compliance issues pertaining to residuals. On September 30, 1996, Mendelson provided a report, entitled "Report Regarding PaineWebber Incorporated's CMO Residual Training and Sales Practices." As a result of further discussions with PaineWebber's in-house counsel, Mendelson issued a modified report on February 17, 1997.

In the fourth quarter of 1997, after receiving the Mendelson reports, PaineWebber's legal department asked PaineWebber's management audit and controls group, its internal audit function, to review the CMO residual trading and sales desk to evaluate the desk's procedures as compared to the recommendations set forth in the Mendelson report. Terry Ann Goulard, group manager of the management audit and controls group, performed the review. On March 16, 1998, Goulard furnished Gerard Citera, deputy general counsel of PaineWebber, with a draft memorandum and accompanying work papers (Goulard memorandum) reflecting this review. The Goulard memorandum set forth Mr. Mendelson's legal advice regarding various aspects of PaineWebber's residuals business and, in many instances, included verbatim quotations from the Mendelson report. For each item of legal advice from Mendelson, the Goulard memorandum listed observations of the desk's procedures relating to that advice.

During the discovery process, several disputes arose. PaineWebber repeatedly refused to turn over documents. One of the disputes, relevant to this appeal, occurred on October 17, 2001, during the deposition of one of PaineWebber's employees named Ramesh Singh - which the trial judge took the extraordinary step of personally attending via video conference. Sterling's counsel asked Singh what he knew about a 1996 investigation into the conduct of one of PaineWebber's traders in its mortgage-backed securities department. PaineWebber's counsel objected and refused to allow the witness to answer on the ground that the questions called for information protected by the attorney-client privilege. PaineWebber's counsel requested an opportunity to brief the privilege issue. Subsequently, however, despite insisting on briefing the propriety of its privilege objections, and despite Sterling's reminder to address them, PaineWebber failed to do so in its briefs submitted to the trial court. Instead, PaineWebber addressed only its refusal to produce the Mendelson report and the Goulard document and ignored the deposition objections.

On January 14, 2002, after briefing, oral argument and an in camera inspection of the withheld documents, the circuit court rejected PaineWebber's privilege argument and entered an order denying PaineWebber's motion to affirm the attorney-client privilege. The court ordered PaineWebber to produce the withheld documents and further ordered that the witness reappear for a deposition to answer those questions that had previously been objected to by PaineWebber. On January 22, 2002, the court entered an order holding PaineWebber in indirect civil contempt after PaineWebber informed the court that, for the purpose of seeking review of this otherwise unappealable discovery order, it would respectfully not comply. In this appeal, PaineWebber asserts that the trial court incorrectly determined that the documents and communications were not protected by the attorney-client privilege. Specifically, PaineWebber claims that the court should have applied New York law when deciding whether the materials were privileged, and further contends that these materials are privileged under New York law.


PaineWebber has not included the standard of review in its briefs. Generally, rulings on discovery matters are reviewed under an abuse of discretion standard. Maxwell v. Hobart Corp., 216 Ill. App. 3d 108, 110, 576 N.E.2d 268, 270 (1991). A trial court, however, lacks the discretion to compel the disclosure of information that is privileged. In re Marriage of Daniels, 240 Ill. App. 3d 314, 324, 607 N.E.2d 1255, 1261 (1992). Nonetheless, because privileges are designed to protect the interests that are outside the truth-seeking process, they are strictly construed as an exception to the general duty to disclose. Daniels, 240 Ill. App. 3d at 324-25, 607 N.E.2d at 1262. Generally, the applicability of a statutory evidentiary privilege, and any exceptions thereto, is a matter of law subject to de novo review. Norskog v. Pfiel, 197 Ill. 2d 60, 70-71, 755 N.E.2d 1, 9 (2001). Courts have applied a de novo standard of review in deciding the applicability of the attorney-client privilege. Hayes v. Burlington Northern & Santa Fe Ry. Co., 323 Ill. App. 3d 474, 477, 752 N.E.2d 470, 473 (2001); Midwesco-Paschen Joint Venture for the Viking Projects v. IMO Industries, Inc., 265 Ill. App. 3d 654, 660, 638 N.E.2d 322, 326 (1994). This court has also applied the de novo standard of review to the trial court's decision on a choice-of-law issue. Household International, Inc. v. Liberty Mutual Insurance Co., 321 Ill. App. 3d 859, 749 N.E.2d 1, 9 (2001). Our review is de novo.


PaineWebber's primary issue raised on appeal is "whether Illinois choice-of-law rules require that New York law be applied when determining whether the communications and documents at issue are protected by the attorney-client privilege." While the question implies that there is a conflict between Illinois law and New York law, PaineWebber has neglected to articulate clearly whether there is a conflict. *fn2 As Sterling correctly notes, it was PaineWebber's responsibility to explain why it mattered whether Illinois law rather than New York law was applied by explaining the germane features of New York law (with citation of authority) and how that law conflicts with Illinois law. Before this court undertakes a choice-of-law analysis to determine which state's law governs a claim, we must look to see whether a conflict exists. This is a threshold question because choice-of-law considerations are not implicated unless there is an actual conflict in the law of the two states. Household International, Inc. v. Liberty Mutual Insurance Co., 321 Ill. App. 3d 859, 868, 749 N.E.2d 1, 8 (2001); Malatesta v. Mitsubishi Aircraft International, Inc., 275 Ill. App. 3d 370, 374, 655 N.E.2d 1093, 1096 (1995). A conflict exists when the application of one state's law over another will make a difference in the outcome. Malatesta v. Mitsubishi Aircraft International, Inc., 275 Ill. App. 3d at 374, 655 N.E.2d at 1096. If the law of the jurisdictions in question is essentially the same on the disputed issue, there is no need to apply a choice-of-law analysis. Wreglesworth v. Arcto, Inc., 316 Ill. App. 3d 1023, 1028, 738 N.E.2d 964, 969 (2000). Moreover, if there is no conflict, Illinois law applies as the law of the forum. Dearborn Insurance Co. v. International Surplus Lines Insurance Co., 308 Ill. App. 3d 368, 373, 719 N.E.2d 1092, 1096 (1999). Thus, we must decide whether there is a conflict in the laws of the two states regarding the attorney-client privilege.

In the typical choice-of-law case involving a privilege, the conflict is undeniable because one state has a privilege that is nonexistent in the other state. Here, it is undisputed that both Illinois and New York recognize the attorney-client privilege generally, as well as specifically, for corporations. It is the potential difference in the scope of the corporate attorney-client privilege that arguably creates a conflict. Therefore, the comparison of the substantive law of each state is more involved than merely comparing the existence versus the nonexistence of a privilege. Our analysis necessarily involves a consideration of how each jurisdiction has defined the scope of the privilege and a determination of whether New York applies its corporate attorney-client privilege in the same way Illinois does. We must undertake this analysis in the context of the case before us in order to assess whether any difference in the scope of the privilege would have an impact on the particular facts of this case, i.e., whether the difference would be outcome determinative.


As discussed by our supreme court in Consolidation Coal Co. v. Bucyrus-Erie Co., 89 Ill. 2d 103, 432 N.E.2d 250 (1982), various tests have been used by jurisdictions in deciding the question of who speaks for a corporation on a privileged basis. The control group test "focuses on the status of the employee within the corporate hierarchy." Consolidation Coal, 89 Ill. 2d at 114, 432 N.E.2d at 255. Broader tests, including the so-called "subject matter" test, "focus on why an attorney was consulted rather than with whom he communicated." Consolidation Coal, 89 Ill. 2d at 115, 432 N.E.2d at 255. The United States Supreme Court has rejected the control group test as the governing ...

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