Name of Assigned Judge Amy J. St. Eve Sitting Judge if Other or Magistrate Judge than Assigned Judge
Defendants' Motion to Compel  is granted in part and denied in part. O[ For further details see text below.] Notices mailed by Judicial staff.
Before the Court is Defendants Access Community Health Services, Inc. ("Access"), Vital Community Health Services, Inc. ("Vital"), Wessel Bengston, B. Macon Brewwe, George Chapas, Fred Cuppy, William Fruland, Roger Mays, John Mullen, David Shanahan and George Thoma's (collectively "Defendants") Motion to Compel Allegedly Privileged and Work Product Information from Debtor. For the following reasons, the Court grants in part and denies in part Defendants' motion to compel.
This case is an adversary proceeding associated with the bankruptcy proceedings of Edgewater Medical Center ("EMC"), a hospital located in Chicago, Illinois. EMC is an Illinois not-for-profit corporation. (R. 54-2, Ex. 2, Amended Complaint, ¶ 2.) EMC's court-appointed custodian caused EMC to file a voluntary petition for relief under Chapter 11 of the Bankruptcy Code, 11 U.S.C. § 101, et seq., on February 25, 2002, and EMC continues to manage its estate as a debtor-in-possession pursuant to § 1117 of the Bankruptcy Code. On July 31, 2002, Judge Black of the Bankruptcy Court for the Northern District of Illinois entered an order in the bankruptcy case confirming that EMC's custodian has the power to control, exercise and/or waive EMC's attorney-client privilege. (R. 46-2, Ex. 3.)
On April 23, 2004, EMC filed this adversary proceeding against Access and Vital, not-for-profit corporations that were EMC's parent companies, and the individual defendants, directors of EMC or members of the board of directors or finance committees of Access and Vital. EMC's initial complaint alleged that Defendants breached their fiduciary duties to EMC by: (I) causing EMC to enter into a lease that contained terms disadvantageous to EMC; (ii) approving a loan to an out-of-state organization for purchase of a California hospital; (iii) approving payments and forbearances to out-of-state organizations for no consideration; (iv) approving management agreements with Peter Rogan's management companies; and (v) failing to terminate the management companies and pursue legal action against them. (R. 54-2, Ex. 1, Complaint.) The amended complaint alleges that Defendants breached their fiduciary duties to EMC by: (i) approving a multi-million dollar lease on terms that were disadvantageous to EMC; (ii) approving a $10 million loan to an out-of-state hospital that resulted in no benefit to EMC; (iii) approving a $3 million consulting contract on terms disadvantageous to EMC; (iv) approving the transfer of $1 million from a charitable foundation to an out-of-state corporation for no consideration or benefit to EMC; (v) approving management contracts with Rogan's management companies on terms disadvantageous to EMC; and (vi) abandoning their fiduciary role to monitor and ensure compliance in matters relating to EMC's legal and financial affairs. (R. 54-2, Ex. 2, Amended Complaint.) While the amended complaint challenges much of the same conduct by Defendants, it contains greater detail regarding those claims.
On August 15, 2005, Defendants filed a motion to compel a series of documents relating to legal advice given to Defendants while they were directors or committee members of the boards of directors of EMC and/or its affiliates. Specifically, Defendants requested the bankruptcy court to "order Edgewater to immediately produce all documents relating to legal advice provided to Defendants during their association with Edgewater, including all board minutes and all documents produced by McDermott, Will & Emery." (R. 54-2, EMC's Opp'n, Ex. 3, p. 2.) Defendants asserted that the bankruptcy court should reject EMC's privilege claims on the following five grounds: "(1) the advice was provided to Defendants and forms the basis for their 'advice of counsel' defense against Edgewater's claims, (2) the same counsel jointly represented Edgewater and the Defendants, (3) Edgewater has waived any privilege claim by putting the documents at issue in this litigation, (4) Edgewater has waived any privilege claim by producing a full set of unredacted board minutes to third parties, and (5) Edgewater cannot use the privilege as a shield and a sword." Id. Defendants did not assert in their 2005 motion to compel that EMC could not assert the privilege because the entity was defunct or because no privilege attached to certain communications due to the presence of third parties. On September 26, 2005, Judge Black denied Defendants' motion to compel with the exception of the following four items: (i) David Stetler's March 2000 presentation to the Access and Vital boards regarding the fact that the hospital and management company were indictable; (ii) David Stetler's advice at the April 2001 board meeting regarding the results of counsels' investigation and the March 2000 presentation; (iii) the advice of David Stetler and McDermott Will & Emery in the months prior to and including May 2001 to discharge the management companies and Mr. Rogan; and (iv) the May 9, 2000 advice of counsel referenced in paragraph 123 of the complaint to discharge Rogan and the management companies. (R. 54-2, Ex. 5., p. 2.)
In August 2008, EMC's counsel made documents produced by its attorneys available to Defendants' counsel for review, without prejudice to EMC's ability to assert privilege. After Defendants' counsel selected documents, in September 2009, EMC produced some documents and provided a privilege log as to others. In addition, in the summer of 2009, almost four years after Judge Black's ruling, Defendants sought to depose three former EMC attorneys: Robert Hoban of McDermott, Will & Emery, Richard Zimmerman of Foley & Larner, and David Stetler of Stetler & Duffy. EMC objected to the depositions on the basis of attorney-client privilege and, in some cases, the work product doctrine. In correspondence regarding the parties' discovery dispute, EMC asserted that Judge Black's 2005 privilege ruling controls.
In their motion, Defendants contend that the "law of the case doctrine" does not affect four of the five arguments presented for the first time in the instant motion to compel: (i) there is no privilege to assert because EMC is a defunct organization; (ii) privilege was waived from 1995-September 1998 because third parties were present when the communications were made; (iii) "at issue" waiver should encompass all legal advice given to Defendants about the transactions referenced in the complaint; and (iv) EMC's work product claims are meritless.
Defendants also argue that Judge Black's 2005 ruling does not bar reconsideration of whether a party can assert the privilege against directors who received the legal advice.
Because the Court has jurisdiction over this case based on diversity of citizenship and the claims in the complaint arise under Illinois law, Illinois law also governs the claims of attorney-client privilege. Dexia Credit Local v. Rogan, 231 F.R.D. 268 (N.D. Ill. 2004) (citing Fed. R. Evid. 501 and Allendale Mut. Ins. Co. v. Bull Data Sys., Inc., 152 F.R.D. 132, 139 (N.D. Ill. 1993)); Favala v. Cumberland Eng'g Co., 17 F.3d 987, 989 (7th Cir. 1994). In defining the attorney-client privilege, the Illinois Supreme Court has stated that "where legal advice of any kind is sought from a professional legal adviser 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 adviser, except the protection be waived." Fischel & Kahn v. van Straaten Gallery, 727 N.E.2d 240, 189 Ill. 2d 579, 584 (Ill. 2000). "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." Id. "Moreover, '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. (citing Upjohn Co. v. U.S., 449 U.S. 383, 66 L.Ed. 2d 584, 101 S.Ct. 677 (1981)).
Under Illinois law, it "is the [attorney-client] privilege, not the duty to disclose, that is the exception" and, therefore, "the privilege ought to be strictly confined within its narrowest possible limits." Waste Management, Inc. v. Int'l Surplus Lines Ins. Co., 144 Ill. 2d 178, 200-201, 579 N.E.2d 322, 327 (Ill. 1991). Illinois courts accordingly "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." Id.
I. Attorney-Client Privilege
As an initial matter, the Court has reviewed the parties' briefing and Judge Black's order on the initial motion to compel privileged documents. In many respects, the motion to compel presently before the Court is a motion for reconsideration. Because EMC has filed an adversary proceeding arising out of the bankruptcy proceedings against Defendants, the district court in which the bankruptcy case is pending constitutes the appropriate venue for the adversary proceeding. See 28 U.S.C. § 1409(a). The Court accordingly may reconsider an earlier ruling by Judge Black in the bankruptcy court. While the amended complaint filed in the adversary proceeding on March 6, 2008 contains significantly more detail that the initial complaint filed on April 23, 2004, both complaints challenge much of the same conduct and cover the same time period. Defendants argue that discovery since 2005 "has shown just how crucial legal advice was to all of the challenged decisions." (R. 58-1, Defs.' Reply, p. 4.)
The Seventh Circuit has said that a motion to reconsider is appropriate where: "(1) the court has patently misunderstood a party; (2) the court has made a decision outside the adversarial issues presented to the court by the parties; (3) the court has made an error not of reasoning but of apprehension; (4) there has been a controlling or significant change in law since the submission of the issue to the court; or (5) there has been a controlling or significant change in the facts since the submission of the issue to the court." Orange v. Burge, 451 F. Supp. 2d 957, 961 (N.D. Ill. 2006) (citing Bank of Waunakee v. Rochester Cheese Sales, Inc., 906 F.2d 1185, 1191 (7th Cir. 1990)). "Reconsideration is not an appropriate forum for rehashing previously rejected arguments or arguing matters that could have been heard during the pendency of the previous motion." Caisse Nationle de Credit Agricole v. CBI Indus., 90 F.3d 1264, 1270 (7th Cir. 1996). The Seventh Circuit has repeatedly cautioned that "motions for reconsideration serve a limited function: to correct manifest errors of law or fact or to present newly discovered evidence." See, e.g., Publishers Resource Inc. v. Walker-Davis Publications, Inc., 762 F.2d 557, 561 (7th Cir. 1985) (quotation omitted); In re Oil Spill by "Amoco Cadiz," 794 F. Supp. 261, 267 (N.D. Ill. 1992) ("Motions to reconsider are not at the disposal of parties who want to 'rehash' old arguments"). Accordingly, "any arguments... raised for the first time in [a] motion to reconsider are waived." Bloch v. Frischholz, 587 F.3d 771, 784 (7th Cir. 2009) (citation omitted).
A. Defendants Have Waived the Argument that EMC's Status as an Allegedly "Defunct" Entity Warrants Disclosure
Defendants first argue that because EMC is defunct there is no privilege to assert. Defendants, however, could have raised this argument in their initial motion to compel which sought "all documents relating to legal advice provided to Defendants during their association with Edgewater." (R. 50-1, Case No. 04-2330, Bankruptcy Court for the Northern District of Illinois, pp. 1-2.) Defendants premise this argument on the fact that EMC ceased operations in December 2001 in the wake of the indictment of the hospital's management company and the Circuit Court of Cook County's February 2002 finding that "the Corporation is no longer able to carry out its purpose of operating a hospital" and that "grounds for judicial dissolution of the Corporation exist." (R. 46-1, Defs.' Mot., pp. 17-18.) While Defendants do not contend that there has been any change in the facts regarding EMC's status since 2005, Defendants appear to request the Court to reconsider their argument in the present motion because "the law has been materially clarified with respect to whether a defunct corporation may assert the privilege." Id. at 18. In support of this argument, Defendants cite TAS Distrib. Co. v. Cummins Inc., 2009 WL 3255297, 2009 U.S. Dist. LEXIS 93750, *5-*6 (C.D. Ill. Oct. 7, 2009). In TAS, the court interpreted the Supreme Court's decisions in Commodity Futures Trading Comm'n v. Weintraub, 471 U.S. 343, 348, 105 S.Ct. 1986, 85 L.Ed. 2d 372 (1985) as follows:
Weintraub itself does not decide the question whether a corporation's attorney client privilege survives the "death" of the corporation. A number of courts have, however, relied on Weintraub's reasoning to decide that question in the negative, ruling that a dissolved corporation does not have the right to assert the attorney-client privilege. See, City of Rialto v. U.S. Dep't of Defense, 492 F. Supp. 2d 1193, 1199 (C.D. Cal. 2007) (concluding that the special master correctly determined that a dissolved corporation may not assert the attorney-client privilege); Gilliland v. Geramita, No. 2:05-CV-01059, 2006 U.S. Dist. LEXIS 65546, 2006 WL 2642525, at *4, Sept. 14, 2006 (W.D. Pa.) (noting that "there should be a presumption that the attorney-client privilege is no longer viable after a corporate entity ceases to function, unless a party seeking to establish the privilege demonstrates authority and good cause," and concluding that "counsel has no duty to assert the privilege on behalf of a nonfunctioning corporation"); Lewis v. United States, No. 02-2958B/AN, 2004 ...