Appeal from the Circuit Court of Cook County No. 07 L 4924 Honorable Daniel J. Pierce, Judge Presiding.
The opinion of the court was delivered by: Justice Sterba
JUSTICE STERBA delivered the judgment of the court, with opinion.
Presiding Justice Lavin and Justice Pucinski concurred in the judgment and opinion.
¶ 1 Plaintiff-appellee Peter Garvy sued defendant-appellant Seyfarth Shaw LLP (Seyfarth) and defendant Edward J. Karlin for legal malpractice, fraud, and breach of fiduciary duty. During the discovery phase of the proceedings, Seyfarth objected to Garvy's requests to produce communications between Seyfarth attorneys and both in-house and outside counsel related to Garvy's claims against Seyfarth, on the grounds that the communications were protected by attorney-client privilege or the work-product doctrine. In response to Garvy's motion to compel, the circuit court ruled that communications related to Garvy's claims against Seyfarth were not privileged as to Garvy during the period of time that he was represented by Seyfarth and ordered Seyfarth to produce certain documents and communications. Seyfarth subsequently informed the circuit court that it would not comply with the order to the extent that it involved attorney-client communications or work product, and the circuit court ordered Seyfarth held in contempt and entered a $100 fine against it. On appeal, Seyfarth first contends that the circuit court's discovery and contempt orders are void because the circuit court improperly denied Karlin's motion for substitution of judge as of right pursuant to section 2-1001(a)(2) of the Illinois Code of Civil Procedure (Code) (735 ILCS 5/2-1001(a)(2) (West 2008)). Seyfarth further contends that the documents and communications in question are protected by the attorney-client privilege and work-product doctrine and that Garvy waived any conflict of interest that could potentially pierce those privileges. For the following reasons, we reverse the order of the circuit court and remand for further proceedings.
¶ 3 In 2001, Garvy retained Seyfarth to provide corporate advice related to the management of the Garvy Holding Company (GHC), which was privately owned by Garvy, his father, Eugene Garvy (Gene) and his four siblings, Maria Garvy, Joseph Garvy, Elizabeth Garvy and Anthony Garvy (Siblings). Garvy and the Siblings each owned 20% of the common shares and 6,000 preferred shares in GHC and Gene owned 8,950 preferred shares in GHC. At that time, the GHC board of directors (Board) consisted of three people: Garvy, Gene and Garvy's mother, Adeline Garvy. GHC is the holding company for all issued and outstanding shares of Vegetable Juices, Inc. (VJI).
¶ 4 Garvy and Gene were in agreement on issues related to the management of GHC and sought legal advice from Seyfarth regarding how to keep the Siblings from interfering with their management decisions. Seyfarth advised Garvy to issue 11,000 preferred shares to certain key management personnel in lieu of compensation bonuses, and allegedly further advised him not to put the issuance of the shares before the GHC shareholders for discussion, ratification or approval. Seyfarth also advised Garvy to increase the size of the GHC Board from three to seven members. In addition to the original Board members, the new Board would consist of two of the Siblings and two people who held management positions in GHC and whose votes were controlled by Garvy. The Board voted to issue 11,000 preferred shares and informed the Siblings of the issuance at the GHC shareholders' meeting. The Board was also increased to seven members.
¶ 5 The Siblings objected to the issuance of the 11,000 shares and demanded that they be rescinded. On Seyfarth's advice, Garvy entered into settlement negotiations with the Siblings through Seyfarth. The negotiations involved the terms of two settlement agreements between Garvy and the Siblings, an employment agreement and a shareholders' agreement. The terms of the agreements provided, inter alia, that the Board would be reduced to five members, comprised of Garvy and the Siblings, and that the 11,000 preferred shares would be rescinded.
¶ 6 Prior to the execution of the agreements, Garvy sought advice from Seyfarth regarding his intention to purchase 8,500 of Gene's preferred shares. The intended purchase would mean that Garvy would then own 14,500 preferred shares which, together with his common shares, would give him minority control of the Board and the ability to prevent any transaction that would require a two-thirds majority vote. Seyfarth allegedly advised Garvy to delay the purchase of the preferred shares until after the agreements had been signed by all parties. Seyfarth allegedly further advised Garvy not to disclose his intended purchase to the Siblings.
¶ 7 The employment agreement and shareholders' agreement were both executed on July 31, 2002. On August 13, 2002, Gene sold 8,500 preferred shares to Garvy for $10 per share. Because the purchase of the shares gave Garvy voting rights and a minority control interest, the actual value of the shares exceeded $3.5 million. When the Siblings learned of the purchase, they threatened to void the shareholders' agreement. In the meantime, Adeline, who had commenced divorce proceedings, accused Gene of dissipating marital assets by selling the shares to Garvy. She subsequently filed a fraudulent conveyance claim against Garvy and Gene. Garvy retained Seyfarth to represent him in the fraudulent conveyance litigation.
¶ 8 In August 2004, the Siblings voted to terminate Garvy as president and chief executive officer of GHC and as president of VJI, in part because of his failure to disclose the intended purchase of the 8,500 preferred shares. The Siblings also filed a lawsuit against Garvy and Gene in the circuit court of Cook County (the chancery litigation). The complaint in the chancery litigation alleged that the issuance of the 11,000 preferred shares was unlawful because it violated the preemptive rights of the existing shareholders. The complaint further alleged that the 8,500 preferred shares transferred from Gene to Garvy were undervalued and that the failure to disclose the transfer constituted a breach of fiduciary duty. Garvy asked Seyfarth to represent him in the chancery litigation.
¶ 9 At the direction of its in-house counsel, Peter Woodford, Seyfarth sent Garvy and Gene a letter dated November 3, 2004, regarding the potential conflicts of interest in Seyfarth's representation of either or both of them in the chancery litigation. In the letter, Seyfarth noted that the complaint in the chancery litigation alleged that Garvy and Gene engaged Seyfarth to advise them on how they could "obtain control over GHC and VJI," and Seyfarth advised them on the issuance of the preferred shares. The letter confirmed that, according to Seyfarth's billing records, it did indeed provide advice concerning the composition of the GHC Board, as well as on the issuance of the preferred shares. Seyfarth stated that it would likely be treated as counsel to GHC, rather than to Garvy and Gene personally, and would most likely have to produce its files regarding the representation. Moreover, Seyfarth stated that it was likely that the plaintiffs would seek to add Seyfarth as a defendant and assert a malpractice claim regarding the issuance of shares without recognizing the shareholders' preemptive rights, or claim that Seyfarth aided and abetted an illegal scheme perpetrated by Garvy and Gene.
¶ 10 The letter also discussed allegations in the complaint related to the 8,500 preferred shares that were transferred from Gene to Garvy after the employment and shareholders' agreements were executed. The letter noted that the complaint alleged that the transfer was the result of advice rendered by Seyfarth for the purpose of assisting Garvy and Gene in retaining control of GHC. The complaint further alleged that the failure to disclose the transfer constituted a breach of fiduciary duty which invalidated the shareholders' agreement. Seyfarth explained that the subject of whether the agreement should be invalidated was a very complicated legal question. In addition to the conflicts presented by the allegations as discussed in the letter, Seyfarth noted that it was also representing Garvy in the fraudulent conveyance litigation and had worked closely with Gene's separate attorney in the divorce proceeding.
¶ 11 The letter went on to explain that because Garvy's and Gene's interests could diverge as a result of the various proceedings against both of them, Seyfarth advised them to consider and decide between themselves, with the advice of independent counsel, whether they wanted Seyfarth to represent both of them in the chancery litigation. Finally, Seyfarth explained that because its prior advice would be an issue in the chancery litigation, there was the potential that Seyfarth could be seen as taking positions to favor its own interests over the interests of Garvy and Gene. The fact that Seyfarth attorneys could be witnesses could also adversely affect its ability and effectiveness in representing either of them. The letter discussed various ways in which the issues could develop during the course of the litigation and disclosed what Seyfarth intended to argue with respect to the different counts in the alternative scenarios. Finally, the letter stated: "Because plaintiffs have made so many allegations relating to the role of Seyfarth Shaw in this matter, we strongly encourage you to seek independent counsel regarding the import of this consent and your rights in this matter." (Emphasis in original.) The letter concluded with the following:
"If, after reviewing the issues and conflicts described above with separate counsel, you wish Seyfarth Shaw to continue to represent you in this lawsuit, please sign this letter below as your acknowledgement [sic] of the potential conflicts of interest between yourselves, and yourselves and Seyfarth Shaw, and as your consent to Seyfarth Shaw's representation of you in light of this discussion of the conflicts and potential developments as the lawsuit proceeds.
We emphasize that you remain completely free to engage independent counsel at any time even if you do decide to sign the consent set forth below, and we will cooperate fully with independent counsel's review of the matter."
¶ 12 There is no evidence in the record that Garvy ever signed the letter. Shortly after his receipt of the letter, Garvy retained Allan Horwich of Schiff Hardin as independent counsel to address the issues raised in the letter. Horwich asserted legal malpractice claims against Seyfarth on behalf of Garvy and entered into precomplaint settlement discussions with Woodford. On December 23, 2004, Horwich sent Woodford a letter regarding the settlement negotiations and stated that it was his understanding that Garvy would like to continue to proceed with representation by Seyfarth in the chancery litigation. On February 16, 2005, Horwich requested that Seyfarth enter into a tolling agreement regarding Garvy's claims against Seyfarth. Seyfarth entered into the tolling agreement and settlement discussions continued on the malpractice claims. On February 24, 2005, in a communication to follow up on the ...