FRANKLIN UNITED METHODIST HOME, INC. v. LANCASTER POLLARD & CO. et al

Filing 154

ENTRY and ORDER - Plaintiff's Motion for Protective Order [doc. 86] is GRANTED. The parties are directed to confer on the text of a proposed protective order and FUMH shall file a proposed protective order no later than November 26, 2012. Defendants' Motion to Compel [doc. 94] is DENIED. (See Entry for details.) Signed by Magistrate Judge Denise K. LaRue on 11/8/2012. (TMA)

UNITED STATES DISTRICT COURT
for the SOUTHERN DISTRICT OF INDIANA,
INDIANAPOLIS DIVISION
FRANKLIN UNITED METHODIST
HOME, INC.,

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) CAUSE NO. 1:10-cv-1086-RLY-DKL
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Plaintiff,
vs.
LANCASTER POLLARD & CO., et al.,
Defendants.

ENTRY and ORDERS
Plaintiff’s Motion for Protective Order [doc. 86]
Defendants’ Motion to Compel [doc. 94]
This Cause comes before the Court on the above-entitled motions. Plaintiff Franklin
United Methodist Home (“FUMH”) seeks a protective order (1) facilitating its production
of non-privileged documents that relate to its settlement agreement with non-party
Lehman Brothers Special Financing, Inc. (“Lehman”) and that are currently subject to
confidentiality orders issued in Lehman’s bankruptcy case, and (2) precluding its
production of privileged attorney-client and work-product documents pertaining to that
settlement. Defendants Lancaster Pollard & Co. and Steven W. Kennedy, one of its
partners (collectively “LP”) seek an order compelling FUMH to produce both categories
of documents. For the reasons set forth herein, FUMH’s motion is granted and LP’s motion

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is denied.1

Familiarity with the details of the allegations is presumed and are summarized here
as relevant to the present motions.

In its role as FUMH’s financial advisor, LP

recommended to FUMH that it enter into two interest-rate swaps with Lehman. FUMH
accepted the recommendation and entered into two such swaps, one in 2006 and one in
2007. In September 2008, Lehman filed for bankruptcy protection in the United States
Bankruptcy Court for the Southern District of New York, Judge James M. Peck. In re
Lehman Brothers Holdings, Inc., et al., Chapter 11 Case No. 08-13555 (JMP) (Bankr. S.D. N.Y.)
(“Lehman Bankruptcy”). In October and November 2008, LP advised FUMH that Lehman’s
filing constituted defaults under the terms of the swaps, entitling FUMH to terminate the
swaps, and that FUMH should not make the next payments. LP prepared notices of the
suspension of FUMH’s payments and the termination of the swaps and directed FUMH
to fax the notices to Lehman. FUMH followed LP’s advice and utilized their notices. In
addition, FUMH alleges that, in November 2008, again at the direction and advice of LP,
FUMH entered into a swap transaction with Morgan Stanley Capital Services, Inc. to
replace the Lehman swaps.

FUMH alleges that LP’s notices and directions regarding the Lehman swaps were
defective in three respects: first, the notices terminated only the 2007 swap, not the 2006

1

Peck, Shaffer & Williams, LLP, and Jason L. George participated in the briefing on FUMH’s
motion for protective order while third-party defendants. They since have been dismissed but added as
defendants.

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swap as well; second, under the terms of the swaps, termination notices could not be sent
by fax; and, third, LP miscalculated the termination payment due from FUMH to Lehman.

In September 2009, Lehman notified FUMH that its purported termination of the
swaps was not valid, that FUMH was delinquent in its payment obligations under the
swaps, and that its delinquency was a violation of the automatic bankruptcy stay (the
“Lehman Claims”). [Doc. 87-1.] Lehman asserted that FUMH was, therefore, obligated to
continue making its payments and that it was then too late for FUMH to terminate the
swaps based on Lehman’s insolvency, financial condition, or bankruptcy. Lehman also
indicated that the Bankruptcy Court had the power to enforce FUMH’s performance under
the swaps. Lehman included with its letter a September 15, 2009 ruling issued by the
Bankruptcy Court in its case regarding another customer’s swap contract with Lehman that
supported Lehman’s positions (the “Metavante Order”). [Doc. 87-3]. Lehman demanded
that FUMH resume its payments and pay all arrearages, with interest. Lehman also
warned that it might seek compensation for all damages it incurs as a result of the
delinquencies.2

FUMH filed the present suit against LP in August 2010, seeking a declaratory
judgment that, if FUMH is found liable on the Lehman Claims, then LP is liable to FUMH
for all resulting damages and the costs and fees incurred by FUMH in defending the

2

FUMH was listed as a derivatives-contract counterparty in Lehman’s initial and amended
Schedules G (Executory Contracts and Unexpired Leases, Rider G – Derivatives Contracts) filed in March
and June 2009. Lehman Bankruptcy [docs. 3021 and 3066].

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Lehman Claims. [Doc. 1-1, p. 4.]

The Bankruptcy Court aggressively promoted quick settlements with Lehman’s
swap customers in hopes of bringing substantial assets into Lehman’s bankruptcy estate
without trial or further litigation. To that end, the court ordered the customers and
Lehman to engage in alternative dispute resolution (“ADR”) and ordered certain
procedures to facilitate those efforts. In re Lehman Bros., Alternative Dispute Resolution
Procedures Order for Affirmative Claims of Debtors Under Derivatives Contracts (doc. 5207)
(“ADR Order”) (Bankr. S.D. N.Y., Sept. 17, 2009) [doc. 87-2 in the present case]. Under the
ADR Order, FUMH was compelled to engage in good faith in the mandatory staged ADR
process with Lehman. This process consisted of an initial notice/response stage, followed,
if resolution is not achieved, by a mediation stage with a third-party mediator. The ADR
Order also warned the parties of the possible consequences of failing to participate in good
faith:
12. Sanctions for Parties. Each Debtor, Derivatives Counterparty and
Indenture Trustee must participate in good faith with these Derivatives ADR
Procedures with regard to the ADR Disputes specified in the applicable
Derivatives ADR Notice. If, after notice and a hearing, the Court determines
that a party has not complied with the Derivatives ADR Procedures in good
faith in connection with any Derivatives ADR Dispute, the Debtors,
Derivatives Counterparty or Indenture Trustee, as the case may be, may be
subject to such sanctions as the Court deems appropriate (the “Sanctions”).
If a mediator reports to the Court that any party subject to this Order is not
cooperating in good faith with the Derivatives ADR Procedures, the Court
may, without the need for further motion by any party, schedule a hearing
and order Sanctions. Litigation with respect to the issuance of Sanctions shall
not delay the commencement of the Mediation Stage of these procedures
upon completion of the Notice/Response Stage. Sanctions may include, but
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are not limited to:
*
*
*
b. Against Derivatives Counterparties (including
Indenture Trustees with Authority): (i) attorneys’ fees
incurred by the Debtors with respect to the Derivatives
ADR Procedures after the sending of an ADR Package;
(ii) fees and costs of the Mediator; (iii) an award of the
Derivatives ADR Dispute up to the amount specified in
the Derivatives ADR Notice.
ADR Order § 12.

In the Metavante Order, Judge Peck found that Metavante, another swap customer
of Lehman, had waived its contractual option to terminate the swap by not taking timely
and effective action “fairly contemporaneously” with Lehman’s bankruptcy filing and,
therefore, continued to owe payments to Lehman. Because he found that Metavante had
“an insufficient commitment to a timely settlement” after unsuccessfully engaging in ADR,
Judge Peck ordered it to perform under the swap agreement until such time as Lehman
determined, under the Bankruptcy Code, whether to assume or reject their executory swap
contract. Thus, Metavante was held responsible for making delinquent payments in excess
of six million dollars (representing unpaid quarterly payments and in excess of $300,000
default interest) and future swap payments.

Lehman initiated the notice/response stage of the ADR process with FUMH in May
2011. FUMH and Lehman reached a settlement sometime in September 2011, (Defendants’
Combined Memorandum in Opposition to Plaintiff’s Motion for a Protective Order [doc. 95]
(“Defendants’ Combined Memorandum”) at 11 n. 2), pursuant to which FUMH made payment
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of $2.4 million to Lehman. Amended Complaint [doc. 44] ¶ 17.

In December 2012, FUMH filed its Amended Complaint, asserting negligence and
breach-of-fiduciary-duty claims against LP. [Doc. 44.] FUMH alleges that the assertion of
the Lehman Claims and its resulting settlement of them were the proximate results of LP’s
faulty advice and services. It seeks judgment against LP for its damages, including, but not
limited to, FUMH’s settlement payment to Lehman, the costs of the Morgan swap, fees and
costs incurred defending the Lehman Claims, and disgorgement of all fees and moneys
paid to LP for its services. LP brought third-party claims against the law firm Peck, Shaffer
& Williams, LLP, and Jason L. George, one of its partners, (collectively “Peck”), who
provided legal advice to LP regarding the termination of the Lehman swaps. LP’s claims
demanded reimbursement for any amounts for which LP is held liable to FUMH. In
September 2012, the Court dismissed LP’s third-party claims against Peck as untimely.
[Doc. 123.] In October 2012, FUMH filed its Second Amended Complaint adding Peck as
defendants and asserting legal-malpractice and breach-of-fiduciary-duty claims against
them. [Doc. 138.]

LP served thirty requests for production on FUMH seeking documents relating to
FUMH’s settlement negotiations and agreement with Lehman. [Doc. 87-5.] For example,
the requests seek the following categories of documents:
4. All notes, memoranda, and all other documents which, directly or
indirectly, relate to, refer to, and/or comment upon any and all meetings,
conferences, and/or mediations between FUMH and Lehman . . . .
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6. All documents which, directly or indirectly, relate to, refer to,
and/or comment upon the “settlement payment made to Lehman Brothers Special
Financing in the amount of $2,400,000” . . . including, but not limited to, all
settlement agreements, all drafts of or proposed settlement agreements . . .
and all drafts of or proposed releases and covenants not to sue.
7. All notes, memoranda, and all other documents prepared, in whole
or in part, by any member of FUMH’s Board of Trustees or any officer,
employee, or attorney for FUMH . . . pertaining, directly or indirectly, to any
settlement or proposed settlement with Lehman of the Lehman Claims.
8. All documents which, directly or indirectly, contain any assessment
and/or evaluations of the merits of the Lehman Claims.
9. All documents which, directly or indirectly, contain any
recommendations or advice to FUMH to settle the Lehman Claims.
13. All documents which, directly or indirectly, explain why FUMH
paid Lehman the sum of $2,400,000 to settle the Lehman Claims . . . .
28. All documents which, directly or indirectly, contain, set forth,
relate to, refer to, or comment upon any and all opinions or conclusions that
FUMH was at any time liable to Lehman for the Lehman Claims.
29. All documents . . . which mention, relate to, refer to, and/or
comment upon Lehman, the Lehman Claims, LP, Peck, and/or Benesch.
30. All documents which, directly or indirectly, relate to, refer to,
and/or comment upon any and all discussions, negotiations, and/or
mediations between FUMH and Lehman with respect to the settlement or
compromise of the Lehman Claims.
Peck served similar requests for production. [Docs. 87-6 and 87-7.] FUMH objected to
producing two categories of documents — privileged documents covered by the attorneyclient and/or work-product privileges, and documents relating to the Lehman Bankruptcy
ADR negotiations that fall under the Bankruptcy Court’s confidentiality orders. FUMH
produced a privilege log of its withheld documents. [Docs. 94-2 through 94-10.] After the
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parties were unable to resolve their differences, FUMH filed the present motion for
protective order and LP countered with the present motion to compel. Peck participated
in the briefing of FUMH’s motion.

Although there is a dispute about the relevance of the requested documents to
FUMH’s claims, the Court finds that the dispute is irrelevant and will assume the
documents’ relevance for the purposes of the present motions. The parties do not dispute
the applicability of a particular privilege or restriction to any specific document; instead,
they argue the general validity and effect of the privileges and the Bankruptcy Court’s
confidentiality orders in the facts and circumstances of this case.
The Bankruptcy Court’s Confidentiality Orders
The ADR Order issued in the Lehman’s Bankruptcy provides that “the contents of
any papers submitted during the mediation stage . . . and all discussions in mediation shall
remain confidential and privileged and shall not be discoverable or admissible as evidence
in any subsequent litigation of the Derivatives ADR Dispute or elsewhere, except as
provided by further order of this Court.” ADR Order ¶ 4. This order further provides:
The confidentiality provisions of section 5.0 of the Standing Order are
hereby incorporated by reference into this Order. No statements or
arguments made or positions taken by the mediator, the applicable Debtors,
Derivatives Counterparties, Indenture Trustee or the Creditors’ Committee
during any part of the alternative dispute resolution process, including
Settlement Conferences and the Mediation Stage may be disclosed by the
mediator or any such parties or their attorneys and advisors to the Court or
any third party; provided, however, that Indenture Trustees may disclose such
statements, arguments and positions as may become necessary with their
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respective noteholders and advisors subject to these same confidentiality
provisions. Similarly, all briefs, records, reports, and other documents
received or made by the mediator while serving is such capacity shall remain
confidential and not be provided to the Court, unless they would be
otherwise admissible. In addition, the mediator shall not be compelled to
disclose such records, reports, and other documents in connection with any
hearing held by the Court; provided, however, the mediator shall on a
monthly basis beginning 60 days following entry of this Order report to the
Court the status of the mediation efforts but shall not disclose the content
thereof, which report shall include the number of ADR Notices served on
Derivatives Counterparties, the number of settlements reached after
mediation, the number of mediations still pending, the number of mediations
that have terminated without settlement, and the cumulative dollar amount
of settlements reached with Derivatives Counterparties following service of
ADR Notices. Rule 408 of the Federal Rules of Evidence shall apply to all
aspects of the Derivatives ADR Procedures including Settlement Conferences
and Mediation Stage.
ADR Order § 13. The “Standing Order” incorporated by the ADR Order, § 1, provides:
Any statements made by the mediator, by the parties or by others during the
mediation process shall not be divulged by any of the participants in the
mediation (or their agents) or by the mediator to the court or to any third
parties. All records, reports, or other documents received or made by the
mediator while serving in such capacity shall be confidential and shall not be
provided to the court, unless they would be otherwise admissible. The
mediator shall not be compelled to divulge such records or to testify in
regard to the mediation in connection with any arbitral, judicial or other
proceeding, including any hearing held by the court in connection with the
referred matter.
In re Court Annexed Mediation Program: Adoption of Procedures Governing Mediation of Matters
in Bankruptcy Cases and Adversary Proceedings, Amended General Order M-143 § 5.1 (Bankr.
S.D. N.Y., Jan. 17, 1995) (“Amend’d Gen’l Order”). LP does not dispute that these orders
apply to the non-privileged documents for which FUMH is seeking protection.3

3

Defendants argued that the Bankruptcy Court’s orders prohibit only voluntary disclosures of
ADR information, not disclosures pursuant to discovery requirements in other cases. The Court does not

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FUMH wants to produce its non-privileged ADR-related documents that fall within
the scope of the Bankruptcy Court’s orders but it wants this Court to enter a protective
order that will facilitate that production. Lehman has agreed to FUMH’s production but
it wants use of the documents restricted to this case and it wants an opportunity to argue
that any ADR document that a party files or uses in Court be sealed. The parties and
Lehman attempted to agree on the terms of a protective order but LP and Peck would not
agree to Lehman’s two conditions. Lehman agreed to the last draft attached to FUMH’s
motion, specifically the following pertinent terms:4
Materials designated by Plaintiff as “ADR CONFIDENTIAL” shall be
used by the parties solely for the purposes of the prosecution or defense of
any claim asserted in this action (the “Litigation”).
Draft Agreed Order ¶ 5 [doc. 87-4, p. 15].
The Materials designated “ADR CONFIDENTIAL” shall not be filed
with the Court unless: (a) the consent of Plaintiff and Lehman has been
obtained; or (b) if such consent is not obtained, the party intending to file the
“ADR CONFIDENTIAL” Materials gives Plaintiff and Lehman no less than
14 days notice of the intent to file the Materials (describing the Materials), to
give Plaintiff or Lehman the opportunity to file a motion to have the
Materials filed under seal.
Id. ¶ 12 [p. 18].
If any party receives a subpoena seeking, or court order requiring, the
production or disclosure of materials designated as “ADR
interpret the Bankruptcy Court’s orders to have this limited scope.
4

(Brief in Support of Franklin United Methodist Home’s Motion for Protective Order [doc. 87] at 9
(“Counsel for Lehman has authorized counsel for FUMH to represent to the Court that Lehman agrees to
the provisions in the draft Agreed Order attached to Mr. Rosiello’s April 13, 2012, email (Exhibit 4,
attached to this brief).”)). The draft also specifically states in its preamble that it has the agreement of
Lehman. Agreed Order (draft), preamble [doc. 87-4, p. 14].

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CONFIDENTIAL,” the party in receipt of the subpoena or court order shall
give written notice to Plaintiff within five (5) business days of receipt of such
subpoena or court order, and in no event less than five (5) business days
prior to the time for production of such materials pursuant to the subpoena
or court order, if possible. If such written notice cannot be made, the party
in receipt of the subpoena or court order immediately must give notice to
counsel for Plaintiff by telephone. Immediately upon receipt of such notice,
Plaintiff shall notify counsel for Lehman. In no event shall production or
disclosure be made before notice is given, unless the party receiving the
subpoena or court order is prohibited by law or regulatory order from
providing such notice. The purpose of this Paragraph is to provide Plaintiff
or Lehman the opportunity to intervene at its own expense to object to the
production of the materials designated as “ADR CONFIDENTIAL”.
Id. ¶ 14 [pp. 18-19]. The Draft Agreed Order also states that FUMH will not use the
Bankruptcy Court’s orders or the swap termination agreement as a basis to object to
production and that Lehman will not seek sanctions or any other relief against FUMH for
violation of the Bankruptcy Court’s orders or the swap termination agreement by reason
of its producing ADR documents to Defendants. Id. ¶¶ 1 and 2 [p. 14]. Lehman also
agreed to the following provision: “Lehman does not believe that relief from the United
States Bankruptcy Court for the Southern District of New York . . . is required for the
production of “ADR CONFIDENTIAL” documents under this Order and that the ADR
Order does not preclude the relief provided by this Order.” Id. ¶ 18 [p. 20]. The Draft
Agreed Order provides that “Lehman shall be able to enforce this Order and is bound by the
terms of Paragraph 2 of this Order.” Id. ¶ 19 [p. 20].

LP and Peck oppose the Court entering the Draft Agreed Order. First, they argue that
this Court does not have authority to abrogate or permit violation of the Bankruptcy

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Court’s ADR confidentiality orders; only the Bankruptcy Court can modify its own orders.
Second, they argue that it is FUMH’s burden to seek such modification in the Bankruptcy
Court and that it cannot present the Bankruptcy Court’s orders as preventing production
until it has sought — unsuccessfully — such modification. LP argues that the Court should
grant its counter motion for an order compelling FUMH to produce the non-privileged
ADR-related documents because their relevance to this case is assumed for present
purposes. FUMH then must seek modification of the confidentiality orders from the
Bankruptcy Court in order to comply with this Court’s order. But LP goes further: it
argues that the viability of FUMH’s claims in this case depend on its success in obtaining
that modification. Because FUMH was not obligated to participate in the Bankruptcy
Court’s ADR process or to settle the Lehman Claims, LP argues that it “voluntarily,”
“knowingly,” “purposefully,” and “willfully” placed the relevant ADR-related documents
within the scope of the Bankruptcy Court’s restrictions while, at the same time, “harboring
and preparing a claim against LP.” (Defendants’ Combined Memorandum [doc. 95] at 11-13).
Therefore, FUMH “must now remove them [the ADR documents from the scope of the
Bankruptcy Court’s orders] if it wishes to pursue this action.” (Id. at 13). [Doc. 87-9, p. 5
(“If the ADR Order applies to the documents at issue . . . then FUMH knowingly and
voluntarily put them within its scope. It must now remove them if it wishes to pursue this
action.”)] Finally, Defendants argue that good cause has not been shown for restricting use
of the ADR-related documents to this case or for requiring two weeks’ advance notice to
Lehman before an ADR Confidential document can be filed.
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While courts accord deference to the protective orders of other courts, there are
circumstances under which modifications of other courts’ restrictions are justified. See Abel
v. Mylan, Inc., No. 09-cv-650-CVE-PJC, 2010 WL 3910141 (N.D. Okla., Oct. 4, 2010); Air
Cargo Inc. Litigation Trust v. 12 Technologies US, Inc., Civil No. CCB-08-2002, 2010 WL 348492
(D. Maryland, Jan. 22, 2010); Donovan v. Lewnowski, 221 F.R.D. 587 (S.D. Fla. 2004); Melea
Limited v. Commissioner of Internal Revenue, 118 T.C. 218 (T.C. 2002); Tucker v. Ohtsu Tire &
Rubber Co., Ltd., 191 F.R.D. 495 (D. Maryland, Feb. 18, 2000). “These principles [of
federalism, comity, and courtesy], while unquestionably important, are not absolute, and
courts asked to issue discovery orders in litigation pending before them also have not shied
away from doing so, even when it would modify or circumvent a discovery order by
another court, if under the circumstances, such a result was considered justified.” Tucker,
191 F.R.D. at 499-500.

Looking for a practical solution to the dilemma, the court in Tucker identified four
“rules of reason” to help determine whether modification of another court’s earlier
protective order is justified. First, the court should consider the nature of the protective
order. Was it the result of an agreement reached by the parties and issued by the court
without a hearing on the merits, or was it the result of the issuing court’s resolution of the
parties’ disputes, reflecting the court’s deliberative process and decision? “There is less
need for deference and comity when the order involved is really an agreement by counsel
approved, almost as a ministerial act, by the court, than an action directed by the court after

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a full consideration of the merits of a fully briefed dispute.” Tucker, 191 F.R.D. at 501.

In this case, the ADR confidentiality orders issued by the Bankruptcy Court do not
fall squarely into either category. Both orders were issued unilaterally by the Bankruptcy
Court: the 1995 Amend’d Gen’l Order is court-wide standing order that applies generally
to all mediations and the 2009 ADR Order issued in the Lehman Bankruptcy is also a
general order, applying to all mediations of derivative contracts in the case, and it was
issued without any input or involvement of Lehman or its derivatives customers. The
Bankruptcy Court issued the orders to encourage and facilitate settlement discussions by,
in the present context, protecting what it anticipated would be the confidentiality interests
of mediating parties.

Thus, while the orders represent the Bankruptcy Court’s

consideration of what protections would facilitate mediations, it did not adjudicate any
disputes presented to it by the parties. In these circumstances, together with the fact that
both mediating parties sought to be served by the orders, FUMH and Lehman, do not
oppose modification of the orders, this factor weighs in favor of modifying the orders.5

Second, “the court should consider the identity of the party from whom discovery
is sought.” Id. The focus here is on whether the subject discovery is sought from the party
against whom the restrictions of the earlier order apply or from the producer of the

5

Despite the mediating parties’ consents to modification, the Bankruptcy Court could have a
strong remaining interest in protecting the confidentiality accorded its appointed mediators. However,
the Court does not understand that Defendants are seeking any documents or information generated by
the mediator.

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documents. In the present case, the defendants seek both FUMH-produced and Lehmanproduced documents from FUMH and the Bankruptcy Court’s orders apply equally to
both of these parties. In these circumstances, and especially considering the fact that
neither of the mediating parties oppose modification of the orders, this factor is neutral.

Third, “the court should consider whether the case in which the original protective
order was issued is still pending, and if not, the burden and expense to the plaintiffs if they
are required to file a new action in the [other] court simply to seek modification of the
Order issued there.” Id. In this case, while the massive Lehman bankruptcy case is still
pending, the matters pertaining to FUMH were concluded with the settlement. If this
Court does not modify the orders, FUMH would be required to incur the time and expense
of going to the Southern District of New York and seeking to intervene in Lehman’s
bankruptcy case for the sole purpose of litigating a motion to modify the orders, a motion
to which both mediating parties agree and in which Defendants have suggested no
independent interest the Bankruptcy Court might have denying. This factor weighs in
favor of allowing the modification.

Fourth, “the court should consider whether it is possible to incorporate terms in its
own order which will further the protections ordered by the [other] court.” Id. Lehman
consents to modification of the Bankruptcy Court’s orders on condition that two
confidentiality protections are maintained: use of the information is restricted to this case
and Lehman is afforded an opportunity to move to seal any of the documents that are filed
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in court. The Draft Agreed Order includes these restrictions and they are not infrequent ones
in protective orders. Defendants argue that good cause has not been shown for the Court
to so limit their use of the information. The Court disagrees. Deference to the Bankruptcy
Court’s confidentiality orders itself provides good cause and, while there is no recognized
settlement-negotiations privilege per se, there is a policy interest in facilitating and
encouraging settlements, an interest which is well-served by preserving the confidentiality
of parties’ communications during the mediation process. The requested conditions do not
interfere with or hinder Defendants’ litigation of this case. If Defendants want to use the
information to serve their interests in pursuing other litigation, then they may move to
intervene in the Lehman Bankruptcy to move to modify the ADR confidentiality orders.

The weight of the four Tucker factors favors this Court’s modification of the
Bankruptcy Court’s orders. The fact that all of the parties protected by the confidentiality
orders — FUMH and Lehman — consent to their modification confirms this result.
Therefore, the Court will issue the Draft Agreed Order, but with a modification. The Draft
provides that, if any party intends to file ADR Confidential material in court, but FUMH
and Lehman do not consent, then the filing party must “give[] Plaintiff and Lehman no less
than 14 days notice of the intent to file the Materials (describing the Materials), to give
Plaintiff or Lehman the opportunity to file a motion to have the Materials filed under seal.”
Draft Agreed Order ¶ 12 [doc. 87-4, p. 18]. The local rules and practice of this Court provide
that a document that is intended to be filed under seal must be filed provisionally under

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seal and a separate motion to maintain the seal must be filed contemporaneously. S.D. Ind.
L.R. 5-11 and S.D. Ind. CM/ECF Policies and Procedures Manual § 18. Therefore, the Court
prefers a protocol along the lines indicated in the margin of the Draft Agreed Order as
having been deleted from an earlier draft. Draft Agreed Order at 6 [doc. 87-4, p. 18].

Requiring fourteen days advance notice to FUMH and Lehman of an intended filing
of ADR Confidential material is acceptable but should not otherwise delay the filing party’s
filing of the material provisionally under seal, together with a motion to maintain the seal,
as indicated in the deleted terms. The supporting brief for maintaining the seal — or a
notice that the material may be unsealed — shall be filed by the party who designated the
material as confidential, either FUMH or Lehman. Therefore, if a filing party files such
material under seal together with a motion to maintain the seal, then it will only be
complying with the terms of the protective order issued by the Court; it will not thereby
be vouching that the material is sealable; in fact, the filing party may argue against sealing
the material. The material will remain under seal until the Court rules on the motion to
maintain the seal. The preferred protocol, with a fourteen-day advance notice requirement
if desired, does not materially alter the terms agreed to by Lehman.

Therefore, the parties are directed to confer, together and with Lehman, to prepare
a protective order for submission that conforms to the rulings herein. The proposed order
should restore the deleted sealing protocol, with any agreed modifications, and may
include a fourteen-day advance-notice requirement.
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Waiver of privileges
Defendants argue that FUMH has waived its attorney-client and work-product
privileges6 for the documents listed in its privilege log by placing the causation of its
settlement with Lehman in issue and by seeking recovery of its attorney’s fees incurred in
defending the Lehman Claims.

1. At-issue waiver. Defendants argue that FUMH’s professional-malpractice and
breach-of-fiduciary-duty claims against them has placed the cause of its settlement with
Lehman directly in-issue and, thereby, waived FUMH’s attorney-client and work-product
privileges regarding any materials relevant to the causes of that settlement, including
communications with its attorneys regarding, e.g., litigation strategy, investigation of the
facts, legal evaluations, and advice, and its attorneys’ work involving these matters.
According to Defendants, an essential element of FUMH’s claim is that Defendants’
allegedly bad advice was both the cause in fact and the proximate cause of FUMH’s
settlement with Lehman, the truthful resolution of which will require examining FUMH’s
confidential communications with its attorneys and those attorneys’ work product created
for defending, and ultimately settling, the Lehman Claims.

The Court concludes that Defendants’ interpretation of the at-issue waiver doctrine
and its characterization of FUMH’s causation element are incorrect. Because FUMH is

6

Although work-product protection is not a privilege, both protections from discovery will be
referred to as privileges for ease of reference.

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asserting an Indiana state-law claim, it is Indiana’s privilege law that governs. Fed. R.
Evid. 501. Defendants argue, in effect, for a blanket waiver of privileges whenever a
plaintiff alleges that professional negligence caused it to incur damages. Indiana’s
privilege law does not go so far. Applying Indiana’s law, the United States Court of
Appeals for the Seventh Circuit held that an implicit waiver of privileges occurs “when a
holder relies on a legal claim or defense, the truthful resolution of which will require
examining confidential communications.” Lorenz v. Valley Forge Insurance Co., 815 F.2d
1095, 1098 (7th Cir. 1987). While Defendants rely on this general statement, more focused
decisions show the scope of this “at-issue” waiver. A party waives the attorney-client
privilege when it “relies specifically on advice of counsel to support a claim or a defense”
and it intends to prove that claim or defense by using privileged communications. Harper
v. University of Indianapolis, 5 F.Supp.2d 657, 664 (S.D. Ind. 1998) (collecting cases). The
relevance of privileged material to a claim or defense at issue “is not a sufficient basis for
finding a waiver of the privilege.” Id. at 665. “Only when the client seeks to take
advantage of the privilege communications themselves should a waiver be found on the
theory that the client has put the attorney’s advice in issue.” Id. See also Fischel & Kahn,
Ltd. v. van Straaten Gallery, Inc., 727 N.E.2d 240 (Ill. 2000); Green v. Beer, No. 06 Civ. 4156
(KMW) (JCF), 2010 WL 2653650 (S.D. N.Y., July 2, 2010), affirmed in relevant part, 2010 WL
3422723 (S.D. N.Y., Aug. 24, 2010); Leviton Mfg. Co., Inc. v. Greenberg Traurig, LLP, No. 09
Civ. 8083 (GBD) (THK), 2010 WL 4983183 (S.D. N.Y., Dec. 6, 2010), objections overruled, 2011
WL 2946380 (S.D. N.Y., July 14, 2011). Because FUMH has unequivocally stated that it does
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not intend to use any of its logged privileged material to prove its claim against
Defendants, it has not waived its privileges by putting that material in issue.

To prevail on its claim, FUMH must prove causation — both causation in fact and
proximate causation. Causation in fact means that the alleged harm would not have
occurred “but for” the alleged negligent conduct. Daub v. Daub, 629 N.E.2d 873, 877 (Ind.
App. 1994). The requirement of proximate causation shortens that but-for causal chain
based on foreseeability. Defendants argue that FUMH must prove that Defendants’ alleged
bad advice directly and immediately caused in fact FUMH to settle with Lehman, which
places in issue, inter alia, the legal advice and information that FUMH received from its
attorneys. They contend that FUMH’s privilege logs show that its attorney’s advice at the
time was the immediate and direct cause of its settlement with Lehman, not the alleged bad
termination advice given by Defendants, who repeatedly advised FUMH not to settle
because their termination advice was not bad, it was not liable to Lehman, and there was
no sufficient reason to settle.

The Court agrees with FUMH’s description of its causation burden: Defendants’
bad advice caused Lehman to assert the Lehman Claims against FUMH, the natural,
foreseeable, and proximate result of which was FUMH incurring defense costs and being
placed in the position of either litigating the Claims or making a reasonable settlement (and
incurring the costs of either choice). To recover the cost of its settlement, FUMH must
prove that its settlement was objectively reasonable considering the circumstances that it
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faced. See The Good Samaritan Home, Inc. v. Lancaster Pollard & Co., No. 3:11-cv-75-RLYWGH, [doc. 72, p. 8], 2012 WL 952825, *4 (S.D. Ind., Mar. 20, 2012). Under this theory,
Defendants’ bad advice was a cause in fact of FUMH’s settlement with Lehman in that the
settlement (or the continued litigation) of the Lehman Claims would not have occurred but
for the advice received from Defendants.

FUMH must then prove the objective

reasonableness of its settlement with Lehman.

As FUMH concedes, Defendants are free to utilize all the tools of discovery,
including a Fed. R. Civ. P. 30(b)(6) deposition, to inquire into the facts relating to FUMH’s
decision to settle with Lehman, including the information that it knew at the time and
information on which it relied in making that decision, including whether such information
was obtained through privileged sources. However, Defendants may not discover the
content of any privileged attorney-client communications or work product.

2. Attorney’s fees. Neither FUMH’s assertion of a claim for the legal fees and
expenses it incurred defending the Lehman Claims nor its production of redacted invoices
to support that claim waive the privileges protecting its attorney-client communications
and work product. Reynolds v. Beneficial Nat’l Bank, 288 F.3d 277, 286 (7th Cir. 2002);
Meridian Financial Advisors, Ltd. v. Pence, No. 1:07-cv-995-LJM-TAB, 2011 WL 1750716, *3
(S.D. Ind., May 5, 2011); Eli Lilly & Co. v. Valeant Pharmaceuticals Internat’l, No. 1:08-cv-1729TWP-TAB, 2011 WL 691982 (S.D. Ind., Feb. 15, 2011); Zion’s First Nat’l Bank v. Boyz Car
Wash, Inc., No. 1:09-cv-331-LJM-JMS, 2010 WL 779499 (S.D. Ind., Feb. 25, 2010). FUMH may
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produce its redacted invoices without effecting a waiver.

Conclusion
Plaintiff’s Motion for Protective Order [doc. 86] is GRANTED. The parties are
directed to confer on the text of a proposed protective order and FUMH shall file a
proposed protective order no later than November 26, 2012. Defendants’ Motion to Compel
[doc. 94] is DENIED.

SO ORDERED this date: 11/08/2012

_______________________________
Denise K. LaRue
United States Magistrate Judge
Southern District of Indiana

Distribution to all ECF-registered counsel of record via e-mail.

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