AKH Company, Inc. v. Universal Underwriters Insurance Company

Filing 158

MEMORANDUM AND ORDER granting 123 Motion to Compel. Signed by Magistrate Judge Kenneth G. Gale on 7/3/14. (df)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF KANSAS

AKH COMPANY, INC.,

)
)
Plaintiff,
)
)
v.
)
)
UNIVERSAL UNDERWRITERS
)
INSURANCE COMPANY,
)
)
Defendant,
)
______________________________ )

Case No. 13-2003-JAR-KGG

ORDER ON DEFENDANT’S MOTION TO COMPEL
Now before the Court is Defendant’s “Motion to Compel Sufficient Written
Responses and Production of Documents.” (Doc. 123.) For the reasons set forth
below, the Court GRANTS this motion.
I.

GENERAL BACKGROUND
A.

Factual Background and Claims.

The facts of the case were summarized by District Court in its Order (Doc.
66) denying Defendant’s motion to transfer venue, which stated in relevant part:
This is an insurance coverage dispute filed by
AKH Company, Inc. (“AKH”) against Universal
Underwriters Insurance Company (“UUIC”), arising out
of a trademark infringement action against AKH which
UUIC defended and settled under a reservation of rights.
AKH is a California corporation with its principal place

of business in California. It sells and installs tires
through its retail garages and internet website under the
name “Discount Tire Centers.” In May of 2010, The
Reinalt-Thomas Corporation dba Discount Tire filed a
civil action against AKH in the District of Arizona,
alleging that AKH infringed upon and diluted its
trademark under state and federal law. AKH in turn filed
its own civil action against Reinalt-Thomas in the Central
District of California and successfully moved to transfer
venue of the first action to the Central District of
California. The two lawsuits were consolidated (“the
R-T lawsuits”) and ultimately settled in December of
2012. UUIC insured AKH under a series of annual
liability insurance policies from 2007 to 2013. In
December of 2011, AKH notified UUIC of the R-T
lawsuits and tendered the claims against AKH for a
defense. UUIC accepted AKH’s tender of defense of the
R-T lawsuit under a reservation of rights.
In this case, AKH seeks declaratory relief that
UUIC breached its duties to defend, settle, and act fairly
and in good faith. UUIC brings counterclaims for
declaratory relief and breach of contract arising out of its
defense and settlement of the R-T lawsuits.1
(Doc. 66, at 1-2.)
B.

Nature of the Motion to Compel.
Defendant brings the present motion arguing that Plaintiff “has refused to

provide critical facts that relate to the very heart of this lawsuit.” (Doc. 124,

1

Hereinafter, Plaintiff AKH Company, Inc. shall be referred to as “Plaintiff” or
“AKH.” Defendant Universal Underwriters Insurance Company shall be referred to as
“Defendant” or “Universal.” Reinalt-Thomas shall be referred to as “RT” and the
underlying lawsuit between it and Plaintiff shall be referred to as the “RT litigation.”
2

sealed, at 6.) Defendant contends that it took Plaintiff “over four months to
provide partial written responses and to produce some documents” in response to
the underlying discovery requests. (Id.) Defendant further contends that Plaintiff
“produced 185 pages of privilege logs, identifying approximately 3,500 documents
(more than those actually produced!) as allegedly attorney-client privileged or
work product communications withheld from production.” (Id.) Defendant
contends that even if these documents are in fact privileged, they should be
produced under the crime-fraud exception to the attorney-client privilege. This
portion of Defendant’s motion, including the relevant evidence and factual
allegations, is discussed in Section III of this Order, infra.
Defendant also complains about various other “run of the mill” objections
Plaintiff raised in response to Defendant’s discovery requests. These objections,
which Plaintiff virtually ignored in its responsive brief, are discussed in Section II,
infra.
II.

GENERAL DISCOVERY OBJECTIONS.
In response to Defendant’s discovery requests, Plaintiff raised various

standard objections which, for various reasons, Defendant argues are improper.
The Court will address each of these objections in turn.
A.

“Materiality” versus “Relevance.”
3

Defendant contends that in response to its discovery requests, Plaintiff
objects, in part, that the requests seek documents “which are not material.” (Doc.
124, sealed, at 15.) Defendant argues that this objection “wholly ignores that the
standard for permissible discovery is that it be relevant to a party’s claim or
defense, not that it be ‘material.’” (Id., at 16.)
Plaintiff has not addressed this issue in its responsive brief. As such, the
objection is waived. Sonnino v. Univ. of Kansas Hosp. Auth., 221 F.R.D. 661,
670–71 (D.Kan.2004) (holding that a party fails to meet its burden to support its
objections when it fails to address those objections in response to a motion to
compel, leaving the Court “without any basis to determine whether the objections
are valid and applicable in light of the particular circumstances of the case”);
Cooper v. Old Dominion Freight Line, Inc., No. 09–2441–JAR, 2011 WL
251447, at *2 (D.Kan. Jan.25, 2011) (holding that a discovery objection not relied
upon in response to a motion to compel is waived). The Court will, however, also
address the substantive merits of the objection.
Fed.R.Civ.P. 26(b) states that “[p]arties may obtain discovery regarding any
matter, not privileged, that is relevant to the claim or defense of any party . . .
Relevant information need not be admissible at the trial if the discovery appears
reasonably calculated to lead to the discovery of admissible evidence.” As such,
4

the requested information must be both nonprivileged and relevant to be
discoverable.
“‘Discovery relevance is minimal relevance,’ which means it is possible and
reasonably calculated that the request will lead to the discovery of admissible
evidence.” Teichgraeber v. Memorial Union Corp. of Emporia State University,
932 F.Supp. 1263, 1265 (D. Kan. 1996) (internal citation omitted). “Relevance is
broadly construed at the discovery stage of the litigation and a request for
discovery should be considered relevant if there is any possibility the information
sought may be relevant to the subject matter of the action.” Smith v. MCI
Telecommunications Corp., 137 F.R.D. 25, 27 (D.Kan.1991). Stated another way,
“discovery should ordinarily be allowed unless it is clear that the information
sought can have no possible bearing on the subject matter of the action.” Snowden
By and Through Victor v. Connaught Lab., 137 F.R.D. 325, 341 (D.Kan.1991),
appeal denied, 1991 WL 60514 (D.Kan. Mar. 29, 1991).
This differs substantially from the definition of “material.” Typically, a fact
is considered “material” if “proof of that fact would have effect on establishing or
refuting one of essential elements of a cause of action or defense asserted by the
parties, and would necessarily affect [the] application of [an] appropriate principle
of law to the rights and obligations of the parties.” BLACK’S LAW DICTIONARY,
5

977 (6th ed. 199). Clearly, this is a much higher standard than whether the
information has the requisite discovery relevance. Plaintiff’s objection is
substantively overruled. Plaintiff is directed to provide supplemental responses
without this objection.
B.

Vagueness.

Defendant next argues that Plaintiff has objected to “all but one” of
Defendant’s discovery requests
on the grounds that the requests contain terms such as
‘EMBODY,’ ‘COMMUNICATIONS,’ ‘RELATING TO’
and/or ‘RELATED’ that are ‘vague and ambiguous’ so as
to render the requests so broad as to potentially include
all documents in [Plaintiff’s] possession and make it
impossible for [Plaintiff] to determine exactly what
documents are responsive.
(Doc. 124, sealed, at 17.) Defendant continues that the objections are “meritless”
and the terms “should be construed in their ordinary meaning based on common
sense.” (Id.)
Plaintiff again chooses not to address this issue in its responsive brief. As
such, the objection is waived. Sonnino, 221 F.R.D. at 670–71; Cooper 2011 WL
251447, at *2. The Court will again, however, address the substantive merits of
this objection.
Courts look “with disfavor on conclusory or boilerplate objections that
6

discovery requests are irrelevant, immaterial, unduly burdensome, or overly
broad.” Id., 650. “Unless a request is overly broad, irrelevant, or unduly
burdensome on its face, the party asserting the objection has the duty to support its
objections.” Sonnino, 221 F.R.D. 661, at n.36 (D.Kan.2004) (citing Hammond v.
Lowe's Home Ctrs., Inc., 216 F.R.D. 666, 670 (D.Kan. 2003)); Cont’l Ill. Nat’l
Bank & Trust Co. of Chicago v. Caton, 136 F.R.D. 682, 685 (D. Kan. 1991)
(stating that a party resisting a discovery request based on relevancy grounds bears
the burden of explaining how “each discovery request is irrelevant, not reasonably
calculated to the discovery of admissible evidence, or burdensome”). Thus, “the
objecting party must specifically show in its response to the motion to compel,
despite the broad and liberal construction afforded by the federal discovery rules,
how each request for production or interrogatory is objectionable.” Sonnino, 221
F.R.D. at 670–71 (internal citation omitted).
The Court finds that the terms “embody,” “communications,” “relating to,”
and “related” are not per se vague and ambiguous. Plaintiff can, and should,
employ the ordinary, common sense definitions of these words in the context of the
discovery requests at issue. Plaintiff’s objections are substantively overruled.
Plaintiff is directed to provide supplemental responses without these objections.
C.

Temporal Limitation.
7

Plaintiff also objects that “all but one” of Defendant’s requests are overbroad
for failure to be limited to a particular time period. (Doc. 124, sealed, at 17.) The
Court finds that Defendant has adequately limited the time frame for the various
discovery requests and overrules Plaintiff’s objection.
D.

Identification of Produced Documents.

Defendant next argues that Plaintiff did not comply with the requirements of
Fed.R.Civ.P. 34(b)(2)(E), which provides that “[a] party must produce documents
as they are kept in the ordinary course of business or must organize and label them
to correspond to the categories in the request.” Defendant argues that Plaintiff has
engaged in a document “dump,” “‘deliberately [mixing] critical documents with
others in the hope of obscuring significance.’” (Doc. 124, sealed, at 18 (citing
S.E.C. v. Collins & Aikman Corp, 256 F.R.D. 403, 409 (S.D.N.Y. 2009).)
Defendant contends that the documents should be produced again with proper
organization and indexing “so that they are organized to correspond to the
[specific] document requests.” (Id.)
Because Plaintiff fails to address this issue in its responsive brief, the Court
grants this portion of Defendant’s motion as uncontested. Plaintiff is instructed to
reproduce the documents at issue with sufficient indexing and organization so as to
indicate which documents produced correspond to which particular discovery
8

requests.
E.

Sufficiency of Privilege Log.

Defendant argues that the information contained in Plaintiff’s privilege log
is insufficient to support an assertion of the attorney-client privilege or work
product doctrine for 15-20% of the documents listed on Plaintiff’s 146-page
privilege log. (Doc. 124, sealed, at 19.) Pursuant to the Federal Rules of Civil
Procedure,
[w]hen a party withholds information otherwise
discoverable by claiming that the information is
privileged or subject to protection as trial-preparation
material, the party must:
(I)
(ii)

expressly make the claim; and
describe the nature of the documents,
communications, or tangible things not
produced or disclosed – and do so in a
manner that, without revealing information
itself privileged or protected, will enable
other parties to assess the claim.

Fed.R.Civ.P. 26(b)(5); see also Kear v. Kohl’s Dept. Stores, Inc., No. 12-1235JAR-KGG, 2013 WL 3088922 (D.Kan. June 18, 2013) (citation omitted) (stating
that “[a] privilege log must provide sufficient information to allow the other party
assess the claimed to privilege.”).
Defendant has, however, provided only certain “examples” of entries in the
voluminous privilege log that it finds questionable. (See Doc. 124, sealed, at 20;
9

Doc. 124-21, sealed, at 3.) It is not the Court’s province to engage in a line-by-line
review of the privilege log at issue and attempt to surmise which entries Defendant
may or may not have wanted to Court to consider in the present motion as
improper applications of the attorney-client privilege or work product doctrine.
As to the three examples listed on page 15 of Defendant’s brief, the Court
does not find the privilege log entries to be facially improper. The first two
examples involve communications between Plaintiff’s officers regarding
settlement issues.
Organizational clients and business entities often are
personified by a number of employees. In preparation
for, or in the midst of, consultations with an attorney,
employees of the client will often consult one another to
ensure that the attorney's advice is based on full
knowledge of all relevant facts.
Williams v. Sprint/United Management Co., No. 03-2200-JWL-DJW, 2006 WL
266599, *3 (D. Kan. Feb. 1, 2006). The Court finds these two entries to
sufficiently describe examples of “confidential information gathered for the
dominant purpose of facilitating the attorney’s efforts to provide services to the
client.” Id.2

2

Even though the Court holds the privilege log to be sufficient, Defendant will
still be able to see the documents to the extent it establishes a prima facie case sufficient
to invoke the crime-fraud exception to the attorney-client privilege, discussed in § III,
infra.
10

The third and final example relates to five entries in which the recipients’
initials in the log are cut off. (Doc. 124, sealed, at 20.) Plaintiff is instructed to
provide Defendant with revised copy of the privilege log with this information
intact and legible.
III.

ATTORNEY-CLIENT PRIVILEGE & AND THE CRIME-FRAUD
EXCEPTION.
As referenced above, Defendant also argues that even if communications

withheld by Plaintiff are found to be privileged, “both Kansas and California law
recognize an exception to the attorney-client privilege where evidence
demonstrates that a crime or fraud was committed.” (Doc. 124, sealed, at 22.) The
Court will thus examine the applicable legal standard and apply it to the evidence
presented by Defendant.
A.

Applicability of Privilege to Documents Regarding Settlement.

Defendant contends that although Plaintiff “shut [Defendant] completely out
of the settlement process,” Defendant’s role as “defending insurer” gives it the
“absolute right to participate in the settlement negotiations that resolved the
consolidated underlying lawsuits.” (Doc. 124, sealed, at 21.) Plaintiff responds
that “[t]here is no question in this case that Paul Hastings [law firm] was acting as

11

independent counsel” for Plaintiff,3 thus shielding from discovery its
communications with that law firm under the attorney-client privilege. (Doc. 136,
at 10.) Defendant argues that “Paul Hastings’ status as either ‘appointed’ defense
counsel or ‘independent counsel’ does not matter, because under either California
or Kansas law, defending insurer had an absolute right to participate in the
settlement negotiations that resolved the consolidated underlying actions.” (Doc.
124, sealed, at 21.)
The policy at issue states that “[e]ach INSURED must cooperate and assist
US in the investigation, settlement, defense, enforcement of contribution or
indemnification. The INSURED may not, except at their own expense, make any
offer or payment, assume any obligation, or incur any expenses unless otherwise
permitted in this Coverage Part.” (Id. (capitalization in original).) Defendant
complains that Plaintiff “never provided [Defendant] the opportunity to exercise its
duty and right to participate in settlement negations” in the underlying lawsuit,
failed to inform Defendant of negotiations occurring the in the fall of 2012, and
that Plaintiff had already reached a settlement before conveying RT’s settlement

3

In the Court’s estimation, Plaintiff has created at least some question regarding
this issue by alleging in its Complaint that Defendant “breached its duty of defense by . . .
not providing [Plaintiff] with independent counsel.” (Doc. 1, at ¶ 51.) The Complaint
continues that Defendant “wrongfully failed to provide independent counsel.” (Id., at ¶
77.)
12

demand to Defendant.4 (Id., at 21-22.)
The Court finds that the status of the Paul Hastings firm was created by
agreement in the February 29, 2012, correspondence from Defendant to Plaintiff.
(Doc. 32-9, at 35-41.) In that letter, Defendant stated that it “is willing to pay for
AKH’s choice of counsel instead of assigning provided that AKH’s choice of
counsel agrees to abide by the terms of California Civil Code section 2860 and
complies with Universal’s defense counsel guidelines and billing rates . . . .”5 (Id.,
at 35.) That statute
requires an insurance carrier to provide independent
counsel to the insured when a conflict of interests exists
between the insured and the carrier. This independent
counsel is often called Cumis counsel because § 2860
codified the substantive elements of San Diego Navy
Federal Credit Union v. Cumis Ins. Society, Inc., 162
Cal.App.3d 358, 208 Cal.Rptr. 494 (1984). See First
Pacific Networks, Inc. v. Atlantic Mutual Ins. Co., 163
F.R.D. 574, 576 n. 1 (N.D.Cal. 1995). Section 2860,
however, also protects the interest of the carrier. Thus,
the statute provides that
it shall be the duty of [Cumis] counsel
4

As discussed infra, Defendant also contends that “neither [Plaintiff] nor its
counsel Paul Hastings, whom [Defendant] was paying to defend the RT Lawsuit, never
informed [Defendant] that Paul Hastings had a 25% contingency interest in the ultimate
settlement.” (Doc. 124, sealed, at 22 (emphasis in original.)
5

The parties apparently operated under this agreement, evidencing the acceptance
of these terms by Plaintiff. This agreement between the parties obviates the Court’s need
to decide the choice of law as to this issue.
13

and the insured to disclose to the insurer
all information concerning the action
except privileged materials relevant to
coverage disputes, and timely to inform
and consult with the insurer on all
matters related to the action . . . . Any
information disclosed by the insured or
by independent counsel is not a waiver
of the privilege as to any other party.
Cal. Civil Code § 2860(d). However, “[t]hese
obligations are strictly of an informational character, and
arise only because of the unique three-cornered
arrangement that carriers create when they agree to
defend only under a reservations of rights.” First
Pacific, 163 F.R.D. at 579 (citing Assurance Co. of
America v. Haven, 32 Cal.App.4th 78, 89, 38
Cal.Rptr.2d 25 (1995)). Section 2860 does not create an
attorney-client relationship between Cumis counsel and
the carrier. Id.; Assurance, 32 Cal.App.4th at 90, 38
Cal.Rptr.2d 25.
San Gabriel Basin Water Quality Authority v. Aerojet-General Corp., 105
F.Supp.2d 1095, 1101 (C.D. Cal. 2000). Under the statutory agreement, “the
insured and its independent counsel retain fully the right to communicate between
themselves in private – and to shield those communications from the carrier.” Id.
(citing First Pacific, 163 F.R.D. at 580).
Thus, Plaintiff and its counsel have a statutory duty to provide Defendant
with any and all information regarding this case – including about settlement –
other than information relating to coverage disputes. Because this duty is
14

informational only, however, Plaintiff may still apply the attorney-client privilege
to the underlying communications it had with its counsel on any issue and specific
communications, generally, need not be produced. As discussed below, however,
Defendant argues that the crime-fraud exception to the attorney-client privilege
mandates the production of the requested information.
C.

The Crime-Fraud Exception.

Defendant asks the Court to “conduct an in camera review of a sampling of
[Plaintiff’s] documents withheld from production, to determine if they should not
be shielded from disclosure because they were made in furtherance of a crime,
fraud or other misconduct.” (Doc. 124, sealed, at 22-23 (emphasis removed).)
Defendant also seeks “all communications regarding fee agreements between
[Plaintiff] and its attorneys at Paul Hastings [litigating] and Gauntlett & Associates
[coverage] so that it can see how/whether both counsel had a pecuniary interest in
the settlement.” (Id., at 23.) Plaintiff argues that Defendant’s motion is “plainly
lacking in the evidentiary showing needed to substantiate any such crime-fraud
exception, e.g. a prima facie showing that a crime-fraud was committed.” (Doc.
136, at 12 (emphasis in original).)
As the parties acknowledge, there remains an issue as to the choice of law
between California law and Kansas law in this case. As such, the Court will
15

analyze the crime-fraud exception under the law of both jurisdictions.
1.

California law.

Under California law,
[t]o invoke the crime-fraud exception, the proponent
must make a prima facie showing that the services of the
attorney were sought or obtained to aid someone in
committing a crime or fraud. (BP Alaska Exploration,
Inc. v. Superior Court (1988) 199 Cal.App.3d 1240,
1262, 245 Cal.Rptr. 682.) ‘Evidence Code section 956
does not require a completed crime or fraud. It applies to
attorney communications sought to enable the client to
plan to commit a fraud, whether the fraud is successful or
not.’ (Ibid.; see also Travelers Ins. Companies v.
Superior Court (1983) 143 Cal.App.3d 436, 446, 191
Cal.Rptr. 871 [communication must be ‘‘made in
contemplation of crime’’ for exception to apply].) ‘[I]t is
the intent of the client upon which attention must be
focused and not that of the lawyers.’ (State Farm &
Casualty Co. v. Superior Court (1997) 54 Cal.App.4th
625, 645, 62 Cal.Rptr.2d 834.)
Favila v. Katten Muchin Rosenman LP, 188 Cal.App.4th 189, 220, 115
Cal.Rptr.3d 274 (Cal.App. 2 Dist. 2010).
This prima facie standard of proof was established in BP Alaska
Exploration v. Superior Court, 199 Cal.App.3d 1240, 245 Cal.Rptr. 682, 696–97,
and was adopted by the Ninth Circuit in In re Grand Jury Proceedings, 87 F.3d
377, 380 (9th Cir.1996). The In re Grand Jury case held that a party seeking to
invoke this exception to the attorney-client privilege must make a prima facie
16

showing that “the communications were in furtherance of an intended or present
illegality . . . and that there is some relationship between the communications and
the illegality.” Id. (quoting United States v. Laurins, 857 F.2d 529, 540 (9th
Cir.1988), cert. denied, 492 U.S. 906, 109 S.Ct. 3215, 106 L.Ed.2d 565 (1989)).
The In re Grand Jury court also held:
[t]o trigger the crime-fraud exception, the government
must establish that ‘the client was engaged in or planning
a criminal or fraudulent scheme when it sought the
advice of counsel to further the scheme.’ In re Sealed
Case, 754 F.2d at 399 (citations omitted). The
government is not obliged to come forward with proof
sufficient to establish the essential elements of a crime or
fraud beyond a reasonable doubt, United States v.
Friedman, 445 F.2d 1076, 1086 (9th Cir.), cert. denied,
404 U.S. 958, 92 S.Ct. 326, 30 L.Ed.2d 275 (1971), since
the crime-fraud exception does not require a completed
crime or fraud but only that the client have consulted the
attorney in an effort to complete one. In re Grand Jury
Subpoena Duces Tecum (Marc Rich & Co., A.G. v.
U.S.), 731 F.2d 1032, 1039 (2d Cir.1984). On the other
hand, it isn't enough for the government merely to
allege that it has a sneaking suspicion the client was
engaging in or intending to engage in a crime or fraud
when it consulted the attorney. A threshold that low
could discourage many would-be clients from
consulting an attorney about entirely legitimate legal
dilemmas. Rather, the district court must find
‘reasonable cause to believe’ that the attorney's
services were ‘utilized . . . in furtherance of the
ongoing unlawful scheme.’
In re Grand Jury Proceedings, 867 F.2d at 541 (emphasis added).
17

2.

Kansas law.

For instruction on the Kansas approach to the crime-fraud exception, the
Court turns to the opinion of Berroth v. Kansas Farm Bureau Mutual Ins. Co.,
Inc., 205 F.R.D. 586 (D. Kan. 2002). The Berroth court held
[u]nder Kansas law, the attorney-client privilege does not
extend ‘to a communication if the judge finds that
sufficient evidence, aside from the communication, has
been introduced to warrant a finding that the legal service
was sought or obtained in order to enable or aid the
commission or planning of a crime or a tort.’ K.S.A.
60–426(b)(1). ‘Sufficient evidence’ for purposes of the
crime-fraud exception is ‘that which constitutes a prima
facie case.’ Burton v. R.J. Reynolds Tobacco Co., 177
F.R.D. 491, 501 (D.Kan.1997) (citing Wallace,
Saunders, Austin, Brown & Enochs, Chtd. v. Louisburg
Grain Co., 250 Kan. 54, 61, 824 P.2d 933, 939 (1992)).
A prima facie case consists of ‘evidence which, if left
unexplained or uncontradicted, would be sufficient to
carry the case to the jury and sustain a verdict in favor of
the plaintiff on the issue it supports.’ Wallace,
Saunders, 250 Kan. at 61, 824 P.2d at 939 (quotation
omitted).
Id., at 589. Berroth addressed the issue under federal law as well, holding that the
‘attorney-client privilege does not apply where the client
consults an attorney to further a crime or fraud.’ Motley,
71 F.3d at 1551 (quotation omitted). The party claiming
the exception applies ‘must present prima facie evidence
that the allegation . . . has some foundation in fact.’ Id.
The trial court has discretion to determine whether the
party has established a prima facie case, id., but it is
unclear what, precisely, constitutes a prima facie case for
establishing the crime-fraud exception under federal law.
18

United States v. Zolin, 491 U.S. 554, 563–64 n. 7, 109
S.Ct. 2619, 105 L.Ed.2d 469 (1989) (‘The quantum of
proof . . . remains . . . subject to question’).
Id.
Berroth relied on the case of In re Grand Jury Subpoenas, 144 F.3d 653,
660 (10th Cir. 1998), which analyzed how other circuits “have attempted to define
precisely what the prima facie standard requires.” Id. (citing In re Richard Roe,
Inc., 68 F.3d 38, 40 (2d Cir.1995) (probable cause to believe a crime or fraud has
been committed); Haines v. Liggett Group, Inc., 975 F.2d 81, 95–96 (3d Cir.1992)
(evidence that if believed by the fact finder would be sufficient to support a finding
that the elements of the crime-fraud exception were met); In re International Sys.
& Controls Corp. Sec. Lit., 693 F.2d 1235, 1242 (5th Cir.1982) (evidence such as
will suffice until contradicted and overcome by other evidence); United States v.
Davis, 1 F.3d 606, 609 (7th Cir.1993) (evidence presented by the party seeking
application of the exception is sufficient to require the party asserting the privilege
to come forward with its own evidence to support the privilege); In re Grand Jury
Proceedings (Appeal of Corporation), 87 F.3d 377, 381 (9th Cir.1996) (reasonable
cause to believe attorney was used in furtherance of ongoing scheme); In re Grand
Jury Investigation (Schroeder), 842 F.2d 1223, 1226 (11th Cir.1987) (evidence
that if believed by the trier of fact would establish the elements of some violation
19

that was ongoing or about to be committed); In re Sealed Case, 107 F.3d 46, 50
(D.C.Cir.1997) (evidence that if believed by the trier of fact would establish the
elements of an ongoing or imminent crime or fraud).) Berroth also acknowledged
that “the Tenth Circuit has not yet articulated its precise standard for what is
required to establish a prima facie case under the crime-fraud exception.” Id., at
589-590.
Given this context, the Berroth court was
guided by the principle that, at a bare minimum, before
the court even has an obligation to consider whether
to conduct an in camera review of the privileged
material, the party invoking the crime-fraud
exception must make a threshold showing of a factual
basis that is ‘adequate to support a good faith belief
by a reasonable person that in camera review of the
materials may reveal evidence to establish the claim
that the crime-fraud exception applies.’ Zolin, 491
U.S. at 572, 109 S.Ct. 2619 (internal citations and
quotations omitted); accord Burton v. R.J. Reynolds
Tobacco Co., 167 F.R.D. 134, 141 (D.Kan.1996) (citing
Zolin).
Id. (emphasis added). The Court finds this standard to be consistent with both
California and Kansas law and will apply it to the matter at bar.
D.

Establishing a Prima Facie Case of Fraud.

Defendant requests that the Court conduct an in camera inspection “of a
sampling of [Plaintiff’s] documents withheld from production, to determine if they
20

should not be shielded from disclosure because they were made in furtherance of a
crime, fraud or other misconduct.” (Doc. 124, sealed, at 22-23.) Defendant
contends that it “has a good faith belief that based on the documents it has received
in discovery, coupled with those it believes exist and were improperly withheld
from [Defendant] during its defense of [Plaintiff] (and now in discovery in this
coverage action), it will demonstrate by a preponderance of evidence that
[Plaintiff] engaged in a scheme to commit fraud against [Defendant].” (Id., at 26.)
Relying on Zolin, supra, Defendant argues that “[t]he United States Supreme
Court has specifically held that it is permissible for a court to conduct an in camera
review of the allegedly privileged documents to determine whether the crime-fraud
exception applies to such documents, and order any subsequent disclosures as
appropriate.” (Doc. 124, sealed, at 26.) This is an incorrect statement of the law.
As an initial matter, Defendant cannot meet its burden with “beliefs” and
conclusory statements. It must set forth a factual basis to establish the prima facie
case. Documents Defendant “believes exist” are irrelevant to the analysis before
the Court. Zolin holds that
Before engaging in in camera review to determine the
applicability of the crime-fraud exception, ‘the judge
should require a showing of a factual basis adequate to
support a good faith belief by a reasonable person,’
Caldwell v. District Court, 644 P.2d 26, 33 (Colo.1982),
that in camera review of the materials may reveal
21

evidence to establish the claim that the crime-fraud
exception applies.
49 U.S. at 572, 109 S.Ct. at 2631. In other words, a court will not order an in
camera inspection until after the requesting party meets the prima facie standard
with a factual basis. The Court will not, as Defendant suggests, engage in an in
camera inspection of a sampling of Plaintiff’s withheld documents in an effort by
the Court to compile evidence that would allow Defendant to establish a prima
facie case, that would then warrant a review of all documents. The approach
suggested by Defendant is inconsistent with California, Kansas, and federal law,
discussed supra.
As such, the Court will analyze only the evidence presented in Defendant’s
brief to determine whether Defendant has established a prima facie showing that
the fraud-crime exception to the attorney-client privilege should be applied.
“Actionable fraud may be based upon false representations made as to existing and
material fact . . . or upon a suppression of facts which the party is under a legal or
equitable obligation to communicate and in respect of which he could not be
innocently silent . . . .” DuShane v. Union Nat. Bank, 223 Kan. 775, 759, 576
P.2d 674, 678 (1978); see also Hasso v. Hapke, ___ Cal.Rptr.3d ___, No.
G047495, G047588, 2014 WL 2768837 (Cal.Appp. 4 Dist. June 19, 2014). If the
evidence presented by Defendant establishes a prima facie case of fraud by
22

Plaintiff based on these elements, only then will the Court order an in camera
inspection of documents withheld pursuant to the attorney-client privilege.
E.

Facts Alleged Regarding RT Litigation Settlement Discussions.

Defendant contends that Plaintiff and RT began settlement negotiations after
their failed mediation in September 2012. Defendant also contends that it was not
informed of the negotiations, in violation of Defendant’s rights under Plaintiff’s
insurance policy, until approximately two months later. For purposes of this
motion, the Court will accept both allegations as true.
On November 14, 2012, Plaintiff received a $20 million settlement demand
directly from RT. (Doc. 124-24, sealed, at 20.) The demand referenced “policy
limits” exposure under Plaintiff’s underlying insurance policy with Defendant.
(Id.) Defendant contends – and Plaintiff apparently does not contradict – that this
letter was never communicated to Defendant. (Doc. 124, sealed, at 30.)
On November 20, 2012, Plaintiff’s coverage counsel sent correspondence to
Defendant (Doc. 124-24, sealed, at 23-34) discussing a different demand letter
from RT’s counsel dated November 19, 2012, which contained a settlement
demand of $20 million (Id., at 41-42).6 A similar letter, dated November 19, 2012,

6

The firm of Gauntlett & Associates represented Plaintiff on issues regarding
coverage under Plaintiff’s insurance policy with Defendant. This firm, and the lawyers
working there, will be collectively referred to as “Plaintiff’s coverage counsel.”
23

was e-mailed to Defendant by Plaintiff’s litigating counsel.7 (Id., at 36-39.) Both
letters mention the $20 million settlement demand from RT. (Id., at 26, 39.) The
former letter discusses the tax implications and benefit of having the settlement
finalized by the end of that calendar year and requests that Defendant authorize
settlement for $15 million. (Id., at 25, 34.) The latter later states that RT’s $20
million demand “is a reasonable calculation of what a jury might determine” and
opines that “settlement is reasonable and the preferred alternative to trial in this
case.” (Id., at 39.)
The underlying settlement demand letter from RT’s attorney specifically
references the mediation in which the parties participated in September 2012.8 (Id.,
at 41-42.) RT’s counsel also noted that Plaintiff “took the position during
settlement negotiations that its exposure to liability for these claims provided
significant consideration for offsetting potential damages associated therewith to
bring [Plaintiff] to its final settlement number.” (Id.) There is no indication
whether RT is referring to Plaintiff’s position during negotiations occurring at the
mediation or in the subsequent two months.
7

The Paul Hastings firm represented Plaintiff in the underlying RT litigation.
This firm, and the lawyers working there, will be collectively referred to as “Plaintiff’s
litigating counsel.”
8

The Court is aware of no evidence discussing whether Defendant participated in
and/or had a representative at this mediation.
24

A draft settlement agreement was sent to Plaintiff’s litigating counsel by
RT’s counsel on November 27, 2012. (Doc. 124-24, at 63-79.) This draft
agreement includes an amount of $8 million to be paid by RT to Plaintiff, a portion
of which would be in exchange for Plaintiff’s “transfer of ‘discounttires.com’
domain name and any rights [Plaintiff] may have acquired in the
DISCOUNTTIRES.COM trademark . . . .” (Id., at 66 (capitalization in original).)
The next day, November 28, 2012, Plaintiff’s coverage counsel sent
correspondence (Doc. 124-24, sealed, at 84-85) to Defendant’s counsel9 inquiring
as to the status of Defendant’s response to Plaintiff’s counsel’s November 20,
2012, letter (id., at 25-34) discussing RT’s $20 million settlement demand. The
November 28th letter reminds Defendant of the recommendation by Plaintiff’s
coverage counsel to settle the case for $15 million and “respectfully insist[ed]”
that, within two days (November 30, 2012), Defendant provide a “complete
substantive response to our correspondence, authorize the settlement on the terms
communicated and confirm that [Defendant] will honor its policy obligations by
paying all sums that [Plaintiff] is required to pay to effectuate settlement.” (Id., at
84-85.)

9

Defendant retained the firm of Sinnott, Puebla, Campagne & Curet, referred to
herein as “Defendant’s counsel.”
25

The settlement request from Plaintiff’s coverage counsel was slashed to $5
million, within the policy limits Defendant “now acknowledges,” per
correspondence dated November 30, 2012. (Id., at 87-90.) A revised draft
settlement agreement submitted by Plaintiff’s litigating counsel to RT’s counsel on
November 30, 2012, removed the $8 million and left blank the amount RT was to
pay Plaintiff to resolve the underlying litigation. (Doc. 124-24, at 94, 116.)
In an e-mail dated November 30, 2012, Plaintiff’s litigating counsel
contacted Defendant regarding Defendant’s wish for a conference call discussing
RT’s settlement demand to Plaintiff. (Doc. 124-24, at 132.) Plaintiff’s counsel
stated that “settlement discussions with [RT] are quite fragile and time-sensitive, so
we want to try and keep the momentum going to see if a final resolution can be
reached in the next few days.” (Id.) Defendant responded to Plaintiff’s litigation
counsel, stating
[b]asically I would like to discuss why you believe the
$20 million demand [from RT] is reasonable. I have
asked for and received evaluations of this case and have
never been advised that it was your firm’s belief that this
case had a value of $20 million. In [counsel’s] update of
9/4/12 she states that [Plaintiff’s] experts were ‘strong’
each punching significant holes in the theories of RT’s
experts.’ IT was my belief that the case was defensible.
In your 11/19/12 letter you now say that RT potentially
has a very strong case for liability against [Plaintiff]. Are
you now saying that [Plaintiff] did infringe on RT’s
Trademark and that the same was intentional?
26

I don’t see that you provided any reason for the
change of evaluation or exposure. It appears that the
reasons for your recommendation were all known when
your firm first provided its opinions and evaluations to
this company yet were left out of the evaluations.
(Id., at 134.) Defendant also inquired as to when RT first made its $20 million
settlement demand. (Id., at 134.) Plaintiff’s litigating counsel responded to
Defendant by correspondence dated December 4, 2012, that his evaluation of the
case “changed as a result of [the] rulings on the parties’ motions for summary
judgment/adjudication.” (Doc. 124-24, sealed, at 140.) Counsel reiterated its
request that Defendant extend $5 million in settlement authority to resolve the
litigation with RT. (Id., at 142-43.) Defendant was given no response as to when
RT first made the $20 million demand.
Plaintiff’s coverage counsel sent Defendant correspondence two days later
on December 6, 2012, imploring that it was “imperative” for Defendant to “make
an offer to settle [the RT] claims against [Plaintiff] this week.” (Doc. 124-24,
sealed, at 145.) While contending more coverage was available, Plaintiff’s
coverage counsel mentioned “at least $5 million of coverage is available under
[Defendant’s] policies” and demanded that Defendant “must come forth with that
$5 million figure immediately to resolve [the RT litigation], before settlement
opportunities die on the table and before trial is nigh.” (Id., (emphasis in
27

original).) This was followed by additional correspondence from Plaintiff’s
coverage counsel on December 7, 2012, stating “[t]here is no reason to not extend
– first thing next week – settlement authority of a least $5 million, the coverage
you acknowledged in your November 29, 2012 letter. Further delay will
jeopardize prospects for comprehensive settlement.” (Doc. 124-24, sealed, at 149.)

Defendant’s counsel sent correspondence to Plaintiff’s coverage counsel on
December 11, 2012, acknowledging coverage counsel’s “significantly revised
analysis of the ‘reasonableness’ of RT’s settlement demand . . . on 12/4/12.” (Doc.
124-24, sealed, at 152.) Defendant’s counsel stated that “the amount of RT’s
settlement demand and the urgency to respond to it did come as a complete
surprise” to Defendant. (Id.) After stating that Defendant is “permitted to
participate in settlement discussions,” defense counsel also expressed concern that
Plaintiff and RT had “apparently been involved in principal-to-principal settlement
discussions since the mediation, and [Plaintiff] never apprised [Defendant] of this
fact.” (Id.) Defense counsel stated that Defendant “only learned of the ongoing
settlement discussions based on its reading of RT’s settlement demand, forwarded
with your 11/20/12 letter.” (Id.) Defendant again requested that it “be advised of
the entirety of the settlement terms being discussed, including all non-monetary
28

terms.” (Id.)
Plaintiff’s coverage counsel responded that same day, arguing it was
“improper” for Defendant to see draft settlement terms that involve “distinct
business issues outside the scope of an insurer’s defense or indemnity coverage,
particularly when that insurer has disavowed its obligation to assist in the
prosecution of affirmative causes against the claimant.” (Doc. 124-24, sealed, at
155.) Counsel also mentioned that Plaintiff was awaiting Defendant’s “extension
of authority to finalize any agreement.” (Id., at 156.) Coverage counsel
questioned why Defendant “has not explained why it has continued to delay even
while mindful that this delay may prevent settlement” even though Defendant
received the most recent settlement demand offer “twenty two days ago.” (Id.)
Coverage counsel also informs Defendant that because “no money has yet been
offered regarding [RT’s] claims, you can have no legitimate objection to the
continued exploration of this settlement opportunity.” (Id., at 160.)
Also on December 11, 2012, Plaintiff’s litigating counsel e-mailed RT’s
attorney asking when he “might expect to see your proposed revisions to the
settlement agreements.” (Doc. 124-24, at 162.) He was “hoping” the agreements
can be finalized in the next week because he was scheduled to be out of town the
following week. (Id.)
29

The next day, December 12, 2012, Plaintiff’s coverage counsel sent a letter
to Defendant’s coverage counsel stating that “RT demands this matter be resolved
by the close of business tomorrow or any proposal to settle RT’s action against
Plaintiff will be withdrawn and the matter will proceed to trial, in order to facilitate
year end consummation of the proposed settlement terms’s conditions.” (Doc.
124-24, at 169.) Plaintiff’s coverage counsel states that “no lesser sum” than $5
million “will suffice.” (Id.)
The Court is aware of no evidence that RT in fact drew such proverbial line
in the sand as to the timing of any resolution. To the contrary, also on December
12, 2012, RT’s counsel sent an e-mail to Plaintiff’s counsel attaching RT’s
revisions to the most recent settlement agreement. (Doc. 124-24, sealed, at 165.)
The Court notes that this e-mail from RT’s counsel (id.) does not express the same
urgency to settle by a certain date that Plaintiff’s coverage counsel attributes to RT
in coverage counsel’s December 12 letter to defense counsel (id., at 169). Rather,
RT’s email to Plaintiff states that
all of the proposed terms remain conditional upon the
parties’ agreement on the payment terms, which we are
still waiting to hear from you on. We understand you are
still waiting to hear from [Defendant] and just ask that
you relay the proposed payment terms to us as soon as
possible so that we can continue to diligently work on the
settlement.
30

(Doc. 124-24, sealed, at 165.)
By correspondence dated December 17, 2012, Plaintiff’s coverage counsel
confirms that Defendant extended $5 million of authority to settle RT’s claims
against Defendant. (Doc. 124-24, sealed, at 172.) Plaintiff’s coverage counsel
attests that
[p]rior to your extension of $5 million in authority, no
monetary figure was referenced in the parties proposals,
and at no time had the parties agreed on any amount to be
paid.10 As they addressed various business issues (of no
concern to [Defendant]) which the parties have been
discussing, there was no point in forwarding to
[Defendant] unconsummated drafts. We are now
negotiating a dollar figure with [RT] and believe we can
settle if we can secure $5 million for [Defendant] well in
advance of year’s end.
(Id.) Plaintiff’s coverage counsel notes that “if a settlement for $5 million is
achieved, it will be due to [Plaintiff’s] surrender of valuable interests in addition to
[Defendant’s] cash contribution.” (Id., at 173.)
On December 18, 2012, Plaintiff’s coverage counsel e-mailed a draft
settlement agreement to RT’s attorneys “suggesting some revisions that will
hopefully satisfy the concerns regarding insurance which we discussed earlier
10

As stated above, however, a draft settlement agreement was sent to Plaintiff’s
counsel by RT’s counsel on November 27, 2012. (Doc. 124-24, at 63-79.) This draft
agreement includes an amount of $8 million to be paid by RT to Plaintiff. (Id., at 66.)
This $8 million was specifically removed by Plaintiff’s litigating counsel in the
November 30, 2012, draft. (Id., at 116.)
31

today.”11 (Doc. 124-24, sealed, at 175.) Counsel at Gallagher & Kennedy
responded that
[t]he revisions you made to the draft of the RT
Agreement do not satisfy the concerns we raised with
you and David in our call yesterday afternoon. The
proposed course of action was for the insurance company
[Defendant] to write a check to [Plaintiff] directly, with
language in the agreement that put the carrier on
notice that although the payment would resolve and
extinguish the claims asserted by RT against
[Plaintiff], it was part and parcel of a global
resolution, which would include business concessions
by [Plaintiff] and the payment of monetary
compensation by RT to [Plaintiff]. We understood that
your office was awaiting confirmation, expected
tomorrow, that the carrier would accept that settlement
structure. The revised language you propose
contemplates the carrier sending a check for $5
million to “a payee designated by RT.” Presumably,
this designee would be [a Plaintiff] affiliated entity.
Alternatively, you may be proposing that the designee is,
in fact, an RT entity, which we assume would then
contemplate a $13 million payment by RT to [Plaintiff].
This is the structure which we told you yesterday was
unacceptable to RT. Finally, the language you added
to the “Whereas” clause on p. 2 exacerbates the
problem instead of putting the carrier on notice that
its payment is, in fact, part and parcel of a
11

The email was sent to counsel at the Ballard Spahr firm, which the Court is
aware represented RT, as well as counsel at the firm of Gallagher & Kennedy, P.A. The
Court surmises that Gallagher & Kennedy also represented RT, but cannot be certain
from the information presented. Regardless, counsel at Gallagher & Kennedy was
involved in finalizing the RT litigation settlement agreements and, as noted infra,
expressed reservations about representations Plaintiff was making to Defendant’s counsel
in regard to that settlement.
32

comprehensive settlement of all of the claims asserted
by both parties in the consolidated action.
(Doc. 124-24, sealed, at 188 (emphasis added).)
F.

Application of Facts Presented to Allegations Made.

Defendant argues that Plaintiff’s “knowledge that it reached a settlement
with RT for $8 million, and/or that its counsel had a 25% contingency reward in
the net settlement to [Plaintiff], and its failure to inform [Defendant] of the fact that
it was in settlement discussions for some two months, and that it settled with RT
before [Defendant] agreed to offer its policy limits in settlement, amply justifies an
in camera review of [Plaintiff’s] allegedly privileged communications.” (Doc.
124, sealed, at 27.) Defendant enumerates various communications it had with
Plaintiff and/or its counsel (id., at 27-46) in an effort to “demonstrate that
[Plaintiff] likely reached a settlement with RT weeks before Universal agreed to
make its $5 million policy limits available for settlement . . . .” (Id., at 47.)
Defendant continues that “[i]n other words, it appears that [Plaintiff] knew it had
already settled both lawsuits for $8 million, yet sought to omit/conceal the details
of that settlement from Universal so that it could obtain an additional $5 million
from Universal.” (Id.) Defendant does not, however, expend much, if any, effort
analyzing or explaining how these listed communications specifically support this
argument.
33

The Court will, however, analyze the facts presented in Defendant’s brief to
determine whether there is sufficient evidence to meet a prima facie case of
criminal or fraudulent activity. As stated above, Defendant contends that
Plaintiff’s factual omissions and/or misrepresentations fall under the following
categories: 1) Plaintiff’s alleged failure to inform Defendant of the 25%
contingency reward to Plaintiff’s counsel in the net settlement to Plaintiff; 2)
Plaintiff’s alleged failure to inform Universal that it was in settlement discussions
with RT for some two months following the unsuccessful mediation of the RT
litigation; 3) Plaintiff’s alleged failure to inform Defendant that it reached a
settlement agreement with RT in which RT would pay Plaintiff $8 million,
essentially funded in party by Defendant; and 4) Plaintiff’s alleged settlement with
RT before Defendant agreed to offer its policy limits in settlement.
1.

Plaintiff’s failure to inform Defendant that Plaintiff’s
counsel had a 25% contingency reward in the net
settlement to AKH.

There is evidence that at some point before July 5, 2011, a contingency
agreement existed between Plaintiff and its litigating counsel in which counsel agreed to
discount its hourly fee “on condition that our contingency recovery on the back end
remain at 25%.” (Doc. 124-23, sealed, at 1.) It is uncontested, however, that Defendant
was aware of the existence of the contingency agreement no later than January 26, 2012,
34

when litigating counsel informed Defendant’s claims handler that “he had entered into
an agreement with [Plaintiff] regarding a partial contingency, which reduced his hourly
rate to $600 per hour.” (Doc. 32-9, at 3, 18.)
Although this is, at a minimum, more than six months after the contingency
agreement was created, it is also almost an entire year before the settlement was
finalized in the RT litigation. As such, even assuming Plaintiff should have informed
Defendant of the contingency agreement by an earlier date or in some other manner, the
fact remains that Defendant was aware of the contingency fee sufficiently in advance of
the finalized settlement. Although not fraudulent in and of itself, this fact does suggest
motivation for participation in the fraud described in subsection 3, infra.
2.
Plaintiff’s failure to inform Universal that it was in
settlement discussions with RT for some two months.
Defendant complains that, following the unsuccessful mediation of the RT
litigation, Plaintiff and representatives of RT engaged in settlement discussions for
approximately two months before Defendant was made aware of such discussions.
The mediation occurred in September 2012. (Doc. 124-24, sealed, at 41-42.)
Defendant was aware of the continued settlement negotiations no later than
November 19, 2012 – approximately two months after the failed mediation and
approximately a month before the finalized settlement of the RT litigation. (Doc.
124-24, sealed, at 25-34, 36-39.)
35

The Court acknowledges that Plaintiff had a contractual duty to Defendant to
cooperate and assist Defendant “in the investigation, settlement, defense,
enforcement of contribution or indemnification.” (Doc. 124, sealed, at 21.) The
Court also acknowledges that the insurance contract also prohibited Plaintiff,
except at its own expense, from “mak[ing] any offer or payment, assum[ing] any
obligation . . . .” (Id.)
In addition to defending the RT lawsuit, Plaintiff was also prosecuting
claims against RT with which Defendant, by choice, was not involved. It is
undisputed that the final resolution of these claims would be intertwined. Further,
information regarding settlement of Plaintiff’s claims against RT would certainly
be relevant to Defendant’s analysis of any settlement of RT’s claims against
Plaintiff. Even so, under circumstances (involving claims not entirely covered by
the insurance policy at issue), the Court finds that Plaintiff’s post-mediation
settlement discussions with RT without input from Defendant do not provide
evidence supporting a prima facie case under the crime-fraud exception to the
attorney-client privilege.
3.

Plaintiff’s failure to timely inform Defendant of an $8
expected million payment from RT which was to be
partially funded by Defendant and Plaintiff’s alleged
settlement with RT before Universal agreed to offer its
policy limits.
36

The Court will address these final two allegations together. In support of
these allegations, Defendant argues that
[t]he documents [it] seeks pursuant to the crime-fraud
exception to the attorney-client privilege are identified on
[Plaintiff’s] privilege log as communications involving
[Plaintiff] personnel . . . and [Plaintiff’s] counsel
attorneys . . . . These communications concern
‘settlement’ or ‘draft settlement agreement(s)’ or
‘finalization of settlement agreements,’ for all dates that
precede [Plaintiff’s] communication to Universal on
November 20, 2012 of RT’s alleged settlement demand
of November 19, 2012 to [Plaintiff]. They also include
those communications made through [Defendant’s]
payment of $5 million, sent to [Plaintiff’s] attorney . . .
on December 31, 2012.
[Plaintiff’s] description of these communications
and the dates of these communications demonstrate that it
likely reached a settlement with RT weeks before
[Defendant] agreed to make its $5 million policy limits
available for settlement on December 13, 2012. In other
words, it appears that [Plaintiff] knew that it had already
settled both lawsuits for $8 million, yet sought to
omit/conceal the details of that settlement from
[Defendant] so that it could obtain an additional $5
million from [Defendant.] Otherwise, the documents
would expose the arrangement between [Plaintiff] and
RT that allowed [Plaintiff] to pocket the $5 million
[Defendant] policy limits.
(Doc. 124, sealed, at 46-48)
Plaintiff continues that “[a]bsent the required evidentiary showing, and with
a motion premised heavily upon what is allegedly possible and not what is proven
by competent evidence, the motion does not meet the required showing” of a prima
37

facie case under the crime-fraud exception. (Doc. 136, at 12 (emphasis in
original).) Plaintiff asks, “Can [Defendant] extrapolate from the fact that there was
a history of varying prior settlement demands or offers, or a prior draft settlement
agreement for a different amount, that there was a prior undisclosed settlement,
even if none of the prior offers were accepted?” (Id., at 13.) Plaintiff continues,
Moreover, here, the evidence as addressed in this
Opposition shows that [Defendant], through its in house
and outside coverage counsel, knew and reviewed the
details of the settlement, including the settlement
agreements and the escrow agreement. Incidentally, the
motion itself is silent as to this point. In other words, the
claim that [Defendant] did not know about the terms of
the settlement agreements or the escrow or payments of
money by each party to settle their respective claims is
simply inaccurate. [Defendant] simply saying that it
knew nothing about the settlements, or was barred from
reviewing them, is not enough, especially when its
counsel is in the email chain showing that it reviewed and
edited the settlement agreements.
(Id., at 14.)
Plaintiff’s argument misrepresents Defendant’s concerns. Defendant did not
get an opportunity to review and edit the underlying settlement agreement until
mid to late November, 2012. By that point, or contemporaneously therewith,
Defendant was under significant pressure from Plaintiff’s litigating counsel and
Plaintiff’s coverage counsel to approve the settlement terms as soon as possible –
even though communications involving RT’s counsel do not necessarily evidence
38

the same urgency Plaintiff’s counsel was attributing to RT.
As discussed above, on December 11, 2012, Plaintiff’s litigating counsel emailed RT’s attorney asking when he “might expect to see your proposed revisions
to the settlement agreements.” (Doc. 124-24, at 162.) He was “hoping” the
agreements can be finalized in the next week because he was scheduled to be out of
town the following week. (Id.) The next day, Plaintiff’s coverage counsel sent a
letter to Defendant’s coverage counsel stating that “RT demands this matter be
resolved by the close of business tomorrow or any proposal to settle RT’s action
against Plaintiff will be withdrawn and the matter will proceed to trial, in order to
facilitate year end consummation of the proposed settlement terms’s conditions.”
(Doc. 124-24, at 169.)
Defendant was not included in settlement negotiations between Plaintiff and
RT. Considering Plaintiff had claims against RT that were not covered by
insurance, the Court acknowledges that Plaintiff had arguably legitimate reasons to
continue negotiating with RT without Defendant’s involvement. As stated in § F.
2. above, however, the Court finds that information regarding settlement of
Plaintiff’s claims against RT would certainly be relevant to Defendant’s analysis of
any settlement of RT’s claims against Plaintiff. An intentional concealment of this
arrangement by Plaintiff would be fraudulent.
39

Some evidence appears to indicate that Plaintiff was actively attempting to
mislead Defendant about the universal settlement with RT – in particular the fact
that Plaintiff would ultimately receive the $5 million Defendant was paying under
Plaintiff’s insurance policy to settle RT’s claims against Plaintiff. As outlined in
the factual background, supra, Plaintiff’s coverage counsel e-mailed a draft
settlement agreement to RT’s attorneys on December 18, 2012, “suggesting some
revisions that will hopefully satisfy the concerns regarding insurance which we
discussed earlier today.” (Doc. 124-24, sealed, at 175.) Counsel at Gallagher &
Kennedy responded that
[t]he revisions [Plaintiff’s coverage counsel] made to
the draft of the RT Agreement do not satisfy the
concerns we raised with you and David in our call
yesterday afternoon. The proposed course of action was
for the insurance company [Defendant] to write a check
to [Plaintiff] directly, with language in the agreement
that put the carrier on notice that although the
payment would resolve and extinguish the claims
asserted by RT against [Plaintiff], it was part and
parcel of a global resolution, which would include
business concessions by [Plaintiff] and the payment of
monetary compensation by RT to [Plaintiff]. . . . The
revised language you propose contemplates the
carrier sending a check for $5 million to “a payee
designated by RT.” Presumably, this designee would be
[a Plaintiff] affiliated entity. Alternatively, you may be
proposing that the designee is, in fact, an RT entity,
which we assume would then contemplate a $13 million
payment by RT to [Plaintiff]. This is the structure
40

which we told you yesterday was unacceptable to RT.
Finally, the language you added to the “Whereas”
clause on p. 2 exacerbates the problem instead of
putting the carrier on notice that its payment is, in
fact, part and parcel of a comprehensive settlement of
all of the claims asserted by both parties in the
consolidated action.
(Doc. 124-24, sealed, at 188 (emphasis added).) This suggests that Plaintiff was
actively attempting to conceal aspects of its settlement with RT – namely, that the
$5 million settlement payment from Defendant to RT was, in fact, going to be paid
by RT back to Plaintiff.
Additionally, the November 28, 2012, correspondence to Defendant from
Plaintiff’s coverage counsel which inquires as to the status of Defendant’s response
to Plaintiff’s counsel’s November 20, 2012, letter discussing RT’s $20 million
settlement demand supports Defendant’s claim. (Id., at 84-85.) The November
28th letter reminds Defendant of coverage counsel’s recommendation to settle the
case for $15 million. Coverage counsel “respectfully insist[ed]” that Defendant
authorize a settlement for $15 million within 2 days. (Id., at 85.) This seems
questionable in light of the reference to an $8 million payment to Plaintiff in the
draft settlement agreement Plaintiff’s litigating counsel received from RT the day
before on November 27, 2012 (id., at 63, 66) – especially considering that $8
million reference was removed by Plaintiff’s litigating counsel in its November 30,
41

2012, settlement agreement draft (id., at 92, 116).
Further, defense counsel’s December 11, 2012, correspondence expressed
concern that Defendant “only learned of the ongoing settlement discussions”
between Plaintiff and RT “based on [Defendant’s] reading of RT’s settlement
demand, forwarded with your 11/20/12 letter.” (Doc. 124-24, sealed, at 152.)
Defendant again requested it “be advised of the entirety of the settlement terms
being discussed, including all non-monetary terms.” (Id.) Plaintiff’s coverage
counsel’s immediate response was that it was “improper” for Defendant to see
draft settlement terms that involve “distinct business issues outside the scope of an
insurer’s defense or indemnity coverage, particularly when that insurer has
disavowed its obligation to assist in the prosecution of affirmative causes against
the claimant.” (Id., at 155.) Coverage counsel also informed Defendant that
because “no money has yet been offered regarding [RT’s] claims, you can have
no legitimate objection to the continued exploration of this settlement
opportunity.” (Id., at 160 (emphasis added).) This would seem to contradict the
$8 million that was initially included in – and subsequently removed by Plaintiff’s
coverage counsel from – the draft settlement agreement, discussed above. (See id.,
at 66, 92, 116.)
These facts, taken as a whole, establish a prima facie case sufficient to
42

invoke the crime-fraud exception to the attorney-client privilege – false
representations made by Plaintiff as to a material fact or the suppression of facts
which Plaintiff was under a legal or equitable obligation to communicate and “in
respect of which [it] could not be innocently silent . . . .” DuShane v. Union Nat.
Bank, 223 Kan. at 759, 576 P.2d at 678.12 The Court must now fashion the
appropriate remedy and parameters for the document production being ordered
from Plaintiff.
F.

Procedure for Production.

Plaintiff shall provide to the Court for in camera inspection all
communications between itself and counsel (whether coverage counsel or litigating
counsel) that were withheld on the basis of the attorney-client privilege or work
product doctrine that occurred from the completion of the unsuccessful mediation
in September 2012 until Defendant received the final draft of the settlement
agreement with RT in December 2012. The documents shall be delivered to the
Court within thirty (30) days of the date of this Order in both a hard copy as
well as by searchable PDF form (saved in individual pages). The Court will
review the communications for evidence of an intent by Plaintiff to conceal

12

The Court does not suggest that these facts establish fraud. Rather, standing
alone and unrebutted, they would create a prima facie case of fraud.
43

material elements of the negotiations or settlement from Defendant.
To the extent Plaintiff has withheld any communications with, or documents
shared with, RT at any time on the basis of the attorney-client privilege or work
product doctrine, such documents shall be produced to Defendant as no privilege
applies to documents shared with a third party. The documents shall be delivered to
Defendant within thirty (30) days of the date of this Order in both a hard copy as
well as by searchable PDF form (saved in individual pages).

IT IS THEREFORE ORDERED that Defendant’s Motion to Compel
Production of Documents (Doc. 123) is GRANTED as more fully set forth herein.
IT IS SO ORDERED.
Dated at Wichita, Kansas, on this 3rd day of July, 2014.
S/ KENNETH G. GALE

KENNETH G. GALE
United States Magistrate Judge

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