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Seventh Circuit Court Denies Plaintiffs’ Motion to Compel Production of Documents Subject to Attorney-Client Privilege in Mutual Fund Excessive Fee Litigation

On April 25, 2017, the U.S. District Court for the Northern District of Illinois issued an order (the Order) denying the plaintiffs’ motion to compel Calamos Investment Trust, a Massachusetts business trust (the Trust), and its Independent Trustees to produce certain documents redacted or withheld under the attorney-client privilege in connection with pending litigation against Calamos Advisors LLC and Calamos Financial Services LLC (collectively, Calamos or the Defendants). The plaintiffs, shareholders of the Calamos Growth Fund, a series of the Trust, who have alleged that Calamos breached its fiduciary duty under Section 36(b) of the 1940 Act by charging excessive advisory and distribution fees to the Fund, argued that, although the documents in question may be subject to the attorney-client privilege, a “fiduciary exception” to the privilege should apply to allow the plaintiffs to gain access to the documents. The Trust and the Independent Trustees, who are not parties to the litigation, opposed the motion.

In connection with the Section 36(b) case against Calamos, plaintiffs issued subpoenas requesting production of certain documents from the Trust and the Independent Trustees. In response, the Trust and the Independent Trustees produced a limited number of documents, with certain documents involving legal advice provided to the Independent Trustees redacted or withheld in reliance on the attorney-client privilege. Thereafter, the plaintiffs moved to compel production of the redacted and withheld documents, arguing that a “fiduciary exception” to the privilege should apply.

The attorney-client privilege gives a client the right to maintain the confidentiality of communications, which includes the right to refrain from producing a document in response to a subpoena, “where the document contains a confidential communication between a client and her attorney in which the client seeks legal advice.” The purpose of the privilege is to encourage full and frank communications between attorneys and their clients. The fiduciary exception to the attorney-client privilege, which derives from trust law, prohibits trustees who obtain legal advice in connection with their administration of a trust from asserting the privilege with respect to the trust’s beneficiaries. The exception is based on the notion that the benefit of legal advice provided to a trustee in connection with the administration of a trust runs to the trust’s beneficiaries, to whom the trustee owes a fiduciary duty, and that, accordingly, communications relating to the provision of such legal advice should not be withheld from the beneficiaries.

The Court stated that, to establish the applicability of the fiduciary exception, otherwise known as the “Garner doctrine” after the seminal 1970 case Garner v. Wol nbarger, 430 F.2d 1093 (5th Cir. 1970), “the party seeking discovery must establish both a fiduciary relation and good cause for overcoming the privilege.” Citing Garner, the Court identified several factors that may establish good cause. These factors include: whether the claim is colorable; the apparent need or desirability for the party seeking production to have the information and the ability to obtain the information from other sources; whether the communication relates to past, present or prospective actions; whether the communication relates to legal advice relating to the litigation in connection with which production is being sought; the extent to which the communication is identified versus the extent to which the party seeking production is “blindly shing”; and the risk of revealing trade secrets or other confidential information.

The Court conceded that several factors weighed in the plaintiffs’ favor, including that the plaintiffs were not seeking communications related to the defense of, or discovery in, the present 36(b) litigation, there was no risk of disclosing trade secrets and, pursuant to a confidentiality order in place, the documents would not have been disclosed publicly. However, the Court determined that the plaintiffs failed to demonstrate the necessity of the information and its unavailability from other sources. In this connection, the Court noted its agreement with the Southern District of New York which, in previous cases, held that the necessity of the information and its unavailability from other sources is the “most important factor” in undertaking the Garner analysis and determining whether the attorney-client privilege should be pierced. Consequently, the Court denied the plaintiffs’ motion to compel after determining that the plaintiffs had not met their burden to demonstrate good cause to overcome the attorney-client privilege based on the fiduciary exception.

In denying the plaintiffs’ motion to compel, the Court distinguished the November 2016 order issued by the U.S. District Court for the Eastern District of Washington in Kenny v. Pacific Investment Management Company LLC, a Section 36(b) case in which, under similar facts, the court granted the plaintiff’s motion to compel production of documents subject to the attorney-client privilege by applying the fiduciary exception. The Court found Kenny unpersuasive, noting that the U.S. Court of Appeals for the Ninth Circuit, which hears appeals from the U.S. District Court for the Eastern District of Washington, had not adopted the good cause standard from Garner, and that accordingly the Kenny court did not, and was not required to, apply that standard in determining the applicability of the fiduciary exception.

The Order was issued by the U.S. District Court for the Northern District of Illinois under the caption Chill v. Calamos Advisors LLC, et al., Case No. 17-C-1658. The Order relates to Section 36(b) litigation currently pending in the U.S. District Court for the Southern District of New York under the caption Chill v. Calamos Advisors LLC, et al., Case No. 15- C-1014 (S.D.N.Y. led Feb. 11, 2015).

© 2017 Vedder Price


About this Author

Vedder Price P.C. attorneys provide a full range of services to a diverse financial services clientele. Attorneys practicing in the firm’s Investment Services Group are experienced in all aspects of investment company and investment adviser securities regulations, broker-dealer regulatory and compliance matters, derivatives and financial product matters, and ERISA and tax matters. Clients include mutual fund complexes, hedge and other private funds, money managers, broker-dealers, independent directors, and many other types of institutions such as banks, savings and loans,...

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