732 F.2d 1302 (7th Cir. 1984), 83-2973, Matter of Continental Illinois Securities Litigation

Docket Nº:83-2973.
Citation:732 F.2d 1302
Party Name:In the Matter of CONTINENTAL ILLINOIS SECURITIES LITIGATION. Appeal of CONTINENTAL ILLINOIS CORP. & Continental Illinois National Bank & Trust Co. of Chicago.
Case Date:April 23, 1984
Court:United States Courts of Appeals, Court of Appeals for the Seventh Circuit

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732 F.2d 1302 (7th Cir. 1984)


Appeal of CONTINENTAL ILLINOIS CORP. & Continental Illinois

National Bank & Trust Co. of Chicago.

No. 83-2973.

United States Court of Appeals, Seventh Circuit

April 23, 1984

Argued Dec. 8, 1983.

Rehearing and Rehearing En Banc Denied June 20, 1984.

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[Copyrighted Material Omitted]

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Franklin P. Auwarter, Mayer, Brown & Platt, Chicago, Ill., for appellant.

Michael Conway, Jeremiah Marsh, William J. McKenna, Jr., Hopkins & Sutter, Chicago, Ill., Robert D. Sack, Ann Loeb, Patterson, Belknap, Webb & Tyler, New York City, for appellee.

Before PELL, CUDAHY and POSNER, Circuit Judges.

CUDAHY, Circuit Judge.

In this appeal we must balance the public's right of access to documents relied on as evidence in civil proceedings against a party's interest in the confidentiality--based primarily upon the attorney-client privilege--of its investigation into the merits of derivative suits brought on its behalf. The district court held that Dow Jones & Company, Inc. (publisher of The Wall Street Journal ) and Field Enterprises, Inc. (publisher of the Chicago Sun-Times ) (collectively the "Newspapers") are entitled to copies of the Special Litigation Committee Report (the "Report") compiled in connection with derivative actions pending in the district court. Because the Report was admitted into evidence in connection with a motion pending before the district court and because the court expressly relied on the Report in reaching a tentative disposition of the motion, the public is presumptively entitled to the Report. The district court did not abuse its discretion in concluding that this presumption was not rebutted in this case. Therefore, we affirm the order of the district court granting access to the Report.


A. The Securities Litigation

Appellants, Continental Illinois Corporation ("CI Corp.") and its wholly-owned subsidiary, the Continental Illinois National Bank and Trust Company of Chicago (the "Bank") (collectively "Continental"), are defendants in derivative suits and class actions in the district court. 1 The derivative suits were brought by shareholders to compel Continental to assert claims it may have against third parties or, alternatively, to allow the shareholders to assert such claims on Continental's behalf. CI Corp.'s board of directors formed a Special Litigation Committee ("SLC") to evaluate the various derivative claims. Under Delaware law, which applies because CI Corp. is a Delaware corporation, if the corporation on whose behalf a derivative suit is brought decides, with court approval, that pursuit of the claim is not in the corporation's best interest, the action may be dismissed. 2 See Zapata Corp. v. Maldonado, 430 A.2d 779 (Del.1981). The SLC was formed, presumably, so that none of the directors sued in the various actions would participate in the decision whether to terminate the claims. See Maldonado, 430 A.2d at 786.

CI Corp. empowered the SLC to conduct an investigation into the basis of the pending derivative actions to determine whether the actions should be dismissed as not being in the best interests of the Corporation. To assist it in this endeavor, the SLC retained the law firm of Jenner & Block and its partner, former U.S. Circuit Judge Philip W. Tone, as legal counsel. Jenner & Block, in turn, engaged Thomas A. Donahoe and the accounting firm of Price Waterhouse as its accounting consultants for investigation of allegations against Continental's independent auditors, Ernst & Whinney.

The SLC, with the aid of counsel, conducted its investigation between September 27 and December 7, 1982. This investigation

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involved, inter alia, reviewing numerous documents and summaries of interviews conducted earlier by the law firm of Mayer, Brown & Platt, which was Continental's counsel in the district court litigation. Additionally, Jenner & Block, on behalf of the SLC, conducted more than eighty interviews of bank employees and others who might have information about the Penn Square Bank fiasco. The law firm also researched the law applicable to the derivative claims, the standards governing special litigation committees and the availability of insurance coverage for liabilities arising in the litigation.

On December 7, 1982, the SLC met and decided that it would be in Continental's best interest to terminate all of the derivative actions except the Penn Square-related claims against three former officers of the Bank. Jenner & Block then prepared the Report which is the subject of this appeal, reporting and defending the SLC's conclusions. "The Report is 158 pages long and is a full and candid discussion of all of the SLC's significant factual findings, its understanding of the applicable law, and its conclusions." Brief of Appellants at 8.

On December 8, Continental moved in the district court to terminate the claims the SLC found to be not in Continental's best interests. This brought into play the standards prescribed in Zapata Corp. v. Maldonado, 430 A.2d 779 (Del.1981), which govern a court's review of a corporation's decision to terminate a derivative suit. The district court's interpretation of Maldonado led it to conclude that the reasonableness of the SLC's investigation and findings was an important determinant of whether it was proper to terminate the claims. 3 Thus, the Report became crucial to disposition of the motion to terminate. And on May 13 the district court--Judge John Grady--ordered Continental to provide the court and opposing counsel with a copy of the Report. 4

The district court determined that in order to terminate the claims, Continental had the burden of showing that the SLC conducted an independent investigation in good faith and that the bases for its conclusions were reasonable. (Step One). See Order dated May 6, 1983 pp. 5-6. 572 F.Supp. 928. If Continental met that burden then the district court would exercise " 'its own independent business judgment' in determining whether the motion to dismiss should be granted." (Step Two). Id. at 5 (quoting Maldonado, 430 A.2d at 789). Continental introduced the Report into evidence at the June 30, 1983 hearing on Step One, presumably to support its claim that the SLC conducted an independent, good faith investigation and that the SLC's conclusions were reasonable. The record also indicates that witnesses testified in open court, on both direct and cross-examination, about the contents of the Report. In fact, on cross-examination in open court, plaintiffs' counsel read excerpts from the Report aloud to witnesses.

After the June 30 testimony was completed, Judge Grady, still in open court, discussed his "tentative impressions" of

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the merits of Continental's motion. It is apparent from the transcript that these "tentative impressions" were the result of detailed, careful analysis of the factual and legal issues raised by Continental's motion. Judge Grady agreed with the SLC that the cases against the outside directors should be dismissed. The trial judge noted that, if he were to find in favor of the plaintiffs on Step One, he would apply his own business judgment (Step Two) and conclude that public policy dictated dismissing the cases against the outside directors. Judge Grady disagreed, however, with the SLC's decisions concerning Ernst & Whinney and three bank officers, George R. Baker, Patrick M. Goy and James D. Harper, Jr. The court also stated that further argument was necessary on whether Continental's motion should be granted with respect to five additional defendants. In the cases of Ernst & Whinney and Harper, the district court concluded that the SLC's investigations were inadequate. 5 Regarding Baker and Goy, Judge Grady concluded that the suit should not be dismissed as to them despite the SLC's conclusion that recovery from the remaining defendants would provide the maximum financial benefits. Judge Grady feared that a jury might react to what would appear to be selective prosecution among bank officials by refusing to find anyone liable.

After hearing further argument on July 1, 1983, the district court set September 6, 1983, as the date for a further hearing on the motion to terminate. At the July 1 hearing, however, Judge Grady made it clear that only the plaintiffs were to be allowed to present evidence on September 6 and that the SLC had effectively rested its case and would only be allowed to present "argument from Counsel on the evidence ... already heard." Continental Appendix at 389. In fact, Judge Grady clearly conveyed his attitude that his "tentative impressions" would become his rulings unless argument by defense counsel or evidence on behalf of the plaintiffs changed his mind. Continental Appendix at 384-85. The tentative nature of Judge Grady's conclusions appears to derive from the fact that the plaintiffs had not yet put on their case. It, therefore, seems more likely that what might have changed Judge Grady's mind was the evidence to be proffered by the plaintiffs rather than legal argument by the defendants.

On August 5, 1983, consistent with the district court's announced conclusions, the plaintiffs agreed to dismiss the derivative claims against the outside directors. On August 22, 1983, again in conformity with Judge Grady's views, Continental withdrew the motion to terminate the claims against the remaining defendants. In a letter to the district court, Continental's counsel explained that Continental did not wish to participate in a "mini-trial" of the merits of the claims against the remaining defendants. Such a "mini-trial" would have been necessary because of the district court's conclusion that it was required, under Maldonado, to evaluate the reasonableness of the SLC's decision to terminate the claims and to exercise its own business judgment before deciding the...

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