FMC Corp. v. Liberty Mut. Ins. Co.

• Decision Date: 30 September 1992
• Docket Number: No. 1-91-2168,1-91-2168
• Citation: 236 Ill.App.3d 355,603 N.E.2d 716,177 Ill.Dec. 646
• Parties: , 177 Ill.Dec. 646 FMC CORPORATION, a corporation, Plaintiff-Appellee, v. LIBERTY MUTUAL INSURANCE COMPANY, et al., Defendants-Appellants.
• Court: United States Appellate Court of Illinois

Page 716

603 N.E.2d 716

236 Ill.App.3d 355, 177 Ill.Dec. 646

FMC CORPORATION, a corporation, Plaintiff-Appellee, v. LIBERTY MUTUAL INSURANCE COMPANY, et al., Defendants-Appellants.

No. 1-91-2168.

Appellate Court of Illinois First District, Third Division.

Sept. 30, 1992.

Kirkland & Ellis, Chicago (Douglas J. Kurtenbach, Bowen H. Tucker, of counsel), for FMC Corp.

Sidley & Austin, Chicago (Michael J. Sweeney, Erica M. Landsberg, of counsel), for KPMG Peat Marwick.

Peterson & Ross, Chicago (Stephen M. Hoke, of counsel), for Rayment and Companies.

Buchalter, Nemer, Fields & Younger, Los Angeles, Cal. (Victoria Pynchon, of counsel), for AIU Ins. Co.

Presiding Justice GREIMAN delivered the opinion of the court:

This is an appeal from the circuit court's order to quash a subpoena duces tecum served upon KPMG Peat Marwick on the grounds that the accountants' workpapers which were subpoenaed are protected from disclosure under the accountant privilege established in section 27 of the Illinois Public Accounting Act (Ill.Rev.Stat.1987, ch. 111, par. 5533).

The sole issue on appeal is whether the statutory accountant privilege protects the subpoenaed documents from disclosure.

These proceedings are ancillary to a declaratory judgment action filed in California by plaintiff, FMC Corporation ("FMC"), against numerous insurance companies including defendants, Rayment and Companies and AIU Insurance Company ("insurers"). In the California action, FMC is seeking a declaration that would require defense and indemnity coverage under certain insurance policies for FMC's claimed environmental liabilities at over 75 sites across the country.

KPMG Peat Marwick (Peat Marwick) is a firm of certified public accountants and is not a party to the California action. FMC is headquartered in Illinois and has retained Peat Marwick or its predecessor to audit FMC's financial statements since 1928.

The subpoena served upon Peat Marwick sought, in general, to obtain documents relating to FMC's contingent environmental liabilities.

On motion of Peat Marwick and FMC, the circuit court quashed the subpoena and expressly found that the matter sought was privileged under section 27 of the Illinois Public Accounting Act which provides:

"5533. Accountant as witness

sec. 27. A public accountant shall not be required by any court to divulge information or evidence which has been obtained by him in his confidential capacity as a public accountant. This Section shall not apply to any investigation or hearing undertaken pursuant to this Act."

Ill.Rev.Stat.1987, ch. 111, par. 5533.

The trial court took great care to indicate that the supreme court's decision in In re October 1985 Grand Jury No. 746 (1988), 124 Ill.2d 466, 125 Ill.Dec. 295, 530 N.E.2d 453, did not apply to the facts in this case. October was the first Illinois decision to interpret the statutorily created accountant's privilege ¹ and determined that it did not apply to tax information which the client could reasonably expect would be disclosed to third parties and therefore not received by the accountant in confidence.

In October, the court suggests that documents or information turned over to an accountant in connection with the preparation of a client's tax return are not confidential because there is a likelihood that they will be disclosed to a third party. The court concludes that a "tax client provides information to his accountant with the understanding that there may be, at the accountant's discretion and judgment, a disclosure of it to a third party, the State, or other parties, e.g., Federal and other taxing authorities." (October, 124 Ill.2d at 477, 125 Ill.Dec. 295, 530 N.E.2d 453.) The October court assumes that the tax client puts at risk the confidentiality attached to the information and such communications therefore are beyond the scope of the section 27 privilege. October, 124 Ill.2d at 477, 125 Ill.Dec. 295, 530 N.E.2d 453.

The October decisions provide an exception to the privilege as it relates to tax returns and accountant's workpapers and information necessary to prepare such returns. (In re October 1985 Grand Jury No. 746 (1987), 154 Ill.App.3d 288, 107 Ill.Dec. 342, 507 N.E.2d 6, vacated (1988), 124 Ill.2d 466, 125 Ill.Dec. 295, 530 N.E.2d 453.) It is clear that the basis for such a ruling was concern that one seeking to evade tax or reporting requirements might attempt to shield such information by merely transferring to his accountant all documents relating to his tax liability. october, 154 Ill.App.3d at 296, 107 Ill.Dec. 342, 507 N.E.2d 6; Paper Corp. of America v. Schneider (Fla.App.1990), 563 So.2d 1134.

Although this concept has been extended to at least one other area (In re Estate of Berger (1987), 166 Ill.App.3d 1045, 117 Ill.Dec. 339, 520 N.E.2d 690 (information given to an accountant in connection with preparation of a current or final account for probate court proceedings)), we do not believe that it may be extended to an accountant whose limited task is to perform an audit for the client.

To establish parameters for the accountant's privilege, the October court recognized four factors to be considered in regard to the privilege:

"(1) The communications must originate in a confidence that they will not be disclosed.

(2) This element of confidentiality must be essential to the full and satisfactory maintenance of the relation between the parties.

(3) The relation must be one which in the opinion of the community ought to be sedulously fostered.

(4) The injury that would inure to the relation by the disclosure of the communication must be greater than the benefit thereby gained for the correct disposal of litigation." (Emphasis in original.) October, 124 Ill.2d at 475, 125 Ill.Dec. 295, 530 N.E.2d 453, quoting 8 J. Wigmore, Evidence § 2285, at 527 (McNaughton rev. ed. 1961).

We are concerned here only with whether the documents held by Peat Marwick "originated in a confidence," i.e., FMC's intention that they not be disclosed.

In considering any privilege, we must be mindful that privileges, by their nature, tend to adversely affect the fact finding process and often stand as a barrier against illumination of truth. Therefore, privileges are not to be expansively construed because they are exceptions to the general duty to disclose during discovery. Illinois Educational Labor Relations Board v. Homer Community Consolidated School District No. 208 (1989), 132 Ill.2d 29, 34, 138 Ill.Dec. 213, 547 N.E.2d 182; Maxwell v. Hobart Corp. (1991), 216 Ill.App.3d 108, 111, 159 Ill.Dec. 599, 576 N.E.2d 268.

However, we are required to balance this inconvenience with the interest that society has in protecting privileged relationships in general. Our legislature has determined that the accountant-client relationship is one of substantial significance and by enactment of section 27 encourages people to make use of professional accounting services and to be frank and candid with such professionals. Accordingly, it is critical to our analysis that we do not carve out a series of exemptions that would emasculate the straight forward language of section 27. ²

In the instant case Peat Marwick was not a preparer of tax returns, Security and Exchange Commission filings or other similar documents, reports or returns, but rather was limited to providing audit services and determining that FMC's accounting procedures were appropriate. However, in order to comply with the mandate of October, Peat Marwick will be required to produce any documents that have previously been filed with third parties and any claims or communications received from third parties since these materials did not originate in confidence.

We now address our findings as to each category of documents requested. The first category of documents listed in the subpoena for...