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10/26/93 STATE EX REL. PEABODY COAL COMPANY AND

October 26, 1993

STATE EX REL. PEABODY COAL COMPANY AND PEABODY DEVELOPMENT COMPANY, RELATORS,
v.
HONORABLE THOMAS C. CLARK, JUDGE, CIRCUIT COURT, JACKSON COUNTY, RESPONDENT.



Robertson, Jr.

The opinion of the court was delivered by: Robertson

ORIGINAL PROCEEDING IN PROHIBITION

Relator, Peabody Coal Company brings this original action in prohibition to prevent discovery of certain documents it alleges are protected by the attorney-client privilege. The underlying suit is a civil proceeding. Respondent, the Honorable Thomas C. Clark, Circuit Judge for the Sixteenth Judicial Circuit, ordered Peabody to produce the documents under the crime-fraud exception to the attorney-client privilege. We granted our preliminary writ in prohibition to determine whether respondent exceeded his authority in applying the crime-fraud exception in this civil case. For the reasons that follow we make our preliminary writ absolute.

I.

Commerce Bank is the personal representative of the estates of Gladys Kelce and Grant Stauffer ("the estates"). Commerce brought the underlying action to recover sums it alleges are due the estates from Peabody Coal Company ("Peabody") under the terms of the 1946 royalty agreement (the "royalty agreement") between Peabody and holders of mineral rights including Stauffer and Kelce's deceased husband. The agreement required Peabody to pay royalties of five percent of the "gross realization F.O.B. the mine" to Kelce and Stauffer for all coal extracted from the defined "boundary area."

Beginning in the 1970s, the federal government and the State of Kentucky imposed taxes on the production of coal from mines. Peabody passed these taxes on to its customers, increasing the gross payment Peabody realized for its coal. Peabody continued to pay royalties to Kelce and Stauffer based on the pre-tax calculations. These payments did not account for the taxes Peabody passed through to its customers. Had Peabody included the taxes in its gross realization calculation, Kelce and Stauffer would have received higher royalties.

Commerce's petition included three related fraud claims based on Peabody's conduct. Specifically, the petition alleged that Peabody had assigned its mining rights within the area to Pyramid Mining Company, in return for mining royalties. Commerce avers that Peabody fraudulently concealed these Pyramid royalties from Kelce and Stauffer and did not include these payments in the gross realization figures that it paid. Second, Commerce alleged that Peabody fraudulently concealed its failure to include taxes in the gross realization and, as a result, the estates did not receive the true gross realization royalty for which the royalty agreement called. Third, Commerce alleged that, in 1985, Peabody obtained a royalty reduction from the estates but did not disclose either that it had assigned some of the mining rights to Pyramid or that it calculated royalty payments on something other than gross realization.

Other parties to the royalty agreement brought suit in federal court in Kentucky on similar claims. As part of the discovery in the federal suit, plaintiffs sought production of relevant Peabody internal memoranda relating to issues in the lawsuit. Peabody produced most of the requested material but claimed the attorney-client privilege as to approximately 24 documents.

Commerce, aware of the proceedings in Kentucky, sought to compel production of the documents Peabody claims are privileged in its lawsuit in Missouri. For the most part, these documents concern the written legal advice provided Peabody by its attorneys on settlement negotiations relating to threatened litigation by the Beaver Dam Coal Company against Peabody. Peabody had calculated its royalty payments to Beaver Dam in the same way it calculated payments to the estates.

Respondent appointed a special master pursuant to Rule 62.01. Peabody produced the disputed documents for the master's in camera review. The master ruled that all the documents contained confidential attorney-client communications. The master also found that the documents related to the gross realization issue and did not concern the Pyramid Mining issue.

The master decided that Peabody had neither a duty to disclose its settlement with Beaver Dam to Kelce and Stauffer in 1979 nor a duty to inform Kelce and Stauffer that it had not paid them according to the new, tax-included gross realization figures. The master reasoned that Peabody was "not attempting to actively take advantage, but merely continuing to report to [the estates] as they had done for years." After reviewing the documents, the master held that Commerce did not make a sufficient showing to vitiate the attorney-client privilege.

However, the master determined that Peabody might have had a duty to volunteer information about the Beaver Dam settlement six years later, when Peabody renegotiated its new royalty rates with the Kelce and Stauffer estates through Commerce in 1985. In the master's opinion, Peabody had a duty to disclose the 1979 settlement in 1985. Its failure to do so provided "sufficient grounds to conclude that the fraud exception . . . should be applied." The master recommended that the trial court apply the crime-fraud exception to pierce the attorney-client privilege and render the documents relating to the Beaver Dam settlement discoverable.

Peabody objected to the master's findings. Respondent overruled the objections and ordered the documents produced. Peabody filed its ...


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