In a decision sure to affect the behavior of parties in transactional and other contexts, the New York Appellate Division for the First Department on December 4, 2014 eliminated the “pending or reasonably contemplated litigation” requirement from the common interest privilege. Thus, the presence of a third party at an otherwise privileged communication will not (at least for actions pending in Manhattan and the Bronx) waive or destroy that privilege.
The Appellate Division decision brought the First Department into line with the majority of federal courts (including in the Southern District of New York) that have addressed the issue, the Restatement of Law Governing Lawyers and the Delaware Rules of Evidence.
The Common Interest Privilege
Generally speaking, communications between a client and her counsel for the purpose of seeking legal advice will be protected from disclosure by the attorney-client privilege. That privilege, however, normally is waived if a third party is present at the communication or the communication is disclosed to him. A “common interest” or “joint defense” privilege arose in the criminal context where two or more criminal defendants needed to speak with their counsel and agreed to keep their communications confidential and privileged. Over time, questions arose whether that exception to the privilege waiver would apply in non-criminal litigation, to co-plaintiffs as well as co-defendants, in situations where the litigation was not pending but contemplated or anticipated — or even in non-litigious situations. The First Department now has squarely answered the final question (making the others moot).
Ambac v. Countrywide
In Ambac Assurance Corporation, et al. v. Countrywide Home Loans, Inc., et al., 2014 N.Y. App. Div. LEXIS 2439; 2014 NY Slip Op 08510 (First Dept. 2014), the monoline insurer Ambac alleged that from 2004 to 2006, Countrywide fraudulently induced Ambac to insure certain RMBS transactions and that Countrywide breached and continues to breach the insurance agreements. Ambac also asserted successor-in-interest claims against Bank of America Corp. into which Countrywide merged in 2008.
In the course of the litigation, Ambac sought discovery of several hundred communications between Countrywide, Bank of America and their counsel between the January 11, 2008 merger agreement and the July 1, 2008 closing of the merger transaction. Although Countrywide and Bank of America had entered into a confidentiality agreement and a common interest agreement shortly before they signed the merger agreement, no litigation was pending or contemplated.
The referee supervising discovery and the trial court held that the defendants had to produce the documents, reasoning that since no litigation was pending, contemplated or anticipated when the communications were made, the common interest privilege did not apply to them. The Appellate Division’s decision reversed that holding, made clear that the parties’ common interest was sufficient to protect otherwise privileged communications from disclosure and remanded the matter to the trial court to determine which of the communications were privileged in the first place.
Common Interest Agreements
This decision will affect parties which are acting together in a number of contexts. Whenever two parties believe they share a common interest and want to protect their shared attorney-client communications, they should consult with counsel to be sure their interests are common and their communications are properly structured. While a writing confirming their agreement to keep their communications confidential and privileged may not be required, they should consider with counsel whether to prepare and sign an appropriate written confidentiality and common interest agreement.
The First Department’s decision in Ambac leaves open at least two questions. The parties did not raise the issue of whether communications before the execution of the merger agreement would be protected. On the one hand, they might have occurred after the common interest agreement had being signed. On the other hand, until the merger agreement was signed, Countrywide and Bank of America were at least technically still negotiating with each other and so arguably on opposite sides of the table. Whether the common interest privilege will apply, for example, to prospective joint venturers before the joint venture agreement has been formalized remains to be seen.
The other question to be addressed is what would have happened if the merger had not been consumated, leading to a dispute between Countrywide and Bank of America (or if a dispute had arisen post-merger between the former shareholders of Countrywide and Bank of America). Could one of the parties which formerly had a common interest but which then became adverse have used the other’s previously-privileged statements against it? Presumably, both parties would have had to have agreed to the waiver, but the issue is untested.
A Final Note
While the Ambac v. Countrywide decision is certainly welcome news for parties which are contemplating joint ventures, mergers or other common activities, care always should be taken not to rely too heavily on the attorney-client privilege. Just because parties have a common interest does not mean that all of their communications will be privileged. They will be privileged only if they relate to legal advice or issues and only if the privilege as to them has not otherwise been waived — and the party asserting the privilege bears the burden of proof on these issues.
Parties would do well to consult with counsel on these issues before the communications are made, lest they not be able to protect them from disclosure later.
 The First Department’s holding is not binding on the three other New York Appellate Divisions, and there is contrary authority in at least the Second Department which covers Brooklyn, Queens, Long Island and Westchester, among other counties.