In a much anticipated decision rendered just days ago – one which will have profound implications in the transactional world as well as in the courtroom – New York’s highest court refused to extend the so-called common interest privilege to communications between two or more parties and their counsel where there was no actual or reasonably anticipated litigation.
On June 9, 2016, the New York Court of Appeals in Ambac Assurance v. Countrywide Home Loans, Inc. and Bank of America Corp., reversed the decision of the Appellate Division, First Department, and reaffirmed New York’s longstanding rule that the attorney-client privilege is waived if an otherwise privileged communication is shared with a third-party absent actual or reasonably anticipated litigation at the time of the disclosure, even where the third party may have a common interest in the subject matter or outcome. Although the Court of Appeals was divided 4-2, the majority forcefully rebuked the First Department’s elimination of the “litigation requirement” which, in that case, permitted the common interest privilege to include communications shared between two parties and their counsel in the context of a contemplated (and ultimately completed) merger transaction. The high court’s decisive ruling sends a clear signal that only those communications shared between multiple parties sharing a common interest and their counsel in the context of actual or reasonably anticipated litigation will be protected through an extension of the attorney-client privilege.
The Dispute Between Ambac and Bank of America
In the wake of the recent financial crisis, Ambac Assurance Corporation (“Ambac”), a monoline insurer, sued Countrywide Home Loans, Inc. (“Countrywide”), alleging that Ambac had been fraudulently induced to guarantee mortgage loans made by Countrywide. Ambac also included Bank of America Corp. (BoA”) as a defendant in the action based upon BoA’s merger with Countrywide on the theory that BOA became Countrywide’s successor-in-interest and alter-ego and was therefore responsible to Ambac for the damages resulting from Countrywide’s fraud. In discovery, Ambac sought the production of hundreds of written communications between BoA, Countrywide and their counsel. BoA withheld production of those documents on the basis of attorney-client privilege because “they pertained to a number of legal issues the two companies needed to resolve jointly in anticipation of the merger closing, such as filing disclosures, securing regulatory approvals, reviewing contractual obligations to third-parties, maintaining employee benefit plans and obtaining legal advice on state and federal tax consequences.” At the heart of BoA’s assertion of privilege was the notion that both parties maintained a “shared legal interest in the merger’s ‘successful completion'” and that the communications among them and their counsel were therefore privileged even though neither party anticipated litigation at the time.
Ambac’s motion to compel the production of these documents was referred by the trial court to a referee for disposition. The referee concluded that the common interest privilege would extend only if, and to the extent that, there was actual or anticipated litigation at the time of the communications. The referee thereafter directed the parties to review the withheld documents, to update BoA’s privilege log and to submit any disputed documents for in camera review. BOA challenged the referee’s decision that the common interest privilege applied only if there was actual or threatened litigation, but that view was ultimately upheld by the trial court based upon the long-established New York law which “requires that there be a reasonable anticipation of litigation in order for the common interest doctrine to apply.”
The Appellate Division Reversed the Supreme Court and Made New Law
Intent upon shielding from discovery all of its pre-merger communications with Countrywide and their counsel, BoA appealed to the Appellate Division, urging the First Department to break from existing New York law in order to bring common interest jurisprudence in this State in line with various other state courts and a number of federal court decisions, including a recent decision from the Second Circuit Court of Appeals.
The Appellate Division reversed the trial court. In doing so, the Court first took notice of New York’s historically narrow view of the common interest privilege which, until then, had been unanimously held to apply only “with respect to legal advice in pending or reasonably anticipated litigation.” Nevertheless, the Appellate Division abandoned the “litigation requirement” in favor of extending the attorney-client privilege to communications among two or more parties who share a common legal interest in a commercial transaction or other joint enterprise notwithstanding the absence of actual or anticipated litigation. Drawing support from the “federal approach” which places no significance upon the existence of actual or anticipated litigation as a factual predicate for the extension of the privilege, the Appellate Division pronounced that “so long as the primary purpose for the communication with counsel is for the parties to obtain legal advice or to further a legal interest common to the parties, and not to obtain advice of a predominantly business nature, the communication will be privileged” even in the absence of actual or anticipated litigation. As a matter of “better policy,” the Appellate Division adopted BoA’s reasoning that without the ability to freely communicate with respect to the merger, the parties would inevitably face the prospect of “regulatory or private litigation because of the parties’ lack of sound guidance from counsel.”
The Court of Appeals Comes Full Circle To Revive the “Litigation Requirement”
The New York State Court of Appeals reversed. Judge Eugene F. Pigott, Jr., writing for the majority, noted at the outset the “obvious tension” between the established societal virtues of the attorney-client privilege and the State’s robust policy favoring liberal discovery. But the Court reasoned that “[b]ecause the privilege shields from disclosure pertinent information and therefore ‘constitutes an obstacle to the fact-finding process,’ it must be narrowly construed.” From there, the Court traced the roots of the common interest privilege in New York and found that its application had always been inextricably tethered to actual or threatened litigation, initially in the context of criminal prosecution, and later extended to civil litigation.
The Ambac Court emphasized the litigation context of the common interest privilege since that is “where the benefit and the necessity of shared communications are at their highest, and the potential misuse is minimal.” Moreover, the Court did “not perceive the need to extend the common interest doctrine to communications made in the absence of pending or anticipated litigation” and was loath to do so for fear of diluting the sanctity of the attorney-client dynamic while creating a thorny evidentiary dilemma. In the final analysis, the majority foresaw that “[t]he difficulty of defining ‘common legal interests’ outside the context of litigation could result in the loss of evidence of a wide range of communications between parties who assert common legal interests but who really have only non-legal or exclusively business interests to protect.”
The Significant Impact – Back to the Way it Was
The law in New York is now settled that attorney-client privileged communications may not safely be disclosed to others based upon a common legal interest unless done so in the context of ongoing or reasonably anticipated litigation. The next legal battle to surface may involve a determination as to when litigation is “reasonably anticipated,” or how “common” the interest must be in order to support the extension of the privilege. But for now, at least, we know that potential counterparties, joint venturers or merger partners need to exercise due care in maintaining the confidentiality of their communications with counsel – lest the privilege be waived.