The Appellate Division of the New York Supreme Court for the First Department—the intermediate appeals court for cases originating in Manhattan—recently expanded the scope of the attorney-client privilege in the M&A context by holding that "in today’s business environment, pending or reasonably anticipated litigation is not a necessary element of the common-interest privilege." Underlying the decision in AMBAC Assurance Corporation v. Countrywide Home Loans, Inc. (AMBAC)1 was the court’s acknowledgement that "business entities often have important legal interests to protect even without the looming specter of litigation." The ruling, which will apply in many commercial cases in New York, brings the scope of the common-interest privilege into line with the approach previously adopted by numerous federal courts, including those in New York, and by the Delaware courts.
Facts of the Case
The AMBAC decision arises out of a discovery dispute between the plaintiff AMBAC, which insured residential mortgage backed securities issued by Countrywide, and defendant Bank of America Corporation, Countrywide’s successor. AMBAC claims that Countrywide fraudulently induced it to enter into the insurance agreements and that Countrywide breached those agreements. AMBAC sued Bank of America as Countrywide’s successor-in-interest following Countrywide’s merger with Bank of America.
Countrywide and Bank of America signed a merger agreement on January 11, 2008 and entered into a common-interest agreement. Between January 11, 2008 and the July 1, 2008, closing, Countrywide and Bank of America worked together on several pre-closing issues that required shared legal advice to ensure their joint compliance with applicable laws and regulations. The resulting communications between and among Countrywide, Bank of America and their counsel, were the documents in dispute.
The trial court ordered disclosure of the communications to AMBAC because it held that New York law requires pending or reasonably anticipated litigation for the common-interest privilege to apply. The First Department appeals court reversed and remanded the case to the trial court for a document-by-document review in light of the newly announced broader common-interest privilege.
Analysis and Impact
The presence of a third party to a communication between a client and attorney typically waives the attorney-client privilege. The common-interest privilege is a limited exception to such a waiver when the communication (a) otherwise qualifies for the attorney-client privilege, and (b) is made for the purpose of furthering a legal interest or strategy common to the parties.
Neither the First Department nor the Court of Appeals (the state’s highest court) had squarely considered whether the common-interest privilege also requires that the communication concern pending or reasonably anticipated litigation. The AMBAC decision holds that there is no litigation requirement. Consequently, confidential communications among corporate entities and their counsel seeking or conveying legal advice concerning a shared legal interest or legal strategy are entitled to protection from disclosure. The court observed that encouraging such communications is consistent with the legal policy underlying the attorney-client privilege, which promotes a free flow of information between attorney and client. It is also consistent with sound business policy to seek legal assistance in order to meet legal requirements and plan corporate conduct accordingly.
A note of caution, however: the scope of the common-interest privilege has not been addressed by New York’s highest court, and the state courts within the Second Department continue to limit the common-interest privilege to communications concerning pending or reasonably anticipated litigation.2
In holding that the common-interest privilege is not limited to litigation contexts, the AMBAC decision creates greater certainty for parties involved in M&A transactions governed by New York law and particularly those in which potential disputes will be heard in a Manhattan court. In such a transaction, shared legal communications between and among the parties and their counsel will be protected by the attorney-client privilege.
1 -- N.Y.S.2d –, 2014 WL 6803006 (App. Div. Dec. 4, 2014).
2 The Second Department covers the following counties within New York: Kings (Brooklyn), Richmond (Staten Island), Queens, Nassau, Suffolk, Westchester, Rockland, Dutchess, Putnam, and Orange.
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