(Article from Securities Law Alert, October 2015)
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Pursuant to the fiduciary exception to the attorney-client privilege, shareholders who bring suit against corporate management for breach of fiduciary duty or similar claims may, under certain circumstances, obtain access to communications between management and corporate counsel. On October 8, 2015, the New York Appellate Division, First Department, adopted the multifactor test set forth in Garner v. Wolfinbarger, 430 F.2d 1093 (5th Cir. 1970) for determining whether the fiduciary exception applies with respect to any given attorney-client communication. NAMA v. Greenberg Traurig LLP, 2015 WL 5839311 (1st Dep’t. 2015) (Acosta, J.).
Background
In the case before the Court, NAMA Holdings, an investor in a real estate development entity, The Alliance Network, brought suit against the managers and other members of that entity asserting various direct and derivative claims, including breach of fiduciary duty claims. Defendants objected to certain of NAMA’s document requests in connection with the suit on grounds of attorney-client privilege. NAMA asserted that “the ‘fiduciary exception’ to the attorney-client privilege compelled production, because the [m]anagers owed a fiduciary duty to NAMA and accordingly sought legal advice on its behalf.”
The trial court found that the key inquiry for purposes of the fiduciary exception was “whether NAMA and Alliance [had] ever developed an adversarial relationship.” Following a hearing on the issue, a special referee “concluded that no such relationship existed” and therefore found that all of the disputed documents must be produced. The trial court adopted the special referee’s report and ordered defendants to produce all documents as to which defendants had asserted the attorney-client privilege. Defendants appealed.
Rejecting the Trial Court’s Adversity-Based Analysis, First Department Holds the Garner Factors Govern the Application of the Fiduciary Exception
On appeal, the First Department stated that “the fiduciary exception has been widely accepted throughout most of the United States in trustee-beneficiary and corporation-shareholder cases.” The court noted that “[s]everal New York courts have also recognized the fiduciary exception.” The First Department explicitly adopted the Garner test for assessing whether the fiduciary exception applies.
In Garner, the Fifth Circuit “set forth a non-exhaustive list of factors that should be considered to determine whether a party has shown good cause for applying the exception in a given case.” “These factors include (1) ‘the number of shareholders and the percentage of stock they represent,’ (2) ‘the bona fides of the shareholders,’ (3) ‘the nature of the shareholders’ claim and whether it is obviously colorable,’ (4) the apparent necessity or desirability of the shareholders having the information and the availability of it from other sources,’ (5) ‘whether, if the shareholders’ claim is of wrongful action by the corporation, it is of action criminal, or illegal but not criminal, or of doubtful legality,’ (6) ‘whether the communication related to past or to prospective actions,’ (7) ‘whether the communication is of advice concerning the litigation itself,’ (8) ‘the extent to which the communication is identified versus the extent to which the shareholders are blindly fishing,’ and (9) ‘the risk of revelation of trade secrets or other information in whose confidentiality the corporation has an interest for independent reasons’” (quoting Garner, 430 F.2d 1093). The First Department found that the Garner test “strikes the appropriate balance between respect for the privilege and the need for disclosure.” The First Department further found that the Garner test’s “requirement of a good-cause showing appropriately accounts for the sensitive nature of discovery disputes over attorney-client privilege, particularly in the corporate context.”
The First Department explained that although “some factors in the Garner test are relevant to a determination of adversity, Garner did not create a categorical adversity limitation.” The Court concluded that “adversity is not a threshold inquiry” for purposes of the fiduciary exception but rather, “a component of the broader good-cause inquiry.” The First Department found that under Garner, whether the fiduciary exception applies to attorney-client communications made during the existence of an adversarial relationship depends on the nature of those communications. Communications “that (1) concerned how to deal with the plaintiff, (2) were specifically relevant to the handling of the very issues the plaintiff had been threatening to litigate, or (3) were of advice concerning the litigation itself will likely remain privileged – unless other factors are strong enough to establish good cause.” However, “[o]ther communications that are germane to the allegations in the complaint, even those that occurred after adversity arose, would still be discoverable pursuant to the fiduciary exception (provided good causes exists).” The First Department reasoned that “[t]his communication-specific adversity inquiry operates as a fail-safe, maintaining balance in the operation of the fiduciary exception.”
First Department Remands Case for a Comprehensive Good Cause Analysis and an In-Camera Review of Each Contested Document
The First Department remanded the case for the trial court “to conduct a comprehensive good-cause analysis” under Garner. The First Department explained that the trial court, “given its discretion under CPLR article 31, may not need to evaluate each factor listed in Garner.” However, the First Department emphasized that if “a court finds that a shareholder has demonstrated good cause to apply the fiduciary exception and pierce the corporate attorney-client privilege, it must at least address those factors that support such a finding.”
Notably, the First Department stated that “a court’s ability to conduct an in camera review of the communications” can be “crucial” to the analysis. Here, the special referee had not “review[ed] a single document in camera, despite being instructed by the motion court to conduct an item-by-item review.” The First Department found that “[a]bsent a review of the communications (or at least a sampling thereof), it would be impossible to determine whether they involved advice concerning the instant litigation or ‘how to deal with’ NAMA.” The First Department concluded that it could not “affirm an order directing the production of more than 3,000 purportedly privileged communications without a single one of those communications having been reviewed.”