(Article from Securities Law Alert, June 2016)
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Pursuant to the common interest doctrine, “an attorney-client communication that is disclosed to a third party remains privileged if the third party shares a common legal interest with the client who made the communication and the communication is made in furtherance of that common legal interest.” Ambac Assurance Corp. v. Countrywide Home Loans, 2016 WL 3188989 (N.Y. 2016) (Pigott, J.) (Countrywide III).
On June 9, 2016, the New York Court of Appeals held that New York’s common interest doctrine only applies if the attorney-client communications were shared with a third party “in furtherance of a common legal interest in pending or reasonably anticipated litigation.” Id. (emphasis added). Significantly, the court found New York’s common interest doctrine inapplicable to attorney-client communications shared by entities with “a common legal interest in a commercial transaction or other common problem” where those entities “do not reasonably anticipate litigation.”
Background
Ambac Assurance Corporation guaranteed payments on certain residential mortgage-backed securities (“RMBS”) issued by a subsidiary of Countrywide Financial Corporation. “When the mortgage-backed securities that Ambac insured failed during the recent financial crisis,” Ambac brought suit against Countrywide asserting breach of contract and fraudulent misrepresentation claims, among other claims. Ambac named Bank of America as a defendant in the suit based on its merger with Countrywide, pursuant to which “Countrywide sold substantially all of its assets to Bank of America.” Ambac claimed “Bank of America became Countrywide’s successor-in-interest and alter ego and was responsible for Countrywide’s liabilities to Ambac in the underlying action for fraud.”
During the course of discovery, Bank of America contended that the common interest doctrine protected several hundred attorney-client communications shared with it by Countrywide “because they pertained to a number of legal issues the two companies needed to resolve jointly in anticipation of the merger closing.” Ambac moved to compel these communications on the grounds that Bank of America and Countrywide “were not affiliated entities at the time of disclosure and did not share a common legal interest in litigation or anticipated litigation.”
The trial court held the common interest doctrine inapplicable based on its determination that “New York law ‘requires that there be a reasonable anticipation of litigation’ in order for the common interest doctrine to apply.” Id. (quoting Ambac Assurance Corp. v. Countrywide Home Loans, 41 Misc. 3d 1213(A) (N.Y. Sup. Ct. 2013)). On appeal, the First Department “concluded that pending or reasonably anticipated litigation was no longer a necessary element of the [common interest] exception.” Id. (discussing Ambac Assurance Corp. v. Countrywide Home Loans, 124 A.D.3d 129 (App. Div. 2014) (Countrywide II)). In so holding, the First Department observed that federal courts have “‘overwhelmingly rejected [a litigation] requirement’” for the common interest doctrine. Id. (quoting Countrywide II, 124 A.D.3d 129)). Ambac appealed.
New York Court of Appeals Holds the Common Interest Doctrine Does Not Extend to Attorney-Client Communications Disclosed Outside the Context of Pending or Threatened Litigation
The Court of Appeals observed that “until the First Department’s decision in this case, New York courts [have] uniformly rejected efforts to expand the common interest doctrine to communications that [do] not concern pending or reasonably anticipated litigation.” Reversing the First Department’s decision, the Court of Appeals declined to “expand[ ] the common interest doctrine to protect shared communications in furtherance of any common legal interest” other than “pending or reasonably anticipated litigation.”
The Court of Appeals reasoned that this formulation ensures that the common interest doctrine remains “limited to situations where the benefit and the necessity of shared communications are at their highest, and the potential for misuse is minimal.” The court explained that “[w]hen two or more parties are engaged in or reasonably anticipate litigation in which they share a common legal interest, the threat of mandatory disclosure may chill the parties’ exchange of privileged information and therefore thwart any desire to coordinate legal strategy.” The court found that in these types of situations, “the common interest promotes candor that may otherwise have been inhibited.”
The Court of Appeals found this same rationale does not extend to “clients who share a common legal interest in a commercial transaction or other commercial problem but do not reasonably anticipate litigation.” The court observed that there was “no evidence . . . that mergers, licensing agreements and other complex commercial transactions have not occurred in New York because of [the] [s]tate’s litigation limitation on the common interest doctrine.” The court reasoned that “when businesses share a common interest in closing a complex transaction, their shared interest in the transaction’s completion is already an adequate incentive for exchanging information necessary to achieve that end.”
Moreover, the Court of Appeals determined that broadening the common interest doctrine “to communications made in the absence of pending or anticipated litigation” could result in a “substantial loss of evidence,” and would entail “potential for abuse.” The court observed that the common interest doctrine could be asserted with respect to “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 court “conclude[d] that the policy reasons for keeping a litigation limitation on the common interest doctrine outweigh any purported justification for doing away with it.”
Judge Rivera, Dissenting, States That the Common Interest Doctrine Should Extend to the Transactional Context
In a lengthy dissent, Judge Rivera expressed her view that the common interest doctrine “should apply to private client-attorney communications exchanged during the course of a transformative business enterprise, in which the parties commit to collaboration and exchange of client information to obtain legal advice aimed at compliance with transaction-related statutory and regulatory mandates.” Judge Rivera stated that applying the common interest doctrine in the transactional context “encourages parties committed to a merger to disclose confidential information to avoid submission of incomplete or noncompliant documents.”
Justice Rivera opined that there was no “distinction between coparties or persons who reasonably anticipate litigation, and parties committed to the completion of a merger” because “[b]oth are incentivized to cooperate in order to secure a mutually beneficial outcome—one a successful litigation outcome, the other a successful commercial outcome.” She stated that “[n]o rational basis exists to recognize the expectations for maintaining confidences in the former but not the latter.”