Why it matters: The New York State Court of Appeals recently heard oral argument in the case of Ambac Assurance Corporation v. Countrywide Home Loans, Inc. and Bank of America Corp., and its decision could have important ramifications under New York law regarding when the common interest rule can be used to preserve the attorney-client privilege. The common interest rule has traditionally been narrowly construed by New York courts to allow for the sharing of attorney-client privileged documents with third parties—without waiving that privilege—only in situations where litigation is pending or reasonably anticipated. In December 2014, a lower state appellate court inAmbac ruled that the common interest rule should not be so limited and could apply to protect attorney-client privileged documents that are shared with any third party who has a “common interest” with the sharer, such as in this case where the documents were shared in merger negotiations. On appeal, the New York State Court of Appeals will decide if the lower court’s expansion of the common interest rule in this manner was appropriate. As of press time, the Court’s decision was still pending. We will be watching with great interest to see how it decides.
Detailed discussion: On May 2, 2016, the New York Law Journal reported on the oral argument before the New York State Court of Appeals in Ambac Assurance Corporation v. Countrywide Home Loans, Inc. and Bank of America Corp., a case which, as the reporter described it, “began as a fraudulent inducement claim on insuring mortgage-backed securities [that] has mushroomed into what litigants and observers say could be a defining moment for attorney-client privilege in New York and the ‘common interest’ rule.”
To briefly recap the facts as set forth in the December 2014 ruling of the Appellate Division, First Department (First Department) court that was the subject of the appeal before the New York State Court of Appeals, the discovery dispute at issue in the case arose from a lawsuit filed by Ambac Assurance Corporation (Ambac), a financial-guaranty insurer, against Countrywide Home Loans, Inc. (Countrywide) in connection with the guaranty by Ambac of payments on residential mortgage backed securities (RMBS) issued by Countrywide. In its complaint, Ambac alleged among other things that, between 2004 and 2006, Countrywide fraudulently induced it to enter into agreements to guaranty the RMBS transactions. Ambac also asserted secondary claims against Bank of America Corp. (BAC) as successor-in-interest to Countrywide due to the merger between Countrywide and a BAC subsidiary in 2008. Relevant to this discussion, all information exchanged between Countrywide and the BAC subsidiary was subject to confidentiality provisions and a common interest agreement entered into shortly before the merger agreement was signed. The merger agreement required the parties to work together to effectuate several pre-closing matters, as to which BAC claimed the parties “shared legal advice from counsel together in order to ensure their accurate compliance with the law and to advance their common interests in resolving the many legal issues necessary for successful completion of the merger.”
As part of its lawsuit, Ambac sought discovery of the “several hundred” joint documents (challenged documents) reflecting communications between BAC and Countrywide and their legal counsel during the pre-merger period between January and July, 2008, arguing that the documents were significant to its successor-liability claims against BAC and also to see whether BAC was put on notice of the fraud at Countrywide before the merger closed. BAC argued that the challenged documents were subject to the attorney-client privilege and refused to produce them. In 2013, a discovery referee granted Ambac’s motion to compel BAC to turn over the challenged documents, finding that the attorney-client privilege had been waived with respect to them and the common interest rule that would have preserved the privilege did not apply because the challenged documents were not prepared in anticipation of litigation. A motion court upheld the discovery referee’s ruling, and BAC appealed to the First Department.
The First Department panel reversed the motion court and discovery referee in December 2014, holding that the traditionally narrow view of when the common interest rule applies was no longer viable and that the common interest rule will still protect attorney-client privileged communications that have been shared with third parties so long as the third parties have a “common interest” with the sharer, regardless of whether the common interest arises from pending or reasonably anticipated litigation. Ambac appealed to the New York State Court of Appeals, which heard oral argument in late April 2016.
According to the New York Law Journal reporter who observed the oral argument, Ambac’s attorney, Stephen Younger, began by arguing that the First Department’s ruling represented an unacceptable and unnecessary “dramatic expansion” of the common interest rule and that “[f]or two decades, lawyers have operated under the assumption that the privilege is waived by an exchange of information among merging entities and their attorneys prior to closing.” In addition, Younger pursued an “if it ain’t broke, don’t fix it” line of reasoning, arguing that “[t]here is nothing wrong with how this doctrine is working in New York … [and] there is nothing in the record to say that this rule hasn’t been working.” Arguing that privileges “are supposed to be narrowly construed,” Younger urged the Court to consider the potential negative public interest ramifications of upholding the First Department’s overbroad ruling, such as imposing further limitations on a litigant’s access to relevant discovery.
BAC’s attorney, Jonathan Rosenberg, argued that the First Department ruling altered the common interest rule only to “the reasonable extent of making it clear the privilege can be invoked by parties who ‘share a common legal interest—not a business interest, but a legal interest.’" To this argument, Judge Eugene Fahey countered that it was difficult to tell the difference between the two: “Here's what I struggle with, how to distinguish a common business interest with a common legal interest and how this court could ever do that … In the environment that we live … a ‘common business interest’ and a ‘common legal interest’ are the same thing.” Judge Fahey continued that he thought limiting the common interest rule to cases of pending or anticipated litigation was a manageable and “measurable” rule, much easier to identify than what Rosenberg was proposing, which “seems to almost subsume every communication of any particular business transaction.”
The tone of Judge Fahey’s questioning suggests that he would vote to overturn the First Department’s decision and return to a narrow construction of the common interest rule, which was the position being urged in amicus briefs filed by both the New York State Academy of Trial Lawyers and the New York State Trial Lawyers. The Court’s decision is expected by early June 2016. We will keep an eye out and report back.
See here to read the 5/2/16 New York Law Journal article by Joel Stashenko entitled “Court Weighs Merits of Attorney-Client Privilege Expansion.”
See here to read the 12/8/14 Appellate Division, First Department opinion in Ambac Assurance Corporation, et al., Plaintiffs-Respondents v. Countrywide Home Loans, Inc., et al., Defendants, Bank of America Corp., Defendant-Appellant.