On June 9, 2016, the New York State Court of Appeals, in Ambac Assur. Corp. v. Countrywide Home Loans, 2016 BL 184648 (N.Y. June 9, 2016), reversed a lower court decision, consistent with the overwhelming majority of federal court decisions, that the common interest doctrine under New York law is not limited to communications made in connection with pending or reasonably anticipated litigation. In so ruling, the New York Court of Appeals distanced itself from the approach applied in most federal courts and in other states with a significant volume of corporate transactions, such as Delaware and California. However, the impact of this development in bankruptcy cases, where courts generally apply federal law and treat bankruptcy as a form of litigation, may be limited.
The Common Interest Doctrine
The common interest doctrine, which in most jurisdictions is an extension of the attorney-client privilege and the work product doctrine, serves to protect the confidentiality of information and documents that are shared by attorneys representing different clients with aligned legal interests. Although issues concerning the common interest doctrine must usually be analyzed under the relevant state law, the general rule is that parties invoking the privilege must demonstrate that: (1) the communication was made by separate parties in the course of a matter of common interest; (2) the communication was designed to further that effort; and (3) the privilege was not otherwise waived. Velo Holdings, Inc. v. Paymentech, LLC (In re Velo Holdings, Inc.), 473 B.R. 509, 514 (Bankr. S.D.N.Y. 2012); In re Leslie Controls, Inc., 437 B.R. 493, 496 (Bankr. D. Del. 2010).
The first element requires that the communication be made between separate parties in the course of a matter of common interest. However, the common interest doctrine is not limited to parties who are perfectly aligned on the same side of a single litigation. Rather, “the doctrine applies where parties demonstrate actual cooperation toward a common legal goal with respect to the documents [that] they seek to withhold.” Costello v. Poisella, 291 F.R.D. 224, 232 (N.D. Ill. 2013). Thus, the common interest doctrine does not require complete agreement or accord among the parties. The focus of an inquiry concerning the common interest doctrine should be the purpose for which the information was disclosed among the parties asserting a common interest.
The second element requires that the purpose of the communication at issue be to further the common interest shared among the parties. Stated otherwise, the existence of a theoretical common interest is not sufficient; parties must affirmatively demonstrate a collective cooperation in the development of a shared legal strategy. Leslie Controls, Inc., 437 B.R. at 496–97.
The third element simply requires that the parties have not otherwise waived the attorney-client privilege or protections afforded under the work product doctrine. Id.
In 2007, Countrywide Home Loans (“Countrywide”) and Bank of America (“BOA”) began negotiating a merger. The merger was publicly announced on January 11, 2008, and closed on July 1, 2008. After the merger was consummated, Ambac Assurance Corporation (“Ambac”) sued Countrywide, alleging that Countrywide had breached contractual representations, fraudulently misrepresented the quality of certain loans, and fraudulently induced Ambac to guarantee certain loans. Ambac also named BOA as a defendant in the action on the basis of its merger with Countrywide.
In November 2012, BOA refused to produce approximately 400 communications made during its merger negotiations with Countrywide, notwithstanding the fact that the communications took place after the merger was announced but before the merger was consummated. BOA argued that New York’s common interest doctrine protected the communications from discovery because the communications pertained to legal issues which the companies needed to resolve jointly in anticipation of the merger closing. These issues included filing disclosure statements, securing regulatory approvals, reviewing contractual obligations to third parties, maintaining employee benefit plans, and obtaining legal advice on state and federal tax consequences. In addition, the merger agreement signed by BOA and Countrywide required them to share privileged information relating to these issues. Thus, BOA argued that the merger agreement was evidence of the shared legal interest of BOA and Countrywide in the successful completion of the merger.
Ambac moved to compel production of the communications, arguing, among other things, that the parties did not share a common legal interest in litigation or anticipated litigation at the time of the communications. According to Ambac, because BOA and Countrywide failed to share a common legal interest in litigation or anticipated litigation at the time of the communications, they waived the attorney-client privilege when they voluntarily shared confidential material.
A special referee appointed to handle privilege disputes ruled in favor of Ambac, reasoning that New York law required a common legal interest in litigation or anticipated litigation in order for the common interest doctrine to apply. BOA moved to vacate the special referee’s decision, but the New York Supreme Court denied the motion. See Ambac Assur. Corp. v. Countrywide Home Loans, Inc., 2013 BL 285640 (N.Y. Sup. Ct. Oct. 16, 2013).
BOA appealed to the Appellate Division, which reversed, holding that “in today’s business environment, pending or reasonably anticipated litigation is not a necessary element of the common-interest privilege.” Ambac Assur. Corp. v. Countrywide Home Loans, Inc., 124 A.D.3d 129, 130 (N.Y. App. Div. 2014). The Appellate Division noted that communications between a single party and counsel are privileged, regardless of whether litigation is anticipated or pending, and it reasoned that imposing the anticipated or pending litigation element on communications between two parties with a common legal interest could not be reconciled with the purposes underlying the attorney-client privilege. The Appellate Division also noted that federal courts have overwhelmingly rejected a litigation requirement in the context of the common interest doctrine.
The New York State Court of Appeals reversed on appeal. It explained that requiring pending or anticipated litigation limits use of the common interest doctrine to situations where the benefit and necessity of communications are at their highest and the potential for misuse is minimal. The court also noted that when businesses share a common interest in closing a transaction, their shared interest in the transaction’s completion is already an adequate incentive for exchanging the information necessary to achieve that end. As such, the court concluded, any benefits that supported an expansion of the common interest doctrine were outweighed by the substantial loss of relevant evidence and the potential for abuse.
After Ambac, parties in New York seeking to invoke the common interest doctrine must demonstrate that: (1) the communication was made with respect to legal advice in pending or reasonably anticipated litigation in which the parties have a common legal interest; (2) the communication was designed to further the common legal interest; and (3) the privilege was not otherwise waived. Federal and state courts in Texas, which also has a large volume of mergers and commercial disputes, have adopted a similar approach. See U.S. v. Newell, 315 F.3d 510, 525 (5th Cir. 2002) (the Fifth Circuit requires a palpable threat of litigation for the common interest doctrine to apply); In re XL Specialty Ins. Co., 373 S.W.3d 46, 51–52 (Tex. 2012) (“Texas requires that the communications be made in the context of a pending action. . . . Thus, in jurisdictions like Texas, which have a pending action requirement, no commonality of interest exists absent actual litigation.”). Like New York, Texas imposes this requirement because it “restricts the opportunity for misuse [and] limits the privilege to situations where the benefit and the necessity are at their highest.” XL Specialty, 373 S.W.3d at 51–52 (internal quotations omitted).
This differs from the approach taken in many other states, including Delaware and California. Parties in Delaware can invoke the common interest doctrine absent pending or anticipated litigation. See, e.g., 3Com Corp. v. Diamond II Holdings, Inc., 2010 BL 133915 (Del. Ch. May 31, 2010) (Delaware’s common interest doctrine is applicable when two companies have a common interest in the approval of a merger). However, parties in Delaware can invoke the common interest doctrine only if the communications primarily concern legal advice. See Glassman v. Crossfit, Inc., 2012 BL 270254 (Del. Ch. Oct. 12, 2012) (“The common-interest doctrine does not protect communications between parties, or even between their attorneys, when those communications primarily concern a common commercial objective.”) (internal citations omitted).
Similarly, California does not require pending or anticipated litigation to invoke the common interest doctrine. Parties must establish: (i) a common interest in securing legal advice related to the same matter; and (ii) that the communications were made to advance the parties’ shared interest in securing legal advice on the common matter. See Seahaus La Jolla Owners Assn. v. Superior Court, 169 Cal. Rptr. 3d 390 (Cal. App. 4th Dist. 2014).
Impact on Communications Made in Anticipation of or During Bankruptcy
The common interest doctrine applies in bankruptcy. See, e.g., In re Mortg. & Realty Trust, 212 B.R. 649 (Bankr. C.D. Cal. 1997). In bankruptcy cases, the doctrine has been applied to communications between a debtor and an ad hoc committee, a future asbestos claims representative, a creditors’ committee, an affiliate of the debtor, and a creditor. See, e.g., In re Tribune Co., 2011 Bankr. LEXIS 299, at *4 (Bankr. D. Del. Feb. 23, 2011) (discussing federal common law and Delaware law); Leslie Controls, 437 B.R. at 496 (citing federal court rulings); Kaiser Steel Corp. v. Frates, 84 B.R. 202, 205 (Bankr. D. Colo. 1988) (citing federal common law and state law); In re Quigley Co., 2009 Bankr. LEXIS 1352, at *1 (Bankr. S.D.N.Y. Apr. 24, 2009) (applying federal common law); Village at Lakeridge, LLC v. United States Bank N.A. (In re Village at Lakeridge, LLC), 2013 BL 370668 (B.A.P. 9th Cir. Apr. 5, 2013) (applying federal common law), aff’d, 814 F.3d 993 (9th Cir. 2016).
It remains to be seen if Ambac and its reasoning will have any significant impact on whether communications made in anticipation of or during a bankruptcy case are protected by the common interest doctrine. For a couple of reasons, however, the impact may be limited. First, bankruptcy courts, in determining matters of privilege, generally apply federal common law, which generally does not impose a litigation requirement for the common interest doctrine to apply (see the cases cited above). Second, “bankruptcy itself constitutes litigation for purposes of delineating privilege.” Brown v. Adams (In re Fort Worth Osteopathic Hosp., Inc.), 2008 Bankr. LEXIS 3156, at *44 (Bankr. N.D. Tex. Nov. 14, 2008); see also In re McDowell, 483 B.R. 471, 494 (Bankr. S.D. Tex. 2012) (“The Fifth Circuit has implied that the filing of a bankruptcy petition itself creates litigation.”); Tri-State Outdoor Media Group, Inc. v. Official Comm. of Unsecured Creditors (In re Tri-State Outdoor Media Group, Inc.), 283 B.R. 358, 364 (Bankr. M.D. Ga. 2002) (“While Bankruptcy is not entirely litigation, it is an adversarial proceeding, particularly when considering the rights of the debtor versus the rights of an unsecured creditor.”).
McDowell is illustrative in this regard. In that case, which involved the application of Fifth Circuit law (which is relatively restrictive) on the common interest doctrine, the bankruptcy court reasoned that the filing of a bankruptcy petition constitutes litigation because: (1) the filing of a bankruptcy petition imposes the automatic stay on all creditors; (2) the automatic stay is nothing more than an injunction; and (3) injunctions can be obtained only through the filing of a lawsuit. As such, the McDowell court held that documents prepared in anticipation of a bankruptcy filing were protected by the common interest doctrine.
Similarly, the court in Quigley held that a debtor’s bankruptcy was considered litigation for purposes of the work product doctrine. The court reasoned that “[a]sbestos bankruptcies, by their nature, are designed to stop existing and threatened litigation.” Similarly, in Osherow v. Vann (In re Hardwood P-G, Inc.), 403 B.R. 445, 460 (Bankr. W.D. Tex. 2009), the bankruptcy court held that the common interest doctrine was applicable to a report which was prepared by the debtors’ forensic accountants and shared with the official committee of unsecured creditors as well as certain of the debtors’ lenders. The court reasoned that although the Fifth Circuit requires pending or anticipated litigation to trigger the common interest doctrine, this element was satisfied when the parties who received the report agreed to work together to confirm a chapter 11 plan of liquidation.
Even in jurisdictions requiring pending or anticipated litigation to invoke the common interest doctrine, Ambac and its reasoning may not have a significant impact on whether communications made in anticipation of or during a bankruptcy case are protected by the common interest doctrine. This is because communications made in anticipation of or during a bankruptcy case should be protected by the doctrine because bankruptcy is generally deemed by the courts to qualify as litigation for purposes of the common interest doctrine. Nevertheless, careful attention to the law of the jurisdiction involved is warranted to determine whether particular communications would be protected under this doctrine.