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Earlier this month, in Ambac Assurance Corp. v. Countrywide Home Loans, Inc., No. 08510 (1st Dep’t Dec. 4, 2014), an appellate court in Manhattan took a long step back from a group of cases that had raised serious doubts about whether insurers can preserve the confidentiality of communications with lawyers that are conducted before a claim has been denied.

One of those cases, National Union Fire Ins. Co. of Pittsburgh v. TransCanada Energy USA, Inc., 119 A.D.3d 492 (2014), involved an insured’s claim for over $70 million, asserted against a consortium of insurers, each of which had sold a percentage of the total coverage and used an identical policy form.  When the claim was first noticed, several insurers hired a single law firm to assist with coverage issues.  In an opinion that was subsequently withdrawn, the Appellate Division for the First Department ruled that the insurers had waived the attorney-client privilege by jointly communicating with the law firm before the insured’s claim had been denied.  The court found that the so-called “common interest doctrine” did not apply, because “there was no pending or reasonably anticipated litigation.”

The court’s final ruling in TransCanada retracted that statement and declined to address the common interest issue, but, in doing so, it left open the strong possibility that insurers covering a single risk may not safely share attorney-client communications.  (TransCanada also had implications for the attorney-client privilege and the work-product doctrine. If you’d like to read a detailed, three-part discussion, here are part 1part 2, and part 3.)

This background makes the opinion in Ambac, which was issued by another panel of the same court, all the more striking.  In Ambac, the court held that “pending or reasonably anticipated litigation is not a necessary element of the common-interest privilege.”  Ambac did not concern insurers’ communications with a lawyer, but it has important implications for the handling of large, complex claims.

The Common Pursuit

The “common interest doctrine” or “common interest privilege” is an exception to the general rule that disclosure of attorney-client communications to a third-party waives the attorney-client privilege.  The exception permits disclosure, without waiver, if it is made for the purpose of furthering an interest that the client and the third party have in common.  In New York, for the doctrine to apply, the parties’ “common interest” must be “identical, not similar,” and it must be “legal, not solely commercial.” Bank of American, N.A. v. Terra Nova Ins. Co. Ltd., 211 F.Supp.2d 493, 496 (S.D.N.Y. 2002).

New York’s highest court, the Court of Appeals, has expressly recognized the common interest privilege only in criminal cases, and only in the context of communications about a common defense to a pending prosecution.  E.g., People v. Osorio, 550 N.Y.S.2d 612 (N.Y. 1989).  In Parisi v. Leppard, 660 N.Y.S.2d 307 (N.Y. Sup. Ct. 1997), a Nassau County trial court extended the doctrine to civil litigation, but, given the narrow limits in which the Court of Appeals had ruled, it held that the doctrine applied only to communications that were “made in contemplation of legal action by or against” the parties involved.

Following Parisi, other trial courts expressly adopted the requirement that common interest communications be made in “anticipation of litigation.”  E.g.Aetna Cas. & Surety Co. v. Certain Underwriters at Lloyd’s London, 676 N.Y.S.2d 727 (N.Y. Sup. Ct. 1998), aff’d, 692 N.Y.S.2d 384 (1st Dep’t 1999).  (The opinion affirming this decision did not address the litigation requirement.)  But only one appellate court—the Appellate Division for the Second Judicial Department, which includes Brooklyn, Queens and Long Island—has followed suit. Hyatt v. State of Cal. Franchise Tax Board, 962 N.Y.S.2d 282 (2d Dep’t 2013); Hudson Valley Marine, Inc. v. Town of Cortlandt, 816 N.Y.S.2d 183 (2d Dep’t 2006).

TransCanada and the Common Interest

The trial court in TransCanada was located in the First Department, but the court was addressing two consolidated cases, one of which had been filed in Brooklyn.  Citing the Second Department’s decision in Hyatt, the trial court ruled that the common interest doctrine applies only to communications made in “anticipation of litigation.”

The court also considered case law governing the work product doctrine—specifically, cases holding that an insurer does not “anticipate litigation,” for purposes of that doctrine, until it has made a final decision to deny a claim.  E.g.Bonbard v. Amica Mut. Ins. Co., 783 N.Y.S.2d 85 (2d Dep’t 2004).  Reading the two lines of cases together, the trial court held, as a matter of first impression, that the common interest privilege does not apply to communications that an insurer conducts before deciding to deny coverage.

On appeal, the First Department expressly endorsed that ruling, finding that the common interest doctrine did not apply, because “there was no pending or reasonably anticipated litigation.”  But that opinion was withdrawn in July 2014, and the new opinion stated only that “[w]e need not reach the question of whether the common interest exception … applies.”

Ambac to the Rescue!

The defendant in Ambac, Countrywide Home Loans, was once a leading issuer of residential-mortgage-backed securities (RMBS).  In July 2008, as those securities began to lose their appeal, Countrywide was merged into a wholly-owned subsidiary of Bank of America Corp.  Before the merger closed, Countrywide and the bank prepared a joint proxy and registration statement, which could be used both to obtain approval of the merger from Countrywide’s shareholders and to allow the bank to register its new shares.  The two companies received shared advice about the preparation of this statement from their respective legal counsel.

Ambac is a monoline insurer that guaranteed payments on Countrywide RMBS.  It has sued Countrywide and Bank of America in state court in New York, alleging that Countrywide fraudulently induced it to insure RMBS transactions, and that the bank is liable as Countrywide’s successor-in-interest.  In that suit, Ambac sought discovery of pre-merger communications among Countrywide, Bank of America and their respective attorneys.

In June 2013, a referee supervising discovery granted Ambac’s motion to compel, on the ground that the common interest privilege applies only where the parties share a common interest in potential litigation.  The trial court denied Bank of America’s motion to vacate the referee’s order, and the bank appealed.

The New Order

On appeal, the First Department Appellate Division acknowledged an important, real-world consideration:  “business entities often have important legal interests to protect even without the looming specter of litigation.”  Two of the Justices on the Ambac panel had previously joined both of the unanimous opinions inTransCanada, but  the court now treated those decisions as a near-miss, stating that it “has never squarely decided whether,” for purposes of the common interest privilege, “there is a … requirement … that the communication must affect pending or reasonably anticipated litigation.”  At any rate, the court concluded, “[w]e answer that question today in the negative.”

In today’s business environment, pending or reasonably anticipated litigation is not a necessary element of the common-interest privilege.

The court’s ruling had two foundations.  First, the court noted that the common interest doctrine “descends” from the attorney-client privilege, and that the privilege itself “is not tied to the contemplation of litigation.”  Imposing a litigation requirement for the common interest doctrine is, therefore, irrational:

These cases [that impose the requirement] provide that when two parties with a common legal interest seek advice from counsel together, the communication is not privileged unless litigation is within the parties’ contemplation; on the other hand, when a single party seeks advice from counsel, the communication is privileged[,] regardless of whether litigation is within anyone’s contemplation. We cannot reconcile this contradiction, as it undermines the policy underlying the attorney-client privilege.

Secondly, the court found that the litigation requirement denies business reality:

[I]mposing a litigation requirement … discourages parties with a shared legal interest, such as the signed merger agreement here, from seeking and sharing that [legal] advice, and would inevitably result instead in the onset of regulatory or private litigation because of the parties’ lack of sound guidance from counsel.  This outcome would make poor legal as well as poor business policy.

Ambac involved legal advice about the preparation of a complex government filing, but its reasoning ought to apply to the circumstances presented in TransCanada:  insurers jointly seeking legal advice about a single claim, which each of them has covered under an identical policy.  No less than in Ambac, denying those insurers the ability to share communications with counsel would “undermine[] the policy underlying the attorney-client privilege,” and it would “discourage[]” insurers “from seeking and sharing … [legal] advice.”

A Note of Caution

Ambac significantly improves the legal landscape that followed TransCanada, but it is not a final resolution of the issues TransCanada raised.  For one thing, TransCanada applied the attorney work-product doctrine to the records in a claim file in an unduly narrow wayAmbac did not address the work-product doctrine at all, and it has no impact on that ruling.

Equally important, the rule that the common interest doctrine applies only where the parties anticipate litigation is still the law in New York’s Second Department, just across the East River from the Ambac court.  See Hyatt v. State of Cal. Franchise Tax Boardsupra.  Ambac provides reason to hope that the law is changing, but it is still too early to rely on it.