On June 9 2016 New York's highest court issued a decision in Ambac Assurance Corp v Countrywide Home Loans, Inc(1) that narrowly interprets the scope of the common interest exception to attorney-client privilege. Under the common interest exception, sharing privileged communications with a third party will not serve to waive the privilege insofar as a common legal interest exists between parties. Holding that the common interest exception shields the waiver of attorney-client privilege only in the context of current or reasonably anticipated litigation, the New York Court of Appeals overturned a prior intermediate appellate court decision and cleared the way for the discovery of over 400 communications between Bank of America and Countrywide Home Loans.
Bank of America was not initially a party to the case, which arose from Ambac Assurance Corporation's guarantees of payments on residential mortgage-backed securities issued by Countrywide. When the mortgage-backed securities that Ambac insured failed during the 2007 financial crisis, Ambac sued Countrywide, alleging that it "fraudulently misrepresented the quality of the loans and fraudulently induced Ambac to guaranty them". In 2008 Countrywide sold substantially all of its assets to and merged into a wholly owned subsidiary of Bank of America. After the merger, Ambac added Bank of America as a defendant and in 2012 it sought discovery of certain communications between Bank of America and Countrywide, exchanged after the merger agreement was signed but before closing. Bank of America resisted disclosure, arguing that the information was protected by attorney-client privilege and that the common interest doctrine defeated any claim of waiver.
Going against the decisions of several federal circuits – and Delaware and other state courts – the New York Court of Appeals held that the common interest exception is available under New York law only where communications between separately represented parties relate to "pending or reasonably anticipated litigation", and not when parties merely share a common legal interest in consummating a commercial transaction. Rejecting Bank of America's argument that its denial of protection to the merger parties in Ambac would discourage M&A activity in New York, the court responded that "[put] simply, when businesses share a common interest in closing a complex transaction, their shared interest…is already an adequate incentive for exchanging information". Finding it likely that Bank of America and Countrywide would have shared the information even if both knew it would be discoverable at a later date, the court dismissed fears that its decision might lead to a "corporate crisis" or discourage M&A activity in the state.
While Ambac was a split decision and the majority opinion leaves room for legislative action to expand the common interest exception, following the decision parties involved in M&A transactions subject to New York law must take care to understand the situations in which the courts will consider litigation to be "pending or reasonably anticipated", to avoid inadvertent waivers of privilege when sharing communications with other parties to the transaction. Ambac could also have further ramifications beyond agreements that stipulate that New York law will govern. It can be hard to predict which evidentiary rules will be applied so parties should carefully approach their decision making around sharing privileged communications during all phases of a M&A transaction.
This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.
For further information on this topic please contact Anne Johnson Palmer at Ropes & Gray LLP's San Francisco office by telephone (+1 415 315 6300) or email (firstname.lastname@example.org). Alternatively, contact James C Davis at Ropes & Gray LLP's Chicago office by telephone (+1 312 845 1200) or email (email@example.com). The Ropes & Gray website can be accessed at www.ropesgray.com.
William Schoenfeld, summer associate, also contributed to this update.