This summer, the New York Court of Appeals ruled that the common interest doctrine applies only when two parties and their respective counsel share privileged communications related to a common interest in a pending or reasonably anticipated litigation. In Ambac Assurance Corp. v. Countrywide Home Loans, Inc., 27 N.Y.3d 616 (2016), the state’s highest court reversed a 2014 decision by an intermediate appellate court that had expanded the application of the common interest doctrine to commercial transactions, such as mergers, where litigation was neither pending nor anticipated.
The Common Interest Privilege
The attorney-client privilege shields from discovery any confidential communications between an attorney and his or her client made in connection with obtaining or facilitating legal advice in the course of an attorney-client relationship. This privilege, however, does not apply to communications made in the presence of third parties, where that presence is known to the client. Additionally, the client effectively waives the attorney-client privilege if the confidential communication of its counsel is later revealed to a third party.
An important exception to this rule exists when two or more clients separately retain counsel to advise them on matters of common legal interest. The common interest doctrine provides that the privilege is maintained when certain attorney-client communications are revealed to the other party in connection with furthering a common legal interest. Often, common interest arises in the context of litigation, but that need not be the case. Consider the following hypothetical.
Two funds are considering a joint loan to a distressed issuer. The issuer has senior indebtedness, and there is some question about whether the new loan would be permitted under its debt covenants. The attorney for one of the funds prepares a memo on the issue for its client, and the memo is shared with the other fund, which is separately represented. The loan is made, and legal action ensues. The senior lenders seek discovery of the memo, and the question is whether the memo is discoverable. Under Ambac v. Countrywide, it may very well be that it is.
Background of the Case
Plaintiff Ambac Assurance Corporation is a monoline insurer that had guaranteed payments on certain residential mortgage-backed securities issued by defendant Countrywide Home Loans. During the 2008 financial crisis, the mortgage-backed securities failed, and Ambac brought suit alleging that Countrywide misrepresented the quality of the loans and fraudulently induced Ambac to guaranty such loans. Due to the economic pressures brought on by the financial crisis, Countrywide merged with Bank of America Corporation in 2008, and consequently, Ambac filed suit both against Countrywide and against Bank of America, as Countrywide’s successor-in-interest or alter-ego.
Ambac sought production of documents that defendants Countrywide and Bank of America had shared in the course of merging. Bank of America withheld approximately 400 communications that took place between it and Countrywide, and each of their counsel, after the signing of the merger agreement in January 2008 but before closing in July 2008.
The defendants argued that communications among the parties and their counsel that occurred between the signing and the closing were privileged under the common-interest doctrine. In 2014, the First Department of New York’s Appellate Division broke with prior New York precedent, holding that such communications were privileged, even if unrelated to litigation, so long as their primary purpose was “for the parties to obtain legal advice or to further a legal interest.”
The Court of Appeals’ Decision
In reaching its decision to limit the common interest exception to communications made in connection with pending or reasonably anticipated litigation, the Court of Appeals explored its doctrinal and historical underpinnings. The Court noted that the common interest doctrine originated in criminal law in order for attorneys of criminal co-defendants to freely share confidential information regarding defense strategies without waiving attorney-client privilege. Later the courts expanded the doctrine to include parties in civil ligations, under the rationale that when two parties are engaged in or reasonably anticipate litigation in which the parties 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.”
This policy rationale, the court reasoned, does not apply to separately represented parties that share a common legal interest in a commercial transaction but do not reasonably anticipate litigation. The court observed that there is no evidence that transactions, including mergers, have been impeded in New York because of the state’s litigation limitation on the common interest doctrine. Furthermore, the court argued that parties’ mutual desire to complete a transaction is an adequate incentive for parties to share information regardless of the scope of the common interest exception. Underscoring the unimportance of the common interest doctrine’s policy rationale in transactional contexts, the court stated, “Defendants have not presented any evidence to suggest that a corporate crisis existed in New York over the last 20 years when our courts restricted the common interest doctrine to pending or anticipated litigation, and we doubt that one will occur as a result of our decision today.” The court also justified limiting the common interest doctrine on the theory that the limitation serves as a safeguard against separately represented parties seeking to deliberately avoid disclosure based on the alleged commonality of legal interests, where the interests are in fact of only a commercial or business nature.
The court acknowledged that other federal courts and states have extended the common interest doctrine to communications in furtherance of any common legal interest. It concluded, however, that the policy justifications for maintaining the litigation limitation in New York “outweigh[s] any purported justification for doing away with it.”
Where lenders in a financing transaction are jointly represented, there should be no issue in sharing communications from their mutual counsel. In those cases where the lenders are separately represented, however, Ambac v. Countrywide injects a heavy dose of caution in sharing attorney communications, even where the parties’ interests are strongly convergent. It may very well be that attorney communications can be styled “in anticipation of litigation,” particularly where the debtor is in distress and imminent adversarial proceedings are not difficult to contemplate. Nonetheless, the specter of the waiver of attorney-client privilege, perhaps going even beyond the particular shared communication, should be enough to chill the free exchange of legal advice among parties to financial and other commercial transactions.