Finally, Some Good News for the Attorney-Client Privilege
The attorney-client privilege, one of the oldest common-law evidentiary privileges, has been under attack on a number of fronts for some time now. Various forces (both judicial and administrative) have been steadily whittling away at the privilege. In this environment, a recent New York appellate court decision offers a ray of hope, broadens the application of the privilege in the M&A context.
Ambac Assur. Corp. v. Countrywide Home Loans, Inc. (App. Div. 1st Dep’t 12-4-2014) considers the application of the so-called “common interest privilege.”
In general, the presence of a third party in a communication between the lawyer and the client is sufficient to “bust” the attorney-client privilege with respect to that communication. One of the exceptions to that rule is the “common interest privilege.” It permits a third party to be privy to the lawyer-client communication for “the purposes of furthering a nearly identical legal interest shared by the client and the third party.” Some New York courts have taken a narrow view of the common interest privilege, holding that it only applies with respect to legal advice involving pending or threatened litigation.
Ambac insured mortgage-backed securities issued by Countrywide and brought suit claiming that Countrywide fraudulently induced it to enter into these insurance transactions. Ambac also sued Bank of America, which acquired Countrywide in 2008, claiming Bank of America was liable as Countrywide’s “successor-in-interest.”
Ambac sought discovery of communications exchanged by Countrywide, Bank of America and their counsel in connection with the acquisition. Bank of America resisted, claiming that the communications were protected by the common interest privilege. A lower court ruled against Bank of America holding that for the common interest privilege to apply, pending or reasonably anticipated litigation is required. Generally, no such litigation exists in the M&A pre-acquisition or due diligence context.
The Appellate Division of the New York Supreme Court, First Department reversed. The appellate court reasoned that attorney-client privilege is not limited to litigation situations. Indeed, legal advice is often sought with the goal of avoiding litigation. Attorney-client privilege is designed to encourage clients to be forthright with their lawyers, thus better enabling the lawyer to advise on legal compliance.
The Court found that the case law requiring pending or anticipated litigation did not adequately address the M&A context, where two business entities enter into a confidentiality agreement and undertake acquisition negotiations in which they must share advice of counsel in order to “accurately navigate the complex legal and regulatory process involved in completing the transaction.” Denying the common interest privilege in this context “would inevitably result … 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.”
On this basis, the Court rejected the earlier cases and held that communications relating to the acquisition of Countrywide by Bank of America were protected by the common interest privilege.
Parties contemplating M&A activities in New York will welcome the expanded privilege, and may want to add language to their confidentiality agreements confirming its applicability.
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