Ambac Assurance Corp. v. Countrywide Home Loans, Inc.

• Decision Date: 04 December 2014
• Docket Number: 651612/10
• Citation: 2014 N.Y. Slip Op. 08510,998 N.Y.S.2d 329,124 A.D.3d 129
• Parties: AMBAC ASSURANCE CORPORATION, et al., Plaintiffs–Respondents, v. COUNTRYWIDE HOME LOANS, INC., et al., Defendants, Bank of America Corp., Defendant–Appellant.
• Court: New York Supreme Court — Appellate Division

124 A.D.3d 129

998 N.Y.S.2d 329

2014 N.Y. Slip Op. 08510

AMBAC ASSURANCE CORPORATION, et al., Plaintiffs–Respondents

v. COUNTRYWIDE HOME LOANS, INC., et al., DefendantsBank of America Corp., Defendant–Appellant.

651612/10

Supreme Court, Appellate Division, First Department, New York.

Dec. 4, 2014.

O'Melveny & Myers LLP, New York (Jonathan Rosenberg, B. Andrew Bednark, and Anton Metlitsky of counsel), for appellant.

Patterson Belknap Webb & Tyler LLP, New York (Robert P. LoBue, Peter W. Tomlinson, Harry Sandick, and Joshua Kipnees of counsel), for respondents.

PETER TOM, J.P., KARLA MOSKOWITZ, LeLAND G. DeGRASSE, ROSALYN H. RICHTER, BARBARA R. KAPNICK, JJ.

Opinion

MOSKOWITZ, J.

In general, the presence of a third party at a communication between counsel and client is sufficient to deprive the communication of confidentiality. However, there is an exception to this rule:

the common-interest privilege. Under this doctrine, a third party may be present at the communication between an attorney and a client without destroying the privilege if the communication is for the purpose of furthering a nearly identical legal interest shared by the client and the third party. New York courts have taken a narrow view of the common-interest privilege, holding that it applies only with respect to legal advice in pending or reasonably anticipated litigation. On this appeal, we are asked to decide the continued viability of the New York approach.

We hold that, in today's business environment, pending or reasonably anticipated litigation is not a necessary element of the common-interest privilege. Our conclusion holds particularly true in this case, where the parties have a common legal interest because they were engaged in merger talks during the relevant period and now have a completed and signed merger agreement. Indeed, the circumstances presented in this case illustrate precisely the reason that the common-interest privilege should apply—namely, that business entities often have important legal interests to protect even without the looming specter of litigation.

Facts

This discovery dispute arose from a lawsuit commenced by plaintiff Ambac Assurance Corporation (Ambac), a financial-guaranty, or monoline, insurer that guaranteed payments on certain residential mortgage backed securities (RMBS) issued by defendant Countrywide Home Loans, Inc. and its affiliated entities (together Countrywide). The complaint alleged that between 2004 and 2006, Countrywide fraudulently induced Ambac to enter into agreements to insure RMBS transactions. Ambac further alleged that Countrywide breached, and continues to breach, the terms of those agreements.

Ambac also asserted secondary claims against defendant Bank of America Corp. (BAC), alleging that BAC would be liable for any judgment as Countrywide's successor-in-interest. These secondary claims relate to a merger between a BAC subsidiary and Countrywide Financial Corp. (CFC), a Countrywide entity. After due diligence and negotiations, CFC and BAC signed a merger agreement on January 11, 2008; under the terms of that agreement, CFC would merge into the wholly-owned BAC subsidiary, Red Oak Merger Corporation (the merger). The transaction closed on July 1, 2008, and the companies merged. All information and material exchanged between BAC and CFC under the merger agreement was subject to confidentiality provisions and a common interest agreement the parties entered into shortly before they signed the merger agreement.

The merger agreement bound the parties to work together on several pre-closing issues, including maintaining employee benefit plans, consulting on state and federal tax consequences, and securing the appropriate merger approvals and consents of third parties and regulators. Because all shares of CFC would be converted into BAC shares, BAC and CFC intended to prepare and file a joint proxy and registration statement that would serve both to obtain CFC shareholder approval of the merger and to allow BAC to register its new shares. The joint statement required SEC approval before becoming effective. Because of these and other merger agreement provisions, BAC claims that it and CFC—two heavily regulated public financial institutions—required shared legal advice from counsel together in order to ensure their accurate compliance with the law and to advance their common interests in resolving the many legal issues necessary for successful completion of the merger.

The resulting communications between BAC and CFC and their counsel during the pre-merger period of January 11, 2008 to July 1, 2008—some several hundred documents—are at issue on this appeal. Ambac argues that BAC must produce these pre-merger communications because they are significant to Ambac's successor liability claims, which arise from the merger and the merger's associated transfers of assets and liabilities to BAC. Ambac further argues that documents BAC previously produced in the underlying litigation suggest that BAC may have been “put on notice of the prevalence of unreported fraud at Countrywide well before the [merger].”

In June 2013, the referee supervising discovery granted Ambac's motion to compel BAC to produce the challenged communications. The referee held that New York law does not permit the withholding of a large class of joint communications between parties and their counsel, thereby immunizing the communications from disclosure. The referee concluded that the common interest rule, an exception to the attorney-client privilege, does not apply unless the parties share a common legal interest that impacts potential litigation involving all parties, and that to hold otherwise would be inconsistent with the narrow scope of the attorney-client privilege.

The motion court denied BAC's motion to vacate the referee's order. In so doing, the court agreed that New York law requires pending or reasonably anticipated litigation in order for the common interest doctrine to apply. The court concluded that BAC sought not an application of existing law, but rather “an extension of New York's common-interest doctrine.”

Analysis

As noted above, the common-interest privilege is an exception to the rule that the presence of a third party at a communication between counsel and client will render the communication non-confidential (Kelly v. Handy & Hartman, 2009 WL 2222712, *2, 2009 U.S. Dist. LEXIS 63715, *5–*6 [S.D.N.Y. July 23, 2009] ). The doctrine, a limited exception to waiver of the attorney-client privilege, requires that: (1) the communication qualify for protection under the attorney-client privilege, and (2) the communication be made for the purpose of furthering a legal interest or strategy common to the parties (see id.;see also U.S. Bank N.A. v. APP Intl. Fin. Co., 33 A.D.3d 430, 431, 823 N.Y.S.2d 361 [1st Dept 2006] ). This Court has never squarely decided whether there is a third requirement: that the communication must affect pending or reasonably anticipated litigation. We answer that question today in the negative.

To properly understand the common-interest doctrine, it is necessary to examine the purpose of the privilege from which it descends—namely, the attorney-client privilege. The attorney-client privilege is “the oldest among common-law evidentiary privileges” (Spectrum Sys. Intl. Corp. v. Chemical Bank, 78 N.Y.2d 371, 377, 575 N.Y.S.2d 809, 581 N.E.2d 1055 [1991] ). The purpose of this privilege “is to encourage full and frank communication between attorneys and their clients and thereby promote broader public interests in the observance of law and administration of justice” (Upjohn Co. v. United States, 449 U.S. 383, 389, 101 S.Ct. 677, 66 L.Ed.2d 584 [1981] ).

Further, “[i]n New York, we recognize that ‘the public interest is served by shielding certain communications ... from litigation, rather than risk stifling them altogether’ ” (U.S. Bank N.A. v. APP Intl. Fin. Co.,

33 A.D.3d 430, 431, 823 N.Y.S.2d 361 [1st Dept.2006], quoting Liberman v. Gelstein, 80 N.Y.2d 429, 437, 590 N.Y.S.2d 857, 605 N.E.2d 344 [1992] ). A delicate balance exists between this goal and the CPLR's objective of “full disclosure of all evidence material and necessary in the prosecution or defense of an action” (CPLR 3101[a] ). Indeed, as the Court of Appeals has noted, an “[o]bvious tension exists between the policy favoring full disclosure and the policy permitting parties to withhold relevant evidence” (Spectrum Sys. Intl. Corp., 78 N.Y.2d 371 at 377, 575 N.Y.S.2d 809, 581 N.E.2d 1055 ). Consequently, the party asserting the privilege has the burden of establishing any right to protection (id. ).

The “attorney-client privilege is not tied to the contemplation of litigation,” because “advice is often sought, and rendered, precisely to avoid litigation, or facilitate compliance with the law, or simply to guide a client's course of conduct” (id. at 380, 575 N.Y.S.2d 809, 581 N.E.2d 1055 ). For that reason, and because of “the vast and complicated array of regulatory legislation confronting the modern corporation, corporations, unlike most individuals, constantly go to lawyers to find out how to obey the law, particularly since compliance with the law in this area is hardly an instinctive matter” (Upjohn Co., 449 U.S. at 392, 101 S.Ct. 677 [internal quotation marks omitted] ).

Similarly, the Restatement of the Law Governing Lawyers notes that the common-interest privilege is not tied to the contemplation of litigation, but rather that the privilege applies either to a “litigated or nonlitigated matter” ( Restatement [Third] of the Law Governing Lawyers § 76 [2000] ). This conclusion flows logically from the attorney-client privilege, from which the common-interest privilege derives, and furthers its same basic purpose—namely, it “encourages parties with a shared legal interest to seek legal assistance in order to meet legal requirements and to plan their conduct accordingly,” and therefore “serves the public interest by advancing compliance...