Spectrum Systems Intern. Corp. v. Chemical Bank

• Decision Date: 24 October 1991
• Parties: , 581 N.E.2d 1055, 60 USLW 2357 SPECTRUM SYSTEMS INTERNATIONAL CORPORATION, Respondent, v. CHEMICAL BANK, Appellant.
• Court: New York Court of Appeals Court of Appeals

Page 809

575 N.Y.S.2d 809

78 N.Y.2d 371, 581 N.E.2d 1055, 60 USLW 2357

SPECTRUM SYSTEMS INTERNATIONAL CORPORATION, Respondent, v. CHEMICAL BANK, Appellant.

Court of Appeals of New York.

Oct. 24, 1991.

[78 N.Y.2d 372] [581 N.E.2d 1058] Robert F. Mullen, Vicki Share Fleiss and Sandra E. Nickel, New York City, for appellant.

Marianne Stecich and Regina F. Kelly, Tarrytown, for respondent.

[78 N.Y.2d 373] Daniel J. Capra and Dierdre A. Burgman, New York City, for The Committee on Professional Responsibility of the Ass'n of the Bar of the City of New York, amicus curiae.

[78 N.Y.2d 374] William B. Pennell, Joseph T. McLaughlin, Arthur Norman Field and James F. Stronski, New York City, for the Executive Committee of the New York County Lawyers Ass'n, amicus curiae.

OPINION OF THE COURT

KAYE, Judge.

In an action to recover fees for consulting services, Spectrum Systems International Corporation demanded that defendant, Chemical Bank, produce certain documents pertaining to the bank's internal investigation of possible fraud by employees and vendors, including Spectrum. Chemical responded by seeking a protective order, asserting that the documents were protected from disclosure by the attorney-client privilege, by the attorney work product doctrine, and as material prepared in anticipation of litigation. This appeal requires us to consider whether a report prepared by Chemical's specially retained outside counsel is privileged and therefore immune from discovery.

I.

The facts are simply stated. Spectrum is a computer software consulting firm that provided services to Chemical Bank until the spring of 1987. According to the affidavit of a partner in the New York City law firm of Schulte Roth & Zabel, in June 1987 Chemical's general counsel retained the firm to perform an investigation and render legal advice to Chemical regarding possible fraud by its employees and outside vendors, and to counsel Chemical with respect to litigation options. According to the affidavits of Spectrum, Chemical's own investigation began even earlier. Over the next months, Schulte Roth conducted interviews of Chemical employees, of a former officer responsible for the bank's arrangements with Spectrum, and of representatives of Spectrum itself.

In a letter report dated August 20, 1987, signed by John S. Martin, Jr., then a partner, the law firm summarized the results of its investigation. After three pages of narrative regarding the central problem and the facts bearing on it, the final paragraph of the Spectrum section sets forth the law firm's opinion as to a possible claim against Spectrum, an estimate of Chemical's damages, a potential weakness if such a claim were to be asserted, and the firm's view that there was insufficient proof to establish particular matters described in the letter. The report was addressed to Chemical's vice-chairman--the company's senior legal officer--with copies to Chemical's general counsel and senior auditor.

Spectrum commenced the present action in October 1988, seeking $33,600 in fees, and Chemical counterclaimed for damages of at least $100,000 on the ground that Spectrum had falsified invoices and overcharged the bank.

After the close of pleadings, and before any other discovery, Spectrum demanded that Chemical turn over "[a] report and/or notes or written documents of investigation conducted by or on behalf of Chemical Bank of the business relationship between Chemical Bank and vendors." Spectrum's president had been told of the investigation by Chemical's former employee, and had himself been questioned in July 1987 by a Chemical investigator and again in August by the law firm, where he appeared with his counsel. Apparently, the Chemical investigator made a memorandum regarding his conversation with Spectrum's president, as did a Schulte Roth attorney of the later interview.

In response to Chemical's motion for a protective order, Supreme Court--without examining the documents--ordered them produced, holding that "an independent investigation cannot obtain privileged status merely because it may have been communicated to an attorney." The court subsequently denied Chemical's motion for reargument or for an in camera inspection of the documents in issue.

While agreeing that Chemical's motion for a protective order should be denied--the documents were not privileged, work product or material prepared in anticipation of litigation--the Appellate Division, having itself reviewed the documents, modified Supreme Court's orders and granted Chemical's alternative request for remittal for an in camera inspection to determine materiality and necessity (CPLR 3101[a]. The Appellate Division, further, granted leave to appeal to this Court, certifying the following question: "Was the order of this Court, which modified the orders of the Supreme Court, properly made?"

We now answer the certified question in the negative, concluding that the Appellate Division erred in denying Chemical's claim of privilege with respect to the Spectrum section of the Schulte Roth report--the only portion of the report in issue on this appeal.

II.

The CPLR directs that there shall be "full disclosure of all evidence material and necessary in the prosecution or defense of an action." (CPLR 3101[a].) "The test is one of usefulness and reason." (Allen v. Crowell-Collier Publ. Co., 21 N.Y.2d 403, 406, 288 N.Y.S.2d 449, 235 N.E.2d 430.) This statute embodies the policy determination that liberal discovery encourages fair and effective resolution of disputes on the merits, minimizing the possibility for ambush and unfair surprise (see, 3A Weinstein-Korn-Miller, N.Y.Civ.Prac. pp 3101.01-3101.03).

By the same token, the CPLR establishes three categories of protected materials, also supported by policy considerations: privileged matter, absolutely immune from discovery (CPLR 3101[b]; attorney's work product, also absolutely immune (CPLR 3101[c]; and trial preparation materials, which are subject to disclosure only on a showing of substantial need and undue hardship in obtaining the substantial equivalent of the materials by other means (CPLR 3101[d][2].

Obvious tension exists between the policy favoring full disclosure and the policy permitting parties to withhold relevant evidence. Consequently, the burden of establishing any right to protection is on the party asserting it; the protection claimed must be narrowly construed; and its application must be consistent with the purposes underlying the immunity (Matter of Priest v. Hennessy, 51 N.Y.2d 62, 69, 431 N.Y.S.2d 511, 409 N.E.2d 983; Matter of Jacqueline F., 47 N.Y.2d 215, 218-219, 417 N.Y.S.2d 884, 391 N.E.2d 967; Koump v. Smith, 25 N.Y.2d 287, 294, 303 N.Y.S.2d 858, 250 N.E.2d 857; see generally, Note, The Attorney-Client Privilege and the Corporate Client: Where Do We Go After Upjohn?, 81 Mich.L.Rev. 665 [1983].

Against this backdrop, we consider Chemical's claims for a protective order.

III.

The attorney-client privilege, the oldest among common-law evidentiary privileges (8 Wigmore, Evidence § 2290 [McNaughton rev 1961]; Upjohn Co. v. United States, 449 U.S. 383, 389, 101 S.Ct. 677, 682, 66 L.Ed.2d 584), fosters the open dialogue between lawyer and client that is deemed essential to effective representation (see, Matter of Vanderbilt [Rosner--Hickey], 57 N.Y.2d 66, 76, 453 N.Y.S.2d 662, 439 N.E.2d 378; Matter of Priest v. Hennessy, 51 N.Y.2d 62, 67-68, 431 N.Y.S.2d 511, 409 N.E.2d 983, supra).

A century ago this Court referred to the attorney-client privilege statute as a "mere re-enactment of the common-law rule" (Hurlburt v. Hurlburt, 128 N.Y. 420, 424, 28 N.E. 651); reliance on the common law continues to this day. CPLR 4503(a) states that a privilege exists for confidential communications made between attorney and client in the course of professional employment, and CPLR 3101(b) vests privileged matter with absolute immunity. For definition of what is encompassed by the privilege, courts still must look to the common law (see, Siegel, Practice Commentaries, McKinney's Cons. Laws of N.Y., Book 7B, CPLR C3101:25, at 37).

Although typically arising in the context of a client's communication to an attorney, the privilege extends as well to communications from attorney to client. The privilege is of course limited to communications--not underlying facts (Upjohn Co. v. United States, 449 U.S., at 395-396, 101 S.Ct., at 685-686, supra). In order for the privilege to apply, the communication from attorney to client must be made "for the purpose of facilitating the rendition of legal advice or services, in the course of a professional relationship." (Rossi v. Blue Cross & Blue Shield, 73 N.Y.2d 588, 593, 542 N.Y.S.2d 508, 540 N.E.2d 703.) The communication itself must be primarily or predominantly of a legal character (id., at 594, 542 N.Y.S.2d 508, 540 N.E.2d 703).

As is plain from mere statement of the principles, whether a particular document is or is not protected is necessarily a fact-specific determination (Rossi v. Blue Cross & Blue Shield, 73 N.Y.2d, at 592-593, 542 N.Y.S.2d 508, 540 N.E.2d 703, supra), most often requiring in camera review.

Here, Spectrum does not challenge the confidential nature of the Schulte Roth report. Moreover, it is uncontested that the law firm was specially retained as outside counsel for the purpose of conducting an internal investigation into possible fraud on Chemical and rendering legal advice about that problem, including counseling about litigation options. Clearly the requisite professional relationship was established when Chemical retained the law firm to render legal assistance (Radiant Burners v. American Gas Assn., 320 F.2d 314 (7th Cir.), cert. denied 375 U.S. 929, 84 S.Ct. 330, 11 L.Ed.2d 262).

The report itself, after presenting facts, sets forth the firm's assessment regarding a possible legal claim, its approximate size and weaknesses. As a confidential report from lawyer to client transmitted in the...