New York Court Dispenses with the Litigation Requirement for the Application of the Common-Interest Privilege: Why Transactional Counsel Should Pay Attention

Alerts / February 2, 2015

In a recent decision, the Appellate Division of the Supreme Court of New York, First Judicial Department, broke with other New York courts and joined Delaware and federal courts in applying the common-interest privilege to circumstances where there is no pending, anticipated, or threatened litigation. In a unanimous decision in Ambac Assurance Corp. v. Countrywide Home Loans, Inc.,[1] the First Department permitted the application of the common-interest privilege to merger parties’ pre-closing communications. The court based its ruling on the need for parties to a transaction to share common legal advice “in order to accurately navigate the complex legal and regulatory process involved in completing the transaction.”[2]

The First Department’s decision is significant because while it is in line with precedent followed by the Second, Third, Seventh and the Federal Circuits, as well as Delaware courts, it is a significant departure from decisions by other New York courts, particularly the Second Department. The Court of Appeals (New York’s highest court) has yet to consider the propriety of a litigation requirement for the common-interest privilege, but the First Department’s well-reasoned and pragmatic decision, which is consistent with the weight of the authority on the subject in other jurisdictions, as well as the realities of today’s business world, makes it likely that the Court of Appeals would follow suit should the issue come before it.

Decisions from the Appellate Division often capture the interest of litigators, but this decision is of particular importance to transactional counsel because the steps that need to be taken for the privilege to be upheld by a court down the road must be considered and executed well before any prospect of litigation arises. Although the decision has some language that could be narrowly construed to limit the application of the common-interest privilege to circumstances similar to Ambac, there are certain best practices, discussed below, that transactional counsel should follow to increase the likelihood that in the event of a dispute, their clients can enjoy the protection of this privilege.

Procedural History and the Lower Court Decision

The underlying lawsuit involves a claim by plaintiff Ambac Assurance Corporation (Ambac), an insurer of residential mortgage-backed securities, against defendants Countrywide Home Loans, Inc., and certain of its affiliated entities (Countrywide). Ambac claimed that Countrywide fraudulently induced it to insure payments on certain residential mortgage-backed securities. Because one of the Countrywide affiliates subsequently merged with a subsidiary of Bank of America Corp. (BOA), Ambac asserted secondary claims against defendant BOA as Countrywide’s successor-in-interest.

In connection with its successor liability claims, Ambac sought disclosure of several hundred documents reflecting communications among the BOA subsidiary, the Countrywide affiliate, and their counsel in the period between the signing of the merger agreement and the closing of the merger.[3] BOA refused to disclose the documents, arguing that they were protected by the common-interest privilege exception to the waiver of the attorney-client privilege. BOA relied in part on the fact that all information and materials exchanged between the parties under the merger agreement were subject to confidentiality provisions, and the parties had executed a common-interest agreement shortly before they signed the merger agreement.[4] BOA claimed that it and Countrywide, “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.”[5]

A special master overseeing the discovery dispute ordered BOA to produce the documents, concluding that “the common interest rule . . . 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.”[6] Justice Eileen Bransten of the commercial division upheld the ruling, holding that there must be “a reasonable anticipation of litigation for the common-interest doctrine to apply” and that none existed in this case.[7] BOA appealed.

The First Department’s Decision

In a unanimous reversal of the lower court’s decision, the First Department held that “in today’s business environment, pending or reasonably anticipated litigation is not a necessary element of the common-interest privilege.”[8] While the court acknowledged a line of cases from other New York courts, particularly the Second Department, where the court had applied a pending or anticipated litigation requirement, the First Department found this requirement to be inconsistent with the purpose of the attorney-client privilege: “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.”[9] The court further emphasized the need for the application of the common-interest privilege to a case involving corporate parties, observing that “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,”[10] quoting from the Supreme Court’s decision in Upjohn Co. v. United States, 449 U.S. 383, 389 (1981).

The court justified its departure from the holding of other New York courts by observing that those courts had adopted a litigation requirement based on case law applying the common-interest privilege in a criminal context where co-defendants and their counsel “share information in furtherance of a common defense.”[11] The court found this line of cases to be inadequate in addressing the specific situation presented in Ambac:

[T]wo business entities, having signed a merger agreement without contemplating litigation, and having signed a confidentiality agreement, required the shared advice of counsel in order to accurately navigate the complex legal and regulatory process involved in completing the transaction. . . . [I]mposing a litigation requirement in this scenario discourages parties with a shared legal interest, such as the signed merger agreement here, from seeking and sharing that advice, and would inevitably result instead 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.[12]

Thus the court specifically held that no pending, threatened, or anticipated litigation was required for the application of the common-interest privilege.

Lessons of Ambac

While the Ambac decision is significant in its departure from current New York law in other departments and its alignment with the prevailing precedent on the common-interest privilege law in the federal courts and in Delaware, it is important to note that the decision is controlling law only in the First Department, which includes cases filed in Manhattan and the Bronx. Unless and until the Court of Appeals speaks on the issue, the law in the Second Department (which includes cases filed in Brooklyn and Queens) still requires “reasonable anticipation of litigation”[13] before the common-interest privilege can apply.

The decision also raises as many questions as it answers. The language of the opinion itself emphasizes the case-by-case nature of the inquiry at issue.[14] And although the legal principles underlying the court’s reasoning are stated clearly, the decision’s application in each particular case remains far from clear.

For example, the decision focuses a great deal on the execution of the merger agreement between the BOA and Countrywide entities, leaving open the question of whether the common-interest privilege applies to communications during due diligence conducted prior to the signing of the merger agreement. The decision also does not address who controls the privilege after the close of the merger. The court has indicated an inclination to look to Delaware law for guidance, and Delaware law provides that while rights to privileged communications generally pass to the purchaser upon the close of a merger,[15] parties to a merger agreement can agree to limit the purchaser’s post-merger rights to certain privileged communications.[16]

Finally, while the decision does not explicitly limit its application to circumstances where the parties have entered into a common interest, as well as a confidentiality agreement, the court makes it clear that it considered these agreements as important factors in reaching its decision.[17] Thus a prudent practitioner in this jurisdiction is well served to keep in mind two main takeaways to ensure the greatest benefit from this business-friendly decision by the First Department:

  • Reach an agreement and memorialize it. As mentioned above, the court implicitly relied upon the merger agreement (and its confidentiality provision) and the common interest agreement as a clear indication of the parties’ intent regarding what they viewed as privileged and who owned that privilege. In the context of sophisticated business entities, the courts will likely give considerable weight to the parties’ contemporaneous views regarding what information was necessary to exchange in furtherance of their common interest and the characterization of such information as confidential.
  • Separate legal from business interests. The Ambac court specifically held that so “long as the primary or predominant purpose for the communication with counsel is for the parties to obtain legal advice or to further a legal interest common to the parties, and not to obtain advice of a predominately business nature, the communication will remain privileged.”[18] Counsel and their clients must be mindful of the nature of the communications and/or information they seek to keep confidential under a common-interest privilege theory and maintain rigorous distinctions between legal and business advice in order to protect the former from disclosure down the road.

If you have any questions regarding this alert, please contact Gilbert S. Keteltas at or 202.861.1530; Sammi Malek at or 212.589.4275; or any member of BakerHostetler's Complex Commercial Litigation team.

Authorship Credit: Sammi Malek and Samuel M. Light

[1] Ambac Assurance Corp. v. Countrywide Home Loans, Inc., 2014 N.Y. Slip Op. 08510, 2014 WL 6803006 at *1 (1st Dep’t, Dec. 4, 2014).
[2] Id. at 5.
[3] Ambac also argued that these documents were relevant because “documents [BOA] previously produced . . . suggest that [BOA] may have been put on notice of the prevalence of unreported fraud at Countrywide well before the merger.” Id. at *2 (internal citations and quotation marks omitted).
[4] Id. at *1.
[5] Id.
[6] Id. at *2.
[7] Ambac Assurance Corp. v. Countrywide Home Loans, Inc., 2013 WL 5629595, at *1-2 (Sup. Ct., N.Y. Cnty. Oct. 16, 2013).
[8] Ambac, 2014 WL 6803006 at *1.
[9] Id. at *3 (internal citations and quotations omitted).
[10] Id. (internal citations and quotations omitted).
[11] Id. at *5.
[12] Id.
[13] Hyatt v. State of Cal. Franchise Tax Bd., 105 A.D.3d 186, 205 (2d Dep’t 2013); Hudson Val. Mar., Inc. v. Town of Cortlandt, 30 A.D.3d 377, 378 (2d Dep’t 2006).
[14] See, e.g., Ambac, 2014 WL 6803006 at *1 (“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.”) (emphasis added).
[15] See CFTC v. Weintraub, 471 U.S. 343, 349 (1985).
[16] See Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP, 80 A.3d 155, 161 (Del. Ch. 2013) (advising parties “to use their contractual freedom . . . to exclude from the transferred assets the attorney-client communications they wish to retain as their own”).
[17] See, e.g., Ambac, 2014 WL 6803006 at *5.
[18] Id. at 4.

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