Ambac II in the M&A Context: New York’s Highest Court Tightens The Common Interest Doctrine

Monday, November 27th, 2017 at 3:21 pm by Allison Giebisch


In June 2016, New York’s highest court decided Ambac Assurance Corp. v. Countrywide Home Loans, Op. No. 80, 2016 WL 3188989 (N.Y. June 9, 2016) (Ambac  ). Its ruling significantly narrowed the scope of New York’s common interest doctrine, a key exception to the waiver of attorney-client privilege when communication is disclosed to, or made in the presence of, a third party. The Court of Appeals held the common interest doctrine to apply only if the parties in question are engaged in, or have a reasonable anticipation of, litigation.[1] The decision represented a sharp pivot away from Delaware law, which applies the common interest exception more broadly to include non-litigation situations.[2] Moreover, federal courts, including the U.S. Court of Appeals for the Second, Third, Seventh, and Federal Circuits, have all rejected the litigation requirement when construing the common interest doctrine. In particular, the Ambac II decision implicates parties contemplating a merger or acquisition and the types of privileged communications they make during the due diligence and pre-closing negotiation stages.

Attorney-Client Privilege and the Common Interest Doctrine

In as early as 1888, the Supreme Court stated that the concept of attorney-client privilege was “founded upon the necessity, in the interest and administration of justice, of the aid of persons having knowledge of the law and skilled in its practice, which assistance can only be safely and readily availed of when free from the consequences or the apprehension of disclosure.”[3] Indeed, the notion that confidential communications shared between a client and his or her lawyer are protected from disclosure to third parties remains central to American jurisprudence. This protection is lost, nonetheless, when such communication is revealed to a third-party.

Yet, under the corollary common interest doctrine, attorney-client communication that is disclosed to a third party retains its privilege if the third party shares a common legal interest with the client who made the communication, and the communication is made in furtherance of that common legal interest.[4] The Ambac II case sheds light on what precisely constitutes a “common legal interest” and the scope of the doctrine’s protection.

Background to Ambac Assurance Corp. v. Countrywide Home Loans 

Ambac II featured a discovery dispute between the two defendants in the case, Countrywide Financial Corp. and Bank of America Corp., involving communications shared between the two parties preceding the closing of their merger.[5] During the recent financial crisis, mortgage-backed securities insured by the plaintiff, Ambac, failed.[6] Ambac thus initiated a suit against Countrywide, the underlying issuer of the securities, claiming that Countrywide breached contractual representations, fraudulently misrepresented the quality of the loans, and fraudulently induced Ambac to guarantee them.[7]

In 2008, Countrywide merged into a wholly owned subsidiary of Bank of America named Red Oak Merger Corporation. Ambac accordingly named Bank of America as a second defendant in the action. In November 2012, Ambac decided to challenge Bank of America’s withholding of hundreds of communications that were exchanged between Bank of America and Countrywide and their separate counsel after the signing of the merger agreement but before the merger actually closed six months later. Ambac argued that such voluntarily shared material before the merger closed waived attorney-client privilege.[8] In response, Bank of America claimed that the parties shared a common legal interest in the merger’s “successful completion” and thus, the communications should not be subject to discovery.[9]

The Special Referee appointed to handle privilege disputes concluded that the common interest doctrine permitted limited disclosure of confidential communications to parties who share a common legal (as opposed to business or commercial) interest in pending or reasonably anticipated litigation. Bank of America moved to vacate the Referee’s decision and order to review the withheld documents. When the Supreme Court denied the motion, Bank of America appealed, and the Appellate Division (First Department) granted the motion to vacate, noting that pending or reasonably anticipated litigation was no longer a necessary element of the common interest exception.[10] Finally, the Court of Appeals reversed once more, holding that where the litigation requirement is not satisfied, the common interest doctrine does not apply to communications made in the context of a merger, even though those communications are made in pursuit of a common goal, such as the successful completion of a merger.

Most notably, the court rejected Bank of America’s argument that highly regulated financial institutions, such as Bank of America, perpetually face the threat of litigation. It responded that the difficulty of defining “common legal interest” outside the context of litigation would result in “a loss of evidence of a wide range of communications between parties assert common legal interests but who really have only non-legal or exclusively business interests to protect.”[11]  The decision solidified a jurisdictional split on the issue of whether pending litigation is required for the common interest doctrine to apply, and it left questions about which privilege law would apply in the case of a conflict of law.

Practical Implications in the M&A Context

After the Ambac II decision, many law firms issued client alerts that highlighted potential obstacles for corporate parties exchanging privileged information in non-litigation contexts. Clients and attorneys involved in non-litigation matters might consider the following strategies.

First, removing or redacting non-litigation business communications during the due diligence and negotiation process would minimize the risk that those communications would later be subject to discovery. Alternatively, parties might also consider separating or isolating communications that relate to “reasonably anticipated litigation” from non-litigation-related material during due diligence and negotiations. They might make agreements subject to the law of a jurisdiction like Delaware, instead of New York. Reasonably anticipated or pending litigation is not required for the common interest doctrine to apply in Delaware. Other states that have limited the doctrine’s application to litigation-related communications include Texas, New Hampshire, New Jersey, Virginia, Florida, and Connecticut. Finally, parties might consider sharing counsel for certain aspects of a deal. The Ambac II opinion expressly notes that the common interest doctrine would still protect communications among parties represented by the same counsel in a merger from disclosure.

Aftermath of Ambac II

The Ambac II decision reveals the uncertainty parties contemplating a merger may face regarding the privilege their shared communications enjoy. Parties must tread carefully when sharing sensitive information with opposing parties. Indeed, the case has begun to spawn a body of research and scholarship. In a recent article, Eric Franz argues that Ambac’s litigation requirement frustrates the purpose behind attorney-client privilege and urges many jurisdictions to reject Ambac’s restrictive litigation requirement.[12] However, other scholars such as Edna Epstein find that “the greatest push to expand the common interest privilege comes from corporate attorneys representing multiple clients, often in an antitrust context.”[13] Indeed, the Ambac court even cites Epstein’s commentary when it acknowledges Ambac’s speculation that Bank of America withheld communications that might have revealed how the merging entities structured their transaction to conceal Countrywide’s fraudulent behavior.[14]

Ambac II provides more clarity for a doctrine with ambiguous boundaries, yet it might encourage parties not to communicate fully with their respective attorneys. On the other hand, it could bring a wider range of communications into the scope of discovery, thereby increasing transparency. The full implications of the decision in the merger context are worth monitoring.

[1] Ambac Assurance Corp. v. Countrywide Home Loans, Op. No. 80 at 2, 2016 WL 3188989 (N.Y. June 9, 2016).

[2] Del. R. Evid. 502(b)(3).

[3] Hunt v. Blackburn, 128 U.S. 464, 470 (1888).

[4] Ambac Assurance Corp. v. Countrywide Home Loans, Op. No. 80 at 2, 2016 WL 3188989 (N.Y. June 9, 2016).

[5] Id. at 1.

[6] Id. at 2.

[7] Id. at 2.

[8] Id. at 2.

[9] Id. at 3.

[10] Ambac Assurance Corp. v. Countrywide Home Loans, 124 A.D.3d 129 (1st Dept. 2014) (Ambac I).

[11] Id. at 7.

[12] Eric Franz, Anything but Common: New York’s Pending or Anticipated Litigation Limitation to the Common Interest Doctrine Creates More Problems than it Solves, 92 Wash. L. Rev. 983 (2017).

[13] Edna S. Epstein, The Attorney-Client Privilege and the Work-Product Doctrine 277 (5th ed. 2007).

[14] Ambac Assurance Corp. v. Countrywide Home Loans, Op. No. 80 at 8, 2016 WL 3188989 (N.Y. June 9, 2016).