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Bank of America cannot claim attorney-client privilege for legal documents shared between it and Countrywide during their 2008 merger, New York's highest court ruled yesterday. The documents were passed between each company's lawyers during merger discussions, but before the union had been completed. The bank may now be compelled to release those legal communications, made at the height of the subprime mortgage crisis and ensuing Great Recession.
The ruling is a blow to Bank of America, which had sought to protect the documents, which may reveal to what extent Countrywide considered its liability for fraud connected to its mortgage-backed loans.
Countrywide Bank of America
Ambac Assurance sued Countrywide in 2008, after it was revealed that mortgage-backed securities issued by Countrywide Home Loans and Countrywide Financial Corporation were worthless. Ambac is a monoline insurer who guaranteed payments on many of those loans. The insurer alleged that Countrywide fraudulently misrepresented the quality of the loans and fraudulently induced Ambac to guaranty them.
Countrywide merged with Bank of America shortly after, becoming Red Oak Merger Corporation. Ambac then added Bank of America as a defendant in its suit, as Countrywide's successor-in-interest or alter ego, responsible for Countrywide's liabilities.
The Common Interest Exception to Waiver of Privilege
During discovery, Bank of America withheld several hundred communications between it and Countrywide, claiming that they were protected by attorney-client privilege. Those documents related to legal issues between the companies, including regulatory approvals, filing disclosures, employee benefits plans, and more. The documents were produced by both businesses' attorneys, separately, and shared before the merger concluded.
According to Bank of America, those documents were protected even though they had been disclosed to the other party. (Countrywide's to Bank of America and vice versa.) Under New York law's common interest doctrine, exposure of attorney-client communications to a third party does not waive 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."
But not just any interest will do. Bank of America had argued that the "common legal interest" binding the two companies together was the "successful completion" of the merger and their "commitment to confidentiality."
That wasn't good enough for the New York Court of Appeals, the state's highest court. Noting that the exception to wavier began in criminal law, as the "joint defense" exception, the court explained that such an exception must be connected to "mounting a common defense." The shared legal interest then must be more than simply dealing with common legal matters. For attorney-client communications to retain their privilege when shared with another party, they must relate to litigation, either pending or anticipated.
The ruling doesn't break any new ground, but it is an important reminder to in-house counsel, in New York and elsewhere, of the ease with which privilege can be waived and the narrow nature of most exceptions.