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Posted: October 15, 2015

First Department Analyzes Scope And Application Of The Fiduciary Exception To Attorney-Client Privilege

On October 8, 2015, the First Department issued a decision in NAMA Holdings, LLC v. Greenberg Traurig LLP, 2015 NY Slip Op. 07346, discussing the application of the fiduciary exception to the attorney-client privilege in intra-corporate disputes.

In NAMA Holdings, the plaintiff, NAMA, was the 70% owner of The Alliance Network LLC, and the defendants were Alliance’s managers and Alliance’s lawyers. After a series of disputes led to litigation and several arbitrations, NAMA filed the present action alleging direct and derivative claims of breach of fiduciary duty, aiding and abetting breach of fiduciary duty, tortious interference, malpractice, etc.

In discovery, the lawyer defendants provided a privilege log with 3000-odd entries. NAMA moved to compel on the grounds that all of the communications fell within the fiduciary exception. The New York County Commercial Division (Bransten, J.) found that, based upon a prior arbitration finding that the managers had engaged in misfeasance, NAMA had shown good cause to invoke the exception. The IAS court referred the matter to a special referee for an item-by-item review and for a determination of when, if ever, NAMA and Alliance became adverse. For the time period where no adversity existed, all communications were to be produced, otherwise disclosure would be based upon the content of the individual communication. The special referee reported that NAMA and Alliance had never been adverse and—without conducting the item-by-item review—recommended that all 3000 communications be disclosed. The IAS court confirmed the report and the defendants appealed.

The First Department began by examining the history of the fiduciary exception to the attorney-client privilege, which originated in trust law, on the theory that the beneficiaries are the trustee’s lawyer’s “real clients,” so communications relating to the trust could not be withheld from the beneficiaries. Then, in Garner v. Wolfinbarger, 430 F.2d 1093 (5th Cir. 1970), the Fifth Circuit followed more recent English cases and extended the exception into corporate law, allowing shareholders—upon a showing of good cause—to pierce the corporate attorney-client privilege. After Garner, the fiduciary exception spread throughout the United States, including to New York. However, “the precise meaning of good cause has not been articulated by the New York courts.”

Because no specific test of “good cause” had been applied in New York, the First Department considered several alternatives and decided to adopt the original Garner test, which includes the following factors:

(1) the number of shareholders and the percentage of stock they represent; (2) the bona fides of the shareholders; (3) the nature of the shareholders’ claim and whether it is obviously colorable; (4) the apparent necessity or desirability of the shareholders having the information and the availability of it from other sources; (5) whether, if the shareholders’ claim is of wrongful action by the corporation, it is of action criminal, or illegal but not criminal, or of doubtful legality; (6) whether the communication related to past or to prospective actions; (7) whether the communication is of advice concerning the litigation itself; (8) the extent to which the communication is identified versus the extent to which the shareholders are blindly fishing; and (9) the risk of revelation of trade secrets or other information in whose confidentiality the corporation has an interest for independent reasons.

The First Department found that the IAS court had not considered the Garner factors or any similar test, and that its reliance on a single arbitration ruling was insufficient for a finding of “good cause.” The case was therefore remanded for “a comprehensive good-cause analysis.” The First Department went on to say that:

The [IAS] court, given its discretion under CPLR article 31, may not need to evaluate each factor listed in Garner. However, where a court finds that a shareholder has demonstrated good cause to apply the fiduciary exception . . . it must at least address those factors that support such a finding. This type of scrutiny is vital to ensure that courts do not arbitrarily order disclosure of corporate attorney-client communications.

As well as its holding on “good cause,” the First Department also ruled in the “adversity” question. The defendants had argued that the fiduciary exception did not apply to any communications after NAMA and Alliance had become adverse, but the court disagreed:

Adversity is not a threshold inquiry but a component of the broader good-cause inquiry. Moreover, of the Garner factors that pertain to adversity, some will indicate whether the parties are generally adverse, while others will require a review of the communications in dispute; the relevant factors may weigh against finding good cause to apply to those communications that reveal adversity. Accordingly, a court may find that the party seeking disclosure has shown good cause to be given access to some communications but not others.

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If the documents or other evidence objectively demonstrate an adverse relationship between the shareholder plaintiff and corporate management, then those communications that (1) concerned “how to deal with” the plaintiff, (2) were specifically relevant to the handling of the very issues the plaintiff had been threatening to litigate, or (3) were of advice concerning the litigation itself will likely remain privileged—unless other factors are strong enough to establish good cause. Other communications that are germane to the allegations in the complaint, even those that occurred after adversity arose, would still be discoverable pursuant to the fiduciary exception (provided good cause exists) . . . . Thus, the motion court correctly stated that whether communications that occurred after an adversarial relationship developed are privileged depends on their content.

The First Department therefore remanded for both “a comprehensive good-cause analysis” and “a review of the communications (or at least a sampling thereof).”

This opinion lays out a clear road map for lower courts to follow when addressing whether good cause exists, and how to deal with communications that took place after the shareholders and the company became adverse. However, the First Department did not specifically hold that the motion court was required to conduct an in-camera review of pre-adversity communications (although such might be required to determine if good cause exits). The First Department did say that that it could not “affirm an order directing the production of more than 3,000 purportedly privileged communications without a single one of those communications having been reviewed.”

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