New York Court Dispenses With The Litigation Requirement For The Application Of The Common-Interest Privilege: Why Transactional Counsel Should Pay Attention

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...