Action Item: In light of this decision, in-house counsel and outside counsel representing companies should develop protocols for attorney-client communications that, to the extent possible, clearly identify the purpose and subject matter of particular communications so as to defend against piercing of the attorney-client privilege.

In a recent decision that has significant implications for attorneys representing businesses, the New York Appellate Division, First Department ("First Department"), in NAMA Holdings, LLC v. Greenberg Traurig LLP, et al., recognized and accepted the so-called Fiduciary Exception to the attorney-client privilege and, for the first time, provided clear guidance on how to determine when such Fiduciary Exception should supplant the attorney-client privilege.1 Through this decision, New York now joins a growing number of states embracing the Fiduciary Exception to the attorney-client privilege, including Colorado, Delaware, Pennsylvania, and Texas. 

NAMA Holdings involved a discovery dispute arising out of a series of legal proceedings between the managers of Alliance Network, LLC ("Alliance"), the law firm of Greenberg Traurig, LLP ("Greenberg"), which had been retained as counsel to Alliance, and NAMA Holdings, LLC ("NAMA"), which was the majority investor in Alliance. During discovery, Greenberg objected to the disclosure of some 3,000 pages of documents on the basis of an attorney-client privilege between Alliance and Greenberg.2  NAMA, in turn, argued, amongst other things, that disclosure was required under the Fiduciary Exception to the attorney-client privilege because the managers of Alliance owed it a fiduciary duty, as a member of Alliance. Essentially, NAMA argued it was entitled to disclosure as an intended beneficiary of the advice Greenberg provided to Alliance's managers.

Recognizing that while the attorney-client privilege is the oldest evidentiary privilege at common law, it is not without limitations, the First Department held that in disputes among the owners of business entities in New York, when shareholders or members challenging management actions demonstrate "good cause," there is a fiduciary exception to the attorney-client privilege which entitles them to receive communications between the company and its counsel that might otherwise be privileged. Holding that "it strikes the appropriate balance between respect for the [attorney-client] privilege and the need for disclosure," the First Department adopted the multifactor "good cause" test laid out by the United States Court of Appeals for the Fifth Circuit in Garner v. Wolfinbarger, 430 F.2d 1093, 1104 (5th Cir. 1970). The Garner court noted that there are "many indicia" relating to the presence or absence of good cause and offered the following non-exhaustive list of factors:

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

In adopting the Garner test, the First Department noted that courts considering application of the Fiduciary Exception must engage in a comprehensive, case-specific and often  "communication-specific" analysis using the Garner factors as their analytical framework. While the court observed generally how certain factors might affect a "good cause" determination, it also made clear that no one factor was dispositive. Further, the court held that in camera review by the Court of the contested documents was "crucial" and, indeed, found that it could not have affirmed the lower court's order where no such review took place. 

The First Department's ruling in NAMA Holdings makes clear that the Fiduciary Exception to the attorney-client privilege is a firmly established part of New York law and offers an analytical framework for its application.

Footnotes

1 NAMA Holdings, LLC v. Greenberg Traurig, LLP, et al., Index No. 601054/08, 2015 NY Slip Op. 07346 (1st Dep't Oct. 8, 2015).

2 Greenberg also asserted attorney work product privilege with respect to some of those documents. In its decision, the First Department appears to suggest that the attorney work product privilege is not subject to the Fiduciary Exception.

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