Thursday, October 8, 2015

Fiduciary Exception and Adversity Explored

An opinion on attorney-client privilege from the New York Appellate Division for the First Judicial Department

This appeal arises from a discovery dispute in which the managers of a limited liability company and corporate counsel invoke the attorney-client privilege in opposition to document requests by one of the company's investors. The investor argues that it is entitled to the so-called fiduciary exception to the privilege because it is a beneficiary of the attorney-client relationship that exists between the company's managers and counsel. The managers and counsel, on the other hand, contend that because the investor had interests that were adverse to the company's interests, the fiduciary exception is inapplicable. Supreme Court found that the parties were not adverse, and ordered the production of all the documents claimed to be privileged.

We conclude that "adversity" is not a threshold issue in determining whether the fiduciary exception is applicable in a given case, but one of several factors to consider in making that determination, and that adversity cannot be determined without a review of the purportedly privileged communications. Therefore, we remand the matter for an in camera review of the withheld documents and a full analysis of whether the exception is applicable in this case. Absent a more deliberate review and analysis, the risk of disclosure of privileged communications is manifest.

The case was an appeal from a special referee's production order.

The court recognized the "fiduciary" exception and held

 although defendants do not take issue with the motion court's finding of good cause — they focus on the determination that there never was an adversarial relationship between NAMA and Alliance — we conclude that the case must be remanded for the court to conduct a comprehensive good-cause analysis. The 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 and pierce the corporate attorney-client privilege, 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...

 The adversity question is therefore not one of timing, as defendants contend, but is answered by the communications' content. For this reason, we reject defendants' argument that, if NAMA were adverse to Alliance at some point, all subsequent communications between the Managers and the Attorneys would rest beyond the fiduciary exception's reach. Communications regarding defendants' alleged breach of fiduciary duties could have occurred at the same time as attorney-client communications regarding how to deal with NAMA (for example, during the California arbitration); it would frustrate the balancing of interests in attorney-client privilege cases to permit defendants to withhold communications that might reveal the alleged wrongful conduct simply because the parties were adverse at some point in the past. Thus, the motion court correctly stated that whether communications that occurred after an adversarial relationship developed are privileged depends on their content.

This is where a court's ability to conduct in camera review of the communications is crucial (see Spectrum Sys. Intl., 78 NY2d at 378 ["whether a particular document is or is not protected is necessarily a fact-specific determination, most often requiring in camera review"] [*12][internal citation omitted]; see also Stenovich, 195 Misc 2d at 102 [discussing court's in camera review of arguably privileged documents]). Absent a review of the communications (or at least a sampling thereof), it would be impossible to determine whether they involved advice concerning the instant litigation or "how to deal with" NAMA.

The matter was remanded for further proceedings. (Mike Frisch)

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