Court Outlines How Investors Can Pierce Corporate Privilege

The ABA/BNA Lawyers’ Manual on Professional Conduct™ is a trusted resource that helps attorneys understand cases and decisions that directly impacts their work, practice ethically, and...

By Samson Habte

Oct. 13 — When investors suing their company want to see confidential corporate communications by invoking the fiduciary exception to the corporate attorney-client privilege, the trial court can't declare the exception inapplicable merely because the parties' interests aren't aligned, the New York Supreme Court, Appellate Division, First Department, held Oct. 8.

Instead, the judge must consider a host of factors in determining whether the corporate privilege withstands the investors' discovery demands, Justice Rolando T. Acosta said.

The ruling—in which the Manhattan-based First Department recognized the fiduciary exception for the first time—was triggered by a discovery dispute in a lawsuit that accuses managers of a billion-dollar Las Vegas real estate development and their lawyers at Greenberg Traurig LLC of defrauding investors.

Embracing Garner

In Garner v. Wolfinbarger, 430 F.2d 1093 (5th Cir. 1970), the fiduciary exception to the attorney-client privilege, which originated in trust law, was extended to the corporate environment, allowing shareholders to use it to pierce the corporate attorney-client privilege under certain circumstances.

Here, the court expressly adopted the test articulated in Garner, which sets forth a nonexhaustive list of factors a trial court should consider in determining whether a party has shown good cause for applying the fiduciary exception in a given case. Acosta also referred to factors the Restatement (Third) of the Law Governing Lawyers lists on this subject. (See box.)

The court declined to recognize a “categorical adversity limitation” under which the exception would never apply to communications between corporate managers and counsel that occurred after shareholders seeking to pierce the privilege “pursued interests that were adverse to those of” the corporation.

Acosta rejected the notion that if the shareholders “were adverse to [the corporation] at some point, all subsequent communications between the Managers and the Attorneys would rest beyond the fiduciary exception's reach.” Rather, he said, “adversity is not a threshold inquiry but a component of the broader good-cause inquiry.”

Acosta further stated that because the trial court failed to “conduct a comprehensive good-cause analysis,” the appellate panel “cannot affirm an order directing the production of more than 3,000 purportedly privileged communications without a single one of those communications having been reviewed.”

Investors vs. Managers, Counsel

Plaintiff NAMA Holdings LLC is the majority investor in Alliance Network LLC, a group of companies created to develop commercial properties in Las Vegas that were slated to become the World Market Center (the WMC Project).

NAMA's lawsuit alleges that Alliance's managers “carried out a systematic … scheme” to misappropriate “assets, rights and opportunities belonging to” Alliance and NAMA. According to the court, the complaint asserts that Alliance's corporate counsel at Greenberg Traurig aided and abetted the scheme by

advising and counseling the Managers with respect to their interference with NAMA's rights and the rights and benefits of the various Alliance companies under certain agreements. NAMA further alleges that the Managers engaged in self-dealing, with the assistance of the Attorneys, by creating a secret partnership known as the Blue Diamond Venture (BDV), an entity that directly competes with the WMC Project and in which the Attorneys improperly took a financial interest. NAMA claims that BDV wrongfully appropriated Alliance's intellectual property, usurped business opportunities belonging to Alliance, and violated an operating agreement governing the management of Alliance.

The complaint—which asserts both direct and derivative claims against the defendants—further alleges that Greenberg Traurig helped the managers orchestrate distributions of Alliance assets so as to avoid paying a $22 million arbitration award NAMA won in 2009.

The arbitration panel concluded that the managers “largely abdicated their contractual duties to act on behalf of” Alliance.

That finding became relevant to the present discovery dispute, which arose when NAMA moved to compel production of attorney-client communications relating to a 2011 transaction that transferred Alliance's interest in the WMC Project to a newly formed entity.

No Categorical ‘Adversity Limitation.'

According to the opinion, “NAMA asserted that, in light of [the] arbitral finding…, NAMA was the only party safeguarding Alliance's interests. In addition, NAMA argued that the ‘fiduciary exception' to the attorney-client privilege compelled production, because the Managers owed a fiduciary duty to NAMA and accordingly sought legal advice on its behalf.”

The defendants, by contrast, argued that if at some point NAMA's interests diverged from those of Alliance, the fiduciary exception was inapplicable to any communications between the managers and counsel from that point forward.

The appellate court disagreed. “While some factors in the Garner test are relevant to a determination of adversity, Garner did not create a categorical adversity limitation,” it said. “Thus, adversity is not a threshold inquiry but a component of the broader good-cause inquiry.”

Explaining how a finding of adversity might affect the Garner inquiry, Acosta said “where communications evince an adverse relationship and contain advice on how corporate management might handle the shareholder, a finding of good cause is less likely.”

“The adversity question is therefore not one of timing, as defendants contend, but is answered by the communications' content,” Acosta said.

Because the trial court ordered production of the purportedly privileged communications without reviewing those materials in camera and applying the Garner factors, the appellate court remanded the case with directions to conduct that inquiry.

Also on the panel were Justices David Friedman, Karla Moskowitz, Rosalyn H. Richter and Barbara R. Kapnick.

Steven A. Berger and Jonathan Rogin of Berger & Webb LLP, New York, represented NAMA Holdings LLC.

Justin Y.K. Chu of Steptoe & Johnson LLP, New York, represented Greenberg Traurig. Jonathan Montcalm and David C. Singer of Dorsey & Whitney LLP, New York, represented defendants Shawn Samson and Jack Kashani.

To contact the reporter on this story: Samson Habte in Washington at shabte@bna.com

To contact the editor responsible for this story: Kirk Swanson at kswanson@bna.com

Full text at http://www.bloomberglaw.com/public/document/NAMA_Holdings_LLC_v_Greenberg_Traurig_LLP_No_60105408_2015_BL_332.

The ABA/BNA Lawyers’ Manual on Professional Conduct is a joint publication of the American Bar Association Center for Professional Responsibility and Bloomberg BNA.

 

Copyright 2015, the American Bar Association and The Bureau of National Affairs, Inc. All Rights Reserved.


Factors Trial Judge Should Consider in Deciding Whether Fiduciary Exception to Attorney-Client Privilege Applies

In Garner, the Fifth Circuit said courts should consider the following nonexhaustive list of factors in determining whether shareholders who have sued corporate managers for breach of fiduciary duty may invoke the fiduciary exception to override the attorney-client privilege that attached to management's communications with counsel:

• 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 action criminal, or illegal but not criminal, or of doubtful legality;

• whether the communication related to past or to 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 NAMA, the court said Section 85 of the Restatement (Third) of the Law Governing Lawyers (2000) offers a test “that appears more succinct” in that it focuses “primarily on the balancing of the requesting party's need for information against the threat to corporate confidentiality,” which “is indeed the overarching consideration.” But the commentary accompanying that Restatement section “sets forth a version of the Garner test with no fewer than 10 factors for consideration,” the court noted.