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Subject-Matter Waiver of the Attorney-Client Privilege

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  • Posted on: Jul 26 2021

“The attorney-client privilege shields from disclosure any confidential communications between an attorney and his or her client made for the purpose of obtaining or facilitating legal advice in the course of a professional relationship.” Ambac Assur. Corp. v. Countrywide Home Loans, Inc., 27 N.Y.3d 616, 623 (2016). The privilege “fosters the open dialogue between lawyer and client that is deemed essential to effective representation.” Spectrum Sys. Intl. Corp. v. Chemical Bank, 78 N.Y.2d 371, 377 (1991)). “It exists to ensure that one seeking legal advice will be able to confide fully and freely in his attorney, secure in the knowledge that his confidences will not later be exposed to public view to his embarrassment or legal detriment.” Matter of Priest v. Hennessy, 51 N.Y.2d 62, 67-68 (1980).

Although the privilege serves an important function – the open and candid dialogue between attorney and client – there exists an “[o]bvious tension” between the privilege and the policy of New York State that favors liberal discovery. Ambac, 27 N.Y.3d at 624 (citing Spectrum, 78 N.Y.2d at 376-377); see also CPLR § 3101(a)(1) (requiring “full disclosure of all matter material and necessary in the prosecution or defense of an action”). Because the privilege shields from disclosure “material and necessary” information “and therefore ‘constitutes an “obstacle” to the truth-finding process,’” courts narrowly construe its application. Ambac, 27 N.Y.3d at 624 (quoting Matter of Jacqueline F., 47 N.Y.2d 215, 219 (1979)); Spectrum, 78 N.Y.2d at 377. For this reason, “[t]he party asserting the privilege bears the burden of establishing its entitlement to protection by showing that the communication at issue was between an attorney and a client ‘for the purpose of facilitating the rendition of legal advice or services, in the course of a professional relationship,’ that the communication is predominantly of a legal character, that the communication was confidential and that the privilege was not waived.” Ambac, 27 N.Y.3d at 624. (quoting Rossi v. Blue Cross & Blue Shield of Greater N.Y., 73 N.Y.2d 588, 593-594 (1989)).

Sometimes, a party possessing the privilege can waive its protection by affirmatively making the subject matter of the privileged communication an issue in a litigation. This is called “at-issue” waiver or “subject matter waiver”. Deutsche Bank Trust Co. of Ams. v Tri- Links Inv. Trust, 43 A.D.3d 56, 64 (1st Dept. 2007) (holding, subject matter waiver of a privilege occurs when “a party affirmatively places the subject matter of its own privileged communication at issue in litigation, so that invasion of the privilege is required to determine the validity of a claim or defense of the party asserting the privilege, and application of the privilege would deprive the adversary of vital information.”). 

Notably, the fact that privileged communications may contain information “relevant” to issues the parties are litigating will not, without more, place the contents of the privileged communication itself “at issue.” See Long Is. Light. Co. v. Allianz Underwriters Ins. Co., 301 A.D.2d 23, 33 (1st Dept. 2002); see also Veras Inv. Partners, LLC v. Akin Gump Strauss Hauer & Feld LLP, 52 A.D.3d 370, 372 (1st Dept. 2008). Rather, “at issue” waiver occurs “when the party has asserted a claim or defense that he intends to prove by use of the privileged materials.” North Riv. Ins. Co. v. Columbia Cas. Co., 1995 WL 5792, *6, 1995 U.S. Dist. LEXIS 53, *17 (S.D.N.Y. 1995) (citations omitted); see also Manufacturers & Traders Trust Co. v. Servotronics, Inc., 132 A.D.2d 392, 397 (1987) (no “at issue” waiver where the party asserting privilege “does not need the privileged documents to sustain its cause of action”). An example of an affirmative act that constitutes a subject matter waiver of the privilege is the affirmative defense of a party’s “reliance upon the advice of counsel.” Village Bd. of Vil. of Pleasantville v. Rattner, 130 A.D.2d 654, 655 (2d Dept. 1987). “Moreover, selective disclosure is not permitted as a party may not rely on the protection of the privilege regarding damaging communications while disclosing other self-serving communications.” Id.; see also Orco Bank v. Proteinas Del Pacifico, 179 A.D.2d 390, 390 (2d Dept. 1992) (attorney-client privilege was waived by client’s “selective disclosure” of legal advice). 

This Blog examined subject matter waiver here.

Whether the attorney-client privilege was waived by a party to a litigation was the subject of U.S. Bank Nat’l Assn. v. Lightstone Holdings LLC, 2021 N.Y. Slip Op. 04537 (1st Dept. July 22, 2021) (here).

U.S. Bank arose from a $7.4 billion loan from defendant Wachovia Bank, NA (succeeded by Wells Fargo) and nonparties Bear Stearns and Bank of America (the “Original Lenders”) to affiliates of defendants Lightstone Holdings LLC (“Lightstone”) and David Lichtenstein (“Lichtenstein”), entered into for the purpose of purchasing Extended Stay Hotels (“ESH”), a real-estate investment trust that held a portfolio of over 600 hotel properties. Of the $7.4 billion, $4.1 billion consisted of a “Senior Loan,” which was secured by mortgages on the hotel chain’s properties, and the remaining $3.3 billion consisted of 10 tranched mezzanine or “Junior Loans” (the “ESH Transaction”). The Original Lenders acted as the senior and junior lenders on the aggregate loan. Lightstone and Lichtenstein (the “Guarantors”) extended a $100 million capped guaranty for payment on the loans (the “Guaranty Cap”).

After the closing, the Original Lenders securitized their interests in the Senior Loan in a commercial mortgage-backed security trust, receiving in return certificates representing their interests in the Trust entity. Ultimately, the trust certificates were sold to other investors. Plaintiff was the special servicer to the Trustee, acting on behalf of the present holders of the certificates, and, therefore, acted on behalf of the current senior lender holders (the “Senior Lender”). The junior loans were sold to various entities, including, as relevant to the appeal, defendants Line Trust, Deuce, Wachovia and Ashford (the “Junior Lenders”).

On June 15, 2009, the borrowers filed for bankruptcy. The senior lender recovered the gross amount of $4,149,414,854.32, and the junior lenders were essentially wiped out. The Junior Lenders sued the Guarantors, which actions were ultimately settled with the Guarantors paying the Junior Lenders certain amounts.

In the action before the First Department, plaintiff (as “Senior Lender”) sought to claw back settlement payments received by the remaining Junior Lender defendants in the action, alleging it had priority over them pursuant to the Intercreditor Agreement (the “ICA”), the document governing the relationship between the lenders in their respective capacities as debtholders under the senior and junior loans. Nonparty respondent Cadwalader Wickersham & Taft, LLP (“Cadwalader”) represented the Original Lenders in the ESH Transaction and drafted the ICA.

At the bench trial, the Junior Lenders relied on the testimony of the two Cadwalader attorneys who drafted the ICA, as well as Tony Fineman (“Fineman”), Wachovia’s (as one of the Original Lenders) primary contact with respect to the ESH Transaction. The witnesses testified as to the meaning and intent of certain provisions of the ICA. At that time, and at various times prior to trial, plaintiff sought the production of Cadwalader documents that were protected by the attorney-client privilege. Plaintiff contended, as it did on appeal, that the Junior Lenders’ reliance on counsel’s testimony as to the meaning and intent of the ICA resulted in a subject matter waiver, requiring the production of privileged documents on the same topic. Supreme Court denied plaintiff’s request and after the bench trial, dismissed the claims against the Junior Lenders, finding that the evidence established, by a preponderance of the evidence, that the parties intended to give priority over the Guaranty Cap to the Junior Lenders.

On appeal, plaintiff asked the Court to remand the matter for a new trial on the basis that it was entitled to the privileged Cadwalader documents. The First Department declined to do so and affirmed Supreme Court’s findings.

The Court held that Ashford, Line Trust, and Deuce, as Junior Lenders, were not the holders of the privilege with Cadwalader. Rather, said the Court, the Original Lenders were the holders of the privilege. Slip Op. at *2. Thus, concluded the Court, “they did not place the ‘subject matter of its own privileged communication at issue in litigation.’” Deutsche Bank Trust Co. of Ams., 43 A.D.3d at 64. “Since they are not using their attorney-client privilege as a sword,” observed the Court, “it cannot be said that plaintiff is deprived of ‘vital information’ necessary to ‘determine the validity of a claim or defense of the party asserting the privilege.’” Id. (citing id.).

The Court also held that Wachovia, who was also a Junior Lender defendant in the action, was “the holder of the privilege since it was also an Original Lender.” Id. The Court found that Wachovia also relied on the testimony of the two Cadwalader attorneys concerning the Original Lenders’ intent with respect to the ICA. “In this regard,” said the Court, “the trial court correctly held, after the deposition testimony of Fineman was read into the record, that the privilege, as held by Wachovia ha[d] been waived with respect to communications/documents between Fineman (acting on behalf of Wachovia) and counsel concerning the relevant provisions of the ICA.” Slip Op. at *2-*3.

The Court found “unavailing” “[p]laintiff’s contention that Wachovia’s reliance on counsel’s testimony was enough to constitute a waiver as to all documents.” Slip Op. at *3. “Wachovia was not the only party that was represented by Cadwalader with respect to the original ESH Transaction,” said the Court. The Court noted that “Bear Stearns and Bank of America [were] equal holders of the privilege since Cadwalader represented all the Original Lenders.” Id. In fact, said the Court, “in at least one statement on the record, Cadwalader’s counsel averred that Bank of America, a nonparty, would not consent to a waiver of any privilege.” Accordingly, the Court held that “Wachovia could not unilaterally waive any privilege on behalf of the other privilege holders.” Id. (citations omitted).

In sum, the Court said:

To hold otherwise threatens the sanctity of the attorney-client privilege and would permit the unauthorized waiver of such without the consent of the actual party that possesses the privilege. Plaintiff’s position that the documents were necessary and relevant to the issue of the parties’ intent ignores the well-protected rights afforded privileged communications.

Id. (citation omitted).

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