The Most Overlooked Exception to Attorney-Client Privilege
In-house counsel often communicate with corporate management under the assumption that these communications are protected by the attorney-client privilege— absent some type of unusual and extraordinary circumstance, such as waiver of the privilege or the crime-fraud exception. A surprising number of both in-house and outside counsel, however, are unfamiliar with the longstanding “fiduciary exception” to the attorney-client privilege. Forty-five years ago, in Garner v. Wolfinbarger, the Fifth Circuit allowed the attorney-client privilege of a corporation to be pierced by the corporation’s shareholders upon a showing of “good cause.” While some courts have rejected this approach, a New York appellate court recently joined other courts, including the Delaware Supreme Court (see Wal-mart Stores, Inc. v. Indiana Electrical Workers Pension Trust Fund) in adopting it.
In particular, the New York Appellate Division, First Department issued a decision, NAMA Holdings, LLC v. Greenberg Traurig LLP, expressly adopting the so-called “Garner test” for the fiduciary exception to the attorney-client privilege. The NAMA Holdings case involved a discovery dispute arising out of a series of legal proceedings between the managers of Alliance Network, LLC (“Alliance”), its corporate counsel Greenberg Traurig, LLP (“Greenberg”), and NAMA Holdings, LLC (“NAMA”), the majority investor in Alliance. During discovery, Greenberg objected to the disclosure of around 3,000 pages of documents on the basis that its communications with Alliance’s managers were protected by attorney-client privilege. NAMA then moved to compel production of those documents pursuant to the fiduciary exception to the attorney-client privilege, among other reasons. According to NAMA, to the extent the documents reflected legal advice given by Greenberg to Alliance’s managers, the advice was sought by the managers as fiduciaries of NAMA — i.e., NAMA was an intended beneficiary of that advice — and thus was discoverable by NAMA.
The trial court sided with NAMA and ordered Greenberg to produce all 3,000 pages of documents. The First Department vacated that decision and remanded the case back to the trial court for a comprehensive and “communication-specific” analysis of whether NAMA established good cause to apply the fiduciary exception under Garner. “The Garner test,” the First Department wrote, “strikes the appropriate balance between respect for the privilege and the need for disclosure.” More specifically, the First Department instructed the lower court to look to the nine “good cause” factors set forth in Garner, which are:
(1) the number of shareholders and the percentage of stock they represent; (2) the “bona fides” of the shareholders; (3) the nature of the shareholders’ claims and whether they are “obviously colorable”; (4) the apparent necessity or desirability of the shareholders to obtain the information and the availability of it from other sources; (5) whether, if the shareholders’ claim is of wrongful conduct by the corporation, such conduct is criminal, illegal but not criminal, or of “doubtful legality”; (6) whether the communications related to past or to prospective actions; (7) whether the communication concerns advice regarding the litigation itself, (8) the extent to which the requested communications are specifically identified versus the extent to which the party seeking the documents is “blindly fishing”; and (9) the risk of revelation of trade secrets or other information in whose confidentiality the corporation has an interest for independent reasons.
In-house counsel in New York must keep the NAMA decision in mind, and inform the corporation’s executives that upon a showing of “good cause,” shareholders may be allowed to pierce the corporation’s attorney-client privilege and access documents that the corporation would normally expect to be privileged. Additionally, in-house counsel in other jurisdictions must determine whether, and to what extent, their jurisdiction follows Garner, and should advise corporate management accordingly.