No Privilege for BofA &|Countrywide Merger Docs

(CN) — An insurer can compel Bank of America to release 400 pages of documents from its merger with Countrywide Financial that may shed light on whether it considered its liability for alleged pre-merger fraud, New York's high court ruled.

Ambac Assurance Corporation sued Countrywide Home Loans, a subsidiary of Countrywide Financial Corp., when mortgage-backed loans Countrywide issued were exposed as worthless in the 2008 financial crisis.

Ambec claimed that Countrywide fraudulently misrepresented the quality of the loans, and deceptively induced it to guarantee them.

It named Bank of America as a defendant when it merged with Countrywide in 2008, seeking to hold it liable for the alleged fraud as Countrywide's successor-in-interest.

As a result of the merger, Countrywide sold almost all of its assets to Bank of America, and became a wholly-owned subsidiary called Red Oak Merger Corporation.

In its discovery responses, Bank of America withheld approximately 400 communications that took place between Bank of American and Countrywide in the months before the merger's close, claiming they are protected by attorney-client privilege.

Ambec challenged the withholding, and New York's highest court, the Court of Appeals, ruled in its favor Thursday.

"We hold today, as the courts in New York have held for over two decades, that any such [privileged] communication must also relate to litigation, either pending or anticipated, in order for the [attorney-client] exception to apply," Justice Eugene Pigott said, writing for the high court's majority.

Here, Countrywide and Bank of America agreed to share confidential information between their attorneys for the purpose of ensuring the merger met all legal and regulatory requirements.

"We do not perceive a need to extend the common interest doctrine to communications made in the absence of pending or anticipated litigation, and any benefits that may attend such an expansion of the doctrine are outweighed by the substantial loss of relevant evidence, as well as the potential for abuse," the 22-page opinion states.

For example, the responsive party could broadly define "common legal interests" to withhold responsive documents which really discuss only business interests. "Ambac argues that the very communications Bank of America withheld from disclosure would have revealed that the merging entities structured their transaction to conceal Countrywide's fraudulent dealings and leave potential victims without recourse," Pigott said.

Although there is no evidence of actual abuse by Bank of America or Countrywide, "the potential for abuse is sufficiently great, and the accompanying benefits so few, that expansion is not warranted."

The court noted that, had defendants simply hired a single attorney to represent them in the merger, which would not have been a conflict of interest, the communications would have remained privileged.

Two of the seven justices dissented, finding that parties that have a common legal interest in a successful merger should be allowed to claim privilege over their related communications.

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