In an article published in last year’s Suffolk Lawyer, I discussed decisions that upheld the confidentiality of attorney-client communications, one of our oldest common law evidentiary privileges. The two cases in question – Stock v. Schnader Harrison Segal & Lewis LLP, 142 A.D.3d 210 (1st Dep’t 2016), regarding intra-firm communications by attorneys seeking ethical advice, and Rossi v. Blue Cross and Blue Shield of Greater N.Y., 73 N.Y.2d 588 (1989), which provided protection to corporate communications that are predominantly legal in character – helped expand and develop attorney-client privilege into a robust doctrine. Now in two recent decisions by the First and Third Departments, the Appellate Division provided clarification regarding the limits of attorney-client privilege. 

In January 2019, the First Department, in Metropolitan Bridge & Scaffolds Corp. v. New York City Hous. Auth., 168 A.D.3d 569 (1st Dep’t 2019), held that the New York City Housing Authority (NYCHA) waived attorney-client privilege when it placed the knowledge of its counsel at issue with respect to documents that were the subject of a discovery dispute. Namely as NYCHA alleged the third-party defendants defrauded their Law Department, they were required to establish reasonable reliance on third-party defendants’ “alleged misrepresentation.” The Court further held that NYCHA could not rely on attorney-client privilege to redact or withhold documents while selectively disclosing other privileged communications in support of their own interests. (See Deutsche Bank Trust Co. of Ams. v. Tri-Links Inv. Trust, 43 A.D.3d 56, 64 (1st Dep’t 2007); Orco Bank v. Proteinas Del Pacifico, 179 A.D.2d 390, 390 (1st Dep’t 1992)).

The case concerned NYCHA’s alleged nonpayment to Metropolitan for equipment and services provided at various NYCHA residences. In response, NYCHA filed a third-party complaint alleging that the third-party defendants (Liberty Architectural Products, et. al.) had conspired to deceive NYCHA by submitting fraudulent certifications attesting that Metropolitan’s former owners had never been convicted of a crime (a conviction would have resulted in disqualification). Following a discovery dispute concerning NYCHA’s failure to produce documents regarding the alleged conspiracy and its reliance on the false certifications, NYCHA eventually produced over 700 heavily redacted documents, and withheld another group of over 400 documents as privileged. Another late production of documents followed depositions. Plaintiff and Third-Party Defendants moved to compel NYCHA to comply with prior discovery orders, and the Court granted the motion, taking issue with NYCHA’s claims of attorney-client privilege.

On appeal, the First Department affirmed the motion court’s decision, holding that “the court correctly found that having placed the knowledge of its law department at issue, NYCHA waived attorney-client privilege with respect to the subject documents” and further that “NYCHA may not rely on attorney-client privilege while selectively disclosing other self-serving privileged communications.” 168 A.D.3d at 571-572.

In a similar context, in February 2019, the Third Department echoed the First Department’s clarification regarding which material does not fall under attorney-client privilege. In Galasso v. Cobleskill Stone Prods., Inc., 169 A.D.3d 1344 (3rd Dep’t 2019), Plaintiff, a shareholder of Cobleskill Stone Products, Inc. (Defendant), alleged that pursuant to Business Corporation Law §§ 706(d) and 716(c), the Defendant squandered corporate assets and “engaged in self-dealing,” acting in self-interest rather than in the interests of the corporate shareholders. In the course of discovery, Defendant requested a valuation of stock report, which was prepared for Plaintiff by an independent business valuation and advisory firm. Plaintiff refused to provide the report on the grounds that the report was not material and necessary, and that it was furthermore privileged information, at which time the Defendant moved to compel discovery. The Supreme Court granted Defendant’s motion to compel discovery, after which the Plaintiff appealed.

On appeal, the Third Department unanimously upheld the lower court’s decision, holding that the Supreme Court was vested with the discretion to determine whether discovery was “material and necessary in the prosecution or defense of an action” (CPLR § 3101(a)). Key to the Court’s analysis in determining the validity of the valuation report falling under attorney-client privilege was Ambac Assur. Corp. v. Countrywide Home Loans, Inc., 27 NY3d 616, 623 (2016), which held that the party asserting attorney-client privilege was required to establish that the communication in question was between an attorney and client “for the purpose of facilitating the rendition of legal advice or services” and was “predominantly of a legal character.” As the valuation report was not initially created for litigation purposes, contained no legal information and was originally for estate tax purposes, the Court judged it not to be “of a legal character.”

Most importantly, the Court specified that because the valuation report expressed “serious and substantial concerns” to Plaintiff based on its appraisal of Plaintiff’s stocks in Defendant, the valuation report played a role in the commencement of legal action in this matter. Thus, the court declared it “probative,” stating that it provided proof or evidence for why Plaintiff brought allegations of gross malfeasance against Defendant in the first place. Applying that logic, the Appellate Division agreed with the lower court’s determination that the valuation report offered a standard allowing the court to evaluate Plaintiff’s damages.

These recent decisions show that attorney-client privilege can be inapplicable in instances where the communications in question are the basis for bringing a legal action before the court. Due to their very nature as intrinsic to the legal action in question, the Court and all parties involved in the action must be allowed access to information which may be classified as “privileged” in other instances. Although the privilege offers vast protection, litigants and their counsel are warned that they should not automatically assume attorney-client privilege provides exemptions from disclosure for material and necessary information upon which a legal claim is asserted.