In a case defining—for the first time—the parameters of the fiduciary exception to the attorney–client privilege in corporate disputes, a New York appellate court adopted the fiduciary-exception test enunciated in Garner v. Wolfinbarger, 430 F.2d 1093 (CTA 5 1970). In doing so, the court rejected the corporation’s argument that the fiduciary exception is inapplicable once its shareholders-plaintiffs become adverse to the company. NAMA Holdings, LLC v. Greenberg Traurig, LLP, 2015 WL 5839311 (N.Y. App. Div. Oct. 8, 2015). You may read the decision here.
Shareholder Derivative Suit
NAMA Holdings, LLC, an investor in The Alliance Network, LLC, sued Alliance, its managers, and its law firm alleging a variety of business-tort claims, including breach of fiduciary duty. Alliance and its co-defendants asserted the attorney–client privilege in refusing to produce a variety of documents, including communications between the company’s managers and its law firm. NAMA responded that the fiduciary exception applicable in shareholder derivative suits obviated the privilege.
This exception to the attorney–client privilege arose in trust law on the theory that a trustee’s communications with the trust’s lawyer benefitted the trust beneficiary and, as such, the beneficiary could obtain these communications under a so-called fiduciary exception to the attorney–client privilege.
In Garner, the Fifth Circuit extended the fiduciary exception to the corporate environment, and identified a non-exhaustive list of factors that one must prove to show the “good cause” necessary to invoke the fiduciary exception. The list includes:
- Number of shareholders and percentage of stock they represent;
- The “bona fides” of the shareholders;
- Nature of the shareholders’ claim;
- The shareholders’ need for the information and the information’s availability from other sources;
- Whether the purported wrong is criminal, illegal but not criminal, or of doubtful legality;
- Whether the communication sought involves past or prospective actions;
- Whether the communication involves advice concerning the litigation itself;
- Whether the shareholders have identified the communication or are “blindly fishing”; and
- The corporation’s interest in maintaining the confidentiality of its information, such as trade secrets.
Not all jurisdictions follow this test and, even where they do, it is with some modification. For a recent critique of this rule, see Benjamin Cooper, An Uncertain Privilege: Reexamining Garner v. Wolfinbarger and Its Effect on Attorney-Client Privilege, 35 Cardozo L. R. 1217 (2014), available for reading here.
Some courts hold that the fiduciary exception does not apply to communications made after the suing shareholders become adverse to the company. A recent Massachusetts Supreme Court case, profiled in this post, held just that. The NY court, however, rejected the adversity-threshold requirement, stating that Garner “did not create a categorical adversity limitation” and that adversity is “a component of the greater good-cause inquiry.”
And importantly, the court applied a “communication-specific adversity inquiry,” meaning that the trial court must review each purportedly privileged communication to determine whether—using the Garner factors—it revealed the necessary level of adversity. In other words, adversity is “not one of timing … but is answered by the communications’ content.”
Rejecting an adversity-only threshold, the court adopted Garner in totality, stating that courts evaluating a fiduciary exception must apply all of the Garner factors to each challenged communication. Noting that this is a “difficult task,” the court nonetheless remanded the case for a communication-specific inquiry.