People v. Greenberg

50 A.D.3d 195, 851 N.Y.S.2d 196

Opinions

OPINION OF THE COURT

Malone, J.

In February 2005, American International Group (AIG), a Delaware corporation with its principal place of business in New York, received document subpoenas from the New York Attorney General’s Office (NYAG) and the Securities and Exchange Commission relating to two reinsurance transactions involving a subsidiary of AIG and a subsidiary of General Reinsurance Corporation. The inquiries ultimately expanded to include a host of transactions and accounting entries by AIG, then led by defendants Greenberg, who served as AIG’s CEO from 1968 until March 2005, and Smith, who served as AIG’s CFO from 1996 until March 2005. According to AIG, both Greenberg and Smith resigned from the board of directors in June 2005; however, Greenberg and Smith assert that they resigned in March 2005.

On May 26, 2005, NYAG filed a complaint (the original complaint) charging AIG, Greenberg and Smith with violating Executive Law § 63 (12) and General Business Law § 352-c (1) (a) and (c) (the Martin Act), and perpetrating common-law fraud. As to Greenberg and Smith, the original complaint alleged, inter alia, that they engaged in at least two sham insurance transactions to improperly bolster AIG’s reported loss reserves and several other schemes to portray an unduly positive picture of AIG’s underwriting performance to the investing public.¹

As a followup to their respective answers, which included advice of counsel defenses, Greenberg and Smith served document requests on AIG during the course of discovery, seeking, inter alia, all memoranda created during their tenure as officers and directors of AIG reflecting the advice of counsel, efforts to obtain the advice of counsel, and counsel’s involvement in the four transactions giving rise to the subject charges (legal memoranda). As officers and directors of AIG, Greenberg and Smith claimed to have frequent interaction with internal and external counsel for AIG, that they separately had the authority to communicate with and direct the actions of AIG’s counsel and each did so routinely, that Greenberg himself authored and received some of the legal memoranda at issue on this appeal, and that others at AIG who reported to defendants and upon whom they relied would have authored, received and relied on the advice and involvement of AIG counsel, as reflected in the legal memoranda. Following AIG’s dismissal from the action, Greenberg and Smith issued subpoenas duces tecum to AIG seeking, inter alia, the legal memoranda. However, AIG refused to honor the subpoenas on grounds of the attorney-client privilege and work product protection.

Greenberg and Smith then moved for an order compelling AIG to produce, inter alia, the legal memoranda.² At oral argument their counsel reasoned that under the laws of Delaware, where AIG is incorporated, Greenberg and Smith did not lose access to communications with corporate counsel when they left the board of directors. Since the documents were created while they were officers and directors of AIG and the decisions Green-berg and Smith made were often on the advice of counsel, their counsel further argued that Greenberg and Smith should have access to the legal memoranda to prepare an effective defense.

AIG opposed the motion and maintained that, consistent with New York law, the attorney-client privilege attaching to a corporation’s confidential documents belonged to the corporation alone and therefore may be properly asserted even against former officers and directors. Counsel for AIG further asserted that when deciding privilege issues New York courts apply the law of the jurisdiction where the evidence in question will be introduced at trial or the jurisdiction of the discovery proceeding.³

The motion court denied the motion, holding that the attorney-client privilege attached to AIG, not its officers; in addition, it adopted the argument made by NYAG that “the recent amendment of the complaint [by omitting the claim for common-law fraud] eliminate [d] the element of scienter which would implicate advice of counsel” (Spitzer v American Intl. Group, 2006 NY Slip Op 30372[U], *2). We reverse.

As AIG concedes, New York courts routinely apply “the law of the place where the evidence in question will be introduced at trial or the location of the discovery proceeding” when deciding privilege issues. Thus, given the fact that in this case the privileged communications were made in New York and have been sought in discovery in New York for use at a trial in New York in which the New York Attorney General is the plaintiff who is suing defendants for alleged breaches of New York’s securities law, we hold that New York law is controlling. Indeed, the evidentiary privilege for confidential communications between attorney and client, perhaps the oldest of the common-law evidentiary privileges, is codified in New York as CPLR 4503 (see Alexander, Practice Commentaries, McKinney’s Cons Laws of NY, Book 7B, CPLR C4503-.1). By contrast, other than being the state where AIG was incorporated, Delaware has no connection to this litigation. In any event, regardless of whether New York or Delaware law applies, Greenberg and Smith should be entitled to access the legal memoranda. Accordingly, the motion should have been granted.

The law is well settled in New York that, although a corporate director has an absolute, unqualified right, with roots in the common law, to inspect the corporate books and records, once he is removed from office such right terminates forthwith. “This is so manifestly because he no longer has a voice in governing the corporation” (Matter of Cohen v Cocoline Prods., 309 NY 119, 124 [1955]). Nevertheless, a former director may still have a qualified right to inspect the books and records covering a period of his directorship whenever in the discretion of the trial court he can make a proper showing by appropriate evidence that such inspection is necessary to protect his personal responsibility interest as well as the interest of the stockholders (id; Matter of Murphy v Fiduciary Counsel, 40 AD2d 668, 669 [1972], affd 32 NY2d 892 [1973]). In Cohen, a longtime corporate director was about to undertake an investigation of alleged misappropriation of corporate funds and, after being rebuffed by the board in his efforts, commenced a proceeding to compel an inspection of the corporate books and records when he was not reelected as a director. The Court of Appeals held that it was error to grant the now former director such an inspection as a matter of absolute right, but remitted the proceeding to the trial court for a hearing as to the purpose for which petitioner had sought the inspection. In Murphy, this Court found that the record failed to establish facts that would warrant such inspection inasmuch as there was no satisfactory or convincing proof that there was a reasonable probability that petitioner had or might have a personal responsibility interest to protect during his stewardship so as to warrant the exercise of judicial discretion in his favor. There, we found that petitioner had not been sued or threatened with suit and that there was no substantial showing that he had been or might reasonably be charged with malfeasance or nonfeasance during his incumbency. Here, however, there is no need for any factual inquiry since defendants have already been sued and seek the internal legal memoranda that were allegedly prepared for their use and relied upon by them in order to support their advice of counsel defense.

Generally, “[t]he attorney-client privilege encourages full and frank communication between attorneys and their clients” (Tekni-Plex, Inc. v Meyner & Landis, 89 NY2d 123, 138-139 [1996] [internal quotation marks omitted]), and applies to communications from the client to the attorney when the communication is “made for the purpose of obtaining legal advice and directed to an attorney who has been consulted for that purpose” (Rossi v Blue Cross & Blue Shield of Greater N.Y., 73 NY2d 588, 593 [1989] [internal quotation marks omitted]). The proponent of the privilege bears the burden of establishing that the information sought is immune from disclosure (Spectrum Sys. Intl. Corp. v Chemical Bank, 78 NY2d 371, 377 [1991]).

In analyzing the issue of whether former directors are entitled to any privileged documents generated or created during their tenure at the corporation, the attorney-client communications here should be separated into two categories: general business matters and the four transactions at the heart of this action (see Tekni-Plex, 89 NY2d at 136). When analyzed in this manner, we find that the laws of New York and Delaware are substantively similar.

While neither Cohen nor Murphy involved privileged material, this Court, in Fochetta v Schlackman (257 AD2d 546 [1999]), exercised its discretion and, citing Tekni-Plex, held that, given the extent of his ownership interest and management of certain closely held corporations prior to his execution of a stock surrender, the attorney-client privilege was not properly invoked by successor management to deny a former 50% shareholder access to otherwise privileged presurrender materials essential to the proof of claims questioning the validity of his stock surrender. Here, there is no question regarding the extent of defendants’ management of AIG. We also note that most recently in Teachers’ Retirement Sys. of La. v Greenberg, the Delaware Chancery Court, addressing the identical question presented here and involving Greenberg and Smith as defendants, found that Greenberg and Smith were entitled to discovery of AIG documents generated during their tenure as AIG officers and directors that directly or indirectly reflected legal advice regarding certain AIG business transactions and that AIG’s production of such documents would not constitute a waiver of its privilege (New Castle County, July 11, 2007, Strine, Jr., VC., C.A. No. 20106).⁴

Although in New York, unlike Delaware, the corporation and its current board of directors control the attorney-client privilege with regard to confidential communications arising out of general business matters (Tekni-Plex, 89 NY2d at 136; cf. Talvy v American Red Cross in Greater N.Y., 205 AD2d 143, 149 [1994], affd 87 NY2d 826 [1995]), a former director is not absolutely barred from an inspection of all confidential documents generated during his tenure (Cohen, 309 NY 119, 124 [1955], supra), and upon a proper showing that an inspection of the corporate books and records covering the period of the directorship is necessary to protect the personal responsibility interest of the former director as well as the interest of the board, the former director may have a qualified right to an inspection of such documents (id; Murphy, 40 AD2d 668, 669 [1972], supra; see also Matter of Cohen v C-C Clubs, 10 Misc 2d 57, 58 [1958]). The qualification of that right of inspection clearly means that former directors must make a showing that the records sought are necessary to protect their personal responsibility interests. As noted above, defendants have clearly made such a showing.

Further, contrary to AIG’s contention, the Court of Appeals’ decision in Tekni-Plex (89 NY2d 123 [1996], supra) does not mandate denying Greenberg and Smith access to the privileged documents in question. Tekni-Plex involved a dispute over the acquisition of a corporation that manufactured and packaged pharmaceutical products. The Court of Appeals, in analyzing the issue of whether a former director was entitled to any privileged documents generated or created during his tenure at the corporation, separated privileged communications as to general business communications from those relating to the merger negotiations (at 136). The Court of Appeals held that TekniFlex’s former outside counsel, who was retained among other things to assist in Tekni-Plex’s environmental compliance investigations, could not disclose to Tekni-Plex’s former director environmental compliance communications that transpired while he was on the board. However, the new board was held to be “without authority to assert the attorney-client privilege to preclude [the former counsel] from revealing to [the former director] the contents of communications conveyed by [the former board] concerning the merger transaction” (at 139). Thus, as Tekni-Plex makes clear, the fact that Greenberg and Smith are no longer directors is not fatal to their motion to compel where their conduct while directors has been called into question and the inspection is needed to prepare their defenses (C-C Clubs, 10 Misc 2d at 58).

The issue here is not whether the legal memoranda constitute privileged attorney-client materials (they do) or whether Green-berg and Smith are entitled to assert or waive AIG’s privilege (they are not), but whether Greenberg and Smith are among the class of persons legally allowed to view those privileged communications. Under both New York and Delaware laws, the fact that Greenberg and Smith are no longer directors is not fatal to their motion to compel, since their conduct while directors has been called into question and the inspection is needed to prepare their defenses.

Given that determining and reviewing document immunity claims are largely fact-specific processes (Spectrum Sys., 78 NY2d at 381), on the record presented, we find that defendants are within the circle of persons entitled to view privileged materials without causing a waiver of the attorney-client privilege. Since Greenberg and Smith, while directors and officers of AIG, were privy to, and on many occasions actively participated in, legal consultations regarding the four subject transactions, AIG, as the proponent of the privilege, has failed to sustain its burden of establishing that the privilege is assertable to defendants, especially considering that their request is limited to the viewing of the legal memoranda.

Most significant to the issue of waiver is AIG’s acknowledgement in its respondent’s brief (at 6 n 4) that it

“has produced virtually all of the documents Appellants seek. After being served with Appellants’ brief, the Securities and Exchange Commission (‘SEC’) asked AIG to waive its privilege and produce several of the documents as part of its regulatory investigation of certain of the transactions at issue in this lawsuit. As a result, AIG then produced those documents to Appellants.”

Applying New York law, the Southern District of New York has held that the voluntary production and disclosure of certain documents to the SEC, without objection on the ground of attorney-client privilege, must be deemed to have been a complete waiver of the privilege unless express claims of confidentiality were made as to the documents turned over at the time they were so disclosed (Teachers Ins. & Annuity Assn. of Am. v Shamrock Broadcasting Co., Inc., 521 F Supp 638 [1981]). While the court’s finding of the possibility of a limited waiver has been questioned and, in effect, overruled in the Second Circuit (In re John Doe Corp., 675 F2d 482, 489 [2d Cir 1982]), the principle that a voluntary production of privileged documents must be deemed a complete waiver of the privilege is now well settled in the circuit, as is the principle that New York law controls. On the present record we are unable to determine whether AIG’s concession that it “has produced virtually all of the documents Appellants seek” and has waived its privilege and produced “several of the documents” means that such documents include the documents relating to the four transactions that form the basis of the charges against defendants. Nevertheless, whether or not it is determined that AIG has waived its privilege, we hold that on the facts of this case, Greenberg and Smith have the unequivocal right to review relevant materials generated by or for AIG counsel while serving as AIG’s directors and officers.

In light of this disposition, we do not reach the issue raised by defendants and NYAG regarding the claim that federal law, namely the National Securities Markets Improvement Act, preempts the Martin Act.

Accordingly, the order of the Supreme Court, New York County (Charles E. Ramos, J.), entered October 2, 2006, which, insofar as appealed from, denied the joint motion of individual defendants Greenberg and Smith to compel AIG to produce certain legal memoranda prepared during their tenure at AIG, should be reversed, on the law, with costs, the motion granted, and the matter remanded for further proceedings consistent herewith.

1 . In February 2006, AIG entered into a settlement agreement with NYAG for payments totaling $800 million and the action was discontinued against AIG with prejudice. However, the caption on the record on appeal still names AIG as a defendant.

2 . One day before oral argument, NYAG filed an amended complaint naming only Greenberg and Smith as defendants, which abandoned previously interposed claims of common-law fraud, but retained three causes of action against Greenberg and Smith arising under Executive Law § 63 (12) and General Business Law § 352-c (1) (a) and (c) (Martin Act). The amended complaint retained allegations made in the original complaint regarding Greenberg’s and Smith’s purported knowledge of wrongdoing.

3 . Although a nonparty to the motion, NYAG asserted at oral argument that the legal memoranda were not relevant to the litigation because the amended complaint included only causes of action that could be pursued without a showing of scienter.

4 . However, along with a former director’s right to learn of privileged information when he was a director “comes the obligation to maintain the confidentiality of that communication, since the privilege belongs to the [corporation] and is not the Director’s to waive” (American S.S. Owners Mut. Protection & Indem. Assn., Inc. v Alcoa S.S. Co., Inc., 232 FRD 191, 198 [SD NY 2005]).