New York's highest court ruled Thursday that Bank of America must disclose to an insurer communications it had with Countrywide Financial six months before the bank bought the mortgage lending company in 2008. The insurer, Ambac Assurance Corp., claims in a lawsuit that Countrywide illegally misrepresented its mortgage-backed securities.
 
The Court of Appeals ruled attorney-client privilege doesn't shield hundreds of communications between the two institutions and their lawyers from Ambac as it collects evidence for its fraud lawsuit. The court reinstated the order of a judge in Manhattan, where the fraud case is pending.

Ambac guaranteed payments on securities issued by Countrywide subsidiaries between 2004 and 2006.

"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," Judge Eugene Pigott Jr. wrote. "Defendants ... respond that there is no evidence of actual abuse in this case."

Pigott, writing for the four-judge majority, noted that attorney-client privilege in New York is generally lost when communications are shared with third parties, except when they relate to pending or anticipated litigation such as with co-defendants in criminal cases.

He rejected the bank's argument that privilege should apply more broadly to any common legal interest, concluding that any benefits of that would be outweighed by lost evidence, along with the potential for abuse. Judges Sheila Abdus-Salaam, Leslie Stein and Eugene Fahey agreed with him.

In a dissent, Judge Jenny Rivera wrote there's already a "crime-fraud exception" to attorney-client privilege that permits disclosure of communications related to future wrongdoing. A referee in the Countrywide case reviewed and distilled the 366 communications at issue to 110 deemed privileged, she noted.