Bally Mid-Atlantic later sold some of its health clubs, including the Charlotte club, to Blast Fitness Group, LLC. The Asset Purchase Agreement (“APA”) between Bally Mid-Atlantic and Blast transferred obligations arising under the real property leases of the clubs sold. The APA also included an indemnification clause under which Blast agreed to “defend, indemnify, and hold [Bally Mid-Atlantic and Bally Holding] . . . harmless of, from and against any Losses incurred . . . on account of or relating to . . . any Assumed Liabilities, including those arising from or under the Real Property Leases after the Closing.”

In May 2014, Friday Investments sued Bally Mid-Atlantic and Bally Holding (together, the “defendants”) for payment of back rent and other charges due under the lease stemming from Blast's alleged failure to pay rent on the space the defendants had assigned to Blast.

The defendants notified Blast of the lawsuit, and Blast agreed to defend and indemnify them in accord with the APA.

During discovery, Friday Investment's counsel requested copies of “post-suit correspondence and documents exchanged between [the defendants] and Blast.”

After the defendants refused to comply, Friday Investment moved to compel production of the requested documents.

The defendants objected and moved for a protective order, asserting the attorney-client privilege.

The trial court denied the defendants' motion for a protective order and granted Friday Investment's motion to compel.

The court of appeals affirmed, holding that a tripartite attorney-client relationship did not exist between the defendants and Blast because “an indemnification provision in an asset purchase agreement, standing alone, [was] insufficient to create a common legal interest between a civil litigant indemnitee and a third-party indemnitor.”

The court of appeals reasoned that the defendants and Blast shared “merely a common business interest” and, as a result, the attorney-client privilege did not extend to the communications between the defendants and Blast.

The dispute reached the North Carolina Supreme Court.

The North Carolina Supreme Court's Decision

The court found that an attorney-client relationship existed between the defendants and Blast, a non-party that had contractually agreed to defend and indemnify them.

In its decision, the court explained that, historically, an attorney-client relationship arose between an attorney and a single client the attorney represented. The court then noted that it had also recognized a multiparty attorney-client relationship in which an attorney represented two or more clients. It said that the rationale for recognizing a tripartite attorney-client relationship was that individuals “with a common interest in the litigation should be able to freely communicate with their attorney, and with each other, to more effectively defend or prosecute their claims.”

The court pointed out that, in the insurance context, the attorney defending the insured and receiving payment from the insurance company represented both the insured and the insurer. It reasoned that, notwithstanding that usually only the insured had been sued, a tripartite attorney-client relationship existed because the interests of both the insured and the insurer in prevailing against the plaintiff's claim were “closely aligned.”

A contractual duty to defend and indemnify created a common interest and tripartite relationship between the insurer, the insured, and the defense attorney, the court continued. Like the common interest found between an insurer and insured, an indemnification agreement created “a common interest between the indemnitor and the indemnitee” in that the indemnitor contractually shared in the indemnitee's legal well-being because the agreement subjected the indemnitor to the “damages assessed and loss resulting from an adverse judgment.”

The fact that indemnification related to a business purpose did not sever but strengthened that common interest, the court added.

As a result, the court found, a tripartite attorney-client relationship arose because the interests of both the indemnitor and indemnitee in prevailing against the plaintiff's claim were “contractually aligned,” notwithstanding that usually only the indemnitee had been sued.

Here, Blast had contractually agreed to indemnify and defend the defendants against any losses incurred relating to their real property lease. After litigation commenced, the defendants notified Blast of the litigation, and Blast engaged counsel to defend the case under the indemnification agreement. According to the court, like the common interest found in the insurance context, Blast's interest in the defendants' legal well-being as indemnitees created the “common interest” in this litigation: The indemnification provision subjected Blast to any damages that resulted from an adverse judgment against the defendants. Accordingly, a tripartite attorney-client relationship existed between the defendants, Blast, and their defense counsel, the court concluded.

The case is Friday Investments, LLC v. Bally Total Fitness of the Mid-Atlantic, Inc., No. 248PA16 (N.C. Nov. 3, 2017). Attorneys involved include: Horack, Talley, Pharr & Lowndes, P.A., by Keith B. Nichols, for plaintiff-appellee. Knox, Brotherton, Knox & Godfrey, by Lisa G. Godfrey; and Burt & Cordes, PLLC, by Stacy C. Cordes, for defendant-appellants.