Imagine that a legal dispute has arisen between a trustee and a trust beneficiary regarding the administration of the trust. The beneficiary claims that the trustee has breached its fiduciary duties by certain actions and omissions. In the course of discovery, the beneficiary seeks discovery as to why the fiduciary did what it did. The fiduciary refuses to provide such discovery, citing the attorney-client privilege.
Will the fiduciary’s assertion of privilege be upheld by the court? It depends on whether the jurisdiction recognizes the fiduciary exception to the attorney-client privilege. In general, the fiduciary exception provides that a fiduciary cannot shield communications with its legal counsel from a person to whom the fiduciary owed fiduciary duties, where such legal services related to the administration of the fiduciary entity (rather than the fiduciary’s defense against charges of misconduct) and were paid for with assets of the fiduciary entity. This article will consider the origins of the fiduciary exception, the reasons for and against recognizing the exception, and the current status of the exception in federal and state jurisdictions.
Initially, it should be noted that the term “fiduciary exception” is somewhat of a misnomer. The word “exception” suggests a situation in which the attorney-client privilege does not apply. In fact, that is not really the case. The rationale behind the fiduciary exception is that the beneficiary of a fiduciary estate is either the true client of the attorney, or a joint client (together with the fiduciary) of the attorney. The privilege thus still applies in the fiduciary context, but it cannot be invoked against the beneficiary who is deemed to be included in the attorney-client relationship.
The Attorney-Client Privilege
The attorney-client privilege protects the confidentiality of communications between a client and an attorney where the communications are intended to be confidential and the confidentiality is not waived. See United States v. United Shoe Machinery Corp., 89 F. Supp. 357 (D. Mass. 1950). “The attorney-client privilege ranks among the oldest and most established evidentiary privileges known to our law.” United States v Jicarilla Apache Nation, 131 S. Ct. 2313, 2318 (2011). Its purpose is “to encourage full and frank communication between attorneys and their clients and thereby promote broader public interests in the observance of law and administration of justice.” Upjohn Co. v. United States, 449 U.S. 383, 389 (1981).
English Courts Recognize Fiduciary Exception
In the 19th century, English courts recognized a limitation upon the attorney-client privilege when asserted by a fiduciary in litigation with a beneficiary of the fiduciary estate. Specifically, the English courts ruled that a fiduciary who obtained legal advice regarding the management of the fiduciary estate and paid for such advice with the assets of the fiduciary estate could not withhold such attorney-client communications from the beneficiaries.
In Talbot v. Marshfield, 2 Drew & Sm. 549, 62 Eng. Rep. 728 (Ch. 1865), certain beneficiaries of a trust, as plaintiffs, commenced litigation against the trustees, as defendants. In the course of the litigation, the plaintiffs sought production of two legal opinions provided to the trustees by their attorneys. The first legal opinion, issued prior to the litigation, addressed whether the trustees should exercise their discretionary power to make a distribution of trust assets to beneficiaries other than the plaintiffs – a distribution that was opposed by the plaintiffs. The second legal opinion, issued after the litigation was commenced, related to the trustees’ defense of the litigation. The trustees asserted the attorney-client privilege for both legal opinions and refused to produce them. The plaintiffs asked the court to compel production.
The court ruled that the plaintiffs were entitled to production of the first legal opinion because it related to trust administration and was paid for with trust assets:
[The first legal opinion was] taken by the Defendants to guide them in the exercise of a power delegated to them by the trusts of the will, and which, if exercised, would affect the interests of the other cestuis que trust [i.e., beneficiaries]. The opinion was taken before proceedings were commenced or threatened, and in relation to the trust. Under these circumstances it appears to me that all the cestuis que trust have a right to see that [o]pinion. [Defendants] contended that it was not taken for the benefit of all the cestuis que trust; but all the cestuis que trust have an interest in the due administration of the trust, and in that sense it was for the benefit of all, as it was for the guidance of the trustees in their execution of their trust. Besides, if a trustee properly takes the opinion of counsel to guide him in the execution of the trust, he has a right to be paid the expense of so doing out of the trust estate; and that alone would give any cestuis que trust a right to see the [o]pinion.
Id. at 551.
However, the court concluded that the plaintiffs were not entitled to production of the second legal opinion because it related to the trustees’ defense of the lawsuit brought against them, rather than to the administration of the trust: “The other [o]pinion [s]tands on a totally different footing. This was not to guide the trustees in the execution of their trust; but, after proceedings had been commenced against them, they took advice to know in what position they stood, and how they should defend themselves in the suit.” Id. Accordingly, the beneficiaries had no right to see the second opinion, “unless they can make out that the trustees can charge the expense thereof on the trust funds.” Id.
This principle subsequently appeared in other 19th century English decisions: Wynne v. Humberston, 27 Beav. 421, 54 Eng. Rep. 165 (1858) (recognizing rule that, “where the relation of trustee and cestui que trust is established, all [legal o]pinions taken by the trustee to guide himself in the administration of his trust, and not for the purpose of his own defense in any litigation against himself, must be produced to the cestui que trust”), and In re Mason, 22 Ch. D. 609 (1883) (ordering production of “communications by and to the trustees and their solicitors in relation to the trust estate, made before the action was brought”).
Legal Treatises on Trust Law Recognize Rationale for Fiduciary Exception
In the United States, treatise authors recognized the rationale for the fiduciary exception before the courts did. In 1948, Bogert on Trusts recognized that a trust beneficiary required information about the management of the trust in order to hold the trustee accountable. “If the cestui is to be able to hold the trustee to proper standards of care and honesty and procure for himself the benefits to which the trust instrument and the doctrines of equity entitle him, he must know of what the trust property consists and how it is being managed.” Id. at § 961 (2nd ed.).
In 1959, the Restatement (Second) of Trusts declared that a trustee was only entitled to refrain from sharing certain types of information from the beneficiaries. “The trustee is privileged to refrain from communicating to the beneficiary information acquired by the trustee at his own expense and for his own protection. Thus, he is privileged to refrain from communicating to the beneficiary opinions of counsel obtained by him at his own expense and for his own protection.” Id. at § 173, cmt. b.
And in 1967, Scott on Trusts posited that a trustee was not entitled to withhold legal opinions about the administration of the trust from a beneficiary. “A beneficiary is entitled to inspect opinions of counsel procured by the trustee to guide him in the administration of the trust.” Id. at § 173 (3rd ed.).
Early Federal Cases Addressing Fiduciary Exception
One of the first cases to consider a beneficiary’s right to discover trustee-attorney communications was In re Prudence-Bonds Corp., 76 F. Supp. 643 (E.D.N.Y. 1948). There, an indenture trustee for the issuance of corporate bonds (related to a corporate reorganization) petitioned for the approval of accountings covering an 18-year period, and a representative of the bondholders filed an objection. In the ensuing litigation, the indenture trustee disclosed that it had obtained, from its various attorneys and law firms, “several hundred opinions, oral and written, [o]n a great number of different and unrelated matters.” Id. at 644. The bondholders’ representative sought disclosure of such legal opinions, and the indenture trustee filed a motion to quash.
Relying on “certain English cases,” the special master denied the motion to quash, ruling that “opinions obtained by the Trustee with respect to the administration of a Trust, on behalf and for the benefit of the cestui que trust (such as the bondholders) belong to the latter.” Id. at 646. On appeal, the district court reversed, quashing the discovery request. “I do not think the English cases apply to the situation here. The situation here relates to [t]he right of both the Trustee and its attorneys to have advice given when called upon without the fear of possible future annoyance and cross-examination should the acts of the client not meet with the approval of some bondholder, who in the future sought in some way to sustain a criticism of an act.” Id. at 646.
One of the first U.S. cases adopting the fiduciary exception was Garner v. Wolfinbarger, 430 F.2d 1093 (5th Cir. 1970). There, the Fifth Circuit held that a stockholder in a derivative suit against corporate management could access attorney-client communications based on a showing of good cause:
The corporation is not barred from asserting [the privilege] merely because those demanding information enjoy the status of stockholders. But where the corporation is in suit against its stockholders on charges of acting inimically to stockholder interests, protection of those interests as well as those of the corporation and of the public require that the availability of the privilege be subject to the right of the stockholders to show [good] cause why it should not be invoked in the particular instance.
Id. at 1103-1104.
The court’s holding was influenced by, and intended to comport with, Professor Wigmore’s fourth factor for evaluating a claim a privilege: “The injury that would inure to the relation by the disclosure of the communications must be greater than the benefit thereby gained for the correct disposal of litigation.” 8 Wigmore, Evidence § 2285 at 527. Hence, the Garner rule has subsequently been described as a balancing test.
Riggs National Bank of Washington D.C. v. Zimmer
Riggs National Bank of Washington, D.C. v. Zimmer, 355 A.2d 709 (Del. Ch. 1976), is recognized as the leading American case on the fiduciary exception.
In Riggs, the trustees of a private trust filed a petition for instructions with the court. Subsequently, the trustees asked their law firm for a legal opinion regarding both the pending petition for instructions and potential tax litigation between the trust and the State of Delaware. In requesting the legal opinion, the trustees communicated certain facts to their law firm. Attorney David Workman of the firm prepared the requested legal memorandum (the “Workman Memorandum”), which was provided to the trustees. The firm invoiced the trustees for its legal services, and the trustees paid the invoice from trust assets. About one year later, beneficiaries of the trust brought a surcharge action against the trustees, seeking to compel the trustees to reimburse the trust for damages allegedly caused by their breaches of fiduciary duty. The alleged breaches related to the potential tax litigation about which the trustees had consulted the law firm. Id. at 710.
During discovery in the surcharge action, the trustees declined to produce the Workman Memorandum, asserting the attorney-client and other privileges, and the beneficiaries moved to compel production. The beneficiaries argued that the trustees were, by definition, administering the trust for the benefit of the beneficiaries, and so legal advice rendered to the trustees about trust administration was rendered for the ultimate benefit of the beneficiaries. “The beneficiaries’ argument is simply that the Workman memorandum cannot be subject to the various privileges asserted by the trustees because, in effect, it was prepared for their benefit and in aid of the administration of the trust.” Id. at 711. The beneficiaries also argued that the trustees could not shield the Workman Memorandum from them because they essentially paid for its preparation: “[T]hey emphasize the fact that the fees for the preparation of the document in question were paid out of the corpus of the trust and therefore indirectly by the beneficiaries.” Id. The beneficiaries further argued that the timing of the Workman Memorandum’s preparation showed that it was not obtained in anticipation of the surcharge action or to protect the trustees from a breach of fiduciary duty claim: “Because the memorandum was completed over a year before the surcharge claim was filed and months before it was first asserted, they argue that it cannot logically be considered to have been in aid of the trustees’ defense of the surcharge claim.” Id.
The court observed that the discoverability of the Workman Memorandum depended on “the purpose for which it was prepared, and the party or parties for whose benefit it was procured, in relation to what litigation was then pending or threatened.” Id. When the Workman Memorandum was prepared, the only active legal proceeding was the trustees’ petition for instructions, “the very nature of which normally indicates that the trustees were not implicated in any way.” Id. At that time, the only anticipated litigation was tax litigation by the trustees against the State of Delaware. Given the nature of the pending proceeding and the anticipated litigation, the legal advice sought by the trustees could only have related to the trustees’ administration of the trust for the benefit of the beneficiaries. Accordingly, the beneficiaries were the ultimate or real clients of the law firm.
Substantively, there was no indication that the Workman Memorandum set forth legal advice intended to protect the trustees personally. There was no reason to believe that the trustees could have had any concerns other than promoting the best interests of the beneficiaries when they consulted the law firm. Moreover, the trustees paid the law firm from the trust assets, which was a “strong indication of precisely who the real clients were[,]” given that Delaware trust law only permitted an attorney to be paid from the trust when such services were necessary for proper trust administration or otherwise benefited the trust. Id. at 712. Based on this record, the court concluded “that the Workman memorandum was prepared ultimately for the benefit of the beneficiaries of the trust and not for the purpose of the trustees’ own defense in any litigation against themselves.” Id.
Having made these findings, the court next considered “whether the beneficiaries ought to be permitted to inspect documents prepared by an attorney on their behalf though completed at the request of the trustee[,] or whether the privileges asserted are of such compelling importance as to allow the trustee to withhold the documents from them.” Id. The court recognized the scarcity of U.S. case law on this question: “Incredibly, counsel agree that American case law is practically nonexistent on the duty of a trustee in this context.” Id. Consequently, the court turned to legal treatises on trust law for guidance, citing the provisions already quoted above in this article. The court also noted that the right of trust beneficiaries “to inspect the opinions of counsel in circumstances such as those in the case at bar” was well-established under English law and that Delaware had a “strong English common law tradition[.]” Id.
Based on these persuasive authorities, the court characterized a beneficiary’s right to access opinions of counsel retained by the trustee, pursuant to trust administration, as “a clearly desirable rule of substantive trust law.” Id. at 713. But the court deemed it necessary to consider whether trust law (favoring access to information) or evidence law (favoring confidentiality and privilege) took priority in this situation: “[T]he question becomes whether the privileges claimed and the policies supporting them should override” the beneficiary’s right to information under trust law. Id.
With regard to attorney-client privilege, the court noted that the purpose of the privilege “is to foster the confidence of the client and enable him to communicate without fear in order to seek legal advice,” the scope of the privilege “can be limited where circumstances so justify,” and “the privilege belongs to the client and not to the attorney.” Id. The court found that the privilege could not be invoked against the beneficiaries because they –not the trustees – were the real clients being served by the law firm:
As a representative for the beneficiaries of the trust which he is administering, the trustee is not the real client in the sense that he is personally being served. And, the beneficiaries are not simply incidental beneficiaries who chance to gain from the professional services rendered. The very intention of the communication is to aid the beneficiaries. . . . The fiduciary obligations owed by the attorney at the time he prepared the memorandum were to the beneficiaries as well as to the trustees. In effect, the beneficiaries were the clients of Mr. Workman as much as the trustees were, and perhaps more so.
Id. at 713-714.
The court opined that the trustee’s assertion of privilege was calculated to protect the trustees’ personal interests at the expense of the beneficiaries’ interests: “The trustees here cannot subordinate the fiduciary obligations owed to the beneficiaries to their own private interests under the guise of attorney-client privilege.” Id. at 714. And the court concluded that, even if the privilege did apply, the policy interests behind the fiduciary exception outweighed the policy interests behind the privilege: “The policy of preserving the full disclosure necessary in the trustee-beneficiary relationship is here ultimately more important than the protection of the trustees' confidence in the attorney for the trust.” Id. at 714.
The trustees relied upon In re Prudence-Bonds Corporation, 76 F. Supp. 643 (E.D.N.Y. 1948), which had declined to recognize the fiduciary exception. “Some of the language in the Prudence-Bonds case is in striking contrast to the English rule. It emphasizes the necessity of having the corporate trustee free to exercise its own judgment after consulting with counsel and that such freedom should be unhindered by the threat of future disclosure of the attorney-client communication.” Id. at 714. However, the court distinguished Prudence-Bonds on the ground that it involved an indenture trustee for an issue of corporate bonds, rather than the trustee of a private trust. “[I]t is more difficult, due to multiple interests involved in the Prudence-Bonds situation, to label the bondholders’ interest there as the equivalent of the client’s interest than it is the case now before the Court. That strikes me as the key difference and a firm basis for distinguishing the Prudence-Bonds case.” Id. Accordingly, the court ruled that the attorney-client privilege did not shield the Workman Memorandum from disclosure and granted the beneficiaries’ motion to compel production.
Subsequent decisions from various jurisdictions that discuss Riggs have reflected some confusion as to the exact nature of the court’s ruling. Some courts read Riggs to create an absolute rule that the privilege cannot be asserted against the beneficiary because the beneficiary is the real client of the attorney. Other courts read Riggs to create a balancing test, in which the trustee’s interest in confidentiality is weighed against the beneficiary’s interest in disclosure. This confusion is apparently the result of the Riggs court jumping back and forth between the ideas that “the beneficiary was the real client and within the privilege” and that “the beneficiary was outside the privilege, but the privilege was outweighed by the trustee’s duty of disclosure.”
Subsequent Changes to Delaware Law
Riggs appears to remain good law in Delaware, cited most recently in an unpublished 2010 decision of the Court of Chancery, N.K.S. Distributors, Inc. v. Tigani, 2010 WL 2011603 (Del. Ch. May 7, 2010). Post-Riggs, the Delaware Legislature adopted a statute providing that a fiduciary may assert attorney-client privilege for communications related to a claim that may be, or has been, asserted against the fiduciary, regardless of the source of payment for the attorney’s fees. “Except as provided in the governing instrument, a fiduciary may retain counsel in connection with any claim that has or might be asserted against the fiduciary, and the payment of counsel fees and related expenses from the fund with respect to which the fiduciary acts as such shall not cause the fiduciary to waive or to be deemed to have waived any right or privilege including, without limitation, the attorney-client privilege.” Del. Code Ann. Title 12, § 3333 (West 2007).
States that Have Adopted Fiduciary Exception
Over time, the courts in five states have expressly adopted the fiduciary exception, following the rationale espoused in Riggs. However, two of those states (Florida and South Carolina) no longer remain in this column because their respective legislatures have statutorily invalidated the exception. One of those states (New York) has partially invalidated the fiduciary exception by statute.
Arkansas: Arkansas common law recognizes a variant of the fiduciary exception, under which the fiduciary and the beneficiaries of the fiduciary estate are deemed to be joint clients of the fiduciary’s attorney for purposes of the attorney-client privilege. In the Matter of the Estate of Torian, 564 SW2d 521 (Ark 1978). In Torian, there was litigation between the executor and the beneficiaries of an estate. At trial, the beneficiaries proffered the testimony of an attorney consulted by the executor who had advised the executor to probate the estate in Arkansas, rather than Mississippi. The executor had ignored the advice, to the financial harm of the estate. The trial court excluded the testimony based on attorney-client privilege, and the beneficiaries appealed.
The Arkansas Supreme Court reversed the trial court’s ruling, finding that the executor and beneficiaries were joint clients of the attorney and that neither joint client could assert attorney-client privilege against the other client. “Here the [e]xecutor, in consulting with the attorney[,] was necessarily acting for both itself as executor and for the beneficiaries under the will. [T]he fee sought by the executor was to be paid out of the estate. We are of the opinion the attorney-client privilege was inapplicable and the testimony admissible on the issue of the reasonableness of the executor’s fee.” Id. at 526.
Pennsylvania: A decision of the Pennsylvania Court of Common Pleas has recognized the fiduciary exception. “[T]he trustee cannot withhold from any beneficiary documents regarding the management of the trust, including opinions of counsel procured by the trustee to guide the trustee in the administration of the trust, because trust law imposes a duty to make these documents available to the beneficiaries.” Follansbee v. Gerlach, 56 Pa. D. & C.4th 483 (Ct. Comm. Pl. 2002).
States That Have Expressly or Apparently Rejected Fiduciary Exception
Ten states have either rejected or declined to adopt the fiduciary exception. These states have expressed concern that the fiduciary exception would undermine both the sanctity of attorney-client privilege and the full and frank communications between a trustee and legal counsel that the privilege is intended to foster. They have defined the scope of the trustee’s duty of disclosure more narrowly (i.e., merely keeping the beneficiary “reasonably informed” of the trust administration) and claimed that the beneficiary can obtain discovery of material facts through the litigation process. They have rejected the notion that the beneficiary is the “real client” of the trustee’s attorney. They have declared that the source of payment for the invoices of the trustee’s attorney is not dispositive on the question of the identity of the attorney’s client, and that trust assets used to pay administrative expenses (such as legal billings) cannot be deemed to be property of the beneficiaries.
California: Under California law, the attorney-client privilege and any exceptions to the privilege are governed exclusively by statute. “The attorney-client privilege is codified in Evidence Code section 954, which unambiguously provides that it can be limited only by statutory exceptions: the privilege applies ‘[subject] to Section 912 and except as otherwise provided in this article.’” Dickerson v. Superior Court, 185 Cal. Rptr. 97 (Cal. Ct. App. 1982). The California Supreme Court has recognized that the California Evidence Code does not recognize the fiduciary exception to the attorney-client privilege, and that California’s courts lack authority to recognize the fiduciary exception at common law. Wells Fargo Bank v. Superior Court, 990 P.2d 591 (Cal. 2000).
Despite its lack of authority, the California Supreme Court has articulated in some detail why it would not recognize the fiduciary exception, even if it could. First, the court explained that “material facts” about the trust administration could always be obtained through discovery in the event of a dispute between trustee and beneficiary. “Knowledge that is not otherwise privileged does not become so merely by being communicated to an attorney. Obviously, a client may be examined on deposition or at trial as to facts of the case, whether or not he has communicated them to his attorney.” Id. at 597 (internal quotation omitted).
Second, the court rejected the beneficiaries’ claim to be joint clients (together with the trustee) of the trustee’s attorney. “The attorney for the trustee of a trust is not, by virtue of this relationship, also the attorney for the beneficiaries of the trust. The attorney represents only the trustee. [N]o [joint client] relationship [between trustees and beneficiaries] is implied in law[.]” Id. at 598 (internal quotation omitted).
Third, the court emphatically rejected the notion that the beneficiaries were entitled to see the attorney-client communications because they were paid for by the trust.
Payment of fees does not determine ownership of the attorney-client privilege. The privilege belongs to the holder, which in this context is the attorney’s client. [A]s discussed above, the trustee, rather than the beneficiary, is the client of an attorney who gives legal advice to the trustee, whether on the subject of trust administration [o]r of the trustee’s own potential liability[.] To the extent the source of payment has any significance, it is but one indicium in determining the existence of an attorney-client relationship [a]nd, thus, who holds the privilege. In any event, the assumption that payment of legal fees by the trust is equivalent to direct payments by beneficiaries is of dubious validity. Under California law, a trustee may use trust funds to pay for legal advice regarding trust administration [a]nd may recover attorney fees and costs incurred in successfully defending against claims by beneficiaries[.] When the law gives the trustee a right to use trust funds, or to reimbursement, the funds do not in law belong to the beneficiaries.
Id. at 598-599.
Connecticut: In the unpublished opinion of Hubbell v. Ratcliffe, 50 Conn. L. Rptr. 856 (Conn. Super. Ct. 2010), the Connecticut Superior Court declined to recognize or apply the fiduciary exception.
Florida: Under a Florida statute adopted in 2011, the fiduciary exception is not recognized. “A communication between a lawyer and a client acting as a fiduciary is privileged and protected from disclosure under [Fla. Stat. §] 90.502 [codification of lawyer-client privilege] to the same extent as if the client were not acting as a fiduciary.” Fla. Stat. § 90.5021(2). “In applying [Fla. Stat. §] 90.502 to a communication under this section, only the person or entity acting as a fiduciary is considered a client of the lawyer.” Id. For purposes of this statute, “fiduciary” is defined to include a personal representative, trustee, administrator ad litem, curator, guardian, guardian ad litem, conservator, and/or attorney in fact. Fla. Stat. § 90.5021(1). The enactment of this statute overturned Florida common law’s recognition of a version of the fiduciary exception. See Jacob v. Barton, 877 So.2d 935 (Fla. Dist. Ct. App. 2004).
Hawai’i: A 1995 Hawai’i court rule provides that, where an attorney represents a fiduciary, then the fiduciary (and not the beneficiaries) is the client of the attorney. “An attorney employed by a fiduciary for an estate, guardianship, or trust represents the fiduciary as client as defined in Rule 503(a) of the Hawai’i Rules of Evidence and shall have all the rights, privileges, and obligations of the attorney-client relationship with the fiduciary insofar as the fiduciary is acting in a fiduciary role for the benefit of one or more beneficiaries or a ward.” Hawai’i R. Probate Rule 42(a). “An attorney for an estate, guardianship, or trust does not have an attorney-client relationship with the beneficiaries of the estate or trust or the ward of the guardianship, but shall owe a duty to notify such beneficiaries or ward of activities of the fiduciary actually known by the attorney to be illegal that threaten the security of the assets under administration or the interests of the beneficiaries.” Id. at 42(b). If the beneficiaries are not considered clients of the attorney for the fiduciary, then presumably the beneficiaries cannot pierce the privilege between the trustee and its legal counsel.
Illinois: The Illinois Court of Appeals has considered the fiduciary exception several times, but each time it has expressly declined to adopt the exception. MDA City Apartments LLC v. DLA Piper LLP, 967 N.E.2d 424 (Ill. App. Ct. 2012); Garvy v. Seyfarth Shaw LLP, 966 N.E.2d 523 (Ill. App. Ct. 2012); Mueller Industries, Inc. v. Berkman, 927 N.E.2d 794 (Ill. App. Ct. 2010).
New York: New York’s stance toward the fiduciary exception is unique. Initially, New York common law recognized the fiduciary exception. Hoopes v. Carota, 531 N.Y.S.2d 407 (N.Y. App. Div. 1988). There, beneficiaries of several private trusts, which owned a majority of the voting stock in a certain corporation, sought to remove the trustee for breach of fiduciary duty. The trustee also served as chief executive officer of the corporation and as a member of the board of directors. At his deposition, the trustee-CEO refused to answer certain questions on the grounds of attorney-client privilege. The trial court granted the beneficiaries’ motion to compel discovery, and the trustee-CEO appealed. Id. at 408.
The appellate division found that the defendant owed fiduciary duties to the plaintiffs by virtue of both his trustee role and his CEO rule. “In any of these roles, defendant was not entitled to shield absolutely from his beneficiaries the communications between him and his attorneys regarding pertinent affairs of the trust and of the corporation[.]” Id. at 409. The appellate division recognized two different approaches to the fiduciary exception: courts (such as the Riggs court) holding “that the privilege does not attach at all when a trustee solicits and obtains legal advice concerning matters impacting upon the interests of the beneficiaries seeking disclosure,” and courts (such as the Garner court) holding that “a showing of good cause [is required] from those seeking disclosure from the fiduciary on a balancing of the competing factors for and against the privilege present in the individual case[.]” Id. at 410.
Adopting the latter approach, the appellate division found that there was good cause to compel disclosure:
Plaintiffs may have been directly affected by any decision defendant made on his attorneys’ advice. The information sought is highly relevant to and may be the only evidence available on whether defendant’s actions respecting the relevant transactions and proposals were in furtherance of the interests of the beneficiaries of the trust or primarily for his own interests in preserving and promoting the rewards and security of his position as a corporate officer. The communication apparently related to prospective actions by defendant, not advice on past actions. [D]efendant made no showing [t]hat he solicited advice from counsel solely in an individual capacity and at his own expense, as a defensive measure regarding potential litigation over his disputes with the trust beneficiaries[.]
Subsequently, in 2002, the New York legislature adopted a statute that appeared intended to limit the fiduciary exception: “For purposes of the attorney-client privilege, if the client is a personal representative and the attorney represents the personal representative in that capacity, in the absence of an agreement between the attorney and the personal representative to the contrary:
No beneficiary of the estate is, or shall be treated as, the client of the attorney solely by reason of his or her status as beneficiary; and
The existence of a fiduciary relationship between the personal representative and a beneficiary of the estate does not by itself constitute or give rise to any waiver of the privilege for confidential communications made in the course of professional employment between the attorney or his or her employee and the personal representative who is the client.
N.Y. EVIDENCE LAW § 4503(a)2(A) (McKinney 2002).
For purposes of this statute, the term “personal representative” is defined to include an administrator, administrator c.t.a., ancillary administrator, executor, preliminary executor, temporary administrator, and/or trustee “to whom letters have been issued.” Id. at § 4503(a)(2)(B). “Beneficiary” is deemed to mean “[a]ny person entitled to any part or all of an estate.” “Estate” is defined as “[a]ll of the property of a decedent, trust, absentee, internee or person for whom a guardian has been appointed[,] as originally constituted, and as it from time to time exists during administration.” Id. at (a)2(B).
In terms of trustees, Section 4503 only applies to a trustee “to whom letters have been issued.” That language indicates that the statute applies to a trustee of a testamentary trust. N.Y. Court Procedure Act §103(34) (McKinney 2006). The statute’s definitions do not extend to the trustee of an inter vivos trust. So, Section 4503 eliminates the fiduciary exception for certain types of fiduciaries, but not for others.
“Because of the definitional limitations of the amendment, it is a fair inference that the Legislature intended [with the 2002 amendment] to leave the fiduciary exception intact with respect to attorney-client privilege communications in contexts other than the representation of estate fiduciaries and [specific] guardianships.” N.Y. Evidence Law § 4503(a)(2)(A) (McKinney 2002), Practice Commentaries C4503:7. “The fiduciary exception would also appear to remain viable in disputes between beneficiaries and the trustee of an inter vivos trust.” Id. (citing Hoopes v. Carota, 531 N.Y.S.2d 407 (App. Div. 1988)). See also Stenovich v. Wachtell, Lipton Rosen & Katz, 756 N.Y.S.2d 367, 380-81 (2003) (decided after the enactment of Section 4503 and acknowledging the continued viability of fiduciary exception in shareholder derivate context).
Ohio: A 2007 Ohio statute provides that, where an attorney represents a fiduciary, the attorney owes no duties (including contractual duties) to the beneficiaries for whom the fiduciary acts. “Absent an express agreement to the contrary, an attorney who performs legal services for a fiduciary, by reason of the attorney performing those legal services for the fiduciary, has no duty or obligation in contract, tort, or otherwise to any third party to whom the fiduciary owes fiduciary obligations.” Ohio Rev. Code Ann. § 5815.16(A) (West 2007). Under this statute, “fiduciary” is deemed to mean “a trustee under an express trust or an executor or administrator of a decedent’s estate.” Id. at § 5815.16(B).
There can be no attorney-client relationship between the fiduciary’s attorney and a beneficiary, where the attorney owes no contractual legal duties to the beneficiary. Consequently, the beneficiaries presumably cannot pierce the privilege between the fiduciary and its legal counsel.
South Carolina: In 2005, the fiduciary exception was recognized under South Carolina common law, in the case of Floyd v. Floyd, 615 S.E.2d 465 (S.C. Ct. App. 2005). Subsequently, the South Carolina Legislature enacted a statute expressly intended to overrule Floyd’s recognition of the fiduciary exception. “Whenever an attorney-client relationship exists between a lawyer and a fiduciary, communications between the lawyer and the fiduciary shall be subject to the attorney-client privilege unless waived by the fiduciary, even though fiduciary funds may be used to compensate the lawyer for legal services rendered to the fiduciary. The existence of a fiduciary relationship between a fiduciary and a beneficiary does not constitute or give rise to any waiver of the privilege for communications between the lawyer and the fiduciary.” S.C. Code Ann. § 62-1-110 (2008).
Texas: In Huie v. DeShazo, 922 S.W.2d 920 (Tex. 1996), the Texas Supreme Court rejected the fiduciary exception. Huie involved a trust beneficiary’s breach of fiduciary duty action against the trustee. In the litigation, the beneficiary sought production of pre-suit communications between the trustee and legal counsel. The trustee opposed production based on attorney-client privilege and other grounds. The trial court ordered production; the Court of Appeals denied the trustee’s petition for relief, but the Texas Supreme Court granted the trustee’s mandamus petition.
The court first rejected the beneficiary’s argument that the trustee’s fiduciary duty to disclose information about the trust to the beneficiaries should preclude the trustee from invoking attorney-client privilege. According to the Court, the trustee’s duty of disclosure extended to “all material facts affecting the beneficiaries’ rights.” Even if the attorney-client privilege were applied, the Court ruled, the beneficiary would still have access to all “material facts” through the discovery process. “In the underlying litigation, [beneficiary] may depose [trustee] and question him fully regarding his handling of trust property and other factual matters involving the trust. Moreover, the attorney-client privilege does not bar [trustee’s attorney] from testifying about factual matters involving the trust, as long as he is not called on to reveal confidential attorney-client communications.” Id. at 923.
Next, the court listed the practical reasons why it was unwilling to recognize an exception to the attorney-client privilege in the trust context. “Without the privilege, trustees might be inclined to forsake legal advice, thus adversely affecting the trust, as disappointed beneficiaries could later pore over the attorney-client communications in second-guessing the trustee's actions. Alternatively, trustees might feel compelled to blindly follow counsel's advice, ignoring their own judgment and experience.” Id. at 923-924 (internal citation omitted).
Moreover, the court noted, the Texas attorney-client privilege is codified as a rule of evidence – a rule that contains no fiduciary exception. “If the special role of a fiduciary does justify such an exception, it should be instituted as an amendment to Rule 503 through the rulemaking process.” Id. at 925. Consequently, the court declined to recognize the exception: “[W]hile a trustee must fully disclose material facts regarding the administration of the trust, the attorney-client privilege protects confidential communications between the trustee and his or her attorney under Rule 503.” Id. at 925.
The beneficiary also argued that the attorney-client privilege did not apply because, as suggested by Riggs, the beneficiary – not the trustee – was the true client of the attorney. The Court rejected this argument as well. “While Huie owes fiduciary duties to Chenault as her trustee, he did not retain Ringer to represent Chenault, but to represent himself in carrying out his fiduciary duties. [I]t would strain reality to hold that a trust beneficiary, who has no direct professional relationship with the trustee’s attorney, is the real client.” Id. at 925. “We conclude that, under Texas law at least, the trustee who retains an attorney to advise him or her in administering the trust is the real client, not the trust beneficiaries.” Id.
VIRGINIA: A decision of the Virginia Circuit Court has declined to adopt or apply the fiduciary exception. Batt v. Manchester Oaks Homeowners Association, Inc., 80 Va. Cir. 502 (Va. Cir. Ct. 2010).
Fiduciary Exception in Federal Courts
The fiduciary exception has enjoyed more success in federal courts than in state courts. Numerous decisions of both circuit courts of appeal and district courts have recognized the exception. See, e.g., Wachtel v. Health Net, Inc., 482 F.3d 225, 233-234 (3rd Cir. 2007); In re Long Island Lighting Co., 129 F.3d 268, 272 (2nd Cir. 1997); Wildbur v. Arco Chemical Co., 974 F.2d 631, 645 (5th Cir. 1992); United States v. Evans, 796 F.2d 264, 265-266 (9th Cir. 1986). Trust and estate litigation is typically brought in state court, so federal cases applying the fiduciary exception most commonly involve shareholder derivative actions or ERISA litigation.
United States v. Jicarilla Apache Nation
The U.S. Supreme Court considered the fiduciary exception for the first time in United States v. Jicarilla Apache Nation, 131 S. Ct. 2313 (2011).
In 2002, the Jicarilla Apache Nation (the “Nation”) commenced a breach of trust action against the United States (the “Government”) in the Court of Federal Claims (the “CFC”), seeking damages for the Government’s alleged mismanagement of funds held in trust for the Nation under the American Indian Trust Fund Management Reform Act of 1994 and other federal statutes. The Government withheld certain documents from production, based on the attorney-client privilege, and the Nation moved to compel production.
Reviewing the withheld documents in camera, the CFC determined that some of the documents related to the Government’s management of trust funds. The CFC granted the Nation’s motion to compel with respect to the trust fund management documents, ruling that such documents fell within the fiduciary exception to the attorney-client privilege.
Under that exception, which courts have applied in the context of common-law trusts, a trustee who obtains legal advice related to the execution of fiduciary obligations is precluded from asserting the attorney-client privilege against beneficiaries of the trust. The CFC concluded that the trust relationship between the United States and the Indian tribes is sufficiently analogous to a common-law trust relationship that the exception should apply.
Id. at 2319. Accordingly, the CFC ruled that the Government could not assert privilege as to documents that “involve matters regarding the administration of tribal trusts, either directly or indirectly implicating the investments that benefit Jicarilla” and contain “legal advice relating to trust administration.” Id. at 2319 (internal quotation of CFC’s opinion omitted).
The Government appealed to the Court of Appeals for the Federal Circuit, petitioning for a writ of mandamus to compel the CFC to vacate its ruling. The Court of Appeals denied the petition, finding that the CFC had correctly applied the fiduciary exception. “[T]he United States cannot deny an Indian tribe’s request to discover communications between the United States and its attorneys based on the attorney-client privilege when those communications concern management of an Indian trust and the United States has not claimed that the government or its attorneys considered a specific competing interest in those communications.” In re United States, 590 F.3d 1305, 1313 (CA Fed. 2009).
The Government appealed to the U.S. Supreme Court, which granted certiorari. In its ruling, the Supreme Court assumed the existence of the fiduciary exception under federal common law. “Neither party before this Court disputes the existence of a common-law fiduciary exception, [s]o in deciding this case we assume such an exception exists.” 131 S. Ct. at 2321 n.3.
The Supreme Court found that the rationale for applying the fiduciary exception in the private trust context did not extend to the Government’s administration of trust funds for the Nation. The Government is not a private trustee but a sovereign. A private trustee would owe the Nation a fiduciary duty of absolute loyalty to the Nation’s interests. As a sovereign, however, the Government must serve many other interests besides promoting the best interests of the Nation. “For that reason, when the Government seeks legal advice related to the administration of tribal trusts, it establishes an attorney-client relationship related to its sovereign interest in the execution of federal law. In other words, the Government seeks legal advice in a ‘personal’ rather than a fiduciary capacity.” Id. at 2327-2328.
Moreover, the Government’s duties towards the Nation are based on statute, not the common law of fiduciaries or trusts. “The Government assumes Indian trust responsibilities only to the extent it expressly accepts those responsibilities by statute.” Id. at 2325. “For that reason, the Tribe must point to a right conferred by statute or regulation in order to obtain otherwise privileged information from the Government against its wishes.” Id. Further, the Government’s attorneys were paid for with congressional appropriations, not with assets held in trust for the tribe. “We [f]ind it significant that the attorneys were paid by the Government for advice regarding the Government’s statutory obligations.” Id. at 2326.
Ultimately, the Supreme Court concluded that the Government’s administration of the trust funds for the Nation was too dissimilar from the private trust context to justify application of the fiduciary exception. “Not every aspect of private trust law can properly govern the unique relationship of tribes and the federal government. The fiduciary exception to the attorney-client privilege ranks among those aspects inapplicable to the Government's administration of Indian trusts.” Id at 2330 (internal quotation omitted).
Should the Fiduciary Exception be Recognized More Widely?
Some courts say the trustee is the real client; others say the beneficiary is the real client. The best answer is probably that both are the real clients, at least in the context of non-adversarial trust administration. The essence of the trust relationship is the division of legal and beneficial title between the trustee and the beneficiary. The trustee certainly has the right to retain legal counsel, but the beneficiary has a beneficial interest in the legal advice rendered by counsel.
The idea that the trustee can keep confidences from the beneficiaries in the context of routine trust administration seems totally contrary, not only to the duty of disclosure, but also to the duty of loyalty. A trustee of a trust owes an absolute duty of loyalty to the beneficiaries of the trust. Whenever there is a conflict between the trustee’s self-interest and the beneficiaries’ interests, the trustee must resolve that conflict in favor of the beneficiaries’ interests. This duty of loyalty applies to all aspects of trust administration, including the retention of, and consultation with, professionals such as attorneys to advise the trustee regarding the administration of the trust and the performance of its duties. If there is no conflict or litigation between the trustee and the beneficiary, and the trustee decides that legal advice is needed to properly administer the trust, and the trustee decides that such legal advice is properly paid for from the trust, why precisely would the trustee need to keep the content of that advice secret?
In general, the trustee can be expected to follow legal advice rendered by its counsel. Hence, the rationale for the trustee’s acts and omissions in trust administration will often be traceable to the advice received from counsel. In the states that have rejected the fiduciary exception, a beneficiary may be able to discover “material facts” through the discovery process in litigation: The trustee sold one-half of the stock in Corporation X; the trustee distributed $1,000,000 to the settlor’s grandchildren; the trustee set up a reserve fund to pay potential tax penalties. But the beneficiary may never be able to discover the reason why the trustee did what it did: “Sorry, that’s privileged.”
Moreover, the suggestion that a beneficiary must use discovery tools to obtain “material facts” from the trustee obviously requires the existence of litigation. It is unclear why a state would choose to constrict the trustee’s duty of disclosure and push an information-seeking beneficiary towards litigation as the only means for obtaining such information.
Certainly, the trustee should not be precluded from obtaining confidential legal advice to protect itself from charges of misadministration or other liability. But if such advice is desired, the trustee should obtain such advice in its non-fiduciary role and should pay for the advice with its own personal assets.
As long as there is litigation between fiduciaries and beneficiaries, the beneficiaries can be expected to seek discovery of the legal advice behind the fiduciaries’ challenged conduct, and the fiduciaries can be expected to resist disclosure. A majority of the states have yet to decide whether the fiduciary exception represents the correct resolution of that contest. As we have seen, there are compelling considerations both for and against the fiduciary exception.
Michigan Probate & Estate Planning Journal (Vol. 27, No. 5)