Review of the Law
Whether the attorney-client privilege may be invoked to bar beneficiaries from inspecting such communications may turn on whether counsel is engaged to guide the trustee in the administration of the trust, or if the trustee has engaged counsel due to potential litigation with the trust’s beneficiaries. If the former, the privilege may not be available, and if the latter, it should be. It must be noted that the law in this area is unsettled and developing. Many states have yet to address this issue.
In the leading 1976 case of Riggs National Bank v. Zimmer,[i] the Chancery Court of Delaware held that the trustees could not invoke the attorney-client privilege to prevent beneficiaries from obtaining a legal memorandum prepared for the trustees in connection with a petition for instructions filed by the trustees. In a later surcharge action brought by the beneficiaries against the trustees, the beneficiaries requested copies of the legal memorandum. The trustees refused, invoking the attorney-client privilege.
The Chancery Court held that as the purpose of the memorandum was to aid the trustee in the administration of the trust and was not obtained for the purpose of the trustee’s own defense in any litigation against the trustees, the attorney-client privilege did not bar disclosure of the legal memorandum to the trust’s beneficiaries. This has come to be known as the “fiduciary exception” to the attorney-client privilege. In the court’s view, the memorandum requested by the trustee was prepared for the benefit of the beneficiaries, as it was prepared to assist the trustee in the administration of the trust. The court also noted as a factor that the legal fees for the attorney’s advice were paid from the trust.
Decisions of courts in Arizona, In re: Kipnis Section 3.4 Trusts,[ii] and Pennsylvania, Follansbee v. Gerlach,[iii] have held that in their respective states there is a fiduciary exception to the attorney‑client privilege. Likewise, Restatement (Third) of Trusts § 82 cmt. f takes the position that there is a fiduciary exception to the attorney‑client privilege.
Some courts have rejected the fiduciary exception to the attorney-client privilege, however. For example, in Wells Fargo Bank N.A. v. Superior Court,[iv] the California Court of Appeals for the Fourth District held that the court had no power to restrict the attorney-client privilege as established by the legislature; therefore, the fiduciary exception was rejected. In the 2012 case of Garvy v. Sayfarth Shaw LLP[v], the Illinois Appellate Court noted that Illinois has not adopted the fiduciary exception to the attorney-client privilege. In Huie v. DeShazo,[vi] the Texas Supreme Court held that attorney-client privilege could be invoked by the trustee even though documents sought were not prepared in anticipation of litigation. Thus, the court rejected the fiduciary exception.
Florida, New Hampshire, South Carolina and Ohio have enacted statutes that specifically reject the fiduciary exception to the attorney-client privilege.
The fiduciary exception has even made its way to the United States Supreme Court. In United States v. Jicarilla Apache Nation[vii], the existence of the fiduciary exception was conceded by the United States to be part of the common law. Thus, the Supreme Court did not have to determine if the fiduciary exception exists. The Supreme Court held that the fiduciary exception would not be applicable to the United States government in its capacity as trustee of tribal funds held in trust.
Closer to home, in the 1994 case of Spinner v. Nutt,[viii] the Massachusetts Supreme Judicial Court held that trustee’s counsel did not owe a duty of care to the trust’s beneficiaries. The court held that to impose a duty of care upon the trustee’s attorney would create an impermissible conflict of interest. It should be noted that the question of attorney-client privilege was not before the court, however, the logical extension is that if no duty is owed by the attorney to the beneficiaries, they cannot pierce the attorney-client privilege.
In Symmons v. O’Keeffe,[ix] a case decided shortly after Spinner, the Massachusetts Supreme Judicial Court held that the trustee could properly invoke the attorney-client privilege to preclude discovery of legal memoranda prepared by the attorney retained by the trustee. The court noted the trustee sought legal advice due to concerns of possible conflict between the beneficiaries and the trustee.
It is not clear whether the fiduciary exception to the attorney-client privilege exists in Massachusetts. Spinner did not directly address the issue. In Symmons, it was clear the trustee was seeking the advice of counsel for the trustee’s own protection, therefore the attorney-client privilege applied. To date, neither the Massachusetts Supreme Judicial Court nor the Appeals Court has directly addressed whether the fiduciary exception will be recognized in the Commonwealth.
The law is unsettled and varies from state to state. Best practice is to discuss this with counsel at the outset. Keep in mind, however, that there is no absolute certainty that communications between the attorney and trustee will be protected by the attorney‑client privilege. If a beneficiary questions an action taken by a trustee, it may be helpful if the trustee refers to the advice of counsel. If, on the other hand, counsel has been retained to represent the trustee due to threatened or actual litigation by the beneficiaries against the trustee, care should be taken to keep these communications separate from any other communications in which the same attorney is advising the trustee on administrative matters.
Finally, the trustee should also discuss with counsel if and when legal fees should be paid from the trust. If fees are paid from the trust, the court could consider the representation as administrative and apply the fiduciary exception. While most trust instruments empower a trustee to hire and pay attorneys, and § 816(15) of M.G.L. c. 203E (the MUTC) authorizes a trustee to pay expenses incurred in the administration of the trust, if there is litigation and the trustee does not prevail, or if a court believes the fees are unreasonable, the trustee could be ordered to reimburse the trust for the trustee’s attorney’s fees. In some cases, the court has considered payment of counsel fees from the trust as a factor in applying the fiduciary exception. A trustee may want to consider personally paying the attorney fees and, when the matter is resolved, seek reimbursement from the trust pursuant to § 709 of the MUTC.
[i]355 A.2d 709 (Del. Ch. 1976).
[ii]329 P.3d 1055 (Ariz. Ct. App. 2014)
[iii]56 Pa. D. & C. 4th (Civ. Div. Allegh. 2002)
[iv]22 Cal.4th 201, 91 Cal.Rptr.2d 716; 990 P.2d 591 (2000).
[v]2012 IL App (1st) 110115 (2012).
[vi]922 S.W.2d 920 (1996).
[vii]564 U.S. 162 (2011).
[viii]417 Mass. 549 (1994).
[ix]419 Mass. 288 (1995).