Fiduciary Exception to Privilege

Confidential

“A beneficiary is entitled to inspect opinions of counsel procured by the trustee to guide him in the administration of the trust.”

THE PRIVILEGE

The attorney-client privilege protects the confidentiality of communications between a client and its attorney when the communications are intended to be confidential and confidentiality is not waived.  If a communication, for example an e-mail sent from a client to its attorney or a memorandum prepared by the attorney and sent to the client, is privileged then a court will not compel the disclosure of that communication unless an exception applies.

But what about attorney-client communications in the context of trust litigation?  Assume that a beneficiary has initiated a lawsuit against a trustee for breach of fiduciary duties.  Are the communications between the trustee and its attorney privileged?  For whose benefit is the attorney rendering advice and counsel?  The Trustee?  The Beneficiaries?  The leading case of Riggs National Bank of Washington, D.C. v. Zimmer sheds light on these questions and on what is commonly referred to as “the fiduciary exception to the attorney-client privilege.”

CASE STUDY

In Riggs, the Trustee filed a petition for instruction with the Delaware Court of Chancery.  After the Trustee filed the petition, the Trustee contacted a law firm and requested a legal opinion about the matters in the petition for instruction and about potential tax litigation involving the trust.  The law firm prepared a memorandum and provided it to the Trustee.  The Trustee subsequently paid for the law firm’s services out of the assets of the trust.  The trust beneficiaries ultimately filed suit against the trustee for breach of fiduciary duties.

During the discovery phase of litigation, the trust beneficiaries requested that the Trustee produce the memorandum prepared by the law firm.  The Trustee declined based on attorney-client privilege.  The beneficiaries requested that the Court of Chancery compel production of the memorandum.  The Court of Chancery agreed with the beneficiaries and compelled the Trustee to produce the memorandum.

Court’s Rationale

The Court held that “a beneficiary is entitled to inspect opinions of counsel procured by the trustee to guide him in the administration of the trust.”  The court reasoned that the memorandum “was prepared ultimately for the benefit of the beneficiaries of the trust and not for the purpose of the trustee’s own defense in any litigation against [the Trustee],” and that “the ultimate or real clients were the beneficiaries of the trust, and the trustee . . . in his capacity as a fiduciary, was, or at least should have been, acting only on behalf of the beneficiaries in administering the trust.”

The Court found particularly compelling the fact that the Trustee paid for the legal memorandum out of assets of the Trust and not out of the Trustee’s own pocket: “[W]hen the beneficiaries desire to inspect opinions of counsel for which they have paid out of trust funds effectively belonging to them, the duty of the trustee to allow them to examine those opinions becomes even more compelling.”

Protecting the Trustee’s interest or the Beneficiaries’ interest?

The Court found that the Trustee’s assertion of attorney-client privilege was calculated to protect the Trustee’s own interests at the expense of the beneficiaries’ interests: “The Trustee here cannot subordinate the fiduciary obligations owed to the beneficiaries to their own private interests under the guise of attorney-client privilege.”

Balancing Policy Interests

The Court weighed the policy interests supporting the fiduciary exception against the policy interests supporting the privilege and found that “The policy of preserving the full disclosure necessary in the trustee-beneficiary relationship is here ultimately more important than the protection of the Trustee’s confidence in the attorney for the trust.”

FIDUCIARY EXCEPTION IN OTHER CONTEXTS

It is interesting to note that federal courts have applied the fiduciary exception to the attorney-client privilege to contexts outside the scope of trust litigation, including shareholder derivative litigation and ERISA litigation.  The United States Courts of Appeals for the 2nd Circuit, 4th Circuit, 5th Circuit, 7th Circuit, and 9th Circuit have all applied the fiduciary exception in the context of ERISA litigation and have held that an ERISA plan administrator cannot invoke the attorney-client privilege to prevent beneficiaries from receiving communications regarding the plan’s administration.  The 9th Circuit Court of Appeals has held that “[T]here is no attorney-client privilege between a pension trustee and an attorney who advises the trustee regarding the administration of the plan.”  The 5th Circuit has explained that:

“[A] plan’s administrator owes a fiduciary duty to the plan’s beneficiaries, not its sponsor.  When an attorney advises a plan administrator or other fiduciary concerning plan administration, the attorney’s clients are the plan beneficiaries for whom the fiduciary acts, not the plan administrator.  Therefore, an ERISA fiduciary cannot assert the attorney-client privilege against a plan beneficiary about legal advice dealing with plan administration.”

The application of the fiduciary exception to ERISA litigation is not surprising since the duties of an ERISA fiduciary are modeled after the duties required of trustees.  As the 5th Circuit Court of Appeals has noted, “ERISA does not expressly enumerate the particular duties of a fiduciary, but rather relies on the common law of trusts to define the general scope of a fiduciary’s responsibilities.”

LESSONS LEARNED?

FOR BENEFICIARIES: Depending on the particular facts and circumstances of each matter, Riggs and its progeny may provide very effective tools to gain access to otherwise privileged communications which may be very helpful to establish that the Trustee breached a fiduciary duty.

FOR TRUSTEES: Who is paying for the legal advice you receive?  You or the trust?  Is the legal advice sought and rendered for the benefit of the Trustee in anticipation of litigation or is the legal advice sought and rendered on behalf of and for the beneficiaries in administering the trust?