The Fiduciary Exception to the Attorney-Client Privilege: Whose Privilege is it in Litigation?
The attorney-client privilege is a cornerstone of the legal practice. The privilege protects the confidentiality of communications between a client and an attorney from disclosure to a third party when the communications are intended to be confidential and the confidentiality is not waived. Can a fiduciary rely on the attorney-client privilege to prevent disclosure to trust or estate beneficiaries of communications between the fiduciary and its attorney? In general, the “fiduciary exception” to the attorney-client privilege provides that a fiduciary cannot withhold communications with an attorney from trust or estate beneficiaries when the legal services were related to trust or estate administration and the fiduciary used trust or estate funds to pay for the legal services. If a fiduciary ends up in a dispute with a beneficiary regarding the administration of a trust or estate, or claims of misconduct against the fiduciary, such fiduciary should proceed with caution in determining whether communications with its attorney will receive the protection of the attorney-client privilege.
Early Recognition of the Fiduciary Exception
English courts in the 19th
century recognized the fiduciary exception limitation on the attorney-client privilege. Generally, English courts held that a fiduciary who obtained legal advice regarding management of the fiduciary entity and paid for that advice with the assets of the fiduciary entity could not withhold such attorney-client communications from the beneficiaries. In the United States, legal treatise authors recognized the fiduciary exception before the courts did.
Riggs National Bank of Washington, D.C. v. Zimmer
The leading case in the United States on the fiduciary exception is Riggs National Bank of Washington, D.C. v. Zimmer
. In Riggs
, the trustees filed a petition for instructions with the court, and, subsequently, asked a law firm for an opinion regarding the petition and potential tax litigation with the State of Delaware. The law firm prepared the requested opinion and the trustees paid for the legal services from the trust assets.
Approximately one year later, the trust beneficiaries brought a surcharge action against the trustees for breach of fiduciary duty related to the potential tax litigation. During discovery, the beneficiaries sought to compel production of the legal opinion. The trustees asserted that the legal opinion was protected from disclosure by the attorney-client privilege and the work product doctrine.
The court noted that the discoverability of the legal opinion 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.” The court found “that the [legal opinion] 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.” The court also concluded that “the legal services were performed at the request of the trustee for the benefit of the beneficiaries of the trust.” Finding that the legal opinion was prepared for the benefit of the beneficiaries, the court went on to hold that “the trustee’s invocation of the privileges cannot shield the document involved herein from the beneficiaries’ desire to examine it.” The court found that “[t]he 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.”
, the Delaware legislature enacted a statute providing that a fiduciary may assert the 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 legal fees.
States Adopting the Fiduciary Exception
States that have adopted the fiduciary exception include Arkansas and Pennsylvania. Arkansas common law recognizes the fiduciary and the beneficiaries of an estate are deemed to be joint clients of the fiduciary’s attorney for purposes of the attorney-client privilege. Pennsylvania has recognized that trust law imposes a duty on a fiduciary to make documents available to beneficiaries, including opinions of legal counsel.
States Rejecting the Fiduciary Exception
States that have rejected the fiduciary exception have expressed concern that to do so would undermine the sanctity of the attorney-client privilege. These states have found that a fiduciary’s duty to provide information consists of keeping the beneficiary reasonably informed as to the administration of the estate or trust. Further, these states have found that the source of payment of fees of the fiduciary’s attorney is not dispositive on the question as to whether the fiduciary or the beneficiary is the attorney’s client. Some states include California, Illinois and Texas. Connecticut has declined to recognize or apply the fiduciary exception. Florida, South Carolina and Ohio have enacted statutes that reject the fiduciary exception to the attorney-client privilege.
Jurisdictions are divided as to whether the fiduciary exception would apply in litigation to permit a beneficiary to receive otherwise privileged communications between a fiduciary and the fiduciary’s attorney. It is important for the fiduciary and the fiduciary’s attorney to understand the applicable law and the extent to which any communications will be protected under the attorney-client privilege. Measures to ensure that communications will be protected may include clearly memorializing the terms of representation in the engagement letter and consideration of the source of payment of attorneys’ fees.
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