It’s Monday morning and you receive your regular weekly call from your client who serves as trustee of several trusts for his family. Usually the calls are routine—a question about a tax return, whether yet another beneficiary demand for a discretionary distribution is permitted or how to allocate receipts and expenses between income and principal. But on this particular morning the question is unusual and your client appears to be headed for trouble. You listen to the trustee’s story and give frank, thorough, and critical comments about the trustee’s actions and how he can straighten things out. You fire off a concise e-mail to your client summarizing your discussion, and, as you hit “send,” you think to yourself, “I t’s a good thing these kinds of things are privileged. Then it hits you—can your client be sure your discussion and e-mail will remain confidential? The answer is more complicated than many assume.
The intuitive answer for most lawyers and clients is that anything discussed with counsel is subject to the attorney-client privilege. After all, the attorney-client privilege is the oldest privilege known to the common law. 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 the administration of justice. Of course, that privilege shas never been absolute. For the attorney-client privilege to attach, the communication must have been made in confidence to an attorney (as part of an actual attorney-client relationship) and in connection with the provision of legal services. And as many have painfully learned, that privilege is fragile and can be easily waived or lost, thanks in no small part to the person that decided it would be a good idea to include a “reply to all” option for our e-mail.
For clients who function as an executor, trustee, or other fiduciary, their questions about the right to the attorney-client privilege have been answered for some time with a hesitant “maybe,” because of the so-called fiduciary exception to the privilege, which has been imported from English common law in only a handful of American cases and been rejected in others. The fiduciary exception suggests that there is a category of legal advice received by a fiduciary for which there is no privilege as to the beneficiaries. The fiduciary exception, in simplest terms, holds that communications between the fiduciary and its attorney concerning the administration of the estate or trust are not privileged from discovery by beneficiaries, because for such advice the “real client” is the beneficiaries and not the fiduciary. When the fiduciary is defending an attack from the beneficiaries, however, the “real client” remains the fiduciary and the privilege is generally retained.
The fiduciary exception and the accompanying uncertainty about the privilege were recently brought into the spotlight by the U.S. Supreme Court’s decision on June 13, 2011, in United States v. Jicarilla Apache Nation, 131 S. Ct. 2313 (2011), which considered whether the fiduciary exception applies to the United States as trustee for certain Apache Indian lands. This article will review the origins and status of the fiduciary exception as part of American law, the effect (or non-effect) of Jicarilla on that status, the serious policy concerns arising out of the exception, and the arguments supporting the removal of the exception from American fiduciary law by state statutes.
An Inconsistent English Import
The fiduciary exception was first developed by the English courts in the cases of Wynne v. Humberston, 54 Eng. Rep. 165 (1858), and Talbot v. Marshfield, 62 Eng. Rep. 728 (1865). Under the English rule, trust beneficiaries were entitled to documents related to legal advice received by a trustee to guide the trust administration. The beneficiaries were not entitled, however, to receive advice received for the trustee’s defense for their own defense in litigation. The English courts reasoned that the attorney-client privilege did not apply to administration advice because the advice was for the benefit of the beneficiaries and was charged to the trust.
After being rejected by a New York federal court in 1948, the fiduciary exception was finally imported into American law in 1976 in the Delaware case of Riggs Nat’l Bank of Washington, D.C. v. Zimmer, 355 A.2d 709 (Del. Ch. 1976).
In Riggs, trust beneficiaries sued the trustees for breach of trust and during the course of the litigation moved to compel the trustees to produce a legal memorandum related to the trust administration for which the trustees asserted the attorney-client privilege. The Delaware Chancery Court adopted the English rule and held that the memorandum was discoverable for two reasons. First, the trustees received the advice as representatives for the beneficiaries to whom the trustees owed duties and therefore the beneficiaries were the “real clients” of the trustee’s attorney. Therefore, the privilege belonged to the beneficiaries and not the trustees.
The Delaware court reached its determination of the “real clients” based on the facts that (1) when the advice was sought, there was no dispute between the trustees and beneficiaries; (2) the memorandum did not suggest it was for any purpose other than to benefit the trust; and (3) the attorney was paid out of the trust assets, which the court called a “significant factor” and a “strong indication” of who the real clients were. The Delaware court distinguished legal advice for the trustee’s own protection paid at his own expense, which remained privileged, from other advice obtained by the trust when the interests of the beneficiaries are at stake when the fiduciary exception applies, and the trustees cannot assess the privilege and withhold the communications from the beneficiaries. The Delaware court also held on public policy grounds that the trustees’ duty to disclose information to the beneficiaries outweighs the trustees’ interest in preserving confidential attorney-client communications.
Although federal courts of appeals apply the fiduciary exception based on the Riggs criteria, other state courts have completely rejected the Riggs decision and the fiduciary exception in its entirety. In Huie v. DeShazo, 922 S.W.2 920 (Tex. 1996), the Texas Supreme Court rejected the fiduciary exception and observed that the attorney-client privilege serves the same important purposes in the trustee-attorney relationship as in any other attorney-client relationships. In Wells Fargo Bank v. Superior Court, 91 Cal Rptr. 2d 716 (Cal. 2000), the California Supreme Court rejected the fiduciary exception along with the notion that the attorney for the trustee is actually the attorney for the beneficiaries. Most recently, the New Mexico federal district court in Murphy v. Gorman, 271 F.R.D. 296 (D.N.M. 2010), affirmed the holding in Huie v. DeShazo and concluded that if the Supreme Court of New Mexico were confronted with the issue it would not recognize the fiduciary exception to the privilege. The New Jersey Appellate Division made it clear in Barner v. Sheldon, 678 A.2d 717 (N.J. Super. Ct. App. Div. 1996), that the attorney represents that fiduciary only and is not the “attorney for the estate” or the beneficiaries.
All that can really be said with any certainty is that the few courts that have considered the issue differ on whether the privilege is available for communications between a trustee and attorney concerning the administration of the trust, and the vast majority of courts have never addressed the issue at all.
It is better to have less thunder in the mouth and more lightning in the hand.
The Jicarilla Apache Nation is an Indian tribe that occupies a large reservation in New Mexico. The land contains timber, gravel, and oil and gas reserves that are developed under statutes administered by the Department of the Interior, with proceeds by the United States in trust for the tribe under federal law. In 2002, the tribe sued the United States as trustee in the Court of Federal Claims, alleging breach of trust and seeking money damages for alleged mismanagement of the trust assets. Six years of alternative dispute resolution failed to resolve the matter. Although the United States turned over thousands of documents during that process, it withheld 226 potentially relevant documents in part because of its assertion of the attorney-client privilege.
In 2008, the case was returned to the active docket, and the United States continued to assert the attorney-client privilege for 155 of the withheld documents. The Court of Federal Claims reviewed those documents in camera and classified them into categories. For the documents the court categorized as communications relating to the management of trust funds, the court held that the documents fall within the fiduciary exception to the attorney-client privilege and that the trust relationship between the United States and the Indian tribe is sufficiently analogous to a common-law trust relationship that the exception should apply. Accordingly, the court ordered the United States to turn over the documents.
The United States petitioned the Court of Appeals for the Federal Circuit for a writ of mandamus directing the Court of Federal Claims to vacate its production order, and the Federal Circuit denied the petition holding that the fiduciary exception was properly applied to the United States as trustee. The Supreme Court granted certiorari.
Curious Concession Countenances Colorful Court Colloquy
In arguing Jicarilla before the Supreme Court, the United States actually conceded the existence of the fiduciary exception as part of the common law of trusts, despite its thin and conflicting treatment in the cases, and instead focused on its argument that the exception does not apply to the unique role of the United States as trustee for Indian trusts. The United States did not explain why it conceded the existence of the fiduciary exception, although it is reasonable to speculate that other government agencies may assert the exception in other contexts (that is, ERISA litigation) and the United States might not want to undermine their positions. The concession by the United States prevented the Supreme Court from having to actually decide and rule on the merits of the fiduciary exception.
The oral argument revealed a number of important policy issues regarding the viability of the exception. Several Justices expressed concern about the concession by the United States. Several questions asked by the Justices suggested that the Court has concerns about the rationale and ramifications of the fiduciary exception. Chief Justice Roberts’s questions suggested that the fiduciary exception would deprive a trustee of frank legal advice. For example, the Chief Justice, noting that the exception could leave open the prospect that advice might be disclosed, asked whether that would result in “bland, mushy, hedging advice rather than direct candid advice.” He suggested that if the fiduciary’s counsel knows his advice can be discovered, the quality of the advice rendered might be impaired, potentially undermining the relationship between fiduciary and counsel.
During argument, the tribe’s counsel argued that a trustee concerned about personal liability can engage counsel and maintain the privilege, but a trustee seeking advice on asset management could not. The Chief Justice questioned the merits of such a distinction, noting that there is “always a question of liability.”
This colloquy at oral argument reflects the primary deficiency of the fiduciary exception. If the privilege is intended to protect communications concerning matters for which a trustee could potentially be sued and held liable, then it must cover all communications. Although it may have been true in 1865 in England or in 1976 in Delaware that some aspects of trust administration are so routine that there is no possibility of suit against the trustee, it is clear that that is no longer the case. It is fair to say that a trustee today can and will be sued in connection with every aspect of the trust administration—investments, distributions, expenses, tax returns, communications—every aspect of a trustee’s discretion and duties has been the basis for a lawsuit. Today’s trustees operate in a world in which they can be sued for every action taken or not taken in connection with the trust administration. Therefore, all advice given to a trustee is essentially given to protect the trustee from liability and should be privileged. The fiduciary exception simply does not fit the modern world of trusts. It is a historical relic that should be moved out of our jurisprudence and placed on the shelf next to its brethren, the Rule in Shelley’s Case.
All Smoke Signals and No Fire
Once private trust lawyers learned about Jicarilla (because a private trust was not involved, most did not become aware of the case until just before oral argument), they anxiously waited to see how the Supreme Court would rule on the fiduciary exception and prepared to assess the likely significant effect on fiduciaries and their counsel. In the end, however, Jicarilla had no effect at all on the application of the fiduciary exception to private trusts and estates.
As a consequence of the concession by the United States, the Supreme Court assumed for purposes of its analysis that the fiduciary exception exists as a feature of the common law of trusts and did not rule on this issue or on the merits of the exception, nor did it offer any meaningful analysis of the parameters or limitations of the exception.
Ultimately, the Court held that the assumed common-law fiduciary exception to the attorney-client privilege does not apply to the general trust relationship between the United States and the tribe. The Court noted that although the United States’ management of the tribal trust bore some resemblance to a private trust, the United States’ obligations to the tribe are created by statute rather than common law, and the United States acts under its sovereign interest in the execution of federal law rather than as a private trustee. Further, the tribe was not the “real client” because the United States did not use trust funds to obtain the legal advice and the advice was sought in its sovereign capacity rather than as a private trustee. In addition, the Court held that the United States’ trust responsibilities were explicitly delineated by statute and did not include the common law disclosure sought by the tribe.
The Court noted that the United States exercises its carefully defined trust responsibilities in a sovereign capacity to implement national policy respecting Indian tribes and held that the two features justifying the fiduciary exception—the beneficiary’s status as the real client and the trustee’s common-law duty to disclose information about the trust—are notably absent in the trust relationship Congress has established between the United States and the tribe. According to the Court, not every aspect of private trust law can properly govern the unique relationship of Indian tribes and the United States. The fiduciary exception to the attorney-client privilege ranks among those aspects inapplicable to the administration of Indian trusts by the United States.
Jicarilla clearly has no effect on the fiduciary exception in the private trust context and provides no guidance to attorneys practicing in the trust and estate area, particularly those representing fiduciaries in the administration of those entities. Jicarilla, however, has brought important awareness about the uncertainty of this area of the law and the need for further action in response to that uncertainty.
Jicarilla shines a much needed spotlight on the uncertainty in this important area of law, with the small handful of cases reaching polar opposite results and the supposed lead case, Riggs, being based on notions of trust administration that seemingly have no application to modern practice. The current uncertainty creates practical difficulties in the representation of fiduciaries. In virtually all attorney-client relationships, the attorney and client can engage in a frank exchange of issues confident that their communications are privileged. The privilege permits a comfortable disclosure and evaluation of options and factual issues whether favorable or unfavorable. The privilege operates to allow the attorney to provide a fair—if sometimes unfavorable—assessment of proposed courses of action.
Fiduciary clients are entitled to receive more than the mushy advice that troubled Chief Justice Roberts. Fiduciary clients, now more than ever, require objective and sometimes blunt advice to avoid or correct errors in the administration of the trust, protect themselves from the seemingly limitless personal liability of the modern civil justice system and the endless complaints by beneficiaries that are impossible to satiate, and at the same time ensure that the beneficiaries receive their intended benefits from their trusts.
Litigation is possible for every fiduciary action or inaction, yet case law offers precious little guidance about when the beneficiaries’ complaints rise to the level that the fiduciary exception falls away and the privilege is maintained. A recent Delaware case, N.K.S. Distributors Inc. v. Tigani, No. 4640-VCP, 2010 WL 2011603 (Del. Ch. May 7, 2010), holds that even preparations for future litigation can be fully protected by privilege, but cases in this area are far too rare to provide the certainty of well-defined legal parameters.
Jicarilla does not substantively address the fiduciary exception, but undoubtedly the Court’s assumption that the fiduciary exception is part of trust common law will be cited by attorneys for beneficiaries seeking to compel discovery by trustees in the many states where the issue has never been addressed. In those jurisdictions, fiduciaries seeking to assert the privilege would be right to point out that Jicarilla did not decide the question and offers little guidance on the underlying ramifications. The transcript of oral argument reveals that the Justices were concerned about those ramifications, but the United States’ concession short-circuited the opportunity to explore those issues.
Jicarilla’s lack of substantive impact on the fiduciary exception is illustrated by the March 1, 2012, decision of the Illinois Court of Appeals in the case Garvy v. Seyfarth Shaw LLP (No. 07-L-4924). In this post-Jicarilla opinion, the Illinois Court of Appeals reviewed the lower court’s order compelling a law firm to turn over communications with its own internal and external counsel, related to a legal malpractice claim against the firm, to the client bringing the malpractice claim. In that case, the Illinois Court of Appeals noted that Illinois did not recognize the fiduciary exception. Acknowledging the survey of the law set forth in Jicarilla, the court held that it was not persuaded by other cases cited to create new Illinois law by recognizing the exception. The court went to hold that even if the exception did apply in Illinois, it could not apply to the actual case since it was an adversarial proceeding not covered by the fiduciary exception.
Until the law settles in this area either through cases or by statute, fiduciaries concerned about whether their communications are privileged would be well served to (1) give careful thought about whether to charge the costs of legal advice to the trust, (2) pay special attention to engagement letters and other documentation of the reason for seeking legal advice, and (3) assume that everything they write will be attached to a pleading. The uncertainty also presents challenges for attorneys wrestling with their duty to preserve client confidences.
State Legislatures Saddle Up
The better policy of the law is to preserve the confidentiality of all communications between the fiduciary and his attorney. Beneficiaries can protect their interests in the trust and prove their claims against the trustee without access to privileged communications, and the rationale for the fiduciary exception has long become obsolete. In virtually every other area of the law litigants do not gain access to privileged communications. No compelling policy argument consistent with modern trust and estate practice supports treating fiduciaries differently and depriving them of access to competent and candid legal advice.
Some state legislatures have acted to eliminate any fiduciary exception to the attorney-client privilege. New York eliminated the fiduciary exception in the estate context through N.Y. Civil Practice Law and Rules § 4503, which provides: “No beneficiary of the estate is, or shall be treated as, the client of the [personal representative’s] attorney solely by reason of his or her status as beneficiary.” That section also provides that the “existence of a fiduciary relationship between the personal representative and a beneficiary of an estate does not by itself constitute or give rise to any waiver of the [attorney-client] privilege. . . .”
In 2011, Florida amended its evidence code to provide that a communication between a lawyer and a client acting as a fiduciary is privileged and protected from disclosure under the statutory attorney-client privilege to the same extent as if the client were not acting as a fiduciary. Fla. Stat. § 90.5021. Florida also amended its probate and trust codes to make it clear that the “real client” is the personal representative or trustee, and not the beneficiaries, and to provide a mechanism for giving beneficiaries notice that the fiduciaries can retain counsel and assert the attorney-client privilege. See Fla. Stat. §§ 733.212, 736.0813.
The New York and Florida statutes provide a helpful model for other states that desire to ensure that their fiduciaries can obtain the candid advice of counsel in the carrying out of all of their duties.
The fiduciary exception, and its mere specter for states that have never addressed the issue, undermines the fiduciary’s ability to receive candid advice that virtually all other clients receive, placing them at an unfair disadvantage. The historical rationales for the exception are antiquated and have no reasonable place in modern practice when litigation arises from every fiduciary action and inaction. Even if the advice is given in a jurisdiction that has rejected the fiduciary exception, a fiduciary dispute could arise in some other jurisdiction that recognizes the exception and a local court may apply its own evidentiary rules and almost any presumably privileged communication might become the subject of scrutiny in another state. All of this suggests a need for uniform treatment, and rejection, of the fiduciary exception. Rather than placing attorneys in an ethical dilemma and leaving fiduciaries in a position where they might be unable to secure candid advice, the better rule would be to eliminate the fiduciary exception by statute. A statutory solution would allow attorneys to provide the best possible advice to their clients, who will be able to follow that advice without fear of future disclosure. One can readily conclude, as Chief Justice Roberts implied at argument in Jicarilla, that both fiduciaries and beneficiaries will be better served when fiduciaries have full and candid advice. Eliminating the fiduciary exception serves that goal. Until then, the confusion surrounding the fiduciary exception will endure with an assist from the Supreme Court.