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February 29, 2012 Articles

Supreme Court Examines the Fiduciary Exception to Privilege

The Jicarilla decision is instructive as to the applicability and contours of the fiduciary exception to the attorney-client privilege.

By David Dodds

The attorney-client privilege is one of the oldest and most venerable privileges under the common law. However, the privilege is not absolute, and many courts have recognized an exception to the privilege in the context of certain fiduciary relationships. Originally grounded in the common law of trusts, the “fiduciary exception” to the attorney-client privilege permits the beneficiaries of a trust to obtain privileged communications where the trustee obtains legal advice related to the exercise of his fiduciary duties in connection with the administration of the trust. The fiduciary exception has since been applied by courts to other fiduciary relationships beyond the traditional trust context—for example, fiduciary relationships in the Employee Retirement Income Security Act (ERISA) and corporate shareholder contexts.

Against this backdrop, the U.S. Supreme Court issued its recent opinion in United States v. Jicarilla Apache Nation, 564 U.S. ___, 131 S. Ct. 2313 (2011), holding that the fiduciary exception to the attorney-client privilege does not apply to the U.S. government’s administration of Indian trusts. Although the specific holding in the Jicarilla decision has limited application, the Supreme Court’s analysis is instructive with respect to the application of the fiduciary exception to other types of fiduciary relationships.

The Jicarilla case involved a breach-of-trust action by an Indian tribe against the federal government for alleged mismanagement of funds held in trust for the tribe. The government withheld certain documents from production on the basis of the attorney-client privilege. The tribe moved to compel the government to produce the withheld documents. The lower courts held that the common-law fiduciary exception to the attorney-client privilege applied to require production. The Supreme Court reversed and held that the fiduciary exception did not apply in this context.

The Supreme Court acknowledged that some state courts—including in Texas and in California—have “altogether rejected the notion that the attorney-client privilege is subject to a fiduciary exception.” However, neither party in Jicarilla disputed the existence of a common-law fiduciary exception, and therefore the Court assumed that such an exception exists. The Court commented that American courts began adopting the fiduciary exception by the 1970s, noting the Fifth Circuit’s opinion in Garner v. Wolfinbarger, 430 F.2d 1093 (5th Cir. 1970), which allowed shareholders, on a showing of “good cause,” to discover legal advice given to corporate management.

The Supreme Court in Jicarilla identified two reasons for applying the common-law fiduciary exception, based on the leading case of Riggs National Bank of Washington, D.C. v. Zimmer, 355 A.2d 709 (Del. Ch. 1976). First, the court in Riggs explained that the trustees had obtained the legal advice at issue as “mere representative[s]” of the beneficiaries because the trustees had a fiduciary obligation to act in the beneficiaries’ interest when administering the trust. For this reason, the beneficiaries were the “real clients” of the attorney who had advised the trustees on trust-related matters, and therefore the attorney-client privilege belonged to the beneficiaries rather than the trustees. As described in Jicarilla, the court in Riggs based its “real client” determination on several factors, including whether there was a reason for the trustees to seek legal advice in a personal rather than a representative capacity, whether the legal advice was intended for any purpose other than to benefit the trust, and whether the attorney had been paid out of trust assets. Second, the court in Riggsconcluded that the trustees’ fiduciary duty to furnish trust-related information to the beneficiaries outweighed the trustees’ interest in the attorney-client privilege.

In Jicarilla, the Supreme Court held that, unlike a private trust under the common law, the statutory Indian trust at issue was derived from the unique position of the U.S. government as a sovereign and was governed by federal statutes. These statutes, and the regulations promulgated under them, established the fiduciary relationship and defined the contours of the government’s fiduciary responsibilities. Thus, the Indian tribe was required to identify a right conferred by statute or regulation to obtain otherwise privileged information from the government against its wishes. In this statutory context, the court found that the two features justifying the fiduciary exception—the beneficiary’s status as the real “client” and a trustee’s common-law duty to disclose information about the trust—were absent in the general trust relationship between the United States and the Indian people.

As to the first feature, the Court held that the United States did not obtain legal advice as a “mere representative” of the tribe, nor was the tribe the “real client” for whom the advice was intended. Although the source of payment of legal fees is not usually determinative of client status, the Court found it significant that the government’s attorneys were paid out of congressional appropriations at no cost to the tribe, and that these attorneys were paid to render advice regarding the government’s statutory obligations. This payment structure confirmed the Court’s view that the government sought legal advice in its sovereign capacity rather than as a conventional fiduciary of the tribe. The Court concluded that the government’s sovereign interest in the administration of Indian trusts is distinct and independent from the interests of tribes who may benefit from the trusts. Thus, the government’s request for legal advice related to the administration of the trusts was in a “personal” rather than a fiduciary capacity. Moreover, the government had too many potential competing legal concerns to allow for a case-by-case inquiry into whether the purpose of each communication with counsel triggered the fiduciary exception.

As to the second feature, the Court concluded that the United States does not have the same common-law disclosure obligations as a private trustee. The government had already complied with the specific disclosure requirements enumerated in the trust-creating statute. The Court held that the common law of trusts did not override these specific statutory requirements. The Court declined to construe the statute to include a general common-law duty to disclose all information related to the administration of Indian trusts.

Implications of the Jicarilla decision
The Jicarilla decision is instructive as to the applicability and contours of the fiduciary exception to the attorney-client privilege. Trustees and other fiduciaries should expect that the decision will be cited by beneficiaries seeking to compel the production of privileged communications between fiduciaries and their counsel.

As a threshold matter, the Court’s recognition that the fiduciary exception has not been recognized in some states demonstrates a potential issue as to which privilege law applies. In federal cases, counsel should consider whether federal or state privilege law applies. SeeFed. R. Evid. 501. Assuming state privilege law applies, counsel should consult applicable choice-of-law principles in determining which state’s privilege law should apply.

The Jicarilla decision also illustrates the application of the two criteria traditionally required for the fiduciary exception to apply—the beneficiary’s status as the “real client” and the trustee’s duty to disclose trust-related information to the beneficiary. To the extent a particular relationship does not satisfy these two criteria, courts following the analysis in Jicarilla would likely hold that the fiduciary exception does not apply.

Keywords: litigation, business torts, fiduciary exception, attorney-client privilege, Supreme Court

David Dodds – February 29, 2012