Estate litigation presents complex conflicts issues because the parties’ relationships’ can be simultaneously aligned and adverse, individuals can wear multiple hats, and parties often try to reduce transaction costs through joint representation. An attorney’s failure to understand conflicts of interest can result in discipline, disqualification, loss of fees, or a malpractice action.
The starting point for analyzing conflicts of interest is the rules of professional conduct. Every state except California has adopted the ABA Model Rules of Professional Conduct, which address conflicts in rules 1.7 and 1.9. While not every state has adopted the model rules verbatim, the main variation, for conflicts purposes, involves whether provisions calling for the client’s informed consent require that consent to be in writing. California has its own rules of professional conduct, which address conflicts in rule 3-310.
Rule 1.7 relates to current clients and prohibits a lawyer from representing a client if the representation “will be directly adverse to another client.” In addition, rule 1.7 prohibits a lawyer from representing a client if there is a “significant risk” the representation “will be materially limited by the lawyer’s responsibilities to another client, a former client or a third person or by a personal interest of the lawyer.” Finally, rule 1.7 permits a lawyer to represent two current clients with a conflict if the “lawyer reasonably believes that the lawyer will be able to provide competent and diligent representation to each affected client” and the client gives “informed consent” in writing. However, two types of conflicts cannot be waived: representations “prohibited by law,” and representations involving claims by clients against each other in litigation “or other proceeding before a tribunal.”
Rule 1.9 relates to former clients and prohibits a lawyer from representing a client if the representation is “substantially related” to a matter in which the lawyer represented another client and the representation will be “materially adverse to the interests of the former client.” Once again, the rule allows the representation if the “former client gives informed consent, confirmed in writing.” Finally, the rule broadly prohibits a lawyer from using information obtained in a former representation “to the disadvantage of a former client.”
Who Is (or Was) the Client?
In trust and estate litigation, an attorney can represent one or more fiduciaries, one or more beneficiaries, or some combination. Representation of beneficiaries is straightforward—the beneficiary is always represented as an individual. A fiduciary can be represented in two capacities. The first is in the fiduciary’s general role in administering the estate or trust.Moeller v. Superior Court, 16 Cal. 4th 1124, 1134 (Cal. 1997). The second is in the fiduciary’s role as an individual, which occurs when dealing with compensation or breach of fiduciary duty.
An additional question is whether the fiduciary is a client at all. A trust exists for the benefit of beneficiaries. Thus, when trust funds are used to pay an attorney, even when the attorney is directly advising the fiduciary, the attorney could be considered to be acting on behalf of the beneficiaries. See., e.g., Riggs National Bank v. Zimmer, 355 A.2d 709, 713–14; Wachtel v. Health Net, Inc., 482 F.3d 225, 232 (3d Cir. 2007). This traditional approach has roots in English common law. United States v. Jicarilla Apache Nation, 131 S. Ct. 2313, 2316 (2011). This is the basis of the so-called “fiduciary exception” to the attorney-client-privilege rule, and it remains controversial. The more modern approach to this issue, however, is that the trustee is the real client. See, e.g., Huie v. DeShazo, 922 S.W.2d 920, 925 (Tex. 1996); First Union Nat. Bank v. Turney, 824 So. 2d 172, 185 (Fla. Dist. Ct. App. 2001); Wells Fargo Bank v. Superior Court, 22 Cal. 4th 201, 208–10 (2000). Because many states have yet to address this issue, caution and diligence should be exercised when undertaking such representations.
Whether a client is past or present is important because a lawyer cannot be adverse to a current client on any matter, but is only prohibited from acting adverse to a former client on a related matter. Compare ABA Model Rule 1.7 with 1.9. An attorney-client relationship terminates when the lawyer sends explicit notice, when an agreed-upon length of time has passed, or when the contemplated services have been completed. See, e.g., Restatement (Third) of Law Governing Lawyers § 31(2)(e), cmt. h (2000); ACTEC Commentaries on MRPC 1.4 at 57 (4th ed. 2006). Ambiguities about whether a representation ended are construed in the client’s favor. See Comstock Lake Pelham, L.C. v. Clore Family, LLC, 74 Va. Cir. 35, 37–38 (Va. Cir. Ct. 2007). Consequently, in the absence of an express termination letter, the answer to whether an entity is a present client will generally be yes.
Finally, a trust or estate itself does not have a legal existence and cannot be a client. See Presta v. Tepper, 179 Cal. App. 4th 909, 913–14 (2009) (“It has long been established under California law that an express trust . . . is merely a relationship by which one person or entity holds property for the benefit of some other person or entity. . . .” (emphasis original)); see also ACTEC Commentaries on MRPC 1.13 at 128 (4th ed. 2006). However, “[a] very small minority of cases and ethics opinions have adopted the so-called entity approach under which the fiduciary estate is characterized as the lawyer's client.” ACTEC Commentaries on MRPC 1.13 at 128 (4th ed. 2006). So it is important for the practitioner to be aware of the law on this subject applicable to the trust or estate matter in which he or she is engaged.
Conflicts-of-interest analysis proceeds along two different paths depending on whether the potential conflict is with a current or a past client.
Current clients. In estate administration and litigation, a conflict with a current client generally arises when a lawyer undertakes joint representation of clients in the same matter and the clients’ interests become adverse over the course of the joint representation. Lawyers owe a duty of loyalty to all clients in a joint representation; consequently, a lawyer cannot be directly adverse to a current client without full disclosure and consent. ABA Model Rule 1.7. Thus, a lawyer must consider whether potential clients in a joint representation are likely to become adverse. If the lawyer misjudges the situation and jointly represented clients become adverse, the lawyer will have to withdraw from representing all the clients. ABA Model Rule 1.7 cmt. ; see also Restatement (Third) of Law Governing Lawyers §§ 121, 128 (2000). As discussed more fully in section D, infra, it is often helpful and advisable to spell out the scope and terms of such representations in a retention or engagement letter, which each client must sign before the representation commences.
The simplest form of joint representation in this context involves representing co-fiduciaries or similarly situated beneficiaries, which is common and permissible. ACTEC Commentaries on MRPC 1.7 at 92 (4th ed. 2006) ([A] lawyer may represent co-fiduciaries whose interests do not conflict to an impermissible degree.). However, before taking the representation, the lawyer must consider whether the interests of the potential jointly represented clients may diverge and must monitor the matter to determine if an actual conflict develops.
A more complicated question is whether an attorney may represent an individual who is both a fiduciary and a beneficiary in both capacities. Some authorities support a lawyer representing an individual in both capacities. See, e.g., ACTEC Commentaries on MRPC 1.7 at 92 (4th ed. 2006); Baker Manock & Jensen v. Superior Court, 96 Cal. Rptr. 3d 785, 787, 789, 791, 792 (Cal. Ct. App. 2009); Virginia LEO 1599 (8/12/94) (explaining that a lawyer representing an executor and one of two beneficiaries does not have a conflict unless the lawyer also represents the other beneficiary). But, a lawyer representing an individual in dual capacities should inform the other beneficiaries of the joint representation, create separate files, receive separate payment for services to the client in each capacity, and monitor the representation and withdraw if a conflict develops. ACTEC Commentaries on MRPC 1.7 at 33, 92 (4th ed. 2006).
Finally, a lawyer may represent a fiduciary and a separate individual who is a beneficiary as long as their interests do not diverge. ACTEC Commentaries on MRPC 1.7 at 92–93 (4th ed. 2006). However, it may be necessary to obtain informed consent before undertaking joint representation of two people, one as beneficiary and one as fiduciary. This representation may not be permissible, though, if other beneficiaries are adverse to the fiduciary. Estate of Huber, 31 Cal. App. 3d 126, 134 (Ct. App. 1973); Estate of Effron, 117 Cal. App. 3d 915, 929 (Ct. App. 1981).
Past clients. An attorney who represented an estate-planning client may be disqualified from representing a beneficiary in an action against the successor trustee of a trust created by the client because a lawyer cannot act adverse to a previous client on the same or a substantially related matter. ABA Model Rule 1.9. The conflict inquiry based on past clients involves two parts. The first inquiry is whether a prior attorney-client relationship exists. Gagliardo v. Caffrey, 344 Ill.App.3d 219, 226 (1st Dist. 2003). Thus, a successor trustee asserting disqualification based on a prior representation must show that it holds the prior attorney-client relationship of the estate-planning client. The attorney-client relationship, like most trustee’s powers, attaches to the office of the trustee, not to a particular person. See Bogert, Trusts & Trustees § 553, § 962 n.112 (3d ed. 2007). Thus, the office of trustee passes from one person to another and the power to assert the attorney-client privilege passes as well. See In re Estate of Fedor, 356 N.J. Super. 218, 220 (Ch. Div. 2001); Moeller v. Superior Court, 16 Cal. 4th 1124, 1134 (Cal. 1997). Because most grantors appoint themselves as the initial trustee, a drafting attorney who represented the grantor in drafting the document has an attorney-client relationship with a successor trustee if the attorney represented the grantor in his or her capacity as grantor and trustee.
The second inquiry is whether there is a substantial relationship between the action the beneficiary is bringing against the successor trustee and the prior representation of the estate-planning client. The rule defines “substantially related” broadly by including any matter where confidential information that the lawyer acquired during the prior representation could be used to the former client’s disadvantage. ABA Model Rule 1.9 cmt. . In some jurisdictions, a three-part inquiry is used to determine if a substantial relationship exists: (1) “make a factual reconstruction of the scope of the former representation;” (2) “determine whether it is reasonable to infer that the confidential information allegedly given would have been given to a lawyer representing a client in those matters;” and (3) “consider whether the information is relevant to the issues raised in the litigation involving the former client.” In re Estate of Wright, 377 Ill.App.3d 800, 803 (2nd Dist. 2007), quoting Schwartz v. Cortelloni, 177 Ill.2d 166 (1997).
The scope of the former representation can be determined from a retention letter, or in the absence of one, facts showing what the client and attorney discussed. Ultimately, the scope will be whatever the record allows the fact finder to infer that the client reasonably thought that it was. See Herbes v. Graham, 180 Ill.App.3d 692, 699 (2nd Dist. 1989). Once again, for the careful practitioner, a clear and well-crafted retention or engagement letter may be invaluable to avoiding accusations of a conflict or disqualification in a later matter. See section D, infra.
Next, “it is reasonable to infer that the confidential information” conveyed to the drafting attorney would have included: the size and make-up of the grantor’s trust assets; how the grantor planned to treat children in estate planning documents; how and why the grantor might make estate-planning changes in the future; and the manner in which the client makes decisions about estate planning, seeFranzoni v. Hart Schaffner & Marx, 312 Ill. App. 3d 394, 402 (1st Dist. 2000).
Finally, the information a grantor likely conveyed to the drafting attorney may be “relevant to the issues raised in [ ] litigation” between a beneficiary and a successor trustee. Claims for breach of fiduciary duty against the successor trustee are likely to have little or no relationship to the earlier representation. However, claims to rescind trust documents based on undue influence, lack of capacity, or fraud might involve information concerning the grantor’s previous estate-planning decisions and whether the documents a beneficiary seeks to rescind are consistent or inconsistent with earlier versions of estate-planning documents.
Avoiding Conflict Problems
Better than determining whether you have a conflict requiring withdrawal or disqualification is avoiding it in the first place using representation or retention/engagement letters, termination letters, and other agreements to avoid problems.
Representation letters can be used to make clear the “lawyer’s relationship to the parties involved.” ABA Model Rule 1.7 cmt. ; see also Estate Planning for Illinois Attorneys: The Basics and Beyond at §2.11 (IICLE, 2008). In particular, because the formation of a joint representation can be complex, see, e.g., Sky Valley Ltd. P'ship v. ATX Sky Valley, Ltd., 150 F.R.D. 648, 652–53 (N.D. Cal. 1993); Robert Bosch LLC v. Pylon Mfg. Corp., 263 F.R.D. 142, 145 (D. Del. 2009), a retention letter can be used to clearly identify the joint clients and their relationship. When identifying the client, make sure to indicate whether you represent the client as an individual, a fiduciary, or both.
Termination letters are a simple way to identify whether a client is current or past. Indeed, some precedent suggests the only way to terminate an attorney-client relationship is with a termination letter. Lawyers who wish to avoid sending a termination letter might want to indicate in the retention letter that the representation will be for a limited period of time. For example, a lawyer representing an estate-planning client might want to state in the retention letter that the representation will end after one year—more than enough time to implement an estate plan for many smaller and mid-size clients who do not have ongoing estate-planning needs.
A lawyer faced with a conflict may seek informed consent from all affected clients. Rules 1.7(b) and 1.9(a) both permit affected clients to give informed consent to a conflict. Of course, the client is not likely to give informed consent to a conflict —particularly if it is a former client. And even if the attorney receives consent, the attorney must still believe that effective representation is possible. ABA Model Rule 1.7(b).
Finally, when there is a potential conflict, a written prospective waiver from the clients may allow the representation to continue if an actual conflict develops. The waiver should be written and should include a complete and detailed explanation by the lawyer of how any joint representation and waiver of conflict affects the clients’ interests. ABA Model Rule 1.7 cmt. . However, some precedent suggests a prospective waiver is only effective if the client “possesses sophistication.” Restatement (Third) of Law Governing Lawyers § 31(2)(e) (2000). A drawback to this approach is that full disclosure of the possible downsides of the prospective waiver might frighten the prospective clients away altogether. And, irrespective of any waiver, the lawyer must still make sure that effective representation is possible under Rule 1.7(b).
Keywords: litigation, ethics, professionalism, conflict of interest, Model Rules, trust and estate
Daniel S. Ebner is with Prather Ebner LLP in Chicago, Illinois.
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