A trustee enters your office, Petition in-hand, with a look of worry. Litigation has been commenced against the Trust, calling into question not only the conduct of certain trust beneficiaries, but also that of the trustee. “How can this be? We have always done what we thought was right. Do they really get to challenge our decisions? Do they really get to see my files? What about how much this going to cost me to defend? Can I recover my fees?” The questions are un-ending. Today, we’ll try to navigate some the issues that arise on the testy track of advising trustees involved in litigation.
A “fiduciary relationship is one in which one party (the fiduciary) exercises discretionary power over the significant practical interests of another (the beneficiary).” Paul B. Miller, Justifying Fiduciary Duties, 58 McGill L.J. 969, 1011-12 (2013). The resultant power to “act purposively on behalf of another” requires that a trustee, in exercising his authority, abide by the twin fiduciaries duties of loyalty and care. Id. at 1019. “The duty of loyalty proscribes misappropriation and appropriation and regulates conflicts of interest by requiring a fiduciary to act in the ‘best’ or even ‘sole’ interest” of those he is required to protect….The duty of care prescribes the fiduciary’s standard of care by establishing ‘reasonableness’ or ‘prudence’ standard that is informed by industry norms and practices.” Robert H. Sitkoff, An Economic Theory of Fiduciary Law, Philosophical Foundations of Fiduciary Law 198 (Andrew S. Gold and Paul B. Miller eds. 2014), https://dash.harvard.edu/bitstream/handle/1/15274343/PhilosophicalFoundationsFiduciaryLaw.pdf?sequence=1 (last accessed April 8, 2018). In the context of litigation then, the attorney’s role critical role becomes how to advise a fiduciary in such a way that the fiduciary is permitted to protect his or its own interests while simultaneously abiding by the trustee’s fiduciary duties of loyalty and care. A testy track, indeed.
a. A lawyer must also act with commitment and dedication to the interests of the client and with zeal in advocacy upon the client's behalf. (cmt to MR 1.3)
a. The duty of loyalty
b. The duty to furnish information
c. The duty to inform
d. The duty of confidentiality
e. The duty to preserve trust property
f. The duty to defend actions
g. The duty to deal impartially with beneficiaries
The majority view is that a lawyer representing a fiduciary owes a duty only to the fiduciary, and not the beneficiaries of the trust or estate. An ABA legal ethics opinion succinctly articulates this view:
A lawyer who presents the fiduciary in a trust or estate matter is subject to the same limitations imposed by the Model Rules of Professional Conduct as are all other lawyers. The fact that the fiduciary has obligations to the beneficiaries of the trust or estate does not in itself either expand or limit the lawyer’s obligations to the fiduciary client under the Model Rules, nor impose on the lawyer obligations toward the beneficiaries that the lawyer would not have toward other third parties. Specifically, the lawyer’s obligation to preserve the client’s confidences under Rule 1.6 is not altered by the circumstance that the client is a fiduciary. See ABA Legal Ethics Opinion 380 (May 9, 1994); see also Kentucky Bar Ass’n Legal Ethics Opinion E-401 (September, 1997) (“We reject the view that a lawyer who represents a fiduciary owes obligations to the beneficiaries that in some circumstances will override obligations otherwise owed by the lawyer to the fiduciary, such as the obligation of confidentiality;
The California Court of Appeals espoused a similar view:
It is of course the purpose and obligation of both the fiduciary and his attorney to serve the estate. In such capacity they are obligated to communicate with, and to arbitrate conflicting claims among, those interested in the estate. While the fiduciary in the performance of this service may be exposed to the potential of malpractice (and hence is subject to surcharge when his administration is completed), the attorney by definition represents only one party: the fiduciary. It would be very dangerous to conclude that the attorney, through performance of his service to the administrator and by way of communication to estate beneficiaries, subjects himself to claims of negligence from the beneficiaries. The beneficiaries are entitled to evenhanded and fair administration by the fiduciary. They are not owed a duty directly by the fiduciary’s attorney.
Goldberg v. Frye, 217 Cal. App. 3d 1258, 1269, 266 Cal. Rptr. 483 (1990); see also Bain v. Mcintosh, 2015 U.S. App. LEXIS 3116 (11th Cir. March 2, 2015) (concluding that under Florida law, “only the person or entity acting as a [trustee] is considered a client of the lawyer,” and affirming summary judgment in favor of an attorney whose accountings he prepared at the behest of his trustee client were the basis of a claim by the trust beneficiaries against him individually); Huie v. DeShazo, 922 S.W.2d 920, 925 (Tex. 1996); Spinner v. Nutt, 631 N.E.2d 542, 546 (Mass. 1994).
Conversely, other jurisdictions follow the approach espoused by the Restatement (Third) of Law Governing Lawyers in recognizing that a lawyer may owe a duty to non-clients (such as trust beneficiaries) if the lawyer knows the fiduciary is violating its own duty and the lawyer does not act to stop the fiduciary. Restatement (Third) of Law Governing Lawyers Section 51(4) (2000). Specifically, a lawyer may be liable to a nonclient when:
(a) the lawyer’s client is a trustee, guardian, or [performs] similar functions for the nonclient;
(b) the lawyer knows that appropriate action by the lawyer is necessary with respect to a matter within the scope of representation to prevent or rectify the breach of fiduciary duty owed by the client to the nonclient where (i) the breach is a crime or fraud or (ii) the lawyer has assisted or is assisting the breach;
(c) the nonclient is not reasonable able to protect its rights; and
(d) such a duty would not significantly impair the performance of the lawyer’s obligations to the client.
Id.; see also Charleson v. Hardesty, 839 P.2d 1303, 1306 (Nev. 1992) “[W]hen an attorney represents a trustee in his or her capacity as trustee, that attorney assumes a duty of care and fiduciary duties towards the beneficiaries as a matter of law.”; ACTEC Commentaries MRPC 1.2 (the “lawyer for the fiduciary owes some duties to the beneficiaries of the fiduciary estate although he or she does not represent them”).
Where the trustee is an individual, serving in his or her individual capacity, it is clear who is the client: the individual. The question gets murkier when the trustee is a corporate trustee, trust company, or bank with a trust division. By and large, the corporate fiduciary is deemed to be the client. Individuals retained or employed by a corporate trustee are generally thought to directly owe fiduciary duties to trust beneficiaries, as well. In re Estate of Daniel Swiewicki, 106 Ill. 2d 111, 1167-17 (1985).
Attorneys and other professional advisors, such as accountants and financial advisors who serve as trustees are governed not only by fiduciary and negligence standards, but often by the ethical standards of their professions.
ABA Formal Opinion 02-426, “Attorney Serving as Fiduciary for an Estate or Trust” which gives important insight into the ethical norms in this area. Under the current Model Rules, attorneys can seek appointment as a fiduciary, but must not allow self-interest to cloud their exercise of independent professional judgment in recommending trustees. When there's a significant risk that the attorney's independent professional advice will be "materially limited," the attorney must obtain the client's
informed consent in writing. An attorney may prepare an instrument appointing himself as trustee only if the client is properly informed, the appointment does not violate the conflict of interest rules of Model Rule 1.7 and the appointment does not result from undue influence or improper solicitation by the attorney.101 Finally, attorneys should familiarize themselves with Model Rule 1.8 ("Conflict of Interest:
Current Clients: Specific Rules"). Model Rules 1.7 and 1.8, which may be modified in a particular jurisdiction, are the primary ones dealing with the ethical issues that arise when attorneys serve as trustees.
Amy K. Kanyuk, Perils and Potential Profit of a Lawyer Serving as Trustee, Estate Planning Journal (Feb. 2014),
ABA Formal Opinion 02-426, "Attorney Serving as Fiduciary for an Estate or Trust" (5/31/2002).
Charles D. Fox IV, "Ethical Considerations in Acting as an Executor or Trustee: Do You Really Want to Do This?", 49 U. Miami Heckerling Inst. on Est. Plan. Ch 14 (2015)
An exculpatory clause is a provision designed to relieve a fiduciary of liability for certain types of breaches of trust. Such a clause typically appears in a will or trust instrument. In essence, an exculpatory provision is meant to relieve a trustee of liability. Mark L. Ascher Et. Al., Scott and Ascher on Trusts §24.27, at 1798-99. Exculpatory clauses are designed to avoid the duties that would otherwise apply to a fiduciary’s dealings with the trust property. In general, exculpatory clauses are strictly construed by the courts. A trustee is relieved from liability for a breach of trust only when the provision clearly provides for relief with respect to the breach in question. “Thus the courts have often held that the breach of trust in question did not fall within the terms of an exculpatory provision.” See Mark L. Ascher Et. Al., Scott and Ascher on Trusts §24.27.2, at 1804. Further, exculpatory clauses are not enforced if the provision itself is against public policy. Id. at §24.27.3, at 1805.
The law on exculpatory clauses has evolved over the years. Historically, such clauses were often held unenforceable as against public policy. Kevin J. Parker, Trustee Defenses: Statute of Limitations, Laches, Self-Executing Accounting Release Provisions, and Exculpatory Clauses, 23 Probate & Property 53, at 53. Today, exculpatory clauses are enforced, with certain limitations. Most states follow one of three systems: the Restatement; the Uniform Trust Code (UTC); or statutes nullifying exculpatory clauses based on public policy concerns. Id.
12 Del. C. § 3302 (e).
If there is a risk that an interested party may seek removal of a trustee, it is appropriate to consider whether the trustee should simply, prophylactically resign as trustee. Removal of a trustee is an extreme form of equitable relief that places a high burden of proof on the beneficiary. McNeil v. Bennett, 792 A.2d 190, 220 (Del. 2001). A removal petition generally requires the petitioning party to make a “clear showing of abuse or wrongdoing in the actual administration of the trust.” Gresham v. Strictland, 784 So. 2d 578, 581 (Fl. App. 4 Dist. 2001); see also Capaldi v. Richards, 870 A.2d 493, 496 (Del. 2005) (a court “may remove a trustee who fails to perform his duties through more than mere negligence”); Williams v. Duncan, 55 S.W.2d 896, 902 (Mo. App. S.D. 2001) (removal of a trustee is a remedy that the court should use sparingly). Section 706 of the Uniform Trust Code set forth several bases upon which a trustee might be removed:
(a) The settlor, a cotrustee, or a beneficiary may request the court to remove a trustee, or a trustee may be removed by the court on its own initiative.
(b) The court may remove a trustee if:
Section 706’s official comment is instructive in how the removal grounds should be construed:
Subsection (b) lists the grounds for removal of the trustee. . . . A trustee may be removed for untoward action, such as for a serious breach of trust, but the section is not so limited. A trustee may also be removed under a variety of circumstances in which the court concludes that the trustee is not best serving the interests of the beneficiaries. The term “interests of the beneficiaries” means the beneficial interests as provided in the terms of the trust, not as defined by the beneficiaries. Removal for conduct detrimental to the interests of the beneficiaries is a well-established standard for removal of a trustee.
Subsection (b)(1) . . . makes clear that not every breach of trust justifies removal of the trustee. The breach must be “serious.” A serious breach of trust may consist of a single act that causes significant harm or involves flagrant misconduct. A serious breach of trust may also consist of a series of smaller breaches, none of which individually justify removal when considered alone, but which do so when considered together. A particularly appropriate circumstance justifying removal of the trustee is a serious breach of the trustee’s duty to keep the beneficiaries reasonably informed of the administration of the trust or to comply with a beneficiary’s request for information as required by Section 813. Failure to comply with this duty may make it impossible for the beneficiaries to protect their interests. It may also mask more serious violations by the trustee.
U.T.C. Section 706, cmt. While mere disagreement, resentment, or antagonism is not sufficient cause for removal, a trustee’s conduct in causing animosity amongst beneficiaries may be grounds for removal. In re Ex’rs of Koretzky, 8 N.J. 506, 528 (1951).
While the trustee client may not be all that interested in getting involved in protracted litigation, and resigning to “get out of the middle” may sound like a good idea, it is unlikely to yield any appreciable benefit. First, if the trustee’s conduct is being challenged in any way, resignation will not prevent the trustee from being required to participate in discovery or the imposition of potential remedies, such as disgorgement, on the trustee. Second, the trustee’s ongoing service as a trustee may aid in the trustee’s ultimate recovery of its fees and costs incurred in participating in the litigation. Finally, there is a subconscious implication of wrongdoing if a trustee steps down at the first sniff of trouble. Accordingly, unless there are extenuating circumstances, resignation is likely not an effective early strategy.
Consideration must be given to whether the trustee will use trust funds to compensate the attorney or whether the trustee will use his or its own / personal funds to compensate the attorney. Most trust instruments give trustees the power to retain and compensate counsel with trust funds. Even when a trust does not explicitly reference such power, trustees are generally deemed to have the power to retain counsel under statute or common law of most jurisdictions. Webbe v. First National Bank and Trust Company of Barthington, 487 N.E.2d 711, 715 (Ill. App. Ct. 1985) (trial court did not abuse its discretion in awarding the trustee its’ fees and costs and assessing them against a single beneficiary’s share of the trust remainder). Moreover, a trustee who successfully defends himself against a challenge to his conduct may be entitled to reimbursement of his fees from trust assets under the theory that the trustee’s defense of his actions conferred a common benefit, not only a personal benefit:
Coming then to the merits of the dispute, the plaintiff's first complaint is the allowance to the defendant out of the trust assets of his expenses in defending himself in the action. The argument is that these expenses were incurred in the defendant's individual interest, and may not be charged against the trust. That completely misses the true situation: a trustee was appointed to administer the assets; the settlor selected him to do so, and whatever interferes with his discharge of his duty pro tanto defeats the settlor's purpose. When the trustee's administration of the assets is unjustifiedly assailed it is a part of his duty to defend himself, for in so doing he is realizing the settlor's purpose. To compel him to bear the expense of an unsuccessful attack would be to diminish the compensation to which he is entitled and which was a part of the inducement to his acceptance of the burden of his duties. This has been uniformly the ruling, so far as we have found.
Weidlich v. Comley, 267 F.2d 133, 134 (2d Cir. 1959) (citations omitted); see also Regions Bank v. Lowrey, 154 So.3d 101, 112 (Ala. 2014) (finding that trial court improperly reduced reimbursement of attorneys’ fees and costs incurred by trustee in successfully defending surcharge claims and stating that to hold otherwise would diminish the compensation that was an inducement to the trustee accepting the burden of serving).
However, if a trustee uses trust funds to compensate counsel, and the trustee is ultimately found to have done something wrong or exceeded its authority, then there is a risk that counsel will be required to disgorge the fees and potentially, pay the fees of the other litigants. In re: Niles, 176 N.J. 282 (2003) (where an executor or trustee enjoys substantial economic benefits from committing undue influence, that person may be required to pay the counsel fees of the parties establishing that undue influence). If a trustee uses personal funds to compensate counsel, there is a risk to the trustee that a court may not approve reimbursement to the trustee for the trustee’s funds expended in the litigation.
Undoubtedly one of the most frequently sought items in fiduciary litigation, is the attorney’s file. The discoverability of that file hinges on whether the communications between the trustee and counsel are protected by the privilege. In the seminal case of Riggs National Bank of Washington D.C. v. Zimmer, 355 A.2d 709, 712 (Del. Ch. 1976), the Delaware Court of Chancery found that a trustee could not use the attorney-client privilege to prevent disclosure of communications between the attorney and trustee. The court reasoned:
As a representative for the beneficiaries of the trust which he is administering, the trustee is not the real client in the sense that He is personally being served. And, the beneficiaries are not simply incidental beneficiaries who Chance to gain from the professional services rendered. The very intention of the communication is to aid the beneficiaries. The trustees here cannot subordinate the fiduciary obligations owed to the beneficiaries to their own private interests under the guise of attorney-client privilege. The policy of preserving the full disclosure necessary in the trustee-beneficiary relationship is here ultimately more important than the protection of the trustees’ confidence in the attorney for the trust….The fiduciary obligations owed by the attorney at the time he prepared the memorandum were to the beneficiaries as well as to the trustees. In effect, the beneficiaries were the client of Mr. Workman as much as the trustees were, and perhaps more so.
Id. at 713-14. The Court concluded that if a trustee instructs attorneys to perform work that ultimately benefits the beneficiary, then the beneficiary is the “real client” and holder of the attorney-client privilege. Consequently, while the communication is privileged, the beneficiary (i.e., the “real client”) may discover the communication because there was no privilege as to him. Alternatively, if the work benefits solely the trustee, then the trustee is the holder of the privilege and the communication may not be discovered by the beneficiary. Id.; see also United States v. Jicarilla Apache Nation, 131 S. Ct. 2313 (2011) (although not a trust case per se, the Supreme Court acknowledged that the fiduciary exception exists in American law); Hammerman v. Northern Trust Company, No. 1 CA-CV 13-0260 (Ariz. Ct. App. 2014) (holding that “[w]e therefore adopt the fiduciary exception and hold that a component of a trustee’s duty under A.R.S. § 14–10813(A) is a duty to disclose legal consultations and advice obtained in the trustee’s fiduciary capacity concerning decisions or actions to be taken in the course of administering the trust”); Zook v. Pesce, 91 A.3d 1114, 1120 (Md. Ct. App. 2014) (holding that “in a dispute between putative heirs or devisees under a will or trust, the attorney-client privilege does not bar admission of testimony and evidence regarding communication between the decedent and any attorneys involved in the creation of the instrument, provided that evidence or testimony tends to help clarify the donative intent of the decedent” But see Kentucky Bar Association Legal Ethics Opinion E-401 (September 1997) (“We reject the view that a lawyer who represents a fiduciary owes obligations to the beneficiaries that in some circumstances will override obligations otherwise owed by the lawyer to the fiduciary, such as the obligation of confidentiality”).
Of course, not all jurisdictions are in accord as such a result can chill the otherwise free exchange of information between trustees and counsel. In some jurisdictions, such as Florida, legislation has been adopted to clarify the mechanics of how the privilege operates in the context of representing fiduciaries:
A communication between a lawyer and a client acting as a fiduciary is privileged and protected from disclosure …to the same extent as if the client were not acting as a fiduciary….only the person or entity acting as fiduciary is considered a client of the lawyer. This section does not affect the crime or fraud exception to the lawyer-client privilege…
Fla. Stat. Section 90.5021 (2011). Application of the statute was plagued for years by the Florida Supreme Court’s adoption of countervailing court rules, such as Rule 5.240(b)(2) (fiduciaries must give notice to beneficiaries of the fiduciary lawyer-client privilege), and vaguely conflicting interpretations of the “need” for and constitutionality of the statute by the Florida Supreme Court and the South District of Florida. See Bivins v. Rogers, 207 F. Supp.3d 1321 (S.D. Fla. 2016) (applying the statute and noting that the Florida Supreme Court did not “vitiate or overturn the statute” when questioning its need). In January, however, any doubt was resolved when the Florida Supreme Court in In re: Amendments to the Florida Evidence Code – 2017 Out-of-Cycle Report, adopted the statute retroactive to its passage date of 2011.
New Hampshire has similarly codified its rejection of a fiduciary exception to the attorney-client privilege:
(a) A communication between an attorney and a client acting as a trustee, trust advisor, or trust protector is privileged and protected from disclosure to the same extent as if the client was acting in his, her, or its individual capacity and was not acting as a trustee, trust advisor, or trust protector.
(b) The privilege is not waived by (1) a fiduciary relationship between the trustee, trust advisor, or trust protector and a beneficiary of the trust or (2) the use of trust property to compensate the attorney for legal services rendered to the trustee, trust advisor, or trust protector.
(c) If an attorney's client is a trustee, trust advisor, or trust protector, then the attorney's client is only the person acting as trustee, trust advisor, or trust protector.
New Hampshire RSA 564-B:2-205; See also Heisenger v. Cleary, 150 A.3d 1136, 323 Conn. 765, 769 n.2 (2016) (affirming trial court decision, but declining to address appellants’ argument that trial court erred in refusing to adopt the fiduciary exception to the attorney-client privilege).
1. What Are They?
2. Broad Disapproval
3. Abolished or Ignored in Many Jurisdcitions
4. Variability Among Jurisdictions Still Applying Statutes
5. Effect of Fed. R. Evid. 601 and State Counterparts
6. Suggested Resources
7. Ed Wallis, Outdated Form of Evidentiary Law: A Survey of Dead Man's Statutes and a Proposal for Change, 53 Clev. St. L. Rev. 75 (2005)
A. Duty of Prudence
B. Duty to preserve and protect trust property
C. Duty to make property productive
D. Prudent Investor Rule
E. Other Considerations
