After receiving great interest from our “Fiduciary Exception to the Attorney-Client Privilege” article, we provide this follow-up article to address a possible “exception to the exception” that may still protect documents between a fiduciary and attorney even when requested by a beneficiary. Does it matter who is paying the counsel bills?
As you know from the previous article, the fiduciary exception to the attorney-client privilege can allow beneficiaries access to communication between the fiduciary and the fiduciary’s attorney that would otherwise be protected by the privilege. Because of a beneficiary’s right to obtain information regarding the administration of a trust, legal advice a fiduciary receives during the ordinary course of administration is generally not protected. Courts have held, however, that when a fiduciary retains counsel to seek legal advice to protect against the actions brought by a beneficiary, the fiduciary exception does not apply. See Jicarilla Apache Nation v. U.S., 88 Fed. Cl. 1 (Fed. Cl. 2009).
Thus, once a proceeding has become adversarial, and a fiduciary must protect itself against actions from a beneficiary, its interests diverge from those of the beneficiary, rendering the fiduciary exception inapplicable. See Tatum v. R.J. Reynolds Tobacco Co., 247 F.R.D. 488, 493 (M.D. N.C. 2008) (citations omitted). In those cases, then, communication between a fiduciary and counsel would remain protected. Case law in this area is sparse, particularly for cases specifically dealing with corporate trust and estate fiduciaries. It is likely, however, that the reasoning applied in other fiduciary contexts would apply. Why should a fiduciary be any less entitled to protected communications with its counsel during litigation?
This is a fact-specific determination with which courts should take a cautious approach, balancing the interests of the beneficiaries while allowing fiduciaries to maintain one of the fundamental privileges that our legal system affords its litigants - the attorney-client privilege. For example, perhaps a finding that interests “diverge” is more appropriate when the trust is paying attorneys’ fees and the issue is based on a claim of self-dealing, rather than when the dispute is focused on management-related issues.
Should it matter who is paying counsel fees? If who pays the fees is a critical factor, how is the analysis applied to in-house counsel who are not paid directly from the fund? A Virginia Circuit court has suggested that a trustee should pay for contested legal services independently and not from the trust estate, or risk losing the protection of the attorney-client privilege. See Dotson v. Lillard, 1994 WL 1031449 at *4 (Cir. Ct. Va. Nov. 23, 1994). In-house counsel are never paid from trust funds – does this mean a fiduciary’s communication with in-house counsel is always protected?
Significantly, the Restatement (Third) of Trusts diminishes the weight given to who pays for legal services in connection with the privilege. The general comment to Section 82 states:
A trustee is privileged to refrain from communicating to beneficiaries or co-trustees opinions obtained from, and other communications with, counsel retained for the trustee’s personal protection in the course, or in anticipation, of litigation (e.g. for surcharge or removal). This situation is to be distinguished from 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.
The Restatement (Third), while not yet adopted in Pennsylvania, focuses more on the purpose of the communication rather than “who pays” than did Restatement (Second) of Trusts, the corresponding comment to which simply stated that the “trustee is privileged to refrain from communicating to the beneficiary information acquired by the trustee at his own expense and for his own protection.” Restatement (Second) of Trusts § 173, comment b. Clearly, the Restatement (Second) suggested that legal advice obtained at the trustee’s own expense might be privileged.
The Restatement (Third) gives some recognition to the fact that who pays the legal fees is not determinative, and instead the court should focus on the nature of the dispute. While a trustee may still be wise to pay legal fees personally instead of out of the trust in an abundance of caution and in the face of unsettled case law, the Restatement (Third) suggests that the privilege is not undermined when a trustee chooses not to do so.
As an important reminder, only confidential communications made for purposes of obtaining legal advice are protected by the attorney-client privilege. That is, if an attorney provides non-legal business advice, that communication is not privileged. This means that communication regarding routine business matters is not protected. Consider the following case where a document was not protected even though it was sent to in-house counsel.
The Pennsylvania Superior Court recently held that a document prepared in connection with circumstances surrounding a fire was not protected because it was not prepared at the direction of in-house counsel, but instead was prepared by the company’s marketing representative after visiting the site in the context of fostering a client relationship. See Custom Designs & Mfg. Co. v. Sherwin-Williams Co., 39 A.3d 372 (Pa. Super. 2012). Custom Designs, a cabinet manufacturer, suffered a fire at its place of business and claimed that Sherwin-Williams’s paint products self-heated or spontaneously combusted, causing the fire. Prior to a claim being filed, Sherwin-Williams sent a marketing representative to Custom Designs in order to “offer assistance.” The marketing representative summarized his visit in two memoranda directed to Sherwin-Williams’s in-house counsel. Sherwin-Williams claimed that the memoranda were protected by the attorney-client privilege and/or work product doctrine, but the Superior Court found that the memoranda were not protected by the privilege because they were not produced at the request of in-house counsel. While this case is not in the fiduciary context, it gives insight into how Pennsylvania courts treat communications with in-house counsel.
Corporate fiduciaries must be cautious in situations that may lead to litigation because the protections of the attorney-client privilege can shift. Additionally, corporate fiduciaries with in-house counsel should be aware that if counsel has dual roles, not all communications are protected simply when employees are communicating with counsel. Rather, only communication made for the purpose of seeking legal advice are protected. As seen in Custom Designs, even when the reason for the communication may be clear internally, courts may not agree.