On April 7, 2021, the Pennsylvania Supreme Court issued its decision in In re Estate of William K. McAleer, a case that fiduciary litigators and trustees had been watching for some time. At issue was whether Pennsylvania recognizes a "fiduciary exception" to the attorney-client privilege or work product doctrine to allow trust beneficiaries access to attorney-client communications between a trustee and trust counsel. Unfortunately, the Court was unable to reach consensus on the merits as to whether a trustee can refuse a beneficiary’s request for access to these sensitive areas of confidential information with only 6 of the 7 justices participating. Although there is still no clear answer to that question in Pennsylvania, we can glean a few “practice pointers” from the various opinions.
In McAleer, father established a trust for the benefit of his son (the trustee) and the son’s step-brothers. When the trustee revealed in its first and partial trust accounting that roughly $124,000 had been spent from the trust for attorneys’ fees and costs, the other beneficiaries filed a petition for special relief seeking to determine the reasonableness of the fees. In response, the trustee filed a second and final account including trustee fees and the beneficiaries filed objections thereto, contending that both trustee fees and legal fees were excessive.
The beneficiaries requested the legal bills in discovery. Rather than objecting to the discovery request or seeking a protective order, the trustee produced heavily redacted legal bills. The beneficiaries moved to compel unredacted copies of each invoice, and at argument on that motion, the trustee asserted the attorney-client privilege and work product protections. All parties urged the Orphans’ Court to conduct an in-camera review of the unredacted invoices. Despite the joint request, the Orphans’ Court Ordered the trustee to produce the unredacted invoices. The trustee then filed an interlocutory appeal to the Superior Court.
The Superior Court quashed the appeal, concluding that Superior Court lacked appellate jurisdiction in that the Orphans’ Court Order was not (i) a final order under Rule 341 of the Pennsylvania Rules of Civil Procedure; (ii) an interlocutory appeal as of right under Rule 312; and (iii) a collateral order under Rule 313. Moreover, the Superior Court also noted that the interlocutory appeal must fail because the trustee had not sought permission to appeal. The trustee then requested the Pennsylvania Supreme Court to grant allocator and review the underlying issue of whether a fiduciary exception to the attorney-client privilege and work product doctrine exists in Pennsylvania.
Although the plurality decision of the Pennsylvania Supreme Court did not reach a consensus on the issue of the fiduciary exception to the attorney-client privilege and work product doctrine questions, the Supreme Court justices unanimously agreed that the Orphans’ Court Order was collateral and could be appealed because otherwise disclosure of the documents would render the privilege irreparably lost. That, however, was all that the Supreme Court justices agreed upon.
The specific issue on which the Pennsylvania Supreme Court granted the appeal was: “Does the attorney-client privilege and work product doctrine protect communications between a trustee and counsel from discovery by beneficiaries when the communications arose in the context of adversarial proceedings between the trustee and beneficiaries?” In response, Justice Wecht, writing for himself and Justices Todd and Dougherty, traced the history of the fiduciary exception in other jurisdictions, noting that it has largely been adopted by federal courts, particularly in shareholder derivative and ERISA litigation, and cautioning that its reception is state courts since the Delaware Chancery Court’s decision in Riggs National Bank of Washington, D.C. v. Zimmer, 355 A.2d 709 (Del. Ch. 1976) has been mixed. Wecht then cited a well-known trial court opinion out of Allegheny County, Follansbee v. Gerlach, 56 Pa. D.& C. 4th 483, 2002 WL 31425995 (C.C.P. Allegheny 2002), which in turn relied upon Riggs, the Restatement (Second) of Trusts, §173 and comment b thereto and the case of In re Estate of Rosenblum, 328 A.2d 158 (Pa. 1964), which is often cited as adopting a fiduciary exception and often criticized for it. Section 173 sets forth the trustee’s duty to provide certain information to a beneficiary upon request, but comment b thereto clarifies that privileged communications procured by the trustee at his own expense and for his own protection can be withheld. Follansbee thus differentiated between information regarding trust administration paid for out of the trust, which cannot be kept from a beneficiary, and legal advice procured at a trustee’s own expense, for its own protection, which is protected from disclosure.
Justices Wecht, Todd and Dougherty pointed out that the Supreme Court has not adopted Restatement (Third) of Trusts §82, which revised and expanded upon the Second Restatement’s Section 173, and reaffirmed Rosenblum so as not to “increase uncertainty with regard to disclosure disputes in probate matters.” To those three justices “predictability is critical” and they reasoned that “where legal counsel is procured by a trustee utilizing funds originating from a trust corpus, the beneficiaries of that trust are entitled to examine the contents of the communications between the trustee and counsel, including billing statements and the like. That examination necessarily includes reviewing the contents of invoices in order to determine precisely what was procured with trust funds where the reasonableness of costs is at issue.” Further, Wecht, Todd and Dougherty noted that “[t]o the extent that trustees wish to maintain the confidentiality of their communications with counsel, we would find that Pennsylvania law already offers a simple solution: do so at your own expense.”
Justice Donohue, writing for herself and Justice Mundy, noted that the fiduciary exception has been rejected by the vast majority of our sister states and that a number of states have adopted Section 82 of the Restatement (Third) of Trusts, which protects confidential communications between a trustee and counsel when the trustee seeks advice “’in the course, or in anticipation, of litigation’ (e.g. for surcharge or removal), but does not do so when the communications seek advice for the purpose of trust administration.” Justices Donohue and Mundy determined that Justice Wecht’s reliance upon Follansbee was misplaced because, “[c]ontrary to the Follansbee court’s representation, this [Supreme] Court in Rosenblum did not adopt Comment b to section 173 or announce any requirement that a trustee may assert a claim of privilege only if he personally pays the bills of his counsel.” The issue in Rosenblum, as they observed, was the alleged overbreadth of a document request, and there was no indication that any claim of privilege was raised in Rosenblum, nor that a fiduciary exception was adopted. Looking at the issue as a case of first impression, Donohue and Mundy examined the Pennsylvania Trust Act and declined to adopt the fiduciary exception articulated by Wecht because requiring the trustee to itself pay for legal advice would deter anyone from accepting the position of trustee and/or deter a trustee from seeking legal advice, a cost barrier to responsible trust administration not warranted by any weighty considerations, in their opinion. Lastly, they noted that if a trustee invokes an “advice of counsel” defense, the privilege would be waived and the beneficiaries would be entitled to the advice and basis for it.
Finally, Justice Saylor also wrote an opinion of his own, expressing his view that exceptions to the attorney-client privilege should be considered by the legislature, rather than the courts. Notwithstanding, Justice Saylor expressed his opinion that “I am also concerned that the opinion supporting affirmance under-weights the potential that trustees, in light of the fiduciary exception, may not seek the advice of counsel or may withhold sensitive information material to the rendition of necessary legal advice.”
With no consensus on the merits of the fiduciary exception question, the Trial Court’s Order directing the production of the unredacted invoices was affirmed on the basis of the Superior Court’s Order quashing the trustee’s appeal due to a lack of appellate jurisdiction. The moral of the story, to quote Yogi Berra: “When you come to a fork in the road, take it.”
But there are several practice pointers to be gleaned from the three opinions in McAleer for trustees seeking to protect documents from discovery based upon the attorney-client privilege or work product doctrine:
- Object to the discovery
- Seek a protective order
- Seek an in-camera review, by a special master if necessary
- Create a robust privilege log
- Put forth the facts establishing the applicability of the privilege and/or work product
- Take an interlocutory appeal as of right in response to any disclosure order; discovery orders rejecting clams of privilege constitute collateral orders that are immediately appealable
- Characterize the legal advice, if possible, as relating to a threat of litigation rather than trust administration
- Consider paying for the legal advice yourself, rather than from the trust
- In raising an “advice of counsel” defense, be specific as to the subject matter of the advice relied upon such that you may be able to shield advice on other topics from discovery