The fiduciary exception to attorney-client privilege has long complicated attorneys’ lives. And that’s so even when they know their state’s posture on the issue. It’s unclear whether many states recognize the exception at all. The exception provides that a fiduciary can’t invoke the attorney-client privilege against her beneficiary if the communication that the fiduciary wants to protect concerns the exercise of her administrative duties. The exception doesn’t apply to communications relating to a fiduciary’s personal liability, which remain privileged. The trouble is that it’s often hard to sort legal advice into these neat categories. This puts a considerable burden on attorneys who want to speak candidly but prudently before litigation is contemplated and on attorneys and the courts once litigation starts. A recent U.S. Supreme Court ruling and various developments at the state level suggest that the exception may be falling out of favor.

Revisiting the Exception

The Supreme Court addresses the fiduciary exception in United States v. Jicarilla Apache Nation.1 To be sure, most practitioners will never encounter facts like those in Jicarilla: the case sprang from the federal government’s alleged mismanagement of proceeds from Indian land that it held in trust for the Apache Nation (the Tribe). Although the Supreme Court ultimately decided that the fiduciary exception didn’t apply, the case does an excellent job of both contextualizing and demonstrating the fiduciary exception’s inherent difficulties. In fact, given how rarely the Supreme Court addresses trust matters outside the tax realm, its involvement itself is a red flag to practitioners that the fiduciary exception is a thorny area.

The Supreme Court begins by noting that the fiduciary exception is relatively new in the United States. Though it’s featured in English law for nearly two centuries, U.S. courts initially regarded it skeptically; the leading case supporting it, Riggs National Bank of Washington, D.C. v. Zimmer2 was decided in 1976. Drawing from English precedent, Riggs held that trustees’ common law duty to furnish trust-related information is “ultimately more important than the protection of the trustees’ confidence in the attorney for the trust.”3 It also held that the crucial issue is who the “real client” is in the attorney-client relationship and observed that this issue isn’t always clear-cut with trusts. The trustee may be the one seeking advice, but if she’s doing so in the normal course of her duties rather than in anticipation of litigation, the advice is really intended to help the beneficiary. Moreover, counsel is usually paid with trust assets. It makes sense, the Riggs court reasoned, that beneficiarieswould have access to advice procured for their benefit and paid for with their funds.

Practice Makes Imperfect

Jurisdictions adopting the Riggs framework have taken the common sense approach of separating legal advice to trustees into two categories: (1) Advice given in the course of normal trust administration is discoverable by beneficiaries, and (2) Advice given to protect the trustee’s personal interests is privileged. Rather than reject this approach, the Jicarilla court distinguished its facts from the typical private-trustee context. First, the Supreme Court saw no tension between the common law duty to disclose and the attorney-client privilege, because the government’s fiduciary duties come from statutes and regulations. Second, it held that the Tribe can’t be said to be the “real client” of the government’s attorney: congressional appropriations rather than Tribe or trust assets paid for the attorney’s fees, and the government’s interests as sovereign are so distinct from the Tribe’s private interest that the advice couldn’t be said to be for the Tribe. Finally, the Supreme Court reasoned that the government has too many competing statutory and regulatory prerogatives to allow a case-by-case inquiry into each communication’s purpose.

Though the Supreme Court frames its analysis as driven by the unique nature of government trusts, in fact Jicarilla merely reflects what practitioners have long complained of: the fiduciary exception, while theoretically sound, is a nightmare to apply in any context. Even in the course of “normal administration,” a private trustee has a personal interest in seeking advice: she’s the one on the hook for any mismanagement. Then there’s the settlor’s interest, which can conflict with the beneficiary’s and which some commentators see as fatal to the exception’s “real client” rationale. The trustee’s attorney, meanwhile, has competing interests both to provide candid advice and to speak prudently if that advice might be discoverable—but the fiduciary exception is so ambiguous in practice that this line can’t be drawn until litigation has started, if ever. Even if the issues were clear-cut, the exception is burdensome for trial courts and attorneys alike, as it often ends up requiring extensive in camera review of various documents to figure out what’s discoverable.

 

Compound Ambiguities

The waters are muddied further by the fact that the exception’s status is unclear in many jurisdictions. The Uniform Trust Code (2005) simply skips over it, noting that the area is unsettled and requires “further consideration by the courts.”4 Federal appeals courts and some states have adopted the exception, but many states haven’t addressed the issue or have done so only obliquely.5 Moreover, states often adopt the exception for some types of fiduciaries but not for others. For example, in New York, the exception doesn’t apply to personal representatives6 but has a murkier status with respect to corporate fiduciaries.7 The prudent practitioner, of course, will assume it’s fully effective in every jurisdiction and with respect to every type of fiduciary unless and until that jurisdiction has declared otherwise. But it would be far better if attorneys could know, rather than guess, whether a burdensome and ambiguous exception will apply to their particular case.

Cutting the Gordian Knot

Amidst all this uncertainty, some states have decided that the simplest solution is to abolish the exception by statute. Florida did just that: under the just-passed Bill CS/HB 325,8 the exception doesn’t apply to fiduciaries in the trusts and estates context. The move seems to have the support of local practitioners: It’s cheered by a prominent Florida Probate & Trust Litigation Blog9 and is the product of six years of vigorous campaigning by the Florida Bar’s Probate & Trust Litigation Committee.

Florida’s approach is hardly unique. New York has also restricted the exception, as noted above, as have the supreme courts of Texas and California.10 The rule is therefore out of favor in the four largest states, and Jicarilla’s underlying reasoning, if not its expressed conclusion, may accelerate the trend.

This may be good news for practitioners, fiduciaries and courts, but a setback for beneficiaries. Moreover, it’s not without problems. The exception is burdensome and unclear, to be sure—but its logic is sound, as noted above, and it serves an important function. One could easily imagine instances in which a beneficiary can’t prove breach or damages without seeing communications between a fiduciary and his attorney that would otherwise be privileged. It’s not so simple as observing that the exception is onerous to practitioners and doing away with it—there are very real interests that the exception is designed to protect, and it does so effectively, if not efficiently. Florida tries to mitigate the potential harm to beneficiaries by making fiduciaries notify beneficiaries that the exception doesn’t apply there,11 but it’s not clear what good that will do when the beneficiary put on notice has no control over whether he’s harmed and now has no access to documents that might prove he suffered damage.

Endnotes

1. United States v. Jicarilla Apache Nation, 564 U.S. ___ (2011), 2011 U.S. LEXIS 4381 (June 13, 2011).

2. Riggs National Bank of Washington, D.C. v. Zimmer, 355 A.2d 709 (Del. Ch. 1976).

3. Ibid. at 714.

4. Comment to Section 813: Duty to Inform and Report.

5. See, e.g., Leila Macauley and Mark E. Swirbalus, “Fiduciary exception to attorney-client privilege,” Massachusetts Lawyers Weekly, July 7, 2011.

6. N.Y.C.P.L.R. Section 4503(A)(2)(A)(ii).

7. RMED Int’l, Inc. v. Sloan’s Supermarkets, Inc., 2003 U.S. Dist. LEXIS 71 (S.D.N.Y. Jan. 3, 2003); Cf. In re Omnicon Group Inc. Securities Litigation, 233 F.R.D. 400 (S.D.N.Y. 2006).

8. F.S. Section 90.5021.

9. www.flprobatelitigation.com/2011/07/articles/probate-guardianship-statutes/new-attorneyclient-privilege-protection-for-trustees-personal-representatives-and-guardians-new-related-reporting-requirements/.

10. See Huie v. DeShazo, 922 S.W.2d 920 (Tex. 1996); Wells Fargo Bank, N.A. v. Superior Court, 990 P.2d 592 (Cal. Sup. Ct. 2000).

11. F.S. Sections 733.212(2)(b) and 736.0813.