By Tina N. Babel Lawyers who represent trustees sometimes learn to their dismay that the attorney-client privilege actually belongs to trust beneficiaries. This article looks at the confusing state of law in Illinois and recommends steps lawyers can take to protect themselves and their clients. ATTORNEY FOR THE TRUST: Does Attorney-Client Privilege Belong to the Trustee or the Beneficiary? As attorneys, we learn early on that the attorney-client privilege is sacrosanct. We convince our clients they can tell us anything and it will be protected. Throughout our representation, we are ethically bound to act solely for our clients welfare and are committed to doing whatever we can to protect their interest. When your client is a trustee, however, that may or may not be the case. There is a split in authority over whether a trustee who retains an attorney does so on his or her own behalf or on the trust s behalf. As a result, it is unclear in many circumstances whether the attorney-client privilege belongs to the trustee or the beneficiary, especially when there is litigation between them. In fact, the Uniform Trust Code has left open the extent to which a trustee may claim attorneyclient privilege against a beneficiary. 1 In addition, it is uncertain whether a successor trustee who takes over the administration of the trust inherits the privilege and can waive it on behalf of the trust. In Illinois the law is unsettled, although recent case law suggests Illinois courts will adopt the adversarial relationship test. Under that approach, beneficiaries have the right to the trustee s privileged communications about administration of the trust until and unless the trustee and ben- 1. Unif Trust Code 813 (2000). Available at http://www.law.upenn.edu/bll/archives/ulc/uta/2001final.pdf. Tina N. Babel is an attorney at Carmody MacDonald PC in St. Louis, Missouri. She is licensed in California, Illinois, and Missouri, and concentrates her practice on civil and fiduciary litigation. 1
eficiary relationship becomes adversarial. In short, ownership of the attorney-client privilege is uncertain when your client is a trustee. Attorneys who are approached by a trustee for representation must be wary and immediately protect their and their client s whomever that might be interests. The split of authority The beneficiary is the client (the fiduciary-duty exception). In a number of jurisdictions, courts have held that when a trustee retains an attorney on behalf of the trust, the attorney s client is in fact the beneficiary. While acknowledging that a trustee might be discouraged by the loss of the attorney-client privilege from In a number of jurisdictions, courts have held that when a trustee retains an attorney on behalf of the trust, the attorney s client is in fact the beneficiary. seeking counsel s advice, these courts emphasize that the trustee and/or the attorney has a fiduciary duty to beneficiaries that requires him or her to reasonably report to the beneficiaries. This approach has been labeled the fiduciary-duty exception. Riggs Natl Bank of Washington, DC v Zimmer 2 is often cited for this proposition. In Riggs, the trustees communicated certain facts to their attorneys to secure a legal opinion for the trustees petition for instructions and in anticipation of potential tax litigation for the trust, and the beneficiaries sought to compel production of the attorneys internal memorandum. 3 The Delaware Chancery Court found that because the memorandum was prepared for the benefit of the beneficiaries and there was nothing in the record to suggest that the purpose of the memorandum was defensive on the trustee s part, the memorandum should be produced. 4 A number of courts follow Riggs and the policies set forth therein: 5 that the attorneys client is the beneficiary of the trust and, as a result, communications with the trustee are not privileged. 6 Most courts following the Riggs analysis, however, make a distinction between trustees communications that are for the purpose of litigation, which are privileged, and those that are for administration of the trust, which are not. 7 The comments to the Restatement adopt the fiduciary-duty exception, providing that the privilege does apply to communications between the trustee and a lawyer specifically retained by the trustee to represent, not the trust or the trustee with respect to executing trust duties, but the trustee in the trustee s personal capacity, such as to assist the trustee in a dispute with a beneficiary or to assert a right against the beneficiary. 8 Determining when a dispute begins can be difficult. 9 Consider a relationship that starts as non-adversarial but develops into something adversarial precisely when can the trustee invoke the privilege? Courts have recognized that drawing the line can be difficult. 10 The trustee is the client. However, a number of recent decisions in other jurisdictions for example, the California Supreme Court s ruling in Wells Fargo Bank, NA v Superior Court 11 have held to the contrary. According to this line of cases, when a trust retains an attorney, the trustee is the client and holds the privilege, regardless of whether the advice was obtained for purposes of administration or defense. These courts place a premium on the public policy behind the privilege and reason that bene ficiaries benefit from a trustee s full and frank disclosure to his or her attorney. The Texas Supreme Court explained the rationale in Huie v DeShazo: A trustee must be able to consult freely with his or her attorney to obtain the best possible legal guidance. Without the privilege, trustees might be inclined to forsake legal advice, thus adversely affecting the trust, as disappointed beneficiaries could later pore over the attorney-client communications in second-guessing the trustee s actions. 12 Illinois courts and the adversarial relationship approach Illinois courts have not definitively decided the privilege 2. Riggs, 355 A2d 709 (Del Ch 1976). 3. Id at 711. 4. Id. 5. In addition, the attorney-client privilege has been examined in ERISA cases, wherein several courts have held that plan participants are the real clients of an attorney representing an ERISA manager. See Washington-Baltimore Newspaper Guild, Local 35 v Washington Star Company, 543 F Supp 906, 909 FN5 (D DC 1982) ( in a trustee relationship [in the ERISA context] there exists no legitimate need for a trustee to shield his actions from those whom he is obligated to serve. In other words, while the corporate managers perform duties which run to the benefit ultimately of the stockholders, a pension plan trustee directly serves the fund beneficiaries, quoting Garner v Wolfinbarger, 430 F2d 1093, 1101.). 6. See Charleson v Hardesty, 108 Nev 878, 883, 839 P2d 1303 (1992) (holding that when an attorney represents a trustee, the attorney assumes a duty of care and fiduciary duties toward the beneficiaries as a matter of law); In re Hoehl s Estate, 181 Wis 190, 193 NW 514, 516 (1923) (in estate matter, the lawyer serves the estate, the court, and administrator and [i]n his relations to the estate and the court his duties were not confidential or private ); Parker v Stone, 2009 WL 1097914 (D Conn 2009) (any documentation related to administration of the estate or trust falls within the fiduciary exception and is not entitled to protection, although any document prepared in connection or anticipation of current or adversarial proceedings is exempt from disclosure). 7. Floyd v Floyd, 365 SC 56, 87-88, 615 SE2d 465, 482 (SC App 2005) (following Riggs, allowed disclosure of communications between the trustees and attorneys because the contested letters pertain to the administration of the trust, not litigation between the parties ). 8. Restatement (Third) of the Law Governing Lawyers 84 cmt (b) (2000). 9. But see NKS Distributors, Inc v Tigani, 2010 WL 2011603 (Del Ch 2010) (unpublished) (holding that communications were privileged because the contingent beneficiary more closely resembled an adverse party, where the communications related to how the trustee should deal with problems that the trustee believed the beneficiary was causing). 10. Anderson v Sotheby s Inc Severance Plan, 2004 WL 5402553 (SD NY 2004) (unpublished). 11. Wells Fargo, 22 Cal 4th 201, 990 P2d 591 (2001). See also New York Civil Practice Law and Rule 4503(a)(2) (2008) (absent contrary agreement, the trustee or other fiduciary is an attorney s client); Spinner v Nutt, 417 Mass 549, 553, 631 NE2d 542, 544-45 (1994) (rejecting the argument that beneficiaries should be given access to attorney-trustee communications because conflicting loyalties could impermissibly interfere with the attorney s task of advising the trustee ); Barnett Banks Trust Co, NA v Compson, 629 So2d 849 (Fla App Ct 1993) (because beneficiary s position was antagonistic to aligned beneficiaries and did not stand to benefit from the trustee s actions in the suit, she was not the real client and the real client of the law firms is the trustee ); Moeller v Superior Court, 16 Cal 4th 1124, 1131 (Cal 1997) ( when a successor trustee takes office it assumes all of the powers of trustee, including the power to assert the privilege with respect to confidential communications between a predecessor trustee and an attorney on matters of trust administration ); Roberts v Fearey, 162 Or App 546, 553, 986 P2d 690, 694 (1999) ( when an attorney undertakes to represent a fiduciary, he or she represents only the fiduciary and does not, at the same time, maintain an attorney-client relationship with those to whom the fiduciary-client owes a duty for purposes of malpractice liability). 12. Huie, 922 SW2d 920, 924 (Tex 1996). 2
issue, and rulings have been ad hoc and fact-specific. 13 Under Illinois law, attorneys hired to represent a legal entity owe a fiduciary duty of loyalty to the entity not the individuals that control it, 14 but Illinois courts have not taken a clear position on whether a trust or estate attorney represents the beneficiaries or the trustee. 15 They have, however, ruled that an attorney s allegiance is to the estate Under the adversarial relationship test, beneficiaries have a right to the trustee s privileged communications unless the trustee and beneficiary relationship becomes adversarial. when an adversarial relationship arises between the beneficiaries and the estate and/or trust. No attorney-client relationship with estate beneficiaries. In In re Estate of Joel F. Kirk, the second district did not expressly discuss attorney-client privilege, but it did address the attorney s duty to estate beneficiaries. 16 There, heirs brought suit against the attorney of the estate, alleging that he breached his fiduciary duty to them by failing to protect the estate. 17 The court wrote that [a]n attorney representing an estate must give his first and only allegiance to the estate when such an adversarial situation arises. Even though the beneficiaries of a decedent s estate are intended to benefit from the estate, an attorney cannot be held to have a duty to those beneficiaries, due to this potential adversarial relationship. 18 The court concluded that while the attorney for an executor owes a fiduciary duty to act with due care to protect the interests of the beneficiaries, the attorney does not have an attorney-client relationship with the beneficiaries. 19 Because the heirs failed to explain how the attorneys conduct was harmful to the estate, the court held that their objections were properly denied. 20 Similarly, in In re Estate of Vail v First of America Trust Co, beneficiaries of a will and trusts filed a will and trust contest, alleging that certain distributions, accountings, and actions by the trustee/ executor were improper. 21 The beneficiaries contended that the estate s attorneys should not receive their fees because they represented the bank that served as both executor of the will and trustee of the trust, which created a conflict of interest. 22 The fourth district noted that the attorney must act with due care and protect the beneficiaries interests, but also observed that the estate had a duty to defend a will contest and may employ an attorney for that purpose. 23 The court held that an attorney for the executor does not have an attorney-client relationship with the beneficiaries, acknowledging the holding in Kirk that where an adversarial situation arises, the attorney for the executor owes allegiance only to the estate. 24 The court affirmed the lower court s decision that there was no conflict of interest. The Kirk and Vail decisions stand for the propositions that an attorney (1) must act with due care to protect beneficiary interests but (2) does not have an attorney-client relationship with beneficiaries and (3) owes allegiance only to the estate when an adversarial situation arises. Because these decisions held that the attorney does not have an attorneyclient relationship with beneficiaries, it would seem to follow that a beneficiary does not have access to attorney-client communications with the trustee. The sole-beneficiary exception. However, in 2003, the first district recognized an exception to Kirk and Vail in cases where there is a sole beneficiary. In Gagliardo v Caffrey, the plaintiff and her minor children were the sole beneficiaries of her deceased husband s estate. 25 The defendant, the husband s sister, was the executor of the estate and the husband s business partner. 26 When the defendant sister purchased the husband s share of the business, the plaintiff beneficiaries sued to have her removed. They also moved to disqualify the defendant s attorney, arguing that he had a conflict because he represented the estate. 27 The court, in determining whether the defendant s attorney had an attorneyclient relationship with the plaintiff beneficiaries, distinguished Kirk and Vail. In those cases, the court argued, the beneficiaries challenged the will or trust, causing the interests of the estate to diverge from those of at least some of the beneficiaries. 28 In Gagliardo, however, the court found that the plaintiff was the sole party intended to benefit from the estate. As a result, her interests were for all practical purposes, coextensive with those of the estate: her interests are aligned with the estate, not against it. 29 Based upon the particular facts of Gagliardo, the court held that from the time the attorney represented the estate, he also represented the plaintiff because she was the sole beneficiary. 30 Under the circumstances set forth in Kirk and Vail, where the attorneys defended the estate from beneficiaries, the beneficiaries do not have an attorney-client relationship with the estate s attorney. 31 But because the attorney in Gagliardo owed a fiduciary duty to the estate, he could not, without conflict, represent the executor. 32 Based on the analysis in Gagliardo, courts and counsel trying to determine whether the estate or trust beneficiary 13. See comment f to Rest 3d Trusts 82 (a trustee is privileged to refrain from disclosing to beneficiaries or co-trustees opinions obtained from counsel retained for the trustee s personal protection in the course, or in the anticipation of litigation (e.g., for surcharge or removal), which is to be distinguished from consultations obtained in the fiduciary capacity concerning decisions or actions to be taken in the course of administering the trust). 14. In re J. S. II, LLC, 371 BR 311, 323 FN8 (ND Ill 2007). 15. But see Hashim v First Natl Bank of Chicago, 1987 WL 6563 (ND Ill 1987) (unpublished) (the trustee owes a fiduciary duty to the beneficiary and the faithful fiduciary has nothing to hide from his beneficiary; when the person asserting the privilege is an entity which in the performance of its functions acts wholly or partly in the interests of others, and those others, or some of them, seek access to the subject matter of the communications, access should be permitted ). Id at *4, quoting Quintel Corp v Citibank, NA, 567 F Supp 1357, 1363 (SDNY 1983). 16. Kirk, 292 Ill App 3d 914, 686 NE2d 1246 (2d D 1997). 17. Id. 18. Id at 919, 686 NE2d at 1250, citing Jewish Hospital of St Louis, Missouri v Boatmen s Natl Bank, 261 Ill App 3d 750, 763, 633 NE2d 1267, 1277 (5th D 1994); see also In re Estate of George S. Halas, 159 Ill App 3d 818, 512 NE2d 1276 (1st D 1987) (an attorney for an executor must act with due care and protect the interests of the beneficiaries ). 19. Kirk at 919, 686 NE2d at 1250. 20. Id at 922, 686 NE2d at 1251. 21. Vail, 309 Ill App 3d 435, 722 NE2d 248 (4th D 1999). 22. Id at 441, 722 NE2d at 253. 23. Id. 24. Id. 25. Gagliardo, 344 Ill App 3d 219, 800 NE2d 489 (1st D 2003). 26. Id at 221, 800 NE2d at 490. 27. Id at 223, 800 NE2d at 492. 28. Id at 228, 800 NE2d at 496. 29. Id. 30. Id at 229, 800 NE2d at 496. 31. Id. 32. Id. 3
is the client and thus the owner of the attorney-client privilege should first ask whether there is more than one beneficiary. If not, the interest of the estate is the interest of the beneficiary. Gagliardo did not address the instance of numerous beneficiaries whose interests nonetheless are equally aligned. Presumably, though, their interests would likewise be regarded as coextensive with the estate. Courts should then ask whether there is an adversarial relationship between the estate and the beneficiaries. Though the contours remain undefined, the courts in Kirk, Vail and Gagliardo looked to whether the beneficiaries challenge was administrative as opposed to adversarial. To further complicate the matter, the second district recently declared in a nontrust case that Illinois has not yet recognized the fiduciary-duty exception. In Mueller Industries, Inc v Berkman, the court addressed whether a corporate president s communications with the company s attorneys were protected by the privilege. 33 The plaintiff corporation argued that the fiduciary-duty exception to the privilege applied, reasoning that the president s communications were for the benefit of the company-beneficiary and were thus discoverable by the beneficiary. 34 The court noted that the fiduciary-duty exception arose out of trust law and, citing a third circuit opinion, explained that under the exception the beneficiary, not the trustee, was the true client of the attorney, and so was the real possessor of the attorney-client privilege. 35 However, the court held that the fiduciary-duty exception did not apply, and thus the president s communications remained privileged because they were in contemplation of adversarial litigation. That court concluded that Illinois has not yet adopted the fiduciary-duty exception. 36 Practical issues Trust attorneys must carefully protect themselves and their clients by doing their best to determine who holds the attorney-client privilege the trust, the trustee, or the beneficiaries upon initial contact. If a trustee comes into your office, you should first ascertain where the trust or trustee resides (jurisdiction is usually based on the trustee s residence) to determine which state s law applies and whether that state is a fiduciary-duty state, a trustee-is-the-client state, or a state like Illinois where the standard is murky. Once you know who the client is, be it the beneficiaries or the trustee, immediately inform the beneficiaries and the trustee of the scope of your representation in writing. If you determine that you represent the trustee and not the beneficiaries, tell the beneficiaries to retain their own counsel if they have any questions or concerns. Always use a retention letter describing the scope of your representation, including what happens if the relationship becomes adversarial. After you have identified the client and informed the beneficiaries and the client of the scope of your representation, be mindful of your duties to the estate and the beneficiaries. Be sure to respond quickly and fully to beneficiaries reasonable requests for information. Aside from documents protected by the attorney-client privilege and work product doctrine, beneficiaries have the right to reasonable access to the trust s books and accounts. Always remember that your communications with the beneficiaries or the trustee and between the trustee and the beneficiaries could eventually be found not to fall under the attorney-client privilege and thus be discoverable, depending how the facts unfold. Even comments you make in billings or invoices may be discoverable, especially when your fees are being paid out of the trust estate. Beneficiaries often use hostility toward them to support removal or a claim for breach of trust. It is unclear who holds the privilege when a successor trustee is appointed. Some courts have held that a successor trustee can waive the privilege for communications between you and the previous trustee. 37 Make this clear to each trustee you represent. Always be on the lookout for anything that could change the scope of your representation. If you learn that the trustee is doing something that might subject him to individual liability (e.g., that he is misappropriating trust funds), you might need to withdraw. If you do, suggest that the trustee hire an attorney for himself and another for the estate. If he chooses to hire an attorney for himself individually, be sure the attorney is not paid out of trust funds. Illinois Rule of Professional Conduct 1.7 makes clear that conflicts of interest bar a lawyer from representing one client if doing so will be directly adverse to another client. When a trustee acts improperly and could be liable to the beneficiaries and/or the trust, you can no longer act for both the benefit of the trustee and the trust. Use the trustee s power to petition the court for instructions. Unlike civil court rules, probate procedures allow trustees to petition the court for instructions on how to administer a trust or estate. 38 This mechanism provides protection for both the trustee and the attorney and can neutralize an adversarial proceeding before one arises. Conclusion As this discussion has shown, the law of trustee representation is in flux. Some jurisdictions have held that when a trust retains an attorney, the attorney represents the trustee; others hold that the attorney represents the beneficiaries of a trust; still others hold that the attorney represents the beneficiary until an adversarial relationship between the trustee and beneficiaries develops. The weight of Illinois current body of law suggests that while the attorney for the trustee owes a fiduciary duty to the beneficiary, it does not rise to the status of an attorney-client relationship unless there is only one beneficiary or the beneficiaries have coextensive interests. Even in that case, the beneficiaries may lose the benefit of the attorney-client privilege where an adversarial relationship arises between the trustee and beneficiaries. Attorneys must be mindful from the outset that an adversarial relationship could arise and do their best to recognize when it has arisen, which is often not easy. They must constantly identify the client in a trust scenario and ensure that the privilege to whomever it might belong remains protected. 33. Mueller, 399 Ill App 3d 456, 927 NE2d 794 (2d D 2010). 34. Id, 927 NE2d at 806. 35. Id, citing Wachtel v Health Net, Inc, 482 F3d 225, 231 (3d Cir 2007). 36. Id; but see Lawrence E. Jaffe Pension Plan v Household Intl, Inc, 244 FRD 412, 422 (ND Ill 2006) ( Most courts, including the seventh circuit, have recognized the existence of a fiduciary exception to the attorney-client privilege ). 37. See In re Estate of Fedor, 356 NJ Super 218, 221, 811 A2d 970, 972 (2001) ( when the office of trustee passes from one person to another, the power to assert the attorney-client privilege passes as well ); Moeller v Superior Court, 16 Cal 4th 1124, 1131, 947 P2d 279 (1997) ( when a successor trustee takes office it assumes all of the powers of trustee, including the power to assert the privilege with respect to confidential communications between a predecessor trustee and an attorney on matters of trust administration ). 38. See Bangert v Northern Trust Co, 362 Ill App 3d 402, 839 NE2d 640 (1st D 2005) (reaffirming the trustee s right to apply to the probate court for instructions regarding the administration or distribution of the trust if there is reasonable doubt about the powers or duties of the trusteeship or about the proper interpretation of the trust provisions). 4
Reprinted with permission of the Illinois Bar Journal, Vol. 98 #10, October 2010. Copyright by the Illinois State Bar Association. www.isba.org 5