Trust & Estates Litigation Lunch & Learn

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Trust & Estates

Litigation

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Presentation 4: Staying on

Course

The Attorney-Client Privilege and the Fiduciary Exception

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Introductions

• Mary Akkerman

– Trusts & Estates, Partner in the Sioux Falls Office

• Alison Zinn

– Trusts & Estates Litigation, Partner in the Denver

Office

• Nicole Tupman

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About Our Denver Office

• 17 Attorneys

• General corporate work, with specialties in

fiduciary litigation, trust and estate litigation,

bankruptcy, real estate development, and

financial institutions representation.

• Of particular interest is the oil and gas

practice, as trusts may hold interests in oil and

gas.

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Agenda

• Importance of the topic

• Tips in hiring an attorney

• Work product doctrine

• The attorney-client privilege

• The fiduciary exception

• When does the relationship start

• Fiduciary exception

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Important Topic

• Discovery is the fact-finding process in

litigation, and beneficiaries and other

interested parties may request attorney-client

privileged documents or attorney work

product documents.

• _{Need to protect attorney-client privileged}

documents. Releasing privileged documents

raises concerns about case strategy, advice,

and trustee’s actions or knowledge.

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Tips in Hiring an Attorney

• Consult inside general counsel

• When to retain an attorney.

– When files have the potential to be contentious,

having an attorney be informed and involved may be the difference for the fiduciary.

– _{The attorney may be able to offer a strategy to diffuse}

a situation and may be able to consult with a litigation partner to “pre-build” the litigation case in a positive manner.

– Plus, if the matter does become more contentions, the attorney is already aware of the case so no time is lost learning the file.

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Tips in Hiring an Attorney Cont.

• Staffing the case is important.

– May need a T&E attorney, a specialized T&E

litigator but also may need a traditional litigator.

– Ensure that the litigators are familiar with trust rules, specifically SD trust rules.

• Provide all conflict information up front to

your outside counsel.

– Ensure no conflicts.

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Two Key Doctrines

• All states have their own rules which should

be consulted, but there are some general

protections in the two doctrines.

• _{Work product doctrine – protects an}

attorney’s mental impressions, work product,

research, investigations, etc.

• Attorney-client privilege – protects

communications between an attorney and her

client.

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The Work Product Doctrine

• The protection afforded by the work product doctrine is broader than that created by the attorney/client

privilege.

• The work product doctrine provides two levels of protection for an attorney's work product.

• First, an attorney's ordinary work product is

discoverable “... only upon a showing that the party

seeking discovery has substantial need of the materials in preparation of his case and that he is unable without undue hardship to obtain the substantial equivalent of the materials by other means.” SDCL 15–6–26(b)(3).

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The Work Product Doctrine Cont.

• Second, an attorney's opinions and mental

impressions receive a greater level of protection. SDCL 15–6–25(b)(3) further provides, “In ordering discovery of such materials when the required

showing has been made, the court shall protect against disclosure of the mental impressions, conclusions, opinions, or legal theories of an attorney or other representative of a party concerning the litigation.”

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Attorney-Client Privilege

• A client has a privilege to refuse to disclose

and to prevent any other person from

disclosing confidential communications made

for the purpose of facilitating the rendition of

professional legal services to the client.

• _{The privilege also protects communications}

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Communications between Representatives

• The following are all protected by the privilege:

• (1) Between himself or his representative and his lawyer or his lawyer's representative;

• (2) Between his lawyer and the lawyer's representative;

• (3) By him or his representative or his lawyer or a representative of the lawyer to a lawyer or a representative of a lawyer representing another

party in a pending action and concerning a matter of common interest

therein;

• (4) Between representatives of the client or between the client and a representative of the client; or

• (5) Among lawyers and their representatives representing the same client. SDCL 19-19-502(b).

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Formation of Relationship

• “A ‘client’ is a person, public officer, or

corporation, limited liability company,

association, or other organization or entity,

either public or private, who is rendered

professional legal services by a lawyer, or who

consults a lawyer with a view to obtaining

professional legal services from him.” SDCL

19-19-502(a)(1).

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Formation of Relationship Cont.

• “The privilege may be claimed by the client, his

guardian or conservator, the personal representative of a deceased client, or the successor, trustee, or

similar representative of a corporation, association, or other organization, whether or not in existence. The person who was the lawyer or the lawyer's

representative at the time of the communication is presumed to have authority to claim the privilege but only on behalf of the client.” SDCL 19-19-502(c).

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New Case on Privilege

• The formation of the privilege hinges on the client’s reasonable belief that she is consulting a lawyer to obtain professional legal services. State v. Catch the Bear, 352 N.W.2d 640 (S.D. 1984).

• In Nylen v. Nylen (L&V involved), the Supreme Court discussed State v. Catch the Bear and reminded

attorneys and potential clients that discussions with an attorney are not protected unless the

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Nylen v. Nylen

Cont.

• In Nylen v. Nylen, a former client and friend of an attorney shared with the friend-attorney the strategy and comments from her current attorney to the friend-attorney.

– The Supreme Court held that no relationship existed and no reasonable person could have found that a relationship existed.

• Important reminder: be careful that your attorney is your attorney and the relationship is solidified in an engagement letter. Do not share an attorney’s advice with a third party or anyone who is not a client.

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Statutory Exceptions

• _{There are five exceptions to the privilege}

under

SDCL 19-19-502(d)

:

–

1. Furtherance of crime or fraud

–

2. Breach of duty by lawyer or client

–

3. Joint clients (communication on common

interest when offered in action between or

among the clients).

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Statutory Exceptions Cont.

• 4. Claimant through same deceased client: As to a communication relevant to an issue between parties who claim through the same deceased client,

regardless of whether the claims are by testate or intestate succession or by inter vivos transaction (“Testamentary Exception”).

• 5. Documents attested by a lawyer, “relevant to an issue concerning an attested document to which the lawyer is an attesting witness.” SDCL 19-19-502(d).

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Common Law: Fiduciary Exception

• In states which follow the fiduciary exception,

a trustee who obtains a legal opinion about

the trust or in furtherance of its duties as

trustee may have to disclose that opinion in

subsequent litigation, even if the

attorney-client privilege or work product doctrine

would generally preclude the disclosure of the

information.

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History of the Fiduciary Exception

• In

United States v. Jicarilla Apache Nation

, 564

U.S. 162 (2011), the U.S. Supreme Court issued a

decision interpreting the fiduciary exception to

the attorney-client privilege.

• The exception developed as a principle of trust

law in the 19

th

_{Century: “The rule was that when}

a trustee obtained legal advice to guide the

administration of the trust, and not for the

trustee's own defense in litigation, the

beneficiaries were entitled to the production of

documents related to that advice.”

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History Cont.

• Although the fiduciary exception was well

established in England, American courts

expressed skepticism at first.

• _{By the 1970s, however, some American courts}

and states began to adopt the English

common-law rule.

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Discussions in Treatises

• II Scott on Trusts, 3d Ed., s. 173 (“A beneficiary

is entitled to inspect opinions of counsel

procured by the trustee to guide him in the

administration of the trust.”)

• Restatement of Trusts, 2d, s. 173

(differentiating between legal services

procured at the trustee’s own expense and for

its protection and where the trustee seeks

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Uniform Trust Code

• The Uniform Trust Code avoided codifying or

eliminating the fiduciary exception. See Unif. Trust Code, Section 813 cmt. (2006) (“The drafters of this Code decided to leave open for further consideration by the courts the extent to which a trustee may claim attorney-client privilege against a beneficiary seeking discovery of attorney-client communications between the trustee and the trustee's attorney. The courts are split because of the important values that are in

tension on this question.”).

• _{Remember – South Dakota and Colorado are}_not _UTC

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Leading Case

• Riggs National Bank v. Zimmer, 355 A.2d 709 (Del. Ch. 1976) is considered the major leading case on the fiduciary exception in America.

• Facts: beneficiaries of a trust estate sought to compel trustees to reimburse the estate for alleged breaches of trust. The beneficiaries then moved to compel the trustees to produce a legal memorandum relating to the administration of the trust, which the trustees

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Riggs National Bank

Cont.

• The court compelled the attorney to release the

memorandum as, ultimately, it was prepared for

the beneficiaries’ benefit and not for the

trustees’ own defense in any litigation against

themselves.

• Factors the court considered: the ultimate client

was the beneficiaries; the person in contact with

the attorney was a fiduciary on behalf of the

beneficiaries; and the memorandum was not

defensive in nature.

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Riggs National Bank

Cont.

• The court found it significant that the attorneys’ fees were paid out of the trust’s assets: “I conclude that the legal services were performed at the request of the

trustee for the benefit of the beneficiaries of the trust. Indeed, were this not the case, it may have been

improper to charge the trust estate with cost of the legal services.”

• “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.”

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Riggs National Bank

Cont.

• The court found that the facts giving rise to the

memorandum being created were sufficient to get over the work-product doctrine for two reasons.

• _{First, the memorandum was created for the benefit of}

the beneficiaries: “To permit the work product privilege to shield the memorandum from the beneficiaries would contravene the policy of full

disclosure which is essential in the trustee-beneficiary relationship.”

• _{Second, the beneficiaries showed a “substantial need”}

for the document because they were entitled to the legal opinion the trustees sought on their behalf.

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Themes in States

Adopting the Exception

• Three themes exist in jurisdictions that have

adopted the exception:

• First, the fiduciary’s duty to inform and report

trumps the attorney-client privilege.

• Second, the trustee serves as a representative or

proxy for the beneficiary, and thus, the

beneficiary is the real client.

• Third, payment of the legal fees with trust assets

gives the beneficiaries access to the

communications between the trustee and the

attorney.

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Wells Fargo Bank v. Superior Court

• The leading cases for courts declining to accept the fiduciary exception is Wells Fargo Bank v. Superior Court, 990 P.2d 591 (Cal. 2000) and Huie v. DeShazo, 922 S.W.2d 920 (Tex. 1996).

• In Wells Fargo, the court considered whether a co-trustee could be compelled to produce privileged

communications with his attorneys as they related to trust administration in an action by the beneficiaries wherein trustee misconduct was alleged.

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Wells Fargo Cont.

• The court found no basis in California law to require a trustee to produce communications protected by the attorney-client privilege.

• The court rejected the “real client” analysis used in Riggs, and found that evidentiary privileges are part of the statutory law in California, and the court is without authority to expand

them or to recognize implied exceptions.

• Further, the probate code’s requirement that the trustees keep beneficiaries reasonably informed of the trust and its administration can be met by the trustees providing a report of information as outlined in the Probate Code without

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Huie

• Huie involved a similar situation where the

beneficiaries, in action for breach of fiduciary duty, sought to compel discovery of communications

between the trustee and his attorney relating to administration of the trust.

• Despite the relationship between the fiduciary and the beneficiaries, the court rejected the

beneficiaries’ argument and found that

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Themes in States Rejecting the Exception

• Two themes are prevalent in jurisdictions

rejecting the exception:

• First, the exception is largely disfavored by

American courts.

• _{Second, courts want to protect the}

attorney-client privilege to facilitate free-flowing

communication between attorneys and

clients.

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South Dakota

• The South Dakota Supreme Court has not issued a

decision on whether a fiduciary exception exists to the attorney-client privilege or work product

doctrine.

• In our experience in litigation, circuit courts have not found that the fiduciary exception exists in South

Dakota.

• At the outset of litigation, it is important to consider whether any claims of the exception being used

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Minnesota

• A federal court indicated in a corporate case

that the court was unaware of any controlling

authority that would allow a fiduciary

relationship to trump the attorney-client

privilege under Minnesota law.

Opus Corp. v.

Int’l Business Machines Corp.

, 956 F. Supp.

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Colorado

• Although Colorado has no case law or statute

on point, a review of existing authority

suggests that Colorado court may find that the

exception does not apply.

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Colorado Cont.

• In Hill vs. Boatright, 890 P.2d 180 (Colo.App. 1994) aff’d in part, rev’d in part on other grounds, Boatright v. Derr, 919 P.2d 221 (Colo. 1996)(en banc), in connection with determining whether a personal representative could collect non-economic damages on behalf of an estate, the court stated that “if an attorney acts in pursuit of his or her attorney-client relationship, there is no duty owed to the trust beneficiaries” and found that “[t]he attorney-client relationship existed between…[the] personal

representative of the estates, and the [attorneys]. Because of this

relationship and under the circumstances disclosed by this record, the [attorneys] did not owe a fiduciary duty to a third party, such as the beneficiaries of the estates.”

• These findings could be extended to reach the conclusion that the fiduciary, not the beneficiary, is the real client for the purposes of the attorney-client privilege.

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Western Gas Processors

• In a corporate case, two joint venturers had

discussion with a “joint” or common attorney. In a subsequent lawsuit, one of the parties compelled the disclosure of communications between the other

party and the attorney.

• The court held that the fiduciary relationship

between joint venturers outweighed the interests protected by the attorney-client privilege.

• Western Gas Processors, Ltd. v. Enron Gas Processing Co., 1989 WL 20529 (D. Colo. 1989).

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Colorado

• In reading

Hills

and

Western Processors

, a

Colorado court is likely to decline to adopt the

fiduciary exception in the trust and estates

context, but a variation of the fiduciary

exception may apply to joint venturers or

partners who owe fiduciary duties to one

another and consult an attorney during their

relationship.

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Takeaways

• Know your jurisdiction and the rules that apply.

• _{Be careful in requesting a written opinion or}

memorandum from an attorney regarding your duties, especially if the trust assets will pay the attorney fees. That paper trail may be discoverable if the jurisdiction recognizes the exception.

• If a complicated issue or governance question arises, consider whether to hire an attorney from non-trust funds.

• Use the lack of fiduciary exception as a marketing tool for South Dakota situs.