Member Article

The law holds trustees, like any other fiduciary, to a particularly stringent standard of care. As the famed Judge Benjamin Cardozo wrote in 1928, “A trustee is held to something stricter than the morals of the market place. Not honestly alone, but the punctilio of an honor the most sensitive . . . ”
While imposing such a rigorous standard, however, many states all-the-while limit the privilege and confidentiality that a trustee enjoys during communications with her, his, or its attorney. Understanding the limitations of this confidentiality can help trustees and trust counsel contour their communications to avoid surprises and pitfalls down the line.

While North Carolina’s adapted version of the Uniform Trust Code suggests that courts would likely protect this privilege for North Carolina trustees, the state’s appellate courts have not yet addressed the question. Until such time as our state’s courts definitively address the issue (or the legislature offers clarity), North Carolina fiduciaries and their counsel should approach the subject with caution.


The Attorney-Client Privilege
Generally speaking, courts respect confidentiality for communications between a client and its attorney. This privilege, the North Carolina Supreme Court recently observed in In re Miller, 357 N.C. 316 (2003), “is no trivial consideration, as this protection for confidential communications is one of the oldest and most revered in law.” Among the public policy considerations in safeguarding this privilege, the court wrote, is a desire to foster “full and frank communication between attorneys and their clients and thereby promote broader public interests…”

When that client is serving as a trustee or other fiduciary, however, courts (and even legislatures) have split over the degree to which such communications are protected by privilege (at least against beneficiaries of the trust)—with some applying a “fiduciary exception” to the attorney-client privilege, reasoning that because a trustee’s duties flow to the trust’s beneficiaries, so too should the beneficiaries (rather than the trustee) be the owner of such privileged communications with trust counsel.

The ambiguity arises from varying states’ common law and, more recently, interpretations of Section 813 of the Uniform Trust Code, which establishes a trustee’s duty to inform and report to certain beneficiaries. As the comment to the uniform section explains, “The duty to keep the beneficiaries reasonably informed of the administration of the trust is a fundamental duty of a trustee.” But, as further noted in the official comment, “The drafters . . . 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.”


Various Approaches
Accordingly, various states’ courts construing and applying the Uniform Trust Code are left to their own devices–and to fall back on their own common law–when deciding this question. Whereas many states adopt the position that the “beneficiary is the client” of trust counsel—at least during periods of ordinary administration—and apply a so-called “fiduciary exception” to the privilege, other jurisdictions have more zealously protected a trustee’s communications with counsel. In some jurisdictions (like Illinois) the law appears in flux, while several others (including North Carolina) have yet to resolve the issue.

Beneficiary-As Client (a.k.a. the “Fiduciary Exception” to Attorney-Client Privilege). In “beneficiary-as-client” jurisdictions, courts reason that a trustee is but “a representative for the beneficiaries of the trust which he is administering” and therefore an attorney counseling the trust has the beneficiaries, rather than the trustee, as her true client. This “fiduciary exception” or “beneficiary-as-client” theory emerged in the British common law during the middle 19th-century, and was embraced (albeit slowly, and after a lengthy period of reluctance) by some American courts. The ground-breaking American case came in Riggs Nat. Bank v. Zimmer, 355 A.2d 709 (1976), where a Delaware Chancery Court wrote: “The very intention of the [trustee’s communication with the attorney] is to aid the beneficiaries.” Accordingly, the Delaware court reasoned: “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.”
In the June 2011 decision U.S. v. Jicarilla Apache Nation, 131 S. Ct. 2313, the United States Supreme Court acknowledged this “fiduciary exception” to the attorney-client privilege rule. The case involved an action by Indian tribes seeking to discover potentially privileged communications between the U.S. Government and its counsel regarding administration of certain quasi-trusts for the benefit of Native Americans. While the Supreme Court ruled that the relationship between the Government and the Indian Tribes was not sufficiently analogous to a common-law trustee-beneficiary relationship to apply this common law protection, the Court did recognize and endorse that “fiduciary exception” as it has arisen in many states’ (and the federal court of appeals’) common law.

However, even in jurisdictions applying the “fiduciary exception,” the exception applies only in particular situations or periods. Typically, the “fiduciary exception” will destroy privilege where the trustee seeks advice from counsel while acting as a “mere representative” of the beneficiaries (i.e., during periods of ordinary administration, before a dispute arises with the beneficiaries). In determining whether the trustee is a “mere representative,” the Supreme Court wrote that lower courts should consider: (1) when the advice was sought (i.e., was there any adversarial proceeding yet commenced against a trustee?); (2) whether the communication could be construed as intending to benefit anyone other than the trust beneficiaries; and, (3) whether the attorney or law firm was paid out of trust assets.

In the ultimate analysis, the Supreme Court noted in the Jicarilla case, the critical question is whether “the trustees’ fiduciary duty to furnish trust-related information to the beneficiaries outweigh[s] their interest in the attorney-client privilege.” Courts in New York, Pennsylvania, and Rhode Island, have followed suit (at least to a significant extent) and applied this “fiduciary exception.”

Trustee-as-Client (Upholding Privilege). Many other courts have held to the contrary, however, and safeguarded the fiduciary’s privileged communications with trust counsel, even during periods of ordinary administration. Such jurisdictions include California, Texas, and New Mexico.

With the Huie v. DeShazo ruling in 1996, the Supreme Court of Texas placed that state squarely in the set of jurisdictions upholding privilege for fiduciary/attorney communications, even during periods of ordinary administration. In Huie, the Texas court refused to recognize a “fiduciary exception” to attorney-client privilege, writing: “the Trustee who retains an attorney to advise him or her in administering the trust is the real client, not the trust beneficiaries.”

However, in a warning that would be well heeded by fiduciaries in any jurisdiction, the Huie court reminded that the attorney-client privilege protects communications between a fiduciary and counsel. While this includes the recitation of facts during such communications, the underlying facts themselves are not necessarily insulated from a trustee’s broader duty to inform and report to beneficiaries:

“While the privilege extends to the entire communication, including facts contained therein, a person cannot cloak a material fact with the privilege merely by communicating it to an attorney.”

Because the Uniform Trust Code (except in jurisdictions where the enacted version departs from the uniform version, such as North Carolina) requires that a trustee “keep the qualified benefiaries of the trust reasonably informed about . . . the material facts necessary for them to protect their interests,” the distinction noted by the Huie court likely impacts fiduciaries in most uniform states.

Meanwhile in South Carolina and Florida, courts initially recognized the “fiduciary exception” before being expressly overruled by legislative action. Under language now appearing in South Carolina’s probate code, “The existence of a fiduciary relationship between a fiduciary and a beneficiary does not constitute or give rise to any waiver of the privilege for communications between the lawyer and the fiduciary.” Florida, meanwhile, amended its evi-dence, probate, and trust codes to make clear that the trustee or other fiduciary is the “real client” and owner of any attorney-client privilege.


Other States. The law in several other states is either murky and/or unsettled. In Illinois, some courts have refused to apply the “fiduciary exception” and instead have protected a trustee’s communications, while others have strayed from those rulings and carved out exceptions, including the “sole beneficiary” exception. (In a 2003 case, Gagliardo v. Caffrey, 800 N.E.2d 489, Illinois’ First Appellate District held that where there is but one beneficiary to a trust or estate, the “fiduciary exception” should apply, because “for all practical purposes, [the sole beneficiary’s interests are] coextensive with those of the estate.”). Adding to the confusion, that same appellate court announced that, while some Illinois appellate districts may have applied the “fiduciary exception” on a case-by-case basis along the way, “Illinois has not adopted the fiduciary-duty exception.” See Garvy v. Seyfarth Shaw LLP, 2012 IL App. (1st) 110, 115 at *10. In various other states — including North Carolina — the issue remains largely unaddressed.

North Carolina Analysis
State-level appellate courts in North Carolina have yet to consider the “fiduciary exception.” Were the issue to ever reach the appellate courts, however (under current statutory authority), a significant factor in the court’s analysis would likely be North Carolina’s statutory departure from the Uniform Trust Code in Section 813. That section of the Uniform Code requires a trustee to “keep the qualified beneficiaries of the trust reasonably informed about the administration of the trust and of the material facts necessary for them to protect their interests.” Finding this duty “too general in its scope,” North Carolina’s drafters omitted that provision in exchange for more limited, specific duties (which, of course, may be overridden by the settlor with appropriate trust language). In North Carolina, a trustee is by default obligated merely to “provide reasonably complete and accurate information as to the nature and amount of the trust property” and to respond to reasonable requests to review the trust instrument and property. Given this more limited duty to inform and report, even under current statutory authority, one might predict that North Carolina courts would join California and Texas (as well as the legislatures of South Carolina and Florida) in rejecting the “fiduciary exception.”


Practical Pointers
Until the North Carolina courts (or legislature) definitively weigh in, trustees and their counsel must always be mindful of whether their communications may be protected by privilege. A first step is understanding which state’s laws govern the trust and claims arising from it. Like many if not all states’, North Carolina’s Uniform Trust Code defaults to “jurisdiction designated in the terms (of the Trust) unless the designation of that jurisdiction’s law is contrary to a strong public policy of the jurisdiction having the most significant relationship to the matter at issue.” N.C.G.S § 36C-1-107(a)(1). In some states with clear statutes, such as South Carolina, fiduciaries are afforded significant comfort that their communications with counsel will retain privilege. For the meantime, one could reasonably speculate North Carolina courts may follow course. But in other jurisdictions—at least until a clearly adversarial relationship, such as litigation, has developed with the beneficiaries—trustees should be prepared for a court to hold that the beneficiary, not the trustee, owns the privilege. Even in these “fiduciary exception” states, however, certain steps can be taken to mitigate the risk that a court would require disclosure of trustee/counsel communications:

• Be cautious when communicating with counsel, particularly regarding ordinary administrative issues—except in the most clear-cut states, presume that such communications will not be privileged;

• When communicating with counsel regarding non-administrative (i.e., dispute-oriented) topics, clearly articulate the reason for seeking legal counsel, including documenting any divergences of interest, disputes, or threatened litigation with a beneficiary or beneficiaries;

• Where there is a strong interest to preserve the privilege, a trustee may consider paying the attorneys’ fees herself, rather than out of trust assets—in U.S. v. Jicarilla, the Supreme Court quoted the Riggs opinion from the Delaware Chancery Court, “That the advice was obtained at the beneficiaries’ expense was not only a ‘significant factor’ entitling the beneficiaries to see the document but also a ‘strong indication of precisely who the real clients were’”;

• Be mindful that even where a trust is being administered in one location, litigation may arise in another locale, which may employ its own rules governing privilege and the fiduciary exception;

• Remember that, as the Texas Supreme Court pointed out in Huie, a trustee “cannot cloak a material fact with the privilege merely by communicating it to an attorney”—while the communication about the fact will be privileged, some states’ trust codes nevertheless require a trustee to keep beneficiaries’ abreast of “material facts” regarding the trust, or face additional claims of breached fiduciary duty.

Given the disparate – and at times unpredictable – protections afforded communications between a fiduciary and its legal counsel, until North Carolina’s courts or legislature weigh in with certainty, both the fiduciary and outside counsel would be well advised to exercise careful analysis and discretion for such communications. •


Mike Anderson is a commercial litigation attorney at Hunton & Williams LLP in Charlotte with a focus on fiduciary litigation.