Attorney-Client Privilege for a Trustee in an Arizona Probate Case
The attorney-client privilege precludes attorneys from revealing communications with clients without their permission. What happens when the client claiming the attorney-client privilege is a trustee who wishes to prevent trust beneficiaries from seeing documents in the attorney’s file?
Does it matter that the trustee paid the attorneys with trust funds? The Court of Appeals considered these issues in the case of In the Matter of the Kipnis Section 3.4 Trust, 329 P.3d 1055 (2014).
Facts and Background
Northern Trust Company served as the trustee for two trusts created by Mrs. Kipnis. One was the Survivor’s Trust Agreement. The other was a Section 3.4 Trust created under the first agreement. The sole beneficiary was Mrs. Hammerman. Her children hold the remainder interest.
Northern Trust hired the law firm, Quarles & Brady, to advise it regarding the trust matters. It paid the firm with trust funds. Mrs. Hammerman was not happy with Northern Trust Company’s decisions. The disagreements escalated into threats of litigation. She removed Northern Trust as trustee. She asked Northern Trust to produce its complete files on the trusts to herself and the new trustee.
Northern Trust transferred most of its files to the new trustee. However, it did not turn over e-mails that it claimed were subject to the attorney-client privilege. Jane and the successor trustee asked the court to force Northern Trust to release the information. Northern Trust argued that the communications withheld related to advice in its corporate capacity, not fiduciary capacity. The court ordered Northern Trust to turn over the information. Northern Trust brought this appeal
Fiduciary Exception to the Attorney-Client Privilege
Under Arizona law, an attorney cannot reveal any client communication or advice given in the course of professional employment. However, Arizona courts have authority to trim the scope of this privilege when warranted. One exception to the attorney-client privilege is termed the fiduciary exception.
To date, Arizona has neither adopted nor rejected the “fiduciary exception” to the attorney-client privilege. Under this exception, a trustee must provide beneficiaries with all legal advice obtained on trust matters. Some states adopt this exception because their courts view the beneficiaries as the “clients” of the personal representative. That makes them the “real clients” of the trust attorneys.
Arizona courts have rejected this approach, holding that beneficiaries are not the representative’s clients. The court noted that a personal representative owes beneficiaries the duty of fairness and impartiality, not undivided loyalty. In Arizona, attorneys owe clients undivided loyalty. In Arizona, trustees have the duty to keep beneficiaries sufficiently informed about the trust administration to protect their interests.
According to the Restatement of Trusts, this includes legal advice obtained in the trustee’s fiduciary capacity. The Court here agreed with this approach. It adopted the fiduciary exception to the attorney-client privilege. It held that a trustee must disclose legal advice about trust administration obtained in its fiduciary capacity.
Fiduciary Capacity vs. Corporate Capacity
The Court next addressed whether the fiduciary exception applies to legal advice sought by a trustee in its corporate capacity. It first clarified that where a trustee obtains legal advice on trust administration matters, it acts in a fiduciary capacity. When it acts in a fiduciary capacity, it must disclose that legal advice to beneficiaries requesting it.
The Court noted that the question of fiduciary versus corporate capacity is not a matter of who paid for the advice. A trustee need not pass on to the beneficiary information acquired by the trustee for his own protection.
While payment from trust funds suggests a fiduciary capacity, this does not control the nature of the particular attorney-client communications. This communication-by-communication analysis is critical if the attorney-client privilege and the fiduciary exception are to coexist.
Here, the Court said, Northern Trust must disclose all attorney-client communications occurring in its fiduciary capacity regarding trust administration. The Court reiterated that the test is not whether the attorneys were paid with trust funds. Instead, it held that where a fiduciary retains counsel to defend itself against the beneficiaries, the attorney-client privilege remains intact.
The Court held that a trustee’s attorney-client privilege includes all legal advice sought to protect the trustee. A trustee’s attorney-client communications made in a personal or corporate capacity remain privileged even if paid for with trust funds. If the expenditures were unauthorized, the beneficiaries may ask for reimbursement.
Arizona trust law defines “trustee” to include successor trustees. Therefore, a successor trustee has the same duties and powers that the predecessor trustee possessed.
A predecessor trustee cannot assert the attorney-client privilege against a successor trustee as to legal advice sought in its fiduciary capacity. However, this does not include communications made to attorneys in the trustee’s personal or corporate capacity on matters not directly related to trust administration.
The Court of Appeals reversed the trial court order granting the motion to compel. It ruled that the lower court should conduct a private review of the e-mails Northern Trust seeks to withhold. It must determine the primary purpose of the communication. If the trustee made those communications on matters relating to its own interests, the privilege applies.
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