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The Fiduciary Exception To The Attorney-client Privilege

The acceptance of the fiduciary exception to the right of the attorney-client, and in some cases the doctrine of the attorney-work-product, has resulted in the loss of the rights and safeguards formerly enjoyed by ERISA Fiduciaries. Understanding the contours of the fiduciary exception can allow today’s Fiduciaries to understand when the legal advice they receive can end up in the hands of the litigants.


Attorney-Client Privilege Basics

The right of the attorney-client privilege is the oldest privilege acknowledged under common law.

The privilege extends only if (1) the alleged holder of the privilege is or is trying to become a client; (2) the person to whom the contact was made (a) is a member of the bar of the court or his subordinate; and (b) acting as a lawyer; (3) the communication is in connection with the fact that the lawyer has been told (a) by his client (b) without the presence of the client;


The Fiduciary Exception

When the right of the attorney-client privilege is defined, it is not absolute. It can grant a fiduciary exception to that privilege. The fiduciary exception forbids the fiduciary from asserting the right of the attorney-client against those to whom the fiduciary obligation is due.

The fiduciary exception is therefore a collision between two essential policies. Next, a framework that allows people to make absolute and candid reports to their attorneys in order to receive informed legal advice. Secondly, the agreement obliges Fiduciaries to report all relevant details to the beneficiaries, shareholders and those to whom the duties are due. In such cases, the right of the attorney-client is subject to a fiduciary exception.

The courts have interpreted the fiduciary exception not as an exception at all, but as a strict interpretation of the client-law privilege criteria in situations where the Fiduciary works on behalf of the beneficiary and thus the beneficiaries are the real clients who may claim or waive the privilege.

Accordingly, the court required that the president of the insurance firm, who had previously served as the company’s in-house lawyer and informed the company of the transactions in question, be forced to provide evidence of his advice to the company.

Not long after that, the Delaware Chancery Court overturned the claim of the attorney-client privilege by the Fiduciary in order to produce a legal memorandum obtained by the Fiduciary concerning the administration of the trust.

The court observed that the conflict of interest of a law firm, representing a company as well as minority shareholders, may help the finding of a “good cause” to defeat the claim of privilege.

As the Supreme Court has recently acknowledged, the trust exemption is now well recognized in the case law of both federal and state courts, and has been used in a wide range of circumstances, including disputes concerning common law trusts, disputes between companies and shareholders, and ERISA compliance actions.’


Good cause has to be demonstrated

Some courts have requested that anyone seeking a fiduciary exemption have a good reason to do so. The Court of Garner expressed some of the reasons that might justify a demonstration of “good cause” in the form of a class action by shareholders:

• the number of shareholders seeking transparency and the percentage of shares they represent;

• the bonafides and arguments of the plaintiffs; the expressed need for the discovery of otherwise protected information;

• the availability of information from other sources;

• The seriousness of the arguments of the plaintiff (i.e. criminal v. non-criminal corporate wrongdoing);

• whether the communication relates to past or future conduct; whether the communication is guidance on ongoing litigation;

• whether the contact is created as a result of a targeted discovery or a fishing expedition;

• Unless the contact otherwise contains classified or proprietary knowledge.

Other courts have placed a presumption of “good cause” on parties attempting to produce privileged information, in addition to providing the basis for a fiduciary exemption, in particular in the case of shareholder actions.

Relatively few courts have placed a presumption of “good cause” on litigants claiming the right of the attorney-client privilege against the challenge of a fiduciary exception.


When good cause is not needed

The Northern District of Illinois Donovan v. Fitzsimmons Decision, 90 F.R.D. 583, 585 is one of the first decisions to accept the fiduciary exception in the ERISA sense (N.D.Ill. 1981). The court, citing Garner and Riggs, held that where beneficiaries sue their fiduciaries claiming breach of fiduciary duty, the right of the attorney-client does not apply to the legal advice given to the trustee in the performance of fiduciary duties. The court also imported Garner’s “good cause” provision from the party trying to defeat the right.

In fiduciary duty cases since Donovan, however, the courts have declined to enforce a presumption of “good cause” outside of shareholder actions. The reasoning suggests that corporate officers and directors, though still operating in fiduciary capacity, may have valid conflicts of interest with individual shareholders, while the interests of trustees and plan trustees are more generally aligned with the beneficiaries they represent.

The District Court has explained:

Such a good cause requirement is properly confined to a corporate environment in which the management of a sizeable company simply cannot please all of its shareholders all the time, and management needs protection from those who can second-guess or even harass solely in matters of judgment.’ In a fiduciary relationship, on the other hand, there is no valid need for confidence.

Other courts, especially in the sense of ERISA, have waived the presumption of “good cause” for the reasons set out in Washington Star Co.