California Court of Appeals Weighs In On Attorney-Client Privilege of Trustees

Fiduciary Tr. Internat. of Cal. v. Klein, 9 Cal. App. 5th 1184,
216 Cal. Rptr. 3d 61 (Cal. Ct. App. Mar. 21, 2017).

This case out of California deals with the cutting edge issue regarding the attorney-client privilege as it applies to trustees.   The facts of this case center around the Mark Hughes Family Trust (the “Trust”) and litigation in the probate court that lasted several years.

In March 2013 the Probate Court granted, and the Court of Appeals affirmed, the petition of Alexander Hughes, the sole non-contingent trust beneficiary of the Trust, to suspend and remove Conrad V. Klein, Jack Reynolds and Christopher Pair as trustees of the Trust. Sometime thereafter, Fiduciary Trust International of California (“FTI”) was named interim successor trustee of the Trust.  On April 4, 2014, FTI served the former co-trustees’ counsel with a demand for Trust documents in their possession that included communications between the former trustees and legal counsel paid for with Trust funds.  Furthermore, FTI advised the former trustees’ legal counsel that FTI now held the attorney-client privilege with respect to Trust matters and demanded that counsel cease communicating with the former trustees regarding Trust matters and refrain from disclosing to third-parties any confidential or privileged communications without FTI’s permission. Id. at *1192.

When the former co-trustees failed to turn over any documents, FTI filed an ex parte application to compel the former co-trustees to immediately turn over all Trust records in their possession. Several motions on this issue followed.  The results of which were that the former co-trustees produced the first of many privilege logs in November 2013 and identified 3,000 documents from the Trust files as privileged. Id.

On April 18, 2014, FTI and Alexander Hughes filed another motion for an Order requiring the former co-trustees to turn over all Trust records in their possession, arguing that a factual showing of the former trustees’ privilege claims in their privilege log previously submitted was defective. Following another hearing on the former co-trustees’ privilege claims in November of 2014, the Probate Court ordered the former co-trustees to prepare a supplemental privilege log with respect to any withheld documents relating to the first and second accountings.  The Court also ordered FTI and Alexander to submit their rejections to the documents identified as privileged on the supplemental privilege log.  This supplemental privilege log, which was the subject of this appeal, was filed on December 8, 2014 and identified 234 documents pertaining to the first and second accounting as privileged.  FTI and Alexander thereafter objected to the supplemental privilege log as a whole arguing that the former trustees’ factual showing was legally inadequate. Id. at *1193.

Relying on the California Supreme Court’s decision in Moeller v. Superior Court (1997), 16 Cal. 4th 1124, 69 Cal.Rptr.2d 317, 947 P.2d 279, the Probate Court upheld the privilege as to 45 documents on the supplemental privilege log while ordering the former co-trustee to deliver the balance of the documents to FTI by March 5, 2015.

Both parties appealed portions of the Probate Court’s Order permitting the former trustees to withhold some, but not all, of the Trust documents claimed as privileged on the supplemental privilege log. The former co-trustees challenged the ruling to sustain FTI’s objections to all but 45 documents and FTI and Alexander challenged the Probate Court’s ruling to uphold the ruling as to those 45 documents on the privilege log.

The Court of Appeals began its opinion by explaining the underpinnings of the attorney-client privilege. In most situations, the client is the holder of the privilege and, as such, has the burden of making a prima facie showing to support the primary facts necessary to support its exercise.  However, where, as here, a trustee is asserting privilege, the client is the office of the trustee rather than the particular trustee.  The  Court of Appeals reasoned that this distinction arises from the unique relationship between the trustee and trust beneficiary. Id. at * 1195.

In the instant case, both parties relied on the Moeller opinion — the former co-trustees claiming they are entitled to withhold documents under a narrow exception to the discovery rule recognized when a trustee seeks or obtains legal advice in its personal capacity, while FTI and Alexander disagree. Id. at *1196.

In Moeller, the California Supreme Court drew a distinction between confidential communications occurring when a predecessor trustee, in its fiduciary capacity, sought the attorney’s advice regarding administering the Trust and confidential communications occurring when the predecessor trustee seeks legal advice in its personal capacity out of a  genuine concern for possible future charges of breach of fiduciary duty.  With respect to the first category of communications, the power to assert the privilege as to those confidential communications moves to the successor trustee, while the latter, the predecessor trustee, may be able to avoid disclosing the advice to a successor trustee by hiring a separate lawyer and paying for the advice out of its personal funds.  The reason for this distinction is grounded in general principals of California probate law that powers of the trustee are not personal to a particular trustee but, rather, are inherent in the office of trustee. Id. at *1197.

The Court of Appeals noted that in this case the point of disagreement is how one distinguishes between these two types of confidential communications – those occurring when the trustee seeks legal advice in matters of Trust administration and those occurring when the trustee seeks legal advice in a personal capacity. Thus, the Court of Appeals centered its analysis on the whether the character of the relationship between the trustee and counsel is personal or fiduciary. Id. at *1198.

The Court of Appeals pointed out that the Moeller opinion requires a trustee to take certain affirmative steps to preserve its right to rely upon the attorney-client privilege as the basis for withholding from the successor trustee confidential documents maintained in the Trust’s legal files.   For instance, if a predecessor trustee seeks legal advice in its personal capacity out of a genuine concern for possible future charges of breach of fiduciary duty, the predecessor may be able to avoid disclosing the advice to a successor trustee by hiring a separate lawyer and paying for the advice out of its personal funds.

We recognize that the distinction of these two types of confidential trustee-attorney communications – administrative on the one hand, defensive on the other – may not always be clear. Yet, to require a trustee to distinguish scrupulously and painstakingly, his or her own interests from those of the beneficiary’s, is entirely consistent with the purpose of a trust.  Moreover, a trustee can mitigate or avoid the problem by retaining and paying out his or her own funds separate counsel for legal advice that is personal in nature.

Id. at *1199 (internal citations omitted).  

While the Moeller opinion does not mandate the physical segregation of documents or payment of legal services with non-trust funds, the Court of Appeals noted that the opinion does require actual steps be taken to identify communication as privileged when the communication is sought from the trustee’s personal counsel. Id. at *1200.

Thus, the Court of Appeals held that the Probate Court did not hold the former co-trustees to the burden to show primary facts in support of a privilege claim. It was not enough for the former co-trustees to merely label a communication as “defensive” after the fact and describe it as relating to the Petition for Removal or Surcharge.  The Court of Appeals explained,

We, however, fail to see how adding the language ‘petition for removal or surcharge’ suffices to meet the requisite showing that a particular communication reflects legal advice obtained by appellants from their own personal counsel for their own protection and out of concern for their personal liability. As the probate court itself noted, one of the trustee’s primary duties is to respond to questions and objections by beneficiaries regarding the fiduciaries accountings.  In addition, the probate court grants a trustee the authority to prosecute or defend actions, claims, or proceedings for the protection of trust property and of the trustee in the performance of the trustee’s duties.  As such, the mere fact that the communication relates, however broadly, to a petition for surcharge or removal does not prove that the legal advice contained within the communication was sought or obtained by the predecessor trustee out of concern for personal liability as opposed to concern for the general health of the trust.

Id. at *1201-02.

The Court of Appeals agreed with FTI and Alexander that the supplemental privilege log provided insufficient details regarding the underlying documents to permit the Probate Court to conclude on the record that the former co-trustees met the requisite preliminary factual showing to support the privilege claims.   Thus, insofar as the Order upheld the privilege with respect to 45 documents, the Order was reversed and the matter remanded for reconsideration under the correct standard.  As to the other documents, the Order was affirmed.