For trustees in Colorado, the question remains to what extent does the attorney-client privilege offer protection from disclosure of confidential communications between trustees and their attorneys in litigation with beneficiaries. Despite the uncertainty in Colorado, several states and the U.S. Supreme Court have weighed in on this question and Arizona is the latest state to adopt the fiduciary exception to the attorney-client privilege. Hammerman v. The Northern Trust Company, 329 P.3d 1055 (Ariz. App. June 3, 2014).
The Court of Appeals of Arizona held that a trustee’s attorney-client privilege “extends to all legal advice sought in the trustee’s personal capacity for purposes of self-protection.” However, the Court also held that the trustee had an “obligation to disclose to Hammerman [beneficiary] all attorney-client communications that occurred in its fiduciary capacity on matters of administration of the trust.”
These standards will inevitably give rise to many questions depending on the facts and circumstances of the trust administration at issue, but one will likely come up over and over again. At what point will a trustee be permitted to seek advice for self-protection. Is a question from a beneficiary enough? Does a lawsuit have to be filed? A demand letter sent? Can the trustee use trust funds to pay for the advice?
In a departure from other courts, the Court of Appeals of Arizona held that the trustee’s attorney-client privilege does not end merely because the advice was paid for out of trust funds. (For example, the U.S. Supreme Court noted that the source of payment for fees is “highly relevant” in identifying who is the “real client.” United States v. Jicarilla Apache Nation, 131 S. Ct. 2313, 2330 (2011). The Delaware Court of Chancery found that the source of payment was a ““significant factor… [and] a strong indication of precisely who the real clients were.” Riggs National Bank of Washington, D.C. v. Zimmer, 355 A.2d 709, 712 (Del. Ch. 1976).)
Without any clear guidance in Colorado, it is important for trustees (and their counsel) to keep a close watch on future developments.