On June 13, 2011, the Supreme Court issued its opinion in United States v. Jicarilla Apache Nation, 564 U.S. ___ (2011), holding that the fiduciary exception to the attorney-client privilege does not apply to the United States government’s administration of Indian trusts. The fiduciary exception to the attorney-client privilege is a common law rule which has developed to permit beneficiaries of a trust to obtain privileged communications where the trustee obtains legal advice related to the exercise of his fiduciary duties in connection with the administration of the trust. In concluding that the fiduciary exception did not apply to compel disclosure of privileged documents by the government to the Indian tribe in the Jicarilla case, the Court considered the scope of the fiduciary exception generally. To support its holding, the Court explained why the government’s role with respect to Indian trusts does not resemble a private trust relationship. Although the ultimate holding has limited application, the Court’s comments regarding the fiduciary exception should be of particular interest to fiduciaries in the context of private trusts and ERISA plan administration and other ERISA fiduciary acts. In addition, while focusing its analysis on the fiduciary exception in the trust context, the Court also cited case law recognizing a fiduciary exception to permit corporate shareholders, in certain limited circumstances, to obtain privileged advice given to corporate management.
The case involved a breach-of-trust action by an Indian tribe against the government for alleged mismanagement of funds held in trust for the tribe. The tribe moved to compel the government to produce documents. The government withheld certain documents from production on the basis of the attorney-client privilege. Federal Rule of Evidence 501 provides that evidentiary privileges “shall be governed by the principles of common law…in the light of reason and experience.” The lower courts held that the common law fiduciary exception to the attorney-client privilege applied to require production. In a 7-1 decision written by Justice Alito, the Supreme Court reversed and held that the fiduciary exception did not apply in this context.
The Supreme Court’s Opinion
Although the Court acknowledged that some state courts (including California and Texas – discussed further below) have rejected the fiduciary exception altogether, the Court seemed to assume that the fiduciary exception has been widely adopted. The Court commented that American courts began adopting the fiduciary exception in the 1970s, noting the Fifth Circuit’s opinion in Garner v. Wolfinbarger, 430 F.2d 1093 (5th Cir. 1970) which allowed shareholders, upon a showing of “good cause,” to discover legal advice given to corporate management. The Court cited Riggs Nat. Bank of Washington, D.C. v. Zimmer, 355 A.2d 709 (Del. Ch. 1976) as the leading case on the fiduciary exception. The Court also stated that Federal Courts of Appeals have applied the fiduciary exception based upon the same criteria articulated in the Riggs case.
In Riggs, beneficiaries suing for breach of trust moved to compel the trustees to produce a legal memorandum related to trust administration that the trustees withheld on the basis of attorney-client privilege. The Riggs court held that the memorandum was discoverable and in doing so, the court identified two reasons for applying the common-law fiduciary exception. First, the court in Riggs explained that the trustees had obtained legal advice as “mere representatives” of the beneficiaries because the trustees had a fiduciary obligation to act in the beneficiaries’ interest when administering the trust. For that reason, the Riggs court considered the beneficiaries to be the “real clients” of the attorney who had advised the trustee on trust-related matters and therefore the associated attorney-client privilege belonged to the beneficiaries rather than the trustees. As described in Jicarilla, the court in Riggs based its “real client” determination on several factors: “(1) when the advice was sought, no adversarial proceedings between the trustees and beneficiaries had been pending, and therefore there was no reason for the trustees to seek legal advice in a personal rather than in a fiduciary capacity; (2) the court saw no indication that the memorandum was intended for any purpose other than to benefit the trust; and (3) the law firm had been paid out of trust assets.” Second, the court in Riggs concluded that the trustees’ fiduciary duty to disclose trust-related information to the beneficiaries outweighed their interests in the attorney-client privilege.
In the Jicarilla case, the Court found that the two criteria (identified in Riggs) justifying the fiduciary exception – the beneficiary’s status as the “real client” and the trustee’s common law duty to disclose information about the trust – are absent in the trust relationship between the United States and Indian tribes. As to the first criteria, the Court noted that government attorneys were paid out of congressional appropriations at no cost to the Indian tribes and not out of the trust assets. In addition, the attorneys were paid for advice regarding the government’s statutory obligations. Specifically, while one purpose of the Indian trust relationship is to benefit the tribes, the government also has its own independent interest in the implementation of federal Indian policy and must balance competing interests as a result of other statutory duties or obligations to other tribes or individual Indians. The Court therefore concluded that the government sought legal advice in a “personal” rather than a fiduciary capacity. As to the second criteria, the Court held that the general common law duty of disclosure that may be applicable to private trustees (to the extent the duty is not limited or modified by the settlor) does not vitiate the narrowly defined disclosure obligations of the government as specified by Congress.
Implications of the Decision
Importantly for trustees of private trusts and their attorneys in Texas, the Court expressly cited the Texas Supreme Court case of Huie v. DeShazo, 922 S.W.2d 920, 924 (Tex. 1996) as one of the state court decisions that has “altogether rejected the notion that the attorney-client privilege is subject to a fiduciary exception.” While the Texas Supreme Court’s decision in Huie protects privileged communications in the private trust context, persons acting in the capacity of an ERISA fiduciary (a functional test under ERISA) have long followed the federal court decisions defining the attorney-client privilege and the fiduciary exception thereto. Such decisions have recognized the fiduciary exception, but have not applied it when the Riggs criteria described above may not have fully applied, when the parties were adversarial after a beneficiary’s claim for benefits was denied, when the fiduciary sought legal advice for his own civil or criminal liability protection, or when the parties were in litigation. For attorneys advising parties acting as a fiduciary to an ERISA plan (including both in-house and outside counsel), care must be taken to determine the capacity in which the client is seeking advice, in what stage of the proceeding is the advice sought and whether the fiduciary exception applies so the client is aware when advice provided is not an attorney-client privileged communication. Such steps should be considered by all trustees because for litigation in states other than Texas and in federal courts, such as in ERISA litigation, trustees can expect that Jicarilla Apache Nation will be cited by beneficiaries seeking to compel production of privileged communications between trustees and their counsel. Further, this opinion should serve as a reminder to corporate fiduciaries that shareholders may attempt to invoke a fiduciary exception to obtain privileged legal advice provided to the corporation’s management.