As we learned from our prior blog, “Trustees Beware: Limitations of the Attorney-Client Privilege,” the attorney-client privilege between a trustee and an attorney acting on behalf of the trust vests in the office of the trustee, and therefore, the communications between an attorney and a predecessor trustee are discoverable by a successor trustee of that same trust. In this blog, we warned about the potential implications of such a holding:
[W]hen a Trustee is defending against an action for their own removal as trustee and/or for a surcharge upon them individually, there is a risk that all communications with his attorney will be revealed if the removal action is successful or if the Trustee resigns. If demanded by the successor Trustee, the former trustee’s attorney could be compelled to turn over his complete case file, including all such communications with the former Trustee, no matter how damaging the content of those communications may be to the former Trustee. So if a Trustee is suspended by the court during the pending litigation, these private communications may be turned over to the Trustee’s adversary who can then use these documents against the suspended Trustee at trial.[1]
This precise situation occurred in Morgan v. Superior Court (2018) 23 Cal.App.5th 1026, causing the attorney-client communications of the trustee to be made available to the opposing side during the pendency of the breach of trust litigation, meaning that all private communications (including litigation strategy, settlement, pros/cons of the case, etc.) were disclosed to the opposing party and could be used against the trustee at trial. This has dire consequences for any trustee.
Moreover, Morgan compelled this result even though the terms of the trust at issue explicitly sought to protect the trustee from disclosing such communications to a successor trustee. Morgan held that such trust provision was unenforceable and void as a matter of public policy as it contradicted the settlor’s intent as expressed in the other provisions of the trust instrument. Namely, because the trust terms expressly disallowed a trustee to engage in acts of intentional misconduct, gross negligence, or bad faith, public policy would therefore also not permit that trustee to prevent the disclosure of any communications which could evidence such misconduct.[2]
The Underlying Dispute
Morgan involved a dispute between the settlor’s son Thomas, on the one hand, and the settlor’s remaining children and two grandchildren, on the other hand. Thomas was named as the initial successor trustee in the Trust, and took over as trustee after the settlor passed. Litigation began within one month after settlor’s death and led to a motion two years later to “suspend Thomas as trustee based on alleged misuse of his powers to further his own litigation goals and strategies to the detriment of the Trust’s other beneficiaries.” The probate court denied the Motion, but ordered that Thomas: 1) cannot use trust funds to pay for his personal defense; 2) cannot impair the trust assets and cannot cause the trust to borrow money; and 3) should file an accounting of all trust assets used to pay personal litigation expenses and of all loans made by or to the Trust.[3]
Following Thomas’ provision of an accounting to which the probate court deemed “so inadequate that its filing appears to be for the sole purpose of paying lip service to the Court’s Order”[4], the probate court suspended Thomas as trustee. The probate court then appointed professional fiduciaries to temporarily oversee the Trust as interim trustees and ordered Thomas to transfer and deliver trust-related documents to the interim co-trustees, which included attorney invoices and communications between Thomas and the attorney hired by him in his capacity as trustee. Thomas objected to the probate court’s order and refused to turn over the billing invoices and attorney-client communications based on attorney-client privilege and a trust provision which provided that ”all communications (written or oral) between the Trustee and legal counsel, and all work product of legal counsel shall be privileged and confidential and shall be absolutely protected and free from any duty or right of disclosure to any successor Trustee”[5]. After the Court overruled his objections and compelled his production of these communications, Thomas filed a petition for a writ of mandate and/or prohibition with the Court of Appeal.
Public Policy Dictated Disclosure of the Documents to the Successor Trustee
Thomas’s Writ was denied by the Court of Appeals. In issuing its opinion, the Court began by providing an overview of the relevant trust law. The Court first addressed the general provision that, when a trustee seeks legal advice on behalf of the trust, the trustee is the client and has the right to assert or waive the attorney-client privilege. However, the privilege vests in the office of the trustee and is transferred from a trustee to his or her successor trustee.[6]
Second, the Court addressed trustee liability and recognized that, while the settlor may, through the terms of the trust, relieve the trustee of liability for certain breaches of trust, the trustee may not be relieved of liability for intentional misconduct, gross negligence, or reckless indifference.[7]
Applying the foregoing general principles, the Court found that the settlor’s intent was in line with public policy as it was the settlor’s intent not to absolve Thomas of liability for intentional misconduct, gross negligence, or acts taken in bad faith or with reckless disregard to the trust beneficiaries (and moreover, “if the Trust purported to absolve [the trustee] of any liability as successor trustee, we would have to interpret that provision as void.”)[8]In support of this position, the Court cited to three separate trust provisions that exempted acts by the trustee performed with these levels of culpability from limitations of liability.
Moreover, in coming to the foregoing conclusion, the Court distinguished the authorities relied upon by Thomas that protected attorney-client trustee communications from disclosure. The Court distinguished this case from Fiduciary Trust International of California v. Klein (2017) 9 Cal.App.5th 1184, 1197, on the grounds that the communications in Fiduciary Trust were only protected from disclosure because the trustee had retained separate counsel to represent him personally (i.e., not in his capacity as trustee), and had paid for that separate counsel out of his own personal funds. The Court distinguished Wells Fargo Bank v. Superior Court (2000)22 Cal.4th 201, 209, finding that Wells Fargo discussed the trustee’s duties under Probate Code section 16060 to keep beneficiaries reasonably informed, and not any duties that a predecessor trustee might owe his successor. And finally, the Court also qualified a portion of the Restatement of Trusts that provides that the terms of a trust could limit what powers pass to the successor trustee,[9] by a separate Restatement section which restricts the ability of a settlor to exempt from liability a trustee’s acts performed in bad faith.[10]
As applied to the facts of the case before it, the Court found that there was no indication that Thomas, as trustee, distinguished his own interests from those of the office of the trustee or retained separate counsel to represent him as an individual and not in his capacity as trustee. Because Thomas had failed to take these extra steps, and because there were allegations of intentional misconduct for which Thomas could not be absolved of as a matter of public policy, the Court found that his communications with the Trust’s legal counsel were not protected from disclosure to the successor trustee, notwithstanding the trust’s explicit prohibition on the disclosure of such communications; the court further held that this afore-referenced trust provision was void and unenforceable as a matter of public policy.
Implications for Trustees and Trust Attorneys
Following the Morgan decision, trustees and their counsel need to be acutely aware of the purpose and scope of the attorney’s representation. If there is litigation or potential litigation involving claims of breach of trust, there is a good chance that there will be allegations of intentional misconduct, gross negligence or reckless indifference. Where such allegations are made and the client-trustee is suspended during the pendency of the litigation with a successor trustee, regardless of any purporting limiting language in the terms of the trust, communications between the trustee and the attorney for the trust are not protected from disclosure to the successor trustee.
If there is a question regarding the disclosure of documents or information protected by the attorney-client privilege, an assessment regarding the scope and nature of the representation needs to be made early in a case. When an attorney is retained by a trustee, it is important for that attorney to:(i) determine whether their client is the office of the trustee, or the trustee as an individual;(ii) notify the trustee as to whom the attorney-client privilege is vested; and (iii) notify the trustee of the limitations in the attorney-client privilege when acting as attorney for the trust, even in instances where the trust purports to limit the discoverability of such communications. If the trustee wishes to protect such communications from disclosure to the successor trustee, the trustee must therefore seek out independent counsel (paid for with personal – not trust – funds) to act on behalf of the trustee as an individual.
[1]See Keystone Quarterly: Trustees Beware!, April, 2018; Fiduciary Trust International of California v. Klein (2017) 9 Cal.App.5th 1184 (cert. denied) (emphasis added).
[2] The court also indicated that this holding would apply even if the settler had expressed an intent to absolve the trustee for any liability (including for acts of intentional misconduct): “[I]f the Trust purported to absolve [the trustee] of any liability as successor trustee, we would have to interpret that provision as void.” Morgan, 23 Cal. App. 5th at 1036.
[3]Id. at 1030.
[4]Id.
[5]Id. at 1037.
[6]Moeller v. Superior Court (1997) 16 Cal.4th 1124, 1130-1131.
[7]Prob. C. § 16461.
[8]Morgan, 23 Cal. App. 5th at 1036 (Emphasis in original).
[9] Restatement (Second) of Trusts § 196.
[10] Restatement (Third) of Trusts § 85(2).
