The Fiduciary Exception to the Attorney-Client Privilege

While the question of what discovery is permitted in litigation involving the Employment Retirement Income Security Act (ERISA) after the Supreme Court's decision in MetropolitanLife Ins. Co v. Glenn, 554 U.S. 105 (2008), looms, an equally intriguing question is emerging in various federal circuits about what privileges apply in ERISA discovery.

Growing recognition of the fiduciary exception to the attorney-client privilege, and in some cases the attorney-work-product doctrine, has resulted in an erosion of the privileges and protections ERISA fiduciaries formerly enjoyed. Understanding the contours of the fiduciary exception may help today's fiduciaries understand when legal advice they receive may end up in the hands of opponents in litigation.

ATTORNEY-CLIENT PRIVILEGE BASICS

The attorney-client privilege is the oldest privilege recognized under common law. The elements of the attorney-client privilege appear in a commonly-cited decision of the U.S. District Court for the District of Massachusetts:

The privilege applies only if (1) the asserted holder of the privilege is or sought to become a client; (2) the person to whom the communication was made (a) is a member of the bar of a court, or his subordinate and (b) in connection with this communication is acting as a lawyer; (3) the communication relates to a fact of which the attorney was informed (a) by his client (b) without the presence of strangers (c) for the purpose of securing primarily either (i) an opinion on law or (ii) legal services or (iii) assistance in some legal proceeding, and not (d) for the purpose of committing a crime or tort; and (4) the privilege has been (a) claimed and (b) not waived by the client.

United States v. United Shoe Machinery Corp., 89 F. Supp. 357, 358-59 (D. Mass. 1950).

The 3rd Circuit has recognized that "because the privilege obstructs the search for truth and because its benefits are, at best, 'indirect and speculative,' it must be 'strictly confined with the narrowest possible limits consistent with the logic of its principle.'" In re Grand Jury Investigation, 599 F.2d 1225, 1235 (3d Cir. 1979)(quoting 9 Wigmore on Evidence §2291 at 554 (McNaughton rev. 1961)).

The 9th Circuit, on the other hand, has held that "where attorney-client privilege is concerned, hard cases should be resolved in favor of privilege." U.S. v. Mett, 178 F.3d 1058, 1063 (9th Cir. 1999).

THE FIDUCIARY EXCEPTION

Where the attorney-client privilege is established, it is not absolute. It may yield to the fiduciary exception to that privilege. The fiduciary exception bars a fiduciary from asserting the attorney-client privilege against those to whom fiduciary duties are owed.

Hence, the fiduciary exception marks the collision of two important policies. First is the policy encouraging individuals to make full and candid disclosures to their counsel in order to obtain informed legal advice. Second is the policy obligating fiduciaries to disclose all relevant information to beneficiaries, shareholders, and others to whom duties are owed. In certain circumstances, the attorney-client privilege must yield to the fiduciary exception.

As explained by the 9th Circuit, "the [fiduciary] exception is rooted in two distinct rationales." United States v. Mett, 178 F.3d 1058, 1063 (9th Cir. 1999). First, as the 2nd Circuit observed in In re Long Island Lighting Co., 129 F.3d 268 (2d Cir. 1997), a trustee is generally obligated to disclose to beneficiaries all information regarding plan administration; to allow a trustee to hide information behind a privilege may encourage and conceal fraudulent activity.

Alternatively courts have viewed the fiduciary exception as not an exception at all, but the strict application of attorney-client privilege criteria in cases where a fiduciary is acting on behalf of beneficiaries and it is therefore the beneficiaries who are the true clients who can assert or waive the privilege. United States v. Evans, 796 F.2d 264, 266 (9th Cir. 1986).

One of the earliest courts to recognize a fiduciary exception was the 5th Circuit in Garner v. Wolfinbarger, 430 F.2d 1093 (5th Cir. 1970). The court examined the invocation of the attorney-client privilege in response to document requests and deposition questions concerning a life insurance company's securities transactions. The underlying action was a class action by the life insurer's shareholders alleging various counts of securities fraud. While acknowledging the time-honored attorney-client privilege, the court recognized an exception:

[W]here the corporation is in suit against its stockholder on charges of acting inimically to stockholder interests, protection of those interests as well as those of the corporation and of the public require that the availability of the privilege be subject to the right of the stockholders to show cause why it should not be invoked in the particular instance.

430 F.2d at 1103-04.

Accordingly, the court ordered that the insurance company's President, who formerly acted as the company's in-house counsel and advised the company on the transactions in question, could be compelled to testify about his advice to the company.

Not long thereafter the Delaware Chancery Court overturned a trustee's assertion of the attorney-client privilege in ordering the production of a legal memorandum obtained by the trustee concerning the administration of the trust.

The court found that the memorandum had been prepared, ultimately, for the benefit of trust beneficiaries and, especially because outside counsel preparing the memorandum had been paid out of the trust res, the trust beneficiaries were the real clients at interest and were entitled to view the document. Riggs National Bank of Washington v. Zimmer, 355 A.2d 709, 713-14 (Del. Ch. 1976).

Citing Garner, the Northern District of Illinois ordered production of documents withheld on...