Recently, the Arizona Court of Appeals confirmed Arizona’s adoption of the Fiduciary Exception to the Attorney-Client Privilege by holding that a trustee must disclose to the trust beneficiary and successor trustee what would otherwise be privileged communications between the trustee and legal counsel.  Hammerman v. Northern Trust Co., 1 CA-CV 13-0260, 6/3/14.

In Hammerman, the Northern Trust Company served as trustee of a survivor’s trust under which the plaintiff was the sole beneficiary.  The plaintiff, as beneficiary, eventually removed Northern Trust as trustee and thereafter asked Northern Trust to provide all files related to the trust.  Northern Trust transferred the majority of its files but withheld a number of communications between Northern Trust and legal counsel claiming that such communications were protected under the attorney-client privilege.  The plaintiff was eventually forced to petition the court for an order forcing Northern Trust to disclose all communications related to the trust.

Under Arizona Revised Statute §12-2234(A), “an attorney shall not, without the consent of his client, be examined as to any communication made by the client to him, or his advice given thereon in the course of professional employment.”  The attorney-client privilege generally extends to “any communication” between the attorney and client.

However, there are exceptions to the general rule.  Many jurisdictions outside Arizona have adopted the fiduciary exception which requires a trustee to comply with a beneficiary’s request to produce all legal advice that the trustee has obtained on matters concerning the administration of the trust.  Those jurisdictions who have adopted the fiduciary exception have done so under the belief that it is crucial for beneficiaries to know of the affairs and mechanics of the trust management in order to hold the trustee to the proper standards of care and honesty.

Under the fiduciary exception, a trustee has an obligation to disclose all attorney-client communications that occur in its fiduciary capacity on matters related to the administration of the trust.  The Arizona Appellate Court therefore held that “a component of a trustee’s duty under A.R.S. §14-10813(A) is a duty to disclose ‘legal consultations and advice obtained in the trustee’s fiduciary capacity concerning decisions or actions to be taken in the course of administering the trust.’ Restatement (Third) of Trusts § 82 cmt. f. The attorney-client privilege does not permit a trustee to withhold ‘material facts’ from a beneficiary simply because the trustee has communicated those facts to an attorney.”

However, like many things in the law, the exception is not without an exception.  In this case, the fiduciary exception does not apply when a trustee seeks legal advice in a personal capacity on matters not related to the administration of the trust.  Therefore, the attorney-client privilege does protect communications where the trustee has sought legal counsel on whether or not the trustee has breached its duties owed to the trust and/or beneficiaries.  This is true even if the trustee used trust funds to pay for the legal counsel.