In In Re Estate of McAleer, decided April 7, 2021, the Pennsylvania Supreme Court granted review to determine whether the attorney-client privilege and the work product doctrine may be invoked by a trustee to prevent the disclosure to a beneficiary of communications between the trustee and counsel pertaining to attorney fees expended from the trust corpus.  The answer: not if the trust is paying the trustee’s attorney’s fees.

The Facts of In Re Estate Of McAleer

William McAleer (“Trustee”) is the sole trustee of a revocable trust created by his now deceased father for the benefit of the Trustee and his two stepbrothers, Stephen and Michael (“Beneficiaries”).

The Trustee filed a first and partial accounting of the Trust in March 2014.  The Beneficiaries filed twenty-one objections to the accounting.  The Trustee retained two separate law firms to respond to the objections — Gray and K&L Gates.  The probate court ultimately dismissed the objections with prejudice following an evidentiary hearing in March 2016.

Although none of the objections pertained specifically to legal expenses, the Trustee’s filings in Pennsylvania court indicated that roughly $124,000 had been expended from the trust for attorney’s fees and costs through December 2015.  The Beneficiaries filed a petition for special relief to  determine  the  reasonableness  of  those  expenses. The probate court froze further disbursements and legal fees from the Trust absent prior judicial authorization.

In August 2016, the Trustee filed a second and final accounting.  The Beneficiaries filed ten objections to this accounting, contending that the Trustee had paid unreasonable and excessive trustee and attorney fees from the Trust.  Trustee asserted that he was under no obligation to provide Beneficiaries with copies of legal invoices, as they were protected by the attorney-client privilege.

The Beneficiaries requested production of the billing statements for all trustee and attorney fees included in the second and final accounting.  The Trustee did not formally object to the request, and provided substantially redacted copies of invoices from Gray — 223 entries were blacked out with notations for attorney-client privilege and work product doctrine. The Trustee then produced billing statements from K&L Gates, with 98% of the billings similarly redacted.  Beneficiaries moved to compel discovery.

At hearing, Trustee’s counsel noted that she could not “speak for K&L Gates bills because they belong to K&L Gates” and that she had “no knowledge of” those  bills, and noted  the redacted time sheets for  both  firms bore corresponding  notations  for  “protected  information  litigation”  and  “confidential [communications]  with  counsel  relating  to  the  litigation  matters,  not  relating to  the  trust administration or trust management.”

The Pennsylvania court ordered the Trustee to forward unredacted attorney’s fee billing invoices to Beneficiaries within 30 days. Trustee  did  so  only  for  the  trustee  invoices,  but  filed  an  interlocutory  appeal  as  to  the attorney invoices, asserting attorney-client and work product protections.

In its Pa.R.A.P. 1925(a) opinion, the court explained that a party seeking to assert a  privilege first  must set  forth  facts  to  establish  that  the  privilege  is  properly  invoked. While the Trustee had made a “general argument” as to  the  Gray  billings, the court noted that the Trustee’s counsel  specifically  stated  that she could  not  speak  for  the  K&L  Gates  bills.    The  court  thus concluded that  Trustee  had presented no facts to establish the propriety of the invocation of the privilege.  Additionally, the court reasoned that when a trustee obtains legal advice relating to a trust, that advice must be shared with the beneficiaries.  The Trustee appealed.  The case ended up before the Pennsylvania Supreme Court, which granted review to address the following question:

Do   the   attorney-client   privilege   and   work   product   doctrine protect communications   between   a   trustee   and   counsel   from   discovery by beneficiaries when the communications arose in the context of adversarial proceedings between the trustee and beneficiaries?

Attorney-Client Privilege And a Pennsylvania Trustee’s Duty To Furnish Information To Beneficiaries

“The attorney-client privilege is the oldest of the privileges for confidential communications known to the common law.”  Though the attorney-client privilege is a mainstay  of  our  legal  system, the  privilege  is  not absolute.

The Pennsylvania Supreme Court stated:

Where the interests protected by the privilege conflict with weightier obligations, the former must yield to the latter.  This appeal concerns one such conflicting duty: that of a fiduciary to furnish trust-related information to beneficiaries.

The Fiduciary Exception To the Attorney-Client Privilege

The Pennsylvania Supreme Court explained the fiduciary exception to the attorney-client privilege:

Under the so-called “fiduciary exception,” the origins of which can be traced to mid-nineteenth century English trust cases, “a trustee who obtains legal advice related to the  execution  of  fiduciary  obligations  is  precluded  from  asserting  the  attorney-client privilege against beneficiaries of the trust.”  United States v. Jicarilla Apache Nation, 564 U.S.  162,  167  (2011).
Jurisdictions that recognize the  exception largely rely  upon the theory that a fiduciary’s duty to administer a trust solely for the benefit of its beneficiaries prevails over the privilege.  Because “trustees are tasked with providing beneficiaries with information  regarding  the  management  of  the trust,” Pittsburgh  History  &  Landmarks Found. v. Ziegler, 200 A.3d 58, 61 n.2 (Pa. 2019), communications between a fiduciary and  counsel  regarding  trust  administration must  serve  to benefit the  beneficiaries,  and thus are subject to disclosure.

The Pennsylvania Supreme Court engaged in a lengthy and thorough survey of the development of the fiduciary exception to the attorney-client privilege across the nation, and then turned to the case before it.

Here, the Trustee urged the Pennsylvania Supreme Court not to recognize a fiduciary exception to the attorney-client privilege, asserting that an order compelling the disclosure of unredacted attorney’s fee invoices would reveal legal advice and strategy in violation of the privilege.  The Trustee pointed to 42 Pa.C.S. § 5928 (addressing confidential communications to an attorney) which contains no such explicit exception.

The Beneficiaries contend that Pennsylvania law entitles them to access records regarding trust management. At base, Beneficiaries submit that Trustee’s position, were it to prevail,   essentially   would   force   them   to   cover   attorney   fees   for   legal   work the reasonableness of which they would have no way of assessing.

Beneficiaries Of Pennsylvania Trust Can Examine Trustee’s Attorney’s Billing Records If Trust Funds Pay Fees

The Pennsylvania Supreme Court engaged in a lengthy survey of jurisdictions that have retreated from the fiduciary exception, and then stated:

While we appreciate the concerns that animated many jurisdictions’ retreat from the fiduciary exception over the past quarter century, we would stand fast.  Transparency remains the  cornerstone  of  the  fiduciary  duty.  Because trustees in  essence serve  as proxies  for  trust  beneficiaries,  their  fiduciary  duties  compel  them always to  act  in accordance with the latter’s best interests in mind. To the extent that the attorney-client privilege obscures that fundamental obligation by frustrating beneficiaries’ entitlement to information about trust management, the privilege must yield. As with all considerations of restrictions on  attorney-client  confidentiality, predictability is  critical.

The Pennsylvania Supreme Court held:

To that  end, we would hold  that, where  legal counsel is  procured  by  a  trustee utilizing funds originating from a trust corpus, the beneficiaries of that trust are entitled to examine  the  contents  of communications  between the trustee  and  counsel,  including billing  statements  and  the  like. That  examination  necessarily includes  reviewing  the contents of invoices in order to determine precisely what was procured with trust funds where  the  reasonableness  of  costs  is  at  issue. The  attorney-client  privilege  and  work product  doctrine cannot  shield those disclosures  in  this  Commonwealth.   To  hold otherwise would enable fiduciaries to weaponize trust assets reserved for beneficiaries against those very beneficiaries in litigation over the propriety of trust management.  Since those  same beneficiaries  simultaneously  would  be obliged to  foot  their  own  legal bills, they  would,  in  essence, be paying for both parties’ lawyers. That  result is untenable, particularly  in  a  case  such  as  this,  where  Trustee  also  is  a  co-beneficiary  of  the  trust established by his late father for the benefit of Trustee and his step-siblings.

The Pennsylvania Supreme Court noted that trust beneficiaries bear the burden of proving that trust expenditures are unreasonable.  Therefore, beneficiaries require access to those unredacted billing statements to substantiate their claims.  The Court further noted that nothing in their proposed disposition would curtail the ability of trustees to seek remuneration for expenses reasonably incurred in the course of trust management, stating:

To the extent that trustees wish to maintain the confidentiality of their communications with counsel, we would find that Pennsylvania law already offers a simple solution: do so at your own expense. We would uphold the trial court’s discovery order for the foregoing reasons.    Because  the  Court  presently  is  divided  on  whether  the  fiduciary  exception should be recognized in this Commonwealth, however, resolution of that issue must await another day.

Therefore, a trustee in Pennsylvania who wants to keep his attorney’s billing records confidential should not use the Trust to pay for attorney fees.