Presentation on theme: "Coming to a Legal Malpractice Action Near You? The Fiduciary Duty Exception to the Attorney-Client Privilege Donald Patrick Eckler Pretzel & Stouffer,"— Presentation transcript:
Coming to a Legal Malpractice Action Near You? The Fiduciary Duty Exception to the Attorney-Client Privilege Donald Patrick Eckler Pretzel & Stouffer, Chartered One South Wacker Drive, Suite 2500 Chicago, Illinois 60606 312-578-7653 firstname.lastname@example.org
Three recent appellate court cases of fiduciary duty exception to attorney-client privilege One recent Georgia case, Hunter, Maclean, Exley, & Dunn v. St. Simons Waterfront, LLC, 730 S.E. 2d 608 (Ga. Ct. App. 2012) and two recent Illinois cases, Garvy v. Seyfarth & Shaw, 966 N.E. 2d 523 (1 st Dist. 2012) and MDA City Apartments, LLC v. DLA Piper LLP, 967 N.E.2d 424 (1 st Dist. 2012) looked at the application of the fiduciary duty exception to the attorney-client privilege in the legal malpractice context. While both declined to recognize the exception in Illinois, and held further that even if they did recognize it that it would not apply to require disclosure of the documents sought by the plaintiffs, this is a potentially emerging issue to be attuned to and aware of.
Three recent appellate court cases of fiduciary duty exception to attorney-client privilege Considering how narrowly Illinois courts construe all privileges, and in particular the attorney-client privilege, it is somewhat surprising that the court did not recognize this exception. The Georgia Court looked at the issue much differently, but also reversed an order requiring disclosure of documents related to communications between a defendant law firm and attorneys it consulted with in dealing with threatened and actual malpractice claims.
What is the fiduciary duty exception to the attorney-client privilege? The exception to the privilege was created in 19 th century English courts and held that when a trustee obtained legal advice to guide the administration of the trust, and not for the trustees own benefit, the beneficiaries were entitled to the documents related to that advice. These cases have sought to expand this exception to include communications by attorneys with their attorneys. The leading cases on the fiduciary exception to the attorney-client privilege are United States v. Jicarilla Apache Nation, ____ U.S. _____,131 S.Ct. 2313 (2011) and Riggs National Bank of Washington D.C. v. Zimmer, 355 A.2d 709 (1976).
What is the fiduciary duty exception to the attorney-client privilege? In Jicarilla Apache Nation, the Court stated that the first issue to be determined is if the advice was obtained for the benefit of the trustees or for the beneficiaries. In order to determine who the real client was the court looked to the following 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 a fiduciary capacity; 2.the court saw no indication that the memorandum was intended for any purpose other than to benefit the trust;
What is the fiduciary duty exception to the attorney- client privilege? 3.the law firm had been paid out of trust assets. That the advice was obtained at the beneficiaries' expense was not only a significant factor entitling the beneficiaries to see the document but also a strong indication of precisely who the real clients were. 4.The court distinguished between legal advice procured at the trustee's own expense and for his own protection, which would remain privileged, and the situation where the trust itself is assessed for obtaining opinions of counsel where interests of the beneficiaries are presently at stake. In the latter case, the fiduciary exception applied, and the trustees could not withhold those attorney-client communications from the beneficiaries.
What is the fiduciary duty exception to the attorney- client privilege? Next, the Jicarilla Court determined that the trustees fiduciary duty to furnish trust-related information to the beneficiaries outweighed their interest in the attorney- client privilege. It is this second policy concern that is key in the analysis as to whether the information will be protected in the legal malpractice context. As we will see, these issues arise when counsel consulted with internal and outside counsel to determine the appropriate course of action within the Rules of Professional Conduct. It is in this context, pre-suit or after suit has been filed, that proper ethics counseling is necessary.
What is the fiduciary duty exception to the attorney-client privilege? The exception generally applies in the trust context. It has been applied in two additional contexts actions against ERISA fiduciaries and derivative shareholder suits. In the first situation, federal courts have held that beneficiaries of an employee-benefits plan have a right to discover the communications between plan fiduciaries and attorneys regarding the administration of the plan. Bland v. Fiatallis North America, Inc., 401 F.3d 779, 787-88 (7th Cir. 2005);United States v. Mett, 178 F.3d 1058, 1062 (9th Cir. 1999); In re Long Island Lighting Co., 129 F.3d 268, 272 (2d Cir. 1997).
Hunter, Maclean, Exley, & Dunn v. St. Simons Waterfront, LLC In Hunter, Maclean, the Court of Appeals of Georgia reversed an order requiring the production of documents containing communications between counsel for the defendant law firm related to a claim that was threatened by a client. The law firm handled the documents related to the sale of high end condominiums. When the purchasers began to rescind the agreements, a dispute arose between the law firm and the client-developer as to how that should be handled. There was a claim that the law firm had not properly drafted the documents which limited the remedies available to the client-developer.
Hunter, Maclean, Exley, & Dunn v. St. Simons Waterfront, LLC The law firm sought replacement counsel to complete the transactions for the client, but continued to do work so as to not harm the clients interests in completing closings and responding to the requests for rescission. The law firm initiated an internal investigation, but also engaged the services of an outside consultant to assist in assessing any claims that may be made against the law firm. The trial court ordered that the documents related to the internal communication and the outside consultant must be produced.
Hunter, Maclean, Exley, & Dunn v. St. Simons Waterfront, LLC In reversing the trial court, the Court looked at what it called automatic imputation of the communications between in-house and the lawyers involved in the continued representation. The Court stated: we reject the Draconian rule adopted in other jurisdictions that automatically imputes conflicts of interest to in-house counsel, because there is no explicit textual justification for such an approach in this States rules of professional conduct, and adopting such a bright-line rule would, in our view, encroach upon the authority of our Supreme Court over such matters.
Hunter, Maclean, Exley, & Dunn v. St. Simons Waterfront, LLC The Court went on to state: Moreover, even if we were authorized to establish such a rule, we would nevertheless decline to do so because automatic imputation, inter alia, increases the cost of privileged advice by requiring firms to either retain outside counsel or hastily withdraw from the representation. Additionally, this approach discourage[s] firms from seeking early advice when problems with clients arise...., thereby precluding a robust and frank assessment of potential conflicts and undermining conformity with ethical obligations. And the firms duty of loyalty to the client does not prevent the firm from attempting to defend against client claims because the effort to defend is no more disloyal when it involves inside rather than outside counsel.
Hunter, Maclean, Exley, & Dunn v. St. Simons Waterfront, LLC The Court emphasized that the extent of any imputation should depend on the structure of the in- house position. Citing to a law review article, Elizabeth Chambliss, The Professionalization of Law Firm In-House Counsel, 84 N.C.L.Rev. 1515 (2006), the Court stated: the same lawyers who represents the outside client cannot simultaneously represent the firm in a dispute between the firm and that client without the informed consent of both clients.
Hunter, Maclean, Exley, & Dunn v. St. Simons Waterfront, LLC The Court set forth a different rule for firm counsel that is added on an ad hoc basis. The Court held that these lawyers are subject to imputation unless the firm can show that an attorney-client relationship was established before the in-firm communication occurred. The Court further stated that the burden is on the firm to show that the role of firm counsel is clearly defined. The Court counseled that delegation to ad hoc counsel must be done in such a way that representation of the firm must not be done by attorneys who are subject to imputation, that is attorneys who represent the client. The limited exception is the gathering of information from attorneys involved in the representation.
Hunter, Maclean, Exley, & Dunn v. St. Simons Waterfront, LLC The Hunter, Maclean opinion is limited to the situation in which there is an adversary relationship between the firm and its clients and the firm takes steps to protect itself from perceived or certain malpractice threats. The opinion does not deal with a situation in which an attorney seeks in-house ethics advice regarding potential malpractice and the attorneys resulting obligations to the client. The Court was careful to point out that it was not discouraging the candid disclosure of information that should and occur in furtherance of the duty of loyalty.
Garvy v. Seyfarth & Shaw In Garvy, the Illinois Appellate Court, First District held that a law firm who was sued for legal malpractice was entitled to withhold from production communications with both its inside general counsel and outside defense counsel made during the time when the law firm still represented the plaintiff related to claims of legal malpractice brought by the plaintiff. The defendant law firm represented the plaintiff in corporate transactions and subsequent litigation arising out of those transactions. At a certain point the law firm advised the plaintiff that a number of conflicts had arisen and advised that plaintiff to retain independent counsel to represent him in any action against the law firm, which the plaintiff did. However, at the insistence of the independent counsel retained by the plaintiff, the law firm continued to represent the plaintiff in litigation related to the corporate transactions.
Garvy v. Seyfarth & Shaw After determining that it could no longer represent the plaintiff in the underlying litigation the law firm withdrew representation of the plaintiff. In the legal malpractice litigation against the law firm the plaintiff sought all communications from the date of the letter setting forth the conflicts identified by the law firm and the date of withdrawal. The trial court ordered production of all communications and documents, including work product during that period and held the law firm in civil contempt for failing to produce the documents.
Garvy v. Seyfarth & Shaw In vacating the contempt citation and reversing the judgment of the trial court, the Court held that the communications sought to be withheld were protected from disclosure. First, the Court held that the fiduciary-duty exception to the attorney-client privilege is not recognized under Illinois law.
Garvy v. Seyfarth & Shaw The theory behind the fiduciary-duty exception, which was first discussed by the Illinois Appellate Court in the context of the representation of a trust in Mueller Industries, Inc. v. Berkman, 399 Ill.App.3d 456 (2 nd Dist. 2010), is that because the advice from the attorney was obtained using the authority and funds of the trust the beneficiary was the ultimate recipient of the benefit of the advice, that the beneficiary was entitled to discover the communications between the attorney and the fiduciary. However, the court held that the fiduciary-duty exception does not apply in a situation where the legal advice was rendered concerning the personal liability of the fiduciary or in anticipation of adversarial legal proceedings against the fiduciary.
Garvy v. Seyfarth & Shaw The Court rejected application of the exception from two foreign jurisdictions holding that even if they did represent the law of Illinois, the exception was not triggered. Thelen Reid & Priest LLP v. Marland Co., No. C 06-2071 VRW, 2007 WL 578989 (N.D. Cal. Feb. 21, 2007) and Koen Book Distributors, Inc. v. Powell, Trachtman, Logan, Carrle, Bowman & Lombardo, P.C., 212 F.R.D. 283, 284 (E.D.Penn. 2002). Second, the Court held that the communications were specifically protected under Rules 1.4 and 1.7 which allow an attorney to seek advice to comply with the requirements of the Rules of Professional Conduct.
Garvy v. Seyfarth & Shaw Third, the Court found that the law firm had sufficiently disclosed the conflicts and rejected the trial courts holding that allowing a law firm to disclose the conflict was like allowing the law firm to grade its own paper. The Court ruled that such a holding would render the disclosure requirement meaningless. Finally, the Court held that the communications with inside general counsel of the law firm were protected because he did not labor under a conflict of having two clients with conflicting interests.
MDA Apartments v. DLA Piper, LLP In MDA Apartment, the Illinois Appellate Court, First District reversed the order of the trial court for the defendant law firm to turn over documents related to its communications with inside and outside counsel related to motion to disqualify it in the underlying litigation and underlying arbitration as well as communications related to the law firms defense of the instant legal malpractice action. The underlying actions arose from a contact dispute between the MDA Apartments and Walsh Construction related to a conversion of building to luxury apartments. Walsh Construction filed a motion to disqualify because the law firm had represented the individuals that control Walsh in other matters and would know their litigation strategy. When the motion to disqualify was filed the law firm agreed to vigorously fight those motions without compensation from MDA.
MDA Apartments v. DLA Piper, LLP The motion to disqualify was granted and in turn MDA filed a complaint for legal malpractice against the law firm. During discovery in the legal malpractice case e-mail correspondence were withheld by the law firm based on claims of attorney-client privilege. The trial found that those correspondence were not so protected and ordered them turned over. The law firm was cited for civil contempt in refusing to produce the e-mails. The MDA court looked at the analysis in the Garvy and like Garvy, refused to adopt the fiduciary duty exception and found that even if it did the exception would not apply for the same reasons.