If you are seeking advice about a current matter from another attorney, make sure it is protected by the attorney-client privilege.

The recent Pennsylvania Supreme Court decision in In re the Estate of William K. McAleer sends warning signs to Pennsylvania lawyers seeking advice about their own conduct in connection with current client engagements.

In McAleer, the Supreme Court was evenly divided on the critical substantive issue raised in the case: Do the attorney-client privilege and the work product doctrine protect against disclosure to a beneficiary of communications between a trustee and an attorney about disputed fees and expenses paid from trust monies? In other words, does the “fiduciary exception” to the attorney-client privilege exist in Pennsylvania?

Three justices, in an opinion written by Justice David Wecht (Wecht opinion), would have ruled that it applies. Those justices would have held 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 … The attorney-client privilege and work product doctrine cannot shield those disclosure in this commonwealth.”

The other three justices, in two separate opinions, would have ruled that the “fiduciary exception” does not apply. Justice Christine Donohue’s concurring opinion referred to the fact that the exception “has been rejected by the vast majority of our sister states” and that the principles adopted by such a ruling were “unsupported by Pennsylvania law” for two independent reasons.

First, the ruling that the party who pays the attorney’s fees owns the privilege is contrary to the mandate of Rule 5.4 of the Pennsylvania Rules of Professional Conduct, which states in pertinent part, “A lawyer shall not permit a person who recommends, employs or pays the lawyer to render legal services for another to direct or regulate the lawyer’s professional judgment in rendering such legal service.” The only way to reconcile this apparent inconsistency is to conclude that the beneficiaries are the “true clients” of the attorney hired by the trustee. Yet, the reality is that advice to the trustee on the proper course of administration is “rendered to assist the trustee in exercising her judgment in carrying out the terms of the trust, not to necessarily benefit any or all beneficiaries under the trust.”

Second, the attorney is not necessarily spending money owed to the beneficiaries by paying the legal fee from the corpus trust. Beneficiaries do not own the trust funds, but are only entitled to the equitable benefits from the trust as set forth in the trust document.

How does McAleer relate to advice lawyers may seek about their conduct in current engagements? 

Whether the “fiduciary exception” to the privilege applies to communications between in-house counsel and attorneys at the firm has been the subject of numerous cases. Among the earliest cases was In re Sunrise Securities Litigation, in which the court applied the “fiduciary exception” to a lawyer’s communication with his firm’s in-house counsel. The documents at issue included communications to and from lawyers at Blank Rome who had consulted with each other when the firm was general counsel to Sunrise Savings and Loan Association and after litigation relating to the collapse of Sunrise had begun. The court explained that a conflict of interest, which triggers the exception, could arise when the law firm’s ability to meet its ethical and fiduciary obligations to a current client is materially limited by the firm’s representation of itself through in-house counsel. Citing Pennsylvania Rule of Professional Conduct 1.7 (Conflicts with Current Clients), the court ruled that an in camera inspection was required to determine “if the communication implicates or creates a conflict between the law firm’s fiduciary duties to itself and its duties to the client seeking to discover the communication.” If so, the communication was not protected by the attorney-client privilege. See also, Koen Book Distributors v. Powell, Trachtman, Logan, Carrle, Bowman & Lombardo, which applied the “fiduciary exception” because the firm’s fiduciary duty to its client was “paramount to its own interest.”

Later cases from other states—many cited in the Wecht opinion—rejected the extension of the “fiduciary exception” to communications as applied to trusts. Similarly, the more recent decisions from other jurisdictions have rejected the application of the “fiduciary exception” to communications between a lawyer and in-house counsel. RFF Family Partnership v. Burns & Levinson is a prime example. There, the issue before the court was “whether confidential communications between law firm attorneys and a law firm’s in-house counsel concerning a malpractice claim asserted by a current client of the firm are protected from disclosure to the client by the attorney-client privilege.” The court held that the communications were privileged as long as four conditions were met: “the law firm has designated an attorney or attorneys within the firm to represent the firm as in-house counsel, the in-house counsel has not performed any work on the client matter at issue or a substantially related matter, the time spent by the attorneys in these communications with in-house counsel is not billed to a client and the communications are made in confidence and kept confidential.”

Addressing the conflict issue, the Massachusetts court held that “a law firm is not disloyal to a client by seeking legal advice to determine how best to address the potential conflict, regardless of whether the legal advice is given by in-house counsel or outside counsel … Applying the rule of imputation in such circumstances, therefore, would not avoid conflicting loyalties or prevent disloyalty; it would simply prevent or delay a law firm from seeking the expertise and advice of in-house counsel in deciding what to do where there is a potential conflict.”

The Massachusetts court further relied on In re Teleglobe Communications, which ruled that a failure by counsel to avoid a conflict of interest should not deprive the client of the privilege. Applying that ruling in this circumstance, the court concluded: “a client should not be deprived of the benefit of the attorney-client privilege because of its attorney’s violation of Rule 1.7, even if that ‘client’ is a law firm and the ‘attorney’ is an in-house counsel within that same firm.”

The Massachusetts court also addressed the “real client” argument—the other rationale for applying the “fiduciary exception.” In the trust context, it holds that because the trustee “acts as a representative of the beneficiaries, the beneficiaries are the attorney’s ‘real client’ and should therefore be privy to the communications.” See St. Simons Waterfront v. Hunter, Maclean, Exley & Dunn. Some courts have ruled that this rationale simply does not apply to the law firm in-house counsel situation because there is no mutuality of interest between the firm as the fiduciary and the client as the beneficiary. The Massachusetts court also quickly disposed of this rationale, stating, “The ‘current client’ exception is a flawed interpretation of the rules of professional conduct that yields a dysfunctional result.”

The Massachusetts court concluded, “we prefer a formulation of the attorney-client privilege that encourages attorneys faced with the threat of legal action by a client to seek the legal advice of in-house ethics counsel before deciding whether they must withdraw from the representation to one that would encourage attorneys to withdraw or disclose a poorly understood potential conflict before seeking such advice … applying the privilege in such contexts will often benefit the client and will likely result in increased law firm compliance.”

Where does that leave Pennsylvania attorneys? 

The decision in McAleer did not resolve the issue because the voting members of the Pennsylvania Supreme Court were evenly divided on whether the “fiduciary exception” should be recognized. With at least three current Supreme Court justices of the view that the “fiduciary exception” should be recognized combined with the reasoning in Sunrise and Koen that apply the “fiduciary exception” to communications by lawyers with in-house counsel on current engagements, this stance may gain renewed respect and recognition moving forward.

What is the best approach to protect the privilege? 

There are two options that help protect attorney-client communications about possible errors in an ongoing engagement as privileged. First, you may seek to secure an advance agreement with the client covering this circumstance at the inception of a new engagement whereby the client waives any conflict to allow firm lawyers to consult with in-house counsel; and the client agrees that any such communications are covered by the attorney-client privilege between the lawyer and in-house counsel and will not be shared with the client. Many effective engagement letters have provisions concerning conflicts and privileges and a carefully drafted provision of this type could certainly be included in such a letter.

Second, the surest way to receive necessary advice about possible errors in an ongoing engagement and to protect the privilege is to retain outside counsel. There will be no imputation of any conflicts relating to the underlying engagement, assuming outside counsel does not represent the third party client. In addition, there will be no ambiguity as to the identity of the “real client.” A consultation of this type should not be a complicated engagement. In fact, certain insurance policies include an allowance for professional responsibility initiatives and such a consultation may be covered by that allowance. Even if it is not covered by insurance, payment of a fee to outside counsel in these circumstances will provide the important advice you need and the comfort that the communications with counsel about that advice will be covered by the attorney-client privilege.

Reprinted with permission from the July 1, 2021 issue of The Legal Intelligencer. © 2021 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.

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