In a recent case in the Delaware Court of Chancery involving a suit between the trustee of a trust and the trust's beneficiaries, Vice Chancellor J. Travis Laster had to decide whether the beneficiaries could get access to documents that the trustee claimed were protected from disclosure by the attorney-client privilege. In so doing, the vice chancellor considered and rejected the argument that an amendment to the Delaware Decedents' Estates and Fiduciary Relations law in 2015 overruled prior precedent regarding the fiduciary exception to the attorney-client privilege.

In J.P. Morgan Trust Co. of Delaware, Trustee v. Fisher, C.A. No. 12894-VCL (Del. Ch. Dec. 5, 2019), the trustee of a trust sued the trust's beneficiaries for a declaration that the trustee had complied with its legal and equitable duties in all respects. The suit followed the trustee's acceptance of a cash buyout proposal that the beneficiaries had opposed because it would result in a significant tax burden on the trust that the beneficiaries thought could be avoided if the transaction were structured differently. In contesting the trustee's lawsuit, the beneficiaries contended that the trustee had accepted the cash buyout because of its own conflicts of interest.

In the litigation, the beneficiaries sought documents relating to the cash buyout and its acceptance by the trustee. The trustee produced some documents, but withheld others, claiming that they were subject to the attorney-client privilege. The trustee's privilege log indicated that counsel was performing work on behalf of the trust and providing advice to the trustee in connection with the buyout.

The vice chancellor noted that the attorney-client privilege is not absolute. The Delaware Rules of Evidence contain a nonexclusive list of exceptions. Other exceptions are recognized by common law. One long-recognized exception authorized beneficiaries of a trust to gain access to a trustee's communications with counsel. In the leading decision, Riggs National Bank of Washington, D.C. v. Zimmer, 355 A.2d 709 (Del. Ch. 1976), the court conducted a two-step analysis to determine whether a beneficiary could compel the production of a legal memorandum containing legal advice obtained by the trustee. First, the court considered whether the trustee had retained counsel to represent the trust and to provide advice that would advance the interests of the trust and its beneficiaries, or whether the trustee had retained counsel to protect its own interests in anticipation of litigation in which the trustee would be a defendant. Second, after concluding that the trustee secured the advice on behalf of the trust, the court considered whether the beneficiaries ought to be permitted to inspect the documents prepared by the attorney on their behalf, although completed at the request of the trustee, or whether the privileges asserted were of such compelling importance to allow the trustee to withhold the documents. The decision in Riggs is consistent with the Restatement (Third) of Trusts, which states that a beneficiary's right to information includes access to legal consultations and advice obtained in the trustee's fiduciary capacity concerning decisions or actions taken in the course of administering the trust. Such information is reasonably necessary for the prevention or redress of a breach of trust or for the enforcement of the beneficiary's rights under the trust.

The vice chancellor concluded that under Riggs, the beneficiaries were entitled to the production of the documents. First, the trustee was obtaining advice in its role as trustee about matters pertaining to the trust, and not as it related to the trustee's own interests or defensively against potential claims. Second, the beneficiaries' interest in trust affairs and the trustee's duty to provide information outweighed the trustee's interest in keeping its communications with counsel secret.

Anticipating that Riggs might require production of the communications with counsel, the trustee argued that Riggs had been superseded by a 2015 amendment to the Delaware Decedents' Estate and Fiduciary Relations law, 12 Del. C. Section 3333, titled "Retention of Counsel by Fiduciary." The vice chancellor rejected the trustee's argument. He concluded that new Section 3333(a) codified the common-law principle that a fiduciary could retain counsel and invoke the attorney-client privilege for the resulting advice, but it did not address the applicability of any exceptions to the attorney-client privilege. Nothing in the amendment suggested that the General Assembly intended to eliminate exceptions to the attorney-client privilege recognized by DRE Rule 502 or the common law, including the fiduciary exception rule expounded in Riggs.

The vice chancellor found further support that the General Assembly had not intended to overrule Riggs in the synopsis for the 2015 amendment. The synopsis stated that the revisions to Section 3333 provided that the attorney-client privilege protects communications between a fiduciary and counsel in cases where counsel is retained by the fiduciary and paid by the fiduciary from the fiduciary's own funds, and clarified that the fiduciary exception to the attorney-client privilege does not apply in cases where a fiduciary retains counsel in connection with a claim against the fiduciary or in connection with a matter that might reasonably be believed to be a matter that will lead to such a claim, even if the privileged communications have the effect of guiding the fiduciary in the performance of fiduciary duties. The synopsis thus recognized the continuing vitality of the fiduciary exception, rather than the overruling of the exception and the rule in Riggs. The reference to clarification of the fiduciary exception in the synopsis shows that the General Assembly contemplated the preservation of the existing rule, not changing or eliminating it.

The vice chancellor observed that overruling Riggs would have been a serious matter. It would have reversed an established line of Delaware authority and rejected an aspect of DRE Rule 502, which cites Riggs with favor in a comment to the rule. It also would have had a much broader effect outside Delaware, as Riggs is regarded by other states as the majority rule. If the General Assembly had intended to overrule Riggs, it would have said so in the synopsis.

The JP Morgan decision reaffirms the fiduciary exception to the attorney-client privilege, as explained in the Riggs case, despite the 2015 amendment to Section 3333 of the Decedents' Estates and Fiduciary Relations law. An interesting sidelight of the decision is the court's use of the General Assembly's synopsis of the amendment to discern the legislature's intent. Legislative history for acts of the General Assembly is often scarce and sketchy, and it is rare to see it invoked by the Delaware judiciary to interpret a statute. Here, it was the absence of intent in the synopsis, as much as the explanation in the synopsis itself, that the court found helpful.

Barry M. Klayman is a member in the commercial litigation group and the bankruptcy, insolvency and restructuring practice group at Cozen O'Connor. He regularly appears in Chancery Court.

Mark E. Felger is co-chair of the bankruptcy, insolvency and restructuring practice group at the firm.