355 A.2d 709 (Del.Ch. 1976), Riggs Nat. Bank of Washington, D.C. v. Zimmer

• Date: 09 April 1976
• Docket Number: .
• Citation: 355 A.2d 709
• Parties: The RIGGS NATIONAL BANK OF WASHINGTON, D.C. and Edward H. Porter, Jr., Trustees under the Will of Willard Saulsbury, Petitioners, v. Ruth Anna ZIMMER et al., Respondents.
• Court: Court of Chancery of Delaware

Page 709

355 A.2d 709 (Del.Ch. 1976)

The RIGGS NATIONAL BANK OF WASHINGTON, D.C. and Edward H.

Porter, Jr., Trustees under the Will of Willard

Saulsbury, Petitioners,

v.

Ruth Anna ZIMMER et al., Respondents.

Court of Chancery of Delaware, New Castle County.

April 9, 1976

Submitted March 30, 1976.

Page 710

Opinion and Order on motion by certain respondents to compel production. Motion Granted.

Richard G. Elliott, Jr., of Richards, Layton & Finger, Wilmington, for petitioners.

Andrew G. T. Moore, II, of Killoran & Van Brunt, Wilmington, for certain minor and other respondents.

Charles S. Crompton, Jr., of Potter, Anderson & Corroon, Wilmington, for Ruth Anna Zimmer and certain other respondents.

Johannes R. Krahmer of Morris, Nichols, Arsht & Tunnell, Wilmington, for Lillian P. Hunter and certain other respondents.

QUILLEN, Chancellor:

There remains in this litigation, a surcharge claim brought by certain beneficiaries of the Trust Estate of Willard Saulsbury to compel the trustees to reimburse the estate for alleged breaches of the trust in regard to certain tax matters. The case comes before the Court on the discovery motion of the beneficiaries to compel production of a legal memorandum prepared in September of 1973 by David S. Workman, Esquire, of the firm of Richards, Layton and Finger. The trustees have declined to produce the document in question on two grounds; the attorney-client privilege and the work product privilege.

The material facts appear undisputed. In his capacity as trustee, Edward H. Porter, Jr., in August and September of 1973, communicated certain facts to the firm of Richards, Layton and Finger for the purpose of securing a legal opinion in connection with the trustees' pending petition for instructions and particularly in anticipation of potential tax litigation on behalf of the trust with the State of Delaware, Division of Revenue. That potential litigation concerns the same subject matter now in issue by the surcharge claim. In response to Porter's request, Mr. Workman, an associate of the firm, prepared a legal memorandum based upon communications with Porter. It is asserted by the beneficiaries and acknowledged by the trustees that the law firm was compensated for the preparation of the memorandum from the corpus of the trust estate. Approximately a year later, in October of 1974, the beneficiaries filed a claim to surcharge the trustees and it is the discovery requested in connection with the surcharge claim which is presently challenged. It should be noted that the motion to compel is directed to a single document in a specific litigation context. While the surcharge claim has been filed in the same civil action in which the trustees petitioned for instructions, it is in substance and effect separate litigation initiated by certain beneficiaries, who were respondents to the trustees' petition, and it will be so treated herein.

In seeking to withhold the information demanded here, the trustees first contend that the 'Workman memorandum' is within the attorney-client privilege and is therefore protected from disclosure. The basis of this argument is that the document is the result of confidential communications between the trustee and his attorneys for the purpose of securing legal assistance. And, in accordance with the policy favoring freedom and honesty of discourse between a client and his attorney, it is argued that it is necessary to prevent disclosure.

The trustees contend secondly that the document is clearly the work product of their attorney, prepared in connection with potential litigation with the State of Delaware. While acknowledging the fact that the particular document sought in this instance was not prepared with respect to the

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surcharge claim now in issue, but primarily for assistance in a separate tax claim involving different parties, they nevertheless assert that the work product rule is still applicable and that work product prepared for one case remains subject to protection in later litigation. In support of that argument the trustees cite several cases and rely upon the policy which supports the work product privilege, i.e. the protection of an attorney's mental processes and the necessity for confidentiality in the performance of his professional functions. Having characterized the document as work product, the trustees contend that, under the discovery rules, the beneficiaries must establish a substantial need for the material in the preparation of their case and an inability without undue hardship to obtain the substantial equivalent by other means. See Rule 26(b)(3), Court of Chancery Rules. Asserting no such showing was made here, the trustees maintain that disclosure is not required.

The beneficiaries' argument is simply that the Workman memorandum cannot be subject to the various privileges asserted by the trustees because, in effect, it was prepared for Their benefit and in aid of the administration of the trust. In support of that argument, they emphasize the fact that the fees for the preparation of the document in question were paid out of the corpus of the trust and therefore indirectly by the beneficiaries. Because the memorandum was completed over a year before the surcharge claim was filed and months before it was first asserted, they argue that it cannot logically be considered to have been in aid of the trustees' defense of the surcharge claim. The issue as framed by the beneficiaries, therefore, is simply whether they are entitled to inspect an opinion of counsel procured by a trustee to aid him in his duties as administrator of the trust. They view the issue basically as one of the substantive law of trusts.

This is not a simple case of a single client communicating with his attorney to obtain legal assistance but presents a situation which involves the rights of other parties as well. Thus, it seems to me that whether or not disclosure of the document in question should be allowed in this instance must be determined in light of the purpose for which it was prepared, and the party or parties for whose benefit it was procured, in relation to what litigation was then pending or threatened. If it is determined that the beneficiaries were ultimately the persons intended to benefit from the legal assistance requested and the memorandum which was drafted in response thereto, the issue of the asserted right to inspect the document against the defensive claim of privileges comes into clearer focus.

I find on the basis of the record that the Workman memorandum was prepared ultimately for the benefit of the beneficiaries of the trust and Not for the purpose of the trustees' own defense in any litigation against themselves. At the time it was prepared the litigation which was then pending was a petition for instructions, the very nature of which normally indicates that the trustees were not implicated in any way. There was also the possibility of potential litigation against the State of Delaware, Division of Revenue. Both of these actions suggest that the legal assistance to the trustees would be rendered only in their service to the beneficiaries. In both instances, the ultimate or real clients were the beneficiaries of the trust, and the trustee, Mr. Porter, in his capacity as a fiduciary, was, or at least should have been, acting only on behalf of the beneficiaries in administering the trust. At that stage, there were no procedings requiring the trustees to seek legal advice personally. As of that time there are in the record no allegations of litigation, or even threats of it, against the trustees. Moreover, there is nothing before the Court to suggest that the purpose of the Workman memorandum was defensive on the trustees' part. Clearly then, the rights of the beneficiaries would have been the foremost consideration in Mr. Porter's consultations and communications with his legal advisers. Moreover,

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the payment to the law firm out of the trust assets is a significant factor, not only in weighing ultimately whether the beneficiaries ought to have access to the document, but also it is in itself a strong indication of precisely who the real clients were. I conclude that the legal services were performed at the request of the trustee for the benefit of the beneficiaries of the trust. Indeed, were this not the case, it may have been improper to charge the trust estate with cost of the legal services. The Delaware Supreme Court has indicated two situations in which an allowance from a trust corpus for attorneys' fees is legitimate. In Bankers Trust Company v. Duffy, Del.Supr., 295 A.2d 725, 726 (1972), the Court found such an allowance proper: 'when the attorneys's services were necessary for the proper administration of the trust . . . or where the services otherwise resulted in a benefit to the trust. . . .'

Next, it is necessary to consider whether the beneficiaries ought to be permitted to inspect documents prepared by an attorney on their behalf though completed at the request of the trustee or whether the privileges asserted are of such compelling importance as to allow the trustee to withhold the documents from them. For the reasons which are set forth below, I conclude that the trustee's invocation of the privileges cannot shield the document involved herein from the beneficiaries' desire to examine it.

Initially, and most importantly, it must be noted that the trustees have substantive fiduciary duties to the beneficiaries. The special relationship puts this case in an entirely different context than a simple motion for discovery against a claim of privilege. Incredibly, counsel agree that American case law is practically nonexistent on the duty of a trustee in this context. But our treatise writers have not been silent. Thus, Professor Scott writes:

'A beneficiary is entitled to inspect opinions of counsel procured by the trustee to guide him in the...