4 Trust Under the Dorothy B. Kipnis Survivor's Trust Agreement v. N. Trust Co. (In re 3.)

• Decision Date: 03 June 2014
• Docket Number: No. 1 CA–CV 13–0260.,1 CA–CV 13–0260.
• Citation: 4 Trust Under the Dorothy B. Kipnis Survivor's Trust Agreement v. N. Trust Co. (In re 3.), 235 Ariz. 153, 329 P.3d 1055, 688 Ariz. Adv. Rep. 7 (Ariz. App. 2014)
• Parties: In the Matter of The KIPNIS SECTION 3.4 TRUST under The Dorothy B. Kipnis Survivor's Trust Agreement, dated November 26, 1990, Jane Kipnis Hammerman; DBK Residuary Property, LLC; and BOKF, N.A., dba Bank Of Arizona, as Successor Trustee of the Section 3.4 Trust under The Dorothy B. Kipnis Survivor's Trust Agreement, dated November 26, 1990, Petitioners/Appellees, v. The Northern Trust Company, an Illinois corporation, Respondent/Appellant.
• Court: Arizona Court of Appeals

235 Ariz. 153

329 P.3d 1055

688 Ariz. Adv. Rep. 7

In the Matter of The KIPNIS SECTION 3.4 TRUST under The Dorothy B. Kipnis Survivor's Trust Agreement, dated November 26, 1990,Jane Kipnis Hammerman; DBK Residuary Property, LLC; and BOKF, N.A., dba Bank Of Arizona, as Successor Trustee of the Section 3.4 Trust under The Dorothy B. Kipnis Survivor's Trust Agreement, dated November 26, 1990, Petitioners/Appellees,

v.The Northern Trust Company, an Illinois corporation, Respondent/Appellant.

No. 1 CA–CV 13–0260.

Court of Appeals of Arizona, Division 1.

June 3, 2014.

Becker & House, PLLC By Mark E. House, Allison E. Evans, Scottsdale, Counsel for Petitioners/Appellees.

Fennemore Craig, P.C. By Roger T. Hargrove, Jane A. Proctor, Alexander R. Arpad, Phoenix, Counsel for Respondent/Appellant.

Judge PETER B. SWANN delivered the opinion of the Court, in which Presiding Judge ANDREW W. GOULD and Judge JON W. THOMPSON joined.

OPINION

SWANN, Judge.

¶ 1 This case concerns the scope of a trustee's attorney-client privilege as against a beneficiary and a successor trustee. The trial court concluded that because the trustee had sought legal advice from trust counsel using trust funds, the trustee could not withhold any of its attorney-client communications from the beneficiary or the successor trustee. We adopt the fiduciary exception to the attorney-client privilege and hold that disclosure to the beneficiary and successor trustee of otherwise privileged communications is required insofar as the trustee seeks legal advice in its fiduciary capacity on matters of trust administration. We further hold that the attorney-client privilege extends to legal advice sought in the trustee's personal capacity on matters not of trust administration. For the reasons stated below, we reverse and remand for further proceedings consistent with this opinion.

FACTS AND PROCEDURAL HISTORY

¶ 2 The Northern Trust Company served as trustee of the Dorothy B. Kipnis Survivor's Trust Agreement (“Survivor's Trust Agreement”) and the Section 3.4 Trust created thereunder. Jane Kipnis Hammerman is the sole beneficiary for life, and the remainder interest is in the trustor's grandchildren. During its tenure as trustee, Northern Trust also managed the Section 3.4 Trust's ownership of DBK Residuary Property (“DBK”), a single-member limited liability company holding title to a warehouse in Phoenix. Northern Trust hired the law firm Quarles & Brady to advise it on the administration of the Section 3.4 Trust and management of DBK, and paid the firm with trust funds as authorized under the Survivor's Trust Agreement.

¶ 3 Northern Trust eventually had to address multiple lien foreclosure actions because a DBK warehouse tenant defaulted on its lease. Northern Trust organized a sale of the warehouse to a third party on the condition that it satisfied the liens before closing. Hammerman disagreed with this strategy and, in accordance with the Survivor's Trust Agreement, removed Northern Trust as trustee before the sale closed. Northern Trust continued as trustee until Hammerman appointed Bank of Arizona as successor trustee and new manager of DBK.

¶ 4 Once Hammerman removed Northern Trust as trustee, she and Bank of Arizona asked Northern Trust to provide all files related to the Section 3.4 Trust. Northern Trust transferred most of its files but withheld a number of e-mails that it claimed were subject to the attorney-client privilege. Hammerman, as the Section 3.4 Trust's beneficiary, Bank of Arizona, as successor trustee, and DBK jointly petitioned the court to compel Northern Trust to release “any and all information related to” the Survivor's Trust Agreement, the Section 3.4 Trust and DBK. Northern Trust moved to dismiss the petition, arguing that the communications withheld were privileged because they pertained to advice sought in Northern Trust's corporate capacity rather than in its fiduciary capacity.

¶ 5 The court heard oral argument on Northern Trust's motion to dismiss. Counsel for Northern Trust conceded that he believed Northern Trust was obliged to provide all communications that “go to trust administration,” but explained that

almost since the beginning of the problems with the former tenant at the DBK property ... there has been conflict between Northern Trust as trustee and Ms. Hammerman as the beneficiary, and that's evidenced in ... e-mails and communications. Ms. Hammerman was asking Northern Trust about what they were and weren't doing. Her attorney[s] ... [were] doing the same thing.... And to this has culminated a clear and present threat of litigation for some time now, and many of the communications between Northern Trust and its attorneys were either seeking legal advice or providing legal advice ... to agents and employees of Northern Trust as to how to respond to these threats [from] Ms. Hammerman or her attorneys.

... I think it's important to note that we're up against the backdrop of over 1,100 e-mails that have—that are in existence. Only approximately four percent of those have been withheld, and that's because Northern Trust believes that those communications are—all within this special category of advice they sought in their individual or non-fiduciary or non-trustee administration capacity.

The court denied the motion to dismiss, granted the petition to compel without further hearings and ordered Northern Trust to disclose all additional information requested in the petition through the date Hammerman removed it as trustee. In the court's view,

[a] mistake was made by not retaining ... private counsel to give this advice. I think then I would have preserved that attorney/client-privileged communication at that point. That wasn't done. The trust was charged. The trust, I think, has an absolute right to the information that it paid for, and they're the successor trustees, and so I'm ordering that additional information to be disclosed that they've requested....

The court stayed its order pending an anticipated appeal and Northern Trust timely appeals.

DISCUSSION

¶ 6 Northern Trust contends that the trial court erred by finding that it could not assert the attorney-client privilege against either Hammerman or Bank of Arizona as to communications that allegedly concerned a potential dispute between Northern Trust and Hammerman. This appeal therefore presents two discrete but closely related issues: (1) whether a trustee may assert the attorney-client privilege against a trust beneficiary over advice received from trust counsel, and (2) whether a trustee may assert the attorney-client privilege against a successor trustee over advice received from trust counsel.

I. THE SCOPE OF A TRUSTEE'S ATTORNEY–CLIENT PRIVILEGE AGAINST A TRUST BENEFICIARY

A. The Fiduciary Exception to the Attorney–Client Privilege

¶ 7 The scope of the attorney-client privilege is a question of law that we review de novo. Twin City Fire Ins. Co. v. Burke, 204 Ariz. 251, 254, ¶ 10, 63 P.3d 282, 285 (2003). Under A.R.S. § 12–2234(A), “an attorney shall not, without the consent of his client, be examined as to any communication made by the client to him, or his advice given thereon in the course of professional employment.” Although the attorney-client privilege extends to “ any communication” from the client, Arizona courts may, and in the past have, limited its scope where circumstances warrant. SeeAriz. R. Evid. 501 (“The common law—as interpreted by Arizona courts in the light of reason and experience—governs a claim of privilege unless any of the following provides otherwise: [1] the United States or Arizona Constitution; [2] an applicable statute; or [3] rules prescribed by the Supreme Court.”); Buell v. Superior Court, 96 Ariz. 62, 68, 391 P.2d 919, 924 (1964) (adopting crime-fraud exception to attorney-client privilege); Benton v. Superior Court (State), 182 Ariz. 466, 469, 897 P.2d 1352, 1355 (App.1994) (“Not every exception to a privilege established by statute is legislative in origin. The judiciary has also imposed some limitations on it.”). To date, Arizona has neither adopted nor rejected the “fiduciary exception” to the attorney-client privilege, which stems from a principle of English trust law that requires a trustee to comply with a beneficiary's request to produce all legal advice that the trustee has obtained on matters concerning administration of the trust. Wachtel v. Health Net, Inc., 482 F.3d 225, 231 (3d Cir.2007).

¶ 8 Courts in other jurisdictions have relied on two distinct rationales in adopting the fiduciary exception. United States v. Mett, 178 F.3d 1058, 1063 (9th Cir.1999). First, some have found that the trust beneficiaries are “the real clients” and thus the holders of the attorney-client privilege. Riggs Nat'l Bank of Wash., D.C. v. Zimmer, 355 A.2d 709, 713–14 (Del.Ch.1976). These courts reasonthat “[a]s a representative for the beneficiaries of the trust which [it] is administering, the trustee is not the real client in the sense that [it] is personally being served.” Id. at 713. “Understood in this fashion, the fiduciary exception is not an ‘exception’ to the attorney-client privilege at all. Rather, it merely reflects the fact that, at least as to advice regarding [trust] administration, a trustee is not ‘the real client’ and thus never enjoyed the privilege in the first place.” Mett, 178 F.3d at 1063. In Riggs National Bank, the court focused on three factors to identify the beneficiaries as the “real” clients: (1) the trustees had sought legal advice that would only benefit the trust, not the trustees personally; (2) the trustees had paid for that advice with trust funds, not the trustees' personal funds; and (3) there was no adversarial proceeding pending against the trustees, which presumably meant that there was no need for the trustees to seek advice in a personal capacity. 355 A.2d at 711–12.

¶ 9 Contrary to the “real client” rationale, this court has held that the beneficiaries of an estate were not the...