Trust Est. Under Agreement of Sarah Mellon Scaife ( 2022 )

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2022 PA Super 93IN RE: TRUST ESTABLISHED UNDER : IN THE SUPERIOR COURT OF
AGREEMENT OF SARAH MELLON : PENNSYLVANIA
SCAIFE, DECEASED DATED MAY 9, :
1963 :
:
:
APPEAL OF: PNC BANK, N.A. :
:
: No. 722 WDA 2021
Appeal from the Order Entered May 25, 2021
In the Court of Common Pleas of Allegheny County
Orphans’ Court at No. 02-20-2506
BEFORE: MURRAY, J., SULLIVAN, J., and COLINS, J.*
OPINION BY MURRAY, J.: FILED: MAY 23, 2022
In this collateral appeal pursuant to Pa.R.A.P. 313,1 we consider whether
the fiduciary exception to the attorney-client privilege and attorney work
product doctrine, first adopted by the common pleas court in Follansbee v.
Gerlach, 56 Pa. D. & C.4th 483 (C.C.P. Allegheny 2002), is contrary to the law
in Pennsylvania, following our Supreme Court’s plurality decision in In re
Estate of McAleer, 248 A.3d 416 (Pa. 2021) (McAleer II).
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* Retired Senior Judge assigned to the Superior Court.
1 This appeal is properly before us pursuant to the collateral order doctrine,
Pa.R.A.P. 313. See In re Estate of McAleer, 248 A.3d 416, 425 (Pa. 2021)
(McAleer II), 248 A.3d at 425 (deeming a discovery order implicating the
fiduciary exception to the attorney-client privilege appealable under the
collateral order doctrine).
J-A06008-22
PNC Bank, N.A. (PNC or Appellant), corporate trustee of the 1963 Trust
(Trust) established under the agreement of Sarah Mellon Scaife, deceased,
appeals from the order granting the motion to compel discovery filed by David
Zywiec (Zywiec), the personal representative of the Estate of Jennie K. Scaife
(collectively, the Estate). Because we conclude a fiduciary exception is not
contrary to Pennsylvania law, we affirm the orphans’ court’s order compelling
discovery.
Factual History
On May 9, 1963, Sarah Mellon Scaife settled the Trust for the benefit of
her grandchildren, their issue, their spouses, the spouses of their issue, and
charitable organizations. Petition for Adjudication, 6/1/20, Rider to Item 7.
From the Trust’s inception through March 31, 1984 (the charitable period),
the trustees were required to make annual distributions of the Trust’s net
income to charitable organizations. Trust, 5/9/63, Article II. Any time after
the end of the charitable period, the Trust authorized the trustees to create
separate trusts for any income beneficiary, any time after the end of the
charitable period. Trust, 5/9/63, Article V, § 5.01. After the charitable period,
the Trust authorized distribution of net income to the income beneficiaries.
Id. § 5.02. The Trust defined income beneficiaries as the grandchildren of the
donor, their spouses, the issue of grandchildren, spouses of such issue, and
(in the trustees’ discretion) “Charity.” Id. §§ 1.07, 4.01.4.
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In April 1984, at the end of the charitable period, the Trust began
distributing net income to the only income beneficiaries at that time, Jennie
K. Scaife (Jennie) and her brother, David N. Scaife (David). Estate’s
Objections to Account, 9/21/20, ¶ 3. Appellant became a successor corporate
trustee of the Trust in 1993. Id. ¶ 6. David married in 1997 and had two
children; David’s spouse and children also became income beneficiaries. Id.
¶ 7. Jennie remained unmarried and childless until her death. Id. ¶ 6.
Over the years, the trustees issued equal distributions to David and
Jennie. Id. ¶ 11. Jennie died from long-term ailments on November 29,
2018, at the age of fifty-five. Id. ¶¶ 6, 11. On March 1, 2019, the Estate,
through Zywiec, requested the trustees transfer Jennie’s beneficial share of
the Trust to her Estate. Id. In February 2020, in accordance with Jennie’s
will, Zywiec established the Jennie K. Scaife Charitable Foundation, Inc.
(Foundation). Upon learning that trustees did not create a separate trust for
Jennie, Zywiec requested documentation regarding the trustees’ exercise of
discretion when it deemed separate trusts unnecessary. Id. ¶ 12.
On April 27, 2020, Zywiec and the Foundation filed a complaint against
Appellant, as corporate trustee of the Trust, and Matthew A. Groll (Groll),
Blaine F. Aikin (Aikin), Frederick G. Wedell, Corbin P. Miller and Laura B.
Gutnick (Gutnick) (collectively, Individual Trustees), the individual trustees of
the Trust (PNC and Individual Trustees collectively referred to as Trustees).
Zywiec averred Trustees had breached their fiduciary duty to Jennie by not
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creating a separate trust for her benefit. See Jennie K. Scaife Charitable
Found. v. PNC Bank, N.A., No. 2:20-cv-617-NR-LPL, 2021 U.S. Dist. LEXIS
41195 (W.D. Pa. Mar. 5, 2021), The federal court ultimately abstained from
exercising jurisdiction. See id. *8-9.
Trustees’ First and Final Account
On June 1, 2020, Trustees filed their First and Final Account of the Trust
from March 22, 1994, through December 31, 2019 (Trustees’ Account).
Trustees’ Account, 6/1/20. Trustees additionally filed a Petition for
Adjudication, presenting the following issue:
Whether Trustees not creating a “Separate Trust” for the benefit
of beneficiary Jennie K. Scaife before her death on November 29,
2018, constituted a breach of Trustees’ fiduciary duties under the
Trust Agreement and Pennsylvania law. The [E]state of Ms.
Scaife, along with a charitable foundation the [E]state founded,
contends that Trustees breached their fiduciary duties and harmed
the [E]state (and the foundation) by not exercising their power to
create a “Separate Trust” under Article V of the Trust instrument
for the benefit of Ms. Scaife before her death. Trustees deny any
such breach of fiduciary duty.
Petition for Adjudication, 6/1/20, ¶ 14.
On September 21, 2020, David and his son, David G. Scaife, both
income beneficiaries, filed an objection challenging Trustees’ assertion that
the orphans’ court could compel Trustees “to split the Trust” and the Trust
could “now be divided.” Scaifes’ Objection, 9/21/20.
The Estate filed objections to the Account (Estate’s Objections) on
September 21, 2020. The Estate claimed Trustees had violated their fiduciary
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duty to Jennie by: (a) not exercising their discretion and determining whether
separate trusts were necessary to protect the income beneficiaries’ interests;
(b) not acting in good faith, in violation of the Uniform Trust Act (“UTA”);2 and
(c) favoring David’s interests over those of Jennie. Id. ¶ 14 (a)-(c).
Individual Trustees and Appellant filed answers and new matters
denying they had breached their fiduciary duty to income beneficiaries.
Appellant’s Answer and New Matter, 10/21/20, ¶ 1; Individual Trustees’
Answer and New Matter, 10/21/20, ¶ 1. Appellant explained that in April
2017, Jennie and David did not ask for the termination of the Trust or the
creation of separate trusts. Appellant’s Answer and New Matter, 10/21/20, ¶
3. Appellant further denied breaching its fiduciary duties regarding the failure
to create separate trusts. Id. ¶ 5.
Discovery
On October 26, 2020, the Estate filed its first motion to compel
production of the following categories of documents:
(1) Documents spanning the entire Accounting Period and not
limited to the 30-month period in 20 Pa.C.S.A. § 7785; (2) PNC’s
manuals and memoranda concerning its conflict policies; (3)
documents concerning the Trust’s investments in its affiliates
Blackrock and iShares; (4) documents concerning the legal
services provided to the Trust by the law firm of Strassburger
McKenna .., and the appointment of its shareholders E.J.
Strassburger [(Strassburger)] and [] Gutnick as trustees; and (5)
documents concerning the retention of a payment to Independent
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2 See 20 Pa.C.S.A. §§ 7701-7790.3.
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Fiduciary Services Consulting Services Management. As discussed
herein, there is no basis for the Trustees to withhold any of these
documents—which all concern the administration of the Trust—
from the Estate, which is their beneficiary.
First Motion to Compel, 10/26/20, at 2 (unnumbered) (footnote omitted).
On November 5, 2020, the orphans’ court entered an order directing
Trustees to produce all documents related to the legal services provided by
Strassburger McKenna, and the appointment of Strassburger and Gutnick as
trustees. Orphans’ Court Order, 11/5/20, at 1-2 (unnumbered). The orphans’
court ordered production of the documents by November 17, 2020, and
directed the filing of discovery motions by the close of business on November
19, 2020. Id. at 2 (unnumbered).
The Estate filed a second motion to compel on November 19, 2020.
After a hearing, the orphans’ court granted the Second Motion to Compel.
Orphans’ Court Order, 12/3/20.
On January 8, 2021, Appellant and Individual Trustees lodged objections
to the Estate’s notice of intent to subpoena documents from Strassburger
McKenna. Appellant’s objections stated, in full:
Pursuant to Pennsylvania Rule of Civil Procedure 4009.21(c),
trustee PNC Bank, N.A. (“PNC”) objects to the proposed subpoena
that is attached to these Objections as Exhibit A because it calls
for the production of documents protected by the attorney-client
privilege, the work product doctrine, and/or other applicable legal
privilege or protection. Production of the categories of documents
requested in the proposed subpoena would waive PNC’s privilege
without its consent.
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Appellant’s Objections to Notice, 1/28/21, at 2. Individual Trustees’
objections included an identical general assertion of privilege and the work
product doctrine. See Individual Trustees Objections, 1/28/21, at 1.
On February 23, 2021, the Estate filed its third motion to compel.
Relevant to this appeal, the Estate sought production of unredacted versions
of previously produced documents, in accordance with a common pleas court’s
decision in Follansbee and the Pennsylvania Superior Court’s decision in In
re Estate of McAleer, 194 A.3d 587 (Pa. Super. 2018) (McAleer I). Third
Motion to Compel, 2/23/21, ¶ 8. According to the Estate, PNC produced its
privilege log identifying 767 documents withheld and/or redacted.3 The Estate
asserted:
The Estate raised concerns with this privilege log during the recent
meet-and-confer. These issues included: logged documents that
do not identify an attorney as an author or recipient; the inclusion
of documents where an attorney is only one of many people copied
on the transmission; not providing enough information to
ascertain the subject matter of certain communications; and many
of the redactions being heavy-handed and insufficiently justified.
Finally, the Estate asserted that under Follansbee and McAleer
[I], that PNC was required to produce all documents withheld on
privilege grounds that are dated prior to Jennie’s death on
November 29, 2018.
Id.____________________________________________
3 The Estate claimed PNC “used a tiny font that made it nearly impossible to
review.” Id.-7-
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The Orphans’ Court’s Decision
The orphans’ court deferred ruling on the third motion to compel,
pending our Supreme Court’s decision in McAleer II.4 May 25, 2021,
following the Supreme Court’s plurality decision in McAleer II and the
submission of briefs by the parties, the orphans’ court granted the Estate’s
third motion to compel. Orphans’ Court Order, 5/25/21, at 2 (unnumbered).
The orphans’ court concluded “a fiduciary exception is not inconsistent with
Pennsylvania law.” Id. The orphans’ court directed documents “which
heretofore have been withheld from production based upon attorney-client
privilege or work-product doctrine, involving the trustee and its beneficiaries
be produced no later than 20 days from today’s date.” Id. The orphans’ court
expressly certified its order for immediate appeal pursuant to 42 Pa.C.S.A.
§ 702(b) (interlocutory appeals by permission). Appellant timely appealed.5
Appellant and the orphans’ court have complied with Pa.R.A.P. 1925.
Although the orphans’ court certified the order for interlocutory appeal
by permission, in McAleer II, a majority of our Supreme Court agreed that
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4 In McAleer II, the Supreme Court granted allowance of appeal “to
determine whether the attorney-client privilege and the work product
doctrine may be invoked by a trustee to prevent the disclosure to a beneficiary
of communications between the trustee and counsel pertaining to attorney
fees expended from a trust corpus.” McAleer II, 248 A.3d at 418-19.
5 Strassburger McKenna filed an appeal of the orphans’ court’s order at 697
WDA 2021. Individual Trustees appealed at 696 WDA 2021. We address
those appeals in separate decisions.
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an appeal implicating the same issue constituted an appealable collateral
order. See McAleer II, 248 A.3d at 425. We address Appellant’s claims
accordingly.
Appellant’s Argument
Appellant presents the following issue for our review:
Is there an “exception” to Pennsylvania’s statutory attorney-client
privilege and codified work product doctrine where the client of an
attorney is a trustee, and trust beneficiaries demand production
of privileged communications and documents?
Appellant’s Brief at 4.
Appellant advances three arguments against application of the fiduciary
exception to the attorney-client privilege and work product doctrines: (1) no
statute recognizes a fiduciary exception, see id. at 12-13; (2) Pennsylvania
law provides no basis for a fiduciary exception, see id. at 20; and (3) most
jurisdictions reject a fiduciary exception, see id. at 29.
First, Appellant claims there is no statutory exception to the codified
attorney-client privilege. Id. at 12. According to Appellant, the orphans’
court’s order “eliminated Pennsylvania’s codified privileges between attorneys
and their clients, which are vital to trustees carrying out their fiduciary duties.”
Id. (capitalization omitted). Appellant claims the attorney-client privilege,
codified at 42 Pa.C.S.A. § 5928, and the attorney work product doctrine,
codified at Pa.R.C.P. 4003.3, 231 Pa. Code § 4003.3, protects without
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exception such communications and documents from disclosure. Id. at 12-
13.
Quoting Pittsburgh History and Landmarks Found. v. Ziegler, 200
A.3d 58 (Pa. 2019), Appellant argues the privilege “sweeps broader than the
literal language of Section 5928: ‘[I]f open communication is to be
facilitated[,] a broader range [of] derivative protections is implicated.’’
Appellant’s Brief at 13 (quoting Ziegler, 200 A.3d at 80).
Only with full information from the client can an attorney provide
relevant and sound legal advice. A client, however, will not reveal
all necessary information to counsel if she fears that the
information could later be disclosed. Indeed, we have observed
that application of the attorney-client privilege does not actually
result in the loss of evidence in the truth-determining process
because the client would not have written or uttered the words
absent the safeguards of the attorney-client privilege.
Id. at 15 (quoting Ziegler, 200 A.3d at 80 (quotation marks omitted)).
Regarding the work product doctrine, Appellant asserts, “The same
underlying concerns about ensuring that clients receive the best legal advice
possible from their attorneys are embodied in the work product doctrine.” Id.
at 15-16. According to Appellant, “[a]llowing counsel to document legal
theories without concern of disclosure encourages better representation of
clients, which in turn benefits justice.” Id. at 16 (citation omitted). The work
product doctrine, Appellant posits, shields the mental processes of an
attorney, “providing a privileged area within which he can analyze and prepare
his client’s case.” Id. (quoting Gocial v. Indep. Blue Cross, 827 A.2d 1216,
1222 (Pa. Super. 2003) (citation omitted)).
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Appellant emphasizes that beneficiaries, too, benefit from consistent
application of the codified attorney-client privilege. Id. “Indeed,
Pennsylvania law encourages trustees to seek the advice of counsel by
allowing trustees to pay for legal expenses from a trust’s assets, rather than
out of the trustee’s own pocket.” Id. n.1 (citing Larocca Estate, 246 A.2d
337, 339 (Pa. 1968), RESTATEMENT (THIRD) OF TRUSTS § 38(2) (2007), and
Trust, §§ 7.02(k) and 8.10(c)). According to Appellant,
There are instances in which co-trustees disagree on the best
course of action, or a co-trustee needs advice regarding whether
the conduct of another co-trustee complies with the co-trustee’s
fiduciary duties, perhaps rising to a level requiring removal.
Concerns regarding disclosure to beneficiaries under the “fiduciary
exception” to privilege, which include potentially tainting the
relationship between the co-trustee and beneficiaries, might deter
a trustee from seeking such advice—to the ultimate detriment of
beneficiaries.
Id. at 17. Appellant explains, “the trustees’ duty to carry out the intent of
the trust settlor oftentimes does not coincide with one or more beneficiary’s
immediate preferences.” Id. at 18. Under these circumstances, “[g]uidance
from legal counsel can be crucial in circumstances where beneficiaries have
differing rights[.]” Id.
Second, Appellant argues, “in contrast with the law of privilege, the
fiduciary exception has no basis in Pennsylvania law.” Id. at 20 (capitalization
and quotation marks omitted). Appellant asserts no Pennsylvania appellate
court has adopted the “exception” pronounced by the Honorable R. Stanton
Wettick in Follansbee. Id. Appellant criticizes Follansbee as allowing trust
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beneficiaries to invade privileged communications, without explaining the
statutory or legal basis for such an exception. Id. at 21. Appellant
acknowledges the Supreme Court adopted the Restatement (Second) of
Trusts Section 173 in In re Estate of Rosenblum, 328 A.2d 158 (Pa. 1974).
Id. at 23. However, Follansbee relied on comment b to Section 173, which
the Court did not adopt in Rosenblum. Id. Further, the parties in
Rosenblum disputed access to, and disclosure of, records of the trust, not
privileged documents or an attorney’s work product. Id. at 24. Appellant
distinguishes Follansbee as reflecting the common law in 1959, and not its
subsequent development. Id. at 24-25.
Third, Appellant argues the basis for the Follansbee court’s ruling is
“no longer good law, and Pennsylvania would be in a very small minority were
it to adopt the ‘fiduciary exception.’” Id. at 29. Appellant directs our attention
to various jurisdictions which have rejected the fiduciary exception to the
attorney-client privilege. See id. at 30-35.
The Estate’s Argument
The Estate argues four grounds for affirmance: (1) the Pennsylvania
Superior Court’s alternative holding in McAleer I became binding precedent
by operation of law, see Estate’s Brief at 13; (2) the fiduciary exception is
established law in Pennsylvania, see id. at 21; (3) Trustees waived their claim
of an exception to the fiduciary exception because it was not raised before the
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orphans’ court, see id. at 43; and (4) Individual Trustees waived their
argument for prospective application of the fiduciary exception, if recognized,
see id. at 45.6
First, the Estate claims this Court’s alternative substantive holding in
McAleer I,7 affirmed by operation of law, remains binding precedent. Id. at
14-16. The Estate argues, “Because the Justices [in McAleer] were affirming,
by equal division and by operation of law, this Court’s holding applying the
fiduciary exception, they did not need to reach the issue of whether the trustee
also failed to properly preserve the privilege.” Id. at 18-19; see also id. at
19 (“Because the disclosure would nevertheless result from the competing
positions set forth by a majority of the Justices, the lower court’s alternative
ruling is affirmed by operation of law.” (quoting McAleer II, 248 A.3d at
419)).
The Estate directs our attention to our unpublished decision in In re
Trust Under Deed of Trust of Scaife, 225 A.3d 1199 (Pa. Super. 2019)
(unpublished memorandum) (Scaife Trust). In Scaife Trust, this Court,
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6Individual Trustees filed an appeal of the orphans’ court’s order at No. 696
WDA 2022, which we address in our decision at that docket number.
7 As we discuss infra, in McAleer I, this Court quashed the appeal, holding
the order was not appealable as a collateral order. McAleer I, 194 A.2d at
597. Alternatively, this Court recognized a trustee has a duty to share with
beneficiaries complete information regarding administration of a trust. Id.
Because a majority of our Supreme Court reversed our holding regarding the
appealability of the order, the Estate refers to our merits discussion as the
alternative holding in McAleer I.
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although resolving the appeal on other grounds, favorably cited Follansbee
as “germane with regard to the Trust management documents.” Estate’s Brief
at 23 (quoting Scaife Trust, supra, (unpublished memorandum at 5)). The
Estate points out Appellant’s role as corporate fiduciary in Scaife Trust, as
well. Id. The Estate further lists trial court decisions applying Follansbee.
Id. at 24-26.
The Estate argues recognition of a fiduciary exception is consistent with
Section 84 of the Restatement (Third) of the Law Governing Lawyers. Id. at
26. Section 84 provides that, in a proceeding in which a fiduciary of a trust is
charged with breach of fiduciary duties, a communication is not privileged if it
“(a) is relevant to the claimed breach; and (b) was between a trustee and a
lawyer or other privileged person … who was retained to advise the trustee
concerning the administration of the trust.” Id. at 26-27 (quoting
Restatement (Third) of the Law Governing Lawyers, § 84).
Second, the Estate claims holdings from other jurisdictions do not
override the fiduciary exception in Pennsylvania. Id. at 28. The Estate points
out that the Delaware Chancery Court’s decision in Riggs National Bank of
Washington, D.C. v. Zimmer, 355 A.2d 709 (Del. Ch. 1976), remains
binding authority in Delaware, contrary to the assertions of Appellant. Estate’s
Brief at 30. The Estate asserts, “even the United States Supreme Court has
expressly recognized Riggs as “the leading American case” on the fiduciary
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exception.8 Id. (quoting United States v. Jicarilla Apache Nation, 564
U.S. 162, 171 (2011)). The Estate references the Delaware Chancery Court’s
decision in J.P. Morgan Trust Co. v. Fisher, C.A. No. 12894-VCL, 2019 Del.
Ch. LEXIS 1383 (Del. Ch. Dec. 5, 2019). Estate’s Brief at 34. In Fisher, the
chancery court expressly concluded that Riggs was not overruled by statute.
Id. (citing Fisher, 2019 Del. Ch. LEXIS 1383, at *9).
The Estate also disputes the policy arguments made by Appellant as
disregarding the trustees’ duty to beneficiaries. Id. at 36.
PNC’s final hypothetical—that the trustees may make a decision
that benefits some beneficiaries while harming others—is exactly
why the fiduciary exception must exist. PNC rightfully points out
that this problem could occur here with respect to the decision to
create separate trusts. But this is precisely the situation where a
beneficiary is most in need of full disclosure. A beneficiary is
entitled to know that a decision to favor a different beneficiary
over his or her interests satisfied the trustees’ sacrosanct duties
of impartiality and loyalty to each beneficiary. The Trustees
should not be permitted to use the attorney-client privilege as a
shield to hide the reasoning for its most important decisions,
especially those that intentionally favor one beneficiary over
another.
Id. at 38. The Estate, quoting PNC’s brief, claims that in this case, “counsel
advised the Trustees that if one beneficiary ‘were aware that she could split
the trust it’s likely she would,’ and, in the same breath, recommended the
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8 The Estate acknowledges the United States Supreme Court’s ultimate
conclusion that the government’s relationship with a Native American tribe is
not similar to a fiduciary relationship between a trustee and a beneficiary. Id.
at 31 (citation omitted).
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Trustees use their discretionary power to split the Trust as ‘leverage against
another beneficiary should he ask for a distribution.’” Id. at 39.
Importantly, the Estate claims trust counsel attended every formal
Trustees’ meeting during the 26-year accounting period, and Appellant heavily
redacted several Trustees’ Meeting Minutes as “privileged.” Id. The Estate
argues these Minutes are official records of the Trust’s administration, and are
the very documents deemed discoverable by our Supreme Court in
Rosenblum. Id.
The Estate relies on the Supreme Court’s plurality opinion in McAleer
II. Id. at 40. The Estate asks this Court to adopt McAleer’s stated basis for
favoring the fiduciary privilege over that of the attorney-client privilege and
the work product doctrine: the critical importance of transparency in a
fiduciary relationship. Id.
Third, the Estate claims Trustees waived their claim of an exclusion to
the fiduciary exception for communications with litigation counsel. Id. at 43.
The Estate asserts the privilege logs of Strassburger McKenna and Trustees
never identified which documents were communications with litigation counsel
regarding the dispute with the Estate. Id. at 44.
Fourth, the Estate claims Trustees failed to preserve their argument
favoring only prospective application of the fiduciary exception. Id. at 45.
Although the orphans’ court requested briefs on the effect of the split decision
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in McAleer II, Trustees never requested prospective application of the
exception. Id.
Income Beneficiaries’ Argument
David, Jennie, and David G. Scaife (as representative of David’s minor
children) (collectively, Income Beneficiaries) filed a joint appellate brief.
Income Beneficiaries argue: (1) the fiduciary exception, as recognized in
Follansbee, strikes the right balance between the rights of fiduciaries and
beneficiaries, Income Beneficiaries’ Brief at 2; (2) application of the fiduciary
exception is consistent with Pennsylvania law, see id. at 21; and (3)
communications between trustees and trust counsel are not “confidential”
communications to which the attorney-client privilege applies, see id. at 26.
First, Income Beneficiaries claim trustees have a duty to disclose all
information, relevant to trust administration, to the beneficiaries. Id. at 2.
Income Beneficiaries rely on Section 173 of the Restatement (Second) of
Trusts, as adopted by our Supreme Court in Rosenblum. Id. Income
Beneficiaries assert access to these trust records is crucial, and the rationale
expressed in Follansbee “is sound.” Id. at 4.
Income Beneficiaries posit, “evaluating the propriety of a trustee’s
course of conduct requires consideration of the terms of the trust, the nature
of the power accorded to the trustee and all the circumstances surrounding
the trust.” Id. at 8 (emphasis in original; quoting In re Scheidmantel, 868
A.2d 464, 487 (Pa. Super. 2005) (citation omitted)). “To permit a trustee to
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withhold relevant information would allow the trustee to act in the shadows,
sitting as the judge of the trustee’s own conduct, without review by the
beneficiaries or any court.” Id. at 10.
Income Beneficiaries argue trust counsel owes derivative duties to trust
beneficiaries, requiring disclosure of advice given to guide Trustees’
administration of the trust. Id.
Support for these “derivative” duties rests in the fact that the
fiduciary estate has been created by the settlor for the exclusive
benefit of the beneficiaries, the fiduciary and the lawyer for the
fiduciary are compensated by the fiduciary estate, and because
the fiduciary traditionally stands in a superior position relative to
the beneficiaries, who, in turn, “repose trust and confidence in the
lawyer.”
Id. at 12 (emphasis omitted) (quoting Pew Estate, 16 Fiduc. Rep. 2d 73
(O.C. Montg. 1995) (en banc)). Because trust counsel owes these derivative
duties to beneficiaries, “the beneficiaries are entitled to obtain
communications between trust counsel and the trustee generated in the
course of administering the trust.” Id. at 13.
Income Beneficiaries agree with the Estate that Follansbee strikes the
appropriate balance between the duty of disclosure and a trustee’s right to
retain counsel for the trustee’s own protection. Id. Income Beneficiaries
assert, “the rationale for the exception was that if the trustee ‘obtained the
advice [of counsel] using both the authority and the funds of the trust,’ then
‘the benefit of the advice regarding the administration of the trust ran to the
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beneficiaries.’” Id. at 15 (quoting Wachtel v. Health Net. Inc., 482 F.3d
225 (3d Cir. 2007)).
Thus, Income Beneficiaries argue for a more limited exception than that
adopted by the McAleer II plurality. Id. at 17.
[T]he attorney-client privilege may exist between a trustee and
counsel where the interests of the trustee “differ” from or are
“adverse” to the interests of the beneficiaries, when claims have
been threatened against the trustees, or when litigation has been
initiated. In such instances, the trustee (and counsel) are no
longer acting in the best interests of the trust and its beneficiaries
as to that matter, but rather are acting for the trustee’s own
protection, and a privilege can and should be recognized.
Id. at 18 (citations omitted).
Second, Income Beneficiaries claim the application of the fiduciary
exception is consistent with Pennsylvania law. Id. at 21. In particular,
Income Beneficiaries assert the attorney-client privilege does not protect
“facts.” Id. at 24. “[T]he privilege only protects communications from
discovery[; f]acts are discoverable, even if discussed in privileged
communications.” Id. at 25 (quoting, inter alia, Custom Designs & Mfg.
Co. v. Sherwin-Williams Co. 39 A.3d 372, 378 (Pa. Super. 2012)). Even if
this Court rejects the fiduciary exception, Income Beneficiaries argue, the
“relevant facts and circumstances” disclosed by Trustees to counsel would be
discoverable. Id.Third, Income Beneficiaries argue the communications between
Trustees and counsel were not “confidential”; therefore, the privilege does not
apply. Id. at 26. Income Beneficiaries assert that the duty of disclosure to
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beneficiaries prevails over the duty of confidentiality between Trustees and
trust counsel. Id. at 27.
The Commonwealth’s Argument9
The Commonwealth supports application of the fiduciary exception on
three bases: (1) the “alternative holding” of the Superior Court in McAleer I
constitutes binding precedent recognizing the exception, see
Commonwealth’s Brief at 16; (2) the fiduciary exception is embedded in
Pennsylvania’s trust law, which requires the disclosure of information about
trust administration to beneficiaries, see id. at 20; and (3) the beneficiaries
are the “real clients” in cases involving the administration of a trust, see id.
at 27.
First, the Commonwealth asserts the “alternative holding” expressed by
this Court in McAleer I is precedential by operation of law. Id. at 18. The
Commonwealth specifically relies on McAleer I’s distinction between “legal
consultations and advice obtained in the trustee’s fiduciary capacity
concerning decisions or actions to be taken in the course of administering the
trust,” which should be disclosed, and opinions “from counsel retained for the
trustee’s personal protection,” which are privileged. Id. at 18-19. Because
____________________________________________
9 “The responsibility for public supervision [of charitable trusts] traditionally
has been delegated to the attorney general to be performed as an exercise of
his parens patriae powers.” Coleman Estate, 317 A.2d 631, 634 (Pa. 1974)
(citation omitted).
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the alternative holding was not disturbed by the Supreme Court, the
Commonwealth asserts it “remains binding precedent.” Id. at 20.
Second, the Commonwealth argues the fiduciary exception is embedded
in Pennsylvania’s trust law, which independently requires disclosure about
trust administration to beneficiaries. Id. The Commonwealth relies on UTA
Sections 7772(a) (requiring a trustee to administer a trust solely in the
interests of beneficiaries), 7773 (requiring a trustee to act impartially in
managing and distributing trust property, where there are two or more
beneficiaries), and 7780.3(a) (imposing a duty to inform a beneficiary of
information regarding the trust’s administration). Id. at 20-21. The
Commonwealth points out that a majority of the McAleer II Court recognized
a court’s authority to determine whether the fiduciary exception exists. Id.
at 23.
Third, the Commonwealth argues that beneficiaries are the “real clients”
in cases involving trust administration. Id. at 27. The Commonwealth also
advances the Riggs rationale that a trusts’ beneficiaries are the “real clients”
of the attorney. Id. at 28. The Commonwealth disputes Trustees’
presumption that they are the “client” in the relationship. Id. at 28-29.
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Standards of Review
Our scope of review in an appeal from an orphans’ court’s decision is
limited. When reviewing the orphans’ court’s decision, we must determine
whether the record is free from legal error and the orphan’ court’s factual
findings are supported by the evidence. In re Estate of Angle, 777 A.2d
114, 122 (Pa. Super. 2001).
The application of the attorney-client privilege and the work product
doctrine are questions of law over which our standard of review is de novo and
our scope of review is plenary. Bousamra v. Excela Health, 210 A.3d 967,
973 (Pa. 2019).
The Fiduciary Duty of a Trustee
By statute, a trustee’s basic fiduciary duty is to administer the trust:
“Upon acceptance of a trusteeship, the trustee shall administer the trust in
good faith, in accordance with its provisions and purposes and the interests of
the beneficiaries and in accordance with applicable law.” 20 Pa.C.S.A. § 7771.
If a trust has two or more beneficiaries, the trustee shall act
impartially in investing, managing and distributing the trust
property, giving due regard to the beneficiaries’ respective
interests in light of the purposes of the trust. The duty to act
impartially does not mean that the trustee must treat the
beneficiaries equally. Rather, the trustee must treat the
beneficiaries equitably in light of the purposes of the trust.
20 Pa.C.S.A. § 7773.
By its nature a trust involves property transferred to one person,
the trustee, to manage for the benefit of another, the beneficiary.
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Because the trustee stands in a fiduciary relationship to the
beneficiary, the trustee is obligated to manage the property in the
interests of the beneficiary, and not himself.
In re Tr. under Will of Ashton, 260 A.3d 81, 90 (Pa. 2021); see also 20
Pa.C.S.A. § 7772(a) (“A trustee shall administer the trust solely in the
interests of the beneficiaries.”). A fiduciary duty “is the highest duty implied
by law.” Yenchi v. Ameriprise Fin., Inc., 161 A.3d 811, 819-20 (Pa. 2017).
A fiduciary duty requires a party to act with the utmost good faith in furthering
and advancing the other person’s interests, including a duty to disclose all
relevant information. Id.Pertinently, our General Assembly has directed: “A trustee shall
promptly respond to a reasonable request by … a beneficiary of an
irrevocable trust for information related to the trust’s administration.”
20 Pa.C.S.A. § 7780.3(a) (emphasis added). The Comment to Section 7780.3
explains:
[Uniform Trust Code] § 813 has been entirely rewritten in order
to provide the trustee with a road map describing when and what
information the trustee must communicate to the trust’s
beneficiaries. It is an effort to balance the settlor’s likely
expectation that the trust relationship will remain substantially
private during the settlor’s lifetime, like a will, and the reality that
a beneficiary cannot protect an interest in the trust without
knowledge of the trust’s provisions and operations….
Id. Comment.
In Rosenblum, our Supreme Court adopted Section 173 of the
Restatement (Second) of Trusts (1959) as “declaratory of the common law of
Pennsylvania.” Rosenblum, 328 A.2d at 164. In that case, in support of
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objections to a trust account, beneficiaries requested all trust documents; the
trustee refused, claiming the request was overbroad. Id. at 163-64. The trial
court granted “limited discovery of documents to those items which appellants
could demonstrate were relevant to their objections.” Id. at 164. On appeal,
our Supreme Court reversed, concluding “[t]he right of access to trust records
is an essential part of a beneficiary’s right to complete information concerning
the administration of the trust.” Id. As adopted by Rosenblum, Section 173
declares:
The trustee is under a duty to the beneficiary to give him upon his
request at reasonable times complete and accurate information as
to the nature and amount of the trust property, and to permit him
or a person duly authorized by him to inspect the subject matter
of the trust and the accounts and vouchers and other documents
relating to the trust.
Restatement (Second) of Trusts, § 173 (1959). This duty
places cestuis que trustent on a different footing from other
litigants who seek discovery of documents under our Rules of Civil
Procedure. A beneficiary’s right of inspection has an independent
source in his property interest in the trust estate, and the right
may be exercised irrespective of the pendency of an action or
proceeding in court.
Rosenblum, 328 A.2d at 165 (quotation marks omitted).
The Attorney-Client Privilege
In Pennsylvania, the attorney-client privilege is codified in our Judicial
Code:
In a civil matter, counsel shall not be competent or permitted to
testify to confidential communications made to him by his
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client, nor shall the client be compelled to disclose the same,
unless in either case this privilege is waived upon the trial by the
client.
42 Pa.C.S.A. § 5928 (emphasis added). The codification of the privilege is
essentially “a restatement of the common law privilege and its attendant case
law interpretations.” Bousamra, 210 A.3d at 982 (citation omitted).
We recognize “that evidentiary privileges are not favored.” Id. at 975.
“Exceptions to the demand for every man’s evidence are not lightly created
nor expansively construed, for they are in derogation of the search for truth.”
Commonwealth v. Stewart, 690 A.2d 195, 197 (Pa. 1997). Courts should
permit assertion of an evidentiary privilege “only to the very limited extent
that … excluding relevant evidence has a public good transcending the
normally predominant principle of utilizing all rational means for ascertaining
the truth.” Bousamra, 210 A.3d at 975.
Because it “has the effect of withholding relevant information from the
factfinder,” courts construe the attorney-client privilege narrowly to “appl[y]
only where necessary to achieve its purpose.” McAleer II, 248 A.3d at 425-
26 (quoting Fisher v. United States, 425 U.S. 391, 403 (1976)). As the
plurality in McAleer II explained, “Where the interests protected by the
privilege conflict with weightier obligations, the former must yield to the
latter.” Id. at 426.
Courts have recognized exceptions to the codified attorney-client
privilege when (1) the communication takes place in the presence of a third
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person or the adverse party; (2) the attorney represents both parties to the
transaction -- in disputes between the parties inter se; and (3) the attorney
is rebutting the client’s attack on his integrity or professional competence.
Loutzenhiser v. Doddo, 260 A.2d 745, 748 (Pa. 1970).
The Work Product Doctrine
The United States Supreme Court has referred to the work product
doctrine as a “qualified privilege for certain materials prepared by an attorney
‘acting for his client in anticipation of litigation.’” United States v. Nobles,
422 U.S. 225, 237-38 (1975) (citation omitted). The privilege emanating from
the work product doctrine is codified in Pennsylvania Rule of Civil Procedure
4003.3:
Subject to the provisions of Rules 4003.4 and 4003.5, a party may
obtain discovery of any matter discoverable under Rule 4003.1
even though prepared in anticipation of litigation or trial by or for
another party or by or for that other party’s representative,
including his or her attorney, consultant, surety, indemnitor,
insurer or agent. The discovery shall not include disclosure
of the mental impressions of a party’s attorney or his or her
conclusions, opinions, memoranda, notes or summaries,
legal research or legal theories. With respect to the
representative of a party other than the party’s attorney,
discovery shall not include disclosure of his or her mental
impressions, conclusions or opinions respecting the value or merit
of a claim or defense or respecting strategy or tactics.
Pa.R.C.P. 4003.3 (emphasis added). The explanatory comment clarifies the
scope of the Rule:
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The essential purpose of the Rule is to keep the files of counsel
free from examination by the opponent …. Documents,
otherwise subject to discovery, cannot be immunized by
depositing them in the lawyer’s file. The Rule is carefully drawn
and means exactly what it says. It immunizes the lawyer’s mental
impressions, conclusions, opinions, memoranda, notes,
summaries, legal research and legal theories, nothing more.
Id. (Explanatory Comment-1978) (emphasis added).
The Fiduciary Exception to the Attorney-Client Privilege
And the Work Product Doctrine
In this case, we are asked to balance the attorney-client privilege,
codified at 42 Pa.C.S.A. § 5928, and the work product doctrine, codified at
Pa.R.C.P. 4003.3, with a trustee’s duty to inform beneficiaries regarding the
trust’s administration, codified at 20 Pa.C.S.A. § 7780.3(a).
In Follansbee, the Allegheny County Court of Common Pleas addressed
whether there existed a fiduciary exception to the attorney-client privilege,
where the trust beneficiaries (plaintiffs) filed a declaratory judgment action
against counsel for a trust. Follansbee, 56 Pa. D. & C.4th at 485. Plaintiffs
alleged counsel had interpreted the trust in prior orphans’ court proceedings.
Id. Counsel, after undertaking representation of another trust beneficiary,
prepared a memorandum interpreting the trust contrary to its prior
interpretations and favorable to their client beneficiary. Id. Plaintiffs filed a
declaratory judgment action based on counsel’s new interpretation of the
trust. Id. Without disclosing their conflict of interest, counsel induced the
trustee, PNC, to claim stakeholder status in the litigation. Id.
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During discovery, plaintiffs subpoenaed communications from PNC’s
legal department, and a law firm representing PNC, to PNC’s employees
administering the trust. Id. 486. At the time the documents were created,
no litigation was indicated or pending. Id. PNC claimed, “the attorney-client
privilege applies to communications between a fiduciary and its counsel.” Id.
The plaintiffs countered that PNC, as fiduciary and trustee, could not claim
attorney-client privilege as to matters affecting the trust. Id.
Ultimately, the trial court upheld the beneficiaries’ right to documents
related to the trust’s administration. Id. at 491. The trial court relied on
Rosenblum’s adoption of Restatement Section 173 as declaratory of the
common law of Pennsylvania. Id. at 490-91. The trial court explained:
“A beneficiary’s right of inspection has an independent source in
his property interest in the trust estate, and the right may be
exercised irrespective of the pendency of an action or proceeding
in court.” []
In summary, the trustee cannot withhold from any beneficiary
documents regarding the management of the trust, including
opinions of counsel procured by the trustee to guide the trustee
in the administration of the trust, because trust law imposes a
duty to make these documents available to the beneficiaries.
Follansbee, 56 Pa. D. & C.4th at 491 (quoting Rosenblum, 328 A.2d at 165).
In McAleer I, this Court was asked to adopt a fiduciary exception to the
attorney-client privilege and work product doctrine. McAleer I, 248 A.3d at
591. William McAleer (McAleer) and his step-siblings were beneficiaries of a
revocable living trust established by William K. McAleer (William), their father.
Id. at 590. After William died, issues pertaining to the trust’s administration
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arose. Id. As a result, the trustee, a co-beneficiary, retained the services of
two law firms. We explained:
On March 17, 2014, [trustee] filed a first and partial account
relating to the administration of the Trust. [Beneficiaries]
filed objections to the first and partial account filed by [trustee].
[Beneficiaries] also sought disclosure of information pertaining to
two bank accounts, and [trustee] retained K&L Gates to respond.
On March 30, 2016, the trial court dismissed [beneficiaries’]
objections with prejudice.
On August 31, 2016, [trustee] filed a Second and Final
Accounting. On November 14, 2016, [beneficiaries] filed
objections claiming that [trustee] paid expenses in the
administration of the Trust that were unreasonable, including
excessive trustee and attorney fees. On March 2, 2017,
[beneficiaries] served a request for production of documents
including billing statements for all trustee fees and attorney fees.
On April 12, 2017, [trustee] produced substantially redacted
attorney invoices from both law firms.
Id. at 590. Beneficiaries thereafter filed a motion to compel production of
unredacted copies of the invoices. Id. at 591. The trial court granted the
motion. Id. The trustee produced the unredacted trustee invoices but
appealed the production of counsel’s invoices. Id.
On appeal, the McAleer I Court issued two rulings. First, we deemed
the trial court’s order interlocutory, and not appealable as a collateral order.
Id. at 597. In an alternative holding, this Court concluded, “under the law as
presented in the Restatement (Third) of Trusts and our Supreme Court’s ruling
in [] Rosenblum, [the trustee] has a duty to share with Appellees, as
beneficiaries, complete information concerning the administration of the
Trust.” Id.
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In support of our alternative holding, we relied on Restatement (Third)
of Trusts Section 82, comment f, which provides: “A trustee is privileged to
refrain from disclosing to beneficiaries or co-trustees opinions obtained from,
and other communications with, counsel retained for the trustee’s personal
protection in the course, or in anticipation, of litigation (e.g., for surcharge or
removal).” Id. (quoting Restatement (Third) of Trusts § 83, cmt. f (2012)).
[Trustee] neither argued nor presented evidence to establish that
the redacted information pertained to communications from
counsel retained for [the trustees’] personal protection in the
course of litigation. Accordingly, there is no evidence that the
information qualifies as privileged under comment f to the
Restatement (Third) of Trusts. Hence, we are left to conclude that
the information contained in the attorney invoices qualifies as
communications subject to the general principle entitling a
beneficiary to information reasonably necessary to the prevention
or redress of a breach of trust or otherwise to the enforcement of
the beneficiary’s rights under the trust. For this reason as well,
[trustee] cannot invoke the protections of the attorney-client
privilege.
Id.
On allowance of appeal, a majority of the Pennsylvania Supreme Court
reversed our conclusion that the underlying order was interlocutory and not
appealable. McAleer II, 248 A.3d at 425. However, only a plurality of the
Supreme Court agreed on whether a fiduciary exception to the attorney-client
privilege and work product doctrine existed in Pennsylvania. See id.
Consequently, the Supreme Court affirmed this Court’s alternative holding by
operation of law. See id. at 419.
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The McAleer II plurality, after extensively reviewing the history of the
attorney-client privilege and fiduciary exception, would “reaffirm” the core
holding in Rosenblum:
[W]e would hold 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. That
examination necessarily includes reviewing the contents of
invoices in order to determine precisely what was procured
with trust funds where the reasonableness of costs is at issue.
The attorney-client privilege and work product doctrine cannot
shield those disclosures in this Commonwealth. To hold
otherwise would enable fiduciaries to weaponize trust
assets reserved for beneficiaries against those very
beneficiaries in litigation over the propriety of trust
management. Since those same beneficiaries simultaneously
would be obliged to foot their own legal bills, they would, in
essence, be paying for both parties’ lawyers. That result is
untenable, particularly in a case such as this, where Trustee also
is a co-beneficiary of the trust established by his late father for
the benefit of Trustee and his step-sibling.
Id. at 436 (emphasis added).
A Fiduciary Exception is Consistent with Pennsylvania Law
Consistent with Follansbee, McAleer I and McAleer II, we conclude
a fiduciary exception to the attorney-client privilege is consistent with
Pennsylvania law. Although the attorney-client privilege is codified, so too is
a trustee’s duty to inform beneficiaries regarding a trust’s administration. See
42 Pa.C.S.A. § 5928; 20 Pa.C.S.A. § 7780.3(a). As codified by our General
Assembly, interpreted by a majority of our Supreme Court in Rosenblum,
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and applied in McAleer I’s alternative holding and the common pleas court in
Follansbee:
A trustee cannot withhold from any beneficiary documents
regarding the management of the trust, including opinions of
counsel procured by the trustee to guide the trustee in the
administration of the trust, because trust law imposes a duty to
make these documents available to the beneficiaries.
Follansbee, 56 Pa. D. & C.4th at 491 (quoting Rosenblum, 328 A.2d at 165).
Here, unlike McAleer II, we find no support for conditioning the
fiduciary exception on whether the trust paid counsel fees. The Pennsylvania
Rules of Professional Conduct recognize that someone other than a client may
pay an attorney’s fee. See Pa.R.P.C. 5.4(c) (“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 services.” (emphasis added)). While a trust’s payment
of counsel fees may provide evidentiary support for the fiduciary exception, it
is not dispositive. See 20 Pa.C.S.A. § 7769(a)(1) (entitling a trustee to
reimbursement of expenses “properly incurred in the administration of the
trust.”). The trustee’s duty is to disclose “any beneficiary documents
regarding the management of the trust, including opinions of counsel
procured by the trustee to guide the trustee in the administration of the
trust[.]” Follansbee, 56 Pa. D. & C.4th at 491 (emphasis added).
Consistent with the legal authority discussed above, a trustee is
privileged from disclosing to beneficiaries or co-trustees’ opinions obtained
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from, and other communications with, counsel retained for the trustees’
personal protection in the course, or in anticipation, of litigation. See
McAleer I, 194 A.3d at 597. The balancing of interests affords the greatest
protection to beneficiaries, trustees and counsel. In so holding, we
acknowledge the requested documents in this case pertain to the accounting
period from March 22, 1994, through December 31, 2019. See Trustees’
Account, 6/1/20. Our review discloses no litigation pending against trustees
during the accounting period.
Finally, our holding is not restricted only to prospective application. The
Pennsylvania Supreme Court explained,
the United States Constitution and the Pennsylvania Constitution
neither mandate nor preclude a retroactive application of a new
decision. Normally, we apply a new decision to cases pending on
appeal at the time of the decision. However, a sweeping rule of
retroactive application is not justified. Retroactive application is a
matter of judicial discretion and must be exercised on a case-by-
case basis.
Christy v. Cranberry Volunteer Ambulance Corps, Inc., 856 A.2d 43, 51
(Pa. 2004) (citations omitted) (quoting Cleveland v. Johns-Manville Corp.,
690 A.2d 1146, 1151-52 (Pa. 1997)). In this case, our interpretation of the
fiduciary exception is consistent with Pennsylvania law, and thus a prospective
only application is not warranted. Christy, supra.
In conclusion, we affirm the orphans’ court’s order compelling discovery
based on a fiduciary exception to the attorney-client privilege. See Orphans’
Court Order, 6/3/21, at 2 (unnumbered).
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Order affirmed.
Judgment Entered.
Joseph D. Seletyn, Esq.
Prothonotary
Date: 5/23/2022
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