The case involves an appeal by individual trustees of a trust established by Sarah Mellon Scaife in 1963, concerning an order from the Orphans’ Court of Allegheny County compelling discovery related to a fiduciary exception to the attorney-client privilege. The appeal, linked to the estate of Jennie K. Scaife, questions whether this fiduciary exception contradicts Pennsylvania law, particularly after a recent Supreme Court decision. The trustees, including Matthew Groll and others, are contesting the ruling that allows the personal representative of Jennie’s estate, David Zywiec, to access certain documentation regarding the trustees' discretion in managing the trust.
The trust primarily benefits Sarah's grandchildren and their families, with an initial charitable distribution requirement until March 31, 1984. Post-charitable period, distributions of net income began, notably to Jennie and her brother David. After Jennie's death in 2018, Zywiec requested the transfer of her share to her estate and sought documentation concerning the trustees' decision-making, which led to the breach of fiduciary duty allegations. The court ultimately affirmed the order compelling discovery, asserting that the fiduciary exception is compatible with Pennsylvania law.
The federal court abstained from jurisdiction, and on June 1, 2020, Trustees submitted their First and Final Account of the Trust covering March 22, 1994, to December 31, 2019. They also filed a Petition for Adjudication regarding whether their failure to create a 'Separate Trust' for beneficiary Jennie K. Scaife before her death constituted a breach of fiduciary duties under the Trust Agreement and Pennsylvania law. The Estate alleges that this failure harmed both the Estate and the foundation, claiming a breach of fiduciary duty by the Trustees. Trustees deny any breach. On September 21, 2020, David and David G. Scaife filed objections against the Trustees' claim that the orphans’ court could compel a division of the Trust. The Estate further objected, stating that the Trustees acted in bad faith by not considering separate trusts for income beneficiaries, prioritizing David’s interests over Jennie’s. PNC and Appellants responded, asserting they did not breach fiduciary duties and noted that neither Jennie nor David requested separate trusts. On October 26, 2020, the Estate filed a motion to compel the production of various documents related to the Trust, leading to an order from the orphans’ court on November 5, 2020, directing the Trustees to produce legal service documents related to Strassburger McKenna and the appointment of its shareholders as trustees. The orphans’ court set deadlines for document production and discovery motions. Following a second motion to compel on November 19, 2020, the court granted the request. On January 8, 2021, PNC and Appellants objected to a proposed subpoena for documents from Strassburger McKenna, citing attorney-client privilege. On February 23, 2021, the Estate filed a third motion to compel for unredacted documents, referencing prior court decisions and noting that PNC had withheld 767 documents based on privilege claims.
Concerns were raised by the Estate regarding the privilege log during a recent meet-and-confer, particularly about documents lacking attorney identification as authors or recipients and those where attorneys were merely copied. The Estate argued that PNC was obligated to produce all documents withheld under privilege dated before Jennie’s death on November 29, 2018, citing Follansbee and McAleer. The orphans’ court deferred its ruling on a third motion to compel, pending the Supreme Court's decision in McAleer II. Following the Supreme Court's plurality decision on May 25, 2021, and after the parties submitted briefs, the orphans’ court granted the Estate's motion, stating that a fiduciary exception is permissible under Pennsylvania law. The court ordered the production of documents withheld on the basis of attorney-client privilege or work-product doctrine involving the trustee and beneficiaries within 20 days and certified its order for immediate appeal under 42 Pa.C.S.A. 702(b).
Appellants appealed the order, complying with Pa.R.A.P. 1925. They raised the issue of whether a fiduciary exception exists to Pennsylvania's statutory attorney-client privilege and work-product doctrine in cases where a trustee's clients are trust beneficiaries seeking privileged communications. Appellants argue against the fiduciary exception, asserting that no statute recognizes it, that Pennsylvania law does not support it, and that most jurisdictions reject it. They contend that the orphans’ court’s order undermines the codified privileges essential for trustees performing their duties. Citing 42 Pa.C.S.A. 5928 and Pa.R.C.P. 4003.3, Appellants maintain that these laws protect communications and documents from disclosure without exception. They reference Pittsburgh History and Landmarks Found. v. Ziegler, asserting that the privilege extends beyond the literal language of Section 5928, emphasizing that open communication is critical for effective legal advice. They argue that the work product doctrine similarly enhances client representation by allowing attorneys to document legal theories without fear of disclosure, ultimately benefiting justice.
Appellants argue for the consistent application of the attorney-client privilege for trustees, emphasizing that Pennsylvania law permits trustees to use trust assets for legal expenses, which encourages them to seek legal advice. They highlight scenarios where co-trustees may disagree or require guidance on fiduciary duties, asserting that concerns about the 'fiduciary exception' to privilege could discourage such consultations, ultimately harming beneficiaries. Appellants contend that Pennsylvania law does not recognize the fiduciary exception, criticizing the Follansbee decision for allowing beneficiaries to access privileged communications without a legal basis. They note that the Supreme Court's adoption of the Restatement (Second) of Trusts Section 173 does not support Follansbee's reliance on a specific comment that the Court did not adopt. Furthermore, they argue that Follansbee reflects outdated common law and that Pennsylvania would be a minority state if it adopted the fiduciary exception, citing other jurisdictions that have rejected it. Appellants also assert that trustees should not have to use personal funds for legal counsel and should be reimbursed from trust property for incurred expenses, including legal fees. They express concern that the decision in McAleer II would unfairly penalize trustees for seeking reimbursement. In contrast, the Estate presents four arguments for affirmance: the binding precedent from McAleer I, the established nature of the fiduciary exception in Pennsylvania, claims of waiver by the trustees regarding their exception, and the binding nature of the Court's prior holding. The Estate references favorable citations of Follansbee in other decisions and argues that recognizing a fiduciary exception aligns with the Restatement (Third) of the Law Governing Lawyers.
The Estate contends that holdings from other jurisdictions do not negate the fiduciary exception under Pennsylvania law. It emphasizes that the Delaware Chancery Court’s ruling in Riggs National Bank of Washington, D.C. v. Zimmer, recognized as a leading case by the U.S. Supreme Court, remains authoritative in Delaware and has not been overruled by subsequent statutes, as affirmed in J.P. Morgan Trust Co. v. Fisher. The Estate counters the Appellant's policy arguments, asserting that the fiduciary exception is essential to uphold trustees' duties to beneficiaries, particularly in situations where trustees' decisions may favor one beneficiary over another. The Estate argues that beneficiaries require full disclosure in such cases to ensure trustees meet their obligations of impartiality and loyalty. It highlights that the trustees' use of attorney-client privilege to shield critical decision-making processes, especially those affecting beneficiaries' interests, is inappropriate. The Estate cites the advice of trust counsel regarding the potential split of the trust, underscoring the importance of transparency. It claims that trust counsel attended all formal trustees’ meetings during the 26-year period and that the Appellant excessively redacted several meeting minutes, which should be discoverable records per the Supreme Court's ruling in Rosenblum. The Estate urges the Court to favor fiduciary privilege, as articulated in McAleer II, emphasizing the need for transparency in fiduciary relationships. It argues that the Trustees waived their claim to exclude communications with litigation counsel from the fiduciary exception, as they did not properly identify such documents or request prospective application of the exception. Income Beneficiaries support the Estate's position, asserting that the fiduciary exception aligns with Pennsylvania law and that trustees are obligated to disclose all pertinent trust administration information, consistent with Section 173 of the Restatement (Second) of Trusts. They argue that access to trust records is vital, backing the rationale established in Follansbee.
Income Beneficiaries argue that assessing a trustee's conduct requires examining the trust's terms, the trustee's powers, and the surrounding circumstances. They contend that allowing trustees to withhold information would enable self-judgment without beneficiary or court oversight. Income Beneficiaries assert that trust counsel has derivative duties to beneficiaries, necessitating the disclosure of advice relevant to trust administration. This obligation stems from the fiduciary estate being established by the settlor for the beneficiaries' benefit, granting beneficiaries access to communications between trust counsel and the trustee.
They align with the Estate's view that Follansbee appropriately balances the disclosure duty against a trustee’s right to counsel. The rationale for this exception is that if the trustee seeks counsel using trust resources, the resulting advice benefits the beneficiaries. Income Beneficiaries advocate for a narrower exception than that in McAleer II, suggesting attorney-client privilege may apply when the trustee's interests conflict with those of the beneficiaries, especially in the context of threatened claims or litigation. In such cases, the trustee is no longer acting solely in the beneficiaries' interests, justifying the recognition of privilege.
Additionally, Income Beneficiaries maintain that applying the fiduciary exception aligns with Pennsylvania law, emphasizing that the attorney-client privilege protects communications but not facts, which remain discoverable. They also argue that communications between trustees and counsel lack confidentiality, so privilege does not apply. The Commonwealth supports the fiduciary exception on three grounds: the binding precedent from McAleer I, the integration of the fiduciary exception into Pennsylvania trust law, and the principle that beneficiaries are the true clients in trust administration cases. The Commonwealth cites McAleer I's distinction between legal advice for fiduciary actions, which must be disclosed, and personal protection advice, which is privileged, asserting that this distinction remains binding law since the Supreme Court did not overturn it.
The Commonwealth asserts that Pennsylvania trust law inherently includes the fiduciary exception, necessitating disclosure of trust administration details to beneficiaries. Citing UTA Sections 7772(a) and 7773, the Commonwealth emphasizes that trustees must act solely in beneficiaries' interests and impartially manage trust property when multiple beneficiaries exist. Section 7780.3(a) mandates that trustees inform beneficiaries about trust administration. The Commonwealth references the McAleer II ruling, which acknowledged judicial authority to assess the existence of the fiduciary exception, and aligns with the Riggs rationale asserting that beneficiaries are the true clients of the attorney, disputing the trustees' claim to client status.
In reviewing an orphans' court decision, the appellate scope is limited to ensuring the absence of legal error and the evidentiary support of factual findings. Legal questions regarding attorney-client privilege and work product doctrine are reviewed de novo. Statutorily, trustees must administer trusts in good faith, adhering to their terms and the beneficiaries' interests, and must act impartially among beneficiaries, treating them equitably based on the trust's purposes. A fiduciary duty entails the highest standard of good faith, requiring full disclosure of relevant information to beneficiaries.
Trustees must respond promptly to reasonable requests for information from beneficiaries of irrevocable trusts concerning administration. The Uniform Trust Code aims to clarify the information trustees must communicate, balancing the settlor's privacy expectations with beneficiaries' need for knowledge to protect their interests. The Pennsylvania Supreme Court's ruling in Rosenblum upheld Section 173 of the Restatement (Second) of Trusts, establishing that beneficiaries have a right to access trust records, underscoring their entitlement to comprehensive information about trust administration, and allowing them to inspect related documents.
Beneficiaries of a trust, or cestuis que trustent, possess a distinct right to inspect trust documents based on their property interest, independent of any ongoing litigation. In Pennsylvania, the attorney-client privilege is established in the Judicial Code, preventing attorneys from testifying about confidential communications unless the privilege is waived by the client during trial. This privilege aligns with common law but is not broadly construed; courts generally favor the search for truth and will limit the privilege to situations where its application serves a significant public interest. Exceptions to the attorney-client privilege exist in specific circumstances, such as communications made in the presence of third parties, dual representation, or when an attorney defends their professional integrity against client accusations. The work product doctrine, recognized as a qualified privilege, protects materials prepared by attorneys in anticipation of litigation, as codified in Pennsylvania Rule of Civil Procedure 4003.3. While discovery may include other materials prepared for litigation, it excludes an attorney's mental impressions, opinions, and strategies.
The Rule aims to protect a lawyer's files from being examined by opposing parties, explicitly immunizing the lawyer's mental impressions, conclusions, opinions, notes, and legal theories, but not other documents subject to discovery. A case arose in Follansbee where the court evaluated the intersection of the attorney-client privilege and the work product doctrine against a trustee's obligation to inform beneficiaries about trust administration. In this instance, trust beneficiaries sued the attorney for allegedly misinterpreting the trust in favor of another beneficiary without revealing a conflict of interest. The plaintiffs subpoenaed documents from PNC’s legal department regarding the trust, which PNC claimed were protected by attorney-client privilege. However, the beneficiaries contended that PNC, as the trustee, could not invoke this privilege concerning trust matters. The trial court ultimately affirmed the beneficiaries' right to access trust administration documents, noting that a beneficiary’s inspection rights stem from their property interest in the trust, independent of ongoing litigation. Trust law mandates that trustees provide beneficiaries with documentation related to trust management, including legal opinions obtained for guidance. The McAleer I case involved similar issues regarding the fiduciary exception to privilege, arising after disputes over a revocable living trust following the death of its creator.
On March 17, 2014, the trustee submitted a first and partial account for the Trust's administration, which prompted the beneficiaries to file objections and request information about two bank accounts. The trustee engaged K&L Gates for assistance. The trial court dismissed the beneficiaries' objections with prejudice on March 30, 2016. Subsequently, on August 31, 2016, the trustee filed a Second and Final Accounting, leading to further objections from the beneficiaries on November 14, 2016, regarding unreasonable expenses, including excessive trustee and attorney fees.
On March 2, 2017, the beneficiaries requested production of documents, specifically billing statements for fees. The trustee provided heavily redacted attorney invoices on April 12, 2017, prompting the beneficiaries to file a motion to compel unredacted documents, which the trial court granted. The trustee complied with the production of unredacted trustee invoices but appealed the order regarding counsel's invoices.
On appeal, the court ruled that the trial court's order was interlocutory and thus not appealable. In an alternative holding, the court stated that the trustee had a duty to provide beneficiaries with complete information about the Trust’s administration, supported by the Restatement (Third) of Trusts. It noted that the trustee failed to demonstrate that the redacted information was privileged. Consequently, the court found that the attorney invoices were communications subject to beneficiaries’ rights to information necessary for addressing potential breaches of trust.
The Pennsylvania Supreme Court later reversed the appellate court's ruling on the appealability of the order but only reached a plurality decision on the existence of a fiduciary exception to attorney-client privilege in Pennsylvania, ultimately affirming the appellate court's alternative holding by operation of law.
The McAleer II plurality affirms the core holding of Rosenblum, establishing that beneficiaries of a trust have the right to access communications between a trustee and legal counsel when the trustee uses trust funds for legal services. This includes the right to review billing statements to assess the reasonableness of costs. The attorney-client privilege and work product doctrine do not protect these disclosures in Pennsylvania, as denying access would allow trustees to misuse trust assets against beneficiaries. The fiduciary exception aligns with Pennsylvania law, which mandates trustees to inform beneficiaries about trust administration. Although the attorney-client privilege is codified, the trustee cannot withhold documents related to trust management, including legal opinions obtained for the trust's administration. The payment of counsel fees by the trust may support the fiduciary exception but is not the sole factor. A trustee may shield communications made for personal legal protection in litigation from beneficiaries. The decision is applicable to the accounting period under review and is not limited to prospective application; however, retroactivity is determined on a case-by-case basis and not justified in this instance. The orphans’ court's order compelling discovery based on the fiduciary exception is affirmed.
