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Posted: July 8, 2016

Communications Regarding Ethical Obligations Not Subject to Disclosure Under Fiduciary Exception

On June 30, 2016, the First Department issued a decision in Stock v. Schnader Harrison Segal & Lewis LLP, 2016 NY Slip Op. 05247, holding that a law firm’s communications regarding its ethical obligations were not subject to disclosure in a litigation with a former client.

In Stock, lawyers for the defendant law firm “sought the advice of their law firm’s in-house general counsel on their ethical obligations in representing a firm client.” In a subsequent malpractice action, the plaintiff sought disclosure of those communications “under the fiduciary exception to the attorney-client privilege.” The First Department held that the communications did not have to be produced, explaining:

In New York, the fiduciary exception was recognized and applied in Hoopes (142 AD2d 906 [3d Dept 1988], affd 74 NY2d 716 [1989], supra), in which a trustee was compelled to disclose the content of his communications with the trust’s attorneys concerning certain transactions and proposals involving the trust and the corporation of which it was majority shareholder. Although the Hoopes decisions (from the Appellate Division and the Court of Appeals) do not use the term “real client,” each of them cites Riggs, and the Third Department, in holding the fiduciary exception applicable, observed, among other things, that the trustee had not shown any factors which would militate in favor of applying the privilege to the information sought. For example, defendant [the trustee] might have shown that he solicited advice from counsel solely in an individual capacity and at his own expense, as a defensive measure regarding potential litigation over his disputes with the trust beneficiaries. Because no such showing had been made, and the record in fact suggest[ed] that counsel acted on behalf of defendant both in his role as trustee and as the chief executive officer of the corporation, the claim of attorney-client privilege was rejected. In substance, the assertion of the privilege was overruled in Hoopes based on a finding that the trust’s beneficiaries, not the trustee individually, were the “real clients” of the attorney who had advised the trustee.

Because the applicability of the fiduciary exception depends on whether the “real client” of the attorney rendering counsel was the fiduciary in his or her individual capacity or, on the other hand, the beneficiaries to whom the fiduciary duty was owed, the fiduciary exception does not apply to the attorney-client communications of a fiduciary who seeks legal advice to protect his or her own individual interests, rather than to guide the fiduciary in the performance of his or her duties to the beneficiary. . . .

The parties advise us that no prior reported decision of any New York state court has considered the application of the fiduciary exception in a case where the fiduciaries invoking the attorney-client privilege are lawyers who, during their representation of a client, sought legal advice (whether from their firm’s in-house counsel or outside counsel) concerning issues of professional ethics or potential malpractice liabilities arising from the firm’s representation of that client. In recent years, however, the courts of a number of other states — including the highest courts of Georgia and Massachusetts — have held that the fiduciary exception to the attorney-client privilege, assuming that the jurisdiction recognizes it, does not apply to communications between lawyers and their firm’s in-house counsel addressing such concerns arising from the ongoing representation of a firm client. These courts have concluded that, when lawyers seek the advice of their firm’s in-house counsel concerning possible conflicts, ethical obligations and potential liabilities arising from the representation of a current firm client, the in-house counsel’s “real clients” are the lawyers and the firm itself — not the firm client from whose representation the issues arise — and, therefore, evidence of communications seeking or rendering such advice may be withheld from the firm client as privileged.

. . .

The relevant facts of this case — which are not in material dispute — establish that the fiduciary exception does not apply to the January 2011 emails because SHS&L and its attorneys were the “real clients” for purposes of these attorneys’ consultation with Kipnes, the firm’s in-house general counsel, whose time spent on the consultation was not billed to plaintiff and who never worked on any matter for plaintiff. The three SHS&L attorneys . . . had their own reasons, apart from any duty owed to plaintiff, for seeking the legal guidance.

(Internal quotations and citations omitted).

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