The Fiduciary's Conflict: One Lawyer or Two?

• Jurisdiction: California,United States
• Citation: Vol. 12 No. 2
• Publication year: 2006
• Author: By Jeffrey A. Jaech and Kathleen A. Meehan
• topic: Business of Law,Trust Law,Civil Procedure

THE FIDUCIARY'S CONFLICT: ONE LAWYER OR TWO?

By Jeffrey A. Jaech and Kathleen A. Meehan^*

I. INTRODUCTION

When a personal representative's personal interest conflicts with his fiduciary duties, the question arises whether that fiduciary needs two separate attorneys. Consider these not-so-hypothetical scenarios:

• You represent the decedent's surviving spouse. She is now the sole trustee of a living trust that she and her late husband established with their community property. As is typical, the trust instrument provides for the creation of two subtrusts following the husband's death: a revocable survivor's trust to hold the surviving spouse's one-half of the community property and an irrevocable trust (the bypass trust) to hold her husband's one-half of the community property. The community property included their residence. Rather than divide ownership of the residence between two trusts, your client tells you she wants the entire residence to become part of her survivor's trust, and property of equal value would be allocated to the bypass trust. The residence is appraised at $1,000,000. Your savvy client reminds you that an undivided one-half interest in the residence would be worth less than $500,000, because of its lack of marketability. Thus, she proposes effectively to buy her husband's one-half of the residence for $400,000. Your client's personal interest in buying her husband's share for that price may conflict with her duty to the other trust beneficiaries to obtain a higher price.¹ Should you advise her that she should get another lawyer to advise her in her individual capacity?
• Your client is the executor and also the residuary beneficiary. A question arises whether a devise to another beneficiary should bear its own estate tax, or whether the tax should be paid from the residue. May you represent your client personally against the other beneficiary as the client seeks an order that taxes fall on each devisee? What if your client as executor seeks to collect a debt from a beneficiary, the collection of which would enhance the residue passing to your client? Could you represent your client in an action, unrelated to the estate, to collect a debt from a beneficiary for the client's personal account?
• You represent the administrator of an estate, who tells you that he borrowed $115,000 from the estate without court authorization for personal reasons. The administrator asks for your help in keeping him "out of trouble." You immediately attempt to find for the administrator a personal loan, so he can repay the estate, but are unsuccessful. What should you do now? Would withdrawing as the administrator's counsel solve your problem? Should you advise the administrator to hire another lawyer to keep him "out of trouble"?

As the foregoing examples illustrate, a fiduciary's personal interests may conflict with his fiduciary's duties to beneficiaries. Conventional wisdom holds that a client's personal conflict with his fiduciary duties may be such that two lawyers are required to represent his separate interests. In 2004, the California Supreme Court suggested in dicta, without citing any relevant authority, that the conventional wisdom may in fact be California law.² However, our analysis leads us to conclude that two lawyers ordinarily are not required, and in many cases, would be counter-productive. When an attorney identifies that his fiduciary-client has a personal interest that conflicts with the fiduciary's duties to others, the authors recommend that the attorney ask of himself the following questions to determine whether two lawyers are needed:³

• Are the ethical rules being followed? Would my duty of loyalty be compromised by counseling the fiduciary-client in this conflict situation?
• Would confidential communications be compromised?
• What exposure might I have to a claim for professional negligence or for aiding in a breach of trust?
• How will I get paid for my services? How much more will it cost to have two lawyers?

These considerations are discussed below.

II. ETHICAL CONSIDERATIONS

Much of the ethical (and legal) confusion relates to the threshold question of whether a trust or estate is an entity, like a corporation, or a relationship, like a marriage or agency. We frequently hear lawyers describe themselves as the "attorney for the estate." However, in California, it is well settled that an attorney represents the fiduciary, not the "trust" or the "estate," or the beneficiaries.⁴ Furthermore, the third edition of the Restatement of Trusts, published in 2003, retains the definition of a trust as "a fiduciary relationship with respect to the property."⁵ The issue is whether we have one client (the fiduciary), two clients (the fiduciary and the "estate"), or multiple clients (the fiduciary and the various beneficiaries).

It is helpful to consider California Rule of Professional Conduct 3-310(C) regulating a lawyer with more than one client in the same matter. It provides in pertinent part:

1. A member shall not, without the informed written consent of each client:

(a) Accept representation of more than one client in a matter in which the interests of the clients potentially conflict; or
(b) Accept or continue representation of more than one client in a matter in which the interests of the clients actually conflict; or
(c) Represent a client in a matter and at the same time in a separate matter accept as a client a

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person or entity whose interest in the first matter is adverse to the client in the first matter.

In the authors' view, California Rule 3-310(C) is not implicated when a lawyer represents a fiduciary, because the lawyer has only one client in the matter (the fiduciary), no matter how many different roles the fiduciary is playing. Rule 3-310 would thus only apply if the law considered the lawyer to be representing the "trust" or "estate" under the "entity" model (which is not the state of the law). The California State Bar's Estate Planning, Trust & Probate Section's Ethics Committee opined in 1994, without citing any authority, that an attorney who represents a fiduciary/beneficiary, i.e., a "single client who functions in potentially conflicting roles," should apply Rule of Professional Conduct 3-310 as if the attorney had two clients.⁶ Fortunately, this expansive reading of Rule 3-310 was quickly rejected by the California State Bar's Estate Planning, Trust and Probate Law Section. In 1997, the Section published clear guidelines stating that a lawyer may represent a beneficiary/fiduciary in both capacities and he or she has only a single client. The Section's guidelines state that Rule 3-310, which deals with representing multiple clients, does not apply in such circumstances. However, the Section counseled that the "lawyer should advise the fiduciary client of his or her duty as a fiduciary under Probate Code §16003 to act impartially and not to act in a manner that gives preference to his or her own interests as a beneficiary over the interests of other beneficiaries."⁷

Moreover, even if Rule 3-310 were applicable, bear in mind that it does not absolutely prohibit representation when there is a potential conflict between two clients. Rather, such representation may occur if there is "informed written consent of each client." If the two clients are the fiduciary and the estate (acting through the fiduciary), then consent seems easy to obtain.⁸

In 1999, the American College of Trust and Estate Counsel (ACTEC) theorized that a fiduciary's attorney may owe "derivative duties" to beneficiaries in some circumstances, which may require conflict-of-interest analysis.⁹ However, ACTEC's approach is under the much broader ABAModel Rules that do not apply in California.¹⁰ American Bar Association Model Rules of Professional Conduct, Rule 1.7, defines a "concurrent conflict of interest" to include circumstances where "there is a significant risk that the representation of one or more clients will be materially limited by the lawyer's responsibilities to another client, a former client or a third person . . . ." [Emphasis added.] Under Model Rule 1.7, the lawyer owes duties to beneficiaries, because the fiduciary-client owes duties to the beneficiaries. If the lawyer's duties to the beneficiaries would materially limit the lawyer's representation of the fiduciary, then the lawyer may need to limit the scope of his or her representation of the fiduciary.

The ABA Rule would require the client to retain two lawyers. In the authors' view, this is unnecessarily burdensome...