Conflicts of Interest in T&E Litigation

“Conflicts of Interest in T&E Litigation,” that’s the subject of today’s ACTEC Trust and Estate Talk.

Transcript/Show Notes

This is Toni Ann Kruse, ACTEC Fellow from New York. Today, we’ll discuss the sometimes surprising conflicts of interest that can arise in representations of estate planning clients, fiduciaries, and beneficiaries. ACTEC Fellow Daniel Ebner of Chicago will share his thoughts on this complex topic. Welcome, Dan.

Understanding Conflicts of Interest

Daniel Ebner: Thanks, Toni Ann. As you stated, I’m going to be discussing conflicts of interest in trust and estate matters and, in particular, in litigation. While conflicts of interest are a subject that maybe we’d sometimes rather not think about, it’s something that attorneys really need to be well versed in to avoid both potential ethics issues and potential disqualification in a case.

Before we dive in, I want to make clear what we’re going to be discussing. Obviously, financial advisors, accountants, and other professionals involved in trust and estate matters can have conflicts of interest. But, for today, I’m just talking about conflicts of interest involving lawyers and their clients.

Current Client Conflicts

So, what is a conflict of interest? The starting point for that, like the starting point for any attorney ethics issue, is the Rules of Professional Conduct. The Model Rules, Rule 1.7, relates to conflicts of interest with current clients and prohibits a lawyer from representing a client if the representation will be directly adverse to another client. In addition, Rule 1.7 prohibits a lawyer from representing a client if there is a significant risk the representation will be materially limited by the lawyer’s responsibilities to another client, a former client, or a third person, or by the personal interest of the lawyer.

Finally, Rule 1.7 permits a lawyer to represent two current clients with a conflict if the lawyer responsibly believes that the lawyer will be able to provide competent and diligent representation to each affected client and the client gives informed consent in writing. But there are two types of conflicts that cannot be waived: representations prohibited by law and representations involving claims by clients against each other in litigation or other proceedings before a tribunal.

Conflicts of Interest Related to Former Clients

The second category of conflict besides current conflict is conflicts of interest related to former clients, which prohibit a lawyer from representing a client if the representation is substantially related to a matter in which the lawyer represented another client in the past, and the representation will be materially adverse to the interests of the former client. Once again, the rule allows a lawyer to take the representation if the former client gives informed consent, confirmed in writing. Finally, the rule broadly prohibits a lawyer from using information obtained from a former representation to the disadvantage of a former client.

So, these rules can really be boiled down to a few simple statements: (1) a lawyer cannot act adverse to a current client; (2) a lawyer should be extremely careful about representing multiple clients who appear to be similarly situated because their interests may diverge; (3) a lawyer cannot act adverse to a former client in a substantially related matter; and (4) a lawyer cannot use confidential information obtained from a former client to the client’s detriment.  But all of these prohibitions can be overcome – or almost all of these prohibitions can be overcome – with informed consent. However, a lawyer should be very cautious in those instances.

These rules sound straightforward but become complicated quickly, particularly in the context of trusts and estates. The reason is that trusts and estates involve representing clients who are acting in a fiduciary capacity, which is different from their individual capacity. Trusts and estates representation also involve trusts and estates, obviously, which aren’t legal entities like a corporation, but are sometimes treated that way for specific purposes.

Personally, I think the better answer is that a lawyer never represents the trust or estate and only the fiduciary responsible for administering the trust and estate. But not everyone – including judges and some reported opinions – agrees with that view, and so the possibility of representing the trust and estate and what that means for conflict purposes needs to be considered.

Identifying the Client

So, the question of whether a conflict of interest exists starts with an even more basic question. Who is the client? Is it an individual? Is it a trustee or executor who is not also represented in their individual capacity? Can the lawyer be considered to be representing the estate or the trust itself?

Once you’ve identified the client, you need to examine whether there is a conflict. And, again, estate planning presents complex conflict issues above and beyond who the client is because the parties’ relationships with each other can be simultaneously aligned and adverse. Individuals can wear more than one hat and parties often try to reduce transaction costs through joint representation. These issues have been exacerbated in recent years as there is increased use of family member trustees to reduce transaction costs, increased hourly rates of attorneys result in more dual representations, multiple marriages result in more complex families, and longer lifespans ending in a drawn-out and gradual decline in mental abilities, also create more complexity around representations and representation of agents and fiduciaries.

Conflicts in Joint Representations

So, how do these issues arise? In the context of current conflicts, there are two big issues. One is joint representations. You may take on a client or joint clients who appear to be similarly situated under an estate or under the terms of a trust and they may have what appear to be the same issues with a trustee. But, as litigation moves on, there may be a settlement offer on the table that one client wants to take and the other one does not. Or, it may turn out that there were distributions made during the life of the grantor to one of your clients and not the other one, and that comes out in the wash of litigation that turns them against each other. Or there are any one of numerous other sorts of diverging positions that they end up taking on a situation in the litigation. So, while a joint representation may be a great idea at the outset of the litigation, it can be a real problem down the line.

Conflicts in Multi-Generational Representation

The second instance in which current conflicts exist is where there are separate representations. And here, that concern can arise if you say have a Generation 1 client who’s an estate planning client, and a Generation 2 client who might be a client for estate planning or might simply be a corporate client or a litigation client for something unrelated. The Generation 1 client decides that they’re going to amend their estate plan to completely cut out or reduce the interest of your firm’s Generation 2 client. So, the question is, if you help them implement that estate plan, are you acting adverse to another current client whose interest in the estate is being reduced?

Yet another possibility is that multiple generations of a family use the same law firm, and Generation 1 dies off, and whoever they name trustee then hires your law firm to represent them as trustee. If you’re also doing estate planning for Generation 2 and a member of Generation 2 becomes upset that they’re not receiving enough money out of the trust, you suddenly may have a conflict between your estate planning representation of Generation 2 and your representation of the trustee of the trust set up for their benefit by a deceased member of Generation 1.

These are all the sorts of conflicts that can arise when you have multiple generations of clients and multiple hats that various potential clients are wearing.

Information Flow Considerations

And then, the final issue that I want to talk about today that applies to joint representations and is worth some special consideration is information flow. What happens – and it particularly happens when there starts to be a breakdown between joint clients – is that you’ll get a phone call or an email that says: “Absolutely, do not share this with joint client.” And that can create a real problem. What should you do since you owe duties to both of those joint clients? And the better approach is to make sure that that is addressed upfront and in your engagement letter. Your options are to either share everything in terms of information flow or to agree that you will keep things confidential.

Certainly, agreeing to share all of that information or all information between the clients is far and away the easier one. And, unless there’s a really good reason that someone can identify at the outset, which is rare, probably the better approach. Considering what conflicts may arise from current clients and whether you’ve got conflicts with past clients, and how you will address information flow issues when there are multiple clients are all sort of the first step of determining whether there are any conflict issues that you need to deal with when taking on a new trust and estate representation, particularly when taking one on in litigation that may involve fiduciaries and trusts and estates themselves. Thank you.

Toni Ann Kruse:  Thank you so much, Dan, for talking to us today about conflicts of interest in T&E litigation. This was a really interesting discussion.

Also may also be interested in:

• Sample Engagement Letter
• Conflicts That Arise After Retention of a Client (Nov 2023)
• Conflicts of Interest When Representing Fiduciaries (Aug 2022)
• The New Rules of Professional Conduct for Lawyers (May 2019)

This podcast was produced by The American College of Trust and Estate Counsel, ACTEC. Listeners, including professionals, should under no circumstances rely upon this information as a substitute for their own research or for obtaining specific legal or tax advice from their own counsel. The material in this podcast is for information purposes only and is not intended to and should not be treated as legal advice or tax advice. The views expressed are those of speakers as of the date noted and not necessarily those of ACTEC or any speaker’s employer or firm. The information, opinions, and recommendations presented in this Podcast are for general information only and any reliance on the information provided in this Podcast is done at your own risk. The entire contents and design of this Podcast, are the property of ACTEC, or used by ACTEC with permission, and are protected under U.S. and international copyright and trademark laws. Except as otherwise provided herein, users of this Podcast may save and use information contained in the Podcast only for personal or other non-commercial, educational purposes. No other use, including, without limitation, reproduction, retransmission or editing, of this Podcast may be made without the prior written permission of The American College of Trust and Estate Counsel. If you have ideas for a future ACTEC Trust & Estate Talk topic, please contact us at ACTECpodcast@ACTEC.org. © 2018 – 2024 The American College of Trust and Estate Counsel. All rights reserved.