by Rebecca Klock Schroer
When fiduciaries are accused of breach, we often hear them say, “but I only did what my lawyer told me to do, so I can’t be liable, right?” Unfortunately, advice of counsel is not a complete defense to breach of fiduciary duty.
Colorado has case law regarding this issue and has cited to sections of the Restatement (Second) of Trusts. First, the Colorado Supreme Court has held that advice of an executor’s attorney was not an excuse for failure to properly invest. In re Macky’s Estate, 213 P. 131 (Colo. 1923). Second, the trustee in Vento v. Colorado Nat. Bank-Pueblo, 907 P.2d 642, 646 (Colo. App. 1995) was not protected by advice of counsel where the attorneys the trustee consulted did not have appropriate expertise and were affected by a potential conflict of interest.
In a 1998 case, the Colorado Supreme Court cited the Restatement (Second) of Trusts § 226, cmt b and § 201, cmt b in support of the idea that good faith reliance on counsel is not a complete defense against liability for breach, because the trustee could ask the court for instructions. Franzen v. Norwest Bank Colorado, 955 P.2d 1018, 1022 (Colo. 1998). Restatement (Second) of Trusts § 201, cmt b (1959) discusses the limitations of advice of counsel as follows:
Mistake of law as to existence of duties and powers. A trustee commits a breach of trust not only where he violates a duty in bad faith, or intentionally although in good faith, or negligently, but also where he violates a duty because of a mistake as to the extent of his duties and powers. This is true not only where his mistake is in regard to a rule of law, whether a statutory or common-law rule, but also where he interprets the trust instrument as authorizing him to do acts which the court determines he is not authorized by the instrument to do. In such a case, he is not protected from liability merely because he acts in good faith, nor is he protected merely because he relies upon the advice of counsel. Compare § 297, Comment j. If he is in doubt as to the interpretation of the instrument, he can protect himself by obtaining instructions from the court. The extent of his duties and powers is determined by the trust instrument and the rules of law which are applicable, and not by his own interpretation of the instrument or his own belief as to the rules of law.
Although advice of counsel is not a complete defense to breach, it could be a relevant factor in the defense of breach or another claim. For example, it is a factor when determining whether there is probable cause in the context of a no contest clause. In re the Estate of Peppler, 971 P.2d 694, 697 (Colo. App. 1998). Also, practically speaking, it is evidence worth submitting in a breach case when trying to put the fiduciary’s actions in the best light.
The difference between the Second and Third Restatement of Trusts is worth noting. The Restatement (Third) of Trusts § 93, cmt c (2012) takes a less strict approach to this topic and provides that a trustee’s reliance on advice of counsel can be a significant factor in determining whether the trustee’s actions were prudent. In order to be a positive factor for the trustee, the trustee must select an attorney in good faith, provide him or her with relevant information and the attorney must be competent in the area of law. Otherwise, the law would reward a trustee who shopped for advice. Colorado appellate courts have not adopted section 93 of the Third Restatement, but it is some indication of the overall national trend.
- Make sure the fiduciary understands that his or her reliance on counsel will not insulate him or her from liability.
- Evidence of advice of counsel in a breach action (or other claim involving the fiduciary) may be relevant, but make sure to also consider issues regarding attorney-client privilege.
- Even though advice of counsel may not be a complete defense to breach of fiduciary duty, the fiduciary should consider whether he or she has a malpractice claim against the attorney.