Attorney-Client Privilege in Ownership Disputes: The “Fiduciary Exception”

• Courts in many jurisdictions recognize the “fiduciary exception” to the attorney-client privilege, which can enable some shareholders and members to obtain their corporation’s or LLC’s privileged communications, based on a fact-intensive analysis that is difficult to satisfy.
• Unlike members of Illinois LLCs, shareholders and LLC members in most jurisdictions do not have strong generally applicable arguments to obtain privileged communications of their corporation or LLC.

We previously illustrated a scenario where the majority member and manager of an Illinois limited liability company (LLC) investigates one of the LLC’s minority members for suspected wrongdoing. We explained that the minority member may be able to obtain copies of emails between the LLC’s manager and attorney through a books and records request or through discovery in litigation under Illinois law, even if the company’s investigation of the minority member is the subject of those emails, unless the LLC’s operating agreement places limitations on the member’s right to access those documents. (Our initial post explained how a member of an Illinois LLC can pierce the LLC’s attorney-client privilege to obtain communications between the LLC’s managers and its attorneys. Our second post addressed ways that an Illinois LLC and its other members can prevent a minority member from obtaining privileged communications.) But that is not the case in every jurisdiction. In most jurisdictions, a member of an LLC or a shareholder of a corporation generally cannot access the privileged communications of their LLC or corporation. Only in limited circumstances — under the so-called “fiduciary exception” — can a member or shareholder demonstrate, after a fact-intensive analysis, that they have good cause to access those communications.

The Garner Fiduciary Exception

In many jurisdictions, a shareholder of a corporation or a member of an LLC can obtain the corporation’s or LLC’s attorney-client privileged communications only if they can satisfy the Garner test,[1] which is also known as the fiduciary exception to the attorney-client privilege. Where a fiduciary duty is owed to the shareholder or member, that shareholder or member must show good cause why the attorney-client privilege should not protect those communications from disclosure. Courts consider several factors in determining whether the shareholder or member has shown good cause, typically conducting a document-by-document analysis.

The existence of a fiduciary duty is a prerequisite to application of the Garner test; if no fiduciary duties are owed, such as when an LLC agreement expressly disclaims all fiduciary duties, the Garner test does not apply. Even when fiduciary duties exist, the Garner test can be difficult for shareholders and members to satisfy.

Under Delaware law, courts apply the Garner test to determine whether members of Delaware LLCs and shareholders of Delaware corporations can discover their entities’ privileged communications. Under New York law, courts take a similar approach as to members of New York LLCs and shareholders of New York corporations. Delaware courts have suggested that the Garner test applies to other corporate forms, such as limited partnerships. But where the limited partnership agreement expressly disclaims all fiduciary duties, the Garner test does not apply.

Some Jurisdictions Do Not Recognize the Fiduciary Exception

Other jurisdictions have declined to apply the Garner test. California and Illinois courts have explicitly declined to apply the fiduciary exception in the context of litigation between shareholders and their corporations. California courts have also suggested that the fiduciary exception does not apply where members attempt to discover their LLCs’ privileged communications in litigation. (For an explanation of how members of an Illinois LLC can access the LLC’s otherwise-privileged communications, see our initial post.) Consequently, shareholders of Illinois and California corporations and members of California LLCs probably cannot obtain their companies’ privileged communications unless a different exception applies.

[1] The Garner test comes from the case Garner v. Wolfinbarger, 430 F.2d 1093, 1103-1104 (5th Cir. 1970) (holding that a corporation’s shareholders have the right to “show cause” why the corporation should not invoke the attorney-client privilege to protect its communications in a suit alleging that the corporation has acted against shareholder interests).