Federal Court Upholds Attorney-Client Privilege for Mutual Fund Independent Trustees

On April 25, 2017, an excessive fee suit (Chill v. Calamos Advisors LLC) under Section 36(b) of the Investment Company Act of 1940, the U.S. District Court for the Northern District of Illinois denied a motion to compel the independent trustees of the Calamos Growth Fund (Growth Fund) to produce privileged correspondence with their legal counsel related to their review and approval of the Growth Fund’s investment advisory agreement.

While attorney-client privilege typically allows a party to refrain from producing confidential communication between a client and his/her attorney when the client is seeking legal advice, the plaintiffs in this case cited the so-called "fiduciary exception" to the attorney-client privilege. The fiduciary exception is a legal principle which in some instances precludes a trustee from withholding from a beneficiary any communications by the trustee with an attorney that were triggered by the trustee’s need for advice on how to carry out their fiduciary responsibilities.

In Calamos, the court found that while the independent trustees of the Growth Fund had a fiduciary duty to the Growth Fund’s shareholders and the communications at issue related to that duty, the plaintiffs needed to demonstrate "good cause" to overcome the attorney-client privilege based on the fiduciary exception, and they failed to do so.

The court held that parties seeking to use the fiduciary exception to overcome the attorney-client privilege must provide a "particularized showing of need for specifically identified documents," and demonstrate that the information sought for the lawsuit is not otherwise available. In arriving at its decision, the court declined to follow the holding in Kenny v. PIMCO—an analogous 2016 case where the U.S. District Court for the Western District of Washington granted a similar motion to compel solely on the basis that a fiduciary relationship existed between the mutual fund’s trustees and its shareholders, but did not conduct a "good cause" analysis.

While the Calamos court strengthened the attorney-client privilege by requiring a demonstration of "good cause" in order to use the fiduciary exception, mutual fund complexes and their trustees should be aware that litigants are attempting to gain access to independent trustees’ privileged communications with their counsel through this exception, and exercise caution and good judgement when communicating sensitive information.