Bad News for Agents under Powers of Attorney

The Pennsylvania Supreme Court has issued a decision holding that a third party that relies on a power of attorney is not immune from liability if the power of attorney is not valid. This decision calls into question third parties' acceptance of powers of attorney.

In recent years I have been increasingly frustrated by the refusal of financial institutions to honor an agent’s authority under powers of attorney. Time after time my clients have run into situations where a third party such as a broker, bank, or title company simply refuses to honor instructions given by an agent under a power of attorney. Sometimes they ask for the principal to sign "their" form, which is, of course, impossible if the principal is incapacitated. Sometimes they ask for an affidavit from me certifying that a document is valid and currently in force - which I cannot and will not do. That is far beyond my authority and ability as I could never know if documents have been revoked or superceded.

The issue has become very troubling and has caused me to consider recommending revocable trusts to clients solely for the purpose of dealing with disability and incapacity when I would not recommend them for that tired old excuse of "avoiding probate."

Things have now gotten worse. On December 21, 2010, the Pennsylvania Supreme Court handed down its decision in Vine v. SERS Board ( 9 A3d 1150), a case brought to my attention by Attorney William Campbell.

First, some background: To protect third parties, like banks, brokerage houses and retirement plans, the Pennsylvania power of attorney statute includes two provisions. First, the law requires a third party to obey the agent’s instructions, absent good reason not to do so. Second, if the third party acts in good faith reliance on the document, the third party is immune. These provisions have been necessary to provide third parties important relief from liability from relying on powers of attorney. These provisions are what has made the system work. If the third party is not relieved of liability - it is not going to take the risk of honoring the authority.

Here is an example: Grandfather signed a power of attorney naming Son as his agent under a power of attorney document. Grandfather becomes incapacitated. Son needs to access Grandfather’s funds in order to pay Grandfather’s bills. Son takes the power of attorney to the bank as proof of his authority to make withdrawals from Grandfather’s account. Under the Pennsylvania statute, we thought (or at least most, if not all, of my colleagues thought) that the Pennsylvania statute would protect a bank who relied in good faith on a power of attorney. What if the power of attorney were forged, or what if Grandfather was incompetent before he signed the document? If either of those things are true, then the power of attorney is not valid, but how in the world would the bank ever know? If we require the bank or other third party to investigate and make a determination of whether or not Grandfather was competent on the date the power of attorney is signed, then the power of attorney is effectively useless. No prudent bank or other third party is going to rely on any power of attorney document. To prevent this from being the case, the PA statute includes the provision that relieves the bank from liability for relying on the instrument.

Not any more.

The Pennsylvania Supreme Court has announced that the statutory protection for banks and other third parties only applies if the power of attorney is in fact valid. Hard to believe, I know, but true nevertheless. The highest court in the state now says that a third party is taking a risk to act on a power of attorney without a determination that the power of attorney is valid. How would they do that? It’s not something you can tell by looking at the power of attorney. If the power of attorney was signed a year ago and the principal is now incapacitated, how can a third party satisfy itself that the principal was competent when the power of attorney was signed? How can a third party know if the power was subsequently revoked? This is absurd.

True, broad durable powers of attorney can be abused, and they can create opportunities for self-dealing. This decision by the Supreme Court could render powers of attorney virtually useless. This is not a reasonable interpretation of the statue. As dissenting Justice Todd states, the Pennsylvania legislature "does not intend an absurd or unreasonable result" and described the court’s construction as "impracticable."

Since this decision is rendered by the highest court in the state, the only way to remedy the situation is for the legislature to act and pass more legislation. We hope that they will do so promptly. I guess the law would have to say something like a third party shall not have liability for good faith reliance on a power of attorney and "we really mean it."

Former Caretaker Convicted of Ripping Off Elderly Woman

The Springfield, Illinois State Journal-Register reports:

"Sandra Gayle, 65, of Springfield was convicted of financial exploitation of the elderly and financial exploitation of a person with a disability. A Sangamon County jury deliberated a little more than an hour Friday before returning the verdict.

Prosecutors introduced testimony over the course of the four-day trial to show that Gayle used her own family to gain the trust of the doctor. Gayle, who had the victim’s power of attorney, then “gifted” easily more than $300,000 from the doctor’s bank account to herself, relatives and friends, testimony indicated.

Gayle could receive from 4 to 15 years in prison when she is sentenced Nov. 19 by Associate Judge John Mehlick. Her crimes also are probationable."

Perhaps the most shocking piece of the news is that State's Attorney Jay Magnuson stated that  the Gayle case is the first financial exploitation of the elderly case to go to trial in Sangamon County in the 14 years he has been a prosecutor here.  Think about it.  How many cases have you seen of this type of abuse?  It's time to get serious and stop this crime.

Hat tip to Estate of Denial

 

 

Power of Attorney Abuse

In Brodsky Estate. (O.C. Div. Montg), 29 Fiduc. Rep. 2d 57, December 11, 2008, objections were made to an account of the agent, Brent Brodsky,after the principal's, Cecilia Brodsky's, death.  The agent was surcharged $210,000 for transferring funds to himself from an account in joint names between agent and principal.  The funds had been contributed solely by the principal.

This is an excerpt from the opinion written by Judge Ott:

"The accountant does not deny that the account from which he paid himself the $210,000 contained funds contributed only by his mother. That account was titled jointly between him and his mother. From this, he argues, because the money would have become his at her death by operation of law, his having taken the money during her lifetime is not a problem. He is wrong. Cecelia Brodsky was never adjudicated an incapacitated person. In the eyes of the law, she retained authority and control over her assets even after she gave her son a general durable power of attorney. Until the day she died, she could have emptied out the joint account and used the money for any purposes she wished. Her agent breached his fiduciary duty when he made the improper gifts to himself. Had he not exceeded his authority under the gift provisions of the power of attorney, he would, indeed, have been entitled to any balance that remained at his mother's death pursuant to 20 Pa. C.S.A. §6304(a). However, when he removed the $210,000 from the joint account during her lifetime, he severed the joint tenancy and thereby lost any right he would have had to the money as the surviving party on a multiple-party account. Accordingly, the accountant is hereby surcharged for this entire amount he paid himself plus interest at the rate of 6% per annum from December 15, 2000."

This agent did everything wrong. 

  • Judge Ott also, in a separate proceeding, found that the accountant exercised undue influence over his mother, the principal, and this resulted in her executing a will leaving everything to him.   That will was invalidated and the principal's earlier will where the accountant would share equally in the estate with the children of his sister who predeceased their mother was valid.  One of these grandchildren, Steven Lichtenstein, is the administrator of the estate of the deceased principal and the objectant to the agents' accounting.
  • At the hearing on the objections to the agent's account, the agent testified that he made gifts of $200,000 to himself, and four gifts of $10,000 each to himself, his wife, and his two sons. He made it clear that the purpose of these transfers was to spend down his mother's money so the government could "pick up the tab" for his mother's care.

  • Judge Ott said "The accountant and his counsel seem to view this litigation as much ado about nothing. " 

  • The final paragraph:  "Throughout the proceedings involving the instant account and the prior will contest, the accountant and his counsel have exhibited a pattern of obstreperous and dilatory behavior. As just the most recent examples of this conduct, we point to the filing of frivolous preliminary objections to the instant objections and a refusal to cooperate with discovery, including the failure to produce certain requested documents until the very day of the hearing. In light of such tactics, we find it necessary to take the unusual step of assessing counsel fees, under 42 Pa. C.S.A. §2503(7), against the accountant and/or his counsel, Philip J. Berg, Esquire. We will therefore schedule a hearing forthwith, limited to the reasonable fees incurred"

Power of Attorney Abuse

The AARP Public Policy Institute has issued a report entitled Power of Attorney Abuse:  What States Can Do About It. 

Also see this summary of the report by Naomi Karp, J.D.,  In Brief: Power of Attorney Abuse: What States Can Do About It.

The ABA Commission staff, AARP staff, and advisory committee members identified 21 provisions in the Uniform Power of Attorney Act ("UPOAA") that protect against abuse and promote autonomy.  These provisions seek to fix the three inherent problems with the POA:

1.  The breadth of control that an agent generally has over the Principal's property

2.  The lack of third-party oversight of the agent's actions if the principal has become incapacitated, and

3.  The lack of legal standards and clarity about the duty owed by the agent to the principal.

For a case in point, read about the financial elder abuse of New York Philanthropist and socialite Brooke Astor.

 

Abuse of Power of Attorney

Agents acting under durable powers of attorney are in a position to abuse their powers.  Vulnerable elderly principals can be taken advantage of by the very persons they appointed to this position of trust.  

Dennis R. Roddy, writing for the Pittsburgh Gazette, addressed this issue in "Courting Trouble:  The document granting 'power of attorney often leads to abuse."  He writes:

""Once you give people unlimited authority, greed can overcome goodness," said Neil Hendershot, a Harrisburg attorney who has lobbied in the past for reforms in the law. Precisely how many times powers are abused is unclear because no one knows how many power of attorney documents exist. No court requires that they be filed when created, and in many instances, abuses are never uncovered."

 Neil Hendershot's blog post "POA Abuse Report and a PA POA Trial" discusses the AARP Public Policy Institute and the American Bar Association's Commission on Law & Aging joint research report issued December 8, 2008 entitled "Power of Attorney Abuse: What States Can Do About It"

Not only is an agent breaching his or her fiduciary duty to the principal if the power is used to convert funds for the agent's personal benefit  - it's also a crime.  Lori A. Stiegel, J.D., of the American Bar Association Commission on Law and Aging provides a fact sheet for Criminal Justice Professionals:  "Durable Power of Attorney Abuse:  It's a Crime Too."

Matthew A. Christiansen has recently posted on SSRN his article entitled Unconscionable: Financial Exploitation of Elderly Persons with Dementia.  See Wills, Trusts & Estates Prof Blog for an abstract of the article.

 

Power of Attorney Abuse

Neil Hendershot has an excellent post about POA Abuse here which includes the research report "Power of Attorney Abuse: What States Can Do About It."

The most egregious abuse is where the agent simply takes (that is, steals) the principal's money for is or her own purposes.  But there are many other type of abuse.  For example, one often sees agents under a power of attorney creating joint accounts in banks or brokerage houses.  This frustrates the intent of the principal that the assets pass under his or her will to intended beneficiaries.  Similarly, one sees agents changing beneficiary designations on IRA's, life insurance policies, annuities, and other contractual benefits. 

Sadly, this is often in a family context where one child is acting to the detriment of his or her siblings.

The principal thinks that all the children are being treated equally because that is what the will says.  After the principal's death, the facts emerge and siblings see that what passes under the will is relatively small compared to the assets that pass to the agent via beneficiary designations.

Our prior post  How to Act as an Agent under a Power of Attorney talks about how to stay out of trouble when acting as an attorney in fact,

For a discussion of power of attorney abuse as illustrated by the unfortunate case of Brooke Aster,  whose son Anthony Marshall was indicted for abusing her POA, see this NY Times article.

 

How to Act as an Agent under a Power of Attorney

And stay out of trouble!

More and more agents are being asked to account for  their actions and more and more litigaiton is aimed at agents who abuse their powers, especially by making gifts to themseles.  Learn how to do it right and stay out of trouble.

When you agree to serve as attorney-in-fact under a Power of Attorney you become the Agent of the Principal. A Power of Attorney is a grant of authority. It authorizes and permits an Agent to act but does not require the agent to act. The Agent is not obligated to serve. However, an Agent may have a moral or other obligation to take on the responsibilities of agent, especially if the Principal was relying on him or her to do so. Once an Agent begins to act, he or she has a duty to act prudently. An Agent is held to the highest standards of good faith, fair dealing, and loyalty with respect to the principal. The Agent must always act in the best interest of the principal.

That fact that the Principal has named you as her agent does not mean that the Principal cannot act for herself. So long as the Principal is competent, he or she can do anything, including undoing something you may have done as Agent. Obviously, communication with the Principal is key. As long as the Principal is competent, his or her Power of Attorney can be revoked by written notice to you.

What should you do and not do when you are acting as an Agent?

1. Read the Power of Attorney in which you are appointed as agent. Not all Powers of
Attorney are alike. Some are General Powers of Attorney and grant full powers to do anything the Principal could do with regard to financial matters. Others are limited to specific actions. You can only do the things the document authorizes you to do. A Power of Attorney is not a license to take over the Principal's affairs and do things your way. As an Agent it is your duty to carry out the instructions and wishes of the Principal.

2. Sign the Power of Attorney, if required. For Powers of Attorney executed after April 11,
2000, the Agent must sign an oath in which he or she promises to fulfill his or her duties before the Agent can use the power.

3. Make several copies of the original Power of Attorney. Give a copy to each entity with
which you transact business on behalf of the Principal. Banks, brokerage houses, mutual funds, and insurance companies, sometimes insist that you use their own in-house Power of Attorney forms. Find out what forms these institutions require. Have your Principal sign these forms while he or she is still able.

4. Make a complete inventory or list of all of the Principal's assets and income sources.
You need to do this so that you know what you are responsible for, what resources are available, and so that you can keep property such as real estate and motor vehicles properly insured. If you have many assets to manage, consider a custodial account with a financial institution. As Agent, you are responsible for keeping the assets safe.

5. Sign as Agent. When signing documents as an agent, always make clear that you are signing on behalf of the principal. Sign your name and follow it with at least ", Agent" or better, the phrase, "as agent for _____________." Complete the phrase with the name of the principal. If you sign correctly, you will avoid personal liability. The exact wording is not important. Just make sure you indicate that you are signing oh behalf of your Principal, not for yourself. If you sign your name with no indication of your capacity as Agent for another you may be personally responsible.

6. Separation. Always keep the Principal's assets separate from your own. Do not
commingle them.

7. Keep good records of all your Principal's assets and income and all of your actions as
Agent. Keep copies of all statements and all transactions. Use a single checking account. The checks will act as receipts and the checkbook register as a running record of your expenditures.

8. Possible duties. In the course of managing the Principal's financial affairs, the Agent
may need to do any one or more of the following: pay the everyday expenses of the Principal and his or her family; buy, sell, maintain, pay taxes on, and mortgage real estate and other property; apply for and collect government benefits including Social Security, Medicare, Medical Assistance, or other government benefits, invest in stocks, bonds, and mutual funds; handle banking transactions; buy and sell insurance policies; file and pay the Principal's income taxes; operate a business; claim inheritances; transfer property to a trust the Principal created; handle litigation in which the Principal is a party; manage the Principal's retirement accounts.

9. Borrowing and Selling. You may not use the Principal's assets for yourself. Unless the
Power of Attorney document specifically says so, you may not borrow money from the Principal even if you are paying it back at the same or a higher interest rate you would pay a bank. You should not sell any of the Principal's property to yourself, your friends, or your relatives even at a fair price unless the Power of Attorney makes it clear that you can.

10. Gifts. You may make gifts only if the document specifically authorizes gifts. You are to
use the money for the Principal's benefit, and donations and gifts without being specifically authorized are not considered to be for the Principal's benefit. The document may permit limited gifts, that is limited in amount (such as the federal annual exclusion amount) and limited to a particular class of donees.

11. Communicate. Avoid misunderstandings by communicating with the Principal's family
members about how you are managing the principal's affairs.

12. Hire the help you need. An Agent may hire accountants, lawyers, brokers, investment
advisors, or other professionals to help with the agent's duties, but may never delegate his or her responsibility as agent. The reasonable costs of these services are expenses that should be paid from the Principal's assets.

13. Fees. Whether or not the Agent is entitled to a fee for his or her services depends on the
document and the circumstances. In most situations where a family members is the Agent and the Agent's duties are fairly simple, there is no compensation paid to the agent. If, however, the Agent is burdened with substantial responsibilities (such as running a business), payment may be appropriate. If the Principal wants to make sure the Agent is paid, the Powers of Attorney should establish the criteria for payment.

Small articles bought for use exclusively by the Principal such as clothing and toiletries can be paid out of pocket and reimbursed from the principal's funds later. Mutual use expenses, such as for gas and insurance for the Principal's car that the Agent also uses may only be reimbursed to the extent of the Principal's use.

Fees for services such as cleaning the Principal's house and yard, feeding the Principal, or doing the Principal's laundry are legitimate fees, but only if charged at a reasonable and customary rate. Charging twenty five dollars an hour for cleaning house is not reasonable unless you do it for a living for others and normally charge that amount. If you do the taxes for the Principal, running the numbers through a tax program would not entitle you to the same fee charged by a CPA unless you prepare taxes for a living.

Remember, you may have to justify your fees to a judge hour by hour and job by job, and if it appears you overcharged, you may find your fees cut back to minimum wage or eliminated altogether. When in doubt, undercharge and avoid that trip to his honor's woodshed.

14. Prohibitions. There are a few actions that an Agent is prohibited from doing. An Agent
may not sign a document stating that the principal has knowledge of certain facts. For example, if the Principal was a witness to a car accident, the Agent cannot sign an affidavit stating what the Principal saw or heard. An Agent may not vote in a public election on behalf of the Principal. An Agent may not make or revoke a will or codicil for the Principal. If the Principal is a trustee, executor, or other fiduciary the Agent is not permitted to act in those capacities.

Legal Guardian vs. Power of Attorney

Appointment of a Legal Guardian


If an individual lacks the mental capacity necessary to make rational choices, there are two ways recognized by the law for proving a substitute decision maker: (1) the individual, while he was still competent, designated someone to be their agent, also known as an attorney-in-fact, by signing a power of attorney, or (2) the state, acting through the courts, may appoint a substitute decision maker known as a guardian (also sometimes called a “conservator”), for the incapacitated individual.

Power of Attorney

A "power of attorney" is a document which is signed by an individual (the "principal") appointing another person or persons (called the "attorney-in-fact" or "agent") to act for and on behalf of the principal. If the power of attorney authorizes the agent to act for the principal in almost all circumstances, it is called a "general" power of attorney. If the power of attorney is effective even if the principal is disabled or incompetent, it is called a "durable" power of attorney.

A person executing a durable general power of attorney naming a husband, wife, child, or other family member as attorney-in-fact authorizes that family member to manage his or her financial and personal affairs even after incapacity, avoiding the need for any guardianship.

Spouse Has No Legal Authority

Just because you are married does not give you legal authority over the property and person of your spouse. It is absolutely essential that you give your spouse, or some other person you trust, power of attorney. If your spouse becomes incapacitated and you don’t hold his or her power of attorney, you cannot sell the home you own jointly, cannot make withdrawals from your spouse’s IRA or other retirement plan, and cannot act for your spouse in any other legal capacity. If you don’t have a power of attorney, the only other alternative is a court appointed guardian.

Guardianship

The court procedure is termed a “guardianship” in Pennsylvania, In some other states, the procedure is referred to as a “conservatorship.” The individual for whom a guardian has been appointed is called a “ward.” Sometimes the ward is referred to as an “incapacitated person,” which has replaced the old-fashioned and offensive nomenclature of an “incompetent person.” Continue Reading...

Eccentricity is Not Incapacity

Capacity to Contract 

Eccentricity or lack of prudence is not incapacity. In the words of Diana Romano:

“The lawyer’s task when considering the legal standard of competency is to be able effectively to distinguish foolish, socially deviant, risky, or simply “crazy” choices made competently from comparable choices made incompetently. “

People generally have the freedom to contract. Nevertheless, sometimes the law deems people unable to make decisions in their best interest. Minors, people with a mental disability, those who are in bankruptcy or people who have impaired judgment due to illness, disability, hypnosis, alcohol or drugs do not have capacity to contract.

In order to be bound by a contract, a person must have the legal ability to form a contract in the first place. This legal ability is called the capacity to contract. A person who is unable, due to age or mental impairment, to understand what she is doing when she signs a contract may lack capacity to contract.

If a person has a legal guardian and a court has made a determination that he or she is incapacitated, that person completely lacks the capacity to contract. Any contract signed by a person who has a legally appointed guardian is void. Many courts have held, however, that a person who is under legal guardianship may make a will if the person has testamentary capacity. The legal capacity required to make an enforceable contract is higher than that required to make a will.

A person may have a physical condition or illness which prevents him or her from performing at the levels expected of other persons of comparable age. If such a person cannot care for himself or herself, or acts in ways that are against his or her interests, such a person is entitled to the protection of the state to make sure they are not abused or exploited. Examples of physical conditions that can cause the loss of capacity to make contracts include paralysis, delirium, strokes, Huntington's disease, Alzheimer's disease, or dementia. Merely having the condition does not make the person incapacitated. The condition must have sufficiently affected the intellect so that the person cannot comprehend the nature and character of the transaction. If the person cannot comprehend the nature and character of his acts, any contracts or agreements such a person makes are voidable. Any contract may be ratified or disaffirmed by the person when he or she regains full capacity, or it can be ratified or disaffirmed by the person’s agent acting under a power of attorney. If the person’s condition is severe enough, the court may appoint a legal guardian.

Legal capacity is a flexible concept. A diagnosis of Alzheimer’s suggests diminished capacity, but you can not assume that a person is incompetent to contract because of such a diagnosis. Capacity must be viewed in terms of a person’s ability to perform a specific task. A person may be competent for some tasks, but lack capacity for others.

In the Pennsylvania case of Taylor v. Avi, 272 Pa. Super. 291 (1979) 1. 415 A.2d 894plaintiff sought to void a release she had signed after a car accident in which she sustained a head injury which left her with impaired memory, decreased ability to concentrate on such things as reading, and increased irritability. Citing a 1929 will case, Lawrence's Estate, 286 Pa. 58, 65, 132 A. 786, 789 (1926), the court said that “"[f]ailure of memory does not prove incapacity, unless it is total or so extended as to make incapacity practically certain. A testator may not be able at all times to recollect the names of persons or families of those with whom he has been intimately acquainted . . . and yet his understanding of the ordinary transactions of his life may be sound."


The standard announced by the court in Taylor is that mere weakness of intellect resulting
from sickness or old age is not legal grounds to set aside an executed contract if sufficient intelligence remains to comprehend the nature and character of the transaction, and no evidence of fraud, mutual mistake or undue influence is present.

Some cases are obvious. The family of an Oregon man with Alzheimer’s succeeded in voiding his contracts - he bought 7 cars from the same car dealer in one month.

What about drinking and substance abuse? While a person may consume enough alcohol and/or drugs to reduce or eliminate his or her ability to understand what he or she is doing, such conditions are self-induced. The law does not generally allow the intoxication or drugged state to be raised as an excuse. There are cases where a contract is voidable when an intoxicated party cannot understand the nature and consequences of the transaction and the other party is aware of the intoxication. Compulsive and chronic intoxication and abuse may constitute a mental illness. A sober party who takes advantage of a vulnerable drunk may be guilty of fraud or undue influence.

Continue Reading...

PA Supreme Court reverses Superior Court AGAIN

Congratulations to Attorney Kendra McGuire on her win in In re: Weidner, 2007 WL 4555334.  The PA Supreme Court struck down the Superior Court's restrictions on agents acting under powers of attorney and limitations on power of attorney documents.  See Kendra's commentary and analysis by clicking here.  In her words:

"Attempts to interpret power of attorney documents in such limited ways have been litigated repeatedly with the Superior Court applying very limited interpretations of documents and the Supreme Court confirming time and time again that power of attorney documents must be interpreted broadly. Kudos to the Supreme Court for grasping the implications of this issue, as it effects all of those, and there are many, who act under these power of attorney documents."

The attorney-in-fact in this case changed the beneficiary on the principal's life insurance policy.  The clear holding of the Supreme Court is that the power of attorney document expressly incorporated the Powers of Attorney statute and the general language shows the principal's intent to empower the agent to do any or all of the things permitted by the statute, which includes engaging in insurance transactions.  Said the Court: "[W]e hold the power of attorney at issue was sufficient to empower [the agent] to change the beneficiary of the life insurance policy."  The case was remanded for consideration of two other issues:

  • Should the trial court have considered only whether the power of attorney
    authorized the attorney-in-fact to change beneficiaries under insurance
    policies, and declined to consider the principal’s expressed intent regarding
    the particular beneficiary designation under the life insurance policy at
    issue, or whether a breach of fiduciary duty by the attorney-in-fact would
    void the change of beneficiary by the attorney-in-fact, even if the power of
    attorney authorized the type of transaction generally?
  • Do the pleadings establish that the principal intended to authorize the
    attorney-in-fact to change the principal’s named beneficiary during the
    principal’s lifetime without any notice of the principal?

Do you think an agent can change the principal's beneficiaries?