The 3rd District Appellate Court recently ruled on when the fiduciary duty starts for an agent with power of attorney.

In In re Estate of Eugenius Gerulis, 2020 IL App (3d) 180734. two siblings sued their brother for allegedly looting their father’s estate to the tune of several hundred thousand dollars.

Shortly after moving to Illinois from Florida to live with the respondent (his eldest son), the decedent and respondent opened multiple bank accounts, purchased certificates of deposit from an Illinois bank, (a bank where the respondent’s wife happened to work) and transferred more than $60,000 from two of the decedent’s Florida bank accounts to the same Illinois banks.

The respondent then withdrew money from the Illinois accounts to pay for home improvement costs and other personal expenses.

In addition, shortly after the decedent moved to Illinois, the respondent deposited more than $300,000 from the sale of the decedent’s Florida condominium in one of the Illinois accounts.

The petitioners alleged the respondent breached fiduciary duties to the decedent by initiating various transfers of money from the estate to the petitioners’ detriment. They further alleged the respondent exerted undue influence over the decedent by convincing him to change his will after he moved in with the respondent.

The parties filed cross-motions for summary judgment. The trial court entered summary judgment for the petitioners and (1) ordered the respondent to repay the estate more than $900,000 (including nearly $300,000 in prejudgment interest) and (2) voided the decedent’s changed estate planning documents (a revised will, trust, and power of attorney that favored respondent over the petitioners).

The 3rd District Appellate Court affirmed in part the trial judge’s order.

Under Illinois law, an individual holding a power of attorney is a fiduciary as a matter of law. The person designated as a power of attorney agent owes a fiduciary duty to the principal — the person making the designation. The fiduciary relationship between a principal and agent under power of attorney is triggered once the document is signed.

This fiduciary relationship prohibits the agent from obtaining a selfish benefit for himself, and if the agent does so, the transaction is presumed fraudulent.

Under a power of attorney, any conveyance of a principal’s property that financially benefits the agent is presumed fraudulent. This includes transfers directly to the agent as well as those to third parties engineered by the agent.

Once this presumption attaches, the burden shifts to the agent to disprove the fraud by clear and convincing evidence. To satisfy this burden, the agent must establish he acted in good faith and did not betray confidence placed in him. If the agent meets this burden, the challenged transaction is upheld. If the agent doesn’t, the transaction is set aside.

Factors a court considers when determining whether an agent has rebutted a presumption of fraud include (1) whether the fiduciary make a full disclosure to the principal of key information, (2) whether the fiduciary paid adequate consideration for the transfer and (3) whether the principal had competent and independent advice.

The trial judge found (a) the multiple transfers from the decedent’s Florida accounts into the various Illinois accounts and (b) the decedent’s gifting $130,000 to the respondent occurred during the existence of the POA fiduciary relationship. The court also noted that the respondent plainly benefited from the transfers. These events activated the presumption of fraud.

The appeals court agreed with the trial judge that respondent failed to carry his burden of showing the transfers were in good faith.

The court first held it wasn’t enough that the decedent was mentally competent when the challenged transfers occurred. This was because the respondent couldn’t prove he was acting at direction of the decedent or that the decedent even knew the respondent transferred the decedent’s Florida bank account funds to the Illinois accounts under the respondent’s (and his wife’s) control.

The court then cited a lack of evidence of consideration or compensation paid [from the respondent to the decedent] to support the transfers. Absence of consideration for a transfer (no quid pro quo) can trigger a court’s heightened scrutiny of a power of attorney agent’s conduct.

With a joint account (the Florida and some of the Illinois accounts were joint accounts) there is a presumption of donative intent: each joint account holder gifts to the other holder the joint account funds.

So long as funds are deposited and a joint tenancy account contract is signed by the joint owners, the presumption of donative intent prevails and can be defeated only by a showing of clear and convincing evidence.

This is especially so where a joint account is opened before a fiduciary relationship is formed.

When this happens (joint accounts are opened before a power of attorney, e.g.), the two presumptions (presumption of fraud for power of attorney transaction v. presumption of donative intent with joint bank accounts) “cancel each other out” and the court decides the breach of fiduciary duty objectively on a fresh factual record.

Here, the fiduciary relationship between the decedent and the respondent attached before the Florida account funds were transferred to Illinois and the opening of the various Illinois accounts. As a result, the presumption of fraud was triggered before the Illinois joint accounts were opened. The court therefore held that the power of attorney fraud presumption took primacy over the general rule of mutual gifts for joint accounts.

Takeaways

  • The power of attorney fiduciary relationship is triggered upon signing the document.
  • To rebut a presumption of fraud, a power of attorney agent must do more than show his principal was mentally competent. Instead, the agent must prove the principal authorized, directed or had actual knowledge of a challenged act.
  • With a joint bank account, where a fiduciary relationship predates the opening of such an account and the power of attorney agent benefits financially from the account (i.e. withdraws funds), the presumption of fraud wins out over the conflicting presumption that a gift between joint account holders was intended.