Saturday, July 22, 2017

Illinois Supreme Court Clarifies POA Fiduciary Duties

The recent ruling of the Illinois Supreme Court, In re Estate of Thomas F. Shelton, presents the sad tale of a dispute between siblings over a family farm, and the fiduciary duties required of power of attorney agents.  Mr. and Mrs. Shelton both passed away in 2012.  Each named their daughter as executor of their estates, but in a "divide and conquer" approach to naming fiduciaries that is not uncommon for those with more than one adult child, Mr. and Mrs. Shelton named each other as primary agent for Power of Attorney for Property or financial matters, and their son as backup agent (the daughter was named as the second backup). (The opinion does not specify, but it is likely they each named each other as first choice for executor, but the backup order was reversed as to the son and daughter). 

The POAs were signed in 2005, using the "statutory short form" POA for Property.  Fast forward then to late 2011, approximately one year before the death of both Mr. and Mrs. Shelton - Mr. Shelton apparently signed two quit-claim deeds (one for himself and one as POA for Mrs. Shelton), conveying title to farm ground to their son and his wife.  After opening the estates, the sister as executor commenced an intra-probate proceeding called a "citation to recover assets, alleging that the quit claim to her brother was a fraudulent conveyance.

The estate had two alternative theories 1) the brother owed a fiduciary duty in his capacity as successor POA agent, and it is well established that there is a presumption of fraud when a POA agent benefits from a transaction on behalf of the principal; and 2) if that duty only applies to the primary, acting agent, the brother should be deemed to have been acting as primary at the time, because a doctor had issued a written statement in 2014 that Mrs. Shelton was incompetent in 2011 when the quit claim deed was signed.  If she was not competent at that time, then the brother's authority as successor agent would have been triggered, to make him primary agent for Mr. Shelton.

The Court first held that the presumption of fraud only applies to acting POA agents, and that a named successor agent who is not yet acting for a principal does not owe that principal a fiduciary duty.  On the second point, the Court considered the Statutory Short Form language as to triggering the successor's authority, and cited caselaw that this language was clear and unambiguous and must be strictly construed.  While it is true that the form language references a physician certification to demonstrate incompetency to trigger the successor's authority, the court found that the language indicated such certification was meant to serve as the triggering event, at that time.  The certification could not be applied retroactively.  For these reasons, the Supreme Court affirmed the circuit court ruling dismissing the citation.

The story is a sad case of fighting within the family after the parents passed, and for the nagging feeling that perhaps this situation could have been avoided with better estate planning, not to mention family communication.  The case is also a warning to acting POA agents. Be very aware of your fiduciary duty and the presumption of fraud that will apply if you personally benefit from transactions you conduct for the principal.  There could be a good reason for the transaction and it may very well be in the best interest of the principal, but you need to be prepared to explain and document that.  When possible, have an objective third party consider and confirm you are taking the right approach.  This may be your attorney, but it may also mean running the transaction by your sibling in advance.  If they object, it's better to have that argument in advance, before you take the questionable action, than in court after your parents have passed. 

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