In Estate of Gerulis, 2020 IL App (3d) 180734, two siblings [Petitioners] sued their brother [Respondent] for allegedly looting their father’s [Decedent] estate to the tune of several hundred thousand dollars.
Shortly after moving to Illinois from Florida to live with Respondent [his eldest son], Decedent and Respondent opened multiple bank accounts and purchased certificates of deposit from an Illinois bank, [a bank where Respondent’s wife happened to work] and transferred over $60K from two of Decedent’s Florida bank accounts to the same Illinois banks. Respondent then withdrew monies from the Illinois accounts to pay for home improvement costs and other personal expenses.
In addition, shortly after Decedent’s move to Illinois, Respondent deposited over $300K from the sale of Decedent’s Florida condominium in one of the Illinois accounts.
Lower Court Result
Petitioners sued Respondent alleging he breached fiduciary duties to Decedent by initiating various transfers of money from the estate to Petitioners’ detriment. They further alleged Respondent exerted undue influence over Decedent by convincing him to change his will after he moved in with Respondent.
The parties filed cross-motions for summary judgment. The trial court entered summary judgment for Petitioners and (1) ordered Respondent to pay back the estate over $900,000 (including nearly $300,000 in prejudgment interest), and (2) voided Decedent’s changed estate planning documents [a revised will, trust, and power of attorney that favored Respondent over Petitioners].
The Second District affirmed in part the trial judge’s order.
Under Illinois law, an individual holding a power of attorney [POA] is a fiduciary as a matter of law. The person designated as a POA agent owes a fiduciary duty to the principal – the person making the designation. The fiduciary relationship between a principal and agent under POA is triggered once the POA document is signed.
Presumption of Fraud – POA Agent Benefits from Transaction
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 POA, 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 Decedent’s Florida accounts into the various Illinois accounts and (b) Decedent’s gifting $130,000 to Respondent occurred during the existence of the POA fiduciary relationship. The Court also noted that Respondent plainly benefitted 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.
Principal’s Mental Competence Won’t Always Defeat Presumption of Fraud
The Court first held it wasn’t enough that Decedent was mentally competent when the challenged transfers occurred. This was because Respondent couldn’t prove he was acting at direction of the Decedent or that Decedent even knew Respondent transferred Decedent’s Florida bank account funds to the Illinois accounts under Respondent’s [and his wife’s] control.
The Court then cited a lack of evidence of consideration or compensation paid [from Respondent to Decedent] to support the transfers. Absence of consideration for a transfer [no quid-pro-quo] can trigger a court’s heightened scrutiny of a POA agent’s conduct.
Joint Bank Accounts
With a joint account [the FL and some of the IL 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 only be defeated 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 POA, e.g.], the two presumptions [presumption of fraud for POA 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 Decedent and 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 POA fraud presumption took primacy over the general rule of mutual gifts for joint accounts.
The POA fiduciary relationship is triggered upon signing the POA document;
To rebut a presumption of fraud, a POA 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 POA 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.