joint tenancy – Paul Porvaznik

Presumption of Fraud Involving [Power of Attorney] Agent Trumps General Rule of Joint Account Donative Intent – IL 2nd Dist.

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.

Underlying Facts

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].

Appellate Decision

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.

Take-aways:

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.

Don’t Confuse Joint Tenancy with Tenancy-By-Entirety Ownership – Indiana Court Cautions

Title to real estate is typically held in one of three ways: tenancy in common, joint tenancy and tenancy by the entirety.

The salient characteristic of tenancy in common is that each owner holds a ½ interest in the property and that upon an owner’s death, his/her share passes to his/her heir.

Joint tenancy’s hallmark is its survivorship feature: when a joint tenant dies, his/her share passes to the surviving joint tenant. The deceased’s interest will not pass to an heir.

With tenancy by entirety (“TBE”) ownership, sometimes described as “joint tenancy with marriage,” the property is immune from one spouse’s creditor’s judgment lien. This means the creditor of one spouse cannot foreclose on the TBE property. However, to qualify for TBE protection, the parties must be married and live in the property as a primary residence. If the property owners are married but do not use the home as the marital homestead, TBE won’t shield the property from creditor collection efforts.

In Flatrock River Lodge v. Stout, 130 N.E.2d 96 (Ind. Ct. App. 2019), an Indiana appeals court delved into the joint tenancy vs. TBE dichotomy and how the difference between the two realty title vehicles dramatically impacts a judgment lien’s enforceability. The trial court denied the creditor’s motion to foreclose a judgment lien because the subject real estate was held in joint tenancy. On appeal, the Court considered whether a judgment creditor could foreclose on joint tenancy property, force its sale, and apply the proceeds against the judgment.

The judgment debtor owned real estate in joint tenancy with his daughter. The debtor died during pendency of the lawsuit and by operation of law, the title to the property vested in the daughter. Before the debtor died, however, the plaintiff/creditor recorded its judgment lien against the property.

The creditor moved to foreclose its judgment lien against the property. The debtor’s daughter argued the property was exempt from execution by Indiana’s tenancy-by-entirety statute (the TBE statute). Indiana Code Section 34-55-10-2(c)(5). The trial court agreed with debtor’s daughter and denied the creditor’s motion.

Reversing, the Indiana appeals court first rejected the defendants’ argument that since the debtor died, the property escaped plaintiff’s lien. The court noted that the plaintiff’s judgment lien attached from the moment it recorded its judgment against the property – some two years before debtor’s death. As a result, the debtor’s daughter took the property subject to the plaintiff’s lien.

Next, the appeals court rejected the trial court’s finding that the property was immune from the plaintiff’s judgment lien.

In a joint tenancy, each tenant acquires an equal right to share in the enjoyment of the land during their lives. A joint tenant is severed where one joint tenant conveys his/her interest to another and destroys the right to survivorship in the other joint tenant(s). Once a joint tenancy conveys his/her share to another, he/she becomes a tenant in common with the other co-tenant.

Each joint tenant can sell or mortgage his/her interest in property to a third party and most importantly (for this case at least), each joint tenant is subject to a judgment creditor’s execution. [8]

TBE ownership only exists between spouses and is grounded in legal fiction that husband and wife a single unit. A TBE cannot be severed by the unilateral action of one tenant. An attempted transfer of a TBE ownership interest by only one spouse is a legal nullity. The key difference between joint tenancy and TBE is that with the latter, a creditor of only one spouse cannot execute on the jointly owned property

The Court noted that under Indiana Code 34-55-10-2(c)(5), property held in TBE is exempt from execution of a judgment lien. However, this statute applies uniquely to TBE ownership; not to joint tenancy. According to the court, “[h]ad the Indiana legislature intended to exempt from execution real estate owned as joint tenants, it would have done so.” [14]

Take-away:

This case shows in stark relief the perils of conflating joint tenancy and tenants-by-entirety ownership. If a property deed does not specifically state tenancy by the entirety, the property will not be exempt from attachment by only one spouse’s creditor.

Joint Mortgage Debt Means No Tenancy By Entirety Protection for Homeowners

The Illinois First District recently affirmed a mortgage foreclosure summary judgment for a plaintiff mortgage lender in a case involving the protection given to tenancy by the entirety (TBE) property.

In Marquette Bank v. Heartland Bank and Trust, 2015 IL App (1^st) 142627, the main issue was whether a marital home was protected from foreclosure where it was owned by a land trust, the beneficiaries of which were a husband and wife; each owning beneficial interests TBE.

The defendants argued that since their home was owned by a land trust and they were the TBE beneficial owners of that land trust, the plaintiff could not foreclose its mortgage.

Affirming summary judgment, the appeals court examined the interplay between land trust law and how TBE property impacts judgment creditors’ rights.

The Illinois Joint Tenancy Act (765 ILCS 1005/1c) allows land trust beneficiaries to own their interests TBE and Code Section 12-112 (735 ILCS 5/12-112) provides that a TBE land trust beneficial interest “shall not be liable to be sold upon judgment entered….against only one of the tenants, except if the property was transferred into [TBE] with the sole intent to avoid the payment of debts existing at the time of the transfer beyond the transferor’s ability to pay those debts as they become due.”

TBE ownership protects marital residence property from a foreclosing creditor of only one spouse. In TBE ownership, a husband and wife are considered a single unit – they each own 100% of the home – and the judgment creditors of one spouse normally can’t enforce a money judgment against the other spouse by forcing the home’s sale.

An exception to this rule is where property is conveyed into TBE solely to evade one spouse’s debt. Another limitation on TBE protection is where both spouses are jointly liable on a debt. In the joint debt setting, a judgment against one spouse will attach to the marital home and can be foreclosed on by the judgment creditor.

Code Section 12-112 provides that where property is held in a land trust and the trust’s beneficial owners are husband and wife, a creditor of only one of them can’t sell the other spouse’s beneficial land trust interest. 735 ILCS 5/12-112.

The Court rejected the defendants argument that as TBE land trust beneficiaries of the marital home, the spouse defendants were immune from foreclosure. It noted that both spouses signed letters of direction authorizing the land trustee (owner) to mortgage the property, the mortgage documents allowed the plaintiff to foreclose in the event of default and empowered the lender to sell all or any part of the property. (¶¶ 16-18)

Summary Quick-Hits:

TBE property ownership protects an innocent spouse by saving the marital home from a judgment creditor’s foreclosure suit where only one spouse is liable on a debt;
A land trust beneficial interest is considered personal property and can be jointly owned in tenancy by the entirety;
Where spouses are jointly (both) liable on an underlying debt, TBE property can be sold to satisfy the joint debt.

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