Take-Away: An agent who acts under a durable power of attorney may be exposed to claims of self-dealing if the agent takes actions that benefit the agent or the agent’s family members. Less obvious is that the agent’s confidential relationship with their principal can expose the agent to claims of undue influence over his/her principal when it comes to encouraging lifetime gifts and/or testamentary bequests.

Background- Nature of Principal-Agent Relationship: An agent who acts under a durable power of attorney is expected to act in according with the standards of care applicable to fiduciaries. From that fiduciary role arises several issues, including the prohibition against self-dealing and the possible presumption of undue influence exercised over the principal.

  • Confidential Relationship: The grant of a general power of attorney creates a confidential relationship between the agent and principal. Smith v Onaway Community Federal Credit Union, No 246196, 2004 Mich. App LEXIS 2785 (October 21, 2004); In re Estate of Susser, 254 Mich. App 232 (2002).
  • Agent as Fiduciary: An agent who acts under a durable power of attorney is not formally listed as a fiduciary under the definition of fiduciary under the Estates and Protected Individuals Code (EPIC.) [MCL 700.1104(e).] However,  several published Michigan court decisions  note that an agent owes fiduciary duties to the agent’s principal  under the common law (but not EPIC itself.) A fiduciary relationship exists between a principal and agent under a power of attorney instrument. In re Conant Estate, 130 Mich. App 493 (1983.)
  • Self-Dealing: A fiduciary, in the fiduciary’s personal capacity, cannot engage in a transaction with the principal’s estate that the fiduciary represents, nor can a fiduciary  invest the principal’s estate money in an entity with which the fiduciary is affiliated. As such, a fiduciary in his/her personal capacity cannot derive a profit from the purchase, sale of transfer of the principal’s estate’s property. [MCL 700.1214.] This general prohibition can, however, be overridden by an express authorization for the self-dealing in the governing instrument, like the power of attorney that delegates express powers to the agent over the principal’s assets. Even when that express authorization to self-deal is absent in the governing document, like the durable power of attorney,  the Michigan Supreme Court noted that the agent may permissibly engage in self-dealing transactions if the principal consents to, and has knowledge of, the details of the transaction and if the passage of time and the change in the principal’s mental status could not affect the agent’s authority to have transferred the principal’s property. In re Estate of Cummin, 474 Mich. 1117 (2006.) An act of self-dealing can also arise when the transaction involves a relative of the agent and not the agent directly. Thiel v Cruikshank, 96 Mich. App 7 (1980)

Undue Influence: Michigan’s common law requires that the party who asserts undue influence show ‘that the grantor was subjected to threats, misrepresentation, undue flattery, fraud, or physical or moral coercion sufficient to overpower volition, destroy free agency and impel the grantor to act against his inclination and fee will. Motive, opportunity, or even ability to control, in the absence of affirmative evidence that it was exercised, are not sufficient. Kar v Hogan, 399 Mich. 529 (1976.)

Presumption of Undue Influence: A legal presumption of undue influence can arise when there is evidence of the following:

  • (1) the existence of a confidential or fiduciary relationship; and
  • (2) the fiduciary or an interest that is represented by the fiduciary benefits from the transaction; and
  • (3) the fiduciary had an opportunity to influence the donor or testator’s decision in that transaction.

Undue Influence Elements: While each state uses its own definition of undue influence, as a generalization undue influence usually has four evidentiary elements, each of which must be proved to maintain a claim of undue influence. Those 4 elements are:

  • (1) the donor was susceptible to the influence of others; and
  • (2) the donor and the influencer has a confidential relationship; and
  • (3) the influencer used that confidential relationship to effect a change in the distribution of the property either in a will, trust, or lifetime gift; and
  • (4) the change did not express the desires of the donor [and element which courts sometimes summarize as an unconscionable ]

Burden of Proof: An area where there seems to be more confusion is the burden of proof when a claim of undue influence exists with the legal presumption. Some states follow the Restatement (Third) of Property, Section 8.3 which directly places the burden of proof of undue influence on the party who claims that undue influence occurred. Other states create a rebuttable presumption that undue influence exists, a presumption which the alleged influencer must overcome with evidence, if there was a confidential or fiduciary relationship between the testator/donor and the alleged influencer. When there is a presumption of undue influence that arises from the confidential or fiduciary relationship between the principal and agent, the burden of proof then shifts to the agent-influencer under Michigan law to rebut the presumption. Whether that evidence provided by the agent-influencer is sufficient to rebut that evidentiary presumption is question of fact to be determined by the judge or jury. Not so clear however is how much evidence must the agent-influencer produce to overcome the legal presumption of undue influence that arises out of the confidential or fiduciary Also unclear, in the end analysis, is who bears the ultimate burden of proof to persuade the trier of fact: the litigant who claims that undue influence occurred,  or the agent-influencer who produces evidence that overcomes the legal presumption that arises due to the confidential or fiduciary relationship. [In truth, trial courts are all over the map as which party bears the ultimate burden of proof, and lawyers hotly disagree among themselves on this question which can cause much confusion if a jury is called upon to determine if undue influence occurred.]

Mississippi Decision:  A recent example of where an agent was found to have exercise undue influence over her principal is the Mississippi case Johnson v. Johnson, 237 So. 3d 698 (Miss. 2017) which also addressed the level of proof imposed on the purported influencer.

  • Facts: The agent, an adult daughter,  amended her mother’s certificates of deposit (CD’s) by naming the daughter’s children as co-owners of the CD’s with their grandmother. At the same time this action was taken the daughter acted as her mother’s caregiver. The daughter’s transactions deleted the names of the co-owners on the existing CD’s and replaced those names with her own children’s names, the granddaughters, as co-owners with their grandmother. The ‘deleted’ CD owners then brought a legal action to overturn that change in CD co-ownership,  asserting the agent’s undue influence over her mother.
  • Court Decision: The Court found that since the mother’s name was still on the CDs as a co-owner, the change of names on the CD’s was not a completed gift (by the agent), and therefore the name-change transaction could not be challenged on the grounds of undue influence exercised by the daughter acting on  behalf of her daughters (the reasoning is that the grandmother might survive her granddaughters, and thus no benefit was (yet) conferred by the agent’s actions. However, the Court did find that the daughter had used undue influence in her capacity as agent for her mother when she used her authority under the mother’s power of attorney to change the names on the CD’s.  The Court, finding that a confidential relationship existed between the mother and her daughter, produced the presumption of undue influence that the daughter failed to rebut with sufficient In short, the Court imposed a rebuttable presumption of undue influence to overturn the change in CD owners made by the agent using the power of attorney that her mother had given to her.
  • Confidential Relationship: This finding was a bit surprising since Mississippi, unlike Michigan, holds that a power of attorney relationship does not, standing alone, create a confidential relationship between principal and agent. But the Mississippi Court went on to find that a confidential relationship did, in fact, exist because the daughter also served as her mother’s caregiver, there was a close bond between them, and the mother’s reliance and dependence on the daughter created that confidential relationship.
  • Clear and Convincing Burden of Proof: Thus, the Mississippi Court applied the presumption of undue influence to overturn the daughter’s acts using the power of attorney that benefited her own children, and in doing so, it affirmed the shift of the burden of proof, or more accurately to the absence of undue influence, onto the daughter- to show that she did not exercise undue influence over her mother. Adding to that shifted burden of proof was the Court’s imposition of a much higher evidentiary standard on the agent, in that it required  the daughter to show that she had to overcome the legal presumption of undue influence with clear and convincing evidence, not just the more conventional standard burden of proof by a showing of a preponderance of evidence. It is not clear from reading the long decision of the Supreme Court why it decided to impose the much higher burden of proof standard on the daughter-agent. Other courts have also had no hesitation in imposing the higher burden of proof standard on the agent- see Grubb v Grubb, 630 S.E.2d 746 (Va 2006) where the agent under a power of attorney received personal benefit from a transaction and the court held that the agent had to prove the lack of undue influence by clear and convincing evidence. One wonders if the higher standard was used in the Mississippi case because  there were two separate confidential relationships at work under the facts: (i) principal and agent; and (ii) caregiver-patient. Either way, rebutting a legal presumption of undue influence using a clear and convincing standard of evidence put the daughter in a difficult litigation position.

Conclusion: As you review clients’ durable powers of attorney, take a look at whether the instrument requires the agent to report what steps were taken using the power of attorney, and to whom the reporting must be given if the principal is then incapacitated. EPIC only requires that the agent provide an accounting for ‘actions’ [not legal implications] taken using the power of attorney to the principal or the principal’s guardian or conservator upon request. If the principal is incapacitated, and there is no court appointed conservator or guardian for the principal (presumably because there is an agent able to act using the durable power of attorney), then arguably no one has any legal authority to request an accounting from the agent. A well drafted durable power of attorney should require the agent to timely provide to a third party, perhaps a named successor agent under the same instrument, what actions were taken and provide a reason why the actions were taken.