Probate, trust, guardianship and inheritance litigation
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Ohio Power of Attorney Act Prohibits Self Dealing

By:  Daniel McGowan, Esq.

The Ohio Power of Attorney Act Prohibits Self Dealing Transactions

A.  “Hot Powers”

A power of attorney is a written instrument authorizing an agent, known as an “attorney-in-fact” to perform specific acts on the principal’s behalf.  Testa v. Roberts, 44 Ohio Ap.3d 161, 164, 542 N.E.2d 654 (1988).  “[A] general, durable power of attorney does not authorize attorneys-in-fact to transfer the principal’s property to themselves or to others, unless the power of attorney explicitly confers this power.  An attorney-in-fact may not make gratuitous transfers of the principal’s assets unless the power of attorney from which the authority is derived expressly and unambiguously grants the authority to do so.”  MacEwen v. Jordan (Mar. 28, 2003), Hamilton App. No. C-020431, 2003-Ohio-1547, 2003 WL 1571744.

For example, if an agent acting under a power of attorney sells another person’s property, the agent cannot then place the proceeds of the sale into an account where the agent has ownership rights (i.e. a joint account) unless the power of attorney document specifically authorizes self dealing by the agent and provides that the agent may make gifts to herself.  Stated another way, simply because the language of a power of attorney does not specifically deny the right to transfer funds from the sale  property into an account co-owned by the agent, he or she cannot assume the right exists from the absence of such restrictive language.

Chapter 1337, S.B. 117 became effective on March 22, 2012.  That Act created Ohio’s version (the “OPOAA”) of the Uniform Power of Attorney Act (“UPOAA”).  The Act is codified in R.C. §§1337.21 to 1337.64.  Certain “hot powers” in R.C. 1337.42(a) must be specifically authorized.  These powers include making a gift.  If a power of attorney used does not contain any of the “hot powers” identified in the OPOAA, there may be legal grounds to invalidate certain transactions entered into by the agent.  Where a Power of Attorney des not contain the specific authorization required for transfer property rights of the principal  into an account in which the agent has ownership rights (i.e., to make gifts), a challenge may be made in an Ohio Court to the “gift.”  Issues also arise where powers of attorney instruments do not contain a waiver of any conflicts of interest/self-dealing involving transfers by an agent where the agent is a beneficiary.

Ohio Revised Code § 1337.42 requires that a power of attorney must contain an expressed grant of authority to an agent in order to make a gift or create a beneficiary designation on an asset.  Further, under §1337.42(B) “[a]n agent that is not an ancestor, spouse, or descendant of the principal may not exercise authority under a power of attorney to create in the agent, or in an individual to whom the agent owes a legal obligation of support, an interest in the principal’s property, whether by gift, right of survivorship, beneficiary designation, disclaimer, or otherwise.  In other words, an agent is not authorized n use the power of attorney to transfer the cash generated from the sale of the real property of the principal, at a time when the agent does not have any property rights in the proceeds from the sale of that property, into an account where he or she becomes a co-owner of those funds.  This type of transaction is specifically prohibited under Ohio Revised Code § 1337.42 and the action is void ab initio.

 

B.  Whether the Transaction was Directed or Authorized by the Principal is Irrelevant

Often, a defendant in this type of a legal challenge will assert as a defense  that the transfer was directed and authorized by the principal.  However, Ohio law does not permit an agent to self-deal, even at the principal’s direction:

“A transfer by fiduciary agent to himself violates the rule against self-dealing.  The question of bad faith never enters into it.  Because of the potential for mischief, these kinds of transactions are simply barred as a matter of law.”

 

Montgomery, Pike App. No. 448, 1990 WL 127047 quoted by Tewksbury v. Tewksbury, 194 Ohio App. 3d 603 (2011).  As the Tewksbury opinion makes clear, there is no authority to permit an agent to self-deal, even at the principal’s direction.  “The proper method to carry out these transfers, if we assume for purposes of argument that the decedent, in fact desired the transfer, is to appoint an attorney in fact who is completely disinterested in the transactions.”  Id.  This rule in Ohio is consistent with other states that have adopted the Power of Attorney Act that have held that extrinsic evidence of the principal’s intent to allow such transactions is not admissible.[1]  These courts have recognized that ‘durable gifting powers’ carry an “inherent potential for fraud and abuse.”[2]  This is not only because of the broad authority such powers confer but also because in many cases the power is granted precisely because the principal is vulnerable or dependent on others.[3]  If limitations on these powers are not enforced, “an attorney in fact, if so inclined, would be allowed to make an unauthorized gift, based upon claimed oral authorization of the principal, and the only person who could refute the claim would be dead.”[4]  Given these concerns, these courts have held that a principal’s alleged oral statements to her attorney-in-fact cannot modify or “negate [her] formal expression of her intent as embodied in the power of attorney agreement.”[5]  The “justification for such a flat rule” against parol or extrinsic evidence “is made even more apparent when one considers the ease with which such a rule can be accommodated by principals and their draftsmen.”[6]  That is, nothing prohibits a principal from expressly authorizing such gifts in writing.  Because that didn’t occur in this case, the action is void.  “The proper method to carry these transfers, if…the decedent, in fact, desired the transfer, is to appoint an attorney in fact who is completely disinterested in the transactions.”  Tewksbury v. Tewkbury, 194 Ohio App.3d 603, 957 N.E.2d 632, 2011-Ohio-3358 (2011).

 

C.  Transfer on Death Affidavits Do Not Convey any Property Rights During the Principal’s Life

Frequently, the defendant in these types of cases believe that his or her actions are authorized because the principal had previously executed a transfer on death affidavit related to the real property that was sold.  However, the designation of a transfer on death beneficiary has no effect on the present ownership of real property, and a person designated as a transfer on death beneficiary has no interest in the real property until the death of the owner of the interest.  See, Ohio Revised Code § 5302.23(B)(4):

“The designation of a transfer on death beneficiary has no effect on the present ownership of real property, and a person designated as a transfer on death beneficiary has no interest in the real property until the death of the owner of the interest.”

Thus, because these types of defendants do not have any property rights during the life of the principal to the real property, when the power of attorney instrument is used to transfer those property rights into (by cash transfer) an account in which he or she had ownership/property rights, the action is void ab initio because it was not specifically authorized by the power of attorney instrument.

[1] In re Estate of Hemphill, 186 So.3d 920 (Miss.Ct.App. 2016); Kunewa v. Joshua, 83 Hawaii 65, 924 P.2d 559, 565 (Haw.Ct.App 1996); In re Estate of Herbert, 152 S.W.3d 340, 346, 351-354 (Mo.Ct.App. 2004); Crosby v. Luehrs, 266 Neb. 827, 669 N.W.2d 635, 644 (2003); Fender v. Fender 285 S.C. 260, 329 S.E.2d 430, 431 (1985); Studt v. Black Hills Fed. Credit Union, 864 N.W.2d 513, 515-17 (¶¶ 10-14) (S.D.2015); Praefke v. Am.Enter.Life Ins., 655 N.W.2d 456, 460-62 (Wis.Ct.App.2002).

[2] In re Estate of Hemphill, 186 So.3d 920 (Miss.Ct.App. 2016); Praefke v. Am.Enter Life Ins.,  655 N.W.2d 456, 460 at 461 (Wis.Ct.App.2002).

[3] In re Estate of Hemphill, 186 So.3d 920 (Miss.Ct.App. 2016); In re Estate of Herbert, 152 S.W.3d 340 at 353 (Mo.Ct.App. 2004)

[4] In re Estate of Hemphill, 186 So.3d 920 (Miss.Ct.App. 2016); In re Estate of Herbert, 152 S.W.3d 340 at 353.   (Mo.Ct.App. 2004)

[5] In re Estate of Hemphill, 186 So.3d 920 (Miss.Ct.App. 2016); Praefke v. Am.Enter Life Ins.,  655 N.W.2d 456, 460 at 461 (Wis.Ct.App.2002).

[6] Kunewa v. Joshua, 83 Hawaii 65, 924 P.2d 559, 565 (Haw.Ct.App 1996); Estate of Casey v. Comm. Of Internal Revenue 948 F.2d 895, 898 (4th Cir. 1991).

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