Appellate Court Decision Increases Risks Associated With Powers of AttorneyApril 12, 2006
A recent Wisconsin court decision should cause banks to carefully review and consider their policies and procedures related to the use of a power of attorney for bank transactions ("POA"). In Helen F. Losee v. Marine Bank, the Wisconsin Court of Appeals held that the unauthorized self-dealing by an agent under a POA was sufficient to void a bank’s security interest in collateral previously pledged by the agent. In holding against the bank, the Court of Appeals remanded the case back to the trial court for further proceedings. We understand that no appeal of this decision is being filed by the bank.
Facts of the Case
In 1994, Helen Losee executed a durable POA appointing her son John as attorney-in-fact. In 1997, John’s company obtained a business loan from Marine Bank with Helen providing collateral for that loan in the form of a mortgage and an assignment of rents on a condominium she owned. Helen willingly signed the mortgage and the assignment of rents to the bank. The terms of the mortgage provided for the securing of "all future amounts" under the loan to her son’s company, not to exceed an aggregate of $1,000,000.
John’s company subsequently encountered financial difficulties. The mortgage, signed by Mom, was used to secure additional extensions of credit from the bank. John signed for the additional indebtedness in both his capacity as Helen’s POA and as president of his company. In 2001, John asked the bank to release the mortgage and assignment of rents so his mother’s condominium could be sold. The bank agreed to the request on the condition that the net proceeds from the sale would be placed in a certificate of deposit assigned as collateral to the bank to secure its loan. John sold the condominium and, acting in his capacity as Helen’s POA, executed an Assignment of Deposit Account to pledge the CD’s to the bank. When the company later defaulted on its loan, Marine Bank enforced its security interest by applying the proceeds from the CD’s (approximately $240,000) to the outstanding loan balance.
The Court found that because Helen’s POA did not specifically permit self-dealing, the assignment by John of the certificates was unenforceable and void. The Court relied as precedent on an earlier case holding that an "attorney-in-fact may not make gratuitous transfers of a principal’s assets unless the power of attorney… expressly and unambiguously grants the authority to do so."2
The Impact on Wisconsin Banks
We believe this Appellate Court ruling creates an unfavorable legal precedent for Wisconsin banks in their regular dealings and transactions with agents under POA accounts. Banks that have, or should have, knowledge, based on the circumstances, of self-dealing in an account by an attorney-in-fact under a POA, should proceed very cautiously. If the POA does not specifically provide for self-dealing, under the Losee reasoning, the bank should either deny such transactions or realize it runs the risk subsequently of the transaction being held void and unenforceable.
What is not clear is whether this ruling creates or suggests a new duty for banks to inquire into transactions conducted under a POA and determine if self-dealing exists. While the case specifically dealt with a collateral assignment, the Court’s reasoning arguably suggests that banks could also be responsible for monitoring large cash withdrawals or checks drawn by a POA on a principal’s account, to determine if the proceeds are somehow being used to facilitate a "gratuitous transfer of a principal’s assets."
Existing Wisconsin statutes provide that a bank "shall not be required to look into the application of any funds withdrawn by an agent." Other statutes provide that any right or title acquired from a fiduciary in good faith is not invalid as a result of misapplication by the fiduciary. It is unclear how, or if, these statutes factored into the Court’s decision.
Banks need to be diligent in evaluating POA documents and be aware of unusual transactions being conducted by attorneys-in-fact. If the bank becomes aware of a situation where circumstances suggest the attorney-in-fact may be self-dealing, the POA document should be reviewed to determine the scope of the POA powers. If self-dealing is not specifically provided for (it almost never is in our experience), the bank should evaluate the customer’s entire relationship and determine whether the risk justifies continued acceptance of transactions conducted by the agent under the POA.
This Financial Institutions Update is published to provide our friends and clients with current information that may affect their businesses. This information is not intended to serve as specific legal advice or as a solicitation for business.
2 Praefke v. American Enterprise Life Ins. Co., 2002 WI App 235,257 Wis. 2d 637,655 N.W. 2d 456