Posts Tagged ‘bankruptcy’

Agent On Power of Attorney is Personally Liable for Legal Fees

MARCH 3, 2014 VOLUME 21 NUMBER 9

Let’s say that Billy signs a power of attorney, naming his friend Joyce as his agent. Later Billy becomes incapacitated, and his agent needs legal advice about her rights and responsibilities. Who will pay for their legal advice?

Generally speaking, you are not supposed to have to spend your own money for things you need to do while acting under a power of attorney, and that includes getting legal advice. But the real world can sometimes get in the way — Billy’s assets may be insufficient to pay legal fees, there may be a dispute about whether his agents are acting in his best interests, or there may be personal interests that they are simultaneously promoting.

This concern is not academic, at least for the people involved in a recent Arizona Court of Appeals decision. “Billy” in that case was Billy Preston, who was sometimes tagged as “the fifth Beatle.” He became seriously ill in 2005, and was admitted to a hospital in Phoenix; he died in June, 2006, after months in a coma.

Billy had signed a medical power of attorney in 2004, naming his friend Joyce Moore as health care agent. Joyce was already his agent — she had represented him as a musician for some years before he signed the health care power of attorney. In March, 2006, while Billy was comatose, his half-sister petitioned the Arizona probate court to be named Billy’s conservator. Although Joyce’s power of attorney put her in charge of medical, not financial, decisions, she felt that she needed legal advice. Joyce hired a Phoenix law firm to represent her; she signed a retainer agreement on March 30, 2006.

Apparently, Joyce and her lawyers did not have the same understanding of their relationship. While Joyce later testified that she thought her lawyers represented her only as health care agent for Billy, her lawyers insisted that they represented her as an individual because of her financial dealings with Billy.

Joyce insisted that her lawyers should submit their bill to Billy’s estate; whether or not that made sense, it was an impractical way to secure payment since the Billy Preston estate had declared bankruptcy. In fact, the estate sought (and recovered) some of the retainer fee Joyce had given to her lawyers, since it had come from Billy’s estate and had not been approved by the bankruptcy court.

Three years after Billy Preston’s death, Joyce’s attorneys sued her personally for about $30,000 in legal fees. Joyce argued that she was not personally liable for the bill; a fee arbitration process found otherwise, and awarded $13,550.86 in legal fees and costs to the law firm. Joyce appealed and set the dispute for trial.

After a three-day trial, an Arizona jury ruled that Joyce personally owed her lawyers $20,000. Joyce appealed the judgment. Last week the Arizona Court of Appeals upheld the award of fees and costs to Joyce’s lawyers, finding that she had not produced sufficient arguments to overcome the jury’s award. Burch & Cracchiolo, P.A. v. Moore, February 27, 2014.

The ruling itself is not actually all that revealing. Joyce represented herself for the appeal, and did not submit transcripts of the trial proceeding; in the absence of those transcripts, the appellate court ruled that she could not show that there had been mistakes in the trial court. The real value of the case, for our purposes, is a chance to explore the authority of agents under powers of attorney to hire lawyers (and other professionals).

There is little doubt that an agent can hire an attorney, accountant, physician or other professional as may be needed in order to discharge their obligations as agent. So, for instance, it would be easy to imagine a circumstance in which there were legitimate legal questions about the agent’s authority, or powers, or duties, and hiring a lawyer might well be necessary and appropriate to help figure out the answers to those questions. That lawyer’s fees would ordinarily be charged against the estate of the principal (the person who signed the power of attorney).

Similarly, it would be easy to imagine that a financial agent might need to hire an accountant to prepare tax returns or accountings, or to investigate past transactions. Those charges should be paid by the estate in most cases, too. Same thing for hiring a doctor, or a social worker, or a case manager, to help oversee care of a person who has signed a health care power of attorney.

Problems can and do arise when the agent also has business dealings with the principal before the power of attorney is signed or used — and such circumstances do happen. After all, it often makes sense to name your business associate to manage your own finances — typically they might know more about your finances than others, even family members. But that can complicate the responsibility to figure out what the attorney (or accountant, or medical professional) is doing for the agent as agent, and what is being done for the agent as an individual.

It’s hard to tease out how much of that might have been going on in Billy’s case, since the appellate record is sparse. But confusion between the lawyers’ view of their role and the client/agent’s view is not that uncommon; it’s why a fee agreement should spell out the precise relationship and who will be responsible for payment.

Typically, a lawyer’s fee agreement might provide that bills will be submitted to the principal’s estate. If they are not paid for any reason (even though that failure or refusal of payment might be challenged), the fee agreement often will provide that the agent is responsible for payment and for seeking reimbursement from the estate. Such a provision might have been in Joyce’s attorney’s fee agreement, but the appellate court did not mention it.

Does all that mean that you should refuse to act as agent because  you might incur personal expenses if things go awry? If you are very skittish about the possibility, you should consider whether it is important enough for you to decline. In the real world, however, disputes like this are rare — and your loved ones need someone to step up and take responsibility for their care if and when they are unable to do it themselves.

Put Your Accounts in Your Daughter’s Name — What Could Go Wrong?

FEBRUARY 18, 2013 VOLUME 20 NUMBER 7
Seniors are subjected to a constant drumbeat of advice: make sure you have no assets in your own name, or you will lose them to the nursing home. Transfer everything to your children to “protect” your assets. Is it good advice?

We usually counsel against such transfers. They are a bad idea for several reasons, but chiefly for these two reasons:

  1. Such transfers are not likely to work, given the five-year look-back period for Medicaid eligibility. In other words, if you make such a transfer shortly before you go to the nursing home, you won’t be eligible for government assistance with your long-term care costs for up to five years — or even longer, in some cases.
  2. Even if you successfully “protect” your assets from your own nursing home costs, you have just subjected them to the recipient’s creditors and claims.

That second item was the one that cost Deborah Smith (not her real name) her entire life savings. In 2002 Ms. Smith transferred her brokerage account, worth about $200,000, into her daughter’s name. Why would she do such thing? She later testified that it was because she understood that she could not have any assets in her own name if she later wanted to qualify for Medicaid assistance with her long-term care costs. She wanted to protect her money from that possibility, and also from any “scammers” who might try to talk her out of her funds.

Ms. Smith, 71, lives — and still works as a nursing assistant — in the small Arizona town of Cottonwood. She and her husband owned a small pharmacy there, and sold their business to a large chain store in 2002, just before her husband’s death. The proceeds went into an account in their joint names, and was transferred to Ms. Smith’s name upon her husband’s death.

Later in that same year, while visiting her daughter in Virginia, Ms. Smith decided to put her entire life savings into a brokerage account in her daughter’s name. The daughter’s Social Security number was listed on the account, the daughter paid taxes on the income, and she was listed as the sole owner. Ms. Smith did have a debit card on the account, which she could (and did) use to pay for purchases.

In 2010, after the stock market dropped precipitously, Ms. Smith’s daughter moved the money into a new investment vehicle. She paid over $18,000 for a complicated trust arrangement (called “Ultra Trust®“) in order to protect the money from creditors. Although she initially contacted the purveyors of the trust instrument, Estate Street Partners, LLC, (“…learn how to Hide Your Assets despite what your lawyer told you…”), she received documents for her mother’s signature from lawyer John Libertine. The documents included a trust naming a third person as trustee, and a private annuity agreement.

Meanwhile, Ms. Smith’s daughter was having trouble with her own investments. She owned a piece of investment real estate with a second mortgage. When that loan’s balloon payment came due, the property had diminished in value to the point that she could not refinance — so she declared personal bankruptcy. The question then became whether her mother’s brokerage account was part of her bankruptcy estate.

The bankruptcy court ruled that yes, the account did belong to Ms. Smith’s daughter. Although both women testified that they thought of the money as belonging to Ms. Smith, and that the daughter was just holding it in a sort of trust arrangement for her mother, the bankruptcy court noted that Ms. Smith had said she transferred the money in order to make sure he had no assets and could qualify for Medicaid if she ever needed it. Here is the bankruptcy judge’s telling analysis:

“After all, [Ms. Smith and her daughter] argue, why would a woman who was advancing in years, nearing retirement and working for an hourly wage, give the entirety of her retirement nest egg to her daughter? The answer lies in Ms. [Smith]’s own testimony — she wanted to remove the funds from her own name and place them into the name of her daughter, in order to be eligible for Medicaid and other publicly available benefits, should the need arise. Ms. [Smith] can’t have it both ways — she can’t part with title for purposes of Medicaid eligibility, and at the same time claim that she retained an equitable title to the asset. To allow this kind of secret reservation of equitable title would be to sanction Medicaid fraud.”

The bankruptcy judge, incidentally, also completely dismissed the effect of the trust arrangement established by Ms. Smith’s daughter. The end result? Ms. Smith’s life savings were swept into the bankruptcy proceeding to satisfy her daughter’s investment losses. In re Woodworth, US Bankruptcy Court for the Eastern District of Virginia, February 6, 2013.

 

Bankruptcy Court Discharges Trustee’s Liability for Breach

DECEMBER 16, 2002 VOLUME 10, NUMBER 24

Antonia Quevillon, then age 70 and in poor health, consulted attorney Carl Baylis about her estate plan. Mr. Baylis prepared a living trust for her, and arranged transfer of apartment buildings she owned into the trust’s name. The trust named Mr. Baylis himself as co-trustee—to serve along with Ms. Quevillon’s daughter Estelle Ballard.

Ms. Quevillon died shortly after the trust was executed. For the next twenty years Mr. Baylis and Ms. Ballard acted as co-trustees, managing the trust’s property.

A dispute arose between the trustees and the beneficiaries (other than Ms. Ballard) over whether the apartment buildings should be sold. Ms. Ballard resisted efforts to sell the buildings, probably at least partly because she lived in one of the apartments rent-free, and most of her living expenses were paid by the trust.

Although Ms. Ballard eventually agreed to sale of the properties, she did not cooperate with actual sales. Finally the other beneficiaries sued both trutees for breach of their fiduciary duties. The lawsuit ultimately resulted in a judgment against Mr. Baylis personally for almost $1 million; in addition, Mr. Baylis was ordered to repay the trust $27,000 he had used to defend and settle an earlier lawsuit against him by the beneficiaries.

Mr. Baylis responded to the judgment by filing bankruptcy. If successful, the bankruptcy proceedings would result in discharge of all his debts, including those owed to the beneficiaries of Ms. Quevillon’s trust.

Bankruptcy rules, however, permit the court to refuse to discharge debts for breach of fiduciary duty—without specifying precisely how to apply the exception. Mr. Baylis argued that his behavior was not a “defalcation,” the term actually used by the bankruptcy code, and the Bankruptcy Court agreed. It permitted his debt to the trust to be discharged.

The Massachusetts Federal District Court next heard the case, and it reversed the Bankruptcy Court determination, thereby denying Mr. Baylis relief from his debt to the trust and its beneficiaries. Mr. Baylis appealed again, and the First Circuit Court of Appeals permitted most of the debt to be discharged.

The appellate court distinguishes between non-dischargeable debts based on bad acts by the debtor (like embezzlement, or injuries from driving while drunk) and those based on public policy (like taxes and student loans). Finding that defalcation as a fiduciary is more like the former category, the court looked for evidence of either specific intent or recklessness on the part of Mr. Baylis. Finding none, it authorized discharge of most of his debt. Mr. Baylis, however, must still repay the $27,000 spent in defending the lawsuit against him. In re: Baylis, December 10, 2002.

Bankrupt Wins Damages For Bank’s Foreclosure Proceeding

NOVEMBER 22, 1999 VOLUME 7, NUMBER 21

Kenneth A. Kaneb, like many northern retirees, spent his winters in Florida. Although he lived alone after his wife’s death, he owned the family home in Massachusetts and a second home, a condominium, in Florida.

In 1993, at the age of eighty five, Mr. Kaneb found that he had insufficient assets and income to maintain his two-state retirement lifestyle. He filed for bankruptcy in Massachusetts, negotiated the sale of his home in that state and paid off secured creditors, and moved to his Florida condominium.

Once a bankruptcy proceeding is initiated, all legal actions against the bankrupt are suspended automatically by bankruptcy court rules. While it is possible to get the court’s permission to proceed against the bankrupt in individual cases, that permission is not easily gained. The automatic stay of proceedings applies even to the holder of the mortgage on the bankrupt’s real estate, so Mr. Kaneb’s actions stopped the mortgage-holder on his Florida property from foreclosing, at least temporarily.

Shawmut Bank was the original mortgagee of Mr. Kaneb’s Florida condominium, and they argued that the bankruptcy stay should be lifted so that they could initiate foreclosure proceedings. The bankruptcy judge refused to lift the stay, and so Shawmut forwarded the collection file to a Florida attorney’s office to initiate negotiations with Mr. Kaneb and his lawyer.

Shawmut’s Florida attorney did not understand that the bankruptcy court had refused to lift the stay. A copy of the court order which Shawmut had hoped to get signed was included in the file, and the attorney assumed that the original had been signed. She filed a foreclosure action, and published notice of the foreclosure in the local newspapers.

Although Mr. Kaneb’s attorney promptly persuaded the bank’s counsel that the foreclosure was improper, no actions were taken to dismiss the proceeding for six weeks. During that time, neighbors learned of the pending bankruptcy, partly because of a huge volume of “colorful” mail offering to help him work out his financial problems. Mr. Kaneb’s condominium was part of a close-knit gated community, but after news of his difficulties became widespread he stopped receiving invitations to social gatherings and his neighbors began to avoid him.

Mr. Kaneb brought legal action against Shawmut (and its successor, Fleet Mortgage Group) for its violation of the federal bankruptcy stay. After a trial, the bankruptcy court awarded him over $18,000 in legal fees and court costs, plus $25,000 for emotional distress.

The First Circuit Court of Appeals reviewed the case. The court pointed out that “emotional damages” qualify as actual damages, and upheld Mr. Kaneb’s award. Fleet Mortgage Group v. Kaneb, November 8, 1999.

Quitclaim to Children Not “Fraudulent” Transfer

JUNE 3, 1996 VOLUME 3, NUMBER 49

Seniors concerned about the high cost of nursing care often transfer assets, sometimes even including their homes, to their children. Such transfers may actually make paying for nursing care more difficult, since Medicaid (ALTCS) eligibility does not count the residence as an asset, but does count the transfer to children as a disqualifying gift. Nonetheless, many elderly homeowners choose to transfer the home.

Elder law attorneys have long been concerned about another aspect of this practice. Every state has some form of a law making it illegal to give away assets to avoid creditors; do such laws prevent transfers to avoid future nursing home claims against the seniors’ assets? The so-called “fraudulent transfer” rules have not been widely tested, but a recent Tennessee case suggests that most such transfers are permissible.

Ruth Bryan, 71, owned a modest home in Tennessee and had a savings account of about $10,000. She had given her daughter a power of attorney to manage her affairs if she became incapacitated. When Ms. Bryan’s condition worsened and she was hospitalized, her daughter used the power of attorney to quit-claim Ms. Bryan’s home to herself and her brother (Ms. Bryan’s son).

Ms. Bryan improved enough to be discharged to Imperial Manor Convalescent Center, where she incurred a bill of $10,000 which she was unable to pay. Upon her release from Imperial Manor, she filed bankruptcy, claiming that she owned no assets.

The Tennessee court, at the bankruptcy trustee’s request, initially ruled that the transfer of Ms. Ryan’s home to her children was fraudulent, and set it aside. On appeal, the Tennessee Court of Appeals disagreed.

According to the appellate court, Ms. Ryan’s transfer of the home was not fraudulent for two reasons. First, it did not render her insolvent (remember that she also had a small bank account). More importantly, perhaps, she did not owe anything to Imperial Manor at the time of transfer (which was made while she was still in the hospital), and the bankruptcy trustee had not shown that Ms. Ryan’s daughter did not act for the express purpose of making her unable to pay her debts. At the time of the transfer, the daughter did not know that her mother’s debts would accrue beyond her ability to pay. Crocker v. Ryan, Tenn. Ct. App. (1995).

Arizona’s fraudulent transfer law is quite similar to Tennessee’s. Arizona Revised Statutes §44-1004 makes a gift fraudulent if the transferor “intended to incur, or believed or reasonably should have believed that he would incur, debts beyond his ability to pay as they became due.”

In applying this law to the common practice of gifting one’s home to children, two questions come to mind:

  • Does the gifting parent have a basis to believe that he or she will soon incur a debt for nursing care?
  • Does the possibility of qualifying for Medicaid (ALTCS) assistance affect the expectation of the gifting parent?

There are two common circumstances where a senior who has given his or her home to children may qualify for ALTCS. In the first, the parent will have stayed out of the nursing home for three years following the gift. In the second, ALTCS eligibility rules expressly permit gifts of residences to children who have lived with the applicant and provided care for two years. Though there are other, rarer circumstances where transfer of the home is advisable, the fraudulent conveyance law makes it more difficult to recommend that seniors quit-claim the home to children.

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