Posts Tagged ‘Guarantee of Payment’

Trustee Not Personally Liable for Trust Business

JUNE 23, 2014 VOLUME 21 NUMBER 23

It’s a small point, but important — and the Arizona Court of Appeals reiterated it in a decision released last week. So it seems to us that it would be appropriate to call attention to this simple rule: generally speaking, a trustee is not personally liable for her (or his) actions as trustee.

There are, of course, exceptions. A trustee may so intermix her personal interests and those of the trust that she is liable both personally and as trustee. There are some trusts that will be treated as the alter-ego of the trustee — so that creating the trust does not shield the trustee from personal liability. Sometimes the trustee’s actions are so clearly wrong that she might be liable, to trust beneficiaries or others. But in the vast majority of cases, a person acting as trustee can bind the trust without exposing herself to liability.

This concept is not esoteric. It is central to the whole idea of trusts. If you name your daughter as trustee, she needs to know that she can administer the trust without exposing her own assets to liability. If you take over a trust after the death or disability of someone else, or even if you are a professional trustee, you need to be comfortable that you will not be liable for the ordinary business of running the trust.

How was this issue involved in last week’s Arizona court case? It was simple: a trust owned a piece of real estate, and the trustee signed a listing agreement to get the property sold. Later the trust canceled the listing agreement, and the listing agent sued the trust — and the trustee — for the amount specified as payable in the listing agreement upon early termination. A jury found in favor of the listing agent, and judgment was entered against both the trust and the trustee. The trustee appealed, arguing that she should not be liable for the trust’s violation of the terms of the agreement — even if she was the one who both signed and terminated the listing agreement.

The Arizona Court of Appeals reversed the jury verdict against the trustee individually, while upholding the judgment against the trust itself. There were arguments about whether the real estate agent was actually qualified to act, and whether he breached his duties to the trust — but those arguments only went to whether the trust could terminate the listing agreement without paying damages. For our purposes, the important part of the court decision is the simple observation that when a trustee signs as trustee, she is not personally liable on the contract. Focus Point/Kantor v. Johnson/Oak Acres, June 19, 2014.

This principle is actually pretty straightforward, and well-established. Why would the listing agent argue that the trustee should be personally liable in this case? Apparently because when she signed the listing agreement, she did not write “as trustee” or similar language on the contract. But, noted the appellate court, her signature only appeared once, and she couldn’t be signing that one time as both trustee and individually — and there was no dispute that the trust, not the trustee, owned the property being listed. Besides, the contract terms clearly indicated that they were between the listing agent and the property’s owner, and the trust was the owner.

Although the listing agent argued that a handful of cases from other states supported holding the trustee liable, the Arizona court disagreed. In some of those cases, noted the court, the trustee had expressly signed as an individual, guaranteeing the performance of the agreement by the trust. In one other, the trustee had failed to make the argument before the trial court (and so was deemed to have waived it). In yet another case, the officers of a corporation signed in one place as officers and another without any designation — and they were deemed to have been signing in both capacities.

So what does this simple appellate case tell trustees about the discharge of their duties? It just makes sense to clearly indicate that you sign “as trustee” when you are acting in that capacity — it helps head off any argument, even if it is otherwise obvious that you are acting as trustee. The same can be said for someone acting under a power of attorney, or for the personal representative of a decedent’s estate. Just to be safe and clear, after your signature you should write something like “as Trustee of the Pyramidal Trust Dated January 7, 2010” or “as agent for John Roe,” or “as personal representative of the estate of Jane Roe” (substituting, of course, the actual names of the individuals or entities as appropriate).

Even if you do not add that language, you probably are not creating any possible personal liability — at least in any document that is clear about your signature being in a representative capacity. Be very, very cautious, however, about language that seems to include some personal liability — if a pre-printed form recites, for instance, that you are signing “as trustee, and personally as guarantor”, take the agreement to an attorney for review before signing. At the very least, strike out the offending language. Acting properly on behalf of someone else should not cost you personally.

Nursing Home Bills and “the Doctrine of Necessaries”

JULY 8, 2013 VOLUME 20 NUMBER 25
Under the English common law (inherited, to a greater or lesser degree, by all the states of the U.S.), a husband was obligated to support his wife and children. Because women could not legally enter into enforceable contracts, a person who provided goods or services to a woman (or a minor child) on credit might not be able to enforce the collection of the debt. Even if a merchant sold (for instance) food to a married woman on credit, the merchant ran the risk that he might never collect on the debt.

This commercial problem gave rise to a principle of the English common law called “the doctrine of necessaries.” If a merchant provided goods or services to a married woman or minor child, he would be able to collect from the husband/father — if the sale was for “necessaries.” That usually meant food, shelter, clothing, medical care and the like.

Today, where it still exists, the doctrine of necessaries is applied in a gender-neutral way. A husband OR wife might be sued for the “necessaries” provided to his or her spouse. One key step before bringing the action, though, is that the spouse to whom the necessaries were provided must first be determined to be unable to pay for his or her own care.

That neatly sets up the scenario in a recent Indiana Court of Appeals case. Marjorie and Orson (not their real names) were married; Marjorie was admitted to a nursing home. Eventually Marjorie was made eligible for Medicaid, which paid for much of her nursing home care. By the time of her death, though, she had a $5,871.40 unpaid bill at the nursing home.

The nursing home tried to collect from Marjorie’s family. They wrote to her daughter Wilma, who had signed her into the home (and had, incidentally, foolishly signed the admission papers as “guarantor”). They wrote to Orson. They did not get paid. Then they sued Orson and Wilma. When Orson died before the litigation was resolved, the nursing home made a claim against Orson’s estate. The nursing home’s argument: under Indiana’s version of the doctrine of necessaries, he was responsible for his wife’s nursing home bill, and it should be collectible from his estate.

The trial judge denied the nursing home’s claim, reasoning that the home should first have brought legal action against Marjorie (while she was still alive) or her estate. Besides, ruled the trial judge, it was Wilma who had signed her mother into the nursing home, not Orson.

The Indiana Court of Appeals upheld the denial of the claim. The three judges deciding the case first noted that the doctrine of necessaries might no longer be relevant in any event. If it is, though, the person making a claim under it must go through the steps required to pursue the claim. The nursing home should first have sued Marjorie or her estate; as a creditor, they could have opened an estate in Marjorie’s name to officially determine that she died without assets. Just saying that she had nothing, or even that she was a Medicaid patient and so must not have had anything, was not enough. Hickory Creek at Connersville v. Estate of Combs, June 27, 2013.

Let us assume for a moment that Marjorie’s estate was in fact insolvent. If the nursing home had initiated a probate proceeding, determined that she had no assets and then filed against Orson (and later his estate), they might have collected. But now they will be precluded from doing so; the time for presenting claims against Orson’s estate will have expired, and even if a new filing was made to establish Marjorie’s lack of assets there would be no opportunity to pursue the estate.

It is less clear (at least from the Court of Appeals decision) whether the nursing home could still pursue daughter Wilma. She did sign the admission document, and as “guarantor.” The resolution of the claim against her father’s estate does not necessarily resolve the nursing home’s lawsuit against Wilma. The lesson for others is clear: if you sign a nursing home admission agreement for another person (as, say, agent under a power of attorney, or conservator of the estate, or next of kin), make sure you cross out any reference to being a “guarantor” or “responsible party.”

But back to the doctrine of necessaries: does it still exist in Indiana? Yes, according to the Court of Appeals — though its vitality is doubtful.

What about Arizona? Remember that Arizona is a community property state, which means that the obligations of one spouse may not always be the responsibility of the other. Does this mean that the doctrine of necessaries does have vitality in Arizona? Probably not — though there are three reported Arizona Court of Appeals decisions about the doctrine. All three of them, however, involve failed attempts to apply the doctrine to care provided for minor children. In two of them, in fact, the doctrine was raised by out-of-state government agencies who provided welfare benefits to minors, and sought recovery against an Arizona father. Neither court allowed the doctrine of necessaries to apply — but mostly because the agencies have perfectly good rights to recovery under federal child-support rules.

Incidentally, the doctrine of necessaries is different from (even though similar to) so-called “filial support” or “filial responsibility” laws (we have provided information about filial support laws before). The concept of necessaries grew from a common law notion, and was originally applied exclusively to the provision of goods and services to married women and minor children. Filial support laws are state enactments that create a different liability — a child might be liable for an impoverished parent’s care under those newer laws, where they exist.

 

California Nursing Chain Must Change “Guarantee”

NOVEMBER 4, 1996 VOLUME 4, NUMBER 18

Eunice Walker, an elderly California resident, suffered a massive stroke in August, 1990. She was admitted to a local hospital for a short period, but when the treatment failed to return her to her former level of independence the hospital informed her that she would need to find a nursing home placement.

Because Ms. Walker was not able to make her own placement arrangements her daughter, Darlene Brozovich, actually made the contacts with nursing homes and selected a suitable placement for her mother. Her choice was to place Ms. Walker in Hillhaven Hospital of Orange, California.

When Ms. Brozovich arrived at Hillhaven to sign her mother in, she was presented with a stack of admitting papers. The director of Hillhaven told her she would need to sign all the forms, and that they were “routine.” She was also told that Medicare would “cover” her mother’s care. What she was not told was that she signed a “Guarantee of Payment” promising to pay for her mother’s care in the event that other sources were unavailable or insufficient.

Ms. Brozovich’s situation was not unique. In fact, the Hillhaven nursing home chain (which owns 42 California nursing homes) routinely included a guarantee of payment in their admission forms, and scores of family members unknowingly signed such forms. When Hillhaven sought to secure payment from Ms. Brozovich, she joined with other family members of Hillhaven patients to sue the chain over its admission practices.

Hillhaven, in turn, pointed out that its “Guarantee of Payment” form clearly provided that the person applying for admission “is not required, and cannot be required, to sign a Guarantee of payment as a condition of admission” to the facility. The chain also noted that family members received some benefit from guaranteeing payment, since the form provided that the patient would be given an additional 15 days notice before discharge for nonpayment (federal law already required 30 days notice), and would be provided copies of all billings.

Ms. Brozovich and the other plaintiffs had several counter-arguments. Since the patients were already entitled to copies of billings, they said, agreeing to give an additional copy to family members was not much of a concession on the part of Hillhaven. Similarly, agreeing to extend the 30-day period for notice of discharge to 45 days was not much additional benefit. Since Hillhaven had not given family members any additional benefit, Ms. Brozovich argued, the “agreement” to guarantee payment was unenforceable.

More importantly, the plaintiffs insisted that Hillhaven’s practice of including the guarantee in a thick packet of “routine” forms was a deceptive practice. Last week, the California Court of Appeals agreed. The Court objected to “an admissions process in which a stack of documents was hurriedly presented with little or no explanation.” The Court also found that the practice of calling the family member securing admission a “responsible party” confused the issue; family members were led to believe that they had no choice but to pay for their loved ones’ care.

The Court of Appeals sent the matter back to the trial court for further action, but with instructions. Among the requirements imposed by the Court of Appeals: Hillhaven must fully and completely explain the guarantee form both orally and in writing, and must clearly tell applicants that they need not sign the form. Podolsky v. National Medical Enterprises, Inc., Oct. 29, 1996.

[Editor’s note: Arizona law provides an additional defense against “third-party guarantees” where the family member signing the form is married, but the practice of securing signatures from “responsible parties” is widespread.]

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