BREACH OF FIDUCIARY DUTY - WHO DO YOU TRUST?

As attorneys, we all know what a fiduciary relationship is. Certain other relationships are also fiduciary as a matter of law, including trustee/beneficiary and principal/agent. Recent cases have also noted that an agent under a property power of attorney stands in a fiduciary relationship to the principal as a matter of law. In all other cases, a fiduciary relationship is not presumed, even between husband and wife, parent and child, and child and parent and must be established based on the facts of the particular case. "A fiduciary relationship exits when one person places trust and confidence in another who, as a result, gains influence and superiority over the other. The factors to consider in d etermining whether a fiduciary relationship exists between parties, include the degree of kinship, the disparity in age, health, mental condition, education, and business experience, and the degree of trust placed in the dominant party. When the fiduciary relationship does not arise as a matter of law, it must be proved by clear and convincing evidence."

Fiduciary relationships and breaches of fiduciary duty arise often in contested Probate matters. A breach of fiduciary duty is sometimes considered to be a particular type of undue influence. "In certain instances, the law will raise a rebuttable presumption that the will was executed as a result of undue influence. Where a fiduciary relationship exists between the testator and the devisee who receives a substantial benefit from the will, and where the testator is the dependent and the devisee the dominant party and the testator reposes trust and confidence in the devisee, and where the will is written or its preparation procured by that devisee, proof of these facts establishes prima facie the charge that the execution of the will was the result of undue influence exercised by that beneficiary." "The burden of proving the fairness of the transaction, after a full and complete disclosure, is on the dominant party." The foregoing quotes refer to receiving benefits under a will, but the applicable law is the same with regard to wills and will contests, lifetime gifts, and any other circumstances when a fiduciary benefits from the relationship.

Stop and reflect for a minute. Has this ever happened to you? Someone (perhaps an existing client) contacts you to ask if you will prepare a will for his or her parent. The parent acting solely on his or her own then wants to leave a greater share to that child. Even if that is not undue influence, it sure looks like it! You also prepare a power of attorney for property. You have just created a fiduciary relationship as a matter of law! After the parent dies, the estate will seek to recover the excess benefit going to the agent/child. Now, instead of the decedent's other children having to first prove the existence of a fiduciary relationship by clear and convincing evidence, the burden of proof is on the child instead, and the burden of proof often decides this kind of case. After the death of the transferor, the recipient is usually hard-pressed to prove the donor's intent with admissible evidence.

Practical Suggestion 1: Whenever assets are missing from an estate, you should look for any fiduciary relationship. If you can establish the relationship and shift the burden of proof, you may have won the case. If you find a property power of attorney naming the transferee as agent, you have hit paydirt!

Practical Suggestion 2: The best way to avoid later fights is at the planning stage. When you meet with a client to prepare a will, be alert for any relationship that may be deemed "fiduciary," either because of the facts or as a matter of law. Wherever you find one or wherever one heir, legatee, or other individual will receive a disproportionate share of the estate (either through Probate or otherwise), I suggest you do two things. First, state clearly in the document what is being done and why. It may not prevent an attack, but it will go a long way to discourage one. Second, make notes or other contemporary records to document the client's position. You will probably be called as a witness if the matter ever does go to litigation. You and your file may be the difference between your client's intent being carried out and a successful challenge that yields a contrary result.

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Probate litigation is different from most other litigation in one critical way: by definition, one party to the transaction is eithe r dead or mentally disabled. As a result, presumptions and certain rules of evidence take on much greater importance.

The Dead-Man's Act, 735 ILCS 5/8-201, begins as follows:

In the trial of any action in which any party sues or defends as the representative of a deceased person or person under a legal disability, no adverse party or person directly interested in the action shall be allowed to testify on his or her behalf to any conversation with the deceased or person under legal disability or to any event which took place in the presence of the deceased or person under legal disability, except in [certain enumerated instances].

The spouse of an interested party is also barred under the Dead-Man's Act.

In determining whether the Dead-Man's Act applies to particular evidence, it is important to read the language of the statute carefully. The Statute is limited to parties aligned in a particular way and to certain types of evidence. The exceptions can be critical. In Citation proceedings, the Court does have the discretion to call a party as the Court's witness, so as to avoid the bar of the Act. Unless a party is called as the Court's witness, there is independent testimony by a disinterested witness, or the Estate "opens the door" by introducing testimony which can then be contradicted, a party may lose a case or be unable to assert an otherwise valid claim because of the bar of the Act.

Even if a party gets past the hurdle of the Dead-Man's Act, the evidence may be barred by the Hearsay Rule. Hearsay is a statement offered in evidence to prove the truth of the matter asserted. In most Probate litigation, the key question is whether the statement is offered to prove the truth of the matter asserted or whether it is offered to prove some other fact or aspect of the case, such as the decedent's or ward's state of mind. A full discussion of hearsay is beyond the space available for this article. Keep in mind, however, that it gives the estate a second shot at barring admission of testimony related to purported statements of the Decedent.

When evidence is lacking, cases are often decided by presumptions. The key Illinois decision on presumptions came in a Probate case, Franciscan Sisters Health Care Corporation v. Dean, 95 Ill.2d 452, 448 N.E.2d 872, 69 Ill.Dec. 960 (1983).

"[T]he term "burden of proof" encompasses both the burden of producing evidence that will satisfy a judge of the existence of an alleged fact and the burden of persuading the trier of fact that the alleged fact is true. [Citation omitted]. The burden of persuasion does not shift but remains with the party who initially had the benefit of the presumption. . . .

The prevailing theory regarding presumptions that Illinois follows and Diederich speaks about is Thayer's bursting-bubble hypothesis: once evidence is introduced contrary to the presumption, the bubble bursts and the presumption vanishes. [Citation omitted] . . .

The amount of evidence that is required from an adversary to meet the presumption is not determined by any fixed rule. A party may simply have to respond with some evidence or may have to respond with substantial evidence. If a strong presumption arises, the weight of evidence brought in to rebut it must be great. [Citation omitted].

Thus, a presumption will decide the case if there is insufficient evidence to the contrary to rebut the presumption. Once sufficient evidence is produced and the presumption "bursts," the trial commences as if there never was a presumption in the first place, and each of the parties bears its respective burdens of proof on all issues.

This material may seem rather dry and technical, but these rules decide more Probate cases than the evidence. In the next two articles, I will bring together issues discussed here with those related to joint tenancies and breach of fi duciary duty to demonstrate how they apply to real cases.

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Let's look at how the law and rules on joint tenancy, fiduciary relationships, Dead-Man's Act, hearsay rule, and presumptions interrelate in an actual fact situation. Della Decedent sets up two bank accounts. Account A is an account in joint tenancy with Carla Crook, her cousin. Account B is in the name of Della payable on death (POD) to Carla. Bank accounts are used here for illustration, but the rules and analysis are the same for other kinds of property. Della has a Will which leaves all of her Estate to her only child, Vera Victim. These issues arise after Della's death. A Court will usually decide the case on an asset-by-asset basis, and the results can be and are often split.

The presumption for Account A is that Della intended to make a gift of the account to Carla. If there is no other evidence, Carla wins. If there is enough admissible evidence that Della had a contrary intent when she first set up the account, the presumption "bursts," and trial is held de novo with no presumption either way. Carla cannot testify to any transactions with or conversations between herself and Della unless the Estate "opens the door" by presenting testimony of specific incidents. Without Carla's direct testimony, she will likely lose.

The presumption for Account B is also that Della intended to make a gift of the account upon her death. However, a POD account is rarely set up "for convenience," since the decedent has full control over the account while she is alive and the beneficiary has no rights in the account until the owner dies. If there is no other evidence, Carla wins. Even with other evidence, Carla will still probably win.

Now assume that Carla is acting as a fiduciary for Della pursuant to a property power of attorney or as otherwise established. If the bank accounts were set up prior to the date the fiduciary relationship arose, the results would be the same, since Carla did not take any action to benefit herself during the time she stood in a fiduciary relationship towards Della.

However, what if the fiduciary relationship was established first, and then Account A was set up by Carla? Assume also that Della herself signed documents setting up the account. After Della dies, there is no admissible testimony as to Della's intent, and a peculiar situation results. On the one hand, because Account A was a joint account, the presumption is that Della intended the account to be a gift to Carla, and Carla wins. On the other hand, because Carla benefited from an account established during the time Carla was a fiduciary for Della, the presumption is one of fraud which Carla cannot rebut, and Vera wins. What happens when the Court is faced with "dueling presumptions"? The Fourth District Appellate Court was faced with that exact question in Estate of Rybolt. The Court acknowledged that it had "an interesting conflict of presumptions in this case." That Court said:

We conclude the facts here require strong evidence to overcome the presumption of fraud. As more of our population become aged, more will need financial assistance. Unfortunately, greed and the temptation to benefit oneself will exist. If the presumption of fraud can be offset by a presumption of donative intent through joint tenancy with right of survivorship, then greed will often win out. We deem it necessary to hold in this case that the presumption of donative intent was outweighed by the presumption of fraud--that presumption requiring more evidence to overcome. Thus, under our facts, Vera wins. To date, no other Appellate District has addressed that question. Based on my experience, I agree with the decision, and I hope it will be followed by other Courts.

A similar analysis will apply to other variations of these facts. For example, if there is a three-way joint tenancy and one of the names is "removed" to the benefit of the fiduciary, that is a breach of fiduciary duty. If "new" money is added to pre-existing accounts to the fiduciary's benefit, it is a breach of fiduciary duty. In some cases, the party benefiting may not be the actual "fiduciary," but two or more people may act in concert or conspiracy.

In general, a Court will look at the assets before the fiduciary relationship arose and at the date of death and will review the Decedent's testamentary plan. Where there are significant deviations from the Decedent's intent and where the fiduciary is involved in benefiting herself or her cohorts, a Court is more likely to act. While the law is clear, each case turns on its particular facts in light of the evidentiary rules and probably the applicable presumptions.

Let's look at how the law and rules on joint tenancy, fiduciary relationships, Dead-Man's Act, hearsay rule, and presumptions interrelate in an actual fact situation. Della Decedent sets up two bank accounts. Account A is an account in joint tenancy with Carla Crook, her cousin. Account B is in the name of Della payable on death (POD) to Carla. Bank accounts are used here for illustration, but the rules and analysis are the same for other kinds of property. Della has a Will which leaves all of her Estate to her only child, Vera Victim. These issues arise after Della's death. A Court will usually decide the case on an asset-by-asset basis, and the results can be and are often split.

The presumption for Account A is that Della intended to make a gift of the account to Carla. If there is no other evidence, Carla wins. If there is enough admissible evidence that Della had a contrary intent when she first set up the account, the presumption "bursts," and trial is held de novo with no presumption either way. Carla cannot testify to any transactions with or conversations between herself and Della unless the Estate "opens the door" by presenting testimony of specific incidents. Without Carla's direct testimony, she will likely lose.

The presumption for Account B is also that Della intended to make a gift of the account upon her death. However, a POD account is rarely set up "for convenience," since the decedent has full control over the account while she is alive and the beneficiary has no rights in the account until the owner dies. If there is no other evidence, Carla wins. Even with other evidence, Carla will still probably win.

Now assume that Carla is acting as a fiduciary for Della pursuant to a property power of attorney or as otherwise established. If the bank accounts were set up prior to the date the fiduciary relationship arose, the results would be the same, since Carla did not take any action to benefit herself during the time she stood in a fiduciary relationship towards Della.

However, what if the fiduciary relationship was established first, and then Account A was set up by Carla? Assume also that Della herself signed documents setting up the account. After Della dies, there is no admissible testimony as to Della's intent, and a peculiar situation results. On the one hand, because Account A was a joint account, the presumption is that Della intended the account to be a gift to Carla, and Carla wins. On the other hand, becau se Carla benefited from an account established during the time Carla was a fiduciary for Della, the presumption is one of fraud which Carla cannot rebut, and Vera wins. What happens when the Court is faced with "dueling presumptions"? The Fourth District Appellate Court was faced with that exact question in Estate of Rybolt. The Court acknowledged that it had "an interesting conflict of presumptions in this case." That Court said:

We conclude the facts here require strong evidence to overcome the presumption of fraud. As more of our population become aged, more will need financial assistance. Unfortunately, greed and the temptation to benefit oneself will exist. If the presumption of fraud can be offset by a presumption of donative intent through joint tenancy with right of survivorship, then greed will often win out. We deem it necessary to hold in this case that the presumption of donative intent was outweighed by the presumption of fraud--that presumption requiring more evidence to overcome. Thus, under our facts, Vera wins. To date, no other Appellate District has addressed that question. Based on my experience, I agree with the decision, and I hope it will be followed by other Courts.

A similar analysis will apply to other variations of these facts. For example, if there is a three-way joint tenancy and one of the names is "removed" to the benefit of the fiduciary, that is a breach of fiduciary duty. If "new" money is added to pre-existing accounts to the fiduciary's benefit, it is a breach of fiduciary duty. In some cases, the party benefiting may not be the actual "fiduciary," but two or more people may act in concert or conspiracy.

In general, a Court will look at the assets before the fiduciary relationship arose and at the date of death and will review the Decedent's testamentary plan. Where there are significant deviations from the Decedent's intent and where the fiduciary is involved in benefiting herself or her cohorts, a Court is more likely to act. While the law is clear, each case turns on its particular facts in light of the evidentiary rules and probably the applicable presumptions.

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