Power of Attorney Misuse and Fraud

Many times family members and individuals execute Powers of Attorney as a part of their estate plan, and sometimes people execute them as individual documents. Disputes frequently arise over these documents when different people’s rights are potentially effected. 

Definition of Power of Attorney – Two Main Types

First, let’s define a Power of Attorney. A Power of Attorney is a legal document in which one person – the Principal – authorizes another person – the Agent or Attorney-in-Fact – to act for the Principal for specific matters. 

There are two main types of Power of Attorney in North Carolina. One is the Health Care Power of Attorney, and the other is a Durable Power of Attorney. A Health Care Power of Attorney has its own set of laws and implications that are very important. 

However, this article addresses the second type of Power of Attorney. Specifically, a person can make a Power of Attorney effective after their incapacity. This type of Power of Attorney is a Durable Power of Attorney (DPOA). 

What Can a Power of Attorney Cover?

The authority given in a DPOA can be broad or limited. For example, a general DPOA may authorize the Agent to manage, on behalf of the Principal:

1. Real property, such as homes and land;
2. Personal property, such as money, jewelry and other “tangible” property;
3. Stocks and bonds;
4. Commodities and options;
5. Banking and dealing with other financial institutions;
6. Operation of businesses or other entities;
7. Insurance and annuities;
8. Estates, trusts, and other beneficial interests;
9. Litigation (meaning lawsuits or suing on behalf of the Principal) and other claims;
10. Maintenance of the Principal and other family maintenance;
11. Government benefits, including Social Security, Military benefits, or other Civil programs; 
12. Retirement plans;
13. Taxes;
14. Gifts to a wide range of individuals. 

As you can tell from the list above, DPOAs can cover a broad range of topics. A Principal can choose to make the DPOA cover one or more of all the legal authorities under North Carolina Law. The list above does not include all of the topics a DPOA can cover. If you wish to cover additional topics, as with all Powers of Attorney, it is recommended you seek legal counsel. 

Acting in Principal’s Best Interest – Fiduciary Duty

There are additional limits on the actions of an Agent in a DPOA. The Agent in a DPOA must only act in the Principal’s best interests. This is called a fiduciary duty.

A fiduciary duty means that the Agent must follow many rules when acting on behalf of the Principal. An Agent’s duties are fully defined under the law in North Carolina General Statute § 32C-1-114, along with other cases under North Carolina law called common law. 

A brief and non-exclusive list of how an Agent must act under their fiduciary duty is:

1. Act in accordance with the Principal’s reasonable expectations to the extent actually known by the Agent and, otherwise, in the Principal’s best interest. 
2. Act in good faith.
3. Act only within the scope of authority granted in the Power of Attorney. 
4. Act loyally for the Principal’s benefit.
5. Act so as not to not create a conflict of interest that impairs the Agent’s ability to act impartially in the Principal’s best interest.
6. Keep a record of all receipts, disbursements, and transactions made on behalf of the Principal.
7. Attempt to preserve the Principal’s estate plan, to the extent actually known to the Agent.

Under the law of North Carolina, there are many other responsibilities of the Agent to the Principal under their fiduciary duty. 

Misuse or Potential Fraud by Agent

For a person to hold an Agent accountable for violation of their fiduciary duty to the Principal, they must first “have standing” under North Carolina law. This is where things get tricky. 

Under North Carolina law, in general, standing is a party’s legal right to ask a court to decide a particular dispute. A party must have a sufficient, or legally defined, interest in the issue. They may not have merely a general interest in how the law is applied. 

Under North Carolina Uniform Power of Attorney Act, standing is defined under N.C.G.S. § 32C-1-116(c). Under that section of the law, a party has standing to challenge an Agent for a breach of their fiduciary duty under a DPOA if they are:

1. The Principal or the Agent;
2. A general guardian, guardian of the Principal’s estate, or guardian of the Principal’s person;
3. The personal representative of the estate of the deceased Principal;
4. A person authorized to make health care decisions for the Principal;
5. Any other interested person, including a person asked to accept a power of attorney.

If a party is covered clearly by one of the first four definitions, then they have standing. A legal professional can help the party know if they are clearly covered by those provisions.

For the purposes of this post, the first four provisions of the statute will not be covered in detail. 

Big Question

Can An Non-Agent Child (or Party) Accuse the Actual Agent of Breaching their Fiduciary Duty?

A common set of facts that bring this issue up to legal professionals are: 

Child A is assigned as the Agent for Parent, who is the Principal. Child B believes that Child A is spending Parent’s money in a way that is not in the best interest of the Parent. Child A is also accused of spending money or selling real property (as authorized in the DPOA) that if Parent passed away, would be inherited by Child B. Can Child B bring an action in court to determine if Child A is breaching their fiduciary duty to Parent?

The most common question in these matters is: “I am a child of the Principal. Do I get to see how the Agent (many times another child or family member) is spending the Principal’s (many times Mom or Dad) money?”

The answer to this question is unclear, and the North Carolina Statute listed above does not define “other interested person.” In addition, as of the time of this post, there is no published (meaning binding) additional caselaw defining “other interested person.” Caselaw means higher courts in North Carolina have not, as of yet, defined this term. 

The answer is maybe, maybe not. One lower court in North Carolina issued a ruling stating that Child B does have standing. This lower court ruling, however, does not require other lower courts to follow. It is likely each county’s court that handles these types of issues may make different rulings specific to the facts of the case before it.

Bottom Line

Power of Attorney challenges and disputes are confusing and complicated issues. This is why it is important to consult with experienced litigators that have specifically handled these types of fiduciary cases. Not every litigator does this type of work, and it is important to find one that does. Call our office to today to schedule a consultation if you are facing this type of issue.