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Abuse of Power
In Brief
In an important decision for people considering their estate plan, the Supreme Court of New South Wales has recently reiterated the limits on an attorney’s ability to use a power to benefit themself. But even with this protection, the case highlights the need for people to carefully consider who they appoint as their attorney and to understand what powers they will be granting to that person and when those powers can be exercised.
Facts
Aviva Cohen by her tutor the New South Wales Trustee and Guardian v Shalom Cohen [2016] NSWSC 336
In late 2000, Mrs Cohen, the plaintiff, granted to her son, Mr Cohen, the defendant, an Enduring Power of Attorney (POA). To recap, an enduring power of attorney is a document whereby a person (the principal) grants to another person (the attorney), the power to manage the principal’s legal and financial affairs when the principal loses capacity to do so for themself.
The POA granted to Mr Cohen contained the usual power to do anything that Mrs Cohen may lawfully authorise an attorney to do. However, the POA also permitted the attorney to “execute any assurance or other document, or do any other act, whereby a benefit is conferred on him”. As a result, the POA gave Mr Cohen wide powers to do any act on behalf of his mother which would confer a benefit on himself. There was no evidence to suggest that Mrs Cohen did not have capacity when the POA was executed and, because the POA was an enduring power of attorney, it would continue in effect if she subsequently lost capacity.
In late 2001, Mrs Cohen purchased a property at Lane Cove in her sole name. The Lane Cove property was her main asset and she lived there until about mid 2012 when she moved into a nursing home. Mrs Cohen received a government pension and did not have any other assets.
A year after Mrs Cohen had moved into the nursing home, Mr Cohen, using the POA, transferred the Lane Cove property to himself for $1.00, leaving Mrs Cohen without any assets. A couple of months later, Mr Cohen resigned as attorney for his mother, leaving her without anyone to manage her legal and financial affairs.
As nursing home costs mounted and remained unpaid, the manager of the nursing home applied to the NSW Civil and Administrative Tribunal to have a financial manager appointed to manage Mrs Cohen’s affairs. The application was successful and the NSW Trustee and Guardian was appointed as the financial manager of Mrs Cohen’s estate.
In the course of reviewing Mrs Cohen’s affairs, the NSW Trustee and Guardian looked into the transfer of the Lane Cove property. Mr Cohen asserted that “the property was purchased with his funds and put into his mother’s name to be held in Trust for him.” Mr Cohen made an offer to resolve the matter but this was not accepted by the NSW Trustee and Guardian on behalf of Mrs Cohen. As a result, the NSW Trustee and Guardian started proceedings to set aside the transfer of the Lane Cove property.
The Decision
At the hearing (at which Mr Cohen did not appear), the NSW Trustee and Guardian submitted that although the Mr Cohen had the power to transfer title of the Lane Cove property to himself, he should not have done so because the transfer was not for Mrs Cohen’s benefit and in fact it seriously disadvantaged her by depriving her of her only substantial asset.
The judge agreed that Mr Cohen’s act of transferring the property to himself was an abuse of the power given to him under the POA and ordered him to transfer the property back to his mother.
In the course of his judgment, the judge reiterated that the relationship between a principal and the attorney is a fiduciary one and as a result:
- the attorney must act in good faith towards and for the benefit of the principal; and
- the attorney must refrain from putting himself in a position where his own personal interests conflict with the interests of his principal.
The judge also confirmed that, whilst the terms of a power of attorney set out the extent of the powers, the fiduciary duty that the attorney owes to the principal regulates how the powers can be properly exercised. In short, there is an important difference between lacking power, having power and abusing power.
What does this mean for you?
Drafted properly, a power of attorney is a very helpful legal document which should form part of everyone’s estate plan. If you have appointed someone as your attorney under a power of attorney, you should carefully review its terms to see whether they can use the power to benefit themselves or any other people and, if so, whether this is desirable. You should also review the document to find out whether the attorney can use the power while you have capacity or only after you lose capacity.