Attorney in Fact - or Fiction?

Huntington National Bank made a $55,000 line of credit available to Paul and Elizabeth Kazmaier, which loan was secured by a mortgage on their residence. So far, this is a pretty routine transaction.

Here is where it gets interesting: neither Paul nor Elizabeth ever signed a note or a mortgage on their home.

What happened is that Paul and Elizabeth’s son, Timothy, came to the bank with a power of attorney from each of his parents. The power of attorney gave Timothy the ability to act for them with regard to their property, including real property, just as if they were doing it themselves. Timothy signed as attorney in fact for Paul and for Elizabeth on the note and mortgage in the fall of 2003.

By winter of 2003, Elizabeth died, and she was followed shortly thereafter by Paul who died the next summer. The house passed to each of their three children: Terrence, Tamara, and Timothy in 1/3 shares.

In May of 2006, however, the loan by Huntington was in default, and Huntington filed foreclosure proceedings against Timothy and the heirs of Paul (Elizabeth’s share had passed to Paul on her death). Terrence and Tamara filed a counterclaim against Huntington claiming that: 1. Timothy used property that was not his to get a loan; 2. Paul and Elizabeth never got the benefit of any of the line of credit and the bank was negligent in not protecting them, and, further, it was negligent in not protecting Terrence and Tamara as next of kin; and 3. the powers of attorney and the mortgage were invalid because the notary provisions were defective. The trial court found for Huntington.

Terrence and Tamara appealed.

Regarding their first claim that Timothy didn’t own the property and therefore could not mortgage it to secure the line of credit, the court concluded that Timothy did have powers of attorney from each parent. The powers of attorney gave him the ability to take out a loan and secure it with a mortgage. To the extent that he used the money for his benefit instead of his parents, such a claim should be brought by Terrence and Tamara against Timothy, but not against Huntington.

Their second claim was that Huntington owed a duty to its customers to protect them (in this case, the Kazmaiers) and it breached this duty by permitting Timothy to enter into the loan for them. Case law clearly does not impose a fiduciary duty on a bank to its customer in the absence of special circumstances. Generally speaking, the relationship between a bank and its customer is one of debtor-creditor, and that does not create a duty by the bank to protect its customers from fraud by their attorney in fact.

As to the second part of the claim that such a duty extended to Paul and Elizabeth’s next of kin, the court pointed out that Terrence and Tamara were not even customers of the bank. As a result, they had even less of a claim than their parents that the bank should have protected them.

Finally, the court reviewed the testimony of Terrence and Tamara’s expert that the notary provisions in the powers of attorney and mortgage were defective. The more interesting of these two arguments has to do with the mortgage. The notary provision indicated that the mortgage had been signed by Paul and Elizabeth Kazmaier. Strictly speaking, of course, this was not true. Timothy had signed for them as their attorney in fact. The court easily concluded that Timothy was signing for Paul and Elizabeth as their attorney in fact, and, therefore, the notary substantially complied with the requirements of the recording statutes.

The court affirmed the holding of the trial court.

The moral of the story is that if you make someone your attorney in fact, then as far as anyone dealing with the attorney in fact is concerned, the attorney in fact is you. Be very careful to whom you grant a power of attorney!

Posted by: Kimberly K. Mauer

Categories: Bankruptcy & Banking Law