Because of a recent decision by the Tennessee Court of Appeals, a bank may not rely as heavily on a Power of Attorney ("POA") as much as it may have relied previously for immunity to claims brought against the bank by the Grantor of the POA. A bank may now be held liable for transactions made by the Agent, even when the POA grants broad and virtually unrestricted authority to the Agent.

Until recently, there appeared to be a conflict in the Tennessee Code. On the one hand, state law provides what appears to be unfettered immunity to banks for transactions involving a POA:  Banks "may recognize the authority of a power of attorney authorizing in writing an attorney-in-fact to operate . . . the account of a depositor . . . until the bank receives written notice of the revocation of the authority."  Further, "[n]o bank shall be liable for damages" for making payments in accordance with the terms of a POA. See TCA § 45-2-707.

On the other hand, state law also provides a list of "red flag circumstances" under which a bank handling a transaction will be "on notice" of breach of fiduciary duty and therefore, subject to claims such as conversion brought against the bank by the person represented by the fiduciary. See TCA §§ 47-3-307(b) and -420. These "red flag circumstances" arise when a bank takes an instrument such as a check made payable to a depositor: (i) in payment for a debt that the bank knows is the Agent's personal debt, (ii) in a transaction that the bank knows is for the Agent's personal benefit, and (iii) as a deposit by the Agent into an account that does not belong to the depositor.

Reading the laws together, until recently it was not clear whether a bank transacting business pursuant to a POA would be immune to misappropriation claims when the bank had notice of any of the "red flag circumstances" set out in TCA § 47-3-307(b). The facts of the case of Clara Jean West ex rel. Harvey v. Regions Bank, No. W2010-02023-COA-R3-CV, 2011 WL 3059693 (Tenn. Ct. App. July 26, 2011), forced an examination of this issue.

In the Clara Jean West case, a man granted his Nephew a very broad POA, authorizing the Nephew to:

deposit and withdraw funds from any bank account or other account which [Uncle] now [has] or [has] in the future in any bank or other depository, and to sign [Uncle's] name as a drawer of checks and drafts thereon, and to endorse checks, drafts or other instruments belonging to [Uncle] or in which [Uncle has] any right, title or interest for any purpose whatever, whether for deposit or for any other purpose.

The POA further allowed the Nephew to sell any stocks owned by his Uncle and to handle matters related to life insurance. The POA was durable and would not be adversely affected by any later disability or incapacity of the Uncle. The Nephew's power was virtually unrestricted.

Shortly after the Uncle executed the POA, the Nephew set about transferring the Uncle's assets at the bank to his own accounts at the same bank. When the Uncle died leaving no will, his Widow was his only heir at law. The Widow was disabled and her affairs were being managed by a conservator. The conservator filed suit against the Nephew for breach of fiduciary duty and conversion, among other things, and also sued the bank for negligence and for aiding and abetting the Nephew's misappropriation and conversion.

In its defense, the bank argued that it was immune to the Widow's claims by virtue of the POA statute. The Widow fought back, arguing that the bank was on notice of the Nephew's breach of fiduciary duty because the bank knew that the Nephew was depositing checks made payable to the Uncle into the Nephew's personal accounts. Therefore, she argued, the bank was liable for conversion. Ruling in favor of the bank, the trial court found that the bank relied on the broad POA and could not be held liable pursuant to the immunity statute.

On appeal, the Court of Appeals reversed the trial court, holding that the transactions in question fell within the ambit of the "red flag circumstances" and that the immunity statute did not shield the bank from liability given the facts of the case. The Court of Appeals noted that the Tennessee General Assembly passed the statute setting out the "red flag circumstances" after the immunity statute was passed, and noted that the statute was part of a "delicately balanced statutory scheme governing the endorsement, negotiation, collection, and payment of checks."  

Importantly, the Court of Appeals' opinion left the door open for the bank, on remand of the case to the trial court, to defend itself on grounds that it acted in a commercially reasonable manner. Thus on remand, the bank may argue that the Nephew was authorized by the extremely broad POA to transfer the Uncle's funds to himself as he did. Indeed the Court of Appeals acknowledged that it was not addressing the issue of whether the bank acted in a commercially reasonable manner, and limited its opinion only to its disagreement with the holding of the trial court that the immunity statute shielded the bank from any liability whatsoever.

Fortunately, the Clara Jean West case does not mean that immunity from claims arising from Powers of Attorney transactions is a thing of the past. The case does, however, instruct that banks do not have blanket immunity when transacting business with the holder of a POA. It tells banks that there are circumstances where immunity can be removed, and those circumstances arise when a bank takes an instrument made payable to a depositor, and knowingly transacts that instrument in a way that benefits the Agent.

In the Clara Jean West case, the Agent (the Nephew) took checks made payable to the depositor (the Uncle) and deposited them into his own account. The bank was therefore on notice of the Nephew's breach of duty. On the other hand, had the Nephew simply converted the checks to cash and nefariously spent the cash at his local watering hole, then the bank may not have ever had the requisite knowledge for a court to remove the immunity. The bank in that circumstance may have been immune. Importantly, the holding of the Court of Appeals is limited to the "red flag circumstances" listed in the statute.

To protect themselves, banks should require Agents upon their presentation of a POA to the bank, to sign a written agreement to indemnify and hold the bank harmless from claims of any kind arising in any way relating to the use of the POA. Most importantly, banks should exercise caution when dealing with holders of POAs, and ensure that the Agent's transactions are transactions permitted by the words within the four corners of the document granting the power.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.