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.