Presented to Advanced Elder Law conference
Sponsored by National Business Institute
May 8, 2014
By Thomas J. Murphy
Murphy Law Firm, Inc.
FINANCIAL EXPLOITATION – FACTUAL ISSUES
Financial exploitation – what is it?
Financial exploitation is not easy to spot since much of what is going on is not readily apparent. The exploited person is often embarrassed or afraid to notify family members much less report the matter to the police. Yet, it is also easy to jump to conclusions when in fact Mom or Dad are doing exactly what they want with their funds but the children or other family members do not approve. Always remember that is Mom and/or Dad’s money to with as they please, to include doing stupid things with it.
The studies on financial exploitation, particularly when done by a family member or close friend, are of very limited use since all of the authorities on this topic agree that exploitation is greatly underreported, resulting in some very sketchy figures on the extent of the problem. Michael J. Tueth, “Exposing Financial Exploitation of Impaired Elderly Persons”, American Journal of Geriatric Psychiatry, May 2000; Hall, Hall & Chapman, “Exploitation of the Elderly: Undue Influence As A Form of Elder Abuse”, Clinical Geriatrics, February 2005.
Financial exploitation – how to spot it
There are two common threads in all of the financial exploitation cases I have dealt with. One common feature is the aspect of secrecy. No one outside of the exploiter and exploitee is aware of the situation as it is occurring. The other common feature is either isolation or domination of the exploited person by the exploiter.
Much of the literature emphasizes tell-tale signs that are ridiculously obvious but, in my experience, seldom seen. A typical example set forth in the literature is a child with no apparent source of income who is living extravagantly. But such obvious, blatant examples are rare. Exploiters not want to call attention to themselves. Secrecy and lulling other family members into a sense of complacency is key. More typical in my experience has been:
Preventing or greatly limiting access to the residence.
Family members must call ahead to visit with Mom. Or the visits keep getting cancelled at the last minute. Or they can only occur at inconvenient times, such as early weekday mornings. Or the visiting child is never allowed to be alone with Mom, either in the home or taken out for a meal or shopping.
Preventing or greatly limiting access to the telephone.
Very similar tactics. Mom is sleeping and cannot come to the phone. Or the exploiter insists on being on the line with Mom.
Unpaid bills or increased credit card activity.
Most elderly people are very scrupulous about paying bills on time and keeping debt to a minimum. Unpaid bills may be indicative of the fact that Mom or Dad have relinquished control over their finances and the fact that the bills are not being paid may indicate that money that should be available to pay them is not available. Why? And who is making this determination? Likewise, credit card activity is a likely tipoff. Look to see where the charges are taking place – fancy restaurants or bars that Mom or Dad would never frequent? Chic or high-end clothing stores where it is unlikely Mom or Dad would ever go or purchase anything? Charges for baby clothes or other charges for young children when Mom and Dad have none of their own?
Another danger sign is increased ATM activity – this is not the way the elderly handle their finances. It is a common tactic for the more savvy exploiter since they figure that cash is harder to trace.
Are Mom and Dad’s needs being met? Are they regularly visiting their doctor? Is Mom making her hair appointments?
Ending long-term relationships.
Is there a new attorney, doctor, accountant or financial advisor in place of the professionals that Mom and Dad have used for years? There are several reasons why exploiters use this method. One is that they are afraid that the long-term advisor who knows many of the family members may report their suspicions to the family. It is also easier to hide sudden changes in finances when a new advisor is brought on without adequate knowledge of Mom and Dad’s financial history. A recurring problem for me has been the use of document preparers who, when trouble arises, will hide behind the fact that they are “only” document preparers. They will claim that they did not discuss the situation with Mom or Dad and simply prepared the documents they asked for with no questions asked. I doubt this is what happens but it is hard to prove otherwise. Any why would a wealthy person retain a flimsy, low-budget operation to do something so important as make a will or trust? Whose idea was it to terminate the existing relationship?
If there are concerns about Mom and Dad’s situation, a great place to start is doing an on-line search with the county recorder. Very few lay persons are aware of how easy it now is to review recorded documents. Are there deed that have been cut? Has a POA been recorded? Is there a judgment or tax lien against Mom, Dad or the exploiter? I have had several cases where this was the tip-off that something untoward was up.
You also must scrutinize the persons who are helping Mom and Dad. Do they have a spotty work history? Are they going through a troubling time or event, such as a divorce, a bankruptcy or an arrest? Do they have a history of substance abuse? Or are they just anti-social with little regard for the rights of others?
But the fact remains that it is often difficult to find out about these matters. The exploiter makes it difficult and Mom and Dad, even if they suspect something is amiss, are often reluctant or embarrassed to talk about it. Or they may have themselves convinced that nothing has happened or that the exploiter will correct the situation.
When suspicions are raised, it has always been my practice to address the matter head-on. Explain to the parents that the children are concerned and maybe even tormented by what they think is going on. If there is nothing to worry about, why not let them know? If there is a problem, then it is only a matter of time before the other children find out. This usually happens within days of the funeral, when emotions are already sky-high and what could otherwise be a manageable situation now explodes into all-out family warfare – is this what Mom and Dad want?
A very problematic ethical dilemma for attorneys occurs when Mom and Dad, both of capacity, are aware of the situation but do not want to make an issue of the matter. Typically, they do not believe that the amounts are large enough to risk a confrontation or they are afraid of the consequences if the exploitation comes to light. The children will be in an uproar, which is not what Mom and Dad want in their last days. Or they are afraid that the child could end up in jail or have a costly court battle on their hands. Or they are afraid that, with the caregiver child gone, that they will end up in the dreaded nursing home. Or they will correct the problem by leaving the exploiter out of the will.
The list goes on, but the problem is that there may be valid reasons why Mom and Dad want to look the other way. But the attorney must be aware that there will eventually be hell to pay and the attorney will likely be caught in the crossfire if nothing is done.
The other difficulty is ascertaining if any financial exploitation has in fact occurred. Simply because the children do not agree with what Mom or Dad is doing does not equate with financial exploitation. There may be a good reason why one child is being favored, particularly when that child is the primary caregiver. The non-caregiver children almost never fully appreciate the time, effort and anguish that caregiving entails. I always warn the caregiver child – do not expect profuse gratitude from your siblings for the care provided to Mom or Dad. This may be Mom and Dad’s way of repaying the caregiver child but the other children seldom see it that way. This is where thorough discussion and documentation is absolutely essential. And the value of the attorney services skyrockets when he or she becomes the corporate memory for Mom and Dad. The peace of mind afforded by making sure that Mom and Dad’s testamentary desires are enforced can be priceless.
If the attorney suspects trouble, address it in the fee agreement that the estate will pay your fees if called as a witness at a deposition or trial and to cover copying costs and other costs of production.
FINANCIAL EXPLOITATION – LEGAL ISSUES
ARS 46-456 – Financial exploitation of a vulnerable adult
The starting point in analyzing a potential financial exploitation claim is to review the statutory form of action, ARS 46-456. This is a rather vague statute with few reported cases to assist in interpreting the statute. It has also been significantly revised in recent years so that you may be dealing with more than one standard of care. These ambiguities can cut both ways. One is that it allows for some creativity since there is little limiting case law or other interpretation of the statute. But since there is no firm guidance, this can be both an incentive as well as a stumbling block to reaching a settlement. On the other hand, one should be reluctant to push the envelope given the uncertainties of statutory interpretation. This is particularly a problem for a defendant because of the potentially draconian penalties if a violation of the statute is found.
Note that since this is a Title 46 civil action, jurisdiction is not limited to the probate courts. I have prosecuted cases as a non-probate civil matter to increase my chances of a jury trial.
Who is protected?
ARS 46-456(a) protects “an vulnerable adult”. The definitional section is ARS 46-451(a)(9) that defines a “vulnerable adult” as someone who is “unable to protect himself from abuse, neglect or exploitation by others because of a physical or mental impairment. Vulnerable adult includes an incapacitated person as defined in section 14-5101.” The conventional wisdom among probate litigation practitioners is that this is equivalent to the standard for a conservatorship, someone who is “unable to manage the person’s estate and affairs effectively” who “has property that will be wasted or dissipated unless proper management is provided”. ARS 14-5401(2).
But there is a difference between incapacity and vulnerability. The leading case on ARS 46-456, Davis v, Zlatos, 211 Ariz. 519 (App. 2005), noted this by stating that:
“An incapacitated person cannot make informed decisions. A vulnerable person may be able to make such decisions, but is unable to protect herself against being abused, neglected or exploited. The protections of the statute extend to a vulnerable adult even if the person is not incapacitated.”
211 Ariz at 526
The key test is impairment, a term not defined by the statute. The Zlatos court stated that impairment “is something that causes a ‘decrease in strength, value, amount, or quality’”. 211 Ariz at 525. The court also emphasized that the exploited person was
“physically frail and unable to walk”, required daily care for twelve hours a day, to include assistance for many of her activities of daily living (“ADLs”) and that her spouse of 70 years had recently passed away,
In a memorandum decision, the Court of Appeals held that an elderly person may be vulnerable even if the alleged exploited person was “sharp”, “alert”, “bright”, “aware of what was going on around her” and “of sound mind”. The Court agreed with the trial judge that the person’s “physical condition was sufficient to support a conclusion that Lillian was a vulnerable adult”. The trial court found that the person was virtually blind, with hearing aids in both ears, could not walk and could not use a telephone. Miller v. Lee, 1CA-CV02-0043 (Feb 27, 2003), paragraph 33.
Once impairment is found, the next issue is whether the impairment caused the person to be “unable to protect himself from abuse, neglect or exploitation by others”. ARS 46-451(a)(9). The Zlatos court pointed out that
“Failing to complain is not persuasive evidence that a person is not vulnerable. Just because an individual does not act to protect herself by complaining about abuse, neglect, or exploitation does not mean that person is able to protect herself” and that “a victim may not even realize she is being abused or exploited, particularly when the issue is financial exploitation and she is willingly parting with her money or property”.
211 Ariz at 526
But keep in mind that this does not mean that that every transaction undertaken by the exploited person is invalid. Again, the Zlatos court: “A vulnerable adult may still have the capacity to make financial decisions, deed property and transfer cash.” 211 Ariz at 527
Another informative but unpublished case is ESTATE OF RENFROW, 1 CA-CV 12-0081 (Ariz.App. 5-9-2013). For the problems created by the 2009 revisions to the statute, see another recent unpublished case, ESTATE OF JOHN D. v. MUELLER, 1 CA-CV 12-0262 (Ariz.App. 2-28-2013).
Who is a defendant?
Anyone who is in a “position of trust and confidence” is a covered person, a potential defendant. ARS 46-456(a) & (b). This is defined as a) someone who has assumed a duty to provide care, b) a joint tenant or tenant in common and c) someone who is in a fiduciary relationship with the person. The first two classifications are straightforward. The battle on these cases is usually over whether a confidential or fiduciary relationship existed. The meaning of a fiduciary relationship is discussed in further detail later in these materials.
An agent acting under a power of attorney comes within the reach of ARS 46-456 “if the agent acted with intimidation or deception as defined by ARS 46-456 in procuring the power of attorney”. ARS 14-5506(a).
What is exploitation?
Exploitation is defined as “the illegal or improper use of a vulnerable adult or his resources for another’s profit or advantage”. ARS 46-451(a)(5). This standard requires that the agent “shall use the vulnerable adult’s assets solely for the benefit of the vulnerable adult and not for the benefit of the person who is in the position of trust and confidence”.
There is what appears to be a safe harbor where the sole benefit standard is waived if “the transaction is specifically authorized in a valid durable power of attorney that is executed by the vulnerable adult as the principal or in a valid trust instrument that is executed by the vulnerable adult as a settlor”. ARS 46-456(a)(2).
But this may not provide protection to the agent as might first appear since I have been involved in litigation as to what exactly the term “specifically authorized” means. Does the POA or trust agreement refer to a specific transaction? Or class of transactions? Is a wide-ranging financial POA sufficient? There is no reported case on this.
Another safe harbor is for spouses if “the transaction furthers the interest of the marital community, including applying for benefits pursuant to title 36, chapter 29 or benefits for supplemental security income, medicare or veterans’ administration programs”. 46-456(a)(4).
Many practitioners have noted that there is no minimum dollar amount that must be met before the statute is triggered, so that even a small or nominal amount could constitute an actionable claim. There is also no scienter requirement – negligence is enough. Clients acting in a fiduciary capacity need to be warned of this, especially if there are other family members spoiling for a fight.
What happens if there is exploitation?
This is where it can get ugly. Really ugly, since the penalties of a violation of the statute can be so severe and the “sole benefit” standard can create some real but unintended consequences.
First and foremost, anyone who has violated the statute, whether intentionally or not, a court can order that the exploiter “forfeit all or a portion of the person’s:
(a) Interest in any governing instrument.
(b) Benefits under title 14, chapter 2 with respect to the estate of the vulnerable adult, including an intestate share, an elective share, an omitted spouse’s share, an omitted child’s share, a homestead allowance, any exempt property and a family allowance”.
A governing instrument has a broad definition: “a deed, a will, a trust, a custodianship, an insurance or annuity policy, an account with pay on death designation, a security registered in beneficiary form, a pension, a profit sharing, retirement or similar benefit plan, a family limited partnership, an instrument creating or exercising a power of appointment, a power of attorney, an estate planning document or a dispositive, appointive or nominative instrument of any similar type”. ARS 46-456(j)(4)
Note that this is no longer a mandatory forfeiture as it was under prior law. Also note that the inclusion of the reference to “governing instrument” is meant to avoid the result reached under prior versions of the statute that held that forfeitures only applied to the probate estate and not to non-probate assets such as trusts, POD or joint accounts, annuities, etc. See IN RE NEWMAN, 219 Ariz. 260, 270 (CA1. 2008).
Despite the “governing instrument” language, it would appear that this statute would not apply to 401k plans and other ERISA assets since the federal ERISA statutes regarding beneficiary designations would pre-empt any state law to the contrary. Egelhoff v. Egelhoff, 532 US 141, 121 SCt 1322 (2001).
The statute also provides for double damages and reasonable attorney fees and court costs, ARS 46-456(b), as well as punitive damages, injunctive relief and the dissolution or divestiture of any enterprise found liable. ARS 46-456(f) & -455(h)
What is the standard of proof?
Proof is by a preponderance of the evidence. ARS 46-456(f) & -455(l).
What is the statute of limitations?
The statute of limitation is currently two years from the date of actual discovery of the cause of action, ARS 46-456(f) & -455(k), for actions accruing after September 18, 2003. The prior statute of limitations is seven years from the date of actual discovery.
A cause of action under this statute survives death, to include any action for pain and suffering. ARS 46-456(f) & -455(p), Denton v. American Family Care, 190 Ariz 152 (1997).
Common law financial exploitation – breach of fiduciary duties
What is a fiduciary?
A fiduciary cannot unfairly taken advantage of a person who has entered into a confidential or fiduciary relationship. For a confidential relationship to exist, “there must be something approximating business agency, professional relationship or family tie impelling or inducing the trusting party to relax the care and vigilance he would ordinarily exercise”. In Re McDonnell’s Estate, 65 Ariz 248, 253 (1947).
It has also been defined as
“(a) relationship which arises by reason of kinship between the parties, or professional, business or social relations that would reasonably lead an ordinarily prudent person in the management of his business affairs to repose that degree of confidence in another which largely results in the substitution of that other’s will for his in the material matters involved in the transaction; or where the parties occupy relations, whether legal, natural, or conventional in their origin, in which confidence is naturally inspired or, in fact, reasonably exists.”
In Re Guardianship of Chandos, 18 Ariz App 583, 585 (1972);
It is a relationship with “great intimacy, disclosure of secrets or intrusting of power”. “Mere trust in another’s competence or integrity does not suffice, peculiar reliance in the trustworthiness of another is required”. Taeger v. Catholic Family and Community Services, 196 Ariz 285 (CA1, 1999).
A commercial contractual relationship, even where the collection of money is concerned, will not by itself create a fiduciary relationship unless the contract so states. Urias v. PCS Health Systems, Inc., 458 Ariz Adv Rep 3, (CA1, 2005).
Such a relationship “is particularly likely to exist where there is a family relationship”, Restatement of Trusts, Second, Sec. 2, comment b. Arizona courts have found that “the relationship between husband and wife is confidential in the highest degree”. MacRae v. MacRae, 37 Ariz 307, 314 (1930). In Re Marriage of Gerow, 192 Ariz 9, 18 (CA1, 1998, memorandum decision); State Farm Mutual Automobile Insurance Co. v. Long, 16 Ariz App 222, 225 (CA1, 1972); Blazak v. Superior Court, 177 Ariz 535, 539 (CA1, 1994) and Nanini v. Nanini, 166 Ariz 287 (CA2, 1990)
What constitutes a breach of the fiduciary relationship?
When a person in a fiduciary relationship has received any benefit, practitioners need to keep in mind the following quote from the controversial case of Estate of Shumway, 198 Ariz 323 (2000):
“Where a confidential relationship is shown, the presumption of invalidity can be overcome only by clear and convincing evidence that the transaction was fair and voluntary. This is a difficult standard of proof.”
198 Ariz at 328
What this means is that a plaintiff in a financial exploitation action need only prove two elements: the existence of a fiduciary relationship and self-dealing by the fiduciary. Chandos, supra.
Agents acting pursuant to a power of attorney will be a fiduciary of the principal, AUTOVILLE, INC. v. FRIEDMAN, 20 Ariz. App. 89, 93 (1973). The Restatement of Agency, Second, Sec. 13, states that an agent “is subject to a duty to his principal to act solely for the benefit of the principal”, Restatement of Agency, Second, Sec. 387 (emphasis added).
Likewise, under agency concepts, one acting on behalf of another “is bound to exercise the utmost good faith” with the burden of proof resting on the agent to show “an absence of all undue influence, advantage or imposition”. Starkweather v. Conner, 44 Ariz 369, 376 (1934). Even “(i)f the principal consents to a self-dealing transaction, the agent nevertheless must conform to the standard that the transaction be ‘fair and reasonable’ to the principal.” Comment (e) to Sec. 1.01, Restatement of the Law of Agency Third, Tentative Draft No. 2 (March 14, 2001).
What are the consequences of a breach of fiduciary duties?
While Arizona courts have not always made a distinction between fiduciary and confidential relationships, it is clear that a breach of duties created by either relationship will constitute constructive fraud. In Re Purton, 7 Ariz App 526, 533 (1968); Raestle v. Whitson, 119 Ariz 524 (1978); Matter of Swartz, 129 Ariz 288, 294 (1981). Constructive fraud has two elements: a fiduciary relationship and the lack of full and truthful disclosure of all materials facts. Rhoads v. Harvey Publications, Inc., 145 Ariz 142, 148-9 (CA2, 1985). Neither intent to deceive nor dishonesty of purpose is a necessary element of constructive fraud. Lasley v. Helms, 179 Ariz 589, 592 (CA1, 1994).
Once a confidential or fiduciary relationship is established, a presumption of constructive fraud is created which places the burden upon the alleged perpetrator to prove, by clear and convincing evidence, that she acted in the principal’s best interest. Chandos, supra, 18 Ariz App at 585, and that the transfer was made freely and voluntarily by the alleged exploited person and with that person’s full knowledge of the facts, Eagerton v. Fleming, 145 Ariz 289, 292 (CA2, 1985). The duty to disclose is not obviated by a showing that the outcome of a transaction was fair to the alleged exploited person. Full disclosure of all pertinent information, including the presence of any conflicts of interest, is independently required. Estate of Weiner, 120 Ariz 349, 352 (1978)
Failure to provide the clear and convincing evidence renders the transactions voidable. ARS 14-5422; Chandros, supra.
Said failure also is grounds for the imposition of a constructive trust, which is a remedial device used to prevent unjust enrichment or when it is inequitable to allow property to be retained by the legal title holder. Burch & Cracchiolo PA v. Pugliani, 144 Ariz 281, 285 (1985). Because of the variety of circumstances in which a constructive trust has been imposed, the doctrine has remained flexible. As Justice Cardozo explained: “A constructive trust is the formula through which the conscience of equity finds expression. When property has been acquired in such circumstances that the holder of the legal title may not in good conscience retain the beneficial interest, equity converts him into a trustee ….A court in equity in decreeing a constructive trust is bound by no unyielding formula. The equity of the transaction must shape the measure of relief.” Raestle, supra, 119 Ariz at 526, quoting Beatty v. Guggenheim Exploration Co., 225 N.Y. 380, 122 N.E. 378, 380-381 (1919) “In most cases where a constructive trust has been established, it appears there has been shown in addition to the family relationship such factors as age and infirmity on one hand, actual dominance on the part of one of the parties, an established course of management of the grantor’s affairs by the grantee, or other similar facts making it inequitable to allow the grantee to prevail.” Stoltz v. Maloney, 129 Ariz 264, 267 (CA2, 1981).
The constructive trustee is required to account for all monies provided to her together with all investment proceeds from that money. LM White Contracting Co. v. Tucson Rock and Sand Co., 11 Ariz App 540, 545 (CA2, 1970), ARS 14-7235(b).
FINANCIAL EXPLOITATION – OTHER LEGAL ISSUES
Lack of capacity, lack of knowledge and undue influence
Many times, the financial exploitation is not discovered until after the exploited person has died. The financial exploitation case then takes on many facets of a will contest. Issues such as incapacity, lack of knowledge and undue influence will be raised. Conceptually, the issues are largely the same regarding transfers done while the decedent was alive (ie, deeds, contracts, etc) or in a post-mortem setting (wills, trusts, POD designations, etc.). The only difference is that a will is given certain protections through the use of presumptions in favor of the validity of a properly executed will.
Keep in mind that these issues will normally only be raised where no fiduciary relationship exists.
Capacity To Contract
Capacity to contract is presumed. Capacity is defined as “whether, under all the circumstances, the person’s mental abilities have been so affected as to render him incapable of understanding the nature and consequences of his act, that is, unable to understand the character of the transaction in question”. Hendricks v. Simper, 24 Ariz App 415, 418 (1975). The party challenging a contract on incapacity grounds must prove incapacity by clear and convincing evidence.
The same test holds for the conveyance of real estate, with the focus on capacity at the time of delivery. Stewart v. Woodruff, 19 Ariz App 190 (1973); Pass v. Stephens, 22 Ariz 461 (1921)
A similar if not identical test exists for executing a power of attorney, which requires that “the person is capable of understanding in a reasonable manner, the nature and effect of his act”. Golleher v. Horton, 148 Ariz 537, 540 (CA1, 1985). The test is not whether the principal understood each potential transaction that was authorized under the POA.
The capacity to create, amend, revoke or fund a trust is governed by the terms of the trust. In Re Estate of Pilafas, 172 Ariz 207, 211 (CA1, 1992).
Capacity To Make a Will
When challenging a will on capacity grounds, the following quote from Justice Lockwood should be kept in mind:
“No matter how much we may reprobate the conduct of a testator from the standpoint of natural justice, or even humanity, we may not on that account permit his will to be set aside unless it clearly appears that he did not fully realize what he was doing with his property, for it is his to dispose of as he pleases”
A person is presumed to have testamentary capacity. Vermeersch, supra, 109 Ariz at 127 (1973). There are three elements: 1) the ability to know the nature and extent of one’s property, 2) the ability to know the natural objects of one’s bounty and 3) the ability to understand the nature of the testamentary act. Vermeersch, supra.
The burden is on the contestant to prove by a preponderance of the evidence that one of these three elements did not exist. Matter of Estate of Thorpe, 152 Ariz 341, 343 (CA1, 1986); Smith, supra. This is not an easy thing to do since a contestant must show more than a “generally deteriorating mental condition”. Evans v. Liston, 116 Ariz 218 (CA1, 1977). Furthermore, it must be shown that these conditions existed at the time the will was executed. Arizona courts have long taken a dim view of experts and other witnesses who attack a will by relying on acts or statements that made by the testator days or weeks before or after the will was signed. Thorpe, supra; In Re Walters’ Estate, 77 Ariz 122 (1954); In Re O’Connor’s Estate, 74 Ariz 248 (1952); In Re Stitt’s Estate, 93 Ariz 302 (1963). This means that practitioners must keep in mind that critical time is not when the client meets with the lawyer for the first time – it is when the document is signed.
And even if a lack of capacity exists, it must be shown that the lack of capacity impacted the terms of the will, eg, that the testator devised property in a manner that she would not have otherwise done. Smith, supra, Evans, supra at 220. The O’Connor case is a good example of this. The testator thought that her husband and sister, both deceased, were still alive when executing her will. But the court ruled that, even if Ms O’Connor believed this, it would not have changed the terms of her will.
On the other hand, in the case of In The Matter of the Estate of Killen, 188 Ariz 562 (CA1, 1996), a will was invalidated because the testator clearly was seriously mentally ill and delusional. The proponents of the will maintained that she had capacity since she met the three-pronged test: she knew she was executing a will, she knew the natural objects of her bounty and she was aware of the nature and extent of her property. But the trial court’s finding of lack of capacity was upheld because the testator’s false and irrational beliefs that her nephews were trying to kill her affected the terms of the will. In other words, the testator lacked capacity because her delusions rendered the testator unable to understand the true relationship with her family members and friends.
But the Killen court emphasized that the inquiry was limited to the existence of unfounded delusions. No inquiry was needed or allowed regarding the testator’s feelings or motivations:
“if the testator is eccentric or mean-spirited and dislikes family members for no good reason, but otherwise meets the three-prong test, leaving the family members out of the will would not be due to lack of testamentary capacity”.
Killen, supra, 188 Ariz at 55. See also Estate of Smith, supra, 53 Ariz at 510 where the testator omitted a daughter because she appeared to be financially well-off when in fact she was experiencing serious financial difficulties. (“It must appear not merely that the testatrix was mistaken in the facts, but that the mistake was caused by a mental derangement”.)
Yet, a will can still be validly executed by someone laboring under a mental impairment. The testator in In Re Teel’s Estate, 14 Ariz App 371 (CA1, 1971), was mentally retarded, functioning at an age level of ten to twelve years old. The court upheld the trial court’s finding that testamentary capacity existed. Likewise, in In Re Thomas’ Estate, 105 Ariz 186, 189 (1969), the court held that the appointment of a guardian does not necessarily equate with the lack of capacity to execute a will and that a person who had a guardian could still perform a valid testamentary act.
Another case is Estate of Gillespie, 183 Ariz 282 (1996) where the court invalidated a will made by a testator who was heavily medicated after a recent cancer surgery. The parties argued the case on capacity grounds but the Supreme Court never reached that issue, ruling that the testator did not know what she was signing. The largely undisputed facts were that the testator’s son had his lawyer prepare a will without meeting with her that substantially changed her prior will. There was no record before the trial court that she had ever approved or intended these changes and there was some serious overreaching by the son. At the hospital, the will was simply put in front of the testator by the son who signed it, sight unseen and without having it read to her. There was nothing I the record to show the testator was made aware of the changes.
The Court emphasized that a will can be challenged on many grounds. Lack of capacity is only one of them. Here, the testator not only lacked understanding of the terms of the will but was actually misled about them. “The 1992 Will was the will of James, not Grace.”
One crucial point that practitioners and their clients must keep in mind is that, when challenging a will, it is not whether influence was exerted but rather undue influence. Another is that undue influence must be proven by clear and convincing evidence rather than by a preponderance. Taken together, this often means that any litigation alleging undue influence is an uphill battle but, as discussed below, the Mullins case may have drastically changed the landscape if a fiduciary relationship can be proven.
Evans v. Liston, supra is the case most often cited regarding undue influence. “A person exercises undue influence over a testator in executing a will when that person through his power over the mind of the deceased make’s the latter desires conform to his own so that the will does not conform to the wishes of the testator but to those of the person exercising the undue influence.” Evans, supra 116 Ariz at 220. The opinion sets out eight factors tending to establish undue influence:
- Fraudulent representations
- Hasty execution of the will
- Concealment of the execution of the will
- Active involvement in procuring the will by the party exerting the influence
- Prior statements that are consistent with the terms of the will
- Unusual or unreasonable terms of the will
- Testator’s susceptibility to undue influence
- Existence of a confidential relationship
Prior to Mullin, the presumption disappeared when the person alleging undue influence denies it. Evans, supra 116 Ariz at 220; In Re Pitt’s Estate, 88 Ariz 312, 317 (1960). The trier of fact does not have to believe that the denial is true, only that it was made. O’Connor, supra, 74 Ariz at 260. See also In Re Estate of Harber, 102 Ariz 285 (1967) and In Re Estate of Thompson, 1 Ariz App 18 (1965).
But the case of Mullin v. Brown, 210 Ariz 545, 115 P 3d 139 (CA2, 2005) appears to have dramatically changed this. For estate planners, this case should be setting off alarm bells. It is the first case to discuss the ramifications of Estate of Shumway, 198 Ariz 323 (2000) regarding the shifting of the burden of proof in a will contest. At issue was the following jury instruction, which the Court upheld:
If Chris Mullin Jr. and/or Dr. David Mullin had a confidential relationship with Ralph Mullin; was/were active in procuring the execution of the 1995 will; and was/were a principal beneficiary under its terms, then the 1995 will is presumptively invalid and the defendants must prove by clear and convincingevidence that Chris Mullin Jr. and/or Dr. David Mullin did not unduly influence Ralph Mullin.
Shortly before death, Chris Jr. had his grandfather change his will, leaving the entire estate to him and disinheriting Chris’ brother, who under a prior will was a 50% beneficiary. Chris Jr. also emptied a joint account and had the decedent issue a new deed for certain, unspecified gas and oil interest. The will in question had been prepared by an attorney.
The Court began by noting that “A presumption of undue influence arises when one occupies a confidential relationship with the testator and is active in preparing or procuring the execution of a will in which he or she is a principal beneficiary”. See In re O’Connor’s Estate, 74 Ariz. 248 (1952). The precise issue on appeal was under what circumstances does this presumption cease? The Court emphasized the statement made in Shumway that “`[W]here a confidential relationship is shown the presumption of invalidity can be overcome only by clear and convincing evidence that the transaction was fair and voluntary.”‘ Id. ¶ 16 (alteration in Shumway), quoting Stewart v. Woodruff, 19 Ariz. App. 190, 194 (1973). The court noted that “[t]his is a difficult standard of proof ”.
Arizona courts have long held that the donee has the burden of proving the validity of a gift by “certain, clear, complete, direct, positive, express and satisfactory” evidence. Stewart v. Damron. 63 Ariz 158, 163 (1945). While Arizona courts do recognize that “less evidence is required to establish a gift from a parent to a child than from a stranger to a stranger”, Elkins v. Vana, 25 Ariz App 122, 125 (1975), courts also recognize that when there is a confidential relationship between the alleged donor and donee, the donee has the burden to show “by clear evidence” that the donor “acted independently, with full knowledge and of his own volition free from undue influence”, Chandos, supra, 18 Ariz App at 585; Eagerton, supra at 292. Such transactions “will be scrutinized with care and when challenged will be held valid on clear and convincing evidence” showing the “utmost good faith, and an absence of all undue influence, advantage or imposition”. Amado v. Aguirre, 63 Ariz 213, 219 (1945).
Statute of limitations
When a fiduciary relationship is found to exist, it is not always clear when the statute of limitations begins to run and whether it has been tolled. “With respect to those in a professional or fiduciary relationshipwith the tortfeasor, an adverse or untoward result, or a failure toachieve an expected result, is not, as a matter of law, always sufficientnotice. To trigger the statute of limitations, something more is requiredthan the mere knowledge that one has suffered an adverse result while under the care of a professional fiduciary”
Walk v. Ring, 202 Ariz 310, 317 (2002).
If, as will normally be the case in a financial exploitation situation, the bad act was concealed or otherwise not disclosed by a fiduciary, then the concept of fraudulent concealment exists and will also toll the statute. Morrison v. Acton, 68 Ariz 27 (1948). The exploited person “is relieved of the duty of diligent investigation required by the discovery rule and the statute of limitations is tolled until such concealment is discovered, or reasonably should have been discovered”. Walk, supra, 202 Ariz at 319.
Dead Man’s Statute
Many times, the alleged exploiter will argue that promises were made by the exploitee or that some other agreement or understanding was reached. In a post-mortem setting, practitioners must be familiar with the workings of the Dead Man’s Statute to prevent the mischief that such self-serving evidence can create. The Dead Man’s Statute, ARS 12-2251, states, in part, that in a probate action “neither party shall be allowed to testify against the other as to any transaction with or statement by the testator, intestate or ward unless called to testify thereto by the opposite party”. It applies to interested parties as well, such as heirs and devisees. Condos v. Felder, 92 Ariz 366, 372 (1962); Cachenos v. Baumann, 25 Ariz App 502, 505-506 (CA1, 1976).
The Statute is designed to apply to “persons who will gain from inaccurate distortions of a transaction with (a) decedent….where death has rendered decedent incapable to giving the lie to the inaccuracies”. Carillo v. Taylor, 81 Ariz 14, 25 (1956). See also Fridena v. Evans, 127 Ariz 516, 521 (1980)
In applying the Statute, courts look for corroboration or some other indicia of reliability that “strengthens or confirms that either the statement was made or that the statement was true”. Troutman v. Valley National Bank of Arizona, 170 Ariz 513, 517 (CA1, 1992).
Most practitioners overlook the fact that, even if the admission of a statement is not precluded by the Dead Man’s Statute, the statement is still subject to a hearsay objection. Rules 803 & 804 of Evidence.
Parol evidence rule
A closely related issue to the Dead Man’s Statute is the parol evidence rule which governs the admissibility of testimony or other evidence to supplement the party’s understanding of the terms of a written agreement. In a financial exploitation setting, one party or another will often try to explain away or contradict a written document that evidences an agreement or transaction. Arizona has a very liberal and permissive parol evidence rule and the leading case is Taylor v. State Farm Mutual Automobile Insurance Co., 175 Ariz 148 (1993). An instructive and recent case is Long v. City of Glendale, 208 Ariz 319 (CA1, 2004), where the Court held that extrinsic evidence could be used in interpreting a deed. The Court then went on to apply the rule, stating that as long as there is ambiguity in the written language in the deed that is “reasonably susceptible” to the interpretation asserted by the proponent of the extrinsic evidence, then the extrinsic evidence must be admitted. 208 Ariz at 328.
However, the parol evidence rule cannot be used to prevent the introduction of fraudulent actions that contradict the terms of the written agreement, so that an exploiter cannot hide behind a document whose creation was fraudulently induced. Lusk Corp v. Burgess, 85 Ariz 90 (1958). See also Pinnacle Peak Developers v. TRW Investment Corp, 129 Ariz 385 (CA1, 1980).
Standing of beneficiaries to contest
A very overlooked concept is that beneficiaries of a trust or estate may not be bound by any alleged agreements made between the grantor/testator and a third party. For instance, beneficiaries of a trust were held to be not bound by an arbitration clause between the trustee and the brokerage house, Schoneberger v. Oelze, 208 Ariz 591 (CA1, 2004), or that beneficiaries of a probate estate were not bound by a wrongful death settlement reached by the personal representative. Wilmot v. Wilmot, 203 Ariz 565 (2002).
In a financial exploitation setting, this means that beneficiaries may be able to void any alleged deal between exploiter and exploitee, regardless of the apparent fairness of it.
The way to avoid this problem and enforce the terms of the transaction is to obtain court approval. Such approval is binding as to all if proper notice is given and no fraud is alleged in obtaining the approval. Estate of Thurston, 199 Ariz 215 (CA1, 2000).