Fiduciary Duties and the Presumption of Fraud

A stranger called recently in the mistaken belief that this office had prepared a power of attorney for property that named her estranged brother as the attorney-in-fact for her ill and aged mother. Evidently her brother had used a power of attorney to transfer large sums (hundreds of thousands of dollars) from accounts owned by his mother to accounts owned by him, although the wants and needs of the mother did not warrant these transactions.

He had not answered a letter from a lawyer demanding an accounting. The question was whether litigation against the brother would be worthwhile. And it was practically impossible to tell without actually engaging in some litigation. But the obstacles were manageable. One, although the brother had left Illinois, the “long-arm statute” would permit Illinois courts to exercise jurisdiction over him at least as to the transactions that took place while he lived in Illinois. Two, the amount at stake was certainly sufficient to justify some pursuit of him in the courts if he did not provide a satisfactory explanation, for the risk that he was judgment proof was all but nil: He was frugal and had no one to care for but himself. Above all, the transactions were presumptively fraudulent, and the onus would be on him to show otherwise.

Fraud is not, as a rule, presumed. But there is an exception when a fiduciary profits from a transaction with the beneficiary of his/her trust. In this case the son was a fiduciary of the mother, not because of the mother-son relationship, but because of the power of attorney. As such, he owed her the utmost honesty, loyalty, and due care; and he was answerable to her for the slightest breach of those duties. It is well-settled that when a fiduciary benefits from a transaction with the beneficiary of the trust relationship, the law will presume that the transaction was fraudulent. The presumption is rebuttable, but the fiduciary must show -- by evidence that is clear and convincing -- that the transaction was wholly fair and equitable to the beneficiary and in no way the product of undue influence or overreaching.

The courts look for the following “significant” factors: first, a showing that -- before the transaction -- the fiduciary made a full and frank disclosure of all relevant information; second, that the fiduciary furnished adequate consideration for the transaction; and, third, that the principal had the benefit of competent and independent advice. By those standards it would be practically impossible for the fiduciary in this case to rebut the presumption. (And let this be noted: Rebutting the presumption of fraud does not ipso facto establish that the transaction was free of fraud. The presumption is a legally acceptable substitute for evidence, and so if there is evidence of fraud, it might be sufficient to support a conclusion that the transactions were fraudulent even if the presumption of fraud were overcome.)

             See Franciscan Sisters Health Care Corp. v. Dean, 95 Ill.2d 452, 69 Ill. Dec. 960, 448 N.E.2d 872 (1983); Rizzo v. Rizzo, 3 Ill.2d 291, 120 N.E.2d 546 (1954); In re Estate of Miller, 334 Ill.App.3d 692, 268 Ill.