Living Well on Other People's Money

Article written by Paula McCann, Esq.
Posted on May 30, 2012

Co-authored by Ron R. Morgan, Esq.

          Vermont is the number one state in the nation for embezzlement thefts from corporations and nonprofits.[1]  In fact, we may well be on our way to another dubious number one ranking: for thefts by fiduciaries from estates of all types – guardianships, decedents’ estates and by Agents acting under Powers of Attorney[2].  It appears that living well on other people’s money has become a way of life for some Vermonters.  The purpose of this article is to begin a conversation among our brethren on this issue and ask that you join us to make it more difficult for fiduciaries to steal the money and assets from the people they are supposed to protect.

            In our practice, we have seen a range of disturbing cases over the past five years involving fiduciaries converting money placed in their charge to their own personal purposes. These cases involve the misuse of powers of attorney, defalcation by trustees, thefts by guardians, and the diversion of funds by executors.  Under the laws of this state, fiduciaries (Agents, Guardians, Trustees, Executors/Administrators) are given tremendous power over other people’s money and assets; yet, in our experience, defalcating fiduciaries have been able to act with impunity, virtually unquestioned by those who are responsible for supervising their actions, specifically us – the lawyers – and the courts.  Unfortunately, we find that most of the fiduciaries in the cases we have handled have “gotten away with it” because, frankly, under our current system, the thefts are not coming to light until it is too late and our laws are too outdated to deal with the modern reality of thefts from vulnerable adults or the dead.

            After presenting several case examples of the problems we have seen, we will discuss how these problems could have been avoided or how the process of recovering assets could be improved within our legal system.  We hope you will consider these issues and, perhaps, consider changes to your own practice to make it more difficult for a fiduciary to steal from the people they have been entrusted to protect.

I.  Case Studies

1. A.  Theft under Power of Attorney; Estate of RAW, 2007 Superior Court Case

             In this case[3], the son, along with his sister, served as co-agents under a Power of Attorney for his mother.  The son was one of nine children, and the only one to attend college.  He had worked for a major Vermont company. 

            In establishing the power of attorney, the son and his sister consulted with a non-lawyer engaged in giving advice to elders who were in need of long term care.  The mother executed a standard form power of attorney document giving her two children agency authority over her financial and legal matters.  We were told by the sister that the agents were then advised to put all of their mother’s money into a joint bank account in their own names for Medicaid asset planning reasons and to privately pay her care for what was then a 3-year Medicaid look-back period for transfers for no value.[4] 

            Acting under the power of attorney, the two children transferred all of their mother’s funds into a joint account in their own names, not a Power of Attorney account.  The son was the first name on the account, and it was arranged that he receive all bank statements.  The son was supposed to send copies of the statements out to his eight siblings on a routine basis so that all of the children would be informed of the status of their mother’s funds.  The son did send out bank statements to his siblings for several years, showing a declining balance as funds were supposedly used to pay for their mother’s care.  The mother died in 2007.  The day after the mother’s funeral, the daughter found that, contrary to what she and her siblings had been told, there was no money in the account and, in fact, the account had been closed years earlier by the son.

            After attempting unsuccessfully to get the local States Attorney to prosecute the son for theft of well over $100,000 from a vulnerable elder, the decedent mother’s estate filed suit in Superior Court under the Vermont power of attorney statute (14 VSA 3501 et seq.).[5]  The State’s Attorney’s office did not revise their position even after they were shown fraudulent bank statements that had been created by the son through a rather talented use of a computer program and mailed to his siblings every month for several years through the U.S. Postal Service. 

            Ultimately, the son admitted liability and has been paying money back into the estate.  The estate will only recover a fraction of the funds taken from the mother.  The expense of bringing the case in Superior Court reduced the estate’s recovery by approximately one-half of the agreed repayment amount.

 B.    Theft by Trustee –Criminal
         United States of America vs. Donah Smith Case No: 5:11-cr-26-1

            Donah Smith worked at ARC, a charity in Rutland, Vermont, until May 18, 2010, when she was terminated for theft from her clients’ Social Security accounts.  Ms. Smith’s job had been as a caseworker for disabled adults living in the Rutland area and, as part of her job, she became the Social Security Representative Payee for her clients.  That meant that each month, accounts she controlled received the federal cash benefit paid under Social Security for her clients.  It came to light after the U.S. Attorney and F.B.I. became involved, thatMs. Smith was also serving as Trustee of two different Supplemental Needs Trusts (SNTs) for two of her clients and had stolen funds from those SNTs for her personal benefit.  In the end, Ms. Smith was charged with stealing $41,225 from 15 clients, including the Social Security accounts and the two SNTs.

            Ms. Smith pleaded guilty to multiple counts of mail and wire fraud, including thefts from the SNT accounts.  She is currently serving 24 months in a federal prison in West Virginia and will pay restitution once she is released.[6]

            Gregory Waples, Esq., the Assistant U.S. Attorney who brought the case, along with Special Agent William McSalis of the F.B.I., who investigated the case, focused this financial exploitation case on the vulnerability of the victims, not the total dollar figure.  AUSA Waples brought the federal charges and added the state charges of theft from the SNTs, successfully arguing that since all of the amounts taken were part of a single scheme or pattern of theft, the Court should order full restitution of all funds taken by Ms. Smith from her former clients. 

            AUSA Waples and Special Agent McSalis are excellent resources for lawyers who find themselves in the position of having a client who has been a victim of theft by a fiduciary where federal funds (Social Security) are involved.  In many cases, the victims may have a better path to recovery of assets via the criminal court process rather than through the civil court system.  

            To assist with this case, our office obtained necessary court orders for all banking records, due to Ms. Smith’s refusal to turn them over, analyzed the thefts from the trusts, traced the assets, provided evidence in the indictment phase and testified at the sentencing hearing to support a near maximum prison sentence for Ms. Smith.  (The maximum sentence would have been 27 months; she received 24). 

            Our client chose to assist the government in their criminal case and forego a civil case for breach of fiduciary duty against Ms. Smith because the government added the state charges regarding the trust thefts to the federal charges on the Social Security thefts and requested restitution for all of the funds taken as part of Ms. Smith’s sentence.  Ms. Smith was judgment proof; she had spent the money on non-recoverable items such as leasing a luxury SUV.  Furthermore, the SNTs did not require a surety bond by the trustee, so a civil suit would have been pointless.

C.    Conversion of Assets from Estates

            In the past two years we have seen the following situations, illuminating some of the methods used by fiduciaries to take what does not belong to them.

Impersonating an Executor/Theft of Estate Assets

            In one estate case still in progress, an interested person (referred to herein as “M”) was named as executor in a decedent’s Will.  “M” expressly declined appointment as executor and consented to the appointment of an independent Administrator.  Subsequently “M” flew to Europe, taking with them a copy of the Will naming “M” as executor, along with the Order Admitting the Will, and presented these documents at a foreign bank where the deceased had a bank account, credit card and safe deposit box.  “M” proceeded to take items of value from the safe deposit box and drained the bank account, causing an overdraft of more than $70,000.  “M” under oath and during questioning on a witness stand in a probate court, freely admitted impersonating the Executor at a foreign bank and taking in excess of $70,000 in estate assets.

Guardianship/Agency Conversion of Assets

            We have seen a number of instances where Guardians have taken assets from the guardianship estate and converted them for their own benefit.  They are summarized below; all are supported by court records.

• Guardian purchases vehicle with Ward’s money, titles/registers vehicle in their own name, then drives the vehicle for personal use and charges mileage to the Ward’s estate, along with all costs for gas, maintenance and repair.
• Guardian uses fiduciary position to quit-claim Ward’s home to himself and one other person, then sells the home, splitting the proceeds with other person. No license to sell is obtained from the Court through hearing process.  The sale comes to light after the Ward dies.
• Guardian moves into Ward’s home, sends Ward to live with another relative 1,500 miles away on a one-way airline ticket, then proceeds to use Ward’s assets to pay all costs of use of home by Guardian and their family, without  paying rent or utilities.
• Agent for Principal who is housed in a long-term care facility arranges to have Agent’s personal monthly cable TV and utility bills paid automatically from Principal’s checking account where the Principal’s Social Security check is deposited.  Agent fails to pay any of the long term care costs, despite cashing out and apparently spending a $10,000 CD owned by the Principal.  Adult Protective Services and legal counsel become involved after Principal incurs nearly $15,000 in unpaid long term care costs.  Agent is removed, refuses to provide an accounting to the Principal. 

II. Recommendations

            We believe that Vermont lawyers, state and federal prosecutors, and the judiciary have a responsibility to fully address the prevalence of abuse of vulnerable adults by theft and exploitation in this state.  Thefts from fiduciary arrangements could be reduced, and damage from thefts repaired, by more effectively using existing administrative and legal tools that are currently available and by amending Vermont laws and administrative and court procedures in an appropriate fashion.  

            Members of the Vermont Bar have a general responsibility to act to protect their clients. It is noteworthy that the model rules of professional conduct specifically enable an attorney representing a client with diminished capacity to seek assistance to protect a vulnerable client from exploitation.  MRPC Rule 1.14(b) provides: 

            When the lawyer reasonably believes that the client has diminished capacity, is at risk of substantial physical, financial or other harm unless action is taken and cannot adequately act in the client’s own interest, the lawyer may take reasonable necessary protective action, including consulting with individuals or entities that have the ability to take action to protect the client, and in appropriate cases, seeking the appointment of a guardian ad litem, conservator or guardian. 

            We believe that Vermont should examine whether additional requirements may appropriately be imposed on attorneys who have reason to know that the client could suffer financial harm from the actions of others.  We also suggest that the proposed rule on the unauthorized practice of law be adjusted so that non-lawyers giving legal advice are subject to the same standard as lawyers giving legal advice.[7]

            A.  Amend Power of Attorney Statute

            Vermont’s existing Power of Attorney Statute (Title 14 Chapter 123) appears to be based in large part on the Uniform Durable Power of Attorney Act as it was amended in 1987 by the National Conference of Commissions on Uniform State Laws (NCCUSL) committee.  NCCUSL revised the 1987 version by proposing a Uniform Power of Attorney Act (2006) (“UPOAA”).  Short of adoption of the UPOAA, we recommend the following.

             Persons Requesting Accountings from Agents.  Under current law (14 VSA §3510), only the principal, the principal’s legal representative, and the Commissioner of Disabilities, Aging, and Independent Living (DAIL) may request an accounting by an agent acting under a power of attorney.   We would propose expanding the categories of individuals who may request an accounting of an agent to those permitted by the 2006 UPOAA model statute.  Pursuant to the Uniform Act, Section 116, a court may grant appropriate relief upon the petition of: 

1. The principal or agent;
2. A guardian, conservator, or other fiduciary acting for the principal;
3. A person authorized to make health care decisions for the principal;
4. The principal’s spouse, parent, or descendant;
5. An individual who would qualify as an heir of the principal;
6. A person named as a beneficiary to receive any property under a trust or other arrangement;
7. A government agency having regulatory authority to protect the welfare of the principal;
8. The principal’s caregiver or another person that demonstrates sufficient interest in the principal’s welfare;
9. A person asked to accept the power of attorney.

            While waiting for an appropriate statutory change, we believe attorneys should modify their Power of Attorney documents to embody the recommendations of the UPOAA when it comes to authority to demand accountings.

            Contempt as a Remedy for Failure by Agent to Account. A statutory provision in Vermont law should provide for a contempt proceeding against an Agent who refuses to turn over assets upon revocation of the Agency and/or failure to account for their actions as Agent.  Far too often, legal expenses for the Principal are driven much higher than necessary by former Agents who refuse to comply with requests for production of assets, documents, and accountings.

            Who pays.  In appropriate cases (e.g., when no defalcation is found), principals should be obligated to pay for accountings prepared by or for a former or current Agent.  When an Agent is removed and fully complies with the transition of assets, fully accounts for all monies used and shows that no negligence or self-dealing occurred, then the Principal should pay for the time and expense of preparation of such accounting and transition of assets.  The Power of Attorney document should provide for payment of the expense of annual accountings or accountings on demand.  This is an open issue in our existing statutory framework.

           B.  Properly “Vetting” Fiduciaries.  As can be understood from our case studies, fiduciaries have substantial powers over assets they control, including the ability to convert them for their own personal benefit.  In our view, the individuals in the case studies should never have been selected as agents, executors, trustees, or guardians.  Most of the fiduciaries involved would have flunked any kind of cursory screening.  Several of the guardians we dealt with had no understanding of the law or their duties as fiduciaries.   Several guardians and Agents had no stable work history, were financially unstable in their personal life, could not have passed a credit/background check, and were potentially close to filing personal bankruptcy when they took over the assets of a Ward/Principal.   We are left to wonder what type of vetting process, if any, was involved when these individuals were nominated to manage assets as fiduciaries in the legal documents or in court proceedings.

            It seems to us that in many cases the attorneys preparing documents naming fiduciaries to act on behalf of their clients fail to ask basic “due diligence” questions regarding the potential fiduciary’s history of managing their own money, and whether they have any dangerous propensities that indicate they may pose a potential threat to the client’s assets.  For instance, are we asking whether or not the nominee has issues with alcohol, drug use/abuse, or gambling, or whether they have a poor credit history, poor employment history, or have lawsuits pending against them that could result in financial distress?   Perhaps adding a few basic questions to a lawyer’s estate or guardianship planning questionnaire would help in counseling a client on their choice for fiduciary.  In addition, the questionnaire might ask if the fiduciary nominee would be willing to provide a credit history (or at least their credit score) before assuming their office.  Although the decision of whom to choose as a fiduciary resides with the client, we also believe that the lawyer drafting documents has a responsibility to make some inquiries in the context of explaining the legal significance of the documents to his or her client. 

            We take this responsibility seriously in our practice.  In a recent situation, we declined to name a relative of the client to become Agent and Executor due to lack of employment history, lack of credit worthiness and other behaviors indicating to us that the person would not be able to act in accordance with the standards of conduct of a fiduciary.

            C.  Bonding Statute.  Any Vermont lawyer who has not yet had the experience of having to consider how to recover damages under a probate division personal bond should read 14 V.S.A. § 2108 before opening their next estate or consenting to the petition of another lawyer. 

            Duplicate judicial process.  The first problem encountered by the lawyer seeking to enforce what essentially constitutes a simple promise to pay (like a check) is that, while the bond is given to the probate division, and thereby the obligations run to the judge of probate, section 2108 requires a suit in the civil division in the county in which bond is given.  The unification of the Vermont trial courts all within the new Superior Court makes this allocation of jurisdiction to two divisions highly inefficient. 

            Under current Vermont law, the person claiming the breach on a probate bond must solicit the permission of the probate judge to bring an action in the civil division and then “give a bond to the adverse party.”  14 VSA §2108(1).  Why the individual who is harmed by the executor/administrator’s alleged defalcation must give a bond defies logic in today’s world.    We note that this section of our statute was first cited in case law in 1833 and last cited by case law in 1913. 

            Recommended Changes to Existing Probate Procedures.  If section 2108 gave jurisdiction to the judge of probate over the enforcement of probate bonds, the procedural path for recovery would be much simpler.  In such cases, where the defalcating executor still had the money or probate assets under administration, the litigants and judge could (as discussed below) use proposed Rule 72 to hold the executor in contempt.  Even should the executor be found to have spent all of the money, recovery could be had by using the normal collection procedures available in Superior Court for a judgment, such as trustee process.  To supplement these powers, we intend to propose a rule to the Probate Rules Committee that would make it clear that the probate courts have the same types of collection tools available to them as those available to courts in the civil division.  This rule could be similar to Family Rule 4, which sets forth which Rules of Civil Procedure apply to Family Court actions for divorce and legal separation.[8]

            Surety Bonds.  In addition to the foregoing proposals, we believe that the rules of probate procedure should be amended to provide that a personal bond (unsecured) should only be granted to an executor or administrator once they have proved that they have sufficient assets to satisfy a judgment and are otherwise credit-worthy.  Under federal law, an individual is entitled to one free credit report a year from each of the major credit reporting agencies.  It seems to us anomalous that a credit report is sought by banks that extend a credit card to a college student for amounts up to $1,500, but our probate courts are willing to issue unsecured bonds to individuals handling $500,000 to $600,000, or even millions of dollars, worth of assets without a credit check.  We believe that the probate rules should reverse the de facto presumption in our probate division that unsecured bonds are the default position.  A surety bond should be required unless the executor can prove credit-worthiness, as is now the common practice in the State of New Hampshire.  In addition, some states, Colorado for example, require not only a credit report but also a criminal background report from the state bureau of investigation before an individual can be appointed as a fiduciary.

            D.  Probate Court Rules.  Historically, the U.S. probate courts have been a convenient forum for the administration of estates.  Essentially, the courts are supposed to exercise a supervisory role over the administration of estates, making sure that the provisions of the Will are respected, creditors of the decedent are paid, tax compliance rules are respected, and title to property is vested in the takers under the testamentary arrangement.  When simple administration goes awry because of a probate dispute or because assets of the estate have been taken (either before death or post-mortem) by a person not entitled to them, the probate courts begin to serve a judicial function-- hearing motions, taking evidence, reviewing accountings and records of different types, and ultimately issuing orders. 

            Unfortunately, the probate rules, while adapted to the administrative process, have failed to be modernized to consider the increased complexity of estates, trusts, guardianship, and other forms of litigation that are now (or should be) within the purview of the probate court as a court of primary jurisdiction.  A particularly striking example of the mismatch between the current functions of the probate courts and probate rules can be seen when considering the relatively recent attribution of jurisdiction to the probate court over express trusts upon the adoption of the Vermont Trust Code.  As our article on the Alden decision (Alden v. Alden: Lessons of the Vermont Trust Code[9]) shows, litigation of the type involved in the Alden case might well be unmanageable in the probate division under its current rules.  For example, after extensive discovery and depositions, the Alden case was decided on cross motions for summary judgment.  Under current probate rules, discovery may be obtained only after “notice and hearing” (Rule 26), and the practitioner may scan the Probate Rules in despair of finding a rule allowing summary judgment. 

            The Probate Rules Committee has been attempting to update the rules to deal with the increasing number of complex cases involving trusts and estates.  As mentioned above, in January 2012, the Probate Rules Committee adopted New Rule 72 (setting forth a means for the probate division to handle cases of contempt in the form of refusals to abide by its orders), and the new rule will be forwarded to the Supreme Court for comment and review by the Vermont legislature. Similarly, the Probate Rules Committee is attempting to add time limits and other necessary rules regarding motions in probate court.  As of this writing, a litigant is left to guess at what the response time might be for motions, and indeed left to wonder what types of motions might be accepted.  For this reason, at its January 2012 meeting, the Probate Rules Committee began to consider a rule similar to Family Rule 4, setting forth procedures in contested cases.  This draft rule is designed to fill-in the gap in the Probate Rules.  Pretrial and judgment enforcement procedures are lacking in the probate rules as currently drafted.  This new rule attempts to bring in all of the normal pretrial protective measures available in the Superior Court Civil Division, including pre-judgment[10] and post-judgment[11] enforcement procedures.[12]

            It is our hope that once litigants in the probate division and their attorneys become familiar with how to use these new rules, an individual filing a petition in the probate division that alleges defalcation from the decedent’s estate should be able to request a temporary restraining order or prejudgment attachment, issue subpoenas without having to suffer a 30 to 40 day delay in seeking a court order, and (in short) avail themselves of all of the normal civil court procedures typically used to defend litigants’ rights and protect their financial assets.

IV. Criminal Procedure

            While the Vermont statutes have numerous provisions that criminalize thefts from fiduciary relationships,[13] they do not impose penalties consistent with larceny statutes nor provide for restitution.

            Whatever the State of Vermont’s statutes may actually say, in practice we find that referral to State’s Attorneys concerning thefts from estates are rarely made by the judges of probate when they become aware of such thefts.[14]  Litigants seeking to have Vermont criminal law applied to individuals stealing from estates also are likely to find that the local State’s Attorney will resist taking such a case.  It is our experience that the only governmental authority in Vermont that has been willing to purse thefts from fiduciary arrangements is the U.S. Attorney’s office.[15] 

            The current state of law enforcement concerning thefts from estates, guardianships and trusts and from vulnerable adults reminds us of the general attitude in our country some years ago concerning spousal abuse, which was often viewed as a private “family matter” outside the scope of law enforcement.  We hope that this article may help bring the attention this issue deserves, at least within the Vermont legal community. 

            We believe that the State’s Attorneys in Vermont have an obligation to protect financially vulnerable adults and elders by allocating resources to the prosecution of individuals who steal from their families or those they are entrusted to care for under legal authority as fiduciary, where their fiduciary obligations are violated in a willful and knowing manner in contravention of our state’s criminal laws.  

            To facilitate a “reset” of Vermont attitudes towards thefts from elders and other vulnerable adults, we advocate that the Vermont legislature pass a single statute that criminalizes thefts from all varieties of fiduciary arrangements and has uniform penalties for such thefts.[16]  We also believe that the Vermont legislature should require the Attorney General to report on thefts from fiduciary arrangements, in particular by providing statistics concerning referrals to its office by individuals, attorneys, and the probate courts, including the number of criminal complaints filed and successful prosecutions.

SUMMARY

            The prevalence of thefts from fiduciary relationships is a problem that has been ignored by the general public and many public authorities, or swept under the proverbial rug by vulnerable adults too embarrassed to report the crimes against them.  We hope that the Vermont bar will take the lead in ending the unwelcome phenomena of fiduciaries living well on other people’s money by drafting documents that place clear boundaries on the use of money and that impose appropriate accounting responsibilities on fiduciaries.  In addition, we hope that members of the bar will take care in vetting potential fiduciaries, and that they will consider regularly arguing for surety bonds in court appointments of guardians and estate fiduciaries. 

            Please contact any of the authors of this article for assistance or resources if you find yourself confronted with these issues in your practice.  We will also be posting blogs and sample documents, such as a sample Power of Attorney, on our website in the next few months to continue our campaign against this form of theft.

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