Case Title: Bank IV Olathe v. Capitol Fed'l Savings & Loan Ass'n

Citation: 250 Kan. 541, 828 P.2d 355

Docket Number: 66,420

State: kansas

Court: Kansas Supreme Court

Date: 1992-03-20T00:00:00Z

Document:
250 Kan. 541 (1992)
828 P.2d 355
BANK IV, Olathe, Administrator C.T.A. of the ESTATE OF TILLIE A. FLINN, Deceased, Appellant,
v.
CAPITOL FEDERAL SAVINGS & LOAN ASSOCIATION, et al., Appellees.
No. 66,420

Supreme Court of Kansas.
Opinion filed March 20, 1992.
Keith Martin, of Payne & Jones, Chartered, of Overland Park, argued the cause, and Erich W. Wurster, of the same firm, was with him on the brief for appellant.
John Anderson, Jr., of Overland Park, argued the cause and was on the brief for appellee.
The opinion of the court was delivered by
McFARLAND, J.:
This is an action by the estate of a decedent to recover funds paid to an individual operating under a power of attorney executed by the decedent. The district court entered summary judgment in favor of one of the two defendant savings and loan institutions, and the estate appeals therefrom.
*542 The facts may be summarized as follows. On June 15, 1987, Tillie A. Flinn executed a durable power of attorney designating her nephew James C. Flanders and/or Martha E. Flanders (James' wife) as her attorneys in fact. Tillie's signature on the power of attorney was duly notarized and the estate admits the signature is Tillie's. In January 1988 Tillie owned 12 certificates of deposit issued by defendant Capitol Federal Savings and Loan Association. The value of said CD's was approximately $194,000. Some of the CD's dated back to 1973.
On January 13, 1988, at approximately 10:00 a.m., Martha Flanders went to a Capitol Federal office. She had: (1) the durable power of attorney instrument; (2) five certificates of deposit; and (3) a hand-printed letter identifying Martha as an attorney in fact and stating that Tillie wished to cash the five CD's (identified by number) that Martha had with her. At approximately 10:31 a.m., five checks were given to Martha in the aggregate amount of $135,791.34, representing the funds in said CD's less penalties for early withdrawal in the aggregate amount of $4,757.70. Some of the checks were drawn in Martha's name, individually, and some in the names of James and Martha, also as individuals. Nothing on the checks indicated that they were being issued to said individual or individuals in her or their representative capacities. Uncashed CD's in the aggregate amount of $58,127.58 then remained at Capitol Federal. Tillie was found dead of heart disease later that day. The time of death on her death certificate is set at 11:30 a.m.
Bank IV, as administrator C.T.A. of Tillie's estate, filed two lawsuits in 1990: (1) the action herein against Capitol Federal and Argentine Savings and Loan Association seeking the return of Tillie's funds paid out to the Flanders; and (2) an action against Martha and James Flanders seeking return of said funds. The two actions were consolidated for discovery purposes only. The estate's action against Argentine was settled and dismissed. The district court entered summary judgment in favor of Capitol Federal and the estate appeals therefrom.
It is apparently undisputed that the Flanders spent all sums received by them from Capitol Federal for their personal usage, and that the funds cannot be traced and recovered. Other facts will be stated as necessary for the discussion of particular issues.
*543 The estate contends that the district court erred in granting summary judgment to Capitol Federal. Specifically, the estate contends:
DUTY TO INVESTIGATE
The estate contends that the size of the transaction involved herein and the forfeiture of interest thereon, coupled with the fact the checks were requested to be issued in the individual name(s) of the attorney(s) in fact were sufficiently suspicious circumstances to create a duty in Capitol Federal to investigate before releasing the funds. Specifically, the estate contends that Capitol Federal should have: (1) determined whether or not Tillie's "true wishes" were being carried out; and (2) checked to see whether Tillie was still alive. Capitol Federal argues that its duty only requires a favorable comparison of the signatures of the depositor with that on the power of attorney, proper identification of the attorney in fact, and a determination that the transaction is within the scope of the power of attorney. Capitol Federal further contends any requirement for additional investigation would be unduly burdensome on lending institutions.
The first aspect of this issue concerns Tillie's competency. It is unclear whether the estate is contending that Capitol Federal should have made inquiry into Tillie's competency as of the time of the execution of the power of attorney or as of the time of the request for the transfer of funds, or both.
As far as the question relates to competency at the time of the transfer of funds is concerned, the matter is resolved by statute. Kansas has adopted the Uniform Durable Power of Attorney Act (K.S.A. 58-610 et seq.). Included therein is K.S.A. 58-611, which provides:
Additionally, the instrument itself expressly provides: "This power of attorney is durable and shall not be affected by the subsequent disability or incompetence of the principal."
Thus, incapacity of Tillie at the time of the withdrawal of funds is not a factor in the determination by the lending institution on whether or not to honor the request by an attorney in fact for withdrawal of funds. If it were otherwise, the very purpose of many powers of attorney, which is to allow the orderly transaction of a person's business during contemplated disability or incompetency without expensive and time-consuming probate proceedings, would be defeated.
Did Capitol Federal have a duty, under the facts herein, to investigate into the capacity of Tillie at the time of the execution of the instrument in determining whether or not to honor the request for the withdrawal of funds? We believe not. The circumstances involved herein demonstrate the impracticality of imposing such a requirement. It is 10:00 a.m. on January 13, 1988. The attorney in fact is standing on one side of the counter seeking withdrawal of funds under a power of attorney executed on June 15, 1987. The test for capacity to execute a power of attorney would presumably be comparable to that for capacity to execute a will. An individual who is incompetent most of the time may have lucid intervals in which he or she has the capacity to contract or make a will. Determination of a person's capacity to contract or make a will involves determination of capacity at the particular point in time the instrument was executed. Frequently, there is conflicting testimony among lay persons and health care professionals and the judicial hearings thereon are lengthy and involved. As a practical matter, how could the Capitol Federal employee, responding to the attorney in fact's request for withdrawal of funds, make such a determination? Capitol Federal notes in its brief that every working day it has over 500 transactions involving an agency or power of attorney relationship. The practical effect of requiring such a determination would, again, be to eliminate the power of attorney as a useful tool in the transaction of the *545 business of any elderly, disabled, absent, or otherwise incapacitated individual.
As noted by the district court in its memorandum decision:
The estate cites no authority in support of the proposition that a lending institution has a duty to determine the capacity of the grantor at the time of the execution of a power of attorney before honoring a request for a transfer of funds thereunder. We conclude that no such duty exists and that the district court correctly determined that Capitol Federal had no such duty to investigate. It should be noted, perhaps, that there is no claim made that Capitol Federal had actual knowledge of any incapacity or incompetency on the part of Tillie nor had she been adjudicated a disabled or incapacitated person.
This brings us to the claim that Capitol Federal should have ascertained whether or not Tillie was alive when the request for transfer was made.
K.S.A. 58-613 provides:
Here again, the estate cites no authority for the proposition Capitol Federal was under some duty to determine that Tillie was alive before transferring the funds. There is no claim made *546 that Capitol Federal had actual knowledge that Tillie was deceased when the transfer was requested. In fact, based upon the death certificate's stated time of death, Tillie was alive when the transfer was made. We find no merit in this point.
Next we shall consider the catchall claim that Capitol Federal should have determined the transfer of funds by checks to the attorney(s) in fact was carrying out Tillie's "true wishes." Presumably, this would entail some type of face-to-face meeting between a representative of Capitol Federal and Tillie to determine if she knew of and approved of the requested transfer and the form of the checks. A telephone call would be insufficient as the Capitol Federal employee would have no way of knowing if the person responding to the call was really Tillie. Inherent in this procedure would be the requirement that the Capitol Federal employee know Tillie or had secured sufficient identification to be positive that the person with whom he or she was conferring was, in fact, Tillie. For reasons already expressed, a duty to determine the "true wishes" of the principal is unrealistic and would result in the loss of powers of attorney as useful tools in the transaction of the business of disabled, elderly, and/or absent principals.
We conclude that when confronted with the request for withdrawal of funds herein, Capitol Federal had a duty to:
It is uncontroverted that Capitol Federal did compare the signatures, and it is admitted Tillie executed the power of attorney. This requirement then, has been satisfied. There is no claim that the Martha Flanders with whom Capitol Federal dealt was an imposter and not the individual designated as attorney in fact or that Capitol Federal breached a duty relative to her identification. This leaves only the question of whether the transaction was within the scope of the durable power of attorney, and that is the subject of the next issue.
*547 The district court's memorandum decision essentially placed the same three requirements on Capitol Federal and we find no error therein.
SCOPE OF DURABLE POWER OF ATTORNEY
The estate contends that the scope of the durable power of attorney herein was not broad enough to authorize Capitol Federal to issue the checks in the name(s) of the attorney(s) in fact as individuals.
The powers granted are as follows:
"This instrument may not be changed orally.
"TO INDUCE ANY THIRD PARTY TO ACT HEREUNDER, I HEREBY AGREE THAT ANY THIRD PARTY RECEIVING A DULY EXECUTED COPY OR FACSIMILE OF THIS INSTRUMENT MAY ACT HEREUNDER, AND THAT REVOCATION OR TERMINATION HEREOF SHALL BE INEFFECTIVE AS TO SUCH THIRD PARTY UNLESS AND UNTIL ACTUAL NOTICE OR KNOWLEDGE OF SUCH REVOCATION OR TERMINATION SHALL HAVE BEEN RECEIVED BY SUCH THIRD PARTY AND I FOR MYSELF AND FOR MY HEIRS, EXECUTORS, LEGAL REPRESENTATIVES AND ASSIGNS, HEREBY AGREE TO INDEMNIFY AND HOLD HARMLESS ANY SUCH THIRD PARTY FROM AND AGAINST ANY AND ALL CLAIMS THAT MAY ARISE AGAINST SUCH THIRD PARTY BY REASON OF SUCH THIRD PARTY HAVING RELIED ON THE PROVISIONS OF THIS INSTRUMENT."
In holding that the powers granted in the instrument were broad enough to authorize Capitol Federal to issue checks in the name or names of the attorney(s) in fact only, the district court reasoned as follows:
The form for the instrument at issue was cut from a magazine and not specifically drafted for the use of Tillie. This fact has no bearing on the issues before us but is mentioned only to note that there is no drafter of the instrument who has knowledge of the particular circumstances surrounding its creation and execution.
The estate argues that strict construction of the power of attorney is required and that under such construction there is no authority therein for an attorney in fact to have checks representing the principal's funds issued in the agent's individual name.
We do not agree with this conclusion.
3 Am.Jur.2d, Agency § 30, pp. 533-35, states:
*550 3 Am.Jur.2d, Agency § 31 states that, as a general rule, powers of attorney are to be strictly construed.
But 3 Am.Jur.2d, Agency § 33, pp. 536-37, states:
Extremely broad powers are granted by the instrument to the attorney(s) in fact. In essence, the instrument is saying to third parties that the attorney(s) in fact are authorized to act in Tillie's place and stead relative to all of her assets and business. Tillie could, obviously, have gone to Capitol Federal, cashed the CD's (with penalties), and had the checks drawn in the individual names of the Flanders. We see nothing in the instrument which operates to limit the powers of the attorney(s) in fact to the withdrawal of funds only if Tillie's name appears on the checks or the agency relationship is otherwise disclosed. Even had the checks been drawn with the agency relationship set forth thereon, the misappropriation of the funds by the agents would not have been avoided. The Flanders had only to deposit the checks and then write checks to themselves.
There are cases which hold a banking institution liable for an agent's misappropriation of a principal's funds, but some additional factor is present in those cases which, in effect, put the bank on notice of the agent's wrongful usage of the funds and made the bank an accessory therein. For example, see First Nat. Bank v. Cooper, 252 Ga. 215, 312 S.E.2d 607 (1984). A son, holding a power of attorney from his father, assigned one of the father's CD's as collateral to secure a personal loan for himself. In affirming the lower court's judgment against the bank, the Georgia Supreme Court stated:
This same thread runs through Wickens v. Valley State Bank, 125 Kan. 751, 266 Pac. 81 (1928). A retired farmer set up a trust with a bank officer as trustee. The bank was not a party thereto. The trustee had broad discretionary powers to invest the trust fund. Unfortunately, the trustee pocketed a substantial portion of the trust. In holding the bank was not liable for the trustee's misappropriation of funds, the court stated:
In 5A Michie, Banks and Banking § 72 (1983), it is stated:
Michie states the rule is the same for trustees who withdraw money from a trust account and use it for their own purposes:
Michie's statement of the law is supported by case law. In Empire Trust Co. v. Cahan, 274 U.S. 473, 71 L. Ed. 1158, 47 S. Ct. 661 (1927), a father had given his son power of attorney to draw checks for him at two banks. The powers of attorney had no pertinent restrictions in them. For two years the son drew checks against his father's account, signing his father's name by himself as attorney in fact. A number of these checks were made payable to the son's order, and the son deposited them in his own accounts and eventually spent the money. The father sued one of the banks in which he had an account.
The trial court and the U.S. Second Circuit Court of Appeals held that the bank had sufficient notice that the son was misappropriating money that the bank should be held liable. The United States Supreme Court reversed, stating:
In the end, the Court held that it would be impractical to put the burden on banks to check each agency transaction to make sure the agent is acting within his authority: "`The transactions of banking in a great financial center are not to be clogged, or their pace slackened, by over-burdensome restrictions.'" 274 U.S.  at 480 (quoting Whiting v. Hudson Trust Co., 234 N.Y. 394, 406, 138 N.E. 33 [1923]).
In Nashville Trust Co. v. Southern Buyers, Inc., 40 Tenn. App. 11, 288 S.W.2d 469 (1956), a corporation asserted a claim against a bank for allowing an agent of the corporation to draw checks on the corporation's account in his own name. The Tennessee Court of Appeals held that the bank was not liable because the corporation had given the bank a signature card with the agent's name on it, without any limitation. The court said,
In Dockstader v. Brown, 204 S.W.2d 352 (Tex. Civ. App. 1947), a sister had given her brother a power of attorney which included the power, "in my name, place and stead, to do any and every act, and exercise any and every power that I might, or could do or exercise through any other person, and that he shall deem proper or advisable, intending hereby to vest in him a full and universal power of attorney...." The brother, pursuant to this power of attorney, sold an oil and gas interest in land in which his sister held an interest. After the sale of the interest, the brother, using his power of attorney, withdrew most of the proceeds for his personal use.
The sister sued the brother, the purchasers, and a bank, claiming the bank participated in the conversion by her brother of the money from the sale. The appellate court ultimately held that the bank was not liable. The court said that a bank may be liable for such a conversion when the bank has notice of the wrongdoing. 204 S.W.2d  at 358-59. The court distinguished certain other cases in which banks had been held liable, because in those cases there were facts putting the banks on notice, i.e., repeated transactions, etc. The ultimate holding of this case is that a bank may be liable for conversion of funds by a trustee or attorney, but the facts must be such as to put a bank on notice of the conversion. 204 S.W.2d  at 359.
In Grace v. Corn Exchange Bank Trust Co., 287 N.Y. 94, 38 N.E.2d 449 (1941), a trustee, over a period of six years, managed to waste and appropriate almost $450,000 from a trust account. He wrote 146 checks on the trust account and deposited them in his own account. The money was spent on the trustee's personal business. The court stated:
*554 The court explained the bank's duties as follows:
The court went on to discuss the fact that although the bank was aware that the trustee was shifting money to his personal account, the bank was not liable unless it appeared that the bank "knew that the trustee was engaged in embezzling trust funds by withdrawal of the trust money in the personal account in order to apply them to his own use ...." 287 N.Y.  at 102. The court said that when a trustee withdraws funds in his own name, there is a presumption that he is applying them to a legitimate and lawful use. 287 N.Y.  at 102. The appellate court ultimately upheld the trial court's determination that the bank did have sufficient notice to constitute constructive knowledge and affirmed the judgment against the bank, largely because of the number of checks written.
In Cassel v. Mercantile Trust Company, 393 S.W.2d 433 (Mo. 1965), a trustee and executor withdrew money from the decedent's checking account by cashing a series of checks to himself totaling $108,225. He did not use the money for trust or estate purposes. The successor trustee sued Mercantile, alleging that because of the series of transactions, it had sufficient knowledge that the trustee was breaching his duties to hold the bank liable. The court said that there are three ways in which a bank could incur liability for deposits misappropriated by a fiduciary:
*555 The Missouri court went on to say that in order to state a claim for relief, the plaintiff must allege:
The court held that under the facts and Missouri rules for pleading, the plaintiff had failed to state a cause of action and affirmed the trial court's dismissal.
In the case before us, Capitol Federal was presented with a power of attorney which it is agreed was signed by Tillie, its depositor. Martha Flanders was properly identified as being the Martha Flanders designated as attorney in fact. We conclude the request to cash the CD's and the issuance of checks in the individual name(s) of the attorney(s) in fact was within the scope of the power of attorney. Capitol Federal had the right to assume the attorney in fact was acting lawfully in the performance of her agency duties and to honor the agent's request that the checks be drawn in her own name and that of her husband, also an attorney in fact for Tillie. Capitol Federal had no knowledge the funds would be subsequently misappropriated by Flanders, nor did it participate in such misappropriation. Absent an act and acts amounting to participation in the wrongdoing, Capitol Federal's issuance of the checks in the name(s) of the attorney(s) in fact imposes no liability on Capitol Federal.
We find no error in the district court's entry of summary judgment in favor of Capitol Federal relative to this issue.
PROCEDURAL ERROR
On January 10, 1991, Capitol Federal filed its motion for summary judgment with accompanying statement of uncontroverted facts and memorandum. On January 24, 1991, the estate filed its response thereto and a cross-motion seeking summary judgment *556 with an uncontroverted statement of facts attached. On January 31, 1991, a hearing was held on both motions for summary judgment. At the close of the hearing, the court indicated it had made up its mind on the motions and there was a discussion of whether a memorandum decision would need to be written. Counsel agreed a written decision was needed because there would be an appeal. There was some additional discussion at the end of the hearing concerning the fact that Capitol Federal had not filed a response to the estate's memorandum of uncontroverted facts. As will be recalled from the time frame involved herein, the estate's cross-motion for summary judgment was filed only five business days before the hearing on both motions. Supreme Court Rule 141 (1991 Kan. Ct. R. Annot. 117) grants an opposing party 21 days to respond thereto. Thus, the time had not expired for the filing of this response.
It is unclear whether Capitol Federal expressly waived the filing of a response, but certainly Capitol Federal did not contemplate filing a response. None was filed. The district court issued its memorandum decision on or about February 19, 1991, granting summary judgment to Capitol Federal.
On appeal, the estate contends Capitol Federal's failure to file a response to the estate's uncontroverted statement of facts admits all such alleged facts. It cites Rule 141, which provides that failure to respond is an admission of the uncontroverted facts.
Hearing the motion prior to the expiration of the time for response or the filing of a response is at variance with Rule 141. However, a careful review of the hearing transcript, both parties' statements of uncontroverted facts (including the estate's response), the district court's memorandum opinion, and the issues involved therein and in this appeal convinces us that no reversible error has been shown.
The judgment is affirmed.
ABBOTT, J., concurring and dissenting:
I have no quarrel with the law or reasoning of the majority except as set forth in this dissent. I would point out that most of the authority cited by the majority deals with checks. Clearly, a bank could not function if, in check transactions, the bank was required to do more than the majority opinion requires.
*557 My dissent is simple. In my opinion, the trial judge's grant of summary judgment was premature because I would adopt an additional requirement: If a transaction dependent upon a durable power of attorney is more than a routine transaction and if an officer of the bank is involved directly and has actual or constructive knowledge leading a reasonable person to suspect funds are about to be misappropriated, then the bank has a duty either to inquire into the circumstances before it pays out the money or to pay the funds out in such a manner that will protect the depositor. See Hubbard v. Home Fed'l Savings & Loan Ass'n, 10 Kan. App.2d 547, 557, 704 P.2d 399 (1985); Renzi v. Aleszczyk, 44 App. Div.2d 648, 352 N.Y.S.2d 736 (1974).
My proposed standard raises a fact question of whether a reasonable person would find that Capitol Federal had actual or constructive knowledge funds were about to be misappropriated. I am aware the facts set forth in this dissent do not always correspond with the facts set forth by the trial judge or the majority; however, the record supports the discussion of facts that follows. Summary judgment was premature because, as will be illustrated, the facts are both material and conflicting.
Martha Flanders appeared at Capitol Federal on January 13, 1988, and 20 minutes later walked out with $135,791.34 in checks, some payable to Martha Flanders and some to Martha and her husband, James Flanders.
Mrs. Flanders was taken to the desk of John Denton and, when she explained what she wanted, he took her to Joseph Morley, an assistant vice president. Morley was not acquainted with Mrs. Flanders or her husband. In fact, Morley had never met the Flanders or Mrs. Flinn, the depositor.
Mrs. Flanders presented a durable power of attorney from Mrs. Flinn dated June 15, 1987. On its face, it was apparent the document had been "clipped" from the "Family Circle" magazine issue of June 1, 1987, and the blanks had been filled in. Although not relevant to my dissent, Mrs. Flinn signed the durable power of attorney without legal advice at a time when her treating physician testified she was incompetent. The document was notarized by the same woman who, after a grant of immunity, admitted she also had notarized Mrs. Flinn's purported will, *558 which was forged five days after Mrs. Flinn's death and backdated to December 29, 1987.
Mrs. Flanders also had a handwritten letter signed by Mrs. Flinn, instructing that Mrs. Flinn's niece and nephew, the Flanders, had her power of attorney and that Mrs. Flinn wished to cash five certificates of deposit that she identified by number. Mrs. Flanders wanted three of the certificates of deposit cashed and a check made payable to her personally. The remaining two certificates of deposit were to be cashed and the check made payable to both Mrs. Flanders and her husband. The five certificates of deposit totalled $135,791.34, and Mrs. Flanders forfeited $4,757.70 in accrued interest in order to cash the certificates of deposit.
Morley testified by deposition that the use of a power of attorney is "an unusual occurrence at most banks. You don't see it that often. You want to pay attention to what you are doing." In its brief and at oral argument, Capitol Federal stated that it averages 500 transactions involving agency or the power of attorney relationship each day. Capitol Federal's statement, which is noted in the majority opinion, seems at odds with the deposition testimony of Morley, an assistant vice president of Capitol Federal.
All Morley did was check the signature on the durable power of attorney against the signature on the letter of instruction and the five signature cards, one signature card for each certificate of deposit. He then made out the checks. The entire procedure took less than 20 minutes.
Anyone giving the signatures even a cursory glance can see that Mrs. Flinn's signatures on the early signature cards, dated 1973 and 1982, are clear, firm, and legible. Even the signatures on the cards signed in 1986 are clear, firm, and legible. The signature on the durable power of attorney was started twice. There is only one "hump" on the "M" in "Mrs." and the word "Flinn" is not legible. The handwriting is weak and shaky. The signature on the handwritten letter of instruction (no one would contend the letter itself is in Mrs. Flinn's handwriting) is shaky and meandering.
In summary, a complete stranger entered a financial institution and a bank officer, who had never seen that person before and *559 who did not know the depositor, accepted a durable power of attorney that clearly shows on its face that it was clipped out of a magazine usually sold at a supermarket checkout stand. The bank then paid out a large sum of money to the holders of the power of attorney, after deducting $4,757.70 in forfeited accrued interest. The transaction was based on signatures that clearly showed a deteriorating depositor. To me, the above presents a question of fact whether a reasonable person would be put on notice that funds were about to be misappropriated.
Any inquiry could have prevented the loss. The financial institution also could have fully protected itself by drawing the checks in Mrs. Flinn's name. I cannot agree with the majority's view that, because Mrs. Flanders could have stolen the money later, Capitol Federal's lack of due caution is irrelevant. If the Flanders had deposited the funds and then written checks to themselves, Capitol Federal's duty would have ended and any negligence would be that of another institution. By not making the checks payable to Mrs. Flinn, Capitol Federal made the cashing of the checks simple. Had the checks been made payable to Mrs. Flinn, the theft might have been prevented or the funds recovered. In summary, Capitol Federal could have left Mrs. Flinn in the same position as before the transaction by making the checks for her money payable to her.
I would reverse and remand for trial.
HERD, J., joins the foregoing concurring and dissenting opinion.