Court Addresses Actions Taken By Agent Acting Under Power of Attorney

In this case, mom’s only child, a daughter was given a general power of attorney (POA) in 2001.  The POA specifically provided that the daughter could not use the POA to make gifts to herself. Mom owned 120 acres of farm ground, including a homestead where she had lived for nearly 50 years. In 2004, mom personally guaranteed a loan in favor of her daughter and delivered to the bank a signed a mortgage agreement securing a note for $170,000 for her daughter. The farmland was listed as collateral. 

In 2005 and 2006, the daughter, acting as POA, added additional liens against the property to secure loans on which she was liable. In 2009, the bank filed a foreclosure action because the daughter was in default and sought a judgment against several tracts of real estate, including the mother’s 120-acre farm parcel and homestead. The mother responded to the foreclosure, through her attorney, and stated that she “did not have the capacity to contract” at the time the 2004 mortgage was obtained by her daughter. She further argued that she never executed the required “homestead exemption waiver” and the mortgages were void. The mother stated that she never intended the POA to be used as a tool for her daughter to make gifts of her property to herself. 

The trial court ruled that mom failed to prove incompetence in the co-signing of the 2004 mortgage and that the daughter, in obtaining subsequent mortgages affecting the farmland, was not making gifts to herself.  On the homestead issue, the court held that since mom had lived with the daughter since 2007, she essentially abandoned the homestead.  The court entered a judgment and decree of foreclosure against the daughter and ordered the farmland sold to satisfy the judgment. 

On appeal, mom argued that the trial court erred in finding her competent when she executed a mortgage creating a lien in favor or the bank in the farmland. She further argued that the court erred in denying her homestead interest in the farmland and in finding that subsequent liens established against the farmland by her daughter acting as her POA in order to secure loans in favor of herself were not gifts to her daughter. 

Ultimately, the court remanded the case for an evidentiary hearing on the issue of mom’s competency at the time of the initial mortgage. At the time the 2004 mortgage was executed, mom was 82-years old and suffering from memory loss.  Testimony at trial indicated that mom was suffering from Alzheimer’s disease. 

The remand of the trial court’s decision raises an interesting question.  Does a bank have the duty to investigate the competency of a person that could reasonably be believed to have competency issues? This case seems to indicate that such a duty exists.. According to the court, the bank was unable to present any evidence showing that mom was competent and a guardian ad litem should have been appointed to look out for the rights of the mother. 

The court also held that mom never signed a waiver of her homestead rights (in accordance with Iowa Code §561.22), thus, the homestead and forty acres should have been set free of the bank’s encumbrance. Iowa law is protective of homestead rights by making them exempt from execution, with some exceptions. The lender should have obtained the waiver. As to the bank’s arguments that the homestead was abandoned, the appellate court found no evidence of mom’s intent to abandon her home of 50 years. She left her possessions in the home and was forced to move for a time for health reasons. 

Finally, the appellate court found that the trial court erred in finding that that the daughter was not making gifts to herself in mortgaging the real estate to secure loans. According to the appellate court, the trial court applied too-narrow of a definition of gifting. The loans the daughter executed were “gratuitous” transactions in violation of her POA. Remember, the POA specifically stated that the daughter did not have the right to make gifts that benefitted her. 

One Iowa Court of Appeals justice did dissent in this case. The judge found the trial court’s determination of mental capacity, POA construction and the abandonment of homestead to be well-reasoned. The dissent found that mom was never able to establish a lack of contractual capacity and that she did abandon the homestead. At trial, the daughter admitted that there was never any intent on the part of any party that mom would move back home, because of the nature of Alzheimer’s disease. There was no “fixed purpose to return.” 

Upon a strict reading of the POA document, the dissenting judge also found that the daughter was not making gifts to herself, because she did not divest all control over the subject of the gift, she merely encumbered it. If the mortgages had been paid, the property would never have been foreclosed and the land would still have belonged to mom.  Citizens State Bank v. Ruebel, et al., No. 1-090/10-1028, 2011 Iowa App. LEXIS 732 (Iowa Ct. App. Jul. 27, 2011).