Bank Liable for Using Unwitnessed Power of Attorney

A recent decision of the B.C. Supreme Court required a bank to pay more than $120,000 after a bank employee allowed a customer to use an improperly witnessed power of attorney to strip the bank account of an elderly woman with dementia. The case means banks have a duty to make inquiries when faced with an unusual transaction. It also highlights the importance of appointing a trustworthy attorney.

What is a Power of Attorney?

A power of attorney is a written document which allows an individual (the “donor”) to appoint someone else (an “attorney”, which does not mean lawyer in this case) to act on behalf of the donor. The power is restricted to dealing with property and financial affairs, such as buying, selling or mortgaging real estate and other assets. The power can be further restricted in the document to only certain assets or to a limited duration. In B.C., an attorney does not have the power to make non-financial decisions, such as health care decisions, on behalf of the donor. Powers of attorney can be used to complete a transaction when the donor is going to be out of town or unavailable for signing due to accident or illness.

Enduring Powers of Attorney

We recommend to our clients that they consider an enduring power of attorney. It is estimated that a significant number of Canadians over the age of 65 suffer or will suffer from some sort of dementia. An enduring power of attorney provides an effective and economical way for an individual to prepare for this possibility.

A regular power of attorney becomes void upon the donor becoming incapable. An enduring power of attorney contains a statement that the attorney may continue to act on behalf of the donor should the donor become mentally incapable. The only other way that important financial transactions can legally occur after a person becomes mentally incompetent is through an expensive and time-consuming process involving the courts, the Public Trustee, and usually a bonding company.

An enduring power of attorney can provide peace of mind, knowing that someone you have chosen can handle your affairs. Most married persons appoint their spouse as their primary attorney, and may appoint one or two of their children as well. Given the nature of the powers given to the attorney, the choice of attorney is very important and not without risk (as illustrated in the court case referred to earlier).

The Court Decision

In the case mentioned above, the donor was an elderly woman living in California who had granted power of attorney to her nephew who lived in B.C. The donor left the power of attorney with a bank in Richmond where she kept a sizeable account. The bank lost the power of attorney and prepared a replacement for the donor to sign, which it gave to the nephew to have signed by the donor and notarized.

The nephew returned to the bank several weeks later with the power of attorney signed but not witnessed or notarized. A bank employee checked that the donor’s signature matched her bank signature and then witnessed the power of attorney herself. A month later, the nephew used the power of attorney to transfer the donor’s entire savings of over $120,000 to his own account, which he then used for his own purposes.

The judge ruled that since the bank was relying on the replacement document, not the original, to authorize the nephew’s transfer of funds, the bank was obligated to make sure that the replacement was properly executed. In between the time of signing the original power of attorney and the replacement power of attorney, the donor had become mentally incompetent and was declared by a California court to be incapable of managing her affairs. As a result, she did not have the legal or mental capacity required to grant the replacement power of attorney.

The bank had a duty to safeguard the donor’s funds and pay them out only when properly authorized to do so. The bank could not rely on the new power of attorney because it did not make normal inquiries to ensure that the donor understood the nature of the document.