Transactions overturned due to undue influence - equitable fraud & questions of undue influence over the elderly

Two recent cases in the New South Wales Supreme Court addressed the issue of equitable fraud and undue influence being exercised over elderly people.  The cases have implications for legal advisers involved in any matters in which one of the parties is an elderly person.

Farrell v Stephenson [2008] NSWSC 1350

Mrs Stephenson's son and daughter-in-law persuaded her to transfer two properties valued at $1.5 million to them for $1.  Mrs Stephenson did not receive independent legal advice.  Her son and daughter-in-law mortgaged the properties for the purpose of purchasing, renovating, and selling other properties for a profit. 

At the time of the hearing, the two properties were mortgaged for approximately $1.14 million and Mrs Stephenson was residing in a nursing home.

Chief Judge Young said that:

"This evidence tends to negate the suggestion that the principal reason for the transfer of the properties was so that a bigger property could be purchased for the second and third defendants and the widow to live in.  It would seem that the second and third defendants have been carrying on activity as unskilled property developers with the result that they have lost millions of dollars and have nothing to show for it.

The case is what is these days called a classic Elder Law case.  The widow in 2005 was left by her husband with property worth $1.5 million on the basis that she could enjoy her life and live off the income with an understanding that she would leave the property to her child and stepchild.  Without any independent legal advice and in a situation where the widow is admitted.... to have been reliant on the defendants and easily manipulated and suggestible, she gave away her $1.5 million properties, she obtained no benefit and she is now living in a nursing home, subsidised."

The transaction was declared void and set aside.

The Court also determined whether Mrs Stephenson had made a binding agreement with her late husband to hold one of the properties for his daughter.  It held that there was no binding agreement between Mrs Stephenson and her late husband, nor that Mrs Stephenson held the property on trust for her late husband's daughter.

Badman v Drake [2008] NSWSC 1366

Mr and Mrs Drake befriended Mrs Badman and assisted her with her living arrangements over approximately four years.  The Drakes were in financial difficulty and Mrs Badman suggested that she buy their property from the reverse mortgagee for the three of them to reside in on the understanding that the Drakes would care for her in her old age.  The Drakes organised the transaction, with the result that the property was purchased in their name using Mrs Badman's money.

Solicitors were initially involved acting separately for Mrs Badman and the Drakes.  Both solicitors were concerned about the proposed transaction to the extent that Mrs Badman's solicitor considered approaching the Office of the Protective Commissioner to manage Mrs Badman's affairs.  The Drakes decided the solicitors were too slow and expensive and completed the transaction without their involvement.

Chief Judge Young said of the matter:

"It is not at all unusual in undue influence cases for the persons receiving the benefit to have been generous to the person whose property they have taken.  Sometimes this is out of the goodness of their hearts (as may well be the case here).  Other times it is just the bait in order to secure the transaction."

However, as in this case:

"where there is doubt about a person's capacity, the transaction is always in some danger of being attacked unless it can be shown that the action was a free will action of the elderly person."

Chief Judge Young described this case a "classic example of a situation that needs to be set aside for undue influence".

The Court said that the transaction may have been held as valid had it proceeded with all the parties receiving independent legal advice.

Notably, the solicitors for the reverse mortgagee were rebuked by the Court for their participation in the matter.  Having met Mrs Badman personally and accepted her cheque for the discharge of the Drake's mortgage, Chief Justice Young said of their acquiescence in the matter:

"Justice in New South Wales can only be achieved if all legal practitioners are sensitive to the commission of fraud.  Where a professional solicitor sees an old lady of 87 who may be in a vulnerable situation, it is impermissible to any solicitor to take the view that because monies are going to flow in which are to the advantage of his or her client, that they can just close their eyes to the fraud that may be being perpetrated on the vulnerable person."

Conclusion

Professional advisers of elderly clients should ensure that either the client understands what they are doing, or that the client's appointed representative is acting in their best interest.  Legal practitioners have a clear duty of care towards their own clients, however they should also be mindful of any elderly party to a transaction.

It may be appropriate for a professional adviser to make an application to the Supreme Court or Guardianship Tribunal under the Powers of Attorney Act 2003.  The Act allows "interested persons" to apply for the appointment of the Office of the Protective Commissioner or some other suitable person as a client's financial manager, or to remove an attorney and appoint an alternative attorney.

Author: Philip Davis