The First Appellate District Court recently determined that even though funds deposited into a Trust were “owned” by the Trust, the elderly couple who funded the Trust could sue under the Elder Abuse and Dependent Adult Civil Protection Act for mismanagement of those funds under several provisions of the Act. Mahan v. Charles W. Chan Ins. Agency, Inc., 12 Cal. App. 5th 442 (Cal. App. 1st Dist. June 2, 2017)
Frederick Mahan, 86, and his 79-year-old wife Martha purchased two life insurance policies in the mid-1990s totaling $1 million and naming their children as beneficiaries under a revocable living Trust with their daughter Maureen as Trustee. The Mahans also sufficiently funded the Trust to cover the $14,000 annual premium costs. Some 20 years later, in 2012, Martha was diagnosed with Alzheimer’s and gave power of attorney to Fred to handle their affairs. Soon thereafter, Fred began to exhibit signs of confusion and cognitive decline. During this time, defendants helped Fred obtain casualty and earthquake insurance on the home and subsequently offered to review Fred’s life insurance plan. When defendants discovered that the two insurance policies had accumulated a substantial cash value, they told Fred that he could use the cash value to obtain additional coverage while keeping the same annual premium cost. They then dealt entirely with Fred, discussed none of the changes to the Trust with Maureen, and only provided her with signature pages or blank forms containing Fred’s signature as a sign of his approval.
Defendants ultimately carried out an elaborate scheme involving the surrender of one of the policies and the replacement of the other with a policy offering less coverage at a massively increased cost. The premiums totaled $800,000, forcing the Mahans to take cash from the Trust to pay them and in effect consuming most of their intended $1 million gift to their children, including $100,000 in commissions paid to the defendants.
The Mahans and Maureen sued for negligence, breach of fiduciary duty, fraud, violation of Business and Professions Code section 17200 and for damages under the Elder Abuse Act. Defendants countered with an attack that the Trust owned the life insurance policies and all commissions paid to them were by the Trust. Whatever money the Mahans paid into the Trust was done voluntarily for the benefit of their children and the only proper plaintiff was the Trust, which did not have an Elder Abuse Act claim “because [it] is not 65 years old.” The trial court ruled that the Mahans had not alleged any “deprivation of property” owned by them within the meaning of Section 15610.30 of the Elder Abuse Act since the Trust was the only party that suffered harm and dismissed the Mahans’ claims in favor of the defendants. The Mahans appealed.
Based upon the belief that “the primary issue here is whether the Mahans have stated legally cognizable harm to themselves,” the Appellate Court reviewed the statutory text of the Elder Abuse Act and especially its provisions regarding deprivation of an elder’s “property” taken for a “wrongful use” or with intent to defraud and committed by “undue influence.” No one disputed that the Mahans were elders, but defendants contended that they were not deprived of any “property” because the Trust owned whatever was allegedly taken, and thus defendants committed no statutory violation because they did not take the “property of an elder” to obtain the commissions they were allegedly paid. The Appellate Court determined that the Mahans had properly alleged that they had been deprived of their rights through (1) damage to their estate plan and (2) loss of money they felt compelled to transfer to the Trust to cover the lost insurance proceed funds for their children and to cover the defendants’ commissions. In determining that the Mahans had in fact suffered a loss to their estate plan, the Court stated that because they had had to reach into their pockets and sell assets to provide cash to the Trust– something they had never intended to have to do — they had been deprived of “property” when they were separated from their money.
In assessing the issue of “wrongful use” the Court found this case to be very similar to the issues in Zimmer v. Nawabi, 566 F. Supp. 2d 1025 (E.D. Cal. May 13, 2008) involving insurance agents who were held liable for financial elder abuse for what essentially amounted to “churning” where brokers make excessive stock trades primarily to generate commissions. Just as in Zimmer, defendants here wrongfully obtained thousands of dollars in commissions through their false statements about the terms of the Mahans’ refinance, which defendants knew were less favorable than their previous insurance policies.
Finally, the Appellate Court reviewed the issue of “undue influence.” Its determination that there was undue influence was based upon the defendants’ alleged expertise as insurance professionals who, upon finding two aged individuals in a state of cognitive decline, had used their influence to carry out an elaborate scheme to deprive the Mahans of their money in a manner completely inconsistent with their estate planning goals. The Court thus found in favor of the Mahans, reversing the lower court’s ruling and remanding the case for further proceedings consistent with its opinion.