Bonfigli – Don’t Press Your Luck with a Power of Attorney

The decision in Bonfigli v. Strachan (Feb. 24, 2011) 2011 DJDAR 2893 is a reminder not to press for advantage when using a power of attorney.  The defendant was a developer who used a power of attorney to reconfigure two parcels so that he got to keep the land, but did not have to pay the seller.  Needless to say, the court of appeal was not amused.

As part of its analysis, the court considered the rules applicable to a “power coupled with an interest,” and based its decision on a Supreme Court case from 1823.  Let’s take a history lesson.

Plaintiff owned two parcels on Sebastopol Road in Santa Rosa.  The defendant developer needed “needed the [plaintiffs’] parcel in order to develop the overall project, and specifically, the ‘Village Square’ portion of the development.”  Defendant took an option to purchase the properties.  In a critical fact, “The option expired on July 1, 2001, without being exercised.”

Here’s where it gets interesting.  “In May 2001, respondents filed a lot line adjustment application with the City of Santa Rosa.”  Acting under a power of attorney, the developer executed the lot line adjustment on behalf of plaintiffs.  According to the court, “the reason given for the lot line adjustment was to ‘reconfigure lot line as desired by property owners.’”

However, the reality was that “the requested adjustment decreased the size of the Bonfiglis’ front parcel by approximately 60 percent,” with the acreage being transferred to a different parcel owned by the developer.  Which is to say, the defendant took land from plaintiffs “to create a buildable parcel [but] respondents did not pay the Bonfiglis for the transfer nor did they ever purchase the front parcel.”

Then, to rub salt in the wound, the developer encumbered the property with a $22.6 million loan.  “The Bonfiglis’ parcel, among others, was used as collateral for the loan, with respondents signing as attorneys-in-fact for the Bonfiglis . . . even though the option had expired.”  This was followed, not surprisingly, by a bankruptcy filing by the entity that was being used to make the development.

It seems astonishing that this case made it to a jury, and more astonishing that plaintiffs did not prevail (however, reversed on appeal).  The critical issues on appeal involved a power of attorney signed by plaintiffs in 2000.

Here the court used its wayback machine, stating that “California decisional law has consistently followed the definition of a power coupled with an interest set out by Chief Justice Marshall in Hunt v. Rousmanier (1823) 21 U.S. 174, 203: ‘A power coupled with an interest,” is a power which accompanies, or is connected with, an interest.  The power and the interest are united in the same person.’”

Manhattan

This isn’t a traditional power of attorney.  Its sui generis.  “The purpose of a power coupled with an interest is to protect the agent’s interest in the subject and its value, this kind of power of attorney is not an ‘agency’ as that term is commonly understood.  Rather, the creator of the power relinquishes irrevocably any authority to direct the attorney-in-fact who is permitted, under such an arrangement, to act solely in his own interests. “

This special kind of power of attorney does not create fiduciary obligations by the power holder in favor of his principal.  Citing the Restatement Third of Agency, section 3.12, the court explained that a “power given as security does not create a relationship of agency . . . The holder is not subject to the creator’s control and the holder does not owe fiduciary duties to the creator.”

However, “If the creator grants the power to protect an ownership interest of the holder, the power terminates when the holder no longer has the ownership interest.” For this reason, the developer was held liable for wrongful acts after its option had expired.  “The powers granted to [the developer gave] them the power to use the land to develop the project.  The interest being protected is the right to purchase the property at a specified price; and the value of that interest was secured by respondents’ ability to control the property for development purposes.”

Even more, the developer (Alan Strachan, who was represented by family member Gordon Strachan) was held personally liable for the injuries to plaintiffs because he directed his business entity to execute the lot line adjustment.

Explained that court, “Respondents [ ] cannot escape potential liability by using their business entity as a shield . . . Directors or officers are liable to third persons who are injured by their own tortious conduct regardless of whether they acted on behalf of the corporation and regardless of whether the corporation is also liable.”

Added the court, “This liability does not depend on the same grounds as ‘piercing the corporate veil,’ on account of inadequate capitalization for instance, but rather on the officer or director’s personal participation or specific authorization of the tortious act.”

In the end, justice was served.

Bonfigli v. Strachan (Feb. 24, 2011) 2011 DJDAR 2893

Randy Krbechek posted at 2011-3-1 Category: Case law, Real Property, Trusts and estates

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