Presumption of Undue Influence Does Not Apply

In a case of first impression, the Court of Appeals of Indiana on January 19, 2010 held in Compton et al. v. First National Bank of Monterey that because of the 2005 amendment to I.C. 30-5-9-2(b), the common law presumption of undue influence does not apply to a transaction even when an attorney in fact benefits if the following conditions exist: 1. the principal takes the action and 2. the power of attorney is unused.

In its opinion, the court reaffirmed that Indiana recognizes certain legal and domestic relationships raise a presumption of trust or confidence as to the subordinate party on the one hand and a corresponding influence as to the dominant party on the other. When those sort of transactions arise, the law imposes a presumption that the transaction was the result of undue influence exerted by the dominant party, constructively fraudulent, and thus void. In order to rebut or defeat the presumption, the dominant party had to show by clear and unequivocal proof that the transaction was made at arm’s length. (In practice, the effect of this presumption was to essentially preclude all transactions between a principal and her agent.)

The court did acknowledge that prior case law stood for the proposition that a power of attorney creates a fiduciary relationship between a principal and her agent and as a consequence, the presumption applied. However, the court held that the 2005 amendment to I.C. 30-5-9-2 changed the law. While finding no cases on point, the court cited, with approval, the probate treatise, Henry’s Indiana Probate Law and Practice as supporting the court’s finding that the statutory amendment essentially “abrogated” the common law presumption dealing with qualifying transactions involving a principal and her agent.

Importantly, the court found that a person who wishes to challenge the action of an attorney in fact was not left without a remedy. The challenger still has available the right to complain based on undue influence.

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