FRANCIS W. GAGNON vs. JOAN G. COOMBS, individually and as trustee, & another. [Note 1]

LAURENCE, J. An agent acting pursuant to a "durable," [Note 2] but revocable, power of attorney conveyed the principal's real property, which was subject to the power, to herself as trustee

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of a trust that she had created. The trust was not only irrevocable, but also gave the agent a beneficial interest in the corpus, which consisted entirely of that real property. A judge of the Superior Court found nothing legally amiss about this transaction, even though the agent was aware that the principal had, prior to the creation of the trust, himself contracted to sell the real property to a third party. After a bench trial, the judge entered judgment for the agent on the principal's suit to set aside the agent's conveyance. We conclude that the principal should have prevailed. The agent's authority to deal with the property had been effectively revoked by the principal's precedent purchase and sale contract. Reversal is also in order because the transaction violated basic agency principles.

1. Background. The relevant facts are not in dispute. On November 27, 1990, eighty-five year old Francis W. Gagnon (Gagnon) and his wife executed durable powers of attorney, each naming their elder daughter, Joan Coombs (Joan), their attorney in fact. There was no immediate need or purpose for the power of attorney. It was executed in recognition of the two principals' advanced years and general deterioration of health associated with old age. At the time, Gagnon and his wife lived in a house on the property at issue, a 184-acre "farm property" in Shelburne. [Note 3] The Shelburne property was not a functioning farm and produced no income. Gagnon also

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owned a smaller parcel of real estate in Hillsborough, New Hampshire.

Under the power of attorney, Joan was broadly empowered "to act in and concerning all of my affairs as fully and effectually as I might do if personally present . . . ." Her specific powers included the authority "to sell any of my real estate and to [execute any documents] . . . necessary in order to carry out the proper sale or transfer of real estate," and "to add property to or withdraw property from any trust of which I am the grantor or beneficiary." The document did not, however, contain any provision authorizing the agent to acquire interests adverse to those of the principal or to seek or derive personal advantage, profit, or benefit from the agency or from any transactions undertaken pursuant thereto. The instrument was also silent as to any compensation for the attorney in fact. Gagnon did not discuss with Joan the handling of any particular property or financial matter before or at the time he signed the power of attorney. Its execution was simply a precaution in the event Gagnon became unable to attend to his affairs personally. [Note 4] The document was shortly thereafter recorded in the Franklin County registry of deeds. See G. L. c. 183, Section 5.

In February, 1991, Gagnon's wife had to enter a nursing home. While she was being admitted, Gagnon's son Frank learned of Joan's power of attorney for the first time. Following discussions between Gagnon and Frank (who had moved from his trailer into the Shelburne house because his father was now alone), Gagnon decided to revoke the power of attorney he had given to Joan. He did so in a document executed on February 28, 1991, with the assistance of a Greenfield lawyer whom Frank had found for him. He did not, however, send a copy of the revocation to Joan or anyone else, nor did he or anyone else orally advise Joan of the revocation, at least not prior to the activities of Joan that precipitated

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the instant litigation. The revocation was not recorded in the Franklin County registry of deeds until a year after those events.

In April, 1991, Gagnon was hospitalized, and his wife died soon thereafter. In light of these developments, Joan consulted the lawyer who had drafted the power of attorney, for probate and estate planning advice. The lawyer prepared a so-called "Medicaid Qualifying Trust" that provided Gagnon, as beneficiary, with income for life and divided all of his property at his death among his three children, who were named as trustees. The trust draft (which is not part of the record on appeal) was sent to Gagnon, who had been discharged from the hospital, in May, 1991. Gagnon never responded to the draft, never discussed it with the lawyer or his children, and never signed it.

Following his discharge, Gagnon improved in health and by the fall of 1991 had resumed interest, which he had first manifested in December, 1990, in selling the Shelburne property. During the earlier part of 1991, Gagnon had authorized Joan's husband, Allyn Coombs (Allyn), a seasoned real estate investor, to investigate the possibility of such a sale. In May, 1991, Allyn had identified one Camille Cosby, whom he had previously helped purchase other land in the area, as a potential buyer. When Cosby offered $600,000 for the property, Gagnon responded that it was worth $1,000,000. Allyn obtained an appraisal establishing a fair market value of $760,000 as of July, 1991.

At that point, Gagnon told Allyn to "talk to Frank" regarding future negotiations with Cosby as to the Shelburne property. Frank authorized a sale for the price of $750,000. Further negotiations (without Allyn's involvement) ensued in the fall of 1991. They culminated on December 5, 1991, in the signing by Gagnon and Cosby of a purchase and sale agreement for the Shelburne property at a price of $750,000. Under the agreement, Cosby placed an escrow deposit of $75,000 with Gagnon's attorney, to be paid to Gagnon and applied to the balance of the purchase price at a closing that the agreement specified would be held on January 21, 1992.

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Gagnon promised in the agreement to convey good and clear title and to deliver a warranty deed for the premises at the closing. One week later, on December 12, 1991, Gagnon executed a deed conveying his Hillsborough, New Hampshire, property to Frank.

At some time after December 12, 1991, but before December 26, 1991, Gagnon told Joan about his having executed the purchase and sale agreement with Cosby. He also revealed to her that he was moving to Hillsborough, New Hampshire, to live with Frank. What ensued was the result of Joan's learning of these developments. On December 26, 1991, without discussing it with Gagnon, Joan created and executed the "Francis W. Gagnon Trust," with a stated corpus of $1,000.00 (although no money was ever actually placed in the trust). She was both the "[d]onor" and the sole trustee of the trust, with Gagnon designated as the "[p]rimary [b]eneficiary." The trust was made irrevocable, with one exception: Joan reserved to herself as settlor the right at any time to amend or revoke any provision relating to the powers and duties of the trustee and the appointment or removal of additional or successor trustees. Joan expressly empowered herself as trustee to deal with both real and personal trust property "whether or not personally interested in the exercise of any such power and without approval of any Court."

As primary beneficiary, Gagnon was entitled to the net income of the trust for life (although the trust never saw any income, its sole asset being the unproductive Shelburne property). Joan, however, as trustee reserved sole discretion not only as to when such income should be paid, but also whether it should be paid directly to Gagnon or rather "applied" for his benefit. Additionally, Joan as trustee could alone determine what should be deemed income and what should be credited to principal, "notwithstanding any determination by the Courts." Any income not paid to Gagnon was to be added to principal of the trust, which at Gagnon's death was to be divided into equal shares among Joan, Jeanne, and Frank. Gagnon had no right to call upon the

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principal during his lifetime; rather, Joan as trustee had the "sole discretion" to apply so much of the principal for his support, maintenance, and health as she deemed "advisable."

On December 26, 1991, simultaneously with the creation of the Francis W. Gagnon Trust, Joan conveyed the Shelburne property, purportedly pursuant to the terms of the November 27, 1990, power of attorney, to herself as trustee of that trust. The conveyance was without consideration and by quitclaim deed, recorded in the Franklin County registry the next day. Joan also recorded with the deed an affidavit, which stated that at the time of the execution of the deed she did not have "actual knowledge" of the termination of her power of attorney by revocation, death, disability, or incapacity of the principal. [Note 5]

By letter dated December 26, 1991, Joan notified Frank of her actions. She asserted that they had been taken for "the preservation of our father's assets and estate" and to make the sale of the Shelburne property "easier" by eliminating buyer "concern" about Gagnon's "competence" and "ability to fully understand the nature and extent of the transaction." [Note 6] Joan proposed to make Frank a cotrustee, along with

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herself and Jeanne. Frank rejected this offer. Jeanne may have received and accepted a similar offer. [Note 7]

In early January, 1992, after he had learned of her conveyance to the trust, Gagnon demanded (through his lawyer) that Joan return the Shelburne property to him. (The attorney's letter to Joan also informed her that Gagnon had revoked her power of attorney.) When she refused, Gagnon immediately filed the instant action seeking to set aside the conveyance. After a three-day trial in May, 1993, the judge ordered judgment for the defendants upon findings of fact and rulings of law that upheld Joan's authority under the power of attorney to convey the Shelburne property to the trust.

The judge's disposition rested upon his conclusion that Joan had neither actual nor constructive notice "that her authority to act on [Gagnon's] behalf had been terminated prior to December 26, 1991." The judge further ruled that Joan's affidavit denying "actual knowledge" of any revocation of her agency, along with the December 26, 1991, letter to Frank, "provide[d] conclusive proof that, as of December 26, 1991, [Joan] did not reasonably believe that her power of attorney had been terminated"; and that Gagnon's execution

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of the purchase and sale agreement "was not an act in derogation of the power of attorney such that [Joan] had constructive notice that her authority to act on Gagnon's behalf had been revoked prior to the disputed conveyance . . . ." We reverse, because Joan should have realized that her authority to dispose of the Shelburne property had been effectively revoked when she learned Gagnon had contracted to sell it. Even if there was no revocation, however, Joan's conduct was inconsistent with well established doctrines of the law of agency that require her to undo the challenged transaction.

2. Joan's authority to act regarding the Shelburne property was revoked by Gagnon's purchase and sale agreement. The judge's conclusion as to the effect of Gagnon's purchase and sale agreement on Joan's authority cannot stand. It is subverted by Joan's knowledge of that agreement prior to the December 26, 1991, conveyance and her concession that she undertook the trust arrangement in response to learning of the agreement.

A principal may manifest his termination of his agent's authority, either in whole or in part, by conduct that is inconsistent with its continuance. Examples of such implicitly countermanding conduct are "where [the principal] retakes possession of goods which he had authorized the agent to sell, or where he sells or disposes of the subject matter or of his interest therein, or voluntarily causes its loss or destruction." Restatement (Second) of Agency Section 119 comment b & illustration 4 (1958). See Flynn v. Butler, 189 Mass. 377, 388-390 (1905) (principal impliedly revoked power of attorney of agent authorized to pursue legal action by commencing action on her own behalf). "[A]ny form of manifestation made known to the [agent] is effective" if, "reasonably interpreted, [it] indicates that the principal no longer consents to have the agent act for him . . . ." Restatement (Second) of Agency Section 119 comment a.

"An agent is authorized to do, and to do only, what it is reasonable for him to infer that the principal desires him to do in the light of the principal's manifestations and the facts

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as [the agent] knows or should know them at the time he acts." Id. Section 33. "Whatever the original agreement or authority may have been," if the agent "knows facts which should lead him to believe that his authority is restricted or terminated, he has a duty to act only within the limits of the situation as it is currently known to him." Id. Section 33 comment a. The "will [of the principal] may change . . . . Whatever it is at any given time, if the agent has reason to know it, his duty is not to act contrary to it. The fact that in changing his mind the principal is violating his contract with the agent does not diminish the agent's duty of obedience to it." Id. Section 33 comment b. See also id. Section 108(1) & comments b, c, & f.

Finally, an "agent has notice that authority to do an act has terminated or is suspended if he knows, has reason to know, should know, or has been given a notification of the occurrence of an event from which the inference reasonably would be drawn . . . by the agent, that the principal does not consent to the act or would not if he knew the facts . . . ." Id. Section 134.

These objective principles were activated by Joan's knowledge prior to December 26, 1991, of Gagnon's December 5, 1991, purchase and sale agreement. Joan was thereby on notice, see id. Section 9(1) & (2), and should have known that (a) Gagnon desired to sell the Shelburne property himself to Cosby no later than January 22, 1992, and (b) Gagnon would not have consented either to losing the opportunity to complete that sale or to any conveyance of the property that would deprive him of all control over the property and the right to immediate enjoyment of the proceeds from its sale. His prompt demand for return of the property and swift litigation upon Joan's refusal constitute ample evidence of his contemporaneous wishes. Indeed, Joan was not just passively on notice of Gagnon's desires with respect to the Shelburne property: her trust arrangement was deliberately effected to

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frustrate those desires, by preventing the consummation of Gagnon's purchase and sale contract. [Note 8]

Joan had engaged in a number of real estate transactions over the years with her broker-investor husband, Allyn, and was trustee of a realty trust. She must or should have realized that by conveying title to the Shelburne property from Gagnon to herself as trustee, she was preventing Gagnon from performing his promises under the purchase and sale agreement and thereby exposing him to a suit for specific performance and possibly damages (see infra) -- undesirable consequences that she reasonably should have known Gagnon (and any seller of land under favorable contract) would want to avoid.

In these circumstances, Joan must be deemed to have had, prior to her conveyance of the Shelburne property to herself as trustee, constructive (if not actual) notice that Gagnon had effectively terminated her authority with respect to that property. Her affidavit disclaiming "actual knowledge" of the termination or revocation of her power of attorney was irrelevant to the issue of constructive notice. The judge's determination that the affidavit was "conclusive proof" that Joan remained empowered to convey the Shelburne property was erroneous [Note 9] in light of the undisputed facts, as well as applicable agency principles.

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3. Joan violated the basic fiduciary duties of an agent. Gagnon's effective revocation of the power of attorney with respect to the Shelburne property is not the only reason for reversal. The power of attorney created (as Joan acknowledges) a traditional principal-agent relationship. That relationship has one supreme characteristic: as his agent, Joan stood in a fiduciary relation to Gagnon with respect to all matters within the scope of the agency. Restatement (Second) of Agency Sections 1, 13, 375.

a. Joan violated her fiduciary duty of loyalty by impairing Gagnon's rights with respect to the Shelburne property. Like all fiduciaries, Joan owed Gagnon the duty of utmost good faith and absolute loyalty. [Note 10] The quintessential mandate of that primal fiduciary duty obligated Joan to act, in the absence (as here) of language in the power of attorney to the contrary, solely in and to further Gagnon's interest, even at the expense of her own interest in matters connected with the agency. See Spritz v. Brockton Sav. Bank, 305 Mass. 170, 172 (1940); Jerlyn Yacht Sales, Inc. v. Wayne R. Roman Yacht Brokerage, 950 F.2d 60, 66 (1st Cir. 1991); Restatement (Second) of Agency Sections 39, 387, 393.

Joan's conveyance of the Shelburne property to herself as trustee of an irrevocable trust would have injured Gagnon's interests in several respects, were it upheld. [Note 11] Gagnon was divested of the power to revoke the agency as to the property. [Note 12] He was prevented from ever regaining title to or control

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over the property. [Note 13] He was deprived of enjoyment of the proceeds of the sale for which he had contracted. [Note 14] He was precluded from conveying the property to successors of his choosing through testamentary disposition. See Dolbeare v. Bowser, 254 Mass. 57, 61 (1925) (fiduciary should not be concerned, let alone interfere, with succession to property subject to his power). Finally, he was exposed to suit by Cosby and to liability for breach of his purchase and sale agreement, which was specifically enforceable in equity, and of his warranties made therein. See Flynn v. Wallace, 359 Mass. 711, 717, 720 (1971); Yiakas v. Savoy, 26 Mass. App. Ct. 310, 313 (1988). See also Limpus v. Armstrong, 3 Mass. App. Ct. 19, 22, 24 (1975).

b. Joan violated her fiduciary duty of loyalty by refusing to honor Gagnon's request for reconveyance of the Shelburne property. An agency differs from other fiduciary relations in the fact that it is the agent's duty to obey the will of the principal, to respond to the principal's wishes, and not to act contrary to the principal's directions. Restatement (Second) of Agency Sections 14, 33, 385. "[I]n no event must [the agent] act contrary to what . . . the principal desires him to do," id. Section 33 comment a, even if the principal's directions amount to a breach of the agency contract. Id. Section 118 comment b.

Whether or not Joan's power to act with respect to the Shelburne property had been effectively terminated when she learned of Gagnon's purchase and sale agreement, she remained his agent in all other respects subsequent to December 26, 1991. As such, Joan continued to be subject to the

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duty to respond to his wishes. Her refusal to reconvey the Shelburne property upon his request in early January, 1992, or to take steps that were within her power to achieve his expressed desire, plainly violated Joan's fiduciary duty of obedience to her principal. [Note 15]

c. Joan violated her fiduciary duty of loyalty by failing to inform Gagnon of material facts. An agent's duty to make full disclosure to the principal of all material facts relevant to the agency is a necessary corollary to the fundamental agency obligations of undivided loyalty and utmost good faith. See Gage v. Boston Natl. Bank, 257 Mass. 449, 452 (1926); Spritz v. Brockton Sav. Bank, 305 Mass. at 172. As set forth in the Restatement (Second) of Agency Section 381, "an agent is subject to a duty to use reasonable efforts to give his principal information which is relevant to affairs entrusted to him and which, as the agent has notice, the principal would desire to have and which can be communicated without violating a superior duty to a third person." Whenever facts known to the agent but not to the principal may affect the desires and conduct of the principal, the agent must communicate that information to the principal, id. Section 381 comment a, particularly if the agent is engaging in "any arrangement . . . adverse to the [principal's] interest." Spritz v. Brockton Sav. Bank, 305 Mass. at 172. See Restatement (Second) of Agency Section 390 comment a. In short, an agent, "must be `upfront' with his principal at all times." Jerlyn Yacht Sales, Inc. v. Wayne R. Roman Yacht Brokerage, 950 F.2d at 69.

Joan's conveyance of the Shelburne property to an irrevocable trust created and controlled by her alone came at a time when she knew of Gagnon's firm desire to sell the property. Her failure to inform him of her purpose regarding the trust transaction and of its consequences -- most notably, its effective elimination of Gagnon's ability to control either the property or the proceeds of its sale -- was incompatible with the full and faithful discharge of the disclosure obligation she owed Gagnon. Her breach of duty in this respect was especially

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objectionable in light of her virtual admission (on cross-examination) that the entire December 26, 1991, arrangement was motivated by an intent to block Gagnon's imminent sale to Cosby.

Even if the conveyance-to-the-trust transaction was, as Joan argues, literally authorized by the power of attorney (but see note 11, supra), Joan remained under and violated the duty to disclose all relevant facts that she as agent "should realize would be likely to affect the judgment of the principal in giving his consent to the agent to enter into the particular transaction on the specified terms." Restatement (Second) of Agency Section 390 comment a. The existence of the purchase and sale agreement and the fact of this litigation underscore the materiality that advance information about the December 26, 1991, transaction would have had for Gagnon.

d. Joan violated her fiduciary duty of loyalty by self-dealing. The upshot of Joan's creation of the trust and conveyance to it of the Shelburne property was that not just title to, but also control over the parcel and its disposition, during and after Gagnon's lifetime, passed from Gagnon to Joan. The transaction also provided her with a remainder interest in the Shelburne property (or its proceeds). Joan thus benefited personally from the transaction in a manner directly opposed to Gagnon's interest and manifested desires.

Such self-dealing by an agent, in the absence (as here) of distinct authority from the principal expressly granted in the empowering instrument, has been continuously and uniformly denounced as one of the most profound breaches of fiduciary duty, irrespective of the agent's good faith and however indirect or circuitous the accomplishment of the benefit to the agent. See Jennison v. Hapgood, 24 Mass. 1, 7-8 (1828); Sikes v. Inhabitants of Hatfield, 79 Mass. 347, 353 (1859); American Circular Loom Co. v. Wilson, 198 Mass. 182, 206-207 (1908); Lindsay v. Swift, 230 Mass. 407, 412 (1918); Dolbeare v. Bowser, 254 Mass. at 61; Pitman v. Pitman, 314 Mass. 465, 471, 476 (1943); Berenson v. Nirenstein, 326 Mass. 285, 288, 289 (1950); Mackey v.

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Rootes Motors Inc., 348 Mass. 464, 467-468 (1965); O'Brien v. Dwight, 363 Mass. 256, 283-284 (1973). See also Robertson v. Chapman, 152 U.S. 673, 681-682 (1894); Estate of Casey v. Commissioner of Int. Rev., 948 F.2d 895, 898-899 (4th Cir. 1991); Jerlyn Yacht Sales, Inc. v. Wayne R. Roman Yacht Brokerage, 950 F.2d at 66-67; Fender v. Fender, 285 S.C. 260, 262 (1985); Creasy v. Henderson, 210 Va. 744, 749-750 (1970); Restatement (Second) of Agency Sections 34, 39, 387, 388, 389, 391, 394.

The sedulous application and uncompromising rigidity of the prohibition against unauthorized fiduciary self-dealing do not flow merely from the interpretive principle that powers of attorney are to be strictly construed to require explicit, and not inferential, grants of "dangerous" agency authority the exercise of which is potentially destructive of the principal's interests. See, e.g., Hoyt v. Jagues, 129 Mass. 286, 288 (1880); Williams v. Dugan, 217 Mass. 526, 529-530 (1914); Estate of Casey v. Commissioner of Int. Rev., 948 F.2d at 900; Restatement (Second) of Agency Section 34 comment h. [Note 16] The interdiction has been said to be based upon "the highest and truest principles of morality," Dzuris v. Pierce, 216 Mass. 132, 136 (1913); cf. Matthew 6:24; but it is equally grounded in the law's prudent "[dis]trust [of] human nature [when] exposed to the temptations" inherent in the fiduciary relationship, Hall v. Paine, 224 Mass. 62, 73 (1916), with the attendant necessity to "protect the weak and incompetent from the encroachments and overreachings of the artful and the powerful." Arnold v. Brown, 41 Mass. 89, 96-97 (1832). Joan's artful December 26, 1991, transactions so entangled her personal interests with those of her uninformed principal,

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to her benefit and his detriment, as to justify branding them a breach of her fiduciary obligation of undivided and unselfish loyalty.

4. Disposition. Gagnon, as a principal whose agent violated her fiduciary duties, is entitled to a judgment ordering Joan, who stands as constructive trustee for his benefit with respect to the Shelburne property, to reconvey the property to him. See Jones v. Swift, 300 Mass. 177, 185 (1938); Lydia E. Pinkham Medicine Co. v. Gove, 303 Mass. 1, 10-11 (1939); Berenson v. Nirenstein, 326 Mass. at 288-289; Sanguinetti v. Nantucket Constr. Co., 5 Mass. App. Ct. 227, 236-237 (1977); Restatement (Second) of Agency Sections 399, 402, 407; Restatement of Restitution Section 4(c) & comment d, Section 130 & comment a, Section 141 & comment a, Section 190 & comment a, Section 192 & comments a & d, and Section 199 (1937).

Accordingly, the judgment entered on October 1, 1993, for the defendants is reversed. The case is remanded to the Superior Court for entry of a new judgment declaring that the plaintiff-appellant, Francis W. Gagnon, is the fee simple owner of the 184-acre Shelburne property; declaring that the defendant Joan Coombs' deed to herself recorded on December 27, 1991, at the Franklin County registry of deeds, book 2596, page 69, is null and void; and directing the defendant Coombs to reconvey the property to Gagnon, to record the deed and a copy of the new judgment in the grantor's index under her name, both individually and as trustee, and to take any other steps, as reasonably requested by Gagnon's attorney at law, which may be necessary to insure that these declarations and Gagnon's restored title are properly reflected on the appropriate records of the Franklin County registry of deeds. (A copy of the new judgment may also be recorded in the Registry by Gagnon or his attorney.) Gagnon's request for appellate legal fees against the defendant Coombs is denied;

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her resistance to his appeal cannot be characterized as frivolous in light of the decision in her favor below. [Note 17]

So ordered.