The Pennsylvania Legislature enacted extensive changes to Title 56 of the Decedents, Estates and Fiduciaries Code affecting powers of attorney, effective as of January 1, 2015. The amendments create a number of issues for creditors in commercial transactions and individuals and businesses engaging in the transfer of equity interests, bonds or other assets of a business.

The general rules applicable to execution of a power of attorney require, in part, that the power of attorney be acknowledged before a notary and witnessed by two individuals older than eighteen years of age. Prior to the recent amendments to Title 56, exempted from the notary acknowledgment and witness requirements certain transactions including:

  • powers granted to or for the benefit of creditors in commercial transactions,
  • a power granted for the sole purpose of facilitating the transfer of stock, bonds or other assets,
  • a power contained in a governing document for a corporation, partnership, limited liability company or other legal entity by which a director, partner or member authorizes another to do things on behalf of the entity; and
  • a warrant of attorney to confess judgment.

Under the current version of Title 56 (20 Pa.C.S.A. § 5601(e.1)), the exemption applies to the witness requirement, but not the notary acknowledgment requirement. As a result, commercial loan documents, for example, which contain terms pursuant to which the borrower grants a power of attorney to the lender, should include a notary acknowledgment. While it is widely believed that the failure of revised Title 56 to exempt commercial transactions from the witness and notary requirements, until the legislature further amends Title 56 to restore the notary acknowledgment exemption, financial institutions would be well advised to engage in a careful review of their loan and credit documents, identify terms pursuant to which the borrower grants a power of attorney to the lender, or which grant the lender the right to confess judgment against the borrower, and include a notary acknowledgment to each loan document in which the borrower grants a power of attorney to the lender or includes a right to confess judgment.

Revised Title 56 also adds a new section (§ 5601.3) imposing duties on the agent. The general obligations of the agent, which may not be waived by the principal, require the agent to act:

  • in accordance with the principal's reasonable expectations, to the extent known by the agent and otherwise in the principal's best interests;
  • in good faith; and
  • only within the scope of the authority granted in the power of attorney.

The first of the above agent duties is problematic for lenders because, when acting under a loan document power of attorney, the lender is typically protecting its rights or enforcing its remedies under the loan documents, which includes executing on the borrower's collateral. The lender's actions under a loan document power of attorney are almost exclusively intended to protect the lender's (agent's) best interests, not those of the principal (borrower). While this issue may not have a drafting solution, it may be advisable to revise the power of attorney grant in each loan document to include an acknowledgment by the borrower as to the borrower's reasonable expectations that the lender's actions under the power of attorney may be adverse to the borrower's interests. That, however, does not relieve the lender from the duty to otherwise act in the best interests of the borrower, a duty which is completely at odds with the nature and purpose of a grant of a power of attorney in loan and credit documents.

This is an issue that must be fixed by the Pennsylvania legislature.

Section 5601.3 of revised Title 56 enumerates certain other duties of the agent which may be waived by the principal by the terms of the power of attorney. These other duties include, but are not limited to:

  • act loyally for the principal's benefit,
  • a duty to not commingle the funds of the agent and principal,
  • not creating conflicts of interest that would impair the agent's ability to act in the principal's best interests,
  • act with care, diligence and competence, and
  • keep records of receipts, disbursements and transactions made on behalf of the principal.

The above duties are imposed on an agent, except as otherwise provided in the power of attorney. As such, these duties may be waived by the principal and powers of attorney granted in loan and credit documents should include an express waiver of the duties imposed by 20 Pa.C.S.A § 5601.3(b).

Had Pennsylvania adopted the Uniform Power of Attorney Act (UPA Act), or, at a minimum, the applicability section of the UPA Act, all of these issues would have been avoided. Section 103 of the UPA Act provides that the act applies to all powers of attorney except for four enumerated blanket exemptions. The exemptions include a power coupled with an interest granted to a creditor in a commercial transaction and a proxy or other delegation to exercise voting or management rights with respect to an entity. While the Pennsylvania Legislature is expected to correct what is widely believed to be an oversight or drafting error, and hopefully retroactively, in the meantime lenders would be prudent to revise their loan, credit and other documents that contain a power of attorney to account for the acknowledgment requirement and address the agent duties imposed by revised Title 56.

This article is presented for informational purposes only and is not intended to constitute legal advice.