Confidentially Speaking: Disclose Or Not? — North American Title Insurance Company

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Over the years, the power of attorney has become ubiquitous, an inexpensive estate planning opportunity for someone with modest means (the Principal) to give another person (the Attorney-in-Fact) the right to act as his or her agent in real estate or financial transactions and other personal decisions.  A power of attorney, if used responsibly, can be an invaluable and legal tool that empowers the Principal by designating the Attorney-in-Fact to make important decisions at a time the Principal is unable to choose or make such decisions.  Use of a power of attorney, however, is not always a panacea for the Principal or ideal for the title insurer who may face increased underwriting risks.  This authority to act is not foolproof, and when it fails or is challenged, disastrous consequences for the Principal and the title insurer can follow.

From the perspective of the Principal, the key to granting a power of attorney with confidence is to select carefully and specify the decisions the Attorney-in-Fact can make and the circumstances under which it will be effective.   A “general” power of attorney is used to permit the agent to carry out a variety of business transactions on behalf of the Principal, subject to inherent limitations such as prohibiting the agent from self-dealing or acting in his own name, and delegating his authority unless expressly authorized.  In contrast, a “special” power of attorney is limited in scope to certain types of action specifically described in the power of attorney itself; it is typically given for the purpose of a particular transaction such as a sale of a particular piece of property.

An agent’s authority to act under a power of attorney generally ends when the Principal revokes the power of attorney, the power of attorney expires (if granted only for a specific term) or the Principal becomes incapacitated or dies.  Acts performed by the Attorney-in-Fact under any Power of Attorney after the death of the Principal are void, even under a durable power of attorney.  However, a “durable” power of attorney does allow the agent to continue to act for the Principal even after the Principal becomes mentally incompetent or incapacitated.

The express terms of the power of attorney, and not inferences drawn from the actual language of the instrument itself, define the powers of the agent and the parameters of such agency.  For this reason, the Principal must take extra care to ensure that the power of attorney is accurate and precise in all respects, including the spelling of the name of the Attorney-in-Fact.  Take the cautionary tale of John “Smyth”, whose birth surname is spelled “Smith”.  Over the years, he changed the spelling to “Smyth”, but his sister didn’t.  He had an experienced attorney draft a will and power of attorney, appointing his sister to act as his agent should he become ill and/or incapacitated.  Through a scrivener’s error, the power of attorney identified his sister with John’s adopted surname of “Smyth”.  A few years later, John was involved in a serious accident and went into a coma.  Needing to access John’s bank account to pay for his care, the sister presented the power of attorney to the bank with the explanation that her misspelled last name in the document was harmless, a mere typographical error.  The bank, concerned with potential elder abuse and fraud, would not honor her power of attorney because her birth certificate, passport and driver’s license, bearing her birth name (“Smith”) did not match the name (“Smyth”) on the power of attorney.

The authorizing words in the power of attorney may not be read or interpreted as the Principal might have intended.  For example, it has been held that the power to “sell”, by itself, means that the agent only has the authority to negotiate the terms of the sale.  The words “sell and convey” would be necessary for the agent to be able to execute a deed to convey title.  The power to execute a “mortgage” does not imply a power to execute a “deed of trust”, but the power “to mortgage or otherwise encumber” or “to mortgage and hypothecate” is considered sufficient to include the execution of a deed of trust.  The power to “transfer” is not a power to mortgage or encumber property.  Similarly, the power to “negotiate” a lease does not authorize the agent to execute a lease.  Imagine the potential consequences of having insured a sale or refinance in reliance on a power of attorney that did not spell out the Attorney-in-Fact’s authority to convey title or encumber property when challenged by a family member of the Principal.

As in the case with John “Smyth” and his sister, the very ubiquity of powers of attorney in this modern day has led to fears of fraud or elder abuse of the Principal by the agent.  In 2009, Anthony D. Marshall, the son of philanthropist and socialite, Brooke Astor, was convicted of stealing tens of millions of dollars from his mother.  Although they were estranged, Mrs. Astor entrusted Marshall with handling her finances and supervising her care in old age under a power of attorney.  As Mrs. Astor became incapacitated with Alzheimer’s, her friends, who had noticed that Marshall was diverting millions from Mrs. Astor who died in 2007 with an estate worth $131 million, were powerless to stop Marshall until lawyers got involved.   After a six-month criminal trial, Marshall was convicted of numerous crimes, the most serious of which was abusing his power of attorney.  His attorney, named as co-executor of Astor’s will, was convicted of conspiring with Marshall to take advantage of Mrs. Astor’s diminished capacity and forging an amendment to her will.

To minimize the potential for fraud and elder abuse, a “springing” power of attorney may be drafted to “spring” into effect upon the occurrence of a future event, e.g., when a doctor determines a person is incapacitated.  This type of power of attorney allows the agent to make decisions if and when the Principal is unable to do so even on a temporary basis, such as during recovery from surgery.  When the Principal later regains the ability to handle his or her affairs, the springing power can “recoil”, terminating the agent’s authority until triggered again.  Sadly for Mrs. Astor, even a springing power of attorney might not have prevented her son’s conduct, as in hindsight, she needed to look outside of her immediate family for protection.

When presented with a power of attorney, our focus too often is on the technical aspects and details of the power, such as the form of the document and its language, without first asking why a power is being used in the first place.  Why is the Principal, who lives 50 miles away from the closer or settlement agent, unavailable?  Does it make sense that the owner is taking out a loan while out of town on business or vacation?  Is the Principal missing, ill, hospitalized, or dead?  Can the Principal (not the Principal’s attorney or administrative assistant) be contacted?  Does the reason for the Principal’s unavailability make sense?  These fundamental questions need to be answered to your and your underwriter’s satisfaction before verifying the scope of the power of attorney instrument.

From the perspective of the title insurer, given the potential for improper or abusive use of a power of attorney and even fraud by the agent, before closing, consider obtaining from the Attorney-in-Fact the current and permanent address of the Principal along with exemplar signatures of the Principal, and compare them with available signatures from the public record.  An affidavit from the Attorney-in-Fact may be required to confirm that the agent does not have actual knowledge of the termination or revocation of his authority as a result of the Principal’s death or incapacity (unless the power is durable).  Even if such an affidavit is provided, the settlement agent’s actual knowledge that the authority of the Attorney-in-Fact has expired will trump any reliance on the affidavit.

Approval from the prospective or new lender to allow the Attorney-in-Fact to execute documents on behalf of the Principal must also be obtained.  Some lenders may not permit the use of a power of attorney that they consider “old” or if the quality and value of the loan for purposes of the secondary mortgage market is impacted by the use of such a power.

Each state has its own set of minimum requirements that must be met in order for a power of attorney to be properly used in connection with a real estate transaction.  For example, some states require the power of attorney to be recorded for specified acts authorized in the power of attorney.  It is important to consult with the Company’s underwriting counsel prior to relying on a power of attorney to ensure that it complies with all of the local requirements.  Due to increased insuring risks to the underwriter, a power of attorney should be used sparingly and only after careful consideration of the reasons for the use of a power to your satisfaction.

Article provided by: North American Title Insurance Company

Claims Connection (2014-009) is provided by your North American Title Group Legal Department as a general information service and is not intended to contain comprehensive discussions or be relied upon as conclusive.  Please contact Margery Q. Lee, Esq., Manager of National Claims and Litigation (925.295.0519) with any questions or requests for assistance.