The Impact of Pennsylvania’s New Power of Attorney Law on Commercial Loan Documents
Are your Bank’s loan documents compliant with the recent changes to the Pennsylvania Power of Attorney Law under the Pennsylvania Decedents, Estates and Fiduciaries Code?
While this appears to be an unusual question, banks, secured lenders and creditors have in fact been affected by recent changes to the Decedents, Estates and Fiduciaries Code. The amended Code, purporting at first glance to apply to Powers of Attorney used for estate planning matters, broadly revised the requirements for valid and enforceable powers of attorney, likely requiring a review and retooling of your current loan documents.
Previously the Code only required the principal granting the Power of Attorney to sign and date the document. All such documents executed after December 31, 2014, are now required to be acknowledged before a Notary Public. Further, the party to whom the Power of Attorney is granted cannot permissibly notarize the document. This change goes beyond only Powers of Attorney, and appears to also include promissory notes, guarantees, mortgages and other loan documents that contain a Warrant of Attorney to Confess Judgment, and security agreements, stock pledge agreements, proxy designations and other loan documents containing any form of power of attorney allowing the lender to act on behalf of the borrower.
Moreover, the Legislature’s recent changes also impose new duties on agents, which, while rational in the context of trusts and estates, are not completely consistent with the role of lenders enforcing loan documents upon a default by the borrower. Under the Code, agents have certain non-waivable obligations, including the duty to act in accordance with the principal’s reasonable expectations, to the extent actually known by the agent, and, otherwise in the principal’s best interest, in good faith; and within the scope of the authority granted. It is possible that these non-waivable obligations could be deemed to be in direct conflict with the purpose of powers of attorney granted by borrowers in loan documents, which allow lenders to act on the borrower’s behalf when the borrower refuses to do so.
It appears these changes may have sweeping implications for both how loan documents are signed, and the lender’s subsequent enforcement of loan documents upon a default by the borrower. It should be noted that the amended Code has generally been criticized for its far-reaching, and potentially unpredictable, consequences, so there may be fine-tuning to the scope of the changes and/or some guidance from lawmakers or the courts. Until then, lenders need to take additional steps to ensure that the recent changes to the Code are not used by borrowers to challenge the lender’s ability to enforce its loan documents.
We recommend that all promissory notes, guarantees, mortgages, security agreements, stock pledge agreements, proxy designations and any other loan document that contains a Warrant of Attorney to Confess Judgment or a grant of power of attorney be signed in the presence of a Notary. While in a perfect world, the Notary would not be an employee of the lender, we recognize that this is likely not practical. Our concern is based on the prohibition in the Code that the party designated in the Power of Attorney cannot notarize the document, and that borrowers may try to claim that notarization by a bank’s employee violates that provision.
Next, we suggest your loan documents be reviewed, and where appropriate, provisions added where the borrower expressly waives all statutorily imposed duties of loyalty, to the extent permitted by law, and acknowledges potential outcomes of the actions which the lender may take in enforcing the loan documents. Since some changes to the Code are also retroactive, we suggest you also take the opportunity to review existing loan documents when restructuring loans.
While we are hopeful that the legislature will further amend the Decedents, Estates and Fiduciaries Code, or that courts will provide a clearer interpretation of what is required in the context of loan documents, until that occurs, making these changes will help avoid a borrower raising these issues when you attempt to enforce your loan documents.
Attorneys Thomas E. Reilly, Jr., Michael A. Henry and Nicole J. O’Hara provide business and banking services to businesses and financial institutions in the Lehigh Valley. For more information on the new Power of Attorney Law on commercial loan documents, contact Thomas, Michael or Nicole at (610) 820-5450.