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Read the Fine Print! Restrictions in a Power of Attorney May Invalidate Loan Documents

On November 6, 2012, the North Carolina Court of Appeals ruled in a unanimous decision that several commercial guaranties were invalid when signed by an attorney in fact, pursuant to a power of attorney which contained a condition precedent that had net yet occurred.  This case contains important lessons for lenders regarding transactions with attorneys in fact.

In this case, the appellant-wife executed a durable power of attorney appointing her husband as her attorney in fact.  The power of attorney was properly recorded with the Wake County Register of Deeds.  After the execution and recordation of the power of attorney, the husband and his business partner, through various business entities, borrowed money from plaintiff-lender.  The husband signed a series of commercial notes, unconditional personal guaranty agreements, and a deed of trust in his wife’s name, relying on the power of attorney.  The notes went into default, and the lender/plaintiff commenced foreclosure proceedings.  The sale of the collateral yielded less than the outstanding obligations, and the plaintiff sued the borrowers and guarantors – including the wife - to recover the deficiency balance.  The trial court granted the plaintiff’s motion for summary judgment as to all defendants.

On appeal, the wife argued that the power of attorney was ineffective, and she should not be bound by the guaranty executed by her husband as her attorney in fact.  The power of attorney contained a provision titled “RESTRICTIONS ON EXERCISE OF POWERS BY ATTORNEY-IN-FACT” which stated that “the rights, powers, duties and responsibilities herein conferred upon my Attorney-in-Fact shall not be exercised by my Attorney-in-Fact until a physician has certified to my Attorney-in Fact that in his or her opinion I am no longer able…to handle my…affairs.”

The Court of Appeals reversed the decision of the trial court, holding that no power of attorney ever vested in the husband, that the wife’s guaranty was invalid, and that the plaintiff was not entitled to recover from the wife as a guarantor.  

First, the Court of Appeals agreed with the wife that the power of attorney was ineffective because there was no evidence in the record indicating that the wife had been certified incompetent by a physician, which was a condition precedent to the effectiveness of the power of attorney.  Since there was no evidence that the wife was certified incompetent by a physician, no power of attorney ever vested in her husband, and he had no authority to bind her to the guaranty.  Further, the Court of Appeals held that the plaintiff was deemed to be on notice of any limitation or restriction contained in the power of attorney as it was in writing and “a third party who fails to inspect a POA’s terms does so at his own peril since he is deemed on notice of the limitations and restrictions contained therein.”

Nor could the plaintiff argue that it justifiably relied on the husband’s representations of authority based upon the broad grant of authority and the third party reliance provisions contained in the North Carolina General Statutes.  Despite the broad grant of authority contained in the statutes, the statutes did not override the restriction that the wife be certified incompetent by a physician.  Here, the power of attorney conferred no powers upon the husband because the condition precedent never occurred.

 Likewise, statutes which generally protect third parties who rely on the apparent authority of an attorney in fact, did not apply because the plaintiff had constructive notice of the terms of the power of attorney, which was part of the public record, and the power of attorney indicated that there was no apparent authority for the husband to execute the guaranty on behalf of his wife.

This case provides two very important lessons for lenders.  First, the lender should confirm with the attorney in fact, in writing, that the attorney in fact does have the proper authority to act.  The North Carolina General Statutes contain a statutory form of affidavit that a lender may obtain in connection with any transactions with a person named as an attorney in fact.    Additionally, this form affidavit can be modified to specifically address whether any express conditions to the effectiveness of a power of attorney, such as having a person declared to be mentally incompetent by a physician, were ever met.  

Second, this case squarely places the burden on lenders to confirm whether an express condition to the effectiveness of a power of attorney, such as having a person declared to be mentally incompetent by a physician was ever met.  Despite the statutory protections given to persons dealing with an attorney in fact, based on the results of this case, lenders should not simply assume that the attorney in fact is properly exercising his or her powers.  As described above, lenders should obtain written confirmation from the attorney in fact that any conditions precedent to the power of attorney becoming effective have been met, and should also have the attorney in fact provide proof that the conditions were met.  

The lessons described above are particularly important for durable powers of attorney, which are required to be recorded in the real estate records in North Carolina to be fully effective.  Under North Carolina law, lenders will be deemed to be aware of the contents of these recorded durable powers of attorney regardless of whether the lender is actually aware of its contents or not.  Based on the results of this case, before relying on the power of attorney as part of making its loan to a borrower, lenders should carefully scrutinize the terms of any power of attorney agreement and follow the lessons outlined above.

© 2020 Poyner Spruill LLP. All rights reserved.National Law Review, Volume III, Number 221


About this Author

Christopher H. Roede, Commercial Real Estate Attorney, Poyner Spruill Law Firm

Chris Roede works primarily in the financial services industry, working with banks, FinTech companies, and others on regulatory and lending matters.

Chris’s practice includes regulatory and compliance review of new bank products and processes, acting as transaction counsel in closing both real estate secured and personal property secured loans, and working with lenders to resolve distressed credit assets. His focus for bank regulatory and compliance products is on new and emerging technologies, including advice regarding payment and credit card processing laws, multi-state licensing...