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Feb 17, 2011

Financial Institution Compliance With Maine's Uniform Power Of Attorney Act


Category: Business

By 

Gretchen L. Jones

 

Introduction and Overview

            The Uniform Power of Attorney Act was completed by the National Conference of Commissioners on Uniform State Laws in 2006.  According to its website, this organization “provides states with non-partisan, well conceived and well drafted legislation that brings clarity and stability to critical areas of the law”.  Some other Uniform Laws with which financial institutions may be familiar include the Uniform Fraudulent Transfers Act, the Uniform Limited Liability Company Act, the Uniform Consumer Credit Code, the Uniform Probate Code, the Uniform Prudent Management of Institutional Funds Act, the Uniform Securities Act, the Uniform Transfers to Minors Act, the Uniform Commercial Code (UCC) and the Uniform Unclaimed Property Act. 

            According to the website, the Uniform Power of Attorney Act (the “new Act”) has, as of this writing in February 2011, been adopted in Colorado, Idaho, Maryland, Nevada, New Mexico, the U.S. Virgin Islands, Virginia and Wisconsin, as well as in Maine.  It has been introduced in Minnesota, Ohio and West Virginia.  It became effective in Maine on July 1, 2010, at 18-A M.R.S.A. §§5-901 et seq.  Maine financial institutions should be familiar with the practical requirements of this new law, which has broad application to everyday operations.

            The new Act replaces the Uniform Durable Power of Attorney Act (the “prior Act”) and includes some significant differences from the prior Act, including that a Power of Attorney is now durable (i.e. its effectiveness is unchanged by the disability of the principal) unless it specifically states that it terminates upon the disability of the principal; acceptance of a Power of Attorney is generally required unless certain exceptions apply; and a later appointed conservator cannot limit, suspend or terminate the authority of an agent absent a court order. 

            As adopted in Maine, the provisions of the new Act regarding the validity of a Power of Attorney deviate from the Uniform Act in two notable respects:  First, the Power of Attorney must be notarized; and second, it must contain the “Notice to Principal” and “Notice to Agent” language which has long been required under Maine law.  However, as the Maine Comment notes, under the new Act, the notices need only be “substantially similar to the statutory language as opposed to verbatim”, reversing prior law, which “would frequently invalidate otherwise valid powers of attorney due to minor and inadvertent omissions in the notice”. 

New Rules for Acceptance of a Power of Attorney

            Many financial institutions routinely refuse to accept a Power of Attorney if there is any question regarding its validity or the authority of the agent.  The new Act not only discourages this practice, but in fact penalizes it, and in turn provides for certain “safe harbors” which should greatly reduce, if not eliminate, risks attendant to acceptance of a Power of Attorney. 

            So long as a Power of Attorney is notarized, its acceptance in “good faith” is protected by a presumption that the signature of the principal is in fact genuine.  The “good faith” concept under the new Act differs from “good faith” under the UCC; here, the standard is “honesty in fact”, without more.  Unlike the UCC, there is no requirement of commercial reasonableness.  If the person accepting the Power of Attorney honestly believes the principal’s signature to be genuine, the presumption applies.  Additional protections are available for financial institutions and others conducting activities through employees; even if one employee has actual notice of a fact relating to a Power of Attorney, the principal or the agent, that knowledge is not imputed to the financial institution or to any other employee.  For example, if Employee A in the collection department knows of a fact pertaining to a Power of Attorney, that knowledge is not imputed to the financial institution or to Employee B who is asked to accept a Power of Attorney in a loan transaction.  Employee B must have actual knowledge of that fact and nonetheless accept the Power of Attorney in order to render the presumption inapplicable. 

            A presumption of validity and genuineness also applies to the agent’s authority.  However, this presumption does require a certain level of due diligence by financial institution employees with regard to whether the agent is exceeding or improperly exercising the authority granted under the Power of Attorney, as is discussed below. 

            In addition to the above presumptions, the new Act permits a financial institution to require certification as to “any factual matter concerning the principal, agent or Power of Attorney”; an English translation of a Power of Attorney or any portion thereof containing another language; and/or a legal opinion as to any matter of law concerning the Power of Attorney, so long as the reason for requesting the legal opinion is provided with the request.  If the certification, translation or opinion is not provided to the financial institution within five business days of the request, then the financial institution has no obligation to accept the Power of Attorney.  The new Act includes a statutory form for the factual certification, at Section 5-951.          

Liability for Refusal to Accept a Power of Attorney

            As indicated above, the new Act introduces a concept applicable to Powers of Attorney which is novel in Maine – liability for refusing acceptance.  Monetary penalties include attorney’s fees and costs incurred in any proceeding which confirms the validity or mandates acceptance of a Power of Attorney.  The Comments cite “a growing state legislative trend” in this regard.  It appears to be an open question as to whether a financial institution would be liable for actual, consequential or punitive damages for a wrongful refusal to accept a Power of Attorney. 

            The new Act includes specific and enumerated grounds upon which a financial institution can refuse to accept a Power of Attorney, which are set forth at Section 5-920.  These grounds are:  1) the financial institution is not required to engage in the contemplated transaction with the principal; 2) engaging in the contemplated transaction would be inconsistent with federal law; 3) the financial institution has actual knowledge that the agent’s authority or the Power of Attorney has terminated; 4) the financial institution has requested certification, a translation or an opinion and the request is refused; 5) the financial institution in good faith believes that the Power of Attorney is invalid or that the agent is not authorized to engage in the contemplated transaction (even if a certification, translation or opinion has been provided); or 6) the financial institution in good faith believes that the principal may be subject to physical or financial abuse, neglect, exploitation or abandonment, and either the financial institution makes a report to DHHS, or has actual knowledge that another person has made such a report.

            Unless one of these exceptions applies, however, the financial institution must accept the Power of Attorney or assume the risk of the imposition of penalties for wrongful refusal.  Interestingly, the new Act as enacted in Virginia allows for another exception, included at the request of the Virginia Bankers Association, which permits a financial institution to refuse to accept a Power of Attorney where the principal “has otherwise relieved the [financial institution] from an obligation to engage in the transaction with an agent…”.  In other words, under Virginia Law, a financial institution has the ability to refuse to accept a Power of Attorney by simply including such a provision in its account agreements.  Maine law does not include this exception.

            It is also worth noting that another exception may be available to financial institutions under Section 5-922, which states that the new Act “does not supersede any other law applicable to financial institutions…and the other law controls if inconsistent with” the new Act.  The Comment states that this Section was included in the new Act to address concerns “that there may be regulations which govern these entities that conflict with provisions of this Act”, but that no conflicts were identified during the drafting process.  It is unclear whether any such conflicts actually exist.  For example, the Customer Identification Program rules specifically contemplate use of a Power of Attorney to establish a relationship with a financial institution.  The Inter-Agency FAQs issued in May 2005 state that where the relationship with a financial institution is established using a Power of Attorney, the “customer” is the principal, if the principal is “a competent person”, but is the agent if the principal “lacks legal capacity”.  This guidance, of course, begs the question as to how a financial institution determines the competency or legal capacity of the principal. 

            Finally, the new Act does not permit a financial institution to refuse acceptance of a Power of Attorney because the Power of Attorney is provided electronically or is a photocopy, or to require use of the financial institution’s form.  However, if another statute, such as a recording statute, mandates an original document, then that statute will apply to supersede this prohibition. 

“Shorthand” Statements of and Limitations on Agent’s Authority

            The new Act contemplates the use of a type of “shorthand” in the Power of Attorney itself to describe the authority granted to the agent.  The Power of Attorney can state either the Section number or descriptive term used to grant that authority to the agent.  A general grant of authority encompasses all such Sections.  Authority regarding “Banks and Other Financial Institutions” is found at Section 5-938.  This authority includes transactions on an “account or other banking arrangement”, safe deposit boxes and vault spaces; withdrawals from accounts by any means; receipt of statements and other notices; the ability to obligate the principal to pay loans and enter into security interests in personal property; dealing with negotiable instruments; and receiving and using letters of credit, credit and debit cards and EFT transactions.  Note that this authority does not include the authority to mortgage the principal’s real estate; this authority is granted under Section 5-934, Real Property.  Financial institutions should understand this “shorthand”, its implications and limitations.

            The authority granted under Section 5-938 for “Banks and Other Financial Institutions,” like all other authorities granted under the new Act, is subject to statutory restrictions on the agent’s ability to “self-deal”, for lack of a better term.  Section 5-931 sets forth these restrictions.  Unless the Power of Attorney specifically grants the authority, the agent cannot make gifts, create or change survivorship benefits (i.e. joint accounts) or create or change beneficiaries (i.e. payable on death accounts), among other things.  Even if gifting authority is specifically granted, it cannot be exercised to benefit the agent or a dependent of the agent, unless the agent and principal are related.  Additional restrictions on gifting, even if the principal and agent are related, are set forth at Section 5-947; under these provisions, in order to engage in any gifting, unless the Power of Attorney provides otherwise, the agent must consider the principal’s financial objectives, if known, or best interests, if the objectives are unknown. This latter requirement is particularly problematic where an agent seeks to add a joint owner or payable on death beneficiary; in the event these actions are within the agent’s authority under Sections 5-931 and 5-938, it is not possible for the financial institution to determine the principal’s best interests or objectives with any certainty.  In such cases, the financial institution can look to the Section 5-920 exceptions and also rely upon the right to require an opinion of counsel as to the agent’s authority.

Conclusion

            Financial institutions face multiple risks when asked to accept a Power of Attorney, including that the Power of Attorney is invalid, that an agent’s authority has terminated, or that the agent is exceeding the authority granted or improperly exercising that authority.  However, the new Act provides multiple “safe harbors” to financial institutions to mitigate these risks.  Financial institutions are entitled to rely on presumptions of genuineness and validity so long as the Power of Attorney is acknowledged and includes the statutory notices to the agent and principal, and to request and rely upon certifications of fact, English translations and legal opinions.  Financial institutions can also refuse acceptance on multiple statutory grounds. 

            At a minimum, financial institutions should:

  •  Develop and follow procedures to ensure the applicability of the presumption of genuineness and validity of a Power of Attorney.
  • Train employees in the exceptions which permit refusal of acceptance of a   Power of Attorney.
  • Train employees in the “shorthand” statements of agent authority and how these statements apply to financial institution operations.
  • Train employees in the limits on agent authority with respect to gifting.
  • Develop and implement policies governing factual certifications, legal opinions and translations, including timelines and circumstances under which requests will be made.

           Clear policies and procedures applicable to Power of Attorney risk management, encompassing the protections available under the new Act, can significantly limit if not eliminate these risks.