By Jeffrey A. Marshall
A decision by the Pennsylvania Supreme Court could make life more difficult for anyone who has to deal with powers of attorney.
A power of attorney (POA) is a document through which you appoint someone (your “agent”) to act for you when you are unavailable to act on your own behalf. Over the past 30 years POAs have become widely used as incapacity planning devices. The agent can step in when the person who created it (the “principal”) is unavailable because he or she is no longer competent. In this way burdensome, costly and embarrassing guardianship court proceedings can be avoided.
But to be an effective planning tool, the POA has to be accepted by the bank, broker or other third party to whom it is tendered. If the bank won’t accept the document the whole system breaks down, and someone will be forced to go to court to get authority to manage the principal’s financial affairs.
Pennsylvania has long used a carrot and stick approach to encourage banks and other third parties to accept POAs. The stick is that the third party can be held liable for the damages that flow from its refusal to follow the instructions of the agent (20 Pa.C.S. §5608(a)).* The carrot is that, if the institution does follow the instructions of the agent it is immune from liability (20 Pa.C.S. §5608(b)).* Because of these incentives, it has become rare for an institution to refuse to accept a power of attorney that appears to be valid.
This system may break down now as the result of a December 2010 ruling by the Pennsylvania Supreme Court. In Vine v. SERS Board, Pennsylvania’s highest court held that a third party is ONLY entitled to immunity if the POA is legally valid. For example, if the principal was not competent when he signed the POA, the document is not valid and the statute's immunity protection does not apply. Even though the POA appears to be valid on its face, the third party may bear liability for accepting it and acting in accordance with the instructions of the agent.
It is unclear how a bank or other third party is supposed to determine if a POA that appears to be valid is actually, legally valid. How can it determine if a now incompetent principal was competent when he signed the document? If the principal was competent when the document was signed, how is the bank to know if it was later revoked? How can the agent prove to the bank that the POA is valid?
It’s a Catch-22 situation for the bank. If it refuses to follow the instruction of the agent and the POA turns out to be valid, the bank is liable for damages. But if it follows the directions of the agent and the POA turns out to be invalid, the bank may also bear liability. Because the bank is in no position to determine whether the POA is valid, it has no reasonable way to choose what to do. There is no easy way, short of court proceedings, to determine whether a POA is valid.
This appears to be a mess that only the Pennsylvania Legislature can fix. It could clear up the dilemma for banks and agents by amending Section 5608(b) to read “Any person who acts in good faith reliance on a power of attorney that appears on its face to be valid shall incur no liability as a result of acting in accordance with the instructions of the agent.” Hopefully, the Legislature will act on this matter in 2011.
*The Pennsylvania Statute (Section 5608) states, in relevant part:
(a) Third party liability.--Any person who is given instructions by an agent in accordance with the terms of a power of attorney shall comply with the instructions. Any person who without reasonable cause fails to comply with those instructions shall be subject to civil liability for any damages resulting from noncompliance. . . .
(b) Third party immunity.--Any person who acts in good faith reliance on a power of attorney shall incur no liability as a result of acting in accordance with the instructions of the agent.