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Impact of Pennsylvania's Recently Revised Power of Attorney Law on Commercial Lending Transactions

June 10, 2015

Recently, the Pennsylvania General Assembly substantially revised the power of attorney laws under Chapter 56 of the Decedents, Estates and Fiduciaries Code.[1] These changes may create issues for lenders and other individuals and businesses engaged in a variety of commercial transactions. In particular, the new law affects all loan documents that contain power of attorney provisions in favor of the lender, including confession of judgment provisions.

Under the prior statute, certain commercial powers of attorney were exempted from the requirement that an agent act as a principal's fiduciary and from procedural rules requiring notarization, witnesses, notice and acknowledgment. Exempted powers included:

• Powers granted to or for the benefit of lenders in commercial transactions;
• Powers authorizing an agency relationship in commercial instruments;
• Powers granted exclusively to facilitate the transfer of stock, bonds or other assets;
• Powers contained in governing documents for corporations, partnerships, limited liability companies and other legal entities by which a director, partner or member authorized another to act on behalf of the entity or as a proxy to exercise voting or management rights with respect to the entity; and
• A warrant of an attorney to confess judgment.

Current law no longer requires an agent to act as a fiduciary for the principal, but instead establishes the following mandatory duties, applicable to all agents:[2] 

• 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; 
• To act in good faith;[3] and 
• To act only within the scope of authority granted to the agent by the principal in the power of attorney. 

The mandatory duty to act in the principal's best interest is potentially problematic because loan documents are typically drafted to protect a lender's (agent's) best interests rather than those of a borrower (principal), and usually enable a lender to protect its rights or enforce its remedies, including execution on a borrower's collateral.

As a result of the amendments to Chapter 56, loan documents containing power of attorney or confession of judgment provisions should specify the borrower's reasonable expectations that a lender's actions under the document may be adverse to the borrower's interests. Although this language may not relieve a lender from these new mandatory duties, a court may consider them in the event litigation arises regarding whether a lender has acted in a borrower's best interest.

The revised law also specifies a number of duties which apply to a lender (agent) unless specifically waived in the power of attorney. These duties include requiring a lender (agent) to act loyally for a borrower's (principal's) benefit, keep funds separate (unless already commingled when the power is executed), keep records, avoid conflicts of interest, and act with care, competence and diligence. Loan documents containing power of attorney or confession of judgment provisions should include an express waiver of these duties imposed by 20 Pa.C.S. § 5601.3(b). Because this section of the statute applies to all powers of attorney entered into before, on or after January 1, 2015, an express waiver of these duties should also be included when amending an existing loan document.

Under Chapter 56, as amended, loan documents and other commercial instruments are no longer exempt from the procedural requirement that all powers of attorney be notarized.[4] As a result, going forward, all loan documents containing a power of attorney, confession of judgment or agency designation should be notarized, including all notes, guaranty and suretyship agreements, security agreements, and assignments of contracts, leases or accounts. Some lenders may choose to include a notary block in all loan documents out of an abundance of caution so as to avoid any potential consequences for failing to recognize that a document contains language to which Chapter 56 applies. Many attorneys question whether the General Assembly intended for these changes in Chapter 56 to apply to commercial loan documents and believe that the legislature will act to correct these issues. Unless and until an amendment is passed to correct this oversight or drafting error, lenders and their counsel should carefully review and revise any loan documents that include a power of attorney, confession of judgment or other agency designation.

Practice Pointer: Lenders and their counsel should consider the following drafting techniques with regard to all promissory notes, guaranty and suretyship agreements, security agreements, assignments of contracts, leases or accounts, and all other loan documents containing power of attorney, confession of judgment and/or agency designation provisions:

• Adding a notary's acknowledgment; 
• Including an explicit waiver by the borrower (principal) of the duties imposed by 20 Pa. C.S. § 5601.3(b);
• Including an acknowledgment by the borrower (principal) that its reasonable expectations include execution on or foreclosure of collateral, confession of judgment, and other actions typically taken by a lender (agent) to protect its rights or enforce its remedies under the loan documents.
 
For more information, please contact Kenneth J. Fleisher at kjfleisher@zarwin.com.

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