Pennsylvania Statute May Jeopardize Powers of Attorney and Confessions of Judgment in Loan Documents – Deja Vu All Over Again

Pennsylvania’s power of attorney law has recently undergone significant changes by virtue of legislation that went into effect January 1, 2015.¹ Among other instruments and transactions affected, the new law² will impact all loan documents that contain power of attorney provisions, including confession of judgment provisions. Most security agreements and many other loan documents contain powers of attorney in favor of the lender.

The new legislation provides that the signature of the principal³ on a power of attorney executed after December 31, 2014 shall be acknowledged before a notary public or other individual authorized by law to take acknowledgments, and that the person taking the acknowledgment shall not be the agent.⁴ As a result of this legislation, lenders should consider requiring the acknowledgment of all loan documents, not just documents authorizing judgment by confession or containing readily recognizable powers of attorney, so as to avoid the consequences of failing to recognize that a document contains a power of attorney.

The new legislation also increased the duties of the agent in a power of attorney relationship, and, more importantly, dropped the exemption from those duties which previously applied to a power of attorney contained in an instrument used in a commercial transaction, such as a power given to or for the benefit of a creditor in a loan transaction. The duties include, among others: (i) the duty to act loyally for the principal’s benefit; (ii) the duty to keep the agent’s funds separate from the principal funds with certain exceptions; and (iii) the duty to act so as not to create a conflict of interest that impairs the agent’s ability to act impartially in the principal’s best interest. See 20 Pa.C.S. § 5601.3(b). These duties will often conflict with, and undermine the purpose of, powers of attorney granted to lenders in loan documents.

The agent duties contained in Section 5601.3(b) can be waived, but the waiver must be contained in the power of attorney. Powers of attorney contained in commercial loan documents governed by Pennsylvania law should provide language that disclaims any and all agent duties set forth in Section 5601.3(b). It is important to recognize that without the appropriate waiver or disclaimer, in many instances, the utility of the power of attorney may be greatly diminished or lost altogether. These agent duties, including the duties that may be waived under Section 5601.3(b) apply to all powers of attorney entered into before, on or after January 1, 2015.⁵ If the opportunity to amend a loan document containing a power of attorney without a waiver arises, such as when a borrower requests an extension of maturity or the like, it might be advisable to require an amendment adding the waiver in return.

We saw a similar situation when Pennsylvania passed power-of-attorney legislation in 1999 (Act 39) imposing duties which were not previously provided for by statute and adding certain related requirements, but not containing any exclusion for powers of attorney in commercial transactions. These added provisions were contained in subsections (c), (d) and (e) of Section 5601 (Act 39 did not require signatures on powers of attorney to be acknowledged). In response, many lenders revised their loan documents to disclaim the duties imposed by Act 39. Act 39 was amended in 2002 by adding a subsection (e.1) which excluded powers of attorney in commercial transaction, including powers of attorney and warrants of attorney to confess judgment in commercial loan transactions, effective on April 12, 2000. An Official Comment explained, “New subsection (e.1) takes effect as of April 12, 2000, which was the effective date of 1999 Act No. 39, the act that added subsections (c), (d) and (e). The rationale is that subsection (e.1) is a curative amendment to correct some unintended interpretations of Act 39. There should not be a ‘gap’ period where this curative amendment does not apply.”

An amendment that would have restored the exclusion for commercial transactions previously adopted in 2002, and exempted powers of attorney from the new acknowledgment requirement, died in the 2014 legislative session, but it is expected to be re-introduced. We are told that it will be backed by the Business Law Section of the Pennsylvania Bar Association and by the Pennsylvania Bankers Association.

Any party entering into a commercial contract or loan agreement that contains a power of attorney should consult legal counsel to address these issues and should bear in mind that failing to take account of the acknowledgment and agent-duty requirements discussed above could greatly impair or nullify the power of attorney granted by the document(s).