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COMMERCIAL FINANCE 701 — The powerless power of attorney


The long-awaited closing date on the $21.5million commercial construction loan is finally here.  Construction projects involve numerous moving parts. By the time a loan closing occurs, the out-of-pocket developer on the project awaits a hefty advance.

The borrower, a Mississippi limited liability company, has two members – one of whom serves as the managing member.  The managing member is present and ready to sign the risible stack of loan documents, certificates, LLC minutes, and guaranties.

To the frustration and surprise of the lender and lender’s counsel, the other member/guarantor is not in attendance.  The missing member/guarantor, it turns out, is elk hunting.  The managing member confidently produces a durable power of attorney prepared by a capable attorney, signed just last week in blue ink by the huntsman, and acknowledged by a state-licensed notary public.  The managing member declares the power of attorney authorizes him to sign LLC resolutions and the guaranty on behalf of the absentee member/guarantor.

Is this transaction going to close and fund on time?   Not likely.

What is a Power of Attorney?  A power of attorney (POA) is a legal instrument by which a person (the principal) grants another person or entity (the agent), the power to act on behalf of the Principal for stated purposes.   POAs come in many forms and vary in terms of duration and ambit.  The Agent is commonly referred to as an “attorney-in-fact” (though the Agent need not be a licensed attorney).

POAs have their usefulness.  Estate planning attorneys routinely prepare various types of POAs, including durable general powers of attorney and supplemental healthcare powers of attorney.  These are important and necessary family documents, which provide a “low-cost, flexible, and private form of surrogate decision making” for “incapacity and planning as well as convenience.” (Uniform law commission, power of attorney summary). In commercial transactions, however, the POA is almost worthless.

Uniform Power of Attorney Act.  You might reasonably ask: “Doesn’t the Uniform Power of Attorney Act require banks and insurance companies to accept POAs?”  The UPOAA, a comprehensive 2006 model act recommended by the Uniform Law Commission, includes language obliging businesses (such as banks and insurance companies) to accept POAs.  The UPOAA is, however, a consumer-oriented law with limited application to commercial transactions.  Regardless, Mississippi and 28 other states have not yet adopted the UPOAA.

So what’s wrong with a POA in a Commercial Transaction?

In commercial transactions, the lawyers seek to minimize risk. Checklist items include making sure all entities exist, their actions are authorized, corporate and LLC formalities have been met, transaction documents are fully and properly executed, and the various legal instruments are enforceable.

The use of a POA in a commercial transaction introduces unnecessary risk.  In the first instance, no one can safely conclude by looking at a POA if it was validly executed.  Second, to determine if the POA even purports to authorize a person to take the contemplated actions, someone must scrutinize the multi-page document.  Third, a factual question exists as to whether the POA has been subsequently revoked either by act of the principal or operation of law.  Fourth, a legal question exists as to whether the POA satisfies the laws of the relevant jurisdiction. Just as examples of varying laws, in some states the POA must follow a statutory form or include statutory language.

The Mississippi Supreme Court had occasion to address many of these issues and others in Kountouris v. Varvaris, 476 So. 2d 599 (1985).  While the nine-page opinion makes for an interesting read of facts and law, the overriding takeaway suggests that parties desiring to avoid litigation should have principals execute documents.

A legal opinion is also unlikely to save the day.  In many transactions, borrower’s counsel solely represents the borrower entity and does NOT represent the individuals.  Also, legal opinions deal with law, with critical facts being assumed.

Is there a solution?

We probably can’t salvage this closing today, but there are steps than can be taken in future transactions.

1. An Ounce of Prevention.  Often, documents for execution aren’t available until the last minute. Still, it is worth asking if select documents (resolutions, certificates, guaranties, etc.) can be signed in advance of closing. As one memorable Mississippi businessman often chants: “If you can’t be on time, be early.”

2. Technology.  In this age, PDF execution documents can be emailed around the world and signed originals shipped back in mere days.  As long as the principal isn’t hiking Mount Kilimanjaro, we can climb this hill.

3. Transaction-Specific POA.  There might be a factual situation where a POA is necessary and appropriate.  If so, the parties should discuss the situation with the lender and attorneys, and consider using a transaction-specific POA.

Other Scenarios.  Other pitfalls exist. An officer of an entity (such as the President of a corporation) obtains authority from corporate documents.  Absent express approval, a corporate officer has no authority to assign that officer authority via a POA.  Also, the use of a POA in a real estate transfer is problematic. Title insurance companies are leery of insuring real property where title passed via a deed signed by an agent.  Mississippi law requires a POA used to transfer title be recorded in the appropriate land records.

Conclusion & Summary.   

A power of attorney is of little usefulness in commercial transactions.  If first presented at the closing table, the closing will likely be delayed.  Legal opinions rarely cure the factual and legal issues associated with the POA.  To avoid delays, principals should be available for closing or make other arrangements in advance.  While a delayed closing is better than no closing, everyone will be happier if the money flows on the first try.

Ben Williams and Molly Jeffcoat Moody are attorneys engaged in an active commercial law practice at Watkins & Eager PLLC.   Ben and Molly are both recognized by Chambers USA and Best Lawyers in America.   Ben was selected as Best Lawyer’s 2017 Mergers & Acquisition Law Attorney of the Year in Jackson, Mississippi.   Additional information is available at www.watkinseager.com.


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