Worst-Case Scenario Sparks Major Law Change
In Pennsylvania, a power of attorney (“POA”) authorizes one person, the agent, to act on behalf of the creator of the POA. The creator of the POA is called the principal. A POA can be absolutely invaluable to a principal when used as the law intends. An agent is supposed to use his/her authority solely for the benefit of the principal. What happens when an agent chooses a disadvantageous pension election for an incapacitated principal instead? Suppose an agent is self-interested and uses a POA for his/her own benefit?
For Teresa Vine (“Teresa”), it took appealing to the Supreme Court of Pennsylvania and years in litigation to reverse what may have been a self-serving decision made by her agent. In that case, unconscionable results combined with unusual circumstances led to an overhaul of Pennsylvania’s POA laws by the legislature.
The case, Vine v. Commonwealth of Pennsylvania, State Employees’ Retirement Board, 607 Pa. 648, 9 A.3d 1150 (Pa. 2010), involved the authority of an agent acting under a POA and the duties and obligations of a third party receiving instructions under the same POA. Teresa worked for the Commonwealth for 29 years and was a member of the State Employees Retirement System (“SERS”). On January 24, 1998, she had a serious automobile accident in Virginia sustaining injuries resulting in paraplegia. Two days later, on January 26, 1998, Teresa suffered a stroke that left her with right side weakness and global aphasia, a condition that rendered her unable to speak or comprehend. She did not respond to family members who visited her several weeks after the accident and has no memory of the time following the accident.
Four days after her stroke, on January 30, 1998, Teresa purportedly executed a POA making her then-husband, Robert Vine (“Robert”), her attorney-in-fact which gave him authority to, among other things, engage in retirement-plan transactions for her. Teresa’s signatures consisted of an “X” marked on the appropriate line accompanied by the notation “Her Mark”. A nurse at the hospital signed as a witness and the document was notarized. According to the testimony of Teresa’s physician in Pennsylvania who reviewed the medical records from her hospitalization in Virginia, at the time of the signature on the POA, Teresa was suffering from traumatic brain injury; was intubated (meaning that a machine was breathing for her); was being treated with sedatives which affected her reasoning and judgment; and was unable to make important life decisions due to her aphasia. Teresa recovered mentally but remains a paraplegic.
Teresa retired from state employment on February 13, 1998. On February 23, 1998, Robert met with the SERS retirement counselor. The counselor knew that Appellant was involved in an accident but was unaware of Teresa’s particular health condition, reviewed the POA and discussed various retirement options available to Teresa. Robert selected a retirement option which allowed him to withdraw an amount equivalent to Teresa’s total accumulated deductions, rolling over the taxable contributions when receiving payments of Teresa’s non-taxable contributions.
Though the disability options were explained to Robert, the option he selected was not selected on Teresa’s behalf. If he had selected in Teresa’s best interest, Teresa’s monthly payments during her disability would have been greater. However, with the disability option, her accumulated deductions would not have been available for Robert to withdraw.
The Hearing Examiner Takes up the Matter
In 2003, Robert filed for divorce at which time Teresa discovered that she had not been retired on disability. She then wrote to SERS asking to change her election to disability retirement based on her permanent physical disability. SERS denied the request. Teresa’s request to SERS ultimately reached the SERS Board (“Board”) which scheduled an administrative hearing before a hearing examiner. At that hearing, Teresa asserted that she was incapacitated at the time she placed the “X” on the POA rendering the document invalid. She gave medical testimonial support of her position.
The hearing examiner filed his report finding that Teresa was incapacitated at the time she purportedly signed the POA. He concluded that a person with capacity must be an adult who is able to receive and evaluate information effectively and communicate decisions in such a way that person is not partially or totally unable to manage his affairs and to meet essential requirements for one’s physical health and safety. As Theresa did not meet this test, he concluded the POA was invalid rendering ineffective any retirement selection made by Robert. The hearing examiner stated that SERS must now return Teresa to the position she occupied prior to Robert’s use of the invalid POA thus allowing her to make her own retirement elections. However, he added that the relief must be conditioned on Teresa returning all withdrawals since her accident so that SERS would not incur any liabilities as a result of its reliance on the POA.
The SERS Board Reverses the Hearing Examiner’s Findings
SERS took exception to the proposed report from the hearing examiner but did not challenge the hearing examiner’s finding that Teresa lacked the capacity to execute a valid POA or that the POA was in fact invalid. Instead, SERS asserted that it complied in good faith on the POA and therefore was immune from Teresa’s action under Section 5608 of the Probates, Estates and Fiduciaries Code (“Code”). SERS contended that it should not be in a position to investigate the facts underlying a facially valid POA. SERS argued that the imposition of such an investigatory duty would place it in an untenable position as it was more or less impossible to inquire into the circumstances of a POA’s execution and attempting to do could further put it at risk with Section 5608(a) of the Code. A provision in Section 5608(a) requires a third party to follow the instructions of an agent designated in a POA. SERS then added that it was an aggrieved party because the granting of the relief proposed by the hearing examiner might cause administrative difficulties.
By a 6-5 decision, the Board declined to accept the proposed report and issued its own opinion (“Adjudication”). The Board ruled that in light of the fact that retirement applications are contracts, are generally binding and irrevocable, and that SERS was provided with a facially valid POA that designated Robert as Teresa’s attorney-in-fact, that Robert had apparent authority to act as agent for Teresa and his actions were binding. The Board stated that regardless of the underlying facts, the Board did not have the authority or jurisdiction to reach the issue of whether or not Teresa lacked mental competency.
Appeal of the Board Ruling to the Commonwealth Court
Upon appeal of the Adjudication of the Board, the Commonwealth Court (“CC”) affirmed. The CC reasoned that under Pennsylvania common law, the POA and transactions undertaken pursuant to the POA were voidable. It placed emphasis on the distinction between void and voidable transactions concluding that void acts have no significance and are nullities, whereas voidable acts are valid until annulled.
The CC found this distinction significant in Teresa’s case because SERS became involved before an attempt at avoidance was made. According to the CC, Pennsylvania’s statutes were intended to modify the common law to limit avoidance of the acts of apparent agents under such circumstances. The CC further noted it was a trend among Pennsylvania statutes to seek to reduce risks for third parties who transact business in good faith with an agent or an apparent agent. The CC suggested that, at the administrative level, the only way Teresa could nullify the retirement selections made by Robert was to demonstrate that SERS had “reasonable cause” not to comply with Robert’s instructions made under apparent authority or that SERS did not act in good faith reliance on the POA. The CC found that neither condition was proven and therefore affirmed the Adjudication.
Appeal to the Pennsylvania Supreme Court
After an appeal for review to the Supreme Court, the Supreme Court granted review on the issue of whether Teresa could only obtain relief if she had demonstrated that SERS employees did not act in good faith or had reasonable cause to question the POA’s validity or Robert’s apparent authority.
On appeal to the Pennsylvania Supreme Court, Teresa challenged the validity of the POA. She argued that one incapable of understanding and acting in the ordinary course of affairs cannot express his or her intention or mental conclusions and therefore cannot have authorized the existence of the POA. Given that the hearing examiner found that Teresa was incapacitated at the time her “X” was placed on the POA, he properly deemed the POA to be void and concluded that her then husband’s retirement elections were invalid and subject to modification. Additionally, Teresa asserted that whether the POA and the subsequent retirement elections are considered void or merely voidable is not legally significant because even if the use and selection of the POA was merely voidable as opposed to void because she was incapacitated at the time of the creation of the POA, Teresa should be able to void the elections made on her behalf. Lastly, Teresa argued that the SERS counselor had reasonable cause to question the validity of the POA as the counselor was on notice from the file that because she had functioned at a high level for 29 years, she did not ordinarily sign her name with an “X”.
The Board countered that it was entitled to the immunity of Section 5608 and if Teresa’s position was honored, it would lead to the absurd result that would require every third party presented with a facially valid POA to seek the principal’s ratification before acting. Furthermore, 5608 provided the Board with a statutory immunity which would have to be ignored if they were compelled to replenish Teresa’s pension fund.
The Board developed that argument by stating that a person’s mental competence to conduct business is presumed unless and until the person is adjudicated an incompetent by a court and Teresa was never adjudicated an incompetent. Thus, the Board argues that Robert’s choices for Teresa were presumptively valid. They contended that Teresa’s mental capacity to execute a valid POA is not important but whether under Section 5608 the Board was supplied with statutory immunity was important. They argued that the only way to overcome the presumption of immunity is to prove that SERS acted in bad faith or lacked reasonable cause to comply with Robert’s instructions.
The Supreme Court, in an exhaustive opinion by Judge Saylor, held that the Board expressly determined that the counselor acted in good faith and lacked reasonable cause not to follow Robert’s instructions and because Appellant did not challenge those findings before the CC, Teresa is bound by those determinations for purposes of the appeal. The Supreme Court also questioned whether the CC findings that SERS was immunized from liability under Section 5608 of the Code notwithstanding the hearing examiner’s finding of incapacity was correct.
The Supreme Court decided, in trying to discern the intent of the legislature that they should look to the plain language of the Act. Powers are only given to an agent pursuant to a POA. Whether a POA exists at all is subsumed within the question of the whether the POA is invalid. The legislature wrote Section 5608 without any mention that approval and authority rendered a third party’s reliance immunized. The Supreme Court found that many other states and jurisdictions had provided that additional immunity. For example, the California Probate Code immunizes persons who act in good faith reliance on Powers of Attorney where, among other things, the Power of Attorney appears on its face to be valid. Such language did not exist in the Pennsylvania statute.
The Supreme Court further ruled that at common law the risk of loss due to a putative agent’s false dealing was only placed on the principal if the principal had acted negligently or was otherwise at fault in creating the circumstances to allow the fraud to occur. The Supreme Court held that common law was not expressly changed by the Pennsylvania Code Section 5608.
The Supreme Court argued against the dissenting opinions in their opinion. One of the dissenting Justices argued that third parties would be placed in a difficult situation if they were uncertain whether the document purporting to be a POA is valid, particularly if they fail to complete a timely investigation into the document’s validity. The Supreme Court ruled that notwithstanding what may be on the one hand an important policy that the legislature may or may not have considered, the language of the statute only applies to actually valid POA.
In discussing the pros and cons of POAs, the Supreme Court’s opinion noted that POAs are something of a mixed blessing: they can facilitate transactions by freeing the principal to be elsewhere when the transaction occurs, but they can also create opportunities for self-dealing by unscrupulous persons.
The Final Decision of the Supreme Court
The Court held that in light of their earlier reasoning, the Board and the Commonwealth Court should not have denied relief on the grounds that Teresa failed to demonstrate the SERS and employees acted in bad faith or had reasonable cause to question the validity of Robert’s apparent authority. Instead, the purported POA was never valid for Teresa’s lack of mental capacity and therefore could not be relied upon by SERS and SERS had the power to retroactively alter benefits. The Order of the Commonwealth Court was reversed.
This case led to a revision of the Pennsylvania Power of Attorney law by the legislature that is more fully described below.
New POA Law
As a result of the Vine v. Commonwealth case, the Pennsylvania legislature recently passed House Bill 1429, revising Title 20 Chapter 56 (20 Pa.C.S. §§ 5601 – 5612)—the law that governs powers of attorney used for financial and property transactions. While its revisions are meant to provide protection to principals and third parties, the law can be very technical and difficult to understand, especially for non-lawyers.
In general, the amendments provide for steps to prevent the creation of an invalid POA while protecting third parties (for example, SERS and banks) from the liability of accepting an invalid POA. I detail below some of the additions to Title 20 of the Pennsylvania Consolidated Statutes and discuss their effects on principals, agents, and third parties.
Execution of the Power of Attorney
The POA law was significantly changed with regard to the execution process. These changes only apply to POAs executed on or after January 1, 2015. Some of the changes include:
- A principal who is unable to sign must specifically direct another individual to sign on his or her behalf.
- Execution of any POA must be acknowledged by a notary public as well as witnessed by two adult individuals. Previously, legal acknowledgment (a notarized signature) was not required.
- The “Notice” that is required to appear in all POA documents has been broadened to include additional language regarding how an agent is required to act “in accordance with [the principal’s] reasonable expectations… in good faith and act only within the scope of authority granted by [the principal] in the power of attorney.” The Notice also has added language warning that the POA may grant the agent the power to give away the principal’s property or change how the property is distributed at death.
- The principal is advised to seek the advice of an attorney at law before signing the POA.
The acknowledgment form to be signed by the agent is extended to emphasize further that decisions made by the agent on behalf of the principal must be as close as possible to the decisions that would be made by the principal himself/herself.
Additional changes to the POA law reflect more thorough coverage of the agent’s duties. Many of these duties can be crafted to unique situations and/or waived entirely. These duties include acting loyally for the principal’s benefit; keeping the agent’s funds separate from the principal’s (with some stated exceptions); acting with care, competence and diligence; keeping records; cooperating with a person who has authority to make health care decisions for the principal; and attempting to preserve the principal’s estate plan.
It is important to consider whether any or all of these duties should be changed or waived entirely. For instance, if a principal wants to grant the authority for an agent to have access to his or her funds after the date of the execution of the POA, this ability can be provided for in the document.
Preservation of Principal’s Estate Plan
Among the other duties of the agent that may be modified or waived in a POA is the responsibility to preserve the principal’s estate plan. This duty calls for the agent to attempt to preserve the principal’s estate plan, to the extent actually known by the agent, if preserving the plan is consistent with the principal’s best interest based on all relevant factors, including the following:
(i) The value and nature of the principal’s property;
(ii) The principal’s foreseeable obligations and need for maintenance.
(iii) Minimization of taxes, including income, estate, inheritance, generation-skipping transfer and gift taxes.
(iv) Eligibility for a benefit, program or assistance under a statute or regulation.
Non-liability of an Agent
Additions to this section place added limitations on the liability of an agent. It states that an agent who acts in good faith shall not be liable to a beneficiary of the principal’s estate plan for failure to preserve the plan. Furthermore, without a breach of duty to the principal, an agent cannot be liable if the value of the principal’s property decreases.
Specific and General Authority
The new law also provides that certain circumstances require special express authority. Its intention is to limit the power of an agent to take certain actions unless authority is expressly granted in the POA. The following are examples of actions that must be specifically authorized:
- Create, amend, revoke or terminate an inter vivos trust;
- Make a gift;
- Create or change rights of survivorship;
- Create or change a beneficiary designation;
- Delegate authority granted under the power of attorney;
- Waive the principal’s right to be a beneficiary of a joint and survivor annuity, including a survivor benefit under a retirement plan;
- Exercise fiduciary powers that the principal has authority to delegate; and
- Disclaim property, including a power of appointment.
Third Party Acceptance
As a result of the Pennsylvania Supreme Court decision in Vine, the new POA law addresses issues related to third party acceptance. The case brought into question the statutory immunity afforded to third parties who act in good faith on the instructions of an agent without knowledge that the POA is void or voidable, the POA has expired, or the agent is overreaching on the scope of his authority.
Interestingly, the legislative changes affecting third parties reflect the ruling of the Commonwealth Court in favor of the SERS Board: that SERS acted correctly in honoring what appeared to be a lawful power of attorney. The amendments provide that a third party may, without liability, rely on the genuineness of a signature or mark; rely upon the POA as if it were genuine, valid and in effect; assume the agent had not exceeded the agent’s authority; and assume the agent properly exercised the authority. The third party also has a right to inquire as to the validity of the POA even after initially accepting it.
What Should You Do Now?
The changes made to the Pennsylvania POA law take effect only for POAs executed on or after January 1, 2015. Any and all POAs executed previously will remain valid
This article provides notice of a revised POA law, but does not constitute legal advice. Please do not hesitate to contact us with any questions you may have; these amendments may affect your personal situation. This article may cause you to consider revising and updating your estate plan, so please consider contacting Henry I. Langsam, Esquire at (215) 732-3255 should you wish to do so. Remember you should periodically revise and update your estate plans, including POAs.
We at Langsam Stevens Silver & Hollaender LLP thank you for your patronage and would like to assist if you have questions or needs. Thank you.