The Pennsylvania Supreme Court has issued a decision holding that a third party that relies on a power of attorney is not immune from liability if the power of attorney is not valid. This decision calls into question third parties’ acceptance of powers of attorney.

In recent years I have been increasingly frustrated by the refusal of financial institutions to honor an agent’s authority under powers of attorney. Time after time my clients have run into situations where a third party such as a broker, bank, or title company simply refuses to honor instructions given by an agent under a power of attorney. Sometimes they ask for the principal to sign "their" form, which is, of course, impossible if the principal is incapacitated. Sometimes they ask for an affidavit from me certifying that a document is valid and currently in force – which I cannot and will not do. That is far beyond my authority and ability as I could never know if documents have been revoked or superceded.

The issue has become very troubling and has caused me to consider recommending revocable trusts to clients solely for the purpose of dealing with disability and incapacity when I would not recommend them for that tired old excuse of "avoiding probate."

Things have now gotten worse. On December 21, 2010, the Pennsylvania Supreme Court handed down its decision in Vine v. SERS Board ( 9 A3d 1150), a case brought to my attention by Attorney William Campbell.

First, some background: To protect third parties, like banks, brokerage houses and retirement plans, the Pennsylvania power of attorney statute includes two provisions. First, the law requires a third party to obey the agent’s instructions, absent good reason not to do so. Second, if the third party acts in good faith reliance on the document, the third party is immune. These provisions have been necessary to provide third parties important relief from liability from relying on powers of attorney. These provisions are what has made the system work. If the third party is not relieved of liability – it is not going to take the risk of honoring the authority.

Here is an example: Grandfather signed a power of attorney naming Son as his agent under a power of attorney document. Grandfather becomes incapacitated. Son needs to access Grandfather’s funds in order to pay Grandfather’s bills. Son takes the power of attorney to the bank as proof of his authority to make withdrawals from Grandfather’s account. Under the Pennsylvania statute, we thought (or at least most, if not all, of my colleagues thought) that the Pennsylvania statute would protect a bank who relied in good faith on a power of attorney. What if the power of attorney were forged, or what if Grandfather was incompetent before he signed the document? If either of those things are true, then the power of attorney is not valid, but how in the world would the bank ever know? If we require the bank or other third party to investigate and make a determination of whether or not Grandfather was competent on the date the power of attorney is signed, then the power of attorney is effectively useless. No prudent bank or other third party is going to rely on any power of attorney document. To prevent this from being the case, the PA statute includes the provision that relieves the bank from liability for relying on the instrument.

Not any more.

The Pennsylvania Supreme Court has announced that the statutory protection for banks and other third parties only applies if the power of attorney is in fact valid. Hard to believe, I know, but true nevertheless. The highest court in the state now says that a third party is taking a risk to act on a power of attorney without a determination that the power of attorney is valid. How would they do that? It’s not something you can tell by looking at the power of attorney. If the power of attorney was signed a year ago and the principal is now incapacitated, how can a third party satisfy itself that the principal was competent when the power of attorney was signed? How can a third party know if the power was subsequently revoked? This is absurd.

True, broad durable powers of attorney can be abused, and they can create opportunities for self-dealing. This decision by the Supreme Court could render powers of attorney virtually useless. This is not a reasonable interpretation of the statue. As dissenting Justice Todd states, the Pennsylvania legislature "does not intend an absurd or unreasonable result" and described the court’s construction as "impracticable."

Since this decision is rendered by the highest court in the state, the only way to remedy the situation is for the legislature to act and pass more legislation. We hope that they will do so promptly. I guess the law would have to say something like a third party shall not have liability for good faith reliance on a power of attorney and "we really mean it."