Secured lenders and other parties entering into commercial transactions face new, potentially problematic requirements under recent changes to Pennsylvania’s statute governing powers of attorney (20 Pa.C.S.A. Ch. 56), which became effective January 1, 2015. Lenders receiving commercial powers of attorney governed by Pennsylvania law are now subject to duties that go beyond typical expectations for a finance transaction. Additionally, commercial powers of attorney, including confessions of judgment, now require acknowledgement before a notary public to be effective under Pennsylvania law. In response, lenders should consider the steps set forth in this alert.

Chapter 56 sets forth requirements for the form and content of powers of attorney governed by Pennsylvania law, as well as the rights and duties of the grantor (the principal) and grantee (the agent) of the power. Prior to the recent amendments, certain powers of attorney granted in commercial transactions were exempted from an agent’s duty to act as a fiduciary for the principal, and from procedural requirements regarding notice, acknowledgment, and witnesses. These exempted powers included:

• a power contained in an instrument used in a commercial transaction that authorizes an agency relationship;
• a power granted to or for the benefit of creditors in connection with a loan or other credit transaction;
• a power exclusively granted to facilitate transfer of stock, bonds or other assets;
• a power contained in a governing document for a corporation, partnership, limited liability company or other legal entity by which a director, partner or member authorizes another to act on behalf of the entity or a proxy or other delegation, to exercise voting rights or management rights with respect to a legal entity; and
• a warrant of attorney to confess judgment.

The changes to the statute deleted an agent’s duty to act as a fiduciary for the principal, but substituted instead that all agents must “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.” The amended statute provides no exemption for commercial powers of attorney and no waivers or other way to avoid the duty to act in the principal’s best interest.

For lenders, this duty could be troublesome since a lender’s transfer of assets or other dealings with collateral may not be in the best interest of the borrower granting the power. As a result, consideration should be given to specifying the parties’ expectations in the document granting the power of attorney, in the hope that a court will consider them if litigation arises over whether the agent acted “in the best interests” of the borrower or other principal.

The changes to the statute also require the agent to act loyally for the principal’s benefit, keep funds separate, avoid conflicts of interest, keep records, and act with care, competence, and diligence. The law allows these duties to be waived, so attorneys drafting commercial powers should consider including an explicit waiver of these requirements.

As noted above, the amended statute also requires acknowledgement before a notary public for any power of attorney governed by Pennsylvania law that is executed on or after January 1, 2015, including those commercial powers listed above. As with the new duties discussed above, no exemption is provided for commercial powers from this new procedural requirement. As a result, all commercial loan documents containing powers of attorney or confession of judgment provisions governed by Pennsylvania law are subject to the statute’s notarization requirements.

Many lawyers question whether Pennsylvania lawmakers understood the impact of the changes when they voted to amend the power of attorney law, and believe the legislature will act to correct the problems. Unless and until that happens, attorneys drafting commercial documents with a power of attorney governed by Pennsylvania law should consider:

• Including an acknowledgment by the principal that its reasonable expectations include foreclosure on collateral, confession of judgment, or other action typically taken by a lender under the applicable power of attorney;
• Discussing with the lender the risk that exercising its customary rights under a power of attorney might violate the requirement to act “in the best interest” of the principal;
• Including an explicit waiver by the principal of the duties imposed by 50 Pa.C.S.A. § 5601.3;  and
• Adding a notary’s acknowledgment of the principal’s signature.