Tuesday, October 29th, 2013

1. What law governs powers of attorney?

A power of attorney (“POA”) is a written instrument by which one person (the “principal”) grants to another person or persons (the “agent” or “attorney-in-fact”) authority to act for and in the place of the principal. Alabama POAs executed on or after January 1, 2012 are governed by the Act. The Act is prospective only, so powers of attorney executed prior to January 1, 2012 are governed by the prior statute, Ala. Code § 26-1-2, and the common law. However, the Act does provide a few exceptions to its own applicability; for example, the Act does not apply to (i) a power coupled with an interest in the subject of the power, such as a power given to a creditor in connection with a credit transaction, (ii) a proxy or other delegation of voting rights with respect to an entity, or (iii) a power created on a form prescribed by a governmental agency for a governmental purpose.

2. How is a POA executed?

A POA need only be signed by the principal, but to be fully useful, a POA should also be acknowledged by the principal before a notary public.

3. What are the duties of an agent?

A POA creates a fiduciary relationship with the duties of loyalty, good faith and fair dealing. An agent must: act in the principal’s best interest; act consistently with the principal’s wishes; keep the principal informed of the agent’s actions; act only within the scope and intent of the POA; avoid creating a conflict of interest with the principal; and avoid self-dealing.

4. What are the powers and authority of an agent under the Act?

A POA may be as broad or as limited as the principal desires. The Act provides a “laundry list” of powers that can be granted to the agent and a form POA in which the principal may check or initial the powers he desires to grant. If the principal desires for his agent to have very broad authority, the principal may give a “general” grant of authority. A general grant of authority gives the agent the power to do virtually everything that the principal can do with respect to the principal’s assets and affairs.

5. What is an agent’s liability to the principal?

An agent who acts in good faith is not liable simply because he undertakes an action that causes the property of his principal to decline in value, nor is he liable to a beneficiary of a principal’s estate plan if, acting in good faith, his actions cause that interest to diminish. An agent who commits a breach of duty is liable to the principal for the amount required to restore the value of the principal’s property to what it would have been had the violation not occurred. The remedies provided under the Act are not exclusive, and an agent may face additional civil or criminal liability for breach of his duties.

6. Can a principal exonerate an agent from liability for acting under a POA?

The Act provides that a principal may exonerate an agent for breach of duty under the POA, except for: (i) dishonest acts, (ii) actions with an improper motive, or (iii) actions with reckless indifference to the purposes of the POA or the best interest of the principal.

7. Under the Act, what are the obligations/liabilities of a third party who is presented with a POA in order to effect a transaction?

No person is required to accept or honor a POA that has not been properly acknowledged before a notary public. The Act fully exonerates a person from liability for effecting a transaction in good faith reliance upon a properly acknowledged POA. A person presented with a POA may request a written certification that the POA is still valid and that the agent is authorized to act, and can also seek a legal opinion as to the validity of the POA or the proposed action thereunder.

The Act provides that there is no automatic imputed knowledge in POA matters, i.e., a financial institution is not necessarily imputed with knowledge that one of its employees may possess. A person who refuses to honor a properly acknowledged POA is subject to (i) a court order requiring him to do so, and (ii) liability for attorney’s fees and costs incurred in taking the issue to court. Liability only arises, however, if the person would be required to effect the transaction with the principal if the principal were present and competent to act on his own behalf.

8. How is a POA terminated?

A POA terminates when (i) the principal dies; (ii) the principal becomes incapacitated, if the POA is not durable; (iii) the principal revokes the POA; (iv) the POA provides that it terminates; (v) the purpose of the POA is accomplished; or (vi) the principal revokes the agent’s authority. If an agent is the spouse of the principal, authority terminates if divorce or separation proceedings commence. An agent who acts in good faith, without actual knowledge that a POA has terminated, will continue to bind the principal and the principal’s successors.

9. What is the effect of the principal’s incapacity, disability or incompetency on the effectiveness of a POA?8

Post-1/1/12 POAs are presumed to be durable, i.e., effective even if the principal subsequently becomes disabled, incompetent or incapacitated. Pre-1/1/12 POAs, however, must affirmatively state words to the effect that “this POA shall not be affected by the disability, incompetency or incapacity of the principal” in order to be durable.