Better safe than sorry when it comes to granting power

Real Estate Weekly, Dec 1, 2004 by Fern Epstein, Mario Lan

Cases of real estate fraud, often the result of individuals granting power of attorney to unscrupulous family members, financial advisors and even business partners, are a growing impediment to timely closings on real property transactions.

Many of the problems that occur at the closing table arise from errors in the inputting of information onto the power of attorney form. In New York State, the accepted form of power is the Durable General Power of Attorney. All powers executed from January 1, 1997 forward require the grantor of the power (the "donor") to grant specific powers by initialing within the boxes provided on the form (i.e. real estate transactions, insurance, banking, etc.). There are many cases where the form is initialed outside of the box or by marking "x" within the box instead of initialing. These errors make the instrument unrecordable in the county clerk/ register's office, thereby preventing deeds and mortgages signed by power from being recorded.

Another common error in the execution of powers lies in the form of acknowledgement used for the donor's signature. Powers signed out of the United States must be notarized by the US Consulate/Embassy located within the country where the donor is residing. In addition, if the country is a member of the Hague Treaty, the Apostile form of notary may be used. On many occasions, closings are adjourned when the power is presented with a regular notary's endorsement (without consulate verification) from the country of origin.

By law, the power of attorney is accepted on its face, however, standard title underwriting practices in the industry delve further into the legitimacy of the power and the intent behind it. A growing concern in the industry is power of attorney fraud, thereby making agents and underwriters stricter in their requirements for the acceptance of this form at the closing table.

The requirement of photo identification of the grantor of the power, the determination that the donor is alive, proof of consent at closing and prior review of the form of power are just a few of the procedures taken to avert a closing disaster.

Pitfalls of closing occur when powers are presented on behalf of individuals who are in nursing homes, partners overseas granting power and husbands or wives attending closings with powers from their respective spouses who cannot be located. These scenarios lead to disruptions in the closing process, possible adjournments and frazzled clients.

It is well established in New York case law that "Any person dealing with an agent is bound to ascertain the limits of the agent's authority beyond which the principal will not be held liable (Matter of Welton's Estate, 257 N.Y.S. 590(1932). It is significant that the relevant statute (General Obligations Law Section 5-1 501) was amended in 1994 to require the donor of the power to initial those boxes which set forth the matters for which the power is being granted to the attorney-in-fact.

Prior to this amendment, the donee was granted broad powers which could then be limited by the donor actively crossing out the specific matters where she/he did not want the power to apply. Clearly, the 1994 amendment is intended to more actively focus the mind of the donor on the specific areas where the power is to be utilized. The focus is on narrowing, not broadening, the authority granted to the agent.

The following are two situations where Horizon was met with strong objections at the closing for being excessively cautious in questioning the validity of the power of attorney. In both cases, subsequent developments demonstrated the necessity for our vigorous inquiry.

1) A power of attorney was presented at the sale of a property in Staten Island by the granddaughter of the owner. When asked why the owner was not at the closing, we were advised that the owner, the grandmother, was in a nursing home. While contacting the nursing home to confirm that it was a bona fide power, the social worker there advised this company that the grandmother, when approached regarding the sale of her home, said, "I don't know, maybe selling is good and maybe selling is not so good." Subsequently, the social worker at the home faxed over a letter stating the grandmother's confusion regarding the sale and a conservator was appointed to protect her interest.

2) A power of attorney was presented at the mortgaging of a property in Queens that was owned by two brothers and held in a partnership name. Brother "A" was in Hong Kong and a power was submitted authorizing brother "B" to act on his behalf. When questioned as to the validity of the power, there were too many inconsistencies as to the whereabouts of brother "A," the donor of the power, and his awareness of the transaction. Subsequent to the closing which was adjourned, brother "A" returned here and sued brother "B" on the basis of a fraudulently executed power of attorney.

One would think that the probability of possible fraud relating to powers of attorney would be greatly diminished when there is an attorney involved in the closing who is willing to put his/her professional license on the line by vouching for the power.