AUTHORITY: WHY WE SHOULD ALL HAVE AN

ISSUE WITH IT Prepared for:

2016 MLTA Spring Education Seminar Helena, MT

By: Mark Josephson

Josephson Law Firm PO Box 1047

115 W. 2nd Ave. Big Timber, MT 59011

& Sweet Grass Title Company

PO Box 1067 118 W. 1st Ave.

Big Timber, MT 59011

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Special Thanks To

• David Stubbs, Underwriting Counsel for Stewart Title

• David Lawson, VP and Underwriter for WA and MT, Fidelity National Title Group

(See David’s more detailed materials presented to MLTA in 2013 at: http://www.mtlandtitle.com/documents/5-13LawsonHandouts.pdf)

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Blind belief in authority is the greatest enemy of truth.

– Albert Einstein

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Powers of Attorney

• Definition:

A written agreement where a person (the principal) appoints another person as his or her agent (aka attorney in fact) to act on behalf of the principal.

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EXAMPLE #1

FACTS:

1996 – Mom forms Irrevocable Trust BUT she is Trustee and has power to sell and use any money or assets.

2007 – Mom and Son record a Notification that Son and Mom are now Co-Trustees AND any sale of real property REQUIRES BOTH Trustees’ consent.

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2013 – Mom executes POA to Son which says:

“To exercise any act, power, duty, right or obligation whatsoever I now have…relating to any transaction, thing, business, property, real or personal, tangible or intangible or matter whatsoever...”

“To…transact any and all lawful business of whatever nature or kind for me, on my behalf and in my name.”

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2016 – Trust attempts to sell the real estate, Buy-Sell is signed by Son as Trustee and by Son as POA for Mom as Trustee.

DOES THIS WORK? CAN SON SIGN FOR BOTH TRUSTEES AND COMPLETE THE SALE?

ARE THERE OTHER FACTS WE NEED TO KNOW?

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Section 72-31-336(1)(g), MCA:

“An agent under a power of attorney may do the following on behalf of the principal or with the principal’s property only if the power of attorney expressly grants the agent the authority [and] ... the authority is not otherwise prohibited by another agreement…

(g) Exercise fiduciary powers that the principal has authority to delegate… [emphasis added]

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In Example #1, Son could NOT sign for Mom as Trustee.

- Mom was still competent, she was still a valid co-trustee!!!

- Trust did not contain express language permitting a trustee to delegate authority.

- Even if Trust had proper delegation authority, the Power of Attorney did not specifically say it was for the purpose of delegating TRUSTEE powers, it only talked about exercising powers on the individual Mom’s behalf.

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Sample Language To Look For

In Trust: My Trustee may appoint any individual or entity to serve as my Trustee’s agent under a power of attorney to transact any business on behalf of my trust or any other trust created under this trust. In Power of Attorney: Look for language expressly saying a purpose is to delegate trustee power pursuant to authority granted in the trust itself.

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Example #2 1996 – Dad creates revocable living

trust, he is trustee, can amend and restate and has all powers over assets.

March 2008 – Dad executes and records a MT Statutory Form Power of Attorney to Daughters which includes statutory powers concerning “estate, trust and other beneficiary transactions.”

November 2008 – Dad amends Trust naming Son as Successor Trustee if Dad cannot serve.

2015 – Dad resigns as Trustee, leaving Son Trustee.

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2016 – Daughters under Power of Attorney attempt to sign for real estate loan with bank on behalf of Dad as Trustee of the Trust. Trust is the owner of the subject real property.

CAN DAUGHTERS DO THAT?

DOES HAVING MT STATUTORY POWERS RELATED TO “ESTATE, TRUST AND OTHER BENEFICIARY DESIGNATIONS” MEAN DAUGHTERS CAN EXERCISE DAD’S ROLE AS A TRUSTEE OF HIS TRUST?

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NO, for several reasons:

Even though this Trust had a provision allowing Trustee to delegate authority, the Power of Attorney did not refer to it. Also, Dad resigned, so even if POA had proper language, Daughters could not use POA to exercise a trustee power Dad gave up.

BUT WAIT, POA says for “estate, trust and other beneficiary designations”?????

MCA 72-31-346: Power to act for principal when principal is receiving assets from an estate, trust or as a beneficiary. Nothing to do with acting as a trustee in place of principal as trustee.

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Example #3

Manager of LLC executes POA to another to sign for LLC in a real estate transaction.

DOES THIS WORK?

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MAYBE.

IF LLC Operating Agreement allows a manager to delegate via a POA and POA expressly references that’s the purpose of the POA.

Sample LLC Operating Agreement language to look for:

“The Manager may appoint any individual or corporation a revocable or irrevocable power of attorney to transact business on behalf of the Company. The power of attorney may grant any rights, powers, and discretion to the extent of the Manager’s authority.”

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What if Member-Managed LLC?

Most standard POAs would allow the agent to vote the Member’s LLC interest.

Same goes for stock in a corporation or partnership interest in partnership – Usually a POA would allow the agent to act for the principal with respect to the principal’s ownership interest in that entity.

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POAs and Business Entities POINT: Whether an LLC, a

corporation, a partnership or a trust, those who act for the entity, i.e., those who are fiduciaries to the entity and its owners (officers, manager, general partners, directors, trustees) CANNOT delegate powers via a Power of Attorney UNLESS the governing documents say so specifically and UNLESS the POA specifically references that is a purpose of the POA.

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OTHER POA PROBLEM AREAS

Per MCA 72-31-336, a POA must expressly contain the following powers for the agent to act:

- Amend a revocable trust - E.g., use POA to amend trust to

appoint someone else or themselves trustee

- Make a gift

- Create or change rights of survivorship

- Create or change a beneficiary designation - E.g., beneficiary deed

- Delegate authority under the power of attorney

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POA and GIFT

Gifting under a POA not only has to be expressly allowed to be valid, but unless POA says otherwise, POA cannot be used to:

1) Transfer property to the agent unless an ancestor, spouse or descendant. MCA 72-31-336(2), AND,

2) Value of property gifted cannot be over federal annual gift tax exclusion per donee. ($14K in 2016 per donee.) MCA 72-31-336(4) and 72-31-352(2)(a).

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MCA 72-31-336 effective October 1, 2011.

Statute says it applies to any power of attorney whether made before or after so BEWARE of those acts which must be expressly in the POA to be allowed.

However, the law says it does not apply to acts done before Oct. 1, 2011.

BUT, under prior law it is unclear if agent had power anyway for these special acts unless POA specifically allowed.

POINT: Proceed cautiously if act done before 10/1/2011.

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POAs - Ask Yourself

• Is the POA valid and in effect?

– “Durable” means valid even if principal incapacitated.

– Is POA effective ONLY if principal is incapacitated and if so has incapacity been determined?

• Is the authority granted to the agent general or specific?

• Has POA been revoked?

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POAs - Ask Yourself

• Is POA properly executed and notarized?

• Is it recorded or recordable?

• IS THE PRINCIPAL STILL ALIVE?

POWERS OF ATTORNEY EXPIRE AT DEATH OF THE PRINCIPAL.

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Red Flags involving a POA: • Agent intends to convey to

him/herself in our transaction.

• POA becomes effective upon the disability/incapacity of the principal, and now the principal is old but remains competent (i.e., the kids want to sell the parent’s house but the parent doesn’t want to move).

• Names don’t match: property is vested in a different name from the name of the principal in the POA.

• Fiduciary wants to delegate authority to an agent using a POA (personal representative, trustee, etc.)

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BUSINESS ENTITIES IN GENERAL

• Does the business exist? Is it in Good Standing?

• Is there written approval for the transaction per the applicable governing documents or law?

• Who has the power and authority to sign on behalf of the entity?

• REPEAT TO SELF: WHAT DO THE GOVERNING DOCUMENTS SAY??

VERIFY THE CURRENT PARTIES WITH AUTHORITY.

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PROFIT CORPORATIONS

Is corporation selling all or substantially all of its assets? If so, law requires board of director approval AND requires 2/3rds vote of shareholders to approve AFTER proper shareholder notification UNLESS Articles of Incorporation require a greater shareholder vote OR, Articles of Incorporation properly allow only a majority vote. (MCA 35-1-823) Example for discussion: All

corporate land advertised for sale, but not all sold at once.

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Profit Corporations – Continued

• Even if not selling all or substantially all, then review bylaws/governing documents to make sure shareholder consent not otherwise required.

• IDEALLY GET IN ALL CASES: Corporate resolution of board of directors and shareholders (if necessary) approving transaction and naming who can sign.

• (Remember: A closely held corporation may not have a board of directors, if properly set up that way.)

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NON-PROFIT CORPORATIONS

• Must review Articles of Incorporation and Bylaws to determine who must approve and get appropriate resolutions/approvals.

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GENERAL PARTNERSHIPS • What does Partnership

Agreement say? Remember, unlike corporations, concept of a certain % of partnership interests voting may not apply.

• If no partnership agreement, MT law allows one partner to transfer property, BUT would you really insure and disburse based on this?

• BETTER: Get all general partners’ signatures or at least written consent to the transaction naming which partner can sign.

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LIMITED PARTNERSHIPS

• What does Limited Partnership Agreement say?

• Usually, the General Partners have all authority to act and Limited Partners none, however, the LP Agreement may require Limited Partners to vote in certain circumstances.

• MT law says majority of general partners rules, unless LP Agreement says otherwise. MCA 35-12-809. This is without regard to % ownership.

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LIMITED PARTNERSHIPS

• Unless LP Agreement says otherwise, MT law says the consent of EACH partner (whether limited or general) is necessary for partnership to sell all or substantially all of its assets.

MCA 35-12-809(2)(c).

Therefore, get appropriate consents, approvals and/or resolutions.

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LIMITED LIABILITY COMPANIES

• Extremely flexible so watch out. Remember decision making authority can and often is separated from ownership %.

• What does Operating Agreement say? (Often LLC owners don’t even know what their documents say.)

• Management and voting may be per head, may be by % ownership, may be by majority, may require unanimity, etc. so WATCH OUT.

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LLC Management

3 types of Management in an LLC:

• Member-managed. Could be: – Unanimous

– % of ownership votes

– Majority of “per head” votes

• Manager-managed. Could be: – Managers have all power

– Loan or sale decisions require member consent

• Officers/Board of Directors. – Could have all power

– Loan or sale decisions require member consent

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LLC CAUTIONS • Beware: One section of an

Operating Agreement may give Managers general authority but buried elsewhere are Member voting approval requirements for certain transactions.

• If NO Operating Agreement, MT law allows any member of a member-managed LLC and any manager of a manager-managed LLC to transfer real property. MCA 35-8-702. DO NOT RELY ON THIS. Get unanimous member/manager consent.

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Trusts

• Does the Trust exist?

• Who is/are the current Trustees? And was current Trustee properly appointed per trust document?

• Is Trustee authorized by the Trust document to do the transaction (sale, purchase, borrow, etc.)?

• Get ALL trustees’ signatures unless there is a clear written document delegating authority to sign to less than all.

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ENTITY RED FLAGS

• Transaction involves conveying or mortgaging land for benefit of a shareholder, member, partner, or officer and not the entity itself.

• NON-United States based entities or directors or other officials not in US.

• Recent amendments to governing documents changing owners, directors, trustees, beneficiaries, etc.

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ENTITY RED FLAGS • Recent changes in state filings

changing who has signing authority.

• The resolution appoints an authorized signor who is not a regular officer, director or other regular authority role in the entity.

• Variations in names in chain of title or entity documentation. Could be evidence of mix up between related entities or worse, fraud.

• Recent conveyance without title insurance.

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MINORS ON TITLE

• If under 18 do NOT have the capacity to contract. Can’t sign a deed, mortgage, etc. (Exception - Court approved emancipated minor and court order allows.)

• Parent cannot sign for minor who owns interest in real property.

• NEED Court order authorizing the minor transaction and naming who can act (could be a parent, could be another guardian.)

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GUARDIANSHIPS AND CONSERVATORSHIPS

• Guardianship: Guardian has power over the person only.

• Conservatorship: Conservator has power over the assets only.

• UNLESS Court order of appointment provides otherwise.

• E.G.: Guardianship order specifically gives guardian the power to sell assets.

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To paraphrase Benjamin Franklin: “It is the first responsibility of every citizen (title and closing professional) to question authority.” AND WHEN IN DOUBT ASK YOUR UNDERWRITER!!!

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