JUST HOW DURABLE IS A DURABLE POWER OF ATTORNEY?
by Barry Whalen, ATG Law Clerk

ATG is increasingly being asked to insure real estate transactions in which an agent under a power of attorney signs some of the documents and instruments. Generally, agency is defined as a fiduciary relationship in which the principal has the right to control the agent's conduct and the agent has the power to act on the principal's behalf. 3 Am Jur 2d Agency § 1. However, the definition of agency creates an implicit restriction on the relationship. By defining one of the characteristics of an agency as the principal being able to control the agent's conduct, the relationship necessarily is terminated if the principal is incapacitated. In all likelihood, this is precisely the time when a person would need an agent the most. To combat this problem, most states have enacted some type of durable power of attorney act. A durable power of attorney allows a principal to create an agency that continues in spite of the principal's later incapacity. 3 Am Jur 2d Agency § 28.

Illinois, Indiana, and Wisconsin have all adopted the Durable Power of Attorney Act. However, each state has adopted a slightly different version. Because a durable power of attorney is a creature of statute, an instrument granting an agent durable power of attorney will be strictly construed and grant only the powers specifically enumerated. 3 Am Jur 2d Agency § 31. If a power of attorney fails to comply with the statutory requirements, then it will be construed as a common law power of attorney. ATG has underwriting guidelines for reviewing both statutory and common law powers of attorney for title insurance purposes. However, because ATG prefers parties use the statutory forms, this article will be limited to a discussion of statutory forms.

Drafting a Durable Power of Attorney for Property

Illinois, Indiana, and Wisconsin all have different requirements for drafting a statutory durable power of attorney. However, all three states agree that the power of attorney must be in writing. 755 ILCS 45/2-3; IC 30-5-4-1; Wis Stat § 243.07(1). The information required to be in the writing varies from state to state.

Illinois
The Illinois Power of Attorney Act sets out a statutory form for a power of attorney for property, known as the Short Form Power of Attorney for Property, which may be made durable. Illinois Power of Attorney Act 755 ILCS 45/3-3. The form provides a brief description of the power of attorney and then lists several powers that the agent can be granted. Following this list is a blank area where limitations or additions can be added to the listed powers. Section 3-3 further states that simply striking out a power in the list will eliminate the power from the authority granted in the document. Please note that the authority to convey the property is separately listed from the power to borrow or mortgage the property, and ATG will not accept a power of attorney that only gives the power to convey property where the agent plans to sign a mortgage. Therefore, if the principal wishes to provide the agent authority to sign a mortgage, both the authority to convey and to borrow should be provided, to ensure authority to sign both the mortgage and the note. Lastly, the form provides lines to insert the effective and termination dates. If these lines are filled out, then the power of attorney terminates on the date listed. However, if a termination date is not filled out then the statutory form creates a durable power of attorney. 755 ILCS 45/3-3 and 2-5.

Although the Illinois Power of Attorney Act provides a statutory form to create a power of attorney, this form is not mandatory. Section 3-3 states that the statutory form can be used or a form that is "substantially" similar to the statutory form. 755 ILCS 45/3-3. This begs the question of what satisfies the "substantially" similar requirement. Fort Dearborn Life Ins Co v Holcomb stated that substantially "does not mean 'identically' or 'exactly alike,' and thus, does not connote a mandatory obligation as to the form." 316 Ill App 3d 485, 736 NE2d 578, 249 Ill Dec 384 (1st D 2000). Fort Dearborn involved a power of attorney that had left out some of the paragraphs in the statutory form. The court held that "whether a power of attorney 'substantially' follows the form outlined in section 3-3 does not depend on the presence or absence of any particular clause." Id at 494. Rather, the court must determine whether the power of attorney, in its totality, indicates that the legislative purpose of the Short Form Act has been satisfied." Id at 493. To determine if the power of attorney in totality, was "substantially" similar to the statutory form, each paragraph was compared. Several paragraphs in the Dearborn form where identical to those in the statutory form. However, the Dearborn from used a catchall provision to grant the agent all other legal powers not listed in the form. This is a substantial departure from the paragraph in the statutory form that allows for additions to the enumerated powers. Even though the catchall provision was different from the statutory provision, the purpose of each was to confer additional powers. Because the purposes of the provisions were the same, the court held that the Dearborn form was substantially similar to the statutory form. Therefore, if the purpose of a power of attorney form is similar to the purpose of the statutory form, the power of attorney form will be substantially similar.

Indiana
Indiana does not have a statutory form to create a power of attorney. Instead, Indiana provides statutory powers that can be incorporated by reference into a power of attorney, and which have the meaning given by the statute. The Indiana Power of Attorney Act sets out four requirements for a valid power of attorney: (1) it must be in writing; (2) it must name the attorney in fact; (3) it must give the attorney in fact the power to act on behalf of the principal; and (4) it must be signed by the principal in the presence of a notary public. IC 30-5-4-1. In addition, the Act sets forth certain powers that the principal may choose to incorporate into the document by either referring to the descriptive language or citing the specific section among Sections 2 through 19 of the Act. IC 30-5-5-1. Further, the Act provides that "[r]eference in a power of attorney to the descriptive language in sections 2 through 19 of this chapter shall be construed as though the entire section is set out in full in the power of attorney." IC 30-5-5-1. If the instrument contains similar or overlapping powers, the broadest power controls. A principal may delete from, add to, or modify any of the powers incorporated by reference, including the power to make gifts. Id. Finally, a power of attorney is durable unless the document specifically states otherwise. IC 30-5-10-3.

Wisconsin
The Wisconsin Basic Power of Attorney Act is very similar to the Illinois Act. The Wisconsin Act provides a statutory form that can be used to create a durable power of attorney for property. The form provides a description of the durable power of attorney followed by a list of powers conferred. Wis Stat § 243.10. It also provides a section for additions and limitations. However, the form does not have lines for effective and termination dates. Instead, one of three options can be checked: either a durable power of attorney effective on the day of signature; a durable power of attorney effective only when the principal becomes incapacitated; or a power of attorney that is effective on the day of signature but is terminated if the principal becomes incapacitated. Wis Stat § 243.10.

Like Illinois, the Wisconsin form states that a power of attorney "is legally sufficient under this section if the wording of the form complies substantially with sub. (1), the form is properly completed, the signature of the principal is acknowledged and the signature of the agent is obtained." Wis Stat § 243.10. The Wisconsin Basic Power of Attorney Act further states that any power of attorney will be durable if it is in writing and contains "the words 'this power of attorney shall not be affected by subsequent disability or incapacity of the principal', or 'this power of attorney shall become effective upon the disability or incapacity of the principal', or similar words showing the intent of the principal that the authority conferred shall be exercisable notwithstanding the principal's subsequent disability or incapacity." Wis Stat § 243.07.

Powers and Duty Conferred by a Power of Attorney

While creation of a statutory power of attorney varies from state to state, the authority conferred through a power of attorney is largely the same in Illinois, Indiana, and Wisconsin.

Powers

As stated above, all three states specifically list the powers that can be granted through a statutory power of attorney. Wisconsin and Illinois provide a set list of powers in the statutory form. Indiana on the other hand, enumerates the transferable powers in Section 30-5-5 of the Indiana Power of Attorney Act. However, in all three states the listed powers are not exhaustive. Each state also has an open clause, which allows any other legal powers to be added. 755 ILCS 45/3-3; IC 30-5-5; Wis Stat § 243.10. Furthermore, each state also allows for any power listed to be deleted or limited. Thus, while almost any legally transferable power can be granted to an agent, none of the powers are mandatory.

Duty

Once an attorney in fact is given certain powers, the agent must exercise a certain amount of care in using the granted powers. Illinois, Indiana, and Wisconsin all require an attorney in fact to use due care to act for the benefit of the principal and to exercise the authority granted in the power of attorney in a fiduciary capacity. 755 ILCS 45/2-7; IC 30-5-6-2/3; Praefke v American Enterprise Life Ins Co, 257 Wis 2d 637, 655 NW2d 456 (Wis App Ct 2002). To ensure that the agent does not act negligently, each state further allows any interested party to petition a court to determine if the agent is acting for the benefit of the principal in accordance with the terms of the agency. 755 ILCS 45/2-10; IC 30-5-3-5; Wis Stat § 243.07. Thus, anyone affected by an agency agreement can bring an action to insure that the agent is acting in the best interests of the principal.

Dealings with Agents

In third party dealings with agents, several problems can arise. A person can claim he or she is acting as an agent when there is no such authority, an agent may simply exceed the authority he or she was granted, or an agent may not disclose the fact that he or she is in fact an agent. Legislatures and common law have announced solutions to these problems. Legislatures have enacted statutes that state that a third party will not be liable to a person claiming to be an agent when that is not true. Common law has gone further and stated that the agent will be liable for all acts outside his or her authority. Thus, a third party will have various causes of action when problems arise while dealing with an agent.

Third-Party Reliance

One of the main purposes of the power of attorney statutes is to ensure that third parties will honor an agent's authority. 755 ILCS 45/2-1. To guarantee that the authority granted to an attorney-in-fact is respected, all three states have included a reliance clause in their power of attorney legislation. The reliance clauses state that any person that relies in good faith on a document purporting to establish a power of attorney will be fully protected unless the person has actual knowledge that the power of attorney is invalid. 755 ILCS 45/2-8, IC 30-5-8-2, Wis Stat § 243.10(3). This clause offers protection to third parties against supposed agents. If someone claims to be an agent, all the third party must do is request the document creating the power of attorney. If it is presented, even if it is a copy, the third party will not be liable to a principal or agent if the agency turns out to be a fraud. 755 ILCS 45/2-8, IC 30-5-8-2, Wis Stat § 243.10(3).

Liability for Agent Exceeding Authority

A third party is also protected against actual agents acting outside their authority. An agent is liable for acts outside the scope of authority. See generally, Karetzkis v Cosmopolitan Nat Bank, 37 Ill App 2d 484, 186 NE2d 72, 75 (1st D 1962); Koval v Simon Telelect, Inc, 693 NE2d 1299 (Ind Ct App 1998), Ratcliffe v Chicago, M & St P Ry Co, 153 Wis 281, 141 NW 229 (Wis 1913). Thus, if an agent acts outside his or her authority to sign a contract, the principal can deny the contract and the agent will be held liable. This also works in the opposite way. If the agent acts outside his or her authority, the principal also has the option of ratifying the contract. Karetzkis v Cosmopolitan Nat Bank, 37 Ill App 2d 484, 186 NE2d 72, 75 (1st D 1962).

In Karetzkis, a property owner hired an attorney to collect a debt on a mortgage. The property owner gave the attorney the mortgage papers to collect the debt. However, instead of collecting the debt, the attorney sold the mortgage to a third party. The proceeds from this sale were then given to the property owner. Subsequently, the property owner brought an action and argued that the attorney acted outside his authority as an agent and thus the third party did not acquire title to the mortgage. The court held that "if an agent acts for his principal outside the scope of his authority, the principal is not bound thereby, yet the principal may ratify such act and thus render it obligatory upon him[self]." Id at 75. The court found that by keeping the proceeds from the sale of the mortgage, the property owner had impliedly ratified the agent's actions. Therefore, the property owner was obliged by the agent's actions.

Furthermore, "Ratification may be express, or it may be inferred from circumstances which the law considers equivalent to an express ratification.... An example of such ratification is for the principal to seek or retain the benefits of the transaction. Thus, it is ratification if the principal, with knowledge of the facts, sues the third party or the agent to enforce promises which were part of the unauthorized transaction or to secure interests which were the fruit of the transaction and to which he would be entitled only if the act had been authorized." Id at 75. A third party will not be liable for a agent acting outside of his or her authority; either the agent will be liable or the principal will be bound by the contract if he or she ratifies the agent's actions.

Undisclosed Principal

A final problem that third parties can run into is an agent who does not disclose the fact of the agency. An agent has a duty to disclose the identity of the principal to avoid being personally liable for his or her actions. See generally Kimco Corp v Murdoch, Coll & Lillibridge, Inc, 313 Ill App 3d 768, 730 NE2d 1143, 1147, 246 Ill Dec 678 (1st D, 2000); Commercial Coin Laundry Systems v Enneking, 766 NE2d 433 (Ind Ct App 2002); Benjamin Plumbing, Inc v Barnes, 162 Wis 2d 837, 470 NW2d 888 (Wis 1991). However an agent can decide not to disclose the principal, in which case the agent is held personally liable for contracts they enter into. Id. In Kimco Corp, a janitorial service company signed a contract with the managing company of a building to provide janitorial services. 730 NE2d 1143. The managing company never informed the janitorial company that it was acting on behalf of the actual owners of the building. The janitorial company performed service for several months but was not paid. When it asked the managing company why it wasn't receiving payment, the managing company stated that it was because the owners of the building were in financial trouble. The janitorial company filed a complaint naming only the managing company as the defendant. The court held that "an agent who contracts with a third party on behalf of undisclosed or partially disclosed principal is personally liable on the contract." Id at 1147. The court further stated, "Agents are not unfairly burdened by such a rule. If the agent would avoid personal liability, the duty is on him to disclose his principal; it is not upon the party with whom the agent deals to discover the principal. There is no hardship in this rule of liability against agents who do not disclose their principals; they always have it in their power to relieve themselves from such liability, and when they do not, it must be presumed that they intend to be liable." Id at 1147. Thus, a third party is protected against an undisclosed principal. The agent must either disclose the principal or accept personal liability for the contract.

Issues Not Discussed in the Statute

While a power of attorney is a creature of statute, there are some issues that are not addressed in the statutes. Many of these issues, including who can be an agent and how and agent should sign documents, have not yet been addressed or have been addressed only sparingly in court. Therefore resolutions to these issues have come about mainly by repeated accepted practices.

Who Can Be an Agent

The title "power of attorney" would seem to indicate that a client has appointed an attorney as his or her agent, however this is not necessarily the case. Generally, any person has the capacity to act as an agent for another. 3 Am Jur 2d Agency § 13. Furthermore, a person can be an agent for another even if contracts for themselves would not be binding, such as minors or persons with a legal disability. 3 Am Jur 2d Agency § 13. This is due to the fact that "where one knowingly and without dissent permits another to act as his agent, the capacity of the latter will be conclusively presumed." 3 Am Jur 2d Agency § 13.

Agent Signatures

Another issue not addressed by the statutes is how an agent should sign contracts. The generally accepted method for an agent to sign documents is to list the principal's name "by" or "per" the agent's name. 3 Am Jur 2d Agency § 171. Another option is to sign the agent's name "for" the principal's name. 3 Am Jur 2d Agency § 171. While both of these methods are commonly used, they are not required. An agent can also sign either his or her own name alone or the principal's name alone. When this is done, the liability of the signer is determined by the intention of the parties derived form the instrument signed. 3 Am Jur 2d Agency § 170. Therefore, if the agent has not clearly indicated he or she is signing as an agent, then the intentions of the parties are examined to determine whether the agent should be liable or the principal. ATG requires agents to sign using the following format: "John Smith [principal] by Joe Jones [agent], his attorney-in-fact." When the notary acknowledges the signature of the agent, the acknowledgment should read: "Joe Jones [agent], as attorney-in-fact for John Smith [principal]."

Conclusion

Durable Powers of Attorney were created by statute to combat the very specific problem of agents not being able to act for incompetent principals. Because it was created by statute, the laws governing durable powers of attorney are very specific. Generally, few disputes have arisen from durable powers of attorney because the requirements are so stringently set out. Even the areas that are not expressly discussed in the statute have not been heavily litigated due to the universal acceptance of general practices. Thus, it is vitally important to follow the statute and common practice when creating a durable power of attorney, to avoid litigation.

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