Litigation

By: Nancy J. Glidden

Powers of Attorney (“POA’s”) are authorized under Pennsylvania law and are integral to many types of transactions. The Pennsylvania Supreme Court’s relatively recent decision in Vine v. Commonwealth of Pennsylvania[1], however, has injected uncertainty into the immunity afforded when a third party acts in good faith reliance upon a POA.

Section 5608(b) of Pennsylvania’s Probate, Estates and Fiduciaries Code provides:

Any person who acts in good faith reliance on a power of
attorney shall incur no liability as a result of acting in
accordance with the instructions of the agent.

In Vine, the Court held that the immunity of Section 5608(b) applies only in circumstances where the POA is actually valid and, by extension, the agent is legally an agent. While at first glance this may not appear to be such a radical concept, the practical effect is quite disturbing and disruptive for third parties who regularly engage in transactions involving POA’s. Prior to Vine, when an agent presented a POA that facially met all statutory requirements and thus appeared to be valid, a third party had comfort level in carrying out the agent’s directions because it was believed that in instances where a problem developed, Section 5608 provided immunity.

Now in a post-Vine world, a third party who acts at an agent’s direction pursuant to a POA does so at their peril unless determining first that the POA is in fact valid and the agent is in fact authorized. Since conducting such an investigation is time-consuming, potentially costly, and cumbersome, an alternative is for third parties to simply decline to engage in transactions in which a POA is involved. Since Vine, increasingly many third parties are opting for this latter approach. A disruption to banking affairs, real estate transactions, and estate planning is the obvious result.

To ameliorate the effects of Vine, and restore commercial viability to POA’s, discussions are under way to amend the Probate, Estates and Fiduciaries Code to provide greater safeguards to principals executing POA’s, and to clarify the circumstances under which third parties acting in good faith when presented with POA’s can expect immunity. For principals, amending Section 5601(b) to both require and increase the number of witnesses, requiring specific averments as to free will and capacity, and requiring formal execution by the principal and witnesses in the presence of a notary public, are apt to provide greater protections and reduce the chances of fraudulent or invalid POA’s entering the stream of commerce. For third parties, amending Section 5608(b) to expressly provide immunity when a third party acts in good faith reliance upon a POA that appears to be valid makes a great deal of sense and would go a long way toward returning POA’s to the level of acceptance found prior to Vine.

The Pennsylvania Bar Association’s Section on Real Property, Probate and Trusts, and the Elder Law Section jointly support such changes and it is hoped that the legislative process will move forward and act to amend the Probate, Estates and Fiduciaries Code at the earliest possible opportunity.

Ms.Glidden is a member of the Pennsylvania Bar Association’s Real Property, Probate and Trust Law Section Council.

Nancy Glidden

Nancy Glidden is an attorney at Unruh, Turner, Burke and Frees. Nancy practices in the areas of Pennsylvania litigation, mediation and arbitration. The firm maintains law offices in Malvern, Phoenixville, and West Chester Pennsylvania, which serve the Main Line and many surrounding communities such as Devon, Exton, West Chester, Ardmore and others.

[1] The Vine opinion was issued by the Pennsylvania Supreme Court on December 21, 2010, and it appears at 9 A.3d 1150 (Pa. 2010).

By: Kristen Wetzel Ladd

As the holder of an unsecured  debt (that is, a debt which is not secured by a mortgage on real estate  or a security interest in personal property), how does a creditor  proceed with collecting its debt in the event that its borrower ceases  payment? The first step is to determine what, if any, notice is required  to the borrower under the contract existing between the creditor and  borrower. After demand is made, the borrower usually has a set amount of  time in which to either reinstate or pay off the debt. If the borrower  is non-responsive to the payment demand, the creditor may then sue the  borrower for the unpaid debt. The borrower must respond to the  creditor’s complaint within a certain timeframe after service. If no  response is filed, the creditor will be able to obtain a default  judgment.

Once the judgment is acquired,  it acts as a lien against all real estate owned by the borrower in the  county where the judgment is entered. The creditor then has —if the  borrower still doesn’t pay — a number of methods to ensure repayment.   The judgment lien means that if the borrower’s property is sold,  proceeds of the sale (if there are proceeds; i.e. the property is not  “underwater” on equity) must be applied against the creditor’s debt. The  borrower’s property cannot be sold free and clear of all liens until  the creditor’s lien is paid off, which means that the lien both makes it  more difficult to sell the property (since the owner’s interest is not  free and clear) and also makes it more difficult to profit from the  property’s sale. The creditor can take a “sit and wait” approach until  the borrower tries to sell the property. If this strategy is taken, the  creditor must revive its judgment lien every five years to maintain its  priority.

Another option for the  creditor is to execute on the judgment against personal assets of the  borrower. While wages cannot be garnished in Pennsylvania (except for  certain types of debts such as a debt for a domestic support  obligation), other personal property such as a bank account in the  borrower’s name, may be attached. What this means is that any money  existing in the bank account as of the date of garnishment (excluding  the Pennsylvania statutory exemption and the garnishee bank’s  administrative fees) will become available to the creditor for  satisfaction of its judgment.

If you are a creditor who  needs assistance with collecting a debt, the law offices of Unruh Turner Burke & Frees may be able to assist you with your claim.

Kristen Ladd

Kristen Ladd is an associate at Unruh, Turner, Burke and Frees, Kristen practices in the areas of Pennsylvania Litigation, and Pennsylvania Creditors’ Rights and Bankruptcy Law. The firm maintains law offices in Malvern, Phoenixville, and West Chester Pennsylvania which serve the Main Line, and many surrounding communities such as Devon, Exton, West Chester, Ardmore and others.

By: Daniel P. Dwyer

Previously, I blogged about the “standing” requirements that must be satisfied if a shareholder or member of a corporation or other entity, like an LLC, wants to sue its officers, director or managers for mis- or malfeasance. That blog described the requirement for court certification that a plaintiff in such a derivative action adequately represents all other shareholders or members. A related issue is how Pennsylvania’s courts apply the “business judgment rule” and how this interacts with Pennsylvania’s pleading requirements.

The business judgment rule limits courts in second-guessing corporate decisions. Like any such protection, it must be designed to protect others from abuse of the discretion it provides. The Pennsylvania Supreme Court, in Cuker v. Mikalauskas, 692 A.2d 1042, 1045 (Pa. 1997), indicated that a corporate officer will not be liable for the consequences of his or her decision if:

- It was a business decision, and;

- done in good faith, and;

- the corporate official had no personal interest in the outcome, and;

- he or she was informed about the decision to the extent they reasonably believed was appropriate under the circumstances, and;

- he or she rationally believed it to be in the best interests of the corporation.

One need only look at the qualifiers and modifiers in that paragraph to conclude that the protections of the business judgment rule can be very limited. This is particularly true when one considers Pennsylvania’s pleading and motion standards. Therefore, while the business judgment rule may protect a corporate officer from liability, it will not necessarily protect him or her from lawsuits.

Pennsylvania’s courts, while stricter than the federal courts, give a plaintiff a great deal of latitude when asserting claims. A plaintiff only has to plead facts sufficient to place a corporate defendant on notice of the claims against which he must defend. These facts can sometimes be pleaded “on information and belief” that is, the plaintiff’s personal belief about what may have occurred. Finally, there is a judicial preference in favor of rejecting initial challenges to claims; courts prefer to let the parties go through discovery to collect evidence before claims are dismissed. If a claim requires proof of many facts and subjective conditions, it is more likely to proceed to litigation.

In conclusion, although the business judgment rule may protect an officer or director from ultimate liability, it does not necessarily protect him or her from the time and cost of the litigation necessary to establish whether that rule’s protections apply. Even if a corporate officer or director acted in good faith without personal interest and with sufficient information, he or she could still have to pay significant legal fees.

What can business owners, entrepreneurs and lawyers do about this exposure? When forming a corporation, the founders should consider whether the entity should indemnify, that is compensate, the officer or director for legal fees and other litigation-related costs. They should also be aware of the provisions of Pennsylvania’s Business Corporation Law that address indemnification of corporate officers and directors: under some circumstances indemnification is mandatory; under other circumstances, it is prohibited. Finally, parties who serve in these capacities should know whether they are indemnified and the extent of that indemnification.

A subsequent blog will address the law of indemnification of corporate officers. If you have any questions about these topics, please contact Dan Dwyer.

By: Nancy J. Glidden

The old adage, “ignorance of the law is no excuse,” has been underscored in the context of debt collection practices in a recent decision issued by the United States Supreme Court. In Jerman v. Carlisle (2010 WL 1558977 U.S.), the Court held that the “bona fide error” defense to civil liability under the Fair Debt Collection Practices Act (“FDCPA”) has no application to mistakes of law. The decision resolves a split within the District Courts that have addressed the issue.

The mistake committed by the creditor’s attorney in Jerman, was relatively subtle. In a statutorily-required communication with the debtor, the attorney advised the debtor that the debt would be presumed valid unless the debtor disputed the debt in writing. The FDCPA, however, contains no such in writing requirement. It mattered not whether the addition of the in writing language was inadvertent or intentional - it was a mistake of law insofar as it constituted a misinterpretation of the statute by the creditor’s attorney.

In reaching its decision, the Court strictly construed the statute, and invited Congress to address whether the FDCPA should be amended to provide enhanced safeguards for creditors and their attorneys. Such action is unlikely to happen any time soon, however, so for the foreseeable future, attorneys representing creditors are advised to exercise the utmost caution, and closely scrutinize and understand all provisions of the FDCPA in order to avoid the prospect of liability, (with attorney’s fees and enhanced damages).

For more information contact Nancy Glidden.

By: Anthony T. Verwey

Read my recent blog about charter schools being subject to real estate taxes.

For more information, contact Anthony Verwey.