Worst Law of the Decade May Have Ramifications Beyond New York

On September 1st a new power of attorney law became effective in New York State and I think it may win the prize for “The Worst Law of the Decade”. Without meaning to affect commercial transactions, several months ago this esoteric and extremely technical law was amended by the legislature and signed by the Governor. While New York lawmakers had good intentions -- they wanted to protect senior citizens from being abused in connection with the granting of powers of attorney -- the actual law goes far beyond what was intended and is a disaster. Because of a series of drafting errors and omissions, the law inadvertently expands the new power of attorney rules to include routine commercial and business transactions. According to the TriBar Opinion Committee (a well respected non-partisan legal panel), the new power of attorney law threatens to bring New York commerce and banking to a halt.

Generally, a power of attorney is a document that provides legal authority for a person or organization to act on behalf of another person or organization. Every state has laws and rules that govern how powers of attorney should be documented and the scope of legal authority that is imbedded in different types of powers of attorney. New York State’s power of attorney law was amended and the effective date of the amendment was September 1, 2009.

The TriBar Opinion Committee identified three principal problems with the New York law (quotes from the TriBar Opinion Committee are indicated):

1. “The new law applies to every “power of attorney” defined as a “written document by which a principal with capacity designates and agent to act on his or her behalf” executed in New York by an individual after September 1, 2009.”

The TriBar Committee articulated some examples of the unintended application of the new law.

“Examples

A short list of examples of powers of attorney used in commercial transactions that would be affected by the new law would include the following:

· Stock powers to transfer stock are printed on the back side of stock certificates for all public companies. None of them would comply with the new law. The functioning of the stock exchanges and Depositary Trust Company in New York are dependent on the smooth operation of these powers.

· All purchases of securities on stock exchanges are effected by stock brokers acting as agents for their customers.

· Standard form proxies used by all public companies in elections of directors are powers of attorney authorizing an agent to vote on behalf of the stockholder at a stockholders’ meeting. The new law would question the validity of all proxies signed by individuals in New York.

· Cooperative apartments and charities use proxies to enable residents and member to vote at annual meetings.

· Banks routinely use powers of attorney in loan agreements enabling them to sell collateral in the event of default.

· Stock brokers routinely ask customers to sign powers of attorney authorizing them to buy and sell securities, make margin loans and take other action.

· Commercial agreements, such as standard leases, joint venture agreements, partnership agreements and merger agreements, routinely contain provisions authorizing one person to do something on behalf of another in the event of certain contingencies, such as to file documents with state agencies, to pay taxes and other charges, to sign ancillary documents and the like.

The definition of “power of attorney” in the new law would apply to these kinds of powers, proxies and agreements, but none of them were considered by the drafters of the law as examples of abuses that needed to be addressed by the new legislation.”

2. “The new law requires that, to be valid, a power of attorney must be acknowledged by the principal before a notary public and contain the exact wording of a prescribed cautionary statement to the principal and a notice to the agent.”

This means that every pre-printed proxy, securities trading agreement, bank loan agreement, stock transfer powers signature, DTC agreement, street name agreement, etc., needs to be reprinted with the appropriate cautionary language (which doesn’t make any sense in the context of commercial transactions) and needs to be notarized to be enforceable. Because of the special status of New York in the financial community, there are national economic implications to this problem with the law. I am guessing that there are few commercial powers of attorney that have been executed since September 1st with the required language and have been notarized. Therefore, pursuant to the new law, all of these documents are arguably invalid and unenforceable. It is only with enormous cost and expense that certainty of enforceability can be restored.

3. “The new law provides that the execution of a power of attorney revokes any and all prior powers of attorney executed by the principal unless the principal expressly provides otherwise.”

Among the bad provisions and mistakes of the New York power of attorney law, this provision wins the prize for the worst. This provision of the new law has the effect of changing the legal status of business relationships without notice and without the maker of the power of attorney realizing that he has revoked all prior powers of attorney. For example, voting in two corporate elections by proxy revokes the first vote by virtue of the second vote. Even worse, any proxy vote revokes unrelated powers of attorney including things like health care proxies, spousal powers of attorney and a host of commercial documents. The unintended consequences of this provision of the law are almost unimaginable.

The Tri-bar Opinion Committee report continues:

“The new law became effective on September 1, 2009. A technical corrections act was passed by the Assembly but not by the Senate. However, the Law Revision Commission has observed that there are defects in the technical corrections act and is seeking to revise it, but the revisions will not be considered by the Legislature until January, 2010. Because the new law casts doubt on the validity of routine commercial and business transactions, the Legislature should pass a statute now delaying the effective date of the new law for at least six months, and this should be made retroactive to September, 1, 2009……

…In any event, prompt action to clarify the uncertainties caused by the new law is important for the continuation of viable commercial and business transactions in New York.”

As a former lawyer, my mind is running wild with the implications of legal challenges to the enforceability of contracts, shareholder votes, stock transfers and collateral pledges in loan agreements. If left uncorrected by the legislature the New York power of attorney law has the potential to destroy commercial activity in New York while providing an employment windfall to New York lawyers who start lawsuits to challenge to all sorts of customary and usual transactions and business dealings.

The new New York power of attorney law definitely gets my vote for the worst law of the decade and needs to be fixed immediately.

A couple of good lawsuits and it will take Federal preemption to fix it.

Also, if you combine the power of attorney mess up with the mortgage recoding screw up (reported by the NYT for the last few weeks) many, if not most mortgages are going to be unenforceable.

Comments

[John Lounsbury:]

Mark - - -

Interesting piece. Contract law is under assault from a number of forces - looks like this can be added to the list.

Oct 03 12:43 PM

[notsosmart:]

what do you mean? this is great for lawyers. more nonsense & legal entanglements to put money in their $500 an hour pockets.the legislature knew as most are lawyers & care only for me,me, me, along the same as the congress of the USA.this country is turning itself into crap.sadly.

Oct 03 03:10 PM

[TheSnail:]

Worst Law of the Decade?

Oh that's right the Bush administration didn't bother with laws, they just wrote executive order exempting them from laws.

Oct 03 04:52 PM

[User 398811:]

Mark, your mind has run a little too wild; this shouldn't have the "potential to destroy commercial in New York" because any corporate counsel worth his cubicle has long since sent out a memo to the proper paper pushers alerting them to the change in the law, and providing the language for new forms.

Remember, any forms executed prior to September 1, 2009 under the old form are still valid. That means the only potential challengeable forms are those executed on the wrong form after that date, and I don't think there will be all that many because we've all had months to prepare for this.

Bottom line--there are probably very few invalid POAs out there.

As far as the new ones invalidating all the old ones, I agree that the statute is poorly drafted, and MAYBE some lower court will interpret it as literally as you have, but don't you think that if that happens, it will be overturned on appeal?

Oct 21 01:16 PM