Problems with Powers of Attorney

Often we are asked by title companies and their closing teams to prepare a power of attorney for parties that cannot sign at closing.

While humans, signing in their individual capacity, are fine to delegate their powers to other humans, a POA given from a trust, corporation, executor, administrator, limited liability company, partnership or similar "entity" or fiduciary is not favored by the law or the courts.  For such reasons, we usually decline to draft them this way, and try to steer the requesting party to a different solution.

In the case of a corporate entity such as an LLC, corporation, partnership, etc., the person signing on behalf of that entity has been entrusted with powers on behalf of the entity.  That trust and that appointment to sign on behalf of that entity is special under the law.  In the case of a corporation, the shareholders had a special meeting to elect the directors, and the directors then elected the officers, and the directors may have also had a special board meeting just to choose which officer can sign for that entity in that particular sale or refinance transaction.  Once appointed by the decision of the board, a person cannot (generally) just delegate their special powers to sign on behalf of the corporation (or LLC, or LP) to anyone they want, just because it's inconvenient for them to sign.   They were chosen.   If they cannot act, the corporation, through its board of directors, must pick someone else to sign.  So the solution is a new corporate resolution to pick a new person to act and sign.

Same idea goes for fiduciaries such as trustees, executors, etc.  They are "entrusted," quite literally, to act on behalf of a trust or an estate, and they can't just delegate their special powers via POA to anyone they want (generally).  The solution here, if they are unavailable, is to go back to the will or the trust and see who bats #2 -- trusts and wills often have alternates that can step up and act, although it may take some court action in the case of a probated estate.

Notice that I have said "generally" throughout -- sometimes we permit the use of POAs in these situations because we are in a time crunch, or some other similar bind.  But that decision and analysis is done on a case by case basis, as it involves a review of "discretionary" vs. "ministerial" duties of the agent.  Sometimes trust agreement will have language that does expressly permit the employment and use of "agents" and attorneys-in-fact to accomplish the wishes and agreements of the original  trustee, and there is law in Texas that suggests that if the agent or attorney-in-fact is simply performing the ministerial duty of signing that fiduciary's name to a document, and is not exercising discretion in what is being signed, that such authority might not violate the law or the original powers delegated to the fiduciary or corporate officer. 

Help ! I've put my girlfriend in title and now....

I seem to recall years ago, when Justin Timberlake and Britney Spears were boyfriend / girlfriend, that they bought an expensive Malibu house together -- while still single.   Their breakup and subsequent dispute over the ownership of that house probably fed their respective lawyers for a little while.

Bottom line, if you someone goes into title on a piece of a real estate with you, they are a co-owner.  As co-owners, the two (or more) of you will have to agree on any plans to sell, lease, or mortgage that co-owned property.

If the co-owner is your spouse, then you generally have the benefit of family laws and divorce procedures to deal with jointly owned real estate if the two co-owners (called "cotenants" under law) cannot agree on what to do with the property. 

But if the two cotenants are brother-sister, or boyfriend-girlfriend, or a same-sex couple, they may not have the benefit of divorce laws and procedures to split the property (comment:  The author is licensed to practice law only in Texas, and presently Texas courts do not authorize divorce for same sex couples, which may not be the case in other states).   So what happens in those instances ?

The best thing to try and achieve, and which should be a guiding principle in these negotiations, is to avoid a court of law.  A settlement, documented by an attorney and signed by the cotenants, is the goal here.   Co-tenancy litigation is expensive and slow and a terrible way to solve any dispute -- although sometimes there is no other option, especially if there are numerous co-owners (e.g., inheritance by many heirs).

Sometimes its as simple as a deed to move title from one person to the other.  Sometimes its a deed coupled with a document called a "Deed of Trust to Secure Assumption," which secures the conveying co-owner in the event there is a joint mortgage that the "selling" co-owner is still liable on.  Sometimes its an agreement to pay or split equity upon sale or refinance.  Your attorney will be able to offer counsel to guide and document your choices.

For forward thinking cotenants who cannot use a divorce proceeding to deal with these issues, a partnership or LLC agreement might be an excellent planning tool.  These agreements are used in business all the time between partners or members of, respectively, a partnership or limited liability company, to pre-determine what happens if one partner wants to leave the partnership, buy out the other, sell to a third party, gets divorced, gets married, goes bankrupt, or dies.  Although more expensive that just a simple deed putting you into title jointly with another owner, it will, if properly drafted, have all the major details and possibilities mapped out.

Equitable Liens in divorce

Why do title companies review divorce decrees ?

Several reasons, really.   The first and primary question is they want to see if either spouse was awarded the property in question.  

If one spouse was awarded the property, the next question is:  Did the "buying" spouse "pay" anything for the transfer of that property ?  If so, what ?

"Payment" for the division and allocation of community property assets in a divorce might simply be division and award of named listed property.   You take these assets listed here, I will take these assets listed there, you will pay this debt listed here, and I will pay that debt listed there.

But if the division is unequal, or there aren't enough assets to divide evenly or they otherwise can't be cleanly divided, perhaps the deal struck in the divorce agreement is to have one spouse literally pay the other one for the award / transfer of the property to one spouse. 

This payment can be done a number of ways.  Some divorce decrees will call for a lump sum payment, or series of payments, by the purchasing spouse within certain deadlines.  This is essentially a debt owed under a payment deadline or payment schedule.  Although not evidenced formally by a promissory note, it is still a debt, created by agreement of the spouses and then confirmed by order of the court. 

Other divorce decrees will go further, creating such debt and requiring the execution and delivery of a promissory note under which the payments are owed. 

And sometimes the divorce decree will create, in the decree itself, a formal lien to secure such debt or promissory note -- often called a lien of "owelty."  (A very strange word indeed which is often misspelled by this author.)   An owelty lien could also be additionally secured by a formal deed of trust, executed by the purchasing spouse, and recorded as a mortgage lien in the county land records.  

As you know, title companies are very interested in liens, and making sure they are paid and released, as a condition to insuring title to a new buyer.  So that is another reason why divorces are scrutinized as part of the closing process.

Q:   What if a divorce decree awards one spouse the property, requires the other spouse to pay for it, but is silent as to any lien or other security to ensure such payment is made ?  If there is no express lien, then the title company doesn't care about verifying that payment, do they ?

A:   They DO care about such payment.   Under common law, a lien can be "implied" (imposed by law) anytime the vendee (think buying spouse) does not pay the full purchase price for the property conveyed, and owes additional payments / $$ to the vendor (think selling spouse).  This lien is sometimes called an "equitable lien" because it is imposed by a court in equity, as a basic remedy to right an injustice.  

Selling spouse:   "You didn't fully pay me for that real estate -- so in all fairness, the court should use its powers in equity to impose a lien in the property for my benefit, and that would allow me to foreclose such lien or otherwise rescind the deed / title I previously gave to you, as a remedy for your non-payment."

Wow.   Really ?   Yes.

If you hold title from your ex, and you are making payments to your ex for the award of that property to you -- or the award of a BUNCH of community assets to you which INCLUDES that property -- your property probably has a lien on it to secure those payments.   You will have to pay up before you can sell or refinance through a title company.  Or if you have already paid, you had better be able to prove you made those payments to your ex, or get your ex to sign a release evidencing that he or she has been paid everything for your title.  

Some folks get quite surprised by this requirement right before closing.  

Away We Go !

First post in the new blog !  How exciting.

What we will try to do here is start simple.   I intend to blog most real estate, contract, and title insurance concepts, issues, problems and solutions for folks to learn and perhaps lend their thought on.  So the first post will be something we are working on right now.

Welcome everybody.