NC Appeals Court Leaves Sloppy Lender Holding The Bag By Voiding Wife's Loan Guarantee Given By Hubby Acting As Her Attorney In Fact; Bank Failed To Read Recorded Instrument, Missed 'Surprise' Provision In POA Making Husband's Authority Ineffectual

From a client alert from the law firm Poyner Spruill LLP:

• On November 6, 2012, the North Carolina Court of Appeals ruled in a unanimous decision that several commercial guaranties were invalid when signed by an attorney in fact, pursuant to a power of attorney which contained a condition precedent that had net yet occurred. This case contains important lessons for lenders regarding transactions with attorneys in fact.
  
  In this case, the appellant-wife executed a durable power of attorney appointing her husband as her attorney in fact. The power of attorney was properly recorded with the Wake County Register of Deeds.
  
  After the execution and recordation of the power of attorney, the husband and his business partner, through various business entities, borrowed money from plaintiff-lender. The husband signed a series of commercial notes, unconditional personal guaranty agreements, and a deed of trust in his wife’s name, relying on the power of attorney. The notes went into default, and the lender/plaintiff commenced foreclosure proceedings. The sale of the collateral yielded less than the outstanding obligations, and the plaintiff sued the borrowers and guarantors – including the wife - to recover the deficiency balance. The trial court granted the plaintiff’s motion for summary judgment as to all defendants.
  
  On appeal, the wife argued that the power of attorney was ineffective, and she should not be bound by the guaranty executed by her husband as her attorney in fact.
  
  The power of attorney contained a provision titled “RESTRICTIONS ON EXERCISE OF POWERS BY ATTORNEY-IN-FACT” which stated that “the rights, powers, duties and responsibilities herein conferred upon my Attorney-in-Fact shall not be exercised by my Attorney-in-Fact until a physician has certified to my Attorney-in Fact that in his or her opinion I am no longer able…to handle my…affairs.”
  
  The Court of Appeals reversed the decision of the trial court, holding that no power of attorney ever vested in the husband, that the wife’s guaranty was invalid, and that the plaintiff was not entitled to recover from the wife as a guarantor.
  
  First, the Court of Appeals agreed with the wife that the power of attorney was ineffective because there was no evidence in the record indicating that the wife had been certified incompetent by a physician, which was a condition precedent to the effectiveness of the power of attorney. Since there was no evidence that the wife was certified incompetent by a physician, no power of attorney ever vested in her husband, and he had no authority to bind her to the guaranty.
  
  Further, the Court of Appeals held that the plaintiff was deemed to be on notice of any limitation or restriction contained in the power of attorney as it was in writing and “a third party who fails to inspect a POA’s terms does so at his own peril since he is deemed on notice of the limitations and restrictions contained therein.”
  
  Nor could the plaintiff argue that it justifiably relied on the husband’s representations of authority based upon the broad grant of authority and the third party reliance provisions contained in the North Carolina General Statutes. Despite the broad grant of authority contained in the statutes, the statutes did not override the restriction that the wife be certified incompetent by a physician. Here, the power of attorney conferred no powers upon the husband because the condition precedent never occurred.
  
  Likewise, statutes which generally protect third parties who rely on the apparent authority of an attorney in fact, did not apply because the plaintiff had constructive notice of the terms of the power of attorney, which was part of the public record, and the power of attorney indicated that there was no apparent authority for the husband to execute the guaranty on behalf of his wife.

For more, see Read the Fine Print! Restrictions in a Power of Attorney May Invalidate Loan Documents.

For the ruling, see Suntrust Bank v.C & D Custom Homes, LLC, 734 SE 2d 588 (N.C. App. 2012).