Beware the Person Who Uses a Power of Attorney in Their Own Self Interest
A recent case, Richland State Bank v. Benny L. Depingre et al, is a cautionary tale for lenders and anyone else who relies on a power of attorney: powers of attorney for real estate are subject to a number of technicalities, and courts are very strict about them when a person (the agent) uses a power of attorney granted to the agent by a third party (the principal), for the benefit of the agent.
Richland State Bank v. Benny L. Depingre et al – Background
In Richland State Bank v. Benny L. Depingre et al, the Louisiana Court of Appeal for the Second Circuit was faced with a fairly routine situation. A mother had given a written power of attorney to her son and her daughter as her agents. Using that power of attorney, the son went to the Richland State Bank and mortgaged his mother’s commercial property to secure a loan to the son for over $175,000.00. When the son later defaulted on the loan and the bank attempted to foreclose, the mother claimed that the power of attorney was inadequate to support the son granting a mortgage on her real estate under these circumstances, and she sought to invalidate the mortgage. She succeeded, and rightfully so.
A power of attorney to sell or mortgage real estate must be expressly given, under Louisiana Civil Code Article 2996. Self-dealing also requires express authorization under Louisiana Civil Code Article 2998, which prohibits an agent from representing a principal and then entering into a contract between the principal, as one party, and the agent, as the other contracting party, unless expressly authorized to do so.
In the Richland State Bank case, the court found that the power of attorney did not grant to the son specific authority to mortgage the mother’s property as security for the payment of a personal loan to the son, and that the language of the power of attorney could not be “reasonably” construed to authorize such self-dealing. Although this is not exactly what Civil Code Article 2998 addresses, the equities of the case inclined the court to make a broad interpretation of that Article by ruling that the “self-dealing” covered by Civil Code Article 2998 extended not only to a contract directly between the principal (represented by the agent) and the agent, but also to a transaction that benefited solely the agent but put the principal’s property at risk.
The Lessons for Lenders
All of the equity was clearly on the mother’s side, and the court did not have to stretch too far to protect her. The lesson is that when a lender or other party is relying on a power of attorney in a situation where the agent, and not the principal, is receiving the benefit, one should proceed with extreme caution. Make sure that the principal knows what action is being taken and that the principal consents to it. If at all possible, obtain a simple written confirmation from the principal before proceeding with the transaction based upon the (supposed) authority of the agent.
Please reach out to Rob Steeg if you have further questions about the technicalities of a power of attorney document.
