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New York Business Is Threatened By The Worst Law Of The Decade

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 effect 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 in ital­ics):

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.

Posted in: Law, Politics, Power of Attorney Law, Public Policy

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