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Scenario: Mr. Smith comes to your dealership with his grandfather and purchases a sports car. Pursuant to the transaction, Mr. Smith is utilizing a durable power of attorney executed by his grandfather to purchase the sports car. Although the grandfather is present at the dealership, Mr. Smith executes all the sales documents and mortgage; however, he does not sign POA after his grandfather's name. After two years, the loan is defaulted and the bank files a lawsuit against the dealership claiming that the dealership breached the Dealer/Bank Financing Agreement by not disclosing that the financing was subject to a power of attorney. What are your obligations?
Just this month, this law firm was involved in a trial that addressed the exact facts in this scenario. It must be noted that, as the jury was being called, the matter was resolved by agreement of the third-party defendant to pay the deficiency balance on the loan. In this case, the grandfather had executed a durable power of attorney which was filed with the Cuyahoga County Probate Court.
Further, one week prior to the purchase of the sports car, the grandfather and grandson had taken out a business loan with the bank utilizing the same power of attorney.
Within three years, the grandson had defaulted on the vehicle loan. The bank repossessed the vehicle and sent a demand letter to the dealership indicating that the dealership was responsible for the deficiency balance since, allegedly, the bank was not aware that the vehicle purchase was pursuant to a power of attorney. The bank alleged in its complaint that the signature on the mortgage was a forgery and that the dealership did not follow the bank's policies and procedures relative to financing when utilizing the power of attorney.
The dealership filed a third-party complaint against the grandfather and grandson for indemnification under the durable power of attorney. Pursuant to the dealership's request for production of documents, the bank produced its entire file regarding the transaction which included a copy of the durable power of attorney.
Although requested, the bank could not produce any policies and/or procedures to be followed when utilizing a power of attorney when financing a vehicle. In fact, the Dealer/Bank Agreement did not contain any policies or procedures to be followed in this instance. There was no terminology which specifically stated that the use of a power of attorney was a special form of financing and that specific rules had to be followed. The dealership provided the bank with all the necessary documents to approve the loan. It was not until the grandson defaulted on the loan that the power of attorney became an issue. For three years, the bank had all of the documentation and never informed the dealership that there was an issue regarding the power of attorney utilized on the loan. Further, the bank's own internal documents indicated that the power of attorney was valid and that the grandfather should be responsible for the loan. The grandfather and grandson argued that the durable power of attorney was for a limited purpose in order to obtain a business loan. However, a clear and fundamental reading of the power of attorney clearly indicated that it was limitless. The power of attorney granted the grandson full access to his grandfather's assets. After extensive legal maneuvering, the third-party defendant realized that the power of attorney that he had executed was limitless; and that he was responsible for the deficiency balance in the loan.
It is obvious from the filing of this lawsuit that the bank was looking for deep pockets in order to recover the loss on the loan. However, the bank should have reviewed its own documentation which proved that there were no policies or procedures in its Dealer/Bank Agreement for special processing of loans utilizing a power of attorney and that it should not be treated as a normal transaction. The bank’s documents specifically stated that any amendments to the Agreement had to be in writing and provided to the dealer.
Dealer/Bank Agreements are generally very standard in nature. In essence, it makes the dealership responsible for any and all representations that it makes to the bank. If any of the representations are wrong, it allows the bank to seek recourse and/or indemnification from the dealership. Remember, there is always a catch-all regarding the dealership and its obligation to the bank. In this case, the bank was alleging that the signatures were a forgery. However, this cannot be a forgery when a valid power of attorney is utilized. Therefore, the dealership, to the best of its ability, complied with the bank's policies and procedures relative to verifying the signatures on the financing documents.
It is strongly recommended that you review your Dealer/Bank Agreements to see if there is a special section regarding the treatment of a power of attorney relative to the financing of automobiles. If there is, it is the dealership's responsibility to strictly comply with the bank's requirements. However, it is suggested that if a transaction involves a power of attorney that the power of attorney be submitted to the bank along with the credit application in order for the financial institution to be immediately placed on notice that a power of attorney is being utilized by the purchaser. Generally, the principal of the power of attorney is acting as a co-signer on the loan. It is also strongly recommended that the nomenclature P.O.A. be written after the attorney-in-fact executes the principal’s signature on the loan documents.
As always, these are highlights of the law and are not to be construed as containing the entire law. This is not a legal opinion. Contact your attorney if you need specific information or advice.
© Robert A. Poklar, 2006
ROBERT A. POKLAR & ASSOCIATES
A Limited Liability Partnership
10100 Brecksville Road
Brecksville, Ohio 44141
Telephone: 440-746-1600
Fax: 440-746-1604
e-mail: poklarlaw@poklarlaw.com
website: www.poklarlaw.com
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