ENTITY AUTHORITY ISSUES - mtlandtitle.com

1 ENTITY AUTHORITY ISSUES MLTA 2013 Spring Underwriting Seminar David lawson , State Underwriter Fidelity National Title Group These materials are an overview designed to help understand ISSUES relating to proper execution of documents by various entities, including corporations, partnerships, limited liability companies, and unusual types of trusts. Additional information is presented for transactions involving entities which have been dissolved, including references to applicable Montana Code. The goal is to help avoid title and escrow claims resulting from fraud, lack of signing AUTHORITY or inadvertent defects in execution of documents by corporate and other entities. This material is intended to provide a better understanding of what to look for when reviewing ENTITY organizational documents and resolutions authorizing real estate transactions to determine (1) who should sign and (2) whether or not they are authorized to bind the ENTITY in the transaction.

2 2 The Problem: The Title Industry has suffered a lot of recent claims that included a total loss of title due to a lack of AUTHORITY in the person executing the documents. Many of these are the result of: Insufficient execution and/or notarization, causing inability to foreclose an insured mortgage or a complete voiding of the lien of the mortgage, Parties with management duties executing documents that exceed their AUTHORITY , Increasingly sophisticated fraud and forgery. As with many of the claims we are presently experiencing, these may have been avoidable if the proper underwriting procedures were followed. ISSUES to Consider: Good Standing: For any ENTITY you must verify that it is in good standing in the state in which it was created, and, if possible, review all the filings (example: LLC Certificate of Formation, amendments, assignments of interests, etc.)

3 If there has been a recent change in the filings that adds or changes parties with AUTHORITY , you should independently verify the current parties with AUTHORITY . Often the attorney representing the ENTITY can verify the recent changes are authorized and effective. Many fraud claims involve recent documentation purporting to add or replace decision makers, in some cases even amending state filings. Fraud perpetrators are learning the steps we go through and are becoming more adept at anticipating what we will be looking for. If the ENTITY is not in good standing it may still be able under the statute of the state of origin to conduct limited types of transactions as part of winding up its affairs. Consult your supervisor or underwriter when encountering such transactions. (See the section on DISSOLUTIONS below for Montana entities which are not in good standing) Document Execution and Notarization - Capacity of Signers: All signatures on recorded documents and all notary acknowledgement blocks need to properly reflect the AUTHORITY or capacity of the signer.

4 No intermediate ENTITY references can be omitted. The same issue applies to signatures on title indemnities. 3 EXAMPLE: If the signature block is: Opportunist LLC, a Montana limited liability company by Hidden Equity, LP, a Delaware limited partnership, its Manager by Prosperity Corporation, a Florida corporation, its General Partner by _____ John Smith, Vice President the notary block should be in the appropriate representative capacity form identifying: John Smith as Vice President of Prosperity Corporation, general partner of Hidden Equity, LP, manager of Opportunist LLC or a similar clear recital. A notary block just listing John Smith as Vice President of Prosperity Corporation or John Smith as Vice President of Opportunist LLC would not be appropriate Self Dealing: Managers and officers of entities normally only have power to bind the ENTITY if the transaction is for benefit of that ENTITY .

5 Every sale transaction should be examined to determine that there is no inappropriate conveying of Land to an officer of a corporation, partner of a partnership, member of an LLC. Similarly, land owned in the name of a trust should not be conveyed to the trustees, individually, if they do not have a right to revoke the trust. A distribution by trustees to less than all beneficiaries of the trust must be reviewed to be sure it was appropriate and the other beneficiaries approved it and were dealt with equitably. Every loan transaction should be examined to determine that the loan does not benefit any party other than the owner of the Land unless the mortgage has been approved by: all directors of a corporation (and all shareholders in some instances) all members (not just managers) of an LLC all general and limited partners of a partnership all trustors and beneficiaries of a trust.

6 If there are multiple borrowers then we must initially assume the loan does not benefit all entities, particularly if there are surplus loan proceeds from a refinance. Foreign Executions: Many fraud claims arise from documents executed overseas, outside of our ability to see the signer and review their identification. When signers for entities are not located in the United States, all signatures on any documentation, should be acknowledged pursuant to your underwriter s foreign notarial guidelines, including compliance with the terms of the Hague Convention for authentication of notarizations, if applicable. 4 Use of a Power of Attorney by a signer for the ENTITY : Parties signing in a fiduciary capacity (signing for the ENTITY on behalf of other parties) normally cannot appoint an Attorney-in-Fact to sign. When the fiduciary (officer, manager, general partner, trustee, etc.)

7 Acquired their powers from other parties, those powers usually can only be exercised by the fiduciary and cannot be assigned. An exception to the rule is that members/partners signing only on their own behalf (their own interest in the ENTITY ) can grant a POA so the Attorney-in-Fact can act on behalf of that member/partner s interest as long as they are not acting as representative of other members/partners. Also, a few rare Trust Agreements specifically allow the Trustee to appoint an Attorney-in-Fact to act in the place of the Trustee. Impact of Bankruptcy of a Member, Partner or other Principal of the ENTITY : You should always contact your underwriter if you become aware of a bankruptcy filed by a partner, member or other principal of the ENTITY holding title. There are varying interpretations of whether or not the bankruptcy will impact the ability of the ENTITY to transact business without a court order.

8 This always requires a detailed review of the bankruptcy to determine if the interest in the ENTITY or property was disclosed in the Schedules of assets and liabilities, and how that interest was disclosed ( as a membership/partnership/stock interest or apparently as a direct ownership interest). You may be presented with an argument that the ENTITY is not the debtor, that it can continue to conduct business without a Bankruptcy Court order, and that the proposed document to be insured can be executed by the debtor in a management capacity. You have to consider the alternative argument that any transaction impacts the value of the debtor s membership/partnership/stock interest and therefore cannot occur without a specific order of the court. Bankruptcy Court approval for the ENTITY to enter into specific transactions may be contained within a Plan of Reorganization, in which case the Plan and the Order Confirming Plan must be reviewed, along with any other order dealing with the property or the ENTITY .

9 If you run across the situation where a Bankruptcy Court order is attempting to allow the court to convey property of the ENTITY without the joinder by all other principals in the ENTITY , be aware that the court will not acquire jurisdiction over the ENTITY and other principals without an Adversary Action being filed against those parties. 5 Overview of Specific Entities: Corporations (for profit): If the corporation is selling LESS than all or substantially all of its assets, you must get a resolution of the board of directors adopted at a meeting called pursuant to the corporation s by-laws approving this transaction. When relying on board of directors resolutions (for transactions not involving substantially all corporate assets), you need: a certified copy of the resolution (certified by the secretary or other officer with the AUTHORITY under the bylaws and containing the corporate seal, if necessary); to confirm that the details of the transaction are spelled out within the resolution ( , sales price or mortgage amount, relevant terms, etc.)

10 ; and determine who has been authorized to sign on behalf of the corporation. NOTE: Incumbancy Certificates (lists of authorized signers) only identify potential signers but do not normally grant AUTHORITY to enter into a particular transaction. If shareholder consent is required, you must: review the evidence of required consent; and confirm that the shareholders have been notified of the full details of the transaction. Execution by proper officers: The articles, bylaws and any resolutions, whether they are by the board of directors or the shareholders, should all be reviewed to determine the identity and propriety of the designated signers. The signers should describe their appropriate capacity ( , vice-president, secretary or authorized signatory ). Corporate seal: Conveyances, mortgages, leases and even resolutions (see above) should be under corporate seal if such is required by the law of the state or country of incorporation.