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Can a Third Party File Bankruptcy for Another?

A third party may be able to file a bankruptcy for someone else. For example, a Power of Attorney may be used to start a bankruptcy action party, but bankruptcy courts have limited the authority of individuals to take this step. The third party in this situation is the agent named by the principal (the would-be debtor in the bankruptcy) in the principal’s Power of Attorney (POA). Since the Bankruptcy Code does not prohibit a third party from taking this action but does require the debtor to be involved in the bankruptcy case, such a filing relies on factual determinations and legal interpretations by the Bankruptcy Court where the case was filed, which is the focus here.

Power of Attorney and State Law

With state law playing a large role in what powers can be granted through a POA and the language that is needed in the document, the courts that have interpreted the filing by a third party via a Powers of Attorney using similar ideas but oft times have reached divergent decisions. Pennsylvania is the primary focus here, but opinions from other states cannot be ignored as they are considered by courts during their decision making.

The principal for whom a Power of Attorney is drafted needs to have the language fit the law that will be applied in the individual’s state. If the agent is supposed to be able to file a bankruptcy for the principal, the Bankruptcy Court looks at the intent from the POA’s wording. At this point, a review of various approaches in different jurisdictions may give a clearer understanding of how the law evolves from jurisdiction to jurisdiction.

Interpretation Left to Bankruptcy Courts

As in Pennsylvania, the courts that have been responsible for determining what a given state’s law requires have been hesitant to prohibit the use of a Power of Attorney regarding bankruptcy in all circumstances. Fairness has been a concern that actually has resulted in positions from state to state that can support a given POA in one state while finding that it is not sufficient in another state. This can make the choice of law to be applied perhaps the most important decision in this area of law – in fact, this is a reason why a Power of Attorney should clearly indicate which state’s laws formed the foundation for the drafting of this legal instrument if it is to be used to file for bankruptcy by a third party.

Various jurisdictions over the years that have addressed the POA issue. There have been influential decisions from bankruptcy courts in Virginia, Missouri, and Pennsylvania. These will be highlighted to show how the issues has been approached by the federal judiciary and to demonstrate how the standards for what constitutes an acceptable document tend to differ, despite some commonalities overall.

Important Decisions from Virginia

A number of the opinions have been authored by judges within the Bankruptcy Court for the Eastern District of Virginia. A 1980 decision looked at when, during a bankruptcy action, an agent might be able to proceed in place of the principal. Specifically, In re Killett revolved around a third party seeking to appear at a reaffirmation and discharge hearing when the debtor, who was an active member of the Armed Services, was in England and was unable to return for this hearing. Section 524(d) of the Bankruptcy Code was at issue.

The Court pointed to its language stating that a debtor shall appear at this hearing. The law views “shall” as is a word that communicates a duty so that the individual has no choice about what must be done. However, despite this, the Bankruptcy Court noted that, as a court of equity, it had to weigh the facts to determine its decision, despite the use of “shall” within the Code’s provision. The Judge concluded that, under the circumstances that existed, the debtor would and could rely on the counsel of his attorney and allowed a third party to appear in the debtor’s place. The Court noted that “any loss of rights is on [the debtor].”

Subsequent cases from Virginia seemed to take a harder line against the use of Powers of Attorney in bankruptcy courts, however. These opinions – like In re Killett – often came from the Bankruptcy Court for Virginia’s Eastern District. 1981’s In re Raymond involved spouses in which only the wife was present at the time of filing. Since the husband had to be out of the area and could not be easily reached, the wife decided to file a bankruptcy on behalf of herself and her husband via a Power of Attorney in which he named her as his agent. The Court refused to permit this to proceed as it emphasized that bankruptcy is the personal exercise of a privilege – not a right – that has serious implications. The Court stated that, too often, a third party will abuse the POA in general and would not permit this to occur in bankruptcy actions.

Then, there was a 1990 case (In re Smith) from the same Bankruptcy Court, with another spouse seeking to file a joint bankruptcy case but, again, having to rely on a Power of Attorney to do so because the husband was physically disabled and could not execute the necessary documents. Again, the Court would not allow this filing. It also pointed to some considerations regarding third party filings, such as the lack of language in the document that set forth a specific power that authorized such a bankruptcy filing.

Notably, the Court would not point to the absence of this language for its denial and wrote that a guardian or a “next friend” could possibly file such a bankruptcy if a court with the necessary power issued an Order regarding this appointment and also included sufficient authorization to the third party filing. A “next friend” is someone who applies to a court based on an individual’s medical incapacity or minority.

The next friend would have to be in possession of evidence (usually an opinion letter) from a licensed, qualified physician to show medical incapacity. Then, the Bankruptcy Court would require the next friend to have the all of the information needed to file a bankruptcy; after this party filed the petition, schedules, and related forms, the Court would proceed with the naming of a guardian (who could be the next friend) to handle the remainder of the case. These decisions did not appear to view a Power of Attorney as sufficient by itself to justify a third party filing.

Other State Courts Also Have Looked at POAs

Courts continued to struggle with the issue of a Power of Attorney being sufficient to allow third party filings. For example, In re Harrison, a 1993 bankruptcy case from Florida, stated that a Power of Attorney could provide authority for a bankruptcy filing in unusual circumstances, such as someone in the service during an active conflict, or in a hospital, or in a state of incapacitation. The court went on to note that a non-debtor cannot be granted authority to sign a verification under oath unless this person has personal knowledge of the facts involved. This is due to Rule 9011 of the Federal Rules of Bankruptcy Procedure, known as the “certification rule.” The Court scheduled a hearing about the possibility of sanctioning the third party for signing the statement that verified facts known only by the debtor.

Courts throughout the United States have continued to struggle with the effect of the Power of Attorney in the context of a bankruptcy filing. Before getting to Pennsylvania, a few other decisions show how what begins as a similar perspective can lead to further confusion among the federal bankruptcy courts. Vermont was the source for an opinion from 2001 that bears similarity to the reasoning found in some leading Pennsylvania cases. The Bankruptcy Court in In re Curtis decided that an agent can file for relief for a debtor under 11 U.S.C. Section 109 but required something more than a simple general Power of Attorney.

In this case, the debtor actually came forward to oppose the agent’s action after the latter filed the petition. The Court’s decision was that the agent lacked authority from the time of the original filing because the Power of Attorney did not include specific language that permitted the bankruptcy filing or allowed the agent even to pursue any litigation or legal proceeding while it had language involving business transactions, gift giving, and other matters. The authority on which the third party relied was seen as too general, resulting in the case’s dismissal. Courts commonly discuss the requirement of “specific language” in such cases, but the problem is practice is that different courts have different ideas about what words are specific enough to be necessary words.

Then, In re Eicholz, a decision from the Western District of Washington state in 2004, opined that, under Rule 9001(c) of the Federal Rules of Bankruptcy Procedure, an agent can file for bankruptcy on behalf of the principal under appropriate circumstances. The language within the Power of Attorney again was crucial to whether or not a bankruptcy filing was within the POA’s scope. Here, the language had to expressly grant authority to start a bankruptcy action. Otherwise, the principal had to ratify the third party’s actions, which looked at the passage of time as well as the acceptance of a benefit from agent’s act or the assumption of an obligation imposed by this act.

One last opinion before reviewing how Pennsylvania is consistent with the overarching idea about the need for specific language comes from the middle of the country. In re Sapp from the Northern Division of Missouri’s Eastern District in 2011 looked at a joint bankruptcy in which the wife was found to be mentally incapacitated and physically disabled (which was defined to mean that she would be prevented from participating in the case in person, by phone, via the internet, or in any other manner). While the case actually involved a guardianship, the Court still stated in this decision a Power of Attorney could not justify a third party filing a bankruptcy action unless the POA specifically set out the agent’s power to file for bankruptcy for the principal. Again, the exact language that would meet this standard did not appear.

Pennsylvania: Third-Party Filings and Powers of Attorney

As noted previously, Pennsylvania decisions are basically consistent with the reasoning found in other jurisdictions. The Bankruptcy Court for the Eastern District of Pennsylvania has two decisions that date back to the 1980s but remain important even now. 1987’s In re Zawisza dealt with a Chapter 13 action filed by a “next friend” and determined that a next friend or guardian ad litem could pursue a bankruptcy under appropriate circumstances.

However, In re Sullivan from 1983 focused on the use of a POA, making it more relevant here. The situation involved a monk who was a Pennsylvania domiciliary but would be in Holland for approximately five years. Meanwhile, he faced financial difficulties in Pennsylvania, which led him to give his brother a Power of Attorney that contained a specific right to sell his real property. Unfortunately for the monk, the language was limited to this action and did not mention bankruptcy. Despite this, the brother – as the monk’s agent – filed a Chapter 7 bankruptcy on behalf of the monk to prevent further deterioration of his financial position. In response, the Bankruptcy Court dismissed this filing because the limited POA that existed did not provide legal authorization for a third party filing. From Holland, the monk amended his Power of Attorney to include a specific grant for his agent to pursue personal bankruptcy on his behalf.

The brother now was authorized to do whatever the unavailable principal could do if he were personally present. Furthermore, in addition to filing the bankruptcy that originally was to be dismissed, the agent also could attend the §341 Meeting of the Creditors in his brother’s place, despite the mandate in the Bankruptcy Code that the debtor must attend this meeting. Being that the Bankruptcy Court is a court of equity, the decision from the Eastern District of Pennsylvania permitted the monk’s agent to attend the meeting while the monk was deemed unavailable due to his five-year commitment in Holland.

Thoughts about the Power of Attorney & Bankruptcy in PA

This case probably sets forth the best blueprint for an agent’s use of a Power of Attorney to file a bankruptcy in Pennsylvania. The POA needs to have specific language that authorizes the agent to file an action under the Bankruptcy Code. The principal also must be unavailable. The cited case involves a debtor who is unable to be physically present to pursue relief under the Code.

Although no definitive statement can be made with absolute certainty, the bankruptcy courts in Pennsylvania are likely to seriously consider and, quite possibly, permit a third party to pursue a bankruptcy for the principal using a Power of Attorney containing language specifically authorizing such a filing under very specific circumstances. These would include debtors who can be proven to be mentally incapacitated or physically unavailable (either due to a significant physical disability or due to inaccessibility). The reasoning behind this is that this facts would prevent meaningful (if any) participation by the debtor and also would amount to a denial of due process if a third party with authority (e.g., through a valid POA) would be prohibited from pursing this matter.

The Financial Power of Attorney after Act 95 of 2014

The Pennsylvania Legislature saw a need to protect individuals from the abusive use of powers by Agents under Powers of Attorney. Act 95 of 2014 was the result. Most of the new law took effect at the beginning of this year. If you had a Power of Attorney (POA) drafted after January 1st or want to get a Power of Attorney so that your financial affairs could proceed even if you no longer could handle them, then you must make sure it complies with Act 95’s changes. Generally, an older POA remains valid. However, due to the changes involving various powers, you might be wise to discuss your current and future concerns with an attorney to see if a new Power of Attorney might benefit you. Also, while you could go to the internet to attempt to draft a POA, remember that Act 95 made major revisions to the law, with the added complexities needing review during the drafting process – a do-it-yourself POA found on a website is not exempt from the new requirements but may not include them.

Unlike POAs focused on medical issues, a financial Power of Attorney in Pennsylvania should include the statutory Notice signed by the Principal, for whom the POA exists, and requires an Acknowledgment for all Agents named by the Principal regarding their duties when acting in this capacity. Both forms changed at the beginning of 2015. The Notice has been revised and must include only capital letters. The Acknowledgment experienced a greater overhaul. While the statutory example was altered, the actual wording now can deviate from the example. For example, you could decide your Agent doesn’t have the duty to keep assets separate from yours. Although this usually is not a good decision, Act 95 allows the waiver of this duty by the Principal, which means that it would be deleted from the Acknowledgment. Before the new law, this duty was mandatory and had to be in the Acknowledgment.

Another change with the financial Power of Attorney is what legal requirements exist for its execution. Pennsylvania only required the date and Principal’s signature at the end. No witnesses were needed. Now, you need two witnesses (neither of whom is an Agent in the POA) as well as a Notary’s involvement. Also, none of these three roles can be filled by the same person so, while only the Principal was needed prior to this year, three additional people now are required to have a valid Power of Attorney. This is stricter than what other estate-planning tools, such as a Will, require for execution. It has been suggested that the reason for this is due to the impact on the Principal being greater under the POA (since the person still is alive) than it would be with a Will, which takes effect after death. Regardless of the reason, you have to be aware of this if you want your POA to be recognized in Pennsylvania.

Those are important changes, but the usefulness in estate planning of the Power of Attorney is affected elsewhere in Act 95. Due to sweeping changes introduced by this law, not all can be covered here, but some major ones follow.

“Reasonable expectations” have been added. An Agent should act according to your reasonable expectations “to the extent actually known.” This may seem a bit vague since the Agent has to know your reasonable expectations in any area that you granted the Agent authority to act. To ensure your Agent knows what you expect, you have to include these expectations in the Power of Attorney — they aren’t defined elsewhere, and only you can define your reasonable expectations. Agents also must act loyally for the Principal’s benefit. What if acting loyally works against the benefit of the Principal? The drafting of the POA is important in defining terms and duties for guidance and to avoid “what if” scenarios that could arise under the new law.

Duties of the Agent have been touched upon, but they are tied to powers given in the Power of Attorney. Again, Act 95 has made numerous changes in the law. While the Power of Attorney is a general grant of authority for an Agent to act, eight powers (so-called “hot powers”) must be explicitly listed to be available. These, generally, are concerned with estate-planning issues. They include: creating, amending, revoking, or terminating an inter vivos trust; making a gift; creating or changing survivorship rights; creating or changing a beneficiary designation; delegating authority granted under the Power of Attorney; waiving the Principal’s right to be a beneficiary of a joint and survivor annuity, including a retirement plan’s survivor benefit; exercising fiduciary powers the Principal can delegate; and disclaiming property, including powers of appointment.

There also are 22 statutory “short-form” powers that can be in the Power of Attorney. These are familiar to anyone who has worked with the prior law. To a large extent, they are estate-planning tools. However, two of them involve healthcare issues and probably should be in a separate medical POA since Act 95 focuses on financial issues. Also, the power to make “limited” gifts is noted while the power to make gifts is a hot power. They are different because a limited gift cannot exceed the annual gift-tax exclusion ($14,000 currently) while the other power is not limited. Although short-form powers are not as powerful as hot powers regarding changes they can make, they still have value when it comes to estate planning. Beyond estate planning, the Power of Attorney could handle a related topic: long-term care planning. Knowing the Principal’s objectives is crucial in drafting a document tailored around powers needed to achieve those objectives.

This gives a basic view of various issues that Act 95 has introduced into the drafting of a financial Power of Attorney. Much more can be said and written about this topic. This, ultimately, is the main point. Sweeping changes have been made, and there is no way one POA size can fit all. Before you decide to execute a Power of Attorney, you must know the options and their possible implications. As these implications can be substantial, you should consider consulting an attorney who works in this area of law because what may have seemed simple to do previously is now a complex web of possibilities to explore to find what fits your needs and wishes. Such is the state of the Power of Attorney in Pennsylvania after the advent of Act 95 of 2014.

When is a Power of Attorney in Effect?(Pt 2)

In the previous post, I took a brief look at various powers of attorney found in Pennsylvania’s laws and discussed how and when they take effect. However, the issue of timing regarding when a financial power of attorney can be used often is something that the principal who would be giving the power wants to address in the document due to concerns such as loss of control and possible abuse. The topic of timing in combination with varied reasons for having a financial power of attorney is the subject of the second part of this discussion of powers of attorney in Pennsylvania.

As your power of attorney is being drafted, you and the attorney should discuss its focus or purpose as well as how to use specific powers to achieve this. There are situations that can be handled by a more limited power of attorney. This limitation may mean that it only can be used by your agent for specific periods of time. If not specified, Pennsylvania law presumes that a power of attorney is durable, however.

The term “durable” means that it is in effect and, technically, could be used by your agent from the moment when it is executed (or, to put it more simply, when it is signed). People often feel that this means that they are giving away the authority to handle financial matters, even though they are capable of doing so, and worry about the power being abused. This, in turn, can spark interest in limiting when the document will be effective. Such restrictions could make sense, depending on the purpose for this document.

A non-durable power of attorney can be used by your agent only when you are not incapacitated. This generally is when you least need to have one. As an instrument of estate planning, this would have little use because you would not need someone handling financial affairs to carry out the objectives of your estate plan while you are capable of doing so.

However, a non-durable power of attorney can be useful to give someone the authority to handle a transaction when you are not able to be present for some reason. The non-durability combined with the limited scope (for example, the authorization for an agent to complete the sale of a vehicle) can make this useful because, in the example, you can sell the vehicle even though you cannot be present and the document only exists until the specific transaction is accomplished.

In other scenarios, a durable power of attorney makes more sense. You might not like the sound of giving your agent the power to handle your banking transactions or to sell your real property (which might mean the house in which you are living). However, if you are handling your affairs, it would not be that easy for someone to take over. If the agent would try to do this, you can put an end to the attempt by revoking the power of attorney, which is easy to do. An agent who misuses this power can be subject to civil and criminal penalties, and you are likely to know if your agent is making such attempts.

For example, to sell your house, the agent would have to record the original of the document in the appropriate office in the county in which the property is located and would have to show the property to prospective buyers. Meanwhile, monthly statements from your financial institution would reveal any problems involving transactions that you did not authorize.

Also, your choice of the agent should reduce the likelihood of abuse of power – you need to trust the person you name as your agent. While this is no guarantee, you should not name someone as your agent if you have doubts about his or her trustworthiness. Instead, this would be a situation in which you might want to wait to get a power of attorney.

Some people prefer to have a “springing” power of attorney, which springs into effect when a specified event occurs. Often, the event involves the person becoming disabled or incapacitated because this is when someone would be needed to handle financial and other affairs. The potential for problems exists because you need a well-defined point at which the power of attorney springs into effect.

Disability and incapacity should be determined by medical professionals. There may not be a doctor available when this occurs so there could be a lag in time before someone can act as your agent. There also could be difficulty in getting a doctor to sign an affidavit acknowledging your condition. Then, if you no longer are disabled or incapacitated, you should get another affidavit stating this and making the springing power ineffective again.

In the end, a durable power of attorney usually is the best choice. The power is least likely to be abused when you can handle your own affairs, and you can easily revoke it during this time. Periods of disability or incapacity are when the power of attorney has the greatest potential for abuse, but the likelihood is limited when you take the time to choose someone you trust to be your agent. Finally, a financial power of attorney must have an acknowledgment signed by your agent detailing the responsibilities of an agent and noting the consequences of ignoring them, which helps to reduce any temptation that might exist.

When Is a Power of Attorney in Effect?(Pt 1)

A Power of Attorney can be useful for numerous reasons. For instance, the importance of a financial power of attorney often is seen in estate planning but can come into play for other purposes as well. For this reason, it is the prime focus here due to the potential impact of its use, which makes many people reluctant to make this power durable (which will be defined below). Of course, there are reasons beyond financial matters for needing a power of attorney. Pennsylvania has statutes that encompass other types of powers of attorney and that address when these powers are in effect.

For example, under Pennsylvania law, a “mental-health power of attorney” gives you the opportunity to choose someone (known as your “agent”) to make a wide range of treatment decision if you are experiencing a mental-health crisis. However, the same law also limits the lifespan of this document to two years from the date that you sign it into effect (unless you revoke it sooner or it is in effect when the two-year mark is reached). Within this time period, this power of attorney can be used by your agent when an attending physician determines that you are not capable of making decisions regarding mental-health treatment. When the attending physician decides that you can make these decisions once again, then your agent ceases to have authority.

A “health care power of attorney” is more common and often is combined with the financial power of attorney in an estate plan. Pennsylvania has a set of laws focusing solely on this legal tool and defining when it is legally relevant. A health care power of attorney is valid until you revoke it, unless you have specified a time when this document no longer is valid. It should be noted that, while it may be valid, this does not mean that it can be used by your agent named in the power of attorney at all times. Instead, it only becomes effective when the attending physician finds that you lack capacity to make these decisions and ceases to have power when the attending doctor finds that you are able to make health care decisions again.

Meanwhile, powers of attorney that deal with financial matters tend to have more variations and need to be drafted carefully to meet your objectives, leading to careful consideration of how and when they can be used. In the list of statutory powers regarding a power of attorney, you currently will find 22 powers, of which 19 are financial in nature. These range from transactions involving tangible personal property to investments in stocks, bonds, and other securities to disclaiming of an inheritance.

The potential scope and consequences of these powers can cause a principal, who is the person giving authority to her or his agent, to be hesitant to want a power of attorney in the first place. This is when you need to look at the flexibility of this document to see if one can be drafted to meet your needs and protect your peace of mind.  In the next post, a closer look at financial powers of attorney and when you might want them to be in effect for your agent’s potential use will be undertaken.