Written by Kyle Niewoehner, Esq. and Matthew Gunter, Esq., Attorney, Lightning Docs
Who is signing your loan documents? Does it matter? We hope you have an answer to the first question. The answer to the second question is a resounding YES. Failure to have the proper signers for the loan documents can result in unenforceable loan documents and lack of security for the money that has gone out the door.
Title insurance covers these issues – until it doesn’t. Like any insurance policy, there are many caveats that may limit or prevent coverage. Even with coverage, the policy will only pay out to a maximum of your policy limits, which may be well below your actual loss. Title insurance, therefore, is not a panacea. This article will explore why examining the borrower’s signing authority is important, and the ways in which title insurance may not always be there to save you in the end.
Entity Types – Management
Limited liability companies, corporations, limited partnerships – they are all entities requiring a human being to act on their behalf. Trusts too, while not entities, act through their trustees and cannot otherwise own or mortgage property. An entity-borrower may have another entity as its manager, but the buck will eventually stop with a human, someone with management and signing authority.
LLCs are managed either by their members or by a manager (which may also be a member). Corporations are managed by their board of directors – do not confuse this with day-to-day management by the officers – the directors have final say and should approve loan transactions. Limited partnerships (and their variations) are managed by their general partners. Trusts are managed by their trustees.
While all of the above statements are generally true, there can be important caveats that are unique to any particular entity or trust. Each individual governing document may contain limitations, consent rights, assignments or delegations, or some other kind of right in others that will require thorough investigation and the participation of additional parties.
Individuals – Someone else may be Signing
When an individual is a borrower or other party to the loan, it is usually a simple matter of having that person sign. But what if they are unavailable or incapacitated? Powers of Attorney are generally sufficient for an individual to delegate personal signing authority to another, but there can be state law limitations, particularly related to wills and trusts. When POAs are used, they should be examined to make sure they contain very specific grants of authority and is best for it to relate to the specific transaction at issue. Incapacity may be covered by a POA or by a conservatorship. Conservators may also have the power to sign, but these powers and the background situation should be examined thoroughly.
Fixing Problems
When an entity’s governing documents do not provide for appropriate signing authority or approvals, or if there are ambiguities, or some other problem – fix it. LLC operating agreements can be amended, or perhaps only a resolution is necessary. Corporations may need multiple resolutions – one from the shareholders to elect or empower the directors, and one from the directors to elect or empower the officers. Limited partnerships may need consents to be granted from limited partners for major transactions. Trustees may need consents from beneficiaries or trustors for major transactions. Sometimes for an entity the formation document (articles of organization, etc.) may even need to be amended. It is important to identify signing authority issues early since resolving the issue may take some time and you will want to make sure it is resolved before closing.
Title Insurance and Signing Authority
Title insurance is an important safeguard for lenders, and a typical title insurance policy will insure the lien of the security instrument, which includes the signing authority for whomever is signing to pledge the property as collateral. Title will normally review the signing authority itself and may provide feedback if it thinks the documentation provided is not sufficient to establish signing authority. However, title companies can miss issues just like anyone else, and lenders should ALWAYS conduct their own review to ensure that they have established proper signing authority. If it is later determined that there was not proper signing authority for the loan documents and the security instrument is invalidated, a lender should be able to rely on title insurance to cover any losses arising from the lender’s inability to foreclose.
However, even if title insurance covers losses related to the invalidity of your lien, there are a number of downsides to relying on title. The title policy will only cover up to the amount of your policy amount. If your loss exceeds the policy amount (which could easily happen if you have to wait a significant amount of time for resolution and interest continues to accrue on the loan) you are out of luck. And even a clear-cut title claim can sometimes be difficult and time-consuming to resolve; title companies will of course look for any possible alternative to avoid paying a claim. If it appears that the lender knew about an issue and ignored, concealed, or failed to report it, a title company could even try to avoid paying a claim on the grounds that the title policy excludes issues known to the lender but not reported to the title company.
Finally, title insurance will not protect the lender from becoming embroiled in other lawsuits or disputes related to the signing authority issue. Frequently when a signing authority issue surfaces it involves a dispute between the shareholders of an entity or beneficiaries of a trust. The aggrieved party will likely bring the lender into the dispute and the lender may be stuck in a costly and time-consuming lawsuit. In short, the downsides of failing to ensure proper signing authority are quite significant and title insurance does not provide a cure-all solution.
Conclusion
Establishing proper signing authority on your loan documents is a paramount consideration for lenders. Failure in this area can lead to monetary losses and potentially even involvement in a draining litigation battle. Each lender should make sure that it has a process in place for reviewing signing authority and resolving any possible issues before closing a loan.
If you need advice about a signing authority issue for your loan, contact Geraci Law Firm for a consultation today.
