Forged power of attorney fails to protect lender

In brief

Court of Appeals of Virginia voids $750K loan due to forged power of attorney

Lender not required to reimburse $148K in voluntary payments

Court: agents acting under POA held to strict legal standards

Fraud exposes risks for lenders relying on POA in real estate

A real estate lender who relied on a power of attorney that was ultimately deemed fraudulent is not shielded from liability or penalties, the Court of Appeals of Virginia has ruled.

But the trial court judge erred by ordering the lender to reimburse nearly $150,000 in interest payments made by the landowners after they discovered the fraud, the panel found.

Robert K. Harwood of Alexandria-based Harwood Mortgages had loaned $750,000 to Carlos Camacho, the purported attorney-in-fact, backed by a deed of trust on his principals’ property. But it was later revealed that Camacho had altered a power of attorney to grant himself additional authority.

The Fairfax County Circuit Court judge had declared Harwood’s lien void ab initio after finding that Harwood couldn’t rely on the power of attorney because of a forged signature.

The trial judge had also found that Harwood was required to reimburse the principals for voluntary payments they made on the loan to avoid foreclosure.

“We determine, first, that the Circuit Court correctly declared Harwood’s deed of trust void, but for a different reason the power of attorney on which Harwood relied was never ‘acknowledged,’” Judge Daniel E. Ortiz wrote for the panel. “Then, notwithstanding the invalidity of Harwood’s loan, we find that the court erred in ordering Harwood to reimburse the principals for voluntary payments made under the loan.”

Ortiz was joined on the panel by Chief Judge Marla Graff Decker and Judge Vernida R. Chaney. The 19-page decision is Harwood v. Chinchilla (VLW 025-7-270).

‘Powerful tools’

Travis Graham, an attorney with Gentry Locke in Roanoke, said powers of attorney feature in about 90% of his estate litigation cases.

“Typically, the issues are theft by the agent from the principal or the principal’s heirs, or accusations of such theft against an innocent agent,” Graham said.

Harwood is “the rare case in which the principal was protected, but only at a huge cost to an innocent third party,” he said.

Graham said a recurring theme in cases involving POAs is their potential for misuse.

“They are extremely powerful tools that should not be granted or used lightly. Aside from marriage licenses, they cause more problems than any other legal documents,” Graham said.

John Altmiller, a principal with Altmiller Melnick Demers Steele & Rosati in Tysons, said that while Virginia’s voluntary payment doctrine is well established, it’s not necessarily well understood.

“Appellants’ counsel did an excellent job raising this argument,” Altmiller said. “In this case, the doctrine appeared to apply squarely to the facts: The owners were fully aware that they had not incurred the debt, and they had the ability to initiate legal action to challenge the lender’s threatened foreclosure.”

John Rinaldi, with Walsh Colucci Lubeley & Walsh in Prince William represented Harwood. He declined to comment, citing an anticipated appeal.

Michael T. Pritchard, a lawyer with Hogan & Pritchard in Fairfax, represented the appellees. He did not respond to a request for comment.

Document fraud

Landowners Juan Carlos Aranibar Chinchilla and Rossemary Jeanneth Arnez Villarroel were a married couple who lived in Bolivia. They owned several investment properties in Fairfax County.

They allowed their brother-in-law, Carlos Camacho, to live at one of the properties, 6011 Old Rolling Road, and maintain the home ahead of a planned visit.

The landowners executed a power of attorney in May 2016 that granted Camacho authority to lease, rent and manage two Old Rolling Road properties.

However, unbeknownst to the landowners, Camacho created a new special power of attorney for 6011 Old Rolling Road by writing a new first page and pasting it on the notarized signature page for the 6015 Old Rolling Road property. The fraudulent document granted Camacho expanded authority, including the ability to borrow against and refinance the property.

In 2018, Camacho did just that, taking out a loan against 6011 Old Rolling Road. According to court documents, the fraudulent POA was recorded in the land record.

In 2020, Camacho sought to refinance that fraudulent loan with Harwood. Lloyd Martin was Harwood’s attorney for the transaction. Martin’s subsidiary, Potomac West Title, handled the settlement.

A pre-closing title examination revealed the 2018 deed with the fraudulent POA attached. Harwood asked Martin via email to review the document. According to the court record, “Martin determined that nothing about it seemed out of the ordinary and that it was ‘properly notarized.’”

Martin communicated that information to Harwood. He also had Camacho sign an agent’s certification before a notary public, affirming the validity of the power of attorney.

Harwood then issued a $750,000 loan to Camacho, secured by a deed on 6011 Old Rolling Road. Martin served as trustee on the new deed of trust.

To disguise the fraud, according to the court record, Camacho opened a new bank account in the name of the landowners’ LLC to receive the proceeds and make payments.

The landowners discovered Camacho’s actions in November 2021 when he emailed them to apologize. Camacho made payments on the Harwood loan until March 2022. But the following month, after Camacho stopped paying, Harwood issued a notice of default to the landowners.

Foreclosure notice

On April 28, 2022, Harwood issued a final notice of default prior to foreclosure and scheduled a foreclosure sale for May 31, 2022.

The landowners asked to reinstate the loan. They voluntarily agreed to pay about $19,000 of the balance plus interest payments going forward in exchange for canceling the foreclosure. The landowners kept up with payments through June 2023. However, after missing the July 2023 payment, Harwood sent another default notice.

The landowners sued Harwood and Martin in August 2023. They sought a declaratory judgment that the Harwood loan was void, quiet title for the 6011 Old Rolling Road property, and reimbursement of $148,759 in payments they made since reinstating the loan.

Following the Circuit Court judge’s decision, Harwood and Martin appealed.

Camacho later pleaded guilty to one felony count of forgery and uttering a forged writing and one felony count of embezzlement.

According to court records, Camacho died on Jan. 6, 2023, the day of his sentencing.

Court ruling

Citing the 1983 Supreme Court of Virginia case of Kern v. Freed Co., Ortiz wrote that “the well-settled principle in Virginia is that ‘[o]ne who deals with an agent does so at his own peril and has the duty of ascertaining the agent’s authority.’”

Therefore, a principal is not bound by acts of the agent that exceed their authority.

However, Ortiz continued, the Virginia Supreme Court imposes “more demanding requirements” on agents empowered as attorneys-in-fact.

“In Virginia, ‘a power of attorney will be strictly construed,’ and ‘[a]n act done by an attorney in fact which is not authorized by the power under which he acts is a nullity,’” Ortiz wrote, citing the 1930 case of Bank of Marion v. Spence. “Thus, although in a typical agency relationship a principal may be bound if an agent acts with apparent authority, with respect to an attorney-in-fact relationship, a principal is not bound unless the action taken was actually authorized by the power of attorney.”

Further, in Harwood, Ortiz said the Circuit Court’s analysis and the parties’ arguments turned on a construction of Virginia Code 64.2-1617, the analog to 119 of the Uniform Power of Attorney Act. However, Ortiz noted two relevant changes the General Assembly made upon enacting Virginia’s UPOAA.

First, it changed the definition of “acknowledged” by removing the word “purportedly” before “verified.” Secondly, while the Legislature incorporated the good-faith exception in the UPOAA, it added a second sentence: “The preceding sentence shall not apply to an acknowledged power of attorney that contains a forged signature of the principal.”

As a result, Ortiz wrote, the Circuit Court, after noting the distinction between the UPOAA and state statute “found that Harwood and Martin ‘were not entitled to rely on’ the altered power of attorney because it contained a forged signature.”

Yet, Ortiz said, a key question remained in determining if the fraudulent power of attorney was acknowledged within the meaning of Code 64.2-1617(a).

According to Ortiz, “the UPOAA places the risk of invalidity on the principal by allowing a third party to seek shelter under Code 119(c) and (d) if an attorney-in-fact merely ‘purport[s]’ that the power of attorney was notarized.”

Code 64.2-1617(a) shifts some of the risk of invalidity to the third party by requiring actual notarization of the document for subsections (b) and (c) to apply, Ortiz wrote.

“Indeed, attorneys-in-fact like Camacho who purported that the entire altered power was verified when in fact only the original 2016 documents had been could continue to bind principals,” Ortiz wrote. “The General Assembly evinced a clear intent in its alteration of the language from the UPOAA that third parties in Virginia should bear the risk in such a circumstance, and we will not upset that intention.”

In addressing the issue of the landowners’ reimbursement payments on the fraudulent loan, Ortiz cited Williams v. Consolvo, a 1989 Virginia Supreme Court case.

The plaintiff in that case bought a property unaware it was encumbered by a deed until the lienholder threatened foreclosure years later. The Supreme Court deemed the payments in Williams voluntary.

While sympathetic to the landowners’ plight in Harwood, Ortiz said the panel was compelled to reach a similar result as in Williams.

“Just as in Williams, the landowners ‘could have presented the facts to the trial court in the foreclosure proceeding,’ id., or otherwise sought equitable relief in May 2022 instead of sending a letter voluntarily agreeing to make payments,” Oritz wrote.

As a result, although the Harwood lien was deemed invalid and the demand for payment was unlawful “because the landowners voluntarily agreed to make interest payments where other courses of action were available, they cannot now seek to recoup that money.”