Probate & Property - May/June 2022, Vol. 36, No. 3 by ABA Section of Real Property, Trust & Estate Law

DETERMINING TITLE INSURANCE LOSS AND CALCULATING DAMAGES

DIRECTIONS TO TRUST DIRECTORS OF DIRECTED TRUSTS

TIMESHARES: HISTORY, REGULATION, DOCUMENTATION, AND OPERATION

VOL 36, NO 3 MAY/JUN 2022

A PUBLICATION OF THE AMERICAN BAR ASSOCIATION | REAL PROPERTY, TRUST AND ESTATE LAW SECTION

The Law of Halloween Nightmares

es for Damag ncing u o B s t Caske , ighway H e h t Down s, lunder B l a i r Bu re and Mo rights F l a r e Fun

She takes care of our family one generation to the next. Grams is the heart of the family. To honor her, we decided to give our daughter her name. We’d hoped to surprise her with the news when she visited us at the hospital, but the pandemic put a stop to that. We mentioned our disappointment to Lisa and the next thing you know, we’re getting a video call from Grams on her brand new tablet that Lisa set up for her. Our daughter Carolyn met her great grandmother and namesake on her very first day. And it was all because Lisa takes care of everything with our family, including the little things. — Julianna, San Diego

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$10MILLIONMARKETABLESECURITIESAND/ORLIQUIDASSETSREQUIRED.InvestmentandWealthManagementServicesareprovidedbyWhittierTrustCompanyandTheWhittierTrustCompanyofNevada,Inc.(referredtohereinindividuallyandcollectivelyas“WhittierTrust”), state-charteredtrustcompanieswhollyownedbyWhittierHoldings,Inc.(“WHI”),acloselyheldholdingcompany.Thisdocumentisprovidedforinformationalpurposesonlyandisnotintended,andshouldnotbeconstrued,asinvestment,taxorlegaladvice.Pastperformanceisno guaranteeoffutureresultsandnoinvestmentorfinancialplanningstrategycanguaranteeprofitorprotectionagainstlosses.Allnames,characters,andincidents,exceptforcertainincidentalreferences,arefictitious.Anyresemblancetorealpersons,livingordead,isentirelycoincidental.

PROFESSORS’ CORNER A monthly webinar featuring a panel of professors addressing recent cases or issues of relevance to practitioners and scholars of real estate or trusts and estates. FREE for RPTE Section members! Register for each webinar at http://ambar.org/ProfessorsCorner

STATE CONTROL OF LOCAL LAND USE REGULATION Tuesday, May 10, 2022 12:30-1:30 pm ET EZRA ROSSER, Washington College of Law, American University ED SULLIVAN, Lewis & Clark Law School SARAH ADAMS-SCHOEN, University of Oregon School of Law Moderator: ANDREA J. BOYACK, Washburn Univ. School of Law

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WHO OWNS THE WATER: ACCOMMODATION IN TIMES OF GROWING SCARCITY Tuesday, June 14, 2022 12:30-1:30 pm ET BURKE W. GRIGGS, Washburn University School of Law DAVID STRIFLING, Marquette University School of Law Moderator: SHELBY D. GREEN, Elisabeth Haub School of Law

Explore opportunities to get in front of more than 18,000 Real Property, Trust and Estate Law attorneys. Sponsorship and advertising opportunities are available now! CHRIS MARTIN | Corporate Opportunities 410.584.1905 | chris.martin@mci-group.com BRYAN LAMBERT | Law Firm Opportunities 312-835.8978 | bryan.lambert@americanbar.org

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Published in Probate & Property, Volume 36, No 3 © 2022 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.

May/June 2022 1

CONTENTS May/June 2022 • Vol. 36 No. 3

12 Features 12

The Law of Halloween Nightmares: Damages for Caskets Bouncing Down the Highway, Burial Blunders, and More Funeral Frights By William A. Drennan

22 Departments

Title Insurance: Determining an Insured’s Loss and Calculating Damages

Young Lawyers Network

By Adam Leitman Bailey and Joshua M. Filsoof

Career Development and Wellness

Directions to Trust Directors of Directed Trusts

Section News

By Michael A. Sneeringer and Jordan D. Veurink

Uniform Laws Update

Timeshares: History, Project Structuring, and Types of Plans

Keeping Current—Property

By Arthur O. Spaulding Jr., Karen D. Dennison, and

Keeping Current—Probate

Practical Pointers from Practitioners

Land Use Update

Technology—Property

The Last Word

Robert S. Freedman

Documentation and Operation of Timeshare Plans

By Arthur O. Spaulding Jr., Karen D. Dennison, and Robert S. Freedman

Federal and State Regulation of Timeshares and Fractional Interests By Arthur O. Spaulding Jr., Karen D. Dennison, and Robert S. Freedman

May/June 2022

A Publication of the Real Property, Trust and Estate Law Section | American Bar Association EDITORIAL BOARD Editor Edward T. Brading 208 Sunset Drive, Suite 409 Johnson City, TN 37604

ABA PUBLISHING Director Donna Gollmer

Articles Editor, Real Property Brent C. Shaffer Young Conaway Stargatt & Taylor, LLP Rodney Square 1000 N. King Street Wilmington, DE 19801

Art Director Andrew O. Alcala

Articles Editor, Trust and Estate Michael A. Sneeringer Porter Wright Morris & Arthur LLP 9132 Strada Place, 3rd Floor Naples, FL 34108

ADVERTISING SALES AND MEDIA KITS Chris Martin 410.584.1905 chris.martin@mci-group.com

Senior Associate Articles Editors Thomas M. Featherston Jr. Michael J. Glazerman

Cover iStockphoto

Associate Articles Editors Travis A. Beaton Kevin G. Bender Kathleen K. Law Amber K. Quintal Jennifer E. Okcular Heidi G. Robertson Aaron Schwabach Bruce A. Tannahill

Managing Editor Erin Johnson Remotigue

Manager, Production Services Marisa L’Heureux Production Coordinator Scott Lesniak

All correspondence and manuscripts should be sent to the editors of Probate & Property.

Departments Editor James C. Smith Associate Departments Editor Soo Yeon Lee Editorial Policy: Probate & Property is designed to assist lawyers practicing in the areas of real estate, wills, trusts, and estates by providing articles and editorial matter written in a readable and informative style. The articles, other editorial content, and advertisements are intended to give up-to-date, practical information that will aid lawyers in giving their clients accurate, prompt, and efficient service. The materials contained herein represent the opinions of the authors and editors and should not be construed to be those of either the American Bar Association or the Section of Real Property, Trust and Estate Law unless adopted pursuant to the bylaws of the Association. Nothing contained herein is to be considered the rendering of legal or ethical advice for specific cases, and readers are responsible for obtaining such advice from their own legal counsel. These materials and any forms and agreements herein are intended for educational and informational purposes only. © 2022 American Bar Association. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Contact ABA Copyrights & Contracts, at https://www.americanbar.org/about_the_aba/reprint or via fax at (312) 988-6030, for permission. Printed in the U.S.A.

Probate & Property (ISSN: 0164-0372) is published six times a year (in January/February, March/ April, May/June, July/August, September/October, and November/December) as a service to its members by the American Bar Association Section of Real Property, Trust and Estate Law. Editorial, advertising, subscription, and circulation offices: 321 N. Clark Street, Chicago, IL 60654-7598. The price of an annual subscription for members of the Section of Real Property, Trust and Estate Law ($20) is included in their dues and is not deductible therefrom. Any member of the ABA may become a member of the Section of Real Property, Trust and Estate Law by sending annual dues of $70 and an application addressed to the Section; ABA membership is a prerequisite to Section membership. Individuals and institutions not eligible for ABA membership may subscribe to Probate & Property for $150 per year. Single copies are $7 plus $3.95 for postage and handling. Requests for subscriptions or back issues should be addressed to: ABA Service Center, American Bar Association, 321 N. Clark Street, Chicago, IL 60654-7598, (800) 285-2221, fax (312) 988-5528, or email orders@americanbar.org. Periodicals rate postage paid at Chicago, Illinois, and additional mailing offices. Changes of address must reach the magazine office 10 weeks before the next issue date. POSTMASTER: Send change of address notices to Probate & Property, c/o Member Services, American Bar Association, ABA Service Center, 321 N. Clark Street, Chicago, IL 60654-7598.

May/June 2022 3

YOUNG LAWYERS NETWORK Preparing for a Lateral Move as a Law Firm Associate I’ve been recruiting and placing attorneys since 2000, and the past year and a half has been the busiest lateral attorney market I’ve seen, even surpassing the white-hot market of 2005-2007 just before the Great Recession. And as we head toward Q2 of 2022, the lateral market remains robust. If you’re a law firm associate and you’re considering a move, you’re not alone. Here are a few things to think about as you consider making a move. Start with the End In Mind Focusing on your long-term objective may be difficult but certainly deserves consideration as a younger attorney. What kind of lawyer do you want to be? Do you want to be a law firm partner? Do you want to go in-house? Start your search with the end in mind. Everyone hopes that her current firm is her forever home, but the statistics paint a different picture. A high percentage of associates move within their first three or four years of practice. When considering this first move (or any subsequent move), it’s essential to see how each potential new firm or new position will set you up for your ultimate end goal. How will that role position you for a future move if you don’t stay in your next role forever? Why Are You Considering Making a Move? There are many reasons associates consider making a move. It could be as simple as working for an extremely unpleasant partner. Perhaps you were brought in as a litigator your first year

Contributing Author: Steve Stone, Stone Search Partners, sstone@ stonesearchpartners.com. YLN Editor: Josh Crowfoot, Daspin & Aument, LLP, 600 Republic Centre, 633 Chestnut Street, Chattanooga, TN 37450.

because that is what the firm needed, but you really want to be a transactional lawyer. Maybe you feel you’re not getting the substantive experience you see your peers getting at other firms and want to ensure your skillset is appropriately on track. Or you might be looking for more sophisticated work or increased compensation. Whatever your reasons, it makes sense to talk to a mentor to confirm that your reasoning is sound. Should You Work with a Recruiter? You should consider working with a recruiter if your credentials are strong enough and if your experience and skillset are a close match for the open role. A common misperception is that candidates have a better chance if they self-submit or go through a friend. This is not necessarily true. Most larger firms (and many small and mid-sized firms) rely on recruiters, and the associated fee does not detract from an attorney’s candidacy. The only exception is if your background is not aligned with the open role or your academic credentials are outside of the firm’s standard criteria. In choosing a recruiter, a referral from another attorney who has had a good experience is a tried and true way to go. When you are initially vetting a recruiter, assess the following: the recruiter’s experience level; is he on the ground and well networked in the geographic market you’re pursuing; is she knowledgeable about the landscape and able to provide information beyond what you could find on your own; and most importantly, do you feel comfortable and trust that this person has your best interest in mind? Pay close attention to whether a recruiter listens to you and your preferences. If the options he comes back to you with don’t mirror your preferences, this clearly indicates that self-interest is his primary motivator.

Preparing for Interviews When preparing for interviews, do as much research as you can on the firm, the group, and the individual attorneys in the group. The law firm’s website and other similar resources can be helpful. So can speaking with someone who either currently or previously worked at the firm. And if you are using a recruiter, this is the time to lean on her the most. Set up a call or two to prepare and learn as much as you can about each attorney’s personality and predilections. In an interview, you should be fully prepared to: articulate your current practice, experience, and skills; discuss why you are seeking a new position (remember to always talk about your current employer in a positive light); and why you are specifically interested in this particular firm, group, and role. Lastly, have some questions in mind to ask your interviewers. What types of clients and industries do they serve? What would the incoming associate’s workload look like, what is the workflow, and how will success be measured for the successful candidate? Making the Final Decision Making a lateral move is a big decision. Once you have an offer in hand, it’s essential to look back at the reasons you began looking in the first place. Does the new role address those issues? How does the role align with your values? If you have a young family, will you have adequate work-life balance? What is the upward mobility path? Is the work interesting? Do you like your potential future colleagues? There are many more questions to ask yourself, but the bottom line is this: make an informed decision and don’t ignore red flags. This is your career, and it’s crucial to ensure you’re making the right move. n

May/June 2022

CAREER DEVELOPMENT AND WELLNESS Modern Mindfulness: Being Mindful Doesn’t Mean I Am Always Zen I have seen varying definitions of “mindfulness” from one of my favorite mindfulness teachers, Jon Kabat-Zinn. One I saw recently is as follows: “Mindfulness is awareness that arises through paying attention, on purpose, in the present moment, non-judgmentally in the service of self-understanding and wisdom.” Some authors on the subject refer to mindfulness as “being fully aware in the present moment with nonjudgmental acceptance.” For a long time, I was viewing mindfulness under the latter definition. I struggled with the concept of “nonjudgmental acceptance” being included as part of the meaning of mindfulness. I would take deep breaths and focus on my breath but find myself still angry at the death of a friend or an injustice that I had witnessed and been able to do nothing about. Ultimately, I concluded in favor of dropping any reference to nonjudgmental acceptance in the way I thought about mindfulness and instead decided to focus on being fully present in the current moment and paying attention, even if being fully present might mean realizing that I am deeply upset about the loss of a loved one or the diagnosis of a frightening disease. Early on in my practice, I would conclude that I was failing at mindfulness because I could not instantly accept whatever was going on in my life by focusing on my breath and the present moment. Mindfulness may help us ultimately to achieve acceptance but the focus of mindfulness is really about being fully present in the current moment. Contributing Author: Mary E. Vandenack, Vandenack Weaver LLC, 17007 Marcy Street, #3, Omaha, NE 68118.

There are many ways to practice mindfulness. Doing so does not require a mat or a meditation chair (although these work well for some). I spend so much time sitting while I am working that I prefer mindfulness practices that involve movement. I often take mindfulness breaks during the day. I might leave my desk, walk around the building, and notice what plants are blooming, where animals have burrowed, or even the trash someone dropped in the parking lot. I just notice by paying attention to my surroundings exactly as they are at that moment. I will stop, take a deep breath, and comment to myself on what I am aware of. I also take many brief mindfulness breaks during the day. I just stop and notice how I am feeling and seek to send breath to any areas of my body that are holding tension. I have turned lines at the grocery store or multiple red lights in traffic into opportunities to practice mindfulness. Currently, many great apps can be used to assist mindfulness practices. One of my current favorites is

Headspace. I also love some of the apps available with virtual reality devices. Technology can be a mindfulness challenge, but I do not advocate for the concept of “digital detox” as being a necessary component of mindfulness practice. I do think turning off all devices now and then is a good thing. I very much support turning off devices when you are at dinner with a loved one or friend so that you can be fully present. On the other hand, I avoid blaming digital devices for a lack of mindfulness and avoid any belief that simply turning them off for an hour will result in a mentally peaceful state. I am just as capable of checking out of the present without being on a device as I am when I have a device. It is likely not uncommon for you to have a scenario on a busy Monday morning at the office where the landline phone on your desk rings (or the VOIP). Your cell phone rings at the same time eight texts pop in. You get numerous notifications on your phone and your desktop computer. Emails are popping in at a mad pace. You decide to walk down the hall to catch your breath and someone asks, “Did you get my email”? On a Monday morning at the office, you are not in a position to shut off all your devices. Instead, practice body awareness and notice where you are. Take a deep breath. Simply note all the forms of communication. Consciously press your foot into the floor. Breathe again. Notice your breath. Notice the devices. It’s okay. As often as possible, breathe. . . and notice your breath. Practice that anytime. Breathe. Notice. Breathe again. Notice again. It really doesn’t matter if your phone rings. n

May/June 2022 5

SECTION NEWS Section Officer and Council Nominations The Nominations Committee, consisting of Chair Jo-Ann Marzullo, Vice-Chair Stephanie Loomis-Price, George Bernhardt, Eric Mathis, and Mary Vandenack met this fall and interviewed Section Officers, Delegates, Council members, Standing Committee Chairs, and Editors of the Section’s publications. The Committee expresses its appreciation to all those who met with the Committee to share their thoughtful insights about the future leadership of the Section. The Committee has completed its deliberations and hereby submits its nomination of the following persons to serve in the officer capacity noted by each name: Section Chair Hugh F. Drake Section Chair-Elect Robert S. Freedman Real Property Division Vice Chair

Marie A. Moore

Trust & Estate Division Vice Chair

Benetta Y. Park

Section Secretary James G. Durham Section Finance Officer Rana H. Salti Assistant Finance Officer James R. Carey Assistant Secretary (Trust & Estate Division)

Mary Elizabeth Anderson

Assistant Secretary (Real Property Division)

Timnetra Burruss

Section Delegate Orlando Lucero Section Delegate Rana H. Salti Diversity Officer Kellye Curtis Clarke The following persons are each re-nominated to serve a three-year term on the Section Council: For the Trust & Estate Division:

Ryan Walsh

Karen Sandler Steinert For the Real Property Division:

Christina Jenkins

Wogan Bernard Soo Yeon Lee The following persons are each nominated to serve an initial three-year term on the Section Council: For the Trust & Estate Division:

Keri Brown

Vanesa Browne For the Real Property Division: Patrick T. Sharkey The following person is nominated to fill a one-year unexpired term on Council: For the Real Property Division:

James E. A. Slaton

May/June 2022

SECTION NEWS

The Nominations Committee requests that, pursuant to Section 6.1(g) of the Section Bylaws, written notice of this report, together with contact information, a biographical statement of each nominated person and such additional information required under the Section Bylaws, be circulated to the Section membership in accordance with the Section Bylaws. Hugh F. Drake Brown Hay & Stephens LLP Springfield, IL

Will automatically assume the position of Section Chair, term ending August 2023. Positions held in Section: Chair-Elect; Vice-Chair, Trust and Estate Division; Officers, Finance and Corporate Sponsorship Officer; Liaison, TE Synergy Summit to Other Groups and Organizations; Member, Vice-Chair and Chair, Fellows; Vice-Chair, Estate Planning & Administration for Business Owners, Farmers, & Ranchers; YLN Chair, Membership; Member, Groups and Substantive Committee; Member, Technology; Chair, YLN; Co-Vice Chair and Co-Chair, Membership; ViceChair and Supervisory Council Member, Business Planning Group; Member, Nominations; Chair and Member, Planning; Member and Co-Chair, Communications; Member, Special Committee on ABA Relations; Member, Council; Member, Task Force on Technology and the Profession; Member, Marketing and Social Media; Member, Investment. Robert S. Freedman Carlton Fields PA Tampa, FL

Nominated for Section Chair-Elect, term ending August 2023. Positions held in Section: Chair, Timesharing and Interval Uses; Member, Continuing Legal Education; Chair, Common Interest Ownership Development; Member, Publications; Member, Technology; Group Chair, Vice-Chair, Council Representative, and Supervisory Council Member, Hospitality, Community Recreation and Common Interest Development; Member, Vice-Chair and Co-Chair, Groups and Substantive; Member, Council.

Marie A. Moore Sher Garner Cahill Richter Klein & Hilbert, L.L.C. New Orleans, LA

Nominated for first term as Section ViceChair, Real Property Division, term ending August 2023. Positions held in Section: Chair and Vice-Chair, Retail Leasing; Advisor and Member, Diversity and Inclusion; Co-Vice-Chair, Co-Chair, and Member, Corporate Sponsorship; Assoc. Articles Editors for RP and Last Word Editor, Probate & Property Magazine; Group Chair and Vice-Chair, Leasing Group; Member, Council; Division Vice-Chair and Member, CLE; Member, Planning; SCM and Council Rep, Residential, Multi-Family, and Special Use Group; Member, Leadership/ Mentoring Task Force; Co-Chair, Special Committee on ABA Relations; Vice-Chair, Affordable Housing; Member, Groups and Substantive. Benetta Y. Park Johnson Keland Management, Inc. Racine, WI

Nominated for second term as Section Vice-Chair, Trust and Estate Division, term ending August 2023. Positions held in Section: TE Vice Chair; Vice-Chair, International Tax Planning; Co-Chair, CLE; Vice-Chair, Spring Meeting; Member, Community Outreach; Member, Council; TE Division Secretary, Council; Member, Planning; Member, Nominations; Liaison, Section of Taxation; Member, Meetings Task Force; Member, Career Development Task Force; Liaison, TE Synergy Summit. James G. Durham University of Dayton School of Law Dayton, OH

Nominated for fourth term as Section Secretary, term ending August 2023. Positions held in Section and ABAwide: Section Secretary; Co-Chair, Career Development and Wellness; Chair, Real Property Division Ethics Committee; Vice-Chair and Group Chair, Practice Management Group; Member, Membership; Member, Task Force on RP Law School Curriculum; Chair and Supervisory Council Member, Legal Education and Uniform

Laws Group; Secretary and Member, Council; Liaison, CPR/SOC Joint Committee on Ethics and Professionalism; Advisor and Member, Planning; Member and Vice-Chair, CLE; ABA Advisor to Drafting Committee on Uniform Electronic Registry for Residential Mortgage Notes; SCM, RP & TE Legal Education and Uniform Laws Group. Rana H. Salti Kinship LLC Madison, WI

Nominated for fourth term as Finance and Corporate Sponsorship Officer, term ending August 2023. Also nominated to fill a one-year unexpired term as Section Delegate, term ending August 2023. Positions held in Section: Finance & Corporate Sponsorship Officer; Member and Chair, Fellows; Co-Vice-Chair, International Tax Planning; Co-Vice-Chair, YLN Subcommittee, Membership; Vice-Chair, Young Lawyers Network; Co-Vice-Chair, Generation Skipping Transfers; Member, Special Committee on In-House Counsel; Co-Chair and Liaison, Membership; Member, ABA Standing Committee on Membership; Member, Planning; CoChair, In-House Counsel; Co-Chair, Estate Planning and Administration for Business Owners, Farmers and Ranchers; Member, Corporate Sponsorship; Liaison, Standing Committee on Membership; Member, Council; Vice-Chair and Group Chair, Income and Transfer Tax Planning Group; Vice-Chair, Future Practice and Guidance Task Force. James R. Carey Levin Schreder & Carey Ltd Chicago, IL

Nominated for first term as Finance and Corporate Sponsorship Officer, term ending August 2023. Positions held in Section: Chair and Co-Vice-Chair, Probate & Fiduciary Litigation; Liaison, Section to Dispute Resolution; Council Representative, Group Chair and ViceChair, Litigation, Ethics and Malpractice Group; Co-Chair and Member, Corporate Sponsorship; Member, Task Force on Technology and the Profession; Member, Group and Substantive Committees; Member, Council.

May/June 2022 7

SECTION NEWS

Mary Elizabeth Anderson Wyatt Tarrant & Combs LLP Louisville, KY

Nominated for third term, Assistant Secretary, Trust and Estate Division, term ending August 2023. Positions held in Section and ABA-wide: Vice-Chair, Surrogate Decision Making; Member, Diversity and Inclusion; Group Chair and Group Vice-Chair, Elder Law and Special Needs Planning Group; Member, Community Outreach; RPTE Section Advisor to ULC Drafting Committee on Fundraising through Public Appeals (f/k/a Management of Funds Raised Through Crowdfunding Efforts Act); and ABA Advisor, ULC Drafting Committee on Fundraising through Public Appeals; Liaison, ULC Drafting Committee on Health Care Decisions Act; Assistant Secretary, Council – Trust and Estate Division; Member, Marketing and Social Media; Liaison, ABA Commission on Sexual Orientation & Gender Identity. Timnetra Burruss Chicago, IL

Nominated for first term, Assistant Secretary, Real Property Division, term ending August 2023. Positions held in Section: Member, Fellows; Member, CLE; Member, Diversity; Vice-Chair, Diversity and Inclusion; Co-Chair, Diversity, Equity, and Inclusion; Vice-Chair, Multi-Family Residential; Member, Communications. Orlando Lucero FNF Family of Companies Albuquerque, NM

Vice-Chair, Officers; ABA Presidential Appointment, Liaison, Council for Racial and Ethnic Diversity in the Educational Pipeline; Liaison, ABA Commission on Racial and Ethnic Diversity in the Profession; Liaison, Rep to RP Synergy Summit; Member, Planning; Member, RP Governmental Submissions; Co-Chair and Member, Special Committee on ABA Relations; Member, In-House Counsel; Liaison, Commission on Hispanic Rights and Responsibilities; Member, Future Practice and Guidance Task Force; Liaison to Fund for Justice and Education, Liaison ABA Entities; Section Delegate, House of Delegates, Council; Advisor, Diversity and Inclusion.

Karen Sandler Steinert Fredrikson & Byron PA Minneapolis, MN

Nominated for second term on Council, Trust and Estate Division, term ending August 2025. Positions held in Section: Member and Vice Chair, CLE Committee, Co-Chair Estate Planning and Administration for Business Owners, Farmers and Ranchers Committee; Member, Marketing and Social Media Committee; Member, Task Force on Technology and the Profession; Group Chair and ViceChair, Business Planning Group; Member, Council; Co-Vice-Chair, National CLE Conference, CLE.

Kellye Curtis Clarke

Christina Jenkins

RGS Title Alexandria, VA

Christina Jenkins, PLLC Dallas, TX

Nominated for first full term as Diversity Officer, term ending August 2023. Positions held in Section: Member, Fellows; Chair and Vice-Chair, Single Family Residential; Member, Membership; Co-Chair, Vice-Chair, Co-Vice Chair, Member, Diversity and Inclusion; Group Chair and Vice Chair, Residential, Multi-Family and Special Use Group; Member, Nominations; Member, RP Government Submissions Task Force; Member, Council; Liaison, Commission on Homelessness and Poverty; Member, Groups and Substantive; Chair, Co-Chair and Member, Special Committee on ABA Relations; SCM, Real Estate Financing Group; Member, Council; Member, Planning; Council Rep., RP Litigation and Ethics Group; Diversity Officer.

Nominated for second full term on Council, Real Property Division, term ending August 2025. Positions held in Section: Member and Vice-Chair, Fellows; Member, Communications; Member, Corporate Sponsorship; Vice-Chair and Group Chair, Residential, Multi-Family, and Special Use Group; Co-Chair and Member, Diversity and Inclusion; Member, RP Governmental Submissions; Member, Membership; Member, Council; Council Rep, Commercial Real Estate Transactions Group; Member, CLE; Member, Groups and Substantive; Member, Nominations. Wogan Bernard Chaffe McCall LLP New Orleans, LA

Nominated for second term on CounRyan Walsh Nominated for second full term as Section cil, Real Property Division, term ending Croke Fairchild Morgan & Beres LLC Delegate, term ending August 2025. PosiAugust 2025. Positions held in Section: Chicago, IL tions held in Section: Vice Chair and Chair, Vice-Chair, Governmental Incentives; Remedies and Miscellaneous Clauses Nominated for second term on Council, Chair and Vice-Chair, Mortgage LendCommittee; Member, Partnerships, Joint ing; Vice-Chair and Member, Corporate Trust and Estate Division, term ending Ventures and Other Investment Vehicles August 2025. Positions held in Section: Sponsorship; Vice-Chair, Young Lawyers Committee; Member and Chair, Diversity Network; Chair and Vice-Chair, YLD; CoChair and Member, Fellows; Co-Chair Committee; Chair, Brokers and Brokerage Vice-Chair and Member, CLE; Member, and Vice-Chair, Estate and Gift Tax; MemCommittee; Chair, Residential, Multifamber, CLE; Member, Future Practice and Membership; Member, Nominations; ily and Special Use Group; Section Liaison Guidance Task Force; Co-Chair and MemCouncil Rep., Group Chair and Vice-Chair, to ABA Commission on Racial and Ethnic ber, Membership; Member, Leadership/ Real Estate Financing Group; Member, Diversity in the Profession; Chair, Residen- Mentoring Task Force; Member, Council; Leadership/Mentoring Task Force; Memtial, Multifamily and Special Use Group; ber, Council. Group Co-Chair and Vice-Chair, Income Member, Planning Committee; Council and Transfer Tax Planning Group. Member; Secretary; Published in Section Probate & Property, VolumeRP 36,Division No 3 © 2022 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.

May/June 2022

SECTION NEWS

Soo Yeon Lee

Keri Brown

Patrick T. Sharkey

Mauck & Baker, LLC Chicago, IL

Baker Botts LLP Houston, TX

Jackson Walker LLP Houston, TX

Nominated for second term on Council, Real Property Division, term ending August 2025. Positions held in Section: Member, Communications; Liaison, NAPABA; Liaison, Korean American Bar Association/International Association of Korean Lawyers; Co-Chair and ViceChair, Community Outreach; Chair and Vice-Chair, Ground Leasing; Liaison, ABA Standing Committee on Pro Bono and Public Service; Member, Task Force on Technology and the Profession; Chair, Solo and Small Firm Practice; Member, Corporate Sponsorship; Member, Task Force on Technology and the Profession; Group Vice-Chair, Law Practice Management Group; Group Vice-Chair, RP Litigation and Ethics Group; Group Co-Chair, Joint Law Practice Management Group; Member, Council; Council Rep., Hospitality, Timesharing & Common Interests Development Group; Member, Diversity and Inclusion; Member, Nominations; Chair and Vice-Chair, Life Insurance Company Investments; Member, Groups and Substantive; Assoc. Department Editor, Probate & Property.

Nominated for first term on Council, Trust and Estates Division, term ending August 2025. Positions held in Section: Co-Chair and Co-Vice-Chair, Tax Litigation and Controversy; Assistant TE Editor, eReport; Assoc. Articles Editor, Probate & Property; Vice-Chair and Member, Groups and Substantive; Group Co-Chair and Vice Chair, Income and Transfer Tax Planning Group. Vanesa Browne Bessemer Trust Washington, DC

Nominated for first term on Council, Trust and Estates Division, term ending August 2025. Positions held in Section: Vice-Chair, Diversity, Equity, and Inclusion; Vice-Chair and Co-Vice-Chair, Non-Tax Issues Affecting the Planning and Administration of Estate and Trusts; Liaison, ABA Commission on Racial and Ethnic Diversity in the Profession; Liaison, ABA Commission on Hispanic Rights and Responsibilities.

Nominated for first term on Council, Real Property Division, term ending August 2025. Positions held in Section: Vice-Chair, Condition of the Premises; Vice-Chair, G-2 Office Leasing; Vice-Chair, Ownership and Management; Vice-Chair, Industrial Leasing; Chair, Office Leasing; Group Chair and ViceChair, Leasing Group; Co-Chair, Vice- Chair and Member, Corporate Sponsorship; Member, Groups and Substantive; Council Rep., RP Division Litigation and Ethics Group. James E. A. Slaton Stone Pigman Walther Wittmann L.L.C. Baton Rouge, LA

Nominated to fill a one-year unexpired term on Council, Real Property Division, term ending August 2023. Positions held in Section: Chair and Vice-Chair, Land Use and Zoning; Group Chair and Vice-Chair, Land Use and Environmental Group; Member, Marketing and Social Media; Member, Conservation Easement Task Force; Chair, Purchase and Sale; Member, Membership; Member, Nominations; Member, CLE; Assistant RP Division Secretary; Member, RP Government Submission. n PROUD SILVER SPONSOR RPTE NATIONAL CLE

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May/June 2022 9

UNIFORM LAWS U P D AT E Filling the Gap: A New Uniform Law to Address Electronic Estate Plans Background In 1999, the Uniform Law Commission (ULC) approved the Uniform Electronic Transactions Act (UETA), which gained quick acceptance, and has now been adopted by every US state except New York. UETA is a permissive statute. It does not require anyone to transact business electronically, but it states that if both parties involved in a transaction agree to conduct business electronically, the transaction cannot be denied legal effect or enforceability solely because a document or signature is in electronic form. UETA § 7. The act also provides that if another statute requires a document to be “in writing” or “signed,” an electronic record or signature suffices to satisfy the requirement. Id. Congress enacted similar legislation the following year, the Electronic Signatures in Global and National Commerce Act of 2000 (E-Sign Act). The growth of internet commerce over the ensuing two decades is largely attributable to these two laws, which provide the necessary legal basis for the enforcement of electronic transactions. However, both UETA and E-Sign Act have express exemptions for transactions governed by the law of wills. UETA § 3(b)(1); 15 U.S.C. § 7003(a)(1). When these laws were passed, most attorneys believed that electronic signatures were inappropriate for a last will and testament, reasoning that the traditional formalities of will execution and Uniform Laws Update Editor: Benjamin Orzeske, Chief Counsel, Uniform Law Commission, 111 N. Wabash Avenue, Suite 1010, Chicago, IL 60602.

Uniform Laws Update provides information on uniform and model state laws in development as they apply to property, trust, and estate matters. The editors of Probate & Property welcome information and suggestions from readers.

attestation with two witnesses served several important purposes. The formalities provide reliable evidence of the testator’s intent, protect the testator from coercion or fraud, and ensure that the instrument was in final form rather than a draft. Jumping forward 20 years, it now seems anomalous to many people that online estate-planning services still require a testator’s will to be printed onto paper and signed with ink in the presence of two witnesses. Secure electronic documents with signatures and tamper-evident properties are now common, lessening concerns about fraud. Moreover, consumer expectations have changed for a generation used to banking, shopping, and communicating online. There is a growing demand for online estate-planning services, and the law is just now catching up. The ULC addressed these issues with the approval of the Uniform Electronic Wills Act (UEWA) in 2019. UEWA allows attorneys to offer online estate-planning services yet preserves important safeguards, including the requirement for attestation and witnesses.

For a will to be considered self-proving under UEWA, it must also be notarized by an online notary, who saves the executed will in a secure format and preserves a video recording of the signing ceremony. A Gap in the Law Only months after UEWA was approved, the COVID-19 pandemic significantly increased the demand for online legal services. Lawyers wanted to meet with their clients and execute documents remotely, but the sudden increase in demand also revealed gaps in state laws. In the field of estate planning, issues are not limited to wills. In many states, there is ambiguity about whether other estate-planning documents, like trusts and powers of attorney, can be legally executed in electronic form. UEWA addresses only wills because some electronic estate planning documents are already permitted under other uniform acts, e.g., the Uniform Trust Code and Uniform Power of Attorney Act. But the validity of these documents is unclear in states that have not adopted those other uniform acts. Moreover, even though the nearly universally adopted UETA specifically exempts only wills, some of the official comments to UETA cast doubt on whether the execution of trusts and powers of attorney constitutes a “transaction,” which is defined in UETA to require the participation of two or more persons. If an estate plan is electronically executed by the settlor or principal unilaterally, it would seem to fall outside of the scope of UETA and into a legal gray area.

May/June 2022

UNIFORM LAWS U P D AT E

The Solution The ULC recently formed a new drafting committee to resolve ambiguities and clarify the intent of the law for states where the status of electronic estate planning documents is in doubt. The committee will produce a new uniform act applicable to a broad array of estate-planning documents and provide a rule analogous to the permissive recognition of transactional documents in UETA: An estate-planning document may not be denied legal effect or enforceability solely because the document or signature is in electronic form. Other laws will determine whether the parties validly executed the documents, but there will be no question that the option of electronic execution is available. The committee may also draft amendments to existing uniform acts so that the rules governing electronic

execution of estate-planning documents can be consistent, regardless of whether the state previously adopted one or more uniform trust and estate acts. Once enacted into law, the resulting statutes will bring estate planning fully into the internet age and into greater conformity with the widely accepted laws governing electronic commerce—UETA and E-Sign Act. Estate planners who wish to develop an online practice or simply to meet with existing clients by videoconference rather than in-person will have clear statutory authority to do so with confidence that the resulting documents will not be denied legal effect simply because they are in electronic form. The drafting committee’s work and the resulting act, when completed and approved, will be available at www. uniformlaws.org. n

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Estate-Registry.info Published in Probate & Property, Volume 36, No 3 © 2022 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.

May/June 2022 11

Damages for Caskets Bouncing Down the Highway, Burial Blunders, and More Funeral Frights By William A. Drennan

William A. Drennan is a professor at Southern Illinois University Law School and a former editor for the Books & Media Committee of the Real Property, Probate and Trust Law Section of the ABA.

By William A. Drennan

May/June 2022

Getty Images

The Law of Halloween Nightmares

alloween lore abounds with tales of the disrespected dead seeking retribution. Debate on the existence of wrathful wraiths is spirited. But surviving family members frequently recover money damages in court for their own mental and emotional distress arising from the indignities visited upon the dead because of funeral or burial blunders and bloopers. A decedent was not only late for his own funeral, but completely missed it, because of a botched embalming job. Seventy-five to 100 friends gathered inside for the funeral, but the decedent was left outside because of the foul stench. The jury presumably pondered the family’s ignominy from their ancestor’s malodorous end. In 2012, a Michigan family received $80,000 in settlement after the casket fell from the hearse and grandma rolled out onto the road in front of the mourners on the way from the funeral home to the church. Members of another decedent’s family nearly fainted when their ancestor’s casket was opened, revealing that only the top half was embalmed. Elsewhere, a hearse collided with a railway train, scattering the decedent’s remains, and nobody from the funeral home bothered to “pick up the pieces.” In a rather dramatic protest of low wages, the driver and

attendants sped off in the hearse just as the pallbearers stepped into the street, leaving the family at the curb with the corpse and casket, without proper transport to the cemetery. In another blunder, an especially confident funeral director assured the family that embalming the corpse would preserve it “practically forever” and referred to the great funeral parades for Abraham Lincoln and Enrico Caruso. Twenty months later, when exhumed, the family was horrified, as mom had become a “decomposed, rotted . . . mass.” These cases, and the citations, are discussed in greater detail in the section of this article subtitled “Actual Damage Awards in Selected Cases.”

Torts or Contracts? Litigants and courts may treat these funeral or burial blunders as tort or contract cases. The rationale for treating these actions as torts rests on property law. Generally, the decedent’s next-ofkin has a quasi-property right in a corpse. The next-of-kin cannot make a commercial sale of the corpse but may choose how to respectfully dispose of the corpse, subject to a decedent’s binding declarations. See Parker v. Quinn-McGowen Co., 138 S.E.2d 214, 215 (N.C. 1964). Many courts have concluded that family members may bring an action in tort against a funeral director or cemetery for wrongful actions interfering with the next-of-kin’s rights and causing mental or emotional distress. See Robert A. Brazener, Civil Liability of Undertaker in Connection with Embalming or Preparation of Body for Burial, 48 A.L.R.3d 261, 268, 270 (1973); David B. Sweet, Liability of Cemetery in Connection with Conducting or Supervising Burial Services, 42 A.L.R.4th 1059, 1060 (1985). Other

istockphoto

Introduction: Haunting Legal Issues and Practical Responses Legal restrictions of the past may haunt plaintiffs attempting to reach a jury and obtain appropriate damages in these cases. This article discusses potential restrictions such as the absence of any physical injury from a physical impact (to the surviving family); the family’s inability, in many cases, to prove willful or malicious intent; and the general prohibition on recovering mental or emotional distress damages in breach of contract actions. This article considers whether plaintiffs tend to pursue these actions as torts or breaches of contract, the practical difficulties of proving severe mental or emotional distress damages, the need for independent medical evidence, and the attempts to monetize these damages, all with a backdrop of reported cases capable of inspiring horrific nightmares.

Creepy Background Death for all, and a funeral and burial for many, creates hundreds of thousands of annual opportunities for willful misdeeds and innocent mistakes. Each year, approximately three million people die in the US (officially, 2.85 million in 2019, with an estimate of 3.4 million in 2020 due in part to COVID-19). And each year, approximately 36.6 percent of decedents are buried—the cremation rate surpassed the burial rate for the first time in 2015. Statistics, Nat’l Funeral Dirs. Ass’n, https://www.nfda.org/news/ statistics (projecting the 2021 cremation rate at 57.5 percent and the burial rate at 36.6 percent).

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courts have treated these disputes as contract cases between the bereaved and the service provider hired to prepare, transport, or bury the deceased. In either case, litigants face many obstacles to recovery. Tort Restrictions Although recognizing the possibility of recovering in tort, courts often denied relief on one of three grounds. First, numerous courts concluded that damages for mental or emotional duress were available only if the funeral director’s actions were willful or grossly negligent, and not merely negligent. See, e.g., Mensinger v. O’Hara, 189 Ill. App. 48, 57 (1914). This is consistent with the general notion that defendants should pay damages for intentionally wrongful acts, but perhaps not for inadvertent accidents. Jack Leavitt, The Funeral Director’s Liability for Mental Anguish, 15 Hastings L.J. 464, 471 n.27 (1964). As a related restriction, many courts required a showing of actual malice, where the defendant’s actions were not only intentionally wrongful but actually intended to harm the plaintiff. See, e.g., Kimple v. Riedel, 133 So. 2d 437, 439 (Fla. App. 1961). Second, other courts refused to grant relief because damages from mental and emotional duress were impossible to precisely evaluate, measure, predict, and monetize. Mental and emotional distress could encompass “fright, nervousness, grief, anxiety, worry, mortification, humiliation, embarrassment, terror, or ordeal.” 22 Am. Jur. 2d, Damages, § 224, at 214 (2013). Symptoms could include headaches, upset stomach, sleep disorders, neurosis, depression, and personality changes. One court observed that the cases were in “hopeless conflict” on whether “mental pain” is a proper element of damages. Sanford v. Ware, 60 S.E.2d 10, 12 (Va. 1950). Third, some courts refused to grant these damages unless the plaintiff could show the mental or emotional distress flowed from physical injuries resulting from a physical impact. See 22 Am. Jur. 2d, Damages, § 224, at 213 n.1 (citing several cases); see, e.g., Gatzow v. Buening, 81 N.W. 1003, 1009 (Wis. 1900). Contract Law Avoids Many Restrictions Many older cases treated funeral failures or cemetery slip-ups as torts, but things have changed with an important contract law development. Normally, a plaintiff cannot recover for mental or emotional distress in breach of contract cases. Joseph M. Perillo, Contracts, § 14.5(b), at 520 (7th ed. 2014). But now, many courts make an exception when a fundamental purpose of the contract is to provide peace of mind. The Restatement recognizes this exception, and it specifically includes an illustration for funeral or burial cases. Restatement (Second) of Contracts § 353, illus. #3 (Am. Law Inst. 1981). Other classes of contracts in this club include holiday, vacation, and entertainment contracts; travel arrangements; and all sorts of agreements related to weddings. The rationale is that the heart of these bargains is preserving and promoting peace of mind, and a performance creating mental anguish or emotional distress violates a fundamental purpose of the contract, so the parties must have contemplated the consumer would collect damages for such a breach.

As a result, a plaintiff suing for breach of contract may not have to prove either physical injuries from an impact or that the funeral director’s actions were willful, wanton, or malicious. Also, suing for breach of contract can dispense with the argument that mental and emotional distress damages should not be awarded because of calculation complications. In light of this legal development, it is not surprising that the emerging trend is to pursue these cases as breach of contract actions. Brazener, supra (summarizing this evolution). Fundamentals for Recovering for Mental and Emotional Distress Damages in Contract Cases The jury has the initial responsibility “to determine the amount of damages, and there is no formula or pattern for measuring such damages.” Clark v. Smith, 494 S.W.2d 192, 198 (Tex. App. 1973). A judge considering a jury verdict, or a reviewing court on appeal, may “reduce [the amount] . . . if in the exercise of . . . sound judicial judgment and discretion, [the judge or court] find[s] the award to be [so] excessive . . . [or] irrational . . . as to shock the conscience of the court.” Id. Also, the amount may be increased, if necessary, to a reasonable amount. See, e.g., French v. Ochsner Clinic, 200 So. 2d 371, 374 (La. App. 1967) (involving an unauthorized autopsy). Practical Observations About Damage Awards and Strategies In this thicket of the law, not only are the fact patterns memorable and disturbing, but also the methods of proof and the amounts awarded can be intriguing. Litigants, judges, and juries have much to consider. (1) Estimating the Damages Reasonable Persons Would Contemplate. The fundamental rationale for contract liability is that the parties contemplated that the funeral director or cemetery would be liable for missteps causing mental or emotional distress. As a result, in the absence of any discussion or agreement between the parties about special circumstances or sensitivities when forming the contract, it seems appropriate that the jury or the court should base the damage award on what reasonable persons in the positions of the parties would have foreseen. This is consistent with the approach for calculating “general” consequential damages described in one of the most famous contract cases, Hadley v. Baxendale. 156 Eng. Rep. 145 (Exch. 1854). (2) Actual Damage Awards in Selected Cases. An analysis of some reported cases indicates a judicial desire for consistency and objectivity. For example, after discussing a funeral director’s failures, and the family’s resulting mental and emotional distress, an appellate court may revise the jury’s verdict to be consistent with damage awards in other reported cases. See, e.g., Jones v. City of N.Y., 915 N.Y.S.2d 73 (App. Div. 2011) (considering two prior New York cases); Hirst v. Elgin Metal Casket Co., 438 F. Supp. 906, 909 n.8 (D.C. Mont. 1977) (considering cases from three other jurisdictions). The damage awards in some of the cases discussed at the beginning of this article, and a few others, cluster near either $100,000 or $30,000 (in current value). For example, in Flores v. Baca, 871 P.2d 962 (N.M. 1994), the funeral director embalmed only the top half of the decedent. “The medical examiner . . . testified that he had not seen a more inadequate case of embalming.” Id. at 965. The decedent’s surviving spouse and all 13 children sued. The jury awarded

May/June 2022

the family a total of $500,000, but a new trial solely on the issue of damages dropped the award to $100,000 total. The New Mexico Supreme Court affirmed, stating that the amount was “not inconsistent with substantial justice.” Id. at 970. In the 2012 Michigan case involving the casket sliding out of the hearse, and the deceased grandmother tumbling out on the pavement, the family settled for $80,000. Ellen Connelly, Funeral Home Drops Casket and Body Falls out, Family Gets $80,000 Payment, GlobalPost, Aug. 17, 2012; see also Smith v. Clark, 494 S.W.2d 192 (Tex. App. 1973) (involving another embalming error; the jury initially awarded the current equivalent of $185,000, and the appellate court reduced the combined award to the four children to approximately $77,000 and indicated that a fifth plaintiff might recover damages in a new trial). An overconfident undertaker told the decedent’s son that embalming would preserve the mother’s corpse “practically forever.” Chelini v. Niere, 188 P.2d 564 (Cal. App. 1948), aff ’d, 196 P.2d 915 (Cal. 1948). Twenty months later, when exhumed, the body was a “rotted, decomposed . . . mass.” The jury awarded the son the equivalent of $115,000 plus an extra $10,000 in punitive damages in today’s dollars. On appeal, the court affirmed the general damage award but eliminated the punitive damages. Other cases cluster around $30,000 (in current value). For example, in the case of the odiferous decedent unable to attend his own funeral because of bad embalming, the plaintiff’s attorney asked for over $300,000 (in current value). The jury awarded one-tenth of that amount (approximately $30,000 in current value). Ultimately, the Colorado Supreme Court reversed and denied any recovery based on the old restriction that there could be no recovery unless the family had suffered a physical injury from an impact. Hall v. Jackson, 134 P. 151 (Colo. 1913), overruled in part, Towns v. Anderson, 579 P.2d 1163, 1164 (Colo. 1978) (en banc); see also Hirst v. Elgin Metal Casket Co., 438 F. Supp. 906, 907 (D.C. Mont. 1977) (limiting a family’s damage award to $27,500 total; they paid for a hermetically sealed casket, but upon exhumation the decedent’s face was moldy due to water in the casket). In two of the older cases discussed at the beginning of this article, the courts denied relief completely. In the case of the hearse colliding with the train, and the funeral director failing to “gather up the scattered remains of the dead body,” the court denied recovery because the plaintiffs suffered no physical injuries. Nail v. McCollough, 212 P. 981, 982 (Okla. 1923). Similarly, when a driver of the hearse and the attendants drove off to protest low wages, leaving the family at the curb with the corpse and casket and no transportation to the cemetery, the court denied relief because there were no physical injuries. Gatzow, 81 N.W. at 1009. There are a wide range of damage awards outside these clusters. For example, in Jones v. City of New York, 915 N.Y.S.2d 73, an appellate court reduced the trial court’s award for emotional distress from $800,000 to $400,000. In that case, the morgue released the son’s body to the wrong funeral home. When the mistake was discovered and the body found a week later buried in Pennsylvania, it had decomposed to the point where an

open-casket funeral was no longer possible. At the other extreme, in a case involving bad lawn care, a court awarded $300 total for mental and emotional distress, which was $50 for each visit to the cemetery from 1991 to 1994. Yochim v. Mt. Hope Cemetery Ass’n, 163 Misc. 2d 1054 (Yonkers, NY, City Ct. 1994). In reviewing reported cases, I found no indication that the courts or juries were following the often-discussed “three times specials” rule of thumb that estimates general damages for pain and suffering at three times the amount of special damages in a given case. See Marc Galanter & Mia Cahill, “Most Cases Settle”: Judicial Promotion and the Regulation of Settlements, 46 Stan. L. Rev. 1339, 1375 (1994) (discussing damages for pain and suffering equal to three times the amount of economic damages, generally in tort cases). Scholars point out a lack of empirical evidence for the “three times” rule of thumb and suggest that “general damages equal to special damages may be more accurate.” Margo Schlanger, Inmate Litigation, 116 Harv. L. Rev. 1555, 1622 (2003) (referring to “three times specials” as “folklore”). (3) The Need to Prove “Severe” Mental or Emotional Distress in Contracts Cases. Although contract law dispenses with the three traditional tort restrictions, courts often impose a different restriction—that only “severe” mental or emotional distress is compensable. For example, in Flores v. Baca, 871 P.2d 962 (N.M. 1994), the case in which only the top half of the decedent was embalmed, the New Mexico Supreme Court adopted the requirement that plaintiffs in these cases must prove “severe” or “serious” mental distress to recover for breach of contract. The purpose is to “serve[] as a threshold guarantee of genuineness” and to “separate the . . . distress that [the] skilled . . . services of a funeral director are intended to allay” from the “[g]rief . . . ordinarily associated with any funeral and burial service.” Id. at 970. The Restatement supports this requirement. Restatement (Second) of Contracts § 353 (Am. Law Inst. 1981). Courts describe “severe” as so extreme that “no reasonable person could be expected to endure it.” See 74 Am. Jur., Torts, § 38, at 692 (noting four different approaches to defining “severe”). (4) “Special” Damages in Contract Cases. As a further complication, consistent with the landmark case of Hadley v. Baxendale, additional damages (sometimes called “special” damages) may be available if the customer explains, when negotiating the contract, that unusually high damages will result from a breach. This may have been a factor in the Chelini case, discussed above. In Chelini, when hiring the undertaker, the decedent’s son told the undertaker he planned to have his mother’s body exhumed after the war, that the funeral director should then place a certain ring on the mother’s finger and slippers on her feet, and the body (in the casket) should then be moved to a different cemetery where the casket would be placed inside a lead box and buried in a newly erected family vault. 196 P.2d at 916. The funeral director accepted an extra $25 for agreeing to provide these services. This detailed discussion about special circumstances may have enhanced the damages when, after the war (about two years later), the son discovered at the exhumation that his mother’s body had become a “rotted, decomposed . . . mass.” Id. (5) Proving Actual Damages—Is Independent Medical Evidence

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Necessary? In these cases, a plaintiff should be obligated to prove actual damages to the extent of any recovery. The only exception should be in the highly unlikely event that the parties agreed in advance on the amount of liquidated damages payable upon a particular breach, which actually occurred. See Wallace Real Estate Invest., Inc. v. Groves, 881 P.2d 1010 (Wash. 1994) (indicating the plaintiff need not prove actual damages to collect an agreed-upon liquidated damage amount). There are several practical difficulties in proving these damages. A basic problem is separating the family’s general grief and distress because of the decedent’s death from their particular distress caused by the funeral director’s (or cemetery’s) missteps. See Flores, 871 P.2d at 970. Further, there is the matter of evaluating the plaintiff’s mental, emotional, and possibly physical state before the decedent died, compared to that person’s situation after the funeral director’s (or cemetery’s) errors. Specifically, if the plaintiff complains of headaches, lack of appetite, depression, and disturbed sleep, what reliable evidence will be needed to prove the plaintiff’s condition both before and after the blunder? Should the plaintiff’s own selfserving testimony be sufficient? Or should the court require independent medical evidence, such as the testimony of medical experts? Should absence from work be sufficient proof? Moreover, it may be impossible to precisely determine how far into the future the symptoms will continue and their future severity. One court observed that all this uncertainly can lead to verdicts generated more by the “ingenuity of counsel, [exaggeration and actual fraud] by the clients, and the prejudices of the jury” than valid standards of just compensation. Huston v. Freemansburg, 212 Pa. 548, 550 (1905), quoted in Leavitt, supra, at 486 n.83. Perhaps because of the relatively modest amounts often involved in these cases, the plaintiffs frequently do not appear to provide any independent medical evidence. For example, in Flores v. Baca, the surviving spouse merely testified about her “feelings of distress, including sleeplessness, lack of appetite, and depression . . . [and later alleged] long-term emotional pain.” 871 P.2d at 965. She also testified about her “feelings that [her husband’s] body was disgraced and dishonored.” Id. at 970. As discussed above, the New Mexico Supreme Court affirmed an award of $100,000. Nevertheless, some plaintiffs have provided expert medical testimony or other independent medical evidence. Although candidly recognizing the limits of medical analysis in these areas, some courts (and presumably some juries) appear to have given weight to such evidence. One court observed: While psychiatry and psychology may not be exact sciences, they can provide sufficiently reliable information concerning causation and treatment of psychic injuries, to provide a jury with an intelligent basis for evaluation of a particular claim. In this light, we are confident that juries are capable of assessing whether a claim is concocted . . . or, in fact, real.

Towns v. Anderson, 579 P.2d 1163, 1164 (Colo. 1978) (en banc). Consistent with this view, a court stated that in mental or emotional distress cases, “we have often considered medical corroboration to be . . . highly probative.” Sparrow v. Demonico, 960 N.E.2d 296, 304 (Mass. 2012) (contrasting emotional distress cases with capacity to contract cases; for the latter the court required medical evidence). The court stated that “[s]uch corroboration not only guards against feigned or fraudulent claims of mental distress, but also alleviates the concern that even honest plaintiffs erroneously might convince themselves that they suffer from emotional distress . . . thereby compounding the problem of fraudulent lawsuits.” Id. at 305. As an example, in the case of the funeral director’s false representation that the embalming would preserve the body “practically forever,” the plaintiff presented expert testimony concerning his mental and physical condition before and after the cemetery nightmare. The physician testified that (i) the son likely suffered a “cerebral spasm” the night of the horror—a “cerebral spasm” can be a precursor to a stroke; (ii) the next day, in the doctor’s office, the son’s blood pressure was 230; and (iii) thereafter, the son was no longer able to work without becoming faint. Chelini, 188 P.2d at 566. Again, in that case, the California Supreme Court affirmed the trial court award of approximately $115,000 in current value. (6) “Self-Inflicted” Mental or Emotional Distress. Another factor sometimes at play is the extent to which the family was responsible for its own trauma. In Hirst v. Elgin Metal Casket Co., 438 F. Supp. at 908, the court reduced the jury award after describing some of the plaintiffs’ distress as “self-inflicted.” Some plaintiffs attended an exhumation when not required, and several of them talked unnecessarily about the unfortunate occurrences (such as the decomposition of the body over time). Practical Conclusions and Future Nightmares Contract law now provides a dependable avenue for avoiding the obstacles that often blocked these lawsuits from getting to a jury under tort law. But contract law imposes its own restrictions, such as that the plaintiff must prove severe mental or emotional distress. Also, in contract, it is appropriate that a judge or reviewing court limit a jury’s award to a reasonable, foreseeable amount because the recovery is founded on what the parties should have contemplated when they entered into the contract. Reviewing courts should reduce (or increase) jury awards to align the damage amounts with recoveries in similar cases. In light of the modest amounts involved in many of these cases, it is appropriate that expert or other independent medical evidence should not be strictly required. A comprehensive examination of the law of Halloween nightmares would consider additional issues. Important topics would include (i) whether various relatives and friends should have standing to sue (as intended third-party beneficiaries of the contract or otherwise); (ii) the availability of punitive damages or other damages if a tort action could be maintained; (iii) whether funeral providers and cemeteries can disclaim liability in advance, in a written contract; and (iv) possible criminal penalties for abuse of a corpse. An examination of those areas doubtlessly would dig up more nightmares, but those subjects are beyond the scope of this article. Pleasant dreams to all. n

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KEEPING CURRENT PROPERTY CASES EMINENT DOMAIN: Just compensation clause of state constitution waives sovereign immunity for inverse-condemnation claim that seeks injunctive relief. The government’s road-widening project caused flooding “within and around” Mixon’s real property. Mixon sued the government for inverse condemnation under the just compensation clause of the state constitution, seeking both damages and injunctive relief to prevent recurrent flooding. The trial court denied the government’s defense of sovereign immunity. The appellate court affirmed, and the supreme court agreed, with some narrowing language with respect to the claim for injunctive relief. The court began by noting a long line of cases and constitutional amendments regarding just compensation and sovereign immunity, explaining that just compensation must be paid prior to a taking and that this principle carries over to inverse condemnations. This right necessarily waives sovereign immunity. Otherwise, the state’s obligation to pay just compensation before damaging property would ring hollow. When the government invokes eminent domain and has not prepaid compensation for the taking, the just compensation clause waives sovereign immunity. Likewise, when the government takes or damages private property without invoking eminent domain, the just compensation clause also waives sovereign immunity. With respect to Mixon’s claim for injunctive relief, the court held that sovereign immunity is waived to the extent that her claim seeks to stop Keeping Current—Property Editor: Prof. Shelby D. Green, Elisabeth Haub School of Law at Pace University, White Plains, NY 10603, sgreen@law.pace.edu. Contributor: Prof. Darryl C. Wilson.

Keeping Current—Property offers a look at selected recent cases, literature, and legislation. The editors of Probate & Property welcome suggestions and contributions from readers.

the taking or damaging until the government fulfills its legal obligations that are conditions precedent to eminent domain. Dep’t. of Transp. v. Mixon, 864 S.E.2d 67 (Ga. 2021). FORECLOSURE: Title to property bought at homeowners’ association foreclosure sale is subject to additional attorney’s fees imposed under prior deed of trust. At a foreclosure sale of a homeowners’ association lien, Oella Ridge Trust paid $4,700 for the property, subject to a first deed of trust held by Silver State. Oella Ridge Trust brought an action to quiet title against Silver State, claiming that the homeowners’ association was entitled to superpriority and therefore the foreclosure sale extinguished the deed of trust. Although Oella Ridge Trust prevailed in trial court, the state supreme court reversed, ruling that Silver State’s deed of trust still had first priority. Oella Ridge Trust then sought to pay off the debt, which had a remaining principal balance of $138,000. Silver State demanded an additional amount of $96,500 for attorneys’ fees incurred in defending the quiet title action. Oella Ridge filed a complaint for declaratory relief, alleging that the attorneys’ fees were unreasonable, and that Silver State had waived any request for attorneys’ fees by failing to seek them during the litigation to affirm the deed of trust, as required by Nev. Rules of Civil Proc. 54(d)(2). The trial court granted partial

summary judgment to Silver State, concluding the deed of trust allowed it to add the fees to the debt, without moving for those fees in court. The supreme court affirmed. As an initial matter, the court concluded that the provision of the deed of trust applied to Oella Ridge. Because Oella Ridge purchased the property at an HOA foreclosure sale, it took title subject to all the terms of Silver State’s prior deed of trust, which was not extinguished by the sale. Although Oella Ridge was not personally liable for the attorneys’ fees, if it wishes to pay off the note, then it must to pay any costs Silver State properly added to the secured debt pursuant to the deed of trust. Since the fees did not arise from a judgment, Silver State’s claim was not subject to the time requirements of Rule 54(d)(2). Oella Ridge Trust v. Silver State Schs. Credit Union, 500 P.3d 1253 (Nev. 2021). FORECLOSURE: Lender who immediately assigns rights after sale is still purchaser for purpose of calculating deficiency based on fair market value of property. Rockwell Homes defaulted on a loan from Jackson Lumber with a balance due of $1.041 million. Appraisals showed the property had an “as is” value of $1.1 million. At the foreclosure sale, Jackson Lumber was the highest bidder at $550,000. It executed a purchase and sale agreement naming itself as both seller and “purchaser” of the property. Jackson Lumber then assigned rights under the purchase and sale agreement and gave a deed to the eventual purchaser. Jackson Lumber then brought suit against Rockwell Homes for a deficiency judgment. The trial court entered judgment for Rockwell Homes on the ground that as mortgagee who purchased the property at the sale, the deficiency judgment is determined by comparing the amount owed with the fair market value of the property at

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the time of the sale, as established by an independent appraisal. 14 Me. Rev. Stat. § 6203-E. Using that measure, there was no deficiency. The supreme judicial court affirmed. This measure for a deficiency judgment under the statute stands in opposition to the ordinary rule that compares the sale price with the sum owed to the mortgagee. The issue here was whether Jackson Lumber was the “purchaser at the public sale” even though it did not ultimately acquire title to the property because it later assigned away its rights under the purchase and sale agreement. The court explained that while the term “purchaser,” viewed in isolation, means “someone who obtains property for money or other valuable consideration; a buyer,” the meaning under the foreclosure statute is different based on its usage in the statutory scheme. Particularly, because a “purchaser” is authorized to assign the agreement suggests that the “successful bidder” is the “purchaser at the public sale.” This interpretation was buttressed by the statutory language that the calculation of the deficiency is determined “at the time of the sale,” not the fair market value at the time that money or the deed changes hands. Because the mortgagee was the purchaser at the time of the sale, it was not entitled to a deficiency judgment. Jackson Lumber & Millwork Co. v. Rockwell Homes, LLC, 266 A.3d 288 (Me. 2022). LANDLORD-TENANT: Landlord’s loud music on weekends and shooting firecrackers does not interfere with tenant’s right to quiet enjoyment. A landlord initiated eviction proceedings against a residential tenant. While the proceedings were pending, the tenant brought an action against the landlord, alleging that, in retaliation for the eviction proceedings, the landlord, who lived in a house next door, played “loud” rock music on an outdoor stereo system early in the morning and during the day from early morning Friday through Monday; yelled “GET OUT OF MY HOME!” loudly from her property; and either shot a gun or ignited firecrackers on two evenings. The trial

court entered judgment for the landlord. The supreme court affirmed. Under N.H. Rev. Stat. § 540-A:2, a landlord may not willfully violate a tenant’s right to quiet enjoyment. The statute codifies the common-law right that obligates the landlord to refrain from interfering with a tenant’s beneficial use or enjoyment of the property. To establish a violation, the evidence must show that the landlord acted willfully, that is, voluntarily and intentionally, not by mistake or accident. Here, the trial court found that the music did not interfere with the tenant’s quiet enjoyment because it was played during a summer weekend when people generally listen to music outside and it did not appear to overpower regular conversation. The tenant also had not demonstrated that the alleged gun shots and firecrackers were in retaliation against the tenant. As the landlord controverted much of what the tenant claimed, the trial court was free to believe the landlord. Magee v. Cooper, 2021 N.H. LEXIS 174 (N.H. Dec. 3, 2021). MORTGAGES: Owner loses statutory redemption right by mistakenly paying less than full redemption amount after foreclosure sale. Clement defaulted on a loan secured by a mortgage on 208 acres of farmland, and the bank instituted foreclosure proceedings. The promissory notes bore an initial rate of 4.25 percent and a default rate of 21 percent. The notes did not contain a cure provision allowing a post-default reversion back to the nondefault rate. At a foreclosure sale on May 22, 2017, Mlady purchased the farmland and obtained a certificate noting the redemption expiration date of May 22, 2018. The notice of sheriff ’s sale and the underlying default judgment both indicated the default interest rate of 21 percent and per diem interest of $933.34. Shortly thereafter, Clement assigned his redemption rights to Dougan, who then deposited $1,690,000 with the county clerk and filed a petition asking the court to set the rate at 4.25 percent, instead of 21 percent. While this challenge was ongoing, Dougan deposited

additional funds based on the default interest rate, as a protective payment. However, Dougan’s counsel miscalculated the amounts due. Based on the applicable 21 percent interest rate, Dougan had to pay $1,938,799.79; but she actually paid $1,937,001—$1,798.79 below the required amount. After Mlady received a deed to the property on May 24, 2018, Dougan deposited additional money and asked the court to recall the deed. The trial court later determined that Dougan should be allowed, as a matter of equity, to pay the additional money due, despite the expiration of the redemption period. After additional motions and review, the appellate court held that the redemption effort was untimely. The supreme court agreed, first affirming that the higher default interest rate applied at all times after Clement’s default and that Dougan’s early partial payment did not reduce the daily accrual of interest. Based on this, the redemption effort was untimely because the necessary amounts to redeem were not deposited with the clerk prior to the redemption expiration date. The court stated that post-deadline payments are not allowed. Showing little concern for the hardship to the property owner, but great concern for disruptions in the market, the court noted that knowing the precise amount and deadlines are important for the marketability of foreclosed properties and related financing. Dismissing the claim off-handedly, the court stated: “Close only counts in horseshoes and hand grenades, not our redemption statute.” Mlady v. Dougan, 967 N.W.2d 328 (Iowa 2021). REAL COVENANTS: Termination of covenants for changed conditions requires changes within neighborhood that neutralize benefits of covenants and defeat their objects and purposes. Covenants recorded in 1982 required a minimum lot size of five acres for single-family dwellings. In 2003, Delongchamp purchased property subject to the restrictions. In 2015, Capitol Farmers Market (CFM) acquired nearby land in the restricted neighborhood and later announced plans to subdivide its

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property into a high-density residential subdivision with small lots. DeLongchamp sued CFM, and the trial court, based on the findings and report of a special master, held that the terms of the covenants were not ambiguous, there was no waiver of the restrictions, and the covenants were not extinguished by changed conditions. After an appeal and remand, the supreme court agreed with the lower courts. On the changed conditions claim, the court noted that CFM’s only evidence was the development of 910 single-family residential lots and other commercial development within a one-mile radius of the property since the covenants were imposed in 1982. But this was not enough. Instead, what mattered was that the properties to the west, south, and east of the land in question had not changed nor did use of the properties within the restricted neighborhood. The proof failed to show a change in character so great as to neutralize the benefits of the covenants and render them unenforceable. Capitol Farmers Mkt., Inc. v. Ingram, 2021 Ala. LEXIS 128 (Ala. Dec. 3, 2021). REAL COVENANTS: Promise to arbitrate disputes arising from construction defects touches and concerns the land. In 2007, a builder sold a new home, conveying title by special warranty deed that included extensive provisions regarding mediation and arbitration as well as other covenants, conditions, and restrictions. The deed stated that the restrictions were binding on both the original buyers and subsequent purchasers of the property. The Hayslips bought the property in 2010, taking title by a deed stating the property was “subject to easements, restrictions, reservations, and limitations if any.” In 2017, the Hayslips sued the builder over allegedly defective stucco and the builder filed a motion to stay the lawsuit and compel arbitration. The trial court granted the motion, and the supreme court affirmed, holding that a valid arbitration agreement existed and ran with the land, binding the Hayslips. A real covenant runs with the land if it touches and concerns

the land involved, there is intent for the covenant to run, and there is notice of the restriction to the party against whom enforcement is sought. The element at issue was “touch and concern.” The court found that because the alleged construction defect physically affected the dwelling and the resolution of it depended on the arbitration outcome, the covenant touched and concerned the land. The court declined the Hayslips’ argument that the promise to arbitrate lacked privity because they were not party to the original deed. Instead, the court relied on the relaxed privity rules traditionally applied to equitable servitudes. Hayslip v. U.S. Home Corp., 2022 Fla. LEXIS 176 (Fla. Jan. 27, 2022). RIGHT OF FIRST REFUSAL: A 125-year lease does not trigger right of first refusal. In 1982, the Luckinbill Living Trust leased a portion of a huge parcel to Nielson for a three-year term, to continue from year to year unless terminated by either party. The lease contained a right of first refusal under which Nielson had a “first right to purchase the property upon the same terms and conditions and for the same purchase price as … [offered by] any other bona fide purchaser of the property.” Nielson assigned the lease to Holding, including Nielson’s right of first refusal. Years later, Luckinbill subdivided the land into smaller parcels. On more than one occasion, Luckinbill honored Holding’s right of first refusal. In 2019, the Lennons sought to purchase two parcels. Luckinbill notified Holding, and each time Holding exercised the right of first refusal to pre-empt them. Then, without first notifying Holding, Luckinbill entered into a 125-year lease with the Lennons for a 6.6-acre parcel, with a lease payment of $1,200 annually, to end in the year 2144. Holdings brought suit alleging a violation of the right of first refusal. The trial court rejected the claim, and the supreme court affirmed. The lease was clear: the right of first refusal was triggered by potential sale. A lease is not a sale. The court went on to reject Holding’s argument that the recording act’s definition

of a conveyance that includes leases of terms greater than three years should control because the lease did not refer to the recording act. The court also rejected Holding’s claim based on the essential differences between a sale, by which the purchaser gains substantive ownership and control over the subject property, and a lease, which does not change ownership and relinquish full control over the property. Luckinbill retained ownership, allowable uses were specifically limited, and any improvements or changes required Luckinbill’s approval. Holding v. Luckinbill, 503 P.3d 12 (Wyo. 2022). SALES CONTRACTS: City dealing at arm’s length in sale of shopping mall has no duty to disclose environmental contamination to buyer. A shopping mall in Fairbanks, Alaska, operated under a lease from the City of Fairbanks. In 1974, Gavora, Inc., acquired the leasehold and, in 2002, bought the property from the city pursuant to a purchase option. Before purchase, Gavora did not order an environmental inspection and the property appraisal stated that it did not address environmental contamination. For many years, beginning before Gavora acquired the leasehold, a mall dry-cleaning tenant contaminated the groundwater with hazardous drycleaning chemicals. In 2009, the state environmental agency notified the city and Gavora that they were potentially liable for remediation of the groundwater contamination. Gavora sued the city in federal district court, which held the city and Gavora jointly and severally liable and apportioned remediation costs 55 percent to the city and 45 percent to Gavora. Then Gavora sued the city in state court, claiming misrepresentation, fraud, breach of contract, and breach of an implied covenant of good faith and fair dealing. Gavora also claimed that the city, in selling the property, breached a duty under the Restatement of Torts “to exercise reasonable care to disclose” the environmental contamination “because of a fiduciary or similar relation of trust and confidence between” the parties.

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Restatement of Torts (Second) § 551(2) (a) (1977). The trial court ruled for the city on all the major claims. The supreme court affirmed. In particular, it rejected the § 551 claim, which imposes a duty to disclose between co-venturers. The court determined that the city and Gavora did not enter into a joint venture but were engaged in an arm’s length purchase and sale transaction. That relationship did not change on account of the city being a government entity because the city participated as a commercial real estate vendor. The court declared that a duty to disclose is rarely imposed when the parties deal at arm’s length and when the information is the type that a buyer is expected to discover by ordinary inspection. As an experienced real estate investor, Gavora had reason to know about environmental concerns, yet it took no action to investigate the condition of the property. The court went on to reject a “free-floating disclosure duty arising solely under an implied covenant.” Gavora, Inc. v. City of Fairbanks, 502 P.3d 410 (Alaska 2021). STATUTE OF LIMITATIONS: Sales agreement with letter “s” printed next to signature line is not contract under seal with 20-year statute of limitations. In 2005, Sweetwater Point bought two parcels of land from Kee for $8 million. Before closing, Sweetwater learned that the state had a claim to a de minimis portion of one of the parcels, although the claim did now show up in the seller’s chain of title. After consulting with counsel and a survey, Sweetwater concluded that the sellers had superior title to the parcel and went forward with closing, accepting title by special warranty deed. In 2009, the state brought a quiet-title action against Sweetwater, claiming title to the entire parcel. That litigation lasted until 2017, when the court of chancery declared that the state held superior title. One year later, Sweetwater filed suit against the sellers, seeking rescission, alleging mutual mistake, failure of consideration, and unjust enrichment. The court dismissed all the actions as time-barred under the state’s three-year

statute of limitations. 10 Del. Code § 8106. The supreme court affirmed, rejecting arguments for extending the statute of limitations, either based on contract under seal or tolling under a discovery rule. Ordinarily, the cause of action on the claims accrues at closing and is time-barred three years thereafter. The statute of limitations for a contract under seal, however, is 20 years. Although a wax or impressed seal is no longer required to create an instrument under seal, there is yet a bright-line rule that there must be both a testimonium clause and the word “SEAL” printed next to the signature line. Here, the form contract referred to a seal in the testimonium clause and next to each signature there appeared an “(s).” These did not clearly indicate that the parties intended to affix a seal, and the “(s)” could have stood for something innocuous like signature or sign here. The court stated that given the high cost of extending the statute of limitations, it was not unreasonable to require parties to use the word “seal” next to the individual signatures to create a contract under seal. The court also rejected tolling because that theory applies only when the injury is inherently unknowable, and the claimant is blamelessly ignorant of the wrongful act and the injury. Here, Sweetwater was put on inquiry notice as early as 2007, when the state interfered with Sweetwater’s land clearing activities, stating that it intended to build a highway over one of the parcels because it owned the land. A reasonable person would have inferred at that time that there were serious reasons to doubt whether the sellers had conveyed good title. Lehman Bros. Holdings, Inc. v. Kee, 268 A.3d 178 (Del. 2021). LITERATURE MORTGAGES: In Can a Pledge of Equity Interests Be a Prohibited Clog on the Equity of Redemption?, 56 Real Prop. Tr. & Estate L.J. 301 (2021), Brian D. Hulse explores this question. He explains that it is common for a lender to take a security interest in all the equity interests in an entity that owns

real estate (such a security interest is often called a “pledge”). In many cases, the entity has no material assets other than a single piece of real estate. The entity may or may not grant a mortgage on the real estate. If there is a mortgage, the mortgagee may or may not be the same lender that holds the equity pledge. The pledge of the equity interests is taken pursuant to Article 9 of the Uniform Commercial Code, which has remedies provisions that can be enforced in many cases much more quickly than foreclosure of a mortgage and often without other disadvantages of a mortgage foreclosure. In recent New York litigation, the debtors argued that such a pledge violates centuriesold principles of real estate law holding that any device that allows a creditor with real property as collateral to realize on the property without going through the statutory real property foreclosure procedures is a “clog” on the property owner’s equity of redemption and is invalid. The New York court dismissed this litigation without making a substantive ruling on the clogging argument and, to date, there is no reported decision on the issue. This article reviews the relevant law, the arguments on each side of the issue, and how those arguments might play out in various factual settings. The definitive resolution remains to be seen. PROPERTY TAX: The phenomenon known as “tax privateering” is the exploitation of purchased tax debt, which affects thousands of property owners every year. Wildly profitable to the privateers, it is inordinately devastating to the property owners, particularly to vulnerable populations—the elderly and cash-poor property owners who experience unanticipated economic shocks in their lives. In Property Tax Privateers, 41 Va. Tax. Rev. 89 (2021), Cameron M. Baskett and Christopher G. Bradley reveal the true evils of this regime, which the local property tax system has created and now supports. If a property owner is unable to pay property taxes, along with exorbitant interest, penalties, and fees, the local government sells the debt to third-party

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collectors, who can foreclose on that debt, and, soon after, the privateer resells the property at a sizable profit. The authors show that property tax system is remarkably unfair—although progressive in that the amount of tax increases with the property value, it is yet regressive in the sense of disparate impacts on property owners. Property taxes represent 4.2 percent of the total income for the poorest twenty percent of homeowners, compared to only 1.7 percent for the wealthiest one percent. By using privateers, local governments avoid the burden of foreclosure and the blame for resultant hardships. To control some of the abuses, while at the same time protecting the government’s right to enforce tax obligations, the authors call for a suspension of the privateers’ right to foreclose. They should have to wait until the property owner dies, sells the home, or vacates. The authors also offer useful ideas for improving the property tax system, including tax exemptions, credits, and other forms of tax relief to help preserve the property rights of distressed property owners. ZONING: Ira K. Lindsay is against abolishing statutory protection for nonconforming uses. In In Praise of Nonconformity, 61 Santa Clara L. Rev. 745 (2021), he offers a range of reasons. The protection of existing uses adheres to the original logic of zoning regulation as a planning instrument. Existinguse protection vindicates values that are central to the normative function of property rights by allowing uses without outside interference. Losing protection for existing uses would upset the existing relations between neighbors as to how they use their respective property and unsettle the mechanisms that are better suited for resolving land use disputes between neighbors, such as private bargaining and nuisance litigation. Also, existing-use protection reflects appropriate skepticism about the value of strict separation of uses for those uses that are not so harmful or that they cannot plausibly be considered nuisances. Lindsay thinks that protecting existing uses fits well in the context of comprehensive planning and

our evolving notion of ownership and that, rather than viewing the concept as a “grubby concession in the law,” it should be preserved as a vital tool for wise land use regulation. In Standing in Land Use Litigation, 56 Real Prop. Tr. & Estate L. J. 237 (2021), Prof. Daniel R. Mandelker explores the merits and problems of third-party standing to sue in land use litigation. He believes that questionable land use decisions will not be taken to court unless a third-party can sue, but notes that third-party standing is limited. Standing law is fragmented, obstinate, excessively restrictive, and split between judicial and statutory requirements. Reform is necessary so that third parties can have access to court to protect public values. The article explains why third-party standing should be expanded and proposes a conceptual model to guide reform. Prof. Mandelker discusses conflicting third-party standing rules in the US Supreme Court, including the dominant restrictive rule that requires injury, and similar rules in the states. He also discusses nuisance-driven and statutory rules for third-party standing in zoning cases. He recommends reform that gives standing in court in land use cases to all participants in public hearings and a gatekeeper function that blocks standing when bias is present.

LEGISLATION NEW JERSEY amends landlordtenant law to require covers on steam radiators. Tenants have a right to request steam-radiator covers. Landlords must give tenants notice of the right as a rider to leases and by posting in common areas. 2021 N.J. Laws 259. NEW YORK amends real property law to require education by brokers on fair housing laws. The amendments specify that courses should include instruction on the legacy of segregation, unequal treatment, and the history of lack of access to housing on the basis of race, disability, and other protected characteristics. 2021 N.Y. Laws 697. NEW YORK amends real property law to require cultural competence of real estate brokers. Licensees and applicants for renewals must complete at least two hours of training. 2021 N.Y. Laws 688. NEW YORK amends housing law to require that agencies affirmatively further fair housing. The required measures include identifying and overcoming patterns of segregation, reducing disparities, and eliminating disproportionate housing opportunities. 2021 N.Y. Laws 690.n

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TITLE INSURANCE

Determining an Insured’s Loss and Calculating Damages

itle insurance is the most misunderstood, yet one of the most valuable, forms of insurance in America. Even the most prudent attorney or layperson cannot inspect and discover each and every title defect or claim that might affect a specific property. Property purchasers buy title insurance to protect against this inherent risk of property ownership or defects in ownership. “A title insurance policy is a contract by which the title insurer agrees to indemnify its insured for loss Adam Leitman Bailey is the founding partner of Adam Leitman Bailey, P.C., in New York, New York. Joshua M. Filsoof is an associate at Rosenberg & Estis, P.C., in New York, New York.

occasioned by a defect in title.” E.C.I. Fin. Corp. v First Am. Tit. Ins. Co. of N.Y., 121 A.D.3d 833, 834 (N.Y. App. Div. 2d Dep’t 2014). This is fundamentally different from other forms of insurance, as the policyholder need not prove fault. Automotive insurance, for example, might protect a car owner in the event that their car breaks down or is damaged in an accident after the policy is issued. Title insurance, on the other hand, looks backwards. For a single payment made at closing, it protects the insured against hidden defects encumbering the property for as long as the insured retains an interest in that property. The policy also protects the insured’s successors who succeed to the protections of the policy either under the definition of “insured” or the provisions for the continuation of coverage

in the Rate Manual. The Title Insurance Rate Service Association (TIRSA), licensed by the N.Y. Department of Financial Services, proposes rules for its member title insurance companies. TIRSA’s Rate Manual includes the rates and rules of policies and endorsements issued by its member insurers. For a detailed discussion of other facets of title insurance, see Adam L. Bailey & Michael J. Berey, Real Estate Title: The Practice of Real Estate Law in New York (2020). In that way, title insurance looks “back to the future”—meaning that it insures title defects, such as adverse possession, that existed before the transfer of the property. Unfortunately, this is often misunderstood by both legal practitioners and purchasers. Although a title company might be found negligent in failing

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By Adam Leitman Bailey and Joshua M. Filsoof

timely to file an action disputing an alleged title defect, title companies are not liable for negligence merely because hidden defects are found to encumber the property. See, e.g., Citibank v. Chicago Tit. Ins. Co., 214 A.D.2d 212 (N.Y. App. Div. 1st Dep’t 1995) (dismissing the insured’s negligence cause of action against title company for a negligently conducted title search). This is because title insurance is a contract and therefore any damages owed are designated, and limited, by the terms of the policy. Similarly, a title insurance policy may not be used as a homeowners insurance policy to protect against nontitle-related issues with a property. See, e.g., Ilkowitz v. Durand, 2018 U.S. Dist. LEXIS 51946 (S.D.N.Y. Mar. 27, 2018), in which it was successfully argued that the title insurance company was not liable for personal injuries caused by lead-based paint. Prior to the use of the ALTA Owner’s Policy of Title Insurance, which came into circulation in 2006 (the 2006 Policy), most title policies were silent as to how damages should be calculated in the event of a title defect. This left courts to fill the void and develop a general framework for this analysis. These cases provided lessons that are reflected in the 2006 Policy. The New York Court of Appeals and the Second Appellate Department took up this task in a series of decisions in the 1980s under the caption L. Smirlock Realty Corp. v. Title Guarantee Co. In one of the Second Department decisions, affirmed by the court of appeals, the court laid out a remarkably simple

standard: The measure of recovery depends on the nature of the defect. 97 A.D.2d 208 (N.Y. App. Div. 2d Dep’t 1983), aff ’d on appeal, 63 N.Y.2d 955 (1984). Where there is a total loss of title, such as a fraudulent deed or the complete adverse possession of one’s property, the insured will recover the market value of the property, within the limits of the policy. Where there is a partial loss of title, and where that partial loss cannot be easily rectified, such as an easement running over a portion of one’s property, the insured will recover the difference between the value of the property without the defect and the value of the property with the defect. Consequential or speculative damages are not considered; instead, the court looks to how the property is then being used to determine its value. This is best demonstrated by examining the facts of L. Smirlock. In that case, the plaintiff purchased a warehouse property for $600,000 and obtained a title policy in the same amount. Soon after purchasing the property, the plaintiff invested $95,000 in improving

the property. Two years after the closing, it was discovered that the primary means of access to the property had been condemned by the town years before. Now worth only a fraction of its prior value, the property was foreclosed upon, and the plaintiff sued for the full $600,000 under the title policy. The Appellate Division, applying the above standard, subtracted the property’s value with the primary means of access, $800,000, from the value of the property without such access, which it found to be $206,150 based upon expert testimony. The court thereby awarded plaintiff $593,850, which represented the difference in the value of the property caused by the defect in title. As noted by the court, this is “at once, a restrictive and expansive statement of damages. It is restrictive in that conjectural lost profits are not included. It is expansive in that the insured is protected against more than just nominal damages or out-of-pocket expenses.” Id. at 219. These general principles are reflected

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An insured is entitled only to recovery of the direct diminution in property value sustained as a result of the defect in title and is not entitled to consequential or speculative damages. in both the 2006 Policy and the Proposed 2021 Policy. Title Company Liability Under the 2006 and 2021 ALTA Policies The 2006 Policy has in many ways been modeled after L. Smirlock and applies the same general standard. Section 8 of the 2006 Policy, Determination and Extent of Liability, provides: This policy is a contract of indemnity against actual monetary loss or damage sustained or incurred by the Insured Claimant who has suffered loss or damage by reason of matters insured against by this policy. (a) The extent of liability of the Company for loss or damage under the 2006 policy shall not exceed the lesser of (i) the Amount of Insurance; or (ii) the difference between the value of the Title as insured and the value of the Title subject to the risk insured against this policy. The Proposed 2021 Policy follows the 2006 Policy in this regard and provides for the same general calculation of damages. Insured Is Entitled to Recover the Direct Loss in Value and Not Consequential or Speculative Damages Courts have interpreted the 2006 Policy provision insuring against “actual monetary loss or damage sustained” as having the same meaning as provided for in L. Smirlock, namely, that an insured is entitled only to recovery of the direct diminution in property value

sustained as a result of the defect in title and is not entitled to consequential or speculative damages. For example, in Gomez v. Fidelity National Title Insurance. Co. of New York, a landowner purchased a title policy that insured him against defects in title up to a policy limit of $175,000. 34 Misc. 3d 1233(A) (N.Y. Sup. Ct. 2012), aff ’d on appeal, 109 A.D.3d 638 (N.Y. App. Div. 2d Dep’t 2013). The plaintiff began construction of improvements to a building on his property and soon thereafter discovered a defect in title that allegedly prevented the completion of construction. The defect at issue was an encroachment of a neighbor’s structure onto the plaintiff ’s property, which was greater than the encroachment listed in the title policy’s exceptions. The title insurance company offered to pay the insured $6,000, as the difference between the value of the property without the encroachment, $609,000, and the value with the encroachment, $603,000. The plaintiff sought damages for the now-impossible construction, alleging that if the new construction had been completed, the property would have been worth $1,150,000. The cost was believed to be $206,000, and so the plaintiff sought damages in the amount of $341,000 ($1,150,000 − $603,000 − $206,000), or up to the policy limit. The court granted the title company’s motion to dismiss the complaint, holding that a title policy is a contract to indemnify against actual monetary loss or damage sustained or incurred by the insured claimant, which does not include consequential damages. The court thereby held that the plaintiff was only entitled to recover the $6,000 offered by the insurance company. Both the current 2006 Policy and

the upcoming Proposed 2021 Policy contain identical language of indemnity against “actual monetary loss” and do not otherwise address consequential damages. Therefore, case law will control. Determining the Date Used to Calculate the Value of the Property Although the 2006 Policy and common law share numerous similarities, one key difference is the date used to calculate the value of the property. Under section 8(b)(ii) of the 2006 Policy, the insured can decide whether to have the value, and corresponding loss, calculated as of either the date the claim was made by the insured or the date the claim was settled and paid. Under the majority common law rule in New York, the value is calculated as of the date the insured discovered the defect. ALTA is working on proposing a new policy form that would adopt a combination of the 2006 Policy and the common law rule. The contemplated revised ALTA policy will permit the insured to choose among several dates when claiming a loss: (1) the date that the insured discovered the defect; (2) in the event of a total loss, the date of the policy’s purchase; (3) the date the insured made the claim; or (4) the date the claim was settled or paid. Although the date of discovery and date of notification will often be the same date in practice, it might be different depending on the case. Payment to the Insured Depends on the Policy Amount or Property’s Market Value There are two direct inferences one can draw from the aforementioned measure of damages. The first, and more obvious, is that the insured can recover under a title policy only when the insured suffers some form of actual monetary loss. For example, if a hidden lien is discovered on a mortgagee’s property, but the mortgagee later forecloses and discharges the undisclosed lien, the mortgagee has suffered no recoverable loss under a title policy. See Citibank, 214 A.D.2d 212.

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The second, and more surprising inference is that the insured’s equity in the property is not a relevant consideration under either the 2006 Policy or common law. Although the purchase price is certainly a useful factor in determining a property’s value at the time of loss, and in practice is often the limit of the policy, it is not necessarily dispositive. For example, the property’s fair market value may be considerably greater than the purchase price, in which case the recovery will still be the title policy limit. On the other hand, where the fair market value at the time of loss is less than the purchase price, the insured is entitled to the limit of the policy as compensation for the total breach of the warranty of title, that being the out-of-pocket injury. This is best demonstrated in the Second Department case Rose Development Corp. v. Einhorn, 65 A.D.3d 1115 (N.Y. App. Div. 2d Dep’t 2009). In that case, a group of investors purchased a property at a foreclosure. The insured then purchased the property from the investors for $150,000 and obtained title insurance with a policy limit of $275,000. It was later revealed that the group of investors did not actually own the foreclosed-upon property and that the subsequent sale to the insured was invalid. The court, in applying the above principles, held that the title company was required to pay the maximum amount under the policy, $275,000, despite the fact that the insured purchased the property for less. Id. The contemplated revised ALTA form of policy would adopt this case’s reasoning in providing that the insured can elect to use the date the policy was insured to calculate fair market value if the entire title is void. Insuring the Contract Price or the Market Value Rider A limited but notable exception to the above is where the insured homeowner purchases a Market Value Policy Rider, which is the highest level of coverage an insured is able to obtain. The standard 2006 Policy will insure title up to the limits of the policy—potentially increased by 10 percent in the event

that the insurer elects to litigate a claim. A Market Value Policy Rider, on the other hand, does exactly what it sounds like—rather than setting a policy limit to a specific dollar amount, such as the purchase price, the policy limit is set to whatever the fair market value of the property is at the date of loss. For additional information on the market value rider, see Rosemary Liuzzo Mohamed & Carly Clinton, The Market Value Rider— Solved!, https://bit.ly/3sWpAcV (last visited Dec. 2, 2020). The Market Value Policy Rider is easily applied to the framework laid out above. For example, in the Second Department case Appleby v. Chicago Title Insurance Co., an insured held a market value rider and was entitled to recover damages for the loss of an easement running to the property. The court held that the insured would recover the diminution of the market value of the premises from the date of purchase to the date of loss, up to the market value of the premises on the date of loss. 80 A.D.3d 546 (N.Y. App. Div. 2d Dep’t 2011). In New York, the Market Value Policy Rider typically costs an additional 10 percent of a policy’s premium. Despite its clear advantages, it is not often purchased. For most purchasers, this makes sense: A market value rider is truly helpful only if the loss will exceed the purchase price or face value of a policy. Where there is a partial loss, such as an easement or slight encroachment, it is exceedingly unlikely that the diminution

in property value will, by itself, exceed the value of the policy. Rather, the market value rider’s primary benefit is where there is a total loss of title and property, which may have greatly increased in value since purchase. Although that is a tremendous gain for an insured, it helps only in those limited circumstances. Prejudgment interest is another very important consideration, especially in states like New York where the statutory rate of interest is extremely high. The primary question is whether prejudgment interest is recoverable and included in calculating an insured’s loss. Surprisingly, neither the 2006 Policy, the contemplated revised policy, or case law conclusively answers whether an insured is permitted to include interest in this calculation. Without discussing whether such interest should be included, the Second Department and Court of Appeals in L. Smirlock permitted prejudgment interest from the date that the cause of action existed, following N.Y. C.P.L.R. 5011(b). Absent any policy provision to the contrary, practitioners should be wary and take note of what their jurisdiction’s common law dictates on the issue. Conclusion Real estate lawyers should keep in mind that the nature of title insurance is that of indemnity coverage and consider the guidelines provided by case law in measuring losses when pursuing claims under title insurance policies. n

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KEEPING CURRENT P R O B AT E CASES POWER OF ATTORNEY: Agent was authorized to sign arbitration agreement. A durable power of attorney authorized the agent to make “personal care decisions” including entering contracts and committing the principal’s resources for the provision of residential care. The document expressly stated that it did not authorize “anyone” to make the principal’s “medical and other health care decisions.” The principal moved to a residential care facility, and the agent signed an agreement to arbitrate disputes with the facility on the principal’s behalf. After allegedly falling and sustaining a broken hip, the principal sued the facility for negligence. The facility filed a petition to compel arbitration, which the trial court denied, concluding that the agent was not authorized to sign the arbitration agreement. The California intermediate appellate court reversed in Gordon v. Atria Management Co., LLC, 285 Cal. Rptr. 3d 787 (Cal. Ct. App. 2021). The court held that, in the absence of evidence that the principal was admitted to the facility to obtain medical care, the arbitration agreement was binding on the principal because the power of attorney granted authority to arbitrate disputes and to arrange for residential care. POWERS OF APPOINTMENT: Testamentary exercise of power may be challenged after time to challenge probate has expired. The testator’s will exercised a broad non-general power of appointment over a family trust by appointing the trustee of the testator’s

Keeping Current—Probate Editor: Prof. Gerry W. Beyer, Texas Tech University School of Law, Lubbock, TX 79409, gwb@ ProfessorBeyer.com. Contributing Authors: Claire G. Hargrove, Paula Moore, Prof. William P. LaPiana, and Jake W. Villanueva.

Keeping Current—Probate offers a look at selected recent cases, tax rulings and regulations, literature, and legislation. The editors of Probate & Property welcome suggestions and contributions from readers.

revocable trust. The trustee of the family trust refused to transfer the trust assets to the testator’s trust, and the testator’s personal representatives filed a petition for instruction. The taker in default moved for summary judgment, asserting that the exercise was invalid because, under the terms of the testator’s trust, some of the appointive property could be used to pay creditors of the testator’s estate. The trial court granted the personal representatives’ counter-motion for summary judgment because the taker in default had not challenged the will within the statutory time limit. In Tendler v. Johnson, 332 So. 3d 521 (Fla. Dist. Ct. App. 2021), the Florida intermediate appellate court reversed and remanded because the taker in default was not challenging the validity of the will but rather the purported exercise of the power. TRUST AMENDMENT: Option signed by settlor and trustee of a revocable trust is a trust amendment. The settlor reserved the right to revoke or amend the trust by a writing signed by the settlor and accepted by the trustee. While serving as trustee, the settlor executed a document granting an option to buy real property held in the trust for the second of the settlor and the settlor’s spouse to die. The settlor signed as trustee, the optionees signed, and the settlor recorded the option. The original trust terms directed the sale of the real property on termination of the trust

and the distribution of the proceeds to the settlor’s children. The optionees are descendants of the settlor’s spouse. After the settlor’s death, the optionees, the surviving spouse, and remainder beneficiaries litigated the validity of the option. In Borough v. Caldwell, 497 P.3d 1260 (Or. Ct. App. 2021), the intermediate Oregon appellate court held that by executing and recording the option document, the settlor had substantially complied with the method of trust amendment in the trust terms. TRUST BENEFICIARIES: Designation of beneficiaries as “others” too indefinite to create valid trust. The testator’s will gave the residuary estate to the nominated executor “as trustee” in trust to be distributed to the testator’s family “and others” according to the testator’s instructions to the trustee. In Wilson v. Wilson, 181 N.E 3d 417 (Ind. Ct. App. 2021), the Indiana intermediate appellate court held that the trust failed because the identity of the beneficiaries cannot be determined “with reasonable certainty” as required by Ind. Code § 30-4-2.1(c). The use of the word “others” means “different or additional” and includes everyone on earth. In addition, though the statute says that a power of a trustee to select a beneficiary from an indefinite class is valid, the word “others” means that the provision is not applicable. TRUST FUNDING: Testator may exercise testamentary powers of appointment to validly fund an unfunded charitable trust. The testator created a charitable trust but did not fund it during his lifetime. The testator’s will exercised powers of appointment over three separate trusts (one governed by the law of Connecticut, two by the law of Illinois) in favor of the unfunded trust. A default taker challenged the exercise of the powers. In Benjamin v. Corasanti, 267 A.3d 108 (Conn. 2021),

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the Supreme Court of Connecticut held the exercise to be valid under the common law of both states. The court found that a trust can be funded after the execution of the document creating the trust and that the initial funding of a trust can be accomplished by the proper exercise of a power of appointment in favor of the trustee. TRUST REVOCATION: Interest given to beneficiary related by affinity ends on divorce. In In re Joseph and Sally Grablick Trust, Nos. 353951 & 353955, 2021 WL 5976582 (Mich. Ct. App. Dec. 16, 2021), the Michigan intermediate appellate court held that provisions of a revocable trust benefiting the settlor’s stepchild were revoked by the settlor’s divorce from the child’s parent. The court held this even though the evidence established the existence of a parental relationship between the settlor and the child both before and after the divorce. Mich. Comp. Laws § 700.2807 (identical to U.P.C. § 2-804) prevents revocation by divorce of gifts to the relatives of the ex-spouse who after the divorce are still related to the divorced person “by blood, adoption or affinity.” Despite this statute, the court held that relationships by affinity that arise solely because of the marriage end when the marriage ends by divorce. TRUST SITUS: The settlor’s designation of governing law does not designate trust situs. The settlors of a revocable trust designated the law of Illinois, the state of their residence, as the governing law but did not designate the trust situs. After the death of the surviving settlor, a resident of Colorado became the trustee in accord with the trust terms. One of the two remainder beneficiaries resided in Florida and the other in the state of Washington. The Florida resident sued the successor trustee for breach of duty in the Illinois courts. The trial court dismissed for lack of personal jurisdiction and the intermediate appellate court affirmed in Silver v. Horneck, No. 1-20-1044, 2021 WL 4931871 (Ill. App. Ct. Oct. 22, 2021). The court found that the successor trustee’s retention of the family’s Illinois lawyer

as an advisor and the Illinois-based family accountant to complete Illinois tax returns for the trust did not mean that administration of the trust was carried on in the state. Furthermore, interests in an Illinois corporation and a Delaware LLC with offices in Illinois could not sustain jurisdiction because they were distributed before the start of the litigation, and both beneficiaries were non-residents of the state. TRUSTS: Beneficiary is “qualified” only at distribution date. In Matter of Colecchia Family Irrevocable Trust, 180 N.E.3d 988 (Mass. App. Ct. 2021), the Massachusetts intermediate appellate court addressed a multi-faceted summary judgment motion in a case involving an irrevocable trust. The court held that the definition of “qualified beneficiary” in Mass. Gen. Laws ch. 203E, § 103 (identical to U.T.C. § 103(13) (C)), for a beneficiary who would be a distributee or permissible distributee of income or principal if the trust terminated on the date the beneficiary’s status as qualified is determined, means that qualification is determined by the date “on which an event occurs to trigger” entitlement under the trust. In the instant case, that date was the death of the surviving income beneficiary, which triggered the termination of the trust of which the party was a remainder beneficiary. TAX CASES, RULINGS, AND REGULATIONS PORTABILITY ELECTIONS: Multiple decedents’ estates were granted a 120-day extension to elect portability under I.R.C. § 2010 to allow the surviving spouse to take the decedents’ deceased spousal unused exclusion amount. Although the estate tax returns were not timely filed in any of the cases, the estates met the requirements in the regulations for acting reasonably and in good faith. PLR 202202003, 202202005, and 202202008. QUALIFIED DOMESTIC TRUST: Trustee has an extension of time to file the notice and certification with

the IRS that the surviving spouse had become a citizen of the United States. The decedent was survived by a spouse who was not a United States citizen at the time of the decedent’s death. The trustee, a United States citizen, established and funded a qualified domestic trust for the benefit of a spouse under I.R.C. § 2056A. The spouse became a citizen before her death but did not inform the trustee or file a final Form 706-QDT. From the decedent’s death until the time the spouse became a citizen, the spouse lived in the United States. The trustee distributed only income from the trust. Once the notice is filed under the extension, the distributions from the trust would no longer be subject to the estate tax under I.R.C. § 2056A(b). PLR 109793-21. SHAM TRUST: Sham trust cannot be used to shelter income in a life insurance policy. Noting a pattern of suspicious documents and transactions, the Seventh Circuit in Wegbreit v. Comm’r, 21 F.4th 959 (7th Cir. 2021), affirmed the Tax Court’s finding of civil fraud. The appellate court further ordered the appellants to show cause why Rule 38 sanctions should not be imposed. The court noted that the brief was lengthy and incoherent. Of the rambling arguments, only two issues met the minimum requirement of Rule 28 to support the argument with citations to authorities and parts of the record, but, even so, those issues had already previously been stipulated away. The court noted that the appellants also accused the IRS attorneys of threatening and intimidating them to settle without any evidence, and the accusation was irresponsible for a lawyer admitted to practice. LITERATURE ADVANCEMENTS: Jackie Elder and Fredrick E. Vars propose updating and modernizing the Uniform Probate Code by presuming that gifts in the exact amount of the annual gift tax exclusion are advancements, thus bringing the distributive effect of these transfers in line with the decedents’ probable intent. In The Ultimate Gift Horse: Modernizing the

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UPC on Advancements to Avoid Unintended Redistributions, 47 ACTEC L.J. 31 (2021), they argue that President Biden has proposed taxing thousands more estates, so the time to make this change is now. ALKALINE HYDROLYSIS: Victoria J. Haneman contends that it is past time that alkaline hydrolysis (also known as liquid cremation, water cremation, organic cremation, bio cremation, or aquamation) become the body disposition of choice over traditional burial or even cremation because it is a clean, green alternative to fire-based cremation. In her article, Alkaline Hydrolysis, 47 ACTEC L.J. 55 (2021), she identifies how the law is being leveraged to obstruct this innovative death technology from being more broadly available to consumers. ANTIRACIST ESTATE PLANNING: In his article, Black Deaths Should Matter, Too! Estate Planning as a Tool for Antiracists, 47 ACTEC L.J. 39 (2021), Terrence M. Franklin argues that Black people should look squarely at what can be done with “estate planning” and then act in antiracist ways to disrupt policies, laws, and practices that have inequitable racist effects. CANNABIS BUSINESS OWNERS: In their essay, Estate Planning for Cannabis Business Owners: An Introduction, 47 ACTEC L.J. 11 (2021), Bridget J. Crawford and Jonathan G. Blattmachr seek to assist estate planners in two ways. First, the authors seek to raise general awareness of cannabis business owners’ unique concerns and, second, to provide an overview of some of the fundamental issues about which cannabis business owners are likely to seek estate planning advice: business formation, wealth transfers, the ability of trusts to own cannabis-related businesses, and gift, estate, and income tax considerations. CLIENT PRIVACY: In Maintaining Client Privacy in an Increasingly Public World, 47 ACTEC L.J. 65 (2021), Mel M. Justak and Anne-Marie Rhodes explore techniques and best practices families could

employ to maintain a balance between transparency to beneficiaries and the protection of family privacy with respect to third parties. ELDER LAW: Omri Ben-Shahar’s essay, Personalized Elder Law, 28 Elder L.J. 281 (2021), introduces personalized elder law as a regulatory technique. Personalized age-of-capacity rules would replace uniform ones, and rights and duties that are currently uniform would be personalized according, in part, to age. ELECTRONIC WILLS: Naman Anand and Dikshi Arora argue that the COVID-19 crisis has, in all probability, made major common law jurisdictions (with a focus on India, the most populous and judicially overburdened common law nation) move into the uncharted territory of recognizing e-wills as a necessity and addresses how the courts can retain their active role and thus obviate the need for a legislative process to formalize the inclusion of digital methodology in Where There Is a Will, There Is No Way: COVID-19 and a Case for the Recognition of E-Wills in India and Other Common Law Jurisdictions, 27 ILSA J. Int’l & Comp. L. 77 (2020). ENVIRONMENTAL, SOCIAL, AND GOVERNANCE INVESTING: In her article, Investing in and for the Future: ESG Investing for Trust Assets Under the Prudent Investor Rule, 47 ACTEC L.J. 23 (2021), Jane Gorham Ditelberg posits the question: Is there legal authority for a trustee to consider ESG factors in investing trust assets? And if so, is there possibly an obligation to consider those factors? A big part of this question has been whether it is the settlor’s values or those of the beneficiaries that should guide the investment decision-making. KENTUCKY—FUNERAL PLANNING DECLARATION ACT: Author J. Conner Niceley’s Note, I’d Be Better off in a Pine Box: Analyzing Kentucky’s Funeral Planning Declaration Act as a Model for Uniform Legislation, 109 Ky. L.J. 185 (2020-2021), analyzes funeral planning declaration statutes, with Kentucky’s version serving as a model for widespread

acceptance and usage, detailing why these statutes exist and how they are an effective tool for estate and funeral planning and for protecting the freedom of disposition. MARRIAGE PLANNING: Allison Tait’s article, Trusts and Marriage Planning in High-Wealth Families, 34 J. Am. Acad. Matrim. Law. 219 (2021), takes up the question of asset protection trusts being used as substitutes for prenuptial—or in some cases, postnuptial—contracts and presses on questions concerning how they work, how trust companies market the new generation of trusts, the judicial treatment of these trusts in court, and how to think about the purported benefits when weighed against harm to spouses, the idea of marital partnership, and equality values. PURPOSE TRUSTS: Alexander A. Bove, Jr. and Melissa Langa explain how a purpose trust differs from all other trusts and make suggestions on how to best implement them in The Perpetual Business Purpose Trust: The Business Planning Vehicle for the Future, Starting Now, 47 ACTEC L.J. 3 (2021). RACIAL INEQUITY: In The Intersection of Racial Inequities and Estate Planning, 47 ACTEC L.J. 87 (2021), Reetu Pepoff examines racial inequities in the trusts and estates field and, in particular, the lack of estate planning by Black, Indigenous, and people of color and its corresponding impact on the racial wealth gap. REMOTE WITNESSING: Bridget J. Crawford, Kelly Purser, and Tina Cockburn employ a dual Australian-United States perspective to investigate the purposes of traditional will-making requirements and to suggest their continued vitality in the context of remotely witnessed wills in Wills Formalities in a Post-Pandemic World: A Research Agenda, 2021 U. Chi. Legal F. 93 (2021). SOUTH DAKOTA—POWER OF ATTORNEY: In his article, Restraining the Unsupervised Fiduciary, 66 S.D. L. Rev. 208 (2021), Thomas E. Simmons reviews

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some of the most important powers of attorney opinions issued by the South Dakota Supreme Court in the last 25 years and considers which aspects of that jurisprudence may have been displaced or supplemented with the new power of attorney statutes.

speaker Helen Jenkins discusses various ethical issues faced by estate attorneys and goes into detail about exceptions to the privity defense that Texas Courts have allowed in Thoughts on Ethics of an Estate Planner, 61 S. Tex. L. Rev. 83 (2020).

STEP-UP-IN-BASIS: In his article, When the Stepped-Up Basis of Inherited Property Is No More, 47 ACTEC L.J. 77 (2021), Richard L. Kaplan explains that the tax code provision that excludes gifts from a recipient’s gross income applies as well to a “bequest, devise, or inheritance.” The same carryover basis rule should apply, therefore, to testamentary transfers with equal force as it does to lifetime transfers. Accordingly, the step-up-in-basis rule is anomalous and discordant with the general framework of the Internal Revenue Code.

TRUST TAX STRATEGY: The Supreme Court recently applied the Due Process Clause to prevent the states from closing a tax strategy that employs outof-state trusts. Many had hoped that the case would serve as a vehicle for the Court to overrule taxpayer-friendly precedents that make the strategy possible. But it failed. After examining the decision, Mitchell M. Gans considers the options available to the states in Kaestner Fails: The Way Forward, 11 Wm. & Mary Bus. L. Rev. 651 (2020).

(2021), Richard Ausness warns that a settlor should think twice about appointing a family member as trustee because it can cause strife in the family. In particular, a settlor should avoid naming a surviving spouse as sole trustee if some of the beneficiaries are adult children from a prior relationship. LEGISLATION WISCONSIN prohibits discrimination in organ transplantation based on disability. 2021-2022 Wis. Legis. Serv. Act 113. WISCONSIN updates its version of the Revised Uniform Unclaimed Property Act. 2021-2022 Wis. Legis. Serv. Act 87. n

TRUSTEE FAMILY MEMBERS: In his article, Keeping it in the Family: The Pitfalls of Naming a Family Member as a Trustee, 34 J. Am. Acad. Matrim. Law. 1

TEXAS—ESTATE PLANNING ETHICS: In this transcript of a speech given at an annual ethics symposium,

YOUR COLLECTION. YOUR LEGACY. The Trusts & Estates department at Heritage® assists professional advisors with complimentary on-site or virtual estate consultations, sales proposals for auction, private sale opportunities, and collection advisory services. Heritage Auctions Appraisal Services, Inc., offers an experienced team of qualified appraisers who produce IRS-compliant formal reports that follow the guidelines set forth by the Uniform Standards of Professional Appraisal Practice (USPAP). Our meticulously researched and detailed reports will not only meet, but exceed your expectations.

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Directions to Trust Directors of Directed Trusts By Michael A. Sneeringer and Jordan D. Veurink

Michael A. Sneeringer is a partner in the Naples, Florida, office of Porter Wright. He is Probate & Property’s articles editor for Trust and Estate and the group chair of the ABA RPTE Section’s Non-Tax Estate Planning Considerations Group. Jordan D. Veurink is a shareholder at Woods, Fuller, Shultz & Smith, P.C., in Sioux Falls, South Dakota. He is a co-vice chair of the ABA RPTE Section’s Asset Protection Planning Committee.

statutory guidance than others concerning the powers and duties of a trust protector of a directed trust. For corporate fiduciaries declining trusteeship of a trust because of assets it does not want to manage, such as real estate, a closely held business, or a large stock concentration, a directed trust joins the trust creator-client, desiring a corporate fiduciary, with a corporate fiduciary, desiring trusteeship and continuing client contact. Florida had a limited version of a statute on its books related to “directed trusts,” but up until 2021 the statute offered minimal guidance to attorneys and clients alike. Further, few Florida cases offered clarity on directed trusts. Some Florida clients designated trust protectors in their trusts but could never articulate their powers. Further, often the designated trust protector was the client’s attorney. How many of those attorneys are still practicing in 2022? Following

the passage of new legislation in 2021, the administration of a Florida trust can more readily be directed by nontrustees. Other states, including South Dakota, have a more robust statutory framework related to directed trusts. South Dakota enacted its directed trust statutes in 1997, which have since been modified numerous times at the recommendation of its governor’s Task Force on Trust Administration Review and Reform. South Dakota’s statutes provide considerable flexibility in drafting directed trusts or, in the absence of articulated powers for trust advisors and trust protectors, provide default provisions and numerous powers that may be incorporated by reference. Directed Trusts Overview A client may want a specific person or institution to have complete discretion to invest trust assets, but that person or

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f you are reading this article, you have probably read the words “directed trusts” before. Directed trusts have gained in popularity over the past decade. For years, many states have allowed a person or entity, other than the trustee, a power over some aspect of a trust’s administration. Such person or entity has been termed a “trust protector,” “trust advisor,” or “trust director.” So-called directed trusts sprang up almost overnight. Some states had more

institution may not want to undertake the day-to-day functions of a trustee. Because it is the trustee that is typically responsible for trust investments, how is this problem resolvable? A client can give that person or institution the authority to direct only the investments of the trust and instruct the trustee to delegate these directed tasks to the client’s chosen investment advisor. Further, a client may want a supervisor to oversee the day-to-day functions of the trustee and to have the power to select another trustee if circumstances warrant a change (i.e., an old trustee or stingy trustee). A client may not want the trustee to have ultimate power over the beneficiaries forever. In that case, a trust protector can be designated, who can be given the power to remove and replace the trustee. A trust protector can also be given the power to add beneficiaries or to even amend or terminate the trust in limited situations (subject, of course, to state and federal laws governing such powers). In other cases, a client may want a specific person or entity—other than the trustee or investment advisor—to have some control over distributions that are made to a beneficiary. In those cases, a directed trust format would be used so that the client can appoint a distribution advisor to make these decisions. A final issue that comes up with directed trusts is when, and to what extent, an investment advisor, trust protector, or distribution advisor has a fiduciary duty to the beneficiaries of the trust. Can such investment advisor, trust protector, distribution advisor, or similarly authorized person of a directed trust be subject to a higher standard of care in exercising its powers? Is a trustee absolved when taking direction from such investment advisor, trust protector, distribution advisor, or similarly authorized person? Now that we have a basic overview of directed trusts, is there a uniform set of laws that states can review to have a template for legislation allowing directed trusts? Uniform Act The Uniform Directed Trust Act (UDTA), currently enacted in some form in 15

states, was introduced by the Uniform Law Commission (ULC) to address the rise of directed trusts. See Directed Trust Act, Unif. L. Comm’n, https://bit. ly/3oIlFig. According to the ULC, the UDTA “provides clear, functional rules that allow a settlor to freely structure a directed trust for any situation while preserving key fiduciary safeguards for beneficiaries.” Id. Some of the items provided by the UDTA include, but are not limited to, “sensible default rules for a variety of matters that might be overlooked in the drafting of a directed trust, including information sharing among trustees and trust directors, the procedures for accepting appointment as a trust director, [and] the distinction between a power of direction and a nonfiduciary power of appointment.” Id. The major sections of the UDTA include exclusions; powers of trust directors; limitations of trust directors; duty and liability of trust director and directed trustee; duty to provide information to trust director or trustee; no duty to monitor, inform, or advise; application to cotrustee; limitation of action against trust director; jurisdiction over trust director; office of trust director; uniform application and construction; and relation to electronic signatures in global and national commerce act. See Nat’l Conf. of Comm’rs on Unif. State L., Uniform Directed Trust Act, at table of contents (Sept. 2021), available at https://bit.ly/3LGzlVd. How do states differ in their treatments and uses of such trusts? One state (Florida) has adopted a modified version of the UDTA and one state (South Dakota) has not adopted it. The Prefatory Note to the UDTA states: “Existing uniform trusts and estates acts address the issue [of directed trusts] inadequately. Existing nonuniform state laws are in disarray.” Id. at 1. Does it follow that because Florida adopted a modified version of the UDTA that it adequately addresses directed trusts? Or does it follow that because South Dakota did not adopt the UDTA, its laws are in “disarray”? Are either or both of the aforementioned statements true? False?

Florida Florida adopts Uniform Acts but often revises the language in substantive and nonsubstantive ways. For example, there are provisions of the Uniform Trust Code that Florida did not adopt and some that were adopted but edited heavily. Accordingly, although Florida adopted the UDTA, there are differences between the Florida Uniform Directed Trust Act (FUDTA) and the UDTA. Florida refers to the FUDTA as a “modified version” of the UDTA. See RPPTL Sec., Miami EC Agenda, at 211 (Nov. 9, 2019), available at https:// bit.ly/3rMGqM0 (Agenda). A few notable similarities and differences follow. Exclusions. Fla. Stat. § 736.1405 provides the FUDTA does not apply to a power of appointment, power to appoint or remove a trustee or trust director, a power of a settlor of a revocable trust, certain powers of a beneficiary over a trust, certain powers over a trust related to taxes, and a power to add or release a power under a trust if the power subject to addition or release causes grantor trust status. The FUDTA differs from the UDTA, as the UDTA does not contain language addressing the “power to add or to release a power under the trust instrument if the power subject to addition or release causes the settlor to be treated as the owner of all or any portion of the trust for federal income tax purposes.” Fla. Stat. § 736.1405(2)(f). UDTA section 5 does not address a trust director’s ability to “pay the income tax liabilities of a settlor attributable to the grantor trust status free of a conflicting duty to trust beneficiaries.” Id.; Agenda at 217. Powers of Trust Director. Fla. Stat. § 736.1406(2) describes that the trust director has only the powers granted by the terms of the trust. There are no default terms granted to a trust director; the terms must be within the trust itself. The UDTA does not contain a provision identical to Fla. Stat. § 736.1406(2), but the Comment to section 6 states the same intention: “This subsection does not provide any powers to a trust director by default. Nor does it specify the scope of a power of direction. The existence and scope of a power of direction must instead be specified by the terms of a trust.” UDTA Act at 19.

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Duty and Liability of Trust Director. Florida adopted its section almost verbatim from the UDTA. Compare Fla. Stat. § 736.1408 and section 8, UDTA Act at 22–23. The purpose is to address the duty and liability of a trust director; that is, a trust director is subject to the same fiduciary duty and liability as a trustee would have if it had such power or did not exercise a power. See Fla. Stat. § 736.1408(1) (a). In taking this approach, Florida follows “the great majority of the existing state directed trust statutes.” UDTA Act at 24. Also, FUDTA and UDTA are similar because the duties under these similarly situated statutes set defaults and minimums, as opposed to a ceiling. Id. See Fla. Stat. § 736.1408(3). Duty and Liability of Directed Trustee. Similar to Fla. Stat. § 736.1408, Fla. Stat. § 736.1409 is almost identical to its UDTA counterpart. Compare Fla. Stat. § 736.1409 and UDTA Act, sec. 9, at 22–23. A directed trustee shall take reasonable action to follow a trust director’s exercise (or nonexercise) of a power of direction, unless compliance would result in willful misconduct by the trustee. Fla. Stat. § 736.1409(1), (2). Duty to Provide Information. “Each of a trustee and a trust director has a duty to provide information to the other to the extent the information relates to powers or duties of both of them. They may act in reliance on such information without committing a breach of trust unless their action constitutes willful misconduct.” Agenda at 220. The FUDTA differs as Fla. Stat. § 736.141(5) provides that “[a] trust director shall provide information within the trust director’s knowledge or control to a qualified beneficiary upon a written request of a qualified beneficiary to the extent the information is reasonably related to the powers or duties of the trust director.” The term “qualified beneficiary” is not used in the UDTA. No Duty to Monitor, Inform, or Advise. Fla. Stat. § 736.1411 and UDTA section 11 are almost identical. The statute specifies that a trustee does not have a duty “to monitor a trust director or inform or give advice to a settlor, beneficiary, trustee, or trust director concerning instances in which the trustee might have acted differently than the director.” UDTA Act at 35.

This language was partially used, according to the Comment to section 11 of the UDTA, because “[m]any existing state statutes are to similar effect, though the language in this section is simpler and more direct.” Id. Application to Cotrustee. The terms of Fla. Stat. § 736.1412 are more detailed than its UDTA counterpart (section 12). Compare Fla. Stat. § 736.1412 and UDTA sec. 12. Fla. Stat. § 736.1412 explains that where there are cotrustees, and one trustee, to the exclusion of the others, has a power to direct or prevent actions of the other trustee(s), such trustee is treated as a trust director and the remaining trustee(s) are treated as directed trustees. The Comment to UDTA sec. 12 explains that, traditionally, cotrustees had duties to use reasonable care to prevent one another from committing a breach of trust. But this statute specifies that one cotrustee may have only the duty required by the reasonable action and willful misconduct standards and be subject to the narrower rules governing information sharing and monitoring. UDTA Act at 36. Miscellaneous Application of the Trust Code to the Trust Director. Certain rules applicable to a trustee also apply to a trust director. Fla. Stat. § 736.1416 is intended to complement the Florida Trust Code revisions following passage of the FUDTA. Items in the Florida Trust Code applicable to trustees and not expressly made applicable to a trust director by Fla. Stat. § 736.1416 or other revisions following passage of the FUDTA do not apply to a trust director. Accordingly, by necessity Florida drafted greater specificity to FUDTA than was modeled by the UDTA, but note the Legislative Note to section 16 of the UDTA, which provides: A state that has enacted the Uniform Trust Code (Last Revised or Amended in 2010) provisions cited in this section should update the bracketed language to refer to the appropriate provisions of that enactment. A state that has enacted relevant statutory provisions other than the provisions of the Uniform Trust Code cited in this section should replace the bracketed language with cross references to

those provisions, except that a state that allows statutory commissions rather than reasonable compensation for a trustee is advised for the reasons given in the comments below to apply a rule of reasonable compensation to a trust director. A state that has not enacted relevant statutory provisions should delete the bracketed language. UDTA Act at 40. By the Prefatory Note’s standard, the FUDTA appears to adequately address directed trusts and is not in disarray. How does South Dakota measure up? South Dakota South Dakota’s directed trust statutes were enacted before the UDTA, but even after the UDTA was drafted, South Dakota did not choose to adopt the UDTA. As a jurisdiction generally viewed to be among the most favorable in the country, whose laws had been enacted 20 years earlier, it is likely that South Dakota’s lawmakers believed the existing statutes were not only adequate but offered better liability protection and flexibility. Similarities and differences between the UDTA and South Dakota statutes include the following. Terminology. Unlike the UDTA, S.D. Codified Laws ch. 55-1B makes no references to “trust directors” or “directed trustees.” Rather, trustees (and, less commonly, other fiduciaries) “excluded from exercising certain powers under [a trust] instrument which powers may be exercised” by others are referred to as “excluded fiduciaries” (“trustee” and “excluded fiduciary” are used interchangeably in this section). See S.D. Codified Laws § 55-1B-1(5) and ch. 55-1B, generally. Additionally, rather than referring to a general class of trust directors, S.D. Codified Laws ch. 55-1B refers to “trust protectors” and “trust advisors,” and, where applicable, further separates trust advisors into “investment trust advisors” and “distribution trust advisors.” Id. Exclusions. Although the UDTA does not apply to a power of appointment, power to appoint or remove a trustee or trust director, a power of a settlor of a revocable trust, certain powers of a beneficiary over a trust, and certain powers

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over a trust related to taxes, S.D. Codified Laws ch. 55-1B has no such exclusions. See UDTA sec. 5 and S.D. Codified Laws ch. 55-1B, generally. Powers of Trust Director. As set forth above, the UDTA does not contain default powers of trust directors, but the Comment to section 6 provides that the existence and scope of a power of direction must instead be specified by the terms of a trust. UDTA Act at 19. South Dakota law takes a similar position for trust protectors but enumerates a list of powers that may be granted to a trust protector in a governing instrument. S.D. Codified Laws § 55-1B-6. S.D. Codified Laws § 55-1B-10 provides that the powers of investment trust advisors shall be as provided in the trust instrument, but, regardless of the powers set forth in the governing instrument, the investment trust advisor shall have the power to “direct the trustee with respect to the retention, purchase, sale, exchange, tender, or other transaction affecting the ownership thereof or rights therein of trust investments,” among others. S.D. Codified Laws § 55-1B-11 provides that the powers of distribution trust advisors shall be as provided in the trust instrument, but, regardless of the powers set forth in the governing instrument, the distribution trust advisor shall direct the trustee with regard to all discretionary distributions to beneficiaries. Duty and Liability of Trust Director. The UDTA provides that all trust directors are fiduciaries. UDTA sec. 8. Similarly, S.D. Codified Laws ch. 55-1B provides that investment trust advisors and distribution trust advisors act in a fiduciary capacity but allows trust agreements to set forth whether trust protectors are acting in a fiduciary or nonfiduciary capacity. S.D. Codified Laws §§ 55-1B-4, 55-1B-1(2). Like the UDTA, S.D. Codified Laws § 55-1B-1.1 ensures that investment trust advisors, distribution trust advisors, and trust protectors are subject to the same fiduciary duty and liability as a trustee would have if it had such power or did not exercise a power, stating that they have “no greater liability to any person than would a trustee holding or benefiting from the rights, powers, privileges, benefits, immunities, or authority

provided or allowed by the governing instrument to such trust advisor or trust protector.” Duty to Provide Information Between Trustee and Trust Directors. As set forth above, the UDTA provides that “[e]ach of a trustee and a trust director has a duty to provide information to the other to the extent the information relates to powers or duties of both of them. They may act in reliance on such information without committing a breach of trust unless their action constitutes willful misconduct.” Agenda at 220. The South Dakota statutes provide that the “trust advisor, trust protector, or other fiduciary designated by the terms of the trust shall keep each excluded fiduciary . . . reasonably informed about: (1) [t]he administration of the trust with respect to any specific duty or function being performed by the trust advisor, trust protector, or other fiduciary . . . ; and (2) [a]ny other material information that the excluded fiduciary would be required to disclose to the qualified beneficiaries under this subdivision. . . .” S.D. Codified Laws § 55-2-13. Accordingly, although trust advisors and trust protectors must provide certain information to the excluded fiduciary, the excluded fiduciary has no statutory duty to provide such information to the trust advisors and trust protector. Duty to Provide Information to Beneficiaries. With respect to disclosure of information to beneficiaries, the UDTA provides that a governing instrument could allow or require a trust director to disclose information regarding a trust to its beneficiaries. UDTA sec. 11; Comment to sec. 8 of the UDTA. The S.D. Codified Laws do not contemplate or impose any duty on the investment trust advisor, distribution trust advisor, or trust protector to disclose information to beneficiaries, but they do allow them to limit a trustee’s disclosure of trust information to beneficiaries. S.D. Codified Laws § 55-2-13. Further, the trustee “is also relieved of any duty to communicate with or warn or apprise any beneficiary . . . concerning instances in which the [trustee] would or might have exercised the [trustee]’s own discretion in a manner different from the manner directed. . . .” Id. § 55-1B-2. No Duty to Monitor, Inform, or Advise

Trust Director. The UDTA does not require a trustee “to monitor a trust director or inform or give advice to” another trustee or trust director. UDTA sec. 11. S.D. Codified Laws § 55-1B-2 provides a more expansive definition, providing that an excluded fiduciary has no “obligation to independently value trust assets, to review or evaluate any direction from a distribution trust advisor, or to perform investment or suitability reviews, inquiries, or investigations or to make recommendations or evaluations with respect to any investments to the extent the trust advisor had authority to direct the acquisition, disposition, or retention of the investment. If the excluded fiduciary offers such communication to the trust advisor, trust protector, or any investment person selected by the investment trust advisor, such action does not constitute an undertaking by the excluded fiduciary to monitor or otherwise participate in actions within the scope of the advisor’s authority or to constitute any duty to do so.” Application to Cotrustee. S.D. Codified Laws § 55-1A-41 states that “unless specifically restricted by the governing instrument, a trustee may appoint a cotrustee.” As further described above, the UDTA allows a governing instrument to “relieve a cotrustee from duty and liability with respect to another cotrustee’s exercise or nonexercise of a power of the other cotrustee to the same extent that in a directed trust a directed trustee is relieved from duty and liability with respect to a trust director’s power of direction.” UDTA sec. 12. Similarly, S.D. Codified Laws § 55-1A-41 states that if the appointment of a cotrustee “confers upon the appointed co-trustee, to the exclusion of another co-trustee, the power to take certain actions . . . the limitations on liability and the relief from duties and obligations afforded an excluded fiduciary under § 55-1B-2 apply to a co-trustee who does not hold such power.” S.D. Codified Laws § 55-1A-41. Family Advisor. In 2016, South Dakota enacted laws creating the position of family advisor. See S.D. Codified Laws § 55-1B-12. The family advisor, if included in a governing instrument, is statutorily a nonfiduciary position. Id.

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Its powers are limited to removing and replacing trustees, trust protectors, and trust advisors; providing information regarding beneficiaries; and directing the trustee with respect to giving notice and information to beneficiaries. See id. The UDTA does not contemplate such a position. Duty and Liability of Directed Trustee. Unlike the UDTA, which provides that a directed trustee shall take reasonable action to follow a trust director’s exercise (or nonexercise) of a power of direction, unless compliance would result in willful misconduct by the trustee, S.D. Codified Laws ch. 55-1B provides that a directed trustee has no duty or liability for complying with an exercise of a power of direction. See S.D. Codified Laws § 55-1B2. Additionally, an excluded fiduciary is not liable, either individually or as a fiduciary, for any of the following: (1) Any loss that results from compliance with a direction of the trust advisor, including any loss from the trust advisor breaching fiduciary responsibilities or acting beyond the trust advisor’s scope of authority; (2) Any loss that results from a failure to take any action proposed by an excluded fiduciary that requires a prior authorization of the trust advisor if that excluded fiduciary timely sought but failed to obtain that authorization; (3) Any loss that results from any action or inaction, except for gross negligence or willful misconduct, when an excluded fiduciary is required, pursuant to the trust agreement or any other reason, to assume the role of trust advisor or trust protector; (4) Any loss that results from relying upon any trust advisor for valuation of trust assets; or (5) Any loss that results from any tax filing made or tax position taken based on the recommendations or instructions received

from a tax preparer or professional used by the excluded fiduciary at the direction of the grantor or of another trust fiduciary. Any excluded fiduciary is also relieved from any obligation to independently value trust assets, to review or evaluate any direction from a distribution trust advisor, or to perform investment or suitability reviews, inquiries, or investigations or to make recommendations or evaluations with respect to any investments to the extent the trust advisor had authority to direct the acquisition, disposition, or retention of the investment. S.D. Codified Laws § 55-1B-2. Interestingly, in its only reference to South Dakota, the Comment to section 9 of the UDTA, “Duty and Liability of Directed Trustee,” states: The drafting committee settled upon the “willful misconduct” standard after a review of the existing directed trust statutes. Roughly speaking, the existing statutes fall into two groups. In one group, which constitutes a majority, are the statutes that provide that a directed trustee has no duty or liability for complying with an exercise of a power of direction. This group includes Alaska, New Hampshire, Nevada, and South Dakota. The policy rationale for these no duty statutes is that duty should follow power. If a director has the exclusive authority to exercise a power of direction, then the director should be the exclusive bearer of fiduciary duty in the exercise or nonexercise of the power. Placing the exclusive duty on a director does not diminish the total duty owed to a beneficiary, because a settlor of a directed trust could have chosen to make the trust director the sole trustee instead. Thus, applying greaterincludes-the-lesser reasoning, a settlor who could have named a trust director to serve instead as a

trustee should also be able to give the trust director the duties of the trustee. Under the no duty statutes, a beneficiary’s only recourse for misconduct by the trust director is an action against the director for breach of the director’s fiduciary duty to the beneficiary. In the other group of statutes, which includes Delaware, Illinois, Texas, and Virginia, a directed trustee is not liable for complying with a direction of a trust director unless by so doing the directed trustee would personally engage in “willful” or “intentional” misconduct. The policy rationale for these statutes is that, because a trustee stands at the center of a trust, the trustee must bear at least some duty even if the trustee is acting under the direction of a director. . . . After extensive deliberation and debate, the drafting committee opted to follow the second group of statutes on the grounds that this model is more consistent with traditional fiduciary policy. The popularity of directed trusts in Delaware, which also adopts the willful misconduct standard, establishes that a directed trust regime that preserves a willful misconduct safeguard is workable and that a total elimination of duty in a directed trustee is unnecessary to satisfy the needs of directed trust practice. See UDTA Act at 29–30. As previously mentioned, Florida also adopted the willful misconduct standard. See Fla. Stat. § 736.1409(2), (4)(a). Conclusion The increasing number of trusts, along with the infinite number of variables that can go into future estate planning, makes directed trusts more important than ever. It is challenging to craft definitive criteria that will work one year but be useful many years into the future. A directed trust allows flexibility in both drafting and trust administration. Choosing the correct jurisdiction for the governing law and situs for a directed trust is crucial to enhance flexibility. n

May/June 2022

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Timeshares: History, Project Structuring, and Types of Plans

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By Arthur O. Spaulding Jr., Karen D. Dennison, and Robert S. Freedman

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his article provides a brief history of timeshares, discusses considerations in timeshare project structuring, and identifies various types of timeshare plans. History Timesharing, as a concept, was conceived in Europe in the 1960s. There, it was originally presented as a contractual lodging arrangement featuring the right to make reservations in multiple properties owned by the offeror or even by third parties. Ironically, viewed with hindsight, that lodging concept looks surprisingly like vacation clubs, the new poster-child of the timeshare industry. Timesharing first appeared in the United States in the mid to late 1970s. In its early iterations, many timeshare projects were failed condominiums. Developers of such projects saw timesharing as a panacea for their woes. These timeshare offerings involved a fixed-unit, fixed-time format, whereby undivided fractional interests in a condominium were offered to multiple owners at a fraction of the cost of whole ownership and provided an owner the right to occupy his or her unit each year (or every other year), on a recurring basis, during the same time period. In the late 1970s, a Seattle-based company, Vacation Internationale, adopted the European model and created the first US vacation club, selling memberships in the club that carried rights of use and occupancy for lodging accommodations that the company owned or leased. At that time, Vacation Internationale was essentially alone in the use of this model, and its scope was generally confined regionally to the Pacific Northwest. The first of the two approaches just described is called “deeded ownership” (timeshare estates, where the timeshare

Arthur O. Spaulding Jr. is a partner at Cox Castle Nicholson in San Francisco, California. Karen D. Dennison is a former partner at Holland & Hart LLP, now retired, residing in Incline Village, Nevada. Robert S. Freedman is a partner at Carlton Fields, P.A. in Tampa, Florida, and is the Section’s Real Property Division vice chair.

interest is coupled with an interest in real estate) and the second is “right to use” (timeshare interests not coupled with an interest in real estate). Historically, in the deeded ownership model, developers and their lawyers relied on traditional notions of real property development and sale, founded on the principle that buyers in this country were more accepting of a product that was, essentially, an interest in land. This deeded ownership was one that: • could be conveyed by real estate purchase and sales documents, • could be transferred by deed, and • could be seller-financed like conventional real estate. By the early 1980s, transient lodging facilities such as small hotels and motels, and apartment buildings, were being sold on a deeded ownership basis; but, in lieu of undivided 1/51st interests in specified condominiums, the offering might also involve undivided interests in the entirety of a building (known as UDIs). As an example, if a hotel property containing 50 rooms were to be converted to a timeshare on a deeded interest basis using 51 weeks per room, the interests sold would be undivided 1/2550th interests in the whole building, rather than an undivided 1/51st interest in a particular unit, given the potential difficulty of converting a hotel building into a condominium project. To the extent that there were regulatory issues or concerns, they were issues and concerns with which real estate developers were familiar. As sales of these products took off in the early 1980s, regulators took a significant interest in adapting their real estate laws and regulations to include timeshares as a regulated product. During the 1980s, many states enacted laws specifically addressing the timeshare industry. For example, in California, timesharing became covered by the Subdivided Lands Law, section 11000 et seq., by passage of chapter 601 of the Statutes of 1980, filed with the Secretary of State on July 17, 1980, effective on January 1, 1981 (the original California Time

Share Law), and was implemented by the adoption of regulations of the Real Estate Commissioner. The Florida legislature enacted the Florida Real Estate Time-Sharing Act, chapter 721 of the Florida Statutes (FS), which became effective as of July 1, 1981, and regulated timeshare plans based in real property. It was substantially amended and expanded as of June 24, 1983, and the Division of Florida Land Sales and Condominiums (now known as the Division of Florida Condominiums, Timeshares and Mobile Homes) (the Florida Division) was granted rule-making authority at that time. Chapter 721 was subsequently amended in 1991 to include timeshare plans based in personal property, such as houseboats or motorhomes, and was renamed the Florida Vacation Plan and Timesharing Act (the Florida Time Share Act). In 1983, the Nevada legislature enacted chapter 119A of the Nevada Revised Statutes (NRS) governing timeshares (the Nevada Time Share Act), and in the same year the Nevada Real Estate Division enacted regulations implementing the new law. In the early days of the timeshare industry in the United States, most of the developers of timeshare projects were independent entrepreneurs. It was not until later, in the 1980s, that the success of the product caught the attention of the hotel companies. When those hospitality companies perceived that they could enhance their balance sheets by selling the equivalent of hotel suites “in advance” to up to 50 buyers (or more) per room, the economics of the business persuaded companies like Marriott, Hilton, Hyatt, Wyndham, and Disney to jump into the fray in a major way. The entry of the hotel companies into the timeshare business coincided with a movement towards the offering of timeshares with more and more flexible features. The fixed-unit, fixed-week product morphed into “floating-unit,” “floating-week” interests. Another feature of the early time share programs was the inherent limitation of owners having to take a one-week vacation at the same project

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Companies whose offerings were previously of the deeded ownership variety sought to shift into the offering of non-deeded, right-to-use club memberships, where either the HOA owned the real estate used and enjoyed by the members or title to the real estate was held in a trust for the benefit of the HOA and the members. year after year. The owners were locked into the property in which they owned their deeded interest. To address the potential desire of timeshare owners to vacation in a variety of locations, two companies formed to channel these desires into a business. These were the so-called timeshare exchange companies Resort Condominiums International (RCI) and Interval International (II). As the timeshare industry matured in the United States during the 1990s, the business began to see consolidation. The major hotel companies came to dominate the landscape, and their products were coupled with their loyalty programs in ways that were unimaginable in the early 1980s. The independent, single-site timeshare developer became the exception rather than the norm. The very presence of the hotel companies as the leaders of the industry lent credence to the timeshare industry like never before. The industry’s trade association, the American Resort Development Association, became a vocal and effective lobbying advocate for the business. The industry had evolved into a three-tiered industry, with the major hotel companies occupying the top tier, timeshare companies unassociated with hotel products but offering multiple resorts occupying the second tier, and “one-off ” developers occupying the bottom tier. The resort products involved not only conventional timeshare projects, but also ultra-luxury products, such as the Ritz Carlton Club. By the end of the 1990s, the perceived demand by the marketplace for more and more flexible products

ushered in the “vacation club” era. Companies whose offerings were previously of the deeded ownership variety sought to shift into the offering of non-deeded, right-to-use club memberships, where either the owners’ association owned the real estate used and enjoyed by the members or title to the real estate was held in a trust for the benefit of the owners’ association and the members. Although vacation clubs could be “single site” projects, most of the vacation club programs consisted of multiple locations, and internal exchange mechanisms to allow “members” of the vacation club to reserve units in different locations within the club. Thus, the vacation clubs took on the image of the exchange companies, at least as far as their own resorts were concerned, while still maintaining the affiliation arrangements with an exchange company to allow the members to “exchange” out of their club and into properties operated by another developer or organization. In addition, the hotel companies operating in the timeshare business also made it possible for their club members to “exchange” their timeshare use rights (usually expressed as “points”) into their branded loyalty programs, enabling a member to vacation at a hotel operating within the brand’s system. Although it is beyond the scope of this article to discuss the monetization of points, this aspect of the timeshare business became significant. Similarly, it is beyond the scope of this article to delve into the complex world of vacation ownership finance. One of the economic lynchpins of the timeshare business model, however, was the

extremely profitable nature of the timeshare sale financing. A developer often made more money from the hypothecation of the timeshare notes and purchase contracts than the developer made from the sale of the timeshare interests themselves. In addition, the major timeshare development companies, including both first-tier companies such as the hotel companies, and the larger second-tier companies, found a ready market for the securitization of timeshare paper in the late 1990s and the 2000s up until the Great Recession. The arbitrage involved between the consumer paper interest rates (in the mid-teens) and the end-buyer rates (in the stabilized upper single digits) made for attractive returns to the developer hypothecators. In recent years, the timeshare industry has continued its path to consolidation. The oversupply of inventory built through the 2000s into the Great Recession, coupled with the limited availability of securitization financing during the Great Recession, caused the major timeshare players to retrench and precipitated the spinoffs of the timeshare divisions of the hotel companies into free-standing entities no longer a part of the operating hotel companies. This was in part the result of the continued demand being made by shareholders in the publicly-traded hotel company sector for earnings and the drag on earnings posed by the continued need by the timeshare companies to invest new capital to create new inventory. To avoid the overcommitment of capital for inventory acquisition, the timeshare companies now prefer arrangements denominated as “fee for services” programs, whereby the timeshare company agrees to license the use of its name to an independent third-party developer or property owner, and to conduct a sales and marketing program for the developer or property owner using inventory owned or built by the third-party developer or owner without ever acquiring that inventory itself. Further, as financing for some timeshare companies dried up after 2008, a number of the second-tier companies were acquired

May/June 2022

and absorbed by the first-tier companies, leaving the industry dominated by first-tier companies. Timeshares vs. Fractionals In the early years of timeshare offerings in the United States, the sales and marketing tactics employed by timeshare sales organizations were consistently condemned as “hard sell.” In truth, there were many sales made by sales representatives that distorted the descriptions of the product through use of misrepresentations and promises that were not performed. These sales abuses led to the regulatory responses in the various states. The state legislatures attempted to rein in the manner in which the product was offered, to insure consumer protections on certain fundamental program components such as completion of construction and release from blanket encumbrances. The timeshare programs most likely to involve hardsell tactics were those involving large numbers of units and, thus, the need to sell thousands of timeshare interests in a single site. For example, if a project contained 100 timeshare units and the timeshare program was designed to create 51 one-week timeshare interests per unit, then the project, if sold out, would have 5,100 timeshare interests. A rule of thumb often quoted during the 1980s was that for every 1,000 pieces of direct mail sent out, the answer rate would be 100 responses. For every 100 responses, there would be 10 project tours; and for every 10 project tours, there would be but a single sale. In a project having 5,100 timeshare interests to be sold, that would translate into 5,100,000 pieces of direct mail. The sales and marketing costs associated with such a program were quite high. In fact, overall sales and marketing costs for a timeshare program might range from a low of 35–40% of gross sales costs for the large branded hotel companies, to upwards of 60% for second- and third-tier companies. Hence, the pressure to close sales on a percentage basis higher than the average drove sales and marketing programs to the higher-pressure tactics. The old

adage was that no one awoke in the morning and said: “Today’s the day I’m buying a timeshare!” The sale of a timeshare was, therefore, something that had to be “sold” to a buyer by convincing the buyer that this was a product that the buyer really “had to have,” and more often than not, convincing that buyer to sign a contract became a bit heavy-handed. One way to reduce the extraordinarily high cost of sales and marketing was to reduce the number of timeshare interests sold and increase the amount of time a timeshare owner could use the units. This involved increasing the size of the fractional interest associated with the timeshare, for example, from a 1/51st interest in a unit to, say, a 1/8th interest, with the 1/8th interest entitling its owner to use six weeks per year instead of a single week. Projects in which the larger fractions were offered came to be known as “fractional” programs. The sale of fractional interests involved sales and marketing costs that were considerably lower than conventional programs, more in the range of 15–20% of gross sales proceeds; however, the cost of the product was commensurately higher, as the size of the units and the luxury levels of the improvements and amenities were generally greater. Accommodations in fractional projects were often two- or three-bedroom units in excess of 1,200 square feet (compared to the standard timeshare unit’s 400–500 square feet), and the price was generally in excess of $500 per square foot. In fact, in the ultra-luxury products, such as those offered for the Ritz Carlton Club, the price might exceed $1,000 per square foot, and those types of fractional interest programs came to be known as “private residence clubs.” Among the determinative factors in making the decision to structure a project as a fractional program were the existence of high barriers to ownership (extremely high pricing for single-family second homes, for example) and high demand. Studies conducted by Dick Ragatz of Ragatz and Associates showed that most second-home owners actually used their properties relatively

few times per year. Therefore, the cost of ownership (both purchase price and annual maintenance costs) was prohibitively expensive relative to the actual use patterns of the owners. There appeared to be a market niche for the more-wealthy vacationers, for whom purchasing a 1/12th fractional interest in a $2,500,000 vacation home for, say, $275,000, with annual dues of $12,000 and four weeks of use, made more sense than buying the whole home. Note that there is a developer mark-up of nearly $70,000 per fraction when the sales prices of the 12 fractional interests are aggregated. Because the sale of fractional interests might involve pricing of up to $300,000 per fraction (or higher), versus pricing for conventional timeshare interests of about $15,000–$30,000 per week, the sales approach taken by the sales and marketing teams for fractional interests was to attempt to differentiate between timeshares and fractional interests by asserting that fractional interests were somehow not timeshares. But, from a legal perspective, the two products are not different, and except for certain exemptions from registration under some state laws for fractional interests consisting of 1/6th interests or larger, the offering of fractional interests is governed by the same set of statutory and regulatory provisions as those governing timeshares. Fee vs. Right-to-Use Projects As mentioned above, in the early days of timeshare in the United States, almost all timeshare projects involved the sale of “timeshare estates,” or timeshare interests coupled with an interest in real property, whether an undivided fee interest in an individual condominium or an undivided interest in a multi-unit property as a whole. The sale of right-to-use timeshare interests was viewed as harder to sell (the sales and marketing emphasis being placed on the tie-back to ownership of real estate, no matter how small the actual deeded interest) versus the sale of a mere contractual right to reserve the use of a unit without owning an interest in the property.

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This dichotomy was also further reinforced by the existence of a Technical Advice Memorandum issued by the Internal Revenue Service (TAM 7803005, dated September 30, 1977), which came to be known simply as “Windrifter,” coupled with limitations on the ability to use the installment sale rules under section 453 of the Internal Revenue Code. In essence, the IRS might determine that a right-touse structure constitutes a lease for a term rather than determining that an actual sale of the timeshare interest has occurred, thus adversely affecting the deductibility of project development expenses and the availability of reporting income under the installment sale method. A detailed analysis of these two tax issues is beyond the scope of this article, but it should be pointed out that if a timeshare right-to-use program is not structured initially to address the issues raised in the Windrifter ruling and by I.R.C. section 453, significant negative tax treatment could result. Fixed-Week and Fixed-Unit Plans. As mentioned above, the early timeshare plans involved relatively inflexible structures, in which a buyer of a timeshare interest acquired a specific week (fixed-week) for use each and every year in a specific unit (fixed-unit). There was no need for a complicated reservation system designed to match inventory to requests for use. When it became clear that the market for the product was increasingly demanding greater flexibility, the next challenge presented was how to sell specified increments of time in specified units while allowing for greater choice of use periods. Floating-Week, Floating-Unit Plans 1. Deeded Plans. The legal structure used to implement the “float” features often involves using a creative conveyancing technique. The timeshare interest, as a creature of real estate, is conveyed by deed. Instead of conveying an undivided fractional interest (say, an undivided 1/51st tenancy-in-common interest) in a specified condominium for a specified one-week period (say, the seven-day period commencing on a Friday and containing the Fourth of July), the deed for a “floating-week,”

“floating-unit” timeshare interest grants a specific fractional interest in a specific condominium as Parcel 1, and then excepts and reserves to the grantor all of the use rights associated with that particular condominium unit. The deed then contains a grant of a Parcel 2, consisting of a right to use and occupy any unit of a certain unit type for a one-week period each year, to be reserved by the timeshare owner in the manner prescribed in rules and regulations adopted by a timeshare owners’ association. 2. Right-to-Use Plans. Generally speaking, right-to-use programs do not contain grants of use rights in specified units (this is not to say that creating specified unit rights is impossible in right-to-use programs). Indeed, deeds are not used for conveyancing at all. The use rights and privileges in rightto-use plans are all creatures of contract, sold as memberships in a nonprofit corporation or as vacation licenses. In the typical right-to-use plan seen in today’s timeshare industry, the real estate is owned by one of three parties: (i) the developer, who grants vacation licenses to timeshare owners; (ii) the association, which issues memberships initially owned and then sold by the developer; or (iii) an institutional trustee for the benefit of the association, the developer, and the timeshare owners as members of the association. 3. Features Found in Both Deeded and Right-to-Use Plans. Both deeded and right-to-use timeshare plans include some or all of the following: • Seasonality. Use rights may be limited to a specific calendar season, say, ski or summer in a mountain resort, or perhaps a holiday season (including the weeks in which the major holidays occur), or even a racing season (when there is an annual event, such as thoroughbred horse racing or a NASCAR event). • Annual vs. biennial. Use rights may occur annually or every other year. • Split weeks. Use rights in a use week may be used in increments at different times, for example, a

three-night weekend use period and a four-night mid-week use period. • Reservation of weeks. In most timeshare plans that have floating use features, there will be a tiered reservation priority procedure, where regular use reservations may be made, for example, during the window commencing one year from the date sought to be reserved and ending 30–45 days out. This window is designed to ensure that each owner has an equal chance to reserve a week of use each year. The next tier is referred to as “space-available use” and allows an owner who has otherwise not made a reservation during the regular use window to reserve a week during a shorter window, starting when the regular use window ends and ending, for example, a week before the first night of the week sought to be reserved. • Bonus use. “Bonus use” is the ability of an owner to reserve additional use periods in excess of that owner’s annual entitlement of one week per timeshare interest owned, to the extent that there is excess availability (known as “breakage”). Bonus use is typically allowed only on a first-come, firstreserved basis within seven days of the starting date. Bonus use, as a concept, works only to the extent that fewer than all owners of timeshare interests book their use weeks. • Association rentals. The use plan will ordinarily allow the owner’s association to rent use periods that are otherwise unreserved through regular or space-available use, and such rentals will be in competition with bonus use reservation rights. Also, the governing documents may authorize the association to rent units during periods when an owner’s right to reserve is otherwise suspended by reason of a default in payment of dues or other violation of the governing documents.

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• Developer rentals. The governing documents should always provide the developer with the right to rent the developer’s unsold inventory. There may be issues on a state-by-state basis if the developer has inventory that is not committed to the timeshare plan (this occurs when a project is phased), as well as inventory committed to the timeshare plan but not yet sold. To the extent that the developer reserves committed but unsold units for rental, that reservation will be in direct competition with reservation requests by non-developer owners. States may limit the developer’s reservation rights to a percentage of total reservations outstanding at any time. Some states allow the developer to rent use weeks that have been sold when the reservation window for timeshare owners to book the weeks has expired. Leasehold Projects A timeshare plan may be established on the basis of a leasehold interest in real estate. Leasehold plans may be sold as either a timeshare estate or a right-touse interest, depending on how state law treats leasehold interests (either as real or personal property). One of the major timeshare companies, The Walt Disney Company, has created its Disney Vacation Club using a leasehold model, in which a Disney entity, as lessee under the terms of a ground lease, is the timeshare developer. The developer “sells” timeshare interests that consist of a fractional sublease, coupled with use rights similar to other timeshare programs. The business theory is that at the end of the normal useful life of the improvements committed to the timeshare plan, the timeshare plan will terminate concurrently with the end of the term of the ground lease, and the lessor-owner simply retains title to the property unencumbered by the timeshare plan. Trust Projects In certain cases, the subdivision of property inherent in the creation of

most timeshare projects may be prohibited. For example, in the early 1980s, under the terms of the bi-state compact between California and Nevada, the subdivision of property within the Lake Tahoe Basin was prohibited under the rules adopted by the Tahoe Regional Planning Agency. In order to convert a hotel to timeshare use, title to the entire property was conveyed to an institutional trustee and, under the terms of the trust agreement, the developer was allowed to sell timeshare interests consisting of (a) memberships in an association and (b) beneficial interests in the trust. Title companies were able to insure the interests of the trustee in the property held in trust, and financing was available with respect to the timeshare interests (as personal property interests) with the purchase money debt secured by UCC article 9 security interests. Trust structures are also the primary vehicles for timeshare projects developed in coastal Mexico where, under the Mexican Constitution, foreigners may not own real property within 50 kilometers of the coast or 100 kilometers from an international border. Mexican law limits the term of the Mexican trusts (called fideicomisos) to 50 years, subject to a single renewal of another 50 years. Vacation Clubs and Points-Based Timeshare Plans The term “vacation clubs” as used in this article describes timeshare plans that are designed to allow the members of a single association (or sometimes multiple separate but affiliated associations) to make reservations in accommodations in multiple properties developed by the same developer or otherwise acquired by such developer for inclusion in the vacation club. The connections between properties are sometimes created by having those properties owned by the association, or sometimes by having what is known as “internal exchange” programs where members in one project can “exchange” a reserved week in their project for a reserved week committed to the internal exchange by another owner in

another project (but developed, indirectly owned, or controlled by a single developer). There are, of course, hybrids that marry these different types of access to multiple properties under one association. Some of the major companies use the “Vacation Club” label to operate their timeshare businesses (i.e., Marriott Vacation Club and Disney Vacation Club). Other vacation club programs are operated under such names as Hilton Grand Vacations and Wyndham Destinations. The types of timeshare interests offered in vacation clubs may be traditional deeded timeshare estates, or they may be right-to-use plans where the core product involves the purchase of a membership to which a number of “points” are assigned. The so-called points programs use points as the currency for making reservations. The number of points assigned to a membership is based on the number of use nights, season of use, and the type of unit purchased. A buyer is typically required to purchase a minimum total number of points, based upon the number that would be required to reserve the smallest unit in the program for seven nights per year. Most regulatory schemes require that the total number of points sold be monitored to prevent the potential for overselling. It is critically important in the design of points-based systems to ensure that it is possible to identify which points are associated with which units, from both an inventory control and financing perspective. If a regulator were to audit a points-based vacation club for compliance with the 1:1 purchaser to accommodation ratio, the tie-back of points to inventory of units becomes critical. This is not a legal issue in terms of the governing documents provisions but a practical administrative and operations issue for the developer creating the points-based timeshare plan. Points-based timeshare plans came into vogue in the timeshare industry around the turn of the millennium. These are the most flexible (and complex) of the timeshare programs. The ability to use points to reserve accommodations can allow for nightly

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reservations, as well as the expenditure of points for other program benefits (such as trades into reservation of hotel rooms, for example). The monetization of points for such trading purposes is of critical importance, especially where the points are expended to access goods and services that are not provided by the timeshare plan; however, the monetization of points is beyond the scope of this article. It simply needs to be acknowledged as an issue. Other specific aspects relevant to vacation clubs are the following: Home resort preference. In vacation clubs, a buyer may actually purchase a timeshare estate interest in a specific resort (say, a property in Hawaii) with the expectation of always being able to reserve a week in that property, notwithstanding that it is a part of a vacation club. To accommodate this expectation, reservation platforms may provide a period (say, the one-year period commencing two years ahead of the date sought to be reserved and ending one year out) within which the member may make a reservation request for a unit in the Hawaii property, and during which time other vacation club members are not yet allowed to book a reservation. Banking and borrowing. Banking and borrowing were first developed by the exchange companies as tools for member satisfaction. The term “banking and borrowing” describes reservation procedures that allow a timeshare owner to “bank” that owner’s timeshare week in a year in which the owner decides not to reserve an accommodation in the timeshare program but to reserve the right to use it in another year. In other words, the owner may choose not to reserve a week in the current year in order to reserve, say, two weeks together the following year; or to “borrow” a week from a future year for use in a current year, to allow for back-to-back weeks in the current year (by agreeing to forgo such owner’s reservation rights in the year from which the use week is borrowed). Again, this requires sophisticated inventory control procedures at the administrative level.

Short-Term Products In most jurisdictions, the definition of the term “timeshare interest,” whether timeshare estate or timeshare right-touse, includes use products that have a term longer than three to four years or a value in excess of a dollar amount ($3,000 in most cases). This allows the offer and sale of short-term products that might be useful as trial memberships, which may be leveraged into full timeshare sales. A developer may offer a short-term product to a buyer who has otherwise gone through the sales process and declined to buy the developer’s regular timeshare interest but might be willing to try out the product for a smaller amount of money and for a shorter period. The benefit to the developer is that it keeps the buyer in the developer’s program and enhances the likelihood of an ultimate purchase without incurring significant marketing costs for the potential timeshare interest sale at a later date. Exchange Programs As mentioned above, the two major exchange companies are RCI and II. Of the two, RCI became the largest timeshare exchange company. In the early days of timesharing, exchange companies would enter into affiliation agreements with the developers of single-site timeshare projects, whereby the owners of timeshare interests in such projects were invited to opt to exchange their timeshare week for a weeklong stay in another affiliated project. To effect this, the developers would prime the pump by committing a certain number of developer weeks to the exchange company, and the exchange company in turn would match the donor owner with a week donated by another owner in a different and unrelated project, in exchange for a fee paid by the timeshare owners opting to exchange. The exchange company operation was a crucial piece of the business in the early days, when most properties were subject to timeshare plans using a fixed-unit/fixed-week program. The exchange companies provided the flexibility lacking in the early programs. With the advent of floating use

programs, and their more flexible use plans, the exchange companies enhanced their attractiveness to developers (and associations) by offering the potential for the exchange company to operate the reservation systems of the participating projects as a backof-the-house exercise on behalf of the association. By the end of the 1980s, the exchange companies were an integral component of the timeshare business. As such, they were a significant lobbying force whenever a change in regulatory approach occurred, ensuring that the exchange business was not regulated as a separate timeshare offering when the need for registration and permitting was involved. Exchange companies continue to be major participants in the timeshare business, by reason of their ability to allow members of even the largest vacation clubs to reserve use in projects that are not connected to or a part of such vacation clubs. Exchange companies also operate their own internal third-party rental programs for the excess weeks they manage within their systems. Termination of Timeshare Plan to Permit Sale of Project There are several recent developments in the timeshare business to note here. Many of the original timeshare projects brought to market in the early 1980s were created as one-off projects whose location and size were not generally of interest to the major timeshare companies. In some cases, independent vacation clubs were created to assemble timeshare interests by purchasing multiple timeshare interests in some of these projects (usually from an association that had taken those interests either by foreclosing on assessment liens or deeds in lieu of such foreclosures) and combined them with interests in other smaller geographically or seasonally similar projects to offer their members multiple use and enjoyment options. In other situations, associations that had taken back multiple timeshare interests have attempted to terminate the timeshare regimes because the projects have become economically

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unfeasible because of assessment delinquencies. In these cases, the associations face a number of legal dilemmas, among them are the following: (a) Restrictions in a project’s declaration limiting terminations to time periods after a definite term (usually 60 years). These types of restrictions require the association to hold a meeting of the timeshare owners to vote on the issue of amending the declaration to permit early termination. Voting issues such as quorum requirements, majority or supermajority voting requirements often make this amendment vote difficult. And, notwithstanding the economic justifications for terminating a timeshare regime, there will always be timeshare owners who oppose the idea of losing something for which they may have paid a significant amount of money, even if it was 40 years earlier. (b) Once the requisite vote to amend the declaration has been conducted successfully, the association then faces the challenge of finding a buyer and structuring a sale of the project, as a whole, with the ability to deliver clean and marketable title to the buyer. Notwithstanding the existence of provisions in the declaration that usually grant the association not only the authority but also powers of attorney to convey the project, with the net proceeds to be divided among the timeshare owners of record as of the date of any sale, most title companies refuse to provide a clean owners policy of title insurance to the buyer unless 100 percent of the owners of timeshare interests have either executed a written agreement to convey their interests or the association has acquired clear title to 100 percent of the timeshare interests in that property.

It is almost a certainty that the association will not be able to provide the kind of title assurances to the title company necessary to cause the title company to issue a policy to a buyer. Hence, it is often necessary for the association to bring a quiet title action in an appropriate court to obtain a court order to convey any straggler timeshare interest inventory not otherwise covered by the association’s efforts. This process can involve lengthy delays and significant legal and court costs that will have to be borne by the association. How a buyer might be persuaded to assist in the termination and title clearance process is a matter for the business negotiations between the buyer and the association attempting to sell. If the number of straggler timeshare interests is small enough, and the economic benefits to the buyer large enough, a buyer might be persuaded to issue a guarantee to the title company to insure against its economic exposure for not clearing all of the timeshare interest titles. Conclusion This article is the authors’ attempt to provide a brief overview of the past and present timeshare industry, the wide range of timeshare products that are available today, and the legal concerns that arise in connection with structuring and documenting a timeshare program. Timeshare has evolved and adapted remarkably to changing

legal and economic demands, and it is likely that it will continue to do so in the years ahead. Whether some form of timeshare will work for a client’s existing project or a new development will depend largely on whether one of its many available legal structures will fit into the client’s business plan and whether any of its various products will appeal to the target customer demographic. In other words, a fractional interest may be best if the project is marketed to high-end consumers, but a traditional timeshare plan sold in increments of 51–52 weeks a year coupled with a points system can be sold to customers having a wide range of disposable income. In addition, one must consider the client’s tolerance for a higher level of governmental regulation not typically required for whole ownership condominium or hotel-condominium projects, as timeshare offerings are thoroughly regulated by almost all states. It also must be noted that, even if the state in which the client’s project is located has a very reasonable level of regulation, it is likely that the client will want to market the project in other states, and the lawyer then will need to review and consider the regulatory requirements of multiple states, including those that may not be so reasonable. From a planning perspective, it is critical to assess where the developer’s target markets lie and to structure the program to meet the most rigorous of the regulatory schemes applicable in the target jurisdictions. Other factors to consider are marketing the timeshares and financing the timeshare paper. An experienced timeshare sales and marketing team (separate and apart from the local real estate broker) is critical to the success of the project. Traditional timeshare sales are either cash purchases or financed by the developer. For those that the developer finances, the down payment will range from 10 percent to 20 percent of the price and, as noted above, marketing costs average 60 percent of gross sales. To cover this gap, a lender that will finance the timeshare receivables will need to be on board. n

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Documentation and Operation of Timeshare Plans

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By Arthur O. Spaulding Jr., Karen D. Dennison, and Robert S. Freedman

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his article explains the governing documents for different types of timeshare plans and discusses the operational requirements of timeshare associations, including budgets, management, rentals, and the termination of the plans. Generally Timeshare plans are generally governed by a set of legal documents—often described as the “governing instruments” or “governing documents”—that establish the manner in which the timeshare plan will be established, operated, and administered, usually by a timeshare association (Association) formed as a nonprofit corporation. The governing instruments usually consist of the following, the titles of which will vary by statute and custom and practice in the relevant jurisdictions: 1. Declaration of Covenants, Conditions and Restrictions (the Declaration); 2. Articles of Incorporation of the Association (Articles); 3. Bylaws of the Association (Bylaws); 4. Rules and Regulations of the Association (Rules and Regulations); and 5. Management Agreement between the Association and a thirdparty management company, often the developer or an affiliate of the developer (Management Agreement). If the project is a multisite project or a vacation club, there may also be a trust agreement providing that the properties in which an owner may reserve a use period are owned by a trustee for the benefit of the Association and its members. Almost all timeshare plans also involve an exchange affiliation

Arthur O. Spaulding Jr. is a partner at Cox Castle Nicholson in San Francisco, California. Karen D. Dennison is a retired partner at Holland & Hart LLP. Robert S. Freedman is a partner at Carlton Fields, P.A. in Tampa, Florida, and is the Section’s Real Property Division vice chair.

agreement with a third-party exchange company. Of the governing instruments identified above, the Declaration is the single-most important, as it will contain the detailed provisions establishing the fundamental rights, duties, and obligations of all parties, including the developer (or declarant), the Association, and the members and owners. It will define and identify the nature of the timeshare interests; the easements and rights granted to and reserved from the Association and the members by the developer; the voting rights of the members and any veto powers retained by the developer; the specific rights, duties, and obligations of the Association; the establishment of the assessment structure for the timeshare plan, including both regular and special or reconstruction assessments; the enforcement rights of the Association; provisions for dealing with damage, destruction, and condemnation; amendment procedures; and any other specialty provisions relevant to a project or required under the governing laws. Although this article mentions vacation club operations in a few places, the variations attributable to multisite, multistate timeshare plans are beyond the scope of the article. Suffice it to say here that the developer will need to take care to ensure that in the structuring of a timeshare vacation club, the laws of every jurisdiction in which timeshare interests will be offered and sold must be taken into account in the design of the program. There are complex operational issues attendant to having a single Association operate and administer a vacation club with multiple locations in multiple states. Overview of Owners Association Operational Requirements In most states, the timeshare plan will be operated and administered by a nonprofit corporation that will function as an owners association, the members of which will be the owners of the timeshare interests in the timeshare plan. Although California law does not expressly require the formation of an Association, the California Time Share

Act clearly contemplates the existence of an Association. The Declaration for the timeshare plan must provide for the organization of an Association, see Cal. Bus. & Prof. Code (BPC) § 11251(a)(1), and the act is replete with references and requirements relating to the Association. Likewise, Nevada’s Time Share Act, by implication, requires the formation of an incorporated association by providing that “each owner is a member of the association for the time-share plan” and further provides that the state of incorporation may be the State of Nevada, the state in which the project is located, or any state where the developer has obtained a permit to sell. See Nev. Rev. Stat. (NRS) § 119A.520. In Florida, a timeshare plan need not have an owners’ association, but each timeshare plan must have a managing entity, which can be the developer, a separate manager, a management firm, or an owners’ association. However, the managing entity for any timeshare plan within a Florida condominium or cooperative is required to be an owners’ association’s board of directors. See Fla. Stat. (FS) § 721.13(1). The state of incorporation for singlesite programs will always be the state in which the project is located. Generally speaking, the nonprofit laws of the state of incorporation will provide the organizational and meeting requirements for the Association, although the respective timeshare statutes may be more specific and more restrictive. The details of the Association’s governance structure (i.e., the requirements for the election of directors, the voting rights of the members, the frequency of annual meetings of the members, the provisions governing the conduct of business by the board of directors of the association, etc.) will be contained in the standard form of nonprofit corporation bylaws. The provisions of the Bylaws will need to be conformed to any specific provisions in the Declaration (such as the timing for the transfer of control of the Association from the developer to the Association). The specific rights, duties, and obligations of the Association with respect to the operation of the timeshare plan and the maintenance, repair, and replacement of the project will usually

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be established in the Declaration. The Declaration will ordinarily be required to be recorded against the project. See BPC § 11251(a); Nev. Admin. Code (NAC) § 119A.030; FS §§ 718.104(2), 719.1035(1). The rights of any underlying mortgagees will ordinarily be required to be subordinated to the Declaration. See BPC §§ 11226(d)(2), 11244(a)(1), 11255; NAC § 119A.230; FS § 721.08(2)(c)2.c. Typically, the Declaration will provide that the Association shall have all of the rights, powers, and duties generally given to and imposed on nonprofit corporations in the jurisdiction of its incorporation and will then separately delineate the power and the duties of the Association to maintain and repair the project; to administer the affairs of the members and the operation of the timeshare plan as provided in the Declaration; to acquire (by lease or purchase), maintain, repair, and replace the common furnishings within the units; to levy, collect, and enforce the assessments enumerated in the Declaration; to rent the units; and to pay, as agent, the expenses and costs enumerated in the Declaration. The Association will have the exclusive possession of each unit during applicable maintenance periods for the performance of maintenance and repairs on such units and the rental of units under any Association rental program. The Declaration typically will cover the following topics: 1. Association bank accounts, including reserve accounts for the collection and expenditure of reserves on deferred capital projects; 2. budget preparation and distribution and preparation and distribution of required financial reports; 3. cleaning and housekeeping of the timeshare plan’s accommodations; 4. cooperation and coordination of activities with the developer; 5. delegation of authority; 6. exchange program coordination; 7. inspection of records; 8. insurance requirements; 9. levy and collection of assessments;

10. maintenance and repair of the project; 11. maintenance of reserves; 12. minutes, agenda, and policies; 13. other necessary acts; 14. parking; 15. rental programs; 16. representation in condemnation proceedings; 17. reservations; 18. rights of entry; 19. roster of owners; 20. rules and regulations; 21. taxes and assessments; and 22. utilities. Note that vacation clubs sometimes require different iterations of the governing instruments in order to comply with the laws of the different jurisdictions within which timeshare interests constituting club memberships will be offered for sale. At the outset of the legal structuring of a vacation club, care needs to be taken to design the timeshare plan so that it will comply with the most restrictive of the timeshare laws that will be applicable to the program. The operational issues that are addressed in a statutory scheme will need to be reflected in the governing instruments. Budget Requirements and Reserves In most jurisdictions, the Association will be obligated under the terms of the Declaration to prepare an annual budget for the timeshare program and to provide a copy of the proposed annual budget to the Association members prior to the commencement of the fiscal year of the Association to which the budget is applicable. See BPC § 11272(a)(1); FS § 721.13(3)(c)1. In Nevada, the current annual budget of the Association must be submitted with the initial permit filing and with each annual renewal of the permit. See NRS §§ 119A.300(1) (k), 119A.355(1). The budget will itemize the annual costs of the operation of the timeshare plan and will establish the basis for the annual assessments to be billed to the members. In California, the initial proposed budget for the Association must be filed with an application for a public report and must be certified

by an expert in timeshare plan financial matters, which expert must be an independent certified public accountant, a certified public accountant employed by the developer, or another person the real estate commissioner has determined to be qualified to prepare a timeshare plan budget. See BPC § 11240(f ). In Florida, a copy of the final budget must be filed within 30 days after the beginning of each fiscal year. FS § 721.13(3)(c)1. In most states, the annual and any special assessments must be divided proportionally among the timeshare owners, using a formula based upon equal assessments for all members of a particular class of owner. See BPC § 11265(a); FS § 721.15(1). Florida, however, requires only that common expenses be allocated among the timeshare interests on a reasonable basis, and there can be differentiation in the allocation based upon the reasonable difference in benefits provided. FS § 721.15(1)(a). Nevada requires only that the timeshare instrument provide for an allocation of the expenses of the timeshare plan among the timeshares. See NRS § 119A.380. Classes of ownership may be created where, for example, there are multiple types of units in a project (studio, one-bedroom, two-bedroom, etc.) and the costs allocable to those units vary by square footage. In some states, such as California, the Association may not increase the budget (and thus the amount of annual assessments) by more than 20 percent on an annual basis without the vote or consent of a majority of the owners other than the developer. See BPC § 11265(a)(5). Nevada has no restriction on yearly increases in assessments. That said, assessments must reflect a budget that is a good faith estimate of the expenses for the next fiscal year. The Florida Time Share Act does not limit annual increases in assessments, but the Condominium Act limits annual increases to 15 percent without approval of the owners. See FS § 718.112(2)(e)2.a. The developer will be obligated to pay regular and special assessments on the timeshares it owns. See BPC §§ 11241(a)(1), 11265(a)(4); NRS § 119A.540; Fla. Admin. Code Ann. (FAC) § 61B-40.005(2). In California and

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Nevada, the developer may enter into a subsidy agreement with the Association under which the developer obligates itself to pay the difference between the annual assessment amounts paid by non-developer owners and the actual cost to operate the timeshare plan. See BPC § 11241(a)(2); NAC § 119A.225; FS § 721.15(2)(b). In Florida, the developer can elect, in the timeshare instrument, to provide a subsidy in lieu of paying assessments. FS § 721.15(2)(b). The obligations of the developer to pay annual assessments (whether through regular payments or through a subsidy arrangement) may be required to be secured by a surety bond or other financial assurance acceptable to the regulatory body. See BPC § 11241(b), (c); NRS § 119A.540. State laws generally require that the timeshare Declaration and the budget provide for collection by the Association of reserves for capital expenditures. See BPC § 11240(b)(2)(L); NRS § 119A.540; FS § 721.07(5)(t)3.a.(XI). Some state laws require reserve studies to be performed by the Association on a periodic basis such as every three years. Although there is no statutory requirement that a reserve study be performed by the Association, Department of Real Estate (DRE) policy requires that such a study be performed by the Association once every three years and that the Declaration obligate the Association to do so. See also NRS 119A.542 (which requires that a reserve study be performed every five years). Transfer of Control of Association When a timeshare plan is created, the developer will own all of the timeshare interests and will control the Association. In custom and practice, a timeshare plan will usually include a two-class voting structure, in which one class is composed of all of the owners or members other than the developer, each of whom shall be entitled to one vote per timeshare interest owned, and the other class consists of the developer as its sole member. See BPC § 11269(b). Most states have a statutorily-imposed point in time when the two classes must merge into one. In California and Nevada, this merger, or transfer of developer control,

occurs once total sales of timeshare interests equal 80 percent of available timeshare interests. See id. § 11269(b)(3). In addition, in California, from and after the first annual meeting of the members of the Association, at least one member of the board of directors must be elected by the members of the Association other than the developer. See id. § 11270(b). Nevada’s Time Share Act follows the Uniform Common Interest Ownership Act (UCIOA) with respect to the election of members of the board of directors by timeshare owners during the declarant control period. See NRS § 119A.522. In Florida, the Florida Time Share Act does not prescribe the length of the developer control period, but it does require disclosure in the public offering statement of any control period that extends beyond one year after a majority of the timeshare interests are sold. Timeshare plans within a Florida condominium are also subject to the Condominium Act, which limits the developer control period to a maximum of seven years following the recording of the condominium plat and provides for staggered relinquishment of control, beginning with the non-developer owners being entitled to elect at least one-third of the members of the Association board upon the sale of 15 percent of the timeshares that are proposed to be in the plan. See FS §§ 721.07(5)(o), 718.301(1). Management Management of timeshare plans will ordinarily be handled under the terms of a written management agreement between the Association and a third party. The third party may be the developer, an affiliate of the developer, or a true independent management company. The terms of such management agreements will be similar to property management agreements for hospitality properties, with the addition of provisions dealing with the special nature of timeshare plans (such as reservation systems). In California, the Time Share Act dictates many of the terms that must be included in timeshare management agreements, see BPC § 11267(a), among which are (i) the five-year limitation on the term of the initial management

agreement; and (ii) the three-year limitation on extension terms of such agreements. In Nevada, the initial term of the management agreement must expire on the earlier of (i) five years or (ii) the first annual meeting of the members; however, the agreement is automatically renewed annually unless a majority of the members, excluding the developer, vote to terminate the agreement. See NRS § 119A.530. In Florida, the management agreement for a timeshare plan that includes timeshare estates (deeded interests) automatically renews for three-year periods until the managing entity is discharged by a vote of at least 66 percent of the non-developer owners who cast votes, with at least 50 percent of the non-developer owners casting votes. See FS § 721.14(1). The fees payable to managing agents under timeshare management agreements will vary. In California, although the Time Share Act is silent on the amount of the management fee, DRE policy is that the management fee should not exceed 10 percent of the annual budget of the Association (exclusive of the management fee), unless the developer can establish a reasonable basis for a higher number. Rentals The rental of timeshare use periods is a subject that poses a number of different issues. Rental by Timeshare Owners. Most timeshare plans permit the rental of timeshare use periods by timeshare owners. Embedded in that privilege is a potential federal securities law issue. In addition, state securities laws may come into play. See Cal. Corp. Code § 25100(f ) (which defines an “investment contract” as a type of security requiring qualification under California law). Nevada’s and Florida’s timeshare acts expressly provide that an interest in a timeshare is not a security under the respective securities laws of those states. See NRS § 119A.180; FS § 721.23. Rental by the Developer. Rental of timeshare use periods by the developer of the developer’s own timeshare interests (unsold inventory) may be limited by state law in some jurisdictions. In California, the developer may rent use

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periods attributable to unsold timeshare interests, but the number of use periods that can be rented by the developer is limited by the Time Share Act to 25 percent of the developer’s unsold inventory of any particular type. See BPC § 11245(b). This limitation is imposed as an attempt to avoid unfair competition between a developer’s rental program and efforts to rent timeshare use periods by individual owners. This is not to be confused with a developer-managed rental program, in which the developer and an individual timeshare owner enter into a rental management agreement (one that is not executed at the time of purchase but after a purchase decision has been made by the buyer, to avoid the investment contract issue) providing for the developer’s rental of the owner’s timeshare use period. Again, this situation is more likely in a fractional ownership timeshare plan. In Nevada and Florida, rental of a developer’s unsold inventory is not regulated. Termination of Timeshare Plan The manner by which owners may terminate timeshare plans varies from jurisdiction to jurisdiction, although generally this is a subject that is not covered by statutory requirements. But Florida has statutorily provided for a default termination upon the vote or consent of 60 percent of the owners in timeshare plans that have been in existence for at least 25 years, in the absence of any termination provision in the timeshare declaration. See FS § 721.125. The termination provisions in many Declarations currently in place derived from condominium declarations, in which a condominium plan was created to last for, say, 60 years, and then the term was subject to automatic extension for additional 10-year periods unless a majority of owners voted to terminate the plan. In the timeshare context, the industry is currently experiencing varying degrees of “owner apathy” where timeshare interest owners who have owned their timeshare interests for 30-plus years may want to terminate a plan they otherwise cannot exit. In some cases, this owner apathy has reached such a level that owners have ceased paying their

annual assessments and Associations are having great difficulty operating projects at even minimal levels of service for those owners still interested in the use and enjoyment of the timeshare project. Further, there are some projects that have actually reached their useful life and the renovation of such projects is beyond the means of those who would be subjected to special assessments to pay for the renovation costs. During the Great Recession, Nevada enacted NRS § 119A.525, allowing a developer to consolidate units dedicated to timeshare use into a portion of the original project, thereby downsizing the project and reducing the maintenance burden in cases where the timeshare project was larger than needed to meet the oneto-one use night to use right ratio. The excess units that are not required to maintain a substantially similar vacation experience for the timeshare owners may be withdrawn from the timeshare plan pursuant to NRS § 119A.495. In the drafting of new Declarations, care should be given to describe how a timeshare plan might be terminated earlier than 60 years out or might be consolidated with another timeshare plan of comparable project components. Consider a situation in which there are two timeshare resorts, each located in the same geographical area. Assume that in one of these projects (Project A), there are 40 units that are subject to a use plan involving 50 deeded timeshare interests per unit. Project A would thus have a total of 2,000 timeshare interests. Assume further that each of the timeshare interests is owned by a separate party and that, of the 2,000 owners, 800 have ceased paying their dues and 1,200 remain desirous of continuing use and enjoyment at Project A. Assume also that in the other project (Project B), there are 50 units that are subject to a use plan involving 50 deeded timeshare interests per unit. Assume as in Project A that each of the timeshare interests in Project B is owned by a separate party and that, of a total of 2,500 owners, 1,200 have ceased paying their dues and 1,300 remain desirous of continuing use and enjoyment at Project B. In this situation, it would be possible to solve the

problems at both projects by terminating the timeshare plan at Project A and transferring the Project A timeshare owners into Project B, allowing Project A to be repurposed for use as a different real estate product. As long as Project B is of comparable composition and quality, the 1,200 owners of timeshare interests in Project A who wish to continue their timeshare ownership could exchange their Project A timeshare interests for Project B timeshare interests, and the owners of timeshare interests in Project B who no longer wish to continue such ownership could exchange their Project B timeshare interests for Project A timeshare interests. These exchanges would serve a dual purpose. First, the owners of timeshare interests in both Project A and Project B who no longer desire to participate and be burdened by paying annual dues may relinquish their timeshare interests (consolidated in Project A) and share in disbursement of net proceeds (after expenses and payment of mortgages) from the sale or other disposition of Project A. Second, the consolidation of the timeshare interests of the Project A timeshare owners with those of the Project B timeshare owners results in a fully committed owner base for Project B. The manner in which the Declaration and other governing instruments approach this topic will determine how such a consolidation might proceed. Certainly, mortgagee protection would also be a significant component of any such approach. Conclusion It should be apparent from this article that such a complex array of product and structure options warrants careful and professional analysis in order to determine the best possibility that may work for a client’s project. n

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Federal and State Regulation of Timeshares and Fractional Interests By Arthur O. Spaulding Jr., Karen D. Dennison, and Robert S. Freedman

his article reviews the regulation of timeshares and fractional interests at the federal level and discusses common threads that run through most state laws and regulations, with a particular emphasis on Florida, California, and Nevada.

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State Regulation Compared to other types of real estate offerings, the timeshare industry is highly regulated at the state level. The authors do not intend this regulatory overview to be a compendium of the various state laws. Instead, they emphasize Florida, California, and Nevada—which are among the top five states in the United States with the highest concentration of timeshare units. State timeshare laws regulate both timeshares and fractional interests. In general terms, most state laws do not distinguish between timeshares and fractional interests, the latter being simply a larger time component than the former; however, some state regulatory schemes do exclude the largest fractional interests from regulatory oversight (e.g., onesixth interests). For purposes of this analysis, this article uses the term “timeshare” to include fractional interests unless otherwise noted. Some states, such as Florida and Nevada, are “disclosure” states, meaning that, for the most part, so long as the timeshare or fractional plan complies with state law, and the disclosure document given to prospective purchasers and the required purchase contract provisions satisfy the state’s consumer protection policy, Arthur O. Spaulding Jr. is a partner at Cox Castle Nicholson in San Francisco, California. Karen D. Dennison is a retired partner at Holland & Hart LLP. Robert S. Freedman is a partner at Carlton Fields, P.A. in Tampa, Florida, and is the Section’s Real Property Division vice chair. Published in Probate & Property, Volume 36, No 3 © 2022 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.

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the state regulatory authority will not dictate the terms of the timeshare plan. In addition, the Nevada Real Estate Division has the authority to waive any provision of the Nevada Time Share Act if it finds that the enforcement of that provision is not necessary for the protection of purchasers. Other states, such as California, are “compliance” states and require compliance with specifically mandated plan documentation and purchase contract requirements. What Is the Basis for State Regulation? The offering of timeshares for sale in a state, whether or not the project or a component site is located in the state, is the basis for state regulation. The State of Nevada regulates the sale of timeshares under the Nevada Time Share Act. The State of California now regulates the sale of timeshares under division 4, chapter 2, part 2 of the Business & Professions Code, section 11210 et seq. (BPC), and The Vacation Ownership and Time-Share Act of 2004 (the California Time Share Act), administered by the Department of Real Estate (DRE). The California Time Share Act completely replaced and superseded the original California Time Share Law. In Florida, the offering and sale of timeshares is regulated under chapter 721 of the Florida Statutes (FS), known as the Florida Vacation Plan and Timesharing Act (the Florida Time Share Act). The Division of Florida Condominiums, Timeshares and Mobile Homes (the Florida Division) has promulgated regulations, which are found at chapters 61B-37 through 61B-41 of the Florida Administrative Code (FAC). Generally, any written or oral communication that is disseminated or used within the state and is used to induce a person to buy a timeshare or attend a sales presentation is a regulated activity. Who Is Required to Register the Timeshare Plan and Obtain a State Permit to Sell? State statutes regulate “developers,” who are required to obtain a state permit to sell before conducting any sales activities in the state. See Nev. Rev. Stat. (NRS) § 119A.270; BPC § 11226(b); FS § 721.07. Developers generally include

persons who create the timeshare plan or are in the business of selling timeshares and any person who succeeds to the interest of the original developer in the plan. See NRS § 119A.040; BPC § 11212(i); FS § 721.05(10). Exemptions from registration may include (a) the sale of a de minimis number of timeshares, (b) the sale of a timeshare by an owner who is not a developer, (c) owner referral programs, (d) the resale of timeshares by an owners’ association that acquires a timeshare from a defaulting member, and (e) the sale of short-term vacation plans. See NRS § 119A.170. Regarding short-term vacation plans, Nevada exempts from registration under the Nevada Time Share Act prepaid vacations of fewer than five years, unless the method of disposition is adopted to evade the law. In addition, mini-vacations, exit programs, and other “sampler” programs, which are commonly offered to persons attending a timeshare presentation who do not purchase a timeshare, are not regulated, provided the program contains a disclosure that it is not regulated by the Real Estate Division. In California, BPC § 11211.5 exempts from the registration requirements of the California Time Share Act timeshare plans having a duration of three years or less. BPC § 11212(m) defines the term “Short Term Product” similarly, but the relevant time period is three years or less, rather than the five-year period referenced in the Nevada law. BPC § 11212(m) defines “Incidental Benefits” as “an accommodation, product, service, discount, or other benefit, other than an exchange program, that is offered to a prospective purchaser of a time-share interest prior to the end of the rescission period set forth in section 11238, the continuing availability of which for the use and enjoyment of owners of time-share interests in the timeshare plan is limited to a term of not more than three years, subject to renewal or extension.” Note also that BPC § 11225 exempts from the California Time Share Act’s registration requirements timeshare plans located entirely outside of the United States. In Florida, FS § 721.03(1) and (6) excludes from regulation under the Florida Time Share Act timeshare plans consisting of no more than seven

timeshare periods or having a term of fewer than three years, and timeshare plans under which the prospective purchaser’s total financial obligation will be $3,000 or less during the entire term of the plan. Notwithstanding the former provisions, “regulated short-term products,” as defined in FS § 721.05(32) to be a contractual right to use accommodations without purchasing a timeshare interest, are subject to certain advertising and contractual limitations, as provided for in FS § 721.11(6). In addition, FS § 721.075 establishes minimum standards and procedures for the use of “Incidental Benefits” in timeshare offerings. Persons in the business of reselling timeshares are generally not required to obtain a state permit to sell but may be regulated under a separate statutory scheme, which is discussed below. The Registration Process Prior to offering timeshares for sale in a state, developers must register the timeshare plan with the state regulatory agency. Statement of Record or Registration Application. In Nevada, the Statement of Record is that portion of the filing containing developer and timeshare plan information. In California, the DRE requires the filing of a registration application on a specified form. In Florida, the Florida Division requires that developers file a Filing Statement application form. The information and documents to be filed include the developer organizational and financial information, recorded maps, zoning compliance information, description of completed and promised improvements, title reports, sample sales contracts, association formation documents and budget, and exchange company affiliation agreements. If the units or amenities are not completed at the time of the application for a permit, the regulatory authority may require a completion bond, escrow, or other arrangement approved by the regulatory authority to ensure that the purchaser’s interests are protected. This is a mandatory requirement in California, Nevada, and Florida. See BPC §§ 11229(b)(3), (4), 11230; NRS § 119A.340; FS § 721.08(2), (5). The

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bond, which may exceed the completion costs, is generally issued in favor of the regulatory authority or the owners’ association. Public Offering Statement or Public Report. The second part of the registration is the developer’s disclosure document, to be given to prospective timeshare purchasers, which may be called a “public report” or “public offering statement.” The state regulatory authority will generally provide forms to be filled out by the developer. These forms are reviewed by the state’s regulatory authority for compliance with laws and regulations. The disclosure document must be given to a prospective purchaser prior to signing the purchase agreement and includes information regarding the type of timeshare plan and vacation sites that are included in the plan, a general description of the accommodations, property information such as taxes and zoning, restrictions on use, and amenities offered as part of the plan. The disclosure document will be accompanied by copies of the project documents, either in paper or electronic format. The disclosure document may also contain certain disclaimers and cautionary warnings of the regulatory authority. Forms and instructions for rescission of the purchase contract by the purchaser will usually accompany the disclosure document. Abbreviated Registration for Out-ofState Timeshare Plans. Some states will accept the public offering statement or public report approved by another state’s regulatory authority, if the disclosures required by the other state are “substantially equivalent to, or greater than,” the information required to be disclosed to purchasers in that state. This eliminates the developer having to deliver several different disclosure documents to a purchaser, which can be confusing to a purchaser and does not further the interest of consumer protection. The regulator makes a discretionary determination of “substantial equivalency” of the out-of-state disclosure document. As a practice tip, in an abbreviated registration filing, annotating the disclosure document with references to applicable statutes

and regulations in the reviewing state will facilitate the review process. Review Periods. Some jurisdictions may have time periods in which the state regulator must either approve the filing or notify the applicant of the deficiencies in the filing. In 2013, Nevada enacted statutorily-prescribed time periods within which the Real Estate Division must respond to the developer’s initial application. The response time is 60 days for a single-site plan and 120 days for a multisite plan. The developer has 90 days to respond to a deficiency notice. See NRS § 119A.320. In California, the Time Share Act is implemented by the California Real Estate Commissioner and by the DRE. The Commissioner has an obligation to issue a public report within a 60-day period after a registration filing has been determined by the DRE to be complete, and the Commissioner is required to issue a deficiency letter within 60 days after receipt of the developer’s application. See BPC § 11231(a). In practice in California, a filing is deemed complete only after all deficiencies have been addressed, so the 60-day issuance clock is a difficult one to enforce. The developer has an unlimited period within which to respond to the deficiency notice. The Florida Time Share Act is administered by the Florida Division, which must respond to a developer’s complete, initial registration application within 45 days for a single-site plan or within 120 days for a multisite plan by either approving an effective public offering statement or citing deficiencies in the application that must be resolved. The developer must respond to any deficiency notice within 20 days or the application may be rejected. See FS § 721.07(2)(a), (b). Preliminary Permits. Some state laws may authorize the issuance of preliminary permits prior to full registration to enable the developer to conduct limited activities. In Nevada, such permits are rarely applied for because a preliminary permit merely entitles a developer to solicit and accept reservations to purchase timeshares and accept refundable deposits. See NRS § 119A.290. In California, preliminary permits are also

obtainable, see BPC § 11227(j), and are used in order to permit the advertising of the eventual purchase opportunity. In Florida, an applied-for and approved reservation program allows a developer to solicit and accept reservations to purchase timeshares and accept refundable deposits, with stipulated disclosures to be included in all promotional materials. See FS § 721.09. Preliminary permits to accept nonbinding reservations do not normally fit the developer’s sales model, which is to enter into a binding sales contract with an earnest money deposit (subject to purchaser rescission rights) immediately after the sales presentation. Permit Renewals and Amendments. Timeshare sales permits generally must be renewed on a periodic basis. The renewal periods vary. In Nevada, annual renewals are required. See NRS § 119A.355. In California, public reports must be renewed every five years. See BPC § 11228. In Florida, there is no periodic renewal requirement, but the information in the public offering statement must be kept current as to all material facts. See FS § 721.07(3). If there is a material change to the timeshare plan, an amendment to the statement of record and revisions to the public offering statement or public report must be submitted to the regulatory authority prior to any renewal date. In Nevada, if there is a material change to the timeshare plan, the developer must file an amended Statement of Record, which is effective, unless a denial is issued by the Real Estate Division, 60 days after filing; however, in cases in which a new component site is added, the time period is extended to 120 days. What constitutes a material change will vary from state to state. Nevada has specifically excluded from the definition of “material change” those changes that result from the orderly development of the timeshare plan in accordance with the timeshare instrument (such as project phasing), so long as the change is made known to prospective purchasers by an addendum to the public offering statement. See NRS §§ 119A.055, 119A.304. In California, if there is a material change to

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the offering, the developer is required to disclose all amendments, supplements, and facts relevant to the material change in a filing with the DRE within 20 days after the date on which such change occurs, but the developer may continue to sell and close timeshare interests if the change is not both material and adverse to purchasers who have entered into contracts. If the change is both material and adverse, then all purchase monies must be held in escrow until the material change is reviewed and approved by the DRE. See BPC § 11226(F). In Florida, any change in fact or circumstance that would render any part of an approved public offering statement false or misleading triggers the requirement to file an amendment with the Florida Division within 20 days of the change. The Florida Division has 20 days either to approve the amendment or to cite deficiencies therein, or the amendment will be deemed approved. A developer must provide to a pending purchaser, no later than 10 days before closing, any amendment to the public offering statement that constitutes a change that is material and adverse to the purchaser, and such purchaser must be granted an additional 10-day period in which to cancel the purchase. See FS § 721.07(3)(a); FAC § 61B-39.001(2).

Marketing and Advertising. States generally regulate the content of advertising that promotes the sale of timeshares and may require submittal of the developer’s or project broker’s marketing plan and advertising materials for review and approval. Advertising includes the publication of material in any medium by a person regulated under the Nevada Time Share Act, including publication in newspapers; radio, television, telephonic, or other electronic broadcasts or displays (which includes internet advertising); written, printed, photographic, or artistic matter; vacation or other gift certificates; and oral statements made by the developer or its representative at a promotional meeting. Nev. Admin. Code (NAC) §§ 119A.010, 119A.060. As of July 1, 2013, Nevada no longer requires submittal of advertising materials to the Real Estate Division for approval; however, the regulations regarding the content of the advertising, found in NAC §§ 119A.305–119A.355, must be strictly followed. In California, there is no requirement that advertising be reviewed; however, BPC § 11245 specifically prohibits activities and promotions that are false or misleading. Further, California Civil Code (CCC) § 17200 prohibits certain unfair business practices, which include false advertising, and there are criminal

penalties for such covered acts and omissions. California Code of Regulations, title 10, chapter 6 contains the Regulations of the Real Estate Commissioner. In article 12.2, section 2811, the Commissioner sets out the DRE’s “TimeShare Advertising Criteria,” providing “[s]tandards which will be applied by the Real Estate Commissioner in determining whether advertising for sale or lease of time-share interests is false, untrue or misleading within the meaning of those terms in Section 11245 of the [BPC].” There are a total of 23 subsections within Regulation section 2811. Take care to ensure compliance with these standards, although the DRE does not require prior review. In Florida, the submission of advertising for review under FS § 721.11 is at the discretion of the developer, but, if submitted, it must be reviewed by the Florida Division within 10 days. Advertising includes, among other things, any promotional material disseminated to the public, whether through radio, television, telephonic, or other electronic broadcasts (including the internet); billboards, signs, printed, photographic, or artistic matter; lodging or vacation certificates; and standard oral sales presentations. Prize and gift promotional offerings used in the sale of timeshares are treated separately under FS § 721.111 and must be submitted to the Florida Division for review and approval. If the advertising includes prizes, the developer may be required to provide to the regulatory authority financial assurances that the developer is able to honor its commitments. In addition, developers or project brokers who make false representations in the purchase transaction may be prosecuted under the state’s deceptive trade practices act and incur civil and criminal penalties for violations. See NRS §§ 598.0903–598.0999; CCC § 17200; FS § 501.204. Purchase Contract Matters Contents of the Purchase Contract. State laws may prescribe certain provisions that must be contained in the timeshare purchase contract. Almost every state mandates purchaser rescission

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periods, which range from 5 to 15 days, with 5 to 7 days being the most common. The purchaser’s rescission rights must be stated in the contract, usually in the form prescribed by state law or regulation. Escrowing of Deposited Funds. State laws may require that purchaser deposits be escrowed or, in lieu of an escrow, that a bond be posted. Nevada requires that the purchaser’s deposit be escrowed for the five-day rescission period, unless (a) the project broker posts a bond in favor of the Real Estate Division equal to the greater of (i) $25,000 or (ii) an amount equal to the highest monthly total amount of deposits received and (b) the money received from a purchaser prior to closing is deposited in a trust account for the project. See NRS § 119A.420. California requires that the purchaser’s deposit be escrowed for the seven-day rescission period, unless the developer posts a bond in favor of the DRE equal to the amount of deposits received and disbursed; provided, however, if any portion of the project is not completed as of the time the rescission period expires, the developer may not have access to the deposits unless completion of construction is also otherwise financially assured by a bond or other acceptable method in favor of the timeshare owners’ association. See BPC § 11243. Florida requires that the purchaser’s deposit be escrowed through the end of the 10-day rescission period, the completion of construction, the closing of the purchase, and the receipt of evidence that the accommodations and facilities are either unencumbered or are subject to an encumbrance that is subjected to the terms of the timeshare plan and the rights of purchasers; however, the Florida Division is authorized to accept a surety bond or other assurances as an alternative to the required escrow. See FS § 721.08(2), (5). Applicability of State Condominium Laws to Timeshare Projects Florida. Condominiums and cooperatives are regulated in Florida under the Condominium Act (FS ch. 718) and the

Cooperative Act (FS ch. 719). A timeshare plan that is created within either a condominium regime or a cooperative regime is regulated by chapter 718 or chapter 719, respectively, in addition to being subject to the Florida Time Share Act. To the extent express conflicts exist between the provisions of these different statutes, the Florida Time Share Act provisions prevail. Timeshare plans have been explicitly exempted from certain provisions of chapters 718 and 719 where their application would be impractical in a timeshare operation. See FS § 721.03(2), (3). Even so, to the extent a timeshare plan is subject to either of these other statutes, more of the terms of the plan will be dictated by that statute. California. Regulation of timeshares in California originated with a 1980 amendment to California’s Subdivided Lands Law (BPC § 11000 et seq.), incorporating the offering of interests in timeshare plans under the traditional subdivision sales regulation governing condominiums and other common interest developments; however, California’s Davis Sterling Common Interest Development Act (Davis Sterling), which regulates specified common interest developments in California, including condominium projects, has never defined common interest developments to include timeshare plans. See CCC § 4100. Hence, if a developer had created a timeshare plan within a condominium project, potentially the provisions of both Davis Sterling and the Subdivided Lands Law would apply such that the developer would have had to comply with both, the provisions of which were not necessarily harmonious on all counts. This potential for conflict was partially resolved with the enactment of the California Time Share Act in 2004. BPC § 11211.7(a) exempts timeshare plans registered under the California Time Share Act from the applicability of Davis Sterling, with certain exceptions listed in that section. Interestingly, however, BPC § 11211.7(b) goes on to say that if there are any inconsistencies between the provisions of the Time Share Act and Davis Sterling, those inconsistencies

will be resolved in favor of the Time Share Act. Nevada. Regulation of timeshares in Nevada originated with the enactment in 1983 of the Nevada Time Share Act found in chapter 119A of NRS. Timeshares were regulated exclusively under the Nevada Time Share Act until January 1, 1992, the effective date of the Uniform Common-Interest Ownership Act as adopted in Nevada (UCIOA). From January 1992 until October 2001, timeshares were regulated by a bifurcated statutory scheme, partly by the Time Share Act and partly by UCIOA. In the 2001 session of the Nevada legislature, the regulation of timeshares was consolidated under the Nevada Time Share Act, and some of the consumer protection provisions of UCIOA were incorporated into the Nevada Time Share Act. UCIOA no longer applies to timeshare projects in Nevada, with one exception: mixed-use projects where the owners’ association governs both a timeshare project and a common interest community (such as a condominium or cooperative apartment project in which the units are not timeshared). In such a mixed-use project, the master association is subject to both the Nevada Time Share Act and the provisions of UCIOA. See NRS § 116.212. An association or subassociation governing only a timeshare project is regulated solely under the Nevada Time Share Act. Regulation of Resales Resales of timeshares (the sale by a person other than a developer of a timeshare that has been previously sold) have recently come under legislative scrutiny in many states because of abuses by unscrupulous marketers. Among the abuses are the collection of advance fees without marketing the timeshare for sale and the sales of timeshares without disclosing that the use rights attributable to such timeshares cannot be used in the year of sale. Most egregiously, there are predatory companies that charge the timeshare owner substantial sums of money to transfer the timeshare to the company (in order for the timeshare owner to avoid

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liability for maintenance fees), without any intention of paying the maintenance fees or reselling the timeshare, which harms the owners’ association. Nevada has enacted consumer protection laws against predatory resale marketers, including the requirement that only a timeshare resale broker may list a timeshare for resale on behalf of another and that a timeshare resale broker must be a licensed real estate broker. The listing agreement must contain a five-day right of rescission and 80 percent of any advance fee collected must be placed in a trust account. Violation of the advance fee statute is expressly made a criminal act and a violation of the deceptive trade practices act. See NRS §§ 119A.4771–119A.4779. In California, although no resale-specific statutes have been enacted, the DRE monitors the activities of resellers through enforcement of the provisions of the real estate brokerage and licensing requirements found in BCP § 10130 et seq. and the advance fee regulations found in BCP § 10167 et seq. In addition, CCC § 17200 prohibits certain unfair business practices, which include false advertising, and there are criminal penalties for such covered acts and omissions. In Florida, the Florida Timeshare Resale Accountability Act was added to the Florida Time Share Act in 2012 as FS § 721.205; it stipulates the disclosures and contractual provisions that a resale service provider must use, requires a resale service provider to be a licensed real estate broker, and details numerous activities that a resale service provider is prohibited from performing. See FS § 721.205. Federal Laws and Regulations Federal laws that may affect the sale of timeshares are (1) the Interstate Land Sales Full Disclosure Act (ILSA), see 15 U.S.C. §§ 1701–1720, and (2) the Securities Act of 1933, see 15 U.S.C. § 77, and the Securities and Exchange Act of 1934. See 15 U.S.C. § 78. ILSA. If timeshare sales commence before the construction of the timeshare project is completed and the timeshare is a deeded or leasehold interest, then there is an issue as to

whether ILSA applies. ILSA regulates the sale of lots in a subdivision by a developer. See 15 U.S.C. §§ 1701(5), 1703. The term “lot” is defined in the regulations as “any portion, piece, division, unit or undivided interest in land located in any State or foreign country, if the interest includes the right to the exclusive use of a specific portion of the land.” See 24 C.F.R. § 1710.1(b). Because the term “lot” is not only a subdivided lot or unit, but also includes an undivided interest in land, it may be argued that the definition could include a deeded or leasehold timeshare interest. See Guidelines to the Interstate Land Sales Regulation Program, 61 Fed. Reg. 13,596, 13,598 (Mar. 27, 1996). (Although the HUD Guidelines are no longer recognized by the Consumer Financial Protection Bureau (CFPB), which administers ILSA, the explanatory note in the Guidelines as to what constitutes a “lot” for purposes of ILSA is worth noting. The Guidelines state: “If the purchaser of an undivided interest or a membership has exclusive repeated use or possession of a specific designated lot even for a portion of the year, a lot, as defined by the regulations, exists. For purposes of definition, if the purchaser has been assigned a specific lot on a recurring basis for a defined period of time and could eject another person during the time he has the right to use that lot, then the purchaser has an exclusive use.”) If the timeshare is not characterized as a “lot,” ILSA will not apply. In the last three decades, most deeded timeshares have been sold on a “floating-unit,” “floating-week” basis. The question as to whether a timeshare is covered by ILSA turns on the meaning of “exclusive use of a specific portion of the land.” In a floating-unit timeshare plan, a timeshare owner does not have the right to use a specific unit, but rather has the right to use a “unit type” that is assigned at the time a reservation for the use year is made; however, it may be argued that during the owner’s occupancy period, the owner has the right of exclusive use of the assigned unit. There are three cases that may be

instructive in analyzing whether a deeded timeshare is a “lot” as defined in the ILSA regulations. First, Becherer v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 127 F.3d 478 (6th Cir. 1997), involved the sale of condominium-hotel units. At the time of purchase of a unit, the purchaser’s use rights were restricted to 14 days per year. The condominium documents dedicated the units for the remainder of the year to be rented as hotel rooms to transient guests. Applying the “exclusive use” test, the court held that because the condominium owners’ occupancy rights were severely restricted, the condominium interests (termed “hotel interests” by the court) were not “lots” under ILSA. Second, Beaver v. Tarsadia Hotels, 816 F.3d 1170 (9th Cir. 2016), involved the sale of hotel-condominium units in the Hard Rock Hotel and Condominium Project. The purchase contracts required the purchasers to execute an agreement restricting the owner’s use of the unit to 28 days a year and required that the units be managed as part of the Hard Rock Hotel. The Beaver court distinguished the Becherer case on the facts. When the units in Becherer were purchased, they were already restricted for use as a hotel business investment and were never available for use at the discretion of the unit owners. In Beaver, the court interpreted the Hard Rock’s use restrictions to be less restrictive and to not directly interfere with the owner’s right to eject tenants during the designated period of use. It should be noted that many timeshare instruments provide that the timeshare owner does not have the right to eject a hold-over tenant. Rather, if the assigned unit is unavailable, the owner will be provided accommodations comparable to the assigned unit within or outside of the timeshare project. The Beaver court found that the unit owner was entitled to use a “specific lot on a recurring basis for a defined period of time” and concluded that the sale of the unit was the sale of a “lot” and therefore subject to ILSA. Third, PFW Inc. v. Residences at Little Nell Development, LLC, 292 P.3d 1094 (Colo. 2012), addressed the question of

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whether a deeded fractional interest in a condominium is a “lot” under ILSA. The purchaser of the fractional interest alleged it had a right to rescind the purchase contract because the seller failed to comply with ILSA’s registration and disclosure requirements. The fractional plan was a “floating-unit,” “floatingweek” plan that provided each owner would participate in a rotating reservation system. The owner was guaranteed four weeks of use in a unit of the same “unit type” as that purchased. The PFW court held that the fractional interest was not a “lot” under ILSA because no right of exclusive possession of a specific unit attached to ownership of a fractional interest. To hedge against an ILSA challenge, it may be prudent to add self-serving language in the declaration of covenants, conditions, and restrictions for a floating-unit, floating-week timeshare project, such as a provision stipulating that the timeshare owner has no use rights in a specific unit during a specific time period and that the owner has waived its right to eject another occupant of the owner’s assigned unit. It may also be advisable, if feasible, to comply with ILSA’s two-year construction completion exemption. See 15 U.S.C. § 1702(a)(2). Under this exemption, the developer’s contract with the purchaser must obligate the developer to complete the construction of the building within two years from the date the sale contract is executed. Questions as to the applicability of this exemption arise from clauses that negate the seller’s obligation to complete, either by eliminating the purchaser’s remedy of specific performance or including a force majeure clause that is not allowed as a defense to performance under state law. See Richard Linquanti, Aspects of the Interstate Land Sales Full Disclosure Act, 44 Real Prop., Trust & Est. L.J. 441 (2009) (provides a complete discussion of this exemption). Federal Securities Laws. The sale of a timeshare is not the sale of a security requiring registration under federal securities laws, unless it is characterized as an “investment contract.” See 15 U.S.C. §§ 77b(a)(1), 78(c)(a)(10). An

investment contract under the Securities Act is defined by the Supreme Court as a “contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of a promoter or a third party.” SEC v. W. J. Howey Co., 328 U.S. 293, 298–99 (1946). If the timeshare is represented by the seller as an interest that will appreciate in value or can be rented at a profit, then the timeshare potentially could be characterized as an investment contract. For this reason, most large timeshare developers will require that the buyer acknowledge that the timeshare is being purchased as a vacation experience and not as an investment with an expectation of profit. Nevada codified this disclosure by requiring that the public offering statement contain the following described language on a separate page: “A timeshare is for personal use and is not an investment for a profit or tax advantage. The purchase of a timeshare should be based upon its value as a vacation experience or for spending leisure time, and not for purposes of acquiring an appreciating investment or with an expectation that the timeshare may be resold.” S.B. 195, 79th Leg. (Nev. 2017). Because fractional interest timeshares can be in the range of as little as three weeks per year to as much as quarter-shares (13 weeks per year), purchasers are interested in renting their unused weeks. Developers or developer affiliates offer rental management programs to fill this need. The federal securities issue of an investment contract arises if a purchase agreement is combined with a rental management agreement. Salameh v. Tarsadia Hotels, 726 F.3d 1124, 1128 (9th Cir. 2013), examines the question of whether the sale of condominium units in the Hard Rock Hotel San Diego was the sale of a security under the Howey test. The plaintiffs claimed that the purchase agreement obligated them to enter into rental management agreements with Tarsadia Hotels and that the purchase contract and rental management agreement, when taken together, constituted

an investment contract. The facts showed that the rental management agreements were entered into with distinct entities 8 to 15 months apart. Therefore, the court concluded the sales of the condominiums to plaintiffs were not sales of securities under federal law. The Intrawest No Action letter issued by the U.S. Securities and Exchange Commission offers guidance to developers to minimize the risk of violating the federal act. See U.S. Sec. & Exch. Comm’n, Securities Act of 1933—Section 2(a)(1), No Action, Interpretive and/or Exemptive Letter—Intrawest Corp. (Nov. 8, 2002). Among the suggested practices that should be adopted when the developer or its affiliate offers a rental management program are: 1. The sales team should not discuss the fractional interest as an investment or quote rental rates for comparable units; 2. The developer’s rental management program should be completely voluntary, and, if a prospective purchaser asks about rental management, the purchaser should be given a choice to speak with either an affiliated or unaffiliated management company; 3. The rental management program should not be discussed by the sales team and should operate from a management office separate from the sales office; 4. The rental management agreement should not be entered into until after the purchaser has signed the purchase contract; and 5. Both the sales team and the rental management team should be provided with scripted answers to investment questions. Conclusion Timeshares are very highly regulated in comparison to other forms of real estate ownership. In addition to federal regulation, regulations of multiple states may be applicable to a single development because the offering of timeshares for sale in a state, whether or not the project is located in the state, is the basis for regulation. n

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PRACTICAL POINTERS FROM PRACTITIONERS Amendments to the Pennsylvania Private Road Act Recent amendments to the Pennsylvania Private Road Act may satisfy lender requirements for a private road maintenance agreement by establishing maintenance obligations on property owners sharing a private road in the absence of a written maintenance agreement. Pennsylvania Private Road Act The Pennsylvania Private Road Act (PRA), which is codified in Title 36, Section 2731 et. seq. of the Pennsylvania Code, permits the owner of a landlocked property to petition the Court of Common Pleas for appointment of the Board of Viewers to evaluate the necessity of a private road to connect the landlocked property to the nearest public thoroughfare or private way leading to a public thoroughfare. Suppose the Board’s report finds that an access road is necessary and that the public would be “the primary and paramount beneficiary” of the proposed access road. In that case, a new private road may be laid out on the adjacent property, causing minimal damage to the property. The landlocked property owner bears the cost of laying out the new private road. Before passage of the recent amendment, the PRA provided that private roads so opened shall be repaired and maintained by and at the expense of the persons at whose request the road was opened and by their heirs and Contributing Author: Olufunke O. Leroy, Holland & Knight LLP, The Cira Centre, Suite 800, 2929 Arch Street, Philadelphia, PA 19104, olufunke.leroy@hklaw.com.

assigns. New banking regulations, however, require express maintenance agreements for properties accessed by private roadways to ensure that the roads remain passable over time. Specifically, regulations for federally backed mortgages like Fannie Mae, VA, and USDA loans (on a case-by-case basis) require such properties to have an agreement for the maintenance of the private road that outlines the responsibility of repairs, including what each owner’s share is, remedies for default, and terms of the agreement. Though this requirement may be more easily met in planned communities, it raises a challenge when a private road has been maintained in accordance with the PRA without any additional written agreement. Without such a written agreement in place, these lenders will not provide financing to close the transaction. Indeed, purchasers of properties that contain or are bordered by a private road who are unaware of this lender requirement have encountered difficulties in closing the transaction, sometimes resulting in delayed closings or deals collapsing due to private roadway issues. The amendment to the PRA addresses the maintenance of private roads by providing for maintenance agreements in the absence of a written agreement. PRA Amendment The PRA amendment—signed into law on October 7, 2021, and made effective on December 6, 2021— addresses the challenges of properties on private roads without maintenance agreements by imposing a statutory minimum maintenance agreement for

all properties on private roads. As has always been the case, all private roads are maintained and repaired by and at the expense of the person or persons respectively at whose request the same were granted and laid out, and by their heirs and assigns. As set forth in the amendment, “[e]ach property owner that shares a common benefit from a private road shall contribute in proportion to the amount of the private road utilized to the cost of maintaining the private road at the current level of improvement,” and shall have the right to bring a civil action to enforce the contribution requirement. § 2735(b). This contribution requirement does not apply (a) where there is a written maintenance agreement applicable to the private road, (b) to access roads established by the Commonwealth or by a municipality for a property that would otherwise be landlocked as a result of the exercise of eminent domain (as set forth in 26 Pa.C.S. § 204(b)(9)) or (c) to private roads within a common interest ownership community under Title 68 of the Pennsylvania Code (relating to real and personal property). 36 Pa.C.S. § 2735(c). The PRA was further amended to define “municipality” as “a county, city, borough, incorporated town or township.” 36 Pa.C.S. § 2739. With the PRA amendment, Pennsylvania now has a minimum statutory maintenance agreement in place that should be sufficient to satisfy lender requirements where a property using a private road does not have an existing written maintenance agreement. Property owners may still choose to create their own written agreements with

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neighboring property owners on a private road. Practical Considerations Pennsylvania practitioners should note that the lender requirement of a written road maintenance agreement no longer imposes a closing barrier. Rather than tracking down neighboring owners to sign an agreement before closing, the property owner can rely on the basic maintenance obligations contained in the PRA. Although easing closing requirements is the primary and intended effect of the PRA amendment, Pennsylvania real estate practitioners should also be aware of a secondary effect. A prior draft of the bill exempted from the contribution requirement property owners who do not use the private road as the primary access to their property. With this exception stricken from the final bill, the legislature has signaled

its intention that all property owners along a private road should be responsible for its maintenance, regardless of their actual use, or lack thereof, of the road. Notably, there appears to be a discrepancy in Section 2735 between subsection (a), which states that a private road shall be “kept in repair by and at the expense of the property owner at whose request the private road was granted and laid out” and subsection (b), which provides that each property owner sharing a common benefit from the private road shall contribute to the maintenance costs. Ultimately, practitioners with clients who intend to purchase property on private roads should be prepared to advise their clients as to the maintenance responsibility (in the absence of written agreements otherwise), even if the property is accessible by a public thoroughfare and the clients do not intend to use the private road. n

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LAND USE U P D AT E Historic Preservation and RLUIPA: What “Zoning” Means This is my first Land Use Update column, and I intend to discuss recent cases, recent developments, and periodical articles. I begin with cases that consider the scope and purpose of zoning. Historic Preservation The first case is an historic preservation case. Historic preservation is an essential function for local governments. They can adopt historic preservation ordinances that require landmark preservation and authorize the creation of historic districts. Historic preservation ordinances stand alone outside the zoning ordinance and are administered by a separate historic preservation commission. These differences from zoning raise a problem. Is historic preservation a type of zoning? If not, what is it, and why? Does it make a difference? A Texas Supreme Court case, Powell v. City of Houston, 628 S.W.3d 838 (Tex. 2021), considered these questions. Homeowners in an historic district brought a declaratory judgment action claiming the historic district ordinance was a zoning ordinance and was void because the city charter required six months’ notice of a proposed zoning and voter approval. The historic district ordinance was not voter-approved. No zoning ordinance has ever been approved for Houston. Although the voting requirement is unique to Houston, similar problems can occur in other municipalities where homeowners could claim an historic preservation ordinance violates other Contributing Author: Daniel R. Mandelker, Washington University School of Law, Stamper Professor of Law Emeritus, St. Louis, Missouri.

zoning ordinance requirements, such as a requirement that zoning must be in accordance with a comprehensive plan or a statutory notice requirement. The Texas court rejected the homeowners’ claim, held that the historic district ordinance was not a zoning ordinance, and provided a detailed discussion of what zoning means based on dictionary definitions, court decisions, and treatises. After reviewing Texas and lower federal court decisions, the court considered two major Supreme Court cases that upheld the constitutionality of zoning and historic preservation. Village of Euclid v. Ambler Realty, 272 U.S. 365 (1926), upheld a comprehensive zoning ordinance, and Penn Central Transportation. Co. v. New York City, 438 U.S. 104 (1978), upheld New York City’s historic landmark ordinance. Reliance on these two land use decisions was unique because the Texas court used them as a guide to history. The court read them to mean that land use movements had two historical periods, an earlier period concerned with incompatible uses that led to the adoption of zoning, and a later period concerned with the task of preserving the history and aesthetics of buildings that led to the adoption of historic preservation ordinances. It concluded that historic preservation is a land use regulation historically distinguished from zoning. Based on its reading of these sources, the court decided “that the ordinary meaning of zoning is the district-based regulation of the uses to which land can be put and of the height, bulk, and placement of buildings on land, with the regulations being uniform within each district and implementing a comprehensive plan.” 628 S.W.3d at 849. Zoning also tended to

be comprehensive geographically by dividing an entire city into districts. The court decided that several “key features” of zoning were missing from the historic district ordinance. Significantly, it did not regulate land use purposes. Instead, it focused on “protecting and preserving the exterior architectural characteristics of buildings based on historical significance, distinctiveness, and connection to a neighborhood.” Id. at 850. The court noted other distinctions. An historic district ordinance, for example, did not meet the typical statutory requirement that zoning must be uniform within a district because each property in a historic district is required to maintain its unique historic exterior features. Id. at 853. Uniqueness is not uniformity. The decision in Powell saved historic preservation ordinances in Texas from extinction because Houston voters have consistently voted zoning down. It is the only major city in the country that does not have zoning. The Houston historic preservation ordinance would have been void under the city charter, had the court held it was a zoning ordinance subject to voter approval, because it was not voter-approved. Avoiding this result may have influenced the Powell decision, but its distinctions are arguable, and another court may take a different view. For example, why doesn’t historic preservation have a land use purpose? Why isn’t the uniformity required by zoning laws met by historic district regulations that apply uniformly throughout a district? Like historic districts, zoning ordinances also require consideration of uniqueness when zoning boards consider hardship variances. Other questions remain. What about other purpose-based land use

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ordinances, such as floodplain regulation, which applies specialized building regulations to floodplain areas? There is a partial answer in the Powell court’s rejection of homeowners’ definition of zoning as “the legal regulation of land by geographic district.” Id., at 852. As the court explained, the homeowners’ definition would invalidate floodplain and subdivision regulations in Houston because they do not usually get voter approval. Religious Land Use and Institutionalized Persons Act The federal Religious Land Use and Institutionalized Persons Act, or RLUIPA, has a major impact on zoning for religious uses. The statute provides in a key provision that [n]o government shall impose or implement a land use regulation in a manner that imposes a substantial burden on the religious exercise of a … religious assembly or institution, unless the government demonstrates that imposition of the burden … (A) is in furtherance of a compelling governmental interest; and (B) is the least restrictive means of furthering that compelling governmental interest. 42 U.S.C.A. § 2000cc(1)(a). The statute is enforceable in court. Id., § 2000cc(2) (a). Substantial burden is a strict requirement because the statute adopts “compelling governmental interest” and “least restrictive means” as the tests for judicial review of land use regulations. These tests are equivalent to the strict scrutiny judicial review that courts demand for laws that violate the free speech clause of the constitution. A “land use regulation” that is subject to strict scrutiny judicial review is defined as “a zoning or landmarking law, or the application of such a law, that limits or restricts a claimant’s use or development of land.” Id., § 2000cc(5). This definition does not entirely solve the problem in Powell because zoning and landmarking ordinances are included

in the definition, but an historic district ordinance is not. What about other land use ordinances? The court considered this issue in Redeemed Christian Church of God v. Prince George’s County, 17 F.4th 497 (4th Cir. 2021), which involved a major suburban county adjacent to Washington, DC. Its membership grew substantially, so it purchased property on which it planned to build an expanded facility. A private study found that the building was feasible, and the church purchased the property with the reasonable expectation that it would be able to build its new church there. Two land use plans contained policies for county development. A General Plan provided a 20-year “blueprint for long-term growth and development.” A Growth Policy Map in the General Plan showed where and how the county should grow over the next 20 years, specified six area classifications, defined a growth boundary that designated “areas eligible to receive public water” and sewer service, and classified properties inside the growth boundary as holding zones if they were located in future water and sewer service areas. These plans identified water and sewer service as part of their land use policy. A Water and Sewer Plan supplemented the General Plan and identified four water and sewer categories that provided different service levels. The church property was in a future water and sewer service area. The church knew it required an upgrade to a new water and sewer category under the county’s sewer and water ordinance to build the church. To get this upgrade, the church needed legislative approval from the county council that met several criteria, including environmental factors, economics and general fiscal concerns, zoning conformity, and traffic impacts. Witnesses at a county council hearing opposed and supported the application for a category change. The council’s Transportation Committee rejected it after the county council chair opposed it at a Committee meeting called to consider it, and the county council concurred. The church sued,

and the district court permanently enjoined the county from denying the application and ordered it to approve the category change. The court agreed, decided that RLUIPA applied, and concluded that the water and sewer plan was “zoning” covered by the statute because it divided the county into different categories that restricted land use and development: “Although the precise contours of ‘zoning’ could be difficult to delineate, ‘at its core [zoning] involves the division of a community into zones based on like land use.’” Id. at 508. But the court was more interested in how the regulation actually functioned, not labels: “If a regulation divides a community into zones, restricting or limiting how land can be used within each zone, the regulation is a zoning law subject to RLUIPA.” This conclusion, the court held, was consistent with the rule that any ambiguity in the law was to be construed in favor of the broad protection of religious exercise. Id. The court’s prior decisions were consistent with this holding, and its decision was consistent with a functionalist approach for interpreting the statute the Second Circuit adopted in Fortress Bible Church v. Feiner, 694 F.3d 208 (2d Cir. 2012). The court held that RLUIPA applied to a state-mandated environmental review when the review considered zoning issues. Redeemed Christian reached a different result than Powell. The setting in a statute regulating land use that protected religious organizations may have made a difference. Like zoning, the county sewer and water regulation is area-based and implements county plans with distinct land use policy goals. Powell concentrated instead on the ordinance’s purpose and held its historic preservation purpose distinguished it from zoning. Had the Redeemed Christian court considered purpose, it could likewise have concluded that the purpose of the water and sewer regulation was the regulation of public services, not zoning. Are you interested in land use? Try my website at landuselaw.wustl.edu. n

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TECHNOLOGY PROPERTY There Be Dinosaurs in the Room: Introducing Modern Workflow into the Law Office Have you ever entered a law office and felt you were back in Jurassic times when dinosaurs roamed the earth? In this office, there are computer monitors covered with Post-It® reminders; accordion binders filled with papers in sections labeled Monday, Tuesday, Wednesday; and Polycom® telephones with lots of flashing lights and buttons. Lawyers sit in large offices with upholstered Georgian period chairs and big mahogany desks. The walls are decorated with Federal Reporter casebooks from before the turn of the century. Phone messages are recorded on pink “While You Were Out” message pads. Clients are handed clipboards to fill out multi-page questionnaires before they meet with attorneys. If this describes your office, you may be due for a makeover. Modernday “workflow” can mean many things. At its root, it means the application of digital technology to tasks that were previously handled aurally or with pen and paper. For your office, it can mean that everyone knows what he needs to do and when he needs to do it. It can mean that lawyers are connected whether sitting at their desks, wandering the halls, or out in the wild; that clients can communicate their needs and their approvals asynchronously, without direct contact with lawyers and staff; and that staff and lawyers can get their work done in a timely

Technology—Property Editor: Seth G. Rowland (www.linkedin.com/in/ sethrowland) has been building document workflow automation solutions since 1996 and is an associate member of 3545 Consulting® (3545consulting.com).

Technology—Property provides information on current technology and microcomputer software of interest in the real property area. The editors of Probate & Property welcome information and suggestions from readers. and cost-effective fashion. It can mean greater profits for your firm and greater client satisfaction. Choosing What Can Be Automated Workflow automation should be done to either save money or to make money. Unless you can define a clear return on investment (ROI), don’t undertake the automation project. Workflows Save Money The initial reason most firms implement workflows is to save money. For example, efforts to address docket management can be driven by your malpractice liability carrier, which may require electronic calendaring or offer a discount if you implement a practice management system with electronic calendaring. In this case, you would save money by implementing a workflow process to make sure all court deadlines show up on the attorneys’ calendars. Workflows Make Money By contrast, efforts to automate the creation of lease and debt financing documents can make money if they are coupled with fixed-fee-for-service offerings. Document assembly systems, with their efficient rule-based logic engines,

can deliver high-quality and highlycustomized legal documents in just minutes. Workflows Increase Referrals Clients talk to their friends, neighbors, and colleagues. If a law firm uses a workflow system to enhance communications with their prospects and clients, to keep clients informed of the progress of their transactions, and to deliver quality service, this will be noticed. It can lead to referrals. In fact, a postengagement workflow can be used to solicit and reward referrals. Workflows Reduce Anxiety Lawyers are masterful multi-taskers and delegators. They hand out dozens of assignments a day and need to keep track of where each task is in the task pipeline. A good workflow engine can give lawyers a detailed timeline by project or a list view by lawyers and staff who are assigned to each task and the task priority. Being able to know which tasks are done and which are in progress can reduce workplace anxiety. Workflows Increase Client Engagement Workflows can increase your closure rate. Not all client walk-ins or referrals turn into new business. A workflow can remind a staff member to do a follow-up call. That extra call can be the deciding factor in whether a client signs the engagement letter. A survey workflow can elicit testimonials and provide information about what was done right and what was done wrong. Before You Choose Your Platform Start by defining which workflows you

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TECHNOLOGY PROPERTY

want to automate before you choose your workflow platform. This will help you choose which platform best meets your needs. Divide your team into workgroups by department and function. The workflow needs of paralegals are quite different from those of office administrators. The needs of estate planning attorneys are quite different from those of real estate attorneys. Workflows are best viewed as an extension of the work already being done. And each workflow process should have its own ROI. Dispense with the fancy Visio diagrams. Just pull up Word or Excel. Layout the process. Start by stating the purpose of each process and articulate what you hope to accomplish. Don’t be too ambitious or be too detailed. Use plain English. Break the process into discrete steps or phases. Each phase may have a checklist of tasks. Don’t try to figure out every detail. Workflows need to be flexible and able to evolve. The best workflows nudge people to get their work done at a particular time. Most people know what needs to be done—focus on giving them reminders. Consolidate steps into mini-checklists if they are all to be done by the same person at the same time. Too many steps can turn a simple process into a major chore. Think Sorcerer’s Apprentice, where a single mop and bucket multiply into an army of mops and buckets. If you are interacting with clients via a questionnaire, be sure to review the questionnaire to make sure the questions are appropriate. Some workflow systems allow you to create rule-based questionnaires that respond to the user’s answers, asking only relevant questions. Questions need to be short and simple. If you are providing multiple-choice options, make sure the choices are clear. If there is an “other” option, be sure to provide a place for this information to be added. If you are going to generate documents as part of the workflow, be sure to gather your model documents or templates, and get your team to approve the legal language. Decide what information will be used to generate

the documents and where that information will be stored. Also, decide what will happen to the document once it is generated. Some workflow systems will auto-profile the document into your document management system. If your system generates an estate plan with 10 documents, auto-profiling can save five to ten minutes on each assembly. You might want a workflow to kick off internal approvals and then send the documents out for electronic signature. Once you have defined what workflows you want to automate, you can then reach out to find the workflow platform that best meets your needs. It could be that your existing practice management software (PMS) already has the tools you need. Some programs like Zola Suite, Time Matters, Actionstep, and Centerbase have task-based workflows and client intakes. Document management systems (DMS), including NetDocuments, Worldox, and iManage, have document-based workflows. By assigning meta-data to documents and using saved queries, you can create approval workflows that allow you to see a document from a draft stage to the final version, to the executed document. The PMS and DMS generally focus on workflows for your internal team of attorneys, paralegals, and staff. Dedicated workflow systems typically divide workflow licenses into internal and external licenses. The external users, such as clients of a law firm or employees of a corporation who are outside its legal department, can interact with the workflows, but they are not full peers of the workflow systems. External users can request a service that initiates a workflow, they can then check the status and participate in an ongoing workflow they initiated, and they can even add documents and approve actions. Workflow systems like WordTech’s DocMinder, NetDocument’s AfterPattern, Onit’s Legal Service Requests, and ThomsonReuters’s HighQ foster this level of client interaction. Workflows can be enhanced by integrating cloud-based document assembly systems like XpressDox, AbacusNext’s HotDocs Advance, and

ThomsonReuters’s Contract Express. These systems produce sophisticated client-facing interviews with complex branching decision trees. The information gathered in the interview can drive further workflows and produce finished legal documents. Once the legal documents are reviewed, they can join a document workflow that includes approvals, electronic signatures, and even court filings. Let us look at some specific use cases. Client Intake Workflows Over the years I have been approached by several law firms with complex client intake procedures that wished to automate the process. They have included an estate planning firm that catered to the LGBTQ community, a real estate firm that generated complex leasing term sheets, a divorce firm that had a 20-page intake questionnaire, an elder law firm that did Medicaid planning, and a personal injury firm that specialized in “diminished value” auto insurance claims. Each of these firms needed to gather detailed information from its clients in advance of the first meeting. They all had printed forms that they would mail in advance to their clients. They were lucky if their clients filled out the forms in advance of the meetings. Most of the time the answers were incomplete. Paralegal and attorney time was required to help the clients complete the forms, all before any meaningful work was performed. The workflow solution for these law firms started with re-writing the questionnaire, dividing it into topics, and assigning “relevance rules” to each topic. My tool of choice was HotDocs, but XpressDox, ContractExpress, or AfterPattern would have accomplished the same job. The first step was to get rid of the paper and bad handwriting and to be able to send the interview as a link to the client in advance of the first meeting. By removing the paper, the firm can get readable answers. The second step was to rethink the questionnaire from the client’s perspective (not the lawyer’s). The intake should start with simple questions,

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which should lead to other questions in a decision tree. The online questionnaire should not contain questions that begin “If you answered yes, … then fill this out; if you answered no, skip to …” Rather, if you answered yes, then the dependent questions should just appear. If you answered no, then you would move on to the next predicate question. Where an explanation is required, help text can be provided in a sidebar. If there is a multiple-choice question, there should only be one clear choice that fits. Where possible, the text of the questions should be dynamic and personalized. The third step was to take the information supplied by the client and incorporate it into data in a document generation system. The lawyer or paralegal, upon being informed that the questionnaire had been completed, could review the answers with the client, and then proceed to generate the required documents without having to key in the information again. These workflows keep the client engaged and reduce the time spent by attorneys and staff as “scribes.” They allow the attorneys to have a more complete picture of the client’s needs starting from the first meeting and allow them to have more time with the client to render advice and to explain the implications of choices made by the client. Greater client satisfaction and fewer attorney and staff hours to accomplish the same work will improve the law firm’s bottom line. Email to Task Workflows Emails are a great way to request legal work, but a very poor way to communicate that the work is done. Email threads can be enormous. Unless great discipline is used in assigning the subject line of the email and writing the text of the email itself, their utility for workflow is limited and is almost counter-productive. In Outlook, you can flag an email as a task, but you can’t convert it into a multi-step project. WordTech, with its DocMinder service, has an innovative workflow solution. In a few clicks, you can convert an email into a DocMinder project,

assign internal staff and external clients to specific tasks on a checklist, and set deadlines. From thereon, all communications drive the user back to the DocMinder project where they can append documents from their DMS (NetDocuments, iManage, Sharepoint), comment on the status, mark items as complete, and even respond to survey questions. DocMinder also supports complex, branching workflows with decision trees and multi-level approvals. It includes support for checklist templates and workflow templates to simplify the project creation process. Unlike other systems which are more pre-programmed, DocMinder empowers the owner to modify the workflow to suit the project. DocMinder also has integrations with document assembly programs like XpressDox and HotDocs. But it is the simple appearance of the email notification form in the DocMinder list that drives attorney adoption. With frequent notifications and advanced reporting, DocMinder alleviates much of the stress that goes with project management. Simple Document Approval Workflows Much of legal practice centers around the production of documents. Some document flows are top-down. A partner assigns a document creation task to an associate; the associate prepares a draft and sends it to the partner; the partner reviews and sends it back to the associate; the associate finalizes and sends it to a paralegal to serve or file. Other document flows are bottom-up. An associate, paralegal, or caseworker is responsible for the entire relationship. The partner shows up to meet with the client when most of the work is done. The partner reviews timelines to make sure the work is on-track. When time is of the essence, these document workflows can be problematic. There can be a bottleneck with a partner who is too busy to get a timely review of the documents back to the associate. Or there can be a reviewing partner who demands constant status reports on all work in progress.

You can work with your existing DMS if the focus is on a single document. By using custom profile attributes and searches in your DMS, the attorney can add a document to a basic workflow and assign a creator, a reviewer, and a status. As the profile values change, a document can appear on a partner’s list of documents assigned for review. Once the partner finishes the work, he can change the status and the document will drop off her list. NetDocuments has recently added dynamic profile attributes to their system so the workflow options can be hidden until the document is assigned to a workflow. For more complex workflows, NetDocument’s plan solution lets the user add Kanban-style task boards to a matter. These task boards can include pre-set tasks, which include checklists. Tasks can then be assigned to internal users and documents can be linked to tasks. CRM and Client Engagement In some offices, the work performed is more standardized. It is possible to map the entire client engagement process to a single workflow. When it comes to marketing and CRM software for attorneys, there is a plethora of options. Many practice management systems include a marketing and CRM component. Programs like ZolaSuite, Centerbase, MyCase, and ActionStep all have basic client intakes that automatically feed into the practice management system. The drawback of these programs falls in the area of list management. The contact list used by the PMS side of the software can get cluttered with thousands of dead leads, as there is no clear separation between the CRM side and the PMS side of the software. Dedicated CRM programs like Clio Grow, Lawmatics, HubSpot, and Salesforce.com do a better job of list and campaign management. They may include pre-built workflows to engage with the prospective clients and convert them into paying customers. These services can help you build a pipeline of business, including automated engagement letters with electronic signatures.

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Document Draft to Execution Workflows Once the client is engaged, the real work begins. The client service requirements may be fully predictable, and the documents may be cookie-cutter. If a portion of your practice falls into this category, you might benefit from a full-on workflow. The goal would be to automate as many steps of the process as possible. Time savings from workflows at this point go straight to the bottom line. The workflow might include a supplemental client intake interview to elicit specific details needed to generate the legal documents. The caseworker or associate could then review the data, make some strategic decisions, and then generate the legal documents from the workflow. The reviewing attorney could be notified when these drafts are ready for review with a direct link to the drafts. Upon approval, notifications can be sent back to the paralegal or caseworker to send out the documents for digital signature. The client would receive the invitation to sign the document and the internal team would be notified when all parties had digitally signed the documents. At any point, the supervising attorney could see if the process is on the right track. To build such a comprehensive workflow, DocMinder might be the glue that binds together different processes. You might also look into Onit or Mot-r. If your firm has an internal programming department, you could try Zapier to build connectivity between products or try building something with PowerAutomate on the Office365 platform. The Next Step Is Yours Workflow projects require a lot of teamwork and cooperation. Not all workflow projects are successful. For a workflow project to be successful, it must be adaptable and flexible to different legal practices and different roles. Today’s workflow might need tweaks tomorrow to keep it relevant and usable. n

SOFTWARE MENTIONED IN THE ARTICLE CATEGORY

SOFTWARE

Document Management Systems

iManage (imanage.com) NetDocuments (netdocuments.com) Worldox (worldox.com)

Practice Management Systems

ActionStep (actionstep.com) Centerbase (centerbase.com) Time Matters (pclawtimematters.com) Zola Suite (zolasuite.com)

Document Assembly Systems

Contract Express (mena. thomsonreuters.com/en/productsservices/legal/contract-express.html) DocuMate (documater.org) HotDocs Advance (hotdocs.com) Woodpecker (woodpeckerweb.com) XpressDox (xpressdox.com)

CRMs & Client Intake Management

Clio Grow (clio.com/grow) HubSpot (hubspot.com) Lawmatics (lawmatics.com) Salesforce (salesforce.com)

Workflow Engines

AfterPattern (afterpattern.com) DocMinder (secure.wordtech.com/ docminder.html) HighQ (legal.thomsonreuters.com/en/ products/highq) Mot-r (mot-r.com) Onit (onit.com/products/ legal-service-requests-products)

Connectivity Software

Power Automate (powerautomate. microsoft.com) Zapier (zapier.com)

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THE LAST WORD Apropos Apostrophes (Part 2) In Part 1 of our consideration of apostrophes, we examined the basic use of apostrophes to form possessives. Marie A. Moore, Apropos Apostrophes (Part 1), 36 Prob. & Prop. 64 (Mar./Apr. 2022). Now, we’ll look at a few variations on apostrophes used to form possessives, their use in contractions, and their common misuse to create plurals (just don’t!). A Few Possessive Variations The general rule dictates that writers make a possessive from a proper name and, in most cases, a singular noun that ends in s by adding an apostrophe followed by an s. But some commentators disagree and call for dropping the s, as in Lynn Truss’ book. See Lynn Truss, Eats, Shoots & Leaves 54-57 (2003) (decrying this usage in American newspapers). Professor Garner observes that the 1996 version of the AP Stylebook, like the nuns in my grammar school, recited this rule as to all singular nouns ending in s. Bryan A. Garner, Modern American Usage 644 (3d ed. 2009). By 2002, however, this stylebook advocated the single apostrophe with no following s for words that end in s that are followed by a word that begins with s and singular names ending with s. Id. Professor Garner now lists as common exceptions only (1) “Biblical and Classical names that end with a /zƏs/ or /eez/ sound,” as in an Achilles’ heel, and (2) corporate and other capitalized names, as in General Motors’ and United States’. Id. at 645. Benjamin Dreyer, the copy chief for Random House, disagrees and The Last Word Editor: Marie Antoinette Moore, Sher Garner Cahill Richter Klein & Hilbert, L.L.C., 909 Poydras Street, Suite 2800, New Orleans, LA 70112, (504) 2992100.

urges the use of ’s even for classical and biblical names, but then these rules are evolving, so stay tuned. Benjamin Dreyer, Dreyer’s English 38-39 (2019). Nouns that show joint possession of a single thing or multiple shared things are formed by the addition of ’s only after the last of those nouns, as in Dreyer and Garner’s rule (when both propound the same rule). See Garner, supra, at 646; Dreyer, supra, at 41–42. On the other hand, when the phrase is meant to show individual possession of separate and distinct things, each possessive noun must be followed by the ’s, as in Dreyer’s and Garner’s books (two books, two authors). See Garner, supra, at 646; Dreyer, supra, at 41-42. Yes, you have to think about it each time. Contractions Apparently, in classical texts, the apostrophe was used to show the omission of letters. Truss, supra, at 37-38. In Shakespeare’s day, when the apostrophe began appearing in printed English, that was its purpose: “Fie on’t” and “I am too much i’the sun.” Id. at 38 (quoting Hamlet). This is still the case for dialog, y’all—and what are contractions but transcribed normal speech? Now contractions and their apostrophes are ubiquitous in modern speech and writing, though we lawyers don’t use them often—or at least, we feel that we shouldn’t use them. Avoiding contractions is a fine rule for contract drafting; a provision stating, “Tenant won’t use the Premises for wild parties,” sounds too much like a hope and not enough like a mandate. But even Professor Garner urges lawyers to go ahead and use contractions in our ordinary communications to clients and colleagues. Bryan A. Garner, Modern Legal Usage 217 (2d ed. 1995).

Don’t Use Apostrophes to Create Plurals Unless . . . Dreyer admonishes: “DO NOT EVER ATTEMPT TO USE AN APOSTROPHE TO PLURALIZE A WORD.” Dreyer, supra, at 36. This is the rule that, when violated, causes grammar nerds to curl their collective lips with particular glee. We are all familiar with the so-called “greengrocer’s apostrophe”: Special price on potato’s. See Truss, supra, at 49-50; Dreyer, supra, at 36. A grammar stickler may take advantage of this special price, but that stickler will certainly sneer at the grocer’s mistake. Now the exception: Dreyer acknowledges that an apostrophe should be used for pluralization of letters, as in “p’s and q’s.” Id. at 37. Professor Garner agrees but calls for dropping the apostrophe if the letter is italicized: ps and qs. Garner, Modern American Usage, supra, at 639. Commentators also disagree about the use of an apostrophe for plural abbreviations or acronyms: REAs or REA’s? Dreyer advises omitting the apostrophe. Dreyer, supra, at 37. Professor Garner agrees but permits the use of an apostrophe to pluralize abbreviations with capital letters and periods, as in M.B.A.’s. Garner, Modern American Usage, supra, at 638. Confused yet? No wonder, since some of the rules have changed over the years. Professor Garner cites the “modern trend toward simplicity.” Id. To honor this trend, in most cases, it seems safest to use ’s to form a singular noun’s possessive, to use an apostrophe with no s to form plural nouns’ possessives, to use apostrophes to show that you’ve omitted letters in contractions, and to avoid apostrophes altogether when creating plurals. n

May/June 2022

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Probate & Property - May/June 2022, Vol. 36, No. 3

Articles inside

Technology—Property

The Last Word

Documentation and Operation of Timeshare Plans

Land Use Update

Practical Pointers from Practitioners

Federal and State Regulation of Timeshares and Fractional Interests

Timeshares: History, Project Structuring and Types of Plans

Keeping Current—Property

Young Lawyers Network

The Law of Halloween Nightmares Damages for Caskets Bouncing Down the Highway, Burial Blunders, and More Funeral Frights

Career Development and Wellness

Keeping Current—Probate

Uniform Laws Update

Title Insurance: Determining an Insured’s Loss and Calculating Damages

Section News