Probate & Property - July/August 2022, Vol. 36, No. 4

DRAFTING ENFORCEABLE INDEMNITY & INSURANCE REQUIREMENTS PROVISIONS

SPLIT-DOLLAR LIFE INSURANCE ARRANGEMENTS

KEY LEASE PROVISIONS TO CONSIDER IN DUE DILIGENCE

VOL 36, NO 4 JUL/AUG 2022

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

Florida Building Disaster Should Set Off Alarm Bells in New York City

When Dad overturned a glass, she righted the whole family.

Only Julie kept her cool. The family foundation had always been a little bone of contention between me and Dad. We just had different ideas about what to do with the money. We were both raising our voices when Dad knocked over a glass without even noticing. That’s when Julie, the peacemaker, stepped in and had an impromptu counseling session with Dad which led to a slightly restructured foundation and a much-improved family relationship. We’re blessed that Julie is the financial advisor that set up our foundation. Because intergenerational wealth doesn’t work without intergenerational harmony and for that you must focus on the little things.

— Marie, Santa Barbara

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americanbar.org/groups/real_property_trust_estate/sponsorship Published in Probate & Property, Volume 36, No 4 © 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.

July/August 2022 1

CONTENTS July/August 2022 • Vol. 36 No. 4

4 Features 4

16

Florida Building Disaster Should Set Off Alarm Bells in New York City

By Adam Leitman Bailey and John M. Desiderio

16

IRS Argues Split-Dollar Is Not “Faire,” but Challenge Is Foiled

By Alexander Lyden-Horn and Justin Miller

Departments 9

Uniform Laws Update

26

The Tacoma Bridge…and Other Planning Disasters

10

Keeping Current—Property

By Scott Johns

21

Keeping Current—Probate

40

Belt and Suspenders Risk Management for Not Getting Caught with Your Pants Down: Drafting Enforceable and Effective Indemnity and Insurance Requirements Provisions

24

Environmental Law Update

43

Practical Pointers from Practitioners

By Michael S. Hale

58

Technology—Probate

44

Freedom to Contract Injunction Waivers in Commercial Leases

60

Career Development and Wellness

By Holly P. Constants

62

Land Use Update

54

Key Lease Provisions to Consider in Due Diligence

64

The Last Word

By Amy Lawrenson, Imran Naeemullah, and Karen Nashiwa

Published in Probate & Property, Volume 36, No 4 © 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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July/August 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 Getty Images

Associate Articles Editors Travis A. Beaton Kevin G. Bender Kathleen K. Law Jennifer E. Okcular Amber K. Quintal 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.

Published in Probate & Property, Volume 36, No 4 © 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.

July/August 2022 3

Florida Building Disaster Should Set Off Alarm Bells in New York City Published in Probate & Property, Volume 36, No 4 © 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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July/August 2022

By Adam Leitman Bailey and John M. Desiderio

T

he disastrous collapse in Surfside, Florida, of the 40-year old Champlain

Towers South condominium tower

should set off alarm bells in New York City, in which it is estimated there are more than a million buildings. Many of these are more than 100 years old, including several in Manhattan that were converted to cooperative apartment buildings in the 1970s and 1980s, in addition to the hundreds of high-rise condominium buildings built more recently, in the 1990s and 2000s, primarily in Manhattan, Brooklyn, and Queens.

New York City Law Unlike Florida, New York City has had, since 1980, laws requiring mandatory inspection and repair of building facades. The latest iteration of the law, the Façade Inspection and Safety Program (FISP) (formerly known as Local Law 11), 1 RCNY § 103-04 (“Periodic Inspection of Exterior Walls and Appurtenances of Buildings”), was updated

Getty Images

istockphoto

in February 2020 to include additional Adam Leitman Bailey is the founding partner of Adam Leitman Bailey, P.C., and John M. Desiderio is the chair of the firm’s Real Estate Litigation Group, in New York, New York.

Published in Probate & Property, Volume 36, No 4 © 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.

July/August 2022 5

inspection items, increased levels of inspection, and more comprehensive documentation. This law requires all buildings in New York City six stories or higher to have all exterior walls and appurtenances (including, among other things, fire escapes, exterior fixtures, ladders to rooftops, parapets, copings, balcony and terrace enclosures, greenhouses and solariums, and any other equipment attached to or protruding from the façade) inspected in five-year cycles. The current Cycle 9 (2-21-20 to 2-21-25) requires that all buildings be inspected, on a staggered schedule, in one of three sub-cycles: 2020–2022, 2021– 2023, and 2022–2024. Inspections must be conducted by Qualified Exterior Wall Inspectors, with at least seven years of relevant experience.

Although FISP scaffolds or other observation platforms are routine on the streets of New York, there is currently no law, either in New York City or elsewhere in New York State, that mandates inspection and repair of the interior structural elements of any size of building. FISP provides no assurance that the type of structural defects that led to the Champlain Tower collapse will be detected unless the structural elements of all buildings are subject to regular routine inspection. Indeed, the mandatory evacuation of a 70-year-old three-story building, a few blocks away from the Champlain Tower site, one month after the headlinegrabbing event (see Deborah Acosta & Jon Kamp, Another Surfside, Fla., Condo Is Evacuated After Building Deemed Unsafe, Wall St. J. (July 21, 2021), https://on.wsj. com/35PbPoD) evidences the need for mandated, comprehensive, and regularly scheduled inspections of both interior and exterior structural elements of all buildings.

Considerations Regarding Building Structural Integrity and Repairs In the meantime, in the absence of governmental requirements for interior structural inspections (other than for elevators, boilers, and gas piping, which are subject to regularly scheduled inspections), building owners (including both commercial and private landlords,

cooperative apartment corporations, and condominium boards) must assume the burden and responsibility of implementing the prudential actions necessary to ensure the continuing structural stability of their buildings.

The cost of maintaining and repairing interior structural building elements, for both old and new structures, can be daunting. Nevertheless, landlords, as a matter of prudent management, or pursuant to any applicable statutory or contractual lease obligations, need to maintain sufficient reserve funds to address capital repairs, improvements, and replacements required for their existing tenants’ health and safety. Similarly, sponsors seeking to convert buildings with residential tenants to condominium ownership must comply with New York City’s Reserve Fund Law (Local Law 70 of 1982, tit. 26, ch. 8 of N.Y. City Admin. § 26-701 et seq.), which mandates that sponsors provide sufficient funds to create reserves necessary for capital repairs, improvements, and health and safety items required for future operation of the condominium. This law requires that sponsor-created reserve funds be at least equal to a statutorily calculated minimum of no less than three percent of the total price that was offered to tenants in occupancy before the effective date of the conversion, regardless of the number of actual sales.

Nevertheless, aside from normal maintenance costs, which either rent, maintenance payments, or common charges are expected to cover, the potential costs that might be incurred in repairing the kind of structural damage from a Champlain-Tower–like disaster, are formidable and likely well in excess of reserve funds a building’s management is likely to accrue, even over several years. For buildings with residents on fixed incomes, board members are reluctant to assess unit owners for the sums necessary to do any extraordinary repairs.

It is reported that the Champlain Towers president told residents in April—when there was only $700,000 in the building’s reserve fund -- that the building was in desperate need of repair and that $15 million in assessments were needed for the required work. See Alex Leary, Miami-Area

Condo Collapse Sparks Calls for Tighter Laws, Wall St. J. (July 10, 2021), https:// on.wsj.com/3LPhuua.

Apparently, unit owners resisted an assessment of that size. Such resistance to assessments is often found in condos and co-ops in New York City. By-laws often include provisions requiring a 66⅔ (or higher) vote to approve funds for necessary repairs or renovations above specified limited amounts. The Champlain Tower tragedy should encourage condominium and co-op boards to consider amending bylaws to be less restrictive, requiring minimum approval when there is evidence certified by independent engineers and architects that repairs are necessary to protect the structural integrity of the building. Moreover, assessments are likely to be less burdensome at the early stages of a detectable structural defect years later when the defective condition has reached a critical level.

Building owners should seek ways to accumulate the necessary reserve funds to address extraordinary structural repairs before a Champlain-Tower–like disaster occurs. If a collapse does occur, however, building owners need to be prepared for the aftermath and have protection, not only against the property losses and damages that they will suffer, but also for the personal and property damages for which they could be held liable by residents and other third parties. The actions building owners should implement are similar to the steps many building owners have taken in the aftermath of terrorist acts, catastrophic hurricanes, and other severe weather events. See Adam Leitman Bailey, Dov Treiman & John Desiderio, Preparing Practitioners for the Next Disasters, Adam Leitman Bailey, P.C., https://bit. ly/38Ak0q1.

Litigation Considerations in Building Disaster Cases In litigation arising from a ChamplainTower–like disaster, a court is likely to consider all of the above factors in assessing the various liability issues that will affect the owners and lessees of the real estate (landowners as individuals and ground lessors, landlords, cooperative apartment corporations, and

Published in Probate & Property, Volume 36, No 4 © 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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July/August 2022

incorporated condominiums), officers of landlords, board members of cooperative apartment corporations and condominiums, officers and property managers of managing agencies, contractors who constructed the building, architects and engineers who designed or certified the project, building inspectors who approved the project, and the insurance companies of each of them.

The primary liability issues for each potential plaintiff and defendant will be the foreseeability of the event and what actions the particular party defendant, third-party defendant, or cross-claim defendant did or failed to do when presented with evidence of the structural defects that likely caused the resulting building disaster. Such issues are not unlike those the court examined in connection with the duties of the building owners and other defendants involved in the 1993 World Trade Center terrorist bombing. See In re World Trade Ctr. Bombing Litig., 776 N.Y.S.2d 713 (Sup. Ct. 2004). In addition, New York’s Multiple Dwelling Law, § 78 (Repairs), mandates “[e]very multiple dwelling, including its roof or roofs, and every part thereof and the lot upon which it is situated, shall be kept in good repair,” and that the “owner shall be responsible for compliance with the provisions of this section, but the tenant also shall be liable if a violation is caused by his own willful act, assistance or negligence.”

A Case Illustrating the Various Liabilities Fitzgerald v. 667 Hotel Corp., 103 Misc.

2d 89 (N.Y. Sup. Ct. 1980), affirmed sub nom., Worth Distributors, Inc. v. Latham, 88 A.D.2d 814 (N.Y. App. Div. 1982), affirmed as modified, 59 N.Y.2d 231 (1983), provides a useful example of how the liabilities of the various parties involved in a building collapse and their insurance carriers are likely to be determined by the courts. In 667 Hotel Corp., 43 consolidated actions arose out of the collapse of the Broadway Central Hotel, located at 673 Broadway. The hotel, constructed in the 1850s, had undergone various alterations over the years. Four persons were killed in the wreckage, many others were injured, and a number of businesses incurred

The primary liability issues for each potential plaintiff and defendant will be the foreseeability of the event and what actions the particular party did or failed to do when presented with evidence of the structural defects that likely caused the resulting building disaster. substantial property damage from the building collapse. The defendants were, among others, the building owners, the net lessee, the mortgagee, a tenant that was having structural renovation done on its portion of the premises, and the contractor the tenant employed. The City of New York was also named as a defendant, as the Department of Buildings had been made aware of the hazardous state of the building and had failed to act to cause the defect to be remedied or the building to be vacated.

The net lessee of the hotel had made extensive renovations to the hotel. In January 1973, the net lessee’s president notified the hotel’s managing engineer of cracks extending through the interior bearing wall and buckling the frames of the double doors going through it.

The lessee’s contractor and architect, who inspected the cracks, concluded that the cracking was a structural danger. The Chief Building Inspector for the Borough of Manhattan then personally inspected the premises on January 29, 1973. He agreed that the bulging exterior wall and the diagonal crack through the weight-bearing wall constituted serious defects and that an architect or engineer should take immediate remedial action.

He opined that the building was not in imminent danger of collapse but that, if the condition were not remedied, it would gradually become more dangerous. But the inspector failed to observe that the crack extended all the way up to the eighth floor. He did not issue any violation with respect to the crack in the weight-bearing wall and made no personal effort to follow up. A violation was issued only for the bulging front façade with no mention of the cracked weightbearing wall. A consulting architect

proposed several plans for correcting the bulge and crack in the front wall, but the hotel lessees opted for the cheapest solution. Nevertheless, no plan had been approved by the Department of Buildings by the date of the collapse.

At trial, the Kings County Borough Superintendent of the Department of Buildings testified that the failure of the city building inspectors to write a comprehensive building order on the day the bearing wall cracks were observed, and to have made no explicit mention of it in the violation order, was a departure from proper procedure. As a result, a Hazardous Building Violation did not issue and a court order was not obtained for immediate vacation of the building and repair within 10 days. By July, the conditions were observably worsening, and, on August 3rd, the need for an immediate building evacuation was clear. There was pressure on the sprinklers, cracking sounds within the building, and rumbling noises, which continued until 5:10 p.m., when there was an explosive sound, the lights went out, the sprinklers broke, and the building collapsed.

The supreme court held the owners of the building 25 percent liable, the net lessee 45 percent liable, and the City of New York 30 percent liable. Although the premises were under a net lease, the court held the owners had a right to enter and inspect the premises and make repairs, holding the owners liable (citing Appell v. Muller, 262 N.Y. 278 (1933)) for failing in the duties imposed upon them under Multiple Dwelling Law § 78. The net lessee, 667 Hotel Corporation, was held liable because retaining an architect only after the building inspection did not satisfy its duties. No repairs were undertaken, and such plans as were filed

Published in Probate & Property, Volume 36, No 4 © 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.

July/August 2022 7

with the Building Department, even if they had been implemented, would not have prevented the collapse. The mortgagee defendant was not held liable because it never became a mortgagee in possession, nor assumed possession or control over the premises, and, therefore, never assumed any obligation for repairs under Multiple Dwelling Law § 78. The court held the City liable for “its total lack of action in the face of danger,” which would have prevented the collapse, and its failure “[gave] rise to tort recovery.” On appeal, the Appellate Division affirmed but modified the judgment, holding that the City was entitled to be indemnified by the owners. But the court of appeals held that the City should not have been held liable, explaining that “in the absence of some special relationship creating a duty to exercise care for the benefit of particular individuals, liability may not be imposed on a municipality for failure to enforce a statute or regulation, . . . even though [the building inspectors] knew of the dangerous structural conditions in the building.”

Insurance Issues Cases against insurance carriers by property owners are determined primarily by the language of the insurance contracts.

In Rector Street Food Enterprises, Ltd. v.

Fire & Casualty Insurance Co. of Connecticut, 35 A.D.3d 177 (N.Y. App. Div. 2006),

the subject policy specifically defined its additional building collapse coverage as “an abrupt falling down or caving in” and provided that “[a] building that is standing is not considered to be in a state of collapse even if it shows evidence of cracking, bulging, sagging, leaning, settling, shrinkage or expansion.” Although the building was demolished by its owner after the City declared an immediate emergency and “even though the building required demolition,” the court held that “the event resulting in the loss was not covered by the provision of defendant insurer’s policy insuring against loss attributable to ‘abrupt’ collapse.”

In contrast, in Hudson 500 LLC v. Tower Insurance Co. of New York, 22 Misc. 3d 878 (N.Y. Sup. Ct. 2008), the policy did not expressly require there be an “abrupt falling down or caving in.” Nevertheless, the carrier contended the insured did not suffer a compensable “collapse,” as that term was used in the policy, “because no part of the building ever fell down.” The court that held the term “collapse” does not require the total destruction of the building, but, rather, only a substantial impairment of the structural integrity of a building,” citing Royal Indemnity Co. v.

Grunberg, 155 A.D.2d 187, 189 (N.Y. App. Div. 1990), and noting that “where a collapse has occurred, the fact that cracking and bulging also occur should not prevent coverage for collapse since it would

be hard to mitigate a collapse that did not include some cracking or bulging of walls.”

In D’Agostino Excavators, Inc. v. Globe Indemnity Co., 7 A.D.2d 483 (N.Y. App. Div. 1959), an insured excavator sought to recover from its liability carrier because of a judgment against the excavator for damages to walls and structure following negligent operation of insured’s bulldozer. The court held the policy rider was limited to coverage for collapse or injury to any building structure directly due solely to excavation or filling or backfilling and did not include injury due to impact between the insured’s bulldozer and the affected property.

In Burack v. Tower Insurance Co. of New York, 12 A.D.3d 167 (N.Y. Sup. Ct. 2004), the court held that genuine issues of fact existed as to whether the insured’s building collapsed because of the shifting of earth by actions of third parties on the adjoining property’s construction site, which would fall within the policy’s exclusion provisions, and not because of the movement of earth from natural phenomena, which was the hazard covered by the policy.

These cases demonstrate that property owners should scrutinize the exclusion provisions of the policies they purchase to ensure that they are covered for conditions that may lead to collapses, so as to be able to recover the cost of repairing such conditions before an “abrupt falling down or caving in” actually occurs.

Conclusion The Champlain Tower building disaster clearly raises issues for New York property owners and lessees because of the many old buildings within the five boroughs.

It is important, therefore, that all parties subject to potential liabilities that might arise from either complete or partial building collapses take prudent action to maintain their buildings “in good repair” and to obtain insurance policies that provide the coverage required for all possible forms of structural building defects, to ensure sufficient funding will be available to remedy hazardous conditions before they reach critical stages, and to protect against the liabilities that will follow if a disaster that could have been avoided should ever occur. n

Published in Probate & Property, Volume 36, No 4 © 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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July/August 2022

UNIFORM LAWS U P D AT E Joint Editorial Boards— Advising the ULC on New and Updated RPTE Laws Like other statutes, uniform laws require periodic updates to accommodate legal, societal, and technological advances. Most commonly, the revision process is overseen by one of several editorial boards comprising experts in a specific area of law who monitor developments in their area of law and recommend amendments or wholesale revisions to uniform acts when appropriate. Two of these boards include representatives from the ABA Section of Real Property, Trust and Estate Law as members.

JEB-URPA The Joint Editorial Board for Uniform Real Property Acts (JEB-URPA) originally comprised members appointed by the Uniform Law Commission (ULC) and the ABA-RPTE Section. It has since expanded to include representatives from the American College of Real Estate Lawyers, the American College of Mortgage Attorneys, the American Land Title Association, and the Community Associations Institute.

The JEB-URPA members choose co-chairs (one uniform law commissioner and one ABA-RPTE appointee) to lead the group, and the Board employs an executive director who conducts research, drafts legal memoranda, and handles administrative duties.

The JEB-URPA meets twice a year to consider proposals for new or updated uniform acts involving real property law and to monitor ongoing drafting projects. At the Board’s most recent meeting in April, it considered proposals for new uniform acts on solar easements, the use of blockchain technology in real estate 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. transfers, and recreational use of privatelyowned land. It also discussed emerging issues for potential further study, such as charging stations for electronic motor vehicles in multi-unit housing developments, the maintenance of aging high-rise condominium buildings, affordability covenants and other strategies for meeting the demand for affordable housing, and the trend of marketing long-term exclusive right-to-sell brokerage agreements to homeowners.

Several of the ULC’s current projects were recommended by the JEB-URPA, including the Drafting Committee on Mortgage Modifications, the Drafting Committee on Restrictive Covenants in Deeds, the Drafting Committee on Tenancy-in-Common Default Rules, and the Study Committee on Redaction of Personal Information from Public Records.

The Board monitors all ULC projects related to real property and provides valuable feedback during the drafting process.

JEB-UTEA The Joint Editorial Board for Uniform Trust and Estate Acts (JEB-UTEA) comprises members from the Uniform Law Commission, the ABA-RPTE Section, the American College of Trust and Estate Counsel, the National College of Probate Judges, and the Association of American

Law Schools. This body also chooses its own chair, employs an executive director, meets semi-annually, and generally functions in a very similar manner to the JEB-URPA but concerning trust and estate legislation.

At its most recent meeting in April, the JEB-UTEA considered several projects involving nonprobate transfers, including transfer-on-death designations for realestate cooperative interests and personal property and a proposal to study how to better integrate probate and nonprobate administration of a decedent’s estate by giving the personal representative certain powers and duties for nonprobate transfers. The Board also reviewed the cy pres provision of the Uniform Trust Code in light of conflicting interpretations and plans to draft clarifying amendments.

The JEB-UTEA also reviewed five ongoing ULC drafting projects: revisions of the Uniform Health-Care Decisions Act and the Uniform Determination of Death Act, and new projects to govern Electronic Estate-Planning Documents, Conflict of Laws in Trusts and Estates, and Tenancy-In-Common Default Rules, providing helpful feedback to the drafting committees.

In addition to the activities described above, the ULC’s editorial boards can revise the official comments to a uniform act to resolve ambiguities, recommend technical and conforming amendments when necessary, and occasionally publish whitepapers or file amici briefs to weigh in on a court’s interpretation of a uniform state law. The boards serve a vital purpose by maintaining the relevance of uniform laws over time and ensuring that they function as intended.

The membership of each editorial board can be found at www.uniformlaws. org/aboutulc/editorialboards. n

Published in Probate & Property, Volume 36, No 4 © 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.

July/August 2022 9

KEEPING CURRENT PROPERTY CASES DEEDS: Deeds excepting and reserving oil and gas royalties create fee interests, not life estates. In two deeds, grantors conveyed surface rights and part of the mineral rights, while retaining part of the oil and gas rights. In the first deed executed in 1916, W.T. and Katherine Fleahman conveyed two tracts of land to W.S. Gillespie. The deed stated: “Grantor … excepts and reserves from this deed the one-half of the royalty of the oil and gas under the above described real estate.”

Thereafter, Mary Fleahman acquired Gillespie’s interest. In the second deed dated 1920, Mary Fleahman conveyed the two tracts to H.J. Jones. The deed stated that “the 3/4 of oil royalty and one-half of the gas is hereby reserved and is not made a part of this transfer.” Those retained mineral interests were later transferred to others. Peppertree Farms and the Moores, successors in title to the surface rights and the conveyed mineral rights, brought a quiet title action seeking a declaration that the retained mineral rights were only life estates and terminated on the deaths of W.T. Fleahman and Mary Fleahman. The trial court granted summary judgment to Peppertree and the Moores, finding that the retained interests were reservations and thus life estates because the deeds did not include words of inheritance. The court of appeals affirmed. On discretionary appeal, the supreme court reversed.

The court explained that the common law required words of inheritance to create a fee simple interest until a 1925 statute changed the rule. Under the common law, which applied here, whether words of inheritance were required to create fee simple interest in the retained interests 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.

depended on whether the deed reserved or excepted the interest at issue. Reservations required words of inheritance to create a fee simple estate. A reservation is created when a grantor conveys an estate and at the same time retains some new right or privilege. In other words, the conveyance establishes a new property right that the grantor did not already own in fee simple absolute. In contrast, an exception results when the grantor excludes a thing already in existence from the operation of the conveyance. This leaves in the grantor a fee simple estate, and words of inheritance are not necessary. Whether the language used in a deed creates a reservation or exception from the grant depends upon the intention of the parties as evidenced by the construction of the whole instrument in light of the circumstances; the use of the word “reserve” or “except” or the use of both words in the same deed provision is not alone determinative. Here, in both deeds, because the oil and gas interests were already in existence at the time of the conveyance, the deeds created exceptions that did not require words of inheritance. Peppertree Farms, L.L.C. v. Thonen, 2022 Ohio LEXIS 286 (Ohio Feb. 15, 2022).

EASEMENTS: Prescriptive easement for public utilities does not require adverse use. In 1980, Garside gave the Wisconsin Energy Corporation (WEC) written consent to install a natural gas pipeline beneath Garside’s property to reach a neighboring home. WEC

periodically serviced the pipeline, including relocating and replacing parts in 1984 and 1989. In 1996, Bauer purchased Garside’s property without actual knowledge of the underground pipeline. Bauer learned of it in 2014 when WEC contacted her to acquire an easement to upgrade and enlarge the pipeline. Bauer denied the request and sued WEC, seeking to stop the continued operation of the pipeline and also asserting claims for trespass and ejectment. WEC counterclaimed under a statute that establishes a prescriptive right when a public utility makes “[c]ontinuous use of rights in real estate of another for at least 10 years.” Wis. Stat. § 893.28(2). The trial court granted WEC summary judgment, finding a prescriptive easement was established and dismissing the claims of trespass and ejectment. The appellate court summarily affirmed, and Bauer petitioned for further review. The supreme court affirmed, stating that the statute supplants the common-law requirements for prescriptive rights for certain defined public utility companies such as WEC. The court noted that the legislature drafted the statute to allow a permissive use to ripen into a prescriptive right, and so an open claim of right is not required.

The court found that the statute, like the common law, still requires continuous use but only for 10 years. A continuous use occurs when the use is not voluntarily abandoned or interrupted by the landowner or a third party. Here, WEC met the requirements through its servicing of the pipeline since its inception. WEC did not change the character of the use or increase the burdens on any affected landowner.

WEC’s continuous use requirement was met in 1990 before Bauer purchased the affected land. Bauer v. Wisconsin Energy Corp., 970 N.W.2d 243 (Wis. 2022).

LANDLORD-TENANT: Landlord fails to mitigate damages by rejecting replacement tenants who offered less than the original rent. Residential

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tenants informed their landlords that they were breaking their 18-month lease but that they had found replacement tenants willing to finish out the lease term.

The replacement tenants were willing to pay only $3,100 a month, $200 less than the tenants’ monthly rent, so the tenants offered to pay the landlords the difference in a lump-sum payment. The landlords, who had advertised the property at $3,500 a month, rejected this offer and asked the replacement tenants to pay the $3,300 rent in full. The replacement tenants backed out. Several months passed before the landlords found other replacement tenants. The landlords charged these replacement tenants $3,100 a month. The landlords sued the tenants for lost rent from the breach of the lease. In their answer to the landlords’ complaint, the tenants asserted that the landlords failed to mitigate damages.

At a bench trial before a magistrate judge, the landlords prevailed on their damages claim. A trial judge affirmed, but the court of appeals reversed. The court noted a recent amendment to the landlord-tenant code requiring landlords “to mitigate actual damages for breach of the rental agreement.” D.C. Code § 42-3505.52. What is a reasonable effort to mitigate is a question of fact, and here the landlords clearly failed to mitigate when they refused to accept the replacement tenants under an arrangement that would have given them the same amount of rent as they would have if tenants had not breached the lease.

The landlords argued that requiring the replacement tenants to pay the original rent would have protected their opportunity to obtain a higher rent after the expiration of the original lease. The court rejected this argument because there was no guarantee that the original tenants would agree to renew at more than $3,100 a month. Sizer v. Velasquez, 270 A.3d 299 (D.C. 2022).

MORTGAGES: Economic loss rule bars tort action against lender for failing to respond to borrower’s application for mortgage modification. Sheen granted a second and third mortgage to Wells Fargo to secure two loans of $167,820 and $82,037. After Sheen suffered financial setbacks and failed to make mortgage

payments, Wells Fargo recorded notices of default and scheduled a foreclosure sale.

Sheen contacted Wells Fargo regarding the possibility of canceling the foreclosure sale so that he could apply for a loan modification. Sheen thereafter submitted applications to modify the loans, and Wells Fargo canceled the sale but never contacted Sheen about the status of his modification applications and never told him whether they were approved or rejected. Two months later, Wells Fargo sent Sheen letters stating that the loans were delinquent, that the balances were accelerated, and that Wells Fargo would take action to protect its interests. Wells Fargo assigned the loans to an investment company that foreclosed. Sheen sued Wells Fargo, the loan servicer, and the assignee, alleging negligence (against Wells Fargo), promissory estoppel, and intentional infliction of emotional distress (against the assignee and loan servicer).

The trial court granted Wells Fargo’s motion to dismiss on the ground that it had no duty to respond timely to Sheen’s requests to modify the loans. The court of appeal affirmed. The supreme court addressed one specific question: whether Wells Fargo owed the plaintiff a duty “to process, review and respond carefully and completely to [his] loan modification applications” to avoid causing the plaintiff pure monetary loss through a lack of care in handling his applications.

The court answered “no.” The court noted that the California courts of appeal were divided on the issue and went on to settle the matter firmly. No statute, either state or federal, imposed any duty on Wells Fargo as to how to treat applications to modify the loan. And the common law, specifically the economic loss rule, argued against it. That rule functions to bar claims in negligence for purely economic losses in deference to the bargained-for rights and duties and risk allocations in the contract. Nothing in the loan agreement provided for how Wells Fargo was to review and act on applications; indeed, to impose a duty of care would be to renegotiate the agreement. The court observed that if it allowed the borrower’s due-care claim concerning loan modifications, it saw no endpoint to bypassing the rule in other contexts, including challenges to

lenders’ decisions to assign loans or select loan servicers. Instead, if there is a need to better equalize the asymmetry in information, or to offer greater protections to homebuyers, those measures are best left to the legislature. Sheen v. Wells Fargo, 505 P.3d 625 (Cal. 2022).

MORTGAGES: Sole remedy provision in pooling and service agreement is triggered only by loan-specific notice of non-conforming mortgages. In December 2011, the trustee of a residential mortgage-backed securities (RMBS) trust sent a letter to DLJ Mortgage Capital, Inc., the sponsor of the trust, demanding the repurchase of 304 specifically-identified loans. In March 2012, the trustee sent another letter demanding the cure or repurchase of an additional 900 loans identified on an attached schedule. DLJ agreed to repurchase approximately 40 of the loans, disputing the remaining allegations of nonconformity. Under the pooling and service agreement (PSA) establishing the trust, DLJ represented and warranted that each loan was underwritten under the originators’ underwriting standards and applicable law, that certain documentation was true and accurate, and that none of the loans was “high cost” or “predatory.” The PSA contained a “sole remedy” provision limiting the trustee’s recourse to a “repurchase protocol” requiring DLJ to cure, repurchase, or substitute a nonconforming mortgage loan within 90 days of notice or independent discovery of such breaching loan. In February 2013, the trustee commenced an action for breach of contract, alleging that DLJ was required to repurchase the 1,204 loans identified in its letters, along with “all other Mortgage Loans in the Trust as to which DLJ breached representations and warranties.” The trustee alleged that a “loan-level” forensic review revealed a significant number of loans were in breach of the representations and warranties based on, among other things, borrower misrepresentation of income and occupancy status, miscalculations of borrowers’ debtto-income ratios, and the charging of high-cost interest on the loans. DLJ moved to dismiss as to loans other than those specifically identified in the trustee’s presuit letters. The trial court denied DLJ’s

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motion. After discovery, DLJ moved for partial summary judgment, arguing again that the trustee could not pursue recovery for the loans not specifically identified in the pre-suit letters. The trial court denied the motion. The appellate court affirmed, finding that the notice complied with the contractual condition precedent of notifying DLJ of its default, such that subsequently-identified loans related back to the time of the initial notice. The court of appeals reversed, declaring that the controversy presented a question of contract interpretation fitting within “a consistent theme: does the contract mean what it says?” “Absent some violation of law or transgression of a strong public policy, the parties to a contract are basically free to make whatever agreement they wish,” and freedom of contract “prevails in an arm’s length transaction between sophisticated parties.” In the RMBS context, the court stated that it had repeatedly enforced sole remedy provisions—a typical component of these transactions—following their plain terms because the provisions are “sufficiently clear to establish that no other remedy was contemplated by the parties at the time the contract was formed.” Here, the sole remedy provision was clear, and the assertion that loan-specific notice is not required is inconsistent with the contractual language. Instead, the parties structured the repurchase protocol entirely through the lens of individual “mortgage loans”—clearly contemplating a loan-by-loan approach to the agreed-upon sole remedy for breach, and limiting the measure of recovery for a non-conforming loan to the “repurchase price,” which was also loan-specific. In the court’s view, this was the only sensible reading of the repurchase protocol, considering that the trust contained over 5,000 mortgage loans and, for DLJ to cure, repurchase, or substitute a claimed non-conforming loan or loans, it needed to know which loans were alleged to be in material breach of its representations and warranties. U.S. Bank Nat’l Ass’n v. DLJ Mortg. Cap., Inc., 2022 N.Y. LEXIS 346 (N.Y. March 17, 2022).

OIL AND GAS: Action to terminate oil and gas lease is not subject to arbitration. An oil and gas lease carried a primary term of five years and a

secondary term for “as long thereafter as oil or gas … or either of them, is produced.”

The lease also provided for a limited extension of the lease term if, at the expiration of the primary term, the lessee is not producing oil or gas but is engaged in certain activities. A subsequent lease amendment added an arbitration clause, requiring arbitration of any questions concerning the lease or performance. The lessor brought an action against the lessee for declaratory judgment, alleging that the lease had terminated because the lessee failed to produce oil and gas. The lessee moved to stay the action pending arbitration. The Ohio arbitration statute makes arbitration clauses in written contracts generally enforceable, with an exception for “controversies involving the title to or the possession of real estate.”

Ohio Rev. Code §2711.01(B)(1). The trial court denied the lessee’s motion, ruling that the claims involved the title to or the possession of real property. That ruling was reversed by the intermediate appellate court. On the sole issue of whether an action seeking a determination that an oil and gas lease has expired involves “title to or the possession of real estate” within the meaning of the statute, the supreme court answered “yes,” reversing the court below.

Relying upon dictionary definitions and case law, the supreme court stated that it is well-settled that an oil and gas lease grants the lessee a property interest in the land. Leases must be recorded; they burden property and prevent the landowner from passing title free of encumbrances; they concern rights to possession of the land; and they give reasonable use of the surface estate to accomplish the purposes of the lease, sometimes to the exclusion of the lessor. Here, a determination that the lease had expired would remove the encumbrance and restore the possession to the lessor. Thus, the lessor’s action involves both title to and possession of real property. French v. Ascent Res.-Utica, L.L.C., 2022 Ohio LEXIS 582 (Ohio Mar. 24, 2022).

RESTRICTIVE COVENANTS: Short-term rentals do not violate residential-use-only covenants. The covenants for the Lake Serene subdivision restrict the lots to residential use only,

prohibit their use for trade or business of any kind, and allow rentals. The property owners association discovered that Esplin, a homeowner, was advertising his property on the internet for short-term rentals and sent him a series of communications alleging violations. The association then amended its bylaws via a board of directors’ resolution, prohibiting renting property for terms of less than180 days.

The association then filed suit against Esplin. The trial court held that Esplin’s use of his property was residential and also held the board’s bylaws amendment was invalid. The association appealed.

The supreme court stated that whether short-term rentals through services such as Airbnb, VRBO, and Homeaway constitute residential purposes is a matter of first impression in Mississippi. The court reviewed the precedent from numerous states emphasizing those finding that “residential purposes” meant a place of abode, using the property for typical activities like eating, sleeping, and bathing. Renting the property solely on the internet supported the conclusion that the property was not being used for commercial purposes. The salient point was whether the property is being used as a place of abode and not how long it is being used. Because nothing in the covenants as originally drawn specified any time limits, shortterm rentals must be permitted. The court agreed that the board resolution amending the bylaws to prohibit short-term rentals was an unauthorized amendment to the covenants, an end-run around a vote required to be made by all homeowners who are members of the association.

Lake Serene Prop. Owners Ass’n v. Esplin, 334 So.3d 1139 (Miss. 2022).

SALES CONTRACTS: Economic loss rule does not bar action for failure to disclose water damage. In 2014, the Cummingses purchased a beach house from Berkeley Investors who were represented

by Re/Max with Carroll as the listing agent. Several months later, they discovered significant structural damage from past water intrusion. Berkeley had purchased the home in 2003 for short-term rentals. Maintenance records indicated problems from 2005 to 2014 including water damage to the ceiling and various

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water leaks. Berkeley listed the property for sale with Carroll in 2013. Berkeley’s agents, Bell and Durham, completed the property disclosure statement, answering questions regarding water problems in the negative even though Bell, Durham, and Carroll knew of the water issues. The contract for sale indicated the property was being sold in its current condition and that no warranties were given. Various inspections also took place before closing, but a detailed report generated after closing provided an extensive list of problems with the home. The Cummingses, who were represented in their purchase by their own agents, Rudd & Associates, sued the defendants for breach of contract, fraud, negligence, and negligent misrepresentation. The trial court granted summary judgment for the defendants on all claims, and the Cummingses appealed.

The appellate court reversed the summary judgment concerning the Cummingses’ claims for negligent misrepresentation and fraud against Berkeley and Bell.

The court also reversed the summary judgment with respect to the claims for negligence, fraudulent concealment, and fraudulent inducement against Re/Max and Carroll, who had pleaded protection from tort liability by the economic loss rule. The supreme court affirmed, explaining that the economic loss rule precludes recovery in tort for simple failure to perform contractual duties, but application of the rule nonetheless requires a showing of a contractual relationship between the parties. The court agreed with the appellate court that ReMax and Carroll were not protected by the rule because they lacked privity of contract with the Cummingses.

Beach house in Cummings v. Carroll. Photo courtesy of Stuart L. Stroud, Wallace, Morris, Barwick, Landis & Stroud, P.A., Kinston, North Carolina.

The claims stemmed from the disclosure statement, but it was not incorporated into the purchase contract. Cummings v.

Carroll, 866 S.E.2d 675 (N.C. 2022).

STATUTE OF LIMITATIONS: Action to enjoin raising hogs in violation of zoning is not barred even though activity began more than ten years earlier.

The Haneys began raising at least one hog on their commercially zoned property in 2006. By the time the town brought a nuisance-abatement action against this activity, the Haneys were raising some 20 hogs. The town alleged that the property was saturated with animal waste, “creating a horrible stench and attraction for flies.” This was not the Haneys’ first animal farm. Years earlier, they operated a deer farm and raised Russian boars, both activities ordered closed by the government. The township alleged that because the Haneys’ land was zoned for commercial use, rather than agricultural use, they could not raise hogs or other animals there. The Haneys moved for summary judgment, arguing that the township’s claim was time-barred by the six-year statutory period of limitations. Mich. Comp.

Laws § 600.5813. The trial court denied the motion, reasoning that this was an action in rem, as opposed to a “personal action,” so the statute of limitations did not apply. The appellate court reversed, holding that because the Haneys had kept hogs on the property since 2006 and the township did not bring suit until 2016, the action was time-barred. After remand on the issue of whether the Haneys had waived the affirmative defense, the supreme court took up the case again and reversed. It noted that the wrong alleged in the township’s complaint was the Haneys’ keeping of hogs on their property, which wrong was committed as long as the piggery operated. Because the Haneys had hogs on their property within the limitations period, the claims accrued during that period, and the township’s action was timely. Apart from this eminently compelling logic, the court also found support for its ruling under the Zoning Enabling Act, which states that a “use” of land in violation of a zoning ordinance is a nuisance per se. Mich. Comp. Laws § 125.3407. Typically, zoning violations are triggered by

“uses” that are inherently ongoing, thus, a limitations period is of little relevance to nuisance-abatement actions. The Haneys’ violation was not a one-time occurrence that happened in 2006. The unlawful use continued as long as the property was used as a piggery. The “claim accrues” under the statute of limitations “at the time the wrong upon which the claim is based was done.” Whether the “wrong” here, a zoning violation, accrued continuously or each day, it certainly accrued within the limitations period. Twp. of Fraser v. Haney, 2022 Mich. LEXIS 349 (Mich.

Feb. 8, 2022).

TRESPASS: Landowner does not have right to immobilize unlawfully parked motor vehicles. Allen parked his motor vehicle in the parking lot of defendant’s shopping center, and the defendant authorized a vehicle immobilization company to place a “boot” on one of the tires.

Allen was required to pay $650 to remove the boot. Allen later filed suit, and the trial court held that that act of immobilizing his vehicle violated his rights because no statute or ordinance authorized immobilization. The defendant appealed, and the appellate court affirmed. The supreme court agreed with the conclusion of the lower courts that the landowner acted wrongfully. Under common law, a landowner has the right to remove property of other persons left on his land without his consent, provided he uses due care not to damage the property upon its removal.

But, nothing in the law gives a landowner the right to immobilize another’s property wrongfully on the land. The ancient doctrine of distress damage feasant, allowing the impounding of trespassing livestock, does not apply to vehicles. That doctrine gives a landowner the right to hold livestock that causes actual property damage until the owner is identified and compensates the landowner for the damage.

Here, the vehicles were not causing any damage to the property (apart from the unauthorized use of parking spaces), and the immobilization company received money whenever vehicle owners paid fees to remove the boots. The court also noted that statutes regulating the proper removal and impoundment of vehicles have replaced the common-law remedy

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of removing trespassing vehicles. Ironically, immobilizing the vehicles only perpetuated the trespass, instead of stopping it.

RCC Wesley Chapel Crossing, LLC v. Allen, 867 S.E.2d 108 (Ga. 2021).

LITERATURE EQUITY: In Equity as Meta-Law, 130 Yale L. J. 1050 (2021), Prof. Henry E. Smith suggests that the purposes and functions of equity are best served by conceiving it as a different regime—meta-law. By metalaw, Prof. Smith means a law that regulates other law. Despite the formal merger of law and equity, equity remains an important force in the law in its own right. In the article, he offers a deep and comprehensive recounting of the emergence and growth of equity and the impetus for the merger. His study reveals equity as a flexible, versatile, and malleable instrument, which is capable of solving problems of high complexity and uncertainty. Equity addresses concerns of polycentricity, conflicting rights, and opportunism that arise in cases presenting morally questionable conduct and hardship. Lamenting the merger of law and equity, Prof. Smith claims that the specialized structures of equity can work to achieve important synergies and perform better than an undifferentiated and homogeneous law— the kind that is usually assumed to be the only one possible. He recommends bringing equity back to center stage because equity as meta-law can best address problems that will always be with us.

In Equitable Remedies: Protecting What We Have Coming to Us, 96 Notre Dame L. Rev. 1115 (2021), Prof. Larissa Katz offers a new conception of equitable remedies that fills the gap when the protections of private law end. She states that equity operates to ensure that we receive “what we have coming to us,” that is, protecting what is already ours, namely our property rights and our rights to another’s performance as agreed. In equitable remedies ranging from specific performance, injunctions, and constructive trusts, she shows how equity intervenes to prevent others from obstructing or diverting what a person expects from contractual and other relations. These equitable remedies go beyond the enforcement of our

established property rights to embrace a distinct equitable right to the unobstructed flow of what a person has coming to her, as a party to a contract, as a competitor in a free market, as a neighbor, as a party to a lawsuit, and more. Equity intervenes in the form of “a negotiable duty” that constrains whoever holds the power to compromise those rights by obstructing or diverting their flow. In this conception, a specifically performable contract is a composite of two distinct rights: the contractual right to performance and an equitable right that extends beyond that contractual right. One important implication of this account is that the equitable interests and duties that arise in conjunction with specific performance need not and often do not track what the parties actually agreed upon.

Conceiving equity in this way may expand the parties’ access to equitable remedies and enable courts to achieve more meaningful resolution of disputes.

PUBLIC LANDS: In The Emerging Law of Outdoor Recreation on the Public Lands, 51 Envtl. L. 89 (2021), Prof. Robert B. Keiter offers a prescription for better management of precious public lands in the face of the exponential growth of outdoor recreation. Outdoor recreation is a big part of the economies of adjoining communities, and the proximity to national parks and wilderness areas makes for attractive sites for housing development. With the evergrowing types of recreational activities and gadgets used in them, management and coordination among government agencies have become increasingly difficult and sometimes at odds. He states that the vast array of federal management statutes, as well as the several agencies charged with different parts of the public domain with sometimes conflicting missions and each with broad discretion, has resulted in what he calls a “common law of outdoor recreation.” To make this common law more readily discernable and predictable, he believes more legislation is needed to set criteria to guide agencies in decision-making.

LEGISLATION IDAHO prohibits the inclusion and reference to racial restrictive covenants in

recorded instruments. The law invalidates racial covenants and other devices, such as rights of entry and possibilities of reverter.

An owner may record a restrictive covenant modification on a prescribed form stating: “The referenced original written instrument contains discriminatory provisions that are void and unenforceable under Section 55-616, Idaho Code, and federal law.”

The modification has the effect of striking from the original instrument all provisions based on race, color, ethnicity, or national origin that are void and unenforceable under law. 2022 Ida. Sess. Laws 159.

INDIANA allows the county sheriff to hold public auctions in foreclosure actions electronically. Purchasers may make payments electronically. The county sheriff may receive electronic payments and establish procedures necessary to secure the payments by the time of the sale. The auction provider may not add an additional cost for conducting the sale electronically. 2022 Ind. Acts 112.

SOUTH DAKOTA adopts the National Geodetic Survey (NGS) for defining and locating geographic positions and points. The act creates the South Dakota State Plane Coordinate System, which will serve as a complete, legal, and satisfactory description of points on, within, and above the surface of the earth, survey stations, and land boundary corners. When NGS coordinates are used in a document that describes land by reference to a subdivision, line, or corner of the United States Public Lands Survey, the NGS description must be construed as supplemental to the basic description. In the event of any conflict, the description under the United States Public Lands Survey prevails. 2022 S.D. SB 87.

UTAH adopts the Uniform Easement Relocation Act. A servient estate owner, at his expense, may relocate an easement under the act if the relocation does not materially lessen the utility of the easement, burden the easement holder, or otherwise impair its value or use or the interests of security holders. A civil action is required to relocate the easement. 2022 UT HB 132. n

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July/August 2022 15

IRS Argues Split-Dollar Is Not “Faire,” but Challenge Is Foiled

By Alexander Lyden-Horn and Justin Miller

Split-Dollar Arrangements Are Not Futile—or Feudal A split-dollar life insurance arrangement is a structure in which one party provides funding for a life insurance policy on another’s life, with repayment to be made from—or secured by— that policy. The remaining proceeds of the policy after repayment of the premiums, if any, will pass to the beneficiaries. Thus, the “split” in split-dollar refers to the split interest between the funder and the beneficiaries in the proceeds of the policy.

The Estate of Levine involved a special type of split-dollar arrangement—often referred to as an intergenerational splitdollar arrangement—in which a parent loans money to pay for insurance on children’s lives, with the benefit passing to grandchildren. The parent’s right

Getty Images

Alexander Lyden-Horn is a managing director and the Director of Delaware Trust Services and Trust Counsel at Evercore Trust Company. Justin Miller is a partner and the National Director of Wealth Planning at Evercore Wealth Management. Justin also is the vice chair of the ABA RPTE Business Planning Group and vice chair of the Individual and Fiduciary Income Tax Committee.

power to terminate the policies and (2) the person with the power to do so was constrained by fiduciary obligations.

Getty Images

I

n Estate of Levine v. Commissioner, 158 T.C. No. 2 (2022), the estate successfully parried an IRS challenge to the valuation of the decedent’s right to repayment of premiums under a splitdollar life insurance arrangement. The IRS argued that the value of such right should be equal to the cash surrender values of the life insurance policies— and their weapons of choice were sections 2036, 2038, and 2703. In an opinion full of dual—or one could argue “duel”—meanings, the court ultimately rebuffed the IRS’s valuation challenges because (1) the decedent retained no

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July/August 2022 17

to repayment—a receivable—typically is the greater of (1) the total premiums paid and (2) the cash value on the death of the last surviving insured—which could be decades in the future—or the date of policy termination, if earlier.

The main question with the split-dollar arrangement in the Estate of Levine case: What was the value of the receivable for estate tax purposes?

Pre-combat Background The decedent, Marion Levine, was born in St. Paul, Minnesota, in 1920.

One of 10 children growing up in the Great Depression, the court went to great lengths to describe her humble beginnings and subsequent business successes. Her rise began with a single family-owned supermarket in 1950, which eventually grew into a 27-store, multimillion-dollar company. After more than three decades of taking care of everything from the company payroll to the inventory, she sold the business for $5 million in 1981, which would be close to $16 million in today’s dollars. She reinvested the proceeds in a wide variety of investments, including real estate, mobile-home parks, and two Renaissance fairs—the latter of which inspired several medieval combat puns throughout the Tax Court opinion, written by Judge Holmes. Marion’s savvy investments ultimately grew her net worth to $25 million.

In June and July of 2008, Marion’s daughter Nancy, her son Robert, and her longtime friend and business associate Bob Larson, in their capacities as Marion’s attorneys-in-fact, executed the necessary documents to effect the split-dollar arrangement. They established an irrevocable life insurance trust under South Dakota law as a directed trust with a South Dakota corporate trustee and appointed Larson as the sole member of the trust’s Investment Committee, which had exclusive authority under the terms of the trust to make all decisions regarding the life insurance and split-dollar arrangement. Nancy and Nancy’s husband, Larry, were selected as the insured parties, as Robert was ruled out because of a preexisting medical condition. Two

The split-dollar arrangement was subject to the regulation’s “economic benefit regime” only for gift tax purposes. second-to-die policies were purchased by the insurance trust, with approximately $6.5 million in total one-time premiums. Marion raised the necessary cash to fund the premiums through a variety of loans and lines of credit. The insurance trust agreed to repay Marion’s revocable trust the greater of (1) the total premiums paid or (2) the cash value on the death of the last surviving insured or the date of policy termination, if earlier.

Nancy and Larson, in their capacities as Marion’s attorneys-in-fact, also signed gift tax returns for Marion for 2008 and 2009. Ordinarily, when a donor transfers property in exchange for less-valuable property, the gift is a “bargain sale” and the value of such gift is the difference in value between what is given and what is received. The Treasury Department, however, has issued specific regulations governing the gift tax valuation of split-dollar arrangements. See Treas. Reg. § 1.61-22(d)(2) (discussed below). Applying these regulations, Nancy and Larson determined that the value of the economic benefit transferred from the revocable trust to the insurance trust was $2,644—even though premiums of $6.5 million were advanced and might not be repaid for several decades until Marion’s daughter and son-in-law both passed away.

Marion died on January 22, 2009, and the estate filed a federal estate tax return (Form 706). The split-dollar receivable owned by the revocable trust was reported on Schedule G of Form 706 with a value (as of the alternate valuation date) of about $2 million. The parties later stipulated that if the estate

was successful in its defense of the IRS challenges, then the value was slightly higher at $2,282,195. Note that, at the time of Marion’s death, the cash surrender value of the policies was close to $6.2 million. The reported value therefore represented a significant discount because it was theoretically possible that the estate’s receivable might not be paid until the death of the last surviving insured far in the future.

The IRS Joust with the Estate As the court described it, the “joust between the IRS and the Estate” began with an audit of the estate tax return and the commissioner’s issuing a notice of deficiency of slightly more than $3 million. The bulk of this deficiency represented an adjustment to the value of the estate’s repayment rights under the split-dollar arrangement. The commissioner also assessed a 40 percent gross understatement penalty under section 6662(h). The two parties worked together to “narrow the issues so their combat could be confined to a small tilt and not become a general melee.” As a result, only two issues remained for review by the court: 1. Was the value of the split-dollar receivable in the estate on the alternative valuation date $2,282,195, as listed on the estate tax return, or the policies’ cash surrender value of $6,153,478, as argued by the IRS? 2. Was any resulting underpayment subject to the 40 percent gross-misvaluation penalty under section 6662(h)?

The court first confirmed that Treasury Regulation § 1.61-22 does not apply to the estate tax consequences of a split-dollar arrangement. The court pointed out that the split-dollar arrangement was subject to the regulation’s “economic benefit regime” only for gift tax purposes, in which case the amount treated as being transferred for gift tax purposes was limited to the cost of current life insurance protection for each year the arrangement remains in place. See Estate of Morrissette v. Comm’r,

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146 T.C. 171 (2016).

Having determined that the splitdollar regulations did not apply, the court then looked to the default estate tax rules to determine the effect of the split-dollar arrangement on the gross value of Marion’s estate. The estate’s position was (1) the only asset includible in the gross estate was the receivable payable to the revocable trust and (2) Marion had no other interest in the life insurance policies, which were owned solely by the insurance trust from the outset. The commissioner, however, argued that the full cash surrender value of the policies should have been included based on several factors. First, under section 2036, Marion effectively retained the right to income, or the right to designate who would receive income, from the split-dollar arrangement as a whole. Second, under section 2038, she also maintained the power to alter, amend, revoke, or terminate the enjoyment of aspects of the split-dollar arrangement. Finally, under the special valuation rules in section 2703, the restrictions in the split-dollar arrangement should be disregarded for valuation purposes, which would cause the full cash-surrender value of the policies to be included in her estate.

The court addressed the commissioner’s section 2036 and 2038 arguments in tandem because the same principles would determine whether either section would apply. The court acknowledged that Marion did receive something in exchange for the $6.5 million advanced to pay the premiums, which was the receivable under the split-dollar arrangement. Under the terms of that receivable, she had the right to receive the greater of the premiums paid—that is, $6.5 million—or the cash surrender value when terminated.

The split-dollar arrangement, however, did not confer upon her the immediate right to receive the cash surrender value. Instead, the receivable would not be paid until the deaths of both insureds or the termination of the policies, if earlier.

Furthermore, under the terms of the split-dollar arrangement, only the trustee of the insurance trust had

the power to terminate the arrangement. This is a major distinction in the split-dollar arrangement in this case compared to the arrangements in Estate of Cahill v. Commissioner, T.C. Memo. 2018-84 (2018), and Estate of Morrissette v. Commissioner, T.C. Memo.

2021-60 (2021), and may have been the key factor upon which the court relied in finding for the estate. In those previous cases, the donor and donee could jointly agree to terminate the agreement. Marion’s “carefully drafted agreement,” however, gave the power to terminate exclusively to the insurance trust. The court acknowledged that “if the contest between the Estate and the Commissioner were confined to the tiltyard defined by the transactional documents, we would have to conclude that sections 2036(a) and 2038 do not tell us to include the policies’ cash surrender values in the Estate’s gross value.”

The commissioner attempted “to unhorse the Estate’s argument with the pointed assertion” that the court should look beyond the documents to the transaction as a whole, so the court then examined the facts and circumstances of the overall split-dollar arrangement.

The court hypothesized that the commissioner’s “first pass at the Estate in this part of their joust” would be to argue that the cash surrender value is a form of income and that the general principles of contract law would enable the revocable trust and the insurance trust to mutually agree to return such income to the estate. The court, in looking at Helvering v. Helmholz, 296 U.S. 93 (1935), and Estate of Tully v. United States, 528 F.2d 1401 (Ct. Cl. 1976), reasoned that a power to “alter, amend, or revoke” does not include “all speculative possibilities” that could lead to the modification of an agreement under general principles of law. The court therefore concluded that general principles of contract law that “might theoretically allow modification of just about any contract” are not the types of powers to which sections 2036 and 2038 are referring. Instead, such powers are only those “created by specific instruments.”

The commissioner then switched to “shorter, sharper weapons forged from the particular facts of particular cases,” specifically, Estate of Strangi, 85 T.C.M. (CCH) 1331, and Estate of Powell v. Commissioner, 148 T.C. 392 (2017). The commissioner used Strangi and Powell to support the argument that the decedent, through her attorneys-in-fact, stood on both sides of the transaction and could therefore unwind the split-dollar arrangement at will, which would entitle the revocable trust to the full cash-surrender

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July/August 2022 19

values of the policies at any time. The court acknowledged that Larson stood on both sides of the transaction—as both attorney-in-fact and the sole member of the investment committee—but also acknowledged the presence of two important limitations. First, as attorneyin-fact, Larson held only the powers possessed by the decedent, which, as stated above, did not include the ability to terminate the arrangement. Second, as the sole member of the investment committee, the trust expressly provided that Larson was serving in a fiduciary capacity, and, therefore, under both the terms of the trust and South Dakota law, he had a fiduciary duty to act in the best interest of the trust beneficiaries—and could be held liable for acting otherwise. In response, the commissioner argued that, as Robert and Nancy are beneficiaries of both the insurance trust and the estate, Larson could terminate the split-dollar arrangement without violating his fiduciary duties because the children would benefit either way. The court was quick to point out the estate’s “blunt parry” to this “subtle thrust”—the decedent’s grandchildren were also beneficiaries under the insurance trust but would not receive anything from the estate if the arrangement was terminated. As a last gasp, the commissioner argued that the grandchildren should be disregarded as beneficiaries, as their interest can be “extinguished” by their parents’ exercise of a testamentary power of appointment. But the court rightly pointed out that a testamentary power of appointment is not effective until the death of the holder of the power. Until that time, the grandchildren are still considered beneficiaries and Larson would owe a fiduciary duty to them.

Therefore, the court found that the fiduciary duties owed by Larson were not merely illusory. His ability to terminate the split-dollar arrangement could not be characterized as being a right retained by the decedent, which precludes the inclusion of the policies’ cash surrender value in the decedent’s gross estate under either section 2036(a)(2) or 2038(a)(1).

As a backup to the section 2036 and

2038 arguments, the commissioner also argued that the split-dollar arrangement was merely a restriction on the decedent’s right to access the funds transferred to the insurance company and should therefore be disregarded under the special valuation rules of section 2703.

As with the section 2036 and 2038 arguments, the application of section 2703 hinged on the definition of “property.” The estate argued that section 2703 applies only to property actually owned at death and not property that was gifted during life—or property that was never owned. Consequently, even if the inability to surrender the life insurance policies is considered a “restriction” under section 2703, it is not a restriction on property owned by the decedent. The commissioner pushed the court to focus instead on the rights held as a whole rather than the specific property in question—a similar premise as the section 2036 and 2038 arguments that both parties could consent to the termination of the split-dollar arrangement. The commissioner argued that, without this restriction—that is, the requirement that the insurance trust consent to the termination—the value of the decedent’s retained right would be equal to the cash surrender value.

The court flatly disagreed with this argument, stating that the “property” to which section 2703 refers is the property of an estate, not some other entity’s property. The court noted that this interpretation has been upheld by numerous court decisions, including Strangi. Thus, the property in question here is the receivable held by the estate.

The court concluded that there were no restrictions on the receivable—because the decedent had unfettered control and was free to transfer or sell it. Therefore, section 2703 had no application to the split-dollar arrangement.

Court Declares Victory for the Taxpayer Because the commissioner did not prevail under any of the section 2036, 2038, or 2703 arguments, the commissioner was bound to the previously

stipulated value of $2,282,195 for the estate’s receivable without any accuracy-related penalties—that is, a 65 percent discount for the $6.5 million receivable. In other words, premiums of $6.5 million were advanced, the value for gift tax purposes was only $2,644, and the decedent’s estate was required to include only $2.3 million the following year for estate tax purposes—even though the estate was entitled to repayment by an insurance trust with a cash surrender value of $6.2 million at death.

Ultimately, the court argued that the tax windfall in favor of the taxpayer was the result of a problem with the regulations. The court concluded, “If there is a weakness in this transaction, it lies in the calculation of the value of the gift between Levine and the Insurance Trust—the difference between the value that her Revocable Trust gave to the Insurance Trust and what it got in return. But the gift-tax case is not this estate-tax case. And the problem there is traceable to the valuation rule in the regulations. No one has suggested that this rule is compelled by the Code and, if it isn’t, the solution lies with the regulation writers and not the courts.”

Conclusion From a planning perspective, there are certain key lessons in this case. First, the power to terminate a split-dollar arrangement must be vested exclusively in the owner of the policy. Under sections 2036 and 2038, any power held by the decedent, even if held jointly with another, may be sufficient to cause estate inclusion. Second, all parties with the ability to terminate a split-dollar arrangement must be acting in a fiduciary capacity. This is important when drafting the irrevocable trust because state laws may vary as to whether power holders, by default, are serving in a fiduciary capacity. Finally, the donor’s retained right to be repaid should be clearly defined as a distinct “receivable,” ideally in the form of a promissory note rather than a bundle of rights under the split-dollar arrangement. n

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KEEPING CURRENT P R O B AT E CASES JOINT TENANCIES: Execution of a contract of sale does not sever a joint tenancy.

The decedent and one of the decedent’s children owned real property as joint tenants with the right of survivorship. They entered into a contract to sell the property about a month before the decedent’s death, and the sale closed seven days after the decedent’s death. The probate court ruled that the agreement to sell severed the joint tenancy and thus the decedent’s estate was entitled to one-half of the purchase price. In Matter of Estate of Moore, 869 S.E.2d 868 (S.C. Ct. App. 2022), the South Carolina intermediate appellate court reversed, holding that severance does not automatically occur on entering into a sales contract, absent an indication in the contract or the circumstances that the parties intend severance. In the absence of any such evidence, the surviving joint tenant is entitled to all of the sale proceeds.

NO-CONTEST CLAUSES: No violation by objection to ministerial acts. The decedent’s will and trust both contained no-contest clauses. The clause in the trust required forfeiture on the part of any beneficiary who objects to any action the trustee takes in good faith. One of the beneficiaries objected to the trustee’s inclusion of certain property in the estate’s Connecticut estate tax return. Another beneficiary filed a complaint alleging that the objection violated the nocontest clause. Both the Probate Court and the Superior Court found that the objecting beneficiary did not violate the no-contest clause. In Salce v. Cardello, 269 A.3d 889 (Conn. App. Ct. 2022), the appellate court affirmed, holding that although the objecting beneficiary’s objections were technical violations of the no-contest clause, to enforce Keeping Current—Probate Editor: Prof. Gerry W. Beyer, Texas Tech University School of Law, Lubbock, TX 79409, gwb@ProfessorBeyer. com. Contributors: 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.

the clause in this instance would violate public policy because it would penalize objections to ministerial acts not involving the fiduciary’s exercise of judgment and limit judicial oversight of the fiduciary.

TRUST CONTEST: Tort action is not a trust contest. The Massachusetts version of U.T.C. § 604, Mass. Gen. L. 203E § 604, requires contests over the validity of a revocable trust to be brought within the earlier of one year of the settlor’s death or 60 days after receiving notice of the existence of the trust and information about how to contact the trustee. The Massachusetts Supreme Judicial Court held in Sacks v. Dissinger, 178 N.E.3d 388 (Mass. 2021), that the code provision does not apply to claims based on intentional interference with an expectancy and unjust enrichment brought against persons alleged to have exerted undue influence on the settlor, resulting in the plaintiffs’ elimination as beneficiaries. The court decided that these claims involved not the validity of the trust but rather harm to the plaintiffs from the actions of other persons.

TRUST CONVEYANCE: Trust terms prevent the settlor-trustee from conveying property in own name. The individual who was both the surviving settlor and trustee of a revocable trust conveyed trust real estate by a deed signed in the individual’s personal capacity. The successor co-trustees brought an action to invalidate the deed and were granted summary judgment by the trial court, which was affirmed by the Arkansas intermediate appellate court in Leavell v. Gentry, 636 S.W.3d 794 (Ark. Ct. App. 2021). The

court agreed with the trial court that trust terms forbidding the transfer of trust property by the settlor in the settlor’s own name meant the deed was invalid.

In addition, because the trust terms did not set forth a method of revocation or modification, the settlor may do so by any method that manifests clear and convincing evidence of the intent to do so under Ark. Code § 28-73-602(c)(2)(b) (identical to U.T.C. § 602). Execution of the deed did not provide the needed evidence because the settlor had made transfers of trust property by executing deeds as a co-trustee to herself and then executing deeds as an individual.

TRUST JURISDICTION: Court has jurisdiction even though principal place of administration was in another state.

In Allen v. Campbell, 499 P.3d 1103 (Idaho 2021), the Idaho Supreme Court held that a proceeding alleging breach of duty by trustees of a trust created by Idaho residents could be heard in the Idaho courts, even though the principal place of trust administration was moved to Indiana after the settlors’ deaths. The court reversed the grant of a motion to dismiss based on the lack of subject matter jurisdiction, holding that the relevant statute, Idaho Code § 15-7-203 (identical to former U.P.C § 2-703) is concerned only with the issue of forum non conveniens and not with subject matter jurisdiction, disavowing Rasmuson v. Walker Bank & Trust, 625 P.2d 1098 (Idaho 1981), in which the court had held that the statute did indeed deal with jurisdiction.

UNDUE INFLUENCE: Child’s co-trusteeship of parent’s trust and authority as parent’s agent under power of attorney does not give rise to a confidential relationship. In Matter of Williams, 162 N.Y.S.3d 9 (App. Div. 2022), the New York intermediate appellate court affirmed the Surrogate’s dismissal after trial of allegations by settlor’s stepchildren of undue influence on the settlor of a revocable trust by settlor’s child. The court expressly

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KEEPING CURRENT P R O B AT E

approved the Surrogate’s refusal to charge on the existence of undue influence as a matter of law due to a confidential relationship between the settlor and the child because the close family relationship “counterbalances” any presumption of undue influence. Nor were the stepchildren entitled to submit the question of a confidential relationship to the jury. As the settlor’s only surviving child, “it makes sense” that the child would replace the settlor’s deceased child as co-trustee, agent, and health care proxy. In addition, the settlor’s right to remove the co-trustee and amend the trust made the child a trustee “in name only.”

UNDUE INFLUENCE: Testimony rebuts presumption of undue influence despite misallocation of burden. The trial court refused to find the existence of a confidential relationship between the testator and the testator’s spouse, the alleged source of undue influence. The Supreme Court of Arkansas affirmed in Matter of Estate of Haverstick, 635 S.W.3d 482 (Ark. 2021). Although the marriage and the spouse’s authority as agent under the testator’s power of attorney did create a confidential relationship giving rise to a presumption of undue influence, the testimony elicited by the contestants in their unsuccessful effort to prove that the testator lacked capacity was sufficient to rebut the presumption.

WILL FORMALITIES: Notary can be counted as witness to will. The testator executed a will containing an attestation clause with signature lines for two witnesses. Only one witness signed. Another clause titled “Affidavit” followed the attestation clause. Its terms recited the facts of the execution ceremony and included the signature and stamp of a notary public. After the testator’s death, the will was offered for probate and both the witness and the notary signed affidavits of proof.

The probate court ordered the will admitted over an objection alleging lack of due execution. The Superior Court affirmed.

On appeal, the Supreme Court of Rhode Island affirmed in In re Estate of Cardiff, 266 A.3d 1217 (R.I. 2022). The court held that the notary was not disqualified as a witness by also signing as a notary. In addition, the language of the will shows

that the testator, the witness, and the notary all signed in the presence of each other, thus fulfilling the requirements of R.I. Gen. Laws § 33-5-5.

TAX CASES, RULINGS, AND REGULATIONS GROSS ESTATE: Decedent’s lack of termination rights for life insurance policies leads to exclusion from gross estate. As part of a complex estate plan, the trustee of the decedent’s revocable trust agreed to pay the premiums on life insurance policies taken out on the decedent’s daughter and son-in-law. A separate and irrevocable insurance trust held the policies. The decedent’s children and grandchildren were the beneficiaries of the irrevocable trust. Only the trustee of the insurance trust could terminate the insurance policies, and a family friend served as the sole member of the investment committee to direct the trust. The decedent herself did not have the right to terminate the policies, but the decedent’s revocable trust had the right to be repaid for those premiums. Although the family friend who directed the insurance trust served as one of the decedent’s three agents, the court separated that role from his fiduciary duty to the beneficiaries of the life insurance trust. The receivable the decedent held on the day of her death was the right to receive the greater of the premiums paid or the cash surrender values of the policies when they are terminated.

The Tax Court in Estate of Levine v. Comm’r, 158 T.C. No. 2 (2022), held that without any contractual right to terminate the policy, the decedent did not have possession or right to their cash surrender values.

Accordingly, the policies’ cash surrender values were not included in the decedent’s gross estate.

LITERATURE COUPLES ESTATE PLANNING: In Twenty-First Century Trusts and Ethics: Estate Planning for Couples, 53 Creighton L. Rev. 683 (2020), Carla Spivack re-orients the conversation by posing the fundamental question: given the economic inequality between men and women, and between primary caregivers and primary wage-earners in today’s American family,

can a couple—same or opposite sex—ever be assumed to be non-adverse in estate planning? Or would it be wiser to reverse this presumption? She poses this question in the context of the twenty-first-century trust because she thinks that it, in all of its permutations, highlights the identified problems.

FOREIGN TRUSTS: In his article, Achtung with Your Stiftung: Evolving Concept of Foreign Trusts and Potential Relief for Taxpayers, 33 J. Int’l Tax’n 49 (2022), Hale E. Sheppard identifies obligations associated with having foreign assets, activities, and income, defines the concept of foreign trusts, chronicles the major cases and IRS rulings on this issue from 1955 to the present, explains the IRS’s current foreign trust compliance campaign, and explores potential relief for taxpayers thanks to a recent Revenue Procedure.

FUNERAL PLANNING: In You Can’t Always Get What You Want: Inconsistent State Statutes Frustrate Decedent Control over Funeral Planning, 55 Real Prop. Tr. & Est. L.J. 147 (2020), Tanya D. Marsh posits that the disconnect between common and statutory law creates problems for decedents and estate planning professionals. She provides a comprehensive appendix listing and summarizing each state’s “personal preference” and “designated agent” laws as an aid to practitioners.

ILLINOIS—TRANSFER ON DEATH DEEDS: In The New & Improved Transfer on Death Instrument Act, 110 Ill. B.J. 30 (2022), Charles G. Brown and Nathan B. Hinch explain the significant changes made to the law governing transfer on death deeds, including the expansion of the technique to all real property, rather than being limited to residential real property.

INHERITANCE CRIME: In their article, Inheritance Crimes, 96 Wash. L. Rev. 561 (2021), David Horton and Reid Kress Weisbord expose the dangers of criminalizing this unique area of law, positing that such laws may be unconstitutional in some situations and make probate litigation unreliable.

Additionally, because inheritance law and criminal law have been traditionally understood as distinct, jurisdictions have not yet figured out how to gracefully merge them.

Finally, this article builds on these insights to argue that states should abolish criminal

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undue influence, harmonize civil and criminal rules, and create exceptions to abuser laws.

LIMITED PARTNERSHIPS: Elaine Hightower Gagliardi presents an exploration of the continued viability and new role the limited partnership can take in estate planning in Estate Planning Choice of Wealth Management Entity: The Limited Partnership as an Alternative to the Trust, 53 Creighton L. Rev. 695 (2020).

MEXICO: Michelle Rosenblatt and Abril Rodriguez Esparza provide an insightful perspective of U.S.-Mexico Cross-Border Estate Planning: Planning Techniques From a U.S. and Mexican Perspective, 14 Est. Plan & Comm.

Prop. L.J. 121 (2021).

NEW JERSEY—PROBATE MANUAL: Gerard G. Brew’s two-volume treatise, New Jersey Estate and Trust Administration and Procedures Manual (2021), provides comprehensive guidance for handling the administration of estates and trusts.

NON-PROBATE ASSETS: In Just a Will Won’t Cut It: Planning for the Transfer of Non-Probate Assets At Death, 14 Est. Plan & Comm. Prop. L.J. 55 (2021), Arielle M. Prangner explains the importance of planning for assets that pass outside of the probate process and makes helpful suggestions.

PRUDENT INVESTMENT: C. Boone Schwartzel provides a comprehensive analysis of the UPMIFA in Was It Wise to Try to Implement Trust Law Reforms Through the Uniform Prudent Management of Institutional Funds Act?, 14 Est. Plan & Comm. Prop. L.J. 179 (2021).

PURPOSE TRUSTS: In his article, Christian Purpose Trusts, 53 Creighton L. Rev. 643 (2020), Thomas E. Simmons contextualizes noncharitable purpose trusts, outlines and critiques the Uniform Trust Code provisions governing purpose trusts, and proposes a corporate purpose trust format that preserves a business founder’s core Christian values modeled on a recent statutory enactment in Oregon.

SLAYER STATUTES: In her Comment, Avoiding Prison Bars, But Gaining a Bar to Inheritance: A Statutory Solution for the Insane Slayer Through a Comparative Approach, 89

Miss. L.J. 763 (2020), Brittany Brewer argues that the insane slayer should be able to inherit and proposes the comparative solution, reasoning that because insane slayers do not possess the requisite intent, they do not fall under the “manners” required in most slayer statutes and, therefore, should not be barred from inheritance. She further contends that the genetic inheritance of mental illness should not bar inheritance for the insane slayer because it is uncontrollable and unsolicited.

TESTAMENTARY CAPACITY— COGNITIVE COMPETENCE: Julie Blaskewicz Boron’s essay, Cognitive Competence and Decision-Making Capacity, 53 Creighton L. Rev. 659 (2020), includes information on normative age-related changes in cognition and the relation to capacity and competency. In addition, she discusses appropriate considerations for decisional capacity and evaluation of capacity, along with suggestions to support aging clients.

TESTAMENTARY CAPACITY—ECONOMICS: Ben Chen argues in Capacity Law and Economics, 106 Cornell L. Rev. 1457 (2021), that the mental capacity doctrine in prevailing American law is illsuited for the era of an aging population and suggests that it be reformulated to offer appropriate protection against elder financial abuse without undue intrusion into close families and personal relationships. In particular, when applied to transactions between close relatives and friends, the doctrine should be narrow, determinate, and respectful of individual will and preferences.

TESTAMENTARY CAPACITY— MINOR SOCIAL MEDIA INFLUENCERS: In her Comment, Sucking Success Out of Minor Social Media Influencers: A Call for Testamentary Capacity Rights in Texas, 14 Est. Plan & Comm. Prop. L.J. 337 (2021), Symphony Munoz argues that states should allow commercially valuable minor social media influencers to have the ability to execute wills under certain circumstances.

TEXAS—CUTTING-EDGE ISSUES: Joyce W. Moore and Christian S. Kelso

delve into several complex Texas issues in Unanswered Questions in Wills and Trusts (and How to Try and Answer Them), 14 Est. Plan & Comm. Prop. L.J. 1 (2021).

TEXAS—MARRIAGE: With Texas being the only state both to follow the community property system and authorize common law marriage, Ana Mitchell Córdova addresses the “disconnect between the legal treatment of marriage in Texas and the people’s understanding and manifestation of a marriage-like relationship” in her Comment, First Comes Love, Then Comes Marriage: Cohabitation As a Framework for Conflicts Between Community Property and Common Law Marriage, 14 Est. Plan & Comm. Prop. L.J. 293 (2021).

WILLS: In her Comment, Mitigating the Lack of Wills One Brochure At a Time, 14 Est. Plan & Comm. Prop. L.J. 257 (2021), Katelyn Barker proposes that states incorporate “a prompting system and informational brochure into the driver’s license renewal process” to increase awareness of the importance of having a will.

LEGISLATION INDIANA enhances protections for purchasers of cemetery commodities or services. 2022 Ind. Legis. Serv. P.L. 113-2022.

MISSISSIPPI prohibits discrimination against recipients of an anatomical gift or organ transplant based on disability. 2022 Miss. Laws H.B. 20.

NEBRASKA modifies the inheritance tax structure. 2022 Neb. Laws L.B. 310.

NEW YORK enacts legislation to govern remote ink and electronic notarization.

2022 Sess. Law News N.Y. Ch. 104.

SOUTH CAROLINA authorizes a parent or legal guardian of a medically eligible child to request and revoke a DNR order for emergency services. 2022 S.C. Laws Act 122.

SOUTH DAKOTA allows succession to real property by an affidavit. 2022 S.D. Laws HB 1115. n

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July/August 2022 23

ENVIRONMENTAL LAW U P D AT E ASTM Approves Revised Standard for Phase I Environmental Site Assessments In November 2021, ASTM International approved its revised standard for Phase I Environmental Site Assessments, the first update to the standard since November 2013.

Created by ASTM in the early 1990s, the Phase I Environmental Site Assessment standard was developed as a reliable tool to assess potential environmental liabilities arising out of the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), 42 U.S.C. §§ 9601 et seq. Later versions of the standard (ASTM E1527-05) made important changes to help users efficiently satisfy the All Appropriate Inquiries Rule (AAI rule), 40 C.F.R. part 312, adopted by the US Environmental Protection Agency (EPA) under the Small Business Liability Relief and Brownfields Revitalization Act of 2002, 42 U.S.C. § 9607(r).

Satisfaction of the AAI rule allows purchasers of real property to qualify as a “bona fide prospective purchaser” (BFPP), thereby gaining protection from certain liabilities under CERCLA. The new standard (ASTM E1527-21) updates ASTM E1527-13. Although the new standard does not break significant new ground, there are several changes with the potential to have an effect on future Phase I findings. What follows is a brief discussion of some of the key changes to the Phase I standard.

First, ASTM has made important clarifications to the terms “recognized environmental condition” (REC); “controlled recognized environmental condition” (CREC); and “historical Environmental Law Update Editor: Kyle R. Johnson, Brown Rudnick LLP, 185 Asylum Street, Hartford, CT 06103, kjohnson@ brownrudnick.com, 860.509.6570.

recognized environmental condition (HREC). The revised ASTM standard defines an REC as the presence or likely presence of hazardous substances or petroleum products at the subject property because of a release or the material threat of a release. The revised standard also has clarified that offsite issues without the potential to affect the property that is the subject of the Phase I assessment cannot be an REC. In other words, the condition in question must be present or threatened at the subject property that is evaluated by the Environmental Site Assessment. Although many environmental professionals interpreted the standard in this manner before the 2021 change, the revised standard confirms this interpretation.

The revised term CREC refers to RECs that are controlled via the implementation of institutional controls (deed restrictions, activity and use limitations) or engineering controls (engineered caps, vapor mitigation).

The revised term HREC refers to RECs that have been addressed to the satisfaction of regulatory authorities and meet unrestricted use criteria. The new standard includes a helpful discussion of when a condition “has been addressed to the satisfaction of the applicable regulatory authority.” This clarification will be immediately important in jurisdictions where agencies do not issue no-further-action determinations. Several states have environmental professional-led cleanups that ultimately do not require agency oversight or sign-off (e.g., Connecticut, Massachusetts, and New Jersey). The revisions to CREC and HREC make clear that the “satisfaction of regulatory authorities” includes these types of third-party-led cleanups.

Perhaps the most meaningful change to the standard is not in the standard itself but an appendix. To reduce misclassifications of RECs, CRECs, or HRECs, the revisions include a new appendix with a helpful flow chart that provides a logical decision-making process in evaluating whether a condition is an REC, CREC, or HREC, as well as 12 example fact patterns to guide environmental professionals. The fact patterns include examples of conditions indicative of an REC, HREC, CREC, and a de minimis condition.

Other important changes include the following: • The revisions include formal definitions for the terms “property use limitation” and “significant data gap,” terms of art that previously lacked definitions.

• The historical records review section is revised to reflect common industry practices. The revisions include language that clarifies the identification of the subject and adjoining properties, as well as the use of those properties.

• The site reconnaissance requirements are revised to be more streamlined and efficient.

• The revisions also change the required contents of the Phase I Environmental Site Assessment report, including the requirement that any REC, CREC, or significant data-gap conclusion should be accompanied by the environmental professional’s rationale for such a characterization.

One of the most noteworthy omissions from the new standard is the failure meaningfully to address the

Published in Probate & Property, Volume 36, No 4 © 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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ENVIRONMENTAL LAW U P D AT E

emerging contaminants known as perand polyfluoroalkyl substances (PFAS) previously addressed in this column. See Kyle R. Johnson, The Forever Chemicals: New Concerns with Per-and Polyfluoroalkyl Substances, 34 Prob. & Prop. 54 (Mar/Apr 2020). The only reference made to PFAS in the new standard is to note that they

are not included in the scope of a Phase I assessment because CERLCA does not define PFAS as hazardous substances.

As both federal and state governments begin to regulate PFAS more seriously, landowners may want to consider voluntarily evaluating their sites for PFAS effects, especially in states that already

regulate PFAS, or in anticipation of future federal regulation.

In March 2022, the EPA published a direct final rule adopting the new standard with the public comment period ending on April 13, 2022. 87 FR 14224 (Mar. 14, 2022). The revised standard is expected to go into effect later this year. n

SAVE THE DATES

COMMERCIAL LEASING BOOT CAMP SERIES August 18, 1:30 – 2:45 CT September 29, 1:30 – 2:45 CT October 6, 1:30 – 2:45 CT October 20, 1:30 – 2:45 CT The Real Property Division Leasing Group will present a series of four programs providing a broad background in leasing basics, geared towards the new practitioner or established practitioner new to commercial leasing work.

The programs will focus on: • Leasing Basics, including term, rent, deposits, and use.

• Insurance and Lender Issues, including types of insurance, limits of insurance, waivers of subrogation, damage and destruction, estoppel, and subordination.

• Lease Expenses, including rent structures, common area expenses, base years and expense stops, exclusions, maintenance and repair costs and market trends.

• End of Term Issues including holdover, surrender, assignment and subletting, and defaults and remedies.

Speakers will include group and committee chairs and vice chairs.

The goal of this series is to provide basic information on all aspects of commercial leases to enable a new leasing lawyer to competently draft or review commercial leases for both landlords and tenants.

Published in Probate & Property, Volume 36, No 4 © 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.

July/August 2022 25

The Tacoma Bridge… and Other Planning Disas ters

By Scott Johns

Scott Johns is the sole member of Johns Law Firm PLLC with offices in Juno Beach and Stuart, Florida.

the bridge was constructed caused the windward side of the bridge to experience torsion, and the pattern of air flow under the bridge exacerbated the problem, generating “lift” underneath the bridge.

(Think what would happen to an airplane if the end of the wing away from the plane were welded to a wall: the wing would try to lift and ultimately rip off of the wall.)

In short, although the bridge may have “looked fine” when viewed in splendid isolation, the design of the bridge didn’t account for how aeroelastics (more basically, physics) would stress and eventually destroy the bridge once a sustained gust of wind came along. This article is meant to address a similar concept in estate plans: Things that may look or sound good conceptually on paper may collapse the moment you start stress-testing them with real-world applications.

Family Members Serving as Trustee, or “How to Ruin Thanksgiving Dinner” “Say not you know another entirely till you have divided an inheritance with him.”

—Johann Kaspar Lavater We’ve all heard some iteration of the phrase “don’t mix business with pleasure” sometime in our lives. A more specific application of that sentiment, directed towards trusteeships, is this: Don’t select a trustee who risks damaging a positive personal relationship with a beneficiary by simply doing the trustee’s job. When discussing naming family members to serve as trustee of trusts for the benefit of other family members, we’re necessarily discussing the imposition of a business-type

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Getty Images

T

he Tacoma Narrows Bridge was a suspension bridge in Tacoma, Washington, that opened in the summer of 1940 and connected the city of Tacoma to the Kitsap peninsula.

Barely four months after being opened to vehicle traffic, the bridge started “fluttering” violently during a sustained wind event and ultimately collapsed into Puget Sound. From the moment the bridge was placed into service, people noticed that the bridge would move and warp vertically during windy conditions, which is not something you want from a bridge.

Without getting deep into the physics, the problem was that the manner in which

relationship upon people who until now may have had a purely familial relationship. We must be cognizant of the possibility that imposing this dynamic, even if temporary, can permanently affect the relationship in question, turning it from a positive or cordial relationship into something hostile and bellicose. What follows are some of the significant stress points to consider when naming a family member to serve as trustee. For purposes of this discussion, I shall designate “Uncle Joe” as the archetypical family member trustee.

My Framework for Individual Trustees, Generally Though beyond the scope of this article, in my experience clients who want to name family members to serve as trustee do so because they either operate under a framework in which “professional trustees are too expensive” or believe a professional trustee adds unwanted “complexity” (which is facially nonsensical because the job is what it is regardless of who holds it). Although the value proposition of professional trustees is beyond the scope of this article, I will assert that most clients who have this view are operating within a framework in which they view trusteeships less as actual jobs and more akin to the task of performing carpool duty for shuttling neighborhood kids to baseball practice. If clients don’t think that trustee duties are a big task, they aren’t going to spend significant time contemplating the selection of a trustee. Further, and somewhat amusingly to me, the trustee’s identity ipso facto communicates the settlor’s mindset regarding trustee selection to all other parties involved.

Consider this: Suppose a client names Uncle Joe to serve as trustee. Uncle Joe has a lot going on in his life. He has a family and a job, along with all the responsibilities that come with them, and presumably spends his time on recreational activities or hobbies. When Uncle Joe learns that he’s been named as trustee, is he going to think that he needs to completely rearrange his life to handle his new responsibilities as trustee? No, he isn’t, and practice bears this out. He’s going to think something to the effect of “I

have a family, a job, and hobbies. The settlor knew all of this when I was named to serve as trustee, so the settlor must think this is something inconsequential enough that I can work it into my life without jeopardizing my job or interfering too much with my family and my hobbies.”

Thus, I believe the best-case scenario for an individual trusteeship is that the trustee will treat the job as a not-too-important hobby. Consider this arrangement from the perspective of a beneficiary: Somebody left you money and selected a custodian for that money who will get around to caring about it once they’ve seen to their own workplace and family responsibilities, and probably also several of their own hobbies whenever free time is found. Is it surprising that a beneficiary would feel anything other than anxiety towards a trustee whom they think will act in a cavalier manner with “their” money?

Let’s suppose that Uncle Joe (rightfully) believes he has a positive relationship with all the trust beneficiaries. After all, he talks to them a few times a year and sees them at family events or around the holidays, and everyone seems to get along with one another quite well. That’s pretty good, isn’t it? Therein lies the rub; Uncle Joe’s relationship may be positive when viewed through the family prism, but that relationship is very different from that of a trustee-beneficiary relationship. The responsibility of determining when, why, and how much to distribute to beneficiaries can be succinctly stated (I just did it), but it can be very time-intensive and quite personal in practice. It may require acquiring information about beneficiaries and their relationships vis-à-vis one another that never comes up over Thanksgiving dinner (are the topics discussed at your own family holiday dinners more or less intense than your most serious conversations with your parents or children?). Will Uncle Joe really put in the time, reviewing the terms of trust agreements and consulting with a trust attorney to discuss what is and is not within the parameters of any distribution standards, to do the job properly? Will Uncle Joe spend significant time becoming intimately aware of the financial needs and family circumstances

of other family members? Do those family members want Uncle Joe in their most personal affairs? Will they be completely forthright about their financial and family matters with Uncle Joe to allow him to properly do his job? If the answer to any of those questions is “no,” I believe we’ve failed from the start.

Within that framework, let’s move on to some specific problems that may arise, while keeping these questions just posed in mind. Note that in my opinion, once any of these problems arise, the damage has already been done, such that there isn’t much difference in result if beneficiaries have an easy path to removing and replacing Uncle Joe as trustee (in case you were thinking that removing Uncle Joe solves all problems).

Uncle Joe Steals the Money This is obscene, but it happens. Remember that Uncle Joe has a job and family obligations. Maybe Uncle Joe has never earned more than $80,000 in salary in any given year. Suddenly, Uncle Joe has custody over several million dollars.

That money could go a long way towards improving Joe’s own lot in life. Consider the myriad circumstances (and very easily made justifications) that could tempt Uncle Joe to stick his hand in this particular cookie jar: 1. Improving Joe’s lifestyle. “Man, wouldn’t my life be so much better with an extra forty grand? . . .

Surely my sister knew of my circumstances and would understand me taking a few extra bucks for serving as trustee. . . . I think she knew this is an inconvenience and I’m doing her a favor. . . .”

2. The unforeseen expenditure. Maybe Uncle Joe’s roof popped a leak and needs to get replaced. Maybe Uncle Joe’s wife had a bad hospitalization and the costs aren’t fully covered by her health insurance. “It’s not like I’m going to make a habit of reaching into this money. I’m sure everyone would understand these are extreme circumstances.”

3. The “it’s really a family reserve.”

Uncle Steve (you know, the brother

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July/August 2022 27

of Uncle Joe and the deceased) just found out his daughter was admitted to Random Prestigious University, there’s no way Steve can afford to pay tuition on his salary, and he doesn’t want his daughter taking on mountains of student loan debt. “I’m sure my sister understands that this is a lot of money for her own kids. They don’t need it all.

I’d be ok if I had died first and my sister did the same with my money.

All of these iterations of Uncle Joe taking money that doesn’t belong to him always seem to play out in the same way. If the amount Uncle Joe wants to take doesn’t look “too high” (in Joe’s completely-made-up-without-the-foggiest-idea-of-what-comparable-fiduciaryfee-schedules-look-like estimation), he’ll sneak that money out of trust funds under the rubric of taking a “standard trustee’s fee.” If the number is higher than Joe feels comfortable straight-face claiming as a trustee’s fee, “special or unique services” may be manufactured as a line item on an annual accounting (without any explanation of those special or unique services, naturally, and assuming an accounting is given). If the number is even higher than that, Uncle Joe may well dispense with providing accountings altogether or rely on the beneficiaries not wanting to be perceived as a “bad guy” by instituting a lawsuit. In any event, we’ve opened the door to the worst-case scenario: deliberate theft by the trustee and a burden on trust beneficiaries to institute a lawsuit against Uncle Joe to remove and surcharge him, and the speculative prospects of collection that come with such a lawsuit.

(Uncle Joe may not be made of money; the money he stole may be spent and gone forever.) Regardless of the outcome of such a lawsuit, it’s unlikely that Uncle Joe will be welcomed at the dinner table next Thanksgiving..

Uncle Joe “Sets and Forgets” the Investments I’m deliberately burying the lede on this one so that I can paint the picture and set the stage for the problem, all the while redundantly mixing metaphors. Suppose Uncle Joe, to his credit, engages with

a financial advisor to handle the investments and portfolio mix, recognizing that his selection was probably geared more towards deciding when and why to make distributions and how much to distribute. Once Uncle Joe places the money with an investment firm, how much time (if any) is Joe going to spend conducting follow-up? In my experience, the answer is “none” or “close to none.” To the extent individual trustees have enough conscientiousness to engage a financial advisor, what often follows is a complete abdication of any further responsibility for investment performance (as in, they don’t really bother to see what the performance looks like at all). As with anything else, there are good and bad money managers. Though few individual trustees seem to recognize it, the onus for investment performance ultimately remains with the trustee. In the short term, reliance on a professional money manager may shield the trustee from any personal liability if issues are raised. But if review of investment performance would reveal poor performance, the trustee may not be able to hide behind the presence of a professional money manager beyond that point in time.

The problem in this scenario is that the practical responsibility for investment performance review falls upon the beneficiaries, the same as it would if a professional trustee were serving. If a professional trustee is serving, however, replacing the money manager is often relatively easy (if the trustee is also the money manager, consult provisions for trustee removal; if the trust is a directed trust, the beneficiaries often possess hiring and firing powers over the money manager). With an individual trustee, the beneficiaries must typically convince the trustee to fire and replace the investment manager, adding an extra step to the process, or they may need to seek removal of the trustee to then daisy-chain removal of the investment manager. Note that if the basis for their complaint is that the investments are being managed poorly, that poor performance is likely to continue during the pendency of litigation, further exacerbating their problem. Thus, we’ve created a problem that poor investment performance may not be rectified as

quickly as it might be otherwise.

Worse Yet: Uncle Joe Ignores the Investments This scenario happens a lot: The settlor did her own investing on a platform and had some heavily concentrated positions. Uncle Joe was nominated as trustee when the settlor died. Uncle Joe thinks his only job is dealing with the distributions and dismisses any responsibility for redeploying or diversifying asset holdings (“this is obviously what she wanted to invest in”).

Who cares what Mom wanted to invest in while she was alive? She was free to invest in whatever manner she chose when “what she wanted” related only to herself. Now that Uncle Joe is handling the money, he has responsibilities to beneficiaries regarding the investments whether he wants them or not. It is here that I will state the rules of risky portfolio allocation in an overly simplified manner: If the trustee beats the market, the beneficiaries win. If the market beats the trustee, the trustee is liable for breach of fiduciary duties (sounding in violation of the prudent investor rules).

Consider the following “hypothetical” (read: actual scenario): Lady dies and leaves her assets in trust for the benefit of her children. All of her assets are included in her gross estate for federal estate tax purposes so that we could sell off positions and redeploy at no or minimal tax “cost.” For simplicity, let’s say that the entire value of those assets is encapsulated in an investment portfolio.

Approximately 70 percent of the value of that portfolio is concentrated in the stock of a company that builds, among other things, airplanes. For sake of the hypothetical, let’s call this company something nonobvious . . . like BA. The trustee assumes the trusteeship and does absolutely nothing regarding redeployment of capital within the portfolio (recall that all the BA stock could have been sold shortly after the settlor’s death and redeployed in a more diversified manner to safeguard against volatility). A couple of years go by and, by George, if BA doesn’t have a couple of its airplanes fall out of the sky. Over the next three months, BA stock drops in value by approximately 20 percent.

Rudimentary mathematics tells us that a 20 percent loss multiplied by 0.70 (the value of BA stock relative to the whole of the portfolio) equals a 14 percent loss for the portfolio

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as a whole. Over the same period of time, the S&P 500 grew by approximately five percent. Congratulations! Your selection of a lazy individual trustee led to the beneficiaries experiencing a 20 percent loss when compared to the market as a whole. Is that really what we believe the settlor wanted?

Decreased purchasing power for her family members? Unfortunately, this scenario plays out far too often when family members serve as trustee, and beneficiaries are left with an asset mix that more closely resembles a pile of lottery tickets than a sound investment strategy. Again, Uncle Joe may not be made of money, so there may not be any way to make up for that loss in portfolio value if he is sued. If Uncle Joe’s slacking off causes trust assets to tank, he’s almost assuredly not welcome around next Thanksgiving.

Wild Card: Uncle Joe Greases the Squeaky Wheel It’s also possible that Uncle Joe may be inclined to take the path of least resistance when dealing with family member trust beneficiaries in an effort to avoid doing anything to cause detriment to a familial relationship. In this scenario, Uncle Joe administers the trust as a de facto pot trust (regardless of what the trust agreement actually says) and doles out money when and in the amount necessary to keep people from causing him anxiety and making any problems for him (remember, he has a job, family, and hobbies; the last thing he wants is headaches in his free time over other people’s money). Suppose his nieces Sally and Susan have competing beneficial interests in the trust. In the absence of Sally making a fuss about anything, isn’t it possible that the amount of money Joe distributes to Susan will be directly correlated with how often Susan bugs him for money? Once Sally finds out about this, she has a conundrum on her hands. If she complains, she risks looking like “the bad guy” for accusing Uncle Joe of bad action, and also invites a fight from Susan for daring to question when and why she needs money. Or she could become just as nagging as Susan to increase the frequency with which she gets money from Uncle Joe. This invites a “Thunderdome” situation to see who can badger the most money out of Uncle Joe before the money runs out. Now there’s potential for

a three-way fight: Sally and Susan attack each other for their spending habits and also attack Uncle Joe for allowing all the money to be spent, and it’s anybody’s guess as to what the ultimate resolution is (there’s a strong chance that Uncle Joe made a bunch of impermissible distributions, but neither Joe, Sally, nor Susan has the ability to put money back into the trust if demanded, so the practical result is that nothing happens, possibly beyond Uncle Joe getting removed as trustee).

As a short aside, this presents a good guide for crafting distribution standards: If you insist on selecting a family member as trustee, the trustee will always have better “cover” from beneficiaries the less discretion the trustee is given. For all the myriad ways Uncle Joe might be tempted to disregard trust agreement terms for the sake of convenience, rigid distribution standards give Joe something to point to when, not if, a beneficiary complains about the amount of money he or she is receiving. This is perhaps the only time I’ll ever say this, but this is exactly the way you want Uncle Joe to be able to hide behind the statement “this is what your mom wanted” as a means of deflecting complaints about him not loosening the purse strings. Otherwise, this time it’s Uncle Joe who doesn’t want to be around at Thanksgiving, lest he be badgered with requests for money.

Uncle Joe Doesn’t Do Anything Obviously Objectionable, Yet We Have Problems Anyway Suppose Uncle Joe does everything as bythe-book as can be expected: He secures sound asset management, engages an attorney to help review the trust agreement and discharge his duties, properly contemplates distribution standards anytime he makes a distribution, and sees that accounting and tax returns are timely delivered and filed. What happens the first time he denies a beneficiary’s request for funds? In my experience, beneficiaries assume the whole trust arrangement is a cockamamie game in which Uncle Joe rubberstamps requests for money whenever they want and they can hide behind the existence of the trust should they need to do so. (I can’t recall it verbatim, but I once heard a beneficiary say something

to the effect of “this isn’t a ‘real’ trust; ‘real’ trusts have ‘real’ trustees,” which gave me a good chuckle.) Should Uncle Joe not rubberstamp distributions, beneficiaries get angry, and I mean “I’ve been betrayed!”

Game of Thrones dynasty-style indignation. Sometimes, beneficiaries deploy dirty, war-of-attrition-style tactics to wear Uncle Joe down and nag him into resigning if he won’t give them money as they desire. Sometimes, they’re willing to scorch the ground and salt the earth of their relationship with Uncle Joe if that means getting some more walking-around money. While this is not true 100 percent of the time, I believe the notion that beneficiaries will get pugnacious at a family member trustee who doesn’t act as their personal patsy is close enough to being absolute that you can rely on it the same as the theory of general relativity and the Pythagorean theorem. Thus, even in the ideal situation, the intrafamilial relationship can get strained unless Uncle Joe acts like the beneficiaries are his boss. As with the previous scenario, Uncle Joe may want to avoid Thanksgiving get-togethers for the sake of his stress levels and sanity.

Penultimate Thoughts: How Much Cost Is an Individual Trustee Saving?

Overlaying all of these scenarios, the question arises: How much is the trustee to be paid for serving as such? Perhaps more aptly: How much is Uncle Joe insisting on being paid to make it worth his while?

Consider a scenario in which the aggregate value of trust assets is $5 million.

Consider a (very real-world) scenario in which a professional fiduciary who also provides investment advisory services might charge one percent for the money management only and 1.25 percent to serve as trustee and do money management. The difference between those two figures is $12,500, meaning cost savings are achieved only if Uncle Joe takes less than that amount. If Uncle Joe is in the 22 percent income tax bracket, savings are achieved with Uncle Joe’s trusteeship only by his walking away with $9,750 or less.

What’s the likelihood Uncle Joe agrees to take such a small fee? Even if Uncle Joe takes a small fee, are we getting any actual value from Uncle Joe’s service, or are we

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July/August 2022 29

sacrificing competent job performance so that we can shift some money from a professional trustee’s coffers into Uncle Joe’s wallet? Even if Uncle Joe waived fees for his service, do we want to burden Uncle Joe with the responsibility of service, and inject all the potentialities just discussed, just to save a few thousand dollars on professional trustee fees? When a client says, “it’s too expensive,” what they’re really saying is, “I haven’t thought about it and don’t want to be bothered with thinking about it.” Make them think about it because it’s usually worth it to the beneficiaries.

Final Thoughts: Perverting a Relationship Ultimately, I believe there are only three ways a family member trusteeship plays out: One, a party (be it the trustee or beneficiary) is afraid, embarrassed, or reticent to ask about distributions because that’s more personal than one of the parties is prepared to get, and trust administration functions akin to setting a car in neutral and pushing it down a hill because somebody prevents serious information from being collected that would allow administration to function in a useful manner.

Two, emotions rule the day and Uncle Joe and the beneficiaries engage in a longgame fight about who has the power.

(Uncle Joe doesn’t want to be told how to do things by beneficiaries, and beneficiaries don’t like Uncle Joe functioning as a de facto parent from whom they need to request money, and all the legalities get thrown by the wayside.) Three, Uncle Joe does rubberstamp distribution requests, which gives divorcing spouses and other creditors of a beneficiary an opportunity to take a poke at trust assets, via routes such as the emerging and re-emerging doctrines of “de-facto trustee” or “sham trust,” or alternative theories of recovery that perform end-runs around statutory prohibitions on attachment of beneficial interests in trust such as writs of garnishment. (See, for example, Berlinger v.

Casselberry, 133 So. 3d 961 (Fla. Ct. App. 2013), a case from Florida’s Second District Court of Appeals.) All of these scenarios strike me as bad options, so I recommend none of them.

Few people ever seem to consider that their children and their uncles or aunts

have precisely the relationship that they have for a reason: at least one of the parties didn’t consent to it being anything more than what it is. Putting one of them in charge of money for the other fundamentally and permanently alters their relationship. Consider something as banal as asking the trustee for money to go on vacation. Might Uncle Joe inquire about, and then pass judgment on, the vacation activities themselves? Do the beneficiaries worry about Uncle Joe getting personal with them and blathering about frivolous or reckless spending? Might Uncle Joe think the beneficiaries are spoiled jerks if the nature of the request is expensive?

Might the beneficiaries find themselves haggling with the trustee over the minutia of the trip (you get a three-star hotel, not a five-star hotel; you can go for four nights, not seven; etc.) Might a beneficiary feel guilty for asking for money at all, as if asking for the money constitutes “flaunting” it to Uncle Joe? Might a beneficiary refrain from asking solely to avoid awkwardness with their uncle? Might the existence of all these questions suggest there are too many opportunities for fights to happen over answering these questions such that you shouldn’t pervert a relationship between the family members at issue by naming one of them to serve as trustee?

How many of you, reading this article, have ever had an in-depth conversation with a family member (other than a parent or child) about how much money you were making, or wanted to spend on something and why you wanted to spend it, or how you were allocating your disposable income among yourself and your family and their wants and desires?

I don’t think it happens very much, and for good reason, so let’s try and keep it that way. For your client’s benefit and the benefit of their intended beneficiaries, I encourage you to dissuade your clients from nominating family members to serve as trustee; that way when everybody gets together at Thanksgiving, the only reason anybody fights is because they got to talking about movies and somebody made the imbecilic assertion that Die Hard 2 was the best John McClane film. (With apologies to the late Alan Rickman, who absolutely crushed it as Hans Gruber, the answer is Die Hard

with a Vengeance; all other answers are wrong.)

Tarnishing a Relationship to the 74th and a Half Power—Naming a Spouse or Child of a Second (or Third, or Seventh) Marriage to Serve as Trustee “’Til Death Do Us Part”—Marriage Liturgy, Book of Common Prayer The above-cited phrase is a common predicate in marriage vows and is intended to convey the message that the death of one of the parties to a marriage ought to be the only thing that terminates the vows made between spouses. There are two things about this framework that are critically important to note. First, nobody is making any promises to somebody else’s kids. Second, they openly state that the internal logic acknowledges that any promises made to anybody go out the window as soon as one of the spouses dies. If you’ve ever attended a wedding at which you recall one of the participants making a vow to the effect of “if you die first, I promise not to spend all of your money so that your kids can have some of it once I’m gone,” please write to me.

To the extent hostilities between stepparents or stepchildren can hide themselves when everyone is alive, those hostilities come out to play once the topic of “who’s going to get the inheritance money?” is broached.

With that framework in mind, very serious attention needs to be given to fiduciary appointments in second marriage situations in which an estate plan calls for children to receive some or all of a parent’s money only after the surviving spouse (who is not their parent) dies. Most commonly, this dynamic appears in the form of a marital deductiontype trust for the benefit of the settlor’s spouse, of which such trust the settlor’s children are the remaindermen, so that is the scenario to which I shall apply the following themes. (If any of you grant the surviving spouse beneficial interest in a bypass trust, consider the following themes equally applicable.)

Perhaps the strongest “rule” I can offer regarding trustee selection is this: You should never select a person to serve as trustee who has incentive to disregard or pervert the trustee’s directives. In this case,

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all the beneficiaries who might serve as trustee have double incentives to pervert the trustee’s directives (more money for them AND spiting somebody they don’t like).

Consider a typical 2056(b)(7) QTIP trust in which discretionary invasion of principal subject to an ascertainable standard is also permitted. In this scenario, there is strong incentive for perverting fiduciary directives.

If the surviving spouse is sole trustee, there’s a seemingly sensible rationale for that individual to think, “if I were really supposed to be restricted in accessing the money, why is it that I’m the only person who can access it?” Thus, self-serving financial interest and lack of interest in trust law particulars can lead the trustee-spouse to disregard the terms of the trust agreement entirely and simply take money whenever and for whatever reason the surviving spouse desires. If the surviving spouse surrenders to this temptation, further abdication of other fiduciary responsibilities (such as failure to render accountings) is sure to follow. Why would we expect the trusteespouse to inform the beneficiaries of how much money is being spent if the trusteespouse has already rationalized away any trust formalities? By this point, “accounting and information reporting” has been reinterpreted as “it’s none of their business how I spend the money” in the mind of the trustee-spouse.

In practice, this fiduciary selection encourages a scenario in which principal is spent impermissibly for the benefit of the surviving spouse and the remaindermen’s only recourse is to sue their stepparent trustee to produce accountings and, if the accountings reveal malfeasance, put the money impermissibly taken back into trust (known as a “surcharge” action). There are a myriad of problems in this scenario: (1) the stepparent may not have the money if the principal impermissibly taken was spent on current expenditures and (2) if principal distributions were permitted but limited by an ascertainable standard, the burden is on the remaindermen to show that distributions were made in excess of the standard, meaning any litigation will revolve around the fact-intensive inquiry of what the outer bounds of the ascertainable standard is and whether the surviving spouse exceeded those bounds in taking money from the trust. Add to this that the remaindermen will

have to fund their own lawsuit unless they win AND get an award for attorney fees, but even then, they may not be able to collect. Think about it: If the trustee-spouse was taking funds for current expenditures, that individual may not have had other resources, and that money is likely gone. Thus, there’s a good chance that the trustee-spouse’s only source of assets with which to satisfy an order to pay the opposing party’s litigation costs are the assets impermissibly taken from the trust. All in all, my candid assessment of an “all to marital deduction trust with surviving spouse as sole trustee” plan is really a “my surviving spouse can run rampant with trust assets and it’s on the remaindermen to spend their own time, money, and intellectual and emotional capital to ensure the surviving spouse complies with the settlor’s wishes” plan. That doesn’t sound like a good plan to me.

Alternatively, if we appoint the remaindermen, we’re appointing the people who stand to gain by seeing that as little as possible is distributed to the surviving spouse. In this scenario, the myriad problems that present themselves are (1) negligent or deliberate failure to distribute income on the annual (or more frequent) basis required by the trust agreement; (2) bad faith refusal to exercise discretion over principal distributions; (3) improper invasion of principal for the benefit of the remaindermen, who are not themselves current permissible distributees, which has the compounding deleterious effect of reducing the value of principal from which income can be generated; and (4) greatly increasing the cost of securing enforcement by the surviving spouse (think: if the surviving spouse doesn’t receive distributions, that individual has less available money with which to fund a lawsuit over not receiving distributions . . . a bit of a downward spiral, isn’t it?). My assessment of the “all to marital deduction trust with remaindermen as trustee” plan is that we have the same fundamental problems, simply with the roles reversed: The remaindermen have incentive to shut off the money valve whenever they want and the surviving spouse has to spend time, money, and intellectual and emotional capital to ensure compliance with terms of the trust agreement. This doesn’t

sound like a good plan either.

To recap: If you give fiduciary duties to the economically inferior party, the upshot of taking money for themselves may outweigh any perceived costs of noncompliance with terms of a trust agreement. If you give fiduciary duties to the economically superior party, they may perceive that the economically inferior party can’t afford to bring a lawsuit to force compliance, thus giving them some upshot to ignore the terms of the trust agreement anyway.

This spouse/remaindermen discussion to this point has admittedly presumed a bad relationship between current distributees and remaindermen and bad faith action by the trustee-beneficiary.

But I submit that even if the relationship is positive or neutral and the trustee isn’t acting in bad faith, things that the trustee would do in the ordinary course of action can be interpreted as bad faith because the existence of the trustee having a beneficial interest means that actions taken that benefit that interest necessarily look like self-serving actions. Consider the following scenarios, in which the action taken would probably be considered prudent by a trustee who didn’t hold a beneficial interest: 1. “I’m not getting enough income.”

You’ll be hard pressed to find a surviving spouse receiving a mandatory income interest who doesn’t simultaneously think that no amount of income is too high and the amount of income being generated currently isn’t enough. This is due to some curious elements of the human condition in which people (1) like free money and (2) prefer not needing to ask somebody for money over needing to ask somebody for money. As a consequence, income beneficiaries tend to not only believe that the value of their income interest at the time of trust inception is a hard “floor” below which their interest may never fall, but that they are also entitled to growth of that interest with time (in my experience, this is usually because nobody ever spent time with the settlor or beneficiaries

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discussing the specifics of distribution standards, failing to articulate the difference between income and principal, and failing to discuss growth drivers for assets under administration). If a trustee-beneficiary sells off a stock with an otherwise high-yielding dividend because the market value of the stock is about to crater, the income beneficiary can’t help but conclude this was an “excuse” to take money away from the income beneficiary and give it to the remaindermen. If principal value jumps up 15 percent, but the income interest doesn’t experience a commensurate increase, the income beneficiary can’t help but conclude there’s some “shady investing” going on that disproportionately benefits the remaindermen. If the income beneficiary’s cost of living (inflation, anyone?) goes up but the income interest doesn’t pace inflation, the income beneficiary will feel like his present ability to pay for things is being sacrificed for the benefit of the remaindermen.

2. “Principal isn’t keeping up with the market.” On the flipside of things, you could have a portfolio that isn’t growing with the market, such that time-value-of-money considerations are causing the remaindermen’s interest to suffer.

The two ways in which this scenario most frequently arises are when the settlor held positions geared towards income generation and the trustee never bothers to examine whether portfolio allocation ought to be changed (similar to “Uncle Joe ignores the investments,” discussed earlier) and when a trustee-beneficiary holding an income interest deliberately seeks out investments that lock in a high-income yield and doesn’t care much what happens to principal (I’ll be dead when that money’s spent, so what do I care?). Both scenarios look like the trustee is sacrificing principal value to secure current income (which is true). It

doesn’t help very much what the trust agreement says once beneficiaries get angry because a trust agreement can at best give you guidance as to how the interests should be balanced. The raw numbers of rates of return are always subject to being viewed through the lens of trust agreement guidance and attacked as “not following the guidance,” so having a trustee with “skin in the game” making the decisions necessarily invites charges that the guidance isn’t being followed.

Family Member Trustee Wrap-up Any personal or legal battles over whether a trustee’s actions are prudent are going to involve claims that the trustee’s identity is ipso facto proof that the actions taken weren’t prudent. By naming an independent trustee in office, you can take these types of “unclean hands” arguments off the table; have we never seen a trial court decision in which the fact-finder decided that somebody was a “bad guy” and reached the decision they wanted regardless of whether the factual circumstances supported that decision?

Naming BOTH the surviving spouse and kids to serve as co-trustees isn’t a great solution either. To the extent you have more than three trustees who can act by majority, there’s no point naming the surviving spouse because the surviving spouse is getting outvoted every time, and if you name a spouse and remaindermen as co-trustees and require unanimity for action, you’re likely rendering the office of trustee as incompetent to act as the US Congress after most midterm elections, as the surviving spouse and kids will be diametrically opposed to one another on most actions (though, at least in this latter scenario, you can probably minimize the risk of the mandatory income interest not being distributed in a timely manner).

Friends don’t let friends serve as trustee for one another. Get a professional trustee when you can, and if the settlor refuses to go that route, at least find somebody who isn’t going to have his judgment clouded by having a personal stake in what happens to trust assets.

Lifestyle Restrictions on Beneficiaries “If you love somebody . . . set them free”—Gordon Sumner The problems in this section all arise because the settlor is demanding directives that are informed by emotion. Emotions are, by definition, disassociated from reasoning or knowledge, so allowing clients to dictate trust agreement provisions driven by emotion is often tantamount to drafting trust agreement provisions that don’t make any sense. As will be shown, because these concepts are driven by emotion, little thought is often put into them. Once we think about them for a bit, we find they’re either very difficult—or impossible—to practically implement.

The “I Don’t Want My Wife Seeing Other Men” Restriction The first situation I want to address is one I’ve seen and heard more often than I’d like, and it arises when a client develops anticipatory enmity, directed through the time-space continuum, towards the client’s not-yet surviving spouse’s “replacement” spouse or paramour. In an effort to keep that rapacious and duplicitous scoundrel, who shall not become known until an indeterminate future time and place, from insidiously worming his way into the client’s money via romantic interludes with the client’s spouse, the client has already concocted a plan: “My spouse can use the assets . . . UNLESS. . . .”

That “unless” is invariably aimed at making the surviving spouse take the Benedictine monastic vows: unless my spouse starts “dating” somebody or “cohabitates” with somebody, coupled with a directive that no money be spent on any activity in which our hypothetical conspiring philanderer might indirectly benefit (no flights, no lodging accommodations on vacations, etc.). Invariably, the client’s idea for how to go about implementing these restrictions is as well-constructed as a Wile E. Coyote roadrunner-catching contraption.

There are myriad problems with attempting to impose such conditions on gifts to a surviving spouse. First, as with any condition, it is imperative to define the condition in an objective and unambiguous manner.

If your condition is couched in subjective

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terminology, or if reasonable people can disagree over the meaning of your seemingly objectively worded condition, there’s a strong chance you will wind up with a judge saying that your “condition” is unenforceable. Second, it is equally important to create a framework by which the satisfaction or failure of the imposed condition may be pragmatically measured or observed. Erwin Schrödinger would tell you himself that observing a cat inside of a box proves difficult if the box is opaque.

To illustrate the problem with trying to condition gifts to a spouse based upon that spouse’s subsequent romantic endeavors, let us examine the condition that the surviving spouse will have access to money unless she “cohabitates” with another man.

How in the name of the gods of the Uniform Trust Code is anyone to define what “cohabitates” means to determine if the wife’s beneficial interest fails? What if she’s spotted with somebody on the street acting a bit too giggly? What if she’s spotted at dinner with somebody? Are we to count the number of hours she spends on a daily basis with another person and where that time is spent? Are we hiring a private investigator to stalk this person 24/7 so we can log these hours? Once questions such as these are raised in an effort to illustrate the impossibility of crafting bright-line rules, client pushback invariably devolves into an appeal to draft some vague, ethereal, Potter-Stewartian “I know it when I see it” standard, leaving the planner in the unenviable position of trying to explain why drafting “make it up as you go along” rules are a bad idea.

Clients who are quick on their feet have occasionally attempted to throw my objections out the window by modifying their request to the indisputably objective measurement of “remarriage.” Although this condition satisfies our requirement of objectivity (some iteration of requiring documentation from a governmental body recognizing marriage between two people), this condition cannot be pragmatically measured or observed unless that information is volunteered. Who is to be responsible for determining whether this condition has been satisfied? Let us immediately dispense with the notion that the spouse should be responsible for proving that she isn’t married, as such a framework invokes the hallmark logical fallacy of demanding that somebody

prove a negative. (What’s she supposed to do . . . annually acquire letters from every recognized governmental body on the planet stating they can’t locate a marriage certificate?) The best I’ve thought of is requiring the spouse to produce an income tax return, which may indirectly serve as evidence of remarriage if a joint 1040 is filed, and that game is foiled if the surviving spouse does the married-filingseparately angle. Moreover, there are a lot of additional problems involved in requiring the surviving spouse to produce an income tax return as a precondition to eligibility for distributions.

This leaves either the trustee, other beneficiary, or third party with the responsibility of proving that a marriage exists at any point in time. How is the trustee supposed to prove that? Spend time scouring public records, hoping to discover a marriage certificate? This says nothing of the fact that marriage licenses are confidential in several states and countries; what if the spouse chose to have an exotic, “destination” wedding halfway around the globe? Is our trustee to enlist the services of Remington Steele to fly around the world hunting for marriage certificates?

(I get Pierce Brosnan may need the work, but this feels unrealistic.) This concept is entirely impractical as it lacks any realistic means of enforcement.

Oh, and I almost forgot . . . imposing such conditions also renders the gift ineligible for the federal estate tax marital deduction, if you care about such trivialities. If the client really loves his spouse, the client should drop the pettiness of caring what the spouse does after the client’s death. If finding a new romantic interest makes the surviving spouse happy, why would you want to make the surviving spouse choose between money and new love? That amounts to emotional extortion. You shouldn’t do it, and you cannot practically do it . . . so don’t do it.

Drug Testing or Substance Abuse Restrictions I personally find the desires of clients who endeavor to prevent beneficiaries from taking inherited money and putting it up their nose to be well-intentioned. But things get confounded in a hurry when trying to incorporate those concerns

into trust provisions. Further, I submit that whether a client has a well-articulated concern (“Jimmy does cocaine”) or is merely chasing ghosts of prospective addictions, it makes no difference from a drafting perspective.

I hope the following series of hypotheticals will reveal that attempting to condition a beneficiary’s eligibility for trust distributions upon determinations of a beneficiary’s use, or abuse, of drugs requires a lot of parts that are difficult to move from the realms of the subjective to the objective when framing the parameters or are otherwise impractical in terms of identifying the existence or nonexistence of the condition so imposed.

Importantly, note that any condition is only as strong as its weakest component, so if any one of these fails, the whole condition fails.

Defining the Concern To begin, I have never had a client who was able to articulate concerns about drugs with precision. In every event, the initial analysis seems to be little more than: 1. “Drugs” = “bad” 2. I don’t want my money spent on “bad” stuff.

3. Don’t let the beneficiary have money for drugs.

Fundamentally, the issue is that filling the first gap in logic, namely, “what is a drug,” always proves very difficult because any objective standard either deliberately excludes things that we would want to count as a “drug” (which defeats the client’s end-game) or includes within its ambit things that at this point are deemed socially acceptable (which leads us into the realms of trust law dealing with public policy overrides on restrictions desired by the settlor).

When pressed on this topic, clients frequently respond with some level of indignation that I don’t immediately recognize what they want (“isn’t it obvious?”). It is not obvious because colloquial word use doesn’t play well in trust agreements. We need something hardlined and absolute, and defining “bad things” is a fool’s errand. The rub lies in

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determining not only what those bad things are, but also when “bad” is “bad enough” and how to measure “enough” such that we should be prohibiting trust distributions once we’ve reached “enough.” With that, let’s take a trip down the rabbit hole where I take clients who want to include substance abuse provisions in trust agreements, shall we?

First Stumble: What Are “Drugs”?

The first problem arises is attempting to define what constitutes “drugs.” “You know . . . drugs!” No, I do not know . . . and neither does the trustee. This is of fundamental importance because conditioning eligibility to receive funds on using “drugs” suggests that money may be directed to one person instead of another based upon a determination of whether drug use is present (and we know that if the trustee makes an incorrect call, another beneficiary may be waiting to institute a breach lawsuit). Before we can start telling beneficiaries they’ll be punished for using drugs, we need to know what items make the list of “drugs” and to what degree their use will affect distribution standards. Invariably, this segment of the conversation either winds its way into clients constructing a nonexhaustive list of drugs they can identify—if we’re doomed to argue about whether something is “like” items on a list, we may as well not have a list—or takes turns down culture alley (what is or is not acceptable today), which is as fluid and changing to me as the image perceived with every incremental turn of a kaleidoscope.

Second Stumble: “Illegal” Drugs How about marijuana usage . . . is that acceptable? Marijuana was, and allegedly still is, illegal at the federal level, but a lot of states have “decriminalized” it. As of this writing, 38 states permit use in some manner. If legality is a moving target even for the people charged with enforcing laws, how useful a metric can it be for the rest of us? If a beneficiary uses marijuana in a state such as Colorado, where consumption is “legal,” do we ignore usage?

What if the beneficiary crosses state lines into Wyoming, where consumption is

illegal? Should we do something about the beneficiary’s usage now? Already we see that trying to use legality as our metric allows the whims of various legislatures to overlay some arbitrariness on our trust agreement.

Further, why should legality of the substance matter at all? I thought we were concerned about beneficiaries doing “bad things” to themselves. There are all sorts of legal things that work deleterious effects on people’s minds and bodies. Don’t we hear or read about drunk-driving-related deaths all the time? Is it not conceptually possible that somebody who regularly consumes alcohol is doing worse things to his body than somebody who occasionally snorts cocaine? Nobody’s sought to outlaw beer and liquor to counter these problems, to my knowledge. Further, what if one day heroin becomes legal? Does that now become something our beneficiary can acceptably consume in large quantities? These questions demonstrate that trying to define our parameters around the legality of substances at any given time produces an epic failure, in that our metric will achieve the client’s goals only occasionally and, even then, by dumb luck.

Third Stumble: Lifestyle Impairment After having attempts to blow past the issue without needing to devote any intellectual capital with the “illegal” patch job, clients attempt to get around my “illegality” hang-up by expanding the panoply of substances with which we concern ourselves by redefining drugs as “things that impair a beneficiary’s ability to function in society.” Holy subjectivity, Batman!

Now we need to figure out what “impairment” and “function” mean within this framework. What constitutes impairment? How are we measuring how well a beneficiary is “functioning” in society, and even if we determine that a beneficiary isn’t “functioning” optimally, how do we know with certainty if it’s due to substance use?

Consider the hypothetical of a beneficiary who consumes a handle of vodka every night but is otherwise able to hold a steady job without repercussion. Does this constitute “substance abuse”? One could

argue the beneficiary in this hypothetical is “abusing” alcohol, in that said beneficiary’s liver is being stressed harder than Atlas’s shoulders, but this argument shifts the goalposts from our framework of evaluating the beneficiary’s functionality in society (that is, vis-à-vis other people). If we’re sticking to a “function in society” type of metric, and if there are no observable consequences of substance use that we would interpret as evidencing adverse effects on the beneficiary’s lifestyle, do we really want to be shifting or infringing upon beneficial interests? If we do, then what we’re really saying is that a third party gets to make a value judgment on a beneficiary’s consumption.

This leads to inquiries about how much consumption is too much consumption. I don’t have a good answer to that question, so I don’t bother trying to answer the question at all. It’s not like the trustee can acquire all the world’s supply and ration it to the beneficiary consistent with the trustee’s liking, or be around the beneficiary 24/7 to determine how much is in the beneficiary’s system at any given time.

Fourth Stumble: “Abusing” Drugs or Substances By now, clients are focused on attacking the strawman I’ve just created, namely, the heavy-substance-consuming-yet-otherwise-high-functioning beneficiary. “But he’s abusing drugs!” Great . . . what does “abuse” mean? Abuse is a very nondescript word that functions better as a colloquial descriptor rather than something signaling objective measurement (another iteration of the Potter-Stewartian “know it when I see it” concept). The primary definition of “abuse” in noun form is “the improper use of something.” Considering that the explicit purpose of many drugs is to alter your state of mind, a wordsmith might cheekily argue it’s impossible to abuse drugs because they’re being used precisely for their intended purposes. At the other extreme, it could be argued that the usage of something that’s designed to screw you up is always improper (what, pray tell, is a “proper” use for heroin?). Look at that; I’ve created a conundrum where substance use can simultaneously always and never meet the definition of abuse. So . . . if this definition of “abuse” doesn’t work, what definition should we use?

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What if we try defining abuse as usage that is “detrimental to one’s health,” or some iteration thereof? Doesn’t this lead to a similar semantic or linguistic argument? Lots of stuff is detrimental to one’s health. Ask yourself if there is a meaningful distinction, within this framework of substance abuse, between a person who develops liver failure from alcohol consumption and a person who becomes obese from chocolate bar and soda consumption and ultimately develops type 2 diabetes. Has anyone ever heard of somebody being sent to a detox center to be weaned off Skittles and Kit-Kats? Have you ever seen a trust agreement that forbade eating candy? Where do we draw lines of demarcation between any number of things that might ultimately be detrimental to one’s health? Using this type of framework is a bit like searching for leaves in a forest: You can find them everywhere.

Lastly, the concept of abuse speaks to the state of mind of the user, yet typically the client is focused on the consequences of the use and couldn’t care less about the intentions of the user. (We’ve moved past the client’s disingenuous “I don’t want the beneficiary hurting himself with drugs” framing into the more honest “I don’t want him using my money on drugs and that’s the end of it” portion of the proceedings by now.) Now this starts to look like we’re exactly wandering into the realms of passing moral judgments on our beneficiaries and trying to police their conduct with a trust-agreement-specific moral code.

(Again, consult the “void as against public policy” jurisprudence in your jurisdiction.)

Fifth Stumble: Have the Doctor Test Them! (Addiction Determination) Finally, we arrive at “send them to the doctor and the doctor will decide.” If the client doesn’t arrive at this concept on her own, I make it a point to direct the client’s attention to this. Deferring to the determination of a medical professional seems appealing, as if by farming the determination out to a third party, we’ve rid ourselves of the problem of trying to define it inside a trust agreement. But we’ve merely substituted one problem for another. When, why, and how often are we sending a beneficiary to the doctor’s office?

When and why are we testing the

beneficiary? If the trustee doesn’t have a cognizable basis for believing drug use is an issue, incorporating such provisions into an agreement is just a nuisance play, as it literally becomes instituting a solution in search of a problem. Either a trust agreement is going to provide, in some form, that submission to drug testing is a prerequisite to being eligible to receiving distributions, which means people are being punished in advance for things they may not have done, or testing will be a discretionary call made by a trustee or third party. Who wants to be the person who decides whether to accuse somebody else of being on drugs? If you’re wrong, you’re the person who falsely accused the beneficiary of being on drugs. That’ll do wonders for your relationship going forward. I definitely don’t think the beneficiary will spend time trying to find ways to screw with the trustee as a retaliatory measure; no chance of that happening at all.

Who is paying for the visit? Don’t assume outsider-forced drug testing is paid for by insurance. Who picks the doctor? How much time does the beneficiary have to schedule an appointment to see this doctor? How is the trustee getting access to the doctor’s notes and records?

That’s right; you’ll need the beneficiary to sign a HIPAA authorization so that the trustee can see those records. Beneficiaries LOVE giving people their medical records all because somebody is paranoid about drug use that isn’t happening, in my experience. Oh wait . . . no, no they don’t.

Let’s also consider an issue beyond our control: What if the doctor, or the doctor’s employer, doesn’t want any part of this?

Physicians are probably glad to examine people who come seeking treatment for themselves. But what if the person comes saying, “I’m not on drugs or abusing them; I just need somebody else to say so.” Does the doctor want to jeopardize getting sued over making a judgment call that didn’t actually relate to treating a patient? More pointedly, now that a lot of physicians are leaving private practice and becoming hospitalists . . . do you think the owners or board members of the hospital system are going to allow the employees to meet with people to make determinations that are wholly unrelated to the hospital making

money by treating people, and only serve to expose the hospital to being dragged into somebody’s private trust-related lawsuit? I suspect that the notion of seeking physicians to opine in this area have gone the way of the dodo; it simply isn’t obvious yet.

Sixth Stumble: Testing Frequency How often is a beneficiary to be tested?

By engaging in the exercise of asking the question, we’re necessarily thinking past the sale of creating a dynamic between our trustee and beneficiary akin to that of an ex-convict and parole officer. I can’t think of anything more condescending and humiliating than forcing somebody to get drug tested before they’re allowed to get a check.

What if the beneficiary tests negative?

Does the trustee get to keep sending him off to get tested every so often just because? If we suspend the ability to force testing after a negative test or two, doesn’t that inform the beneficiary he has a green light to start using drugs if he wants to do so? What if a beneficiary tests positive? Are we shutting off the money valve completely, or might we want to spend some of that money on treatment to get the beneficiary off drugs? How many questions do I have to ask for which there aren’t good answers before it sinks in that this is a very, very, very, very, very stupid idea?

Final Thoughts on Drug Testing The whole exercise of trying to address drug use inside a trust agreement ultimately boils down to two scenarios: (1) the client worries that a beneficiary will develop problems with drugs or (2) the client has advance knowledge that a beneficiary has problems with drugs. The crux of my position is that there isn’t a meaningful difference from a trustee’s perspective between either of these scenarios, so who cares? Things that have happened in the past are irrelevant for the specific purpose of distributing funds currently or in the future (unless we believe that nobody in human history has ever ceased with drug use). Nobody ever knows when and if somebody will develop a dependency problem, and the state of things at the time of distribution is all that matters.

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Whether a beneficiary has a known substance abuse problem gives the trustee more reason to look for a problem, but it doesn’t change the difficulty associated with finding the markers that signal that a problem exists right now, when we’re thinking about distributing money.

Clients miss the mark on this because they think about it through the prism of what they do with their money. They can be as arbitrary with their money as they want, so they can absolutely tell somebody who is asking them for money, “go get drug tested first,” and then deal with the ramifications of that demand on the fly. Clients are never bound by rules when giving out their own money, so they don’t appreciate the situation into which they’re attempting to place others. Clients always focus on the problem (“I don’t want my money spent on drugs”) but also summarily discharge themselves from spending any time considering how to solve the problem (“that’s why I’m paying you”). If the concept of punishing a beneficiary for drug use is to be given any teeth (reduced or eliminated benefits), then a trustee who fails to identify drug use runs the risk of being liable to whomever would stand to benefit if a drug-using beneficiary’s beneficial interest is reduced or eliminated.

However, trustees can’t spend their days following beneficiaries around “life policing” them. Thus, we invariably create a scenario where a trustee is heavily incentivized to safeguard the office of trustee by acting paranoid and making our beneficiary submit to testing even absent subjective suspicion of drug use.

If drug testing is a concern, address it indirectly. Make distributions purely discretionary (this gives the trustee a lot of flexibility and avoids the imposition of rigid rules about how testing does and doesn’t work to determine eligibility for distributions) and authorize the expenditure of trust funds for treatment so that IF you find a beneficiary who is using drugs, we can seek help.

Ultimately, recidivism is a common problem with drug users, so the uncomfortable reality for many a settlor is that we need to decide whether we’re cutting a beneficiary’s eligibility for money, cold turkey style, if drug usage persists, or if we’re going to live with the fact that drug

usage is a part of a beneficiary’s lifestyle.

Attempting to Effectuate Corporate Actions Within Trusts and Wills by Disregarding Corporate Formalities “I choose a lazy person to do a hard job because a lazy person will find an easy way to do it.”

—William Henry Gates III Though beyond the scope of this article, the liability theory of recovery known as “piercing the corporate veil” warrants mention as a lead-in to this topic.

This theory asserts that when (1) corporate formalities have been so disregarded by shareholders such that the facts and circumstances evidence that the shareholders treat corporate assets in the same manner as their personal assets and (2) shareholders would be unjustly enriched vis-à-vis creditors if recognition were given to the corporate structure, then the corporate entity may be ignored and a corporation’s duties, obligations, and liabilities may be imputed to its shareholders. (This concept similarly applies to other entities such as partnerships and LLCs, notwithstanding that the idiomatic phrase describing the concept is phrased in terms of a corporate entity. “Reverse veil piercing” is when a creditor of an individual can attach assets held by an entity if the debtor is “hiding” personal use assets inside of that entity. For the duration of this topic, I will speak of limited liability companies (LLC or company, hereafter), notwithstanding the subheading, because they seem more commonplace than corporations among clients who are playing monkey business with entities.

(After all, corporations require a separate tax return, whereas single-member LLCs can be disregarded for tax purposes.) But these issues apply with as much weight to corporations.

I want to discuss this topic because the reality is that people abuse entity formalities ALL THE TIME. I have seen people inquire about forming LLCs because they want to stash away some cash and use the LLC as a creditor exemption tool. (I wish this didn’t need to be said, but LLCs don’t exist for clients to manufacture “creditor

exempt checking accounts” for themselves and their kids.) I have seen clients talk about selling or making a gift of real estate, only to subsequently discover that the client doesn’t own the real estate (it’s owned by an LLC). I could go on, but all these scenarios arise from the same problem: clients acting as if LLC assets are indistinguishable from personal assets.

This problem usually manifests itself in the estate planning arena when clients want to effectuate company directives in one of two manners: 1. Devise or bequeath companyowned assets as part of an estate plan. Even if clients own 100 percent of the company, they seldom understand that company property isn’t theirs to give because it belongs to a separate legal “person” under state law.

2. Vote to replace the manager of the company or to direct company action after the client’s death. Clients always seem to think they can either vote from the grave or mandate that their PR or trustee vote membership interest on their behalf, from the grave, in a certain way.

For purposes of the remainder of this topic, let us consider a hypothetical client who owns membership interests in an LLC and that the LLC actually operates some kind of business, i.e., the client is explicitly mixing business with pleasure.

What follows is a discussion of specific problems raised by clients’ desires to take action as if company’s assets were their own assets.

Attempting to Bequeath Company Cash Something I’ve seen too many times is a client wanting one of his kids to receive a large bequest of cash upon the client’s death and pointing to money sitting in a company bank account. Why is all this cash sitting in the company’s account?

Because that’s where the client keeps his personal use cash, of course! My favorite answer ever, received when asking a client why money is being stockpiled in a company account, is that the client’s wife would spend it all if he moved it to

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their joint account. (There’s so much to unpack there that I’d need to hire a moving company for a few days.) Ultimately, to get to where the client wants to be, either (1) the company needs to distribute cash commensurate with the client’s membership interest, now or to the PR or trustee upon the client’s death, or (2) we satisfy the bequest with membership interests (which, if we’re playing it straight, requires “more” ownership interests than would otherwise be expected after taking into account discount factors on membership interest). These options raise issues of fiduciary obligations for the company, the company’s manager, or both.

Is there any on-hand cash being retained by the corporation for a legitimate corporate purpose (debt servicing, holding cash to acquire property plant or equipment so that they don’t have to finance that purchase with debt, awaiting deployment to acquire inventory, serving as a “rainy day” fund to protect against volatile cash flows or funding short-tointermediate cash flow needs for a cyclical business in a downturn, etc.), or is it all representative of shareholder earnings that ought have been distributed already (i.e., members or managers have allowed for the stashing of personal use cash inside the corporation by deliberately not making distributions)?

If the answer is that the corporation is both properly holding cash for its own uses and improperly holding stores of shareholder cash, we have a commingling problem that needs to be sorted out. Note that if the corporation is holding stores of cash for shareholder use, not only is there a “reverse veil piercing” problem if the shareholder runs into creditor problems, but also company creditors might be able to argue that those cash reserves should be available for their benefit and attempt to void any subsequent company distribution to members. (Although beyond the scope of this article, take a look at your state’s version of section 405 of the Uniform LLC Act, and also what is colloquially called a “clawback” action at bankruptcy.) If, instead, the answer is that all the on-hand cash is shareholder cash masquerading as company money, not only should we get that cash out ASAP, but also we should dig a bit deeper into

company operations, as there are likely other iterations of “disregard of entity formalities” happening.

In either instance, we also need to recognize a potential conflict of interest scenario for the manager. I pick on the manager because managers usually hold authority over amount and timing of distributions; consult your LLC operating agreement or default state law provisions.

The manager of the LLC should have her own representation to assess fiduciary duties as manager, separate and apart from whoever is representing the client or successor-in-interest to the client. As we said at the top, we’re assuming this company has an operating business. There are chances of creating problems for the company and other members, particularly if there are members unrelated to the testator’s family or estate plan beneficiaries. We cannot let the estate planning tail wag the company dog, and other members may have valid reasons to object to company actions that are going to facilitate another member’s personal estate planning concerns, so it’s best to have somebody counsel the manager in the first instance, and then determine if the client-member’s desires can be accommodated without making a mockery of the manager’s fiduciary obligations.

Attempting to Devise Company Real Property This one has the potential to induce level10 migraines: The client wants to give Amaranthacre to an estate plan beneficiary and Amaranthacre is owned by the company. (I hate dealing with Whiteacre or Blackacre; they’ve both been conveyed so many times that it seems inescapable that there are clouds upon their titles.)

Things become even more problematic if there’s an S corporation election on the company and we have to deal with entity level gain when distributing appreciated real property. (Federal income taxes are beyond the scope of this article, but I direct your attention to Internal Revenue Code §§ 1371(a) and 311(b)(1) if you want to examine this issue further.) The fundamental problem is that there are almost always actual and immediately-due costs associated with transferring title to real property.

As one example, I’ve seen a US corporation, involved in commercial real property development, that was owned by a foreign national and taxed as a C corporation (a “blocker” corporation, in colloquial language), that was the owner of a single-member LLC that was holding single-family residential real property that one of the shareholders of the C corporation intended to use as a vacation home for the interim and potentially use as a primary residence in the event the shareholder immigrated to the United States, thereby creating possibility of tax at both the corporation and shareholder levels, along with implicating tax attribution problems for other shareholders, when trying to clean this all up. This example is meant to illustrate the fundamental difference between dealing with cash held inside the company vs. real property or noncash assets. Removing cash from an entity is less likely to generate “costs” than removing noncash assets. (Please note, this is a generalization, not an absolute rule upon which you should rely.) In this example, we have potential for corporate-level tax (which indirectly affects all shareholders), dividend treatment to the shareholder receiving the property (more tax), and state law costs incidental to the transfer of the real property itself or the entity that owns the real property. The following is a list of some of the costs that are typically borne when trying to clean up the “personal use assets held by a company” problem: 1. Realization of taxable gain (by the entity or owner) upon distribution.

2. Deed preparation and recording fees (you may also have tangible or intangible taxes, documentary stamp taxes, and other associated costs in your jurisdiction).

3. Revaluations of, or changes to, the value of that property for state ad valorem taxes.

4. Due-on-sale or transfer provisions of any lending agreement if the property is mortgaged.

5. Changing insurance policies on the property (a new owner needs a new insurance policy).

Further, because many of these

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problems happen at the entity level, the entity has the state-law obligation to pay these costs. If somebody other than the ultimate beneficial owner of the real property in question has ownership in the entity, do you think he’ll be happy to learn that a pro-rata portion of money that would otherwise be distributable to him is going out the door to clean up somebody else’s mess of an estate plan? I’ve seen an instance in which a family-owned business admitted a longtime employee as a membership interest holder, and once that person got clued in to all the nonsense happening with disregard of corporate formalities, stuff hits the proverbial fan.

Considering that these issues exist in addition to all the issues discussed above regarding cash, this is one of the messiest possible estate planning disasters, so be smart: Identify ownership of real property immediately after a client starts talking about devising it, and if anything seems out of whack, get on the problem immediately; kicking the can down the road brings the mess to a head after the client dies, and beneficiaries are going to (perhaps properly) deduce that you’re responsible for the problem.

Trying to Vote Membership Interest or Force Company Action from the Grave This one is straightforward, so I shall be brief: Dead people cannot legally vote membership interests. If a client controls 100 percent of a company and wants to pick his own successor manager, then to the extent you’re going to find a person who will agree to take a job at an unknown time in the future when the client dies, the way to do it is via a contract between the company and that person.

For example, you might name a successor manager in the operating agreement, see if you can secure soft agreement to terms of a would-be employment contract in advance, and have the operating agreement state that the nomination or acceptance of the successor manager is dependent on the signing of an employment contract. DO NOT name a successor manager in a will or revocable trust agreement. That does nothing, and the persons who carry the vote of the entity are the ones who will select the next manager.

Similarly, you can’t vote membership interest in a will or revocable trust. The people who receive the membership interest will vote it as they see fit, not necessarily as the now-dead client wanted.

I’ve seen this problem rear its head when a client directed something to happen with the company that would have benefited person X; persons Y and Z were managers or membership interest holders who prevented the client’s stock from carrying the vote, and they said “no.” Person X gets very grumpy with the dead client’s attorney and persons Y and Z, believing that, just because the client’s testamentary documents said so, they should supersede everything. Now we have hostilities on part of person X directed at a bunch of people who didn’t do anything, much less anything wrong, because somebody else put something very dumb in a testamentary document.

Just as you’d separate your reds from your whites when doing your laundry, separate what’s inside and what’s outside a company when a company owner starts talking about doing things in an estate plan.

Failing to Address Issues Surrounding the Vote or Governance in a Business When Some Family Members Are Active in the Business This one can derail an estate plan worse than that time James Bond fired a tank missile at a Soviet stealth train. (If you know that movie and are suddenly inclined to re-watch it, don’t; I saw it this past Christmas time, and it does not hold up as well as other Bond movies.) It goes like this: Frank Jr. is self-made and owns his own refrigerator repair company. That company constitutes a substantial bulk of Frank Jr.’s wealth. Frank Jr. has three children, Leslie, Chandler, and Frank Jr. Jr. (Yes, that’s two Jr.’s, and shame on you if you don’t get the reference by now.) Leslie works at the company full time and is expected to take over running the business when Frank retires or dies. Chandler has her own job and her own life on the other side of the country and is neither involved in, nor cares about, the company.

Frank Jr. Jr. is as doofy as his name sounds and is an absolute deadbeat. Nevertheless,

Frank Jr. wants to benefit all three of his children equally in his estate plan. In order for each child to receive one-third of aggregate asset value, Chandler and Frank Jr. Jr. are going to wind up owning the majority of the company. Consider the following issues and determine for yourself whether this is a sound plan: From Leslie’s Perspective: 1. How smart is it to let two people who collectively have zero knowhow, and devote zero time to understanding the business, carry the vote of the business?

2. How is Leslie supposed to run the company efficiently if she needs to persuade (read: tell) her know-nothing siblings how to vote their shares every time shareholder action is needed?

3. What if Leslie’s siblings allow the human condition to creep in (admitting you’re holding a huge value asset about which you know nothing is tough for some people) and start pretending they know how the business should be run and casting their vote “as they see fit”?

4. If item 3 comes to fruition, doesn’t this “plan” leave Leslie’s livelihood (recall, she works full time at the company) at the mercy of people who have a higher-than-desired likelihood of running the company into the metaphorical ground?

5. Even in the best-case scenario, how much time does Leslie want to spend explaining herself or teaching the business to her siblingowners, who have questions about company performance and want to review whether Leslie is doing a good job?

From Chandler and Frank Jr. Jr.’s perspective: 1. Isn’t the entire value of their inheritance dependent on how well Leslie runs the company? How well does she run this company? They have no way to assess her job performance. (Think: teaming up and

Published in Probate & Property, Volume 36, No 4 © 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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2.

3.

4.

5.

6.

outvoting Leslie or trying to install a new manager, à la items 3 and 4 from Leslie’s perspective.)

Can they sell their interests? (Probably not.)

Might they rather not be in business with their sister?

Might they rather have cash to invest somewhere else?

Might they want or need to sell off principal so that they’re not stuck receiving only distributions from current earnings? (Recognize that they’re in a situation similar to an income-interest-only QTIP beneficiary . . . if the dividends aren’t large enough to meet your spending needs, you have a problem.)

Does ownership of company equity carry any obligations? (Think about capital calls. It’s bad enough in their mind they inherited something they might not be able to sell.

Being asked to contribute their own money to preserve their inheritance makes it look more like they inherited a money pit.)

There’s nothing quite like forcing people who don’t want to own a business to own a business, and further compounding the problem is forcing siblings who might not want to be in business with each other to be in business with each other. Solving this planning disaster often can involve a lot of leg work up front, whether it be obtaining life insurance on the current owner or key man, bringing in additional equity members, working out a deferred sale to one or more family members, or finding a third-party purchaser.

Much as that might seem like a bother, any of those options is a lot better than looking at a business that risks bleeding money or collapsing because of inefficient management, with a bunch of kids looking around, seeing that none of them has done anything particularly wrong, and concluding this may be the attorney’s fault through shoddy planning.

Assigning Ownership in a CloselyHeld Business Sight-Unseen This one is unlike any of the others because this one is directed at you, attorney-reader. If problems arise here, it’s 100

percent on you. It goes like this: The client tells you he owns membership interests in XYZ, LLC, but “just can’t find the operating agreement,” so in the interest of facilitating probate avoidance, you transfer “all his membership interests in and to XYZ, LLC,” to the trustee of his revocable trust. Then sometime later somebody gets their hands on the operating agreement and discovers there is a whole host of restrictions on transferability coupled with penalties that can be invoked by other members on account of the purported transfer.

A disaster scenario looks like this: A client is a minority interest holder in an LLC but holds enough membership interest that he can “swing” the company vote, such that his voting power can be colloquially labeled “important.” The client’s attorney assigns the client’s membership interests to the trustee of a revocable trust as part of his estate planning and then an operating agreement is found that contains some troublesome provisions. The first of these provisions says that any transfer of membership interests made without first securing the written consent of all other members holding membership interests subjects those membership interests to a buy-sell/put-call option. The second of these provisions says that even if the buy-sell/put-call option isn’t exercised, the recipient of the membership interest is only a “mere assignee,” entitled to receive distributions if and when made, but isn’t admitted as a member and can’t vote the membership interest unless agreed to and admitted by all other members.

Now the client is at the double-mercyveto powers of the other members. If the buy-sell option is exercised, the attorney will want to call the malpractice carrier because the client is losing the benefit of his bargain on a “gotcha.” If the buy-sell provision is enacted AND has a formula for determining the purchase price that allows the other members to buy out the client for pennies on the dollar, your client is losing aggregate asset value on that “gotcha” as well . . . and the attorney should probably go into hiding in addition to calling the malpractice carrier. If the buy-sell provision makes exercising the buy-sell too expensive for the other members, one bullet is dodged, but the client may catch a bullet on the second provision, i.e., the

“mere assignee” provision. In this scenario, the client no longer has a vote at all, much less swing vote power, and is reduced to being along for the ride.

If you think this hypothetical sounds a bit too fantastic, unrealistic, and contrived, ask yourself this: If you invested in a closely-held business and somebody entirely unrelated to you (perhaps you don’t even know this person) did something that gave you the opportunity to buy a larger interest in the company at a steep discount, or garner more voting power for free, wouldn’t you take that opportunity? What makes you think a typical person who is a private equity investor wouldn’t do the same, all day, every day?

In a fashion, this might be the biggest no-no in this article. In many of the other scenarios, while you might wind up in a suboptimal position, there might be enough gray area where the only “costs” associated with implementing a bad plan are headaches, anger, and resentment. In this scenario, you subject a client to the savage reality of private equity investment. (I use “savage” not to cast aspersions, but to draw attention to the economic dynamics at play.)

Be smart. Whenever a client tells you he owns membership interests, make him prove it first. (Clients frequently don’t really know what they own; they might be holding debt rather than equity, for all you know.) Then, get a copy of an operating agreement and confirm with other members and the manager that you have the most recent one before you start looking at assigning membership interests.

Treating a Business Entity as a Substitute for a Trust, Without Giving Any Thought to Anything Finally, let’s ponder a scenario in which ALL the problems discussed thus far appear: the client who puts all his assets in a single-member LLC and wants you to draft a quickie will leaving the LLC to Uncle Joe . . . because, you know, he’s “talked to” Joe and Joe “knows what’s supposed to happen.” Whenever this scenario comes up, just as with this article, I conclude the conversation and go do literally anything else with my time. n

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Belt and Suspenders Risk Management for Not Getting Caught with Your Pants Down Drafting Enforceable and Effective Indemnity and Insurance Requirements Provisions

H

ave you ever seen a person who wears a belt and a pair of suspenders? Isn’t that overkill for keeping your pants up? Depending on the person, maybe not. The same can be said for the ever-evolving yoke of insurance policies to contractual provisions in leases and contracts. This article analyzes both and provides practical recommendations for practitioners in the real property, trust, and estate areas.

Which Goes on First—the Belt or the Suspenders?

Most organizations and trusts (and individuals) purchase insurance as the primary source of risk management protection. In short, an insurance policy is a contractual transfer of risk from one party (the insured) to another party (the insurer) for a negotiated insurance premium. Such policies are an integral part of virtually all organizations, including Michael S. Hale is President of Clairmont Advisors, LLC, Managing Director and General Counsel of 360 Risk Management, Inc., and President of the Law Offices of Michael S. Hale & Associates, PLC, in Northville, Michigan.

coverage for liability for claims of bodily injury, death, property damage, and other torts like wrongful entry or eviction, discrimination, invasion of privacy, wrongful advertising, mismanagement by directors and officers, intellectual property liability, employment practices liability, and new and emerging areas such as cyber liability.

Despite the front row seat insurance policies often occupy in overall risk management, most insurance buyers give short shrift to the insurance buying process, assuming mistakenly that all policies are fungible commodities like soap and attempting to compare quotes for policies “apples to apples.” This is misguided, as most insurers, even where they use standardized forms such as those from the Insurance Services Office (ISO), often modify the policies through endorsements to address the risks the insurer is willing to assume. This has striking similarity to how indemnification and hold-harmless provisions are drafted and interpreted.

The Belt: The Insurance Policy Below are some practical suggestions on transferring risk through the purchase of insurance policies that are based upon

the author’s experience.

Commercial property insurance and waivers of subrogation. These policies cover loss of a property owner or other interested party, such as a mortgagee or lienholder of the owner. Such policies vary considerably and should be carefully reviewed with knowledgeable insurance counsel, as this area is an often-litigated area. Moreover, there has been much litigation against insurance agencies, underscoring the importance of being certain that your client has a good agent. Insurers generally write the policy as requested by the insurance agents and may not otherwise include coverage enhancements where not requested. Further, when insurers pay claims, they have contractual subrogation rights to stand in the shoes of the insured to pursue any tortfeasor who may have caused the loss.

This puts an emphasis on drafting appropriate waivers of subrogation in leases and contracts.

Triple net leases and property insurance. Creating significant insurance and risk management issues are situations in which one party (such as a landlord) allows another party (such as a tenant) to insure its building--such as in triple net

Published in Probate & Property, Volume 36, No 4 © 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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istockphoto

By Michael S. Hale

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leases. This may create problems because the landlord is usually not properly listed as an insured rather than as a loss payee.

Workers’ compensation policies can also have waivers or subrogation provisions in favor of your clients. Such policies provide broad statutory protection for employee injuries, but insurers who pay these losses also look to subrogate against other parties, such as property owners, when an employee may have become injured. Workers’ compensation insurers often agree to waivers of subrogation rights before the loss, but this is something that the better insurance requirement provisions include.

Outdated wording. Insurance requirement provisions often use antiquated language such as “public liability insurance” or “comprehensive general liability insurance.” These terms are no longer recognized in the insurance industry and should be avoided.

Certificates of insurance. In real estate closings, contractor agreements, and service agreements, many companies and counsel rely on insurance certificates and evidences of property insurance. These often do not bind the insurer. Consider the disclaimer language on such certificates that insurers often rely upon once a dispute arises. Moreover, a one-page certificate may not note all the coverage provisions, exclusions, and conditions of the policies. Obtaining copies of the actual policies, where possible, to see what coverage is being provided to your client as an additional insured, mortgagee, or other party.

Covering trusts. Trusts are not automatically covered as insureds on insurance policies such as homeowners’ policies and commercial property or general liability policies. This can be devastating when a claim occurs. Add trust names to all policies, where applicable.

Additional insured endorsements.

Many attorneys place undue emphasis on the additional insured status of their clients on others’ insurance policies. Note that an additional insured is not the same as a named insured on a general liability insurance or other policy. Instead, such status gives only derivative liability coverage if the additional insured is named in a lawsuit

arising from the negligence of the named insured. The author has seen cases where property owners have chosen not to purchase any commercial general liability (CGL) coverage because the property owner is listed as an additional insured on the general contractor’s policy. This is a major mistake. Although it may be advisable to also seek additional insured status of property owners on their lessee’s CGL policies, and for contractors working on their property, note there are more than 30 different types of additional insured endorsements in the commercial general liability insurance marketplace, each providing unique language. Please note insurance requirement provisions should not require additional insured language on every policy. There are times where a party would not want to be named as an additional insured on a policy of another such as on a professional liability insurance policy or environmental insurance policy. Such policies often include an insured versus insured exclusion that would bar coverage for lawsuits between a named insured (an owner, for example) and an environmental contractor or between multiple additional insureds.

Primary and noncontributory language. When named as an additional insured, unless modified, the endorsement may provide only coordinating coverage with any other insurance coverage available to the additional insured.

For this reason, not only should such language be included in insurance requirement provisions in leases and contracts, but also it should be verified on certificates of insurance and the actual endorsement itself.

“Blanket” additional insured endorsements are not always a panacea. Many CGL insurers give automatic additional insured coverage for any party that the named insured agrees, in a written contract, to name as an additional insured. Although convenient, such endorsements often provide inferior coverage when compared to true additional insured endorsements.

Omnibus provisions requiring additional insured status of employees, members, officers, and agents may

not be properly insured. Many insurance requirement provisions in contracts require additional insured status for members, shareholders, employees, officers, agents, and others as a catchall. Note that additional insured endorsements often limit such coverage to the named insured and do not automatically include related parties like employees and officers of the additional insured, unless otherwise negotiated.

The Suspenders: Contractual Indemnity and Hold Harmless Provisions Lawyers who draft contracts are wordsmiths of protection, often looking to words to transfer risk of liability, litigation, claims, demands, and other financial losses. This is a way to transition any risk or exposure to financial loss to a party their client is doing business with or for. Indemnity provisions often are interpreted similarly to insurance policies, according to their plain and unambiguous meaning, subject only to the statutory prohibitions such as indemnification for another’s sole negligence (as further examined below). These provisions may save the day where insurance coverage either does not exist for the liability in question, or even where such coverage does exist, by preventing financial loss from plaguing the loss history of the indemnitee. In short, such provisions can be powerful risk management techniques.

In representing indemnitors such as vendors or subcontractors doing business with owners, the objective, of course, is to limit the liability assumed in an indemnification and hold harmless provision in the agreement entered into between the parties, and if negotiating power to change such terms is lacking, to be certain that the client’s liability insurance picks up such indemnity, which is not always the case. Conflicting or inconsistent contractual indemnity provisions can complicate and delay the insurance claims process.

Here are some key points to consider when looking at indemnification provision “suspenders” based upon whether you are representing the indemnitor or the indemnitee:

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If you are representing an indemnitor, consider the following: Look carefully at what liability is being assumed. Although this seems obvious, it is often overlooked. For example, has your client agreed to assume the liability not only to indemnify the indemnitee but also to defend it? Does this indemnification obligation apply to actual or alleged claims of negligence? Does the language allow the indemnitee to choose counsel?

Does the language, for example, state the indemnity applies to injuries arising “on or about” the leased premises? This could mean that slip-and-fall injuries in the parking lot could be within the indemnitor’s contractually-assumed liability.

Seek the involvement of the client’s insurance professional agreeing to the indemnification. It is important to note that although many CGL policies include coverage for contractually assumed liability of “insured contracts,” some insurers modify this to either exclude contractually-assumed liability of the insured or substantially limit it. Further, we often see that the indemnification provision itself assumes more liability than what is covered as an “insured contract,” such as in the area of non-bodily injury.

If you are representing an indemnitee, consider the following: Reference attorney fees and litigation expenses as part of the indemnification. The ISO insurance standard CGL policy form also provides that reasonable attorney fees and litigation expenses are deemed to be damages if listed in the insured contract and attorney fees and costs are alleged in the underlying complaint.

Include the words “defend,” “hold harmless,” and “actual or alleged.” Too often the author sees situations in which an indemnitee relies upon a contractual indemnity provision that requires indemnity of the actual liability, claims, or damages. This is determined after the fact and would arguably not extend an obligation to defend the litigation. Using the phrases “actual or alleged,” “defend,” and “hold harmless” closes these gaps.

Be cognizant of anti-indemnity statutes, which vary among states. Is there a statutory carve-out for sole negligence for the indemnified party (the indemnitee)?

Virtually all states prohibit indemnification in construction agreements for assuming liability for the sole negligence of the indemnified party. Michigan defines such construction contracts broadly to include things like building maintenance agreements, apparently applying to janitorial contracts. Mich.

Comp. Laws § 691.991(1). Be cautious in analyzing the language being used in this area. Public policy generally disfavors releasing a party from liability for its own negligence. State laws governing indemnity vary widely. For example: (i) New York. N.Y. General Obligations Law § 5-321 provides that agreements exempting lessors from liability for negligence are void and unenforceable, but certain exceptions apply. (ii) California. Cal. Civ. Code §§ 2782.1, 2782.2, 2782.6. Although public policy does not permit indemnity for a party’s gross negligence or willful misconduct and disfavors a party being indemnified from its own negligent acts and omissions, exceptions apply in commercial circumstances in which an indemnity affirmatively includes the negligence of the indemnified party. (iii) Michigan. Michigan law allows indemnification in commercial leases but significantly limits the scope of a residential tenant’s permitted indemnity in leases. Mich. Comp. Laws § 554.633(1) (e) (prohibiting exculpatory provisions except as to loss, damage, or injury caused by fire or other casualty for which insurance is carried by the other party); id. § 554.633(1)(g) (prohibiting contractual attorney fees). Michigan is an “intermediate form” state, which means that a party may receive indemnity except when the personal injury or property damage was caused by the indemnitee’s sole negligence. Id. § 691.991. A potential indemnitor may not escape its indemnity obligations by asserting that its indemnitee was “solely negligent” simply because the indemnitee is the only defendant named in the underlying suit. Lanzo Constr. Co. v. Wayne Steel Erectors, 477 Mich.

854 (2007). An indemnification agreement would properly require notice to the indemnitor of underlying lawsuits and may invoke indemnification; without such an express requirement, the

indemnitee may not have been required to provide notice. It is also important to note that the Michigan Motor Carrier Act bars all contractual indemnity (even for intentional acts) in the context of motor carrier transportation agreements. Mich. Comp. Laws § 479.21. (iv) Florida. Florida law looks to the seminal case of University Shopping Center, Inc. v. Stewart, where the Florida Supreme Court considered whether an indemnity for “any and all claims” includes an indemnity for the indemnitee’s negligence, noting that the general rule is that the negligence of the indemnitee is included only if the indemnity is expressed in “clear and unequivocal terms.” 272 So. 2d 507 (Fla. 1973). The court held, in summary, that an indemnity for “any and all claims” is not sufficient to cause the indemnitor to indemnify the indemnitee for its negligence and that the indemnitor was not required to indemnify the indemnitee for claims resulting from the negligence of the indemnitee. The court also observed that the indemnitor’s liability insurance policy will provide coverage only to the extent of the indemnitee’s liability. In addition, Florida Statute § 725.06 requires that any construction contract indemnify between an owner and a construction or design party.

Some states provide that where the contractual indemnification is prohibited, so, too, is any requirement that the indemnitee be named as an additional insured on the indemnitor’s CGL policy. For example, Arkansas provides that an entity’s insurer’s indemnification shall not exceed any amounts that are greater than that represented by the degree or percentage of negligence or fault attributable to the indemnitors. Ark. Code Ann. § 4-56-104(b), (e).

Georgia bars indemnity provisions in construction agreements requiring one party to insure the sole negligence of the indemnitee.

Ga. Code Ann. § 13-8-2 (2010).

Conclusion When it comes to risk management, wearing both a belt (buying an insurance policy or policies) and suspenders (using effective and enforceable contractual transfer through indemnity and hold-harmless provisions and insurance requirement provisions) is usually required to avoid getting caught with your metaphorical pants down. n

Published in Probate & Property, Volume 36, No 4 © 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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PRACTICAL POINTERS FROM PRACTITIONERS Acceptance-of-Benefits Doctrine in Texas It has long been the rule in Texas that one cannot accept the benefits of a will while simultaneously contesting its validity.

When faced with a will contest, a will’s proponent can assert an acceptance-ofbenefits defense establishing that the contestant is estopped from contesting the will because he has accepted a benefit under it. In response, the contestant may rebut such evidence by showing that the acceptance is consistent with seeking to set the will aside.

Consider the following scenario. Early in the estate administration process, an executor offers to make a very small, partial distribution to an estate beneficiary.

The proposed distribution is insignificant compared to the ultimate distribution that the beneficiary would be entitled to under the will or intestacy laws. Does acceptance of such distribution preclude the beneficiary from contesting the will?

In Estate of Johnson, the Supreme Court of Texas clarified the acceptance-of-benefits doctrine with specific attention to the effect of acceptance of partial distributions. 631 S.W.3d 56 (Tex. 2021).

Dempsey Johnson executed a will containing specific bequests and a residuary to be divided between his three daughters (Lisa Jo Jones, Tia MacNerland, and Carla Harrison). In addition to a residuary interest, Johnson bequeathed MacNerland a mutual fund account and one-half of a bank account. Johnson appointed Jones to serve as his independent executor (the Executor). After Johnson’s death, the Executor transferred the mutual fund account to MacNerland, and MacNerland assumed ownership of the account.

The mutual fund account, valued at over $143,000, made up approximately 10 percent of Johnson’s estate.

Contributing Author: Bri Loughlin, Winstead PC, 401 Congress Ave., Suite 2100, Austin, TX 78701, bloughlin@winstead.com.

Three months later, MacNerland contested Johnson’s will, alleging that Johnson lacked testamentary capacity when he executed the will or did so under undue influence. The trial court dismissed MacNerland’s will contest based on the Executor’s acceptance-ofbenefits defense.

MacNerland appealed and argued that the trial court misapplied the acceptance-of-benefits doctrine, as her contest was “consistent” with her acceptance of the mutual fund account such that the acceptance did not preclude her from contesting the will. MacNerland’s position was that her acceptance of the mutual fund account was consistent with her contest of Johnson’s will because, win or lose the contest, MacNerland was entitled to more than the benefit she had accepted under the will. MacNerland drew support for her position from Holcomb v. Holcomb, an appellate court decision suggesting that a contestant may challenge a will if the benefits accepted are worth less than those to which the contestant is entitled under the challenged will or by intestacy. 803 S.W.2d 411, 414 (Tex. App. 1991). In addition to the court of appeals in Johnson, at least one other Texas appellate court previously endorsed Holcomb. In In re Meeker, the Court of Appeals allowed a beneficiary to pursue pre-suit discovery to determine whether the beneficiary would receive greater benefits than those he had accepted. 497 S.W.3d 551, 554-55 (Tex. App. 2016).

Relying on Holcomb, the court of appeals reversed the trial court and held that MacNerland did not receive anything that she would not also receive if there was no will and therefore her acceptance of the mutual fund account was not inconsistent with her will contest.

The Texas Supreme Court overruled

Holcomb and rejected the suggestion that a will contestant may accept benefits under a will based on a hypothetical claim to greater benefits should a court declare the will invalid.

The Court clarified that the test for determining whether a contestant’s acceptance of benefits is consistent with a contest does not depend on the value of the benefits and is not determined by a comparison of benefits under a will versus benefits under laws of intestacy. Rather, the test is whether the contestant has an existing legal entitlement to the benefit other than under the will. If no entitlement exists except for the testator’s bequest, then the contestant’s acceptance of such benefit is inconsistent with a claim that the will is invalid and such claim is precluded by the acceptance-of-benefits doctrine. The beneficiary of a will must adopt the whole contents of the instrument or forgo all benefits under the will to seek to have it set aside.

A beneficiary who has been offered a partial distribution from an estate should be careful. If there is any chance that the beneficiary may want to contest the will, the beneficiary should not accept any assets from the estate, even if the proposed distribution is a small portion of the overall amount that the beneficiary would ultimately be entitled to receive. An executor should not be under the impression that he can offensively preclude a will contest by making a partial distribution to an unwitting beneficiary. An acceptance-of-benefits defense may not be effective if the beneficiary did not have knowledge of some material fact at the time of acceptance. In addition, a beneficiary’s acceptance of benefits under a will does not preclude the beneficiary from bringing breach of fiduciary duty claims against an executor or seeking to have an executor removed. n

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July/August 2022 43

Freedom to Contract Injunction Waivers in Commercial Leases

By Holly P. Constants

G

Holly P. Constants is a 2022 graduate of St. John’s University School of Law in New York, New York.

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Getty Images

enerally, contract law allows parties the freedom to waive their rights, including the right to seek injunctive relief in advance of any dispute between the parties. But consider a tenant that contractually waived the right to seek injunctive relief to maintain its leasehold in the event of a potential dispute over whether it breached the lease. Should the landlord be able to enforce this waiver?

Jurisdictions differ on contractual waivers of injunctive rights. In 2019, the New York legislature enacted a law forbidding such injunction-waiver clauses in commercial leases and barring their enforcement. N.Y. Real Prop.

Law § 235-h (McKinney 2019). This legislation changes common law, in which such waivers would be enforceable. 159 MP Corp. v. Redbridge Bedford, L.L.C., 33 N.Y.3d 353, 363 (2019), superseded by statute, N.Y. Real Prop. Law § 235-h (McKinney 2019). Other jurisdictions, such as California, generally permit and enforce injunction waivers. See, e.g., Cal. Civ. Code § 3513 (West).

This article addresses the enforceability of injunction waivers, using commercial leases as an example. First, the article provides a general background on injunctive relief, focusing on a unique type of injunctive relief

available to New York commercial tenants disputing potential lease defaults.

Second, it examines various jurisdictions’ approaches to waiving injunctive relief, which are in part influenced by the type of injunctive relief sought and the identity of the parties. Third, it argues that freedom of contract should prevail and parties should have the right to negotiate contractual waivers of injunctions, just as they can negotiate many other terms. Lastly, this article concludes that the majority common-law solution of permitting and enforcing injunction waiver clauses better serves the interests of contracting parties than does New York’s more restrictive approach.

Injunctive Relief and Yellowstone Injunctions An injunction is a remedy for a breach of contract that courts may grant when money damages are inadequate to redress a party’s injury. 12 Corbin on Contracts § 65.27 (2020). The type of injunctive relief requested—whether a temporary restraining order, preliminary injunction, or permanent injunction—depends on the contract and the particular issues involved. For example, a party may seek a preliminary injunction while the parties work to resolve their issues. Preliminary injunctions can be either prohibitory or mandatory. A prohibitory preliminary injunction would prevent a party from taking action and help maintain the status quo until there is resolution on the merits. A mandatory preliminary injunction would require a party to change its behavior. See, e.g., Tokyo Japanese Steakhouse, Inc. v. Sohn, 114 So. 3d 543, 545 (La. Ct. App. 2013).

Nearly half a century ago, the court in First National Stores, Inc. v. Yellowstone Shopping Center, Inc. granted New York tenants a new equitable procedural remedy, similar to a preliminary injunction, called the “Yellowstone injunction” or merely, a “Yellowstone.”

21 N.Y.2d 630 (1968). In First National Stores, the landlord and commercial tenant disputed which party was responsible under the lease to install

a required sprinkler system. Id. at 634.

The Appellate Division, Second Department, had held that the tenant was responsible and, therefore, the landlord had properly terminated the lease according to its provisions. Id. at 636.

However, the court refused to terminate the lease because the “tenant act[ed] in good faith when it brought the declaratory judgment” and, instead, the court enjoined the landlord from evicting the tenant for 20 days to give the tenant time to cure the default. Id. at 637.

The court of appeals reversed the lower court’s grant of injunctive relief, stating that the lower court did not have the authority to grant it because the lease had already expired and the tenant had not sought a declaratory judgment while the lease was in effect. Id. at 637-38.

Although the tenant in First National Stores could not take advantage of a Yellowstone, this unique New York injunction provides tenants an opportunity to maintain their leasehold while seeking to resolve disputes about whether they defaulted under their leases. Gabriel W. Block, “Fair Enough”?

Revising the Yellowstone Injunction to Fit New York’s Commercial Leasing Landscape and Promote Judicial Economy, 14 Brook. J. Corp. Fin. & Com. L. 53, 53 (2019). A tenant typically seeks a Yellowstone injunction in support of a declaratory judgment action requesting a finding that the tenant is not in default of the lease. Ronald Greenberg, Natan Hamerman, Daniel Lennard & Zachary Naidich, Return of Yellowstone: The New York State Legislature Revives the Yellowstone Injunction, JD Supra (Jan. 14, 2020), https://bit.ly/3wT7KuR. Specifically, a Yellowstone injunction allows a tenant confronting a threat of lease termination to protect its investment in the leasehold by obtaining a stay that tolls the cure period to maintain “the status quo.” Graubard Mollen Horowitz Pomeranz & Shapiro v. 600 Third Ave. Assocs., 93 N.Y.2d 508, 514 (1999).

Under this remedy, if the court determines that the tenant defaulted on the lease, the tenant can cure a default and avoid forfeiting the leasehold. Id. In

other words, this remedy gives tenants who believe they have not breached an intermediate option before having to choose between two more drastic alternatives: (1) taking the potentially burdensome and/or expensive route of complying with the landlord’s demands or (2) challenging the landlord’s claim and risking forfeiture of the lease if the challenge does not succeed. 7C Current Leasing Law and Techniques—Forms § 13A.04 (2020). The remedy is available to New York commercial and residential tenants, although New York City commercial tenants take advantage of the remedy most frequently.

Block, supra, at 53; see also Hopp v. Raimondi, 51 A.D.3d 726, 727 (N.Y. App. Div. 2008).

Before a court grants a Yellowstone injunction, a tenant must satisfy a fourfactor test. Graubard Mollen Horowitz Pomeranz & Shapiro, 93 N.Y.2d at 514.

Although tenants do not automatically obtain the injunction, courts tend to grant the relief easily. See id. (citing Post v. 120 E. End Ave. Corp., 62 N.Y.2d 19, 25 (1984) (noting that “courts grant[ ] them routinely”); see also David Frey, Note, The Yellowstone Injunction, or “How to Vex Your Landlord Without Really Trying,” 58 Brook. L. Rev. 155, 175 (1992) (stating courts have “chip[ped] away at what was left of the traditional standard of proof necessary for equitable relief ” when granting Yellowstone injunctions). Unlike section 6301 of New York’s Civil Practice Law and Rule’s (CPLR), which requires that tenants must show likelihood of success on the merits and potential “immediate and irreparable” harm or loss before injunctive relief can be granted, N.Y. C.P.L.R. § 6301 (McKinney), the Yellowstone injunction does not require such proof, “even nominally[.]” Block, supra, at 58 (citing Trump on the Ocean, L.L.C. v. Ash, 81 A.D.3d 713, 715–17 (N.Y. App. Div. 2011); Orange Tea, Inc. v. Am. Wild Ginseng Ctr., Inc., 2012 N.Y. Misc.

LEXIS 2958, at *9–10, 12 (Sup. Ct. June 4, 2012) (granting a Yellowstone injunction but denying relief under CPLR section 6301 based on a failure to show irreparable harm)).

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Common Law’s Enforcement of Freedom of Contract versus New York Legislature’s Curtailed Approach to Injunction Waivers Contracts, including leases, may contain a remedy section, which varies depending on several factors: (1) the type of contract, (2) the jurisdiction, and (3) the parties. A remedy section may have a clause waiving the right to seek injunctive relief, thereby limiting the available remedies in the event one party breaches the contract. See generally, e.g., Restatement (Second) of Contracts § 356 (1981); U.C.C. § 2-719 (1)(b); 2 Ent. L.3d Legal Concepts and Business Practices § 9:100 (2019).

A waiver is a party’s “intentional abandonment or relinquishment of a known right or advantage”, but not all waiver provisions are enforced. Alsens Am. Portland Cement Works v. Degnon Contracting Co., 222 N.Y. 34, 37 (1917).

As a result, a court’s decision whether or not to enforce a contractual waiver illustrates the competing principles that are at play in allowing parties the freedom to contract. Mark L. Movsesian, Two Cheers for Freedom of Contract, 23 Cardozo L. Rev. 1529, 1547 (2002).

Freedom to contract—parties making agreements on a range of subjects and choosing the terms they desire—has a long and important history in American jurisprudence. Id. at 1529. There is a tension in contract law between allowing individuals the freedom to form their own contracts and exerting public control in accordance with laws that reflect community values. Id. at 1547–48. Courts may choose not to uphold waiver provisions for a variety of reasons. Some waivers are prohibited by legislation, and others will not be enforced by a court for other reasons, such as being against public policy, being unconscionable, or being the result of a mistake. See, e.g., N.Y. Real Prop. Law § 235-h; 15 Corbin on Contracts § 79.1 (2020); 7 Corbin on Contracts §§ 28.27, 29.4 (2020).

As previously mentioned, the parties themselves are a major factor in determining whether to allow a waiver clause or to enforce an existing one.

See Daniel D. Barnhizer, Inequality of

Jurisdictions typically allow parties the freedom to waive the right to seek injunctive relief as a remedy, regardless of the type of contract involved.

Bargaining Power, 76 U. Colo. L. Rev. 139, 144 (2005). In a commercial landlord-tenant relationship, the landlord traditionally is viewed as the more powerful party, particularly during a lease negotiation. Block, supra, at 54. The creation of the Yellowstone injunction is just one example indicating the concerns many constituents and courts have expressed about this imbalance, and the desire to protect tenants. See, e.g., Adam Lindenbaum, NYC Bill Continues Expansion of Commercial Tenant Rights, Law360 (Oct. 16, 2019, 4:54 PM), https://bit.ly/3Ke3QAk (discussing the added statutory protections that strengthened the existing protections for landlord harassment against commercial tenants). The view of the power dynamic tends to be even stronger when the tenant is a small business, as such tenants typically have fewer resources and are less likely to obtain legal representation. See Robert A. Levinson & Michael N. Silver, Do Commercial Property Tenants Possess Warranties of Habitability? 14 Real Est. L.J. 59, 68 (1985) (equating a small commercial tenant’s lack of bargaining with a residential tenant); see also Curtis J. Berger, Hard Leases Make Bad Law, 74 Colum. L. Rev. 791, 791 (1974) (arguing for more tenant protections in leases, especially as most leases are standard forms with terms that are highly favorable to the landlord). In contrast, landlords and tenants negotiating large commercial leases have more equal bargaining power. See, e.g., Daniel B. Bogart,

Good Faith and Fair Dealing in Commercial Leasing: The Right Doctrine in the Wrong Transaction, 41 J. Marshall L. Rev. 275, 277 (2008). In sum, the identity of the parties is one of the key variables in determining whether an injunction waiver provision will be enforced. In general, parties are able to contractually waive rights, with few limitations.

The Majority Approach Allows Waivers of Injunctive Relief Jurisdictions typically allow parties the freedom to waive the right to seek injunctive relief as a remedy, regardless of the type of contract involved. For instance, in entertainment law, courts generally enforce waivers of injunctive or equitable relief when the provision is clearly expressed and unambiguously states there is an exclusive remedy provided by the terms of the contract. See Lone Wolf McQuade Assocs. v. CBS Inc., 961 F. Supp. 587, 596–97 (S.D.N.Y. 1997). As a result, injunctive waivers are normally used to prohibit a party from stopping the production or distribution of creative work when there is a dispute over credit rights. 2 Ent. L.3d Legal Concepts and Business Practices § 9:100 (2019). For instance, the Ninth Circuit enforced an injunction waiver provision, which the plaintiff acknowledged he had understood when he signed the agreement, that expressly limited the plaintiff ’s remedies at law for damages in the event of a breach.

Fosson v. Palace (Waterland), Ltd., 78 F.3d 1448, 1451, n.2 (9th Cir. 1996).

California provides another illustration of jurisdictions allowing parties to waive rights. While California places some limitations on contractual waivers of injunctive relief depending on the type of relief, California generally does not interfere with a party’s’ agreement. Indeed, California broadly allows “[a]ny one [to] waive the advantage of a law intended solely for his benefit.” Cal. Civ. Code § 3513 (West). Some Texas courts hold that if the parties’ contract did not contemplate injunctive relief, it is improper to grant, which therefore indicates that these courts essentially enforce waiving the relief.

See, e.g., Metra United Escalante, L.P. v.

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The Lynd Co., 158 S.W.3d 535, 540 (Tex. App. 2004) (noting that “[b]ecause the management agreements contain no express language demonstrating that the parties contemplated intervention to maintain the status quo . . . [w]e . . . conclude that the issuance of a preliminary injunction is not appropriate when the underlying claims are subject to arbitration under the FAA.”). Injunctive relief is considered private if the main effect of the injunction would be to redress or prevent injury to an individual or a small group of individuals. McGill v. Citibank, N.A., 393 P.3d 85, 89 (Cal. 2017) (quoting Broughton v. Cigna Healthplans, 988 P.2d 67, 76 (Cal. 1999)). These private injunctive relief waivers are typically enforced.

See Wright v. Sirius XM Radio Inc., No. SACV 16-01688 JVS (JCGx), 2017 U.S. Dist. LEXIS 221407, at *26–27 (C.D. Cal. June 1, 2017) (holding that McGill did not prohibit enforcement of the contract’s arbitration agreement because the injunction sought was for private relief ). In contrast, California does not allow private parties to contractually prohibit injunctive relief under consumer protection statutes that provide a public injunction remedy, which is when the “primary purpose” of the injunction is for the benefit of the public, such as when the injunction would prohibit unlawful acts that threaten injuries to the public. McGill, 393 P.3d at 86. For example, relief requested under California Unfair Competition Law, the Consumers Legal Remedies Act, and the false advertising law is injunctive relief primarily benefiting the public, and, therefore, parties are prohibited from waiving it. Id. at 94 (quoting Broughton, 988 P.2d 67 (citing Cruz v. PacifiCare Health Systems, Inc., 66 P.3d 1157 (Cal. 2003))). As California courts have explained, a public injunction under California’s Unfair Competition Law directly benefits the public because it eliminates deceptive practices. Id. at 86 (quoting Broughton, 988 P.2d at 76 n.5).

As a result, an exception California has carved out for prohibitions of contractual injunctive waivers is the waiver of the right to request public injunctive relief in all forums. Id. at 94; see also

Blair v. Rent-A-Center, Inc., 928 F.3d 819 (9th Cir. 2019) (holding the exception created in McGill was not preempted by federal law). The parties can specify where the relief is sought; they just cannot prohibit it completely.

Arizona illustrates another pro-freedom-of-contract example specific to the landlord-tenant context. In Chef Tian L.L.C. v. 668 N. L.L.C., the court recently affirmed the dismissal of a tenant’s claim that his waiver of injunctive relief in a commercial lease was unconscionable. No. 1 CA-CV 18-0108, 2020 WL 3056330, at *3 (Ariz.

Ct. App. June 9, 2020). But see Food Pantry v. Waikiki Bus. Plaza, 575 P.2d 869, 875–76 (Haw. 1978) (stating the court was empowered by “its general equity jurisdiction” to prevent a leasehold from being forfeited despite a breach of the lease). The tenant claimed the clause was unconscionable because he had difficulty speaking English, and therefore he did not fully understand the terms when he entered the contract.

Chef Tian L.L.C., 2020 WL 3056330, at *3. While the tenant was the sole manager of a limited liability company, the court nonetheless rejected the tenant’s argument and viewed the transaction as a commercial, rather than residential, transaction. Id. The court further opined that private parties in commercial contexts generally are better than courts at determining their contractual terms to suit their interests. Id. (citing 1800 Ocotillo, L.L.C. v. WLB Grp., Inc., 196 P.3d 222, 224 (Ariz. 2008)). The court held that there was no procedural unconscionability—an unfair bargaining process—because the tenant was an experienced businessman and the lease was straightforward. Id. (referencing the clear terms of the lease provision, “[n]one of Landlord’s obligations under this Lease shall be subject to specific performance or injunctive remedies, and Tenant waives all rights with respect to such remedies”). In addition, the court determined there was no substantive unconscionability because a waiver of remedies, even an entire class of remedies, was not unconscionable.

Id. (concluding the issue of injunctive relief was moot for other reasons).

As a final pro-freedom-of-contract example, regardless of whether a contract attempts to waive injunctive relief, a mandatory arbitration clause at least implicitly waives the right to seek injunctive relief. (This claim assumes there is not a separate provision in the lease explicitly protecting the tenant’s right to seek an injunction.) Arbitration clauses are common contract provisions, and there is strong federal policy in favor of enforcing them. See Volt Info. Scis. v. Bd. of Trs., 489 U.S. 468, 478 (1989). In fact, the Supreme Court has stated that when a question arises about the scope of arbitration, the issues should “be resolved in favor of arbitration[,]” regardless of whether the problem is “an allegation of waiver, delay, or a like defense to arbitrability.” Moses H. Cone Mem’l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 25 (1983) (emphasis added). As the general trend favors enforcing arbitration clauses, thereby preventing parties from seeking injunctive relief, so arbitration clauses illustrate the majority approach of upholding parties’ right to waive injunctive relief.

New York Common Law Favors Freedom of Contract Recently, in 159 MP Corp. v. Redbridge Bedford, L.L.C., the New York Court of Appeals affirmed that a lease clause waiving the tenants’ right to seek declaratory relief was enforceable. 33 N.Y.3d 353, 363 (2019), superseded by statute, N.Y. Real Prop. Law § 235-h (McKinney 2019). In 159 MP Corp., the plaintifftenants sought a Yellowstone injunction to prevent the defendant-landlord from terminating their 20-year commercial leases while the dispute over whether the tenants were in default under the leases was resolved. Id. at 356. The landlord moved for summary judgment dismissing the motion arguing that the request for injunctive relief was barred by a waiver clause in the leases. Id. In deciding whether the provision was enforceable, the court focused on New York’s “deeply rooted” public policy favoring freedom of contract as it “respects the autonomy of commercial parties in ordering their own business

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July/August 2022 47

arrangements.” Id. at 359–60 (quoting New England Mut. Life Ins. Co. v. Caruso, 73 N.Y.2d 74, 81 (1989)). Quoting the seminal New York freedom of contract case involving commercial leases, the court noted that enforcing an agreement by its terms to provide certainty to the parties was especially important in real property transactions, especially when the contract was negotiated by sophisticated and counseled businesspeople. Id. at 359 (quoting Vt. Teddy Bear Co. v. 538 Madison Realty Co., 1 N.Y.3d 470, 475 (2004)).

The court also noted that the tenant-plaintiffs did not challenge the enforceability of the clause on an established contract defense, such as unequal bargaining power or lack of counsel, but rather argued that the clause was against public policy. Id. at 360. The tenants contended that the right to bring a declaratory judgment action was “so central and critical to the public policy” of New York that it could not be waived even by counseled and sophisticated parties. Id. The majority was “unpersuaded” by this argument.

Id. The court emphasized the tenants had other available judicial remedies that were not precluded by the clause, such as raising defenses in a summary proceeding. Id. at 364. Notably, the tenants could not be evicted from their leases until the landlord commenced a summary proceeding and established that the tenants breached the leases. Id. at 366. As the majority recognized, the tenants clearly and expressly waived their right to bring a declaratory judgment action while retaining other means to seek for redress. The waiver clause in question read: Tenant waives its right to bring a declaratory judgment action with respect to any provision of this Lease or with respect to any notice sent pursuant to the provisions of this Lease. . . . [I]t is the intention of the parties hereto that their disputes be adjudicated via summary proceedings.

Id. at 356 (emphasis by the court).

The court concluded the waiver

was “clear and unambiguous, was adopted by sophisticated parties negotiating at arm’s length, and d[id] not violate the type of public policy interest that would outweigh the strong public policy in favor of freedom of contract.” Id. at 363. The majority elaborated that the legislature had “made certain rights nonwaivable in the context of landlord-tenant law,” but it had not made a commercial tenant’s right to waive declaratory relief nonwaivable. Id. at 367. (Other rights that tenants may waive include the right to a jury trial in nonpayment proceedings, waiver of counterclaims, and automatic rent escalation clauses. 159 MP Corp. v. Redbridge Bedford, L.L.C., 160 A.D.3d 176, 188 (N.Y. App. Div. 2018), aff ’d, 33 N.Y.3d 353 (2019), superseded by statute, N.Y. Real Prop. Law § 235-h (McKinney 2019). The court pointed to RPAPL 753(4) as indicative of the legislature’s position on Yellowstone relief for commercial tenants, as the statute specifically gives New York City residential tenants a 10-day post adjudication cure period, which is nonwaivable, and thus, essentially provides tenants more protection than a Yellowstone injunction would. 159 MP Corp., 33 N.Y.3d at 367.)

In a lengthy dissent, Judge Wilson argued “freedom of contract is not a limitless right,” as it is not “an individual right of the contracting parties,” but rather its purpose is “the economic advancement of society.” Id. at 367, 373 (Wilson, J., dissenting). He stated that in cases such as the one at hand, where the object of the contract was the lease of space, society had an interest in the contract. Id. at 376–77 (noting that “[c]ertainty and stability in the contractual affairs of a neighborhood grocery has [sic] consequences for local residents and employees, not merely for the grocer”). Judge Wilson predicted this decision would lead to landlords including declaratory and Yellowstone relief waivers as a standard provision in leases, and that landlords would use these clauses to terminate leases on a tenant’s “dubious violation” whenever rent values increased sufficiently. Id. at 369.

Echoing Judge Wilson’s dissent,

critics of the court’s decision in 159 MP Corp. claimed that if commercial lessors were allowed to include a clause waiving a tenant’s right to seek injunctive relief, the lessors would abuse this right and fabricate reasons to terminate the lease early. See Dan Schechter, Waiver of Commercial Tenant’s Right to Seek Declaratory and Injunctive Relief Is Enforceable, Even Though It Leaves Tenant with Little Practical Recourse, Com. Fin. Newsl., June 3, 2019 (“Commercial tenants will understand that if the neighborhood surrounding their leasehold gentrifies, landlords will invent pretextual grounds for termination, destroying the tenancy with little or no practical recourse, even when the lease is not in breach.”). For example, one critic argued that the lessor in 159 MP Corp. sought to “terminate the lease at all costs” to get a higher and more valuable use. Joel Binstok, Managing Principal, York Grp., L.L.C., Commercial Leasing CLE 10 (July 7, 2020) (transcript on file with author).

Some referred to the waiver as “Draconian” and argued that even if the waiver was enforceable, that did not mean the waiver was necessarily a good idea. See Schechter, supra.

However, others predicted the holding would lead to “heavy negotiations” about waiver provisions between landlords and tenants, with landlords requiring tenants to waive Yellowstone relief completely, and tenants specifically negotiating for a provision protecting their right to Yellowstone relief. Massimo F. D’Angelo, Bye-Bye “Yellowstone”?, 261 N.Y.L.J. 4, 4 (2019).

The following sample lease clause, which unambiguously waives a tenant’s right to seek Yellowstone relief, illustrates a lease provision that was recommended to landlords to include in their leases before the New York legislature intervened: Landlord and Tenant, after due consideration and negotiation at arm’s length, and being fully advised by their respective counsel, hereby agree that the cure period for any event of default under this Lease shall not be the subject of any

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application or motion by the Tenant to a Court of law for a socalled “Yellowstone” injunction to enjoin Landlord from maintaining a summary proceeding against Tenant, and Tenant hereby expressly and knowingly waives and relinquishes all rights it might otherwise have to seek a “Yellowstone” injunction or other comparable equitable relief, if and when Landlord should have occasion to issue a Notice of Default and/or a Notice to Cure under the terms of this Lease after any Event of Default, as defined in this Lease.

Advanced Real Estate Topics, N.Y.S. Bar Ass’n, at 85 (2017) (emphasis added).

New York Legislature Prohibits Injunction Waivers in Commercial Leases In response to the 159 MP Corp. decision, members of the New York State Legislature grew concerned there would be an increased use of injunction waiver clauses in leases and quickly passed N.Y. Real Prop. Law § 235-h.

N.Y. Real Prop. Law § 235-h (McKinney 2019). The statute expressly prohibits commercial leases from containing “any provision waiving or prohibiting the right of any tenant to bring a declaratory judgment action with respect to any provision, term or condition of such commercial lease.” Id. (It is understandable that the legislature did not extend this relief to residential leases, as residential tenants are protected from eviction or loss of tenancy through an entirely different system of rules, which make it significantly harder to evict a residential tenant than a commercial tenant.)

The bill’s sponsor, Assemblyman Otis, argued that the provision would help protect small businesses and other commercial tenants from arbitrary eviction whenever landlords wanted to charge higher rents. 2019 N.Y. Assemb.

B. No. 2554, N.Y. 242nd Leg. Sess., at 81–82 (June 4, 2019) (statement of Steven Otis, Assembl.). He stated the bill’s protection of tenants would also benefit commerce and New York’s

neighborhoods. Id. at 86. Arguing in favor of the bill, Assemblywoman Glick added that small business tenants do not have the time or resources to challenge an eviction in court and that this “minor protection” would be “vitally” important to them, especially as business competition has increased with online retailers like Amazon. Id. (statement of Deborah Glick, Assembl.).

Proponents of the bill focused solely on protecting the tenant, particularly small business tenants, and disregarded the landlord’s position in a lease transaction.

In opposition to the bill, Assemblyman Montesano argued it was completely appropriate to allow landlords to negotiate a tenant’s waiver of the right to seek injunctive relief because a lease is simply a contract that is negotiated by two parties—who typically are legally represented as in 159 MP Corp. Id. at 83 (statement of Michael Montesano, Assembl.). He opined that a tenant can merely negotiate to not waive the right, or any right, if the tenant did not want to do so. Id. Indeed, tenants often do waive rights in leases, such as waiving the right to a jury trial in a nonpayment proceeding, waiving counterclaims, and waiving the right to negotiate future rent with the inclusion of automatic rent escalation clauses and rent acceleration clauses upon the tenant’s default. 159 MP Corp., 160 A.D.3d at 188 (citations omitted).

Montesano warned that passing this bill would interfere with the parties’ ability to negotiate and reminded the assembly that if the tenant disagrees with the eviction process, the tenant can still go to court. N.Y. Assemb. B. No. 2554, at 84 (statement of Michael Montesano, Assembl.). In concluding, Montesano stated landlords also have an important interest if a tenant is in default because the landlord also can be held liable for a tenant’s default. Id. at 85 (noting, for instance, that landlords can be held liable for defaults, such as a dangerous condition on the premises). Nevertheless, the bill passed with Montesano as the only member voting against the bill.

Id. at 87.

The New York legislature’s

prohibition of injunctive relief waivers in commercial leases is not only an outlier compared to New York’s generally prevailing freedom-of-contract public policy, but it is also an outlier compared to other jurisdictions and the New York common law’s approval of similar waivers.

Analysis The Unforeseen Consequences of § 235-h Although the legislature enacted section 235-h as a protective measure, the legislature may have been shortsighted. Indeed, the main purpose of the law was to help small businesses and small business tenants. But there are also small business landlords who depend on the rent from their leases for their economic survival. See, e.g., Matthew Haag, New Threat to New York City: Commercial Rent Payments Plummet, N.Y. Times (May 21, 2020), https:// nyti.ms/3uO3j1F. This law could hurt a small business landlord because the landlord may be stuck with a defaulting tenant for months or years while a lease dispute is resolved. See, e.g., N.Y. Assemb. B. No. 2554, at 83 (statement of Michael Montesano, Assembl.). Yet, if the small business landlord had the option to include a waiver provision in the lease, the waiver could have been an added protection, and such protection would successfully satisfy the legislature’s goal in protecting small businesses.

Another potential consequence is that, despite the new law, landlords may still attempt to waive Yellowstone injunctions or injunctions generally in leases. Section 235-h only refers to declaratory judgment actions and does not explicitly prohibit waiving either of these remedies. N.Y. Real Prop. Law § 235-h (McKinney 2019); see Matthew Funk & Stephen P. Younger, New Legislation Bans Waivers of Declaratory Relief in Commercial Leases on Public Policy Grounds, Patterson Belknap: N.Y. Com. Div. Blog (Feb. 3, 2020), https://bit. ly/3qXYf9T; see also Dani Schwartz, So Long, “Yellowstone” Injunction Waivers?

Not So Fast . . . , N.Y.L.J. (Jan. 23, 2020), https://bit.ly/3tZvef V. Therefore, there

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may be an initial increased burden on the judicial system while the courts clarify whether injunctive relief is included under the law. However, courts likely will conclude the law encompasses injunctive relief because of the policy and legislative history behind the statute. See Funk & Younger, supra (“the policy behind RPL Section 235-h (and its legislative history) would give weight to a tenant’s argument that such waivers are also against public policy”).

Parties Should Be Free to Negotiate Injunctive Relief Waivers in Commercial Leases The New York State Legislature and the critics of the 159 MP Corp. decision failed to look at a lease transaction holistically and consider all aspects of the parties’ positions in a lease negotiation. Consistent with New York’s public policy, freedom of contract should prevail, allowing tenants and landlords to negotiate the waiver of injunctive relief, just as they are free to negotiate and waive other lease terms. See Vt. Teddy Bear Co., 1 N.Y.3d 470.

First, tenants have other forms of statutory protections outside injunctive relief. Addressing a main concern of the 159 MP Corp. decision—that all landlords would include a waiver of Yellowstone relief in leases, thereby making it easier for landlords to evict tenants— if a landlord specifically refers to the relief as Yellowstone in the waiver provision, a tenant still retains the right to seek injunctive relief, which is “always present[.]” Block, supra, at 59 (citing 233 E. 86th St. Corp. v. Park E. Apts., Inc., 131 Misc. 2d 242, 244 (N.Y. Sup. Ct. 1986)).

The “general standard for injunctive relief,” 233 E. 86th St. Corp., 131 Misc.

2d at 244, allows tenants to seek a preliminary injunction and a temporary restraining order to maintain the leasehold while the dispute over the default is resolved. N.Y. C.P.L.R. §§ 6301, 6311, 6313 (Consol. 2018). In situations where a court holds that a commercial tenant breached the lease, another statute allows the tenant to seek a stay allowing the tenant to maintain the lease during an appeal. N.Y. C.P.L.R. § 5519(c) (McKinney 2020).

The lease itself may also already provide tenant protection. In New York, sophisticated commercial parties can be expected to analyze issues that may arise when there is a question about a default and tend to negotiate clauses in the event one was to occur.

It is common for parties to include a “contractual Yellowstone” in the lease agreement. Adam Leitman Bailey et al., Commercial Leasing 39-4 (Joshua Stein et al. eds., 3d ed. 2017). This clause provides a procedure whereby a tenant can obtain some type of declaratory relief to allow the lease to remain in place while adjudicating whether a default exists. Id. (noting that, depending on the agreement, the clause may “contain agreed terms to be included in a Yellowstone injunction, should a court be inclined to grant one, such as the amount of the bond to be posted during the Yellowstone period, limitations on discovery, and a requirement for expedited litigation”). Unlike Yellowstone relief, the parties know exactly what to expect under this method and their intentions are respected.

Additional standard protective provisions of a lease include a notice and cure period, which covers the preevents to a default. Usually, commercial leases have a cure period that provides tenants 30 to 60 days to remedy an issue, which protects tenants from being automatically thrown out of their tenancy even if they did breach their lease. Frey, supra, at 175. Regardless of whether a lease contains a cure period of this length, the cure period is another term a tenant and landlord should, and are allowed to, negotiate. Interestingly, considering the concern about forfeiting the leasehold, sometimes courts have not granted Yellowstone injunctions when the lease did not have a cure period provision. See Boyarsky v. Froccaro, 125 Misc. 2d 352, 356–57 (N.Y. Sup. Ct. 1984). “The public policy concern over the forfeiture of a leasehold has, at times, surmounted this logical obstacle” and courts have granted the relief when the cure period had technically expired. Block, supra, at 67.

Second, as the court in 159 MP Corp. recognized, while negotiating a

contract’s terms, tenants likely agreed to waive their right to injunctive relief “to obtain a valuable benefit, such as a rent concession or the inclusion of a cure period following a notice of default.” 159 MP Corp., 33 N.Y.3d at 364. Parties on both sides of a contract generally concede to some provisions as part of a negotiation, but they are also rewarded by gaining some value in other aspects of the contract.

Just as landlords can insert an injunction waiver clause, tenants can protect themselves by negotiating for a clause that does not waive their right to seek injunctive relief. For example, a tenant could include a clause such as the following: “The foregoing [shall not be] deemed to limit Tenant’s rights to obtain injunctive relief or specific performance or to avail itself of any other right or remedy which may be awarded Tenant by law or under this Lease.”

Richard R. Goldberg, Retail Lease Agreement, SM002 A.L.I.-A.B.A. 1839 (July 26–29, 2006). Another variation of a clause preserving a tenant’s right to seek injunctive relief might be as follows: “Neither party shall be precluded by this Section . . . from seeking, from the courts of any jurisdiction, provisional or equitable remedies of a type not available in arbitration, . . . including temporary restraining orders and preliminary or permanent injunctions.”

Mass. Continuing Legal Educ., Inc., Drafting the Agreement, BSPOB MA-CLE 6-1, at 38 (2016).

The right to request a nonwaiver applies to both large and small commercial tenants. If small tenants “keep[ ] their essential business concerns in the forefront of the lease negotiations,” then they “should be able to achieve leases that meet most of their needs. Landlords benefit from tenants with successful businesses and will usually agree to lease concessions that are reasonably designed to achieve this mutual goal.” Tova Indritz, The Tenant’s Rights Movement, 1 N.M. L. Rev. 1, 17 (1971).

Third, as jurisdictions outside of New York illustrate, there have been long traditions of freedom to contract, especially when the contract involves

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a landlord-tenant relationship. Typically, the law assumes parties in a commercial lease are on a more equal bargaining level compared to those in a residential lease. See, e.g., Schulman v. Vera, 166 Cal. Rptr. 620, 625 (Ct. App. 1980). Jurisdictions have found it not only unnecessary to prohibit contractual injunction waivers, but also necessary to allow waivers of statutes and common law by commercial tenants in commercial leases. Practical Law Real Estate, Common Tenant Waivers in Leases (Commercial) (CA), Westlaw w-019-2202. It is notable too that other jurisdictions have not found it necessary to provide an equivalent option of Yellowstone relief for tenants.

In contrast to the normal deference afforded to landlords and tenants in deciding their own agreements, and other jurisdictions’ deference to the non-prohibition of injunction waivers, the New York legislature interfered with this contractual relationship. In enacting the statute, the legislature did not consider the holistic position of a landlord and should have been mindful about balancing the law’s effect on both parties, especially because an injunction stopping the cure period is never beneficial to a commercial landlord.

Particularly in New York City, landlords are not necessarily the more powerful party in a lease negotiation. Although tenants are traditionally viewed as the “underdog” requiring additional protections, this position should be reconsidered, as there are increased vacancy rates “caused by growing online retail, rising rents, and regulatory burdens.” Block, supra, at 71 (citing Scott M. Stringer, Retail Vacancy in New York City: Trends and Causes, 2007– 2017, Off. N.Y.C. Comptroller (Sept. 25, 2019), https://on.nyc.gov/3IVfTBb).

Both small and large businesses are struggling to maintain their leaseholds in the current environment, between the inability to pay their rents and the continued increase of consumers using e-commerce. Connie Loizos, Commercial Real Estate Could Be in Trouble, Even After COVID-19 Is Over, Tech Crunch (Apr. 8, 2020, 9:46 PM), https://tcrn. ch/3DvivVk. New York City is one of

the least profitable cities for landlords in the United States. Block, supra, at 54 (citing Angela Hunt, Least Profitable County for Rentals? New York, Data Shows, The Real Deal (Apr. 1, 2014, 3:10 PM), https://bit.ly/36MfKTC (stating, “Manhattan’s New York County [was] the least profitable market for landlords of all U.S. counties” in 2014)). The cost of injunctive relief and particularly Yellowstone relief for both landlords as well as the public might significantly outweigh the potential benefits the relief provides tenants. Block, supra, at 71. As previously discussed, tenants already have protection through statutory and case law that tends to favor tenants over landlords. Id. at 54.

In reality, landlords likely would not be so quick to evict a good tenant just to potentially profit more by charging a higher rent with a new tenant because having a stable tenant benefits a landlord. A reliable tenant is valuable to a landlord because it means a stable in-flow of cash. Robert Cox, Solutions for Commercial Tenants Facing Rent Challenges, Law360 (May 12, 2020), https://bit.ly/3LyoECV. Having a predictable income for a landlord is even more essential now in light of the effect COVID-19 has had on the commercial real estate industry. Id. (Of course, because of COVID-19, many tenants are currently struggling to pay their rent, but that discussion is beyond the scope of this article.) As Assemblyman Montesano argued in his opposition to section 235-h, landlords will not readily evict a commercial tenant in today’s market and economy simply because it is difficult to replace them. 2019 N.Y. Assemb.

B. No. 2554, at 84 (statement of Michael Montesano, Assembl.).

If the legislature had allowed the parties to decide whether or not to include the waiver provision, some landlords who did initially choose to include it may eventually have decided against doing so. Indeed, if the waiver provision was part of the lease, “savvy tenants” may have “skimp[ed] on tenant improvements” as they may have believed there was no reason to invest money in the premises if they could be evicted at any time. See Schechter, supra.

However, a “dull tenant” could negatively affect a landlord if the tenant’s sales were underachieving or could adversely affect a landlord’s neighboring properties, as landlords typically have adjacent properties. See id. These potential negative consequences could make landlords reconsider the waiver.

In short, because of the variables pertinent to a lease negotiation, commercial landlords and tenants should not be prohibited from contractually waiving injunctive relief when the waiver is clearly expressed and unambiguous.

The Protection Provided by Prohibiting Injunction Waivers Does Not Outweigh Allowing Parties the Freedom to Contract Injunctions are an equitable remedy that can be extremely beneficial to a party that has a legitimate concern over potentially forfeiting its leasehold. An injunction, especially a Yellowstone injunction, can be “an invaluable defensive tool to a commercial tenant.” Bailey et al., supra, at 39.17(D). As previously discussed, section 235-h was enacted— and the Yellowstone injunction was created—because the legislature and the judiciary believed it was necessary to protect the tenant from losing its entire interest in the property without the ability to litigate an alleged default.

N.Y. Assemb. B. No. 2554, at 81–82 (statement of Steven Otis, Assembl.); First Nat’l Stores, 21 N.Y.2d 630. However, in lease disputes, New York courts have tended to be pro-tenant and have even “ignor[ed]” the lease to protect the tenant. Berger, supra, at 805. The 159 MP Corp. decision raised concerns that if waiver of the relief was allowed, “[h]awkish landlords” would include

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the waiver as a “boilerplate” clause in commercial leases, thereby reducing the number of tenants who could seek the remedy created to protect them. Block, supra, at 73 (citing David B. Saxe & Danielle C. Lesser, Goodbye “Yellowstone” Road: Is This the End of the “Yellowstone” Doctrine?, N.Y.L.J. (Mar. 20, 2018), https://bit.ly/375kfIQ).

Landlords have been encouraged to include provisions in their leases waiving injunctive relief along with limiting other procedural tenant rights. See, e.g., Bailey et al., supra, at 39-4 (recommending landlords include a clause in leases with “agreed terms to be included in a Yellowstone injunction, should a court be inclined to grant one, such as the amount of the bond to be posted during the Yellowstone period, limitations on discovery, and a requirement for expedited litigation”).

There is particular concern in New York about protecting small business tenants, as New York has a strong public policy favoring small businesses and entrepreneurs. See NYC Small Business First, N.Y.C. Gov’t, at 3, https:// on.nyc.gov/36J2UFZ (reporting that in July 2014, Small Business First was launched by Mayor de Blasio in an effort to help small businesses by providing recommendations to make the government more effective and efficient in doing so). Bases for this policy include preservation of NYC streetscape, ensuring a diversity of businesses, strengthening NYC’s economy, anchoring communities, and adding vibrancy to the neighborhoods so as to preserve NYC’s appeal as a city where people want to live, work, and play. Id. As the legislature’s core concern was about protecting small businesses, at minimum the statute is overbroad and should have been limited to small commercial leases. A large commercial tenant is at least as sophisticated as a commercial landlord and, therefore, did not need additional legislative protection. Of course, this limitation would result in several issues that would need to be resolved, mainly how to define a small commercial lease. But this would not be an insurmountable hurdle.

For instance, the court could consider

Allowing injunction waiver provisions does not upset the balance between freedom of contract and social values. factors such as the amount of square footage, the type of zoning, or the rent amount in question to determine whether the case involves a small commercial lease.

Although protecting small businesses is an important policy, especially considering COVID-19’s effect on the real estate industry, see, e.g., Loizos, supra, the legislature should have focused on providing small business tenants with more useful protection, such as granting tenants tax relief. See, e.g., Janaki Chadha, Swaths of New York City Small Businesses Face Extinction in the Wake of Coronavirus, Politico N.Y. (June 6, 2020), https://politi.co/3u0aJjl. (This article does not argue the legislation should have focused its efforts differently because of the effect COVID19 would have, as the legislation was passed before the full reality of COVID19 was understood, but rather argues there were still other protections the legislation could have provided.) Tax relief is a benefit to small business tenants that would not have interfered with the contracting parties’ right to make their own agreements. Another option the legislature could have pursued was prohibiting the enforcement of arbitration clauses, as they are “more restrictive than [a] declaratory judgment waiver” because a tenant cannot seek relief in court. 159 MP Corp., 33 N.Y.3d at 365. Even more relevant to the legislature’s concern would have been prohibiting landlords from eliminating the standard notice to cure provision because courts have rejected a tenant’s request for Yellowstone relief when there

was no cure provision in the lease.

See Boyarsky, 125 Misc. 2d at 356–57.

Therefore, it could still be possible for a lease to include a provision essentially waiving a tenant’s right to injunctive relief, at least Yellowstone, which was the legislature’s concern. 2019 N.Y. Assemb.

B. No. 2554, at 81 (statement of Steven Otis, Assembl.) (“the Yellowstone decision[ ] has protected small businesses and commercial tenants for over 50 years”).

Of course, small business tenants may not always have the resources to retain an attorney during lease negotiations, thus potentially placing them at a disadvantage depending on the party’s own sophistication. A NYC assistance program was specifically created, however, to redress this hurdle. The “Commercial Lease Assistance Program” provides eligible small businesses with free legal services to help sign, amend, renew, terminate, or address a commercial lease. NYC Business, Commercial Lease Assistance Program, https://on.nyc.gov/3DvadNo. Furthermore, as previously discussed, even if a small business tenant is a single individual, other jurisdictions hold the tenant to the same general standard that a commercial party is sophisticated and, thus, able to negotiate and understand the terms, including an injunction waiver, of a lease.

Even if a tenant cannot obtain legal assistance, and though it can be harder for small business tenants to negotiate because the lease is usually a draft form and there tends to be little negotiation regarding the terms, see Berger, supra, at 791, injunctive relief is not such an essential right that it cannot be a negotiated term. Allowing injunction waiver provisions does not upset the balance between freedom of contract and social values. See Lawrence A. Cunningham, Cardozo and Posner: A Study in Contracts, 36 Wm. & Mary L. Rev. 1379, 1396 (1995) (commenting that “Cardozo’s principal concern . . . was with the risks of interparty exploitation and the judicial need to balance freedom of contract with other social values”).

As New York City landlords need tenants, they could very well concede to at

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least meet in the middle on the terms of the waiver. For instance, the provision could be drafted like the contractual Yellowstone provision. Moreover, even without section 235-h and even if a tenant could not insist upon the lease preserving its right to seek injunctive relief, a tenant could ultimately refuse to sign a lease containing an injunction waiver if the tenant feels that strongly about the right. Nonetheless, the availability to a tenant of injunctive relief in a commercial lease should not be fully determined based on “the power dynamics between landlords and tenants.” Block, supra, at 55 (stating the relationship dynamic should not be factored in when examining the value of the Yellowstone injunction).

Although a tenant who succeeds in obtaining an injunction during a dispute with the landlord can maintain the leasehold until the dispute is resolved, if the tenant is in default, it must still cure that default. In reality, therefore, the waiver prohibition merely extends the time that the tenant remains in breach. Even if the tenant is not granted injunctive relief, because the statute allows the tenant to at least argue for the relief, the landlord will incur additional expenses and is delayed in removing the tenant. Because of the potential added cost to landlords with essentially mandatory Yellowstone litigation, litigation costs may inevitably be passed along to a tenant in the form of higher rents yet also chill some leases from ever getting signed. See generally, e.g., Construction and Effect of Lease Provision Relating to Attorneys’ Fees, 77 A.L.R. 2d 735 (West 2020). Depending on the type of default, and whether the tenant plans to cure it, the public may end up suffering as well. The sooner the landlord can re-let the property, the sooner the public can benefit because, at minimum, active businesses generate higher taxes than an unoccupied property. Block, supra, at 65. A new tenant, who could be a small business tenant, would benefit by leasing the space and would also help the public by providing goods or services. Id. (citation omitted). In a city like New York, where

“shuttered storefronts are anathema” to many industries that New York’s public policy strives to protect, it is important to ensure property is not only occupied, but also thriving. Id. Despite the benefits small businesses bring to a community, an injunction right still primarily benefits a tenant, which is potentially in default, and not the public. Just as courts are concerned about the public interest when deciding to grant a preliminary injunction, see M. Devon Moore, The Preliminary Injunction Standard: Understanding the Public Interest Factor, 117 Mich. L. Rev. 939, 943 (2019), as any benefit a tenant brings to the community is secondary because it is the tenant who has the main interest in the leasehold, a contractual waiver of injunctive relief should be permitted. (This article does not argue a lease does not provide any societal value, as it appears Judge Wilson argued the majority in 159 MP Corp. did, but rather that the value does not rise to a level that a prohibition of injunctive waivers is needed. See 159 MP Corp., 33 N.Y.3d at 372–73 (Wilson, J., dissenting).)

In short, Yellowstone injunctions are “one of the most paralyzing tenant weapons that the judiciary has ever created.”

Bailey et al., supra, at 39.17(D). The legislature’s decision to prohibit declaratory relief waivers significantly burdens landlords as the injunction is now essentially automatic because courts freely grant Yellowstone injunctions. Block, supra, at 58 (“It is the relative ease of obtaining a Yellowstone injunction that renders it problematic”). As parties are allowed to waive many other rights—and even courts “regularly uphold agreements waiving statutory or constitutional rights”—parties should also be able to waive the right to seek injunctive relief.

159 MP Corp., 33 N.Y.3d at 361. Even when lease provisions are considered “draconian,” courts have enforced them.

Advanced Real Estate Topics, N.Y.S. Bar Ass’n, at 67 (2017) (citing Four Cees Jewelry Inc. v. 1537 Realty LLC, 11 Misc.

3d 1056(A), 815 N.Y.S.2d 494 (Sup. Ct. 2005) (enforcing a lease provision that allowed a landlord to shut off the electric within five days of a tenant not paying the electric bill)). Besides, implied

in every contract is the duty of good faith and fair dealing, which equally applies to the negotiation of a lease.

Restatement (Second) of Contracts § 205, cmt (a) (1981). But cf. Berger, supra, at 814–15 (arguing the standard form lease “dramatizes how painfully far the leasing practices . . . are from . . . contract integrity[,]” meaning “honesty or fairness of the contract and to its evenhanded completeness”). As the parties in a commercial lease are generally sophisticated parties, it is questionable to argue their deal was not fair or made in good faith.

Conclusion The New York legislature unnecessarily intervened in the landlord-tenant relationship and their constitutionally protected right to contract. U.S. Const. art. 1, § 10, cl. 5. The legislature should have followed the majority approach in allowing parties the freedom to contractually waive injunction rights. Injunction relief waivers would not upset the balance between parties’ autonomy and public order. See Movsesian, supra, at 1548. Commercial parties, whether large or small, should be treated as sophisticated parties who are capable of negotiating their own terms to suit their needs. If parties can negotiate to include a waiver of injunctive relief, parties can also expressly negotiate that injunctive relief cannot be waived. The additional statutory protections granted to commercial tenants do not justify the hindrance imposed on parties’ ability to negotiate all terms of their lease. In conclusion, 159 MP Corp. produces a preferable outcome than the New York legislature’s law. Injunctive relief, including Yellowstone injunctions, is not so paramount to protect commercial tenants’ property rights that the legislature needed to intercede. 159 MP Corp., 33 N.Y.3d at 366. When injunction or declaratory action rights are freely, voluntarily, and knowingly waived, and the right’s primary effect is private to the parties, the deeply-rooted policy of freedom of contract should be the default, and parties should be able to waive those rights. n

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D

Key Lease Provisions to Consider in Due Diligence

uring the due diligence process, whether an attorney represents the lessor or the lessee, the attorney will want to consider numerous lease provisions when advising the client. Although every situation is different, the following are some key lease provisions that often arise during due diligence.

Please note that in this article “due diligence” is being used somewhat loosely to encompass everything from considering a particular property to the terms to include in a letter of intent, in the initial lease draft, provisions to include (if representing the lessor, the typical drafting party) and provisions to pay close attention to during the initial review (if representing the lessee, the typical reviewing party).

The intent of this article is not to offer a comprehensive guide to reviewing leases or negotiating leases, but instead to provide an overview of some key provisions to consider during the due diligence process. At the end, a checklist is included to aid attorneys in their due diligence efforts.

Basic Information First, who is the lessor and who is the lessee? It sounds simple and basic, but perhaps because this is simple and basic, sometimes people gloss right over this.

Ensure that you have all parties’ complete names. For example, if a party is an entity, the lease must include the entity’s full name and jurisdiction of formation. If a trust, the name of the trustee and the full name of the trust must be included in the lease. If there are multiple parties, all owners must be included. One of the authors conducted due diligence for a lease in which the lessee was a defunct entity.

Because the entity did not exist at the time the leases were entered into, corrective Amy Lawrenson is a partner at Baird Holm LLP in Omaha, Nebraska. Imran Naeemullah is an associate at Cades Schutte LLP in Honolulu, Hawaii. Karen Nashiwa is deputy general counsel at Triple Oak Power in Portland, Oregon.

By Amy Lawrenson, Imran Naeemullah, and Karen Nashiwa documents ratifying the leases and changing the lessee’s name were necessary before the deal could move forward.

The Premises The lease must describe the premises with particularity, to the exclusion of all other real property. This benefits the lessor and lessee alike. Consider whether there are any obstacles to doing so. For example, is the square footage of the premises readily available? Is there a valid legal description of the premises? Is there a clear map of the premises (and does it include any extraneous information that may potentially lead to confusion or conflict with the written description of the premises)? Identifying missing information or potential problems can help to avoid issues in closing the transaction. Including a proper legal description and depiction of the leased premises in the lease helps to ensure that the parties agree on the described premises.

Use of the Premises Use is a perennial issue in leases. What is the intended use of the premises?

Many leases require that the lessee use the premises only for purposes allowed by applicable law and zoning regulations. Such a provision requires a two-step review. First, is the intended use permitted under applicable zoning regulations, and second, is the intended use allowed by other applicable law? For example, applicable zoning regulations may allow a medical marijuana dispensary on the leased premises, but state law might prohibit the sale of medical marijuana.

When considering use, the attorney should also contemplate what the lessor wants (if representing the lessor) and what the lessor will allow (if representing

the lessee). For example, if the prospective lessee wants to open a music studio the lessor will be concerned about a potential nuisance to its other lessees. The lessee will want to ensure that the lease allows for it to operate its business without having to worry about lease violations.

Use also extends to other issues. For instance, the lessor should consider what type of businesses it will allow in the premises; and the lessee should consider whether the lessor’s allowed use will be compatible with its intended use.

Exclusive use provisions should also be considered. For example, a lessor must consider whether an exclusive use provision is necessary to protect an existing lessee’s business (whether contractually or as a practical matter to preserve revenues from percentage rent), and a lessee must consider whether an exclusive use provision is acceptable. Both sides should give careful consideration to exclusive use provisions, particularly as the exclusive use provision may not be tested until well into the lease term. For example: Is a hamburger (e.g., at a fast-food burger restaurant) a sandwich for purposes of an exclusive use provision in favor of a deli?

Will the permitted use of a new tenant cause issues with existing tenants or at the end of the lease term? In the event a lessee abandons the premises, the personal property left behind is usually deemed abandoned, and lessors often have the right to remove or dispose of such personal property without liability to the lessee. But what if the personal property is a type of property with which a lessor does not want to be involved? One of the authors represented a lessor who leased space to a gun store. The lessee stopped paying rent and abandoned the premises, so the lessor evicted the tenant. Although the matter was straightforward, what to do with the guns and ammunition left behind was not. Thankfully, the Bureau of Alcohol, Tobacco, Firearms and Explosives was in charge of handling what was left behind.

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Insurance Insurance falls into two general categories: the insurance required by the lease (e.g., commercial general liability insurance, property insurance, etc.) and insurance that the lessee should consider obtaining.

A lessor must consider the types of insurance it wants the lessee to obtain as a condition of entering into the lease. The landlord must consider what insurance coverage is reasonable for the market and what a lessee is likely to be able to obtain for an affordable price. A lessee must consider what the lessor is likely to require and whether the mandated coverage can be obtained for an affordable price.

For example, consider a lessee entering into a ground lease for a hotel located near the ocean. It is not located in an area of likely flooding, according to the Federal Emergency Management Agency (FEMA), but the lessor insists on flood insurance because it does not want to rely on the FEMA risk map. Can the insurance be obtained at all, and if so, is the premium reasonable? Is it likely to be renewable for the entire lease term at an affordable price?

Again, in this hotel example, the lessor may be concerned about the potential for earthquakes and wants the lessee to obtain earthquake coverage. The property might be in an area where an earthquake is extremely unlikely, yet coverage may be difficult to obtain and will be expensive.

Consider whether this may be off-putting to the lessee and, if the lessee objects, whether the lessor will be willing to waive this requirement.

A further consideration may be the type of lessor. If an entity routinely deals in real estate transactions, this may not be an issue, but if the lessor is a group of trusts, then negotiating the lease terms may be more difficult. Additionally, depending on the type of lease, the lessee may want to consider title insurance.

This is particularly true for long-term ground leases. The lessee should consider whether the premises will be insurable, what policy coverage will be available, what endorsements will be necessary (and available), and the cost of coverage. It is generally advisable to begin looking into title insurance considerations early in the process, particularly if underwriting may present some issues, therefore requiring

time and attention in connection with the delivery of the items that the title insurer will require in order to commit to issuing the policy.

Nuisance A lessor’s counsel will want to evaluate the lessee’s business for potential nuisance to other lessees or neighboring properties. Lessee’s counsel will want to determine whether its client’s intended use may create potential nuisance issues. Each side will have this in mind when negotiating language related to nuisance, so learning about the potential issues in advance will help.

For example, a hot sauce manufacturer is looking for a new location for its production facility. There are two prospective sites, one that is more appealing to the manufacturer but is in an industrial complex where the other lessees likely would be exposed to hot sauce “fumes” in the air and could complain to the lessor, and another location that is less convenient but is in a sparsely populated area. Given the potential for nuisance claims, and the lessor’s likely unwillingness to allow use of the premises that may constitute a nuisance, it may be better to advise the client of the potential issues before lease negotiations so it can focus on the alternative site.

Parties’ Rights Often, negotiated provisions address termination, relocation, and expansion rights. For example, a lessor may want to negotiate for the right to relocate the lessee to another space, whereas a lessee may want to negotiate for the right to relocate if a larger space is needed. The potential for these negotiations should be considered during due diligence and the likely alternative spaces evaluated for feasibility.

Particularly in a long-term ground lease, but sometimes in other leases such as restaurant leases or office leases, the issue of who keeps the improvements at the end of the lease term is an essential topic. During the due diligence review, the lessor will need to determine how important keeping the tenant improvements is and what concessions the lessor may be willing to make.

Audit rights are often closely negotiated. For example, the lessee may want to

negotiate for the right to audit common area maintenance expenses. During due diligence, the lessee should consider the frequency, mechanism, and costs associated with periodic inspections of the premises during the lease term. Having clear expectations on the transparency of how reconciliations are prepared can help prevent friction and disputes between the parties.

Renewal options may be of interest to either party. For example, are conveyance or transfer taxes imposed on leases of a given duration, and do those taxes apply to options of a certain duration? Flagging and researching potential issues upfront can save time later in the process.

Other Issues to Consider Assignments. The assignment clause is important and often heavily negotiated, in which many issues need to be thought through. Should the assignment release the original lessee from all obligations under the lease (rarely agreed to by landlords)? Can either party freely assign their interests or is prior written consent required? What about affiliates—can assignments to affiliates be freely effected without prior written consent? If a lessee will be taking an assignment of a lease, it is critical to review in advance what the assignee’s obligations will be, such as with respect to rent, CAM payments, maintenance obligations, and surrender obligations.

This tends to be more pronounced when representing a lessee, but sometimes lessors can have obligations that a potential assignee should be mindful of.

Subleases. Subleases present a unique issue and should be discussed thoroughly prior to lease execution. The sublessee is subject to all of the terms of the master lease, so it is important for the sublessee to review the master lease during the due diligence process to ensure that complying with those terms is acceptable. Likewise, lessors must vet potential sublessees to ensure they meet any lease requirements, such as those imposed by consent to sublease provisions.

Due authority. Many leases require the parties to represent and warrant that they are duly authorized to enter into the lease. Parties should make sure they

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July/August 2022 55

have that authority or, if specific authorization is required, that the appropriate documentation is completed and signed in a timely manner. If a new entity will be formed that will enter into the lease, consider the lead time required for the state of formation to process the filing. Do not

let a potential filing issue delay or kill the transaction.

Conclusion As Benjamin Franklin’s adage goes, “An ounce of prevention is worth a pound of cure.” The checklist and topics covered

should aid a practitioner in lease due diligence. Being aware of and discussing key provisions with your client in advance is a best practice that decreases problems down the road, which should lessen the need for expensive cures. n

Lease Review Checklist BASIC FACTS

Measurement period / lease year:

Tenant Landlord

Name:

When payable:

Address:

Reporting requirements:

Name:

Inspection rights:

Address: Guarantors

Name:

Expense pass-throughs: Operating expenses or CAM (common area maintenance

Address:

· Pro-rata share:

Building/shopping center

· Expense stop:

Use and occupancy

Permitted uses:

· Base year:

Prohibited uses:

Items included:

Continuous operation / occupancy obligation:

Items excluded: When payable:

Exclusive use rights: Term

Radius / noncompetition clauses:

Adjustment mechanism (is paid on estimated basis):

Initial:

Gross-up provision:

Commencement date:

Reporting requirements:

Renewal / extension rights: · Method of exercise:

Audit/inspection rights: Rent adjustments

· Conditions to exercise: PREMISES AND EXPANSION RIGHTS Initial premises description

Rights of refusal / first offer Ancillary use rights

CPI: Other:

Rent concessions Area measured:

Security deposit

Area stipulated: Expansion rights

Basis:

Cash / letter of credit:

Conditions to exercise:

· If letter of credit, when must it be replaced:

Method of exercise:

Methodology for return:

Conditions to exercise:

Prepaid rent

Method of exercise:

Proration provisions

Common areas:

CONSTRUCTION AND OCCUPANCY

Appurtenances:

Landlord’s obligation

Access ways / easements:

Tenant’s obligation Scheduling

Parking rights

Initial plans:

Landlord relocation right

Approval / comment:

RENT AND OTHER COSTS

Final plans:

Base rent

Amount per square foot per year:

Completion:

Annual:

Allocation of costs of delay:

Monthly:

Cost allocation

Tenant:

When payable: Percentage rate

Percentage: _______________%

LEGAL COMPLIANCE

Basis (gross sales, net receipts, etc.):

Landlord’s obligations

· Definition of basis—comments:

Tenant’s obligations

Breakpoint:

Burden for remedial work (ADA modifications, environmental cleanup, etc.)

Offsets:

Landlord:

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ALTERATIONS AND IMPROVEMENTS

RISK ALLOCATION Casualties

Landlord’s insurance requirements:

Tenant’s rights (premises)

Removal obligation:

Rights / obligations to rebuild / repair:

Casualties (continued)

· Landlord:

Landlord’s rights (common areas)

· Tenant:

ASSIGNMENT/SUBLETTING

Rights to terminate:

Landlord’s consent requirement

· Landlord:

Consent standards

· Tenant:

Affiliate / sale of business transfer rights

Application of insurance proceeds: · Landlord’s insurance: · Tenant’s insurance:

Restrictions on indirect transfers

Rent abatement:

Landlord cancellation / recapture rights

Indemnities:

Allocation of profits

· Landlord:

Tenant liability following transfer

· Tenant:

DEFAULT AND REMEDY

Waiver of subrogation:

Tenant default

(Transfers of equity interests by operation of law):

Event of default:

Landlord’s remedies

Recover possession:

Named as additional insured:

Termination:

· Landlord’s liability policy:

Self-help:

· Tenant’s liability policy:

Damages:

Condemnation:

Liquidated damages:

· Rights / obligations to rebuild / repair:

Mitigation requirements:

· Landlord:

Other:

· Tenant:

Landlord’s default

Event of default:

Rights to terminate:

Notice and cure rights:

· Landlord:

Mortgage notice requirements:

· Tenant (premises / common areas):

Tenant remedies

Damages:

Rent abatement:

Offsets:

Awards:

Self-help:

· Mortgagee rights:

Termination:

· Landlord rights:

Liquated damages:

· Tenant rights:

Mitigation requirements: Other:

LANDLORD SERVICES / OBLIGATIONS MISCELLANEOUS

Maintenance and repair of premises Occupancy-related services

Restrictions:

Notice of cure rights:

· Landlord: · Tenant:

Requirements: Ownership:

Tenant’s insurance requirements:

Limitations on landlord’s liability HVAC:

Title

Lighting: Electrical:

Warranty of title: Subordination and attornment:

Notices

Landlord:

Janitorial:

Tenant:

Other:

Mortgagees:

Standard hours of service

Estoppel requirements

Standard level of services

Landlord’s rights to enter

After-hours requirements

Recordation

Nonstandard service requirements

Holdover

Maintenance and repair of common area TENANT MAINTENANCE AND SERVICE OBLIGATIONS

Exhibits Rules and regulations SPECIAL PROVISIONS / COMMENTS

Maintenance and repair After-hours costs Nonstandard services costs

Published in Probate & Property, Volume 36, No 4 © 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.

July/August 2022 57

TECHNOLOGY P R O B AT E Interview with Joel Revill, CEO of Two Ocean Trust The co-hosts of the Digital Planning Podcast (DPP), Jennifer Zegel, Justin Brown, and I, recently sat down with Joel Revill, CEO of Two Ocean Trust.

Based in Jackson Hole, Wyoming, Two Ocean Trust provides a full range of trust and investment capabilities to high-net-worth individuals and families. Additionally, Two Ocean Trust is the first wealth management platform to bridge traditional securities, alternative investments, and digital assets into a single fiduciary platform.

The Q&A below consists of selected parts of the podcast conversation with Joel and has been lightly edited for flow.

Readers interested in hearing more of the conversation can find DPP’s February 15, 2022, episode with Joel wherever you listen to podcasts.

DPP: Can you talk about how Two Ocean decided to position itself to take advantage of Wyoming’s emergence as a state that leading in digital asset and blockchain platform development?

JR: Wyoming has long been known for being advantageously positioned in managing generational wealth, especially when it comes to trust and estate planning. And Wyoming is also known for having the lowest overall tax burden among the 50 US states. Three years ago, Wyoming Governor Mark Gordon appointed me to serve on a legislative committee, the Wyoming Blockchain Select Committee. Since the formation of that committee, the state legislature has passed a total of 24 laws that address blockchain technology and Technology—Probate Editor: Ross E. Bruch, Brown Brothers Harriman & Co., One Logan Square, 14th Floor, Philadelphia, PA 191036996, ross.bruch@bbh.com.

Technology—Probate provides information on current technology and microcomputer software of interest in the probate area. The editors of Probate & Property welcome information and suggestions from readers.

digital assets, one of the most important of which clarifies the legal status of digital assets as property within Wyoming’s Uniform Commercial Code. So, there’s clarity about what exactly digital assets are and how they are treated under our property laws in Wyoming. That, in turn, allowed the Wyoming Division of Banking to build a regulatory framework around digital asset activities and gave us comfort moving forward in a fully-regulated sense. Very early on we wanted to position Two Ocean in front of the unique advantages that Wyoming has to offer, in managing both traditional and alternative investments, and now with digital assets as well.

DPP: Two Ocean is unique in that you are the first trust company to accept digital assets into a trust. How have you found that digital assets fit into traditional estate planning for your clients?

JR: There’s somewhat of a conflict between the self-sovereign ethos of digital assets and the basis of traditional estate planning. With traditional estate planning, three pieces must be in place to form a trust: a grantor who establishes the trust, beneficiaries, and a trustee who takes control of the trust’s assets. To unlock some of these benefits

of traditional trust and estate planning, the grantor must separate herself from dominion and control over the transferred assets. Control must be given to the trustee. That flies in the face of crypto being a self-sovereign asset. There is a very interesting intersection between these two worlds right now, and we are working to create solutions for our clients who subscribe to the idea that crypto is a self-sovereign asset, but who also recognize that although being your own bank can be beneficial in some ways, if they become incapacitated or pass away without a proper succession private key succession plan in place, that value could be lost forever. Helping our clients think about the self-sovereign wealth that they have created, which will last beyond their lifespan, is a fascinating exercise and what we get to do every day.

DPP: Are you seeing digital assets being used for multi-generational wealth and wealth planning strategies?

JR: We’re seeing more of this, but I think it’s still very early. A lot of our digital asset clients are young and, not surprisingly, not thinking as much about estate planning. But I think that though there is an inherent friction between digital assets and traditional trust and estate laws, there are inherent attributes of digital assets that lend themselves very well to preserving and growing generational wealth.

Investment strategies for generational wealth tend to emulate “endowmentstyle investing,” which seeks to invest in diverse and uncorrelated assets and grow principal balances at a rate greater than inflation. What is unique about digital assets and cryptocurrencies is that the store of value properties they

Published in Probate & Property, Volume 36, No 4 © 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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TECHNOLOGY P R O B AT E

possess lend themselves very well to this investment style.

The first is a limited supply. With bitcoin, for example, we know that there will never be more than 21 million bitcoins outstanding. The issuance of bitcoin is finite. It’s programmed, and it can’t be changed. For the next 12 months, we know that the new bitcoin issued will be less than 2 percent of the total outstanding bitcoins, and that number is going to go down until it eventually reaches zero. Contrast this limited supply against other potential investments, especially fiat currency or US dollars, where the rate of issuance of the currency has been double-digits for the last several years. The reality is your wealth is being debased over time by monetary inflation. That is what makes certain digital assets attractive. A sound money standard, like that of bitcoin, is superior for storing multi-generational wealth.

The second thing about digital assets is the persistent lack of correlation between the prices of these assets and traditional investment securities such as stocks and bonds. If you look at bitcoin relative to a 60/40 portfolio of equity and fixed income securities over the last three, five, and ten-year periods, there’s a very low correlation.

Specifically, there is a 0.2 to 0.3 correlation, depending on the lookback period, which means that a small allocation of bitcoin to a diversified investment portfolio can reduce the volatility of the portfolio over a long period of time.

These two things—a finite and known supply and persistent lack of correlation —make a lot of sense for an asset class being considered as part of an overall generational wealth planning strategy.

DPP: Does Two Ocean have any restrictions on the types of cryptocurrency or digital assets that can be invested? For instance, are you able to custody non-fungible tokens (NFTs) at this time?

JR: We do. We work with our regulator, the Wyoming Division of Banking, to put in place policies that prescribe which digital assets we can custody and therefore accept in a trust. These

policies are based on minimum thresholds, such as trading liquidity, market cap, and private keys, which our subcustodian technology partners can store within their technology.

DPP: How do you integrate sub-custodians with your platform? Can you talk about that process?

JR: Two Ocean Trust is the custodian of record for our clients. All the “know your client” (KYC) and antimoney laundering (AML) responsibility resides with us, as well as asset and tax reporting. For storing cryptographic key information, however, we engage with partners across the board in both traditional financial assets and digital assets to assist us with things like sub-custody of digital assets. We have multiple partners who serve as sub-custodians, storing cryptographic keys for our clients. How this specifically works is somewhat up to the client. Each of the sub-custodians we work with has its strengths, and we help our clients determine which solution is best given their needs.

DPP: Staying on the subject of KYC and AML for a moment, running these processes must be extremely difficult when we’re talking about digital assets and, in particular, cryptocurrency. Can you walk us through your thinking here and how you’ve come to terms with it?

JR: With regards to our clients, it’s no different from any other KYC/AML process that we go through. We run the same thorough background checks and continual monitoring of clients’ activities that are required under the USA Patriot Act. As it relates to crypto assets, it becomes a bit more challenging. There are service providers in the marketplace who can forensically track where the crypto assets originated from before a given transaction, and we employ those services to create a sort of audit trail. This is managed as part of our regulatory oversight by the Wyoming Division of Banking, as well as a third-party audit firm that helps us to craft these policies and procedures.

DPP: Many financial institutions are very concerned about security and are hesitant to hold cryptocurrencies

because of the security protocols that are necessary to protect private keys.

Can you talk a little bit about what Two Ocean does to maintain the security of private keys?

JR: If I compare the security protocols that are in place around the digital assets that we manage for our clients relative to traditional securities, there is almost no comparison. The security around the digital assets is far superior in just about every way. Here’s a good example to put this into perspective: for us to access one of our client’s private keys, we must go through a verification process that entails multiple senior officers completing multiple biometric authentication procedures, which include voice recognition, thumbprint recognition, and facial recognition.

Importantly, there are no usernames, no passwords, and no human interactions involved in the authentication process—it’s all done algorithmically.

All cryptographic key information is stored in Hardware Security Modules (HSM) that are always offline. At no time during that transaction process are our clients’ private keys ever exposed to the internet. If you contrast this to how cash or traditional securities are handled by financial institutions in the United State, it is clear which is the more vulnerable side of the business.

DPP: Because we know that technology is inherently flawed, and there is no human oversight for the algorithm that is pulling this information, do you have recovery protocols if there is a glitch in the code or some other snafu?

JR: We do. The biometric authentication algorithm can detect coercion.

In all these instances, there is an override that kicks the approval out of the algorithm, and a human is brought in to verify following our policies and procedures. n

Published in Probate & Property, Volume 36, No 4 © 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.

July/August 2022 59

CAREER DEVELOPMENT AND WELLNESS My Life Is My Artwork: Create a Practice That Is Part of the Artwork “If I am an artist and my life is my art, then I already have everything I need.”

--Rolf Gates I read the above quote when I was taking a yoga training. The thought stuck with me. I started to consider what the canvas of my life looked like. I noted that parts of the canvas contained dark clouds. Other parts contained rainbows. I noted several places where I had fallen off of a horse and was struggling to get back up again. There are the parts where I am reaching for the stars.

There are times when I am wrapped inside a bud and times when life is in full bloom.

The Blurry Parts I particularly noted two things about the canvas. There are many parts of the canvas where the colors and objects are just a blur. I also noted that the canvas includes many people.

I thought about the blurry parts. The blurry parts come in many sizes and forms. Some are periods of great trauma, such as the time surrounding the loss of my brother. Some are times when life is simply a mad juggle trying to balance everything on the plate. The blurriest part of the canvas is the part that reflects the time I was trying to build my law practice in BigLaw while raising a young child as a single mom.

When I think about that time, I remember how many times I thought, “I only have to do this for X number of years….”

The best part of the canvas is where I made a shift to a clearer vision, a clearer path, and a life that is by design. For me, it was a decision to leave BigLaw and start my own firm.

Starting my firm had its challenges, but, at the same time I left BigLaw, I made an absolute commitment to making conscious decisions about anything that I put on my plate. There are parts of the canvas later that still reflect a plate that is too full with items dropping off, but those parts of the canvas are always followed by moments where the plate returns to manageability as a result of making conscious choices to make that happen.

Career Development & Wellness Columnist: Mary E. Vandenack, JD, ACTEC®, COLPM®, is the founding and managing member of Vandenack Weaver LLC in Omaha, Nebraska. Mary also has an advanced certificate of positive psychology from the University of Pennsylvania and is a long-time Yoga RYTE.

The Blank Part of the Canvas Consider creating your own canvas and spending some time evaluating what the canvas looks like to date. Did you create what is on your canvas, or did it happen haphazardly? At some point, the canvas will be blank. The blank part of the canvas represents today and whatever is left of your journey on this earth.

When I got to that part of my canvas, I realized that I could create my own artwork. It might not always be pretty.

I might not always be in control of life events, but I could be in control of making certain life decisions and creating resilience and positivity in my life despite the events I could not control.

Design Our Life and Our Practice as Artwork I have always struggled with the phrase “work/life balance.”

The phrase implies that work and life are two different things and that work is not part of life. The fact is that for those of us who have chosen the legal profession, work is often a significant part of our life.

When I started my firm, I decided to design my practice so that I loved it. I had been through a few law firms before I set out on my own. During that period, I had come to believe that I hated practicing law, but the fact was I simply hated the cultures in which I was practicing law. In my own law firm, I got to choose the culture.

I was fortunate to work with some excellent mentors and coaches as I built my business. I defined what my practice areas were going to be. I chose practice areas that I enjoyed and that allowed me to build relationships. I am not suggesting that every lawyer start her own practice, but rather that, wherever one is practicing, she make conscious decisions about as much as possible on the chosen career path.

Personally, I defined what an ideal client would be. I committed to working only with clients who fit that definition.

By consciously choosing my practice area and being selective about the clients I accepted, I was able to build a practice that I am passionate about. It’s a rare experience that I am ever looking at the clock wondering when the end of the workday will come. Instead, I am often trying to beat the clock to finish things that I really want to do. I am trying to beat the clock because I have also made commitments to end the day and shift.

Published in Probate & Property, Volume 36, No 4 © 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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Having Intentions and Returning to Them In designing my plan, I worked with various coaches. I was taught the power of setting intentions. Setting intentions creates a picture of what we want to do. I wanted to have a practice that I loved, but I also wanted to have time for activities and people who I care about outside of the practice.

It is helpful to create a written list of intentions. Intentions can be general or

specific. A general intention might be wanting to have more emotional resilience. A specific intention might be limiting your work schedule to a certain number of hours per week.

Once you have created a written list of intentions, it is important to return to them regularly. An issue that arises for many of us in living by our intentions is tricky patterns. The patterns represent ways that we have trained the mind in the past. To the extent any of

our go-forward intentions require some changes, we need a method to hone the process.

There are many methods to hone the process. One such method is meditation. Seek to train and focus the mind in a way that allows you to create art with the way you live your life.

John W. Gardner said: “Life is the artwork of drawing without an eraser.”

Draw well. n

Disclaimers in Estate Planning, Second Edition

By Christopher P Cline

Disclaimers are governed by both state and federal law.

This concise guide explains the Uniform Acts involved and the specific issues raised by Section 2518 in order to create the best strategies and techniques for effectively utilizing disclaimers.

$139 NON-MEMBERS $109 YOUR PRICE

https://ambar.org/ disclaimersrpte $169 NON-MEMBERS $134 YOUR PRICE

A Practical Guide to Commercial Real EstateTransactions: From Contract to Closing, Third Edition

By Gregory M Stein, Morton P Fisher Jr, and Michael D Goodwin

Understand how to effectively handle a commercial real estate deal. Useful for attorneys with all levels of experience, the authors explain every aspect of a real estate transaction, focusing on the drafting, negotiation, and revision needed to get the deal done. Includes forms and appendices.

https://ambar.org/practicalguiderpte Published in Probate & Property, Volume 36, No 4 © 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.

July/August 2022 61

LAND USE U P D AT E Takings Litigation and Zoning Reform Takings Litigation Last spring, the Supreme Court clarified the ripeness rules for bringing takings cases in federal court. For decades, property owners had to sue for compensation in state court to make their takings ripe for federal court. This requirement became a trap. If a property owner sued in state court and lost, she was blocked by issue preclusion if she returned to federal court to relitigate the takings claim.

In Knick v. Township of Scott, 139 S. Ct. 2162 (2019), the Court found problems and mistakes in its earlier ripeness decision that had required the state compensation remedy, saw the inequity of the catch-22 trap, and held that a property owner did not have to sue for compensation in state court before bringing a takings case in federal court.

Knick did not overrule the second part of the ripeness rule, which requires a property owner to obtain a final decision before she can bring a takings case in federal court.

The difficulty is that it is not clear how the final decision rule should be applied. A facial takings attack on a land use regulation, which claims it can never be applied so that a taking will not occur, does not have to comply with the finality requirement. An absolute prohibition on hillside development is an example. But what if the takings case is an as-applied takings claim, and the prohibited development could be Land Use Update Editor: Daniel R. Mandelker, Stamper Professor of Law Emeritus, Washington University School of Law, St. Louis, Missouri.

allowed with an administrative hardship variance or a zoning amendment that changes the zoning map to a new zoning district where the development is permitted? Does the final decision ripeness rule mean that a plaintiff must exhaust these remedies?

Pakdel v. City and County of San Francisco, 141 S.Ct. 2226 (2021), a per curiam opinion, provided a partial answer to these questions. A married couple owned a unit as tenants in common in a multi-unit residential building that they rented out. They decided to convert their property interest to condominium ownership, and the city‘s conversion program allowed unit owners to seek conversion to condominium ownership after paying a filing fee and meeting several conditions. One condition required nonoccupant owners like this couple, who rented their unit, to offer their tenants a lifetime lease.

The owners of the unit offered a lifetime lease to the tenant, and the city approved the condominium conversion, but the owners backed out and asked the city either to excuse them from executing the lifetime lease or to pay them compensation for the lease requirement. The city refused both requests, and the owners sued in federal court under Section 1983 of the federal Civil Rights Act, 42 U.S.C. § 1983, claiming that the lifetime lease requirement was an unconstitutional regulatory taking. Although the city denied their requests twice and could no longer grant relief, a panel of the Ninth Circuit held its decision was not truly “final” because the request for an exemption came at the end of the administrative process, and the property owners

had not made a timely request for an exemption through “prescribed procedures.”

The Court reversed and held that the city had made a final decision. This requirement is “relatively modest,” it said, and “nothing more than de facto finality is necessary” to show that a final decision has been made. In this case, the decision was final because there was no question about the city’s position, and it inflicted an actual concrete injury because the property owners had to choose “between surrendering possession of their property or facing the wrath of the government.”

The Supreme Court also held the Ninth Circuit was wrong when it required exhaustion of administrative remedies. Some background is necessary here. Exhaustion of remedies is required in state court before a suit can be brought to challenge a land use regulation with a taking or any other claim. Exhaustion of remedies is not required as a condition in an action brought under Section 1983. Takings claims under the federal constitution are self-executing and do not have to be brought under Section 1983, but attorneys usually bring them under Section 1983 because they can collect attorney’s fees if they prevail in the litigation.

The property owners in Pakdel sued under Section 1983, and the Court held that Section 1983 “guarantees ‘a federal forum for claims of unconstitutional treatment at the hands of state officials.’” That guarantee includes “the settled rule” that “exhaustion of state remedies is not a prerequisite to an action” under Section 1983. The Ninth Circuit’s holding that the plaintiffs must

Published in Probate & Property, Volume 36, No 4 © 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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LAND USE U P D AT E

seek “an exemption through the prescribed [state] procedures … plainly requires exhaustion” of remedies, and is “inconsistent with the ordinary operation of civil-rights suits.”

The Court then held “that a plaintiff ’s failure to properly pursue administrative procedures may render a claim unripe if avenues still remain for the government to clarify or change its decision.” Earlier cases had held that a property owner must make an application for a variance to make her takings case ripe. But that requirement did not apply in this case. “[A]dministrative missteps,” as occurred in this case because the property owners delayed their exemption request, did not defeat ripeness. Why were “missteps” an issue if an exemption was not required?

There is another problem. An “avenue” to clarify or change a decision, like a variance, can be an administrative remedy, but the Court said that exhaustion of administrative remedies is not required in Section 1983 cases, including takings claims. An application for a variance is necessary to exhaust remedies in state courts, but the Court’s rejection of the exhaustion of remedies requirement in Section 1983 cases should mean that an application for a variance is not required in federal courts.

Neither did the Court clarify what other “avenues” are necessary to provide a government an opportunity to “clarify or change” its position. Must a property owner apply for a legislative map amendment that could “clarify and change” the government’s position by moving the property to a zoning district where the owner’s desired use is permitted? Does it make a difference that a legislative map amendment is not administrative relief? Must a property owner apply for a conditional use permit, which would “clarify and change” the government’s position by providing permission to develop the land?

Isn’t this prohibited administrative exhaustion?

Pakdel has important consequences for takings litigation in federal courts.

It explained that a formal denial is not

required to satisfy the ripeness requirement. By rejecting the exhaustion of remedies requirement, it relieved takings plaintiffs from the burden of seeking administrative relief before suing in federal court. The problem is that the holding that a takings claim is not ripe until the government has been given an “avenue” to “clarify or change” its position is inconsistent with the Court’s rejection of an exhaustion of remedies requirement.

Zoning Reform Zoning reform has taken center stage in recent years. I have reviewed several recent zoning reform proposals and recently found an article that provides a comprehensive look at a zoning reform strategy. Lee D. Einsweiler, Practice Simplified Zoning, Zoning Practice (American Planning Association Jan. 2018). Lee is a principal and founder of Code Studio, a planning firm in Austin, Texas, and has extensive experience across the country with zoning.

Lee’s article covers a wide range of issues, including a discussion of different zoning alternatives. What follows is a summary of Lee’s ideas about the problems that have complicated zoning.

He begins by explaining that zoning originally had two key purposes: Making sure that nearby uses did not harm each other, and improving public health by managing building bulk. These purposes are the basis for the traditional and widely adopted zoning format, with its concentration on the separation of uses.

Zoning based on this format requires use separation through the division of a community into zoning districts, but Lee says that over time this simple system has splintered. Cities have created more and more districts to distinguish different areas across communities.

Residential and commercial districts have been split up, and the number of districts has multiplied. Management of the zoning system has become difficult. Zoning also is no longer restricted to the designation of districts with permitted uses. Design review based on aesthetic standards is common, and the

review process has grown more varied by district and building type, creating a patchwork of complications.

The article concludes with a discussion of strategies for simplifying zoning: “Rethink your uses. Gather them into broad categories whenever possible.

Make a place for every use somewhere in your community.” Add only objective use-specific standards to manage any remaining impacts created by a use.

Improve process. Streamline development review to allow development by right to the maximum extent possible. “This is a key opportunity for simplification.” Development by right occurs when the zoning ordinance designates permitted uses and does not require additional review.

Avoid overcontrolling for detail.

Focus on the “minimal elements necessary to achieve good, developed form.”

Manage “more often with form controls and less through use restrictions” so that disparate elements can fit nicely together and uses and housing types can be mixed.

Lee also believes we should do away with cumulative zoning, which is the usual zoning format. Under cumulative zoning, every zoning district consolidates all of the less-intense uses with some new, more intense uses; for example, a commercial district allows residential uses in addition to commercial uses. He believes that we should eliminate excessive parking requirements, consistent with studies showing that cities take too much land from development by insisting on excessive parking for commercial, retail, office, and other uses. Finally, he believes in enhancing the zoning ordinance by using “plain English” and including tables and graphics that make the ordinance easier to use.

Lee’s article can be purchased on the American Planning Association’s website, planning.org. Interested in land use? Try my website at landuselaw. wustl.edu. n

Published in Probate & Property, Volume 36, No 4 © 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.

July/August 2022 63

THE LAST WORD Dialect and Perception I love my Southern rural dialect. If I used this dialect to draft a contract, my introductory recital would be phrased: “SEEING AS HOW the parties are fixing to agree as set out in this Contract.”

But I don’t use my native dialect in my contracts; instead, I use either the archaic legal terms “WITNESSETH” and “WHEREAS” or the more modern approach that employs “RECITALS” followed by simple statements of the agreement’s background. See Marie A. Moore, Every Contract Tells a Story (or Should), 28 Prob. & Prop. 64 (Jan./Feb. 2014). So, what’s wrong with drafting a contract in my native dialect?

Is a Dialect Just “Bad English”?

The English-speaking world is full of dialects, some more respected than others. In the last 30 or so years, for example, Black English has gotten a bad rap and a lot of attention. See John McWhorter, Talking Back, Talking Black (1st ed. 2017) (analyzing Black English as a widely-used dialect of English).

And my native Southern English has always been looked at askance, particularly by those from other parts of the country (e.g., New York City). Id. at 26.

But, are these dialects “Bad English”?

Bryan Garner, the great evangelist of Standard English for lawyers, explains that, to linguists, the term “dialect” means “any linguistic variety that is shared by a group of speakers, including the standard variety,” but that, in popular usage, it means “any linguistic variety other than the standard language.” Bryan A. Garner, Modern American Usage 249 (3d ed. 2009). The 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.

second meaning, like the reference to “standard language,” is the judgmental one adopted by language snobs.

John McWhorter, the noted linguist and New York Times columnist, has a different view. He views dialects as legitimate and understandable varieties of languages—in the case of Black English and Southern English, varieties of English. See John McWhorter, Word on the Street 23-27 (1st ed. 1999). Standard English is also a dialect, and all of these dialects and many more derive from Old English, which no one speaks anymore. Id. McWhorter’s hypothesis is that there is no “real” or “ideal” English: “in no sense, for example, has standard English diverged less from Old English than the others have.” Id. at 27. Each dialect of English just developed differently from the others, and each is a legitimate way to speak. But McWhorter also recognizes that, in a job interview, Standard English is the way to go: “Anyone who wants to become an intellectual giant must learn and use a lot of Proper English and as little Black English as possible.”

McWhorter, Talking Back, supra, at 26.

He also observes, however, that “to be a bidialectical black American is to speak more English than many Americans, very much a larger English.” Id. at 108.

Of course, both Garner and McWhorter recognize that our dialects are generally used in speech, not writing. In fact, Garner observes that his style manuals are primarily directed to Standard Written English. Garner, supra, at 771.

So, Why Standard English?

In many ways, Standard English is the default dialect for English speakers. It permits speakers and writers to signal to one another that they are educated, that they speak and write

“in the English used by educated people.” Id. Garner explains that it’s beside the point that Standard English may have no intrinsic superiority over dialect: “it is the national standard and the international lingua franca.” Id. at 250. Those who don’t speak Standard English “are at a social and professional disadvantage.” Id. McWhorter would not disagree. McWhorter, Talking Back, supra, at 108.

Trimming our Legal English to Standard English Certainly, law schools urge their students to use Standard English. After all, the viability of our profession depends on our clients and potential clients perceiving us as educated professionals and on our documents being widely understandable. Hence, the minute we enter law school, we’re given a copy of Strunk & White’s The Elements of Style and trained to write like a lawyer— meaning to write in Standard English.

But then they start teaching us Legal English, which in some cases subverts the whole effort to have us write in Standard English. As real estate and trust and estate lawyers, we write in a dialect that’s even more specialized than Legal English—the Transactional Lawyer dialect, with its Witnesseths and Whereases. Like other types of Legal English, some Transactional Lawyer dialect is not understandable to our clients or, indeed, some courts. Like those raised with regional and other dialects, we need to be bidialectical, meaning we need to tailor our language to our audience. We don’t have to abandon our common legal terms; after all, we can’t avoid references to, for example, fee simple title. We just need to recognize when we are using our specialized dialect and adjust when possible to adhere more closely to Standard English. n

Published in Probate & Property, Volume 36, No 4 © 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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July/August 2022

RPTE LAW JOURNAL

Don’t forget to check out the latest articles from the Digital RPTE Law Journal Spring 2022 Articles The Forgotten 40 Acres: How Real Property, Probate & Tax Laws Contributed to the Racial Wealth Gap and How Tax Policy Could Repair It Sarah Moore Johnson & Raymond C. Odom Affirmative Action Housing: A Legal Analysis of an Ambitious but Attainable Housing Policy Micah Tempel

To review the latest Digital RPTE Law Journal visit

www.ambar.org/rptejournal

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