eReport 2023 Summer - ABA Section of Real Property, Trust and Estate Law

The Impact of the Sackett Case on Real Estate Development and Environmental Law

REAL PROPERTY

3 The Impact of the Sackett Case on Real Estate Development and Environmental Law

By Brook Boyd

6 Federal Circuit Court of Appeals Finds Fifth Amendment Taking in Rails-to-Trails Case

By Ryan Ellard

8 Selling Federal Energy Tax Credits: Who, What, When, and How…And Other Important Points

By Nicholas H. Kappas

13 Landlords and Tenants: Pay Close Attention to Your Force Majeure Provisions

By Jeffrey N. Brown and Aya Z. Elalami

15 Lease Security Deposits Might Not Be So Secure

By Joshua Stein

TRUST AND ESTATE

17 Black Tie Optional: The Eroding Formalities to Create a Valid Will

By Melissa Osorio Dibble, Benjamin Orzeske,

Ray

Prather, Jenna Rubin

26 Snapshot: Buying and Selling Art In USA

By Gabrielle C. Wilson, Howard N. Spiegler, Lawrence M. Kaye and Yael

M. Weitz

29 Florida Passes Law Restricting Foreign Ownership of Real Estate

By Kelly Shami, Elena Otero and Brian Donnelly

32 Virginia’s Harmless Error Rule May Permit a Will that Doesn’t Meet the Conventional Formalities to be Probated

By Gordon Rees Scully Mansukhani and William W. Sleeth III

SECTION ARTICLES AND NEWS

34 Am I Hallucinating? Artificial Intelligence (AI) Generative Chatbots and ABA Model Rules

By Liz Lindsay-Ochoa

Editor

Robert Steele (TE)

Articles Editor for Real Property

Cheryl Kelly (RP)

Assistant Real Property Editors

John Trott (RP)

Katie Williams (RP)

Sarah Cline (RP)

Articles Editor for Trust and Estate

Ray Prather (TE)

Assistant Trust and Estate Editors

Keri Brown (TE)

Brandon Ross (TE)

Technology/Practice Editor for Trust and Estate

Martin Shenkman (TE)

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.

© 2023 American Bar Association. All rights reserved.

The Impact of the Sackett Case on Real Estate Development and Environmental Law

By Brook Boyd1

As discussed in greater detail in this article, the SCOTUS decision in the Sackett case has narrowed wetlands subject to regulation by the U.S. Environmental Protect Agency and the Army Corps of Engineers.

The recent decision by the U.S. Supreme Court in Sackett v. Environmental Protection Agency2 substantially restricts the power of the U.S. EPA and the Army Corps of Engineers to regulate wet-

lands. In 2004, Michael and Chantell Sackett paid $23,000 for a 2/3 acre residential lot in a subdivision where they planned to build a modest three-bedroom family home. This lot is located about 500 feet from landlocked Priest Lake in Idaho. More than 20 of their neighbors, in this subdivision, have already built homes that are closer to Priest Lake than the Sacketts’ lot is. The Sacketts’ lot is located on one side of a road that is 30 feet wide. On the other side of the road, there is a ditch that drains into a creek, that in turn flows into Priest Lake, which is a navigable intrastate lake.3

In 2007, the Sacketts dumped dirt and rocks in wet portions of the lot in order to make these areas habitable.4 A few months later, the U.S. Environmental Protection Agency (“EPA”) sent a compliance order to the Sacketts, alleging that that their lot contained navigable “waters of the United States,” and that the work by the Sacketts violated the Clean Water Act.5 The EPA threatened the Sacketts with penalties of more than $37,500 a day unless all portions of their property were restored to their original condition in accordance with an EPA “Restoration Work Plan.” The EPA further threatened to double the penalties against the Sacketts, since the EPA issued a compliance order to the Sacketts, but they had failed to comply with it.6

However, on May 25, 2023, the U. S. Supreme Court majority in Sackett ruled that the Sacketts’ property is not subject to the Clean Water Act. Generally, the majority ruled that wetlands are subject to the Clean Water Act only if such wetlands are “as a practical matter indistinguishable from waters of the United States.” Therefore, the party asserting that wetlands are subject to the Clean Water Act must demonstrate (1) “that the adjacent [body of water constitutes] . . . ‘water[s] of the United States,’ (i.e., a relatively permanent body of water connected to traditional interstate navigable waters); and (2) “the wetland has a continuous surface connection with [that adjacent body of water,] making it difficult to determine where the ‘water’ ends and the ‘wetland’ begins.”7 However, the EPA failed to meet this burden of proof.

Also, all nine Supreme Court judges agreed to reverse the judgment of the lower court8 (which had upheld the EPA’s legal right to require the Sacketts to restore their property to its original natural state, and to prevent them from building their new home). This unanimous action by the U.S. Supreme Court may have reflected their sympathy with the Sacketts and their 16year legal battle to build their new home. However, only 5 of the 9 U.S. Supreme Court judges agreed on the legal justification for the Supreme Court’s ruling. In any event, the opinions by the “5 judge” majority in the Sackett case merely reflect their interpretation of the current Clean Water Act. The U.S. Congress has the power to enact amendments to the Clean Water Act that could, in effect, make the Sackett case moot.

Can You Get An Advance Determination of Whether Government Agencies Will Approve Your Project?

Obviously, no one wants to buy a property, but then spend 16 years litigating (like the Sacketts) the right to develop it. The Sacketts sought declaratory and injunctive relief against the EPA, but the district court dismissed their claims for lack of subject-matter jurisdiction. When the Sacketts appealed to the Ninth Circuit, it affirmed the district court’s dismissal of the Sackett’s complaint, on the ground that the Clean Water Act precluded pre-enforcement judicial review of compliance orders. However, the U.S. Supreme Court then ruled, in a 2012 decision, that the EPA compliance order issued to the Sacketts was “final agency action for which there is no adequate remedy” other than an appeal pursuant to the federal Administrative Procedure Act.9

Another alternative is that a lender or property owner may request a “Approved Jurisdictional Determination” (“AJD”) from the Army Corps of Engineers (“Corps”) as to whether jurisdictional waters of the United States are present on the owner’s property. AJDs are reviewable in the federal courts.10 Alternatively, an owner or lender can request the Corps to issue a “Preliminary Jurisdictional Determination” (“PJD”) whether there are waters of the United States at a certain location, but PJDs are merely advisory and may not be appealed.11

Political Stalemate Over WOTUS and Wetlands May Cause Delays or Denials of Wetland Approvals

During the last decade, there has been no national political consensus with respect to how “Waters of the United States” (“WO -

TUS”) and wetlands should be federally regulated. During this period, the definition of WOTUS changed, based on whether the Democratic party or the Republican party controlled the White House. The following summarizes a few of the highlights relating to the efforts made by various U.S. Presidents to establish administrative regulations for WOTUS and wetlands.

In 2015, the WOTUS that were protected under the Clean Water Act were described in “Clean Water Rule: Definition of ‘Waters of the United States,’” 80 Fed. Reg. 37054 (June 29, 2015) (issued during the Obama administration). The U.S. Supreme Court then ruled that any challenges to the WOTUS rule must be first be filed in a U.S. District Court.12 The Environmental Protection Agency and the Army Corps of Engineers then issued a final rule (issued during the Trump administration) that repealed the above 2015 WOTUS rule.13 This rule became effective in every state except Colorado, on June 22, 2020, subject to various appeals, after a California federal court denied a motion brought by several states to stay such rule.14 A federal judge then ordered that the Trump administration’s WOTUS rule be vacated and remanded for reconsideration to the U.S. EPA and the U.S. Army Corps of Engineers.15 Similarly, District Judge Alsup issued an order remanding the Trump WOTUS rule to the U.S. EPA and vacating it.16 However, the U.S. Supreme Court then stayed Judge Alsup’s vacatur of the Trump WOTUS rule, pending the decision of the 9th Circuit.17 A new final WOTUS rule (issued by the Biden administration) became effective on March 20, 2023.18 However, a North Dakota federal judge issued a temporary injunction (in 24 states) against the Biden administration’s new WOTUS rule.19

Other Unresolved Issues Relating to WOTUS and Wetlands

It could be argued that the 2023 Sackett decision’s requirement that “the wetland has a continuous surface [emphasis added] connection with [the adjacent body of water,]” represents a tradeoff between reality and practicality. On the one hand, there are clearly many situations where underground springs and other subsurface water sources are connected to navigable “waters of the United States,” even though this is not apparent on the surface. Justice Kavanaugh discusses at length the possibility of such “subsurface” connections.20 On the other hand, it may be burdensome and expensive for a property owner, or the EPA, to spend the time and money required to prove whether or not a property has subsurface connections with “waters of the United States.”

Nonetheless, recent scientific research may tip the current balance on whether subsurface water issues will be acknowledged. For example, large areas in Corcoran, California (where many agricultural companies are based) have sunk almost 12 feet in a decade as the result of farmers extracting groundwater for farming, but not replenishing it.21 Scientists now believe that the global depletion of groundwater is the second most important factor (after global warming causing the melting of polar ice) in a recent change of the Earth’s axis (away from the North Pole and heading east).22 Obviously, if Mother Earth is at risk, we will all be much more interested in groundwater.

Endnotes

1. Brook Boyd is Counsel to Meister, Seelig & Fein, LLP in their New York office. He is a member of the Connecticut, Florida, New Jersey and New York bars. He is the author of Real Estate Finance (Law Journal Press, 52nd ed.) and has published many articles in legal and professional journals.

2. 598 U.S. ____, No. 21-454, slip op. at 22 (May 25, 2023) (hereinafter called the “Sackett” case).

3. In order to appreciate the distance between the Sacketts’ lot, other neighbors in their subdivision, and Priest Lake, you can go to Google Maps (https://www.google.com/maps) and search for the Sacketts’ property, which is located at 1604 Kalispell Bay Rd, Priest River, ID 83856.

4. Sackett, 598 U.S. ____, No. 21-454, slip op. § 1(B) at 4-5.

5. 33 U.S.C. §1362(7). The Clean Water Act prohibits “the discharge of any pollutant by any person” (33 U.S.C. § 1311), without a permit, into “navigable waters” (33 U.S.C. § 1344). If there has been such a violation of the Clean Water Act, then the EPA may either issue a compliance order or commence a civil enforcement action (33 U.S.C. § 1319(a)(3)).

6. Sackett v. Environmental Protection Agency, 566 U.S. 120, 132 S. Ct. 1367, 1370 (2012).

7. Sackett v. Environmental Protection Agency, No. 21-454, § III(B), slip op. at 22 (May 25, 2023).

8. Sackett v. U.S. Environmental Protection Agency, 8 F. 4th 1075, 1091–1093 (9th Cir. 2021).

9. Sackett v. Environmental Protection Agency, 566 U.S. 120, 132 S.Ct. 1367, 1374 (2012). See also U.S. Army Corps of Engineers v. Hawkes Co , 578 U.S. 590, 136 S. Ct. 1807, 195 L.Ed.2d 77 (2016) (the U.S. Supreme Court ruled that the Corps of Engineers’ determination as to whether a property contains “waters of the United States”, that are protected by the Clean Water Act, constitutes “final agency action.”

10. U.S. Army Corps, Regulatory Guidance Letter No. 16–01, at 1 (2016) (RGL 16–01); 33 CFR §§320.1(a)(6), 331.2. But the Corps maintains that it has no obligation to provide jurisdictional determinations, RGL 16–01, at 2.

11. 33 CFR § 331.2.

12. National Ass’n of Manufacturers v. Department of Defense, 583 U.S. ___, 138 S. Ct. 617, 199 L.Ed.2d 501 (2018).

13. “The Navigable Waters Protection Rule: ‘Waters of the United States,’” 85 Fed. Reg. 22250 (April 21, 2020).

14. “Federal Court Denies Nationwide Stay of Navigable Waters Protection Rule,” Latham & Watkins LLP (June 22, 2020), available at https://www.globalelr.com/2020/06/federal-court-denies-nationwide-stay-of-navigable-waters-protection-rule/ (last visited Apr. 21, 2023).

15. Pasqua Yaqui Tribe v. United States Environmental Protection Agency, CV-20-00266-TUC-RM, 2021 U.S. Dist. LEXIS 163921 (D. Ariz. Aug. 30, 2021).

16. In re Clean Water Act Rulemaking, Nos. C 20-04636, C 20-04869 & C 20-06137 (N.D. Cal. Oct. 21, 2021).

17. Louisiana v. American Rivers, 2022 U.S. LEXIS 1902 (April 6, 2022).

18. ‘Revised Definition of “Waters of the United States,”’ 88 Fed. Reg. 3004 (Jan. 18, 2023).

19. West Virginia v. U.S. Environmental Protection Agency, Case No. 3:23-cv-032 (D. N. Dakota Apr. 12, 2023), available at https://storage.courtlistener.com/recap/gov.uscourts.ndd.57922/gov.uscourts. ndd.57922.131.0.pdf (last visited Apr. 21, 2023).

20. Sackett, 598 U.S. ____, No. 21-454, slip op., at § IV, pps. 12-14, of the separate dissent of Justice Kavanaugh.

21. “The Central California Town That Keeps Sinking,” N.Y. Times, May 27, 2021, Section A, page 14.

22. “The Earth’s Axis Is Shifting, and We’re the Reason,” N.Y. Times, June 29, 2023, Section A, page 1.

Federal Circuit Court of Appeals Finds Fifth Amendment Taking in Rails-toTrails Case

By Ryan Ellard1

This article highlights a recent federal court decision finding landowners adjacent to a converted trail entitled to compensation for taking due to change in the scope of the easement as governed by applicable state law statutes.

On February 13, 2023, the U.S. Court of Appeals for the Federal Circuit issued an opinion holding that conversion of an abandoned railroad corridor into a walking trail constituted a Fifth Amendment taking of the adjacent landowners’ property rights. Behrens v. United States, No. 2022-1277, 2023 WL 1944933 (Fed. Cir. Feb. 13, 2023). The Court’s opinion turned on the language of the underlying easements in conjunction with state law.

In the early twentieth century, Chicago Railroad Company acquired easements over a 144.3-mile corridor of land through a mix of easements and condemnations. Over the years, the easements were passed on to different railroad companies who operated freight lines. Most recently, the easements were conveyed to the Missouri Central Railroad and Central Midway Railroad, which wished to discontinue service and abandon the railway. Pursuant to 16 U.S.C. § 1247, the Missouri Department of Natural Resources filed a request to intervene in the abandonment proceedings and utilize the corridor for interim trail use. Federal statutes and regulations create a framework under which an intervenor may “railbank” the abandoned corridor, i.e., assume financial and managerial responsibility for the corridor while preserving it for “future railroad use.” 16 U.S.C. § 1247(d); 49 C.F.R. §§ 1152.29(a).

Shortly thereafter, owners of land adjacent to the corridor filed a takings claim in the Federal Claims Court arguing that the proposed rails-to-trails use exceeded the scope of the underlying easements. The Claims Court found that the easement allowed for interim trail use and entered summary judgment for the government. The property owners appealed to the Federal Circuit.

On appeal, the Court explained the two-step analysis required in rails-to-trails takings cases. First, it must be determined whether the railroad had obtained easements or fee simple

estates. Here, there was no dispute that the railroad secured easements2 over the segments of corridor in question. The second step involves determining the scope of the easements. The Court observed that eighteen of the nineteen easements included no language limiting the grant to specified purposes. Nevertheless, the Court held that a Missouri statute only empowers the railroads:

[t]o take and hold such voluntary grants of real estate and other property as shall be made to it to aid in the construction, maintenance and accommodation of its railroads; but the real estate received by voluntary grant shall be held and used for the purpose of such grant only ....

Mo. Rev. Stat. § 1035 (1899), now § 388.210(2) (emphasis added). The Court acknowledged that the state’s Supreme Court has construed the clause “to aid in the construction, maintenance and accommodation of its railroads” to limit the scope of such grants to “all railroad purposes.” Brown v. Weare, 348 Mo. 135, 152 S.W.2d 649, 653 (1941). Accordingly, the court framed the issue as follows: “We must then determine whether trail use and railbanking are within the scope of the easements, i.e., whether (1) trail use and (2) railbanking are railroad purposes.” Behrens, 2023 WL 1944933, at *5.

Relying on Missouri Court of Appeals precedent and a provision of the state Constitution, the Court quickly disposed of the first question, holding that trail use simply does not qualify as a “railroad purpose” under state law. Boyles v. Mo. Friends of Wabash Trace Nature Trail, Inc., 981 S.W.2d 644, 649 (Mo. Ct. App. 1998); Mo. Const. art. I, § 26. Turning to the second question, the Court noted that the Trails Act3 requires that the proposed trails be “subject to restoration or reconstruction for railroad purposes.” 16 U.S.C. § 1247(d). The Court reasoned that:

Thus, in Missouri, trail use with the purported but speculative purpose of preserving the right-of-way for future railroad use does not fall within the scope of an easement granted for railroad purposes. Here, there is no evidence that future rail use is realistic. The railroad ceased running trains over the Corridor decades ago, and rails and ties have been removed. There is no evidence of a plan for future railroad use. The mere preservation of a tract of land for possible future rail use under Boyles is not a railroad purpose.

Behrens, 2023 WL 1944933, at *6.4 To that end, the Court held that railbanking under these circumstances could not constitute a “railroad purpose.”5

While the Court went to great lengths to stress that its opinion is based upon Missouri law, the sequence of its analysis and tone of the Opinion may be instructive for practitioners handling Rails-to-Trails matters.

Endnotes

1. Mr. Ellard is an attorney in Womble Bond Dickinson (US) LLP’s Charleston, South Carolina office. His practice includes handling a variety of real property matters. Mr. Ellard graduated from the University of Connecticut School of Law and is a Fellow in the American Bar Association’s Real Property, Trusts and Estates section

2. The Court cited Missouri law for the principle that “Voluntary grants to railroads are easements even if they are formally worded as grants of fee simple estates.” Behrens v. United States, No. 2022-1277, 2023 WL 1944933, at *4 (Fed. Cir. Feb. 13, 2023) citing Brown v. Weare, 348 Mo. 135, 152 S.W.2d 649, 653–54 (1941).

3. 16 U.S.C. § 1247(d).

4. The Court recognized that under Missouri law, establishing a nature trail for the purpose of keeping the corridor intact for future rail service is not considered a railroad purpose if there is no evidence that future use is realistic. Boyles, 981 S.W.2d at 649-50.

5. The Court also rejected the government’s argument that the word “accommodation” in Mo. Rev. Stat § 388.210(2) should be defined as a “benefit.” The Court found that the state Supreme Court has suggested that the term “accommodation” means “operation.” Brown, 152 S.W.2d at 653.

Selling Federal Energy Tax Credits: Who, What, When, and How…And Other Important Points

By Nicholas H. Kappas1

This article provides an overview of guidance available for taxpayers seeking to transfer by sale certain federal income tax credits derived from investments in renewable energy projects.

The U.S. Department of the Treasury recently issued proposed regulations (the Proposed Regulations) providing guidance on the ability of taxpayers to transfer by sale certain federal income tax credits derived from investments in renewable energy projects.

The Proposed Regulations are regulatory sections 1.64181 through 1.6418-5, as well as temporary regulation section 1.6418-4T, all of which are intended to carry out the requirements of Section 6418 of the Internal Revenue Code of 1986, as amended (the Code). Section 6418 was added to the Code by the

Inflation Reduction Act of 2022 (the IRA) and provides the statutory authority for taxpayers to freely transfer by sale specified federal income tax credits generated by investments in specified renewable energy projects. The Proposed Regulations (including the temporary regulation) are published in the Federal Register dated June 21, 2023. Comments to the Proposed Regulations must be submitted by August 14, 2023.

What follows is an overview of the fundamental requirements and procedures for selling federal renewable energy tax credits, as set forth in Section 6418 and the Proposed Regulations. For simplicity, Section 6418, the Proposed Regulations and the temporary regulation are referred to herein collectively as the “Guidance” and the specified federal renewable energy tax credits that may be bought and sold are the “credits”.

Who Can Sell and Who Can Buy Credits?

Sellers The Guidance allows any “eligible taxpayer” to sell credits. A “taxpayer” means any person subject to any internal revenue tax. An “eligible taxpayer” is any taxpayer that is not described in Section 6417(d)(1)(A) of the Code. Section 6417(d)(1)(A) defines those entities that are eligible to make a “direct pay” election (i.e., cash refund payment election from the IRS) for investments in specified renewable energy projects. Direct pay eligible entities are, generally, tax-exempt organizations, States, their political subdivisions and instrumentalities, Indian tribal governments, Alaskan native corporations, rural electric cooperatives, and certain governmental affiliated entities such as the Tennessee Valley Authority.

• Thus, under the Guidance, a seller of credits can be any taxpayer other than an entity that is eligible for the direct pay election; namely, for-profit corporations, including S corporations, partnerships, individuals, trusts, and similar taxpayers. An exception to this rule applies to Sections 45V (clean hydrogen production tax credit), 45Q (carbon oxide sequestration tax credit), and 45X (advanced manufacturing production tax credit), which provisions allow certain for-profit entities to elect to receive direct payments for credits for a portion of the applicable tax credit period for those energy projects.

Buyers A buyer of credits (referred to as the “transferee taxpayer” throughout the Guidance) is any entity with federal income tax liabilities for which credits can be used and which is not related (within the meaning of Code Sections 267(b) and 707) to the seller. Transferee taxpayers can be partnerships, corporations, including S corporations, individuals, trusts, and similar taxpayers.

What Types of Renewable Energy Projects Are Eligible For Credits?

Only credits that are defined as “eligible credits,” that is, derived from specified renewable energy projects, can be sold. No other federal income tax credit can be freely sold.

Eligible credits (and their related Code Sections) are:

• alternative fuel vehicle refueling property (30C)

• renewable electricity production credit (45)

• carbon oxide sequestration credit(45Q)

• zero-emission nuclear power production credit (45U)

• clean hydrogen production credit (45V)

• advanced manufacturing production credit (45X)

• clean electricity production credit (45Y)

• clean fuel production credit (45Z)

• energy credit (e.g., solar, wind, geothermal, etc.) (48).

• qualifying advanced energy project credit (48C)

• clean electricity investment credit (48E).

The above-referenced projects all have their own particular, and complex, requirements.

When Can Credits Be Sold?

Credits can be sold for taxable years beginning after December 31, 2022.

With respect to a specific credit sale, there are various time-sensitive requirements for seller and buyer that are discussed in detail under “How Are Credits Sold?” below.

How Are Credits Sold?

In very general terms, a sale of credits will typically involve a purchase agreement, indemnity or guarantee agreement, insurance coverage for specified recapture events, along with seller provid-

ed transactional diligence related to the project generating the credits. Beyond those negotiated items, the “How” in this section pertains specifically to the tax-required mechanics of a credit sale as set forth in the Guidance.

Pre-filing registration with IRS.

As a crucial first step, the Guidance requires sellers to register with the IRS before selling any credits; specifically, before filing the tax return on which a transfer election (discussed below) with respect to credits to be sold is made and to provide information related to each “eligible credit property” for which the seller intends to transfer all or a specified portion of credits. The seller must satisfy the pre-filing registration requirements set forth in the Guidance.

After the required pre-filing registration process is successfully completed, the seller will receive a unique registration number (Registration Number) from the IRS for each registered “eligible credit property” for which the seller intends to transfer credits. The Guidance anticipates that this pre-filling registration process will occur through an IRS electronic portal. A seller must obtain a separate Registration Number for each “eligible credit property” and cannot aggregate multiple properties under one Registration Number. Registration Numbers are valid only for the taxable year obtained, but may be renewed via the IRS registration portal.

What constitutes an “eligible credit property” varies based on the specific renewable energy projects described above. For example, for the electricity production tax credit under Code Section 45, an eligible credit property is determined on a “facility by facility” basis. For the investment tax credit under Code Section 48, an eligible credit property is determined on a “property by property” basis, which generally means with respect to the “energy property” determined under that Code Section. The Guidance indicates that a seller may make a transfer election with respect to an “energy project” (which comprises multiple energy properties) based on additional forthcoming guidance. Sellers will need to be especially careful in determining the appropriate unit of measurement for making a transfer election based on the renewable energy property from which the credit is derived.

In connection with any sale of credits, the Registration Number will be reported on both the seller’s and buyer’s tax return for the taxable year of the sale. A seller that does not obtain a Registration Number and report the Registration Number on its tax return with respect to an eligible credit property is ineligible to make a transfer election. As a result, any credit sales without such Registration Number will be invalid.

Tax Credit Transfer Election and Required Documentation.

To make a valid transfer election, a seller, as part of filing a return, generally would be required to include the following--(A) a properly completed relevant source credit tax form for the eligible credit; (B) a properly completed Form 3800, General Business Credit, including reporting the Registration Number received during the required pre-filing registration; (C) a schedule attached to the

Form 3800 showing the amount of credit transferred for each eligible credit property; (D) a “transfer election statement” (described below); and (E) any other information related to the election specified in additional guidance.

• A transfer election must be made not later than the due date (including extensions) for the tax return for the taxable year for which the credit is determined.

• The transfer election must be filed on an original return and may not be made or revised on an amended return or by filing a request for an administrative adjustment.

• There is no relief available for a late transfer election.

• Once made, an election to transfer an eligible credit is irrevocable.

A “transfer election statement” is defined as a written document (not a specific IRS tax form) that describes the transfer of credits between seller and buyer. A transfer election statement that is completed by both the seller and buyer would be necessary to allow the buyer the opportunity to file a return without needing to wait for the seller to file. A transfer election statement must include (1) information related to the seller and buyer; (2) a statement that provides the necessary information and amounts to allow the buyer to take into account the credits with respect to the eligible credit property; (3) a statement that the parties are not related (within the meaning of Code Section 267(b) or 707(b) (1)); (4) a representation from the seller that it has complied with all relevant requirements to make a transfer election; (5) a statement from the seller and the buyer acknowledging the notification of recapture requirements (described below) under Code Section 6418(g)(3) and the related Guidance; and (6) a statement or representation from the seller that the seller has provided the required minimum documentation to the buyer. Required minimum documentation is essentially the minimum documentation that the seller must provide to a buyer to validate the existence of the eligible credit property, any bonus credit amounts, and the evidence of credit qualification.

However, a transfer election statement cannot be completed for any taxable year after the earlier of (A) the filing of the seller’s tax return for the taxable year for which the credit is determined, or (B) the filing of the tax return of the buyer for the year in which the credit is taken into account. In other words, the transfer election statement needs to be completed before a return is filed by either party.

• A seller may make multiple transfer elections to transfer separate credit portions derived from an eligible credit property to multiple buyers.

• Partnerships and S corporations (and not their partners or shareholders) must make the transfer election in connection with a sale of credits by the partnership or S corporation.

• If a project is owned by a disregarded entity, then the disregarded entity’s sole ultimate owner must make the transfer election.

• Lessees that receive credits under a lease pass-through election under Code Section 50(d)(5) and Treas. Reg. Section 1.48-4 cannot make a transfer election (and therefore cannot sell credits once received via the pass-through election). However, purchasers/lessors of energy property under a sale-leaseback can make a transfer election with respect to eligible credits.

• Sellers owning projects for which credits are available over a multi-year period, such as the 10-year credit period for the electricity production tax credit under Code Section 45, must make a transfer election for each year of such period for which the seller intends to sell credits.

Other Sale Considerations; Tax Impact; Limitations on Utilization

All credit sales must be paid in cash. Cash means specifically U.S. dollars, and no cash equivalents or any other consideration is permitted, not even a de minimis amount. Other critical points are as follows:

• Credits cannot be sold for progress expenditures.

• Credits can only be sold one time.

• Credits must include all bonus credit amounts. In other words, increases to the applicable percentage for calculating the credit amount, such as for energy communities and domestic content requirements, cannot be sold separately from the base energy credit amount. Therefore, multiple transfers of credits from a single eligible credit property must include a proportionate share of any bonus credit amounts.

• Buyers are subject to passive activity limitations on the use of purchased credits. Therefore, buyers that are subject to the passive activity rules are not treated as materially participating in the seller’s trade or business. As a result, the credits would be treated as passive activity credits to the buyer.

• Buyers can use credits against estimated income tax.

• Buyers can use credits via a 3-year carryback or a 22-year carryforward of unused credits. However, credits cannot be sold if they are in carryforward or carryback status.

• Buyers purchasing credits at a discount to the credit value (e.g., $0.90 cents per $1.00 of credit) do not include the discount in gross income for tax purposes.

• Proceeds from the sale of credits are not includable in gross income of the seller for tax purposes and payments for credits are not deductible for any reason to the buyer.

Buyer and Seller Partnerships

Any amount received by a selling partnership or S corporation as consideration for the transfer of credits is treated as tax-exempt income for purposes of Code Sections 705 and 1366. Specifically, the income is treated as arising from an investment activity rather than a trade or business (and as a result, it is not treated as passive income with respect to the selling entity’s partners or shareholders).

The Guidance provides that a partner’s distributive share of tax-exempt income from a sale of credits is based on such partner’s distributive share of the otherwise eligible credit for each taxable year. In other words, tax-exempt income resulting from the receipt of cash by a selling partnership in exchange for credits should be allocated to the same partners and in the same proportionate amount as the specified credit portion would have been allocated if not transferred. Where a selling partnership transfers only a portion of credits to a buyer while retaining other credits to be allocated through to partners, the Guidance allows that tax-exempt income be specially allocated to those partners that desired to transfer their distributive share of the underlying credits, while other credits may be allocated to those partners that did not desire to sell their distributive share of credits. However, the amount of eligible credits allocated to each partner may not exceed such partner’s eligible credit amount and the amount of tax exempt income allocated to each partner must equal such partner’s proportionate share of tax exempt income resulting from the transfer.

Note that the Guidance imposes no special limitations on the manner in which the cash itself from the sale of credits may be distributed.

With respect to buyer partnerships, an allocation of a transferred credit amount by a buyer partnership to its partners would not be considered a transfer under the Guidance. As a result, an allocation of credits to an owner of a pass-through buyer does not violate the no-second-transfer rule in Code Section 6418(e)(2). Additionally, buyer partnerships must treated the cash paid to the seller as a nondeductible Section 705(a)(2)(B) expenditure. Additional rules also apply to tiered partnerships and to S corporations.

Recapture

The Guidance clarifies that buyers are liable for recapture of credits. Recapture is applicable to credits that are considered to be investment tax credits. However, note that recapture does not apply to production tax credits (with the except of carbon sequestration credits under Section 45Q which provides for a 3-year recapture period).

Very generally, a recapture of credits occurs if the seller disposes of the project during the applicable recapture period (typically five years from the date the project is placed in service). In that

circumstance, the buyer is liable for the recapture amount.

• As a consequence, credit sales will customarily require indemnities between seller and buyer for indemnification of buyer in the event of a recapture. Such indemnities should be funded through insurance coverage for recapture events applicable to the buyer. The scope of such coverage may vary but will ordinarily involve the buyer as loss payee and should include penalties and interest.

The Guidance provides that a buyer is not liable for recapture resulting from an indirect disposition event; that is, a recapture event that arises as a result of an owner of the seller (e.g., a partner in the selling partnership or a shareholder in an S corporation) disposing of all or a portion of its interest in the seller (and, thus, its indirect interest in the energy property assets) below a certain percentage threshold (typically below 66.66% of its interest). Similarly, if a partner or shareholder of seller reduces its at-risk amount below a certain threshold during the recapture period, triggering a reduction in the credit base for such partner or shareholder, such partner or shareholder will remain liable for recapture, and not the buyer.

• Thus, in the case of a disposition of an interest in seller, the disposing partner, not the buyer, remains liable for recapture with respect to the amount to be recaptured.

In the event of a recapture event, the seller is required to provide notice to the buyer of such recapture event, and the buyer is, in turn, required to provide notice to the seller of the amount of any recapture (collectively, the recapture notices). The recapture notices must be exchanged with sufficient time before the due date for both seller’s and buyer’s federal income tax returns (without extension) to allow the buyer to calculate the recapture amount and the seller to calculate any increase in tax basis resulting from the recapture.

Excessive Credit Transfer

In addition to recapture, the Guidance requires buyer to be liable for any excessive credit transfer. That is, where a buyer claims more credits than are otherwise allowable to the seller with respect to the eligible credit property, the buyer will be liable for tax equal to the excess amount of credit claimed, plus 20% of the excess amount. A buyer may be excused from the 20% penalty if the buyer can show reasonable cause for an excessive credit transfer. The Guidance clarifies that a recapture event is not an excessive credit transfer and that the excessive credit transfer rules operate separately from the recapture rules. More specifically, the Guidance explains as follows: “The excessive credit transfer rules apply where the credit amount reported on the original credit source form by the eligible taxpayer [seller] and transferred to a transferee taxpayer [buyer] was excessive. Recapture of a tax credit occurs when the original tax credit reported would have been correct without the occurrence of a subsequent recapture event. Thus, a recapture event does not create an excessive credit transfer.”

Anti-Abuse

In addition to recapture and excessive credit transfer rules, the Guidance includes an anti-abuse provision, which provides authority to the IRS to disallow the transfer of an eligible credit, or to recharacterize a transaction’s income tax consequences, in circumstances where the parties to the transaction have engaged one or more transactions with the principal purpose of avoiding tax liability beyond the intent of Code Section 6418. For example, a transaction where a seller undercharges or overcharges for services to a customer who is also purchasing credits from the seller as a buyer may violate the anti-abuse rule.

The proposed regulations include two examples to illustrate application of the anti-abuse rule. Example 2 describes the following circumstances where a seller attempts to decrease its gross income with respect to a sale of property simultaneous with the sale of credits, while also increasing a buyer’s ability to take an offsetting deduction.

• Taxpayer C, an eligible taxpayer, generates $100 of an eligible credit with respect to an eligible credit property in the course of its trade or business. Taxpayer C also sells property to customers. Taxpayer C offers Customer D, a transferee taxpayer that can deduct the purchase of property, the opportunity to receive the $100 of eligible credit for $20 while purchasing Taxpayer C’s property for $80. Taxpayer C normally charges $20 for the same property without the transfer of the eligible credit, and the average transfer price of the eligible credit between unrelated parties is $80 paid in cash for $100 of the eligible credit. Taxpayer C is willing to accept the higher price for the property because Taxpayer C has a net operating loss carryover to offset any taxable income from the transaction. This transaction is subject to recharacterization under the anti-abuse rule under paragraph (e)(4) of this section, and Taxpayer C will be treated as selling the property for $20 and transferring $100 of the eligible credit for $80, and Customer D will have a $20 deduction related to the purchase of the property instead of $80.

Thus, sellers and buyers should be mindful of clearly separating the economic considerations of credit transfers from other income generating activities between the parties.

Endnotes

1. Nicholas H. Kappas (About Nick Kappas) is a Partner in the Tax Group of Thompson Coburn LLP.

Landlords and Tenants: Pay Close Attention to Your Force Majeure Provisions

By Jeffrey N. Brown1 and Aya Z. Elalami2

Pandemic-related litigation continues to wind its way through the Courts to final resolution. This case note reminds practitioners of the importance of carefully drafting and reviewing force majeure provisions in a lease.

Since March 2020, California commercial landlords and tenants have faced financial ramifications as a result of COVID-19 and associated ordinances which imposed occupancy restrictions and mask and vaccination requirements. Various legal issues have arisen from the pandemic and its impact on business. One such issue that has arisen is: Does COVID-19, a global pandemic, fall within the protections of a lease’s “force majeure” provision and, therefore, excuse the tenant from paying rent?

The Court in West Pueblo Partners, LLC v. Stone Brewing Co., LLC held that the parties must focus on the terms of the force majeure provision to answer that question.

In West Pueblo Partners, LLC, tenant Stone Brewing Co., LLC (“Stone”) entered into a 20-year building Lease with landlord West Pueblo Partners, LLC (“West Pueblo”). The Lease provided that without West Pueblo’s permission, Stone could only use the leased Premises as a full service restaurant and brewery. The Lease also contained a force majeure provision:

If either Party is delayed, interrupted or prevented from performing any of its obligations under this Lease, and such delay, interruption or prevention is due to fire, act of God, governmental act or failure to act…or any cause outside the reasonable control of that Party, then the time for performance of the affected obligations of the Party shall be extended for a period equivalent to the period of such delay, interruption or prevention.

Stone took possession of the Premises in January 2018. From March 20, 2020 through March 2, 2021, Stone was forced to comply with drastically changing COVID-19 dine-in ordinances, including prohibitions against indoor and on-premises dining. Stone described these restrictions as “devastat[ing],” and as a result, Stone withheld rent from December 2020 through March 2021, contending that COVID-19 excused or deferred its obligation to pay rent based on the force majeure provision.

Landlord West Pueblo sued Stone for the rent that would ordinarily be due for that time period. In ruling in favor of Landlord West Pueblo, the Court of Appeal applied the plain meaning of the force majeure provision to hold that Stone was not “delayed, interrupted or prevented from” paying rent due to COVID-19. The Court found Stone had the financial resources to pay rent to West Pueblo. Indeed, Stone conceded that it could and, therefore, the Court found the provision did not apply because Stone was able to meet its obligations under the Lease by making timely payments. The Court noted that a “mere increase in expense does not excuse the performance unless there exists extreme and unreasonable difficulty, expense, injury, or loss involved.” Essentially, because Stone was able to make the rental payments, it was still responsible for the rent.

The Court did note that “the COVID-19 pandemic qualified as a force majeure event” under the Lease, i.e., “is due to fire, act of God, governmental act or failure to act … or any cause outside the reasonable control of that Party.” That the Tenant could still make its rent precluded the Tenant from taking advantage of that provision.

The moral of the story? As we have explained previously, it sometimes is all about the drafting. Be careful in drafting what some people call “boilerplate” provisions, as they may become all-important in a subsequent lawsuit.

Endnotes

1. Jeff Brown (about Jeff Brown) is a Partner in the Los Angeles office of Thompson Coburn LLP.

2. Aya Elalami (about Aya Elalami) is an Associate in the Los Angeles office of Thompson Coburn LLP.

Lease Security Deposits Might Not Be So Secure

By Joshua Stein1

This article discusses the importance of providing tenant security deposit protection language in lease agreements, particularly in states that do not have laws regarding the same.

Tenants often deliver substantial security deposits when they sign leases. Those deposits are supposed to backstop the tenant’s obligations. At the end of the lease, if the tenant has behaved, the landlord is supposed to return the security deposit to the tenant. It’s not the landlord’s money, or is it? Maybe it is—if the landlord files bankruptcy and the right (or wrong) state’s law applies.

A recent case, 10FN, Inc. v. Cerberus Business Finance, LLC, 21CV-5996 (VEC) (S.D.N.Y. Oct. 18, 2022), considered exactly this sequence of events. A tenant under a lease in Chicago gave the landlord a substantial security deposit. The court found that those funds were, under Illinois law, effectively nothing more than a loan to the landlord. When the landlord filed bankruptcy, the tenant had the same rights as any other creditor that didn’t have any security for its claim. In this case, as is often

the case, that meant the tenant would recover very little on account of its unintended loan to the landlord.

The court based its decision in part on the words of the lease itself. The lease required the tenant to post with the landlord, and then maintain, a security deposit. The lease said nothing, though, about ownership of the security deposit or how the landlord was supposed to hold it. Nowhere did the landlord agree to hold the security deposit in trust, escrow, a segregated account, or any other special way to protect the tenant.

The lease said the landlord would return the deposit, minus any proper offsets, to the tenant 30 days after the lease expired. As a result, the court concluded, the tenant’s security deposit was just money that the tenant gave the landlord and that the landlord was supposed to give back later—nothing more than a loan.

Some states set a higher standard for how a landlord handles a security deposit. In New York, for example, the landlord must hold any security deposit in trust for the benefit of the tenant. By law, the deposit remains the money of the tenant, not the landlord. N.Y. Gen. Oblig. Law § 7-103(1), (2).

Unfortunately for the tenant in this particular case, Illinois doesn’t have a statute like New York’s, at least for commercial tenants. That meant the landlord could freely commingle the commercial tenant’s security deposit with its other funds.

When the landlord filed bankruptcy, the tenant’s rights regarding its security deposit were the same as any other rights of any other creditor to receive money from the landlord. Tenant

just had another unsecured claim in the bankruptcy, entitled to payment of pennies on the dollar if that.

This sad saga teaches tenants that when they deliver security deposits under leases, especially substantial security deposits, they should give some thought to the legal protections for those security deposits. Favorable lease language helps. So does favorable state law.

If the parties sign their lease in a state that doesn’t protect security deposits, should the tenant insist that New York law govern the security deposit? That sounds tempting. On the other hand, one hardly wants to have to analyze the validity of such a choice of law when negotiating an ordinary lease outside New York. And the suggestion just seems bizarre.

If state law doesn’t deliver total certainty about a tenant’s interest in its security deposit, and the tenant has any negotiating leverage at all, the tenant might insist on establishing an escrow or similar arrangement to protect its security deposit. This is especially true if the tenant has reason to think the landlord may soon suffer financial problems or go bankrupt.

In the litigation described in this article, the landlord was actually a tech company that was a sublandlord, not a property owner. The tech company entered into the sublease because it didn’t need all the space it had leased. It was shrinking. Those facts alone probably should have set off alarm bells for the subtenant that put up the substantial security deposit. Today, however, any office tenant should ask similar questions about the future solvency of its landlord, given the present economic pressures on office buildings.

More generally, in any state where the law treats a security deposit as an unsecured loan to the landlord, that might create an issue for any lender – a true lender, such as a bank – to consider in negotiating a credit agreement with a landlord. The financial definitions in that credit agreement might intuitively carve out “security deposits” from the definition of the landlord borrower’s liabilities. At the same time, the definitions governing the landlord borrower’s assets might allow the borrower to treat the cash “borrowed” from the tenant as just another asset. Such an anomaly could make the landlord’s financial condition look better than it really is.

Endnotes

1. Sole principal, Joshua Stein PLLC (www.joshuastein.com). The author’s three-volume book on ground leases (www.groundleasebook. com) is scheduled for publication late this year. Mr. Stein has written five previous books and over 400 articles on commercial real estate law and practice, many of which appear on his website. He received his law degree from Columbia Law School, where he was a Harlan Fiske Stone Scholar and a managing editor of Columbia Law Review. Copyright (c) 2023 Joshua Stein. An earlier version of this article appeared on Forbes.com.

Black Tie Optional: The Eroding Formalities to Create a Valid Will1

By Melissa Osorio Dibble2, Benjamin Orzeske3, Ray Prather4, Jenna Rubin5

These materials from the RPTE Section’s 35th Annual Spring Meeting describe the development and application of the harmless error and electronic wills legislation.

A. STATUTORY BASES FOR NON-TRADITIONAL ESTATE PLANNING

1. Uniform Electronic Wills Act (“UEWA”)

a. Approved by the Uniform Law Commission (“ULC”) in 2019

b. Adopted in eight jurisdictions to date:

i. Utah (2020)

ii. Colorado (2021)

iii. North Dakota (2021)

iv. Washington (2021)

v. U.S. Virgin Islands (2022)

vi. District of Columbia (2023)

vii. Idaho (2023)

viii. Minnesota (2023) (substantially similar, but not identical to, UEWA)

c. Introduced in 2023 in three additional jurisdictions:

i. Missouri – Advancing in the House

ii. New Jersey – Pending

iii. Texas – Opposed by the state bar and unlikely to pass this year

2. Non-Uniform E-Wills Statutes

a. Five jurisdictions to date

i. Nevada (2001, Amended 2017)

ii. Indiana (2018, Amended 2021)

iii. Arizona (2018)

iv. Florida (2019)

v. Illinois (2021)

3. Uniform Electronic Estate Planning Documents Act

a. Comprehensive statute addressing trusts, powers of attorney, powers of appointment, etc.

b. Approved by the ULC in 2022

c. Introduced in four jurisdictions this year:

i. Illinois – Passed House, pending in Senate

ii. Missouri – Advancing in House

iii. Oklahoma – Introduced, no hearing yet

iv. Texas – Opposed by the state bar and unlikely to pass this year

d. Non-uniform electronic trusts, powers of attorney (“POAs”), etc.

i. Florida (POAs)

ii. Indiana (POAs, trusts)

B. VARIATIONS BETWEEN STATE LAWS

1. Remote witnessing of e-will permitted?

a. Yes: AZ (added 2023), CO, DC, FL, ID, IL, IN (with supervision by attorney or paralegal), MN, NV, UT, WA, VI,

b. No: ND

2. Custodian of e-will required for self-proving will?

a. Yes: AZ, FL, NV, WA

b. No: CO, DC, ID, IL, IN, MN, ND, UT, VI,

3. Notarized, unwitnessed e-will permitted?

a. Yes: CO (if Notary is in Colorado at the time of notarization), ND, VI

b. No: AZ, DC, FL, ID, IL, IN, MN, NV, UT, WA

4. Integration with remote notarization statute for security?

a. Yes: CO, DC, FL, ID, MN, ND, NV, UT, WA, VI

b. No: AZ (only for self-proved will), IL (tamper-evident documents required), IN (attorney or paralegal supervision required)

C. HARMLESS ERROR DOCTRINE/WRITINGS INTENDED AS WILLS

1. How did we get here?

a. Strict Compliance

i. Every state enumerates its own requirements to execute a valid will within its borders by statute. Historically, state courts have strictly construed these requirements and have invalidated documents purported to be wills that do not meet these requirements.

ii. Proponents of the strict compliance doctrine believe that if the legislature deems it appropriate to include a requirement in the statutory scheme, it is not appropriate for a court to question whether that statutory requirement is really required.

iii. The Uniform Probate Code (“UPC”) § 2-502 lists the requirements to create a valid will that have been adopted in some way, shape, or form by all states. In relevant part, according to the UPC, a will is valid when it is:

a. In writing;

b. Signed by the testator or in the testator’s name by some other individual in the testator’s conscious presence

and at the testator’s direction; and

c. Either:

i. Signed by at least two individuals, each of whom signed within a reasonable time after the individual witnessed the signing of the will or the testator’s acknowledgement of that signature or the acknowledgement of the will; or

ii. Acknowledged by the testator before a notary public or other individual authorized by the law to take acknowledgments.

iv. However, courts across the country (and the world) are relaxing the formalities needed to execute a valid will. In large part, this trend away from strict adherence to formalities is guided by the adoption of UPC § 2-503.

b. Substantial Compliance

i. The doctrine of substantial compliance gained popularity in the 1970’s and allows a technically deficient document to be accepted as a will as long as the document reflects the testator’s intent.

ii. Professor John Langbein, a member of the committee that added § 2-503 on harmless error to the UPC and an advocate for the doctrine’s liberal application, summarizes the doctrine of substantial compliance by arguing that even if a will does not comply with wills formalities, the document can be probated so long as (1) the document expresses the decedent’s testamentary intent and (2) the document’s form sufficiently approximates the wills formalities to enable the court to conclude that the purposes underlying the wills formalities have been served.

2. What is the Harmless Error Doctrine?

a. The doctrine of harmless error relaxes the statutorily prescribed formalities even more than the doctrine of substantial compliance.

b. Harmless error doctrine arose out of study of probate law in Australia. An Australian court found that a will

could be probated that did not comply with wills formalities so long as the court “is satisfied that there can be no reasonable doubt that the deceased intended the document to constitute his will.” Wills Act Amendment Act (No. 2) January 1975 (SA) (emphasis added).

c. Many states have adopted UPC § 2-503, which articulates a more flexible standard for evaluating technically noncomplying documents.

i. Uniform Probate Code § 2-503: Although a document or writing added upon a document was not executed in compliance with Section 2-502, the document or writing is treated as if it had been executed in compliance with that section if the proponent of the document or writing establishes by clear and convincing evidence that the decedent intended the document or writing to constitute:

a. the decedent’s will,

b. a partial or complete revocation of the will,

c. an addition to or an alteration of the will, or

d. a partial or complete revival of his [or her] formerly revoked will or of a formerly revoked portion of the will.

ii. UPC Comments state: “[w]hereas the South Australian and Israeli courts lightly excuse breaches of the attestation requirements, they have never excused noncompliance with the requirement that a will be in writing, and they have been extremely reluctant to excuse noncompliance with the signature requirement.”

iii. UPC Comments further state that the goal is “to retain the intent-serving benefits of [the will formalities] without inflicting intent-defeating outcomes in cases of harmless error.”

d. Restatement (Third) Of Property: Wills and Other Donative Transfers further expands on this approach:

i. § 3.03, comment b: “[T]he purpose of the statutory formalities is to determine whether the decedent adopted the document as his or her will. Modern authority is moving away from insistence on strict compliance with statutory formalities, recognizing that statu-

tory formalities are not ends in themselves but rather the means of determining whether the underlying purpose has been met. A will that fails to comply with one or another of the statutory formalities, and hence would be invalid if held to a standard of strict compliance with the formalities, may constitute just as reliable an expression as a will executed in strict compliance.”

ii. Like the UPC, the Restatement recognizes a hierarchy of mistakes: “[a]mong those defects in execution that can be excused, the lack of a signature is the hardest to excuse. An unsigned will raises a serious but not insurmountable doubt about whether the testator adopted the document as his or her will.”

3. States That Have Enacted the Doctrine

a. While only a minority of states have adopted some version of UPC § 2-503 harmless error doctrine, relaxing the strict formality standards is increasing in popularity.

b. To date, six states have adopted the UPC’s harmless error doctrine in full6:

i. Hawaii: Haw. Rev. Stat. Ann § 560:2-503

ii. Michigan: Mich. Comp. Laws Serv. § 700.2503

iii. Montana: Mont. Code Ann. § 72-2-523 (1993)

iv. New Jersey: N.J. Stat. Ann. § 3B:3-3

v. South Dakota: S.D. Codified Laws § 29A-2503

vi. Utah: Utah Code Ann. § 75-2-5037

c. Four other states have adopted variations on the harmless error doctrine:

i. California: Cal. Prob. Code § 6110(c)(2)

a. California’s variation does not cure defective revocations, alterations, or revivals of wills that do not meet statutory formalities.

ii. Colorado: Colo. Rev. Stat. § 15-11-5038

a. Colorado limits the application of its harmless error doctrine, saying

that the doctrine is only applicable when it is established by clear and convincing evidence that the decedent erroneously signed a document intended to be the will of the decedent’s spouse.

iii. Ohio: Ohio Rev. Code Ann. § 2107.24

a. Ohio’s harmless error statute re quires a defective will be cured after a hearing in probate court. The probate court must find the following by clear and convincing evidence that the decedent:

i. Prepared the document or caused the document to be prepared;

iii. Signed the document and intended the document to constitute the decedent’s will; and

iv. Signed the document in the conscious presence of two or more witnesses.

iv. Oregon: Or. Rev. Stat. § 112.238 (adopted in 2016)

a. Oregon’s harmless error statute follows the UPC and does not require the testator’s signature, but imposes its own additional requirements:

i. The proponent of the document must give notice to heirs and devisees under prior wills; and

v. Provide a 20-day period for any person receiving notice to object before the court makes a determination.

v. Virginia: Va. Code Ann. § 64.2-404(2)

a. Virginia’s harmless error statute cannot be applied in circumstances where the testator failed to meet the signature requirement.

4. Significant Case Law

a. Of the states that have adopted the harmless error

doctrine, New Jersey’s Supreme Court has perhaps upheld its most expansive application. In In re Estate of Ehrlich, 47 A.3d 12 (App. Div. 2012) appeal dismissed 64 A.3d 556 (N.J. 2013).

i. Applying the harmless error doctrine, the New Jersey Appellate Division upheld the probate of a copy of an unsigned document as a valid writing intended as a will.

ii. Richard Ehrlich (“Decedent”) was a trusts and estates attorney. Upon his death, his nephew located an unsigned copy of a document labelled “Last Will and Testament” in Decedent’s desk. The document contained a handwritten note: “Original mailed to H.W. Van Scriver 5/20/2000[.]” H.W. Van Scriver was the named Executor and Trustee of the Will; he also predeceased Decedent. No original Will was returned to Decedent or his Estate.

iii. The Appellate Division found that the proponents of the document showed by clear and convincing evidence that (1) the document was reviewed by the testator, (2) the document expressed his testamentary intent, and (3) the testator assented to the document, even though the document was not signed by the testator.

b. An Ohio court applied its harmless error statute and admitted an electronic document drafted on a Samsung Galaxy tablet as the testator’s will. In re Estate of Castro, No. 2013ES00140 (Ohio Ct. Common Pleas, Prob. Div., Lorain County, June 19, 2013).

i. The contents of the will were dictated by the testator to his brother, and the testator signed the document using a stylus. Two witnesses also signed using the stylus.

ii. The court found that the document on the tablet satisfied the state’s requirement that the will be “in writing” and that the other formalities were met.

c. In Colorado, a man gave his domestic partner of over twenty (20) years a card with a typed, signed note that listed how he wanted his assets disposed of when he died. The testator died a year later. In re Estate of Wiltfong, 148 P.3d 468 (Colo. App. 2006).

i. The purported will was signed, but not acknowledged. The Colorado Court of Appeals

found that a signature or acknowledgement would be acceptable.

ii. Even though the appellate court found that the Colorado’s harmless error doctrine is intended to be limited to minor flaws in execution of documents intended as wills, it remanded the case for a determination of whether clear and convincing evidence exists to prove that the document was intended by the testator to serve as his will. The appellate court directed that extrinsic evidence could be used to make this determination, including the decedent’s statements to others about the letter.

d. Oregon adopted its version of the harmless error doctrine the most recently, in 2016.

i. The Oregon Appellate Court heard its first case applying the state’s harmless error doctrine in 2019 in In re Boysen, 297 Or. App. 21 (2019).

ii. In Boysen, the testator prepared a holographic will in the presence of two of her grandchildren. However, those grandchildren did not sign the document as witnesses to the will. The testator gave the document to those grandchildren for safekeeping.

iii. After creating this document, the testator made statements inconsistent with what she stated in the document. However, the court reversed the probate court’s rejection of the will, finding that confirming the testator’s intent to make the document her will at the time of execution (and not at any time thereafter) is essential. The appellate court remanded the case to the probate court to determine the testator’s intent at the time of creating the document.

e. Pennsylvania has not adopted any version of the UPC’s harmless error doctrine, however, it has accepted documents that are not technically compliant for probate.

i. In Estate of Kajut, a Pennsylvania Court of Common Pleas allowed a will to be submitted for probate even though the testator (who was legally blind) made his mark on the will after his name was already typed underneath the signature line. To be in accord with law at the time, the testator should have made his

mark before his name was typewritten under the signature line.

ii. The Kajut Court found that the will was “in substantial compliance with the Wills Act… [t]he intent of the testator was plain; no useful purpose can be served by destroying the will he created by a technical adherence to the Wills Act.” 22. Pa. D. & C.3d 123, 136 (C.P. Westmoreland 1981).

iii. Thus, although Pennsylvania has not formally adopted the UPC’s harmless error doctrine, it has found exceptions to where its own statutory formalities are not met.

5. Resistance to the Adoption of Harmless Error Doctrine

a. Is it necessary? Many courts impose a “flexible strict compliance” approach, acknowledging that the default approach is strict compliance, while taxing a flexible approach to applying a form of substantial compliance to execution scenarios when they think best.

b. Downsides to Harmless Error Doctrine

i. May encourage third parties to engage in misconduct.

ii. May result in increased costs of administration because testators may be more complacent in how they express their intent resulting in increased litigation.

c. States like Florida and Texas have affirmatively rejected the doctrine.

d. Modification to correct scrivener’s errors: different mechanism by which to balance testamentary intent with wills formalities.

6. Non-Traditional Wills Admitted Around the World

a. The harmless error doctrine is not unique to the United States. Other countries have adopted their own versions of this doctrine.

i. Israel

a. Israel adopted its form of the harmless error doctrine in 1965 and was the first country to do so. Israel adopted the revised version of the

statute in 2004, which is what is in effect today.

b. The revised statute requires strict compliance with certain parts of the will, namely, that the document must be in writing with two witnesses OR a holographic will that is completely handwritten.

c. Noncompliance can be permitted by the court for the other requirements if the court is satisfied that the will represents the testator’s wishes.

ii. Australia

a. Australia has a statute that lists the formal requirements that must be met to create a will. However, one provision of this statute (section 18 of the Succession Act of 1981) allows Australian courts to recognize a document as a will if the court is satisfied that the decedent intended the document to serve as a will.

b. Three conditions must be met for Australia’s harmless error doctrine to apply:

i. The document must exist (as defined in the statute);

vi. The document must purport to state the decedent’s testamentary intent; and

vii. The decedent must have intended for the document to be his will.

c. For example, the Supreme Court of Queensland found an unsent text message to fulfill these requirements. The court considered facts such as the fact that the decedent addressed in the text how he wanted to dispose of his assets in the text and also included information such as his bank PIN number, date of birth, and where he stored cash. Re Nichol; Nichol v. Nichol & Anor,

iii. Canada

[2017] QSC 220, 2017 WL 4534236 (S. Ct. Queensland (Oct. 9, 2017).

a. In 1987, the Uniform Laws Conference of Canada approved a harmless error measure for the Canadian Uniform Wills Act.

b. However, the Canadian provinces of Manitoba and Saskatchewan are the only provinces who have enacted harmless error statutes.

D. BENEFITS AND CONCERNS FOR ERODING FORMALITIES

1. Electronic Wills

a. Signings are easier

i. Documents don’t have to be printed before the signing or assembled after the signing.

ii. Remote signings provide flexibility and allow clients to sign documents from their home or office while having their attorney oversee the process and provide witnesses. This helps attorneys fulfill their obligation to ensure that the documents are signed correctly.

iii. Technology can assist people with disabilities. For example, clients with visual impairments can adjust their settings to provide larger text, and people with hearing impairments can have access to closed captioning to understand oral instructions and answers to their questions.

b. Effects of Integration with electronic notarization statutes

i. Knowledge-based Authentication (“KBA”) and Credential Analysis

a. KBA prevents fraud and forgery

b. Passing the KBA within 2 minutes may provide evidence of testamentary capacity

c. Certain people may find the KBA difficult to successfully complete.

ii. Recorded signings

a. Recorded signings provide visual

evidence of the testator during the signing.

b. While some recordings may demonstrate the testator had capacity, clients aren’t actors. Some people – particularly those who are unfamiliar with the e-notarization process – may not come across well in a recorded signing.

c. Clients who are ill or have physical evidence of their disabilities may be particularly uncomfortable being recorded.

d. Ultra-wealthy clients may have concerns about their likeness being recorded and stored outside of their control.

iii. Cost

a. Most notarization platforms charge a fee. This may not affect most clients, but some non-profit organizations have raised concerns about access to justice.

iv. Tamper-evident documents

a. Tamper-evident documents provide security after the signing to ensure no changes are made to the will.

b. They also provide audit trails of the signing that include the date and time of the signing and IP addresses of the devices used in the signing. Some audit trails provide the location of the signers who are using devices with GPS to sign.

c. Storage of Electronic Wills

i. Custodians

a. Custodians provide an “original” e-will that is safely controlled by a third-party.

b. Custodians are not well-established or regulated, and there are concerns about what happens when a custodian goes out of business or fails to maintain e-wills.

ii. Cloud Storage

a. For states that do not require custodians, what are the best practices for storing electronic wills? Many clients may put the documents in a cloud storage account or leave them in their email account.

b. Unfortunately, the Revised Uniform Fiduciary Access to Digital Assets Act (“RUFADAA”) requires a document to name who has access to online accounts or a court order with that information. Most powers of attorney are revoked upon the principal’s death, so they are not helpful in determining who is permitted to access an electronic will upon the testator’s death. If the will is in cloud storage, the person named to access the account cannot access it because they don’t have a copy of the will that provides access. This leaves obtaining a court order as the only option, which may be burdensome.

d. Revocation

i. Most states allow a will to be revoked by a physical act, but the physical act that destroys an electronic will is ambiguous when there is no “original” document.

ii. Heirs and legatees may not know the physical act has occurred if only one file containing the e-will must be destroyed.

iii. A testator may accidentally revoke the e-will by deleting a file after copying it in another location.

iv. If intent is required to destroy an e-will, this opens the door to litigation as to whether the testator had intent to revoke it.

v. If all the files containing an e-will must be destroyed to revoke the e-will, the testator may easily miss a copy of the file. For example, there might be a version of the e-will archived in the testator’s sent messages folder or on an old computer or cell phone.

e. Litigation

i. Litigating e-wills may be more costly because, in addition to the traditional experts used in

will contests, these cases may require experts in the technology used to create and sign the e-will.

f. Growing Pains and Unexpected Issues

i. E-wills are new, so unexpected issues may arise.

ii. For example, Illinois has allowed e-wills since 2021, but the Administrative Office of Illinois Courts has not yet issued guidelines for numbering and storing e-wills as public records. As a result, the County Clerks of Court are only accepting paper copies of e-wills for filing.

2. Harmless Error Rule

a. Testator Intent vs. Opportunity for Fraud

i. The intent of the harmless error rule is to make it more likely the testator’s intent is carried out in probate.

ii. But formalities for creating a valid will prevent fraud and undue influence. Allowing wills that do not strictly adhere to the statutory formalities may create opportunities for unscrupulous acquaintances and family members to take advantage of testators.

b. Effect on Judicial Resources

i. Strict adherence to will formalities allow judges to quickly determine whether a will is valid. Thus, close examination of the circumstances for signing a purported will is required only in cases where an heir or prior legatee wants to contest the will’s compliance with statutory formalities.

ii. The harmless error rule allows potential legatees to present documents that do not meet the strict formalities of a will. Thus, courts are required to review the circumstances of the signing when potential legatees want a document that does not meet the formalities admitted as a will and when heirs and prior legatees want to contest a will that adheres to statutory formalities.

iii. There has not been a noticeable uptick in will contests in jurisdictions that have adopted the harmless error doctrine. However, courts will inevitably need to devote additional time

and resources to evaluating the validity of wills that do not meet traditional formalities as more states adopt harmless error statutes and more wills seek their protection.

c. Malpractice Claims

i. For estate planning attorneys who mishandle a will signing, the harmless error rule minimizes the damages that result from an invalid will. Thus, fewer malpractice claims may be brought against those attorneys.

Endnotes

1. These materials were prepared for and presented at the RPTE Section’s 35th Annual Spring Meeting in Washington DC, May 10-12, 2023.

2. Melissa Osorio Dibble is an attorney at Archer & Greiner, P.C. in Voorhees, NJ.

3. Benjamin Orzeske is an attorney with at Uniform Law Commission in Chicago, IL.

4. Ray Prather is an attorney at Prather Ebner Wilson LLP in Chicago, IL.

5. Jenna Rubin is an attorney at Gutter Chaves Josepher Rubin Forman Fleischer Miller, P.A. in Boca Raton, FL.

6. Washington, D.C. adopted the UPC’s harmless error rule for e-wills under DC ST § 18-906.

7. Utah’s harmless error rule applies to e-wills under U.C.A. 1953 § 75-2-1406.

8. Colorado’s harmless error rule applies to e-wills under C.R.S.A. § 15-11-1306.

Snapshot: Buying and Selling Art In USA

By Gabrielle C. Wilson, Howard N. Spiegler, Lawrence M. Kaye and Yael M. Weitz1

Lawyers from Kaye Spiegler PLLC provide an overview of the U.S. law regarding art transactions, including the passing of title, implied warranties, and most significantly the legal issues applicable to transactions involving stolen art.

Buying and selling

Passing of title

When does ownership of art, antiques and collectibles pass from seller to buyer?

The Uniform Commercial Code (UCC), which has been adopted in some form by every state in the United States, is a collection of laws governing commercial transactions in the country. Sales of tangible personal property, such as fine art, are governed by article 2 of the UCC. Section 2-401(2) of the UCC provides that title to artwork will generally pass from the seller to the buyer upon the physical delivery of an artwork. The parties may seek to circumvent this by agreeing that title

will not pass until receipt of payment. The majority view, however, is that after physical delivery of the work, the seller will be left with a security interest in the work, but not title to it.

Implied warranty of title

Does the law of your jurisdiction provide that the seller gives the buyer an implied warranty of title?

According to section 2-312(1) of the UCC, unless excluded or modified by specific language or circumstances, a contract for the sale of an artwork will include a warranty by the seller that ‘the title conveyed shall be good, and its transfer rightful; and the goods shall be delivered free from any security interest or other lien or encumbrance of which the buyer at the time of contracting has no knowledge.’ This warranty may be limited with specific language or circumstances that give the buyer reason to know that the seller does not claim title in him or herself, or that the seller is purporting to sell only such right or title as the seller or a third person may have.

Where the seller is a merchant, the UCC also provides the buyer with an implied warranty that ‘the goods shall be delivered free of the rightful claim of any third person by way of infringement or the like’. Pursuant to the UCC, a merchant is ‘a person who deals in goods of the kind or otherwise by his occupation holds himself out as having knowledge or skill peculiar to the practices or goods involved in the transaction’. In the art context, this definition most often applies to galleries, art dealers and auction houses.

An action for breach of warranty must be commenced within four years after the cause of action has accrued. In general, accrual is measured from the date of the breach, which occurs when ‘tender of delivery is made’, regardless of a lack of knowledge of the breach. The UCC provides an exception, however, where a warranty ‘explicitly extends to future performance’ and ‘discovery of the breach must await the time of such performance’. Under those circumstances, the cause of action will accrue when the breach is or should have been discovered.

Registration

Can the ownership of art, antiques or collectibles be registered? Can theft or loss of a work be recorded on a public register or database?

The United States does not have a public register for recording ownership of artworks. If a work of art is lost or stolen, the Federal Bureau of Investigation’s National Stolen Art File is a database that may be consulted. The objects listed in this database are submitted by law enforcement agencies in the United States and abroad. Once an object is recovered, it is removed from the database.

Good-faith acquisition of stolen art

Does the law of your jurisdiction tend to prefer the victim of theft or the acquirer in good faith of stolen art?

A basic tenet of US law is that a goodfaith purchaser for value cannot obtain good title to stolen property. This rule applies regardless of whether the purchaser acquired the artwork at auction or by private sale, or from a subsequent purchaser rather than directly from the thief. Thus, the true owner has the right to reclaim such property unless barred by the statute of limitations or other defence. On its face, this rule tends to prefer the true owner’s rights over those of the possessor’s. The statute of limitations and other defences such as laches, however, may tip the scales in favour of the possessor. Whether a purchaser is considered to be in good faith depends on the facts and circumstances of the case, but, as a general matter, the possessor’s good faith will be contingent on his or her lack of knowledge that the object was stolen.

Acquiring title to stolen art through prescription

If ownership in stolen art, antiques or collectibles does not vest in the acquirer in good faith, is the new acquirer protected from a claim by the victim of theft after a period of time?

Where the possessor is in good faith, in some states, including New York, a ‘demand and refusal’ rule applies, under which the threeyear limitations period will not begin to run until the owner makes a demand of the possessor for the return of the property and the possessor refuses. The majority of states, however, follow a discovery rule. In these states, the limitations period, which differs depending on the state, begins to run when the plaintiff discovers, or after the exercise of reasonable diligence should have discovered, the whereabouts

of the artwork. Where the statute of limitations runs, a claim for the return of stolen art will typically be barred, unless an equitable doctrine is applied to toll the applicable period. As a counterpoint to the statute of limitations, the equitable doctrine of laches may also bar otherwise timely art claims. To establish the defence, a possessor must show that the claimant unreasonably delayed in bringing the action to the prejudice of the possessor. A court may also weigh the relative equities between the parties in determining whether to apply a laches defence.

Can ownership in art, antiques or collectibles vest in the acquirer in bad faith after a period of time?

In the United States, title does not pass to a purchaser in bad faith, irrespective of the amount of time that has elapsed. Nonetheless, a claim for the return of the property may be barred as a result of the statute of limitations or pursuant to the equitable doctrine of laches.

Must the professional seller of art, antiques or collectibles maintain a register of sales?

US law does not require an art dealer to maintain a register of sale.

Risk of loss or damage

When does risk of loss or damage pass from seller to buyer if the contract is silent on the issue?

Where the contract is silent on the issue, the UCC provides that the risk of loss passes to the buyer from a merchant seller upon receipt of the artwork. If the seller is a non-merchant, the risk will pass to the buyer upon ‘tender of delivery’ of the artwork (ie, when the buyer receives notification reasonably necessary to enable him or her to take delivery of the artwork). The UCC also sets forth specific provisions concerning risk of loss when the artwork: (1) is either required or authorised by the contract to be shipped by common carrier; or (2) is held by a bailee to be delivered without being moved. The UCC provides that the risk of loss may be altered by contrary agreement of the parties.

Due diligence

Must the buyer conduct due diligence enquiries? Are there non-compulsory enquiries that the buyer typically carries out?

US law does not impose due diligence requirements on the buyer. Nonetheless, the amount of due diligence conducted may impact a buyer’s remedies in the event of a claim. Courts also consider whether a buyer is a merchant or non-merchant in evaluating the reasonableness of the buyer’s due diligence. Thus, though not required by law to do so, buyers are typically advised to undertake certain threshold enquiries, such as determining whether there are indications that the artwork may have been stolen and to research the provenance of the work (eg, by contacting former owners of the artwork).

Must the seller conduct due diligence enquiries?

Although United States law does not impose a requirement on sellers to conduct due diligence prior to selling an artwork, proper due diligence on the part of the seller is advised. Pursuant to the UCC, the buyer is provided with various warranties that relate to, for example, the artwork’s authenticity, authorship and title. When the seller is a merchant, the UCC provides the buyer with additional implied warranties with respect to the artwork. Therefore, at a minimum, the seller of an artwork should endeavour to ensure that the artwork conforms to these warranties and avoid liability for a breach.

Other implied warranties

Does the law provide that the seller gives the buyer implied warranties other than an implied warranty of title?

Where the seller is a merchant, a warranty of merchantability is provided to the buyer of an artwork. According to the UCC, for art to be merchantable, it must, in relevant part: (1) be able to ‘pass without objection in the trade under the contract description’; (2) be ‘fit for the ordinary purposes’ for which it is sold; and (3) conform to the affirmations of fact made in the sale catalogue or the bill of sale. Where the seller has reason to know of ‘particular purposes for which the goods are required’ and the buyer is relying on ‘the seller’s skill or judgment to select or furnish suitable goods’, the buyer is also provided with an implied warranty of fitness for a particular purpose. Typically, this implied warranty will apply where the seller is a merchant, but it may, in particular circumstances, apply in cases where the seller is not. Both implied warranties may be excluded or modified by the parties.

A cause of action for a breach of warranty must be commenced within four years of accrual, which occurs when tender of delivery is made unless the warranty ‘explicitly extends to future performance of the goods and discovery of the breach must await the time of such performance’. Under those circumstances, the cause of action accrues when the breach is or should have been discovered.

Voiding purchase of forgeries

If the buyer discovers that the art, antique or collectible is a forgery,

what claims and remedies does the buyer have?

Where an artwork is discovered to be a forgery or otherwise inauthentic, claims based on breach of warranties, fraud and mistake may be available to the buyer. Pursuant to the UCC, an express warranty may arise from any description or affirmation of fact or promise by the seller relating to the artwork that ‘becomes part of the basis of the bargain’. Such statements may be made by the seller in written materials, such as sale documentation, advertisements, brochures and catalogues, or from a seller’s oral statements to the buyer. Where the seller is a non-merchant, a court may consider such descriptions, including statements of attribution, to be mere opinion and not an express warranty. But, where the seller is a merchant or is oth-

erwise considered to have a superior level of expertise, and the seller records the artist’s name in the invoice, this will generally be considered an express warranty. Good faith on the part of the seller is no defence if the statement proves to be false.

A buyer may also bring a tort action for fraud against the seller. To establish fraud, the buyer must prove that: (1) the seller made a misrepresentation related to a material issue of fact, either by way of a misstatement or nondisclosure; (2) the misrepresentation was intentionally made with intent to induce reliance; and (3) the buyer did, in fact, rely on the misrepresentation to his or her detriment.

A similar tort action that may be available in a claim for negligent misrepresentation. In contrast to a fraud claim, this cause of action may arise where the seller negligently, instead of intentionally, asserts a false statement. Generally, the seller must also owe a duty of care to the buyer.

Alternatively, a buyer may bring a claim on the grounds of mutual mistake, in which both parties are mistaken with respect to a material assumption on which the contract was made – in this case, the authenticity of the artwork. If, however, the seller is aware of the mistake or has reason to know of it, a buyer may have a claim for unilateral mistake.

Voiding inadvertent sales of works by masters

Can a seller successfully void the sale of an artwork of uncertain attribution subsequently proved to be an autograph work by a famous master by proving mistake or error?

Where both the seller and the buyer are mistaken as to the attribution of an artwork, the seller may, under certain circumstances, succeed in an action for rescission of the sale. Where, however, the seller could have discovered the true attribution of the artwork prior to the sale but did not do so because of a lack of due care or diligence, a court is unlikely to find that a mistake of fact has been made.

Endnotes

1. Kaye Spiegler PLLC - Gabrielle C. Wilson, Howard N. Spiegler, Lawrence M. Kaye and Yael M. Weitz

Florida Passes Law Restricting Foreign Ownership of Real Estate

By Kelly Shami, Elena Otero and Brian Donnelly1

McDermott Will & Emery provides an analysis of Florida’s new law which imposes restrictions on foreign ownership of real estate, including agricultural land and land near military installations and critical infrastructure, by persons and entities from specified nations.

The Florida Legislature recently passed Senate Bill 264 (SB 264), which Governor Ron DeSantis signed into law on May 8, 2023. SB 264 notably presents several new restrictions on persons or entities from certain foreign countries of concern, which are defined as the People’s Republic of China, the Russian Federation, the Islamic Republic of Iran, the Democratic People’s Republic of Korea, the Republic of Cuba, the Venezuelan regime of Nicolás Maduro or the Syrian Arab Republic.

SB 264 particularly (1) prohibits governmental entities in Florida from contracting with any foreign country of concern, (2) prohibits governmental entities in Florida from entering into any contract or agreement granting economic incentives to a foreign country of concern, (3) prohibits the ownership of agricultural land and certain asset classes (such as real property located near a military installation or critical infrastructure) by foreign principals of any foreign country of concern, and (4) largely restricts most ownership by foreign principals from the People’s Republic of China.

There are only minimal carve-outs to these restrictions; as such, the implications of SB 264 will be widely felt by the Florida real estate industry.

In Depth

RESTRICTIONS ON OWNERSHIP OF AGRICULTURAL LAND

SB 264 creates §§ 692.202-204. Newly enacted § 692.202 provides that a foreign principal may not directly or indirectly own, have a controlling interest in, or acquire agricultural land or any interest therein other than a de minimus indirect interest. “Agricultural land” is defined as land classified as agricultural under Florida Statute § 193.461. Florida Statute § 193.461(b) states that “[s]ubject to the restrictions specified in this section, only lands that are used primarily for bona fide agricultural purposes shall be classified agricultural. The term ‘bona fide agricultural purposes’ means good faith commercial agricultural use of the land.”

A foreign principal has a de minimus indirect interest if any ownership is the result of the foreign principal’s ownership of registered equities in a publicly traded company owning the land and if the foreign principal’s ownership interest in the company is either (a) less than 5% of any class of registered equities or less than 5% in the aggregate in multiple classes of registered equities; or (b) a noncontrolling interest in an entity controlled by a company that is both registered with the US Securities and Exchange Commission as an investment adviser under the Investment Advisers Act of 1940, as amended, and is not a foreign entity.

Section 692.202(1) carves out agricultural land owned before July 1, 2023, but creates a registration requirement for foreign principals who continue to own agricultural land after such date. Failure to timely register will subject the foreign principal to a $1,000 civil penalty for each day that the registration is late and could result in the Florida Department of Agriculture and Consumer Services (Department of Agriculture) placing a lien against the unregistered agricultural land for the unpaid balance of any late penalties. Section 692.202(5)(a) also mandates that, at the time of purchase, a buyer of agricultural land must provide an affidavit under penalty of perjury attesting that the buyer is not a foreign principal and is in compliance with § 692.202 requirements. It is worth noting that failure to comply with this statutory requirement does not affect the title or insurability of the land.

Additionally, § 692.202(6) contains numerous consequences for ownership of agricultural land in violation of the section, including (1) forfeiture to the state, (2) a civil action by the Department of Agriculture for forfeiture, (3) the recording of a lis pendens, (4) a final judgment of forfeiture vesting title to the land in the state, (5) sale of the land previously subject to forfeiture, and (6) an ex parte order of seizure in cases of clear and present danger to the state. Moreover, knowingly violating the statute is a misdemeanor of the second degree.

RESTRICTIONS ON OWNERSHIP OF REAL PROPERTY NEAR MILITARY INSTALLATIONS AND CRITICAL INFRASTRUCTURE FACILITIES

SB 264 also creates § 692.203, which prohibits the purchase of real property around military installations and critical infrastructure facilities by foreign principals. Under this provision, a foreign principal may not directly or indirectly own, have a controlling interest in, or acquire by purchase, grant, devise, or descent any interest (except a de minimus indirect interest) in real property on or within 10 miles of any military installation or critical infrastructure facility in Florida.

Despite the restrictions in § 692.203(1), SB 264 also includes an exception—similar to that in § 692.202(2)—permitting a foreign principal to continue holding an interest in such property if they directly or indirectly owned the property before July 1, 2023. Likewise, § 692.203 includes registration requirements (albeit with the Florida Department of Economic

Opportunity, not the Department of Agriculture) and imposes civil and criminal penalties similar to those in § 692.202.

RESTRICTION ON OWNERSHIP OF REAL PROPERTY BY THE PEOPLE’S REPUBLIC OF CHINA

SB 264 § 692.204 prohibits the purchase or acquisition of real property by the People’s Republic of China and certain other enumerated persons and entities as set forth below. Specifically, the following persons or entities may not directly or indirectly own, have a controlling interest in, or acquire by purchase, grant, devise, or descent any interest (except a de minimus indirect interest) in real property in Florida:

1. The People’s Republic of China, the Chinese Communist Party or any official or member of either group.

2. Any other political party or member of a political party or a subdivision of a political party in the People’s Republic of China.

3. A partnership, association, corporation, organization or any other combination of persons organized under the laws of or having its principal place of business in the People’s Republic of China or a subsidiary of such entity.

4. Any person who is domiciled in the People’s Republic of China and is not a citizen or lawful permanent resident of the United States.

5. Any person, entity or collection of persons or entities described in subparagraphs 1 through 4 as having a controlling interest in a partnership, association, corporation, organization, trust or any other legal entity or subsidiary formed for the purpose of owning real property in Florida.

A “de minimus indirect interest” is defined similarly to the above SB 264 statutory provisions. Unlike the other newly created statutes in SB 264, however, it seems that § 692.204(1) (a)5. expands SB 264’s reach by including applicability to a “collection of persons or entities . . . having a controlling interest,” as described in § 692.204(1)(a). This language implies that the de minimus interests collectively could not have a controlling interest in any such legal entity that owns real property in Florida.

Notwithstanding the above property ownership restrictions, SB 264 § 692.204(2) permits a natural person described in (1)(a) to purchase one residential real property that is up to two acres in size if (1) the parcel is not on or within five miles of any military installation in this state; (2) the person has a current verified US visa authorizing them to be legally present within this state; and (3) the purchase is in the name of the person who holds the visa or official documentation.

Additionally, as with § 692.202(3)(a) and § 692.203(3)(a), § 692.204 creates a registration requirement with the Department of Economic Opportunity. Likewise, § 692.204 mandates that the buyer of real property submit an affidavit under penalty of perjury attesting to the fact that the buyer is not a person or entity listed in (1)(a) and is in compliance with the requirements of this section. Failure to comply with this statutory requirement does not affect the title or insurability of the land. Section 692.204 also imposes civil and criminal penalties for violations of this provision, although the criminal penalties are different from those mentioned above. § 692.204(8) particularly states that a violation of this section constitutes a felony of the third degree while § 692.204(9) states that a person who knowingly sells real property or any interest therein in violation of this section commits a misdemeanor of the first degree.

McDERMOTT INSIGHT

SB 264 presents many challenges for foreign nationals and entities who wish to own (or already own) real property in Florida.

Endnotes

1. McDermott Will & Emery - Kelly Shami, Elena Otero and Brian Donnelly

Virginia’s Harmless Error Rule May Permit a Will that Doesn’t Meet the Conventional Formalities to be Probated

By William W. Sleeth III1

William W. Sleeth III looks at Virginia’s “Harmless Error” rule which may permit the probate of a will even if it does not strictly comply with the conventional formalities required for a writing to constitute a valid will.

Virginia has a version of the “harmless error rule” that may permit a will to be probated even if it does not strictly comply

with the conventional formalities required for a writing to constitute a valid will.

Traditionally, Virginia, like most states, required all wills to strictly comply with the legal requirement rules set forth in the code for when a writing can constitute a valid will. Any deviation, even if minor, usually meant that clerks and courts would not admit the will to probate as a valid will. That often led to some harsh results.

In 2007, the Virginia General Assembly adopted the precursor to what is now Virginia Code Section 64.2-404. The current law is based on a provision contained in the Uniform Probate Code referred to as the “Harmless Error” Rule (Section 2-503). Virginia’s provision is a bit more restrictive than the provision in the Uniform Probate Code, but it nonetheless significantly relaxes the traditional requirements for what constitutes a valid will under Virginia law.

Conventional Formalities

Before we examine the law, let’s look at the conventional formalities. Under Virginia Code Section 64.2-403, a will has to fall within one of two categories in order to constitute a valid will under the conventional formalities:

(1) it’s (a) in writing, (b) signed by the testator (the person making the will) or another person in the testator’s

presence and by his direction, in a manner as to make it manifest that the name is intended as a signature, and (c) the testator’s signature is acknowledged by at least two competent witnesses who are present at the same time and who sign the will in the presence of the testator; or

(2) it’s entirely in the testator’s handwriting and signed by him, and the handwriting and signature are proved by at least two disinterested witnesses.

Harmless Error Rule

The Harmless Error Rule, in Virginia Code Section 64.2-404, relaxes the conventional formalities. It provides:

A. Although a document, or a writing added upon a document, was not executed in compliance with § 64.2-403, the document or writing shall be treated as if it had been executed in compliance with § 64.2-403 if the proponent of the document or writing establishes by clear and convincing evidence that the decedent intended the document or writing to constitute (i) the decedent’s will, (ii) a partial or complete revocation of the will, (iii) an addition to or an alteration of the will, or (iv) a partial or complete revival of his formerly revoked will or of a formerly revoked portion of the will.

B. The remedy granted by this section (i) may not be used to excuse compliance with any requirement for a testator’s signature, except in circumstances where two persons mistakenly sign each other’s will, or a person signs the self-proving certificate to a will instead of signing the will itself and (ii) is available only in proceedings brought in a circuit court under the appropriate provisions of this title, filed within one year from the decedent’s date of death and in which all interested persons are made parties.

Under this code section, litigants have a much easier task when it comes to trying to establish a writing as a valid will. It relaxes almost all of the conventional requirements with the exception of the requirement that the writing contain the testator’s signature.

In exchange for the relaxed legal requirements, the proponent of the will has to satisfy some additional hurdles. The proponent has a burden of proof of “clear and convincing” evidence, compared to the normal lower standard of a “preponderance” of the evidence. Also, the proponent has to bring a court proceeding within one year from the decedent’s passing and name all interested parties in that proceeding.

Endnotes

1. Gordon Rees Scully Mansukhani and William W. Sleeth III

Am I Hallucinating?

Artificial Intelligence (AI) Generative Chatbots and ABA Model Rules

By Liz Lindsay-Ochoa, JD, LLM1

This article provides an overview the ethical considerations raised by the use of generative model chatbots such as ChatGPT, Bard (Google), and Bing AI, for legal work, including the possibility of chatbots creating fake information including legal citations and authorities, unintentional breaches of confidentiality and other issues raised under the ABA Model Rules of Professional Conduct.

ChatGPT (Open AI) has been a hot topic since it was launched to the public. This and other similar generative model chatbots, such as Bard (Google), and Bing AI give rise to ethical considerations. This technology is known as generative AI, where the program creates new content by predicting what

words come next based on a prompt from the user. What are the ethical considerations of using this?

The ABA Model Rules of Professional Conduct (Model Rules) give attorneys some guidance on our ethical obligations. Although generative AI touches on many portions of the Model Rules, specifically, I am going to focus on Model Rule 1.1 Competence, 1.6 Confidentiality, and Rule 5.1 and 5.3 Responsibilities of a Partner or Supervisory Lawyer and Responsibilities Regarding Nonlawyer Assistance.

Model Rule 1.1 Competence

A lawyer shall provide competent representation to a client. Competent representation requires the legal knowledge, skill, thoroughness and preparation reasonably necessary for the representation.

Comment 8 of the Model Rule states that “To maintain the requisite knowledge and skill, a lawyer should keep abreast of changes in the law and its practice, including the benefits and risks associated with relevant technology, engage in continuing study and education and comply with all continuing legal education requirements to which the lawyer is subject.” An attorney’s duty to provide competent representation includes making informed decisions as to whether AI is appropriate for the legal services provided to your client and whether the program performs as marketed.

Artificial hallucination refers to the phenomenon that gives seemingly realistic sensory experiences that do not corre -

spond to any real-world input. Generative model chatboxes have been found to produce hallucinations, particularly when trained on large amounts of unsupervised data. By now, you have surely heard about the lawyer that used ChatGPT to write his brief. The AI tool created fake case citations, that is hallucinations. Of course, that lawyer has faced sanctions. The judge stated, in his opinion , there was nothing “inherently improper” about using AI for assisting in legal work, but lawyers must ensure that the filings are correct.

Undoubtedly, there are other aspects to consider. The use of fake information to change the answers in the generative model chatboxes is something to be wary of. Incorporating methods for monitoring and detecting hallucinations can help address this issue. Another issue is the potential to perpetuate biases and discrimination . The tools are only as unbiased as the data and algorithms used to create them, and there is a risk that these tools can perpetuate existing biases in the legal system. Overall, attorneys have an ethical obligation to be competent in the use of technology and to ensure that their use of AI-powered tools does not compromise their clients’ interests.

Model Rule 1.6  Confidentiality of Information

Rule 1.6 includes the obligation to use reasonable efforts to prevent the unauthorized disclosure of, or unauthorized access to, information relating to the representation of a client. As you may have seen, Open AI uses data scraping off the internet to increase its ability to create answers. But, if you look through the Security Portal or the Terms and Policies of ChatGPT, you will some potentially alarming items. If you use ChatGPT, you agree that you will allow OpenAI to share the data it collects with unspecified third parties. Additionally, its employees may review your conversations with ChatGPT. This is all to improve the chatbot’s ability to provide better responses but is not privacy-friendly. Accordingly, an attorney has a duty to understand the vendor’s security practices and decide if the security policies are reasonable prior to sharing any client information.

Model Rule 5.1 and 5.3 Responsibilities of a Partner or Supervisory Lawyer and Responsibilities Regarding Nonlawyer Assistance

This is a novel technology. Are the generative model chatboxes a nonlawyer that you need to supervise? The Model Rules allow lawyers to delegate work to paraprofessionals, but does not delegate responsibility. Lawyers also must ensure that delegation of work to non-lawyers, including the use of vendors who may electronically handle attorney-client communications and confidential information is done responsibly2 It is also clear that the responses generated by ChatGPT and other chatboxes can be imperfect. The technology may not always provide the most up-to-date or relevant information. These tools, when supervised correctly, can help ensure that legal

documents adhere to specific requirements and best practices, reducing the risk of errors or omissions, and save time.

I considered writing this article using ChatGPT, but I decided against it3. Finally, although broader than this subject, I would be remiss to not mention that the House of Delegates adopted Resolution 604 at the 2023 ABA Midyear Meeting. The resolution addresses how attorneys, regulators, and other stakeholders should assess issues of accountability, transparency, and traceability in artificial intelligence. This topic is evolving at a rapid pace and lawyers must think through the ethical implications prior to using this or any new technology.

Endnotes

1. Liz is a Private Wealth Strategist and a leader in the Global Wealth Solutions Group at Raymond James. She focuses on estate, transfer, and income tax planning, using her knowledge to problem solve for high-net-worth clients. She is on Council for the American Bar Association’s (ABA) RPTE section and is active in several committees.

2. See https://www.ctbar.org/docs/default-source/publications/ ethics-opinions-informal-opinions/2013-opinions/informal-opinion-2013-07 on cloud computing. This opinion also provides a list of other states opinions that have similar results.

3. However, this is an interesting article written by ChatGPT, showing the prompts on how the author received his results https://clp.law. harvard.edu/knowledge-hub/magazine/issues/generative-ai-in-the-legal-profession/the-implications-of-chatgpt-for-legal-services-and-society/

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Hospitality, Timesharing, and Common Interests Development Group

The Hospitality Group focuses on the varied and numerous issues involving the development, structuring, management and operation of resorts, hotels, and common interest communities such as condominiums, timeshares, and planned communities. There are three committees within the Group, each of which specifically addresses its designated subject matter (although the reis often a significant amount of overlap between the committees). Each committee pursues the unique issues presented in the irrespective areas of practice, including such issues as the acquisition, financing, development, operation, management and disposition of these special types of development.

Real Property Groups and Committees (americanbar.org)

Income and Transfer Tax Planning Group

This group concentrates on the three federal transfer taxes (estate, gift and generation‐skipping), the income taxation of trusts, estates, grantors and beneficiaries, tax litigation and controversy, and arts and collectibles. Because these taxes comprise the federal tax universe in which most estate planning instruments operate, this group seeks to assist trust and estate attorneys in their constant endeavor to improve their knowledge of these taxes, to stay updated on tax reform, and to play a role in the development of these tax systems. Group members work to improve the transfer tax system by preparing and submitting comments on proposed legislation and proposed regulations, and by suggesting legislative solutions to technical problems.

Trust and Estate Groups and Committees (americanbar.org)

Special Investors and Investment Structure Group

This Group focuses on legal aspects of non-traditional investors (life insurance companies, international investors and land trusts) and investment structures (including REITs, partnerships and limited liability companies). We have committees that concentrate their efforts on each of these areas, as well as a committee focused on federal taxation of real estate.

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Committee Calls SEPTEMBER 2023

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RESIDENTIAL, MULTI-FAMILY AND SPECIAL USE GROUP - IDENTIFYING AND DEALING WITH FRAUD IN RESIDENTIAL REAL ESTATE TRANSACTIONS

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2023–2025 RPTE FELLOWS

REAL PROPERTY FELLOWS

BROOKE BENJAMIN

K&L Gates LLP

Washington, DC

STEVE BERTIL

Troutman Pepper Hamilton Sanders LLP

Philadelphia, PA

ARIELLE COMER

Comer Law Group

Dallas, TX

DANIELLE DOLCH

Shulman, Rogers, Gandal, Pordy & Ecker, P.A.

Potomac, MD

JANE STERNECKY

Uniform Law Commission

Chicago, IL

TRUST & ESTATE FELLOWS

EMMA CONNOR

Prather Ebner Wilson

Chicago, IL

HARRY DAO

McDermott Will & Emery LLP

Menlo Park, CA

MOLLY DEPEW

Grant, Herrmann, Schwartz & Klinger LLP

New York, NY

CLAY MCKENNA

Private Bank at JPMorgan

Houston, TX

TYLER MURRAY

Baker Botts L.L.P.

Dallas, Texas

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Fund for Justice and Education for The Section of Real Property Trust and Estate Law

The ABA, Section of Real Property, Trust and Estate Law Fund for Justice and Education (FJE) is the 501(c)(3) charitable fund that supports the public service, policy, fellowship programs, education, diversity, equity and inclusion work within the Section of the American Bar Association.

Learn about Section of Real Property, Trust and Estate Law’s eReport

The eReport is the quarterly electronic publication of the American Bar Association Real Property, Trust and Estate Law Section. It includes practical information for lawyers working in the real property and estate planning fields, together with news on Section activities and upcoming events. The eReport also provides resources for seasoned and young lawyers and law students to succeed in the practice of law.

For further information on the eReport or to submit an article for publication, please contact Robert Steele(Editor), Cheryl Kelly (Real Property Editor), Raymond Prather (Trust and Estate Editor), or RPTE staff members Bryan Lambert or Monica Larys. Are you interested in reading FAQs on how to get published in the eReport? Download the FAQs here. We welcome your suggestions and submissions!

FREQUENTLY ASKED QUESTIONS BY PROSPECTIVE AUTHORS RTPE eReport

What makes eReport different from the other Section publications? The most important distinction is that eReport is electronic. It is delivered by email only (see below) and consists of links to electronic versions of articles and other items of interest. Since eReport is electronic, it is flexible in many ways.

How is eReport delivered and to whom?

eReport is delivered quarterly via email to all Section members with valid email addresses. At the ABA website, www.americanbar.org, click myABA and then navigate to Email, Lists and Subscriptions. You have the option of receiving eReport. Currently almost 17,000 Section members receive eReport.

What kind of articles are you looking for?

We are looking for timely articles on almost any topic of interest to real estate or trust and estate lawyers. This covers anything from recent case decisions, whether federal or state, if of general interest, administrative rulings, statutory changes, new techniques with practical tips, etc.

How long should my article be?

Since eReport is electronic and therefore very flexible, we can publish a two page case or ruling summary, and we can publish a 150 page article. eReport is able to do this since the main page consists of links to the underlying article, therefore imposing no page restraints. This is a unique feature of eReport.

How do I submit an article for consideration?

Email either a paragraph on a potential topic or a polished draft – the choice is yours – to the Editor, Robert Steele, at rsteele@ssrga.com , and either our Real Estate Editor, Cheryl Kelly, at ckelly@thompsoncoburn.com , or our Trust and Estate Editor, Raymond Prather, at ray@pratherebner.com

Do I need to have my topic pre-approved before I write my submission?

Not required, but the choice is yours. We welcome topic suggestions and can give guidance at that stage, or you may submit a detailed outline or even a full draft. You may even submit an article previously published (discussed below) for our consideration.

Do citations need to be in formal Bluebook style?

eReport is the most informal publication of the Section. We do not publish with heavy footnotes and all references are in endnotes. If there are citations, however, whether to the case you are writing about, or in endnotes, they should be in proper Bluebook format to allow the reader to find the material. Certainly you may include hyperlinks to materials as well.

Can I revise my article after it is accepted for publication?

While we do not encourage last minute changes, it is possible to make changes since we work on Word documents until right before publication when all articles are converted to pdf format for publication.

What is your editing process?

Our Editor and either the Trust and Estate Editor or the Real Estate Editor work together to finalize your article. The article and the style are yours, however, and you are solely responsible for the content and accuracy. We will just help to polish the article, not re-write it. Our authors have a huge variety of styles and we embrace all variety in our publication.

Do I get to provide feedback on any changes that you make to my article?

Yes. We will email a final draft to you unless we have only made very minor typographical or grammatical changes.

Will you accept an article for publication if I previously published it elsewhere?

YES! This is another unique feature of eReport. We bring almost 17,000 new readers to your material. Therefore, something substantive published on your firm’s or company’s website or elsewhere may be accepted for publication if we believe that our readers will benefit from your analysis and insight. In some cases, articles are updated or refreshed for eReport. In other cases, we re-publish essentially unchanged, but logos and biographical information is either eliminated or moved to the end of the article.

How quickly can you publish my article?

Since we publish quarterly, the lead time is rarely more than two months. If you have a submission on a very timely topic, we can publish in under a month and present your insights on a new topic in a matter of weeks.