eReport 2022 Fall - ABA Section of Real Property, Trust and Estate Law

CFPB Issues Guidance on Nursing Home Debt

Editor Robert Steele (TE)

Technology/Practice Editor for Trust and Estate

Martin Shenkman (TE)

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CFPB Issues Guidance on Nursing Home Debt

By: Zisl Edelson1

Zisl Edelson summarizes the policy statement about debt col lection practices for unpaid nursing home bills issued on September 8, 2022 by the Consumer Financial Protection Bureau.

Deciding to admit an elderly loved one, parent, spouse or part ner to a nursing home is an intense and agonizing process. Sometimes there is just no choice, especially when there are insufficient funds for full-time at home care, and when a loved one has suffered a serious illness such as stroke, a disabling fall, or rapid cognitive decline. At the nursing home, in crises mode and faced with numerous documents and forms, family

members are overwhelmed and in weak position to negotiate with the facility and do not know the right questions to ask.

Fortunately, the Consumer Financial Protection Bureau (CFPB) has made a priority of helping seniors protect themselves finan cially. Recently, the CFPB issued a policy statement clarifying the interplay between the Federal Nursing Home Reform Home Act (FNHRA), the Fair Debt Collection Practices Act (FDCPA) and the Fair Credit Reporting Act (FCRA), with respect to nursing home contracts and debt collection practices for unpaid nursing home bills. See, CFPB Circular 2022-05 (Sept. 8, 2022).

The policy statement focuses on two main points:

1. No Third-Party Guarantee. Under the FNHRA2, a nurs ing home cannot require a third party (such as an adult child, or friend) to guarantee payment of nursing home bills, as a condition of admission or continued stay at the facility. Despite this rule, nursing home form con tracts often include boilerplate provisions requiring third party guaranties and signature by a “responsible party.” Family members and friends who have signed

such contracts may mistakenly believe they have liabil ity for nursing home bills, when they actually do not.

Practical Takeaway:

• Nursing home contracts should be signed only by the patient (including as “responsible party”), if the patient has capacity, or by the patient’s legal guardian, or agent under powers of attorney, spe cifically in such capacity and not personally. A family member or friend should never sign as “responsible party” with any personally liabil ity for payment. However, any third-party signer should understand that the FNHRA allows nursing homes to require a third party who has access and control of the patient’s income and assets (such as an agent under financial powers of attorney or a guardian) to use the patient’s funds to pay the facil ity, without obligating the third party to pay from their own resources. Third parties with financial control of a patient’s resources should be careful to keep detailed written records of all financial trans actions and to only use resources for the patient’s benefit.3

• The CFPB policy statement specifically does not include discussion of a spouse’s potential liability for nursing home debt under state filial support laws.4 Under the Illinois Family Expense Act, a spouse may be liable for nursing home debt.5

2. Unfair Debt Collection. Any nursing home contract provision that requires payment by third parties as a condition of admission or continued stay violates the FNHRA and is illegal and unenforceable. There fore, nursing home debts under such contracts are not valid. Nevertheless, it is not uncommon for nurs ing homes to try to collect against third parties (most often family members such as adult children) for amounts owed by patients, especially after the patient has been discharged or has died. Collection of this inva lid debt violates the FDCPA and the FCRA, because it is unlawful to mischaracterize a nursing home debt as collectable, when the debt is based on an invalid nurs ing home contract provision. Trying to collect such debt is false, deceptive, and misleading in violation of consumer debt collection laws.

Practical Takeaway: If faced with collection letters for nurs ing home bills, third parties should immediately dispute the debt in writing (including a reference to CFPB Circular 2022-05) and reach out to local government regulatory agencies and the CFPB. Law firms and collection agencies may be liable for damages under consumer debt collection laws if they pursue collection of invalid nursing home debt.

Endnotes

1. Zisl Edelson is an attorney focused on elder law at Edelson Law LLC in Skokie, Illinois.

2. The Illinois State Bar Association originally published this article. (ISBA Trusts & Estates Newsletter, Vol. 69, No. 4 (Oct. 2022)).

3. The Illinois Nursing Home Care Act generally mirrors the FNHRA. See, 210 ILCS 45/).

4. For an interesting recent case relating to potential limits on the scope of third-party obligations under nursing home contracts, see Wedgewood Care v. Eric Kravitz, NY App. No. 5545/14 (Jan. 5, 2021).

5. See, Circular 2022-05 (footnote twenty-one at p. 4)

6. See, 750 ILCS 65/15.

Estate Planning for Student-Athletes: Building a Playbook for Success in the Era of NILs

By: Rebecca K. Wrock, Katherine M. Szymanski, Jessica E. Visser and Richard T. Hewlett1

Since the landmark Supreme Court ruling NCAA v. Alston, stu dent-athletes can now earn compensation from their name, image and likeness. Previously, they were unable to benefit from the billions of dollars of annual revenue generated by athletic programs.

For decades, college athletes have benefited from scholar ship-funded education and stipends but were otherwise unable to share in the billions of annual revenue generated from athletic programs by the NCAA. The 2021 landmark Supreme Court ruling in NCAA v. Alston changed that by hold ing that the NCAA could not restrict education-related benefits

for athletes, effectively legalizing their ability to earn compen sation from their name, image and likeness (NIL).

This ruling opened the door for student-athletes to earn a potentially significant amount of money during their college careers from marketing, appearances and licensing deals –making personal estate and financial planning considerations even more important for student-athletes who are moving quickly to benefit from the NCAA’s change in policy. From basic but crucial estate planning documents that every athlete should have to more sophisticated tax and financial planning tailored to those benefiting from NIL, the following are impor tant considerations to address the unique needs and career trajectories of athletes to protect them and their earnings.

All Athletes

Patient Advocate Designation and Living Will

While every young adult should have a Patient Advocate Designation and Living Will, athletes are at increased risk of serious injury. A Patient Advocate Designation allows the ath lete to name an individual to act on their behalf with respect to medical decisions, and a Living Will details what type of care they would like to receive under certain circumstances, including end of life wishes surrounding whether and when to implement or withdraw life support. Without this document, a guardian would need to be formally appointed by the pro bate court to make these decisions, adding stress on top of an

already incredibly stressful situation and costing time when time is of the essence. This is the bare minimum that every athlete should have as a legal adult.

Durable Power of Attorney

The Durable Power of Attorney is a document that allows someone else (the “agent”) to make legal and financial deci sions on the athlete’s behalf. These documents can be structured so they are effective immediately upon signing or only upon incapacity. As most student-athletes will be over age 18, they are legally adults and must transact on their own (e.g. signing insurance documents, endorsement deals, etc.). Great care must be given to selecting an agent, particularly if the ath lete has significant assets or fame, as the agent will have the same authority and power over the athlete’s assets that the ath lete would.

Similar to the Patient Advocate Designation, in the event of incapacity a conservator would need to be appointed by the probate court to make these decisions for the athlete if a Durable Power of Attorney is not in place. Also note that the athlete’s agent under Durable Power of Attorney is distinguish able from the athlete’s “Agent” who represents the athlete in contract negotiations for their employment and other endorse ment or sponsorship opportunities. However, the athlete could choose the same person to fulfill both roles, if appropriate under the circumstances.

Income Taxes

Athletes compete all over the country and, in some cases, the world. From an income tax perspective, athletes need to be aware of earning income in multiple states (or countries) and carefully track this as additional tax filings may be required (and additional taxes may be owed).

Athletes Benefitting from NIL

Comparatively few student-athletes will make it to the profes sional ranks, and NIL earnings may be the financial pinnacle of their athletic careers. For those who do end up playing at the professional level, the odds are stacked against long-term financial success: most professional careers end in under five years, and a majority of these athletes who are in the NFL or NBA face serious financial issues or bankruptcy shortly after they stop playing.

Developing a strategy with a team of trusted advisors (attor ney, accountant, agent, financial advisor) is the key to success for athletes who have limited time to spare outside of training and unique needs including (but not limited to) substantial risk of a career-ending injury, a few peak years for earning that must then last for decades and increased risk of being targeted by those who would take advantage of their wealth. This strat egy should include additional estate planning documents,

financial and tax planning advice and a discussion of asset protection and privacy concerns.

Revocable Trusts

The use of revocable trust planning is a great place to start for younger athletes, especially those who are in the wealth accu mulation phase of their life. Trusts can provide an additional layer of security against any third parties who may try to take advantage of the athlete, especially when using a professional or other trusted individual as trustee. Trusts can also provide terms that would allow the athlete to grow with their wealth and learn to manage it in a responsible way by limiting dis tributions to those things that are necessary, like medical or health expenses and housing. Another advantage is privacy, as a Trust does not have to carry the name of the person who cre ated it. Thus, a trust can house assets without easily being tied back to any particular individual. In the event of the athlete’s death, the assets would pass outside of probate court, further preserving privacy, to whomever the athlete has named as beneficiary.

Estate and Gift Tax Planning

When coming into wealth, it is tempting to gift money or items (e.g. homes, cars, watches, etc.) to those people who supported the athlete while they were up-and-coming. However, athletes should be mindful of not only the constraint on their assets but also the tax impact of making these gifts, especially larger ones.

For 2022, any person can gift up to $16,000 to any other indi vidual without needing to file a gift tax return. Anything with a value above that amount will require filing a gift tax return, though tax may not be due. Further, anything reported on the gift tax return reduces an individual’s lifetime exemption ($12,060,000 in 2022) for estate tax purposes. It is important to note that, absent Congressional action, the estate tax exemp tion is scheduled to revert to its previous limit at the end of 2025, which will be half of the current exemption, adjusted for inflation. In that event, if the athlete previously made substan tial gifts, it is possible their entire lifetime exemption could be used. This also means there could potentially be estate tax due at their passing.

If the athlete has a level of wealth that would support large gift ing, utilizing irrevocable trusts to receive those assets could be a good planning option. While there is generally still a filing requirement for gift tax purposes (and exemption used), once the assets are in the trust, they are inherently more protected and could be structured to last for several generations. Assets could also be invested to provide additional growth for benefi ciaries, and future appreciation on the assets of the irrevocable trust would occur outside of the athlete’s gross estate for estate tax purposes, representing additional estate tax savings.

Asset Protection

In several states including Michigan, there are Domestic Asset Protection Trusts (DAPTs) which can be set up for maximum creditor protection. These types of trusts have clear advantages in that the person setting up the trust is still able to receive distributions from it at the trustee’s discretion, in addition to directing investments and setting the terms for ultimate dis position. There are also downsides to DAPTs, mostly that the assets are not easily accessible, the grantor is giving up control over those assets to a trustee and the trust is irrevocable and not readily changeable. DAPTs are most often utilized by peo ple with substantially risky careers who are exposed to liability.

As NIL is a brand-new concept for both athletes and institu tions, it remains to be seen how it will practically play out. What is certain is that athletes now have the ability to earn at a high level during their college years, which is a benefit that has never before been available to them. These income streams could last well past college and even leave a lasting legacy for generations to come. Athletes need a trusted team of advisors to help ensure they are doing the most they can to continue to earn, protect, grow and be tax-efficient with their assets. Hav ing that structure in place will help the wealth last through the athlete’s life and protect it for future generations.

Endnote

1. Varnum LLP Rebecca K. Wrock, Katherine M. Szymanski, Jessica E. Visser and Richard T. Hewlett

Central Register of Beneficial Ownership of Trusts — Key Considerations for UK Trustees

By: John Gill1

UK trustees of trusts with connections to Ireland must file details as to the beneficial owners of the trust with the Central Register of Beneficial Ownership of Trusts. The scope is broad, however, and determining which trusts must register requires careful consideration.

Central Register of Beneficial Ownership of Trusts

obligations placed on trustees of express trusts documented by deed or other declaration in writing whose trustees are res ident in Ireland or where the trust is otherwise administered in Ireland. These include an obligation to maintain an inter nal register of the beneficial ownership for the trust, as well as requiring those trustees to file details as to the beneficial owners of the trust with the Central Register of Beneficial Own ership of Trusts ( “CRBOT”) by October 23, 2021 for trusts in being on April 23 2021 or otherwise within 6 months of the trust being established.

As noted in that briefing, the definition of a beneficial owner of a trust in this context is far more expansive than might be traditionally understood.

In the case of a trust where the trustees are Irish resident or alternatively where the trust is administered in the State, the analysis is straightforward. Firstly is it an “express trust” documented in writing and if so, do any of the specific exemp tions from registration for certain trusts apply, which include amongst others, certain pension trusts and certain approved share schemes trusts.

(“CRBOT”)

– UK Trustees caught when carrying on a business relationship in the State

In our Beneficial Ownership of Trusts: Clock Ticking on Filings to Central Register briefing note we highlighted the compliance

A trust could be considered to be administered in the State, whether trustees are resident in the State or not, when ser vices such as the management of its assets, or other services

provided by legal or accounting professionals or other trust service providers, are rendered to the trust by such professionals operating in the State. The definition of “administered in the State” is broad and can bring a trust within the scope of CRBOT, even when the administration activities are provided on a temporary basis.

In addition to trusts where the trustees are Irish resident or the trust is otherwise administered in the State, the European Union (Anti-Money Laundering: Beneficial Ownership of Trusts) Regulations 2021 (the (“2021 Regulations”), confirmed that for non-EU resident trusts or where the trust is not otherwise administered in the EU, that trusts may still be in scope if the foreign trustees:

This enhances the scope of non-EU trusts that must register with CRBOT. In particular, given the close connection between Ireland and the UK, it is quite possible that UK trusts may meet this threshold.

Whilst the fact pattern of a non-EU trust being administered in the State might not be common, it is much more likely that a foreign trust could be deemed to have a “business relationship in the State”. How easy that might arise was perhaps not fully appreciated when the 2021 Regulations came into being.

The Criminal Justice (Money Laundering and Terrorist Financing) Act 2010 did provide a definition of a business relationship relating to a designated person and a customer of the person. It means “a business, professional or commercial relationship between the person and the customer that the person expects to be ongoing”

In its “ CRBOT – FAQs and Troubleshooting for UK trustees and advisors” Irish Revenue recognise that a business relationship in a trustee context “is a business, professional or commercial relationship between the trustee, on behalf of the trust, and the customer that is expected to be ongoing”.

Further they go on to provide an example of a UK trust holding an Irish investment bond as an example of what will fall within the definition of a business relationship being carried on in the State.

In those circumstances, unless the UK trustees of a relevant trust, have registered that trust and filed the information on the Central Register in another EU Member State where information is the same as what is required to be filed on the CRBOT (with the exception of Irish tax numbers), they will now be obliged to register the details of the beneficial owners of the UK trust on CRBOT. It is notable that a registration by the UK trustees to the UK’s Trust Registration Service (“TRS”) does not fall within this permitted derogation, given the UK’s departure from the EU post Brexit.

This recent guidance will significantly enhance the number of registrations to CRBOT and in practice we have already seen a significant number of enquiries from UK trustees and/or their UK advisors as many of the insurance companies and other financial institutions have relayed the position to their UK trustee clients.

Registration to CRBOT is conducted through a separate channel on Revenue’s Online Service (“ROS”) platform and practically UK trustees are likely to engage a local service provider with an existing ROS registration to make the filing as their agent.

Meeting the registration obligation

Trustees of relevant trusts are reminded that the initial deadline date, to register details of the beneficial ownership of a trust on the CRBOT, was 23rd October 2021 for trusts that were established on or before 23rd April 2021. Trusts established after that date, must register within six months of establishment of the trust. In the recent FAQ’s for UK trustees, Revenue note as follows:

“Revenue recognises that there may have been genuine difficulties for some trustees in registering all their details by this date and will provide support to trustees who are making best efforts to register. Revenue continues to engage with representative bodies and trustees, to help trustees meet their registration obligations. However, failure of a trustee to meet their obligations is an offence under Irish legislation and the Irish Statutory Instrument 194/2021 sets out the penalties for trustees that fail to comply”

Revenue has acknowledged difficulties being experienced by UK Trustees trying to register their details on ROS. Revenue is offering a concessional period to alleviate any concerns in relation to deadlines for registration because of the technical difficulties which have arisen for Trustees registering on ROS. The concessional period does not dispense with the requirement to register the trust.

Endnote

1. John Gill Matheson

ACTS

Uniform Law Commission RPTE Projects

Fall 2022 Update

By: Benjamin Orzeske1

Benjamin Orzeske, counsel to the Uniform Law Commission, provides an update on current projects of interest to Trust and Estate practitioners.

The following Uniform Law Commission projects may be of interest to members of the ABA Section on Real Property, Trust and Estate Law.

New Uniform Acts:

Uniform Electronic Estate Planning Documents Act . This new uniform act will allow estate planning attorneys to offer online services to their clients. The drafting committee modeled this act on the very successful Uniform Electronic Transactions Act of 1999, which provided the legal underpinning for online commerce by validating the voluntary use of electronic docu ments and signatures by parties to a transaction. The Uniform Electronic Estate Planning Documents Act provides similar authorization for the execution of nontestamentary estate

planning documents, including inter vivos trusts, powers of attorney, powers of appointment, and advance directives. A complementary act, the Uniform Electronic Wills Act of 2019, governs testamentary documents, including wills and testa mentary trusts. A state may combine both acts into a single bill to enact a comprehensive law governing electronic estate planning.

Drafting Committees:

Conflict of Laws in Trusts and Estates. This committee will attempt to clarify and resolve the many conflicts of existing state laws governing trusts and estates. The scope of the project is broad, and will likely address trusts, wills, will substitutes, intestacy, estate administration, fiduciary powers and duties, powers of appointments, powers of attorneys, jurisdictional claims, and statutes of limitations. The drafting committee is collaborating with the American Law Institute reporters who are drafting the Restatement (Third) of Conflict of Laws.

Revisions to the Uniform Health-Care Decisions Act . The Uniform Health-Care Decisions Act governs living wills and powers of attorney for health care. It was last updated in 1993. The committee will draft a revision to better address issues including the determination of capacity; default surrogates (including the priority list of those who can act as surrogate, un-befriended patients, and disagreement among surro gates); and barriers to use and execution (including electronic documents, the statutory form, and oral designations). The committee will also add provisions applicable to mental-health advance directives.

Tenancy-in-Common Ownership Default Rules. The commit tee will draft an act to help alleviate the gridlock that can result from the common-law rule requiring unanimity among coten ants for property management decisions. The committee will attempt to balance the protection of individual property rights with the need to make management decisions more efficiently. The law may permit less-than-unanimous decisions on certain some issues while also protecting minority interests and pre serving the cotenants’ right to contract around those rules.

Revisions to the Uniform Determination of Death Act

Another new drafting committee will revise the Uniform Determination of Death Act. This widely adopted act, origi nally approved in 1980, provides a simple two-prong test to determine when an individual is legally dead. A physician must verify that an individual has sustained either (1) irre versible cessation of circulatory and respiratory functions, or (2) irreversible cessation of all functions of the entire brain, including the brain stem. The second prong that defines brain death needs updating to ensure conformity with recent advances in medical science and evolving standards of practice.

Study Committees:

Transfers to Minors Act. This committee will study the need for and feasibility of updating the Uniform Transfers to Minors Act, last updated in 1986, to address issues including optional extension beyond age 21, successor custodians, minor benefi ciaries of qualified retirement accounts, and the relationship between UTMA accounts and other types of investment accounts intended to benefit minors, such as 529 and 529A accounts.

Redaction of Personal Information from Public Records. In 2020, a New Jersey federal judge’s husband and son were shot at their front door by a disgruntled former litigant who tar geted the judge’s family by getting her home address from public records. In the wake of this horrific act of violence, states are beginning to pass legislation allowing the redaction of personal information of judges and other public officials from public records. However, there is no consistent approach. A new study committee on redaction of personal informa tion from public records will determine whether a uniform or model act on the subject is feasible, and the scope of any potential drafting project.

The RPTE Section appoints at least one Advisor to each uniform law commission project involving the law of real property, trusts and estates. All uniform law drafting com mittees are open to any interested observer and members of the RPTE Section are encouraged to join and contribute their relevant expertise. Visit www.uniformlaws.org to find more information on these committees and on other ULC projects.

Endnote

1. Ben is Chief Counsel at the Uniform Law Commission. He supervis es a staff of legislative attorneys who work to enact uniform laws in all fifty United States, the District of Columbia, Puerto Rico, and the U.S. Virgin Islands. Ben provides legislative support for the Uniform Com mercial Code and for uniform laws in the areas of real property, trusts and estates, investment management, and elder law. He also serves as the ULC’s internal Legal Counsel.

Rost v. United States:

Each Stiftung Must Be Analyzed on Its Own Facts and Circumstances

By: Halley Hu1

Are stiftungs foreign trusts? The Fifth Circuit’s recent decision in Rost v. United States provides helpful considerations for practi tioners when advising clients with stiftungs

On August 11, 2022, the Fifth Circuit in Rost v. United States (“Rost”)2 ruled in favor of the government, holding that (1) the Liechtenstein stiftung3 at issue was correctly classified as a foreign trust based on the facts and circumstances, and (2) the existing legal framework for determining whether an arrangement is a for eign trust is sufficiently precise and provides ample notice to the taxpayer. The overall framework and specific factors laid out in Rost provide helpful considerations for practitioners when advis ing clients with stiftungs

How We Got Here

The taxpayer was a US citizen who formed a stiftung under the laws of Liechtenstein in 2005 (“Stiftung”). He made transfers of $2 million and $1 million to the Stiftung in 2005 and 2007, respec tively, but did not report to the IRS the creation of the Stiftung or the subsequent transfers until 2013.

In 2014, the IRS assessed $1,380,252 in penalties against the tax payer for his late filing of Form 35204 and Form 3520-A.5 The penalty for failure to file a timely and complete Form 3520 is the greater of $10,000 or 35% of the “gross reportable amount.”6 The penalty for failure to file a timely and complete Form 3520-A is the greater of $10,000 or 5% of the gross value of the portion of the trust for which the taxpayer is the deemed owner.7

The taxpayer contested the penalties, and the IRS Appeals Office reduced the penalties by half. The taxpayer paid the penalties, as adjusted, and then filed an administrative refund claim with the IRS in 2018. In 2019, the taxpayer filed a refund action in the appropriate district court, claiming that the Stiftung was not a trust and that the penalties imposed violated the Due Process Clause under the Administrative Procedure Act (APA).8 When the taxpayer passed away in late 2019, his executor, Daphne Jeanette Rost, was substituted as plaintiff. The district court granted sum mary judgment for the government; the plaintiff appealed, and the Fifth Circuit ultimately affirmed the district court’s decision.

The Decision

The questions presented to the district court, and reviewed de novo by the Fifth Circuit, were (1) whether the Stiftung was cor rectly classified as a foreign trust and (2) whether the taxpayer had sufficient notice of the classification and the related penalties. The Fifth Circuit concluded that (1) the district court correctly classified the Stiftung as a foreign trust, and (2) the plaintiff’s argu ment of insufficient notice was without merit.

Classification of a foreign trust is a two-part inquiry. The first part determines whether the entity is a trust9 or a business enti ty.10 Morrissey v. Commissioner is the seminal case setting out the facts-and-circumstances approach to determining whether an arrangement constitutes a trust or a business association.11 In Morrissey, the Supreme Court found that the “trust” at issue was “analogous to a corporate organization” because it had distinctly corporate features, such as centralized management and limita tion of personal liability for participants. Based on the corporate features of the arrangement, the Supreme Court in Morrissey con cluded that the arrangement qualified as an “association” rather than a trust. Other courts have since followed a similar approach in applying the facts-and-circumstances analysis when classifying entities.12

The Fifth Circuit adopted the approach set out in Morrissey and other cases and focused on the “nature, purpose, and operations” of the Stiftung when determining whether it qualified as a trust. In applying the facts-and-circumstances test, the Fifth Circuit looked specifically to the Stiftung’s organizing documents and found the Stiftung had numerous characteristics of a trust, including:

• Presence of familial purpose – the Stiftung was organized with the specific purpose of supporting its beneficiaries (who were the taxpayer’s family members)

• Lack of business objective – the Stiftung was prohibited from conducting commercial trade

• Bar on commercial activity – the Stiftung’s organizing documents specifically prohibited it from conducting commercial trade

• Form of organization, including

m Governed by Liechtenstein’s “Act on Trust Enterprises”

m Board members functioned as independent trustees

m Presence of beneficiaries

m Beneficiaries’ lack of involvement with, and knowl edge of, the Stiftung

m Lack of profit-sharing provision

Based on these factors, the Fifth Circuit concluded that both the

Stiftung’s purpose and its form of organization supported its clas sification as a trust.

If the entity is a trust, the second part of an inquiry considers whether the trust is domestic or foreign. To determine whether the Stiftung was a domestic or foreign trust, the Fifth Circuit applied the court test and the control test.13 A trust is domestic if it passes both the court test and the control test. The court test looks at whether a US court may “exercise primary supervision over the administration of the trust.” The Stiftung failed the court test because it was exclusively governed under Liechtensteinian law. The control test looks at whether one or more US persons “have the authority to control all substantial decisions of the trust.” The Stiftung also failed the control test because its board, which consisted entirely of foreign persons, had decision-mak ing authority. The Fifth Circuit concluded the Stiftung was “not a domestic trust and so qualifie[d] as a foreign trust.”

The Fifth Circuit further concluded that the plaintiff’s notice arguments were without merit. Building on the facts-and-circum stances test, the court rejected the plaintiff’s argument that there was “insufficient notice” for the Stiftung classification and that the penalties “violate the duty of clarity for tax laws.” The plaintiff first argued that there is no “notice and comment that [stiftungs] are foreign trusts for tax purposes.” The plaintiff further argued that the penalties imposed “violated the duty of clarity” because there was no “clear description of the prohibited circumstances, facts or status.” Both arguments, the Fifth Circuit explained, were predicated upon the “false presumption” that the Stiftung is auto matically treated as a foreign trust. The Fifth Circuit emphasized that there is no such specific “rule”; rather, “under certain facts and circumstances” a stiftung could be classified as something other than a trust. However, the evidence in Rost did not support such a conclusion.

Addressing the plaintiff’s final argument, the Fifth Circuit noted that the IRS “is not obligated to promulgate a regulation listing all foreign entities that are or may be classified as a foreign trust.” The case law on the facts-and-circumstances approach, combined with the existing legal framework, “are sufficiently precise,” the Fifth Circuit concluded. On September 26, 2022, the plaintiff filed a petition for rehearing en banc, which was subsequently denied on October 12, 2022.

Takeaways

Rost is the latest development on the classification of stiftungs for US tax purposes. The landmark case involving classification of stiftungs is Estate of Swan v. Commissioner, 14 in which the Tax Court examined whether stiftungs created by a US decedent were sub ject to US estate tax. The Tax Court in Estate of Swan took a similar facts-and-circumstances approach and focused on the “essence of the foreign organization, [and] its functional features.” Since 1955 when Estate of Swan was decided, stiftungs have been examined on several other occasions.15 In each case, a facts-and-circumstances approach was followed, focusing on the purpose, organization

and function of the stiftungs. The Fifth Circuit’s analysis and ulti mate holding in Rost further supports the groundwork laid by Estate of Swan.

Rost serves as a reminder that timely and accurate entity classi fications are critical, especially for clients with foreign entities. Foreign entities, such as stiftungs, may be subject to US reporting obligations, regardless of whether they constitute trusts or asso ciations. As noted in Rost, an interest in a foreign trust is subject to US information reporting (and is sometimes subject to US income tax). Likewise, interests in foreign associations may be reportable. In some instances, foreign associations may be treated as foreign corporations.16 US persons holding interests in for eign corporations may be impacted by anti-deferral tax regimes (e.g., controlled foreign corporation and passive foreign invest ment company considerations) and face additional reporting obligations. Failure to identify and comply with such reporting requirements, timely and accurately, could result in significant penalties to the taxpayers.

Acknowledgement

I would like to thank my colleagues from Ernst & Young for their generous support in making this article possible: Caryn Friedman, Dianne Mehany, Anthony Nitti, and Justin Ransome.

Endnotes

1.Halley Hu is a manager in the Private Client Services department, National Tax, at Ernst & Young LLP. The views expressed in this article are those of the author and do not necessarily represent the views of Ernst & Young LLP or other members of the global EY organization.

2. Rost v. United States, 44 F.4th 294 (5th Cir. 2022)

3. Stiftung is a German word that translates to “foundation, establishment, donation, [or] endowment.” https://www.collinsdictionary.com/ us/dictionary/german-english/stiftung.

4. Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts

5. Annual Information Return of Foreign Trust With a U.S. Owner

6. § 6677(a), as amended by the Hiring Incentives to Restore Employment (HIRE) Act of 2010, Pub. L. No. 111-147, § 535, to add the minimum dollar amount, effective for notices and returns required to be filed after 2009. Additional penalties may apply if failure persists after the IRS notifies the taxpayer by mail.

7. § 6677(b), § 6677(c)(2), as amended by the HIRE Act, Pub. L. No. 111-147, § 535, to add the minimum dollar amount, effective for notices and returns required to be filed after 2009. Additional penalties may apply if failure persists after the IRS notifies the taxpayer by mail. Criminal penalties may also be imposed if the failure to file or false failing was due to fraud.

8. 5 USC § 551 et seq. (1946)

9. See § 7701(a)(30)(e), (31)(B); Treas. Reg. § 301.7701-4

10. See Treas. Reg. § 301.7701-2, § 301.7701-3

11. Morrissey v. Commissioner, 296 U.S. 344 (1935)

12. See Swanson v. Comm’r, 296 U.S. 362 (1935); Helvering v. Cole man-Gilbert Assocs., 296 U.S. 369 (1935); Helvering v. Combs, 296 U.S. 365 (1935)

13. See § 7701(a)(30)(E)

14. Estate of Swan v. Commissioner, 24 T.C. 829 (1955)

15. See Berik Stiftung v. Plains Marketing, LP, 603 F.3d 295 (5th Cir. 2010); United States v. Garrity, 121 AFTR 2d 2018-1976 (D.C. Conn. 2018); Kraus v. Commissioner, 59 T.C. 681 (1973); PLR 200226012, PLR 200302005, and 200901023; Chief Counsel Advice AM-2009-012 (2009)

16. Treas. Reg. § 301.7701-3(b)(2)(i)(B)

Real Estate Investment in the Age of Beneficial Ownership Information Reporting

By: Kris Ferranti and Yuval Rosenthal1

This article discusses the issuance of Department of Fin CEN’s highly anticipated final Beneficial Ownership Information reporting provisions and the importance of real estate-holding companies staying apprised of the same.

On September 29, 2022, the Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) issued its highly anticipated final Beneficial Ownership Information (BOI) reporting provisions (Final Rule), thereby implementing part of the Corporate Transparency Act (CTA).

The prevalent use of legal entities in owning real estate assets makes the U.S. real estate market particularly vulnerable to non-compliance. Indeed, FinCEN has frequently noted con cerns about the sector throughout its rulemaking process. Therefore, the industry should pay special attention to the Final Rule’s broad reporting requirements.

Effective January 1, 2024, FinCEN’s Final Rule will mark the most significant updates to the U.S. anti-money laundering and countering the financing of terrorism (AML/CFT) com pliance framework in a generation. It aims to combat illicit financial activity and enhance national security interests by requiring that reporting companies provide detailed infor mation regarding their beneficial ownership. The following summarizes the Final Rule’s key elements:

Who must file?

Both foreign and domestic reporting companies must file BOI reports with FinCEN under the CTA, unless specifically exempt. A domestic reporting company is any entity created by filing with the secretary of state or a similar office, includ ing limited liability partnerships, business trusts, corporations, and LLCs. Foreign reporting companies include any entity formed under the laws of a foreign country that is registered to do business in the U.S. The act of filing with a state office to create or register the entity is the decisive factor in defining reporting companies.

One key exemption to the reporting requirements is for “large operating companies,” or entities that employ more than 20 full-time U.S. staff, report more than $5 million in annual reve nue, and operate out of a physical location in the U.S. However, this exemption will not apply to most real estate-owning enti ties because they generally do not hire their own employees, but instead outsource to property managers employed by other entities.

Other notable exemptions include SEC-registered issu ers, tax-exempt entities, certain financial institutions, and pooled investment vehicles such as REITs and JVs that are not considered foreign reporting companies (domestic pooled investment vehicles are exempt while their foreign counter parts are not) and are advised by other exempted entities. Similarly, most trusts will be exempt from reporting require ments to the extent they are not created by a filing with an applicable state office.

What information must be disclosed?

Reporting companies must disclose each of their beneficial owners or company applicants’ full legal name, date of birth, complete and current address, unique identifying number from an acceptable identification document, and an image of the identification document. An owner may streamline future reporting by requesting a FinCEN ID number that can be reported in lieu of the identifying information listed above.

Each reporting company must also disclose its full legal name, any trade name or “doing business as” name (whether regis tered or not), the address of its principal place of business in the U.S., its jurisdiction of formation, and an IRS Tax Identifi cation Number.

When beneficial owners exercise substantial control or hold ownership interests through exempt entities, a reporting com pany may only disclose the name of an exempt entity rather than additional information about the exempt entity and its beneficial owners.

Who is a beneficial owner?

A beneficial owner is each individual who (1) exercises sub stantial control over a reporting company, or (2) owns and controls at least 25 percent of the ownership interests of a reporting company.

Substantial control is broadly defined and is exercised by a reporting company’s senior officers, those with authority over the appointment or removal of any senior officer or a major ity of the board of directors of a reporting company, and others who make significant decisions on behalf of the entity. Sub stantial control may also be exercised directly or indirectly, including in less conventional ways (i.e., through economic pressures, bribery, or threats) and despite use of emerging governance structures such as series LLCs and decentralized

autonomous organizations. However, how control in such entities is assessed – and who exactly must be included in the reports – remain largely unexplained. Thus, FinCEN will likely issue additional guidance and clarifications in the future as it gains experience with the variety of structures.

Ownership interest is also broadly defined to include equity in the reporting company, capital or profit interests (includ ing partnership interests), convertible instruments, warrants or rights, and options and privileges to acquire equity, capital, or other interests in a reporting company. In addition, a catch-all provision includes “[a]ny other instrument, contract, arrange ment, understanding, relationship, or other mechanism used to establish ownership.” Reports must also disclose 25% or more ownership interests in reporting companies held in trust by trustees or other individuals with authority to control or dispose of trust assets.

The regulations provide five exceptions to the definition of “beneficial owner,” including for minor children, individuals acting as nominees or agents, employees (provided they are not senior officers), individuals whose only interest in a report ing company is a future interest through a right of inheritance, and those whose sole interest in a reporting company is as creditors. The key element of the creditor exception is whether the right in question is intended to secure the right to receive payment or enhance the likelihood of repayment.

Who is a company applicant?

A company applicant is the individual who directly filed the document that creates or registers the entity, or if more than one individual is involved in the filing of the document, the individual who is primarily responsible for directing or con trolling such filing by another. In many instances, company applicants would be the lawyers or paralegals who prepared formation papers. This measure is meant to discourage legal professionals from assisting criminals in the formation of sham entities.

Moreover, the identities of company applicants (unlike ben eficial owners’) never changes after the entity’s creation. To alleviate information gathering challenges, existing or regis tered companies as of the effective date (January 1, 2024) need not identify and report on their company applicants.

When must a reporting company file its disclosures?

Reporting companies created or registered prior to the effec tive date must file their initial BOI report within one year of the effective date, while those created or registered after the effective date must file their initial BOI report within 30 days of creation or registration. Once the initial report has been filed, reporting companies must file updates within 30 days of a change in their BOI.

What are the penalties for a failure to file?

The Final Rule imposes civil and criminal liability on any per son that willfully fails to report true, correct, and complete BOI, including any reporting company, individuals, or other entities. A person is considered to have failed to report com plete or updated BOI if the person causes the failure directly or indirectly (by providing information to another person for purposes of a report) or is a senior officer of the entity at the time of the failure. This means that potentially all senior officers of a reporting company may be held liable for willful failures to report. FinCEN will consider all facts relevant to a determination of willfulness when deciding whether to pursue enforcement actions. A safe harbor provision protects from lia bility if inaccurately reported information is corrected within 90 days after submission.

What are the next steps?

FinCEN must engage in further rulemaking to implement the Corporate Transparency Act. Specifically, who may access BOI, for what purposes, and what safeguards will be required to ensure that the information is secured remain to be estab lished. FinCEN’s Customer Due Diligence rule must also be revised to align with the Final Rule.

Real estate-holding reporting companies must stay apprised of the Final Rule’s requirements and put in place processes and procedures to ensure sufficient time to recognize whether reporting is necessary, identify beneficial owners, and address any complexities associated with their organizational structures.

Endnote

1. Kris Ferranti is the Real Estate Team Leader and a partner at Shearman & Sterling LLP. He represents clients in complex commer cial real estate transactions, including in the areas of acquisitions, dispositions, joint ventures, development projects, foreign invest ment, financings, and ground and space leasing. He is recognized by Bloomberg Law, Law360, Crain’s New York Business, and Super Lawyers as a “Rising Star” in Real Estate, and has authored several publications and has been involved in a number of speaking engage ments at seminars and conferences and on podcasts and webcasts on various real estate subjects.

Yuval Rosenthal is a Law Clerk on the Real Estate Team at Shearman & Sterling LLP. He concentrates on cross-border and domestic real es tate investment transactions, REITs, bank financing, workouts, leasing and acquisitions and dispositions.

What to Do If Your Tenant Is Bankrupt

By: Daniel A. Lowenthal and Kimberly Black1

This article discusses certain proactive steps commercial landlords can take before any tenant bankruptcy filing in order to protect their interests.

On September 15, President Biden announced a tentative deal with unions representing tens of thousands of railroad workers that helped narrowly avoid a strike that threatened to devastate the country’s delicate supply chains that have been strained since the beginning of the pandemic. Now the country awaits the outcome of the union member votes (which may not be known until mid-November), but even if the members approve the deal, the retail sector will still face empty shelves, job vacancies and surging inflation.

In fact, the retail industry has been facing economic headwinds for years. As the red flags continue to mount, commercial landlords may justifiably grow concerned regarding the financial health of their tenants. Although some

tenants may show signs of financial distress or even approach their landlords seeking rent relief or some other form of forbearance, landlords often have little or no advance warning of a bankruptcy filing. Fortunately, landlords can take steps before any filing in order to protect their interests.

First, all landlords should be familiar with their rights and obligations under the applicable lease documents. For example, landlords should know the leases’ events of default and whether any notices must be sent (or any other actions taken) after a default. If a lease default does occur, then landlords must take the appropriate steps in the time prescribed by the applicable lease in order to avoid an unintentional waiver. For this reason, these actions should still be taken even by a landlord that is engaging with a tenant on a potential forbearance deal. Similarly, every landlord should be familiar with the consequences of a default, such as rent acceleration or default interest.

Second, landlords should confirm the amount and form of their security deposit (if any). Once a bankruptcy is filed, a cash security deposit can be used to set off a landlord’s claim, but only with prior court approval. Alternatively, if the security deposit is in the form of a letter of credit, then a landlord can usually freely drawdown on the letter of credit before or after the bankruptcy filing. Relatedly, in any

forbearance negotiations landlords should consider ways to enhance their credit position such as with an increased security deposit or third-party guaranty.

If a bankruptcy is filed, landlords should stay informed regarding the status of the case in order to not miss key deadlines such as the final date to file a claim. Failure to timely file a claim may result in the claim being barred entirely, which is a harsh but avoidable result. Critically, the automatic stay goes into effect immediately upon bankruptcy and prohibits landlords from terminating their leases or taking any other adverse action against the debtor’s property, including commencing or continuing eviction proceedings. However, landlords will be entitled to timely rent payments after the filing date.

During the bankruptcy, a lease may be: (i) assumed by the debtor, (ii) assumed and assigned to a third party, or (iii) rejected. The Bankruptcy Code requires tenants of nonresidential real property to decide what to do with their leases within 210 days after the bankruptcy filing date, subject to a one-time 90-day extension by the court or other extension agreement between the parties. During this time, tenants may ask their landlords to renegotiate unfavorable lease terms or may market favorable leases to third-parties. Either way, the Bankruptcy Code’s strict deadline provides important leverage to landlords. If a tenant-debtor fails to decide what to do within the timeframe set out, then the lease is deemed rejected.

Lease rejection is treated as a breach as of the bankruptcy filing date, and landlords are entitled to damages for the breach, which will be treated as an unsecured prepetition claim. The damages for unpaid, future rent will be capped at the greater of (i) one year, or (ii) 15% of the remaining lease term but not to exceed three years, measured from the earlier of (i) the filing of the bankruptcy, and (ii) the date on which the lessor repossessed or the tenant surrendered the property.

If a tenant instead decides to assume or assume and assign the lease, then all existing defaults must be cured. This means that any amounts due to a landlord, including for prepetition rent, must be paid promptly upon assumption or assumption and assignment. As a result, it is critical that landlords thoroughly assess any defaults and precisely calculate any amounts due so that they can demand the proper amount of cure. Notably, many leases allow landlords to seek reimbursement of costs and expenses, including attorneys’ fees, which should be added to the landlords’ assertion of cure. Failure to assert any existing defaults will likely bar a landlord from seeking payment for such defaults in the future, which is, again, a harsh but avoidable result.

A landlord may also have the right to demand adequate assurance of future performance. Specifically, when

debtor-tenants either (i) defaulted or (ii) seek to assign a lease to a third-party, their landlords have the right to receive evidence that the debtor or assignee can perform for the remainder of the lease term. Significantly, the Bankruptcy Code overrides all anti-assignment provisions that would ordinarily prevent a debtor from assigning a lease unilaterally. Therefore, adequate assurance is a critical bargaining chip for landlords who can, among other things, demand additional guaranties from the debtor or assignee.

In sum, as the economic outlook continues to darken, it is advisable for landlords to be proactive to protect their interests. If a tenant does file for bankruptcy, the rules can be unforgiving to inattentive parties, but they also provide important tools to parties that are informed and prepared to act.

Endnote

1 Mr. Lowenthal is a partner and the Chair of the Business Reorgan ization and Creditors’ Rights Practice at Patterson Belknap Webb & Tyler LLP. Mr. Lowenthal has represented and advised U.S. and non-U.S. business entities in a range of cases including creditors’ rights disputes, cross-border insolvency proceedings, distressed debt acquisitions and other restructuring transactions. Mr. Lowenthal has received Martindale-Hubbell’s highest rating of “AV Preeminent” based on both peer and client reviews, has been named to The Best Lawyers in America in the area of Bankruptcy and Creditor Debtor Rights / Insolvency and Reorganization Law. He has also been named by Super Lawyers in the areas of bankruptcy: business and business litigation. Lastly, Mr. Lowenthal has been named to the 2022 Law dragon 500 Leading U.S. Bankruptcy & Restructuring Lawyers guide.

Ms. Black is an associate in the Business Reorganization and Credi tors’ Rights Practice at Patterson, Belknap, Webb and Tyler LLP. Prior to joining Patterson, Belknap, she was a litigation and restructuring associate at a large internal law firm in New York. She has represent ed and advised both debtors and creditors in a range of cross-border insolvency cases, preference actions, and other restructuring transac tions.

Are Cell Site Lease Rents an “Answer to Prayer”? A Cautionary Tale for Non-Profits and Religious Institutions

By: Linda S. Koffman1

This article explores how cell tower leasing arrangements docu mented in the right way may benefit non-profit organizations.

Non-profit organizations (“NPO”), churches and other reli gious institutions are always looking for consistent streams of income to fund the inevitable budget shortfalls that come with their missions. Given that these organizations are often look ing for supplemental and long-term income, cellular providers are known to approach NPOs, churches and other religious insti tutions to lease space on their buildings or elsewhere on their properties.

Unfortunately, cellular carriers often view NPOs and religious institutions as unsophisticated players in the commercial real estate arena (specifically when involving cell site transactions) and seem to believe they can take advantage of these organiza tions to get very favorable economic and legal terms. While cell site lease transactions may appear to offer lucrative benefits, it is critical that these deals be structured correctly by the landlord lest they create long lasting devastating consequences through buried legal landmines commonly found in carrier template leases. As attractive as consistent income from a credit-wor thy tenant can look to an NPO budget committee, it is essential that the cell site does not become the “tail that wags the dog.” In other words, the adage “sometimes the best deal you do is the one you walk away from” is best illustrated by my client’s experi ence below.

A few months ago, I represented a developer seeking to pur chase real property from a church. The developer was interested in buying the property for several million dollars in hopes of redeveloping the site for a national quick service restaurant. This particular church, which was located in an economically disadvantaged community, was having severe budgetary prob lems. The potential opportunity to sell for such a significant amount of money was therefore undoubtedly appealing.

At the church, the cell tower antennas are located inside the church steeple. This is a common design because it helps

appease the surrounding community because the cell site is completely hidden, which is one of the primary reasons that cellular companies approach churches. This type of hidden installation, especially at a church, commonly allows for the antennas to be placed much higher above ground compared to surrounding buildings. Placing the antenna higher allows the cell provider better connectivity.

While this arrangement may provide a benefit to the cell pro vider, a church should be aware that incorporating this income producing element into the church design might cost the church part of its tax exemption. This is why it is vital to have a qual ified non-profit focused CPA opine regarding whether the cell site lease will trigger Unrelated Business Income Tax (UBIT) affecting the church’s tax-exempt status.

Placing a cell site hidden atop an existing church building or inside an existing or new church steeple or bell tower is usu ally more expensive to build compared to a non-camouflaged design. It might require a zoning variance from the local gov ernment, but governments zoning authorities tend to favor hidden cell site designs, especially inside or immediately adja cent to residential areas, and the zoning and permitting time may be reduced compared to a non-camouflaged monopole type design. Under these circumstances, the knowledgeable church can more effectively stand firm on requiring a higher rental rate, and (in some cases) even more important relocation and early-termination terms in their leases.

Returning to my client in this story, while placing the cell antenna inside the church steeple was initially a “win-win” for both the church and the cell site company, at the time the developer came looking to buy and redevelop the property, the steeple was not a workable architectural structure for my client, the developer. The developer intended to demolish the church— including the steeple—and build a drive-thru quick service food restaurant. Unfortunately, as is usual for a long-term cell site lease, the cell site company’s form did not allow for the church or any subsequent property owner to terminate the lease early or relocate any part of the “communications facility installation” – a overarching term including all of the antennas and antennas supports, and also all of the transmitting/receiving equipment, wires/cables/conduits connecting the cell tower or monopole to the equipment and/or the power source, a back-up power generator, as well as 24/7 site access and utility easements or rights-of-way. Without the ability to terminate the cell site lease upon a sale of the property or the dropping of the church build ing, or the ability to relocate any portion of the communications facility to adapt the site for a different use, my developer cli ent was left to negotiate with the cellular company during the due diligence period and attempt to find a solution that was acceptable to both my client and the cellular company. Absent a clear early termination or relocation provision, a cell site land lord (or, in my case, a developer) can easily expect to ‘give’ the cell company a relocation incentive fee somewhere in the high six figures to the low seven figures to clear out, and that might take a year to happen if there is another suitable nearby prop erty with a willing landlord, and that the local government will approve the new sites. These are big “ifs,”and developers don’t like “ifs”.

As one might imagine, my client had very little leverage to nego tiate a favorable deal with the cellular company because the lease, when originally negotiated by the unsophisticated church, was not structured to give any flexibility to them or subsequent owners of the property. Here, the cell site lease did become the “tail that wagged the dog.” Although there are some circum stances where the church (the seller in this case) may be able to induce the cellular company to cooperate with the buyer, a church is rarely willing to put its relationship with the cellular carrier (and the steady income it brings) at jeopardy to force a workable solution to the buyer’s design problem. In this case, my client benefitted from the fact that this particular site had

not yet been upgraded to 5G and the carrier company was therefore willing to entertain a relocation to another part of the property (entirely at my client’s cost and expense) including the cost of replacing all of its outdated equipment to accommodate 5G and expanding the capacity of the antenna tower/mono pole to accommodate other users as subtenants (with the entire amount of the income from these subtenants going exclusively to the cellular carrier). Even though my client agreed to pay for these upgrades (which would clearly only economically benefit the cell site company), the cellular company continued to make other demands throughout the negotiation process. Every time my client thought it had reached a deal with the cellular com pany, their requests to “sweeten the deal” kept coming.

After six months of intense (and expensive) negotiation and exhausting all extensions of the due diligence period paid for by my client, my client grudgingly concluded it would never come to an economically acceptable deal that would allow for its intended redevelopment of the church site for the national quick service restaurant chain. As a result, my client’s deal with the church fell out of escrow and the church learned a valuable and expensive lesson about dogs and tails.

Although the terms the church negotiated with the cellular com pany decades ago may have seemed favorable at the time (an extra ‘free’ $1,000 a month was a significant benefit to a church’s bottom line), the church ultimately realized it could only real istically sell the property to another church given that the cell antenna tower integrated into the church steeple would really only make aesthetic sense for another church. This factor ulti mately and negatively impacted the church’s ability to sell its property at the much higher price expected from a developer aiming to redevelop the property into a higher and better use.

If the church had originally hired an experienced cell site attor ney (as opposed to a generalist real estate or corporate attorney), it very well might have included carefully crafted terms that would have allowed them to realize several million dollars on the sale to pay off their mortgage and pull cash out, and relocate the church to a location that better meets their budget.

Given that landlord signing bonuses to cover landlord negoti ation costs are increasingly common, there’s every incentive to use an experienced and knowledgeable cell site leasing lawyer to help negotiate away the legal potholes in the boilerplate carrier leases, and to negotiate in protections that would have saved the church and the future owner the headaches and disappointments in the actual story you have just read.

Endnotes

1. Linda S. Koffman is a partner with Smith, Gambrell & Russell, LLP in Los Angeles, CA (Koffman, Linda - SGR Law).

The Rules on How Parties May Partition Their Common Ownership Property Rights

By: Adam Leitman Bailey and John M. Desiderio1

This article dissects the remedy of partition with reference to New York’s scheme.

Whether a property owned by two or more tenants-in-com mon can be partitioned “in kind,” i.e., by physically dividing the real estate or other property interest, or by subjecting it to a judicial sale, or even whether the property may be subject to partition at all, are issues that courts must decide when the property’s majority and minority owners are strongly divided on whether the property should be divided or sold.

Although the law clearly provides a means for parties to par tition their commonly-owned property, see RPAPL §901, oftentimes parties enter into agreements that restrict their right to sever their interest in the property without the unanimous consent of all the owners. Such agreements are

enforceable, but courts have nevertheless identified several ways in which an agreement restricting the right to partition can be nullified.

Whether or not particular agreements restricting the right to partition will be enforceable are subject to how courts deter mine to apply the law to the circumstances of each individual case. Therefore, it is important that parties entering into com mon ownership agreements be certain that the terms of the agreement conform to their respective future desires for either restricting the right of all the owners to partition or for being freely able to partition their separate interests in the property without unanimous consent.

RPAPL § 901(1)

The Real Property Actions and Proceedings Law (RPAPL), Sec tion 901(1) thereof, provides that:

A person holding and in possession of real property, as joint tenant or tenant in common , in which he has an estate of inheritance, or for life, or for years, may maintain an action for the partition of the property, and for a sale if it appears that a partition cannot be made without great prejudice to the owners.(Emphasis added).

As explained in Ching v. Chang, 137 AD2d 371, 373, 529 NYS2d 294, 295 (1st Dept. 1988), citing the seminal Court of Appeals decision, in Chew v. Sheldon, 214 NY 344 (1915),

It is also a generally held view that absent an express agree ment to the contrary, a testamentary restriction against

partition, or extreme prejudice to a co-owner, a partition is a matter of right of a co-owner who no longer desires to hold or use the property in common . (Emphasis added).

Establishing the Basis for a Partition

(1) The party seeking partition must show an ownership interest in the property.

“RPAPL 901 limits the persons who may maintain an action for partition to those specifically enumerated in the statute. Korn v. Korn, 153 AD3d 1023, 22 NYS3d 671 (3d Dept. 2016), and “[t]o establish his or her prima facie entitlement to sum mary judgment in a partition action, the plaintiff bears the burden of demonstrating his or her ownership and right to possession of the real property.” Korn v. Korn, 190 AD3d 1043, 139 NYS3d 701, 704 (3d Dept. 2021).

(2) Physical possession is not necessary.

The party bringing the partition action must have legal title, but it is not necessary that the party be in actual physical pos session of the property, what courts once referred to as “Pedis possessio.” See Tomkins v. Jackson [a/k/a “50-Cent”], 20 Misc.3d 1108(A), 866 NYS2d 96 (Sup. Ct., N.Y. Co. 2008) (citing Gar land v. Raunheim, 29 AD2d 393, 288 NYS2d 417 (1st Dept. 1968) and Brown v. Crossman, 206 NY 471 (1912). “[C]onstruc tive possession, such as the law draws to the title, is sufficient for the purposes of maintaining an action in partition.” Gar land v. Raunheim, 29 AD2d 383, 389, 288 NYS2d 417, 423 also (1st Dept. 1968); see also Deegan v. Deegan, 247 AD2d 340, 287 NYS2d 230 (2d Dept. 1936).

(3) Partition actions involving LLC’s and partnerships.

Limited liability company (LLC) or partnership ownership of a property precludes any of the LLC members or partners from commencing a partition action in his or her individual capac ity. The property is owned by the LLC or by the partnership entity, but not by the individual LLC members or individual partners, because they are not tenants in common. In such cases, the party seeking to “partition” the property must first seek to dissolve the LLC or wind up the affairs of the part nership. See Sealy v. Clifton, LLC, 68 AD3d 846, 847-848, 890 NYS2d 598 (2d Dept. 2009)

Nevertheless, where properties are owned by two or more LLC’s as tenants in common , one or more of the LLC’s may sue to partition the jointly owned property of all the LLC’s in accordance with the express provisions of RPAPL 901(1), supra.

(4) Circumstances that restrict or support the right to partition.

Although partition is generally viewed as a matter of right of a co- owner who no longer desires to hold or use the property in common, see Ching v. Chang and Chew v. Sheldon. supra, “the

remedy [of partition] has always been subject to the equities between the parties.” Hitech Homes, supra, 159 Ad3d, at 489, 72 NYS2d, at 65, citing Ripp v. Ripp, 38 AD2d 65, 327 NYS2d 465 (2d Dept. 1971), affirmed, 32 NY2d 755 (1973).

(a) Testamentary restrictions will prevail.

Partition will not be compelled in violation of a restriction imposed on an estate In Chew v. Shelton, supra, the Court of Appeals held that children not named in the Will were never theless entitled, as tenants in common, to partition or sale of a farm, but that a sale would be subject to the personal lien and claim of another daughter, for whom the right to possession of the farm was given for her home and support, where the proceeds of any sale would have been inadequate to fulfill the wishes of the father. The Court also noted that “it is an equally well-settled rule that ‘equity will not award partition at the suit of one [who is seeking partition] in violation of a condition or restriction imposed upon the estate by one through whom he claims.” 214 NY, at 348-349.

(b) Marital agreements

In Ripp, supra, 38 AD2d, at 70, 327 NYS2d, at 470-471, the Second Department noted that due concern “for the proper and judicious enforcement of the direction in the judgment of divorce [in a matrimonial action] . . . are better evaluated by the court which determined the matrimonial litigation between the parties.” The Court held, therefore, that a hus band’s action for partition of the former marital home, to which the wife had been awarded sole and exclusive posses sion, was premature where the judgment of divorce had not been modified to grant the husband the right of partition. Clearly, therefore, where a judgment of divorce so provides, the right of to partition will be enforced in accordance with the terms of the judgment.

(c) The right to partition may be waived.

The Court, in Leonardo v. Leonardo, 297 AD2d 416, 417, 746 NYS2d 90, 92 (3d Dept. 2002) (citing Chew v. Sheldon, supra), held that “[t]he equitable right to partition can be waived by an agreement not to partition.”

In Leonardo, three brothers in a law partnership, which owned three parcels of real estate, agreed that “should a partner elect to withdraw from the partnership, the remaining partners must purchase his interest at a fixed price, payable over 20 years.” Plaintiff sought partition of the real property contend ing that the agreement, which restricted the transfer of an interest in the partnership to a third party during the lifetime of the other partners without their consent, was unenforce able because it failed to provide a reasonable limitation on the restriction of plaintiff’s right to seek partition.

The Court, implicitly noting the contradiction inherent in

plaintiff’s argument, held that “[p]laintiff has failed to support his argument that an agreement which restricts alienation of a partnership interest during the lifetimes of the partners is unenforceable.” (Emphasis added).

(d) Oral waivers of partition rights are unenforceable.

While parties may agree to limit their right to individually seek to partition their commonly-owned property, they may do so by written agreement only. As explained in Casolo v. Nar della, 275 AD 502, 90 NYS2d 420 (3d Dept. 1949), and cited with approval by the Court of Appeals, in Kaplan v. Lippman, 75 NY2d 320 (1990),

The right to partition is an incident to the ownership of the undivided interest of a tenant in common of real prop erty. It is a valuable part of such interest in that it affords the owner a means of disposing of his interest which can not be defeated by his co-owners. This right of partition is recognized and enforced both under the common law and by statute. This right, like that of other interests in real property, may be limited or surrendered entirely by one tenant in common to the other tenants in common, and when this has been done by agreement it operates as a defense to a partition action brought in violation of such agreement . However, when one tenant in common by agreement relinquishes his right to bring partition, he sur renders to the other tenants a valuable vested interest in his ownership of the property. The surrender of an interest in real property is required to be in writing under the Stat ute of Frauds. (Emphasis added).

(e) Rights of first refusal can bar partition.

Partition can also be denied where a written agreement, between tenants in common, gives each owner an option to exercise a right of first refusal to purchase the interest of an owner who receives a bona fide third-party offer to buy that owner’s interest. See Smith v. Smith, 116 AD2d 810, 497 NYS2d 192 (3d Dept. 1986).

Nevertheless, although the inclusion of a right of first refusal is not an unreasonable restraint on alienation, it was also held, in Smith v. Smith, supra, 116 AD2d, at 811, 497 NYS2d, at 193, that, where an agreement bound the option “upon ‘distributes, legal representatives and assigns of the parties’,” the “inclusion of such words is significant and shows the parties’ understand ing that the option is to ‘extend in duration for an indefinite period of time,’” thereby rendering the agreement “in violation of the rule against perpetuities (EPTL 9-1.1),” and thus invalid, and, therefore, defendant’s motion to dismiss the complaint to partition the property was denied.

(f) Agreements may bar partition until all the owners agree upon a sale price.

In Buschman v. McDermott, 154 AD 515, 517,139 NYS 314 (1st Dept. 1913), the Court held that it was not an unlawful restraint on alienation for the several owners to have agreed with each other not seek to partition the commonly-owned property, without unanimous consent upon a sale at an agreed price. The Court said “[i]f there is a present right to dispose of the entire interest, even if its exercise depends upon the con sent of many persons, there is no unlawful suspension of the power of alienation.” The Court further noted that

the three owners can sell at any time they see fit. All they have to do is to agree upon a price. Not only this, but the death of any one of the parties would terminate the agreement, when a sale or partition could be had. (Emphasis added).

(5) When physical partition causes “great prejudice to the owners.”

RPAPL §915, in pertinent part, provides that:

Where the property or any part thereof is so circumstanced that a partition thereof cannot be made without great prej udice to the owners, the interlocutory judgment, except as otherwise expressly prescribed in this article, shall direct that the property or part so circumstanced be sold at pub lic auction . Otherwise, an interlocutory judgment in favor of the plaintiff shall direct that partition be made between the parties according to their respective rights. (Emphasis added).

In Michelangelo GIIK Flatiron LLC, et al, v. NRS Flatiron LLC, Index No. 654176/2021, majority owners of the iconic Flat iron Building, located at the Manhattan intersection of Fifth Avenue and 23rd Street, sought a partition and judicial sale of the building. The plaintiffs alleged, and it was undisputed, that “certain disagreements have arisen between Plaintiffs and Defendants with respect to the rehabilitation of, development and future uses of the Property,” and they further alleged that “[t]he Property is so circumstanced that it cannot be divided physically between Plaintiffs and Defendants without great prejudice to them as its owners, within the meaning of RPAPL Sections 901 and 915.”

The Court granted summary judgment to the Plaintiffs, find ing that there was “a very clear record of some dysfunction [between the parties], enough to create the kind of tension that leads to these kinds of cases,” that the parties’ ownership agree ment “contains no provision restricting or limiting plaintiffs or the defendant, for that matter, from seeking a partition and sale of the property,” and the “defendant [did] not put forward any evidentiary support suggesting that physical partition of the property is feasible.” Accordingly, the Court concluded that “the plaintiffs have made a compelling case that trying to chop

up the Flatiron Building into multiple separate tracts, each individually owned, just seems entirely impractical.”

A similar decision was made in Hitech Homes v. Burke, 159 AD3d 489, 72 NYS3d 64 (1st Dept. 2018)(held: physical par tition of a one-family, four story, 50 feet by 17 feet dwelling, with one basement and one source of water and sewer service, could not be made without great prejudice to the co-owner tenants in common).

However, even where the physical partition of a building may be feasible, courts may still look to other factors for finding a judicial sale less prejudicial to the parties’ interests. In Snyder v. Fulton Street, LLC, 57 AD3d 511, 868 NYS2d 715 (2d Dept. 2008), the Second Department noted that “we cannot conclude that the resulting $1.2 million loss of value to the property, if physically divided, does not constitute great prejudice,” and held, therefore, that “Supreme Court improperly concluded that the physical partition of the property would not signifi cantly reduce its value.”

In Ching v. Chang, supra, the First Department also noted, with respect to the partition of owner interests in the shares of a cooperative apartment, that:

common sense tells us that the differences arising between co-owners that would compel one owner to seek to alien ate his property interest . . . will, in all likelihood involve conflicts concerning such issues as use and occupancy of the apartment, disagreements as to each owner’s respective financial obligations regarding the apartment, or disagree ments as to entitlement to income tax deductions for payment of real property taxes or mortgage interest. Sim ply put, judicial intervention is sought because there has been a breakdown in the relationship between the co-own ers impinging on their ability to enjoy peacefully their occupancy rights to the apartment, making the focus of the action for partition, quite naturally, the apartment, not the stock . There is absolutely no reason, then, not to have this action governed by RPAPL article 9. (Emphasis added).

Likewise, in Damas v. Biggs, 157 AD3d 454, 66 NYS3d 130 (1st Dept. 2018), the Court ruled that:

Given that the parties could not reach a settlement agree ment, and physical partition would cause great prejudice to both the owners, the motion court correctly decided that the cooperative unit be sold and the proceeds divided.

The considerations elaborated in Ching v. Chang and Damas, for cooperative apartments, apply equally to condominiums See Manganiello v. Lipman, 74 AD3d 667, 905 NYS2d 153 (1st Dept. 2010).

Conclusion

As this article shows, the right of parties to partition property they own, as tenants in common with other parties, is a valu able right that allows parties to either physically divide their interest in the property from the interests of the other owners or to entirely divest themselves of their ownership share of the property -- to allow them either (a) to remove themselves from disputatious and irreconcilable relationships, or (b) to exploit the value of their interest to pursue or invest in other finan cial opportunities. The right to partition (either by partition in kind or by judicial sale) may generally be exploited for these reasons, but exercising that right may in appropriate cases be subject to equitable considerations if circumstances show that partition cannot be made without great prejudice to the own ers. Parties may agree to surrender their right to partition, but the agreement will be unenforceable if the restriction extends beyond the lifetime of any of the parties to the agreement, or if the agreement is made orally and not by written agreement.

Endnote

1. Adam Leitman Bailey (About Adam Leitman Bailey) is the found ing partner of Adam Leitman Bailey, P.C., and John M. Desiderio (About John M. Desiderio) is the Chair of the firm’s Real Estate Litigation Group. Kerstein Camilien, a Summer Associate who will be joining the firm as an associate in September 2023, assisted in the preparation of this article.

NEW UNIFORM ACTS

Uniform Law Commission RPTE Projects

Fall 2022 Update

By: Benjamin Orzeske1

Benjamin Orzeske, counsel to the Uniform Law Commission, provides an update on current projects of interest to Real Estate practitioners.

The following Uniform Law Commission projects may be of inter est to members of the ABA Section on Real Property, Trust and Estate Law.

Drafting Committees:

Tenancy-in-Common Ownership Default Rules. The committee will draft an act to help alleviate the gridlock that can result from the common-law rule requiring unanimity among cotenants for property management decisions. The committee will attempt to balance the protection of individual property rights with the need to make management decisions more efficiently. The law may permit less-than-unanimous decisions on certain some issues while also protecting minority interests and preserving the coten ants’ right to contract around those rules.

Mortgage Modifications. A drafting committee on mortgage mod ifications will draft a uniform or model act to standardize state laws with respect to when modifying the terms of a mortgage requires recording an instrument to document changes to the pre-recorded mortgage. The act will also clarify when a modified mortgage retains its priority over subsequent creditors to secure repayment of the debt.

Restrictive Covenants in Deeds. This drafting committee will draft a new uniform law governing the removal of discrimina tory restrictive covenants from recorded property records. Many older deeds contain restrictions based on race or religion. Though these discriminatory restrictions are unenforceable, some prop erty owners want the offensive provisions expunged. States have begun to accommodate those requests, but without a consistent process. The American Land Title Association proposed this pro ject to provide a standard process for removal of discriminatory restrictions without affecting the integrity of a property’s chain of title.

Study Committees:

Redaction of Personal Information from Public Records. In 2020, a New Jersey federal judge’s husband and son were shot at their front door by a disgruntled former litigant who targeted the judge’s family by getting her home address from public records. In the wake of this horrific act of violence, states are beginning to pass legislation allowing the redaction of personal information of judges and other public officials from public records. How ever, there is no consistent approach. A new study committee on redaction of personal information from public records will deter mine whether a uniform or model act on the subject is feasible,

and the scope of any potential drafting project.

Revisions to the Model Marketable Title Act. This committee will study the need for and feasibility of updating the Model Mar ketable Title Act. The Model Act, which was derived from Article 3 of the Uniform Simplification of Land Transfers Act, was prom ulgated in 1990 and enacted in one state before being withdrawn as obsolete in 2015. However, about 20 states currently have mar ketable title statutes, with widely varying look-back periods and exceptions. The committee will determine whether a more uni form approach could advance the law in this area.

Use of Tokens or Other Similar Products in Real Property Transactions. This committee will study the need for and feasibility of a uniform or model act addressing issues related to the use of blockchain-based non-fungible tokens (or other similar prod ucts) to modernize and simplify the transfer and financing of real property.

Use of Tenant Information in Rental Decisions. This commit tee will study the need for and feasibility of a uniform or model law addressing landlords’ use of tenant screening reports in rental decisions. Such reports may give landlords outdated, inaccurate, or incomplete information about prospective tenants’ involve ment in prior litigation (e.g., if the report states that the tenant was a party to litigation with a previous landlord but does not disclose that the tenant was the prevailing party). In particular, the com mittee will focus on identifying how widespread any problems may be and whether any act should be directed primarily at com mercial providers of screening reports.

The RPTE Section appoints at least one Advisor to each uniform law commission project involving the law of real property, trusts and estates. All uniform law drafting committees are open to any interested observer and members of the RPTE Section are encour aged to join and contribute their relevant expertise. Visit www. uniformlaws.org to find more information on these committees and on other ULC projects.

Endnote

1. Ben is Chief Counsel at the Uniform Law Commission. He supervis es a staff of legislative attorneys who work to enact uniform laws in all fifty United States, the District of Columbia, Puerto Rico, and the U.S. Virgin Islands. Ben provides legislative support for the Uniform Com mercial Code and for uniform laws in the areas of real property, trusts and estates, investment management, and elder law. He also serves as the ULC’s internal Legal Counsel.

Stress Testing a Real Estate JV in Response to Current and Anticipated Challenges

By: Daniel B. Guggenheim and Michael D. Soejoto1

This article summarizes key provisions in a joint venture agreement when unanticipated circumstances arise.

We often hear clients say, the best joint venture (JV) agree ments are the ones that go in a drawer at closing and stay there until it is time to divvy up the spoils from a profitable sale.1 However, even when partners have a great relation ship, and feel that they can count on each other to do the right thing if faced with unexpected circumstances, it is nonetheless a good idea to dust off that JV-turned-paperweight every once in a while for a reminder about the details of the partnership parameters.

Now as much as ever, in the face of recent reports assessing the risk of a recession, and related news and trends indicat ing potential economic headwinds such as inflation, rising interest rates, labor shortages, supply chain constraints, capi tal markets uncertainty and geopolitical risks, it will be helpful for sponsors and capital partners to understand their pro tections and exposures under their existing real estate JV agreements. This article will address capital contributions and control, which are two of the most important concepts to consider revisiting in existing real estate JV agreements between a sponsor and a capital partner, in light of recent events and current market conditions.2

Before reviewing the issues, it is important to keep in mind that the relevance of any particular topic to an actual JV will depend largely upon whether the business plan for the JV contemplated any development or significant construction, and how far along the JV has progressed towards achieving its business plan. On the one hand, the partners in a JV that has undertaken a major construction project may be focused on potential cost overruns (both hard costs and carry costs), achieving stabilization, or challenges with eventually refi nancing the construction loan (or some combination of the foregoing). And on the other hand, the partners in a JV with a stabilized project may be focused on whether to sell or hold (and refinance) and on how the capital call and clawback pro visions work.

1. Capital Contributions. In nearly all scenarios, it is critical to understand each partner’s rights and obligations in con nection with capital contributions.

• In what circumstances can each partner make a capi tal call without the other partner’s approval? Often, the sponsor’s responsibilities include making capital calls, subject to the investor’s approval. And sometimes an investor may have certain rights to make unilateral cap ital calls. Each partner may be interested in reviewing whether either partner can make a capital call with out the other partner’s approval, in particular to pay non-discretionary expenses (including overruns), to make a loan balancing payment, to cover a shortfall in (or lack of) refinancing proceeds, or to reimburse or otherwise indemnify a partner or its affiliate that has provided a loan guaranty.

• What are the consequences for a partner failing to con tribute its share of a capital call? It is common for a non-contributing partner to be subject to remedies such as subordination (e.g., by reason of a loan or a priority contribution by the contributing partner), dilu tion, being bought out at a discount, and, in certain circumstances, reduction or loss of promote, voting rights and management authority, and termination of collateral agreements (e.g., development management agreements, construction management agreements or property management agreements). Each partner should understand what is at stake, including whether the potential consequences might vary based on the reason for the capital call, as part of the cost-benefit analysis in connection with any capital call.

• Is there any exposure to a lender beyond the equity capital that has already been invested? Nearly every JV utilizes financing that will require creditworthy affiliates of either or both of the partners to provide the lender with a non-recourse carveout (aka “bad boy”) guaranty, an environmental indemnity, and, for construction loans, a completion guaranty and poten tially a repayment guaranty. Each partner should confirm the scope of each guarantor’s potential lia bilities to the lender under the loan documents, as well as any requirements to maintain a minimum net worth or liquidity, any rights to provide a supplemen tal or replacement guarantor and otherwise cure loan defaults arising from a guarantor’s breach, and any restrictions on partner buy-outs, exercise of removal and replacement rights, or other direct or indirect transfers (which might include dilution).

• Is there any exposure to the JV or the other part ner beyond the equity capital that has already been invested? Nearly every JV is comprised of single-pur pose-entities as the partners, which results in each

partner’s liability to the JV and to the other partner gen erally being limited to the value of its equity interest, unless otherwise agreed upon. Many JVs include a guar anty by a sponsor affiliate in favor of the investor or the JV (which may be structured as a short-form joinder to the JV agreement), typically covering risks and liabilities arising from cost overruns, loan balancing requirements, bad conduct, prohibited competition, and clawbacks; and less frequently, JVs may include a guaranty by an investor affiliate in favor of the sponsor or the JV (which might be structured as a contribution and indemnity agreement), typically with respect to post-closing cap ital commitments of the investor partner, or liabilities incurred by a sponsor affiliate as loan guarantor in excess of the sponsor’s ownership percentage of such liabilities or arising from the investor’s bad acts. Each partner may wish to refresh its understanding of all loan guaranties, partnership guaranties and reimbursement and indemnification obligations, and the circumstances in which there may be exposure to any partner, includ ing the scope of each partner’s obligations to indemnify the other partner and the JV, the scope of the JV’s obli gations to indemnify the partners and their affiliates, and whether a capital call can be made to satisfy the JV’s indemnification obligations.

2. Control. The general understanding is usually that the sponsor is responsible for day-to-day implementation of an approved business plan within an approved budget, subject to the investor’s right to approve major decisions. But variations on that theme are common, and it is important to understand the details of the JV’s governance provisions.

• Whose decision prevails if the partners do not agree on a major decision, and can either partner propose a major decision? In some instances, the investor’s rights are lim ited to a veto power, with the sponsor controlling the proposals, and not subject to being overridden by the investor. In other instances, though, the investor has ultimate control of the JV, including the right to propose and unilaterally approve and implement major deci sions, subject to limited protections for the sponsor (such as approval over a limited subset of major decisions, protections against self-dealing or disproportionate treat ment of the sponsor’s economic rights by the investor, and perhaps a right to require dispute resolution or ini tiate an exit process in the event of certain fundamental disagreements). Each partner should be familiar with the technicalities of who may, and who must, approve what, and when, as well as any potential consequences for failing to reach agreement.

• What if the partners disagree on whether to sell or to hold and refinance a completed project? The sponsor may wish to realize on its profits and promote, before the market cools, and reinvest its time and money in a new

project with opportunistic potential upside. However, the investor may wish to hold the asset for its cash flow, and if necessary refinance into a new loan. In practice, it is common to see some combination of an exit right and a preemptive right for each partner, for example a right to force a sale of the property after a lockout period (subject to a right of first offer or a call right in favor of the other partner), a right to elect to be bought out after a lock out period (subject to the other partner’s right to elect to sell the property), or a right of first offer or a call right if the other partner elects to force an exit. Less common, but still prevalent, a JV agreement may provide a buysell procedure. Often the exit and preemptive rights will include detailed provisions in the JV agreement regard ing the following (but there may be further limitations under the loan documents): an appraisal or other pro cess to determine the value of the property or a partner’s interest for purposes of a buy-out; replacing, releasing or ratifying loan guaranties (and related indemnifications from creditworthy affiliates when lender releases are not obtained); and earnest money deposits, escrow closing, and closing documentation and calculations. Regard less of whether one partner can control the decision, if there might be misalignment around whether to sell or hold, the best approach may for the partners be to work towards a negotiated resolution that takes into account the actual considerations at the time, with a mutual understanding of each partner’s specific rights under the applicable provisions of the JV agreement to frame the discussion.

• What if the partners are not getting along, and there is a dispute regarding implementation of a decision that was contentious or contested? It is generally understood that the sponsor has the authority to act for the JV, in order to implement decisions that do not require or have already received the investor’s approval. It is also gener ally understood that the investor typically has the right to remove and replace the sponsor as day-to-day man ager in certain circumstances (subject to any conditions under the loan documents, often including the need to provide a replacement guarantor), but there may be a significant period of time between when that process is initiated and when it becomes effectives, which should be taken into account if it might be relevant. In some instances, the investor may also have the authority to act for the JV (prior to having assumed responsibility for day-to-day management, if it has the right to do so), for example many capital partners learned this lesson after the last downturn and updated their JV forms to include the ability to unilaterally deal with third parties on behalf of the JV in some or all events (e.g., by the investor being designated as a “general partner” or a “managing member” in the JV agreement). If the partners are not agreeing on a major decision or there is otherwise an issue with implementing a decision, each partner should

consider the circumstances in which it is required and permitted to act for the JV, and be aware of the potential challenges relating to organizational formalities that may be lurking in the JV agreement (such as noticed meetings, certified resolutions, multiple signatories, or notice and cure periods before self-help rights may be exercised).

Despite the potential for upcoming challenges, we hope that partners in real estate JVs are able to communicate effectively with an understanding of their JV agreements in order to achieve the best possible outcomes for their projects.

Endnotes

1. Daniel B. Guggenheim, Esq. and Michael D. Soejoto, Esq. are Real Estate Members in the Los Angeles office of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. For additional information, please visit www. mintz.com. Nothing herein is to be construed as legal, tax, invest ment, business or insurance advice. © 2022

2. Despite the authors’ best efforts, the unfortunate corollary is that even a perfect JV agreement cannot save you from a bad partner… 3. Many of the concepts are also applicable to other types of partner ships, and all are equally applicable to members of a limited liability company.

Finding Peace: Less Stress Is within Your Reaction – and Reach

By: Gisela M. Munoz1

The Covid-19 pandemic has increased stress to unprecedented levels – and especially for those in the legal profession. Gisela M. Munoz explores how mindfulness can help alleviate stress and provides a simple exercise to introduce us to mindfulness.

I. Introduction

As I started writing this article, I wondered whether I should tell you the good news or the bad news first. I decided to share the bad news first; but don’t stress (pun intended)! There is very good news ahead!

The bad news:

According to a March 2022 poll released by the American Psycho logical Association (“APA”), various societal issues have increased the U.S. population’s stress to “unprecedented levels,” since the beginning of the COVID-19 pandemic, and the stress has seemed to embed itself with a recalcitrance that is making it chronic.2 Unfortunately, lawyers in the U.S. are even more stressed out than the American public at large. Even before the APA’s poll, the National Task Force on Lawyer Well-Being (the “Task Force”), which included representation of the ABA Law Practice Division, ABA Center for Professional Responsibility and the Conference of Chief Justices, conducted research and published their August 2017 Recommendations (the “Task Force Recommendations”), which revealed that the number of attorneys in the United States

struggling with anxiety and stress was respectively 23% and 19%. Moreover, attorneys face depression and substance abuse at twice the rate of the general population. After just the one-year anni versary of the COVID-19 pandemic, the non-profit established by the Task Force – the Institute for Well-Being in Law – had deter mined that “[t]he compounding crises of the past year have acted as an accelerant to the … problems that were already too preva lent in the legal profession.”3

The good news:

Mindfulness can help! What is mindfulness? Mindfulness is “paying attention in a particular way: on purpose, in the pres ent moment and non-judgmentally.”4 I suggest approaching the “non-judgmental” aspect of the definition by suspending both self-judgment and judgment of others and of the world around us.

As I always point out in my articles and presentations, mindful ness is not meant to achieve any particular goal, but as it turns out, mindfulness can have beneficial side effects, including in the development of skills for managing stress and anxiety. Although for years I have resisted promoting mindfulness as a tool, I am going to advocate in this article for the use of mindfulness exer cises not only for the purpose of practicing mindfulness, in and of itself, but also for its secondary effects in helping us better handle stress and anxiety. However, it is important to reflect on the fact that mindfulness is its own goal and not intended to be used to attain other objectives, because using it as a tool to achieve other goals can be counterproductive. For example, since one way in which mindfulness helps with stress management is by main taining our attention in the present moment, if we are practicing it with another purpose in mind, and we let our thoughts wander to that other goal, then we may be wandering to thoughts of the future, rather than focusing on the present moment, since goals are future-facing. That said, if we practice the mindfulness exer cises as intended, without obsessing about the secondary goals

that we may be hoping to achieve, it can have positive effects.

One of those beneficial impacts is in helping us respond better to stress and minimize anxiety, which is not only advantageous to our health, but can, ultimately, help us in our ethical and profes sional practice of law, as well.

II. How Does Mindfulness Help with Stress and Anxiety?

A. Defining Stress and Anxiety

Studies of mindfulness practitioners have shown that mindful ness can improve cognitive function in a variety of ways, but we will be focusing on its impact on stress and anxiety. In order to do that, we must first understand stress and anxiety.

A good definition of stress is a person’s reaction to a perceived threatening stimulus.5 In the face of a new occurrence, the amyg dala fires up and triggers us into immediate action without conscious thought. That causes our body to release adrenaline, which increases our heart rate, as circulation moves away from the body’s core and to the limbs to prepare us to run from the threatening predator the amygdala believes it has encountered – even if the stimulus that your amygdala has interpreted as a threat and turned into stress is really just that your video camera is not working at the start of a Zoom meeting, and there is no lion or tiger poised to jump out and eat you! In addition, cytokines, which are pro-inflammatory cells, go into circulation, in order to assist with the infection that could follow the injuries from being attacked by a predator or from a “flight or fight” situation. Mean while, there is usually less activity occurring in the pre-frontal cortex, where our complex, conscious decision-making is done.6

“Anxiety shares the same physical and biological elements as stress. Two differences are that stress-induced neurotransmitters and hormones stay ramped up and our minds get stuck in repet itive worry, or panic-driven thought loops.”7 Thus, chronic stress can result in anxiety. For lawyers, this can be particularly danger ous, because our jobs often involve stimuli that are perceived as stressful more often than other jobs. In addition, our legal train ing and the very nature of our jobs compound the issue. We are required to identify all potential problems and risks in order to protect our clients, but that type of negative thinking can escape our legal practice and permeate our thinking in other aspects of life, which can lead to anxiety. For example, “rumination” is when our mind repeatedly wanders to negative past events or to the possibility of negative future events. When this becomes an obsessive fixation, rather than a productive attempt to find solu tions, rumination can become chronic and result in anxiety.8

B. How Does Mindfulness Help?

Mindfulness exercises strengthen that proverbial “brain muscle” that allows you to stop your brain from automatically reacting to events – creating a space between stimulus and response. The mindfulness practitioner pauses before responding, rather than having a knee-jerk reaction to something that has happened. She is able to do that as a result of the mindfulness training which repeatedly, intentionally focuses her attention on the present

moment, with openness, and without judgment or jumping to any conclusions. In that space, she is able to respond consciously and thoughtfully to the stimulus that has arisen. In addition, the mindfulness practitioner may be able to shift her attention from the stimulus to other things. For example, rather than focus ing on the event that has occurred, she may shift her attention to the resources that are available to her, and realize that she is fully equipped to address the event/stimulus and that the stimulus presents no threat at all.9

That said, the changes in stress-responses that have been found in mindfulness research are not just behavioral changes, but also physical changes in the brain of mindfulness practitioners. In a Harvard study, the MRI scans of people who engaged in mind fulness exercises for less than three months showed shrinkage of their amygdala, which is known as the stress center of the brain.10 In addition to shrinking, the amygdala’s connection to other parts of the brain has also been found to diminish, which has been correlated with an increase in higher-order brain activities, such as focus and decision-making.11 In other words, once the stress center had less influence over the other parts of the brain that are in charge of the executive functions like attention and decisions, the other parts of the brain were better able to perform those exec utive functions.

“‘[B]rain changes due to chronic stress . . . make[ ] us less capable of making decisions that can give us a healthy future both at an indi vidual and cultural level.’”12 Therefore, counteracting stress with the brain changes from mindfulness becomes perhaps even more salient. Further, the impact of mindfulness on the amygdala may have other health benefits. For instance, one study found that people with high activity in the amygdala were at greater risk of heart disease and stroke.13

All of this is particularly critical in today’s climate, given the nowhigher levels of – and perhaps chronic – stress with which many of us are living, as noted in the APA poll and the information col lected by the Task Force and the Institute for Well-Being in Law mentioned at the start of this article. Mindfulness can help us stop stressing out to stimuli that do not “deserve” a stress reaction.

Moreover, in reducing our stress reactions overall, we are reduc ing the chances of anxiety. While we should not over-simplify anxiety, and while anxiety should be treated by professionals, it has been shown that chronic stress and rumination can lead to anxiety. Likewise, the practice of mindfulness, although not a substitute for clinical therapeutics, can help with anxiety and be part of the process. For example, according to psychologists, when rumination is an issue, the first step is to identify the “cog nitive distortion” or the trick that your mind is playing on you, where you may be imagining a potential negative future event as if it is inevitable, and, as you continue replaying it in your head, it becomes more and more real in your mind, but it is really not even a probable event statistically speaking.14

Mindfulness can help you [identify the cognitive distortion and stop rumination] by keeping you focused on the pres ent non-judgmentally, rather than allowing your mind to

continue on auto-pilot rehashing the past or ruminating on the future with a judgment that something has gone wrong or is going to go wrong. For example, mindfulness may help you recognize that perhaps the outcome of the future event causing you anxiety at a particular time is not actually within your control and, therefore, there is no reason for you to con tinue thinking about it, since you will not be able to solve anything by doing so. That said, your response to the event is within your control. And mindfulness gives you greater con trol over your response and, thereby, can decrease anxiety.15

III. Mindfulness Practice: A Sample, Simple Exercise

If you would like to try mindfulness, I encourage you to find a mindfulness class or coach near you. In the meantime, here is a brief “Awareness of Breath” exercise that you can practice on your own for as little as five minutes a day or longer, if you would like. As always, please take into account any physical limitation that may affect you and adjust the exercise to accommodate that.

~Sit in an upright position that feels stable.

~Rest your hands somewhere comfortable.

~Close your eyes gently (or, if open, allow your gaze to relax so that you are not trying to look at anything).

~Notice the sensations of where your body connects with the chair, the floor, etc. If you detect physical tension somewhere in your body, notice that and perhaps try to release the tension so you feel comfortable.

~Begin focusing on your breathing. Simply notice your breath entering and leaving your body and follow its path through your body.

~If your mind wanders to other thoughts, simply return your attention gently (without self-judgment or berating yourself) to your breathing. At those moments, remind yourself, there is nothing to do, no goal to achieve, simply feel your breath entering and leaving your body.

~Have you noticed a difference from breath to breath? Different sensa tions? Different sounds or smells?16

IV. Conclusion

Many factors over the last two years have exacerbated what were already high levels of stress and anxiety in the United States generally and especially among lawyers. With mindfulness, we achieve a healthier approach to the stressors in our lives and law practices, leading to less stress and anxiety. It’s within our reac tion – and within our reach!

Endnotes

1. Gisela M. Munoz is Associate Counsel, Florida Region, D. R. Horton, Inc. The views expressed in this article are solely the views of the author, not of the author’s employer or any organization with which the author is affiliated. This article is for educational purposes only and does not contain legal advice or therapeutic advice.

2. Press Release, “Inflation, War Push Stress to Alarming Levels at TwoYear COVID-19 Anniversary,” American Psychological Association (March 10, 2022) (citing the American Psychological Association’s CEO, Arthur C. Evans, Jr., PhD), available at Inflation, war push stress to alarming levels at two-year COVID-19 anniversary (apa.org)

3. See Press Release, “National Task Force on Lawyer Well-Being Establish es Institute for Well-Being in Law,” Institute for Well-Being in Law (April 26, 2021) (quoting Bree Buchanan, IWIL President), available at https:// www.prnewswire.com/news-releases/national-task-force-on-lawyer-wellbeing-establishes-institute-for-well-being-in-law-301276518.html.

4. Mary Elizabeth Williams, “Why Every Mind Needs Mindfulness,” Time Magazine Special Edition: Mindfulness, The New Science of Health and Happiness 10 (2016) (quoting University of Massachusetts mindfulness pioneer, Jon Kabat-Zinn).

5. See Kathleen Raven, “Stress, Anxiety, or Depression? Treatment Starts with the Right Diagnosis,” Yale Today, available at https://www.yalemed icine.org/stories/stress-anxiety-depression (May 21, 2020); Markham Heid, “Rising to the Challenge,” Time Magazine Special Edition: The Science of Stress 12 (display until December 13, 2019).

6. See Heid, at 13; Gisela M. Munoz, “Mindfulness: Lightening the Law yer’s Load and Helping the Lawyer Lead during Trying Times,” at 7, The ACREL Papers (American College of Real Estate Lawyers (Fall 2020)).

7. Raven.

8. See Liz Fosslien and Mollie West Duffy, “When Doubt Becomes Destructive,” Time Magazine Special Edition: The Science of Stress 58 (display until December 13, 2019); Jeena Cho, “No Magical Cure for Anxiety,” ABA Journal 12 (Sept.-Oct. 2019); Gisela M. Munoz, “Meant To Be: An Article About Mindfulness In the Practice of Law,” The Bulletin (Miami-Dade County Bar Association March 2017).

9. See Kelly McGonigal, “Embrace the Pressure,” Time Magazine Special Edition The Science of Stress 57 (display until December 13, 2019).

10. See Alice G. Walton, “7 Ways Meditation Can Actually Change the Brain,” Forbes (Feb. 9, 2015), available at http://www.forbes. com/sites/alicegwalton/2015/02/09/7-ways-meditation-can-actual ly-change-the-brain/#2c41fa2c7023

11. See Tom Ireland, “What Does Mindfulness Meditation Do To Your Brain?,” Scientific American (June 12, 2014), available at https://blogs. scientificamerican.com/guest-blog/what-does-mindfulness-meditationdo-to-your-brain/

12. Sophie Brickman, “When Stressed, We ‘Catastrophize’ – But We Can Learn To Calm Our Irrational Fears,” Guardian (June 21, 2022) (quoting Dr. Amy Arnsten, neuroscientist and psychologist at Yale Medical School), available at When stressed, we ‘catastrophize’ – but we can learn to calm our irrational fears | Sophie Brickman | The Guardian

13. See Robert Preidt, “Here’s How Stress in Your Brain May Cause Heart Troubles,” Healthday (Jan. 12, 2017), available at http://www.cbsnews. com/news/heres-how-stress-in-your-brain-may-cause-heart-troubles/. 14. See Fosslien and Duffy, at 58.

15. Munoz, “Mindfulness: Lightening the Lawyer’s Load and Helping the Lawyer Lead during Trying Times,” at 9.

16. See Munoz, “Meant To Be: An Article About Mindfulness In the Prac tice of Law” (quoting most of the exercise directly from this article); see also Jennifer Gibbs, “Saving Lawyers 1 Breath at a Time: Mindfulness in the Law,” Law360 (Jan. 13, 2017), available at https://www.law360.com/ articles/880125; Scott Rogers, “Mindfulness in Law and the Importance of Practice,” The Florida Bar Journal 11 (Apr. 2016); Terry DeMeo, “How To Deal with Difficult People,” May 29, 2011, available at http://www. inner180.com/2011/05/29/how-to-deal-with-difficult-people/

TECHNOLOGY

Automation Stumbling Blocks

By: Barron K. Henley1

In this article, Barron K. Henley, Esq. discusses common docu ment automation challenges, how to overcome them, and how to properly evaluate the potential return on investment before undertaking a document automation project.

There are obvious compelling reasons to automate your docu ment generation. So why isn’t every legal document being drafted this way? There are several reasons document automation initia tives never get off the ground or fail once deployed. Being aware of the hurdles will help you overcome them.

Productivity Paradox

If a private firm bills time, then they have a strong disincentive to employ techniques that reduce the amount of time they spend to render a particular service. As long as hourly billing persists, auto mation makes little financial sense.

Insufficient Training With The Automation Tool

If the project is undertaken in-house, the individuals responsible for the automation are rarely given enough training (particularly if a document assembly application is being utilized). With doc ument assembly in particular, it can take months of practice to become a skilled user of the tool. Unfortunately, the free videos and “click here for help” links document automation vendors pro vide are often of little use.

Insufficient Training With Microsoft Word

In the document automation world, it’s not unusual to build a 300-page template which produces a 30 page document. If many pages of irrelevant text are discarded during the assembly process (which is almost always the case), and the underlying template isn’t set up correctly from a Word perspective, the resulting doc ument will be loaded with formatting problems. Furthermore, if the resulting documents are difficult to edit because they’re not set up correctly, users will become frustrated with and likely stop using the system. Unfortunately, there is little correlation between how long someone has used Word and the skill set developed. Most of the Word features one must use to control complex formatting are concealed in Word, and “clicking around”

set up a List Style for multi-level paragraph numbering, and link each numbering level to a separate style that controls the for matting for the rest of the paragraph. Cross-references, tables of contents, and tables of authority should be set up so they can eas ily be updated to reflect subsequent editing. Word’s “keep with next” and “keep lines together” features should be employed to eliminate awkward page breaks before they happen. Verti cal spacing between paragraphs - particularly when automatic paragraph numbering is used - must be handled by Word’s auto matic paragraph spacing feature. The point is that the decision makers on these projects often assume that just because some one has been using Word for a long time, they must know how to set up a template correctly. As plainly as I can state it, that is a false assumption 98% of the time. If you believe that a particu lar document generated by your office represents a high-level use of Microsoft Word, email a copy to Barron Henley (bhenley@ affinityconsulting.com) and I am happy to provide a quick, free analysis of what functionality is or isn’t being used.

Unsuitable Documents

Unless a lawyer drafts new documents from a blank piece of paper every time, then those documents can be automated. I have never met a lawyer who doesn’t craft new documents from tem plates or pieces and parts of existing documents. However, many lawyers use templates or starting point documents that are related to one another (due to practice area), but which are completely dissimilar due to the fact that the lawyer has never audited the documents and tried to create similarity where it is appropriate. For example, let’s assume a lawyer drafts employment agreements for hourly workers and salaried workers. Those agreements likely contain a lot of duplicate language in at least the boilerplate provi sions. However, they may not share a single paragraph unless the lawyer has made an effort to standardize them. Although it would make sense to combine those documents into a single template for purposes of automation, it may be impossible to do until the underlying documents are re-written so that the common provi sions are actually consistent.

Lawyer Push-Back

A successful document assembly project will present an entire decision tree so that it can produce perfectly customized docu ments with nothing more than the right answers to on-screen questions. Some lawyers feel threatened by this and simply aren’t comfortable with technology which can do in seconds what was previously done by the lawyer through hours of work. I’ve heard more than one lawyer say over the years, “after this pro ject is done, what are they going to need me for?” Support staff

often feel even more threatened by this (sometimes justifiably so) and we have seen support staff make overt attempts to torpedo an automation project. The cold, hard reality is that a very high percentage of legal work is routine legal work. To the extent rou tine legal work involves the generation of documents by a lawyer, then it can be automated, systematized, and in some cases, com moditized. These facts make lawyers uncomfortable for obvious reasons, but they are true nonetheless.

Initial Project Too Difficult

This is another stumbling block for projects undertaken in-house. Most lawyers quickly realize that document automation will pay the biggest dividends with the most complex and time-consum ing documents. However, those are the wrong documents to start with because of their complexity. For the person in charge of the project, it’s like learning to swim by being pushed into the deep end of the pool. If a firm or department wants to automate a com plex set of documents, they should start with simple ones so that the developer has an opportunity to cut their teeth on something that isn’t going to overwhelm them on day one.

Not Enough Time To Finish a Project

Law firms and legal departments often task a support staff per son or lawyer with automation projects and ask them to work on it “between projects” or “in their spare time.” Of course, the time required to work on the project doesn’t materialize or doesn’t come in big enough chunks to get anything meaningful done. In our experience, if you don’t make these projects part of someone’s job description and allocate consistent time to the task, noth ing gets done. Further, if you want a realistic time frame for an in-house project, take how much time you think it should take and triple it.

Chosen Automation Tool Is Not Powerful Enough

Unfortunately, most document automation platforms claim to be superior to their competitors, and it’s very difficult for someone in the market for document automation to evaluate one against another. Furthermore, the vendors often try to sell their products with claims that “no programming experience is required,” and “anyone can do it.” In my experience, describing a platform as “no code” translates to “under-functional.” If you just need to fill in blanks, handle a bit of conditional logic, and some verb conjuga tion and pronoun calculations, Word can already do that natively using merge fields or Mail Merge. An automation platform that only makes it easier to do what Word has always been able to do by itself is of marginal value. On the other hand, a platform which significantly extends what Word can do is of high value. If an under-functional platform is chosen, it will produce documents which often require post-assembly editing to finalize. Post-as sembly editing requirements erode the return on investment, and increase the margin for error. In most cases, a good automation system should produce documents that require no post-assembly editing 95% of the time.

Person Tasked With Project Does Not Understand the Substantive Law

This is often the problem when a law office decides that some one from the IT/computer staff should automate the documents because they’re more tech savvy. Of course, those IT folks tend to know nothing about the substantive area of law (strike one); they typically have little experience with the word processor envi ronment in which the development occurs (strike two); and they cannot get enough face time with the lawyers who do understand the area of law to get questions answered timely and keep the pro ject moving (strike three).

Faulty or No Return On Investment (“ROI”) Analysis

Many times, a law firm or legal department will reject an auto mation proposal based solely on the price tag. That approach is fine as long as an ROI analysis is conducted to confirm or deny whether the project is worth doing. Many times, a project that sounds too expensive will pay for itself in 2 to 3 months. There fore, it is essential to go through the ROI analysis before deciding yes or no on any particular project.

What Is The Return On Investment of The Purchase?

Technically, ROI is an estimate of the financial benefit (the “return”) on money spent (the “investment”) for a particular pro ject. When calculating your cost, only include direct costs and expenses that are generated by the proposed project. Your cal culation of return should include tangible benefits (bottom-line revenue increases or cost savings) and intangible benefits. When evaluating benefits, consider the following criteria:

• Number of people helped: The more people helped by the proposed project, the higher the ROI.

• Frequency of use: The more frequently a system will be used, the higher the ROI.

• Cost of production: The higher your current, internal cost to deliver the service or product, the greater the benefit from automation or technical assistance.

• Potential to re-use: The greater your potential to re-use the data or information in the proposed new system, the higher the ROI. Similarly, if the document automation system can pull data from other systems (like case/matter management applications) and thus avoid redundant data entry, the higher the ROI.

• Communication efficiencies: The easier the proposed pro ject makes it for your firm to communicate with clients, or your employees to collaborate and communicate with one another, the higher the ROI.

• Increased accuracy: The more a product or service increases accuracy, the higher the ROI.

Calculating Cost Savings

Before you can calculate savings, you must first figure out what

your current costs are. Therefore, you’ll need to conduct a work flow analysis. Determine what steps are involved, how long each step takes and the costs associated with each step. After you’ve got that down, figure out how many of those transactions you aver age per week, month and year. This will help you determine your true costs so you can figure out what your savings might be. While you’re doing this, you should consider which steps, if any, can be eliminated. The overall processes should also be scrutinized because it won’t help to automate an inefficient process.

Payback Period

This is the time it takes for the return to equal the investment. With technology projects, most experts agree that you should look for payback periods of one year or less. Furthermore, once a project is past its payback period, you should not be afraid to discard it for something better.

Other Factors Affecting ROI

• Will The New Technology Increase The Competence Of Your Staff And Make The Office More Efficient? The best technol ogy initiative will fail if your colleagues and staff refuse to use it or don’t understand it sufficiently to use it. You have to think about this issue in advance. We recommend bring ing the staff into the technology decision-making process early. This is essential if they are the ones who will be work ing with the new hardware or software. While they cannot dictate what you buy, their ideas can improve it, and their participation is essential if the system is to work. Without this participation and “buy-in,” it can be an uphill battle.

• Will The New Hardware/Software Allow You To Do Some thing You Couldn’t Do Before? For example, if you currently refer to outside counsel all transactions of a particular type, then a new piece of technology may allow you to pull that work back inside your office.

• Will The Quality Of Your Services Be Improved? Any tech nology that enables you to provide more comprehensive, faster, more accurate or less expensive service to your clients should be given special consideration. This also applies to technology that allows you to communicate better with your clients.

Sample Analysis

Typically, lawyers have a difficult time ascertaining their hard and soft costs associated with rendering a particular service. For exam ple, a solo estate planning lawyer might be presented with an option of buying an estate planning document assembly system. Let’s say the cost is $12,000. Some lawyers will dismiss that cost immediately as too expensive and not give it a second thought. However, the return on investment analysis might have worked out like this:

• Lawyer handles 4 plans per week @ $750 each (flat fee).

• Average wage + benefits = $30/hr (internal costs); and the typical transaction takes 8 hours from start to finish

• Therefore, the current profit per plan = $510 or $97,920/yr

• Automated estate planning system cost = $12,000

• Using the proposed system, the lawyer’s total time to com plete a plan drops from 8 hours to 1.5 hours

• Profit per plan goes to $705 or $135,360/yr

• Therefore, revenue would increase by $37,440 in the first year and the system would have paid for itself by the 4th month of use. Most experts on this subject say that if the payoff is 12 months or less, then it is a good idea to pull the trigger.

Conclusion

“It’s supposed to be hard. If it wasn’t hard, everyone would do it. The hard is what makes it great.”

- (1992) A League of Their Own [Motion Picture]. United States: Columbia Pictures. Marshall, P. (Director), Abbott, E. (Producer)

That quote is as applicable to document automation as it is to baseball. The payoff can be enormous, but getting to the finish line can be difficult. If you want to try a do-it-yourself automation project, make sure you’ve picked the right platform, the right per son, and that you provide the necessary training and time. Start with easy documents and work your way toward the more com plex ones. Finally, conduct an ROI analysis and examine the whole process for bottlenecks and inefficiencies. Drafting is typically one part of a larger workflow, and it will do little good to automate a broken process.

Endnote

1. Barron K. Henley, Esq., Partner, is one of the founding partners of Affinity Consulting Group, a legal technology consulting firm focused on automating and streamlining law firms and legal departments. He earned his B.S./B.A. (marketing and economics) and J.D. from The Ohio State University and is a member of the American, Ohio and Columbus Bar Associations, and the Worthington Estate Planning Council. He is a Fellow of the College of Law Practice Management, a Fellow of the Amer ican Bar Foundation, a member of Ohio Supreme Court Commission on Technology and the Courts, and a member of both the ABA Law Practice Management and the Real Property Trust and Estate Law (“RPTE”) Sec tions and is Vice Chair of the Joint Law Practice Management Group. Mr. Henley heads Affinity’s document assembly/automation and software training departments. Barron is also an expert in launching new law firms, overhauling existing firms, and documenting and re-engineering law firm processes. Finally, Barron teaches continuing legal education (CLE) classes throughout the U.S. and Canada covering a wide variety of topics related to law practice management, technology and ethics.

Affinity Consulting Group bhenley@affinityconsulting.com ©2022 Affinity Consulting Group LLC

Noteworthy Events to Calendar

The only certain thing in life is change. Whether the product of the passage of time, deliberate action, or happenstance, most attorneys will find themselves at the crossroads of change at least once during their career. From moving up to partner to moving out to in-house counsel, from moving laterally to moving into retirement, and everything in between, career transitions are a part of life.

Through this six-part series, sponsored by RPTE’s Career Development and Wellness Committee, attorneys who have successfully navigated these changes will deliver candid advice about the process and pro tips on how to evaluate, execute, and excel in your transition.

Register here for upcoming programs and listen to past on-demand archive recordings.

EXPERT PANEL DATE

Movin’ On Up: Transitioning from Associate to Partner August 31, 2022

Movin’ On Over: Lateral Firm Transitions September 14, 2022

Movin’ Out: Transitioning from Private Practice to In-House Counsel October 12, 2022

Moving In Stereo: Transitioning from Private Practice to Non-Traditional Legal Roles

November 2, 2022

Move Over: Transitioning to Solo Practice November 30, 2022

Movin’ On: Transitioning into Retirement December 14, 2022

Beryl Baldwin 1890-1964

Edgar Baldwin 1854-1931 Mary Douglass 1857-1931

Carmen Barrion 1921-2012

Adam Daza 1892-1950

Lucille Bright 1895-1960

Committee Conference Calls

ELDER LAW AND SPECIAL NEEDS PLANNING GROUP

December 20, 3pm CT

Benjamin Rubin will present on Issues with ABLE Accounts, such as Child Support, State Payback, and 529 Plans.

Join Zoom Meeting

https://americanbar.zoom.us/j/92551740021?p wd=WEgrRGJmUTJ4VEZJcTBrRS9UdVFBQT09

Meeting ID: 925 5174 0021

Passcode: 675087 888 475 4499 US Toll-free 877 853 5257 US Toll-free

BUSINESS PLANNING GROUP

December 21, 11am CT

Join Zoom Meeting

https://schiffhardin.zoom.us/j/3122585522

Meeting ID: 312 258 5522 877 853 5257 US Toll-free 888 475 4499 US Toll-free

CHARITABLE PLANNING AND ORGANIZATIONS GROUP

January 4, 11am CT

Join Zoom Meeting

https://americanbar.zoom.us/j/94239226221?p wd=S09zTWtRd2JQMlg0RXg0TWlKd0k3QT09

Meeting ID: 942 3922 6221

Passcode: 359294

888 475 4499 US Toll-free 877 853 5257 US Toll-free

Land Use and Environmental Group

The committee monitors judicial and legislative developments in eminent domain law, including statutory condemnation and inverse condemnation matters, nationwide. The committee consists of a diverse group of eminent domain practitioners representing condemnors and landowners alike to provide insight on all types of takings, like highways/ roadways, pipelines, powerlines, and other unique takings. The committee’s programing addresses valuation, right–to–take, and related issues specifically for eminent domain practitioners in addition to current events and media/news coverage of takings that are of interest to all real estate practitioners. https://www.americanbar.org/groups/real_property_trust_estate/committees/

Leasing Group

The Leasing Group provides its members and the Section as a whole a number of opportunities for growth and learning throughout the year. The group has free monthly calls alternating between 30 minute “nuts and bolts” sessions geared towards new practitioners (including those new to leasing) on basic topics such as property descriptions, rent structures and assignments and more advanced one hour calls on a variety of leasing optics. In addition, the group presents programs at the Section’s annual National CLE Meeting. The Leasing Group encourages all of its members to get involved in presenting programs, writing articles and working in Section leadership.

https://www.americanbar.org/groups/real_property_trust_estate/committees/ real-property-committees/

Litigation, Ethics and Malpractice Group

The Litigation, Ethics, and Malpractice Group includes the Probate and Fiduciary Litigation and Controversy and the Ethics and Malpractice Committees. The first deals with all aspects of disputes, litigation and alternative dispute resolution involving wills and trusts, private and charitable trusts, and related controversies involving conservatorships and guardianships. The second deals with ethical and malpractice issues that arise in the estate and trust context.

https://www.americanbar.org/groups/real_property_trust_estate/committees/ trust-estate-committees/

Non–Tax Estate Planning Considerations

Group

This group is comprised of committees that focus upon estate planning and estate and trust administration issues other than taxation as well as on wealth planning issues and includes committees on financial and insurance planning and asset protection planning. Probate and trust attorneys who want to understand their clients’entire financial situation and protect their clients’ families against more than probate and death taxes will find the information these committees provide crucial to their practice. This group also assists the practitioner to develop estate and trust plans that are sustainable over time.

https://www.americanbar.org/groups/real_property_trust_estate/committees/ trust-estate-committees

2022 RPTE LAW STUDENT

WRITING COMPETITION WINNERS

We are delighted to announce the winners of the 2022 RPTE Law Student Writing Competition.

FIRST PLACE:

The Ownership of Fossils Found on Private Property: Are They Part of the Mineral Estate or the Surface Estate?

by Emma Geesaman, Case Western Reserve University School of Law

SECOND PLACE:

Heir(ing) on the Side of Caution: Is California’s Intestacy Law Too Strict for Posthumous Children Seeking to Inherit Social Security Benefits?

by Jasmine Sadeghani, Pepperdine University Caruso School of Law

THIRD PLACE:

Rolling Easements as a Viable Tool to Address Rising Sea Levels in US Coastal Communities by Katherine Meek, UCLA School of Law

Emma Geesaman, the first-place winner, will receive $2,500 cash, a oneyear free membership in the Section and free round-trip airfare and weekend accommodations to attend the 35th Annual RPTE National CLE Conference, May 10-12, 2023, in Washington, D.C. She is eligible for a full-tuition scholarship to the University of Miami School of Law’s Heckerling Graduate Program in Estate Planning OR Robert TraurigGreenberg Traurig Graduate Program in Real Property Development for the 2022–2023 or 2023–2024 academic year. In addition, Emma’s essay will be considered for publication in a future issue of the Real Property, Trust & Estate Law Journal.

Jasmine Sadeghani, the second-place winner, will receive $1,500 cash. Jasmine’s submission will also be considered for publication in a future issue of the Real Property, Trust & Estate Law Journal.

Katherine Meek, the third-place winner, will receive $1,000 cash. Katherine’s submission will also be considered for publication in a future issue of the Real Property, Trust & Estate Law Journal.

The goal of the RPTE student writing contest is to encourage and reward law student writing on the subjects of real property or trust and estate law. The essay contest is designed to attract students to these law specialties and to encourage scholarship and interest in these areas. Articles submitted for judging are encouraged to be of timely topics and not previously published.

The Section sends a huge thank you to Michael Ostermeyer and the 2022 selection committee: Robert Paul, Edward Brading, Amy Milligan, Amy Hess, Susan Gary, Ray Prather, Andrea Boyack, and Jeff Hopkins.

Undue Influence and Vulnerable Adults

Undue influence is a form of financial abuse of the elderly, with the large number of reported cases just the tip of the iceberg. This valuable and practical legal resource provides a broad understanding of all aspects undue influence, from how to identify it, plan for its possibility, litigate it, and address issues related to it.

Litigating Constructive Trusts

GOLDEN

254 PAGES

Unlike traditional express trusts that are planned well in advance with all parties involved agreeing to roles as trustee and beneficiary, a constructive trust is one created solely by a judge as a distinct remedy— powerful, nuanced, and often complex and daunting. Whether you are litigating in their favor or defending in such a case, this book is an essential guide on the topic, covering crucial considerations a practitioner will need to know including strategies for handling pleadings, discovery, motion practice, and trials.

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 dis tinction 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 rul ing 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 Edi tor, 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 arti cle 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 final ize 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 submis sion 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.