Commercial Real Estate Loans
By Mark Edelstein and Theresa A. Foudy
Joshua Stein
By Timothy J. Keeler, Mickey Leibner, Jennifer L. Parry, Nicholas T. Jackson
By Kevin L. Shepherd and Stephen Liss
Rachel
By Kaye Spiegler PLLC - Gabrielle C Wilson, Howard N Spiegler, Lawrence M Kaye and Yael M Weitz
By Tom Cronkright
By Mark Edelstein and Theresa A. Foudy
This article provides helpful tips for lenders to avoid lender liability claims while dealing with distressed commercial real estate loans.
Distress in U.S. commercial real estate industry persists and is unlikely to go away any time soon.
A number of factors have combined to cause an almost “perfect storm” for commercial real estate distress. The COVID-19 pandemic led to a rise in remote and hybrid work, increasing vacancy rates and decreasing property values. Rising interest rates and inflated operating and maintenance costs made the properties more expensive to maintain, further depressing values. The collapse of several regional banks and greater regulatory scrutiny caused the credit markets to tighten, making financing and refinancing extremely difficult. And difficulties in maintaining existing tenants, and finding replacement ones, have further deflated value. All in all, commercial real estate values in various sectors have plummeted, causing some owners to choose to default or even “hand over the keys” to the mortgage lender.
As a result, lenders have faced increased numbers of troubled commercial mortgage loans and are spending more and more time on workouts, short sales, debt sales, DPOs, and foreclosures and other enforcement remedies. It is in those situations that lenders are most vulnerable to facing lender liability claims from borrowers and third parties.
In this article, the Morrison Foerster Distressed Real Estate Group provides some helpful tips for lenders to avoid lender liability claims while dealing with distressed commercial real estate loans.
Tip #1: Build a record.
During the period leading up to the decision to exercise remedies, it is important to create a record that documents the facts, so that they can be used later as evidence, if need be. Keep records and communications as factual as possible and seek to include two representatives on calls and meetings with borrowers/guarantors/other lenders to enhance credibility of future testimony.
Tip #2: Avoid confrontational communications. Do not send emails, texts, or other communications to the borrower containing inflammatory, defamatory, derogatory, or confrontational comments or threats. Keep your communications (and files) clean and neat and avoid a “lender liability” roadmap. Control all of your communications, always keeping a good paper trail. Recall that all communications could be subject to disclosure in a future litigation, so best to follow the “Wall Street Journal” test and avoid saying anything that you would not feel comfortable appearing on the front page of the Journal. Consider signing up a well-drafted pre-negotiation agreement (more on this in part 2).
Tip #3: Exercise consistency in decision-making.
You should exercise approval rights consistently with your status as a lender, taking into account any applicable standards in the loan documents when granting or withholding approvals or consents. Avoid taking inconsistent positions and precipitous actions that could be viewed as “pulling the rug out from under” the Borrower. When you make changes that affect the course of dealing in a material way, make sure to provide reasonable time and notice, e.g., canceling a line of credit, to provide the borrower reasonable time to arrange alternatives. Bottom line is to observe the Golden Rule, namely, always be fair and treat the borrower as you would expect to be treated if you were in the borrower’s situation.
Tip #4: Do not take actions that unreasonably harm the borrower.
Only take drastic actions under the loan documents as a last resort. Do not make decisions or exercise remedies in a manner that harms the borrower without reasonable justification, even if technically within your contractual rights. For example, you should not commence a foreclosure or refuse to disburse the balance of a construction loan or future advance
for immaterial or technical defaults. Do not declare construction loans to be out of balance without adequate substantiation. You should also avoid being careless or unreasonably slow in processing disbursement requests. Overall, strive for quick, thoughtful replies and actions. Avoid overreacting and appearing arrogant. Before denying borrower requests in regard to major leases or other material business decisions, consider consulting with counsel regarding applicable legal principles. While it’s best to always take actions within the four walls of your loan documents, be aware that doing so does not always absolve you from potential future liability claims. Be familiar with lender’s credit and other policies with respect to distressed real estate loans and adhere to them.
Tip #5: Be truthful.
Be honest in regard to the lender’s intent with respect to renewing a loan or enforcing the lender’s rights under the loan documents. Do not threaten to take actions that have not yet been authorized or actually contemplated. Do not give oral assurances that “soften” the strict language of a loan agreement and then turn around and attempt to enforce the documents as written. Avoid giving rise to false hopes. Do not give the borrower any cause to complain that it took actions in reliance on words or conduct by the lender that was less than candid and forthright.
Tip #6: Do not attempt to control a borrower’s dayto-day operations.
Viable lender liability claims have arisen in circumstances where a lender exercises control over a business or its management to the extent that the lender is viewed to have taken on fiduciary duties to the borrower or to have exercised undue coercion on the borrower’s business. As a lender, you should not be dictating a borrower’s day-to-day business decisions, such as which trade creditors to pay, when to pay them, or what personnel to hire. You should not make payments to contractors or subcontractors that the borrower has not authorized. You should not be interacting with third parties in a manner that causes confusion as to who is in control of the borrower. You should not make threats that the lender does not intend to carry out in order to induce the borrower to follow a course of action suggested by the lender. Generally, steer clear of any form of intimidation tactics. Do not coerce the borrower to accept a third party or an employee of the lender to operate the borrower’s business, especially to the exclusion of the borrower’s own officers and employees. Overall, do not run your borrower’s business.
Tip #7: Give informed advice.
If you choose to take on a role of “financial advising” regarding lease terms, marketing strategies, contractor selection, etc., make sure to give informed and sound advice. It’s alright to monitor the borrower’s business and financial affairs, and/or to insist upon detailed information, but limit your “financial advising” to advice and consultation on discrete business matters. In the end, it’s “borrower’s call.”
Published in eReport, Summer 2024 © 2024 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
Tip #8: Be aware of litigious borrowers and personality conflicts.
Try to identify litigious borrowers early and avoid making loans to them. If you find yourself with a litigious borrower on your hands, take additional care with following all of these tips. If a personality conflict develops between the borrower and the loan officer, consider changing the loan officer to avoid escalation of the situation.
Tip #9: Consider involving outside counsel at an early stage.
When ordering an appraisal, environmental report, property condition report, or other consultant’s report in connection with a distressed loan, consult with the lender’s legal staff to determine whether your outside counsel should engage those consultants directly. Doing so may possibly enable such work product to be treated as attorney work product protected from disclosure in a subsequent litigation.
Tip #10: Be conscious of information and documents covered by attorney-client privilege.
When counsel has been involved in providing advice in connection with a distressed loan, exercise care not to waive attorney-client or attorney work-product privileges that might otherwise apply to documents and communications by sharing them with third parties. Any time attorney-client communications or work product is shared outside of the lender, any applicable privilege may be deemed to be waived. Extreme care should be used before sharing documents or advice externally, including with third-party consultants providing financial or public relations advice. Even sharing work product and communications with co-lenders, mezzanine lenders, and subordinate lenders can be problematic. Seek out advice of your counsel in these situations.
Tip #11: Consider entering into a pre-negotiation agreement (PNA).
A PNA—also referred to as a “pre-workout agreement” or a “negotiation agreement”—is essentially intended to set the framework for discussions among the parties. It permits the borrower and lender (and perhaps other parties) to sit down together to discuss the viability and terms of a workout or other resolution. The essential terms of a PNA are that each party reserves its rights against the others, that nothing is binding until final and definitive documentation is entered into among all parties covering all issues of concern, that nothing said is admissible in court, and that any party can terminate the discussions at any time without liability to the others. Signing a PNA is a means to an end, namely a successful resolution. It’s best, if such an agreement is deemed helpful, to work to negotiate and execute it expeditiously, because while the PNA is being negotiated, the lender is likely not dealing with its underlying problem, namely a defaulted loan secured by a lien on a likely deteriorating asset. PNAs come in various shapes and sizes and often seek some “controversial” provisions, such as
releases, waivers, estoppels, document and lien confirmations, and the like, which can slow a PNA’s final execution. It’s best to discuss with inside or outside counsel the lender’s internal policies regarding the use of PNAs, and what is best for any given credit and in each specific factual situation.
By Joshua Stein1
These Model Ground Lease Criteria appeared as a chapter in the author’s 2024 three-volume treatise, New Guide to Ground Leases. For more information on the treatise, visit www. groundleasebook.com .This article provides a set of concise ground lease criteria that summarize, consolidate, and slightly improve on current rating agency criteria for ground leases.
Introduction
Commercial mortgage-backed securities often rely upon collateral pools that include leasehold mortgages. Whenever that happens, the agencies that rate the securities will test each mortgaged ground lease against a set of criteria. (This discussion treats Fannie Mae’s and Freddie Mac’s published ground lease criteria as if they were additional rating agency criteria.)
Rating agency criteria for ground leases offer a reliable
benchmark to evaluate any ground lease for acquisition or financing. That’s true even if a particular tenant or prospective tenant has convinced itself it will never either: (i) seek a leasehold mortgage destined for securitization or (ii) want to sell its leasehold position to anyone else who might need (or want to be able to obtain, if desired) such a mortgage.
If a ground lease flunks one or more rating agency criteria, a leasehold mortgagee might still accept it as collateral if the leasehold mortgagee considers the deficiency immaterial. If it is deemed material, the leasehold mortgage might cost more. It might require unusual personal guaranties, security measures, a ground lease amendment (often an ordeal, the easiest part of which consists of writing a large check to the landlord), or other less desirable terms. Or the leasehold mortgage might not happen at all.
Thus, rating agency criteria for ground leases give a ground lease negotiator or reviewer a good checklist to avoid problems—including potentially very substantial impairment of the value and salability of the leasehold estate—when negotiating a new ground lease or evaluating an existing ground lease.
A tenant, leasehold mortgagee, or B-piece buyer for a securitization might also have its own criteria for ground leases. Anyone negotiating or reviewing a ground lease must consider
those internal criteria along with rating agency criteria. Internal ground lease criteria might likely address, for example: (i) required minimum length of remaining term; (ii) tolerable base rent reset formulas; (iii) requirements for involvement in, and approval of, any loss proceeds determination; and (iv) variations or acceptable deviations from ordinary rating agency criteria. Failure to meet internal criteria can be at least as serious as failure to meet rating agency criteria.
This model document offers a set of concise ground lease criteria (the “Model Ground Lease Criteria” ) that summarize, consolidate, and slightly improve on current rating agency criteria for ground leases. These Model Ground Lease Criteria began as a compilation of all available rating agency criteria, followed by revision, reorganization, and addition of commentary.
The Model Ground Lease Criteria have three parts:
• Transactional Criteria. Standards for the business and financial terms, and other “nonlegal” terms, of the ground lease (all, collectively, the “Transactional Criteria”);
• Closing Criteria. Standards for the leasehold mortgage underwriting and closing process to the extent specific to leasehold loans (the “Closing Criteria” ); and
• Minimum Protections. A set of baseline leasehold mortgagee protections (the “Minimum Protections” ) that the parties could, at least in theory, incorporate verbatim into a ground lease and thereby satisfy the literal expectations of the rating agencies regarding what the ground lease should say.
The Model Ground Lease Criteria sometimes offer a bit less or more than rating agency criteria, as discussed in footnotes. Other footnotes explore rating agencies’ thought processes, alternatives to proposed language, and the author’s opinions.
The rating agencies’ criteria sometimes change, though only glacially. The descriptions of a particular agency’s criteria offered here may be incomplete, inaccurate, or outdated. Do not rely on them. Instead, check for updates and review current rating agency criteria, which are typically available online without charge but with a registration requirement.
The Model Ground Lease Criteria offered here: (i) omit criteria that apply to any mortgage loan, whether or not encumbering a leasehold estate, e.g., title insurance, which will always require adjustment for the particulars of any loan transaction; (ii) do not consider property or liability insurance issues, including any arising from overbuilt improvements; (iii) assume the landlord will not join in the leasehold mortgage (“subordinate the fee”) because landlords rarely do that
in the 21st Century, unless perhaps they are affiliates of the tenant or unsophisticated and represented by inexperienced counsel; (iv) attempt to cover every criterion for ground leases established by any rating agency; (v) contain only a handful of defined terms; and (vi) leave most terms undefined where ordinary dictionary definitions suffice. (Items (v) and (vi), and other stylistic measures in these Model Ground Lease Criteria, take an approach very different from the other chapters in the author’s New Guide to Ground Leases.)
The Model Ground Lease Criteria vary from the rating agency norm by offering specific and complete language for the Minimum Protections that, if incorporated in any ground lease, would satisfy and fully conform to the literal words of typical rating agency requirements for generic leasehold mortgagee protections. In contrast, rating agency criteria offer general conceptual descriptions of what the ground lease should say, leaving specific wording to the writer of the ground lease. That approach opens the door for unnecessarily complex and overthought language and negotiations far beyond rating agency expectations. The Minimum Protections eliminate any such general conceptual directions in favor of clear, succinct, and minimalistic language ready for parties to insert into a ground lease if they dare. If they don’t dare, then they can instead treat the proposed language as a useful thought experiment and reference point.
The Minimum Protections provide only the essential protections the rating agencies want to see. The words of the Minimum Protections match the essential leasehold mortgagee protections as promulgated by the rating agencies. The Minimum Protections go no further. They paint with a broad brush. For example, they offer time periods or deadlines only where both: (i) the market consistently expects a certain minimum time period or deadline; and (ii) leasehold mortgagees and rating agencies typically consider it important.
The Minimum Protections consider only the interests of leasehold mortgagees and not landlords, who will often seek to dilute some protections, particularly on transfers. Just how much dilution a rating agency or leasehold mortgagee might tolerate lies outside this discussion.
Parties negotiating a ground lease can—and (their counsel) often will—massively complicate the Minimum Protections with clarifications, conditions, exceptions, and so on. This is where the problems arise. The more clarifications, conditions, exceptions, and so on, the greater the chance for mistakes and disputes, and the more protracted the negotiations.
In contrast, any ground lease could, at least in theory, incorporate the Minimum Protections verbatim because they are straightforward, don’t invite overthinking, and require less editing and negotiation than typical leasehold mortgagee protections. For all those reasons, they reduce the likelihood of
Published in eReport, Summer 2024 © 2024 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
mistakes and disputes.
The Minimum Protections do, however, omit and disregard a significant number of details that parties typically include in leasehold mortgagee protections in modern ground leases, going far beyond the minimum words sufficient to track rating agency criteria. Any resulting risks should be considered in light of both the infrequency with which leasehold mortgagees actually exercise any leasehold mortgagee protections and the tendency of reasonable parties to work things out if a problem arises. During the Great Financial Crisis and real estate recession of 2008-2009, or in today’s commercial real estate downturn, did many leasehold mortgagees activate their leasehold mortgagee protections or request new ground leases? How many parties actually had to read the lengthy and often unnecessarily complex leasehold mortgagee protections in their ground leases? Not many.
If a ground lease adequately covers each base suggested by the Model Ground Lease Criteria, the ground lease reviewer can reasonably conclude that the ground lease contains minimally adequate leasehold mortgagee protections. The Model Ground Lease Base Case does cover all those bases. So the Model Ground Lease Base Case, or any ground lease that includes the Minimum Protections, should pass muster with the rating agencies, subject, of course, to: (i) unique transaction details; (ii) compliance with general rating agency criteria for mortgage loans and any party’s internal criteria; (iii) compliance with the Transactional Criteria, the Closing Criteria, and ordinary mortgage loan closing procedures; and (iv) general unease in the market and legal profession regarding simple, succinct language.
Acknowledgments. The author acknowledges with thanks helpful comments from Joseph Philip Forte of McCarter & English, LLP; Bradford Lavender of Haynes and Boone, LLP; Alfredo R. Lagamon, Jr.; an anonymous rating agency analyst; and Daniel Caplow, Alexa Klein, and Lauren Silk of the author’s legal staff.
An earlier version of these Model Ground Lease Criteria appeared in the May 2021 issue of The Practical Real Estate Lawyer, published by ALI CLE. The author acknowledges with thanks the contributions made to these Model Ground Lease Criteria by the late Joseph DiPietro of The Practical Real Estate Lawyer. Other versions of these Model Ground Lease Criteria have appeared in other real estate law publications.
Any ground lease encumbered by a leasehold mortgage should: (i) comply with the Transactional Criteria and Closing Criteria below; and (ii) contain provisions equivalent to (or more protective than) the Minimum Protections below (requirements (i) and (ii) together, the “Model Ground Lease Criteria”).
in eReport
Any party that deposits a leasehold mortgage into a securitization (a “Depositor” ) will need to represent and warrant compliance with the Model Ground Lease Criteria, in addition to making ordinary representations and warranties for any mortgage loan not encumbering a leasehold estate. If a particular leasehold mortgage loan does not fully comply with the Model Ground Lease Criteria, then the mortgage loan file should recognize, identify, and analyze the noncompliance, explaining why it should not impair successful securitization.
The ground lease and its terms should comply with these criteria (collectively, the “Transactional Criteria”):
The premises are located in a market where ground leases are an accepted form of real estate investment. The lease at issue is a ground lease, not a space lease, as those terms are commonly understood in commercial real estate. It contains no unusual or burdensome provisions outside the range of typical provisions in ground leases in the market.3
The ground lease does not: (i) give a leasehold mortgagee any shared appreciation rights or equity (or revenue) participation, such as percentage rent;4 or (ii) trigger a default based on a default under the leasehold mortgage. The ground lease is not a sublease.5
Base rent will increase taking into account only: (i) a fixed schedule; (ii) fixed percentage increases; or (iii) CPI increases capped at up to 3.5% per year, expressed as either an annual cap or a cap compounded over multiple years. The ground lease does not adjust base rent based on any formula involving appraisal, valuation, revenue or income participation, or other contingent value-based review.6
Assuming exercise of all remaining extension options,7 the ground lease term extends at least [30]8 years beyond the scheduled maturity of the leasehold mortgage loan.
The ground lease allows the present use of the existing building. The leasehold mortgagee’s appraisal of the leasehold estate fully considers all use and other restrictions in the ground lease.9
The documentation and underwriting should comply with these requirements (the “Closing Criteria”):
2.1.
The ground lease and each amendment, or a memorandum of each, has been recorded.10 The loan file contains all documents referred to in the previous sentence. They match the documents listed in the landlord’s estoppel certificate. Any change in the ground lease necessary to satisfy the Model Ground Lease Criteria was accomplished through a ground lease amendment, signed by the landlord and the tenant with all necessary fee mortgagee consents.11 An estoppel certificate constitutes a sufficient ground lease amendment only if it: (i) was countersigned by the tenant; (ii) includes consent by all fee mortgagees; (iii) expressly modifies the ground lease; and (iv) was recorded.12
2.2.
The landlord delivered an ordinary and customary estoppel certificate, without material exceptions, dated within the last 30 days before the leasehold mortgage closing.13
2.3.
The leasehold mortgage requires the tenant/mortgagor to comply with the ground lease. The leasehold mortgagee has met all conditions or requirements for leasehold mortgages in the ground lease. The landlord has confirmed in writing receipt of any required notice of the leasehold mortgage and all its assignments, if any.14
2.4.
If the borrower/mortgagor is not the original tenant, then it acquired its leasehold estate in compliance with the ground lease, and the landlord has recognized the tenant as such. The ground lease is in full force and effect. Its term and the tenant’s obligation to pay rent (subject to any contractual free rent periods) have commenced. No uncured default exists under the ground lease.15 To Depositor’s actual knowledge, no condition exists that, but for the passage of time or the giving of notice, or both, would result in such a default.
2.5. Title.
Except for permitted exceptions:16 (i) the leasehold estate is subject to no lien or encumbrance superior or equal in priority to the leasehold mortgage; and (ii) the fee estate is subject to no lien or encumbrance, including any fee mortgage, superior or equal in priority to the ground lease.17
2.6. Underwriting.
The underwriting of the leasehold mortgage loan: (i) treats
ground rent as a priority expense like real estate taxes and insurance premiums;18 and (ii) fully considers any ground lease terms that impair the value of the leasehold estate.19
The following language (the “Minimum Protections”) can be used in the text of a ground lease to provide a minimally sufficient set of leasehold mortgagee protections. The user should, of course, always check that proposition against actual rating agency criteria. Conform nomenclature to definitions in the ground lease, capitalizing as appropriate. Where these Minimum Protections refer to compliance with “Reasonable Standards,” remove that concept or replace it with actual standards that: (i) are appropriate in context, clear, objective, quantitative rather than qualitative, readily determinable, reasonable, short, simple, unambiguous, usually satisfied by ordinary transactions of the type contemplated, and not onerous; (ii) create no material risk of disputes; (iii) contemplate no exercise of landlord discretion, determination, or judgment, reasonable or otherwise; and (iv) do not impair the value of the leasehold estate.20
3.1. Construction.
The tenant may alter, construct, and modify21 improvements without the landlord’s consent. The ground lease may, however, require the tenant to meet Reasonable Standards to assure completion, payment, and preservation of value.22
The landlord shall, on request by the tenant or any leasehold mortgagee, promptly certify in writing (subject only to exceptions described in reasonable detail): (i) that this ground lease is in full force and effect; (ii) whether it has been amended; (iii) that to the landlord’s knowledge the tenant is not in default; (iv) the date through which rent has been paid; and (v) other factual matters as reasonably requested.23
With no requirement for the landlord’s consent, to the extent law allows: (i) the tenant may mortgage or collaterally assign this ground lease to any leasehold mortgagee that meets Reasonable Standards;24 (ii) any permitted leasehold mortgagee may accomplish a foreclosure, assignment in lieu of foreclosure, sale through bankruptcy or similar proceeding, or other involuntary divestiture of the tenant’s leasehold estate (any of those, an “Involuntary Transfer”); and (iii) the direct assignee25 through an Involuntary Transfer may assign this ground lease.26
3.4.
If at any time any damage, regardless of magnitude, occurs or any condemnation is initiated: (i) the landlord and the tenant shall promptly notify each leasehold mortgagee; (ii) each leasehold mortgagee may participate in any adjustment,
negotiation, or settlement of insurance proceeds or condemnation award (either, “Loss Proceeds” ) and shall have the right to approve any settlement;27 (iii) Loss Proceeds shall be held by a financial institution, chosen by the leasehold mortgagee, that complies with rating agency standards for any depository of Loss Proceeds;28 (iv) Loss Proceeds shall be released from time to time to pay for restoration under reasonable disbursement procedures; and (v) unless the condemnation results in a termination of this ground lease, this ground lease shall continue and the tenant shall restore the remaining premises.29 Loss Proceeds shall be applied as follows:
Condemnation.
From any award for condemnation of the entire premises, the landlord shall first receive the fair market value of its entire interest in the premises,30 as if no condemnation had occurred or been threatened. Tenant shall receive the remaining award. After a partial condemnation: (i) the landlord shall receive any condemnation proceeds not needed for restoration;31 and (ii) base rent shall equitably decrease because of that payment.
Damage.
After the tenant has completed and paid for restoration after damage, any remaining insurance proceeds shall be released to the tenant.
Mortgagees.
Any loss proceeds payable to any party shall be: (i) subject to the rights of its mortgagees; and (ii) paid to its most senior mortgagee for application under the loan documents.
3.5. Multiple Leasehold Mortgagees.
If multiple leasehold mortgagees seek to exercise rights under this ground lease, then the most senior may do so (or designate in writing some other person to do so) to the exclusion of all other leasehold mortgagees.32
3.6. New Ground Lease.
If, before its scheduled expiration date, this ground lease terminates for any reason except a total condemnation33 or if the tenant rejects it in insolvency proceedings,34 then the landlord shall so notify each leasehold mortgagee. For 30 days after that notice, any leasehold mortgagee may, by notice, require the landlord to enter into a new ground lease with that leasehold mortgagee or its designee. If a leasehold mortgagee gives that notice, the landlord shall promptly enter into such a new ground lease, effective retroactively to the termination or rejection. When the parties enter into a new ground lease, the landlord may require the new tenant to cure all monetary defaults and agree to cure all other curable defaults within a reasonable time. The landlord shall waive all defaults that are incurable or relate specifically to the former tenant. The new ground lease shall have the same priority and the same terms
and conditions, including rent and remaining term, that this ground lease did when terminated or rejected.
3.7. No Merger.
If the leasehold estate under this ground lease and the landlord’s fee estate are ever commonly held, they shall remain separate and distinct estates (and not merge) unless all leasehold mortgagees consent.35
No leasehold mortgagee or anyone acting for it shall ever have any personal liability under this ground lease unless it becomes the tenant. That liability ends when it assigns, abandons, or surrenders this ground lease.
3.9. Notice and Opportunity to Cure.
If the tenant defaults under this ground lease, all notice and cure periods of the tenant have expired, and the landlord intends to exercise any right or remedy, the landlord shall first notify each leasehold mortgagee. Each leasehold mortgagee may cure that default within 30 days after the landlord’s notice. If it cannot reasonably be cured in that time, then each leasehold mortgagee shall have such additional time as it reasonably needs, so long as it proceeds with reasonable diligence. If cure of a default requires possession of the premises, the landlord shall allow additional time as the leasehold mortgagee reasonably needs to complete an Involuntary Transfer (or have a receiver appointed) and obtain possession. On completion of an Involuntary Transfer, the landlord shall waive all defaults specific to the former tenant36 or not curable. So long as any leasehold mortgagee’s cure periods have not expired, the landlord shall not seek to terminate this ground lease for the tenant’s default.37
3.10. Notices.
No notice by the landlord will be effective against a leasehold mortgagee until the landlord has given that leasehold mortgagee a copy.38 Any party that begins a dispute resolution or appraisal proceeding shall promptly notify all leasehold mortgagees.
3.11. Preservation of Lease.
Without consent by all leasehold mortgagees: (i) this ground lease may not be amended, cancelled, modified, restated, surrendered, terminated by agreement (or by exercise of the tenant’s right, if any, to elect a termination upon condemnation or damage), or waived in whole or in part; (ii) the landlord shall not accept a voluntary surrender or abandonment of this ground lease; (iii) the tenant shall have no power or authority to treat this ground lease as terminated if the landlord rejects it in an insolvency proceeding; and (iv) the tenant shall not subordinate its leasehold estate to any fee mortgage or other interest in the fee estate. Any action violating the previous
Published in eReport, Summer 2024 © 2024 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
sentence shall be void. It shall not bind any leasehold mortgagee or anyone whose title derives from an Involuntary Transfer.
Every fee mortgage is (and every future fee mortgage shall be, and must state that it is) subordinate to this ground lease and all estates derived from this ground lease, and any replacement new ground lease.
To the extent any leasehold mortgagee’s documents authorize a leasehold mortgagee to exercise any rights of the tenant under this ground lease, the landlord shall recognize and accept that authority after notice. If this ground lease contains an extension, purchase, or renewal option and the tenant does not timely exercise it, then the landlord shall promptly notify each leasehold mortgagee, which shall have 30 days from receipt of notice to exercise it on the tenant’s behalf.39 In doing so, a leasehold mortgagee need not meet any condition that would apply to the tenant except payment.40
3.14.
The tenant may assign this ground lease41 (or sublease any premises) subject only to satisfaction of Reasonable Standards.42 The previous sentence does not restrict any Involuntary Transfer. The landlord must agree not to disturb the possession, estate, or quiet enjoyment of any space subtenant whose sublease meets Reasonable Standards.43
1. Copyright (C) 2024 Joshua Stein. The author is the sole principal of Joshua Stein PLLC, a member of the American College of Real Estate Lawyers, and author of a half dozen books and 400+ articles on commercial real estate law and practice, joshua@joshuastein.com.
2. For instructions on how to obtain an editable and well-formatted version of this Model Document in Microsoft Word format for use in transactions, visit www.glbookdocuments.com
3. The last two sentences do not appear in rating agency criteria but accurately describe part of a rating agency’s agenda in reviewing any ground lease. Any ground lease may contain deal-specific concerns that might cause any reviewer, including a rating agency, to require changes to protect a leasehold mortgagee.
4. Clause (i) comes from Freddie Mac’s ground lease criteria. There is no reason to think the prohibition applies only to leasehold mortgages. It might not belong in these Model Ground Lease Criteria.
5. A sublease raises a surprising range of issues and complexities, beyond the scope of these Model Ground Lease Criteria. Unless it’s really also a direct lease from the landlord (see, e.g., the Model Landlord Joinder in Sublease in the author’s New Guide to Ground Leases), a sublease creates more risk than the rating agencies will tolerate, e.g., multiple risks of bankruptcy, termination of intervening estates, and other adverse events. A subleasehold mortgage will typically not be securitizable.
6. Although rating agency criteria by their terms often require a fixed or determinable rent stream obligation, the rating agencies have learned to live with some market-based rent adjustments as long as they can be reasonably projected or underwritten. Rating agency criteria do not expressly mention the possibility of CPI increases with a cap, i.e., item (iii) in this paragraph. That cap matches current marketplace expectations. Rating agencies can often underwrite market-based rent adjustments without a cap. Fannie Mae says it doesn’t want any rent increase to reduce the debt service coverage ratio below whatever existed at loan closing. Presumably this entails projections and predictions in the underwriting process rather than words in the ground lease.
7. The Minimum Protections allow a leasehold mortgagee to exercise these options by satisfying only any conditions that require payment.
8. Some rating agencies will tolerate a remaining term as short as 10 years beyond loan maturity, perhaps inspired by a provision in the Employee Retirement Income Security Act of 1974 that seemed to bless that concept. More typically, tenants and leasehold mortgagees want to see at least 30 years of total remaining term, regardless of loan maturity. Fitch wants the remaining term to be “materially longer” than the loan, whatever that means. For a fully self-amortizing loan, Fannie Mae favors a 10-year remaining term after full amortization. For other loans, Fannie Mae says the remaining term after loan maturity must be 20 years, subject to some nuances. The various and varying requirements of market participants on remaining term, sometimes driven by statute or regulation, are typically quite rigid. They can make perfectly desirable ground leases hard to finance even with significant remaining term. This issue merits a more nuanced analysis than this footnote can provide. It is easily missed in the thicket of more interesting issues in any ground lease.
9. Fannie Mae prohibits “unreasonable” use restrictions. Other rating agency criteria prohibit use restrictions that impair value of the leasehold estate. Rating agencies hate use restrictions, but landlords and tenants often have good reasons to live with them. It makes more sense for the rating agencies to live with them too. But the appraisal (and a rating agency’s valuation and analysis) of the leasehold estate must fully take into account all use and other restrictions in
Published in eReport, Summer 2024 © 2024 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
the ground lease, as suggested in text and as actually required in the rating agencies’ underwriting process, though not in their criteria. Any valuation should not limit itself to the directly and obviously economic terms of the ground lease.
10. Some rating agency criteria say it’s enough if a memorandum will be recorded at some later date. That seems insufficient, given the occasional surprises and travails in the recording process.
11. A separate agreement, not documented as a ground lease amendment, might be executory and subject to rejection in bankruptcy.
12. Rating agencies may live with an estoppel certificate that does not meet all these tests, especially if it covers only minor issues or minor “clarifications” in the ground lease. The author disfavors such a fix. See these items in the author’s New Guide to Ground Leases: (i) Encyclopedia of Ground Leases entry on Estoppel Certificates; and (ii) the Model Estoppel Certificate
13. The estoppel certificate from the leasehold mortgage loan closing should suffice, with no need for a new one at securitization. The operation of the Minimum Protections, coupled with Depositor’s representations and warranties, should provide adequate comfort.
14. The leasehold mortgage should, of course, say much more than this, but the rating agencies don’t address that.
15. Both Moody’s and Standard & Poor’s require that no default has occurred under the ground lease. Of course they mean no uncured default, but that’s not what they say. The rating agency criteria don’t include a knowledge qualifier. If Depositor adds one that will probably not create a major issue. Depositor can gain some but not total comfort from the landlord’s estoppel certificate combined with the notification requirements in the Minimum Protections.
16. Other language in rating agency criteria should set standards for permitted exceptions.
17. Any existing fee mortgagee will need to subordinate to the ground lease.
18. Fitch says the leasehold mortgagee should always establish a lockbox to assure payment of ground rent. That seems excessive as a universal requirement. Whether to require a lockbox depends on many considerations beyond mere existence of a ground lease. Only to the extent that a leasehold mortgagee requires a lockbox or an escrow for real estate taxes and insurance premiums, the same requirement should probably apply to ground rent.
19. Rating agencies will review the terms of the ground lease for this and many other issues. They will not rely on the appraisal in the loan file to adequately identify and consider all impairments of value of the leasehold estate and all problems in the ground lease.
20. Rating agency criteria do not expressly refer to a concept like Reasonable Standards. As a practical matter, though, rating agency review of any ground lease would consider such concepts where relevant, with skepticism about any landlord involvement.
21. “Modify” would probably include “demolish.”
22. The leasehold mortgagee could certainly impose more requirements as between it and its borrower.
23. Neither this estoppel certificate paragraph nor anything else in the Minimum Protections requires the landlord to amend or “clarify” the ground lease if asked. It must be right the first time.
24. Freddie Mac allows no limit on who can be a leasehold mortgagee. A requirement to comply with Reasonable Standards should be tolerable. Moody’s seems to agree, saying only that the ground lease cannot “place commercially unreasonable restrictions” on who may hold a leasehold mortgage. Regulated lenders may be prohibited from agreeing to any restrictions on transfer.
25. A leasehold mortgagee might want to go a step further and refer instead to:
anyone whose title derives directly or indirectly (and through any
number of intervening assignments) from an Involuntary Transfer.
26. Some rating agencies accept a requirement that the landlord consent to leasehold mortgages, if that consent cannot be unreasonably withheld or has actually been granted for this particular leasehold mortgage. That seems too relaxed. The criteria should require more, as suggested in text.
27. Ground leases often (but not always) give every leasehold mortgagee the right to approve any settlement. A landlord would respond that any leasehold mortgagee: (i) already has all the rights it needs through its insurance documents and record interest in the premises; and (ii) should fear lender liability from having any separate approval right. Absence of an approval right will not necessarily be disastrous for rating purposes. A rating agency might drill down on the reliability of alternative protections for the leasehold mortgagee. Freddie Mac doesn’t want the landlord or its mortgagee involved at all. That would impair financeability of the fee estate.
28. The leasehold mortgagee itself would qualify automatically once the loan has been securitized. Rating agencies care a lot about the standards for any depository. Failure to meet them may produce a nonsecuritizable loan. The parties may wish to spell out the rating agency standards here.
29. Fannie Mae and Freddie Mac would cap the tenant’s obligation to restore at the amount of available Loss Proceeds. Why would any landlord accept that? The tenant must either restore, regardless of cost, or abandon both the ground lease and the Loss Proceeds. Freddie Mac’s ground lease checklist requires: Insurance proceeds and condemnation awards will be applied in accordance with the loan documents, which includes the application of any such proceeds/award to the mortgage.
If this supersedes any requirements for the tenant to restore, then it doesn’t work. It invites the lender to “take the money and run” –inconsistent with widespread market standards for ground leases. It is also inconsistent with Freddie Mac’s stated goal and justification for existence as a government-sponsored enterprise: helping to create and preserve multifamily rental housing.
30. Some rating agency criteria refer to the landlord’s interest in only the land. For example, Fannie Mae says the leasehold mortgagee’s share of the award “must not be less than the total award minus the value of the remainder [sic] interest in the land considered as unimproved.” But the landlord also has a valuable interest in the building, separate from its reversionary (not “remainder”) interest in the land. Any allocation of a condemnation award should recognize, respect, and compensate for the landlord’s interests in both building and land—whatever the next investor would pay for the landlord’s entire position absent a condemnation. Perhaps the value of the land is intended to take into account the value of the landlord’s claim to the building. If so, the rating agency criteria should say that.
31. Fannie Mae wants excess proceeds after restoration to go to the leasehold mortgagee. That’s wrong because the landlord should have first claim. The excess proceeds should actually go to the landlord but the rent should drop. If the rent reduction makes sense, then the rating agencies should accept this approach.
32. Multiple leasehold mortgagees are unusual, unless the loan documents allow mezzanine loans and the ground lease treats them as equivalent to leasehold mortgages. If multiple leasehold mortgagees want to expound on this paragraph, they can do that in an intercreditor agreement.
33. Some rating agency requirements refer to any termination at all. That could include a termination upon total condemnation. The new ground lease concept initially protected leasehold mortgagees against a termination for default or in an insolvency proceeding. The rating agencies would probably tolerate a new ground lease clause that acti-
Published in eReport, Summer 2024 © 2024 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
vates only upon termination for default or rejection in an insolvency proceeding.
34. Until November 2021, Moody’s wanted any new ground lease clause to expressly activate upon a rejection of the ground lease in the tenant’s insolvency proceeding. That changed on November 19, 2021, when Moody’s decided that omission of such a reference would not be credit-negative. Nevertheless these Minimum Protections include the reference, as it makes sense to do so. For more on this topic, see the author’s New Guide to Ground Leases, and particularly the Encyclopedia entry on Tenant Bankruptcy—Effect of Lease Rejection.
35. Fannie Mae requires a ground lease to say any merger of fee estate and leasehold estate does not terminate the ground lease or extinguish the leasehold mortgage. Ordinarily ground leases go further and say common ownership of the two estates simply does not cause a merger, which is preferable and more typical.
36. Fannie Mae would prohibit the landlord from terminating the lease at all for any tenant-specific defaults. That seems excessive, though perhaps Fannie Mae doesn’t really mean it, given Fannie Mae’s language on new ground leases.
37. Moody’s declares that the landlord must never, under any circumstance, be able to disturb the tenant’s possession in any way that would impair a leasehold mortgagee’s security. A broad edict of that type would imply the landlord could never even terminate the ground lease for default after complying with all leasehold mortgagee protections. Surely that was not intended.
38. Somewhere else the ground lease should require written notices.
39. This concept may raise issues under the Rule Against Perpetuities. Those issues lie beyond the Model Ground Lease Criteria. The Fannie Mae criteria say that if a tenant exercises a purchase option, then the leasehold mortgage must also become a fee mortgage. Exactly how that would work, or how it interacts with any existing fee mortgage, or what the ground lease needs to say, lies beyond the scope of these Minimum Protections.
40. In particular cases, the previous sentence might require adaptation based on the structure of the tenant’s rights.
41. This paragraph overlaps the paragraph on “leasehold mortgages.” Leasehold mortgagees and rating agencies like that double comfort. One could eliminate it. Any requirement for the landlord’s consent, even if reasonable, will be problematic. Some rating agency criteria suggest it might suffice if the landlord has consented to: (i) this particular tenant’s acquisition of the ground lease; or (ii) an Involuntary Transfer instigated by this particular leasehold mortgagee. That seems too loose. For a financeable and stabilized ground lease, the landlord should have no role at all in any ground lease assignments ever, beyond perhaps enforcing Reasonable Standards.
42. The reference to Reasonable Standards may cause concern, depending on how reasonable they are. If the Reasonable Standards fully and unquestionably comply with the definition of that term above, so they will not impair any reasonably likely ordinary sublease, they should create no significant problem.
43. Some rating agency criteria say the landlord should agree to nondisturb all space subtenants without exception. Taken literally, that would invite abuse by tenants, e.g., below-market subleases to the tenant’s brother-in-law. Those happen. Even if subleases themselves are not subject to Reasonable Standards in a particular ground lease, a cautious landlord will insist on (and a practical tenant will accept) Reasonable Standards for nondisturbance agreements.
By Timothy J. Keeler1, Mickey Leibner2, Jennifer L. Parry3,, Nicholas T. Jackson4
This article highlights CFIUS’ latest efforts to expand the scope of covered real estate transactions subject to its review.
On July 8, 2024, the US Department of the Treasury, in its capacity as chair of the Committee on Foreign Investment in the United States (CFIUS), published a proposed rule that would expand the list of national security sensitive designated “military installation” sites. Based on CFIUS’s authority to review “covered real estate transactions” involving foreign persons in proximity to designated sites, the expanded list would substantially increase the scope of real estate transactions subject to the Committee’s review. We highlight some of the new inclusions here.
The proposed rule is the latest in a string of recent Executive Branch actions taken to address the increasing concern about risks presented by foreign ownership of real estate near sensi-
tive national security sites. Specifically, the list of “military installations” was previously expanded via a final rule published on September 22, 2023 and, in May 2024, President Joseph Biden issued an Order blocking the purchase and requiring the divestment of foreign-owned real estate located near F.E. Warren Air Force Base (Read our related reports from May 2023 and May 2024). In a Treasury press release announcing the proposed rule, Assistant Secretary for Investment Security Paul Rosen acknowledged the increased focus and stated, “Today’s proposed rule is another example of CFIUS’s continuing commitment to hone our tools to protect U.S. national security, and is a significant milestone in safeguarding critical US military installations. Working closely with the US Department of Defense and other CFIUS members, we will remain responsive to the evolving nature of the risks we face to ensure we are protecting our military installations and related defense assets.”
The proposed rule includes the following key updates:
• Expand CFIUS’s jurisdiction over real estate transactions to include those within a one-mile radius around 40 additional military installations, including:
o Naval Air Station Corpus Christi, TX
o Military Ocean Terminal Concord, CA
o Joint Base Myer-Henderson Hall, VA
o Detroit Arsenal, MI
o Naval Support Facility Aguada, PR
• Expand CFIUS’s jurisdiction over real estate transactions to include those within a 100-mile radius around 19 additional military installations, including:
o Camp Grayling, MI
o Dover Air Force Base, DE
o Whiteman Air Force Base, MO
• Expand CFIUS’s jurisdiction over real estate transactions between 1 mile and 100 miles around eight military installations already listed in the regulations, including:
o Malmstrom Air Force Base, MT
o Joint Base San Antonio, TX
o Redstone Arsenal, AL
• Update the names of 14 military installations already listed in the regulations to better assist the public in identifying the relevant sites, including:
o Buckley Space Force Base (formerly Buckley Air Force Base)
o Cape Canaveral Space Force Station (formerly Cape Canaveral Air Force Station)
Parties considering a future covered real estate transaction, or an investment in or acquisition of an existing US business that holds property interests in covered real estate, are encouraged to look out for details included in the anticipated final rule and consider a filing with CFIUS. Although it is voluntary to file for most transactions subject to CFIUS jurisdiction (and all covered real estate acquisitions are voluntary), a filing followed by CFIUS approval is the only way for parties to be certain that CFIUS will not alter or roll back the transaction after closing. Written comments in response to the proposed rule are due to Treasury’s Office of Investment Security 30 days after the proposed rule is published in the Federal Register.
1. Tim Keeler joined Mayer Brown after a varied career in the US Government, serving at the Office of the US Trade Representative (USTR), the US Treasury Department (which chairs CFIUS), and the US Senate Finance Committee. He advises clients on all aspects of CFIUS work
2. Mickey Leibner helps clients navigate the intersection of regulatory and political matters. Mickey has significant experience before the Committee on Foreign Investment in the United States (CFIUS) and has advised on hundreds of transactions involving companies ranging from multinational Fortune 500 corporations to small startups
3. Jennifer Parry routinely advises clients ranging from small businesses to multinational corporations on US forced labor law requirements and compliance with US import laws and regulations, including tariff classifications, country of origin determinations, preferential duty treatment, and application of Section 301 duties.
4. Clients leverage Nic Jackson’s extensive national security experience to help them tackle complex export control, sanctions, and CFIUS matters.
By Kevin L. Shepherd and Stephen Liss1
After six months, where do we stand with the Corporate Transparency Act? This article provides an update on court challenges, open issues, and some of the challenges practitioners have encountered with this new and far reaching law.
It has been over three years since Congress enacted the federal Corporate Transparency Act (“CTA”), the groundbreaking legislation that obligates small business owners, among others, to file beneficial ownership information (“BOI”) reports with U.S.
Treasury’s Financial Crimes Enforcement Network (“FinCEN”). The reporting of beneficial ownership information officially kicked-off on January 1, 2024, and in the six months since then a number of developments—and challenges—have arisen. This article will summarize a few of them.
1. Court Challenges to the Constitutionality of the CTA . Just 60 days after the CTA’s effective date, the U.S. District Court for the Northern District of Alabama ruled on March 1, 2024 that the CTA is unconstitutional. The plaintiffs, National Small Business United (d/b/a National Small Business Association) (“NSBA”) and Isaac Winkles, an NSBA member and small business owner, filed suit in November 2022, alleging the CTA’s mandatory beneficial ownership disclosure requirements exceed Congress’s authority under Article I of the Constitution and violate the First, Fourth, Fifth, Ninth, and Tenth Amendments. The trial court ruled in favor of the plaintiffs and declared the CTA unconstitutional because it cannot be justified by any of Congress’s enumerated powers. Accordingly, the court granted the plaintiffs’ summary judgment motion and permanently enjoined the defendants from enforcing the CTA against the plaintiffs.
The federal government promptly appealed the decision to
the federal Court of Appeals for the Eleventh Circuit. To date, numerous amici curiae have filed briefs in the appeal. Amici include Congressional members seeking a ruling to reverse the district court’s ruling, while 22 states filed a brief in support of the district court’s decision. Oral arguments are scheduled for September 27, 2024. This litigation will not be resolved before January 1, 2025, the CTA filing deadline for entities in existence prior to January 1, 2024. Even if the Eleventh Circuit issues a ruling in 2024, it’s all but certain the losing party will appeal.
Although FinCEN stated it will comply with the injunction not to enforce the CTA “for as long as it remains in effect[],” FinCEN was crystal clear that non-enforcement applies only to the plaintiffs in that case. This means only Isaac Winkles, reporting companies for which Isaac Winkles is the beneficial owner or applicant, the NSBA, and members of the NSBA (as of March 1, 2024). Note that FinCEN included only NSBA members as of March 1, 2024, so an entity seeking to join the NSBA in hopes of shielding itself from CTA enforcement may not succeed. By implication, all other entities must still comply with the CTA and are required to submit beneficial ownership and company applicant information to FinCEN.
Since FinCEN will continue to enforce the CTA against all other parties, reporting companies should continue to comply with the CTA unless additional guidance is provided.
Business groups and others have filed at least six other lawsuits in federal district court challenging the constitutionality of the CTA. The National Small Business United court did not issue a nationwide injunction against the enforcement of the CTA, but a lawsuit filed on December 29, 2023 in the United States District Court for the Northern District of Ohio seeks such a nationwide injunction. That court has stayed proceedings pending the outcome of the Eleventh Circuit appeal. Robert J. Gargasz, Co., LPA et al. v. Yellen et al., 1:23-cv-02468 (D. Ohio). The first federal case challenging the constitutionality of the CTA to be filed after the National Small Business United court decision was filed on March 15, 2024 in the United States District Court for the District of Maine. Boyle v. Yellen et al., 2:24-cv00081-LEW (D. Me.). Less than two weeks later, the Small Business Organization of Michigan, along with other plaintiffs, filed a complaint on March 26, 2024 in the United States District Court for the Western District of Michigan (Southern Division) challenging the constitutionality of the CTA. Small Business Ass’n of Michigan v. Yellen et al., 1:24-cv-00314 ECF (D. Mi.). On May 28, 2024, a complaint was filed in the United States District Court for the Eastern District of Texas (Sherman Division) seeking the invalidation of the CTA and a nationwide injunction prohibiting the federal government from enforcing the CTA and its reporting regulations. Texas Top Cop Shop, Inc. et al. v. Garland et al. 4:24-cv-00478 (D. Tex.). The following day, May 29, 2024, a complaint was filed in the United States District Court for the District of Massachusetts, alleging, among other things, that the CTA infringes on the privacy rights of business owners
in violation of the Fourth Amendment to the federal Constitution. Black Economic Council of Massachusetts, Inc. v. Yellen et al., 1:24-CV-11411. The most recent case is one brought on June 27, 2024 in the United States District Court for the District of Oregon. Firestone et al. v. Yellen et al., 3:24-cv01034-SI. These cases will need to be closely monitored to see if the trial courts reach the same conclusion as the National Small Business United court on the merits and seek to go further in their relief.
2. Surprisingly Smooth Rollout—So Far. The prospect of a FinCEN computer crash was not out of the question in light of the estimated 32+ million filings projected by FinCEN to be made in 2024. The initial rollout has been smooth from all appearances and there has been no public reports of system crashes or malfunctions. The robust nature of FinCEN’s BO IT system will continue to be tested as more initial filings and updated filings are made this year. The request for, and issuance of, FinCEN Identifiers has also not been the subject of any public reports of system crashes or malfunctions. As of April 30, 2024, however, fewer than 2 million BOI Reports haven been filed with FinCEN, which is dramatically lower than the number of filings that were projected to be filed by that date. BOI Reports will need to be filed at a far more rapid rate to achieve full compliance before the end of 2024.
3. Uncertainty on Scope of Various Exemptions. The CTA contains 23 exemptions for reporting companies. FinCEN has sought to clarify the scope of certain of these exemptions in its Small Entity Compliance Guide and periodic FAQ releases, but there are numerous unanswered questions concerning the precise scope of these exemptions and their availability in a myriad of factual scenarios. Set forth below are a couple of examples highlighting this uncertainty.
a. Subsidiary Exemption . The Subsidiary Exemption focuses on subsidiaries, not parents or other affiliates, of exempt entities. To qualify for the Subsidiary Exemption, the entity’s ownership interests must be controlled or wholly owned, directly or indirectly, by any of the enumerated 18 exempt entities. Note that “wholly” modifies “owned,” but does not modify “controlled.” The question thus arises whether a subsidiary whose ownership interests are partially controlled by an exempt entity qualifies for the Subsidiary Exemption. FinCEN answered this question in the negative in its January 12, 2024 FAQ update (Question L.6): “ If an exempt entity controls some but not all of the ownership interests of the subsidiary, the subsidiary does not qualify. To qualify, a subsidiary’s ownership interests must be fully, 100 percent owned or controlled by an exempt entity.” FinCEN explained that “control of ownership interests means that the exempt entity entirely controls
all of the ownership interests in the reporting company, in the same way that an exempt entity must wholly own all of a subsidiary’s ownership interests for the exemption to apply.”
b. Tax-Exempt Entity Exemption . An entity qualifies for the Tax-Exempt Entity Exemption if, among other things, it is described in section 501(c) of the Internal Revenue Code (“IRC”) (determined without regard to IRC section 508(a)) and exempt from tax under IRC section 501(a). At issue is whether a newly formed section 501(c)(3) entity is “exempt from tax” under IRC section 501(a) if it has not yet received an IRS determination letter. There appears to be a lack of consensus among lawyers on whether a potential 501(c)(3) charity can claim the Tax-Exempt Entity Exemption while awaiting the determination letter. The preamble to the BOI reporting rule did not address this specific issue, thus the conservative approach would be for a potential 501(c)(3) charity to file its initial BOI Report with FinCEN and, once the entity receives the IRS determination letter, file an amended BOI Report with FinCEN stating that the reporting company is now exempt.
4. Fact Patterns Not Envisioned by FinCEN. A statutory and regulatory regime as complex and wide reaching as the CTA could not—despite efforts by legislators and regulators—address every conceivable permutation arising from countless corporate transactions and entities. To take just one example, assume that a corporation formed before January 1, 2024 ceases to exist because it failed to maintain its good standing in its state of creation and its corporate charter is forfeited. Assume further that in April 2024 the corporation files for reinstatement after paying any applicable fees and penalties and filing the required reinstatement documentation with the state secretary of state. Based on these assumed facts, does the filing of the articles of reinstatement constitute the creation of a new entity and thus trigger the company applicant provisions of the CTA or, rather, does the reinstatement relate back to the corporation’s original date of creation? Most states have reinstatement statutes that are expressly designed to allow a corporation that was forfeited to address the issue that caused the forfeiture and be reinstated and, once reinstated, to be treated as the same corporation. On that basis, because the company was created before January 1, 2024, it would appear that a company applicant would not have to be identified when the reinstated corporation files its initial BOI Report before the January 1, 2025 reporting deadline.
5. Trusts and the CTA. While common law trusts are not reporting companies, they often own reporting companies. The proper way to attribute reporting companies owned by a trust is far from clear. Anyone with the power to “dis-
pose of trust property” will be attributed ownership. This could include not only the trustee, but a beneficiary with an inter-vivos power of appointment, a grantor with the right to exchange assets of equal value with the trust, as well as investment or distribution advisors if the trust is structured as a directed trust.
Where a corporate trustee is serving, employees of the corporate trust company (e.g., trust officers, members of an investment committee, or members of a distribution committee) may be treated as beneficial owners of reporting companies. Recently issued FAQ D.16 says the owners of a corporate trustee will also be treated as owning a pro-rata amount of any reporting companies held by trusts under the control of the corporate trustee. In other words, if someone owns 25% of a corporate trustee they will be deemed to own 25% of every LLC, limited partnership, corporation, or other form of reporting company under the supervision of that corporate trustee.
If an individual has the right to remove the current trustee and name a successor it’s unclear if that person will be treated as having indirect control over interests in a reporting company owned by the trust.
6. Community Property. If one spouse in a community property state holds legal title to 25% of a reporting company, it’s unclear how that interest should be reported. At a recent American Bar Association conference a representative of the Treasury Department was asked about this issue and was unable to offer any guidance. Arguments could be made for reporting this interest as being owned entirely by one spouse, as entirely owned by both spouses (meaning 25% each), or as being owned equally by the spouses (meaning 12.5% each).
7. Implications of Outsourcing BOI Report . A question that continues to arise is whether a lawyer or reporting company should outsource the population and completion of a BOI Report to a third party service provider. Lawyers will certainly provide guidance of which individuals should be reported as beneficial owners, but lawyers have differing views on whether they should recommend that clients use the services of third party service provider that provide a platform or service for populating the BOI Report. From a cost efficiency standpoint, that approach may appear attractive. On the other hand, would the attorney have any exposure if the third party service provider’s system is hacked or has a security breach? At a minimum, before recommending the services of a third party service provider, it may be prudent for the lawyer to first inquire into the data security provided by the third party to determine whether it meets industry standards.
8. Use of FinCEN Identifiers. Rather than submit the personally identifiable information (“PII”) for a beneficial owner or company applicant to the reporting company,
FinCEN permits a beneficial owner and company applicant to submit their FinCEN Identifier to the reporting company. The reporting company would then include the FinCEN Identifiers for the beneficial owners and company applicants in the BOI Report to be submitted to FinCEN. By obtaining a FinCEN Identifier from FinCEN and providing that number to the reporting company, the beneficial owner and company applicant can reduce the risk their PII will be compromised. Those obtaining a FinCEN Identifier should understand, however, that they will have an obligation to update their PII on file with FinCEN should any changes occur, such as a change in their address or name. Currently, there is no process to deactivate a FinCEN Identifier. Once FinCEN issues a FinCEN Identifier, the individual (and not the reporting company) has an ongoing obligation to notify FinCEN within thirty days of any changes in the PII on file with FinCEN.
9. Identifying Documents. The BOI disclosed under the CTA includes an identifying document, which must be either a non-expired passport, a non-expired identification document issued for by a government for the purpose of identifying the individual, or a non-expired driver’s license. We have learned that many elderly people don’t have any such document, making compliance impossible. It has also been noted that some identifying documents are reissued with the same identifying number while others, including a U.S. passport, provide a different number with each renewal. It is generally simpler to use an identifying document like a driver’s license whose number does not change, since that avoids the need to update your BOI with FinCEN when the document is renewed. On the other hand, a passport often has less BOI than a driver’s license.
10. Lead Counsel and Local Counsel: Who Is the Company Applicant? A complication may arise when lead counsel engages local counsel on a transaction involving the creation of one or more entities in the local jurisdiction. If lead counsel instructs local counsel to prepare and file a certificate of formation to create an LLC in the local jurisdiction, local counsel will instruct his or her paralegal to directly file the creation document with the state Secretary of State’s office. The paralegal will thus be a company applicant. As between lead counsel and local counsel, which one is “primarily responsible” for creating the LLC and thus assuming the role as the other company applicant? In any event, lead counsel and local counsel should agree on who will be the second company applicant in this scenario.
11. Need for Administrative Oversight—Time for a CTA Compliance Officer? Reporting companies subject to the CTA will need to monitor and timely report changes in beneficial ownership. Beneficial owners may change their names through marriage or divorce, moving from one res-
idence to another, or obtaining a new drivers license in another state if such owners move. Someone within an organization, who may assume the role of “CTA Compliance Officer,” needs to implement an effective process to monitor and timely report these changes to FinCEN. The reporting company should determine who will maintain the BOI (and how) at the entity level, and identify the protective measures that should be employed to ensure the confidentiality and privacy of that PII. The reporting company should exercise care in both maintaining and transmitting the BOI to FinCEN.
12. Overreporting? Because of the severe civil and criminal penalties for non-compliance with the CTA and its implementing regulations and notwithstanding the willful violation standard, reporting companies may err on the side of being overly inclusive in identifying those who are beneficial owners by virtue of exercising “substantial control” over the reporting company. One obvious risk of overreporting is that changes in the identified beneficial owners will need to be timely updated with FinCEN as changes occur.
13. Emergence of State-Level CTAs. Some states have embarked on an effort to adopt a state-level variation of the CTA. These “mini-CTAs” are generally not as broad as the federal CTA, but they present potential compliance burdens and costs that will further complicate compliance with another BOI reporting regime. New York enacted its “LLC Transparency Act” that is limited to LLCs (both domestic and foreign) and, initially, contained a public database feature. The final version of the LLC Transparency Act removed the public database provision and limited access to government agencies and law enforcement. The California Senate recently passed S.B. 1201, which would require corporations and LLCs to reveal their beneficial ownership information in a publicly available database. This bill was withdrawn when it reached the California Assembly.
Law enforcement and others consider the CTA a key breakthrough in bringing a level of entity transparency to the United States. The benefits and burdens of beneficial ownership disclosure—perceived or actual—remain to be seen, but lawyers and their clients now have to deal with the reality of complying with a complex reporting regime that continues to pose nuanced compliance issues.
1. Kevin L. Shepherd is a partner with Venable LLP in Baltimore, Maryland and Washington, DC. Stephen Liss is a partner with Dungey Dougherty PLLC in New York City. This information is not intended to be and should not be treated as legal advice and is for informational purposes only.
By Rachel Wasserman1, Thomas A. Tietz, Esq.2 and Martin M. Shenkman, Esq.3
Rachel Wasserman, Thomas A. Tietz, and Martin M. Shenkman discuss actions needed for business owners in light of the recent Supreme Court ruling in Connelly v. United States. Based on this decision, while life insurance owned by a corporation to effect a buyout is included in the value of the business, there is no reduction for the obligation to redeem a deceased shareholder’s shares.
On June 6, 2024, the United States Supreme Court issued a landmark ruling in Connelly v. United States, unanimously deciding that a closely held business’s obligation to redeem a deceased equity owner’s shares does not constitute a corporate liability which reduces the fair market value of the corporation’s shares for estate tax purposes.4 This decision overturns a prior lower Court decision that held that the redemption obligation reduces the value of life insurance proceeds included in the business valuation.5 It clarifies the valuation of corporate assets in estate planning and has significant implications for closely
held businesses and both their existing and forthcoming buysell agreements. This article will explore the case and practical implications that practitioners may discuss with clients.
Brothers Michael and Thomas Connelly owned Crown, a C Corporation, with Michael holding 77.18% of Crown and Thomas owning the remaining 22.82%. The two brothers entered into a buy-sell agreement, granting the surviving brother — Thomas in this case — the option to purchase the decedent brother’s (Michael’s) shares from his estate. If this option was not exercised, as occurred here, the corporation had a binding obligation to redeem the deceased brother’s shares.
To fund the buy-sell agreement, if the surviving brother chose not to exercise his option to purchase, the corporation obtained $3.5 million of life insurance. The stock purchase agreement provided two mechanisms for determining the redemption price of the shares. The primary mechanism employed a methodology commonly used in buyout arrangements for closely held businesses, a certificate of agreed value. With this approach, the shareholders were to agree on a value for the business at the end of each tax year and memorialize that agreed value in a certificate. If the brothers failed to agree on a set value, the secondary mechanism required that the brothers obtain two or more appraisals of fair market value. At the time of Michael’s death, the brothers had not executed either mechanism.
Upon Michael’s death, Thomas did not exercise his option to redeem Michael’s stock. Consequently, once the corporation received the life insurance proceeds, it redeemed Michael’s shares. As neither mechanism for determining the redemption price was utilized, the Connellys determined the corporation’s
total value to be $3.89 million, with Michael’s interest valued at $3 million. The remaining $500,000 of the insurance payout was used to cover the corporation’s operating expenses.
The life insurance proceeds were deemed a corporate asset that increased the value of the entity interests held in the decedent’s estate and thereby may increase the estate tax due. This result was consistent with Treasury Regulations, which require that nonoperating assets, like life insurance, that are not included in the fair market value of the business worth be added to the business’s value6. The inclusion of the life insurance proceeds was not in contention in the case, as apparently that had been agreed to by the parties. The issue that the Supreme Court had to address was whether the valuation of the business, inclusive of the life insurance proceeds, was offset or reduced in part by the obligation the company had to repurchase the deceased brother’s shares.
The Supreme Court held that “…redemption obligations are not necessarily liabilities that reduce a corporation’s value for purposes of the federal estate tax...”7 This holding distinguishes this type of buyout arrangement from a standard corporate liability, which would be taken into account for net asset value and offset the inclusion of insurance proceeds in the valuation of the decedent’s interest in the entity. It is interesting to note that the Supreme Court did not say that a buyout obligation could never reduce the value of the company.
The Court stated in footnote 2: “We do not hold that a redemption obligation can never decrease a corporation’s value. A redemption obligation could, for instance, require a corporation to liquidate operating assets to pay for the shares, thereby decreasing its future earning capacity. We simply reject Thomas’s position that all redemption obligations reduce a corporation’s net value. Because that is all this case requires, we decide no more.”8
Practitioners should consider communicating with clients to inform them of the Connelly decision so clients are not unintentionally subjected to the negative estate tax complications and results of the Connelly decision. This might take the form of direct communication to clients who the practitioner is aware have redemption arrangements in place, general newsletter and email blasts to client databases, and perhaps revising form agreements and form cover letters to note this issue so that clients will be informed.
While Connelly creates potential estate tax issues, most estates are not subject to the estate tax at all. With the exemption set at $13.61 million per person (2024), potential estate tax ramifications may not be, ignoring state estate or inheritance taxes, an actual issue.9 If the value of each equity owner’s estate is under the estate tax exemption, it may not be necessary to restructure the insurance-funded redemption agreement. The
extent to which the life insurance adds to the entity’s value may not trigger federal estate tax. However, states with lower estate tax thresholds or an inheritance tax may cause a tax to be incurred. The redemption is scheduled to be reduced by half in 2026 and may be changed by future legislation, so caution is in order. Continued monitoring of the redemption agreement is necessary to evaluate tax law changes or valuation changes that may create future estate tax implications.
Some commentators have suggested that a cross-purchase arrangement is the solution to the Connelly issue. It may be, but the decision process is more nuanced and complex post-Connelly
If including the value of the entity-owned insurance could trigger estate tax, it might be preferable to restructure the buyout arrangement as a cross-purchase arrangement as an alternative to a redemption agreement. In a redemption agreement, the entity buys back the economic interest of the deceased shareholder. In contrast, a cross-purchase agreement involves the shareholders purchasing the shares directly of a deceased shareholder. In a cross-purchase agreement, however, the insurance policy proceeds are not included in the valuation of the company, so the Connelly issue would seem to be avoided. In that type of structure, the value of the insurance will not affect the entity’s value as the entity has no interest in the life insurance policies.
Additionally, the surviving partner benefits from a step-up in the cost basis to fair market value upon the death of the shareholder whose shares he is obliged to purchase.10 This distinction is particularly important for smaller clients, given the high estate tax exemption. As many clients are unlikely to exceed the exemption threshold, practitioners should evaluate the income tax consequences of the client’s buy-out arrangement.
However, before undertaking such restructuring, business owners need to consider the costs associated with new documentation for the cross-purchase arrangement, the costs of unwinding the existing redemption agreement, and the costs and availability of new life insurance.
Cross-purchase agreements also require each equity owner to pay insurance premiums on the lives of other equity owners. With little in the way of security and ensured compliance, business owners may feel more secure that the life insurance premiums will be paid and the policy enforced when the entity is paying.
Further, cross-purchase agreements can be unwieldy, especially as the number of shareholders increases. For instance, twelve life insurance policies would be required for a cross-purchase agreement in a company with four shareholders, making the arrangement costly and complex to maintain and impractical to execute.
The number of policies required may be potentially reduced by creating an insurance partnership or limited liability company (“LLC”) to own the policies. The life insurance LLC should be formed as a partnership to avoid any transfer for value issues under section 101(a) of the Internal Revenue Code.11 If the proceeds are payable to an LLC and allocated to the surviving partners for a cross-purchase buyout rather than to the company, at first look, it might seem that the Connelly problem has been avoided. However, that does not appear to be the case, as the Connelly reasoning would seem to apply to the insurance partnership or LLC, and a pro-rata portion of the insurance partnership or LLC would have to be included in the deceased shareholder’s estate.
A careful review of the structure and terms of the client’s buyout arrangement is imperative. Was an existing redemption buy-sell agreement drafted with different assumptions prior to Connelly? What might the impact of that be? For example, if a buy-sell redemption agreement establishes the valuation at the fair market value as determined for estate tax purposes, that will now result in the inclusion of the insurance with no offset for the redemption obligation. Prior to Connelly, the equity holders may have assumed that a different economic result would have occurred.
For example, if a corporation is valued at $10 million and the insurance payout is worth $5 million, because the value of the insurance policy is included in the value of the company, half of the equity interests in the company would be worth $7.5 million. The company would then be required to pay the estate based on this inflated value. Therefore, the wording of the buyout arrangement is crucial. Practitioners may consider advising clients that every redemption agreement be reread to ensure that the client is paying what they anticipate.
Finally, practitioners may wish to communicate with clients to ensure that they are aware of any tax apportionment issues. Clients must consider which beneficiaries/bequests they intend to bear the burden of any estate tax and address that in their will or revocable trust. What if, post-Connelly, there is a phantom value included in the estate that is not paid for in the buyout? Does the client want that heir to bear the estate tax on the phantom buyout price? The instrument could stipulate that whoever receives the insurance payout must pay apportioned estate tax.
Another Reminder of The Importance of Adhering to Formalities
The Connelly case also serves as a reminder to practitioners, and especially to clients, that the formalities of business and estate planning arrangements must be respected by the parties if the taxpayers expect the IRS to respect the arrangements. Although these issues were not of note in the Supreme Court’s ruling, which was generally limited to the question of the redemption
obligation not offsetting entity value, they were discussed in the lower Court opinions. The arrangements the brothers agreed to required that they memorialize a value each year in a certificate. They did not do that. The agreement required obtaining an appraisal. They did not do that either. There has been no shortage of recent cases reminding taxpayers of the vital importance of respecting formalities and arrangements.12 Cases have also reminded taxpayers of the importance of independence. In Connelly, the surviving brother was also the executor and the sole surviving shareholder. He orchestrated most of the events in the case and came to a valuation determination with the deceased brother’s family. There was no independence. That is not prudent. In contrast, in the Levine case, the taxpayer victory was in part based on the use of independent and capable fiduciaries.13 So, while the Supreme Court holding and this discussion have focused on the issue of no assured reduction in value for the redemption obligation, the important practical practice lessons from the history of the Connelly case should not be overlooked.
There are several estate planning implications from the Connelly decision that practitioners should consider addressing with clients. Among these considerations is the inclusion when valuing the company of redemption buyouts funded with insurance proceeds payable to the company without any offset in value for the redemption obligation, the benefits and drawbacks of substituting a redemption buyout with a cross-purchase agreement, and the potential of creating an insurance LLC to try and mitigate the complexity of a cross-purchase agreement. There is also the risk of the inclusion of a pro-rata portion of the insurance LLC in the deceased owner’s gross estate inflated by the insurance value and not reduced by the buy-out obligation.
Careful planning and drafting may help mitigate some of the implications raised by the Connelly decision.
1. Rachel is a rising third-year law student at Cardozo School of Law.
2. Thomas is an associate with the law firm Martin M. Shenkman, P.C. practicing in New Jersey and New York.
3. Martin is the principal at the law firm Martin M. Shenkman, P.C. practicing in New Jersey and New York.
4. Connelly v. United States, U.S., No. 23-146 (2024).
5. Estate of Blount v. Commissioner, 428 F.3d 1338 (11th Cir. 2005); See also, Rev. Rul. 83-147, 1983-2 CB 157; Rev. Rul. 83-148, 1983-2 CB 158
6. Treas. Reg §20.2031-2(f)(2).
7. Connelly v. United States, U.S., No. 23-146 (2024).
8. Connelly v. United States, U.S., No. 23-146 (2024).
9. Internal Revenue Service, Estate Tax, https://www.irs.gov/businesses/small-businesses-self-employed/estate-tax .
10. 26 U.S. Code § 1014.
11. 26 U.S.C. § 101(a).
12. See, Smaldino v. Comr., T.C. Memo. 2021-127 (November 10, 2021); Sorensen v. Commissioner, Tax Ct. Dkt. Nos. 24797-18, 2479818, 20284-19, 20285-19 (decision entered Aug. 22, 2022).
13. Levine Est. v. Comr., 158 T.C. No. 2 (February 28, 2022).
Published in eReport, Summer 2024 © 2024 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
By Kaye Spiegler PLLC - Gabrielle C Wilson, Howard N Spiegler, Lawrence M Kaye and Yael M Weitz1
This article provides a helpful synopsis of intellectual property rights, which includes rights that may survive a copyright owner’s death for a term of years. An estate planner should be aware of the basics, especially if they represent a copyright owner.
Intellectual property rights
Creator copyright
Does copyright vest automatically in the creator, or must the creator register copyright to benefit from protection?
Copyright generally vests in the creator once the work is fixed in a tangible medium of expression without the need for copyright registration. Registration, however, is a prerequisite to filing a lawsuit for copyright infringement. A copyright registra-
tion certificate may be presumptive evidence of ownership of a valid copyright. Further, for a copyright owner to be eligible for an award of statutory damages and attorneys’ fees, the registration must have occurred before the copyright infringement or within three months after the first publication of that work.
Copyright duration
What is the duration of copyright protection?
For works created on or after 1 January 1978, copyright protection extends from creation of the work and endures for a term consisting of the life of the author and 70 years after the author’s death. For joint works, the term of copyright is the life of the last surviving author plus 70 years. For an anonymous work, a pseudonymous work or a work made for hire, the copyright endures for a term of 95 years from the year of its first publication or a term of 120 years from the year of its creation, whichever is shorter. The term of copyright for pre-1978 works is complex and depends on several factors. Thus, an attorney should be consulted to determine duration of the copyright for these works.
Display without right holder’s consent
Can an artwork protected by copyright be exhibited in public without the copyright owner’s consent?
While the copyright owner has the exclusive right to display a work publicly, copyright law carves out a special limited exception (tied to the first sale doctrine) for the display of a copy of a work rightfully owned without the authority of the copyright owner, to display that copy publicly, either directly or by the projection of no more than one image at a time, to viewers present at the place where the copy is located.
Reproduction of copyright works in catalogues and adverts
Can artworks protected by copyright be reproduced in printed and digital museum catalogues or in advertisements for exhibitions without the copyright owner’s consent?
An owner of copyrighted artwork (with some limitations, including the exception of a fair use) has the exclusive rights to reproduce the copyrighted work in copies and distribute copies of the copyrighted work. It is thus advisable and common practice that museums seek permission from the copyright owner in connection with the reproduction of images of the copyrighted work in the museum’s publications and marketing for exhibitions.
Copyright in public artworks
Are public artworks protected by copyright?
Public artwork, including ‘street art’, is afforded the same copyright protection as other artwork that is fixed in a tangible medium of expression.
Artist’s resale right
Does the artist’s resale right apply?
Although efforts have been made over several years to enact federal legislation providing for resale royalty rights, the United States does not recognise resale royalty rights. Under US copyright law’s first sale doctrine, once an original copyrightprotected work of authorship is sold, the buyer and all subsequent purchasers are free to resell that work (but not any underlying copyright rights in the work) without having to provide any compensation to the original artist or author. Artists may contract for resale royalty rights, which has recently become a more popular practice. NFTs configured through ‘smart contracts’, for example, may automatically pay out royalties to the original artist with every future sale of the NFT on a specific platform.
Moral rights
What are the moral rights for visual artists? Can they be waived or assigned?
The United States acceded to the Berne Convention for the Protection of Literary and Artistic Works, an international treaty that governs and protects moral rights (among others), in 1988. In 1990, Congress enacted the Visual Artists Rights Act of 1990 (VARA).
VARA offers an artist of a ‘work of visual art’ the right of attribution – specifically, the right to:
• claim authorship of that work;
• prevent the use of his or her name as the author of any work of visual art that he or she did not create; and
• prevent the use of his or her name as the author of the work of visual art in the event of a distortion, mutilation or other modification of the work that would be prejudicial to his or her honour or reputation.
VARA also provides the right of integrity, specifically the right to:
• prevent any intentional distortion, mutilation or other modification of the work that would be prejudicial to the artist’s honour or reputation; and
• prevent any destruction of a work of recognised stature, and any intentional or grossly negligent destruction of that work.
VARA rights extend for the life of the author for works created on or after its effective date, 1 June 1991, and for works created before 1 June 1991 to which the author still holds title on the same date, the life of the author plus 70 years. For joint works (two or more authors), VARA rights endure for the life of the last surviving author.
VARA rights may not be transferred but may be waived by a written instrument signed by the author.
1 Kaye Spiegler PLLC - Gabrielle C Wilson, Howard N Spiegler, Lawrence M Kaye and Yael M Weitz
Tom Cronkright
Tom Cronkright summarizes an analysis of liability in growing incidents of wire fraud in real estate transactions. He emphasizes the critical role of closing agents and attorneys in implementing robust security measures and the limitations of current legal frameworks in addressing modern fraud challenges.
Cybercriminals have taken aim at U.S. real estate transactions at an alarming rate. Data from the FBI reports a surge in losses from business email compromise within real estate, reaching $446 million.
Due to the multiple parties involved and the high financial stakes, real estate remains a prime target for bad actors attempting to divert closing funds. The public MLS information provides insights into active deals and the historically high median sale price of homes offers an enticing opportunity for
scammers seeking to steal money that is exchanged during the home buying and selling process. At this point, most real estate professionals have experienced an actual or attempted fraud in a transaction.
Posing as sellers, title agencies, and lenders, scammers trick victims into wiring funds to fraudulent accounts. In one year’s time, CertifID’s Fraud Recovery Services fielded 463 requests for help from victims of wire fraud, with median losses per incident totaling $70,000 for seller impersonation, $72,000 for fraudulent down payment instructions, and $257,000 for fake mortgage payoff instructions.
Given the substantial losses and increasing sophistication of these scams, effective risk management requires a careful examination of the legal theories underpinning the question: Who bears the liability when wire fraud occurs in real estate transactions?
To provide clarity, we analyzed numerous recent wire fraud cases, exploring common threads in current court opinions, case precedents, and material issues of fact.
As the shift from paper-based to electronic money transfers accelerates, a pivotal question arises: Are banks legally obligated to implement enhanced security measures to shield consumers from wire fraud?
Uniform Commercial Code (UCC) Article 4A, adopted in various forms across all states, governs electronic funds transfers executed by financial institutions, corporations, high-net-worth individuals, and payment processors.
Article 4A delineates the rights and responsibilities of senders and recipients in electronic transfers. However, it does not adequately address contemporary issues such as social engineering, where individuals are deceived into voluntarily transferring funds to fraudsters. Notably, Article 4A lacks mandates for account name matching and comprehensive vetting of new accounts beyond basic “know your customer” (KYC) protocols. Furthermore, it imposes no requirements to monitor or report suspicious activities or unusual behaviors associated with accounts.
Judicial decisions consistently favor banks in interpreting Article 4A. In Tracy v. PNC Bank1, the court held that banks are not obligated to match names on accounts and need only adhere to their account holder agreements to avoid liability.
The inadequacy of the current regulatory framework to protect real estate and title companies from bank account misuse and fraud is vividly illustrated in Approved Mortgage v. Truist2 After a security breach in Approved Mortgage’s computer network, fraudulent mortgage payoff statements were used in two refinance transactions, diverting funds to accounts at Truist Bank that were unrelated to the intended mortgage servicer. Approved Mortgage sued Truist for negligence, citing violations of the Indiana Uniform Commercial Code and common law negligence, alleging that Truist failed to implement adequate security procedures to detect suspicious account activity.
The court granted summary judgment in favor of Truist on all counts, asserting: “Our recognition of the common law negligence action, asserted by the plaintiff in his individual capacity, would contravene the essential objective of UCC Article 4A.” This ruling underscores that Article 4A is designed to establish clear and definitive guidelines for banks in executing electronic transfers on behalf of customers without the threat of negligence liability.
For expanded duties to be imposed on banks to curb the wire fraud epidemic, such obligations should be legislated and regulated rather than judicially imposed. While state and federal courts clearly delineate banks’ responsibilities to consumers under Article 4A, ambiguity persists regarding what constitutes “reasonable security measures” necessary to protect consumers from fraud.
In Fragale v. Wells Fargo3, a homebuyer fell victim to a buyer-side scam where closing funds were diverted to a thief’s Wells Fargo account and promptly withdrawn. The court ruled in favor of Wells Fargo, stating that as a non-customer with no special relationship, Wells Fargo had no duty under Pennsylvania law to prevent unreasonable risk of harm to the wire transfer originator. The court emphasized that merely proving the foreseeability of harm was insufficient under negligence, rejecting claims that Wells Fargo should have monitored or prevented fraudulent activities through a newly opened account.
“This court declines to make banks guarantors of their clients’ trustworthiness,’’ the judge stated, reinforcing the view that banks are not required to safeguard consumers or assume liability for cyber fraud facilitated through accounts opened for illicit purposes. The court deemed such a duty overly burdensome for banks.
Similarly, in King v. Wells Fargo4, the defendant invoked Chapter 93A of the Massachusetts General Laws, which sets standards for businesses to prevent unfair and deceptive practices. This includes a high standard of evidence for plaintiffs to prove wrongdoing in cases involving alleged negligence or deceptive conduct by banks. The courts concluded that the plaintiff’s loss was caused by the criminal who absconded with the funds, not by the “unfair and deceptive conduct” of Wells Fargo. According to the ruling, “A plaintiff must demonstrate that the losses sustained were the foreseeable consequence of the defendant’s deception.”
Nicklas v. Professional Assistance LLC5 highlighted discrepancies among states, noting: “Not all federal circuits appear certain that the lack of adequate security measures equates to an ‘unfair’ act.” The court also suggested an alternative legal approach, observing that “Some states allow recovery for failure to notify of a data breach.”
Another potential counterargument to Article 4A is the “aiding and abetting” claim, pertinent in cases where the defendant is notified of suspected fraud but fails to freeze funds. In Thuney v. Lawyer’s Title of Arizona6, the court stated, “Chase released the funds to fraudsters even though Chase knew about the alleged fraud. Plaintiffs have stated a plausible aiding and abetting claim.” While the claims were not dismissed outright, plaintiffs must still provide sufficient evidence to meet plausibility standards.
Our analysis indicates that UCC Article 4A provides a structured framework governing the rights and obligations of parties in electronic funds transfers. Courts have consistently upheld banks’ adherence to this framework, with no successful claims observed against banks where plaintiffs sought to extend a bank’s responsibilities beyond Article 4A. It may be time to review these established standards to address evolving challenges such as social engineering scams by requiring account name matching and enhanced monitoring of suspicious activities to better protect consumers.
In the current legal landscape, consumers who lose their life savings to wire fraud in real estate transactions frequently resort to litigation, seeking damages from the professionals they hired to safeguard their interests. The wire fraud related cases are flooding into state and federal courts, and while the proximate cause of these losses is the scammer who diverted the wire transfer
Published in eReport, Summer 2024 © 2024 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
and disappeared, courts are left with the unenviable position of determining and allocating legal fault among the remaining parties, all of whom are victims to some extent. The most common theories of liability include negligence, breach of fiduciary obligations, professional negligence, and breach of contract.
The complexity of these cases and the evolving standards of care are pushing courts towards favoring greater protections for consumers. These cases suggest a novel fact pattern and an evolving standard of care, indicating a trend toward imposing more stringent duties on real estate professionals.
In Hoffman v. Atlas Title7, the Ohio Court of Appeals recognized the need to address the responsibility for escrow fraud, allowing claims of negligence and breach of fiduciary duty to proceed despite dismissing the breach of contract claim. This case, along with Mago v. Arizona Escrow & Financial Corp. 8 and Bain v. Platinum Realty9, highlights the evolving interpretation of fiduciary obligations in real estate transactions, permitting plaintiffs to recover financial losses under tort law due to inferred fiduciary duties from closing instructions and the receipt and disbursement of closing funds in escrow and trust accounts.
Similarly, Kenigsberg v. 51 Sky Top Partners, LLC10 illustrates the substantial legal and financial consequences of breaches of trust and security in real estate transactions, where seller impersonation scams led to over $1.5 million in losses and subsequent legal action when a property owner’s vacant land was sold without his knowledge or consent and the construction of a new home commenced.
Real estate professionals, including escrow, title, and real estate attorneys, are expected to exercise due diligence in managing and disbursing funds held in escrow or trust accounts. Courts generally regard these professionals as “legal custodians” in a “position of trust,” thereby elevating their fiduciary responsibilities. Notably, some rulings, such as Wheeler v. Clear Title Company Inc.11, suggest that no written agreement is necessary to impose this heightened negligence standard.
As plaintiffs seek to establish liability due to a breach of a duty of care, courts have highly scrutinized their expert witnesses and their ability to speak to state-specific legal standards. For example, the Oklahoma court of appeals in Cook v. McGraw Davisson Stewart LLC12 required expert testimony on email security standards, contrasting sharply with Arizona’s decision in the Mago case, which found these matters understandable by laypersons.
In Otto v. Catrow Law13, plaintiffs faced difficulties in establishing issues of fact due to insufficient expert testimony. While consumers share some responsibility in safely managing the transfer of their closing funds, real estate professionals must uphold a reasonable duty of care in these complex transactions. The evolving case law indicates an increasing judicial willingness to impose stringent standards on these professionals to protect consumers from wire fraud.
For more detailed case analyses and insights, visit CertifID.com/ sued
When a wire fraud loss occurs, the professionals involved in the transaction often look to their insurance providers for assistance to cover actual losses or the cost of defense when litigation ensues from a third party. Unfortunately, the most common forms of insurance coverage found in errors and omissions (E&O), and fidelity and cyber policies often fail to provide the necessary protections to fully transfer the direct or indirect risk of wire fraud from the insured to the insurer. This has been underscored in recent court decisions where insurance policy language was meticulously examined and strictly enforced by the judiciary.
Insurance agents may offer assurances of coverage for wire fraud or defense costs when a client loses their life savings after falling victim to such fraud. However, the insuring agreement will ultimately govern coverage, conditions, and limits, as the “four corners rule” is clinically applied in these analyses.
In Authentic Title Services v. Greenwich Insurance14, Authentic Title Services sought reimbursement after an email spoofing scam resulted in a substantial transfer of real estate loan funds to a fraudulent account. The court upheld Greenwich Insurance’s denial of coverage, stating: “for any claim… based upon or arising out of the actual or alleged theft as such coverage was not provided under the insuring agreement.”
Similarly, in Helms v. Hanover Insurance15, the federal district court of Arizona affirmed this position as it stated: “The [insurance policy] exclusion’s plain language… states that no coverage is provided for claims based on or arising out of the theft, stealing, conversion, or misappropriation of funds.”
The role of the involved parties is also crucial in determining the outcome of insurance-related claims. For instance, in Star Title Partners v. Illinois Union Insurance Co.16, the court ruled against Star Title because Capital Mortgage Services was not classified as a “customer, client, or vendor,” thereby excluding the fraudulent communication from policy coverage.
In all reviewed cases, courts have consistently applied the “four corners rule,” strictly interpreting insurance agreements based on exclusions, conditions, or defined terms that delineate the scope of protection.
These rulings underscore the importance of thoroughly understanding the precise terms and conditions within insurance policies. Real estate professionals must recognize that while insurance agents may provide assurances, the explicit language within the insuring agreement will ultimately determine the extent of coverage, and wire fraud losses are often excluded or significantly limited in coverage leaving it a self-insured risk profile.
Published in eReport, Summer 2024 © 2024 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
With the increasing prevalence of wire fraud in the real estate industry, legal and title professionals must play a proactive role in implementing robust security measures to protect their clients and organizations from these sophisticated schemes. Effective protection against fraud requires a multi-layered approach that includes education, standardized procedures, advanced technology, detailed response planning, and comprehensive insurance coverage.
Regular training sessions for employees, clients, and partners are essential in raising awareness about wire fraud prevention methods. Staying informed about the latest tactics used by cybercriminals targeting real estate transactions is critical. Distributing educational materials that detail these schemes and providing clear safety protocols ensures that all parties understand the risks and their roles in preventing fraud. This includes employees, referral partners, and clients.
2.
Developing and maintaining standardized operating procedures (SOPs) that address emerging threats and incorporate best practices in fraud prevention is crucial. These SOPs should be well-documented, easily accessible, and clearly communicated to all employees and internal stakeholders. Regular updates ensure they remain effective against evolving fraud tactics.
Investing in advanced verification tools to authenticate the real identity of transaction participants and banking details before processing wire transfer payments adds a vital layer of security. Implementing automated layers of security to detect and alert when suspicious activities or deviations from standard transaction processes occur enables quick responses to potential threats, enhancing the overall security framework and mitigating potential direct or indirect losses.
4. Incident Response Planning
A comprehensive incident response plan is essential for addressing fraud when it occurs. This plan should outline specific steps to take once fraud is detected, including notifying affected parties, freezing transactions, and initiating recovery efforts. Regular simulation drills to test the effectiveness of the response plan ensure all team members are prepared to act promptly in a real fraud scenario, significantly improving recovery prospects.
5. Comprehensive Insurance Coverage
Regularly reviewing insurance policies to understand their scope and identify any gaps that could leave the organization vulnerable is critical. Exploring options for first-party insurance
coverage designed specifically to protect against losses from wire fraud can provide an additional safety net.
In consumer wire fraud litigation, real estate professionals must navigate the intricate complexities of large-scale transactions, extensive communications, fund movements, and the involvement of numerous licensed experts. This environment allows plaintiff attorneys to inundate defendants with exhaustive discovery, motion practice, and trial preparation.
As legal custodians, real estate professionals have a fiduciary duty to exercise due diligence in managing and disbursing funds. Courts are increasingly recognizing the heightened responsibility of these professionals to protect clients from fraud. Understanding and fulfilling these fiduciary obligations is crucial to mitigate legal risks and protect clients’ interests.
Regularly reviewing insurance policies to understand their scope and identify potential gaps is vital. Exploring first-party insurance coverage specifically designed to protect against wire fraud losses can provide an additional safety net. However, reliance on insurance should be part of a broader risk management strategy rather than the sole line of defense.
As the threat of wire fraud continues to grow, real estate professionals must adopt a proactive and comprehensive approach to security. This includes vigilance, adaptability, robust security protocols, and thorough risk management. By doing so, they can better safeguard their clients and organizations against the expensive consequences of wire fraud.
For deeper insights and a comprehensive analysis of these pivotal issues, visit CertifID.com/sued to access the full report. Explore the tools and support CertifID offers to help protect your clients from wire fraud.
Tom Cronkright is the Executive Chairman of CertifID, a technology platform designed to safeguard electronic payments from fraud. He co-founded the company in response to a wire fraud he experienced and the rising instances of real estate wire fraud. He also serves as the CEO of Sun Title, a leading title agency in Michigan. Tom is a licensed attorney, real estate broker, title insurance producer, and nationally recognized expert on cybersecurity and wire fraud.
1. Tracy v. PNC Bank, N.A., No. 2:20-CV-1960, 2024 WL 665227 (W.D. Pa. Feb. 16, 2024).
2. Approved Mortgage Corporation v. Truist Bank, No. 1:22-cv-00633JMS-TAB, 638 F.Supp.3d 941 (S.D. Ind. Nov. 2, 2022), appeal filed (7th Cir. Dec. 1, 2022).
3. Fragale v. Wells Fargo Bank, N.A., Civil Action No. 20-1667, 480 F. Supp. 3d 653 (E.D. Pa. Aug. 19, 2020).
4. King v. Wells Fargo Bank, N.A., Civil Action No. 19-cv-10065-ADB, 2019 WL 3717677 (D. Mass. Aug. 7, 2019).
5. Nicklas v. Professional Assistance, LLC, No. 18-CV-0066-SWS, 2018 WL 8619646 (D. Wyo. Sept. 26, 2018).
6. Thuney v. Lawyer’s Title of Arizona, No. 2:18-cv-1513-HRH, 2019 WL 467653 (D. Ariz. Feb. 6, 2019).
7. Hoffman v. Atlas Title Solutions, Ltd., No. 14-23-04, 2023-Ohio-1706, 214 N.E.3d 1271 (Ohio Ct. App. May 22, 2023).
8. Mago v. Arizona Escrow & Financial Corp., No. 1 CA-CV 19-0753, 2021 WL 829259 (Ariz. Ct. App. Mar. 4, 2021).
9. Bain v. Platinum Realty, LLC, No. 16-2326-JWL (D. Kan. Feb. 14, 2018), 2018 WL 862770.
10. Kenigsberg v. 51 Sky Top Partners, LLC, No. 3:23-cv-00939 (D. Conn. Apr. 5, 2024).
11. Sharon Wheeler, an Individual, Appellant, v. Clear Title Company, Inc., a Nevada Corporation, Respondent. No. 83684-COA, No. 84613COA, Court of Appeals of Nevada, Filed March 24, 2023.
12. Warren Cook v. McGraw Davisson Stewart, LLC, et al., Case No. 119,216, Court of Civil Appeals of Oklahoma, Division No. 4. Filed April 5, 2021.
13. Otto v. Catrow Law PLLC, 243 W.Va. 709, 850 S.E.2d 708 (2020).
14. Authentic Title Services, Inc. v. Greenwich Ins. Co., No. 18-4131 (D.N.J. Nov. 17, 2020), 2020 WL 6739880.
15. Julie-Anne Helms, et al. v. Hanover Insurance Group Inc., et al., No. CV-20-01728-PHX-DWL, United States District Court, D. Arizona. Signed 08/20/2021.
16. Star Title Partners of Palm Harbor, LLC v. Illinois Union Insurance Company, No. 8:20-cv-2155-JSM-AAS, 2021 WL 4509211 (M.D. Fla. Sept. 1, 2021).
Published in eReport, Summer 2024 © 2024 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
REAL PROPERTY FELLOWS
CASSANDRE DAMAS
Atlanta Volunteer Lawyers Foundation Atlanta, GA
LEXI GIBSON
Osterbrock & Associates, LLC Atlanta, GA
TRUST & ESTATE FELLOWS
LEAH BOSTON
Law Office of Leah Boston LLC College Park, MD
MEGHAN GORDON
Arnall Golden Gregory LLP Atlanta, GA
CASEY HOLLOWAY
Miles & Stockbridge Baltimore, MD
BRANDON WOLFF
Brandon Lee Wolff, Esq. King of Prussia, PA
SAMANTHA CONTRERAS
Croke Fairchild Duarte & Beres Chicago, IL
SAMUEL DANGREMOND
Curtis, Mallet-Prevost, Colt & Mosle LLP New York, NY
CARLY JOHNSON
Maslon LLP Minneapolis, MN
NATASHA MCFARLAND
Birchstone Moore LLC Washington, D.C.
ARIA RESORT & CASINO
CLE Conference Dates: Wednesday, April 30 - Thursday, May 1, 2025
Leadership Meeting Dates: Thursday, May 1 - Friday, May 2, 2025
Central Time (US and Canada)
September 3, 2024 10:00 AM CT
Join Zoom Meeting
https://americanbar.zoom.us/j/98015508525?pwd=7D46O4ulgXp5BVFjihf0wOKnS7JUzA.1
Meeting ID: 980 1550 8525
Passcode: 825523
September 11, 2024 01:00 PM CT
Join Zoom Meeting
https://americanbar.zoom.us/j/94468502489?pwd=WlYNIxjKjjlFw2hdX3osk13ZieImOz.1
Meeting ID: 944 6850 2489
Passcode: 817717
A recent highlight is the Income and Transfer Tax Group’s comments to the IRS on the newly proposed regulations covering foreign trusts and large foreign gifts. The Income and Transfer Tax Group Co-Chair, Marianne Kayan, mobilized and worked with RPTE COGS to create an action plan. It unfolded for RPTE to work alongside the Tax Section to issue joint comments. A team of 24 collaborated to meet the IRS comment deadline of July 8, 2024. The comments team was also grateful for Carlyn McCaffrey’s review on behalf of RPTE COGS. Several new practitioners participated, and these individuals were able to greatly impact the project by harmonizing comments and editing for the nuanced required formatting. Several proclaimed that this project renewed their appreciation of collaboration in professional organizations— what a win for ABA RPTE!
Trust and Estate Groups and Committees (americanbar.org)
The Hospitality Group focuses on the varied and numerous issues involving the development, structuring, management and operation of resorts, hotels, and common interest communities such as condominiums, timeshares, and planned communities. There are three committees within the Group, each of which specifically addresses its designated subject matter (although the reis often a significant amount of overlap between the committees). Each committee pursues the unique issues presented in the irrespective areas of practice, including such issues as the acquisition, financing, development, operation, management and disposition of these special types of development.
Real Property Groups and Committees (americanbar.org)
This Group focuses on legal aspects of non-traditional investors (including international investors, life insurance companies and other environmentally and socially conscious investors and land trusts) and investment structures (including REIT’s and other equity investment vehicles, partnerships and limited liability companies). We have committees that concentrate their efforts on each of these areas, as well as a committee focused on federal taxation of real estate. The committees are active in presenting programs at the national CLE conference and e-CLEs and writing articles for publication.
Real Property Groups and Committees (americanbar.org)
VIRTUAL | September 24-25, 2024
4-25, 20
Our Virtual Real Property Essentials CLE Program, September 24-25 was meticulously designed for newer practitioners (or seasoned practitioners new to real estate) as your gateway to understanding core concepts important to real estate transactions. Over the course of two immersive days, our experts will cover the “nuts and bolts” of purchase and sale agreements, conducting due diligence, reviewing title and survey, negotiating commercial leases, and selecting the proper entity type for your transaction, among other fundamental topics.
By attending, you will gain essential knowledge and practical skills that are crucial for excelling in this dynamic field.
WHY ATTEND?
1. Comprehensive Overview: Dive into core concepts and best practices, tailored for aspiring and beginner real estate attorneys.
2. Expert-Led Sessions: Learn from seasoned professionals who bring real-world experience and insights.
3. Networking Opportunities: Connect with peers and industry leaders to build valuable relationships.
WHO SHOULD ATTEND?
1. Newly Licensed and Junior Attorneys: Kickstart your career with a solid foundation and practical skills.
2. Seasoned Attorneys Expanding Into Commercial Real Estate: Expand your existing expertise as a lawyer into topics unique to the real estate practitioner and stay current with evolving industry standards.
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), Keri Brown (Trust and Estate Editor), or RPTE staff members Bryan Lambert or Monica Larys. Are you interested in reading FAQs on how to get published in the eReport? Download the FAQs here. We welcome your suggestions and submissions!
FREQUENTLY ASKED QUESTIONS BY PROSPECTIVE AUTHORS RTPE eReport
What makes eReport different from the other Section publications? The most important distinction is that eReport is electronic. It is delivered by email only (see below) and consists of links to electronic versions of articles and other items of interest. Since eReport is electronic, it is flexible in many ways.
How is eReport delivered and to whom?
eReport is delivered quarterly via email to all Section members with valid email addresses. At the ABA website, www.americanbar.org, click myABA and then navigate to Email, Lists and Subscriptions. You have the option of receiving eReport. Currently almost 17,000 Section members receive eReport.
What kind of articles are you looking for?
We are looking for timely articles on almost any topic of interest to real estate or trust and estate lawyers. This covers anything from recent case decisions, whether federal or state, if of general interest, administrative rulings, statutory changes, new techniques with practical tips, etc.
How long should my article be?
Since eReport is electronic and therefore very flexible, we can publish a two page case or ruling summary, and we can publish a 150 page article. eReport is able to do this since the main page consists of links to the underlying article, therefore imposing no page restraints. This is a unique feature of eReport.
How do I submit an article for consideration?
Email either a paragraph on a potential topic or a polished draft – the choice is yours – to the Editor, Robert Steele, at rsteele@ssrga.com , and either our Real Estate Editor, Cheryl Kelly, at CKelly@ thompsoncoburn.com , or our Trust and Estate Editor, Keri Brown, at keri.brown@bakerbotts.com
Do I need to have my topic pre-approved before I write my submission?
Not required, but the choice is yours. We welcome topic suggestions and can give guidance at that stage, or you may submit a detailed outline or even a full draft. You may even submit an article previously published (discussed below) for our consideration.
Do citations need to be in formal Bluebook style?
eReport is the most informal publication of the Section. We do not publish with heavy footnotes and all references are in endnotes. If there are citations, however, whether to the case you are writing about, or in endnotes, they should be in proper Bluebook format to allow the reader to find the material. Certainly you may include hyperlinks to materials as well.
Can I revise my article after it is accepted for publication?
While we do not encourage last minute changes, it is possible to make changes since we work on Word documents until right before publication when all articles are converted to pdf format for publication.
What is your editing process?
Our Editor and either the Trust and Estate Editor or the Real Estate Editor work together to finalize your article. The article and the style are yours, however, and you are solely responsible for the content and accuracy. We will just help to polish the article, not re-write it. Our authors have a huge variety of styles and we embrace all variety in our publication.
Do I get to provide feedback on any changes that you make to my article?
Yes. We will email a final draft to you unless we have only made very minor typographical or grammatical changes.
Will you accept an article for publication if I previously published it elsewhere?
YES! This is another unique feature of eReport. We bring almost 17,000 new readers to your material. Therefore, something substantive published on your firm’s or company’s website or elsewhere may be accepted for publication if we believe that our readers will benefit from your analysis and insight. In some cases, articles are updated or refreshed for eReport. In other cases, we re-publish essentially unchanged, but logos and biographical information is either eliminated or moved to the end of the article.
How quickly can you publish my article?
Since we publish quarterly, the lead time is rarely more than two months. If you have a submission on a very timely topic, we can publish in under a month and present your insights on a new topic in a matter of weeks.
