Probate & Property - January/February 2022, Vol. 36, No. 1

MOVING FORWARD, GENTRIFICATION

SINGLE ASSET REAL ESTATE FOR BANKRUPTCY PURPOSES

NECESSARY ENGAGEMENT LETTER CLAUSES

VOL 36, NO 1 JAN/FEB 2022

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

ART DEALERS— WEALTH TRANSFER CONSIDERATIONS

34TH ANNUAL RPTE NATIONAL CLE CONFERENCE Virtual | In Person

Dallas, TX | Four Seasons Resorts and Club April 26-29, 2022

1x1 and 2x3 f

The 34th Annual RPTE National CLE Conference, taking place virtually and in person, April 26-29, 2022. We hope you’ll plan to register early for the Conference, which will bring together leaders from both the real property and trusts and estates arenas for four days of cutting-edge programming. Our continuing legal education sessions will feature a faculty of leading practitioners addressing the changes and developments in real property, trust, 34th Annual RPTE and estate law.

National CLE Confere

Virtual | In Person | April 26-2

Visit www.rptecleconference.com

Four Seasons Resort and Club |

34th Annual RPTE National CLE Conference Virtual | In Person | April 26-29, 2022

Four Seasons Resort and Club | Dallas, Texas

PROFESSORS’ CORNER A monthly webinar featuring a panel of professors addressing recent cases or issues of relevance to practitioners and scholars of real estate or trusts and estates. FREE for RPTE Section members!

Register for each webinar at http://ambar.org/ProfessorsCorner

Tuesday, January 11, 2022 12:30-1:30 pm ET

MINE! HOW THE HIDDEN RULES OF OWNERSHIP CONTROL OUR LIVES Tuesday, February 8, 2022 12:30-1:30 pm ET

WENDY GIBBONS, Old Republic National Title Insurance Co. GARY R. KENT, Meridan Land Consulting, LLC

MICHAEL A. HELLER, Columbia Law School JAMES SALZMAN, University of California Santa Barbara

Moderator: SHELBY D. GREEN, Elisabeth Haub School of Law

Moderator: ANDREA J. BOYACK, Washburn University

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Partner with us www.ambar.org/rptesponsorships

Published in Probate & Property, Volume 36, No 1 © 2022 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.

January/February 2022 1

CONTENTS January/February 2022 • Vol. 36 No. 1

12 24 Features 12

Departments

Art Dealers—Wealth Transfer Considerations

By Michael Duffy

24 Moving Forward, Gentrification

36

By Greyson Havens-Morris and Walter E. Block

Can a Hotel Ever Be Single Asset Real Estate for Bankruptcy Purposes?

By Jim Butler, Robert B. Kaplan, and

Nicolas De Lancie

40 Key Considerations for Home Mortgage Debt Collectors under the Consumer Financial Protection Bureau’s Final Rule

By Brian M. Mull

50 Protect Your Practice: Necessary Engagement Letter Clauses to Revisit

6

Young Lawyers Network

8

Uniform Laws Update

18

Keeping Current—Property

32

Keeping Current—Probate

57 Career Development and Wellness 60 Practical Pointers from Practitioners 61 Technology—Property 64

The Last Word

By Maria E. O’Sullivan, Laura Joy Lattman, Soo Yeon Lee, and Sahmra A. Stevenson

Published in Probate & Property, Volume 36, No 1 © 2022 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.

2

January/February 2022

A Publication of the Real Property, Trust and Estate Law Section | American Bar Association

EDITORIAL BOARD Editor Edward T. Brading 208 Sunset Drive, Suite 409 Johnson City, TN 37604

ABA PUBLISHING Director Donna Gollmer

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

Art Director Andrew O. Alcala

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

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

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

Cover

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

Managing Editor Erin Johnson Remotigue

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

Girl with a Pearl Earring by Johannes Vermeer. c. 1665. Mauritshuis, The Hague. Wikipedia Commons.

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

Departments Editor James C. Smith Associate Departments Editor Soo Yeon Lee Editorial Policy: Probate & Property is designed to assist lawyers practicing in the areas of real estate, wills, trusts, and estates by providing articles and editorial matter written in a readable and informative style. The articles, other editorial content, and advertisements are intended to give up-to-date, practical information that will aid lawyers in giving their clients accurate, prompt, and efficient service.

The materials contained herein represent the opinions of the authors and editors and should not be construed to be those of either the American Bar Association or the Section of Real Property, Trust and Estate Law unless adopted pursuant to the bylaws of the Association. Nothing contained herein is to be considered the rendering of legal or ethical advice for specific cases, and readers are responsible for obtaining such advice from their own legal counsel.

These materials and any forms and agreements herein are intended for educational and informational purposes only. © 2022 American Bar Association. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Contact ABA Copyrights & Contracts, at https://www.americanbar.org/about_the_aba/reprint or via fax at (312) 988-6030, for permission. Printed in the U.S.A.

Probate & Property (ISSN: 0164-0372) is published six times a year (in January/February, March/ April, May/June, July/August, September/October, and November/December) as a service to its members by the American Bar Association Section of Real Property, Trust and Estate Law. Editorial, advertising, subscription, and circulation offices: 321 N. Clark Street, Chicago, IL 60654-7598.

The price of an annual subscription for members of the Section of Real Property, Trust and Estate Law ($20) is included in their dues and is not deductible therefrom. Any member of the ABA may become a member of the Section of Real Property, Trust and Estate Law by sending annual dues of $70 and an application addressed to the Section; ABA membership is a prerequisite to Section membership. Individuals and institutions not eligible for ABA membership may subscribe to Probate & Property for $150 per year. Single copies are $7 plus $3.95 for postage and handling.

Requests for subscriptions or back issues should be addressed to: ABA Service Center, American Bar Association, 321 N. Clark Street, Chicago, IL 60654-7598, (800) 285-2221, fax (312) 988-5528, or email orders@americanbar.org.

Periodicals rate postage paid at Chicago, Illinois, and additional mailing offices. Changes of address must reach the magazine office 10 weeks before the next issue date. POSTMASTER: Send change of address notices to Probate & Property, c/o Member Services, American Bar Association, ABA Service Center, 321 N. Clark Street, Chicago, IL 60654-7598.

Published in Probate & Property, Volume 36, No 1 © 2022 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.

January/February 2022 3

2021 EXCELLENCE IN WRITING AWARDS The editors of Probate & Property are pleased to announce the winners of the magazine’s 2021 Excellence in Writing Awards: BEST TECHNOLOGY/LAW PRACTICE MANAGEMENT ARTICLE Real Property Recording Systems and E-Recording in the Age of COVID-19

By Thomas J. Bourguignon (May/June)

BEST CUTTING-EDGE ARTICLES REAL PROPERTY Autonomous Vehicles and Parking: Preparing for a Bumpy Road Ahead

By Andrew Palmieri, Steven Dube, and Brandon Brauer (March/April)

TRUST & ESTATE NFTs for Estate Planners: Not Just a Token Concern

By Joshua Caswell and Leigh E. Furtado (September/October)

BEST PRACTICAL USE ARTICLES REAL PROPERTY The Effect of the New 2021 Minimum Standard Detail Requirements for ALTA/NSPS Land Title Surveys on Commercial Real Estate Transactions

By Wendy Gibbons and Gary R. Kent (September/October)

TRUST & ESTATE Celebrity Estate Planning: Misfires of the Rich and Famous IV

By Jessica Galligan Goldsmith, Samuel F. Thomas, Jessica D. Soojian, Stacia C. Kroetz, David E. Stutzman, Lauren G. Dell, and Daniel J. Studin (September/October)

BEST OVERALL ARTICLES REAL PROPERTY The Impacts of the Coronavirus Pandemic on Real Estate Contracts: Force Majeure, Frustration of Purpose, and Impossibility

By George P. Bernhardt and Jack Fersko (January/February)

TRUST & ESTATE The Estate Planning for a Disrupted Life—Lessons from S.T. v. 1515 Broad Street

By Gerard G. Brew (July/August)

All articles published in Probate & Property during the current year will be eligible for the 2022 Excellence in Writing Awards. Any author interested in submitting an article should contact either Michael Sneeringer or Brent Shaffer at the addresses listed on page 3. The magazine’s “Memorandum for Authors” is posted on the ABA website at https://www.americanbar.org/content/dam/aba/administrative/real_ property_trust_estate/publications-magazine-memo-for-authors.authcheckdam.pdf.

Published in Probate & Property, Volume 36, No 1 © 2022 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.

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January/February 2022

CALLING ALL LAW STUDENTS! The Section of Real Property, Trust and Estate Law is now accepting entries for the 2022 Law Student Writing Contest. This contest is open to all J.D. and LL.M students currently attending an ABA-accredited law school. It is designed to encourage and reward law student writing on real property or trust and estate law subjects of general and current interest.

1st Place

$2,500 award

2nd Place $1,500 award

3rd Place

$1,000 award

n Free round-trip economy-class airfare and accommodations to attend the RPTE Fall Leadership meeting. This is an excellent meeting at which to network with RPTE leadership! (First place only.) n A full-tuition scholarship to the University of Miami School of Law’s Heckerling Graduate Program in Estate Planning OR Robert Traurig-Greenberg Traurig Graduate Program in Real Property Development for the 2022–2023 or 20232024 academic year.* (First place only.) n Consideration for publication in The Real Property, Trust and Estate Law Journal, the Section’s law review journal. n One-year free RPTE membership. n Name and essay title will be published in the eReport, the Section’s electronic newsletter, and Probate & Property, the Section’s flagship magazine.

Contest deadline: May 31, 2022 Visit the RPTE Law School Writing Competition webpage at ambar.org/rptewriting. *Students must apply and be admitted to the graduate program of their choice to be considered for the scholarship. Applicants to the Heckerling Graduate Program in Estate Planning must hold a J.D. degree from an ABA accredited law school and must have completed the equivalent of both a J.D. trusts and estates and federal income tax course. Applicants to the Robert Traurig-Greenberg Traurig Graduate Program in Real Property Development must hold a degree from an ABA accredited law school or a foreign equivalent non-US school.

Published in Probate & Property, Volume 36, No 1 © 2022 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.

January/February 2022 5

YOUNG LAWYERS NETWORK Operating at 10X Levels It has been said that the most successful people in the world read up to 60 books a year. Even for lawyers—who read quite a bit daily—that is a daunting task after meeting your billable hour goals, spending time with your family, and pursuing the other interests that you have outside of work. I have not been able to read nearly that many books in 2021, but I’m glad I could read at least one—Grant Cardone’s The 10X Rule: The Only Difference Between Success and Failure. The book is an inspiring read, and Cardone’s overarching point is this: highly successful people talk, think, and approach situations, challenges, and problems differently than most people. But you can duplicate the actions and mindsets of successful people to help create the same success for yourself. The following steps are a few that Cardone advocates taking to elevate your practice to the next level: 1. Have a “Can Do” Attitude.

Approach every situation with an outlook that, no matter what, you can accomplish your task. Talk in terms of explanations. Resolve issues and communicate challenges with a positive outlook.

Thinking in “10X” requires an approach to everything with an attitude that it can be done.

2. Believe that “I Will Figure It Out.” When a client (or supervising attorney) asks you to do something you do not know how to do, never reply, “I don’t know.” The For more information on the RPTE YLN, please contact: Josh Crowfoot, Chambliss, Bahner & Stophel, P.C., Liberty Tower, 605 Chestnut Street, Suite 1700, Chattanooga, TN 37450, jcrowfoot@chamblisslaw.com.

response should be, “Great question. Let me check into that and figure it out.” Even if it’s true that you do not know how to do something, you should not convey ineptitude to the client. You have to resolve yourself to finding the solution or bringing in someone who can assist.

3. Persist until Successful. The ability to persist on a given path regardless of setbacks, unexpected events, bad news, and resistance is a trait common to those who make it. Train yourself to do whatever is necessary to ensure that you are in the best mental, emotional, and financial position to persevere. You will find yourself on the list of the most successful.

4. Take Risks. Take enough risk to create the success you want and need. Most people never go far enough in getting recognized, getting attention, and making a big splash. Allow yourself to be criticized, looked at, and seen by the world. Taking risks can be challenging for lawyers, who tend to be conservative and risk-averse by nature. But we’re talking about risk associated with business development, not putting your clients at risk.

5. Take Massive Action. A significant component of thinking in 10X is taking massive action. Your ability to act will be a major factor in determining your potential success. Taking action is a discipline that you should spend time on daily. If you need to reach out to 10 potential clients to secure one, reach out to 100 instead. In effect, multiply your efforts much more than you think you need to.

6. Habitually Commit. Whatever goal it is that you are trying to attain, be “all in.” Commitment is a sign that someone pledges completely to a position, issue, or action. When you commit to ensuring success for yourself, your family, your firm, or a project, it means that you will do whatever is necessary to make that pledge a reality and fulfill your commitment. With the 10X mindset, commitments are not something you negotiate with or on which you can “give up.” Commit as though you are already successful, and demonstrate the commitment to everyone you work for and with.

7. Focus on “Now.” The 10X Rule requires that you take immediate action in massive quantities. You must acquire the discipline, muscle memory, and achievements that result from taking enormous action while others think, plan, and procrastinate. According to Cardone, procrastination is the ultimate weakness to achieving the next level of success. Developing a habit of “acting now” rather than when the timing is “just right” (the timing will never be perfect) is a crucial tenet of the 10X Rule.

8. Embrace Change. Successful people look at how the world is shifting and apply their observations to improving their operations and growing their advantage. The willingness to accept change is an excellent quality of the successful.

9. Be Goal-Oriented. According to Cardone, far too many people spend more time planning what

Published in Probate & Property, Volume 36, No 1 © 2022 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.

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January/February 2022

YOUNG LAWYERS NETWORK

they will get at the grocery store than they do on setting the most important goals of their lives. If you don’t say focused on your goals, you will spend your life achieving the objectives of other people—particularly those who are goal-oriented. The ability to remain focused on the goal and keep your orientation on achieving the goal is vital to success.

10. Be Interested in Results. Successful people don’t value effort, work, or time spent on an activity; they value results. In the end, the results are what matter. Don’t

pat yourself on the back for trying but save your rewards and accolades for actual accomplishment.

Results (not efforts)—regardless of challenges, resistance, and problems—are a primary focus of the successful.

11. Have Big Goals and Dreams. Successful people dream big and have immense goals. They are not “realistic.” Cardone advises reading everything you can about great people and the accomplishments of great companies. Surround yourself with everything you can that inspires you to think big, act

big, and reach your full potential.

12. Commit First—Figure It Out Later. The 10X mindset means getting 100 percent behind whatever it is you are committing to before you figure out every detail.

This level of commitment is difficult for attorneys to do because they are detail-oriented by nature.

Although this approach can seem counterintuitive, the basis is that creativity and problem-solving are stimulated only after a person fully commits to the goal. n

The Editorial Board of Probate & Property magazine is interested in reviewing manuscripts in all areas of trust and estate or real property law. Probate & Property strives to present material of interest to lawyers practicing in the areas of real property, trusts, and estates.

Authors should aim to provide practical information that will aid lawyers in giving their clients accurate, prompt, and efficient service.

Manuscripts should be submitted to the appropriate articles editor: FOR REAL PROPERTY: FOR TRUST & ESTATE: Brent C. Shaffer Michael A. Sneeringer Young Conaway Stargatt & Taylor, LLP Porter Wright Morris & Arthur LLP Rodney Square, 1000 N. King Street 9132 Strada Place, 3rd Floor Wilmington, DE 19899-0391 Naples, FL 34108 bshaffer@ycst.com MSneeringer@porterwright.com On our website (www.americanbar.org/groups/real_property_trust_estate/publications/ probate-property-magazine/) click on the links under the "Probate & Property Resources" section for complete author guidelines and submission requirements.

If you have any questions, please email erin.remotigue@americanbar.org.

Published in Probate & Property, Volume 36, No 1 © 2022 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.

January/February 2022 7

UNIFORM LAWS U P D AT E 2021 Legislative Update The COVID-19 pandemic that shut down many state legislatures in 2020 had a reduced effect in 2021. The number of bills passed was still lower than the average for recent years but greater than in 2020 when many legislatures adjourned in mid-session to comply with socialdistancing restrictions.

Unsurprisingly, lawmakers responded to their constituents’ needs and prioritized bills that could help stimulate economic activity and mitigate pandemic-related hardships. The mostenacted uniform law in 2021 was the Revised Uniform Law on Notarial Acts (RULONA), the latest version of which includes provisions for remote notarization. Estate planners and real estate practitioners alike benefitted from new options for clients to execute documents without exposing themselves to possible infection from close contact with other persons. More states are likely to follow suit in 2022 to accommodate the masses of people now working and conducting business remotely.

Arizona, Kansas, New Hampshire, New Jersey, New Mexico, Oregon, and Pennsylvania enacted RULONA last year, bringing the total number of enactments to 17. RULONA bills were also introduced in Connecticut, Delaware, and Rhode Island but failed to pass and may be reconsidered in 2022. Many states continued to operate under executive orders that temporarily permitted remote notarization, remote witnessing, or both. The sharp increase in demand for remote notarization services is likely to persuade the remaining states to authorize the procedure permanently.

RULONA allows notaries licensed in the Uniform Laws Update Editor: Benjamin Orzeske, Chief Counsel, Uniform Law Commission, 111 N. Wabash Avenue, Suite 1010, Chicago, IL 60602.

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

enacting state to offer remote notarization services with appropriate safeguards to ensure verification of the identity of the signer and the integrity of the parties’ documents.

The Uniform Electronic Wills Act (UEWA) was enacted in Colorado, North Dakota, and Washington last year, and UEWA bills were introduced in Idaho and Virginia. This act modernizes the law of will execution by permitting electronic documents and remote witnessing. The UEWA has now been adopted in four states, and four other states enacted non-uniform laws authorizing electronic wills before the Uniform Law Commission (ULC) approved UEWA in 2019.

Four states adopted the Uniform Fiduciary Income and Principal Act (UFIPA), which the ULC approved in 2018 as an update of the widely adopted Uniform Principal and Income Act of 1997. Last year Arkansas, Colorado, Kansas, and Washington joined Utah in modernizing their trust accounting laws by enacting UFIPA. UFIPA includes a new article governing unitrust conversion, which provides more flexibility and comprehensiveness than any previously existing unitrust statute.

The Uniform Partition of Heirs Property Act (UPHPA) continued to gain attention in 2021 as legislators

attempted to address the issue of land loss through abusive partition actions.

UPHPA provides procedural and substantive protections to the owners of “heirs property,” a form of ownership in which at least some of the owners inherited property as tenants in common, often without probate and with clouds on title from unknown heirs.

Seven states and the District of Columbia introduced UPHPA bills, though only the California bill had been signed into law at press time. Eighteen states and the US Virgin Islands have adopted the UPHPA to date, and the number is likely to continue growing because the law has proved to function as intended to reduce land loss in the states that enacted it. In addition, the United States Department of Agriculture implemented a new loan program in 2021 for owners of heirs property to borrow the funds necessary for legal expenses to clear their title and return the property to productive use.

The program gives a preference to applicants from states that have adopted the UPHPA. The new Uniform Easement Relocation Act was approved by the ULC in July 2020 and introduced in five states in the first sessions after its publication: Colorado, Nebraska, Nevada, Utah, and West Virginia. Only the Nebraska bill has been signed into law, though the others are expected to be reintroduced or carried over to 2022.

The Revised Fiduciary Access to Digital Assets Act (RUFADAA) is nearing universal adoption. The District of Columbia City Council enacted a version in 2021, leaving only five states that have not yet adopted the act. RUFADAA allows fiduciaries to access online accounts for the persons or estates they represent while shielding the content of some personal communications unless the account owner expressly granted

Published in Probate & Property, Volume 36, No 1 © 2022 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.

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January/February 2022

UNIFORM LAWS U P D AT E

Published in Probate & Property, Volume 36, No 1 © 2022 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.

January/February 2022 9

UNIFORM LAWS U P D AT E

permission to the fiduciary to review the contents.

Oklahoma upgraded its financial power of attorney law by adopting the Uniform Power of Attorney Act, (UPOAA), which was also introduced in Massachusetts and the District of Columbia. UPOAA is now the law in the majority of the United States.

New Hampshire became the thirty-eighth state to adopt the Uniform Real Property Electronic Recording Act (URPERA) in 2021. URPERA authorizes local recording offices to accept deeds and related documents for recording electronically, following state-established standards.

Hawaii finished a years-long review of the Uniform Trust Code (UTC) and became the thirty-sixth UTC state in 2021. Three other recent trust acts continue to gain enactments: The Uniform Powers of Appointment Act was adopted in Nebraska and Washington, the Uniform Trust Decanting Act in Maine and Montana, and the Uniform Directed Trust Act in Florida and Montana.

The Uniform Commercial Real Estate Receivership Act (UCRERA) was adopted in Connecticut, culminating a two-year enactment effort, and was also introduced in neighboring Rhode Island. Ten states have adopted the UCRERA to date. The Uniform Assignment of Rents Act was introduced in Michigan last year and was awaiting a hearing at press time.

Three older uniform acts were adopted by states in 2021: North Dakota became the twenty-seventh state to enact the Uniform Environmental Covenants Act, New Hampshire became the twenty-sixth state to enact the Uniform Disclaimer of Property Interests Act, and Iowa was the twentieth state to enact the Uniform Custodial Trust Act. A few other uniform RPTE acts were introduced but died on adjournment: The Revised Uniform Residential Landlord and Tenant Act in Oklahoma; the Uniform Real Property Transfer on Death Act in New Hampshire, North Carolina, and Tennessee; and the Uniform Transfers to Minors Act, adopted in 49 states plus the District of Columbia and the US Virgin Islands, again failed to pass in the fiftieth state – South Carolina.

All told, the Uniform Law Commission tracked 62 uniform bills to enact uniform RPTE acts last year, 30 of which were enacted into law. The enactment data includes activity from October 1, 2020, through September 30, 2021. Any bills enacted after September 30, 2021, will be counted as part of the Uniform Law Commission’s 2022 legislative statistics.

ULC Legislative Counsel provide support for the enactment of uniform laws in your state. For details, contact ULC Chief Counsel Ben Orzeske at (312) 4506621 or borzeske@uniformlaws.org. More information about these acts and other ULC drafting projects is available from www.uniformlaws.com. n Published in Probate & Property, Volume 36, No 1 © 2022 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.

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January/February 2022

UNIFORM LAWS U P D AT E

Published in Probate & Property, Volume 36, No 1 © 2022 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.

January/February 2022 11

Published in Probate & Property, Volume 36, No 1 © 2022 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.

12

January/February 2022

ART DEALERS— Wealth Transfer Considerations

By Michael Duffy

I

have read dozens of excellent treatises and articles on the tax and wealth planning considerations that trust and estate lawyers should keep in mind when work-

ing with artists, art collectors, and art investors. But I don’t recall any articles that focus exclusively on planning for art, antiques, and collectibles dealers. Although this article will focus on fine art dealers and fine art gallery owners (hereinafter described for convenience as “dealers”), the general concepts highlighted below are generally applicable to

istockphoto

antiques and collectibles dealers as well.

The Art of Painting by Johannes Vermeer. Wikipedia Commons.

Michael Duffy is Managing Director at Merrill Lynch Private Wealth Management.

He may be reached at mduffy2@ml.com.

Published in Probate & Property, Volume 36, No 1 © 2022 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.

January/February 2022 13

A dealer’s plan should address what to do with the fine art business assets: • transfer some or all of the business to heirs during the dealer’s lifetime • sell the business during the dealer’s lifetime • transfer the business to heirs at death • sell the business at the dealer’s death • liquidate the business at the dealer’s death

Perhaps the dearth of written materials is a natural result of so few dealers having taxable estates. Despite what a casual observer might assume by reading stories of dealers selling works of art for prices that end in seven zeros, the fine art dealer space is mostly made up of businesses that have relatively modest sales volumes. When Dr. Clare McAndrew, Founder of Art Economics and Dr. Taylor Whitten-Brown (PhD Sociology, Duke University) polled thousands of dealers (795 of whom responded) for The Art Market ]2021, An Art and UBS Report (2021) (available at https://bit.ly/3G3xLsC), they found that 64 percent of the respondents had annual sales of less than $1 million, which included 38 percent with annual sales of less than $250,000.

Only 6 percent of the dealers reported having annual sales of greater than $10 million.

The entire dealer ecosystem and the ability to compete have been severely disrupted in recent years due to the proliferation of art fairs, auction houses serving as art dealers, and the explosion of online fine-art sales platforms. Now comes a global pandemic, which has crimped sales for the majority of dealers around the world, according to the 2021 report.

The Art Dealers Association of America (ADAA) currently has nearly 190

member galleries in over 30 cities. See generally artdealers.org. Even if the actual number of dealers in the United States was 20 or 30 times the ADAA’s membership roster, because of the current estate tax exemption and the availability of certain advanced estate planning solutions, the vast majority of these dealers’ estates will not owe any estate tax. According to the IRS, in 2019 there were over 2.8 million deaths in the United States, but only 6,409 estates were large enough to file an IRS Form 706, Federal Estate (and Generation Skipping Transfer) Tax Return. And of those returns, only 2,570 remitted any estate tax. Said another way, only .09 percent of adult deaths in 2019 triggered estate tax. There is no reason to think that annual deaths among dealers in the United States would trigger a substantially different amount of estate tax returns.

Taste in Art Changes—So Too Tax Laws Note, however, that if the current 2021 estate tax exclusion amount of $11.7 million is reduced to $5 million (adjusted for inflation) in 2026 under the so-called sunset provisions of the 2017 Tax Cuts and Jobs Act (TCJA), or lowered sooner by Congress as proposed in the September 13, 2021 tax plan issued by the House Ways and Means Committee (the “2021 Tax Proposal”), the number of art dealers with taxable estates would increase—and perhaps substantially. Thus, even modestly successful dealers should consider advanced estate planning that can reduce or eliminate estate taxes under most scenarios.

Whether a dealer anticipates having a taxable estate or not, as a closely held business owner, a dealer is welladvised to be thoughtful and deliberate with his planning. If the goal is to pass his business to heirs, then in addition to tax and trust planning, it is advisable to also incorporate management succession planning solutions into the mix.

At a minimum, all dealers should have a basic suite of estate planning documents in place that speak at their incapacity or death. These documents

usually include a last will and testament, revocable trust, durable powers of attorney, and health care directives.

Although these documents are crucial in disposing of one’s person or assets, they do not reduce estate tax. The best that a last will and testament or a revocable trust can do is postpone an estate tax event until the last to die of the dealer and the dealer’s spouse. For dealers who anticipate having a taxable estate (now or in the future), there are only three strategies that can reduce an estate below whatever estate tax exemption exits at an estate tax event: personal consumption, charitable donations or bequests, and lifetime transfers to heirs.

If the dealership is co-owned with other stakeholders, then additional factors must be considered, like stakeholder agreements, bylaws (or similar governance documents), and buy-sell agreements.

If the goal is to pass the operating business to heirs, there are a number of lifetime gift strategies that should be considered. The sooner, the better in order to transfer appreciation out of the dealer’s gross estate.

As of the writing of this article, the current transfer planning environment and tax laws are extremely favorable.

To wit, the lifetime gift exemption and estate tax exemption amounts are at all-time highs; applicable federal rates (AFRs) are near all-time lows; valuation discounts for closely held businesses are currently permitted; short-term grantor retained annuity trusts (GRATs) can be designed with little or no gift tax; a properly funded dynasty trust is not subject to an automatic transfer tax every 20, 25, or 90 years; appreciated assets receive a step-up tax basis at death; and it is possible to structure completed gift trusts wherein the settlor is treated as the taxpayer for income tax purposes (i.e., intentionally defective grantor trusts (IDGTs)). The most recent draft of the revised framework for the Build Back Better Act would not disrupt or limit any of the aforementioned wealth transfer solutions.

Before 2018, it was common for practitioners to engage in lifetime

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freeze transactions but refrain from using a taxpayer’s available gift tax exemption in order to preserve the exemption for the client’s estate. But the TCJA changed the basic calculus of estate planning for larger estates by giving taxpayers until December 31, 2025, to use the newly expanded exemption amount. The case for using the exemptions before 2026 was arguably strengthened in 2019 when Treasury issued its “anti” claw-back regulation, which clarified that if a donor took advantage of the increased exemption amount and the exemption was later lowered in 2026, there would be no claw-back.

Paint-by-Numbers: Estate Planning for Taxable Estates Because of the favorable planning factors mentioned above, many estate planning pundits have referred to this moment in time as the “use it or lose it estate planning opportunity of a lifetime” for persons with a net worth as low as $5 million ($10 million if they are married) (indexed for inflation).

They are flipping the 2017 script by recommending that clients soak up their unused remaining lifetime gift exemption before engaging in freezes. In 2021 the “order of things” for larger estates might be summarized as follows:

• First, soak up the temporarily increased lifetime gift tax exemption with completed (discounted) gifts and IDGTs [e.g., dynasty trusts, spousal lifetime access trusts (SLATs), irrevocable life insurance trusts (ILITs), qualified personal residence trusts (QRPTs), etc.].

• Next, consider “freezing” some or all of the taxpayer’s remaining taxable estate by having IDGTs purchase additional assets from the taxpayer in return for promissory notes.

• Next, consider freezing some or all of the taxpayer’s estate with GRAT solutions.

• Next, consider making taxable gifts in 2021 at an effective gift tax rate of 28.875 percent versus an effective estate tax of 40 percent (or higher if Congress increases the estate tax rate in the future).

Yes, the donee will take a carryover basis on the gifted assets, but if the donee intends to keep the business, having a low tax basis becomes perhaps moot from a transfer tax perspective. Paying gift tax versus estate tax basically saves one-third on transfer taxes.

• Finally, consider acquiring life insurance within an ILIT that

could provide the estate with liquidity to pay whatever estate taxes might be triggered despite the dealer using some or all of the advanced strategies mentioned above.

Dealer—IRS Classification The IRS classifies people in the art world into four categories: artists, collectors, investors, and dealers, based upon that person’s conduct as it relates to a work of art. Each IRS category has its own unique set of tax rules. It is possible for an individual to wear all four hats and experience different tax results based upon that taxpayer’s particular conduct with respect to a piece of art. But each art-related endeavor must fall under one discrete set of tax rules, so it’s crucial that dealers keep accurate and complete business as well as personal records. If a dealer is ever challenged by the IRS, remember that the dealer has the burden of proof to demonstrate that he was not a collector or an investor. A lack of thorough records might lead to unwanted tax results. The IRS’s 2012 Art Galleries—Audit Technique Guide (https://www.irs.gov/pub/irs-utl/ artgalleries.pdf ) lays out a roadmap for dealers as to what the IRS considers when examining the activities of dealers.

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January/February 2022 15

Federal Tax Rules for Art Dealers Below is a chart that highlights some of the important federal tax rules for art dealers: Art Dealers

Art Investors

Art Collectors

Artists

Character of income

Ordinary

Capital gain

Capital gain

Ordinary

Income tax expense deduction*

Yes

Yes

No

Yes

Loss deduction**

Yes

No

No

Yes

Charitable lifetime donations†

Tax basis

FMV (Related Use & US Charity Rules must be satisfied)

FMV (Related Use & US Charity Rule must be satisfied)

Tax basis

IRC § 6166 estate tax deferral relief‡

Yes

Yes

No

Yes

*Expenses must be “ordinary and necessary” under IRC § 162. **Activities must rise above that of a mere “hobby” under IRC § 183. †

Sales tax might be triggered when a dealer donates material that was acquired under a sales tax resale certificate.

‡

Estate tax deferral must meet the strict requirements set forth under IRC § 6166.

Dealer—Functional Definition Art dealers essentially come in two forms: those with “bricks and mortar” and those with no physical presence.

Some dealers own the works that they are attempting to resell, but the vast majority of dealers simply sell works of art as an agent under a consignment agreement. Only a small fraction of dealers offer so-called blue-chip material, which generally means that they offer works from artists who are highly recognizable or by artists who have had works recently sell at fine art auctions.

The vast majority of these blue-chip dealers are reselling works. Only a small number of these art dealers function as so-called primary dealers, in which case they sell art that is coming to the market for the first time, directly from the artist’s studio.

Non–Tax Planning Considerations As with any closely held business, art dealers need to consider whether the

business should be sold or liquidated before their death, sold or liquidated at their death, or passed on to heirs. If a dealer’s heirs are not interested in the business or don’t know much about it or the art market ecosystem, it might make sense for the dealer to monetize the business before the dealer passes away, the assumption being that the dealer should be able to find a bona fide buyer more easily, and negotiate better terms for the sale, than an uninformed or uninterested heir might be able to.

There are two key competing income tax concepts that must be weighed when monetizing a closely-held business during a dealer’s lifetime. First, under current law, an entity sale would generate federal LTCG tax at a rate of only 20 percent (plus 3.8 percent surtax under the Affordable Care Act).

Second, under current law, if the dealer holds the entity until death, the entity is entitled to a step-up in tax basis under IRC § 1014. If a dealer’s entity

is a partnership, or an LLC treated as a partnership, the partnership might be eligible to make an IRC § 754 election to step up the inside basis of the entity’s assets to match the entity’s outside basis.

If the goal is to pass the operating business down to their heirs, dealers are advised to consider a number of factors that focus on management succession considerations, like: • Has the dealer asked the heirs if they actually want the business?

• Are the heirs familiar with the artists that the dealer sells, the dealer’s inventory, and the business’s consignment model?

• Do the heirs understand the art market industry?

• Does the business have a written mission statement?

• Has the dealer trained the heirs to run the business?

• Are there any key employees or

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nonfamily advisors who are critical to the future success of the business?

• Will the heirs have to relocate in order to run the business?

• Will some heirs hold voting interests yet others hold nonvoting interests?

• Should a dealer give away some or all of the dealer’s interests in the business during the dealer’s life?

After the Paints Have Been Put Away—Post-Mortem Planning Even after engaging in advanced lifetime transfer tax planning to reduce their taxable estates, if a dealer still ends up with a taxable estate and his art dealer businesses constitute at least 35 percent of the decedent’s gross estate, the dealer’s executor can make an IRC § 6166 election to defer some or all of the estate tax for up to 14 years. Under IRC § 6166, interest only can be paid to the IRS during the first four years of the loan, and then the estate must go on a 10-year repayment plan with equal principal payments plus interest.

If the deceased dealer owned several art-related businesses with at least a 20 percent ownership stake, the executor can combine the value of those endeavors to meet the 35 percent threshold for IRC § 6166 relief.

In addition to considering IRC § 6166 relief for a dealer’s taxable estate, the executor might also be able to reduce the gross taxable estate due by borrowing some or all of the money needed to pay estate tax to avoid a forced liquidation of assets.

IRC § 2053(a)(2) permits an estate to deduct the costs actually and necessarily incurred that are associated with the collection of assets, payment of debts (e.g., estate tax), and distribution of property. This section of the Code allows an executor to reduce the value of the estate by deducting the future interest payments of the loan without first having to discount such interest payments to reflect their present value based on the AFRs in effect at the time of the loan. Such lending solutions, which are intended to provide liquidity and lower estate taxes, have become

In the rare event that a dealer has a taxable estate, it may be possible to claim a blockage discount on some or all of the dealer’s inventory.

known as “Graegin loans,” after the 1988 Tax Court case that has become the seminal IRC § 2053 case that subsequent courts continue to consider (Estate of Graegin v. Comm’r, 56 T.C.M. (CCH) 387 (1988)).

The lender of a Graegin-type loan can be a commercial bank, friend, family member, or family entity. Loans from commercial banks can be somewhat difficult to obtain because the premise for asking for the loan is that the business is already strapped for cash, given the estate tax liability. Commercial lenders will want a clear path to repayment.

Most will require the executor to demonstrate that the business will have sufficient future cash flow to retire the debt. Commercial lenders will require the estate, and sometimes the heirs, to post collateral in which the bank has a priority interest. Most commercial lenders will only consider short-term loan solutions for Graegin loans that will have to be renegotiated every couple of years.

In the rare event that a dealer has a taxable estate, it may be possible to claim a blockage discount on some or all of the dealer’s inventory when appraising the dealer’s business for estate tax purposes.

Finally, it should be noted that an art dealer’s executor may face unique tail-risks when it comes to closing an estate. Dealers’ estates can be subject to a whole host of future claims by artists and patrons who might assert that the artist never got paid by the dealer, the work that was sold was not authentic (i.e., it was forged), the work had clouded title, the work was never delivered, the work that was delivered was not the item that purchasers agreed to purchase, etc. So, even if no estate taxes are due, an executor may wish to hold back a certain amount of assets in reserve for several years until the statute of limitations has run on potential claims. n

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January/February 2022 17

KEEPING CURRENT PROPERTY CASES FORECLOSURE: Fannie Mae’s nonjudicial foreclosure is not state action.

The Federal National Mortgage Association (Fannie Mae) acquired home mortgage loans that were in default and conducted nonjudicial foreclosure sales of the properties under Rhode Island law. The homeowners filed a putative class action suit against Fannie Mae and its conservator, the Federal Housing Finance Agency (FHFA), alleging deprivation of property without adequate notice and opportunity for meaningful hearings in violation of the Fifth Amendment. FHFA and Fannie Mae moved to dismiss, asserting that they were not government actors for purposes of a Fifth Amendment claim. The district court dismissed the complaint on this ground. The First Circuit Court of Appeals affirmed. Its opinion began by describing the turmoil in the housing markets that led to the creation of FHFA, pointing out that FHFA’s mission is to prevent the ultimate collapse of the government-sponsored entities (GSEs), which include Fannie Mae. See Housing and Economic Recovery Act of 2008 (HERA), 12 U.S.C. § 4511. The court explained that when a federal agency, such as FHFA, exercises one statutory power in the role of government actor, that does not make the agency a federal actor for all purposes. Here, under the succession clause of HERA, when the FHFA became the GSEs’ conservator, it succeeded to “all rights, titles, powers, and privileges of the regulated entity … and [its] assets” Id. § 4617(b)(2)(A).

One of these powers was the GSEs’ private contractual right to foreclose on Keeping Current—Property Editor: Prof.

Shelby D. Green, Elisabeth Haub School of Law at Pace University, White Plains, NY 10603, sgreen@law.pace.edu. Contributor: Prof. Darryl C. Wilson.

Keeping Current—Property offers a look at selected recent cases, literature, and legislation.

The editors of Probate & Property welcome suggestions and contributions from readers.

plaintiffs’ mortgages, and plaintiffs did not allege that the FHFA relied on any power other than the one to conduct nonjudicial foreclosures. This means that FHFA stepped “into Fannie Mae’s private shoes” and thus became a private actor. Also, Fannie Mae did not become a federal actor by virtue of the conservatorship because the government did not reserve any permanent authority over Fannie Mae. Instead, by its terms the conservatorship is temporary and for the limited purpose of “reorganizing, rehabilitating, or winding up [its] affairs,” id. § 4617(a)(2), and to take actions “necessary to put the regulated entity in a sound and solvent condition.” Id. § 4617(b)(2)(D)(i). Montilla v. Fed. Nat’l Mortg. Ass’n, 999 F.3d 751 (1st Cir. 2021).

HOMESTEAD: Truck used as shelter qualifies as homestead. Long lived in his truck where he stored his work tools and his personal items. After his truck broke down, he parked in a gravel lot owned by the city for three months, when the police told him that a city ordinance prohibited parking in one location for more than 72 hours.

He did not move the truck, so the city impounded it, and at an impoundment hearing, the magistrate waived the $44 ticket, reduced the impoundment charges from $946 to $547, and drafted a payment plan requiring Long to pay $50 per month. Long stated that he felt

“forced” to agree or risk losing his truck at a public auction. Long appealed the magistrate’s findings, arguing that the impoundment violated the excessive fines clauses of the state and federal constitutions, substantive due process, and the homestead act. The municipal court denied his claims. The superior court affirmed and reversed in part, rejecting the substantive due process claim but ruling that the impoundment costs were unconstitutionally excessive under the Eighth Amendment of the federal constitution and that the payment plan violated the homestead act.

The court of appeals concluded that the payment plan was invalid under the homestead act but rejected the claim that the impoundment and associated costs were excessive. The supreme court affirmed in part and reversed in part.

The court began by hailing the concept of homestead as a “uniquely American contribution” to real property law: “homestead exemptions are based on the notion that citizens should have a home where family is sheltered and living beyond the reach of financial misfortune and the demands of certain classes of creditors.” The court ruled that Long’s truck automatically qualified as a homestead because it was occupied personal property. The homestead act did not require Long to file a declaration; occupying the vehicle as his principal residence sufficed. Wash. Rev. Code § 6.13.040(1). Relying on historical sources going back to Magna Carta and on recent scholarship regarding the disproportionate effects of ostensibly neutral principles on certain groups, the court declared the fines excessive because they did not take into account Long’s ability to pay them. City of Seattle v. Long, 493 P.3d 94 (Wash. 2021).

INSTALLMENT LAND CONTRACTS: Statute of limitations bars vendor’s action for specific

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performance or foreclosure ten years after buyer’s last payment. In 1980, the Urbans sold 146 acres at nearly $640 per acre to their son Richard by an installment land sale contract that required 20 annual payments including interest and payment of annual real estate taxes. Richard took possession, improved the land, and periodically made payments to the sellers. The last payment Richard made was in 2001, and at that time he requested a deed from the sellers, which they did not provide. In 2018, the sellers filed suit seeking specific performance, foreclosure, or ejectment. The parties disputed what amount, if any, remained unpaid.

The trial court found that a balance due including interest of $686,183 and held that the statute of limitations barred foreclosure, but the sellers were entitled to ejectment based on their superior title. The supreme court reversed, observing that Nebraska treats land contracts as mortgage substitutes and Neb. Rev. Stat. § 25-202 places a 10-year limitation on actions to recover the property. With installment land contracts, the statute runs individually from the time each installment becomes due. Because the sellers never accelerated the debt and Richard’s last payment was made in 2001, the 10-year statute commenced at that time and ran out in 2011. The sellers were not entitled to possession based on ejectment or any other theory because they made their claim too late. Richard acquired title by adverse possession under the same 10-year statute of limitations. When he made his last payment in 2001 and demanded the deed, his possession was no longer subordinate to the sellers but became adverse.

A land-contract seller that receives an unequivocal repudiation by the buyer cannot wait more than 10 years before filing an ejectment action. Beckner v.

Urban, 962 N.W. 2d 497 (Neb. 2021).

LANDLORD-TENANT: Res judicata does not bar landlord’s action for damages in civil court after landlord recovers possession in landlord-tenant court. A landlord sued a tenant in landlord-tenant court, seeking back rent and

possession, for breach of a commercial lease authorizing the tenant to improve the leased property for the operation of a bar. The parties settled the case, with the tenant surrendering possession, and the action terminated. Later, the landlord sued the tenant and its guarantors in civil court, seeking $250,000 in damages representing back rent and costs. The tenant filed a motion to dismiss, asserting the suit was barred by res judicata. The trial court ruled for the landlord. The court of appeals affirmed.

The court explained that the doctrine of res judicata—or claim preclusion—precludes re-litigation of the same claim between the same parties. The general rule is that claim preclusion operates to bar a second action asserting claims arising out of the same transaction that the plaintiff could have raised in the first action. The court noted, however, that District of Columbia law has long recognized an exception to the rule, generally permitting landlords to obtain possession in the landlord-tenant branch and then to file a second action in the civil branch seeking damages. The court rejected the tenant’s argument that the exception should not apply because the landlord initially sought damages in the landlord-tenant action. The court saw no reason to apply a different rule to cases when a landlord initially seeks damages in the landlord-tenant action, abandons that request for relief before the trial court decides the damages issue, and then files a separate action in the civil branch seeking damages. PHCDC1, LLC v. Evans & Joyce Willoughby Trust, 257 A.3d 1039 (D.C. 2021).

LANDLORD-TENANT: Tenant may recover treble damages for wrongful eviction only with proof that landlord removed tenant unlawfully and in bad faith. Reimringer rented a house from Anderson under a lease that required first and last month’s rent and a security deposit before possession. One month later, Reimringer moved in without paying any money, the prior tenant having left the premises unlocked with the keys inside. After discovering Reimringer on the premises, Anderson

demanded payment and, following some heated exchanges, Anderson ordered Reimringer out. Reimringer moved to a nearby hotel where he and his family stayed for several weeks.

Anderson paid for their stay for three nights and rented a storage container for their personal property. Reimringer filed suit against Anderson for possession, unlawful removal, and treble damages for wrongful ouster. The trial court granted judgment for Anderson on the ground that Reimringer was not a “residential tenant” under Minn. Stat. § 504B.001(12). The trial court also held that Anderson did not act in bad faith, as required for treble damages, because he paid for some expenses on Reimringer’s behalf. The appellate court affirmed. On further appeal, the supreme court did not resolve whether Reimringer was a residential tenant, but it clarified the statutory requirements for treble damages. The court explained that a successful claim requires a showing of both unlawfulness and bad faith when a landlord removes a tenant. It is not enough that the law prohibits landlord self-help. Noting that there is no definition of bad faith in the statute, Minn. Stat. § 504B.231, the court looked to precedent and Black’s Law Dictionary to hold that bad faith means that the landlord acted dubiously or dishonestly—in a way suggesting an ulterior motive or purpose beyond a mere desire to oust the tenant. In other words, the tenant must show that the landlord wanted to inflict harm beyond merely depriving the tenant of access to the premises. The court instructed that the analysis of bad faith under the new standard should address the totality of circumstances surrounding a tenant’s unlawful removal, including actions by the landlord both before and after the removal. In sending the case back to apply the new standard, the court also cautioned that a landlord’s mistaken understanding of the law does not preclude a finding that the landlord acted in bad faith. Reimringer v. Anderson, 960 N.W.2d 684 (Minn. 2021).

REAL COVENANTS: Short-term rentals do not violate residential-use

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KEEPING CURRENT PROPERTY

covenant when renters use home for ordinary living purposes such as sleeping and eating. The Maynards bought a subdivision lot where they constructed a three-story home with five bedrooms for the purpose of rental to short-term guests for profit. Restrictive covenants for the subdivision limited use to “residential purposes,” including “normal home occupations and offices of recognized professions and bed and breakfast uses.” Further, construction in the subdivision was “restricted to family or residential recreation type dwellings.”

The Wilsons, neighboring property owners, filed suit seeking to enjoin the Maynards’ usage based on violation of the covenants. The circuit court granted summary judgment to the Maynards, and the Wilsons appealed. In a case of first impression, a divided supreme court noted that courts from other jurisdictions have consistently held that use of a home for eating, sleeping, and recreation for any duration is determinative of whether a property is used for residential purposes, regardless of the owner’s receipt of rental income. The court recognized that conclusion was consistently reached whether the court considered the covenant language to be ambiguous or unambiguous. In this case, the court agreed with the parties that the covenant in dispute was unambiguous. The court followed the nearly universal position that such rentals are allowed when the covenant language does not address the term of the rentals.

The Maynards’ use was consistent with the common meaning of “residential purposes.” Similarly, the construction of a multi-bedroom vacation home was consistent with the plain language of the covenant requiring family or residential dwellings. Wilson v. Maynard, 961 N.W.2d 596 (S.D. 2021).

RECEIVERS: Receiver appointed to collect rents to apply to delinquent real property taxes has no power to collect money from holdover tenant who occupies abandoned property.

Cadle Properties of Connecticut, Inc., leased property to M & S Gateway Associates, LLC (Gateway) for use as an automobile dealership. Before the lease

expired in 2001, the state obtained a judgment ordering Cadle to remediate contaminated soil and groundwater and pay a penalty of $2,143,000. Cadle effectively abandoned the property.

Cadle took no further action to manage the property—it did not demand rent from Gateway, advertise the property for lease, or move to evict Gateway after the lease expired. In 2011, at the instance of the town where the property was located, the court appointed a receiver of rents under Conn. Gen. Stat. § 12-163a, which allows the receiver to “collect all rents or payments for use and occupancy forthcoming from the occupants of the building in question in place of the owner, agent, lessor, or manager” when there is a delinquency in the payment of real property taxes.

Thereafter, the receiver sought rent or use and occupancy payments from Gateway and Cadle in the amount of $1,349,648, plus attorneys’ fees, and an order evicting Gateway from the property. Gateway moved for summary judgment, asserting the receiver lacked authority concerning abandoned property. The trial court granted the motion, finding that the lease contained no holdover provisions that would define rights and obligations after the lease expired. The supreme court affirmed, explaining that the scope of a receiver’s authority is a question of statutory construction. The supreme court found the text of the statute to be ambiguous— though it authorizes the collection of “all rents or use and occupancy payments,” it is silent on whether the receiver may establish those rents or use and occupancy payments in the first instance or whether the payments are limited to those resulting from an existing landlord-tenant relationship.

The court thought both interpretations reasonable but adopted the latter. The express statutory powers are limited to collecting funds and making payments.

There is no authority given to evict a tenant, to enter into a new lease, to take possession of the property, or to take any other action in the owner’s place regarding the property, except collecting payment from the building’s occupants. Nothing in the legislative history

showed an intent to apply the statute to abandoned property. Boardwalk Realty Assocs. v. M & S Gateway Assocs, 2021 Conn. LEXIS 220 (Conn. Aug. 13, 2021).

REFORMATION: Discovery rule extends statute of limitations even though mistake is apparent on face of deed of trust. In 2002, a father helped his daughter obtain mortgage financing to purchase a home. Only the father executed the promissory note, and both the daughter (the sole owner of the property) and her father signed the deed of trust. In 2005, they refinanced the mortgage loan, and a mistake was made in the refinancing documents.

Again, only the father executed the promissory note, as the sole borrower, but the new deed of trust erroneously named only the daughter as the borrower. The daughter made all mortgage payments until 2015, several months after her father’s death. The lender commenced a non-judicial foreclosure proceeding in 2017 and, after spotting the error, commenced an action for reformation and judicial foreclosure.

The trial court granted summary judgment to the lender. A divided appellate court reversed, finding reformation barred by a ten-year statute of limitations. N.C. Gen. Stat. § 1-47(2). The supreme court reversed, ruling that the appellate court applied the wrong statute—§ 1-47(2) applies to actions to enforce a sealed instrument, but N.C. Gen. Stat. § 1-52(9) applies to claims seeking relief based on mistake. Even though the latter provision contains a shorter limitations period, three years as opposed to ten, it does not begin to run until the aggrieved party discovers the error, meaning when the party knew or should have known of the mistake. The drafting of a document with an apparent mistake on its face alone does not necessarily trigger the statute. A drafter who makes a mistake is entitled to the benefit of the discovery rule in appropriate cases. Here, the first occasion that would have caused the lender to question the validity of the documents was the 2015 default. Thus, the lender’s reformation action, filed in 2017, was timely and not barred. Wells

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Fargo Bank, N.A. v. Stocks, 861 S.E.2d 516 (N.C. 2021).

claiming that the contingency provision was ambiguous and that the LaPlantes violated an implied covenant of good faith and fair dealing by terminatSALES CONTRACTS: Sellers are ing the contract ahead of the July 14 not liable for breach of contract by terminating their efforts to find “suitdeadline. The supreme court affirmed able” replacement housing before on a ground other than the failure of deadline in contingency. In 2018, the a meeting of minds. The court held LaPlantes contracted to sell their house that the contingency provision was not to the Kellys because of Ms. LaPlante’s ambiguous; the only reasonable interpretation is that the purchase and sale agreement becomes unenforceable upon the non-occurrence of the contingency. After months of searching, the LaPlantes had not found a suitable house. Nor did they breach the implied covenant of good faith and fair dealing by exercising their discretion to withdraw House and yard in Short v. LaPlante. Courtesy of Kathleen M. Mahan, from the contract Esq., Cook, Little, Rosenblatt & Manson, Manchester, New Hampshire. before the date set in the purchase debilitating allergies to the birch and and sale, because by that time, they oak trees on the property. The LaPlanhad “exhausted their search.” Short v. tes wanted to buy a new home with LaPlante, 2021 N.H. LEXIS 129 (N.H. limited exposure to such trees and August 27, 2021). with a garage large enough to house vehicles and large equipment used in STATUTE OF REPOSE: Government’s cause of action to enforce Mr. LaPlante’s mechanical engineering business. Over several months, they conservation regulations renews with each transfer to new landowner. In viewed some 100 properties online and visited 15 to 17 in-person, finding 1979, the Conservation Commission issued John Teixeira a permit to make nothing to satisfy their needs. The purchase and sale agreement stated it was changes to his 2.3-acre tract of land, with specific limits on the amount of subject to the sellers’ finding “suitable housing” by July 14, 2018. However, fill to be added. In 1984, the commission notified Teixeira by letter that he on June 5, the LaPlantes sent an email to the Kellys apologizing to the buyhad exceeded the fill limits in the perers “for wanting to cancel the P&S … at mit, but no enforcement action or this stage.” The sellers explained that restoration took place. In 1996, Teixthey no longer needed to move from eira deeded the property to himself and his wife, Ann Teixeira, as tenants by the property because Ms. LaPlante no longer had allergy symptoms as a the entirety; he died in 2006. In 2014, result of having had allergy injections Ann Teixeira sold the property to Robfor several months. The Kellys sued for ert and Annabella Pesa. Before closing, their attorney requested a “certificate specific performance and damages for breach of contract. The trial court disof compliance” from the commission regarding the conditions in the 1979 missed the action, finding no meeting of minds on account of the continpermit issued to Teixeira. The commisgency provision. The Kellys appealed, sion refused to issue the certificate and

brought an enforcement action against the Pesas, seeking injunctive relief and civil penalties. The trial court granted summary judgment for the Pesas, ruling that Mass. Gen. Laws ch. 131, § 40, is a statute of repose and required the commission to bring an action within three years of the first transfer of ownership of the property after the unauthorized filing. Because Teixeira transferred the property to himself and his wife in 1996, the trial court held that the statute barred an enforcement action commenced after 1999. The supreme court agreed that the statute is a statute of repose, which “eliminates a cause of action at a specified time, regardless of whether an injury has occurred or a cause of action has accrued as of that date.” But the repose is personal to each owner separately—it does not preclude an action for all times, against later owners. This meant that, as to the Pesas, the commission had three years after they acquired title to sue them for enforcement of the regulation. The court explained that interpreting the act in this way is consistent with the overall statutory scheme—to address not only the unauthorized filling of wetlands but also continuing violations. A contrary interpretation that enforcement is possible only against the first subsequent owner would leave conservation commissions without an effective means of enforcement. Conservation Comm’n of Norton v. Pesa, 173 N.E.3d 333 (Mass.

2021).

LITERATURE ADVERSE POSSESSION: In Who Needs Adverse Possession?, 89 Fordham L. Rev. 2639 (2020), Prof. Nadav Shoked questions the continuing value and efficacy of the theory of adverse possession in all contexts. Prof. Shoked begins by rejecting the old romantic image of an industrious possessor who puts seemingly neglected land to productive use and efficiently strengthens titles.

Instead, today the most common assertion of adverse possession concerns mundane boundary disputes, where the reliance interest is much more tenuous. Prof. Shoked argues for judicial and

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KEEPING CURRENT PROPERTY

legislative reforms to better reflect and regulate adverse possession’s true function in current American law. He shows how the existing system of recording is ill-equipped to resolve rudimentary boundary disputes but also shows the limits and costs of the alternative system of title registration. Prof. Shoked’s prescriptions for a predictable and efficient regime include clarifying the role and import of the elements of adverse possession, putting burdens on landowners to survey their land, rethinking color of title, and drastically reforming the title insurance industry.

HOUSING: In From Commodities to Communities: Reimagining Housing After the Pandemic, 68 U.C.L.A/. L. Rev. Disc.

(Law Meets World) 190 (2020), Nisha N. Vyas and Matthew Warren advocate for a human-centered system to address the rental housing crisis facing California, and beyond, further exacerbated by the COVID-19 pandemic. The authors believe the current tenant eviction processes value property rights over human rights and drastic steps are required to prevent catastrophic effects once stays on evictions terminate. The authors point to proposed legislation that separates eviction and rent collection and creates a legal framework for repayment of rent that is fair to tenants and landlords. They assert that this approach is necessary to offset eviction moratoriums like those issued in California that fail to prevent or mitigate mass displacement. Though the authors decry moratoriums as eviction delay over eviction prevention, there is some value even with a delay because almost no money is flowing to landlords or tenants during the moratorium times. The authors note the lack of monies includes a failure of federal and state governments to coordinate adequately the disbursement of funds earmarked to assist all parties during the pandemic. The authors argue that evictions must be taken off the table, becoming an extraordinary remedy, with the burden placed on landlords to justify tenant removal only for demonstrable health or safety reasons.

Although such an approach may well lead to more housing stability for lowincome and minority communities, the authors do not address whether their approach may severely limit the already constrained available affordable housing stock. The authors further advocate for other housing and land ownership alternatives to return community control to the neighborhoods.

They do admit that political and financial capital for such change is currently limited, but they are hopeful that the effects of the moratoriums will highlight the stress felt by tenants generally and especially by those of low-income and minority status. It is hoped that highlighting the stress will trigger a progressive movement toward the suggested reforms.

PROPERTY THEORY: In Fee Simple Failures: Rural Landscapes and Race, 119 Mich. L. Rev. 1695 (2021), Prof. Jessica Shoemaker challenges us to consider whether the fee simple concept is an appropriate one for allocating property rights in rural areas. After recounting the many woes and dysfunctions burdening rural America—from stark racial disparities in rates of ownership, vast poverty, and increasing population decline—she poses the question: To what extent is property law itself responsible? Many values underlie the fee simple concept, including encouraging investment and stewardship and the autonomy that comes from perpetual rights. At the same time, the concept seems to be the basis for entrenchment and discrimination in transfers.

The demographics she offers in support of her claim are stark—more than 98 percent of all agricultural land is white-owned, though a large percentage of farm operators are minorities. She recounts the history of land laws that deliberately or unwittingly excluded indigenous people and people of color from property acquisition—from the homestead laws to heirs property. Prof.

Shoemaker offers a prescription for rural land reform that includes strategies such as inclusive agriculture zoning, mandatory housing quality

standards, and even land redistribution schemes. The article adds insightfully to the ongoing dialogue about the worth of the venerable fee simple.

LEGISLATION CALIFORNIA allows affordable housing development to override restrictive covenants. An amendment to the government code allows owners of affordable housing developments to record instruments that modify or remove existing covenants that restrict the number, size, or location of residences that may be built on the property or restrict the number of persons or families who may reside on the property. 2021 Cal. Stats. ch. 349.

CALIFORNIA amends government code to require notice of opportunity to file restrictive covenant modification. A title company, escrow company, real estate broker, real estate agent, or association that delivers a copy of a declaration, governing document, or deed to a person who holds an ownership interest of record in property must also provide a restrictive covenant modification form with specified procedural information. Upon request before the close of escrow, the title company must assist in the preparation of such form.

2021 Cal. Stats. ch. 359.

CALIFORNIA adopts Fair Appraisal Act. The law prohibits appraisers from determining the market value of a property based on race, color, religion, gender, and other impermissible grounds prohibited by the federal Fair Housing Act. Applicants for licenses to appraise must complete at least one hour of instruction in cultural competency, and each licensed appraiser seeking renewal on or after January 1, 2023, must have at least two hours of elimination of bias training.

Beginning January 1, 2023, licensees are required to complete at least one hour of instruction in cultural competency every four years. Notice must be given in every contract for the sale of single-family residential real property that any appraisal of the property is required to be

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KEEPING CURRENT PROPERTY

unbiased, objective, and not influenced by improper or illegal considerations.

2021 Cal. Stats. ch. 352.

CALIFORNIA amends government code to allow cities to up-zone properties. Up to ten dwelling units per property may be built in transit-rich areas or urban infill sites. Dwellings may be built without the need to conduct an environmental quality review.

2021 Cal. Stats. ch. 163.

CALIFORNIA amends government code to allow property owners to split single-family lots. For lots of at least 2,400 square feet, an owner may divide the lot to allow the construction of up to four dwelling units. Applications to split are reviewed and approved ministerially and must be granted if the applicant meets specific objective criteria. 2021 Cal. Stats. ch. 162.

FLORIDA amends building code to allow enforcement agencies to conduct virtual inspections. A virtual inspection uses visual or electronic aids to allow inspection without the inspector being physically present at the property. The amendment does not apply to structural inspections of threshold buildings. 2021 Fla. Laws ch.

212.

ILLINOIS amends human rights law to cover discrimination in loan modification. It is a civil rights violation for a third-party loan modification service provider to refuse to engage in loan modifications and to indicate a preference for such services based on unlawful discrimination, familial status, or an arrest record. 2021 Ill. Laws 362.

NEW YORK adopts Solar Rights Act. The act prohibits a homeowners association from adopting or enforcing rules or regulations that would effectively prohibit, or impose unreasonable limitations on, the installation or use of a solar power system. Any such restriction is void and unenforceable as contrary to public policy. 2021 N.Y. Laws 342. n

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Understanding Life Insurance and Rethinking Policy Management and Evaluation: Explaining the Unexplainable Gary L. Flotron, M.B.A., CLU®, ChFC®, AEP® Comprehensive resource for planning your client’s personal and business insurance needs

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The author’s discussion and analysis of the fundamentals and the mathematics of life insurance are enriched by a carefully selected collection of articles by these nationally known practitioners and advisors who illustrate and offer unique viewpoints on the book’s topics: Guy E. Baker, Ben G. Baldwin, Jr., Jonathan G. Blattmachr, Marc A. Pasquale, Christopher H. Hause, Donald O. Jansen, Michael E. Kitces, Martin M. Shenkman, Charles M. “Mark” Whitelaw, E. Randolph Whitelaw, and George P. Whitelaw.

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January/February 2022 23

MOVING FORWARD,

Getty Images

By Greyson Havens-Morris and Walter E. Block

GENTRI

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I

t is safe to say that most people want to live with four walls and a roof over their head and that anybody should be allowed to bid on property, whether they seek to buy or to lease.

But should people be entitled to live in whatever state, city, neighborhood, or street they choose even if they cannot afford it? More specifically, should

Greyson Havens-Morris is a senior business management major at Loyola University New Orleans in New Orleans, Louisiana, and a US Army Reserve Sargent. Walter E. Block is the Harold E. Wirth Eminent Scholar Endowed Chair and Professor of Economics at Loyola University New Orleans in New Orleans, Louisiana.

residents who have been members of a community be afforded special treatment to enable them to remain in their neighborhoods, rather than be priced out? Are renters entitled to a price ceiling on their apartment leases?

American cities have faced these questions since the latter half of the 20th century, and the issue that encompasses them is gentrification. Adam A. Millsap, We Shouldn’t Stop Gentrification, But We Can Make It Less Painful, Forbes, Mar. 29, 2018, https://bit. ly/3Fn0Ob2. Citizens wrestle with the tension between gentrification’s vast development opportunities and the stark potential of displacing current residents. Is gentrification good or bad, fair

or unfair? Many dismiss this process as an unwarranted displacement of long standing residents. E.g., Margaret Kohn, What Is Wrong with Gentrification?, 6 Urb. Res. & Prac. 297 (2013), https://bit. ly/3iBOfyU. Critics favor alternatives such as affordable (public) housing mandates and rent control. There are many critics of rent control. E.g., Charles Baird, Rent Control: The Perennial Folly (1980); Rent Control: Myths and Realities (Walter E. Block & Edgar Olsen eds., 1980); Walter E. Block, Joseph Horton & Ethan Shorter, Rent Control: An Economic Abomination, 11 Int’l J. Value Based Mgmt. 253 (1998); Walter E. Block, A Critique of the Legal and Philosophical Case for Rent Control, 40 J. Bus. Ethics

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January/February 2022 25

75 (2002), https://bit.ly/3FoPbjV; Milton Friedman & George Stigler, Roofs or Ceilings? The Current Housing Problem (1946), https://bit.ly/3FlWXev; Gary Galles, Rent Control Makes for Good Politics and Bad Economics, Mises Wire (Apr. 9, 2017), https://bit.ly/2YpBrnU; W.S. Grampp, Some Effects of Rent Control, 16 S. Econ. J. 425 (1950); R.W. Grant, Rent Control and the War Against the Poor (1989); M. Bruce Johnson, Resolving the Housing Crisis: Government Policy, Decontrol, and the Public Interest (1982). Gentrification, however, is a natural, free-market consequence that brings development to an otherwise underinvested neighborhood. It is part and parcel of a free-market system that maximizes economic welfare. Adam Smith, The Wealth of Nations (1776);

years. The reason is that much of the land and the structures built on it have changed with the times. They move forward. The architect Louis Sullivan wrote, “Whether it be the sweeping eagle in his flight or the open appleblossom, form ever follows function, and this is the law.” Eve Sneider, Roundtable: Form Follows Function, Lapham’s Q. (Sept. 29, 2020), https://bit.ly/3ljAoPm. Louis Sullivan was a pioneer of the steel-frame skyscraper—responsible for the Prudential [later Guaranty] building in Buffalo, New York, and St. Louis’s Wainwright Building, both prototypes of the modern office building—and a forefather of American modernist architecture; he saw patterns in nature and felt that urban design ought to follow suit.

Gentrification can help transition an area to benefit the needs of the current market, restore disinvested communities, and promote economic growth.

James Gwartney, Robert W. Lawson & Walter E. Block, Economic Freedom of the World, 1975–1995 (1996).

Positive Impacts of Gentrification Gentrification can have a positive impact on a community. More specifically, this practice can help transition an area to benefit the needs of the current market, restore disinvested communities, and promote economic growth.

Neighborhoods have always evolved, but the idea of gentrification—when an influx of new money and new people transforms a community—has emerged as an issue since only the 1960s. Jesse Van Tol, Perspective, Yes, You Can Gentrify a Neighborhood Without Pushing out Poor People, Wash. Post (Apr. 8, 2019), https://wapo.st/3aePhfI. Whether gentrification is a problem is debatable, but the idea that neighborhoods have changed over time is not. Most cities would be unrecognizable to hypothetical time travelers journeying back 100

Gentrification allows for the development of land based on the market’s needs. Consider waterfront property over the past two hundred years, for example. Most waterfront property was previously occupied by manufacturing, warehouses, and merchants because they wanted access to cheap shipping and water-generated power.

Millsap, supra. Later, fossil fuels, trains, the internal combustion engine, automobiles, the interstate highway system, and airplanes eliminated many of the production advantages of locating near the water. Id. Today, one would be hard-pressed to find an old “warehouse district” (in any major US city) that has not changed in this manner with the times. If we do not adjust our built environment in response to technological progress that changes the best use of land, our local economies will stagnate.

Id. Likewise, not only does gentrification mold the area to the market’s will, but also it pumps much-needed

investment into neighborhoods. Van Tol, supra.

Residents welcome the resurrection and revival of neglected and disinvested areas. Id. Think of condemned houses with windows smashed out or abandoned commercial property covered in graffiti. Consider the weed-filled lot a neighborhood uses as a dump. When gentrification occurs, somebody buys that old house, graffiti-covered building, or lot and builds something new, investing in a neighborhood. Nobody living in that neighborhood says to herself, “You know, that new house they built? Yeah, it is nice and all, but I preferred the trash-filled lot. That really would have been better for the community.” In addition to transitioning disinvested property and pumping money into neglected neighborhoods, gentrification brings economic growth to an area.

Community leaders desire capital investments, leading to better services, jobs, thriving businesses, and other components of a healthy, vibrant neighborhood. Id. With new money injected into a disinvested neighborhood come job opportunities for the residents. New businesses appear on the scene, and they need employees. The new economic activity may increase the property value of a neighborhood, wages in the local labor market may increase, and existing unemployment rates fall. Daniel Fernández Méndez, The Economics of Gentrification, Mises Wire (Nov. 29, 2017), https://bit. ly/3oExxTp. This process renders residential housing more scarce and has the same effect on work. Id. Setting aside all the superficial positive impacts for a moment, the most positive side effect that comes with gentrification is maintaining our free-market economy.

Consider the subject from the theoretical price system.

Prices are fixed by supply and demand and in turn affect supply and demand. When people want more of something, they offer more for it. The price goes up.

This increases the profits of those who have something. Because

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it is now profitable to make that something than other things, the people who have something create more of it. Other people are attracted to that business. The increased supply then reduces the price and reduces the profit margin until the profit margin on that something once more falls to the general level of profits. Demand may also fall, or supply will be increased so much that price will go down.

Henry Hazlitt, Economics in One Lesson, ch. 15: How the Price System Works (new ed. 1979).

Gentrification is the natural product of our price system. The demand is high for housing in cities. Many neighborhoods are experiencing an urban revival as an influx of young, college-educated singles move in to live, work, and play.

Millsap, supra. Because the demand is high, this population of young, collegeeducated workers is willing to spend more on housing. As the productivity and wages of a city’s inhabitants increase, so do the housing prices relative to a place where the inhabitants’ productivity is low. Méndez, supra.

Landlords raise rents and compete with one another for tenants. Subsequently, real estate is bought up in disinvested neighborhoods to increase the supply of housing. Eventually, the increased supply of housing in the city reduces the price and reduces the profit margin until it returns to the level available elsewhere. Demand also changes from one neighborhood to the next. This is the natural order of the free market.

Regardless of development, gentrification is the natural response of the free market. It can only be tampered with at great harm to the economy. Change is a natural part of economic growth, and interference will stifle increased productivity. Millsap, supra. Whether one agrees or disagrees with the side effects of gentrification, one cannot deny that it is the natural order of economic growth. It is the way forward. “We should not expect, nor is it generally desirable, for neighborhoods to remain frozen in time.” Id. Allowing property

values to rise to the free-market level allows all tenants or would-be tenants an equal opportunity to bid for space.

Opposition to Gentrification As the positive impacts come to light, there must be an acknowledgment of the opposition to gentrification.

Although it is a natural event brought on by the free market that ultimately benefits all market participants in the long run, we must consider why some oppose it. There are many reasons why some oppose gentrification.

Some of the reasons include blockbusting (post–World War II, real estate brokers “encouraged [B]lack families to pay a premium to move into particular

urban neighborhoods so that white families would sell their houses at a low price to move out to the suburbs”), redlining (after blockbusting, “the new majority-African American communities were denied the money they needed to invest in improvements to their neighborhoods”), and acceleration. Nat’l Geographic, Gentrification, https://bit.ly/3D3XFeP. Opposition to gentrification indicates displacement is becoming a larger issue in knowledge hubs and superstar cities, where the pressure for urban living is increasing.

The most controversial reason, these authors conclude, is residential and cultural displacement. Public policies implementing rent control measures

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and mandatory affordable housing are the gentrification opponents’ solutions.

“Direct displacement” is when residents are forced to move because of rent increases and/or building renovations. “Exclusionary displacement” is when housing choices for low-income residents are limited. “Displacement pressures” are when supports and services that low-income families rely on disappear from the neighborhood.

Gentrification and Neighborhood Revitalization: What’s the Difference?, Nat’l Low Income Housing Coalition (Apr. 5, 2019), https://bit.ly/2Yw4w1z.

When it comes to the potential displacement aspect of gentrification, three populations are affected, and one negatively so, in the view of most commentators. The first two categories are landlords and tenants. More specifically, it is the tenants of the “outmovers” population who are negatively

affected. Méndez, supra. They claim that they are being “evicted” from the homes they do not own because they cannot afford the increase in rent that gentrification produces. Id. Displaced low-income households most likely end up in new low-income neighborhoods. Gentrification and Neighborhood Revitalization, supra. Many vulnerable households that do move comprise renters and are at greater risk of moving to neighborhoods with lower home values, higher unemployment rates, lower median incomes, and poor public-school performance, as compared to their original neighborhoods. Id. Gentrification can further harm this population with added moving costs or security deposit requirements for a new apartment, which—given that few people have enough cash to cover emergency expenses—could quickly unfold into an even more precarious financial situation. Alex Baca & Nick Finio, Gentrification Is Beneficial on Average, Studies Say. That Doesn’t Mean It’s Not Painful for Some., Greater Greater Wash. (Aug. 6,

2019), https://bit.ly/3oGSpcw.

A basic economic aphorism, however, is that the free enterprise system necessarily benefits all participants.

How can we square this with the view that the tenants turfed out of their newly more-expensive apartments are actual beneficiaries? The reconciliation is that these tenants are no longer market participants, at least not in that gentrified neighborhood.

Consider the in-movers. Landlords buy property and then charge the inmovers significantly higher rents. But they are necessarily beneficiaries, at least in the ex ante sense, because they voluntarily pay these heightened prices so as to enjoy the newer, better neighborhood amenities.

The final group to feel the effects of displacement are the “stayers.” Landlords who already owned property, pre-gentrification, find themselves in a developing environment with benefits previously unknown. The tenants who decide to stay must not be too negatively affected if they can still afford the rent.

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As former residents are displaced, gentrification opposers point out that the area’s culture is also displaced. The people and businesses that move into gentrifying neighborhoods may have goals that are at odds with those of long-time residents. Nat’l Georgrahic, supra. The closing of local landmarks like historically black churches or local restaurants can erase the history of a neighborhood and, with it, a sense of belonging. Gentrification and Neighborhood Revitalization, supra. These changes may also drive out people of color and, specifically, minority-owned businesses. Nat’l Georgrahic, supra.

The National Low Income Housing Coalition has noted that there is no silver bullet or list of sure-thing policies to prevent displacement, but some of the many tools that can help combat gentrification include baseline protections for the most vulnerable residents, producing and preserving affordable homes, non-market-based approaches to housing and community development, and better approaches to community participation. Gentrification and Neighborhood Revitalization, supra.

Critics of gentrification point to implementing rent control measures and mandatory affordable housing to alleviate these problems. Rent control sets a cap on how much a landlord can charge for rent. Id. The theory and goal are to help the poor raise their standard of living by making housing more affordable. N. G. Mankiw, Principles of Economics (2007). Mandatory affordable housing, or public housing, is another solution gentrification detractors favor. Apartments, duplexes, single-family homes, and accessory dwelling units (granny flats) are all viable housing options that should be allowed by default, in this view. Millsap, supra. A range of housing options at different price points makes it easier for lower-income people to find housing in redeveloping neighborhoods. Id. Flaws in Arguments Against Gentrification There are flaws in the opposition to gentrification and the alternatives to it discussed above, staring with the

Critics of gentrification point to implementing rent control measures and mandatory affordable housing to alleviate these problems.

displacement argument.

Some question the displacement theory altogether against the numbers of nongentrifying neighborhoods. Quentin Brummet, with the University of Chicago, and Davin Reed, at the Federal Reserve Bank of Philadelphia, released a paper in July 2019 that challenges the displacement narrative. Alex Baca and Nick Finio report that the paper’s main findings are as follows: Neighborhood mobility is already high across income categories: 70% to 80% of renters change neighborhoods over a decade, and 40% of homeowners do, too.

When a neighborhood is gentrified, the likelihood that original residents move increases only slightly, by about 5%. That likelihood is slightly higher for lower-income renters.

Baco and Finio, supra. They further note that “Brummet and Reed conclude that gentrification only marginally increases out-movement and, importantly, that those who remain experience certain benefits. Those benefits include exposure to lower poverty rates, increases in home values, and other correlates of neighborhood opportunity.” Id. Other researchers question the link between gentrification and displacement altogether, as some believe the research is unclear. As noted by the National Low Income Housing Coalition: Ingrid Gould Ellen and Gerard Torrats-Espinosa have studied

the long-term effects of gentrification and tracked the racial change over time. They defined “gentrification” as an increase in a neighborhood compared to the larger metro region over time. The researchers found that a growing number of low-income neighborhoods occupied predominantly by people of color have gentrified in recent decades, although most have remained low-income.

Gentrification and Neighborhood Revitalization, supra.

So, what does all this mean? Over three-quarters of the “renter” population already changes locales whether the locales are gentrifying or not. Further, these gentrifying neighborhoods usually remain low-income. The fact is that people move all the time for all kinds of reasons. Based on both researchers’ conclusions, we cannot say that gentrification is the sole reason for displacement.

According to Jesse Van Tol, director of the National Community Reinvestment Coalition, gentrification does not have to mean displacement—if the circumstances are aligned correctly. Tol’s analysis of the US Census Bureau and demographic data between 2000 and 2013 showed significant displacement across the country and yielded some unexpected results. Displacement of black people in gentrified neighborhoods was not uniform across all cities.

Counterexamples include Los Angeles, California, which saw the displacement of 13 neighborhoods out of 73 gentrified neighborhoods, yet Minneapolis,

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January/February 2022 29

Minnesota, experienced displacement in only one of its 22 gentrified neighborhoods. Van Tol, supra.

Why isn’t displacement uniform?

The typical response is, “Gentrification is this big, complicated event that affects every city differently. There is no way to avoid displacement.” Before we throw out the proverbial baby (gentrification and development) with the bathwater (displacement) , we need to examine the population vulnerable to displacement. Is it gentrification leading to displacement, or is it the policies these cities are trying or not trying? Or is it something else entirely? (Hint: It is something else entirely.)

Before we arrive at an answer, let us consider other possibilities. Two of the most popular answers are rent control and mandatory affordable public

poor planning by governments lacking courage and vision.” Walter E. Block, Defending the Undefendable III 159 (2021). In 1989, Viet Nam Foreign Minister Nguyen Co Thach said: “The Americans couldn’t destroy Hanoi, but we have destroyed our city by the very low rents.” Bob Dhillon, The Perversity of Rent Controls, Nat’l Post, June 28, 2007, at FP15. The adverse effects of rent control are less apparent to the general population because these effects occur over many years. Mankiw, supra.

Public housing may not be better in the long term, even though in the short term it may seem like it is helping renters. Housing projects radiate dysfunction and social problems outward, damaging local businesses and neighborhood property values. They hurt cities by inhibiting or even prevent-

Rent control and public housing are not long-term solutions and should not be considered even in the short term.

housing. Initially, rent control seems to have a lot to be said in its favor. Rent control offers protection from sudden rent increases, establishes maintenance standards, provides the right to lease renewal, provides the framework for organizing and litigation, and sets limits on security deposits. Gentrification and Neighborhood Revitalization, supra.

Although, in the short run, these exceptions made for renters seem reasonable, they might destroy the very neighborhood they were meant to save.

Swedish economist Assar Lindbeck stated that, “[i]n many cases, rent control appears to be the most efficient technique presently known to destroy a city except for bombing.” James D. Gwartney et al., Macroeconomics: Private & Pubic Choice 76 (2021). In the view of Swedish socialist Myrdal, “Rent control has in certain western countries constituted, maybe, the worst example of

ing these rundown areas from coming back to life by attracting higher-income homesteaders and new business investment. For decades, cities have zoned whole areas as public housing, forever shutting out in perpetuity the constant recycling of property that helps dynamic cities generate new wealth and opportunity for rich and poor alike. Howard Husock, How Public Housing Harms Cities, City J., Winter 2003, https://bit.ly/3lhLRPF; Jane Jacobs, The Death of Life of Great American Cities (1961). One of the worst examples of public housing in United States history comes from Chicago, Illinois, and the Cabrini Green housing projects.

William Voegeli, Public Housing’s Most Notorious Failure, City J., Summer 2019, https://bit.ly/3mqIkh6. Cabrini Green was a public-housing project (named after Saint Frances Xavier Cabrini and labor leader William Green) where 23

towers, constructed between 1950 and 1962, provided 3,000 apartments. The towers came to be known almost solely for their crime and squalor. The Chicago Housing Authority tore down the last high-rise in the Cabrini-Green Homes in 2011.

Rent control and public housing are not long-term solutions and should not be considered even in the short term.

A solution to displacement (if indeed any displacement takes place due to gentrification) is educating people on homeownership. Jeremy Hobson, What Do “Newcomers” Mean for a Neighborhood? The History of Gentrification in the U.S., WBUR (Dec. 6, 2019), https:// wbur.fm/3adnDzP. It gives people more power as to how gentrification will personally affect them. There is no public policy or initiative that will prevent gentrification. It will keep happening because it is a free market event.

When one owns her home, she can opt to live there or rent it, tear it down or make additions, sell it for the market rate or move somewhere else. When municipalities impose policies because a particular group of renters cannot afford to rent in such neighborhoods, it affects the entire city.

If that is the solution for tenants experiencing displacement, then the solution for homeowners is to stay put if community, history, and culture are more important. What often happens, though—more than gentrification opposers like to admit—is that homeowners decide (of their own free will) to take the money and move out. Longtime homeowners benefit from rising property values and increased credit scores, allowing them to sell their property and move to a higher-income area.

Patrick Gillespie, How Gentrification May Benefit the Poor, CNN Bus. (Nov. 12, 2015), https://cnn.it/3uRIfH2. Community, togetherness, history, culture, and neighborhood are not the be-all and end-all of life, as opponents of gentrification would have us believe. Walter E. Block, The Gentrifier, LewRockwell.com (Feb. 9, 2015), https://bit.ly/3oGSvB5.

Displacement is not forcing them out; rather, they are choosing to leave. There

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is one example, however, of displacement that accomplishes forced removal: eminent domain (the Fifth Amendment provides that the government may exercise this power only if it provides just compensation to the property owners).

Richard A. Epstein, Takings: Private Property and the Power of Eminent Domain (1985).

When the Olympics come to town, people are moved en masse (via eminent domain) to make way for the new stadiums, swimming pools, ball fields, etc. Ditto for the World’s Fairs. They, too, export inhabitants with a long history, willy nilly. They, too, eradicate cultures and communities thriving before the rampage took place.

Block, The Gentrifier, supra.

Conclusion In summary, though some dismiss gentrification as displacement and fight for destructive alternatives like affordable housing mandates and rent control, in the view of the authors gentrification is a natural, free-market event that brings much-needed development to an otherwise disinvested neighborhood.

Gentrification is as natural to the free market as a thunderstorm is to nature.

Of course, if one is not prepared for a thunderstorm, one will get rained on, but that thunderstorm facilitates the earth’s natural biosphere. To keep from getting wet, then one needs to find one’s own shelter. In other words, one needs to buy a house. The creation of comprehensive public policies that aim to provide certain people with shortterm shelter harms everyone in the long run. Focusing on a particular group of people is like creating a weather machine for a neighborhood and choosing when to allow thunderstorms to come through. Some areas are going to be flooded and dangerous. Some are going to be dry and ripe for wildfire.

The weather machine does more damage to the earth than letting individual thunderstorms occur naturally. n

RPTE Book Club, sponsored by The Diversity, Equity and Inclusion Committee presents

Thursday, February 24, 2022 12:00 – 1:00 pm Noted educator, journalist, and scholar Andre Perry takes readers on a tour of six Black-majority cities whose assets and strengths are undervalued. In this book, he brings his own personal story of growing up in Blackmajority Wilkinsburg. Perry also spotlights five other cities with which he has deep connections: Detroit, Birmingham, New Orleans, Atlanta, and Washington, DC. He provides an intimate look at the assets that should be of greater value to residents. Andre Perry will discuss the book along with a Q&A session.

Register at Ambar.org/rptebookclub

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January/February 2022 31

KEEPING CURRENT P R O B AT E CASES AFTER-ACQUIRED PROPERTY: After-acquired property is not part of a decedent’s estate. The decedent died in 2004 and was the surviving spouse of William Keough, one of the Americans held hostage in Iran from 1979 to 1980.

Keough died in 1985. In 2015, Congress enacted legislation providing monetary compensation to the hostages and their families. The surviving spouse, whose will disposed of the residuary estate to a stepchild, one of Keough’s three children, was entitled to receive a payment of $600,000. Under the legislation, if a person entitled to payment is deceased, the payment is made to the personal representative of that person’s estate (34 USC § 20144(d)(1)). The surviving spouse’s sole heir was a post-deceased sibling. The administrator of the estate of the surviving spouse’s post-deceased sibling then petitioned for a declaration that the payment passed through intestacy. The Surrogate’s Court dismissed the petition and, on appeal, the intermediate appellate court in Matter of Estate of Keough, 150 N.Y.S.3d 449 (App. Div. 2021), reversed and held that a will disposes of all property that the testator was entitled to dispose of at death.

Because the decedent did not have the capacity to dispose of the payment, it, therefore, passes through intestacy to the estate of the sibling.

NON-TESTAMENTARY TRANSFER: Provision in LLC operating agreement purporting to transfer member’s interest on death was invalid testamentary substitute. The decedent was

Keeping Current—Probate Editor: Prof.

Gerry W. Beyer, Texas Tech University School of Law, Lubbock, TX 79409; gwb@ ProfessorBeyer.com. Contributors: Claire G. Hargrove, Paula Moore, Prof. William P. LaPiana, and Jake W. Villanueva.

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

a member of an LLC whose operating agreement provided that upon death the decedent’s interest in the LLC— the right to share in profits, losses, and distributions—would pass to the decedent’s surviving spouse. Voting rights were to be assigned to other members.

The surviving spouse brought a declaratory judgment action for confirmation of ownership of the decedent’s interest, and the trial court found in the spouse’s favor. On appeal by the decedent’s estate, the court reversed in Potter v. Potter, 252 A.3d 17 (Md. Ct. Spec.

App. 2021), holding that the attempted disposition on death was an invalid testamentary substitute because the decedent had complete control of the property during life, and the only way to dispose of such property at death is through a valid will.

PROBATE EXCEPTION: Probate exception did not apply to suit against bank over investment account in which plaintiff had been co-owner with the decedent. In Fisher v. PNC Bank, N.A., 2 F.4th 1352 (11th Cir. 2021), the Eleventh Circuit reversed the district court’s dismissal of a suit brought under diversity jurisdiction on the ground that hearing it would violate the probate exception. The appellate court held the exception was inapplicable because the plaintiff ’s allegation that the defendant bank mishandled the decedent’s investment account

before the decedent’s death did not involve any of the three situations to which the probate exception applies: a probate proceeding, questions of estate administration, or disputes involving property in the custody of a state probate court.

STANDING OF TRUST BENEFICIARIES: Beneficiaries do not have standing to sue third party for alleged harm to trust. Remainder beneficiaries brought suit against the estate of the life beneficiary, alleging that the beneficiary fraudulently induced the trustee to exercise discretion to make principal distributions to the life beneficiary.

The trial court dismissed the action for lack of standing, and on appeal, the Supreme Court of South Dakota affirmed in Matter of Estate of Calvin, 963 N.W.2d 319 (S.D. 2021). The court held that the beneficiaries would have standing to sue a third party only if they could show that the trustee would not or could not pursue the claim.

STANDING OF WILL BENEFICIARIES: Beneficiaries of a prior will do not have standing to sue to recover property for estate. Two of the decedent’s three children sued the decedent’s surviving spouse and the decedent’s third child, the personal representative of the estate. The suit alleged that inter vivos transfers the decedent had made benefitting the spouse and the third child, which resulted in the ademption of gifts made to them under a prior will, were the result of undue influence. The trial court granted the defendants’ motion to dismiss on grounds of lack of standing, and the Supreme Court of Virginia affirmed in Platt v. Griffith, 858 S.E.2d 413 (Va. 2021). The court stated that because rescission of the inter vivos transfers would directly benefit the estate, only the personal representative had standing to assert the claim.

Published in Probate & Property, Volume 36, No 1 © 2022 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.

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KEEPING CURRENT P R O B AT E

TRANSFER ON DEATH DEEDS: Limitations on lifetime transfer of homestead do not apply to transfer on death deeds (TODD). Shortly before death, a spouse executed a TODD for the benefit of a child. The surviving spouse brought an action to set aside the deed on the grounds that the property that was the subject of the deed was the homestead of a married person.

Under Nebraska law, such property cannot be conveyed unless the instrument doing so is executed and acknowledged by both spouses under Neb. Rev. Stat. § 40-104. The district court agreed with the surviving spouse, and, on appeal by the beneficiary, the Nebraska Supreme Court reversed in Chambers v. Bringenberg, 963 N.W.2d 37 (Neb. 2021). The court held that because the TODD was not a lifetime conveyance, the spousal consent requirement did not apply.

TRUSTEES: Previous trustees’ knowledge of fraud not imputed to successor. A successor trustee sued the lawyers for predecessor trustees who defrauded the trusts of large sums, alleging that the lawyers were complicit in the former trustees’ fraud. The lawyers moved to dismiss on statute of limitations grounds. The trial court found that it was a question for the jury whether the statute had been tolled because of the relationship between the alleged actions by the lawyers and the former trustees’ alleged crimes. On appeal in Antley v. Small, 859 S.E.2d 881 (Ga. Ct. App. 2021), the intermediate Georgia appellate court generally found that questions of fact related to beneficiaries’ exercise of due diligence in discovering fraud prevent granting of summary judgment. The court rejected the lawyers’ argument that the former trustees’ knowledge of the alleged fraud should be imputed to the successor trustee, and even if the principles of agency law imputing the knowledge of the principal to the agent were applicable, the parties claiming the benefit of imputed notice are themselves alleged wrongdoers.

WILL FORMALITIES: Louisiana Supreme Court applies substantial

compliance to statutory formalities.

The statutory provisions governing Louisiana’s notarial will require that the attestation clause recite, among other things, that the testator signed the will at the end and on each individual page. In Succession of Liner, 320 So. 3d 1133 (La. 2021), the supreme court affirmed the admission to probate of a will signed at the end and on each page by the testator but whose attestation clause stated only that it was signed by the testator. The court overruled precedent (Successions of Toney, 226 So. 3d 397 (La. 2017) and Succession of Hanna, 283 So. 3d 493 (La. 2019)) holding that “slight deviations” from the statutory requirements that do not increase the likelihood that the testator was the victim of fraud do not invalidate the will.

Accordingly, the will was executed in substantial compliance with the statute.

TAX CASES, RULINGS, AND REGULATIONS ESTATE TAX: An estate’s reasonable collection potential includes the amount it can potentially collect based on fiduciary liability and transferee liability. An estate with an estate tax debt submitted an offer-in-compromise based upon the total amount of its sole asset: a checking account. The settlement officer denied that offer-incompromise, citing a higher reasonable collection potential calculation. The court in Estate of Lee v. Commissioner, T.C. Memo 2021-092 (2021), held the settlement officer did not abuse the officer’s discretion when the officer included potential claims by the estate for transferee liability and fiduciary liability in the reasonable collection potential. The period of limitations to collect distributed amounts using those theories was still open. The Internal Revenue Manual also required the settlement officer to include these amounts in the reasonable collection potential formula.

ESTATE TAX: Non-resident QTIP trust included in estate of resident decedent. The Oregon Supreme Court held in Estate of Evans v. Dep’t. of Rev.,

492 P.3d 47 (Or. 2021), that the taxable estate of an Oregon resident decedent includes, for purposes of the Oregon estate tax, a QTIP trust. The decedent was the life beneficiary of a QTIP trust, which was created under the will of the decedent’s spouse who was not an Oregon resident. The court found there was no violation of the guarantee of due process under the Fourteenth Amendment because the decedent’s status as the sole income beneficiary and a possible recipient of principal created a sufficient connection to Oregon.

FOREIGN TRUSTS: Sole owner and beneficiary of a foreign trust held liable for a 35 percent penalty for failing timely to report distributions. The Second Circuit in Wilson v. United States, 6 F.4th 432 (2d Cir. 2021), vacated the district court’s decision, which sided with the executrix’s argument that the taxpayer’s penalty should be limited to 5 percent. The court held that the taxpayer was required to timely report distributions from the foreign trust and determined no exception existed for a beneficiary who was also the owner of a foreign trust.

TAX RETURNS: A missing or unknown federal gift tax return could be reasonable cause for the late filing of an estate tax return. When the decedent died, the executor contacted and communicated with the decedent’s tax preparer, a family office service, and an attorney. The attorney advised that no estate tax return needed to be filed because the gross estate was below the exclusion amount for the year of death.

About two years after the decedent’s death, a son mentioned that some gifts had been made approximately five years before the decedent’s death.

After looking into this new information, the executor discovered a federal gift tax return that pushed the gross estate over the threshold for the year of death. When the executor filed in the Court of Federal Claims to recover a penalty collected by the IRS for failure timely to file an estate tax return and failure timely to pay the tax due, the government moved to dismiss the

Published in Probate & Property, Volume 36, No 1 © 2022 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.

January/February 2022 33

KEEPING CURRENT P R O B AT E

claim. In Leighton v. United States, 155 Fed. Cl. 543 (2021), the court denied the motion and held that missing information could constitute reasonable cause for delay. However, based on the complaint alone, the court could not decide whether the executor exercised due diligence in this particular case.

LITERATURE CONNECTICUT—DIRECTED TRUSTS: In their article, New Direction: The Connecticut Uniform Directed Trust Act, 33 Quinnipiac Prob. L.J. 274 (2020), Alexis S. Gettier, Christiana N. Gianopulos, and Margaret St. John Meehan summarize both current Connecticut law and the Uniform Directed Trust Act, discuss the new planning opportunities the act offers, and set forth considerations for practitioners in advising and implementing planning techniques under the new law.

CRYPTOCURRENCY TAXATION: Charlotte A. Erdmann’s article, The Taxation of Cryptocurrencies, 95-AUG Fla. B.J. 58 (2021), focuses on how virtual currency is taxed and the wider implications of virtual currency under federal tax law.

DECEASED TAXPAYERS: Hale E. Sheppard presents a detailed review of post-mortem FBAR enforcement actions and lifetime repatriation actions in Neither Death nor Distance Erases the Issues: IRS Actions Against Deceased or Absconding Taxpayers, 32 J. Int’l Tax’n 37 (2021). He explains the international obligations that can trigger significant liabilities and examines recent cases where the government pursued liabilities from surviving spouses, executors of estates, trustees, distributees, and fiduciaries. The article also identifies the main tools available to the IRS, DOJ, and district courts in international tax collection cases and analyzes the use of repatriation orders over time.

ESTATE PLANNING: Gary R. Gehlbach provides sage advice and insights into estate planning and administration in Thoughts at 5 a.m., Ill. B.J., Feb. 2021, at 24.

ISRAEL—ELDER CARE AND INHERITANCE: Shiri Regev-Messalem offers a qualitative examination of how Israeli legal actors reflect and construct cultural understandings of the relationship between inheritance and elder care in cases in which the deceased has bequeathed property to a caregiver. The author also reveals how inheritance law supports and enhances class reproduction through the institution of the family in How the Law “Keeps the Money in the Family”: Lessons at the Intersection of Elder Care and Inheritance Disputes in Israel, 45 Law & Soc. Inquiry 81 (2020).

LOUISIANA—FIDUCIARY LITIGATION: Louisiana, like many states, has taken important steps to help protect vulnerable populations. Yet many gaps remain. Moreover, Louisiana lacks comprehensive guidance for practitioners and courts who deal with cases of fiduciary misconduct. Elizabeth R. Carter’s article, Fiduciary Litigation in Louisiana: Mandataries, Succession Representatives, and Trustees, 80 La. L. Rev. 661 (2020), attempts to fill a small part of that gap concerning three fiduciaries in the estate-planning setting.

LOUISIANA—WILL FORMALITIES: In his article, Will Formalities in Louisiana: Yesterday, Today, and Tomorrow, 80 La. L. Rev. 1331 (2020), Ronald J. Scalise, Jr. dissects each of the individual requirements necessary for the making of a will in Louisiana with a goal not only of descriptive assessment but also of ascertaining whether each requirement is still necessary.

NEW YORK—UPDATE: Steven Cunningham in Trusts and Estates, 70 Syracuse L. Rev. 591 (2020), covers notable federal and New York State regulatory, statutory, and case law developments related to trusts and estates from July 1, 2018, to June 30, 2019.

PARTNERSHIPS: Jack Spencer discusses An Alternate Approach to Situs

Determination for Partnership Interests, 46 ACTEC L.J. 381 (2021).

POSTMORTEM CONCEPTION: In Reimagining Postmortem Conception, 37 Ga. St. Univ. L. Rev. 905 (2021), Kristine S. Knaplund examines the laws of all 50 states “to provide a comprehensive look at whether a postmortem child inherits and determine how wildly disparate the legal standards are from pubic sentiment.”

SLAYER RULE: In Unworthy Heirs: The Slayer Rule and Beyond, 109 Ky. L.J. 787 (2020-2021), Mary Elizabeth Morey fully analyzes the slayer rules in the United States. She then discusses the potential addition of abandonment in the unworthy heir doctrine, the element of abuse in the unworthy heir context, and the unworthy heir doctrine on an international level. She compares the United States’ doctrines to those of the behavior-based model used in China, arguing for an expansion of the unworthy heir doctrine in the United States.

TRUSTEE DUTIES: Jeffrey Shoenblum “identifies and details the emergence in an increasing number of states of a new trust law the rejects the fundamental tenants of trust law” by “liberat[ing] the trustee from any meaningful accountability to the beneficiary” in The Nonfiduciary “Trust,” 46 ACTEC L.J. 357 (2021).

TRUSTS: Michael D. Mulligan asserts that A Sale to a BIDIT [beneficiary intentionally defective irrevocable trust] Should Work as Well as a Sale to an IDIT [intentionally defective irrevocable trust], 46 ACTEC L.J. 307 (2021).

TRUTH: Duncan E. Osborne provides a glimpse into his “deep dive into the right of privacy and into the consequences of available information and transparency in the world” in Truth, Transparency, and The Right of Privacy, 46 ACTEC L.J. 339 (2021), in which he emphasizes that “[l]awyers are the ultimate guardians of truth.”

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WEALTH TRANSFER TAXATION: In Wealth Transfer Tax Planning After the Tax Cuts and Jobs Act, 46 B.Y.U. L. Rev. 1411 (2021), John A. Miller and Jeffrey A. Maine bring the reader into the wealth transfer tax planning picture while providing references to more detailed treatments of particular topics within this broad field.

LEGISLATION CALIFORNIA adopts the Uniform Partition of Heirs Property Act. 2021 Cal. Legis. Serv. ch. 119.

CALIFORNIA authorizes death certificates to reflect how the deceased individual identified the individual’s gender as female, male, or nonbinary.

2021 Cal. Legis. Serv. ch. 53.

COLORADO requires all individual

and group health benefit plans issued or renewed on and after January 1, 2022, to provide coverage for health care services related to living organ donation for a covered person who is a living organ donor. 2021 Colo. Legis.

Serv. ch. 447.

CONNECTICUT prohibits insurers from discriminating against living organ donors in the issuance of disability, long-term care, or life insurance policies. 2021 Conn. Legis. Serv. P.A. 21-156.

ILLINOIS enacts comprehensive provisions governing electronic notarizations. 2021 Ill. Legis. Serv. P.A. 102-160.

ILLINOIS enacts the Electronic Wills and Remote Witness Act. 2021 Ill. Legis. Serv. P.A. 102-167.

ILLINOIS revises its provisions on transfer on death deeds to permit their use for all types of real property, not just residential property. 2021 Ill. Legis.

Serv. P.A. 102-68.

NEW HAMPSHIRE modernizes its statutes regarding advance health care directives. 2021 N.H. Laws ch. 176.

NEW JERSEY authorizes electronic notarization. 2021 N.J. Sess. Law Serv. ch. 179.

NEW JERSEY updates statutes governing standby guardianships. 2021 N.J. Sess. Law Serv. ch. 192.

NORTH CAROLINA prohibits organ transplant discrimination based on disability. 2021 N.C. Laws S.L. 2021-64. n

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January/February 2022 35

H

otels, resorts, marinas, retail mixed-use, and other hospitality-related assets will likely continue to present challenges to lenders seeking expedited relief from bankruptcy stay provisions available to creditors in “single asset real estate” bankruptcy cases.

CMBS Lenders and Others Use SPEs for Expedited Remedies Since the mid-1990s, lenders on hotels, resorts, and other hospitality properties have generally required their borrowers to transfer the asset being financed into an entity (generally a corporation, limited liability company, or limited partnership) that was both “bankruptcy remote” (a BRE) and “special purpose” (also called “single purpose”) (an SPE). An SPE is an entity that owns only the asset being mortgaged, is unlikely to become insolvent due to its own activities, and is generally protected from the effects of the insolvency of its affiliates. A BRE is an SPE that has a further, structural layer of protection for the lender, such as the requirement for an independent director or manager who must approve the commencement of any bankruptcy case, which makes declaring bankruptcy more difficult.

Jim Butler is a partner and chairman of the global hospitality group at Jeffer Mangels Butler & Mitchell LLP (JMBM) in Los Angeles, California. Robert B. Kaplan is a partner and senior member of JMBM’s bankruptcy group in San Francisco, California. Nicolas De Lancie is a partner and senior member of JMBM’s bankruptcy group in San Francisco, California.

Under the United States Bankruptcy Code, 11 U.S.C. section 101 (51B), if a bankruptcy case involves “single asset real estate” (often called SARE), the proceedings will tilt greatly in favor of the creditor secured by that SARE. Intuitively, then, an SPE that holds a single real estate asset would seem automatically to hold “single asset real estate” under the Bankruptcy Code. But it is not that simple.

This article examines why this is important to lenders and borrowers, gives an overview of the SARE determination, and provides some practical strategies.

The Legal Significance of SARE Status (or Not) for Lenders The determination that a debtor holds “single asset real estate” has important consequences for its bankruptcy case. In a SARE case, the creditor with a repayment obligation secured by the real estate asset will be entitled to relief from the Bankruptcy Code’s automatic stay as a matter of right unless the debtor does one of two things within 90 days (subject to extension) of commencing its case.

Under Bankruptcy Code section 363(d)(3), to avoid relief from the automatic stay being granted to a secured creditor (provided the creditor seeks it) with SARE collateral, the debtor that holds that collateral must, within those 90 days, either (a) file a plan of reorganization in its case that has a reasonable possibility of being confirmed within a reasonable time or (b) commence making monthly, interest-only payments to the secured creditor at the then-applicable non-default contract rate of interest on the value of the creditor’s interest in the SARE. These requirements are often

Can a Hotel Ever Be Single Asset Real Estate for Bankruptcy Purposes?

By Jim Butler, Robert B. Kaplan and Nicolas De Lancie

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Getty Images

difficult to accomplish unless the real estate asset is truly viable and cash is flowing.

Delays and Difficulties with SARE Status If the bankruptcy court finds that the real estate asset—such as a hotel or other resort property—is not “single asset real estate,” the creditor will likely be delayed in much more protracted proceedings and with much greater costs.

The determination of these rights can be time-consuming and expensive for the creditor: making or opposing a motion to determine whether the case is an SARE case, making a motion for relief from stay based thereon, determining whether there is any plan that the debtor could file that would have a reasonable possibility of confirmation within a reasonable time, and determining the value of the creditor’s interest in the SARE (i.e., is the creditor fully secured or undersecured and, if the latter, by how much), are all factors that require consideration.

Why isn’t every single hotel or other resort property an SARE? How could a debtor with a single hotel or other resort asset possibly avoid this SARE rule that is supposed to give the creditor expedited relief from the automatic stay if an expedited plan is not filed or interest payments are not commenced?

When a Hotel Is NOT Single Asset Real Estate “Single asset real estate” is defined in Bankruptcy Code section 101(51B). This section sets out three tests that must each be

satisfied to qualify one or more parcels of real property as SARE, as follows: 1. The real property must constitute a single property or project (other than residential real property with fewer than four residential units); 2. The real property must generate substantially all of the gross income of the debtor (other than a family farmer); and 3. The debtor must not be engaged in any substantial business other than the operation of the real property and activities incidental.

A fourth requirement—a limitation on the amount of debt secured by the real estate to $4 million—was eliminated by the Bankruptcy Code amendments in 2005, so now the SARE rules apply even to hotels and other resort properties with small outstanding loans.

SARE Status Created for Expedited Relief for Lenders The expedited relief from stay provisions of Bankruptcy Code section 362(d)(3) for cases that involve SARE were enacted in 1994 to address what Congress, the courts, and many commentators felt had been a long-time abuse of the bankruptcy process by larger, single real estate borrowers—generally real estate

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January/February 2022 37

developers—in what were already in the bankruptcy parlance known as “single asset real estate” cases. These cases, often in substance two-party disputes (debtor and secured creditor), typically led to “bad faith” bankruptcy case filing with protracted plan disputes and with high rates of the debtors’ inability to confirm a plan. The idea behind the legislation was that secured creditors should not be unduly delayed from foreclosing when there was a single real estate asset and a debtor with an inability to make interest payments and minimal chances of a successful bankruptcy reorganization.

Unfortunately for secured creditors, however, many of these views have changed over time, and in a direction favorable to real estate developers.

Historically, the classic SARE case involved a single office building or apartment house, or integrated office or apartment complex, passively held for income by its debtor owner, with minimal services provided and no real business other than the operation of the real property conducted by that owner. Properties involving an operating business, like hotels and other resort properties, however, are much more problematic.

What the Courts Say about SARE Cases with Hotels and Other Special Assets with Operating Businesses The Ninth Circuit Bankruptcy Appellate Panel, in In re CBJ Dev., Inc., 202 B.R. 467 (B.A.P. 9th Cir. 1996), held that a full-service hotel, which included a restaurant, bar, and gift shop, did not qualify as SARE because the third “prong” of the definition of an SARE—debtor not engaged in any substantial business other than the operation of the real property and activities incidental thereto—was not satisfied.

The bankruptcy court held that the “hotel is sufficiently active in nature to constitute a business other than the mere operation of property,” and observed that the gift shop, restaurant, and bar, among other things included in the operation of the 63-room hotel, constituted other “substantial business” than the operation of real property; and the Appellate Panel agreed. Both the bankruptcy court and

The common theme is whether the debtor has other business operations that are separate and distinct from owning and managing real estate.

the Appellate Panel observed that hotels were not automatically not SARE, but also that not every hotel was SARE. The Appellate Panel recognized that it was not clear what constituted merely “operating property” and what constituted other business activity, and there was little authority on the issue. It observed that the level of services provided by apartment and office building owners was generally minimal, whereas hotels generally provide maid, linen, and other services; and that apartment and office building owners generally have few employees, whereas hotel owners often have numerous employees. Analytically, it concluded that hotels and similar properties needed to be evaluated under the SARE definition on a “case-by-case” basis. Whenever courts are to determine issues on a case-by-case basis, the opportunity for debtor delay is, unfortunately, significant.

More on the Case-by-Case Approach to Hospitality Properties and SARE Rules As part of a changing attitude toward real estate cases, and perhaps to ameliorate the hard SARE rules, some bankruptcy courts have found a wide range of hospitality properties not to be SARE, including marinas, golf courses and clubs, and ski resorts, each on a case-by-case analysis of what sources of income the debtor

had, whether the debtor was an active or passive receiver of income, and what business or businesses it was conducting on or with respect to the real estate in question. The common theme, as articulated by a New Hampshire bankruptcy court in In re MTM Realty Trust, 2009 WL 612147 (Bankr. D.N.H. 2009), is whether the debtor has other business operations that are “separate and distinct from owning and managing real estate” or its “revenues are passive in nature (i.e. collection of rent) and [it] is not conducting any active business, other than merely operating the real estate and conducting incidental activities such as arranging for maintenance.”

This approach has been followed by several bankruptcy and district courts over the ensuing years in declining to apply the SARE rules to hotels. For example, in In re Whispering Pines Estate, Inc., 341 B.R. 134 (Bankr. D.N.H. 2006), the court held that an 89-room hotel without bar, restaurant, or gift shop was not SARE because substantial other business—serving breakfast, providing maid, laundry, phone, and internet services, and employing staff to do so—was conducted by the debtor on the property. See also In re Iowa Hotel Investors, LLC, 464 B.R. 898 (Bankr. N.D. Iowa 2011) (two separate, 64-room, full-service hotels were not SARE because substantial other business conducted; SARE rules apply to each property separately). The same reasoning has been applied to golf clubs (e.g., In re Club Golf Partners, L.P., 2007 WL 1176010 (E.D. Tex. 2007) (18-hole golf course with golf carts, pro shop, driving range, tennis courts, club house, and restaurant not SARE because of substantial other business conducted by debtor)) and marinas (e.g., In re Kkemko, Inc., 181 B.R. 47 (Bankr.

S.D. Ohio 1995) (marina with slip rentals, sales of gas and concessions, other stores, pool and showers, and boat repair, maintenance, and storage not SARE because of substantial other business conducted by debtor)).

The same case-by-case approach has also been followed to apply the SARE rules, such as, for example, to a hotel property in In re City Loft Hotel, LLC, 465 B.R. 428 (Bankr. D.S.C. 2012) (debtor’s boutique hotel was SARE because hotel

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coffee shop and hotel operations were conducted by separate affiliates, not by real estate debtor) and to a tennis club and spa property in In re Aspen Club & Spa, LLC, No. 18-14158-JGR, 2019 WL 4233621 (Bankr. D. Colo. July 23, 2019) (debtor owned real estate leased, in part, to affiliate—also a debtor—tennis and racket club with food and beverage service, spa, salon, sports medicine, and multiple other amenities; on that real estate were also located townhouses, condominiums, and affordable housing units; real estate was SARE because owner debtor conducted no business other than operating real estate).

Other bankruptcy courts, perhaps reflecting the general antipathy toward real estate cases and, particularly, possible “single asset real estate” cases, have also applied the SARE rules without much analysis to a hotel, in In re 5877 Poplar, L.P., 268 B.R. 140 (Bankr. W.D. Tenn.

2001) (debtor’s 126-room Comfort Inn was assumed to be SARE, but case was not about SARE rules).

Clever Debtor Arguments to Avoid SARE Rules But even where the debtor clearly holds SARE, clever arguments have been made to avoid the SARE rules. In In re Meruelo Maddux Props, Inc., 667 F.3d 1072 (9th Cir. 2012), a subsidiary of the debtor, itself, along with more than 50 other subsidiaries of the debtor, a debtor and clearly holding SARE, sought an order determining that this was not a SARE case because it, its parent, and its parent’s other debtor subsidiaries were together a single, consolidated, interrelated business operation. Even though the bankruptcy court below found that the subsidiary “appeared to be” a SARE debtor, that court declined to apply the mandatory SARE relief-from-stay rules under a so-called whole business enterprise exception: The debtor and its debtor-affiliates were to be regarded as a single business enterprise with substantial business beyond just operating real estate. On appeal to the district court, that court reversed the bankruptcy court, holding there was no “whole business enterprise” exception to the SARE rules. On further appeal to the Ninth Circuit, that court upheld the

district court and squarely rejected the claimed exception, noting that if Congress wished such an exception to apply in SARE cases, it could amend the Bankruptcy Code to add one.

What Does This All Mean in Terms of Debtor or Creditor Strategy?

As noted above, a debtor that has a gift shop or other outlet and business on its hotel or other hospitality property may defeat SARE status (one bankruptcy commentator has suggested, perhaps only half tongue-in-cheek, that debtors should open gift shops to defeat SARE status).

Otherwise, it faces relatively short bankruptcy proceedings unless it either files a plan of reorganization within the first 90 days of the case (or a court-approved extension), or starts making monthly, interest-only payments to the secured creditor.

Where it is clear that the debtor holds SARE (like an office or apartment building or complex), the strategy is generally for the secured creditor to wait out the 90-day period. Then, if the debtor has not either filed a plan or started making interest payments during that period, the secured creditor should file a motion for relief from stay under Bankruptcy Code section 362(d)(3) (and any other applicable provision as well).

But when there is doubt about whether the collateral property is SARE— as there will normally be with hotels, resorts, marinas, and sports facilities— the secured creditor should generally move quickly to file a motion for the bankruptcy court to determine if the real property is SARE. The secured creditor should also be prepared to respond quickly to a motion by the debtor that the property is not SARE, which the debtor or an affiliate may make as a defensive maneuver. Even in a jurisdiction where there is good decisional authority on the SARE question, because these are caseby-case determinations, making such a motion early is probably the better practice.

Some Lender Strategies for SARE Cases The secured creditor wants a determination of the SARE status early because, if it

turns out that SARE status applies, Bankruptcy Code section 362(d)(3) gives the secured creditor relief from the automatic stay on the later of 90 days after the case commenced (or any extension given) and 30 days after the court determines the property is SARE. Another strategy that may be used in appropriate situations is including an acknowledgment and representation by the borrower that the real property in question is SARE under the Bankruptcy Code in any workout or forbearance agreement, and that the secured creditor is entering into the agreement in reliance on this representation and acknowledgment. This may be unenforceable in bankruptcy, or simply ignored by the court, but it may be worth a try, and many covenants may be enforceable if made in a workout that would not have been enforceable when the loan was originated.

Conclusion In light of the development and application of the SARE law as discussed above, with its case-by-case analysis and focus on whether the debtor has other substantial business operations on the property that are separate and distinct from owning and managing the property, and whether its income is passive or active in nature, perhaps the most important thing the originator of a loan to be secured by a hotel or other hospitality property can do, just as with general SPE and BRE requirements, is require up front that the structure of the ownership and operation of the property be clearly divided between the property ownership by the borrower and the operation and management of the active hotel and other outlets thereon (restaurants, bars, gift shops and other concessions, spas, and fitness centers) by third parties, even if affiliates, under leases so that the borrower owner has only passive income from the leases and engages itself in no substantial business on the property. If this structure and property characterization were not created at loan origination, special servicers or lenders handling a distressed asset may wish to seek such structuring and documentation in a workout to effectuate the same result. n

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January/February 2022 39

Key Considerations for Home Mortgage Debt Collectors under the Consumer Financial Protection Bureau’s Final Rule

By Bryan M. Mull

Published in Probate & Property, Volume 36, No 1 © 2022 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.

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Getty Images

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nacted in 1978, the Fair Debt Collection Practices Act (the FDCPA) has long loomed over the debt collection industry, governing the collection of consumer debt. The FDCPA is implicated when a “debt collector” pursues collection from a residential tenant, home mortgage borrower, or other consumer or debtor protected by the Act. While the FDCPA generally

Bryan M. Mull is a member of Gordon Feinblatt LLC in Baltimore, Maryland.

does not govern creditors attempting to collect their own debts, it does generally extend to collection agencies, debt buyers, collection lawyers, and mortgage servicing companies that obtain servicing rights after default, among other others. Residential real estate transactions are often the most significant debts that a consumer incurs. Most observers expect mortgage delinquencies to spike in the wake of COVID-19, so debt collectors in this space would be well advised to acquaint themselves with the FDCPA, especially if the debt collector’s jurisdiction requires the use of judicial foreclosure procedure.

Last year the Consumer Financial Protection Bureau (CFPB) issued its long-awaited final rule implementing the FDCPA via amendments to Regulation F (12 C.F.R. part 1006) in two parts.

The first part of the final rule, issued on October 30, 2020, largely focuses on communications between debt collectors and consumers. Notably, the final rule directly addresses more modern forms of communication, such as text messaging, emails, and social media.

Highlights from the final rule include: • Safe Harbor for Limited-Content Messages—The final rule creates a “limited-content message” that is not considered a communication under the FDCPA. Notably, this allows a debt collector to leave a voicemail that encourages the debtor to return a call, without disclosing sensitive information that may otherwise trigger an FDCPA violation.

• Email and Text Messages—Debt collectors may use email or text messages, but the emails and text messages must include instructions for a reasonable and simple method for consumers to opt out of receiving further emails or text messages.

• Social Media—Debt collectors cannot use social media to contact a consumer if such a communication can be viewed by the public or the consumer’s social media contacts. Debt collectors may contact a consumer through a direct

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Debt collectors should pay careful attention to the model form validation notice and consider revising their notices accordingly. message that is not visible on the consumer’s social media platform.

• Call Frequency—A debt collector is presumed to violate the FDCPA’s prohibition on repeated telephone calls if the debt collector calls a consumer more than seven times within a seven-day period or within seven days after engaging in a telephone conversation with the consumer.

• Record Retention—A debt collector must maintain records of compliance or noncompliance from the date that the debt collector begins collection activity on a debt until three years after the debt collector’s last collection activity on the debt. Debt collectors must retain telephone call recordings for three years after the dates of the telephone calls.

The second part of the final rule, issued on December 18, 2020, focuses on validation notices, passive debt collection, and time-barred debt. Highlights from the second part of the final rule include: • Validation Notices—The FDCPA generally requires a debt collector to provide a debt validation notice either in its initial

communication with a consumer or shortly thereafter. The final rule provides a model form collectors may use as a safe harbor. Under certain circumstances, debt collectors may provide the validation notice electronically. Among other things, the validation notice must provide an itemization of the current amount of the debt as of an “itemization date” reference point (e.g., last statement date, chargeoff date, and last payment date).

• Passive Debt Collection—Passive debt collection refers to the practice of reporting debt collection information to credit reporting agencies without first attempting to notify the consumer about the debt. The final rule prohibits this practice, requiring that a debt collector must either speak to a consumer or wait a reasonable period of time (14 days) after sending a written message to the consumer about the debt to receive a notice of inability to deliver the notice before furnishing information to a credit reporting agency. If the collector receives a notice of inability to deliver the notice, it must resubmit the debt information to the consumer before furnishing information to a credit reporting agency.

• Time-Barred Debt—The final rule prohibits debt collectors from bringing or threatening to bring a legal action to collect a debt that is barred by applicable statute of limitations. This rule sets forth a strict liability standard for these violations. The final rule does not prohibit the filing of a proof of claim in a consumer’s bankruptcy case with respect to a time-barred debt.

In October 2021, the CFPB issued guidance in the form of Frequently Asked Questions (FAQs) pertaining to debt collectors’ telephonic communications under the rule. Among other things, the FAQs address required and

optional information for “limitedcontent messages” and clarify that so-called Zortman voicemails (i.e., “we have an important message from [company’s name] . . . this is a call from a debt collector . . . please call [company’s telephone number]”) do not qualify as limited-content messages.

The FAQs also address the rule’s call frequency presumptions. Under the rule, a debt collector is presumed to violate the prohibition against repeated or continuous telephone calls or conversations if the debt collector places a telephone call to a particular person in connection with the collection of a particular debt more than seven times within seven consecutive calendar days, or within a period of seven consecutive calendar days after having had a telephone conversation with the person in connection with the collection of such debt.

Among other things, the FAQs clarify that the above presumption generally applies on a per-debt basis rather than a per-consumer basis (e.g., a consumer with two debts in collection could receive 14 calls from a debt collector in a week—seven for each debt). Also, the FAQs also clarify that if a consumer initiates a call, this does not count toward the call frequency limitations, but that a conversation initiated by a consumer’s call would count toward the conversation frequency limitations.

Debt collectors should review the FAQs, as well as the CFPB’s small entity compliance guide, for insight into how the CFPB intends to apply the final rule in practice.

The final rule became effective on November 30, 2021.

Conclusion The final rule sets out several safe harbors that should guide debt collectors as they review their policies and oversight systems. Debt collectors should also pay careful attention to the model form validation notice and consider revising their notices accordingly. Debt collectors should also review their policies for evaluating any applicable statute of limitations. n

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PART 1006—DEBT COLLECTION PRACTICES (REGULATION F) Subpart A—General Sec. 1006.1 Authority, purpose, and coverage.

1006.2 Definitions.

person excluded from coverage by section 1029(a) of the Consumer Financial Protection Act of 2010, title X of the Dodd-Frank Act (12 U.S.C. 5519(a)).

(2) [Reserved]

Subpart B—Rules for FDCPA Debt Collectors 1006.6 Communications in connection with debt collection.

1006.10 Acquisition of location information.

1006.14 Harassing, oppressive, or abusive conduct.

1006.18 False, deceptive, or misleading representations or means.

1006.22 Unfair or unconscionable means.

1006.26 [Reserved] 1006.30 Other prohibited practices.

1006.34 [Reserved] 1006.38 Disputes and requests for originalcreditor information.

1006.42 Sending required disclosures.

Subpart C—[Reserved] Subpart D—Miscellaneous 1006.100 Record retention.

1006.104 Relation to State laws.

1006.108 Exemption for State regulation.

Appendix A to Part 1006—Procedures for State Application for Exemption From the Provisions of the Act Appendix B to Part 1006—[Reserved] Appendix C to Part 1006—Issuance of Advisory Opinions Supplement I to Part 1006—Official Interpretations Authority: 12 U.S.C. 5512, 5514(b), 5532; 15 U.S.C. 1692l(d), 1692o, 7004.

§ 1006.2 Definitions.

For purposes of this part, the following definitions apply: (a) Act or FDCPA means the Fair Debt Collection Practices Act (15 U.S.C. 1692 et seq.). (b) Attempt to communicate means any act to initiate a communication or other contact about a debt with any person through any medium, including by soliciting a response from such person. An attempt to communicate includes leaving a limited-content message, as defined in paragraph (j) of this section. (c) Bureau means the Bureau of Consumer Financial Protection. (d) Communicate or communication means the conveying of information regarding a debt directly or indirectly to any person through any medium. (e) Consumer means any natural person obligated or allegedly obligated to pay any debt. For purposes of § 1006.6, the term consumer includes the persons described in § 1006.6(a). The Bureau may further define this term by regulation to clarify its application when the consumer is deceased. (f) [Reserved] (g) Creditor means any person who offers or extends credit creating a debt or to whom a debt is owed. The term creditor does not, however, include any person to the extent that such person receives an assignment or transfer of a debt in default solely to facilitate collection of the debt for another. (h) Debt means any obligation or alleged obligation of a consumer to pay money arising out of a transaction in which the money, property, insurance, or services that are the subject of the transaction are primarily for personal, family, or household purposes, whether or not the obligation has been reduced to judgment. (i)(1) Debt collector means any person who uses any instrumentality of interstate commerce or mail in any business the principal purpose of which is the collection of debts, or who regularly collects or attempts to collect, directly or indirectly, debts owed or due, or asserted to be owed or due, to another. Notwithstanding paragraph (i)(2)(vi) of this section, the term debt collector includes any creditor that, in the process of collecting its own debts, uses any name other than its own that would indicate that a third person is collecting or attempting to collect such debts. For purposes of § 1006.22(e), the term also includes any person who uses any instrumentality of interstate commerce or mail in any business the principal purpose of which is the enforcement of security interests.

(2) The term debt collector excludes: (i) Any officer or employee of a creditor while the officer or employee is collecting debts for the creditor in the creditor’s name; (ii) Any person while acting as a debt collector for another person if: (A) The person acting as a debt collector does so only for persons with whom the person acting as a debt collector is related by common ownership or affiliated by corporate control; and (B) The principal business of the person acting as a debt collector is not the collection of debts; (iii) Any officer or employee of the United States or any State to the extent that collecting or attempting to

Subpart A—General § 1006.1 Authority, purpose, and coverage. (a) Authority. This part, known as Regulation F, is issued by the Bureau of Consumer Financial Protection pursuant to sections 814(d) and 817 of the Fair Debt Collection Practices Act (FDCPA or Act), 15 U.S.C. 1692l(d), 1692o; title X of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd- Frank Act), 12 U.S.C. 5481 et seq.; and paragraph (b)(1) of section 104 of the Electronic Signatures in Global and National Commerce Act (E–SIGN Act), 15 U.S.C. 7004. (b) Purpose. This part carries out the purposes of the FDCPA, which include eliminating abusive debt collection practices by debt collectors, ensuring that debt collectors who refrain from using abusive debt collection practices are not competitively disadvantaged, and promoting consistent State action to protect consumers against debt collection abuses. This part also prescribes requirements to ensure that certain features of debt collection are disclosed fully, accurately, and effectively to consumers in a manner that permits consumers to understand the costs, benefits, and risks associated with debt collection, in light of the facts and circumstances.

Finally, this part imposes record retention requirements to enable the Bureau to administer and carry out the purposes of the FDCPA, the Dodd-Frank Act, and this part, as well as to prevent evasions thereof. The record retention requirements also will facilitate supervision of debt collectors and the assessment and detection of risks to consumers. (c) Coverage. (1) Except as provided in § 1006.108 and appendix A of this part regarding applications for State exemptions from the FDCPA, this part applies to debt collectors, as defined in § 1006.2(i), other than a

collect any debt is in the performance of the officer’s or employee’s official duties; (iv) Any person while serving or attempting to serve legal process on any other person in connection with the judicial enforcement of any debt; (v) Any nonprofit organization that, at the request of consumers, performs bona fide consumer credit counseling and assists consumers in liquidating their debts by receiving payment from such consumers and distributing such amounts to creditors; (vi) Any person collecting or attempting to collect any debt owed or due, or asserted to be owed or due to another, to the extent such debt collection activity: (A) Is incidental to a bona fide fiduciary obligation or a bona fide escrow arrangement; (B) Concerns a debt that such person originated; (C) Concerns a debt that was not in default at the time such person obtained it; or (D) Concerns a debt that such person obtained as a secured party in a commercial credit transaction involving the creditor; and (vii) A private entity, to the extent such private entity is operating a bad check enforcement program that complies with section 818 of the Act. (j) Limited-content message means a voicemail message for a consumer that includes all of the content described in paragraph (j)(1) of this section, that may include any of the content described in paragraph (j)(2) of this section, and that includes no other content.

(1) Required content. A limitedcontent message is a voicemail message for a consumer that includes: (i) A business name for the debt collector that does not indicate that the debt collector is in the debt collection business; (ii) A request that the consumer reply to the message; (iii) The name or names of one or more natural persons whom the consumer can contact to reply to the debt collector; and (iv) A telephone number or numbers that the consumer can use to reply to the debt collector.

(2) Optional content. In addition to the content described in paragraph (j)(1) of this section, a limited-content message may include one or more of the following: (i) A salutation; (ii) The date and time of the message; (iii) Suggested dates and times for the consumer to reply to the message; and (iv) A statement that if the consumer replies, the consumer may speak to any of the company’s representatives or associates. (k) Person includes natural persons, corporations, companies, associations, firms, partnerships, societies, and joint stock companies. (l) State means any State, territory, or possession of the United States, the District of Columbia, the Commonwealth of Puerto Rico, or any political subdivision of any of the foregoing.

Subpart B—Rules for FDCPA Debt Collectors § 1006.6 Communications in connection with debt collection. (a) Definition. For purposes of this section, the term consumer includes: (1) The consumer’s spouse; (2) The consumer’s parent, if the consumer is a minor;

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(3) The consumer’s legal guardian; (4) The executor or administrator of the consumer’s estate, if the consumer is deceased; and (5) A confirmed successor in interest, as defined in Regulation X, 12 CFR 1024.31, or Regulation Z, 12 CFR 1026.2(a)(27)(ii). (b) Communications with a consumer—(1) Prohibitions regarding unusual or inconvenient times or places. Except as provided in paragraph (b)(4) of this section, a debt collector must not communicate or attempt to communicate with a consumer in connection with the collection of any debt: (i) At any unusual time, or at a time that the debt collector knows or should know is inconvenient to the consumer. In the absence of the debt collector’s knowledge of circumstances to the contrary, a time before 8:00 a.m. and after 9:00 p.m. local time at the consumer’s location is inconvenient; or (ii) At any unusual place, or at a place that the debt collector knows or should know is inconvenient to the consumer.

(2) Prohibitions regarding consumer represented by an attorney. Except as provided in paragraph (b)(4) of this section, a debt collector must not communicate or attempt to communicate with a consumer in connection with the collection of any debt if the debt collector knows the consumer is represented by an attorney with respect to such debt and knows, or can readily ascertain, the attorney’s name and address, unless the attorney: (i) Fails to respond within a reasonable period of time to a communication from the debt collector; or (ii) Consents to the debt collector’s direct communication with the consumer.

(3) Prohibitions regarding consumer’s place of employment. Except as provided in paragraph (b)(4) of this section, a debt collector must not communicate or attempt to communicate with a consumer in connection with the collection of any debt at the consumer’s place of employment, if the debt collector knows or has reason to know that the consumer’s employer prohibits the consumer from receiving such communication.

(4) Exceptions. The prohibitions in paragraphs (b)(1) through (3) of this section do not apply when a debt collector communicates or attempts to communicate with a consumer in connection with the collection of any debt with: (i) The prior consent of the consumer, given directly to the debt collector during a communication that does not violate paragraphs (b)(1) through (3) of this section; or (ii) The express permission of a court of competent jurisdiction. (c) Communications with a consumer—after refusal to pay or cease communication notice—(1) Prohibition.

Except as provided in paragraph (c)(2) of this section, if a consumer notifies a debt collector in writing that the consumer refuses to pay a debt or that the consumer wants the debt collector to cease further communication with the consumer, the debt collector must not communicate or attempt to communicate further with the consumer with respect to such debt.

(2) Exceptions. The prohibition in paragraph (c)(1) of this section does not apply when a debt collector communicates or attempts to communicate further with a consumer with respect to such debt: (i) To advise the consumer that the debt collector’s further efforts are being terminated; (ii) To notify the consumer that the debt collector or

creditor may invoke specified remedies that the debt collector or creditor ordinarily invokes; or (iii) Where applicable, to notify the consumer that the debt collector or creditor intends to invoke a specified remedy. (d) Communications with third parties—(1) Prohibitions. Except as provided in paragraph (d)(2) of this section, a debt collector must not communicate, in connection with the collection of any debt, with any person other than: (i) The consumer; (ii) The consumer’s attorney; (iii) A consumer reporting agency, if otherwise permitted by law; (iv) The creditor; (v) The creditor’s attorney; or (vi) The debt collector’s attorney.

(2) Exceptions. The prohibition in paragraph (d)(1) of this section does not apply when a debt collector communicates, in connection with the collection of any debt, with a person: (i) For the purpose of acquiring location information, as provided in § 1006.10; (ii) With the prior consent of the consumer given directly to the debt collector; (iii) With the express permission of a court of competent jurisdiction; or (iv) As reasonably necessary to effectuate a postjudgment judicial remedy.

(3) Reasonable procedures for email and text message communications. A debt collector maintains procedures that are reasonably adapted, for purposes of FDCPA section 813(c), to avoid a bona fide error in sending an email or text message communication that would result in a violation of paragraph (d)(1) of this section if those procedures include steps to reasonably confirm and document that: (i) The debt collector communicated with the consumer by sending an email to an email address described in paragraph (d)(4) of this section or a text message to a telephone number described in paragraph (d)(5) of this section; and (ii) The debt collector did not communicate with the consumer by sending an email to an email address or a text message to a telephone number that the debt collector knows has led to a disclosure prohibited by paragraph (d)(1) of this section.

(4) Procedures for email addresses. For purposes of paragraph (d)(3)(i) of this section, a debt collector may send an email to an email address if: (i) Procedures based on communication between the consumer and the debt collector. (A) The consumer used the email address to communicate with the debt collector about the debt and the consumer has not since opted out of communications to that email address; or (B) The debt collector has received directly from the consumer prior consent to use the email address to communicate with the consumer about the debt and the consumer has not withdrawn that consent; or (ii) Procedures based on communication by the creditor. (A) A creditor obtained the email address from the consumer; (B) The creditor used the email address to communicate with the consumer about the account and the consumer did not ask the creditor to stop using it; (C) Before the debt collector used the email address to communicate with the consumer about the debt, the creditor sent the consumer a written or electronic notice,

to an address the creditor obtained from the consumer and used to communicate with the consumer about the account, that clearly and conspicuously disclosed: (1) That the debt has been or will be transferred to the debt collector; (2) The email address and the fact that the debt collector might use the email address to communicate with the consumer about the debt; (3) That, if others have access to the email address, then it is possible they may see the emails; (4) Instructions for a reasonable and simple method by which the consumer could opt out of such communications; and (5) The date by which the debt collector or the creditor must receive the consumer’s request to opt out, which must be at least 35 days after the date the notice is sent; (D) The opt-out period provided under paragraph (d) (4)(ii)(C)(5) of this section has expired and the consumer has not opted out; and (E) The email address has a domain name that is available for use by the general public, unless the debt collector knows the address is provided by the consumer’s employer. (iii) Procedures based on communication by the prior debt collector. (A) Any prior debt collector obtained the email address in accordance with paragraph (d)(4)(i) or (ii) of this section; (B) The immediately prior debt collector used the email address to communicate with the consumer about the debt; and (C) The consumer did not opt out of such communications.

(5) Procedures for telephone numbers for text messages.

For purposes of paragraph (d)(3)(i) of this section, a debt collector may send a text message to a telephone number if: (i) The consumer used the telephone number to communicate with the debt collector about the debt by text message, the consumer has not since opted out of text message communications to that telephone number, and within the past 60 days either: (A) The consumer sent the text message described in paragraph (d)(5)(i) of this section or a new text message to the debt collector from that telephone number; or (B) The debt collector confirmed, using a complete and accurate database, that the telephone number has not been reassigned from the consumer to another user since the date of the consumer’s most recent text message to the debt collector from that telephone number; or (ii) The debt collector received directly from the consumer prior consent to use the telephone number to communicate with the consumer about the debt by text message, the consumer has not since withdrawn that consent, and within the past 60 days the debt collector either: (A) Obtained the prior consent described in paragraph (d)(5)(ii) of this section or renewed consent from the consumer; or (B) Confirmed, using a complete and accurate database, that the telephone number has not been reassigned from the consumer to another user since the date of the consumer’s most recent consent to use that telephone number to communicate about the debt by text message. (e) Opt-out notice for electronic communications or attempts to communicate. A debt collector who communicates or attempts to communicate with a consumer

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electronically in connection with the collection of a debt using a specific email address, telephone number for text messages, or other electronicmedium address must include in such communication or attempt to communicate a clear and conspicuous statement describing a reasonable and simple method by which the consumer can opt out of further electronic communications or attempts to communicate by the debt collector to that address or telephone number. The debt collector may not require, directly or indirectly, that the consumer, in order to opt out, pay any fee to the debt collector or provide any information other than the consumer’s opt-out preferences and the email address, telephone number for text messages, or other electronic-medium address subject to the opt-out request. § 1006.10 Acquisition of location information. (a) Definition. The term location information means a consumer’s: (1) Place of abode and telephone number at such place; or (2) Place of employment. (b) Form and content of location communications. A debt collector communicating with a person other than the consumer for the purpose of acquiring location information must: (1) Identify himself or herself individually by name, state that he or she is confirming or correcting the consumer’s location information, and, only if expressly requested, identify his or her employer; (2) Not state that the consumer owes any debt; (3) Not communicate by postcard; (4) Not use any language or symbol on any envelope or in the contents of any communication by mail indicating that the debt collector is in the debt collection business or that the communication relates to the collection of a debt; and (5) After the debt collector knows the consumer is represented by an attorney with regard to the subject debt and has knowledge of, or can readily ascertain, such attorney’s name and address, not communicate with any person other than that attorney, unless the attorney fails to respond to the debt collector’s communication within a reasonable period of time. (c) Frequency of location communications. In addition to complying with § 1006.14(b)(1), a debt collector communicating with any person other than the consumer for the purpose of acquiring location information about the consumer must not communicate more than once with such person unless requested to do so by such person, or unless the debt collector reasonably believes that the earlier response of such person is erroneous or incomplete and that such person now has correct or complete location information. § 1006.14 Harassing, oppressive, or abusive conduct. (a) In general. A debt collector must not engage in any conduct the natural consequence of which is to harass, oppress, or abuse any person in connection with the collection of a debt, including, but not limited to, the conduct described in paragraphs (b) through (h) of this section. (b) Repeated or continuous telephone calls or telephone conversations—(1) In general. In connection with the collection of a debt, a debt collector must not place telephone calls or engage any person in telephone conversation repeatedly or continuously with intent to annoy, abuse, or harass any person at the called number.

(2) Telephone call frequencies; presumptions of compliance and violation. (i) Subject to the exclusions in paragraph (b)(3) of this section, a debt collector is

presumed to comply with paragraph (b)(1) of this section and FDCPA section 806(5) (15 U.S.C. 1692d(5)) if the debt collector places a telephone call to a particular person in connection with the collection of a particular debt neither: (A) More than seven times within seven consecutive days; nor (B) Within a period of seven consecutive days after having had a telephone conversation with the person in connection with the collection of such debt. The date of the telephone conversation is the first day of the seven-consecutive-day period. (ii) Subject to the exclusions in paragraph (b)(3) of this section, a debt collector is presumed to violate paragraph (b)(1) of this section and FDCPA section 806(5) if the debt collector places a telephone call to a particular person in connection with the collection of a particular debt in excess of either of the telephone call frequencies described in paragraph (b)(2)(i) of this section.

(3) Certain telephone calls excluded from the telephone call frequencies. Telephone calls placed to a person do not count toward the telephone call frequencies described in paragraph (b)(2)(i) of this section if they are: (i) Placed with such person’s prior consent given directly to the debt collector and within a period no longer than seven consecutive days after receiving the prior consent, with the date the debt collector receives prior consent counting as the first day of the seven-consecutive-day period; (ii) Not connected to the dialed number; or (iii) Placed to the persons described in § 1006.6(d)(1) (ii) through (vi).

(4) Definition. For purposes of this paragraph (b), particular debt means each of a consumer’s debts in collection. However, in the case of student loan debts, the term particular debt means all student loan debts that a consumer owes or allegedly owes that were serviced under a single account number at the time the debts were obtained by a debt collector. (c) Violence or other criminal means. In connection with the collection of a debt, a debt collector must not use or threaten to use violence or other criminal means to harm the physical person, reputation, or property of any person. (d) Obscene or profane language. In connection with the collection of a debt, a debt collector must not use obscene or profane language, or language the natural consequence of which is to abuse the hearer or reader. (e) Debtor’s list. In connection with the collection of a debt, a debt collector must not publish a list of consumers who allegedly refuse to pay debts, except to a consumer reporting agency or to persons meeting the requirements of sections 603(f) or 604(a)(3) of the Fair Credit Reporting Act (15 U.S.C. 1681a(f) or 1681b(a)(3)). (f) Coercive advertisements. In connection with the collection of a debt, a debt collector must not advertise for sale any debt to coerce payment of the debt. (g) Meaningful disclosure of identity. In connection with the collection of a debt, a debt collector must not place telephone calls without meaningfully disclosing the caller’s identity, except as provided in § 1006.10. (h) Prohibited communication media—(1) In general. In connection with the collection of any debt, a debt collector must not communicate or attempt to communicate with a person through a medium of communication if the person has requested that the debt collector not use that medium to communicate with the person.

(2) Exceptions. Notwithstanding the prohibition in paragraph (h)(1) of this section:

(i) If a person opts out of receiving electronic communications from a debt collector, a debt collector may send an electronic confirmation of the person’s request to opt out, provided that the electronic confirmation contains no information other than a statement confirming the person’s request and that the debt collector will honor it; (ii) If a person initiates contact with a debt collector using a medium of communication that the person previously requested the debt collector not use, the debt collector may respond once through the same medium of communication used by the person; or (iii) If otherwise required by applicable law, a debt collector may communicate or attempt to communicate with a person in connection with the collection of any debt through a medium of communication that the person has requested the debt collector not use to communicate with the person. § 1006.18 False, deceptive, or misleading representations or means. (a) In general. A debt collector must not use any false, deceptive, or misleading representation or means in connection with the collection of any debt, including, but not limited to, the conduct described in paragraphs (b) through (d) of this section. (b) False, deceptive, or misleading representations. (1) A debt collector must not falsely represent or imply that: (i) The debt collector is vouched for, bonded by, or affiliated with the United States or any State, including through the use of any badge, uniform, or facsimile thereof. (ii) The debt collector operates or is employed by a consumer reporting agency, as defined by section 603(f) of the Fair Credit Reporting Act (15 U.S.C. 1681a(f)). (iii) Any individual is an attorney or that any communication is from an attorney. (iv) The consumer committed any crime or other conduct in order to disgrace the consumer. (v) A sale, referral, or other transfer of any interest in a debt causes or will cause the consumer to: (A) Lose any claim or defense to payment of the debt; or (B) Become subject to any practice prohibited by this part. (vi) Accounts have been turned over to innocent purchasers for value. (vii) Documents are legal process. (viii) Documents are not legal process forms or do not require action by the consumer.

(2) A debt collector must not falsely represent: (i) The character, amount, or legal status of any debt. (ii) Any services rendered, or compensation that may be lawfully received, by any debt collector for the collection of a debt.

(3) A debt collector must not represent or imply that nonpayment of any debt will result in the arrest or imprisonment of any person or the seizure, garnishment, attachment, or sale of any property or wages of any person unless such action is lawful and the debt collector or creditor intends to take such action. (c) False, deceptive, or misleading collection means. A debt collector must not: (1) Threaten to take any action that cannot legally be taken or that is not intended to be taken.

(2) Communicate or threaten to communicate to any person credit information that the debt collector knows or should know is false, including the failure to communicate that a disputed debt is disputed.

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January/February 2022 45

(3) Use or distribute any written communication that simulates or that the debt collector falsely represents to be a document authorized, issued, or approved by any court, official, or agency of the United States or any State, or that creates a false impression about its source, authorization, or approval.

(4) Use any business, company, or organization name other than the true name of the debt collector’s business, company, or organization. (d) False representations or deceptive means. A debt collector must not use any false representation or deceptive means to collect or attempt to collect any debt or to obtain information concerning a consumer. (e) Disclosures required—(1) Initial communications. A debt collector must disclose in its initial communication with a consumer that the debt collector is attempting to collect a debt and that any information obtained will be used for that purpose. If the debt collector’s initial communication with the consumer is oral, the debt collector must make the disclosure required by this paragraph again in its initial written communication with the consumer.

(2) Subsequent communications. In each communication with the consumer subsequent to the communications described in paragraph (e)(1) of this section, the debt collector must disclose that the communication is from a debt collector.

(3) Exception. Disclosures under paragraphs (e)(1) and (2) of this section are not required in a formal pleading made in connection with a legal action.

(4) Translated disclosures. A debt collector must make the disclosures required by paragraphs (e)(1) and (2) of this section in the same language or languages used for the rest of the communication in which the debt collector conveyed the disclosures. Any translation of the disclosures a debt collector uses must be complete and accurate. (f) Assumed names. This section does not prohibit a debt collector’s employee from using an assumed name when communicating or attempting to communicate with a person, provided that the employee uses the assumed name consistently and that the debt collector can readily identify any employee using an assumed name. § 1006.22 Unfair or unconscionable means. (a) In general. A debt collector must not use unfair or unconscionable means to collect or attempt to collect any debt, including, but not limited to, the conduct described in paragraphs (b) through (f) of this section. (b) Collection of unauthorized amounts. A debt collector must not collect any amount unless such amount is expressly authorized by the agreement creating the debt or permitted by law. For purposes of this paragraph, the term ‘‘any amount’’ includes any interest, fee, charge, or expense incidental to the principal obligation. (c) Postdated payment instruments. A debt collector must not: (1) Accept from any person a check or other payment instrument postdated by more than five days unless such person is notified in writing of the debt collector’s intent to deposit such check or instrument not more than ten, nor less than three, days (excluding legal public holidays identified in 5 U.S.C. 6103(a), Saturdays, and Sundays) prior to such deposit.

(2) Solicit any postdated check or other postdated payment instrument for the purpose of threatening or

instituting criminal prosecution.

(3) Deposit or threaten to deposit any postdated check or other postdated payment instrument prior to the date on such check or instrument. (d) Charges resulting from concealment of purpose. A debt collector must not cause charges to be made to any person for communications by concealment of the true purpose of the communication. Such charges include, but are not limited to, collect telephone calls and telegram fees. (e) Nonjudicial action regarding property. A debt collector must not take or threaten to take any nonjudicial action to effect dispossession or disablement of property if: (1) There is no present right to possession of the property claimed as collateral through an enforceable security interest; (2) There is no present intention to take possession of the property; or (3) The property is exempt by law from such dispossession or disablement. (f) Restrictions on use of certain media. A debt collector must not: (1) Communicate with a consumer regarding a debt by postcard.

(2) Use any language or symbol, other than the debt collector’s address, on any envelope when communicating with a consumer by mail, except that a debt collector may use the debt collector’s business name on an envelope if such name does not indicate that the debt collector is in the debt collection business.

(3) Communicate or attempt to communicate with a consumer by sending an email to an email address that the debt collector knows is provided to the consumer by the consumer’s employer, unless the email address is one described in § 1006.6(d)(4)(i) or (iii).

(4) Communicate or attempt to communicate with a person in connection with the collection of a debt through a social media platform if the communication or attempt to communicate is viewable by the general public or the person’s social media contacts. (g) Safe harbor for certain emails and text messages relating to the collection of a debt. A debt collector who communicates with a consumer by sending an email or text message in accordance with the procedures described in § 1006.6(d)(3) does not violate paragraph (a) of this section by revealing in the email or text message the debt collector’s name or other information indicating that the communication relates to the collection of a debt. § 1006.26 [Reserved] § 1006.30 Other prohibited practices. (a) [Reserved] (b) Prohibition on the sale, transfer for consideration, or placement for collection of certain debts—(1) In general.

Except as provided in paragraph (b)(2) of this section, a debt collector must not sell, transfer for consideration, or place for collection a debt if the debt collector knows or should know that the debt has been paid or settled or discharged in bankruptcy.

(2) Exceptions—(i) In general. A debt collector may transfer for consideration a debt described in paragraph (b)(1) of this section if the debt collector: (A) Transfers the debt to the debt’s owner; (B) Transfers the debt to a previous owner of the debt, if the transfer is authorized under the terms of the original contract between the debt collector and the previous owner; or

(C) Transfers the debt as a result of a merger, acquisition, purchase and assumption transaction, or a transfer of substantially all of the debt collector’s assets. (ii) Secured claims in bankruptcy. A debt collector may sell, transfer for consideration, or place for collection a debt that has been discharged in bankruptcy if the debt is secured by an enforceable lien and the debt collector notifies the transferee that the consumer’s personal liability for the debt was discharged in bankruptcy. (iii) Securitizations and pledges of debt. Paragraph (b) (1) of this section does not prohibit the securitization of a debt or the pledging of a portfolio of debt as collateral in connection with a borrowing. (c) Multiple debts. If a consumer makes any single payment to a debt collector with respect to multiple debts owed by the consumer to the debt collector, the debt collector: (1) Must not apply the payment to any debt that is disputed by the consumer; and (2) If applicable, must apply the payment in accordance with the consumer’s directions. (d) Legal actions by debt collectors— (1) Action to enforce interest in real property. A debt collector who brings a legal action against a consumer to enforce an interest in real property securing the consumer’s debt must bring the action only in a judicial district or similar legal entity in which such real property is located.

(2) Other legal actions. A debt collector who brings a legal action against a consumer other than to enforce an interest in real property securing the consumer’s debt must bring such action only in the judicial district or similar legal entity in which the consumer: (i) Signed the contract sued upon; or (ii) Resides at the commencement of the action.

(3) Authorization of actions. Nothing in this part authorizes debt collectors to bring legal actions. (e) Furnishing certain deceptive forms. A debt collector must not design, compile, and furnish any form that the debt collector knows would be used to cause a consumer falsely to believe that a person other than the consumer’s creditor is participating in collecting or attempting to collect a debt that the consumer allegedly owes to the creditor. § 1006.34 [Reserved] § 1006.38 Disputes and requests for original-creditor information. (a) Definitions. For purposes of this section, the following definitions apply: (1) Duplicative dispute means a dispute submitted by the consumer in writing within the validation period that: (i) Is substantially the same as a dispute previously submitted by the consumer in writing within the validation period for which the debt collector already has satisfied the requirements of paragraph (d)(2)(i) of this section; and (ii) Does not include new and material information to support the dispute.

(2) Validation period means the thirty-day period after a consumer’s receipt of the written notice of debt described in FDCPA section 809 (15 U.S.C. 1692g) as defined by this part. (b)(1) Overshadowing of rights to dispute or request original-creditor information. During the validation period,

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a debt collector must not engage in any collection activities or communications that overshadow or are inconsistent with the disclosure of the consumer’s rights to dispute the debt and to request the name and address of the original creditor. The Bureau may provide by regulation a safe harbor for debt collectors when they use certain Bureau-approved disclosures.

(2) [Reserved] (c) Requests for original-creditor information. (1) Upon receipt of a request for the name and address of the original creditor submitted by the consumer in writing within the validation period, a debt collector must cease collection of the debt until the debt collector sends the name and address of the original creditor to the consumer in writing or electronically in the manner required by § 1006.42. The Bureau may provide by regulation for alternative procedures when the original creditor is the same as the current creditor.

(2) [Reserved] (d) Disputes—(1) Failure to dispute. The failure of a consumer to dispute the validity of a debt does not constitute a legal admission of liability by the consumer.

(2) Response to disputes. Upon receipt of a dispute submitted by the consumer in writing within the validation period, a debt collector must cease collection of the debt, or any disputed portion of the debt, until the debt collector: (i) Sends a copy either of verification of the debt or of a judgment to the consumer in writing or electronically in the manner required by § 1006.42; or (ii) In the case of a dispute that the debt collector reasonably determines is a duplicative dispute, either: (A) Notifies the consumer in writing or electronically in the manner required by § 1006.42(a)(1) that the dispute is duplicative, provides a brief statement of the reasons for the determination, and refers the consumer to the debt collector’s response to the earlier dispute; or (B) Satisfies paragraph (d)(2)(i) of this section. § 1006.42 Sending required disclosures. (a) Sending required disclosures—(1) In general. A debt collector who sends disclosures required by the Act and this part in writing or electronically must do so in a manner that is reasonably expected to provide actual notice, and in a form that the consumer may keep and access later.

(2) Exceptions. A debt collector need not comply with paragraph (a)(1) of this section when sending the disclosure required by § 1006.6(e) or § 1006.18(e) in writing or electronically, unless the disclosure is included on a notice required by FDCPA section 809(a) (15 U.S.C. 1692g(a)), as implemented by this part, or § 1006.38(c) or (d)(2). (b) Requirements for certain disclosures sent electronically. To comply with paragraph (a) of this section, a debt collector who sends the notice required by FDCPA section 809(a), as implemented by this part, or the disclosures described in § 1006.38(c) or (d)(2)(i), electronically must do so in accordance with section 101(c) of the Electronic Signatures in Global and National Commerce Act (E–SIGN Act) (15 U.S.C. 7001(c)).

Subpart C—[Reserved] Subpart D—Miscellaneous § 1006.100 Record retention. (a) In general. Except as provided in paragraph (b) of this section, a debt collector must retain records that

are evidence of compliance or noncompliance with the FDCPA and this part starting on the date that the debt collector begins collection activity on a debt until three years after the debt collector’s last collection activity on the debt. (b) Special rule for telephone call recordings. If a debt collector records telephone calls made in connection with the collection of a debt, the debt collector must retain the recording of each such telephone call for three years after the date of the call. § 1006.104 Relation to State laws.

Neither the Act nor the corresponding provisions of this part annul, alter, affect, or exempt any person subject to the provisions of the Act or the corresponding provisions of this part from complying with the laws of any State with respect to debt collection practices, except to the extent that those laws are inconsistent with any provision of the Act or the corresponding provisions of this part, and then only to the extent of the inconsistency. For purposes of this section, a State law is not inconsistent with the Act or the corresponding provisions of this part if the protection such law affords any consumer is greater than the protection provided by the Act or the corresponding provisions of this part. § 1006.108 Exemption for State regulation. (a) Exemption for State regulation. Any State may apply to the Bureau for a determination that, under the laws of that State, any class of debt collection practices within that State is subject to requirements that are substantially similar to those imposed under sections 803 through 812 of the Act (15 U.S.C. 1692a through 1692j) and the corresponding provisions of this part, and that there is adequate provision for State enforcement of such requirements. (b) Procedures and criteria. The procedures and criteria whereby States may apply to the Bureau for exemption of a class of debt collection practices within the applying State from the provisions of the Act and the corresponding provisions of this part as provided in section 817 of the Act (15 U.S.C. 1692o) are set forth in appendix A of this part.

PART 1006—DEBT COLLECTION PRACTICES (REGULATION F) • 1. The authority citation for part 1006 continues to read as follows: Authority: 12 U.S.C. 5512, 5514(b), 5532; 15 U.S.C. 1692l(d), 1692o, 7004.

Subpart A—General • 2. Section 1006.1 is amended by adding paragraph (c)(2) to read as follows: § 1006.1 Authority, purpose, and coverage. ***** (c) * * * (2) Section 1006.34(c)(2)(iii) and (c)(3)(iv) applies to debt collectors only when they are collecting debt related to a consumer financial product or service as defined in § 1006.2(f).

• 3. Section 1006.2 is amended by revising paragraph (e) and adding paragraph (f) to read as follows: § 1006.2 Definitions. *****

(e) Consumer means any natural person, whether living or deceased, obligated or allegedly obligated to pay any debt. For purposes of § 1006.6, the term consumer includes the persons described in § 1006.6(a). (f) Consumer financial product or service has the same meaning given to it in section 1002(5) of the Dodd-Frank Act (12 U.S.C. 5481(5)). ***** Subpart B—Rules for FDCPA Debt Collectors • 4. Section 1006.26 is added to read as follows: § 1006.26 Collection of time-barred debts. (a) Definitions. For purposes of this section: (1) Statute of limitations means the period prescribed by applicable law for bringing a legal action against the consumer to collect a debt.

(2) Time-barred debt means a debt for which the applicable statute of limitations has expired. (b) Legal actions and threats of legal actions prohibited.

A debt collector must not bring or threaten to bring a legal action against a consumer to collect a time-barred debt. This paragraph (b) does not apply to proofs of claim filed in connection with a bankruptcy proceeding.

• 5. Section 1006.30 is amended by adding paragraph (a) to read as follows: § 1006.30 Other prohibited practices. (a) Required actions prior to furnishing information—(1) In general. Except as provided in paragraph (a)(2) of this section, a debt collector must not furnish to a consumer reporting agency, as defined in section 603(f) of the Fair Credit Reporting Act (15 U.S.C. 1681a(f)), information about a debt before the debt collector: (i) Speaks to the consumer about the debt in person or by telephone; or (ii) Places a letter in the mail or sends an electronic message to the consumer about the debt and waits a reasonable period of time to receive a notice of undeliverability. During the reasonable period, the debt collector must permit receipt of, and monitor for, notifications of undeliverability from communications providers. If the debt collector receives such a notification during the reasonable period, the debt collector must not furnish information about the debt to a consumer reporting agency until the debt collector otherwise satisfies this paragraph (a)(1).

(2) Special rule—information furnished to certain specialty consumer reporting agencies. Paragraph (a)(1) of this section does not apply to a debt collector’s furnishing of information about a debt to a nationwide specialty consumer reporting agency that compiles and maintains information on a consumer’s check writing history, as described in section 603(x)(3) of the Fair Credit Reporting Act (15 U.S.C. 1681a(x)(3)). ***** • 6. Section 1006.34 is added to read as follows: § 1006.34 Notice for validation of debts. (a) Validation information required— (1) In general. Except as provided in paragraph (a)(2) of this section, a debt collector must provide a consumer with the validation information required by paragraph (c) of this section either: (i) By sending the consumer a validation notice in the manner required by § 1006.42: (A) In the initial communication, as defined in

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January/February 2022 47

paragraph (b)(2) of this section; or (B) Within five days of that initial communication; or (ii) By providing the validation information orally in the initial communication.

(2) Exception. A debt collector who otherwise would be required to send a validation notice pursuant to paragraph (a)(1)(i)(B) of this section is not required to do so if the consumer has paid the debt prior to the time that paragraph (a)(1)(i)(B) of this section would require the validation notice to be sent. (b) Definitions. For purposes of this section: (1) Clear and conspicuous means readily understandable. In the case of written and electronic disclosures, the location and type size also must be readily noticeable and legible to consumers, although no minimum type size is mandated. In the case of oral disclosures, the disclosures also must be given at a volume and speed sufficient for the consumer to hear and comprehend them.

(2) Initial communication means the first time that, in connection with the collection of a debt, a debt collector conveys information, directly or indirectly, regarding the debt to the consumer, other than a communication in the form of a formal pleading in a civil action, or any form or notice that does not relate to the collection of the debt and is expressly required by: (i) The Internal Revenue Code of 1986 (26 U.S.C. 1 et seq.); (ii) Title V of the Gramm-Leach-Bliley Act (15 U.S.C. 6801 through 6827); or (iii) Any provision of Federal or State law or regulation mandating notice of a data security breach or privacy risk.

(3) Itemization date means any one of the following five reference dates for which a debt collector can ascertain the amount of the debt: (i) The last statement date, which is the date of the last periodic statement or written account statement or invoice provided to the consumer by a creditor; (ii) The charge-off date, which is the date the debt was charged off; (iii) The last payment date, which is the date the last payment was applied to the debt; (iv) The transaction date, which is the date of the transaction that gave rise to the debt; or (v) The judgment date, which is the date of a final court judgment that determines the amount of the debt owed by the consumer.

(4) Validation notice means a written or electronic notice that provides the validation information required by paragraph (c) of this section.

(5) Validation period means the period starting on the date that a debt collector provides the validation information required by paragraph (c) of this section and ending 30 days after the consumer receives or is assumed to receive the validation information. For purposes of determining the end of the validation period, the debt collector may assume that a consumer receives the validation information on any date that is at least five days (excluding legal public holidays identified in 5 U.S.C. 6103(a), Saturdays, and Sundays) after the debt collector provides it. (c) Validation information. Pursuant to paragraph (a) (1) of this section, a debt collector must provide the following validation information.

(1) Debt collector communication disclosure. The statement required by § 1006.18(e).

(2) Information about the debt. Except as provided in

paragraph (c)(5) of this section: (i) The debt collector’s name and the mailing address at which the debt collector accepts disputes and requests for original-creditor information. (ii) The consumer’s name and mailing address. (iii) If the debt collector is collecting a debt related to a consumer financial product or service as defined in § 1006.2(f), the name of the creditor to whom the debt was owed on the itemization date. (iv) The account number, if any, associated with the debt on the itemization date, or a truncated version of that number. (v) The name of the creditor to whom the debt currently is owed. (vi) The itemization date. (vii) The amount of the debt on the itemization date. (viii) An itemization of the current amount of the debt reflecting interest, fees, payments, and credits since the itemization date. A debt collector may disclose the itemization on a separate page provided in the same communication with a validation notice, if the debt collector includes on the validation notice, where the itemization would have appeared, a statement referring to that separate page. (ix) The current amount of the debt.

(3) Information about consumer protections. (i) The date that the debt collector will consider the end date of the validation period and a statement that, if the consumer notifies the debt collector in writing on or before that date that the debt, or any portion of the debt, is disputed, the debt collector must cease collection of the debt, or the disputed portion of the debt, until the debt collector sends the consumer either verification of the debt or a copy of a judgment. (ii) The date that the debt collector will consider the end date of the validation period and a statement that, if the consumer requests in writing on or before that date the name and address of the original creditor, the debt collector must cease collection of the debt until the debt collector sends the consumer the name and address of the original creditor, if different from the current creditor. (iii) The date that the debt collector will consider the end date of the validation period and a statement that, unless the consumer contacts the debt collector to dispute the validity of the debt, or any portion of the debt, on or before that date, the debt collector will assume that the debt is valid. (iv) If the debt collector is collecting debt related to a consumer financial product or service as defined in § 1006.2(f), a statement that informs the consumer that additional information regarding consumer protections in debt collection is available on the Bureau’s website at www.cfpb.gov/debtcollection. (v) If the debt collector sends the validation notice electronically, a statement explaining how a consumer can, as described in paragraphs (c)(4)(i) and (ii) of this section, dispute the debt or request original-creditor information electronically.

(4) Consumer-response information. The following information, segregated from the validation information required by paragraphs (c)(1) through (3) of this section and from any optional information included pursuant to paragraphs (d)(3)(i) and (ii), (d)(3)(iii)(A), (d)(3)(iv) and (v), (d)(3)(vi)(A), and (d)(3)(vii) and (viii) of this section, and, if provided on a validation notice, located at the bottom of the notice under the headings, ‘‘How do you want to respond?’’ and ‘‘Check all that apply:’’: (i) Dispute prompts. The following statements, listed

in the following order, and using the following phrasing or substantially similar phrasing, each next to a prompt: (A) ‘‘I want to dispute the debt because I think:’’; (B) ‘‘This is not my debt.’’; (C) ‘‘The amount is wrong.’’; and (D) ‘‘Other (please describe on reverse or attach additional information).’’ (ii) Original-creditor information prompt. The statement, ‘‘I want you to send me the name and address of the original creditor.’’, using that phrase or a substantially similar phrase, next to a prompt. (iii) Mailing addresses. Mailing addresses for the consumer and the debt collector, which are the debt collector’s and the consumer’s names and mailing addresses as disclosed pursuant to § 1006.34(c)(2)(i) and (ii).

(5) Special rule for certain residential mortgage debt.

For residential mortgage debt, if a periodic statement is required under Regulation Z, 12 CFR 1026.41, at the time a debt collector provides the validation notice, a debt collector need not provide the validation information required by paragraphs (c)(2)(vi) through (viii) of this section if the debt collector: (i) Provides the consumer, in the same communication with the validation notice, a copy of the most recent periodic statement provided to the consumer under Regulation Z, 12 CFR 1026.41(b); and (ii) Includes on the validation notice, where the validation information required by paragraphs (c)(2)(vi) through (viii) of this section would have appeared, a statement referring to that periodic statement. (d) Form of validation information— (1) In general. The validation information required by paragraph (c) of this section must be clear and conspicuous.

(2) Safe harbor—(i) In general. Model Form B–1 in appendix B to this part contains the validation information required by paragraph (c) of this section and certain optional disclosures permitted by paragraph (d)(3) of this section. A debt collector who uses Model Form B–1 complies with the information and form requirements of paragraphs (c) and (d)(1) of this section, including if the debt collector: (A) Omits any or all of the optional disclosures shown on Model Form B–1; or (B) Adds any or all of the optional disclosures described in paragraph (d)(3) of this section that are not shown on Model Form B–1, provided that any such optional disclosures are no more prominent than any of the validation information required by paragraph (c) of this section. (ii) Certain disclosures on a separate page. A debt collector who uses Model Form B–1 as described in paragraph (d)(2)(i) of this section and who, pursuant to paragraph (c)(2)(viii) or (c)(5) of this section, includes certain disclosures on a separate page in the same communication with the validation notice and, on the notice, the required statement referring to those disclosures, receives a safe harbor for compliance with the information and form requirements of paragraphs (c) and (d)(1) of this section except with respect to the disclosures on the separate page. (iii) Substantially similar form. A debt collector who uses Model Form B–1 as described in paragraph (d)(2)(i) or (ii) of this section may make changes to the form and

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retain a safe harbor for compliance with the information and form requirements of paragraphs (c) and (d)(1) of this section provided that the form remains substantially similar to Model Form B–1.

(3) Optional disclosures. A debt collector may include any of the following information when providing the validation information required by paragraph (c) of this section. A debt collector who includes any of the following information receives the safe harbor described in paragraph (d)(2) of this section, provided that the debt collector otherwise uses Model Form B– 1 in appendix B to this part, or a variation of Model Form B–1, as described in paragraph (d)(2) of this section. (i) Telephone contact information. The debt collector’s telephone contact information. (ii) Reference code. A number or code that the debt collector uses to identify the debt or the consumer. (iii) Payment disclosures. Either or both of the following phrases: (A) The statement, ‘‘Contact us about your payment options.’’, using that phrase or a substantially similar phrase; and (B) Below the consumer-response information required by paragraphs (c)(4)(i) and (ii) of this section, the statement, ‘‘I enclosed this amount:’’, using that phrase or a substantially similar phrase, payment instructions after that statement, and a prompt. (iv) Disclosures under applicable law—(A) Disclosures on the reverse of the validation notice. On the reverse of the validation notice, any disclosures that are specifically required by, or that provide safe harbors under, applicable law and, if any such disclosures are included, a statement on the front of the validation notice referring to those disclosures. Any such disclosures must not appear directly on the reverse of the consumer-response information required by paragraph (c)(4) of this section.

(B) Disclosures on the front of the validation notice. If a debt collector is collecting time-barred debt, on the front of the validation notice below the disclosure required by paragraph (c)(2)(ix) of this section, any time-barred debt disclosure that is specifically required by, or that provides a safe harbor under, applicable law, provided that applicable law specifies the content of the disclosure. (v) Information about electronic communications. The following information: (A) The debt collector’s website and email address.

(B) If the validation information is not provided electronically, a statement explaining how a consumer can, as described in paragraphs (c)(4)(i) and (ii) of this section, dispute the debt or request original-creditor information electronically. (vi) Spanish-language translation disclosures. Either or both of the following disclosures regarding a consumer’s ability to request a Spanishlanguage translation of a validation notice: (A) The statement, ‘‘Po´ngase en contacto con nosotros para solicitar una copia de este formulario en espan˜ ol’’ (which means ‘‘Contact us to request a copy of this form in Spanish’’), using that phrase or a substantially similar phrase in Spanish. If providing this optional disclosure, a debt collector may include supplemental information in Spanish that specifies how a consumer may request a Spanish-language validation notice.

(B) With the consumer-response information required by paragraph (c)(4) of this section, the statement ‘‘Quiero este formulario en espan˜ ol’’ (which means ‘‘I want this form in Spanish’’), using that phrase

or a substantially similar phrase in Spanish, next to a prompt. (vii) The merchant brand, affinity brand, or facility name, if any, associated with the debt. (viii) If a debt collector is collecting debt other than debt related to a consumer financial product or service as defined in § 1006.2(f), the information specified in paragraph (c)(2) (iii) or (c)(3)(iv) of this section.

(4) Validation notices delivered electronically. If a debt collector delivers a validation notice electronically, a debt collector may, at its option, format the validation notice as follows: (i) Prompts. Any prompt required by paragraph (c)(4) (i) or (ii) or paragraph (d)(3)(iii)(B) or (d)(3)(vi)(B) of this section may be displayed electronically as a fillable field. (ii) Hyperlinks. Hyperlinks may be embedded that, when clicked: (A) Connect a consumer to the debt collector’s website; (B) Connect a consumer to the Bureau’s debt collection website as disclosed pursuant to paragraph (c)(3)(iv) of this section; or (C) Permit a consumer to respond to the dispute and original-creditor information prompts required by paragraphs (c)(4)(i) and (ii) of this section. (e) Translation into other languages— (1) In general. A debt collector may send a consumer a validation notice completely and accurately translated into any language if the debt collector: (i) Sends the consumer an Englishlanguage validation notice in the same communication as the translated validation notice; or (ii) Previously provided the consumer an Englishlanguage validation notice, in which case the debt collector need not send the consumer an Englishlanguage validation notice in the same communication as the translated validation notice.

(2) Spanish-language validation notice—requirement to provide after optional disclosure. A debt collector who includes in the validation information either or both of the optional disclosures described in paragraph (d)(3) (vi) of this section, and who thereafter receives a request from the consumer for a Spanish-language validation notice, must provide the consumer a validation notice completely and accurately translated into Spanish.

• 7. Section 1006.38 is amended by revising paragraphs (a)(2), (b), and (c) to read as follows: § 1006.38 Disputes and requests for original-creditor information. (a) * * * (2) Validation period has the same meaning given to it in § 1006.34(b)(5). (b) Overshadowing of rights to dispute or request original-creditor information—(1) Prohibition. During the validation period, a debt collector must not engage in any collection activities or communications that overshadow or are inconsistent with the disclosure of the consumer’s rights to dispute the debt and to request the name and address of the original creditor.

(2) Safe harbor. A debt collector who uses Model Form B–1 in appendix B to this part in a manner described in § 1006.34(d)(2) has not thereby violated paragraph (b)(1) of this section. (c) Requests for original-creditor information. Upon receipt of a request for the name and address of the original creditor submitted by the consumer in writing

within the validation period, a debt collector must cease collection of the debt until the debt collector: (1) In general. Sends the name and address of the original creditor to the consumer in writing or electronically in the manner required by § 1006.42; or (2) Special rule if the current creditor and the original creditor are the same. In lieu of taking the actions described in paragraph (c)(1) of this section, reasonably determines that the original creditor is the same as the current creditor, notifies the consumer of that fact in writing or electronically in the manner required by § 1006.42, and refers the consumer to the validation information previously provided pursuant to § 1006.34(a)(1). ***** • 8. Section 1006.42 is amended by revising paragraphs (a)(2) and (b) to read as follows: § 1006.42 Sending required disclosures. (a) * * * (2) Exceptions. A debt collector need not comply with paragraph (a)(1) of this section when sending the disclosure required by § 1006.6(e) or § 1006.18(e) in writing or electronically, unless the disclosure is included on a notice required by § 1006.34(a)(1)(i) or § 1006.38(c) or (d)(2). (b) Requirements for certain disclosures sent electronically. To comply with paragraph (a) of this section, a debt collector who sends the notice required by § 1006.34(a) (1)(i)(B), or the disclosures described in § 1006.38(c) or (d)(2)(i), electronically must do so in accordance with section 101(c) of the Electronic Signatures in Global and National Commerce Act (E– SIGN Act) (15 U.S.C. 7001(c)).

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January/February 2022 49

PROTECT YOUR PRACTICE NECESSARY ENGAGEMENT LETTER CLAUSES TO REVISIT

By Maria E. O’Sullivan, Laura Joy Lattman, Soo Yeon Lee, Getty Images

and Sahmra A. Stevenson

Published in Probate & Property, Volume 36, No 1 © 2022 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.

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E

ngagement letters detail client-attorney relationships from the scope of representation to compensation.

But, by taking a proactive approach and including clauses such as those discussed below, real estate and other attorneys can protect themselves and manage client expectations, contributing to a smoother representation. After all, surprises are rarely fun in these circumstances.

Client Authority On occasion, a client in a real estate transaction may act on behalf of another individual or company. If this situation arises, a clause within the engagement letter regarding client authority can serve as written confirmation that the client is an authorized representative and therefore the attorney may communicate and make pertinent decisions with that person. This protects attorneys, especially when considering Rules 1.2 and 1.4 of the Model Rules of Professional Conduct, and 28 U.S.C. § 1927.

Rules 1.2 and 1.4 of the Model Rules of Professional Conduct govern client authority and attorney communication.

Ultimately, an attorney-client relationship requires cooperation. If a third party is involved in the issue, the attorney should ensure that the client is the proper Maria E. O’Sullivan is a third-year law student at the American University Washington College of Law in Washington, DC. Laura Joy Lattman is the founder of The Lattman Firm LLC in New York, New York, co-chair of the Section’s Trust and Estate Practice Group, and co-chair of the Section’s Joint Law Practice Management Group. Soo Yeon Lee is a partner at Mauck & Baker, LLC in Chicago, Illinois, a member of the Section’s Council, Associate Department Editor for Probate & Property, a member of the Section’s Diversity, Equity and Inclusion Committee, a member of the Section’s Groups and Substantive Committees Committee, chair of the Section’s Life Insurance Company Investments Committee, and the Section’s liaison to the Korean American Bar Association/International Association of Korean Lawyers. Sahmra A. Stevenson is the founder of S.A. Stevenson Law Offices, Wills on Wheels, Inc., and Office Without Walls in Columbia, Maryland.

party with whom to communicate for the representation at hand. Further, the Judiciary and Judicial Procedure Article of the United States Code allows courts to impose personal liability upon attorneys that create excessive costs by multiplying proceedings in a case unreasonably and vexatiously. 28 U.S.C. § 1927. Attorneys should be cautious of a client’s authority to act and additional proceedings through which the proper authority should sue.

For example, in Wachtel Masyr & Missry LLP v. Genger, the Second Circuit reviewed a claim arising from 28 U.S.C. § 1927.

568 F. App’x 10 (2d Cir. 2014). The initial case arose from a suit to enforce a promissory note issued by Omniway, Limited.

Genger v. Sharon, 910 F. Supp. 2d 656, 657 (S.D.N.Y. 2012). Wachtel represented Omniway by way of Gilad Sharon, the supposed owner, who acted as an authorized representative. Wachtel Masyr & Missry LLP, 568 F. App’x at 12. An issue arose as to whether Omniway had ever been truly formed and therefore whether Wachtel had authority to represent Omniway. Id. at 11–12. The District Court imposed sanctions on Wachtel, finding that the attorney acted in bad faith in representing the company after testimony from Sharon stating he was unsure if Omniway had ever been formed. See id. Wachtel believed he had at least implicit authorization to represent Omniway after talking with Sharon. See id. at 12. The Second Circuit reversed the District Court sanctions and the finding of bad faith, holding that Watchel acted on implicit authorization. See id. This case highlights the necessity not only of including clauses for client authority but also of appropriate due diligence. See Model Rules of Pro. Conduct r. 1.3 (Am. Bar Ass’n 2020); see also Leleux-Thubron v. Iberia Parish Gov’t, 2015 U.S. Dist. LEXIS 8020 (W.D. La. 2015) (further demonstrating how disputes can arise if an attorney does not go through the proper channels to validate representation; the plaintiff here disputed opposing counsel’s representation, and a 28 U.S.C. § 1927 claim arose). Having a client attest that it has the required authority to act on the matter can help prevent further litigation surrounding this issue of authority and can prevent potential sanctions.

The following language is an example of how to integrate client authority into an engagement letter: ENTITY REPRESENTATION: The Firm has agreed to represent the Client with respect to the subject matter of this Agreement. As such, it does not represent the interests of individual owners, members, officers, managers, board members, affiliates, partners, employees, or agents of the Client with respect to such subject matter. All such persons are advised that their interests may be adverse to those of the Client and to retain their own counsel in such matters.

CLIENT AUTHORITY: You represent that you have the authority to act on all matters relating to this matter as an authorized representative on behalf of [___], who is [a named plaintiff/defendant/owner/ joint tenant, etc. in the above-referenced matter], including signing this engagement letter and communicating with and giving me instructions and/or permissions to take various actions under this engagement letter.

CLIENT CHOICES (INCAPACITATION): You are permitted under the law to appoint other persons to act in your behalf (for example, an attorney in fact under a durable power of attorney). Those persons can continue to act on your behalf even if you later become unable to make your own decisions. If the authority that you give to those other persons is broad enough, they can make decisions for you concerning your estate planning and any other matters that you have retained me to advise you on.

For example, that authority could include the ability to make gifts of your assets during your lifetime, perhaps including making gifts to the agent himself or herself, and to execute contracts and agreements on your behalf. If you have

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January/February 2022 51

authorized another person to act on your behalf under a power of attorney or some other arrangement, and if in my judgment that authorization is broad enough to include the authority for that person to instruct me on your estate planning or any other matters that you have retained me to advise you on, you agree that I can continue to represent you in your estate planning or those other matters and that I may rely upon the communications and instructions from your authorized agents. You also agree that I may communicate with your authorized agents and disclose to them information that is relevant and necessary to allow them to make informed decisions on your behalf, including information that has been communicated to me by you that is protected by the attorney-client privilege.

Client Cooperation Real estate or other clients may be using an attorney for the first time and have limited knowledge of the legal system, what happens in the course of representation, and what is expected from them. Including clauses in an engagement letter that communicate and put in writing what a client can expect from a representation is vital for an informed process. Clients must recognize the need to cooperate and be truthful with their attorneys, while behaving lawfully, morally, and ethically. They also need to allow the attorneys to act for the matter at hand within the bounds of the law and ethical rules. Clients may not be aware of attorneys’ ethical obligations in terms of reporting, so briefly explaining this can clear the air preemptively.

Clauses regarding client cooperation may be structured as follows: CLIENT COOPERATION: The Client shall (1) cooperate fully with the Firm in its representation; (2) act only through the Firm in connection with these matters; and (3) avoid all acts that are illegal, immoral, or unethical or that might jeopardize the Client’s position in the matters with respect to which

Clients must recognize the need to cooperate and be truthful with their attorneys. the Firm acts as counsel. The Client will be truthful at all times and reveal all information necessary and relevant to the legal representation and shall fully cooperate in all administrative or legal proceedings.

It is understood that some matters are extremely time-sensitive and failure to promptly respond to the telephone calls and requests of the attorneys for information and documents will result in additional fees and costs.

CLIENT COOPERATION: Estate planning is an important and highly personal matter. To be successful, it requires that you disclose to me information about your family relationships and about your financial affairs that you will most likely regard as highly confidential. It also requires that you make decisions that are sometimes difficult. You agree to provide me with all factual information and materials necessary to perform our services, and you will be responsible for making decisions and determinations on matters not involving legal determinations as necessary or appropriate for your estate planning. I urge you to make a complete disclosure of your financial matters and your intentions concerning the disposition of your estate because a failure to do so could make it impossible for me to give proper advice to you. I cannot be responsible for undesired consequences caused by a failure to disclose information to me.

CLIENT COOPERATION: Client agrees to be truthful with Attorney, to cooperate, to keep Attorney informed of any information or developments that may come to Client’s attention, and to abide by this agreement. Further, although it is impossible to predict the course of a representation, it may be important for Attorney to contact Client immediately, or upon short notice, to confer with Client regarding the status of Client’s case. An inability to do so may result in Client’s case being prejudiced and detrimentally affect the outcome of the case.

Accordingly, Client agrees to keep Attorney informed of Client’s current address, telephone number, and whereabouts.

Attorneys should inform clients of their need to make decisions and the attorney’s obligation to communicate choices to them. A lawyer is obligated to explain matters to the extent reasonably necessary to permit clients to make informed decisions on the representation.

Rule 1.4 of the Model Rules of Professional Conduct highlights this point. There may be situations, however, where the attorney makes decisions in the best interest of the client and matter.

Attorney Choices and Duties Just as an engagement should signal to a client what his or her rights and responsibilities are, it should also inform the client as to the attorney’s rights. This will help mitigate potential arising conflict. Attorneys can include language in engagement letters that lays out certain choices the attorney may make. This can include taking steps to protect the clients’ interests in the case using the attorneys’ professional judgment or even the assignment of firm personnel to work on the matter.

Take, for example, these clauses: ATTORNEY CHOICES AND DUTIES: You understand and agree that you are retaining the Firm pursuant to this Engagement Letter and that your cooperation is essential to our effective representation.

You authorize the Firm to take any

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steps that, in its sole discretion, are deemed necessary or appropriate to protect your interests in this case.

Consistent with New York Rule of Professional Conduct 1.2, the Firm may “exercise its professional judgment to waive or fail to assert a right or position of the client, or accede to reasonable requests of opposing counsel, when doing so does not prejudice the rights of the client.”

ATTORNEY CHOICES AND DUTIES: We reserve the right to determine which of our personnel are assigned to this matter, based upon considerations of time and degree of expertise in any given situation. I will, of course, remain responsible for the entire matter and will minimize the number of people involved to ensure confidentiality and expedience.

ATTORNEY DUTIES (INCAPACITATION): The ethics rules that govern us state that if you become unable to make adequately considered decisions about the matters on which you have retained me to advise you, whether because of mental disability or other reasons, we may attempt to continue a normal attorney-client relationship with you as much as possible. Those rules also state that we are authorized to seek the appointment of a guardian or to take other actions to protect your interests if we reasonably believe that to be necessary.

ATTORNEY CHOICES (INCAPACITATION): If I reasonably believe that your agent does not have the authority to act on your behalf in the matter that I represent you on, or if I reasonably believe that your agent is not acting in your best interests or in furtherance of your objectives as I understand them, I reserve the right to refuse to act upon the instructions of your agent and instead to take whatever action that I reasonably believe necessary to protect your interests.

Confidentiality Of paramount importance to clients is confidentiality. Including a clause in an engagement letter detailing obligations to maintain confidentiality puts clients at ease. It can also inform the client as to who else, aside from the attorney, will have access to details on the case, e.g., paralegals, also mitigating future conflict. In addition, it can give notice to clients regarding confidentiality in joint representations.

Take, for example, the following: CONFIDENTIALITY: The ethics rules require that I keep all information that you disclose to me confidential and not disclose it to persons outside our firm without your permission. The lawyer who is primarily responsible for your estate planning work may disclose information about your affairs to other lawyers and paralegals within our firm, if necessary for us to perform our work, on a “need to know” basis, but we will not make unnecessary disclosures. If other persons not in our firm are working with us on your estate planning with your permission (such as your accountant, a bank trust office, a financial planner, an insurance agent, or another law firm), you agree that we may disclose such information to them as is necessary to allow them to fulfill their role in your estate planning.

We will use our judgment in making disclosures to these persons, of course, but unless you instruct us otherwise, you agree that we may disclose information to them as we deem necessary for your best interests.

CONFIDENTIALITY (JOINT REPRESENTATION): By employing us to represent you jointly, you agree that among us (the two of you and your attorney), there will be no confidentiality of communications or information—if one of you discloses information to your attorney about your financial affairs or intentions, we are free to disclose that information to the other one of you if

we think that is necessary to fulfill our duties and obligations to the other one in your estate planning.

If this is not acceptable to you, you must advise us immediately so that other arrangements can be made. If a legal controversy ever developed between you concerning your estate planning, we would be required by the Rules of Professional Conduct to withdraw from the joint representation, and we could not thereafter represent either of you individually in that controversy without the consent of both of you. In addition, if there was litigation between the two of you, your attorney could be compelled to testify about information she obtained from either of you or about advice that she gave to you in your estate planning.

Scope of Representation Outlining the scope of representation in the engagement letter helps manage expectations. The engagement letter should include two key points: the stages of the matter during which the attorney will be representing the client and where that representation ends. For example, it may be prudent to notify the client that the engagement only covers trial-level real estate litigation and that the lawyer will need a new engagement for any appellate activity. This limits the universe of expectations from the client. Or, for example, in the context of estate planning, the engagement letter should specify the limitations of services to be provided: The attorney may not include income, estate, and gift tax planning in their services. This notification is imperative to prevent a potentially unhappy client.

Attorneys should ensure conformity with their state’s rules of professional conduct, and consider Rules 1.2, 1.4, and 1.9 of the Model Rules of Professional Conduct, which advise on scope of representation, communications, and duties to former clients respectively.

These clauses may look as follows: SCOPE OF REPRESENTATION (TRIAL LEVEL LITIGATION): This Agreement covers representation only at the trial level. An additional

Published in Probate & Property, Volume 36, No 1 © 2022 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.

January/February 2022 53

agreement may be required should representation at the appellate level be necessary.

SCOPE OF REPRESENTATION (ESTATE PLANNING): You have asked me to represent you with regard to the planning, counseling, preparation, and implementation of basic estate planning documents as set forth below: [PROVIDE A LIST OF DOCUMENTS]. You may limit or expand the scope of my representation from time to time, provided that any substantial expansion must be agreed to by me. Please note that the basic estate planning does not include any income, estate, or gift tax planning, and tax planning is beyond the scope of our general representation in preparing basic estate planning documents. If you wish to engage in estate planning vehicles that utilize tax planning strategy, I would be happy to discuss it with you.

UPDATES TO ESTATES: Your fee also includes a review of your plan every three years and discounted trust administration services. Our trust administration fees for clients are 0.5–1% of the value of the estate for clients and 1–2% for nonclients, depending on the complexity of the estate, the number of assets to be administered, the status of the beneficiaries, and whether the estate is taxable.

SCOPE OF SERVICES (REAL ESTATE): My representation will include the following. You may limit or expand the scope of my representation from time to time. 1.

Prepare a Purchase and Sale Agreement; 2. Review and/or negotiate the Purchase and Sale Agreement; 3.

Assist with Due Diligence Review; 4.

Review and/or prepare all necessary closing documents; 5. Represent you through closing. Please note that incorporation of a new business entity, choice of entity, and incorporation documents (bylaws or operating agreement, etc.) are

excluded from the scope of my services, unless I specifically agree.

Furthermore, a client should know what specifically catalyzes the termination of representation.

Termination of Representation Of course, there may be instances in which an attorney-client engagement is terminated before the client’s goal is accomplished. More naturally, it may terminate once the tasks specified in the engagement letter have been completed.

Other instances in which termination of an engagement may occur is by default, if the firm does not provide services for 180 consecutive days to the client, or if the client decides to terminate the relationship. Outlining the multiple methods with which to terminate an attorney-client engagement gives the client notice as to options available to them and options available to the attorney. It can help facilitate a healthier relationship to keep both parties happy. Attorneys may look to Rules 1.5 and 1.16 of the Model Rules of Professional Conduct to guide clauses on declining or terminating representation, including the potential for refunding an advance payment of a fee or expenses.

These clauses may look like: TERMINATION WHEN TASK IS COMPLETED: Our current representation will end in the ordinary course upon completion of our work as described above, unless you have asked us to perform further services and we have agreed to do so. However, you may terminate the engagement earlier for any reason by written notice. We too may terminate the engagement by written notice in accordance with applicable rules of professional conduct, including our obligation to take such steps as may be reasonably practicable to protect your interests. If you wish to have any files delivered to you after our representation ends, please advise us.

We will maintain our files in accordance with the terms of our records retention policy, which provides for destruction of files of former clients

on a regular basis.

TERMINATION BY DEFAULT: You or the Firm may terminate our representation for any reason by reasonable, written notice, to the extent permitted by applicable law and ethics standards. Also, if the Firm has not performed services for you for any consecutive 180-day period, the Firm’s representation will be deemed terminated as of the last day it performed services, again to the extent permitted by applicable law and ethics standards. If our representation is terminated, you agree to (1) take whatever steps are necessary to evidence that the Firm is free from any obligation to perform further, including but not limited to filing your consent to our resignation with the court; (2) pay the Firm a fair and reasonable fee for services performed up until the termination in accordance with legally accepted standards; and (3) arrange for substitute counsel.

TERMINATION BY CLIENT: It is further agreed that the Client may terminate this Agreement at any time by written notice delivered to the Firm’s address. The Firm may withdraw as counsel under any circumstances required or permitted by the Rules of Professional Conduct. In addition, the Firm specifically reserves the right to withdraw as counsel in those circumstances in which the Firm believes the course Client wishes to pursue in connection with a legal matter is, in its best judgment, contrary to Client’s best interests. In such cases, the Firm will specifically advise Client with respect to the course of action believed by the Firm to be contrary to Client’s best interests. If the Agreement is terminated, the Client is responsible for fees and expenses incurred only through the date of termination and for the reasonable fees and costs in connection with withdrawing as counsel and transferring the matter to new counsel.

Published in Probate & Property, Volume 36, No 1 © 2022 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.

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WITHDRAWAL IN EVENT OF CONFLICT: As you know, our law firm was engaged by both of you, as spouses, a very common type of joint legal representation in the estate planning area of law. Because our representation was joint, our duty of loyalty to our client extends to both of you individually. Under certain facts and circumstances, the ethical rules may require the attorney to maintain certain duties and loyalties even after a representation is terminated. Thus, our duties to both of you as former clients continue in some respects even after termination of representation. This makes it impossible to continue to adequately represent either or both of you as your attorneys and therefore compels us to withdraw from our representation. Following an important life event, such as a divorce, it is almost always prudent to review existing legal documents.

We recommend that newly divorced clients engage legal counsel to review your planning documents in light of your new unmarried status. It is very important for you to review your estate planning documents under your current unmarried status and, if necessary, to revise those documents. Because our law firm has a former client relationship with each of you, and there are potential conflicts of interest, we would suggest that each of you consider retaining your own independent legal counsel. If you would like, our office can provide you with names of several estate planning attorneys whom you may consider. We are happy to cooperate with your new attorneys with regard to your estate plan. Please notify our office if you would like your original estate planning documents returned to you or forwarded directly to your new attorney. It has been our pleasure to serve as your attorneys and we deeply regret the necessity of our withdrawal. We wish the very best to you and your family.

Outside and Other Services At times, an attorney will need to bring in outside services to carry out the scope of representation. Specifying in the engagement letter the circumstances under which this may occur and how fees for outside counsel and other professionals will be paid will allow the representation to run more efficiently and manage client expectations as to costs. Examples of additional persons to include throughout the course of representation are additional counsel, out-of-state counsel, experts and investigators, and CPAs and appraisers.

An attorney may even find it beneficial to include a referral fee. Although a referral fee does not affect the overall cost to the client, it does inform the client that a percentage of the money they pay goes to the referring attorney. This simply keeps the client in the loop and prevents the appearance of shady business practices.

It also displays compliance with ethical standards, for example, Rule 1.5(e) of the Model Rules of Professional Conduct.

In addition, an engagement letter can outline outside services that will be used in the completion of the engagement.

This could include, for example, a fee for using the firm or attorney as a registered agent, the use of a will vault, or a fiduciary appointment. Given that these are ongoing and more expansive services that go beyond the typical scope of representation, language as to fees for providing such services is imperative. It will inform the client what services are available to them, the scope of the services, and the fee for such services. A well-informed client is a better client.

A sample of clauses an attorney may consider are as follows: ADDITIONAL COUNSEL: The attorneys in the firm of [ ] are not licensed to practice law in some states and jurisdictions. The Firm may, therefore, consult on Client’s matters with an attorney licensed to practice in such jurisdictions, when necessary in connection with the representation, and Client agrees to pay such attorney’s reasonable fees and costs.

OUT-OF-STATE COUNSEL: If it becomes necessary to retain the services of an out-of-state attorney to assist in the transfer of any assets, his or her services will be your separate responsibility. We will, of course, obtain your permission before incurring any such expenses.

EXPERTS AND INVESTIGATORS: The Firm, in its discretion, may employ experts to evaluate facts, render opinions, and provide testimony if needed and to facilitate the representation of the Client.

All such experts and investigators will report to the Firm when necessary. Any costs, disbursements, or expenses advanced by the Firm for such experts shall be reimbursed from Client.

CPAs AND APPRAISERS: Please be advised that we or you may need to engage other professionals, e.g., accountants or appraisers, as part of the matter. Their fees will be separate and apart from my own and you may need to sign separate engagement letters and service contracts with them.

REFERRAL FEES: The Client understands that the Client was referred to the Firm by Attorney. Pursuant to Disciplinary Rule 1.5(e), you are advised that in accordance with the Firm’s agreement with the referring Attorney, the Firm will pay that Attorney ____________ percent (_____%) of the fees collected in this matter, exclusive of costs. The referring Attorney is expected to provide no substantial services in this matter other than the referral but has agreed to be financially responsible for performance of services hereunder. This referral fee will not increase the total fee charged the Client. By executing this Agreement, the Client consents to this arrangement.

SERVICE AS REGISTERED AGENT: If we are given written authorization

Published in Probate & Property, Volume 36, No 1 © 2022 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.

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to act as Registered Agent for any entity, the representation of which is covered by this Agreement, we will charge an annual flat fee of $[_].

Service as Registered Agent would consist of the statutory duties of a Registered Agent pursuant to Illinois law, as well as acting as the entity’s agent for service of process, insuring that all process documents and notices served on us are promptly transmitted to the client, processing the annual report, and preparing standard annual consents of shareholders, members, directors, and/or managers. Any services beyond the standard services will be billed at our usual and customary hourly rates as stated above. The Client shall also reimburse the Firm for any out-of-pocket expenses incurred in connection with acting as Registered Agent, including, but not limited to, any statutory fees paid to governmental agencies.

Attorney’s Lien Retaining liens are a tool that allows attorneys to hold the client’s property, such as documents, if the client fails to pay. Some states permit these liens, such as Texas or New York, with limitations. Others, such as California, do not allow retaining liens but do allow for charging liens. Rule 1.8 of the Model Rules of Professional Conduct finds liens ethical as permitted by law. One concern with retaining liens is the prejudicial nature they pose to clients.

Attorneys should also consider the effectiveness of a retaining lien in the digital age. Now that clients have access to electronic files and documents, retaining liens may not be as effective. Using technology to control access to electronic files could be one solution, but it would not necessarily prevent clients from printing or getting around such security.

Nonetheless, a retaining lien is a beneficial tool to protect attorneys, where permitted, and a clause for it may look like this: ATTORNEYS’ LIEN: Client acknowledges that the Firm is entitled to an attorneys’ retaining lien on the

Client’s documents, files, records, and other property to secure payment of the fees and costs due hereunder. Firm agrees to transfer the Client’s property to the Client, or to Client’s new counsel, at Client’s request and upon payment of any such fees and costs. Client authorizes the Firm to endorse checks payable to Client and to deposit the funds in Firm’s lawyer’s trust fund for Client’s account. To the extent allowed by law and applicable ethical rules, Client further authorizes Firm to use funds so deposited in payment of fees and costs hereunder and to otherwise dispose of such funds in accordance with this Agreement. To the extent to which Client employs the Firm to recover money or property claimed by Client, the Firm has a lien on such money or property pursuant to 770 ILCS 5/1. Client hereby assigns to the firm the Client’s right to any attorney fees, costs, and expenses, except those that have already been paid by Client, and also assigns to the Firm all attorney fees, costs, and expenses that may be awarded to Client as a result of the Firm’s prosecution of Client’s claim, other than that which has already been paid.

Upon retention, the Firm will perfect its attorneys’ lien under Illinois law by, inter alia, sending notice to the potential defendants.

Subpoena A client’s files may become subject to a subpoena in the future for a variety of reasons, such as from a taxing authority. In this case, a client should be both aware of this possibility and prepared to pay the cost of responding to the subpoena.

This clause gives early notice to clients of future potential fees to help avoid “gotcha” feelings.

This notice language may look like: SUBPOENA: In the event we are required in the future to respond to a subpoena (from a taxing authority or from any other party) for documents relating to services that

we have performed for you, or to testify by deposition or otherwise concerning our services, you agree to reimburse us for our time and expenses incurred in responding to and complying with the subpoena.

Acknowledgment by Client The dreaded words “I didn’t know” can always complicate matters. Engagement letters may be intimidating for clients to read, even if brief. However, the matters enclosed within the letter are critical for the client to understand and accept.

Including an acknowledgment clause helps mitigate liability on the part of the firm and attorney in the event the client brings an action against the firm or attorney. The clause should include language attesting that the client understands each of the rights and duties within the letter, and confirmation that he or she has freely and voluntarily signed the letter. This notifies the client that there is an expectation that they understand what they are signing and have read it, and gives them an opportunity to stop and reflect on any confusion they may have with any of the provisions. Attorneys should, of course, follow up with clients if they have any questions.

This language may be as simple as the following: ACKNOWLEDGMENT: The undersigned Client has, before signing this Legal Services Agreement, read the entire Agreement and understands each of the rights and duties set forth herein. The undersigned Client has freely and voluntarily signed the Legal Services Agreement and has full authority to do so.

Conclusion In summary, the above clauses may seem obvious, but attorneys often overlook them. Revisiting these clauses in your engagement letters, or adding these clauses to engagement letters, will benefit attorneys and clients alike by reducing the opportunities for confusion and misunderstanding. Of course, attorneys should also ensure that these clauses comply with state-specific rules. n

Published in Probate & Property, Volume 36, No 1 © 2022 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.

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Deliberate Wellness— How Legal Employers Can Promote Lawyer Well-Being Whether you run a small firm, are involved in any aspect of management of a larger firm, or are simply concerned about your professional colleagues, you should consider the well-being of the lawyers (and staff) on your team.

The ABA Journal recently reported on a Bloomberg survey in which a significant number of lawyers—half of all lawyers and an even greater percentage of younger lawyers—acknowledged a significant decline in their well-being in the first part of 2021. See Survey Reports Decline in Lawyer Well-Being, ABA Journal, June 30, 2021. In a year already plagued by uncertainty and upheaval, those statistics command our concern. But equal emphasis should be placed on the effect such unhappiness can have on workplace morale and the retention of skilled team members. That survey suggests that all of us should be concerned, as one out of two lawyers are facing wellness challenges.

On a national level, the American Bar Association recognized that lawyer well-being issues require prompt attention. It commissioned a National Task Force on Lawyer Well Being. That Task Force examined the issues in its comprehensive report, The Path to Lawyer Well-Being: Practical Recommendations for Positive Change. See https://bit.ly/3Bkmgdw (Well-Being Report).

The Well-Being Report describes its core concern: To be a good lawyer, one has to be a healthy lawyer. Sadly, our profession is falling short when it comes to well-being.

The two studies referenced above reveal that too many lawyers and law students experience chronic stress and high rates of depression and substance use. These findings are incompatible with a sustainable legal profession, and they raise troubling implications for many lawyers’ basic competence. This research suggests that the current state of lawyers’ health cannot support a profession dedicated to client service and is dependent on public trust.

The Well-Being Report presents numerous helpful suggestions.

It’s worthwhile reading for any lawyer who is seeking to promote—or even just understand—the broad range of factors that undermine well-being in the legal profession.

Career Development & Wellness Columnists: Gerard G. Brew, McCarter & English, Four Gateway Center, 100 Mulberry St., Newark, NJ 07102; Jo Ann Engelhardt, JD, LL.M, AEP (Distinguished), Ocean Ridge, Florida.

The ABA and most state bar associations have focused on lawyer well-being through Commission on Lawyer Assistance Programs (COLAP)—mechanisms designed to enable lawyers to obtain assistance with wellness, mental health, and related concerns confidentially and promptly.

The COLAP web pages present a host of resources for those who are encountering issues like mental health challenges—both for the affected lawyer and those around him.

Meanwhile, the ABA has focused on the need to address wellness issues immediately, particularly in the current environment. The ABA House of Delegates adopted, at its Annual Meeting in August, two Resolutions proposed by the ABA Coordinating Group on Practice Forward. One of our own RPTE section members and leaders, Jo Ann Engelhardt, serves on that Group.

The adopted Resolution 602 urges bar associations and legal employers, in connection with a safe return to the workplace, to develop and implement policies and practices that address the COVID-19 pandemic’s disproportionate impact on people of color, women, individuals with disabilities, individuals who identify as LGBTQ+, caregivers, and seniors. Resolution 603 encourages bar associations and legal employers to develop, disseminate, and provide guidance and resources to assist with the implementation of policies and best practices for the safe and effective return to the workplace as a consequence of the COVID-19 pandemic.

For more information, you can access the Practice Forward site, which offers resources including CLEs, articles, checklists, and podcasts, to help lawyers and those who work in legal settings, to address the challenges of COVID, especially as we head towards the new normal. See https://www.americanbar.org/ initiatives/practice-forward/.

With that background, let’s return to things that legal employers can do to address lawyer well-being concerns. These are steps that can be taken almost immediately and then implemented with a sustained emphasis to drive a cultural change in our profession and our legal organizations. The following is an excerpt from the Well-Being Report (edited for brevity and clarity and with footnotes omitted). The original of the full Well-Being Report, containing a host of recommendations for all aspects of the legal profession, can be found on the ABA website.

Legal employers, meaning all entities that employ multiple practicing lawyers, can play a large role in contributing to lawyer well-being. While this is a broad and sizable group with considerable diversity, our recommendations apply

Published in Probate & Property, Volume 36, No 1 © 2022 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.

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CAREER DEVELOPEMENT & WELLNESS

fairly universally. A specific recommendation may need to be tailored to address the realities particular to each context, but the crux of each recommendation applies to all.

Recommendation 1: ESTABLISH ORGANIZATIONAL INFRASTRUCTURE TO PROMOTE WELL-BEING. Form a Lawyer Well-Being Committee.

Without dedicated personnel, real progress on well-being strategies will be difficult to implement and sustain. Accordingly, legal employers should launch a well-being initiative by forming a Lawyer Well-Being Committee or appointing a Well-Being Advocate.

The advocate or committee should be responsible for evaluating the work environment, identifying and addressing policies and procedures that create the greatest mental distress among employees, identifying how best to promote a positive state of well-being, and tracking progress of well-being strategies. They should prepare key milestones, communicate them, and create accountability strategies. They also should develop strategic partnerships with lawyer assistance programs and other well-being experts and stay abreast of developments in the profession and relevant literature.

Assess Lawyers’ Well-Being.

Legal employers should consider continually assessing the state of well-being among lawyers and staff and whether workplace cultures support well-being. An assessment strategy might include an anonymous survey conducted to measure lawyer and staff attitudes and beliefs about well-being, stressors in the firm that significantly affect well-being, and organizational support for improving well-being in the workplace. Attitudes are formed not only by an organization’s explicit messages but also implicitly by how leaders and lawyers actually behave. Specifically related to the organizational climate for support for mental health or substance use disorders, legal employers should collect information to ascertain, for example, whether lawyers: • Perceive that you, their employer, values and supports well-being.

• Perceive leaders as role modeling healthy behaviors and empathetic to lawyers who may be struggling.

• Can suggest improvements to better support well-being.

• Would feel comfortable seeking needed help, taking time off, or otherwise taking steps to improve their situation.

• Are aware of resources available to assist their well-being.

• Feel expected to drink alcohol at organizational events.

• Feel that substance use and mental health problems are stigmatized.

• Understand that the organization will reasonably accommodate health conditions, including recovery from mental health disorders and addiction.

As part of the same survey or conducted separately, legal employers should consider assessing the overall state of

lawyers’ well-being. Surveys are available to measure concepts like depression, substance use, burnout, work engagement, and psychological well-being. The Maslach Burnout Inventory (MBI) is the most widely-used burnout assessment. It has been used to measure burnout among lawyers and law students. Programs in the medical profession have recommended a bi-annual distribution of the MBI. Legal employers should carefully consider whether internal staff will be able to accurately conduct this type of assessment or whether hiring an outside consultant would be advisable. Internal staff may be more vulnerable to influence by bias, denial, and misinterpretation.

Recommendation 2: ESTABLISH POLICIES AND PRACTICES TO SUPPORT LAWYER WELL-BEING. Legal employers should conduct an in-depth and honest evaluation of their current policies and practices that relate to well-being and make necessary adjustments. This evaluation should seek input from all lawyers and staff in a safe and confidential manner, which creates transparency that builds trust.

Legal employers also should establish a confidential reporting procedure for lawyers and staff to convey concerns about their colleagues’ mental health or substance use internally and communicate how lawyers and staff can report concerns to the appropriate disciplinary authority or to the local lawyer assistance program. Legal employers additionally should establish a procedure for lawyers to seek confidential help for themselves without being penalized or stigmatized.

COLAP and state lawyer assistance programs can refer legal employers to existing helplines and offer guidance for establishing an effective procedure that is staffed by properly trained people. We note that the ABA and the New York State Bar Association have proposed model law firm policies for handling lawyer impairment that can be used for guidance.

The ABA has provided formal guidance on managing lawyer impairment.

Monitor for Signs of Work Addiction and Poor Self-Care.

Research reflects that about a quarter of lawyers are workaholics, which is more than double that of the 10 percent rate estimated for U.S. adults generally. Numerous health and relationship problems, including depression, anger, anxiety, sleep problems, weight gain, high blood pressure, low self-esteem, low life satisfaction, work burnout, and family conflict can develop from work addiction. Therefore, we recommend that legal employers monitor for work addiction and avoid rewarding extreme behaviors that can ultimately harm their health.

Legal employers should expressly encourage lawyers to make time to care for themselves and attend to other personal obligations. They may also want to consider promoting physical activity to aid health and cognitive functioning.

Actively Combat Social Isolation and Encourage Interconnectivity.

As job demands have increased and budgets have tightened, many legal employers have cut back on social activities.

Published in Probate & Property, Volume 36, No 1 © 2022 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.

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This could be a mistake. Social support from colleagues is an important factor for coping with stress and preventing negative consequences like burnout. Socializing helps individuals recover from work demands and can help stave off emotional exhaustion. It inhibits lawyers feeling isolated and disconnected, which helps with firm branding and messaging and may help reduce turnover. We recommend de-emphasizing alcohol at such events.

Recommendation 3: PROVIDE TRAINING AND EDUCATION ON WELL-BEING, INCLUDING DURING NEW LAWYER ORIENTATION. We recommend that legal employers provide education and training on well-being-related topics and recruit experts to help them do so. A number of law firms already offer well-beingrelated programs, like meditation, yoga sessions, and resilience workshops. We also recommend orientation programs for new lawyers that incorporate lawyer well-being education and training. Introducing this topic during orientation will signal its importance to the organization and will start the process of developing skills that may help prevent well-being problems. Such programs could: • Introduce new lawyers to the psychological challenges of the job.

• Reduce stigma surrounding mental health problems.

• Take a baseline measure of well-being to track changes over time.

• Provide resilience-related training.

• Incorporate activities focused on individual lawyers’ interests and strengths, and not only on organizational expectations.

Further, law firms should ensure that all members and staff know about resources, including lawyer assistance programs, that can assist lawyers who may experience mental health and substance use disorders. This includes making sure that members and staff understand confidentiality issues pertaining to those resources.

Emphasize a Service-Centered Mission.

At its core, law is a helping profession. This can get lost in the rush of practice and in the business aspects of law. Much research reflects that organizational cultures that focus chiefly on materialistic, external rewards can damage well-being and promote a self-only focus. In fact, research shows that intrinsic values like relationship development and kindness are stifled in organizations that emphasize extrinsic values like competition, power, and monetary rewards.

Work cultures that constantly emphasize competitive, self-serving goals will continually trigger competitive, selfish behaviors from lawyers that harm organizations and individual well-being. This can be psychologically draining. Research on Australian lawyers found that 70 percent reported that the practice of law is bottom-line driven. Lawyers who reported that the practice of law was primarily about generating profits

were more likely to be depressed. This affects the bottom line because poor mental health can cause disability and lost productivity.

Consequently, we recommend that legal employers evaluate what they prioritize and value and how those values are communicated. When organizational values evoke a sense of belonging and pride, work is experienced as more meaningful.

Experiencing work as meaningful is the biggest contributor to work engagement—a form of work-related well-being.

Create Standards, Align Incentives, and Give Feedback.

Contextual factors (i.e., the structure, habits, and dynamics of the work environment) play an enormous role in influencing behavior change. Training alone is almost never enough.

To achieve change, legal employers will need to set standards, align incentives, and give feedback about progress on lawyer well-being topics.

Currently, few legal employers have such structural supports for lawyer well-being. For example, many legal employers have limited or no formal leader development programs, no standards set for leadership skills and competencies, and no standards for evaluating leaders’ overall performance or commitment to lawyer well-being. Additionally, incentive systems rarely encourage leaders to develop their own leadership skills or try to enhance the well-being of lawyers with whom they work. In law firms especially, most incentives are aligned almost entirely toward revenue growth, and any feedback is similarly narrow. To genuinely adopt lawyer well-being as a priority, these structural and cultural issues will need to be addressed. See Well-Being Report, p. 31-34.

Conclusion The Section’s Deliberate Wellness Program urges our RPTE colleagues (whether they are employers or employees) to work within their respective firms or employers to consider implementing some of the foregoing steps, such that those who are suffering in silence in our challenging profession will have an opportunities to address their situations. As the Report notes, the practice of law is traditionally considered a helping profession. As RPTE Section members, we can use this information to help others, bearing in mind that if the survey reported earlier is correct, potentially half of our colleagues have encountered wellness concerns in this year alone. n

Published in Probate & Property, Volume 36, No 1 © 2022 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.

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PRACTICAL POINTERS FROM PRACTITIONERS Worth a Second Look: Opportunity Zone Literacy in Real Estate Transactions “Opportunity zone” has been a buzzword in real estate since late 2017 when Congress passed the Tax Cuts and Jobs Act, yet many real estate attorneys do not consider opportunity zones to be a regular part of their analysis in advising clients on real estate transactions.

Basic literacy in opportunity zones can add value for clients in site selection and finance acquisition, without requiring attorneys to be experts on the topic.

(Of course, tax and corporate expertise should be sought for the formation of the legal vehicles and reporting or certification requirements involved in such transactions.)

As an overview, the opportunity zone tax regulatory scheme aims to incentivize private investment of capital gains into businesses in low-income communities in exchange for tax perks— specifically, deferrals, reductions, and even forgiveness of certain qualifying capital gains taxes. Whether a business is located in an opportunity zone depends entirely on each state’s governor’s selection, based on a litany of community development-related criteria. Nationally, there are 8,700 opportunity zones open for investment. As of June 30, 2021, three and a half years into the program’s existence, Novogradac estimated that investors have directed over $17.52 billion from capital gains into “Qualified Opportunity Funds” (QOFs), the legal vehicles for unrealized capital gains to be invested into qualifying businesses located in opportunity zones or “Qualified Opportunity Zone Businesses.”

Interestingly, close to 80 percent of all QOFs formed to date focus on residential Contributing Author: Chelsea Fitzgerald, Coats Rose, P.C., One Canal Place, 365 Canal Street, Suite 800, New Orleans, Louisiana 70130, CFitzgerald@coatsrose.com.

development—signaling to commercial real estate attorneys that there may be an unattended client need in this space.

Despite the buzz and obvious tax incentives for clients involved in opportunity zone investments, many real estate practitioners have been hesitant to wade into the world of opportunity zones or at least have not taken affirmative steps to broach the topic with clients in instances where such advice is unsolicited. Perhaps some practitioners are waiting to see if the IRS will extend current investment deadlines, thereby opening a window for latecomers to join the fray. Others may deem the organizational structure and tax acumen required to set up QOFs to be outside their comfort zones. Hesitations aside, basic literacy in this field should be normalized among real estate attorneys in light of the clear and continuing benefits that can accrue to clients by adding an opportunity zone layer to already viable deals over the next six years (unless current deadlines are further extended).

To illustrate the volume of potential, as of 2017, an estimated $6.1 trillion in unrealized capital gains were being held by both individual households and US corporations (based on the Federal Reserve’s Survey of Consumer Finances and Financial Accounts). These potential sources of funding were previously untapped and locked up in capital markets due to high capital gains taxes that would result to investors upon disposition of appreciated assets. As of this writing, December 31, 2021, is the deadline for investors to reap the tax benefits of one of the primary components of opportunity zones, 10 percent forgiveness (a 10 percent step-up in basis) on original capital gains invested into QOFs. This deadline stems from the current requirement that gains be invested and

held in QOFs for at least five years prior to December 31, 2026. Though this fastapproaching deadline may arrive too soon for many practitioners to integrate an opportunity zone component in deals closing before the end of 2021, the program still offers significant benefits for capital gains invested in QOFs before June 28, 2027, and held for ten years, offering a 100 percent step-up in basis at the time of sale of the opportunity zone investment (meaning no capital gains tax on new gains from the investment).

At the most basic level, real estate attorneys can advise clients on site selection and alert clients to the locations of opportunity zones within their states.

In Louisiana, for example, there are 150 opportunity zones, with over two dozen checkerboarding across Orleans Parish.

Large swaths of downtown New Orleans constitute opportunity zones, and the distinction between one block of real estate from another could mean a substantial difference in tax outcomes for investor clients.

Attorneys can also direct clients to the relevant economic development councils in their state for further advice on site selection in opportunity zones. Municipalities with economic development councils are in constant competition for businesses to develop in their particular jurisdictions and can assist clients in finding investors or even direct clients toward local tax breaks and public funding sources such as community development block grants, which can further increase project budgets and community impact.

Opportunity zones will continue to be a very real consideration for investors for at least the next six years. It’s not too late for practitioners to familiarize themselves with the basics and add value for their clients. n

Published in Probate & Property, Volume 36, No 1 © 2022 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.

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TECHNOLOGY PROPERTY Surviving the 24-7 Office It is 2022, and lawyers are returning to their offices en masse, leaving the comforts of home. Some are returning full-time; others have negotiated flexible schedules where they work selected days in the office. Over the past two years, lawyers armed with technology have been able to work from anywhere and at any time. With remote meeting technology, their client and colleague interactions have not been constrained by office hours. As a result, our clients and colleagues have been able to reach out to us 24 hours a day, seven days a week, and get a response. The resulting never-ending workday has caused disruptions in the work-life balance for many of us.

Most lawyers have successfully outfitted the home office with the resources of the work office, but they remain tethered to their desktop or laptop computer. With the right balance of technology, however, you can cut the umbilical cord to your computer and gain some level of freedom. Armed with a cell phone, you can leave the “office” to attend your child’s baseball game, go to a birthday party, visit your in-laws, or go on a vacation, so long as there is access to 4G or WiFi connections.

This article examines some of the technology that will allow you to cut the cord that binds you to your desk. It will be up to you to manage what level of Technology—Property Editor: Seth Rowland, Esq. (www.linkedin.com/in/ sethrowland) has been building document workflow automation solutions since 1996 through Basha Systems (www.bashasys. com), the consultancy he founded. He also helps law firms implement document management and practice management systems as a member of the 3545 Consulting Group (www.3545consulting. com).

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

work your clients and colleagues expect from you outside of traditional office hours. Certain legal tasks will always require a dedicated computer with a large screen, such as document drafting and review. But many legal tasks require informed decisions that can be delivered asynchronously. It is these tasks that can be handled via a cellphone or tablet outside of your work or home office that we discuss in this article.

Required Hardware The cellphone is an essential piece of equipment. Start with a current model Android or iPhone cell phone; the larger the screen, the better. The screen display should be at least 6”. If you can get an Apple iPhone 13 Max or a Samsung Galaxy S21+, the extra screen display area is well worth the extra cost. It is also good to have extra storage capacity to handle downloaded documents and all the applications you will be installing. Look for a phone with long battery life. In addition, purchase a high-capacity portable battery to use whenever you travel. If you are working with a phone older than two years, consider getting the battery replaced or just trade it in.

Your cell phone provider is also important. You will want a generous data plan with 4G or 5G in the locations

you will be working. You will also want to be aware of the WiFi hotspots in the places you go outside your office. WiFi connections are usually faster. With the proper precautions, they can be used safely. With 4G/5G you will also want the ability to turn your phone into a mobile hotspot. In this way, should you need the larger screen and keyboard of your laptop, you can connect to the internet through your phone.

Get a quality, noise-canceling headset. You will be making calls from locations where there is a lot of background noise. You will sound unprofessional shouting above the noise, and you will have difficulty hearing the other party on the call. The Apple AirPods Pro have acceptable noise canceling. However, you should also consider earbud offerings from Jabra, Samsung, Microsoft, Sennheiser, or Poly (previously Plantronics). If you expect to be in a noisy setting and have an iPhone, you might consider using an artificial intelligence-based noise cancellation application like Krisp.

Required Infrastructure You must have a cloud-accessible Document Management System (DMS).

Lawyers need to be informed when they talk to clients and colleagues. And this means having your documents at your fingertips to refer to in your conversation. VPN (Virtual Private Network) technology can work for a home office, but it will not work on your phone. And don’t ask me about using RDP (Remote Desktop Protocol) on a cell phone; the screen is too tiny to get anything done.

Documents attached to emails can serve as a basis for discussion, but this approach is problematic. If a legal transaction is under intense negotiation, by the time you review the attachment,

Published in Probate & Property, Volume 36, No 1 © 2022 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.

January/February 2022 61

TECHNOLOGY PROPERTY

the draft version may have changed. By contrast, with a cloud-enabled DMS, you can be sent a secure link to the current version of the document. The document remains secure from hacking inside your DMS rather than as open attachments to an email. With a link to the document, you may even be able to edit the document on your phone and publish those changes back to the DMS. As a NetDocuments consultant, I am partial to the NetDocuments offering. It is entirely cloud-based and meets all industry standards for security. It has a dedicated application for iPhone and Android that allows full-search, preview, and display, as well as editing

of documents. Premise-based DMS vendors like iManage, Worldox, and OpenText offer a cloud option, which either leverages the premise-based document storage or a cloud-hosted database. Cloud-based file storage systems like Microsoft Office365, Dropbox, and Box have business-level offerings that give you anywhere access to your files. The benefit of these file storage systems is that storage space is relatively cheap. However, they currently lack the meta-data profiling, advanced search, workflow, and encryption at rest features available in dedicated DMS systems.

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Asynchronous Communication Tools When working in an office, communication happens with in-person meetings and calls. During the COVID-19 pandemic, virtual meetings occurred over the internet with platforms like Microsoft Teams, Zoom, and GoToMeeting.

These platforms are great for one-onone meetings or small teams. If there are more than three people in attendance, these meetings are inherently unproductive; most attendees are listening with half an ear while checking their email or surfing the web until their names are mentioned.

Asynchronous communication is the solution to unproductive meetings: all meetings should be preceded by an agenda that is distributed in advance of the meeting that also assigns the persons responsible for each item.

The agenda can then be discussed asynchronously in a threaded conversation before the meeting. As a result, the meeting is shorter and focused on decisions.

Your firm should agree on a threaded discussion platform. If your firm has deployed Office365, you can use the included Teams technology. You create a team and, for each team, create discussion channels. In the channel, you can have an open period of discussion where everyone contributes before the meeting, with the options or decisions being presented for consideration at the formal meeting. If the discussion requires synchronous communication, you click on the audio call button and it brings everyone together for a zoom-style call with full screen-sharing. Teams can run on Mac-OS, IOS, and Android.

Slack is a popular alternative for these team discussions because of the ease of bringing in people outside the organization into the discussion and its freemium model. NetDocuments DMS has the ndPlan offering which includes ndThread. The ndThread module allows you to have matter-centric discussions with discussion channels focused on particular documents or issues. With the SmartViewer, you can add an annotation layer to documents

Published in Probate & Property, Volume 36, No 1 © 2022 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.

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TECHNOLOGY PROPERTY

RPTE Book Club, sponsored by The Diversity, Equity and Inclusion Committee presents

Thursday, February 24, 2022 12:00 – 1:00 pm

ambar.org/ rptebookclub and discuss particular provisions to aid in drafting and document review. When combined with CollabSpaces, you can invite external users into these discussions in a secure way.

Hangouts Chat is Google’s alternative to Teams and Slack. Facebook-owned

WhatsApp offers secure international messaging. If you use Salesforce.com or a practice management system like Litify or AdvologixPM that is hosted on the Salesforce.com platform, there is Salesforce Chatter. Be sure to consider how private and secure your messaging platform is. You will want to maintain a clear wall between business communications and personal communications.

For this reason, I would never use Facebook messaging to communicate with clients and would likely avoid the usage of Google Hangouts unless the firm has standardized on an all-Google platform.

Task Management and Workflow If you are going to be working outside of normal office hours and away from your desk, you should be able to let your team know which tasks are in progress or completed, and you should be able to bill for your time. There are now many options when choosing a cloud-based or cloud-enabled legal practice management system.

Strong offerings are available from Zola Suite, ZenCase, Clio, and Centerbase, to name a few. With a Galaxy S21+ or an iPhone13 Max, you can access and run many of these systems in the browser.

The text size will be small, but they will function. Some programs have created dedicated apps that are available for download from the Apple App Store or Google Play. The dedicated applications are better integrated with phone functions like calling, email, and document review.

Some applications like ndPlan, MOT-R Workflow, DocMinder, Onit, BEC Legal Systems MatterLink, and AfterPattern allow you to flow documents through a task workflow. The workflow would include task assignments, as well as approvals. With these systems, you can get asynchronous approvals. Think of them as “votes.” A task that requires multiple approvals before it goes to the next stage can trigger an email or text message with a link back to the documents. Approval is a matter of clicking on a button in the emails. Votes are registered in the workflow application. Once the necessary vote threshold is attained, the assignee of the task is

notified of the result and can proceed to the next step. The workflows can be initiated at any time of day and get brought full circle in minutes without lengthy meetings or time delays. All the information the approver needs is accessible online from their cellphone or tablet.

Task management is usually included in legal practice management systems as part of a billing workflow; completed tasks are turned in billable timeslips. They can be viewed in a list by the assignor and assignee for all tasks, or they can be viewed in a sublist under each matter. This approach works for small matters, but more is required for larger projects that involve multiple teams working together on different aspects of a single project. For these larger projects, you might consider dedicated project management tools like BaseCamp, Trello, Zoho Projects, Wrike, and Asana. Some of these have integration with document management systems. Another option would be to leverage your document management system. NetDocuments includes a Task management tool that allows you to create multiple KanBan task boards for each matter and then attach documents, checklists, notes, and discussion to each task assignment. Other products have integrations with Worldox, iManage, and NetDocuments.

Setting Your Ideal Work-Life Balance These tools and techniques will free up the dead time in your day that is spent in meetings or making sure you are available when someone calls. It will free you up to go to your kid’s soccer game or go on a family outing—just bring your phone. If a client calls, you take a moment to review the file online and get them their answer. If a colleague wants you to review a draft, they can send a link, and you can reply with approval or suggested changes. Ultimately, you will need to manage the expectations of your clients and colleagues. They need to understand that you care about their needs, but you are also off the clock. n

Published in Probate & Property, Volume 36, No 1 © 2022 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.

January/February 2022 63

THE LAST WORD On Notice The notice provisions of contracts are crucial to our clients’ declarations of default, contract terminations, contract renewals, and other exercises of rights.

Giving notice improperly can result in clients losing benefits and their lawyers being sued for malpractice. In contract notice provisions, drafters must satisfy two distinct goals. First, the specified method of giving notice must be clear and simple for the clients to implement when giving notice. Second, this method must assure that notices received by the clients are given in a way that provides actual knowledge of what the other party is communicating.

Satisfying both goals requires drafters to pause and consider what their clients actually need in each situation.

Always Require Notices in Writing At a minimum, notice provisions must require that all notices, particularly important notices like exercises of rights or default demands, be written.

For all important matters, oral notice is bad for both parties. For example, the sender of an oral notice may have trouble proving that it provided an oral notice to the other party, and the recipient may be lulled into disregarding an oral statement or demand, dismissing it as just conversation. The fact that an express writing requirement is generally necessary to overcome each party’s right to communicate its notice orally drives home the importance of requiring written notice in all contracts. See, e.g., Atwood v. Southeast Bedding Co., 485 S.E.2d 217 (Ga. Ct. App. 1997) (analyzing notice under UCC § 2-607).

The Last Word Editor: Marie Antoinette Moore, Sher Garner Cahill Richter Klein & Hilbert, L.L.C., 909 Poydras Street, Suite 2800, New Orleans, LA 70112, (504) 2992100.

What Is Written Notice and How Must It Be Given?

The sender needs to be able to prove to a court that the sender gave notice. The best way to give provable notice is to send a hard copy of the notice by USPS registered or certified mail or national overnight delivery service, with delivery receipt requested. Registered mail is more secure but slower and more difficult for mailrooms to deal with; consequently, certified mail is the USPS service generally used for legal notices.

See Certified vs Registered Mail – Difference b/w Certified and Registered Mail, USPS Info. There are problems with both certified mail and overnight services. Snail mail is notoriously slow and becoming slower by the year, and, although overnight delivery services are faster, they cannot make deliveries to P.O. box addresses. For these reasons, it’s best to provide for notice to be sent by either of these alternatives so that, if the recipient has provided only a P.O. box address, notice can still be given.

What about personal delivery? Most contracts permit personal delivery of the written notice, but if the recipient is a national company, personal delivery to a receptionist at a remote location is probably not feasible for the sender or desirable for the recipient.

What about email notices or their outdated cousin fax notices? Lawyers should be wary of email (and fax) notices for both senders and recipients.

These avenues of communication are a great way to initiate the discussion on a matter that the sender wishes to work out with the recipient. But as an actual notice that may trigger enforcement or property rights, these methods are perilous because the sender may have proof issues, and the recipient may not understand the notice’s gravity. Consequently, most drafters require that

email and fax notices be followed up by hard-copy notices sent by certified mail or overnight delivery.

On What Day Is Notice Considered Given?

Whether a notice is considered to have been given when sent or when received is crucial to both the sender and the recipient—cure periods are triggered by this date, and notices of renewal, termination, and the like must be given on time to be effective. The sender wants the notice to be deemed given when sent, and the recipient does not want the notice to be considered given until received, so compromise is necessary. This compromise generally takes the form of a stipulation that notice is deemed given a certain number of days after it was sent. If the recipient insists on actual receipt, then the sender should include a stipulation that if a notice is returned as undeliverable, then it’s deemed given on the date of attempted delivery.

The Importance of the Notice Address All contracts should designate the parties’ initial addresses for notice, often with a copy to the parties’ counsel.

They should also provide that each party has the right to change its address by notice to the other party (written of course), given a fixed number of days before the notice is to become effective.

Conclusion Although it’s OK to have a standard notice provision as a template, we should think through the practicalities of giving and receiving notice in each contract situation to assure that the sender (and its lawyer) has a practical way of giving notice and the recipient gives each notice the attention it requires. n

Published in Probate & Property, Volume 36, No 1 © 2022 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.

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