By Ezra Dyckman and Lana Kalickstein
New York Law Journal
October 28, 2009
In today's economic climate, an increasing number of taxpayers are struggling to repay loans, and seek concessions from their lenders. These concessions often involve a reduction in the principal balance of a debt, which typically generates taxable income from the discharge of indebtedness ("COD income"). With the aid of ameliorating tax code provisions, taxpayers have been able to avoid the recognition of COD income in certain cases. Now, thanks to a new Internal Revenue Code provision added by Congress, taxpayers can elect to defer certain COD income.
Internal Revenue Code Section 108(i), added by Congress earlier this year, provides welcome relief for many taxpayers, allowing the deferral of COD income generated in 2009 or 2010 in connection with certain debt transactions. For a taxpayer who takes advantage of this provision, COD income will not be included in gross income until 2014, and even then, included only ratably over a five-year period. Revenue Procedure 2009-37, issued by Treasury this past August, contains helpful guidance, clarifying some issues left open by section 108(i), and providing the election procedures.
Background
If a lender cancels all or a portion of a borrower's indebtedness, the borrower generally will have taxable income equal to the amount of the discharge. Section 108 provides various exceptions (i.e., bankruptcy, insolvency) to the general rule that COD income must be included in gross income in the year of the discharge. Generally the price of this exclusion is a reduction in basis or other tax attributes of the taxpayer.
Section 108(i), added by Congress as part of the American Recovery and Reinvestment Act of 2009, provides a new election under which a taxpayer can defer COD income. Under this provision, a taxpayer who has COD income generated in 2009 or 2010 from the "reacquisition of an applicable debt instrument" can elect to defer such income until 2014, and then recognize such COD income ratably over the five-year period beginning in 2014.
Under the statute, an "applicable" debt instrument is defined as a debt instrument issued by either (1) a C corporation, or (2) any other person (including a partnership) "in connection with the conduct of a trade or business by such person." The "reacquisition" of such a debt instrument is defined as an "acquisition" of the debt by either the debtor which issued the debt (or is otherwise the obligor under the debt), or a person related to the debtor. "Acquisition" of the debt includes: (1) acquiring the debt for cash or property, (2) exchanging equity for the debt, (3) exchanging new debt for the debt, (4) debt contributed to capital, or (5) complete forgiveness of the debt by the holder.
Rules for Partnerships
In the case of partnerships and S corporations, section 108(i) requires that the election to defer COD income be made at the entity level. This initially caused a great deal of concern, as partners in a partnership often have conflicting interests regarding whether to defer COD income or apply a different exclusion under section 108. Luckily, Revenue Procedure 2009-37 resolves this problem favorably by giving a taxpayer the ability to make a "partial" election. Under the Revenue Procedure, a taxpayer can elect to defer all, part, or none of its eligible COD income. In the case of a partnership, the partnership must first allocate to each partner its distributive share of COD income under the partnership agreement. The partnership can then decide, on a partner-by-partner basis, how much, if any, of each partner's distributive share of COD income will be deferred under the partnership's election. Although section 108(i) states that no other exceptions under section 108 (i.e., bankruptcy, insolvency) are applicable for COD income deferred under the election, the Revenue Procedure clarifies that a taxpayer can apply another section 108 exception to any COD income that is not deferred and would otherwise be included in income. Thus each partner can effectively decide whether it will (1) defer its share of COD income, (2) take advantage of a different exclusion, or (3) recognize COD income in the current year (and perhaps apply expiring net operating losses). For example, in the case of a partnership with one partner who is an individual and another partner who is a C corporation, the individual may prefer to reduce his basis in depreciable property under the "qualified real property business indebtedness" exclusion (section 108(a)(1)(D)), while the C corporation, to which such exclusion is not available, may prefer to defer its share of COD income.
There is more good news for partnerships. Generally, when a partner's share of partnership liabilities is reduced, there is a decrease in the partner's basis in his partnership interest, which could result in the recognition of gain. However, section 108(i) provides a helpful exception to this rule. In the case of a partnership that has made an election under section 108(i) and has chosen to defer a particular partner's share of COD income, the decrease in such partner's share of partnership liabilities will not be taken into account at the time of the discharge, to the extent it would cause the partner to recognize gain. The deferred decrease in the partner's share of liabilities must be taken into account by the partner at the same time as the related deferred COD income is ultimately included in such partner'sincome. As a result, at the time a partner takes into account any decrease in its liability share due to a debt discharge, the partner will generally have enough basis to absorb the decrease in basis resulting from the deemed distribution.
Acceleration Events
Although deferred COD income, which is treated as ordinary income, generally will not be included in an electing taxpayer's gross income until 2014, certain events will trigger earlier inclusion. Under section 108(i), all deferred COD income of a taxpayer is accelerated at the time of: (1) the death of the taxpayer, (2) liquidation or sale of substantially all the assets of the taxpayer, (3) cessation of business by the taxpayer, or (4) in the case of a partnership or S corporation, the sale, exchange or redemption by a partner or shareholder of its interest in the partnership or S corporation. For those taxpayers considering an election, it is important to evaluate any potential acceleration transactions that might occur in the foreseeable future.
Election Procedures
Revenue Procedure 2009-37 specifies the procedures for making the section 108(i) election. An election statement must be filed by the taxpayer and attached to the tax return for the year the COD income is generated, and must include certain details abut the COD income reacquisition transaction. The Revenue Procedure grants an automatic one-year extension to this deadline. There are also annual filings required by the taxpayer for each year beginning the year following the deferral, through the year all deferred COD income is recognized. Partnerships and S corporations have additional filing and record keeping requirements, including attaching certain statements to K-1's issued to their owners.
Additional Guidance Needed
Section 108(i) provides relief to troubled debtor taxpayers and favorable rules for partnerships. Unfortunately, even with the release of Revenue Procedure 2009-37, some of the crucial terms found in section 108(i) remain undefined, making it difficult for some taxpayers to determine whether they qualify for the election and which actions will trigger acceleration. For example, there is no definition provided for the term "issued in connection with the conduct of a trade or business." If a partnership engaged in a trade or business issues debt in order to make distributions to its partners, is that debt considered to be "issued in connection with a trade or business?" Will a partnership's trade or business be imputed to one of its partners in the case where the partner borrows money in order to buy a partnership interest or make a contribution to the partnership?
Similarly, certain acceleration events, such as "sale of substantially all of the assets of the taxpayer" and "cessation of business by the taxpayer" need clarification. For example: a taxpayer in the real estate business has made an election to defer COD income. One year later the taxpayer sells a large portion of its real estate portfolio and immediately purchases a new real estate portfolio, continuing to operate a real estate business. Has there been a "sale of substantially all the assets of the taxpayer" or a "cessation of business by the taxpayer?" Should there be an exception in this case to prevent acceleration? The current guidance leaves these and other related issues unresolved.
We hope that further guidance from Treasury will be forthcoming to aid the growing number of troubled borrowers wishing to take advantage of section 108(i).
Thursday, October 29, 2009
Wednesday, October 28, 2009
Judges Reject Residency Rule In Determining SEQRA Standing
By Joel Stashenko
New York Law Journal
October 28, 2009
ALBANY - Standing to challenge the environmental impact of a proposed development need not be confined to residents or neighbors of the area where the project would be located but can be extended to any avid users of the affected property, the Court of Appeals suggested yesterday.
The proper course, the Court determined in Matter of Save the Pine Bush, Inc. v. Common Council of the City of Albany, 134, is to make plaintiffs prove standing by showing they have an interest that is greater than the general public's at large in using and enjoying the resource at risk.
The Court of Appeals decision appears on page 25 of the print edition of today's Law Journal.
"Striking the right balance in these cases will often be difficult, but we believe that our rule—requiring a demonstration that a plaintiff's use of a resource is more than that of the general public—will accomplish that task better than the alternatives," Judge Robert S. Smith wrote for the Court.
The judges observed that they were neither seeking to erect barriers to standing that were so "insuperable" that virtually no one could challenge a project under the State Environmental Quality Review Act (SEQRA) nor so elastic that the act could be used to cause "interminable" delays.
The judges ruled in a case involving the proposed construction of a 124-unit hotel on 3.6 acres of commercially zoned property in Albany County. The property is near, but not in, the Pine Bush reserve, a unique wildlife habitat containing the largest remaining pine barrens on inland sand dunes in the United States.
While granting standing to project opponents, the Court ruled that the city of Albany had met its obligations under SEQRA.
The case has been watched carefully by environmentalists and government regulators, especially for how the Court would interpret a major precedent in SEQRA jurisprudence, Society of Plastics Industry, Inc. v. County of Suffolk, 77 NY2d 761 (1991).
Environmentalists have argued that many courts have used Society of Plastics to preclude SEQRA suits filed by plaintiffs who did not live close to the natural resources where environmental harm was being alleged.
Judge Smith stressed that the Court was not departing from Society of Plastics but that its ruling granting the Pine Bush plaintiffs standing is consistent with that 18-year-old ruling.
In Society of Plastics, the Court held that for standing purposes, a plaintiff has to show it "would suffer direct harm" and an injury that is in "some way different from that of the public at large."
"Society of Plastics does not hold, or suggest, that residence close to a challenged project is an indispensable element of standing in every environmental case," Judge Smith wrote.
The Court rejected the city of Albany's argument that the plaintiffs in the Pine Bush case had to either live in the land preserve, or next to or across the street from the protected land. The closest plaintiff in the case before the Court yesterday lives a half-mile away.
"That [residency] rule would be arbitrary, and would mean in many cases that there would be no plaintiff with standing to sue, while there might be many who suffered real injury," Judge Smith concluded.
While affirming an Appellate Division, Third Department, panel on the standing question (NYLJ, Oct. 10, 2008), the Court nevertheless dismissed the Save the Pine Bush group's challenge to the city of Albany's approval of the hotel project plans under SEQRA.
Save the Pine Bush had argued that the environmental review failed to take into account the hotel's impact on the Pine Bush reserve and on several plant and animal species in the pine barren, including the Karner Blue butterfly, the Hognosed snake, the Worm snake, the Eastern Spadefoot toad, the Frosted Elfin butterfly and the Adder's Mouth orchid.
A government agency seeking to comply with SEQRA need not "investigate every conceivable environmental problem" associated with a project, but must pass judgment on those it deems "relevant" within "reasonable limits." the Court held.
"While it is essential that public agencies comply with their duties under SEQRA, some common sense in determining the extent of those duties is essential too," Judge Smith wrote.
Echoing concerns he raised last month during oral arguments (NYLJ, Sept. 16), Judge Smith noted yesterday that scientists have described the extremely elusive nature of the Worm snake and the Eastern Spadefoot toad and how "formidable" a task it would be to gather conclusive evidence about their use of the Pine Bush habitat and the hotel's effect on them.
The final result in yesterday's case was joined by all seven judges but two issued a concurring opinion objecting to what they called a broadening of the standing rule.
'Special Harm' Contested
Judge Eugene F. Pigott Jr. and Judge Susan Phillips Read said they agreed that the Pine Bush project was properly approved under SEQRA. But they argued that the plaintiffs did not suffer "special harm" to give them standing under Society of Plastics or its progeny.
"The majority's holding, in my view, reinterprets much too broadly the special harm requirement that has been the cornerstone of our standing jurisprudence in land use cases," Judge Pigott wrote in the opinion joined by Judge Read.
The plaintiffs' claim they are injured by the loss of recreation and enjoyment in the Pine Bush case are not unique enough to give them standing, Judge Pigott held.
"The concerns of the petitioners amount to the same general concerns of the community as a whole and are not specific to the petitioners," the concurring judges agreed. "In short, because petitioners fail to specify any direct injury that is any different from that of the general public, they lack standing under our precedent."
An environmental law expert, Michael B. Gerrard of Arnold & Porter, said environmentalists and municipal planners have been waiting nearly two decades for a clarification from the Court of Appeals of the Society of Plastics ruling.
"That had been interpreted by many lower courts as strictly narrowing the right to standing in SEQRA cases," Mr. Gerrard said yesterday. "The Court of Appeals has now greatly broadened the conception of standing."
Mr. Gerrard, who was not involved in the Pine Bush litigation, said he also found "remarkable" the Court's reliance on a U.S. Supreme Court precedent in Sierra Club v. Morton, 405 US 727 (1972).
In that ruling, the Supreme Court held that a plaintiff gained standing by demonstrating injury to the "aesthetic and environmental well-being" of a resource rather than showing a generalized "interest" in the environment.
Mr. Gerrard said the Supreme Court was generous in the early 1970s about granting standing to environmental plaintiffs but has narrowed grounds for standing, especially since Justice Antonin Scalia joined the Court in 1986.
"The '72 ruling was never explicitly overturned, but the spirit of the subsequent decisions was far different," said Mr. Gerrard, who writes a column for the New York Law Journal.
Stephen F. Downs, a retired attorney from Selkirk who represented the plaintiffs pro bono, said the case was a "perfect" one from his standpoint in that no one, even in arguments before the Court of Appeals, suggested that the motivations of Save the Pine Bush or its members were financially driven and not based on preservation of the habitat.
"I am thrilled with the standing argument," Mr. Downs said yesterday. "I think it is a huge victory for standing, for getting the public involved again in these cases."
Mr. Downs said the Sierra Club provided valuable assistance in lining up amici curiae support for Save the Pine Bush's position.
Albany Corporation Counsel Jeffrey V. Jamison argued for Albany. He said he agreed with the Court that the city had taken the requisite "hard look" required under SEQRA at the environmental effects of the hotel project.
But Mr. Jamison said he was troubled by the Court's ruling on the standing question. The city has been sued nearly two dozen times by Save the Pine Bush alone for various projects in and around the reserve over the past three decades, he said, and has been worried about a broadening of Society of Plastics that could open what he called the "flood gates" of litigation by interest groups.
Mr. Jamison said it was unclear whether the North Dakota-based developer of the hotel would move forward with the project, which was first proposed in 2003.
Assistant Solicitor General Andrew B. Ayres appeared on behalf of the Department of Environmental Conservation.
The state agency, which rarely takes sides in litigation not involving the department directly, had urged in a amicus curiae brief that the Society of Plastics ruling has been interpreted too narrowly and that some plaintiffs with bona fide interests in the environment have been barred from pursuing claims on standing grounds.
New York Law Journal
October 28, 2009
ALBANY - Standing to challenge the environmental impact of a proposed development need not be confined to residents or neighbors of the area where the project would be located but can be extended to any avid users of the affected property, the Court of Appeals suggested yesterday.
The proper course, the Court determined in Matter of Save the Pine Bush, Inc. v. Common Council of the City of Albany, 134, is to make plaintiffs prove standing by showing they have an interest that is greater than the general public's at large in using and enjoying the resource at risk.
The Court of Appeals decision appears on page 25 of the print edition of today's Law Journal.
"Striking the right balance in these cases will often be difficult, but we believe that our rule—requiring a demonstration that a plaintiff's use of a resource is more than that of the general public—will accomplish that task better than the alternatives," Judge Robert S. Smith wrote for the Court.
The judges observed that they were neither seeking to erect barriers to standing that were so "insuperable" that virtually no one could challenge a project under the State Environmental Quality Review Act (SEQRA) nor so elastic that the act could be used to cause "interminable" delays.
The judges ruled in a case involving the proposed construction of a 124-unit hotel on 3.6 acres of commercially zoned property in Albany County. The property is near, but not in, the Pine Bush reserve, a unique wildlife habitat containing the largest remaining pine barrens on inland sand dunes in the United States.
While granting standing to project opponents, the Court ruled that the city of Albany had met its obligations under SEQRA.
The case has been watched carefully by environmentalists and government regulators, especially for how the Court would interpret a major precedent in SEQRA jurisprudence, Society of Plastics Industry, Inc. v. County of Suffolk, 77 NY2d 761 (1991).
Environmentalists have argued that many courts have used Society of Plastics to preclude SEQRA suits filed by plaintiffs who did not live close to the natural resources where environmental harm was being alleged.
Judge Smith stressed that the Court was not departing from Society of Plastics but that its ruling granting the Pine Bush plaintiffs standing is consistent with that 18-year-old ruling.
In Society of Plastics, the Court held that for standing purposes, a plaintiff has to show it "would suffer direct harm" and an injury that is in "some way different from that of the public at large."
"Society of Plastics does not hold, or suggest, that residence close to a challenged project is an indispensable element of standing in every environmental case," Judge Smith wrote.
The Court rejected the city of Albany's argument that the plaintiffs in the Pine Bush case had to either live in the land preserve, or next to or across the street from the protected land. The closest plaintiff in the case before the Court yesterday lives a half-mile away.
"That [residency] rule would be arbitrary, and would mean in many cases that there would be no plaintiff with standing to sue, while there might be many who suffered real injury," Judge Smith concluded.
While affirming an Appellate Division, Third Department, panel on the standing question (NYLJ, Oct. 10, 2008), the Court nevertheless dismissed the Save the Pine Bush group's challenge to the city of Albany's approval of the hotel project plans under SEQRA.
Save the Pine Bush had argued that the environmental review failed to take into account the hotel's impact on the Pine Bush reserve and on several plant and animal species in the pine barren, including the Karner Blue butterfly, the Hognosed snake, the Worm snake, the Eastern Spadefoot toad, the Frosted Elfin butterfly and the Adder's Mouth orchid.
A government agency seeking to comply with SEQRA need not "investigate every conceivable environmental problem" associated with a project, but must pass judgment on those it deems "relevant" within "reasonable limits." the Court held.
"While it is essential that public agencies comply with their duties under SEQRA, some common sense in determining the extent of those duties is essential too," Judge Smith wrote.
Echoing concerns he raised last month during oral arguments (NYLJ, Sept. 16), Judge Smith noted yesterday that scientists have described the extremely elusive nature of the Worm snake and the Eastern Spadefoot toad and how "formidable" a task it would be to gather conclusive evidence about their use of the Pine Bush habitat and the hotel's effect on them.
The final result in yesterday's case was joined by all seven judges but two issued a concurring opinion objecting to what they called a broadening of the standing rule.
'Special Harm' Contested
Judge Eugene F. Pigott Jr. and Judge Susan Phillips Read said they agreed that the Pine Bush project was properly approved under SEQRA. But they argued that the plaintiffs did not suffer "special harm" to give them standing under Society of Plastics or its progeny.
"The majority's holding, in my view, reinterprets much too broadly the special harm requirement that has been the cornerstone of our standing jurisprudence in land use cases," Judge Pigott wrote in the opinion joined by Judge Read.
The plaintiffs' claim they are injured by the loss of recreation and enjoyment in the Pine Bush case are not unique enough to give them standing, Judge Pigott held.
"The concerns of the petitioners amount to the same general concerns of the community as a whole and are not specific to the petitioners," the concurring judges agreed. "In short, because petitioners fail to specify any direct injury that is any different from that of the general public, they lack standing under our precedent."
An environmental law expert, Michael B. Gerrard of Arnold & Porter, said environmentalists and municipal planners have been waiting nearly two decades for a clarification from the Court of Appeals of the Society of Plastics ruling.
"That had been interpreted by many lower courts as strictly narrowing the right to standing in SEQRA cases," Mr. Gerrard said yesterday. "The Court of Appeals has now greatly broadened the conception of standing."
Mr. Gerrard, who was not involved in the Pine Bush litigation, said he also found "remarkable" the Court's reliance on a U.S. Supreme Court precedent in Sierra Club v. Morton, 405 US 727 (1972).
In that ruling, the Supreme Court held that a plaintiff gained standing by demonstrating injury to the "aesthetic and environmental well-being" of a resource rather than showing a generalized "interest" in the environment.
Mr. Gerrard said the Supreme Court was generous in the early 1970s about granting standing to environmental plaintiffs but has narrowed grounds for standing, especially since Justice Antonin Scalia joined the Court in 1986.
"The '72 ruling was never explicitly overturned, but the spirit of the subsequent decisions was far different," said Mr. Gerrard, who writes a column for the New York Law Journal.
Stephen F. Downs, a retired attorney from Selkirk who represented the plaintiffs pro bono, said the case was a "perfect" one from his standpoint in that no one, even in arguments before the Court of Appeals, suggested that the motivations of Save the Pine Bush or its members were financially driven and not based on preservation of the habitat.
"I am thrilled with the standing argument," Mr. Downs said yesterday. "I think it is a huge victory for standing, for getting the public involved again in these cases."
Mr. Downs said the Sierra Club provided valuable assistance in lining up amici curiae support for Save the Pine Bush's position.
Albany Corporation Counsel Jeffrey V. Jamison argued for Albany. He said he agreed with the Court that the city had taken the requisite "hard look" required under SEQRA at the environmental effects of the hotel project.
But Mr. Jamison said he was troubled by the Court's ruling on the standing question. The city has been sued nearly two dozen times by Save the Pine Bush alone for various projects in and around the reserve over the past three decades, he said, and has been worried about a broadening of Society of Plastics that could open what he called the "flood gates" of litigation by interest groups.
Mr. Jamison said it was unclear whether the North Dakota-based developer of the hotel would move forward with the project, which was first proposed in 2003.
Assistant Solicitor General Andrew B. Ayres appeared on behalf of the Department of Environmental Conservation.
The state agency, which rarely takes sides in litigation not involving the department directly, had urged in a amicus curiae brief that the Society of Plastics ruling has been interpreted too narrowly and that some plaintiffs with bona fide interests in the environment have been barred from pursuing claims on standing grounds.
Thursday, October 22, 2009
Rents on Stuyvesant Complex Units Were Illegally Decontrolled
New York Law Journal
By Joel Stashenko
October 23, 2009
ALBANY - Rents on thousands of units in one of New York City's largest apartment complexes were illegally decontrolled, the Court of Appeals ruled today.
With the dissenters warning of dire legal and financial fallout from today's ruling, a four-judge majority decided that the owners of the massive Peter Cooper Village and Stuyvesant Town complexes in Manhattan were precluded from taking advantage of luxury decontrol provisions of the Rent Stabilization Law on units where owners had accepted tax incentive benefits.
The majority of the Court said in today's 4-2 per curiam ruling that a "practical" reading of the Rent Stabilization Law and of the debate in the state Legislature in 1993, when lawmakers approved extending New York City's so-called J-51 tax benefits to apartments subject to vacancy decontrol, indicates that the luxury decontrol does not apply to units on which landlords accepted tax breaks for improvements.
The ruling in Roberts v. Tishman Speyer Properties, 131, applies to about one-quarter of the 11,200 units at Peter Cooper Village and Stuyvesant Town, which comprise 110 buildings over 80 acres between 14th and 23rd streets along the East River.
A group of residents had contended that rents on the units were illegally raised past the luxury decontrol threshold once improvements were made to the apartments, with the help of taxpayer-funded programs.
Judge Susan Phillips Read, writing in a dissent joined by Judge Victoria A. Graffeo, predicted that today's ruling would spawn a long series of litigation "over many novel questions."
"In the absence of meaningful legislative action, uncertainty will reign in an industry already rocked by the bursting of the great residential real estate bubble," Judge Read wrote.
She argued that the majority of the Court today rejected a "reasonable and longstanding statutory interpretation" of the Rent Stabilization Laws and eligibility for luxury rent decontrol of units made by the state Division of Housing and Community Renewal.
Today's ruling affirmed a finding by the Appellate Division, First Department (NYLJ, March 6).
Chief Judge Jonathan Lippman did not take part in today's ruling.
Wednesday, October 21, 2009
Judges Ponder Constitutionality of State's Use of Eminent Domain for Atlantic Yards Project
By Joel Stashenko
New York Law Journal
October 15, 2009
ALBANY - The state's highest court yesterday confronted the issue of whether eminent domain should have been used to advance a massive private development in Brooklyn.
Philip E. Karmel, arguing for the Empire State Development Corp. on behalf of developer Bruce C. Ratner's Atlantic Yards project, told the Court of Appeals that the development would replace 22 acres of largely "substandard and unsanitary" land.
"It's extremely well-established, from many, many decades that that is an adequate constitutional basis for use of eminent domain," Mr. Karmel told the judges in Matter of Goldstein v. New York State Urban Development Corp., 178.
See the Appellants' Brief, Respondent's Brief and Appellants' Reply Brief.
Matthew D. Brinckerhoff countered for project opponents that the nearly $4 billion Atlantic Yards, whose centerpiece would be a new arena for the NBA's New Jersey Nets, does not fit the Public Use Clause of Article I, §7 of the state Constitution.
The clause, which first appeared in the Constitution in 1821, prohibits taking private property for public use without just compensation. Mr. Brinckerhoff argued that Empire State Development failed to show how the project meets the definition of "public use" that has developed in state courts since.
"Won't it provide recreation facilities for the residents of Brooklyn, athletic facilities for school children, etc.?" Judge Carmen Beauchamp Ciparick asked Mr. Brinckerhoff. "Is that part of the proposed plan? …That's a public purpose, right?"
"Right, but I don't think anybody can argue that its primary purpose is to provide facilities to community groups," Mr. Brinckerhoff replied. "It's primary purpose is to house a for-profit professional basketball organization."
Mr. Brinckerhoff argued that Empire State Development failed to properly make an accounting of the projected private benefits of the project to Mr. Ratner and his Forest City Ratner Companies and weigh those against the benefits to the public before allowing the project to go forward in 2006.
At that time, the state agency authorized the condemnation and taking of 123 parcels of privately owned land, or about 20 percent of the property in the project zone. Some landowners have since sold out to Forest City Ratner.
Though little or no work has been done on the project for months, Mr. Ratner has recently reached an agreement to have Russian billionaire Mikhail D. Prokhorov invest $200 million in the Nets, the 18,000-seat arena and in Atlantic Yards in exchange for an ownership share in all three. He faces an end-of-the-year deadline to break ground.
There was limited discussion before the Court yesterday about the U.S. Supreme Court's controversial ruling in Kelo v. City of New London, 545 U.S. 469 (2005). Kelo allowed, with what critics called an overly broad definition of "public use" under the Fifth Amendment to the U.S. Constitution, the taking of private land for a private development in Connecticut.
Judge Robert S. Smith did ask Mr. Karmel yesterday how Kelo related to Atlantic Yards.
"Are you asking us to follow Kelo and say that any public use is good enough, or do you acknowledge that you have to show blight here to justify the use of the eminent domain power?" the judge asked.
"The result in this case is the same whether you follow Kelo or you don't follow Kelo" based on the state Constitution and case law, Mr. Karmel replied.
State Precedent
Justices Susan Phillips Read and Victoria A. Graffeo both said at several points they wanted to know more about state precedents and how they relate to the use of eminent domain under the state Constitution.
Mr. Brinckerhoff also challenged whether public funding for Atlantic Yards—the state and the city have each pledged $100 million—is legal under Article XVIII, §6 of the state Constitution. It allows public financing for residential housing projects only when low-income units are being replaced by other low-income units.
Atlantic Yards calls for construction of about 3,000 market-value housing units and 2,250 low-income units.
Chief Judge Jonathan Lippman asked whether public funding was going to the project in violation of Article XVIII, §6.
"Are public subsidies going to market-rate housing here?" he asked.
"No," Mr. Karmel responded.
"There are no public subsidies going to market-rate housing?" Judge Lippman asked again.
"The only subsidies identified in the record are the $100 million appropriation by the state Legislature, which is for a state-owned arena and a state-owned rail yard," Mr. Karmel said. "The state has had the authority to fund state-run facilities of that kind forever."
Mr. Karmel said city funding for the project was not subject to Article XVIII, §6.
Filing Timeframe
The judges also probed both sides on whether the state court action before the Court yesterday was filed in a timely fashion. The plaintiffs challenging Empire State Development's approval of the project went first to federal court and, Mr. Karmel contended, missed a 30-day filing notice in state court as they were pursuing their federal claims.
"Can that serve to toll for a couple of years the 30-day requirement in the [Eminent Domain Procedure Law]?" Judge Read asked. "That seems to be the implication."
"I think there is no question that it can and it did here," Mr. Brinckerhoff argued.
The judges yesterday heard an appeal of an Appellate Division, Second Department, unanimous ruling rejecting arguments by Atlantic Yards' opponents that the project's environmental impact statement and use of eminent domain are improper (NYLJ, May 18).
The prime organizer, the coalition Develop Don't Destroy Brooklyn, also tried unsuccessfully to challenge the project and the Empire State Development Corp.'s approval of it in another state court action, Develop Don't Destroy Brooklyn v. Urban Development Corp., (NYLJ, Feb. 27), and in a federal court case, Goldstein v. Pataki, in which the U.S. Supreme Court ultimately denied certiorari (NYLJ, June 24, 2008).
J. Kevin Healy of Bryan Cave and Charles S. Webb III and Kenneth J. Applebaum of Berger & Webb are also representing the Empire State Development Corp.
Eric Hecker of South Brooklyn Legal Services is aiding Mr. Brinckerhoff's representation of the plaintiffs.
In an amicus brief filed in support of the Atlantic Yards project, New York City's Law Department argued that many privately developed projects have been made possible in the city by the condemnation of private property.
Kelo has prompted the filing of a series of bills in the New York state Legislature concerning the use of eminent domain. In 2009, they included A1568/S1669, which would give citizens more time to contest proposed property takings, and A1570/1670, to create an eminent domain ombudsman to ensure the even-handed application of the condemnation of private property.
Again this year, none of the bills gained traction.
The Arlington, Va.-based Institute for Justice, which represented property owners in Kelo, released a report last week in which it named New York as among the most permissive states in the country for the use of eminent domain to aid in the development of private projects. It cited recent projects sponsored by the New York Stock Exchange, Costco and Stop & Shop as among those in which private businesses benefitted from the public taking of private property.
Another Suit Filed
On Tuesday, the Straphangers Campaign of the New York Public Interest Research Group, Develop Don't Destroy Brooklyn and several lawmakers filed another suit related to the Brooklyn Yards project.
The Manhattan Supreme Court suit alleges that the sale by the Metropolitan Transportation Authority of its Vanderbilt Rail Yard to Forest City Ratner vastly undervalued the true worth of the 8.5-acre property. (See the Verified Petition and the Petitioners Memorandum of Law.)
The rail yard, owned by the MTA's Long Island Railroad Co., accounts for about 40 percent of the Atlantic Yards site.
The Court of Appeals is expected to hand down a ruling by the end of November in the case it heard yesterday.
Mr. Prokhorov's investment deal is contingent on Forest City Ratner's securing title to the remaining parcels at the site as well as financing for the project by Jan. 1.
New York Law Journal
October 15, 2009
ALBANY - The state's highest court yesterday confronted the issue of whether eminent domain should have been used to advance a massive private development in Brooklyn.
Philip E. Karmel, arguing for the Empire State Development Corp. on behalf of developer Bruce C. Ratner's Atlantic Yards project, told the Court of Appeals that the development would replace 22 acres of largely "substandard and unsanitary" land.
"It's extremely well-established, from many, many decades that that is an adequate constitutional basis for use of eminent domain," Mr. Karmel told the judges in Matter of Goldstein v. New York State Urban Development Corp., 178.
See the Appellants' Brief, Respondent's Brief and Appellants' Reply Brief.
Matthew D. Brinckerhoff countered for project opponents that the nearly $4 billion Atlantic Yards, whose centerpiece would be a new arena for the NBA's New Jersey Nets, does not fit the Public Use Clause of Article I, §7 of the state Constitution.
The clause, which first appeared in the Constitution in 1821, prohibits taking private property for public use without just compensation. Mr. Brinckerhoff argued that Empire State Development failed to show how the project meets the definition of "public use" that has developed in state courts since.
"Won't it provide recreation facilities for the residents of Brooklyn, athletic facilities for school children, etc.?" Judge Carmen Beauchamp Ciparick asked Mr. Brinckerhoff. "Is that part of the proposed plan? …That's a public purpose, right?"
"Right, but I don't think anybody can argue that its primary purpose is to provide facilities to community groups," Mr. Brinckerhoff replied. "It's primary purpose is to house a for-profit professional basketball organization."
Mr. Brinckerhoff argued that Empire State Development failed to properly make an accounting of the projected private benefits of the project to Mr. Ratner and his Forest City Ratner Companies and weigh those against the benefits to the public before allowing the project to go forward in 2006.
At that time, the state agency authorized the condemnation and taking of 123 parcels of privately owned land, or about 20 percent of the property in the project zone. Some landowners have since sold out to Forest City Ratner.
Though little or no work has been done on the project for months, Mr. Ratner has recently reached an agreement to have Russian billionaire Mikhail D. Prokhorov invest $200 million in the Nets, the 18,000-seat arena and in Atlantic Yards in exchange for an ownership share in all three. He faces an end-of-the-year deadline to break ground.
There was limited discussion before the Court yesterday about the U.S. Supreme Court's controversial ruling in Kelo v. City of New London, 545 U.S. 469 (2005). Kelo allowed, with what critics called an overly broad definition of "public use" under the Fifth Amendment to the U.S. Constitution, the taking of private land for a private development in Connecticut.
Judge Robert S. Smith did ask Mr. Karmel yesterday how Kelo related to Atlantic Yards.
"Are you asking us to follow Kelo and say that any public use is good enough, or do you acknowledge that you have to show blight here to justify the use of the eminent domain power?" the judge asked.
"The result in this case is the same whether you follow Kelo or you don't follow Kelo" based on the state Constitution and case law, Mr. Karmel replied.
State Precedent
Justices Susan Phillips Read and Victoria A. Graffeo both said at several points they wanted to know more about state precedents and how they relate to the use of eminent domain under the state Constitution.
Mr. Brinckerhoff also challenged whether public funding for Atlantic Yards—the state and the city have each pledged $100 million—is legal under Article XVIII, §6 of the state Constitution. It allows public financing for residential housing projects only when low-income units are being replaced by other low-income units.
Atlantic Yards calls for construction of about 3,000 market-value housing units and 2,250 low-income units.
Chief Judge Jonathan Lippman asked whether public funding was going to the project in violation of Article XVIII, §6.
"Are public subsidies going to market-rate housing here?" he asked.
"No," Mr. Karmel responded.
"There are no public subsidies going to market-rate housing?" Judge Lippman asked again.
"The only subsidies identified in the record are the $100 million appropriation by the state Legislature, which is for a state-owned arena and a state-owned rail yard," Mr. Karmel said. "The state has had the authority to fund state-run facilities of that kind forever."
Mr. Karmel said city funding for the project was not subject to Article XVIII, §6.
Filing Timeframe
The judges also probed both sides on whether the state court action before the Court yesterday was filed in a timely fashion. The plaintiffs challenging Empire State Development's approval of the project went first to federal court and, Mr. Karmel contended, missed a 30-day filing notice in state court as they were pursuing their federal claims.
"Can that serve to toll for a couple of years the 30-day requirement in the [Eminent Domain Procedure Law]?" Judge Read asked. "That seems to be the implication."
"I think there is no question that it can and it did here," Mr. Brinckerhoff argued.
The judges yesterday heard an appeal of an Appellate Division, Second Department, unanimous ruling rejecting arguments by Atlantic Yards' opponents that the project's environmental impact statement and use of eminent domain are improper (NYLJ, May 18).
The prime organizer, the coalition Develop Don't Destroy Brooklyn, also tried unsuccessfully to challenge the project and the Empire State Development Corp.'s approval of it in another state court action, Develop Don't Destroy Brooklyn v. Urban Development Corp., (NYLJ, Feb. 27), and in a federal court case, Goldstein v. Pataki, in which the U.S. Supreme Court ultimately denied certiorari (NYLJ, June 24, 2008).
J. Kevin Healy of Bryan Cave and Charles S. Webb III and Kenneth J. Applebaum of Berger & Webb are also representing the Empire State Development Corp.
Eric Hecker of South Brooklyn Legal Services is aiding Mr. Brinckerhoff's representation of the plaintiffs.
In an amicus brief filed in support of the Atlantic Yards project, New York City's Law Department argued that many privately developed projects have been made possible in the city by the condemnation of private property.
Kelo has prompted the filing of a series of bills in the New York state Legislature concerning the use of eminent domain. In 2009, they included A1568/S1669, which would give citizens more time to contest proposed property takings, and A1570/1670, to create an eminent domain ombudsman to ensure the even-handed application of the condemnation of private property.
Again this year, none of the bills gained traction.
The Arlington, Va.-based Institute for Justice, which represented property owners in Kelo, released a report last week in which it named New York as among the most permissive states in the country for the use of eminent domain to aid in the development of private projects. It cited recent projects sponsored by the New York Stock Exchange, Costco and Stop & Shop as among those in which private businesses benefitted from the public taking of private property.
Another Suit Filed
On Tuesday, the Straphangers Campaign of the New York Public Interest Research Group, Develop Don't Destroy Brooklyn and several lawmakers filed another suit related to the Brooklyn Yards project.
The Manhattan Supreme Court suit alleges that the sale by the Metropolitan Transportation Authority of its Vanderbilt Rail Yard to Forest City Ratner vastly undervalued the true worth of the 8.5-acre property. (See the Verified Petition and the Petitioners Memorandum of Law.)
The rail yard, owned by the MTA's Long Island Railroad Co., accounts for about 40 percent of the Atlantic Yards site.
The Court of Appeals is expected to hand down a ruling by the end of November in the case it heard yesterday.
Mr. Prokhorov's investment deal is contingent on Forest City Ratner's securing title to the remaining parcels at the site as well as financing for the project by Jan. 1.
Wednesday, October 14, 2009
Power-of-Attorney Changes Scramble Property Transfers
By Adam Leitman Bailey and Dov Treiman
New York Law Journal
October 14, 2009
As of Sept. 1, New York has abolished its old easy single-sheet statutory power of attorney form (POA) and replaced it with a tremendously complicated new law1 describing a highly complex new document with a misleadingly named optional rider.2
The 1948 original form and its successors were designed to be general-purpose forms consumers with nothing but access to a stationery store and a notary could use with ease. The new form, designed specifically for estate planning, is so complicated that those who use it without attorney guidance do so at their peril and few attorneys will fully understand the pitfalls the new form presents. Attorneys working with them do so at their peril as well.
Among the most common uses of POAs is in real estate transactions, especially purchases and sales of land. However, the new law and form create so many problems for such transactions that until either the Legislature restores the old law or heavily repairs the new one, many of these transactions will prove impossible.
Perhaps even more important than this new form POA, is the new law's insistence that all POAs must be in 12-point type and contain the statute's verbatim explanations to the power-giver3 and the agent.4 These, at about 650 words, remove any incentive to use anything but the full statutory form.
Amending the Law
Various attorneys' Internet chat spaces have been abuzz with conversations about this new law, most notably those dealing with Elder Law, Trusts and Estates, and Real Property. They report that many banks are refusing to accept the new form, this in spite of a provision making it mandatory that they do so, creating a new species of lawsuit to compel it.5
Banks, title companies, and law firms are scrambling to issue internal memoranda to explain what to do and some institutions are refusing to recognize any POA, new or old, executed since the change in law, or before. Bar associations and industry groups are scrambling to propose amendments to it to clear up "technical" problems with it and many are calling for its repeal and restoration of the old statute.6
Clearly, no number of purely technical amendments will change the underlying philosophy of this law that providing the power-giver with a great mass of reading to do when signing this instrument somehow empowers the power-giver to decide whether signing it is really a good idea. Ideally, a power-giver would read not only the warnings, but the entire document. However, we believe in actual practice, few power-givers will actually read anything but the signature line. A bold print warning of a dozen words or so might have alerted a power-giver to the magnitude of the power conveyed, but not the current form that so over-informs as to prevent informing at all.
Which Form When?
Under the new statute, the old forms are still valid if they were signed on or before Aug. 31. The new forms are only valid if signed on or after Sept. 1. So, the old forms are rendered invalid if signed too late and the new forms invalid if signed too soon.7 Nobody is in a position to know how many people knowing that the form had changed, jumped the gun in using it too early. While the statute as it currently stands obliges us to look at whether a power-giver signed the POA before or after Sept. 1, 2009, further tinkering with the statute could create a situation where there are three or more possible periods and wordings attached to them—requiring one not only to examine the wording, but what that wording meant under the statute in effect at the moment of signature. Therefore any action the Legislature takes to repair this mess will require even more heightened caution than the usual. Before enacting any technical corrections, the Legislature should consult with a far broader base of practicing attorneys than it used in creating the new POA.
Instability and Unreliability
The new POA has enormous potential for mischief in real estate law where the two most important principles are stability in the meanings of documents8 and reliability in their authenticity.9
This new POA appears to violate both of those principles. As a result, numerous real estate transactions are simply not taking place or are taking place in exactly the manner the parties sought to avoid —requiring the physical presence of the very people who gave POA's because it was a hardship for them to be physically present.
Other Law Journal articles about the new law:
• "Condominiums and the New Power of Attorney Law," Marc J. Luxemburg and Mark S. Borten, Oct. 9.
• "Proposed Technical Corrections to New Power of Attorney Law," Sanford J. Schlesinger and W. Gyongyi Gulyas, Sept. 22.
• "The Best Intentions—and a Newly Complex Power of Attorney Law," Sanford J. Schlesinger and W. Gyongyi Gulyas, Sept. 17.
• "Power of Attorney Statutory Overhaul Set to Take Effect," Benjamin Weinstock and Meeka Levin, Aug. 24.
• "Making Gifts and Property Transfers Under New Power of Attorney Law," C. Raymond Radigan and David R. Schoenhaar, March 9.
For example, the execution of a new POA revokes all previous ones unless otherwise specified.10 Some proposed amendments would change that so that a POA would revoke its predecessors only when it specifically says so. In the mean time, so as to prevent confusion in the meaning of any form a practitioner prepares, the preparer should expressly both override the provision revoking previous POAs and insert a provision specifically reaffirming them.
Along with the new POA is a so-called "Statutory Major Gifts Rider" (SMGR). However, while the check boxes on the new form cover real property transactions, some analysts are finding that the SMGR is required not only when the attorney-in-fact is making a gift on behalf of the power-giver, but also when there is an ordinary transfer of a real property interest. It therefore appears that so long as this new statute is around, prudent practitioners should require an SMGR with every single POA.
A solution one title company has implemented to limit exposure to a claim that the new POA is invalid for the lack of an SMGR is to call the power-giver on the telephone in all instances and have him or her confirm the authority of the agent. The problem with that procedure is that the new POA is now, unless otherwise specified, still in effect when the power-giver is no longer of sufficiently sound mind to answer such a question.11 The person making the telephone call therefore has no way of knowing whether the person receiving the telephone call is sufficiently mentally acute to answer the question, given the fact that such acuity has no effect on the value of the POA itself.
The title company taking that approach is also advising that it will require an SMGR on a conveyance for consideration where there is an obvious disparity between the price being paid and the property's value, such that the transfer may be deemed to be, in part, a gift. It also advises that whenever a property interest is being transferred by a power of attorney, if there is no POA validly executed under the prior law and a new POA must be signed, it is prudent to also execute an SMGR. Another title insurer requires an SMGR to insure any transfer pursuant to a new POA.
Authenticity an Issue
Authenticity is a major issue with the new POA. First, since the POA now survives the power-giver's dementia, there is no way to check with a demented power-giver whether the agent is really doing the power-giver's will or whether there is fraud happening, potentially even involving forging the power-giver's signature. Absent court intervention, rather than the old law which automatically revoked a demented person's POA, this new law makes it effectively irrevocable.
If the power-giver is demented, it is difficult to prove that the power-giver was not demented at the time of the execution of the POA also.
Secondly, the law allows the creation of a power which can only be exercised by two agents acting simultaneously, but creates an exception to this for when two factors are present: "absence, illness or other temporary incapacity" of one of the agents and potential "irreparable injury" to the power-giver. If both of those factors are present, the remaining able bodied agent may act alone.12
How shall one prove the missing agent is really absent, ill, or incapacitated? How to prove that delaying this closing would inflict irreparable injury on the power-giver? The title company's representative might well refuse to recognize the validity of the present agent's authority to act alone. Perhaps some kind of affidavit procedure will evolve to deal with this issue as well. However, some analysts have concluded that giving a POA to two agents who can only exercise it jointly is asking for too much trouble.
New Suits
The statute purports to create a special judicial proceeding when there is a dispute about whether to recognize the sufficiency of the POA.13 The statute authorizes making a bank a respondent, if the bank cannot show good cause why it refuses to recognize the effectiveness of the POA. Of course, the bank will have good cause if the title company deems the presence of the POA an obstacle to the title being insurable. Thus, while the bank might have problems with refusing to recognize a POA from its own customer, from across the table, it has little to fear.
Under the new law, as a practical matter, anybody can refuse to honor a POA at any time. The burden to bring suit is on the one who wants to insist that the POA is honored. The one who wants to refuse to honor it can also sue, but has no such motivation.
Note, we have been discussing the emergency scenario. Few law firms and few impecunious consumers have the resources to put together an emergency court application or appeal. Finding affiants with personal knowledge can prove challenging and may, if the real estate contract is "of the essence," be too late.
However, when valuable commercial interests are at stake, courts have the power to stop the calendar.14 Therefore, perhaps a special proceeding under the new statute brought just inside an "of the essence" deadline could take as much time as it needs to resolve the issue without the time ever expiring. But, in order to bind everyone, it would be necessary to name as parties respondent everyone who has touched the deal: grantor, grantee, bank, and even the title company.
If that is indeed to be the procedure, then the new POA once again appears to be a tool exclusively for those wealthy enough both to use it and to enforce it. Those who most need a POA, the less wealthy, cannot reliably use one.
Unintended Consequences
Those of us who use word processors are well aware of the dangerous power of the command "change all." When one uses that feature, often one finds truly nonsensical results. This metaphor finds expression in many fields of human endeavor. It should therefore be with only extreme caution that a legislature passes a law that changes a large variety of activities. There is little evidence to suggest that the Legislature here exercised such caution.
For example, ever since the very first condominium came into existence in New York, the scheme has included unit owners issuing so-called "unit POAs" to the board of managers. These powers enable the board to carry on various relatively ministerial functions without having to get the unanimous consent of the unit owners. While unit POAs are valid so long as they were executed prior to Sept. 1, it appears under the new law any new ones will not be valid unless they are in 12-point type and include the 650 word warnings. While amendments to the new law might remove these condominium POAs from the scope of the new statute, who is to say what other POAs are equally quietly being rendered void?
As another example, it is very common in various kinds of contracts to imbed POAs in them. It appears that under the new law, such imbedded POAs are of doubtful validity. While the drafter of such contracts could redraft the document in 12-point type and incorporate the 650-word warnings to meet the two statutory criteria for validity, or move the POA to a rider, schedule, or exhibit, it would appear better to keep the POA a separate document and in the original contract insert a clause which says, "Party A has executed the Power of Attorney of even date herewith."
Powers With an Interest
Previous POA law had it that a POA died with the power-giver unless it was a so-called "power coupled with an interest."15
While the entire scope of a "power coupled with an interest" is beyond the embrace of this article, suffice it to say that we are referring to powers of attorney granted to persons who are supposed to benefit from or are supposed to be protecting their own interests with the receipt of this power.
Consider this simple example of a "power coupled with an interest." D borrows from C $5,000 and signs a promissory note promising to repay the $5,000 on a schedule of payments, further providing that if D defaults, C has a POA to sell the shares of stock that D has put up as collateral. This POA is not for D's convenience, but is to secure C's interest in D's property. Thus this power (the POA) is "coupled" with the interest C has in D's property.
Such a power coupled with an interest does not die when D dies.
However, under the new law,16 all POAs die with the power-giver, without exception. Having to guess whether the courts will take the Legislature at its word leaves the current status of powers coupled with interests unknown and unknowable.
As a further example of an issue relating to a power coupled with an interest, two property owners establish a single zoning lot with the developer-owner having the right to further expand the zoning lot. The other party agrees to execute any further documents that are required to do so, but, if it does not execute the documents necessary to expand the zoning lot, the developer-owner is granted a power of attorney coupled with an interest to execute them on its behalf. Such a power granted in a document executed on or after Sept. 1 may no longer be effective after its signatory's death.
On a related note, however, it should be noted that the new law makes no exceptions for people in genuinely desperate straits without access to a computer or stationer to get the exact wording required for an effective power of attorney. For such people, it is just plain too bad; their transactions cannot go forward.
Governments and Businesses
It should be noted that although fairly obtusely worded, the statute has no application to POAs executed by or on behalf of governments and business entities. However, although the ability to transfer property frequently comes from the operating agreement, in some instances the ability to transfer property will flow from one individual to another by power of attorney. These powers, as non-statutory powers, may need to comply with the provisions of the new statute applicable to non-statutory powers.
Consider a small corporation, for example five friends who get together with each other, one of whom actually has money, another who is the monied one's brother, and three of whom are friends, working the business. The monied brother could issue a POA to his brother to sign all the forms the business has to sign through the year. This would be a POA for a business purpose where the power-giver wants to be a non-participating shareholder, leaving the actual participation to his brother. This could be incorporated in a shareholder agreement.
If so, any POAs executed in such contexts are invalid if they lack the 650-word warning and 12-point type the statute requires for all individuals' POAs executed on or after Sept.17
Well Meaning, but...
There can be little doubt that the intent of this statute is benign and principally aimed at giving the old and infirm a cheap simple procedure to have their affairs taken care of by a trusted friend or relative while ensuring that the helper does not become an oppressor.18
Perhaps a much simpler overhaul of the old statute is all that is necessary: requiring that a POA be accompanied by a contemporary photograph of the power-giver or valid identification; requiring that the power-giver incorporate a current address and telephone number.
However, as currently crafted, the statute is so riddled with problems, both substantive and procedural, that it has injected into the entire legal system huge instabilities, particularly those endangering the orderly secure transfer of real property.19 Until the Legislature finishes the job of amending out its kinks and the courts have had a chance to construe what all that language means, it's going to be a real mess. While they are at it, the Legislature should give serious thought to a more terse warning to the power-giver, something like the kind of text that would fit on a pack of cigarettes.
Adam Leitman Bailey is the founding partner and Dov Treiman is a partner of Adam Leitman Bailey, P.C. Michael J. Berey, general counsel and senior vice-president of First American Title Insurance Company of New York, assisted with this article.
Endnotes:
1. The session law version of this enactment is roughly 50 percent larger than the U.S. Constitution.
2. Chapter 644 of the Laws of 2008, as amended.
3 We say "power-giver" here so as to speak to the title of the document, "Power of Attorney." The statute itself says "principal" and "agent," avoiding the common, "attorney in fact." One should not say "signatory" because under this new law, there are a minimum of three signatures: principal, agent, and notary and the rider requires two witnesses. GOL §5-1514(9).
4. GOL § 5-1501B.
5. GOL §5-1510, discussed infra.
6. Bill A8392/S5910 in the State Legislature specifically proposes "technical" amendments to the new law.
7. Chapter 644 of the Laws of 2008, as amended by Chapter 4 of the Laws of 2009.
8. Holy Properties Ltd., L.P. v. Kenneth Cole Productions Inc., 87 NY2d 130 (1995).
9. Adam Leitman Bailey & Carly Greenberg, "Growing Fraud," NYLJ, 1/31/07; Adam Leitman Bailey, "Expense of Theft Prevention Dwarfed by Cost of Fraud," NYLJ, 4/8/09.
10. GOL §5-1513.
11. GOL §5-1501A.
12. GOL §5-1508.
13. GOL §5-1510.
14. First National Stores Inc. v. Yellowstone Shopping Center Inc., 21 NY2d 630 (1968).
15. Weber v. Bridgman, 113 N.Y.600 (1889).
16. GOL §5-1511(a).
17. GOL §5-1501B(1) Preamble; §5-1501B(4). Some of the provisions of the revised article may actually apply to business entities and governments, but the extent of that problem is beyond the scope of this article.
18. NYS Law Revision Commission Report on Powers of Attorney (2007), pp. 5, 13-17, 19-22.
19. The Law Revision Commission Report which was the genesis of the new POA did not consider that the proposed changes could affect real property law.
New York Law Journal
October 14, 2009
As of Sept. 1, New York has abolished its old easy single-sheet statutory power of attorney form (POA) and replaced it with a tremendously complicated new law1 describing a highly complex new document with a misleadingly named optional rider.2
The 1948 original form and its successors were designed to be general-purpose forms consumers with nothing but access to a stationery store and a notary could use with ease. The new form, designed specifically for estate planning, is so complicated that those who use it without attorney guidance do so at their peril and few attorneys will fully understand the pitfalls the new form presents. Attorneys working with them do so at their peril as well.
Among the most common uses of POAs is in real estate transactions, especially purchases and sales of land. However, the new law and form create so many problems for such transactions that until either the Legislature restores the old law or heavily repairs the new one, many of these transactions will prove impossible.
Perhaps even more important than this new form POA, is the new law's insistence that all POAs must be in 12-point type and contain the statute's verbatim explanations to the power-giver3 and the agent.4 These, at about 650 words, remove any incentive to use anything but the full statutory form.
Amending the Law
Various attorneys' Internet chat spaces have been abuzz with conversations about this new law, most notably those dealing with Elder Law, Trusts and Estates, and Real Property. They report that many banks are refusing to accept the new form, this in spite of a provision making it mandatory that they do so, creating a new species of lawsuit to compel it.5
Banks, title companies, and law firms are scrambling to issue internal memoranda to explain what to do and some institutions are refusing to recognize any POA, new or old, executed since the change in law, or before. Bar associations and industry groups are scrambling to propose amendments to it to clear up "technical" problems with it and many are calling for its repeal and restoration of the old statute.6
Clearly, no number of purely technical amendments will change the underlying philosophy of this law that providing the power-giver with a great mass of reading to do when signing this instrument somehow empowers the power-giver to decide whether signing it is really a good idea. Ideally, a power-giver would read not only the warnings, but the entire document. However, we believe in actual practice, few power-givers will actually read anything but the signature line. A bold print warning of a dozen words or so might have alerted a power-giver to the magnitude of the power conveyed, but not the current form that so over-informs as to prevent informing at all.
Which Form When?
Under the new statute, the old forms are still valid if they were signed on or before Aug. 31. The new forms are only valid if signed on or after Sept. 1. So, the old forms are rendered invalid if signed too late and the new forms invalid if signed too soon.7 Nobody is in a position to know how many people knowing that the form had changed, jumped the gun in using it too early. While the statute as it currently stands obliges us to look at whether a power-giver signed the POA before or after Sept. 1, 2009, further tinkering with the statute could create a situation where there are three or more possible periods and wordings attached to them—requiring one not only to examine the wording, but what that wording meant under the statute in effect at the moment of signature. Therefore any action the Legislature takes to repair this mess will require even more heightened caution than the usual. Before enacting any technical corrections, the Legislature should consult with a far broader base of practicing attorneys than it used in creating the new POA.
Instability and Unreliability
The new POA has enormous potential for mischief in real estate law where the two most important principles are stability in the meanings of documents8 and reliability in their authenticity.9
This new POA appears to violate both of those principles. As a result, numerous real estate transactions are simply not taking place or are taking place in exactly the manner the parties sought to avoid —requiring the physical presence of the very people who gave POA's because it was a hardship for them to be physically present.
Other Law Journal articles about the new law:
• "Condominiums and the New Power of Attorney Law," Marc J. Luxemburg and Mark S. Borten, Oct. 9.
• "Proposed Technical Corrections to New Power of Attorney Law," Sanford J. Schlesinger and W. Gyongyi Gulyas, Sept. 22.
• "The Best Intentions—and a Newly Complex Power of Attorney Law," Sanford J. Schlesinger and W. Gyongyi Gulyas, Sept. 17.
• "Power of Attorney Statutory Overhaul Set to Take Effect," Benjamin Weinstock and Meeka Levin, Aug. 24.
• "Making Gifts and Property Transfers Under New Power of Attorney Law," C. Raymond Radigan and David R. Schoenhaar, March 9.
For example, the execution of a new POA revokes all previous ones unless otherwise specified.10 Some proposed amendments would change that so that a POA would revoke its predecessors only when it specifically says so. In the mean time, so as to prevent confusion in the meaning of any form a practitioner prepares, the preparer should expressly both override the provision revoking previous POAs and insert a provision specifically reaffirming them.
Along with the new POA is a so-called "Statutory Major Gifts Rider" (SMGR). However, while the check boxes on the new form cover real property transactions, some analysts are finding that the SMGR is required not only when the attorney-in-fact is making a gift on behalf of the power-giver, but also when there is an ordinary transfer of a real property interest. It therefore appears that so long as this new statute is around, prudent practitioners should require an SMGR with every single POA.
A solution one title company has implemented to limit exposure to a claim that the new POA is invalid for the lack of an SMGR is to call the power-giver on the telephone in all instances and have him or her confirm the authority of the agent. The problem with that procedure is that the new POA is now, unless otherwise specified, still in effect when the power-giver is no longer of sufficiently sound mind to answer such a question.11 The person making the telephone call therefore has no way of knowing whether the person receiving the telephone call is sufficiently mentally acute to answer the question, given the fact that such acuity has no effect on the value of the POA itself.
The title company taking that approach is also advising that it will require an SMGR on a conveyance for consideration where there is an obvious disparity between the price being paid and the property's value, such that the transfer may be deemed to be, in part, a gift. It also advises that whenever a property interest is being transferred by a power of attorney, if there is no POA validly executed under the prior law and a new POA must be signed, it is prudent to also execute an SMGR. Another title insurer requires an SMGR to insure any transfer pursuant to a new POA.
Authenticity an Issue
Authenticity is a major issue with the new POA. First, since the POA now survives the power-giver's dementia, there is no way to check with a demented power-giver whether the agent is really doing the power-giver's will or whether there is fraud happening, potentially even involving forging the power-giver's signature. Absent court intervention, rather than the old law which automatically revoked a demented person's POA, this new law makes it effectively irrevocable.
If the power-giver is demented, it is difficult to prove that the power-giver was not demented at the time of the execution of the POA also.
Secondly, the law allows the creation of a power which can only be exercised by two agents acting simultaneously, but creates an exception to this for when two factors are present: "absence, illness or other temporary incapacity" of one of the agents and potential "irreparable injury" to the power-giver. If both of those factors are present, the remaining able bodied agent may act alone.12
How shall one prove the missing agent is really absent, ill, or incapacitated? How to prove that delaying this closing would inflict irreparable injury on the power-giver? The title company's representative might well refuse to recognize the validity of the present agent's authority to act alone. Perhaps some kind of affidavit procedure will evolve to deal with this issue as well. However, some analysts have concluded that giving a POA to two agents who can only exercise it jointly is asking for too much trouble.
New Suits
The statute purports to create a special judicial proceeding when there is a dispute about whether to recognize the sufficiency of the POA.13 The statute authorizes making a bank a respondent, if the bank cannot show good cause why it refuses to recognize the effectiveness of the POA. Of course, the bank will have good cause if the title company deems the presence of the POA an obstacle to the title being insurable. Thus, while the bank might have problems with refusing to recognize a POA from its own customer, from across the table, it has little to fear.
Under the new law, as a practical matter, anybody can refuse to honor a POA at any time. The burden to bring suit is on the one who wants to insist that the POA is honored. The one who wants to refuse to honor it can also sue, but has no such motivation.
Note, we have been discussing the emergency scenario. Few law firms and few impecunious consumers have the resources to put together an emergency court application or appeal. Finding affiants with personal knowledge can prove challenging and may, if the real estate contract is "of the essence," be too late.
However, when valuable commercial interests are at stake, courts have the power to stop the calendar.14 Therefore, perhaps a special proceeding under the new statute brought just inside an "of the essence" deadline could take as much time as it needs to resolve the issue without the time ever expiring. But, in order to bind everyone, it would be necessary to name as parties respondent everyone who has touched the deal: grantor, grantee, bank, and even the title company.
If that is indeed to be the procedure, then the new POA once again appears to be a tool exclusively for those wealthy enough both to use it and to enforce it. Those who most need a POA, the less wealthy, cannot reliably use one.
Unintended Consequences
Those of us who use word processors are well aware of the dangerous power of the command "change all." When one uses that feature, often one finds truly nonsensical results. This metaphor finds expression in many fields of human endeavor. It should therefore be with only extreme caution that a legislature passes a law that changes a large variety of activities. There is little evidence to suggest that the Legislature here exercised such caution.
For example, ever since the very first condominium came into existence in New York, the scheme has included unit owners issuing so-called "unit POAs" to the board of managers. These powers enable the board to carry on various relatively ministerial functions without having to get the unanimous consent of the unit owners. While unit POAs are valid so long as they were executed prior to Sept. 1, it appears under the new law any new ones will not be valid unless they are in 12-point type and include the 650 word warnings. While amendments to the new law might remove these condominium POAs from the scope of the new statute, who is to say what other POAs are equally quietly being rendered void?
As another example, it is very common in various kinds of contracts to imbed POAs in them. It appears that under the new law, such imbedded POAs are of doubtful validity. While the drafter of such contracts could redraft the document in 12-point type and incorporate the 650-word warnings to meet the two statutory criteria for validity, or move the POA to a rider, schedule, or exhibit, it would appear better to keep the POA a separate document and in the original contract insert a clause which says, "Party A has executed the Power of Attorney of even date herewith."
Powers With an Interest
Previous POA law had it that a POA died with the power-giver unless it was a so-called "power coupled with an interest."15
While the entire scope of a "power coupled with an interest" is beyond the embrace of this article, suffice it to say that we are referring to powers of attorney granted to persons who are supposed to benefit from or are supposed to be protecting their own interests with the receipt of this power.
Consider this simple example of a "power coupled with an interest." D borrows from C $5,000 and signs a promissory note promising to repay the $5,000 on a schedule of payments, further providing that if D defaults, C has a POA to sell the shares of stock that D has put up as collateral. This POA is not for D's convenience, but is to secure C's interest in D's property. Thus this power (the POA) is "coupled" with the interest C has in D's property.
Such a power coupled with an interest does not die when D dies.
However, under the new law,16 all POAs die with the power-giver, without exception. Having to guess whether the courts will take the Legislature at its word leaves the current status of powers coupled with interests unknown and unknowable.
As a further example of an issue relating to a power coupled with an interest, two property owners establish a single zoning lot with the developer-owner having the right to further expand the zoning lot. The other party agrees to execute any further documents that are required to do so, but, if it does not execute the documents necessary to expand the zoning lot, the developer-owner is granted a power of attorney coupled with an interest to execute them on its behalf. Such a power granted in a document executed on or after Sept. 1 may no longer be effective after its signatory's death.
On a related note, however, it should be noted that the new law makes no exceptions for people in genuinely desperate straits without access to a computer or stationer to get the exact wording required for an effective power of attorney. For such people, it is just plain too bad; their transactions cannot go forward.
Governments and Businesses
It should be noted that although fairly obtusely worded, the statute has no application to POAs executed by or on behalf of governments and business entities. However, although the ability to transfer property frequently comes from the operating agreement, in some instances the ability to transfer property will flow from one individual to another by power of attorney. These powers, as non-statutory powers, may need to comply with the provisions of the new statute applicable to non-statutory powers.
Consider a small corporation, for example five friends who get together with each other, one of whom actually has money, another who is the monied one's brother, and three of whom are friends, working the business. The monied brother could issue a POA to his brother to sign all the forms the business has to sign through the year. This would be a POA for a business purpose where the power-giver wants to be a non-participating shareholder, leaving the actual participation to his brother. This could be incorporated in a shareholder agreement.
If so, any POAs executed in such contexts are invalid if they lack the 650-word warning and 12-point type the statute requires for all individuals' POAs executed on or after Sept.17
Well Meaning, but...
There can be little doubt that the intent of this statute is benign and principally aimed at giving the old and infirm a cheap simple procedure to have their affairs taken care of by a trusted friend or relative while ensuring that the helper does not become an oppressor.18
Perhaps a much simpler overhaul of the old statute is all that is necessary: requiring that a POA be accompanied by a contemporary photograph of the power-giver or valid identification; requiring that the power-giver incorporate a current address and telephone number.
However, as currently crafted, the statute is so riddled with problems, both substantive and procedural, that it has injected into the entire legal system huge instabilities, particularly those endangering the orderly secure transfer of real property.19 Until the Legislature finishes the job of amending out its kinks and the courts have had a chance to construe what all that language means, it's going to be a real mess. While they are at it, the Legislature should give serious thought to a more terse warning to the power-giver, something like the kind of text that would fit on a pack of cigarettes.
Adam Leitman Bailey is the founding partner and Dov Treiman is a partner of Adam Leitman Bailey, P.C. Michael J. Berey, general counsel and senior vice-president of First American Title Insurance Company of New York, assisted with this article.
Endnotes:
1. The session law version of this enactment is roughly 50 percent larger than the U.S. Constitution.
2. Chapter 644 of the Laws of 2008, as amended.
3 We say "power-giver" here so as to speak to the title of the document, "Power of Attorney." The statute itself says "principal" and "agent," avoiding the common, "attorney in fact." One should not say "signatory" because under this new law, there are a minimum of three signatures: principal, agent, and notary and the rider requires two witnesses. GOL §5-1514(9).
4. GOL § 5-1501B.
5. GOL §5-1510, discussed infra.
6. Bill A8392/S5910 in the State Legislature specifically proposes "technical" amendments to the new law.
7. Chapter 644 of the Laws of 2008, as amended by Chapter 4 of the Laws of 2009.
8. Holy Properties Ltd., L.P. v. Kenneth Cole Productions Inc., 87 NY2d 130 (1995).
9. Adam Leitman Bailey & Carly Greenberg, "Growing Fraud," NYLJ, 1/31/07; Adam Leitman Bailey, "Expense of Theft Prevention Dwarfed by Cost of Fraud," NYLJ, 4/8/09.
10. GOL §5-1513.
11. GOL §5-1501A.
12. GOL §5-1508.
13. GOL §5-1510.
14. First National Stores Inc. v. Yellowstone Shopping Center Inc., 21 NY2d 630 (1968).
15. Weber v. Bridgman, 113 N.Y.600 (1889).
16. GOL §5-1511(a).
17. GOL §5-1501B(1) Preamble; §5-1501B(4). Some of the provisions of the revised article may actually apply to business entities and governments, but the extent of that problem is beyond the scope of this article.
18. NYS Law Revision Commission Report on Powers of Attorney (2007), pp. 5, 13-17, 19-22.
19. The Law Revision Commission Report which was the genesis of the new POA did not consider that the proposed changes could affect real property law.
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