As a result of the Great Recession, many homeowners and would-be real estate investors found themselves facing foreclosure of âunderwaterâ properties by banks and other lenders. Â After losing their property, many borrowers heard nothing more and thought their ordeal was over. Â They did not realize that, since the bank sold their property for less than the mortgage balance, they were also liable to the bank for the deficiency â the difference between the value of the underwater property and the full balance of the mortgage (including penalties, interest and legal fees).
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2013 Year End Notes, Part 4: Asset Protection Considerations
Asset Protection for Financial Professionals, Hedge Fund Managers and Investment Advisors
During 2013, we have seen the growth of a new group of clients interested in asset protection: investment advisors, hedge fund managers and other financial professionals. Â This group is faced with an increase in lawsuits brought by litigious investors against their financial advisors and those charged with making investment decisions. Â As investors seek to blame others for investment losses, they are now suing fund managers and investment advisors personally, in addition to the fund itself or the advisorâs employer. Â In the past, it was routine to sue the fund or financial institution; naming the fund manager or investment advisor personally is relatively new, but a phenomenon that we are seeing in increasing numbers.Continue Reading
New Opportunities for Ownership of Co-op Apartments by Family Limited Partnerships & Trusts
Many residential apartments are owned by cooperative corporations (âco-opsâ). Â In New York City, it has been estimated the coop apartments outnumber condominium apartments by three to one. Â The boards of directors of co-ops have been known to be especially and unreasonably restrictive as to who they will admit as shareholders and residents, and many boards, especially in New York, have acquired reputations of being âsnootyâ and exclusive. Â The pop singer Madonna was famously rejected by the co-op board of a very expensive Park Avenue building.
The Wall Street Journal reports (âCo-ops Get Competitiveâ, August 29, 2013, page A-17) that the boards of cooperative apartments are now relaxing their policies and acceptance criteria in order to appeal to younger buyers, as well as to foreign buyers, who are not willing to put up with onerous admission requirements and unreasonable restrictions. Â These co-op boards are changing their policies in order to be competitive with condominiums and in order to attract new investment and new buyers.
What does this have to do with asset protection and tax minimization?
First, oneâs home, whether a co-op, condo, house or otherwise, is normally a very significant asset and should be protected from future claims.
As the Wall Street Journal points out, âwhile buyers have always been able to buy condos and townhouses anonymously under corporations and trusts, now even some Fifth Avenue [co-op] boards have let brokers know that they would now consider purchases done in the names of trusts or limited liability companies . . . .â Â And, we would expect, in the names of family limited partnerships (FLPs), which are similar to limited liability companies (LLCs) but offer better asset protection. Â Thus, ownership of a co-op by an FLP is advisable if allowed by the co-op board.
Second, as noted above, co-op boards are positioning themselves to take advantage of the healthy demand by wealthy foreign buyers for U.S. real estate. Â As the Wall Street Journal reported, co-op boards have clarified their rules, and made âit clear that international buyers, who are active in the condo market, were welcomeâ at co-ops as well. Â We have written before about the appeal of U.S. real estate, especially expensive apartments, to wealthy foreign buyers. Â We have also discussed how, through the use of certain hybrid trusts, foreign buyers can minimize their exposure to the Foreign Investment in Real Property Tax Act (“FIRPTA”), which imposes an onerous 10% tax on the gross sale proceeds when a foreign owner sells U.S. real estate. Â Please see our article, How Foreign Purchasers of U.S. Real Estate Can Save Significant Taxes.
As co-ops attract new buyers, domestic and foreign, it is important to consider the best form of ownership of real estate. Â Ownership in entities such as FLPs and trusts may offer significant asset protection and tax benefits. Â Please contact us for additional information.
Equity Stripping
International asset protection strategies are effective primarily because they involve the physical transfer of an asset to a safe and secure foreign locale where the asset is beyond the jurisdiction of a U.S. court.
Thus, for example, money may be wired offshore in order to be completely protected from a U.S. creditor. Real estate, however, cannot be moved.
Although it is physically impossible to transfer real estate to a foreign jurisdiction, you protect the real estate by turning it into cash, and then you can protect that cash by transferring it offshore.
This can be done by either selling the real estate or by taking out a mortgage on the property.
The equity is thus separated from the property, i.e., equity stripping, and then protected. The proceeds of the sale or mortgage should be protected offshore via a number of effective strategies, such as offshore asset protection trusts or foreign deferred variable annuities.
If the real estate is mortgaged and the proceeds are protected offshore, a creditor will be frustrated because any judgment it may receive would be subordinate to the security interest of the mortgagee.
As with other effective asset protection strategies, the creditor will be more inclined to settle upon terms favorable to you, rather than receive nothing!
Business Owners as Continued Targets of Labor and Wage Lawsuits; Plaintiffs Score Huge Monetary Settlements from Businesses Continuing Reinforcement of the Need for Asset Protection
Our recent article, Labor and Wage Lawsuits are the Latest Threat to Business Owners, Who Respond by Protecting Assets, was widely commended by other lawyers and clients, because it addressed the litigation threat and made important suggestions on protecting assets from the threat. As we wrote, employees of businesses ranging from restaurants to construction companies are now incentivized and encouraged to sue the business owners for alleged violations of the federal Fair Labor Standards Act (FLSA). The claims are based on alleged failure to pay overtime, properly pay tips, and similar theories. Aggressive lawyers entice workers to file lawsuits on a contingency basis – – no cost to workers at all; the lawyer will receive one-third of the award if they win, nothing if they lose. Business owners are the latest class of litigation targets who must proactively protect their assets from such potential lawsuits and other challenges.
Since that article, within the past few months, new examples have arisen which illustrate how these litigations provide significant profits for plaintiffs and the lawyers who encourage them:
Pier Sixty, a banquet hall in Manhattan, agreed to pay $8.5 million as settlement of a class-action claim by workers who alleged that the owners did not properly share a “service charge” on contracts for parties.
Well-known restaurateurs Mario Batali and Joe Bastianich agreed to pay $5.25 million to settle a lawsuit based on improper payment of tips. This is a record settlement for the restaurant industry facing wage claims.
Boston Market paid $3 million to settle a lawsuit based on overtime claims. The lawsuit was a nation-wide collective action brought under the FLSA, as well as class actions pursuant to New York and Connecticut law.
Allis-Chalmers Energy, an oil and gas servicing company, paid $1.9 million to settle a lawsuit brought by its employees, who claimed that their employer failed to pay them overtime.
In addition to these settlements, many similar lawsuits have been brought in recent months against businesses of all types – – from bars and restaurants to giant banks. In a recent lawsuit filed against HSBC, the plaintiffs claim failure to pay overtime to bank relationship managers, personal banking officers and other bank employees. Similarly, Merrill Lynch and Bank of America financial advisors filed a lawsuit based on similar claims. Accounting firm Deloitte & Touche also faces overtime claims. Even Lady Gaga, a very successful pop music entertainer, faces a lawsuit from her former personal assistant, claiming that Gaga failed to pay overtime.
The diversity of the defendants – – from restaurants to banks to service providers to entertainers – – clearly demonstrates that all types of businesses are vulnerable to the threat of employee litigation. All owners of businesses that employ people should be on guard.
At the same time as business owners examine their own employment practices and their compliance with labor laws, they should also consider whether their personal and business assets are exposed to such potential litigation and to creditors. Compliance with labor laws is prudent, but court cases are filed every day, whether or not the plaintiffs’ claims have merit. Even if you “win” in the litigation, you will have spent a great deal of time and money on legal fees. And if you are not successful in the litigation, you may be held personally liable. A judgment against you would endanger your personal assets, e.g., your home, savings, etc.
Proper asset protection is the best pre-emptive defense, and often discourages the predatory lawsuits in the first place. Professionally designed asset protection strategies offer business owners peace of mind and provide the protection needed to withstand the inevitable attacks.
For information about protecting personal and business assets from FLSA and other claims, please contact us
Why Insurance is Not Enough
“I donât need asset protection. I have liability insurance, plus an umbrella policy.”
Insurance does not provide adequate asset protection.
First, a professionally designed asset protection plan discourages lawsuits; insurance actually invites lawsuits.
Potential litigants are more likely to file lawsuits when they expect that your insurance company will pay them a large judgment or settlement.
On the other hand, a potential litigant who learns that your assets are protected and not available to satisfy a judgment will be discouraged from filing the lawsuit.
Second, insurance will only pay up to the policy limit. If that amount is surpassed by a large judgment, your assets are at risk.
This is especially relevant with todayâs trend of large liability awards, increasing insurance premiums and decreasing insurance coverage.
Multi-million dollar liability judgments are commonplace today. To be adequately insured against such excessive judgments, you must pay huge premiums on a yearly basis. In contrast, you need only set up an asset protection plan once.
Thereafter, you will be permanently protected, no matter how large the judgment. Your annual insurance premiums can be reduced to a minimum.
Third, liability insurance will not protect against claims based upon other grounds, e.g., I.R.S. assessments, fraud, intentional acts, employment discrimination, sexual harassment, etc.
A professionally designed asset protection plan, on the other hand, protects against all claims.
Finally, an asset protection plan will provide benefits such as tax minimization and estate planning, which are not available from insurance.
We are often asked whether, based on the above, liability insurance should be cancelled after an asset protection plan is implemented.
We advise clients who have protected their assets to continue to maintain minimal liability insurance, thereby reducing their annual premiums.
A creditor or litigant who realizes that your assets are protected will leave you alone and deal directly with your insurance company, usually settling for the amount of the insurance coverage.
In addition, your conscience might be more comfortable knowing that if someone is indeed harmed, he or she will receive some reasonable compensation from the insurance company (not from you).
Transferring Assets to a Spouse
“I donât need asset protection. Last year, I transferred everything to my wife.”
Bad strategy. The transfer of assets to a spouse is usually not effective.
If the transfer of assets to a spouse leaves you with insufficient assets to satisfy a judgment, you are rendered legally insolvent. Such a transfer can easily be undone by a creditor as a constructive fraudulent conveyance.
In addition, the assets are still at risk should your spouse end up with claims against her or him.
In the event the marriage terminates, your spouse may walk off with the assets.
Finally, the transfer to the spouse must have occurred years in advance of a claim by a creditor, lest the transfer be challenged as a fraudulent conveyance.
Courts have the ability to look back in time for six years and undo fraudulent transfers. Thus, a husband sued this year must have transferred the assets to his wife at least six years ago.
Turning Property into a Fortress
The Increasing Need for Landlords to Protect Their Assets
Landlords have long known that they are frequent targets of litigation by people who come into contact with real estate: tenants, guests or even passers-by. Landlords should also be aware that in the event of a judgment against them, their personal assets may be at risk, above and beyond their real estate holdings. Recent changes in the law, and new theories of liability, have added to landlordsâ exposure to lawsuits. The need for landlords to protect their assets, including their real estate and their personal property, has never been more critical.
Recent Changes in the Law Significantly Increase Landlord Liability
For years, New York City landlords understood that while they were obligated to keep adjacent sidewalks clean and free of snow, ultimately, the City dealt with any major sidewalk renovations. Likewise, liability for sidewalk injuries ultimately rested with the City as the actual owner of the sidewalk.
Three recent changes to the Local Laws of the City of New York have altered this situation. Now, landlords are exposed to significantly increased liability for sidewalk injuries. Like doctors and other professionals, increased liability translates into heightened potential for lawsuits, more expensive insurance premiums and greater operating costs.
Section 7-210 of the Administrative Code of the City of New York now obligates owners of real property that abuts any sidewalk to maintain the sidewalk in a âreasonably safe condition.â According to §7-210, the failure of a real property owner to maintain an adjacent sidewalk in a âreasonably safe conditionâ subjects that property owner to liability for injuries sustained on that sidewalk. The statute specifically exempts the City from liability for such injuries, notwithstanding the fact that the City still owns the sidewalk. The statute obligates real property owners to install and maintain sidewalk flags, and to remove snow, ice, dirt âor other materialâ from the sidewalk. The statute does not otherwise define what constitutes a âreasonably safe conditionâ, and we can thus expect the courts to do so over the coming years.
Section 7-211, in addition, requires real property owners to purchase insurance for personal injury and property damage arising from the failure to maintain the sidewalk in âreasonably safe conditionâ in accordance with §7-210. This statute also exempts the City from liability for injuries to property or personal injury resulting from the property ownerâs non-compliance.
If a judgment is entered against a landlord, and the landlord does not have the required insurance, then §7-212 allows the judgment plaintiff to petition the City for payment. The City will pay the plaintiff and become an assignee of the judgment. Presumably, the City will then turn its attention to collecting from the property owner, in addition to pursuing any fines and penalties for the landlordâs violations.
Clearly, in light of these new laws, owners of real property can expect more lawsuits from private citizens as well as from the City of New York. These new laws come at a time when landlords are already facing significant legal challenges.
Litigation Against Landlords: Traditional Exposure and New Theories of Liability
Landlords are already well-aware of their tort liability arising from asbestos and lead based paint. Some recent court cases wherein New York landlords were required to pay large sums for damages caused by lead based paint include: Nguyen v. Banco Realty L.L.C., No. 22102/97 (Bronx Sup. Ct. May 8, 2002)(case settled for a $2,000,000 payment from landlord to injured tenant); Griffin v. Manning, No. 108083/97 (N.Y. Sup. Ct. Jan. 15, 2002)(jury determined that although the managing agent was negligent, the property owner was liable; $2,500,000 verdict); Garcia v. Gesher Realty, No. 26345-95 (Bronx Sup. Ct. June 14, 2001)($3,000,000 verdict against landlords, in favor of tenants who lived on the premises for six months). See also: John Caher,âJury Awards $6 Million in Paint Caseâ, New York Law Journal, March 27, 2001. The New York Times recently reported that a New York property owner and employer was required to pay a staggering $47 million to an employee injured by asbestos on the premises. See: âTwo Large Verdicts in New Asbestos Casesâ, New York Times, April 1, 2003 at C4 (âThe verdicts . . . are part of a new wave of cases against companies that did not make asbestos or use it in their products, but used products containing asbestos in their buildings.â)
To traditional liability based upon exposure to asbestos and lead based paint, we may now add a third source of liability: exposure to mold. Mold litigation is rampant in other states , and New York is becoming another mold litigation hot spot. Recently, five hundred mold lawsuits, emanating from one apartment complex, were consolidated. The plaintiffs sought $9 billion in damages, but settled for $1.2 million. In addition, a resident in an expensive new building at 515 Park Avenue in Manhattan filed a $400 million suit against his condominium board, management company, the builder, developer and other parties, claiming injuries from mold. As more and more mold stories appear in mainstream periodicals , and public awareness of this cause of action increases, we can expect a proliferation of lawsuits against landlords for alleged mold injuries.
Impending Insurance Crisis
We can look to the medical industry as a guide for what happens when negligence litigation targets a single class of defendants. At a time when medical malpractice insurance policies are becoming smaller, plaintiffsâ malpractice awards grow larger and larger. Insurance companies are not writing new policies and are not renewing existing policies. Many jurisdictions have allowed insurers to increase premiums exponentially. As a result, the medical community is facing a drastic, widely-publicized âinsurance crisisâ. Doctors are staging âwalk-outsâ to protest the insurance crisis. Some have chosen to close their practices, move to other jurisdictions or even leave medicine altogether, rather than endure a barrage of lawsuits and inadequate, expensive insurance coverage.
The increase in mold litigation, continued liability for lead based paint and asbestos, and new statutory sidewalk liability will result in increased insurance costs for landlords. If the medical industry is any example, insurers will soon balk at assuming these new risks. It was recently reported that State Farm, the largest U.S. home insurer, has eliminated coverage for mold in thirty three states, and Allstate, the second largest insurer, has made its coverage for mold more restrictive and limited. Like the medical malpractice situation, declining coverage for mold-based liability has already been termed a âcrisisâ. Landlords will no doubt feel the pinch from both sides, as targets of lawsuits and as they pay more and more for decreasing coverage.
Given the threat to real estate ownersâ assets, it is more apparent than ever that landlords need to protect their assets to the best of their ability. The days of huge insurance policies serving as reliable umbrellas are gone. There are, however, viable alternatives available to those who plan ahead.
Solution: Asset Protection
In light of the changes in the law, and the litigation and insurance risks facing landlords, the need for asset protection has never been greater. Landlordsâ real estate holdings, as well as their personal assets, are at risk.
The best way to fend off a plaintiff is to discourage the lawsuit in the first place. Typical contingency fee lawyers start out with the expectation that they are bringing an action against a wealthy, deep pocket landlord. The sooner they learn that the landlord has no attachable assets, the sooner their strategy will change and the lawyers will take whatever they can get from an insurance settlement. After all, âone third of zero is zero.â The process brings insurance back to doing what it is supposed to do â cover the landlord, rather than invite the lawsuit. Domestic asset protection (for example, a family limited partnership, or FLP) will, if properly established and maintained, be 100% effective against all future claims. Such asset protection should discourage future lawsuits and give defendants significant leverage to force favorable settlements within the parameters of their insurance coverage. Additionally, proper asset protection allows landlords to reduce liability coverage to reasonable levels. One caveat: it is imperative that landlords protect themselves before the commencement of a lawsuit.
Separate and Contain Potential Liabilities
The Revised Uniform Limited Partnership Act (RULPA), which has been adopted as statutory law in all fifty states, provides that the assets owned by a limited partnership are not owned by the individual partners. Therefore, those assets cannot be attached by the personal creditors of a partner. If a landlord contributes real estate to an FLP, the properties are no longer owned by the landlord (although, the landlord may still control those assets as General Partner). Thereafter, creditors of the landlord may not attach those assets merely because they have a personal judgment against him.
As part of an asset protection plan tailored specifically to the landlord and his holdings, each asset should be individually evaluated for its exposure to liability. In general, each parcel of real estate should be placed into a separate FLP. The reason for treating each real estate asset individually and placing each one in its own FLP is to isolate the litigation exposure of each asset.
âEquity Stripâ the Property and Protect the Proceeds
Domestic asset protection via FLPâs is extremely effective against future claimants, but may not be as effective with respect to pre-existing claimants. In such cases, a property owner may not be completely protected by domestic asset protection and may have to utilize international asset protection strategies. International asset protection strategies are effective primarily because they involve the physical transfer of an asset to a safe and secure foreign locale where the asset is beyond the jurisdiction of U.S. courts. Money, for example, may be wired offshore in order to be completely protected from U.S. creditors. Real estate, however, cannot be moved offshore.
Although it is physically impossible to transfer real estate to a foreign jurisdiction, a landlord may protect the real estate by turning it into cash and then protecting that cash by transferring it offshore. This can be done by either selling or mortgaging the property. The equity is thus separated from the property, i.e., âequity strippingâ, and then protected. The proceeds of the sale or mortgage can be protected offshore through a number of effective strategies, such as offshore asset protection trusts or investment in foreign deferred variable annuities.
If the real estate is mortgaged and the proceeds are protected offshore, a claimant will be frustrated because any judgment it may receive would be subordinate to the security interest of the mortgagee. As with other effective asset protection strategies, the claimant will be more inclined to settle upon terms favorable to the landlord, rather than receive nothing.
Conclusion
It is clear that the risks facing real estate owners – – including new statutory-based liabilities and new theories of tort liability, in addition to traditional areas of concern – – all offer compelling reasons for landlords to properly protect the assets they have worked hard to acquire. In addition to their real estate holdings, property owners must give thought to protecting their personal assets. Proper asset protection strategies offer property owners piece of mind and provide the fortress their properties need to withstand the inevitable attacks.
[1]. Asher Rubinstein is a partner at Rubinstein & Rubinstein, LLP. His practice concentration is asset protection and wealth preservation. He may be reached at (212) 888-6600 and via www.assetlawyer.com.
[2]. For example, it was recently reported that plaintiffs in a California lawsuit were awarded $18.5 million for mold-related injuries. See Mark Yagerman and Joel M. Simon, âGot Mold?â, Outside Counsel, New York Law Journal, June 24, 2002.
[3]. Davis v. Henry Phipps Plaza South, No. 116331/1998 (N.Y. Sup. Ct.); 2-1 Mealyâs Litig. Rep. Mold 1 (2002). See also: Deborah Sachs Feit, âToxic Mold Litigation: The Frenzy Continuesâ, Outside Counsel, New York Law Journal, Dec. 6, 2002.
[4]. Kramer v. Zeckendorf, 128014-02 (N.Y. Sup. Ct. 2002).
[5]. See, e.g., Dennis Hevesi, âThe Turmoil Over Mold in Buildingsâ, New York Times, March 23, 2003; Lisa Belkin, âHaunted by Moldâ, New York Times Magazine, August 12, 2001; Anita Hamilton, âBeware: Toxic Moldâ, Time Magazine, July 2, 2001; Christopher Oster,âInsurers Blanch at Proliferation of Mold Claimsâ, Wall Street Journal, June 3, 2001.
[6]. It should also be noted that as more and more personal injury attorneys find it lucrative to sue landlords for mold injuries, those attorneys will likely encourage additional clients to pursue such claims. As was stated poignantly in the New York Law Journal, âas we have seen with other âToxic Tortsâ, the public can easily be educated to perceive what the plaintiffâs bar has set forth as the risk of mold contamination. This creates a ready market supporting the ongoing litigation.â âGot Mold?â, New York Law Journal, June 24, 2002. See also: Randy Maniloff, âMold: The Hysteria Among Usâ, Environmental Claims Journal, Summer 2002, Vol. 14, No. 3 (âThere is no doubt that the media has contributed . . . to the publicâs awareness of the potential hazzards of mold, to both person and property. The media has also fueled the publicâs awareness that, like most other problems in this country, the solution to mold lies in a lawsuitâ).
[7]. See, e.g., Peter Carbonara, âDiagnosis: Premium Shock; Rx: Strikeâ, Money Magazine, May 2003; âW. Va. Doctors Strike Over Insurance Costsâ, CNN, January 2, 2003; âSkirmishing Over Med Mal Coverage Cost, Suits Widen; Tort Laws Targetedâ, New Jersey Lawyer, April 8, 2002; âMedical Malpractice Crisis?â, New Jersey Lawyer, April 1, 2002.
[8]. The effect of mold litigation upon insurance costs is well-documented. In Texas, a mold litigation âcrisisâ state, there was a 548% increase in the number of mold claims between 2000 and 2001, which translated into an 800% increase in premium amounts. See âGot Mold?â, New York Law Journal, June 24, 2002.
[9]. As the New York Times observed, âInsurance companies are especially vulnerable to the new [asbestos] suits because they must pay for the claims under their premises-liability coverage, which usually has no dollar limits.â âTwo Large Verdicts in New Asbestos Casesâ, New York Times, April 1, 2003. See also: âAsbestos Verdict in California Case Worries Insurers in Other Lawsuitsâ, New York Times, May 8, 2003 (âSmall insurers could be driven out of business . . . and others might be forced to limit their coverage.â).
[10]. Randy Maniloff, âMold: The Hysteria Among Usâ, Environmental Claims Journal, Summer 2002, Vol. 14, No. 3.
[11]. See, e.g., Gregory J. Johansen & Leslie K. OâNeal, âMold Exclusion Adopted for CGL Policies – The Mold Crisis has Reached the Point Where Insurance Companies are Fighting Backâ, Mondaq Business Briefing, July 19, 2002; âGot Mold?â New York Law Journal, June 24, 2002.
[12]. For instance, in Graves v. Chen, No. 6658-98 (Albany Sup. Ct., March 23, 2001), plaintiffs were awarded $6.2 million in damages and defendant landlord had only $800,000 in insurance coverage. See âJury Awards $6 Million in Paint Caseâ, New York Law Journal, March 27, 2001.
[13]. See, e.g., New York Revised Limited Partnership Act §§ 121-701 et. seq.
Creating a Safety Net for Landlords
Ownership of real estate carries with it the threat of litigation from tenants, guests or even passers-by. In 2002, New York City changed its law, increasing property owner liability for injuries sustained on sidewalks (notwithstanding that the City owns the sidewalks). Moreover, property owners also face liability based upon lead paint, mold and other environmental risks. Now an additional threat exists based upon a newly strengthened New York State âscaffold law.â
âScaffold Lawâ Increases Property Owner Liability
For years, property owners have known that Labor Law § 240(1), more commonly known as the âscaffold law,â imposes liability on a property owner for elevation-related injuries to a worker on the property. Elevation-related injuries are defined by the âscaffold lawâ as those involving the use of scaffolding, hoists, stays, ladders, slings, hangers, blocks, pulleys, braces and ropes. The most common injuries covered by Labor Law § 240(1) are falls from scaffolding or ladders, or when a worker is injured by a falling object. Because most multi-family buildings must utilize scaffolding and ladders, this law has broad reach. Most importantly, this liability is absolute; i.e., the owner is liable even if he did nothing wrong!
Further, the duty created by this statute to provide safe working conditions is nondelegable. When a duty is nondelegable, a person may not transfer that obligation to another party to avoid responsibility. Thus, under the âscaffold law,â the property owner may not transfer the responsibility to provide safe working conditions on his property to, for example, a contractor. Therefore, the property owner himself is held liable for injuries covered by the law even though the work was performed by an independent contractor over which the property owner exercised no control. For example, if a managing agent hires a painting contractor as part of a renovation project and the painterâs employee falls from a ladder and is injured, the injured worker can seek recovery from the property owner under Labor Law § 240(1), irrespective of the painterâs workersâ compensation insurance or even the ownerâs lack of wrongdoing.
A recent New York State Court of Appeals decision, Sanatass v. Consolidated Investing Company, 10 N.Y.3d 333, 858 N.Y.S.2d 67 (2008), expanded the scope of the âscaffold law.â That case held that a property owner was liable even when the contractor was hired by a tenant in direct disregard of a lease provision prohibiting the tenant from altering the premises without the property ownerâs permission. The lease provision in Sanatass required the tenant to obtain written permission from the property owner before the tenant performed any alterations to the property. The tenant employed a contractor without permission from the property owner. An employee of the contractor was injured when an air conditioning unit, which was being hoisted to the ceiling, fell on top of him. The employee won a judgment against the property owner, notwithstanding the tenantâs breach and notwithstanding that the property owner was not even aware that the contractor was performing work on the property.
The result after Sanatass effectively treats property owners as insurers and will translate into more expensive insurance premiums and a significant increase in the potential for lawsuits. In Sanatass, the Court made it clear that even the lack of ability by the property owner to ensure compliance with the âscaffold lawâ is irrelevant to his liability. In Sanatass, even though the property owner did not know that the tenant hired a contractor, and even though the work was performed in direct violation of the lease, the property owner was still strictly liable for the injury to the worker.
With the new interpretation of Labor Law § 240(1), owners of real property can expect more lawsuits resulting from elevation-related injuries on their property. This expansion of property owner liability comes at a time when property owners are already facing significant legal challenges, such as lawsuits resulting from slips and falls, and from the presence of lead paint, mold and other toxic substances.
Considering the litigation risks and changes in the interpretations of the law, it is clear that property owners must take steps to protect their assets from potential plaintiffs. Property owners can protect their real estate holdings, as well as their personal assets, by employing various asset protection strategies.
Domestic and International Asset Protection Strategies
Perhaps the best way to discourage a plaintiff from bringing a lawsuit in the first place is to ensure that the property owner has no attachable assets. The sooner a potential claimant learns that a property owner has no attachable assets, the sooner the claimant will forego his plans to initiate a lawsuit and agree to an insurance settlement. This process brings insurance back to doing what it is supposed to do â cover the property owner rather than invite a lawsuit.
Domestic asset protection will, if properly established and maintained, be 100% effective against all future claims. For example, ownership of real estate within a family limited partnership (FLP) should discourage future lawsuits and give property owners significant leverage to force favorable settlements within the limits of their insurance coverage. However, it is imperative that property owners engage in asset protection before the injury occurs and a lawsuit is commenced.
The Revised Uniform Limited Partnership Act (RULPA), which is the law in all fifty states, provides that property owned by a limited partnership is not owned by the individual partners. If a property owner transfers property to an FLP, the property is no longer owned by that person (although the former owner, as General Partner of the FLP, still controls the property). A creditor with a judgment against the property owner may not attach FLP assets to satisfy the judgment. In most cases, each parcel of real property should be placed into a separate FLP to isolate the litigation exposure of each asset. If all of the ownerâs assets are held in FLPs, a claimant can do nothing more than settle with the insurance company.
In cases where a property owner is faced with pre-existing claimants, domestic asset protection may not be completely effective. However, international asset protection strategies can be effective in such situations. Although it is impossible to transfer real estate to a foreign jurisdiction, a property owner may turn the property into cash and transfer the cash offshore. This can be accomplished by either selling or mortgaging the property. The proceeds of the sale or mortgage can then be protected offshore by using strategies such as offshore asset protection trusts or investment in foreign deferred variable annuities. The claimant will be more inclined to settle upon terms favorable to the property owner rather than pursue litigation in a foreign jurisdiction, without contingency fees, where the burden of proof and statute of limitations will be against the claimant.
Conclusion
The increasing risks facing real estate owners are clear and compelling. Now property owners may face claims based upon injuries which, as in Sanatass, they are powerless to prevent. Property owners must give thought to protecting their real estate holdings as well as their personal assets. Proper asset protection strategies offer property owners a viable safety net for their property when faced with inevitable litigation arising from real estate ownership.
[i]. Asher Rubinstein is a partner at Rubinstein & Rubinstein, LLP. His practice concentration is asset protection and wealth preservation. He may be reached at (212) 888-6600 and via www.assetlawyer.com.
[ii]. We discussed changes to the sidewalk law in our article titled Turning Property into a Fortress: The Increasing Need for Property owners to Protect Their Assets.
[iii]. See, e.g., New York Revised Limited Partnership Act §§ 121-701 et. seq.