Almost one hundred years ago, an immigrant family bought two adjacent brownstone buildings on Fifth Avenue in Manhattan. The family lived upstairs, and rented space to residential and commercial tenants. For many decades, Humphrey, the son of the immigrants, lived in the buildings and acted as caretaker. Today, the brownstones are on the most valuable street in the world. The buildings remained in the family for decades, but not without conflict. One particular tenant harassed Humphrey for many years, and they both grew old and cantankerous together. One night, Humphrey snapped and shot six bullets into the tenant. Humphrey was tried, convicted of manslaughter and sent to prison for the rest of his life. Humphrey’s criminal lawyer referred the family to us to protect the buildings from the wrongful death lawsuit that was expected from the family of the tenant.
The family’s goal was to keep the real estate within the family, where it had been for close to a century. For this reason, the family was adamantly against a sale of the buildings, even though their location would command a sales price in the tens of millions of dollars, which we might then protect in an offshore trust. Obtaining a mortgage on the buildings so that we might protect the mortgage proceeds proved impossible because of Humphrey’s criminal conviction. Instead, we arranged for a major real estate developer to lease the buildings for forty-nine years on a “net lease” basis, with an upfront, lump-sum payment of tens of millions of dollars.
With the lease proceeds, Humphrey purchased a foreign annuity policy for the benefit of his family. The lump-sum lease payment was wired offshore to the annuity company. The annuity company then created an offshore trust to act as custodian of the funds, and Humphrey’s family members were the beneficiaries of that trust. The trustee safeguarding the funds was a well-credentialed, licensed, bonded trust department of a large and well-respected foreign bank. The trust assets were protected in a stable, secure foreign jurisdiction that did not recognize judgments from American courts.
The tenant’s family eventually obtained a $10 million civil judgment against Humphrey, which included $9 million in punitive damages, and then searched for Humphrey’s assets to satisfy their judgment. But, they soon learned that the man sitting in jail had no attachable assets. The prized family assets, the two Fifth Avenue brownstones, had been leased for forty nine years and the judgment creditors would have to wait until then. The judgment creditors then pursued post-judgment discovery to locate additional assets, whereupon Humphrey disclosed the foreign annuity and foreign trust. The judgment creditors soon realized that those assets were protected under the law of the foreign jurisdiction. The judgment creditors would have to re-litigate their claims in a foreign court, with a very short statute of limitations, no contingency fees, and they would probably lose. The judgment creditors had no choice but to accept our settlement offer of less than ten cents on the dollar.
Humphrey committed murder, and he is serving a life sentence in jail to pay for that crime. But our clients, his family members, were entitled to protect the family assets for themselves; they were not responsible for the criminality of one member of their family. Our strategy accomplished the following for our clients:
- It protected and kept ownership of the buildings within the family, their foremost goal, rather than a sale to strangers and loss of ownership of the family asset. Further, it protected the lease proceeds from the judgment creditor, and it provided the family with a secure, steady stream of annuity payments for many, many years.
- It caused the judgment creditors to accept a reasonable settlement amount, rather than target the family asset and punish our clients for the misdeed of one family member.
- It provided for management and control of the two brownstones by the net lease tenant for the next forty nine years, rather than requiring the family to act as building caretakers, collect rent and manage tenants.
Epilogue: One year later, the City of New York Tax Department attempted to tax the upfront, lump-sum lease payment, claiming it was really a “disguised sale” subject to Real Property Transfer Tax (RPTT). We won that case as well, which we’ve written about here.
Meanwhile, Humphrey’s story formed the basis for a TV episode of “Law and Order”. (The show made no mention that the brownstone buildings were protected and kept safe for the family that owned them for almost one hundred years.)