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 landlords’ 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 “reasonably safe condition.” According to §7-210, the failure of a real property owner to maintain an adjacent sidewalk in a “reasonably safe condition” 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 “or other material” from the sidewalk. The statute does not otherwise define what constitutes a “reasonably safe condition”, 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 “reasonably safe condition” in accordance with §7-210. This statute also exempts the City from liability for injuries to property or personal injury resulting from the property owner’s 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 landlord’s 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,”Jury Awards $6 Million in Paint Case”, 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: “Two Large Verdicts in New Asbestos Cases”, New York Times, April 1, 2003 at C4 (”The 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.”)
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, plaintiffs’ 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 “insurance crisis”. Doctors are staging “walk-outs” 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 “crisis”. 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 owners’ 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. Landlords’ 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, “one third of zero is zero.” The process brings insurance back to doing what it is supposed to do — 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.
“Equity Strip” the Property and Protect the Proceeds
Domestic asset protection via FLP’s 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., “equity stripping”, 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.
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.
. 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.
. 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, “Got Mold?”, Outside Counsel, New York Law Journal, June 24, 2002.
. Davis v. Henry Phipps Plaza South, No. 116331/1998 (N.Y. Sup. Ct.); 2-1 Mealy’s Litig. Rep. Mold 1 (2002). See also: Deborah Sachs Feit, “Toxic Mold Litigation: The Frenzy Continues”, Outside Counsel, New York Law Journal, Dec. 6, 2002.
. Kramer v. Zeckendorf, 128014-02 (N.Y. Sup. Ct. 2002).
. See, e.g., Dennis Hevesi, “The Turmoil Over Mold in Buildings”, New York Times, March 23, 2003; Lisa Belkin, “Haunted by Mold”, New York Times Magazine, August 12, 2001; Anita Hamilton, “Beware: Toxic Mold”, Time Magazine, July 2, 2001; Christopher Oster,“Insurers Blanch at Proliferation of Mold Claims”, Wall Street Journal, June 3, 2001.
. 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, “as we have seen with other ‘Toxic Torts’, the public can easily be educated to perceive what the plaintiff’s bar has set forth as the risk of mold contamination. This creates a ready market supporting the ongoing litigation.” “Got Mold?”, New York Law Journal, June 24, 2002. See also: Randy Maniloff, “Mold: The Hysteria Among Us”, Environmental Claims Journal, Summer 2002, Vol. 14, No. 3 (“There is no doubt that the media has contributed . . . to the public’s awareness of the potential hazzards of mold, to both person and property. The media has also fueled the public’s awareness that, like most other problems in this country, the solution to mold lies in a lawsuit”).
. See, e.g., Peter Carbonara, “Diagnosis: Premium Shock; Rx: Strike”, Money Magazine, May 2003; “W. Va. Doctors Strike Over Insurance Costs”, CNN, January 2, 2003; “Skirmishing Over Med Mal Coverage Cost, Suits Widen; Tort Laws Targeted”, New Jersey Lawyer, April 8, 2002; “Medical Malpractice Crisis?”, New Jersey Lawyer, April 1, 2002.
. The effect of mold litigation upon insurance costs is well-documented. In Texas, a mold litigation “crisis” 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 “Got Mold?”, New York Law Journal, June 24, 2002.
. As the New York Times observed, “Insurance 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.” “Two Large Verdicts in New Asbestos Cases”, New York Times, April 1, 2003. See also: “Asbestos Verdict in California Case Worries Insurers in Other Lawsuits”, New York Times, May 8, 2003 (“Small insurers could be driven out of business . . . and others might be forced to limit their coverage.”).
. Randy Maniloff, “Mold: The Hysteria Among Us”, Environmental Claims Journal, Summer 2002, Vol. 14, No. 3.
. See, e.g., Gregory J. Johansen & Leslie K. O’Neal, “Mold Exclusion Adopted for CGL Policies – The Mold Crisis has Reached the Point Where Insurance Companies are Fighting Back”, Mondaq Business Briefing, July 19, 2002; “Got Mold?” New York Law Journal, June 24, 2002.
. 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 “Jury Awards $6 Million in Paint Case”, New York Law Journal, March 27, 2001.
. See, e.g., New York Revised Limited Partnership Act §§ 121-701 et. seq.