Tag: Real Estate Law

Imperfect Fit: Abercrombie Store Threatens Location In Tailored-Clothing Mecca Savile Row

Womble Carlyle

We’ve all heard the various means of describing the inappropriate place for an otherwise benign thing, rendering the otherwise benign thing a hazard or a liability or just plain offensive.  In 1855, the author Robert De Valcourt referred to, “An awkward man in society is like a bull in a china shop, always doing mischief.”  Robert De Valcourt, The Illustrated Manners Book: A Manual of Good Behavior and Polite Accomplishments (1855).  In 1926, Justice Sutherland opined, “A nuisance may be merely a right thing in the wrong place — like a pig in the parlor instead of the barnyard.”  Village of Euclid v. Ambler Realty Co., 272 U.S. 365 (1926).

Village of Euclid, of course, upheld the constitutionality of the zoning concept, a replacement of single purposes ordinances and private litigation for land use management.  See David Owens, Land Use Law In North Carolina (2d ed. 2011).

bull china shop retail real estate land use

“Late Ming dynasty, kaolin and pottery stone foundation, cobalt firing enamelling with Arabic lettering.  If only I could find a well-tailored suit and some skinny jeans to go with this vase.” 

Well, the “pig” or the “bull” in one particular instance is anticipated to be an Abercrombie and Fitch children’s store in the heart of London.

The “china shop” or the “parlor”?  Well, that may be Savile Row, legendary collection of fine British tailors and suitmaker to the rich and famous.  Consider this quote from Mark Henderson, chairman of “heritage tailor Gieves & Hawkes”, reported by CNBC about objection to the Abercrombie store:

“Opening a kids store on Savile Row is a somewhat bizarre thing to do. It’s a fairly narrow street, it’s got its own atmosphere to it.  It’s just fundamentally a mistake from Abercrombie – they don’t get everything right.”

We don’t purport to know the land use laws in London, we’ll leave that to the Ealing Common Land Use Barrister blog, but it’s always interesting to see just how common and universal land use issues can be.

It’s also interesting to see how different motives underpin all land use issues.  For example, one might assume the “hubub” over the Abercrombie store is a degradation of the historical nature of the narrow street, as Mr. Henderson alludes.  Well, maybe the distaste is different for another, even another from a seemingly similar perspective.  Consider this worry about “higher rents”, from John Hitchcock of “bespoke tailor Anderson & Sheppard” (man, I love the British):

“One or two of the tailors are concerned it might put the rents up, and it will do, I suppose.  There’s only so much rent we can pay. Our costs are already high as we make every suit by hand – unlike the big chains which don’t make their products on the premises.”

The Lesson of the Day

Land use decisions are nuanced legally but they are also very nuanced politically.  In this one space, one street within one small universe of British tailors, we have two very distinct motives for refusing the Abercrombie store.  Yes, both are opposed to the store, but each is opposed for a different reason, which means a political salve must address, at least, two distinct concerns.

One must fully and fairly understand the forces against which one is working, before success is at hand.  I think Sun Tzu, the Zhou Dynasty Land Use Litigator, said that.

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Google, Microsoft Assume Roles of Judge, Jury and Executioner on the Web

Published December 6, 2011 in The National Law Review an article by Nicole Kardell of Ifrah Law regarding Google, Yahoo! and Bing have suspended their accounts with hundreds of advertisers and agents associated with mortgage programs under federal investigation:

 

 

Google, Yahoo! and Bing have suspended their accounts with hundreds of advertisers and agents associated with mortgage programs under federal investigation. The move by Google and Microsoft (Microsoft powers Bing and Yahoo!) has basically shut down these businesses: Without the vehicle of the search engines, these sites cannot effectively generate traffic.

Why did Google and Microsoft cut the cord of these companies, and is there anything the companies can do? Google and Microsoft (we’ll call them the Government’s “Judge, Jury, and Executioner” or the “Enforcers”) acted upon the request of SIGTARP, a federal agency charged with preventing fraud, waste, and abuse under TARP’s Home Affordable Modification Program. (The pressure started a while back, as we wrote last March.)

SIGTARP is investigating mortgage programs that it believes have been wrongly charging “struggling homeowners a fee in exchange for false promises of lowering the homeowner’s mortgage.”

According to a source at SIGTARP, the agency handed Google and Microsoft a list of some 125 mortgage “schemes.” Apparently, the Enforcers then took that list, identified advertisers and agents associated with those mortgage programs, and opted to suspend relations with those companies (about 500 advertisers and agents for Google and about 400 for Microsoft). (SIGTARP’s announcements on these actions can be found here andhere.)

So it looks as if these companies have been penalized through government action without any adjudicative process, merely through government pressure on private companies, i.e. Google and Microsoft. (More analysis from us on this to come.)

It’s easy to understand why the Enforcers would feel pressure. Google just settled with the Department of Justice and agreed to pay more than $500 million for its role in publishing prescription drug ads from Canada. Those familiar with that settlement may see Google’s recent actions for SIGTARP as follow-on. Likely Google is more apt to buckle to the Feds quickly because of the costly settlement, but the matters are not directly related. In fact, the prescription drug settlement agreement relates to prescription drug ads only.

While the SIGTARP investigation is “ongoing,” and Google and Microsoft are continuing to cooperate with the agency, what can companies who have been caught up in this firestorm do? The Enforcers do, fortunately, have grievance processes (see, for instance, Google’s grievance process here).

Either on their own, or with some added strength through legal representation, the companies can try to make their cases regarding the content and nature of the ads at issue.

What is the next step going to be? If the Federal Trade Commission identifies, say, a group of websites that it believes are promoting bogus weight-loss schemes, will the Enforcers simply move to shut off their access to the Web, without further ado?

© 2011 Ifrah PLLC

Common Attornment Provision Held Ineffective After Master Lease and Sublease Rejected in Bankruptcy by Debtor-Sublandlord

Posted in the National Law Review an article by attorney  Howard J. Berman of  Greenberg Traurig regarding a subtenant of commercial office space was permitted to vacate its leased premises after the rejection of the master lease and sublease by the debtor-sublandlord:

GT Law

In Green Tree Serv., LLC v. DBSI Landmark Towers LLC,1 a case that is significant for landlords and leasing attorneys, the Eighth Circuit recently held that a subtenant of commercial office space was permitted to vacate its leased premises after the rejection of the master lease and sublease by the debtor-sublandlord, notwithstanding an attornment provision in the sublease requiring the subtenant to attorn2 to the landlord when the landlord either terminates the master lease or otherwise succeeds to the interest of the sublandlord under the master lease.

Because the Eighth Circuit’s decision hinges on an interpretation of an attornment provision that is common in many sublease agreements, landlords and practitioners must be careful to draft attornment provisions that do not run afoul of the decision.

 

 

In a strict construction of the attornment provision, the court determined that because the master lease was rejected by the debtor-sublandlord and not terminated by the landlord, the attornment provision was never triggered. Because the Eighth Circuit’s decision hinges on an interpretation of an attornment provision that is common in many sublease agreements, landlords and practitioners must be careful to draft attornment provisions that do not run afoul of the Eighth Circuit’s decision.

In Green Tree, the landlord leased an office building to the debtor, DBSI Landmark Towers Leaseco, LLC (“DBSI”), under a master lease. DBSI then subleased the property to Green Tree Servicing, LLC (“Green Tree”). The master lease agreement between the landlord and tenantsublandlord DBSI required that any sublease include a provision providing for the subtenant to attorn to the landlord in certain circumstances. The sublease agreement entered into between DBSI and subtenant Green Tree required Green Tree to attorn to the landlord if the “[landlord] ‘terminates the Master Lease’ or ‘otherwise succeeds to the interest of [DBSI] under the foregoing Lease.’” 3

After tenant DBSI filed for bankruptcy, it rejected its master lease as well as its sublease with Green Tree pursuant to order of the bankruptcy court. In its motion to reject, DBSI indicated that the sublease would be terminated as a result of the rejection. In response, Green Tree exercised its rights under section 365(h) of the Bankruptcy Code (which allows a tenant whose lease is rejected by a debtor-lessor to either remain in possession or treat the lease as terminated) to treat the sublease as terminated.4 Although sublandlord DBSI did not object to Green Tree’s election to terminate the sublease, the landlord objected, claiming that the terms of the sublease required subtenant Green Tree to attorn to the landlord.5Green Tree then commenced an action in Minnesota state court seeking a declaration that the sublease was terminated and that it could vacate its premises. The landlord removed the case to federal court and cross-claimed for a judgment affirming the sublease.

The Eighth Circuit rejected Green Tree’s argument that because it exercised its right to terminate the sublease under section 365(h) it had no obligation to the landlord under the attornment provision in the sublease, stating “nothing in section 365(h) indicates that a debtor-lessor’s rejection of a lease extinguishes a third party’s rights and obligations under the lease.”6 The court then analyzed the language of the attornment provision strictly and determined that it would be triggered only when the landlord terminates the master lease or otherwise succeeds to the interest of sublandlord DBSI.7 Because DBSI and not the landlord rejected the master lease in DBSI’s bankruptcy case and because DBSI rejected and terminated the sublease, the court held that the attornment provision was never triggered and that subtenant Green Tree was free to vacate the premises. 8In reaching this conclusion, the court noted that DBSI never assigned its contractual interest in the sublease to the landlord prior to DBSI’s rejection and termination of the sublease and that the landlord “could not succeed to the interest in the sublease that no longer existed . . . .”9 Here, the only contractual interest to survive under the sublease was the landlord’s right to attornment, which right was not triggered.10

In light of the court’s strict interpretation of the attornment provision, landlords must be careful to include language in attornment provisions in both the master lease and sublease making it clear that a subtenant must attorn to the landlord in the event that a master lease and/or sublease is rejected under section 365 of the Bankruptcy Code by a debtor-sublandlord.

1__F. 3d__, 2011 WL 3802800 (8th Cir. Aug. 30, 2011).

2The term “attorn” means ‘“[t]o agree to be the tenant of a new landlord.’” Id. at *1 n. 5 (quoting Black’s Law Dictionary,
147 (9th ed. 2009)).

3Green Tree Serv., 2011 WL 3802800 at *1

411 U.S.C. § 365(h)(1)(A) provides in pertinent part:

If the trustee rejects an unexpired lease of real property under which the debtor is the lessor and –

(i) if the rejection by the trustee amounts to such a breach as would entitle the lessee to treat such lease as terminated by virtue of its terms, applicable nonbankruptcy law, or any agreement made by the lessee, then the lessee under such lease may treat such lease as terminated by the rejection . . .

5 See Green Tree Serv., 2011 WL 3802800 at *1.
6 Id. at *2 (citation omitted).
7 Id. at *3.
8 Id. at *3.
9 Id.
10Id.

©2011 Greenberg Traurig, LLP. All rights reserved.

Mortgage Industry to Face Centralized Repository for State Regulatory Enforcement Actions – Deadline for Comments is September 20, 2011

Posted in the National Law Review an article by attorney  Thomas J. McKee, Jr., Gil Rudolph and Michael R. Sklaire of Greenberg Traurig, LLP regarding State Regulatory Registry LLC (SRR);

 

 

Deadline for Comments is September 20, 2011

On July 22, 2011, the State Regulatory Registry LLC (SRR) issued a Request for Public Comments on a proposal to collect, centralize and publish all state regulatory enforcement information concerning mortgage loan originators. By creating a central source of investigation information, the SRR aims to provide a repository of background information for both consumers and other state and federal regulators. Before implementing, the SRR has asked for public comments to be submitted by September 20, 2011.

In 2008, the Nationwide Mortgage Licensing System & Registry (NMLS) was created under the federal Secure and Fair Enforcement for Mortgage Licensing Act (“SAFE Act”), with the purpose of “provid[ing] consumers with accessible information . . . regarding the employment history of, and publicly adjudicated disciplinary and enforcement actions against loan originators.” 12 U.S.C.A. § 5101(7). As part of implementing this purpose, the NMLS intended to use the SRR as the vehicle through which to include all regulatory actions taken by state regulators against companies and individuals that could be gathered and published. Previously, actions by state regulators could only be found, if at all, through a search of the individual state regulators’ websites.

The proposal to incorporate state regulatory reporting into the NMLS, which would take effect in Spring of 2012, consists of twelve major policies and processes, which include, among others:

  1. The state agency that took the action will be responsible for inputting such information into the NMLS. The SRR will not verify, validate, or amend any of the enforcement actions, as such information can only be changed by the inputting agency.
  2. Whether an action will actually be included in the NMLS can vary from state to state, depending on state-specific statutes and regulations. Further, each state will determine which actions will be shared only with other regulators, and those that will be made available to the general public.
  3. Reported actions will not be limited to those actions that are public. Instead, a regulator will have the ability, at their discretion, to include information that is to be shared only among regulators or among agency employees.
  4. A recommendation that any postings be made within five (5) days of receipt of a state agency’s final order.
  5. Provide a standardized set of information to be posted, including, for example, (a) the enforcing agency, (b) a description of the Order, and (c) the amount of any fine or other penalty.
  6. The SRR recommends that actions taken against companies should be posted on a prospective basis, while actions taken against loan originators should be posted as of the date each state’s SAFE Act became effective.
  7. All respondents named in an action will be included in any reporting, and the action will be tied to the records of both the named company and/or individuals.
  8. A company or individual will be notified of any posting in the system and will be able to view any publicly posted actions against it in the NMLS. The SRR proposal does not, however, contain a mechanism for a company or individual to learn of the non-public postings against it.
  9. State regulators will have the ability to post multi-state actions through NMLS. Each state involved in such an action is responsible for posting the action pursuant to its own reporting policies.

At first glance, the proposed registry presents a number of benefits to companies. For example, by having a central repository for all state regulatory actions, companies will have easy, up-to-date, access to the types of enforcement actions being pursued across the country, including the resulting fines and penalties assessed. Such information can be invaluable when defending an enforcement action and evaluating settlement proposals with state agencies. Companies will be able to see enforcement trends and use such information to modify their practices. The new system will greatly simplify a company’s ability to learn from the conduct of others.

Such benefits, however, do not come without a host of potential drawbacks. Specifically, while the system seeks to compile standard information regarding enforcement actions, it does not set forth a standard for reporting. Instead, its reliance upon individual state standards for reporting could lead to competitive disadvantages where, despite identical conduct, one company is tagged with a report while another is not solely due to a difference in state reporting standards.

The discretion given to regulators under the system could have similar effects. Giving regulators the discretion to input information (including non-adjudicated information) that will only be shared among regulators or agency employees could result in information being shared without verification, accountability, or opportunity to cure. Successfully defending an enforcement action would not necessarily preclude the sharing of negative comments about a company on the system. Companies will not be privy to such secret, albeit formalized, statements that could be prejudicial to how such entities are viewed and/or treated by other regulatory agencies. Nevertheless, the repository could be a potential treasure trove of information for future plaintiffs and will certainly be a frequent target of discovery in lawsuits.

Companies should carefully examine the potential ramifications each of the proposed policies may have on their business.

©2011 Greenberg Traurig, LLP. All rights reserved.

The Truth about Clean Energy Jobs

Recently posted in the National Law Review an article by U.S. Department of Energy in response to The Washington Post’s assertions  about the Department of Energy’s loan programs:

The Washington Post’s assertions today about the Department of Energy’s loan programs are both incomplete and inaccurate.

Here are the facts: over the past two years, the Department of Energy’s Loan Program has supported a robust, diverse portfolio of more than 40 projects that are investing in pioneering companies as we work to regain American leadership in the global race for clean energy jobs. These projects include major advances for our renewable power industry including the world’s largest wind farm, several of the world’s largest solar generation facilities, and one of the country’s first commercial-scale cellulosic ethanol plants. Collectively, the projects plan to employ more than 60,000 Americans, create tens of thousands more indirect jobs, provide clean electricity to power three million homes, and save more than 300 million gallons of gasoline a year, all while investing in American competitiveness. What matters to the men and women who have those jobs is that the investments that this Administration is making are helping to keep factories open and running.

When the Washington Post claims that the program has created 3,500 jobs, here is what the reporters are excluding:

  • 33,000 American auto jobs saved at Ford. The Post article does acknowledge that the program enabled Ford to modernize its factories to produce more fuel efficient vehicles, which a Ford spokeswoman credits for “helping retain the 33,000 jobs by ensuring our employees can build the fuel-efficient cars people want to drive.”
  • More than 7,300 construction jobs. Many of the projects funded by the program are wind and solar power plants, which create significant numbers of construction jobs but once built can be operated inexpensively without a large workforce. But the Washington Post chose to ignore all of those jobs. If a community built a new highway or a bridge that employed 200 workers directly during construction – and many more in the supply chain — and that also strengthened the local economy by making it faster to transport goods, would anyone say that the project created zero jobs?
  • Supply chain jobs. While these jobs aren’t reflected in official government estimates because of the difficulty in obtaining a precisely accurate count, that doesn’t mean they don’t exist. When a company spends $100 million or $200 million building a wind farm or a solar power plant, most of that economic value actually goes into the supply chain – creating huge manufacturing opportunities for the United States.

In fact, when you look at the Washington Post’s graphic, you can see that the program has already created or saved roughly 44,000 jobs.  Many of the projects it has funded are just getting going, and many of the loans won’t even go out the door until the next few weeks. Others have not ramped fully up to scale. But we are on pace to achieve more than 60,000 direct jobs – and many more in the supply chain.

Here’s a simple example:

Last year, the Department awarded a loan guarantee to build the Kahuku wind farm in Hawaii. It employed 200 workers during construction. Those wind turbines were built in Cedar Rapids, Iowa. The project also features a state of the art energy storage system supplied by a company in Texas. The supply chain reached 104 U.S. businesses in 21 states. But by the Washington Post’s count, none of those jobs – not even the 200 direct construction jobs – should count.

What’s critically important and completely ignored by the Washington Post, is that the value of this program can’t be measured in operating jobs alone. The investments are helping to build a new clean energy industry here in America. We are now on pace to double renewable energy generation from wind and solar from the time the President took office. Yet we are still in danger of falling behind China and other nations that are competing aggressively for leadership in these technologies. This is a race we can and will win, but only if we make these investments today. These investments will pay dividends not just in today’s jobs but in entire industries and supply chains – and in cleaner air and water for our children and grandchildren.

One of the goals of the program is to create projects that will encourage the private sector to take the financing risk on other, similar projects on its own. If we can show, for example, that a commercial scale cellulosic biofuel plant in Iowa can succeed, the private sector will likely finance many more of them around the country.

America’s economic strength has been built on technological leadership. The next great technological revolution is the clean energy revolution, and this Administration is committed to making sure that America will continue to lead the world.

Department of Energy – © Copyright 2011

NYC Condo Refinance Collapses Because There Was No "Meeting of the Minds"

Recently posted in the National Law Review an article by Eric S. O’Connor of Sheppard Mullin Richter & Hampton LLP wherein  plaintiffs sought damages arising out of their attempt to refinance a mortgage loan with the defendant bank:

In Trief v. Wells Fargo Bank, N.A., Index No. 105280/09, — N.Y.S.2d — (Sup Ct, NY County, Apr. 4, 2011) (“Trief”), the plaintiffs sought damages arising out of their attempt to refinance a mortgage loan with the defendant bank (the “Bank”), for breach of contract and violation of New York’s Unfair and Deceptive Practices Act, N.Y. General Business Law (“NYGBL”) § 349. Justice Charles Edward Ramos granted the Bank’s motion for summary judgment on both counts. The parties actually proceeded to closing when plaintiff walked away from the refinancing of a luxury midtown condominium located at 15 West 53rd Street, New York, NY – seemingly over a $518.75 dispute.

The main lesson is that all parties, especially when communicating via more informal modes of communications like email, must clarify and confirm an “agreement on all essential terms” or else a valid contract will not be formed.

The facts – negotiation, informal communications, the exchange of standard loan forms, etc… – follow a seemingly common pattern. A mortgage consultant from the Bank filled out the refinance application on the Triefs’ behalf by telephone and then sent an e-mail attaching a Good Faith Estimate of Settlement Charges (the “GFE”). The GFE proposed a 5.125% interest rate and a standard provision indicating that the “fees listed are estimated – the actual charges may be more or less.” The cover email asked to “let me know if you would like me to lock you in for 60 days”, which Mr. Trief responded “sure.” After a small dispute about the rate, the Bank faxed a Conventional Commitment Letter (the “Letter”) to the Triefs confirming the rate and other details. Despite language in the Letter that “You must sign and return this commitment letter within that period to ensure receiving the terms specified”, neither party signed the Letter. At the scheduled closing, the Triefs refused to proceed because the Bank sought to charge them a rate lock extension fee of $518.75, which the Triefs claim was never negotiated or agreed to.

The main issue was whether a contract was formed. The Court explained the classic rules that a plaintiff must establish an offer, acceptance of the offer, consideration, mutual assent, and an intent to be bound. Kowalchuk v. Stroup, 61 A.D.3d 118, 121 (1st Dept 2009).  Mutual assent means a “meeting of the minds” and must include agreement on all essential terms. Id. The Court held that there was not a meeting of the minds on all of the essential terms of a final contract for refinancing. The two key pieces of evidence – the email from the Bank asking to “let me know if you would like me to lock you in for 60 days” and the standard GFE language that terms were subject to change – were only seeking an acceptance to lock in the rate for a fixed period of time, rather than a final agreement to refinance. Further, the Real Estate Settlement Procedure Act(“RESPA”) shows that the legislature did not intend for the GFE to bind a lender to a final loan agreement. See 24 CFR § 3500.7 [a], [g] (the “GFE is not a loan commitment. Nothing in this section shall be interpreted to require a loan originator to make a loan to a particular borrower.”).

Finally, the Court also rejected the Triefs claim under NYGBL § 349. A claim for violation of GBL § 349 is based upon consumer-oriented conduct that is materially misleading, causing a plaintiff injury. The Court held that the Triefs failed to even identify consumer-oriented conduct on the part of the Bank because private contract disputes, unique to the parties, generally do not fall within the scope of the statute. The Triefs failed to demonstrate injury because they refused to close on the loan refinancing and did not pay any fees to the Bank.
Copyright © 2011, Sheppard Mullin Richter & Hampton LLP.

Avoid Unnecessary Real Property Taxes

Recently posted in the National Law Review an article by Richard B. Tranter and Sarah Sparks Herron of Dinsmore & Shohl LLP regarding valuation pitfalls involved with the purchase of an on-going business that owns real estate.

When Buying an On-Going Business that Includes Real Estate in Ohio

Beware the valuation pitfalls involved with the purchase of an on-going business that owns real estate. A buyer can accidentally cause its real property taxes on the newly purchased property to increase dramatically if it fails to allocate values properly between personal property and real property. Fortunately, a few preventative measures can be taken at the closing to prevent an unnecessary real property tax increase and litigation.

Imagine the following scenario: Company ABC decides to buy a hotel. The purchase includes the real estate on which the hotel is located, the personal property, including the furniture, fixtures and equipment (“FF&E”) within the hotel, and the goodwill associated with the hotel franchise. The purchase price for everything is $3,600,000. Neither the purchase agreement nor the settlement statement allocates this purchase price between the real estate, FF&E and goodwill. After the closing, a title agent goes to record the deed for the real estate at the local recorder’s office. The agent is asked to fill out a “Real Property Conveyance Fee Statement of Value and Receipt” (a/k/a “Conveyance Fee Statement”). The agent fills-in the purchase price as the consideration for the real property. Shortly thereafter, Company ABC receives a notice that the County Auditor will be increasing the value of the real property to reflect the $3.6 million purchase price, and the real property taxes will be going up to reflect this new, higher value. Company ABC objects because the $3.6 million price reflects the combined value of the real property, FF&E and goodwill. Now, to challenge the property valuation, Company ABC must file a complaint with the county board of revision and prove that the purchase price, as stated on the Conveyance Fee Statement, does not reflect the fair market value of the real property.

This is exactly what happened in a recent Ohio Supreme Court case, Hilliard City Schools Bd. of Educ. v. Franklin Cty. Bd. of Rev., 128 Ohio St.3d 565, 2011-Ohio-2258, 949 N.E.2d 1. The buyer in that case, K.D.M. and Associates, L.L.C. (“KDM”), purchased an 80-room, fully operating hotel for $3,600,000. Shortly thereafter, the Franklin County Auditor increased the value of the real property from $2,240,000 to $3,550,000. KDM filed a complaint, and the Franklin County Board of Revision reduced the real property value by $800,000 for FF&E, $60,000 for inventory, and $500,000 for goodwill for a final real property valuation of $2,240,000. The local school board appealed to the Board of Tax Appeals (“BTA”), which disallowed the $500,000 allocation to goodwill and the $60,000 allocated to inventory. Thus, the BTA concluded that the value of the real estate was $2,750,000. On appeals by both KDM and the school board, the Supreme Court valued the real estate even higher. The Court decreased the deduction for FF&E from $800,000 to $280,000. In addition, the Court refused to permit the deduction of $500,000 for goodwill. Thus, approximately six years after the plaintiff purchased an operating hotel for $3,600,000, the Ohio Supreme Court determined that the value of the real estate involved was $3,320,000.

What could KDM have done to avoid years of litigation and an additional $1.1 million in real property tax value? First, KDM could have completely filled out the Conveyance Fee Statement. Section 8(E) of this form asks what portion, if any, of the total consideration paid was for items other than real property. After every sale, the auditor will evaluate whether to increase or decrease the property’s valuation. This determination is made, in part, based on the Conveyance Fee Statement. If the new property owner allocates the purchase price on the Conveyance Fee Statement and the auditor accepts the allocation at this stage, then the new property owner does not have to challenge the auditor’s valuation. Further, if the local school board challenges the property valuation, the school board has the burden of proving a higher valuation. Thus, a fully completed Conveyance Fee Statement can head-off potential valuation disputes.

Second, KDM could have documented the allocation between real property, FF&E and goodwill in the closing documents. Notably, the settlement statement for the hotel purchase did not provide an allocation to personal property. In addition, the bill of sale for personal property was incomplete. The bill included “inventory, equipment, fixtures, assets used by seller in the business in the attached ‘Exhibit A’”, but there was no Exhibit A, nor any value assigned to that property. Thus, KDM had little evidence from the closing to support its conclusion that $800,000 of the purchase price was for FF&E, $60,000 was for inventory, and $500,000 was for goodwill.

The Supreme Court ultimately concluded that the FF&E was worth $280,000 based on a financing appraisal conducted in anticipation of the purchase. The Court pragmatically concluded that an operating hotel clearly included personal property, and this personal property clearly had value to be allocated as part of the purchase price. Thus, the Court rejected the school board’s argument that the sale price, as set forth in the Conveyance Fee Statement, reflected the fair market value of the real property. The Court, however, rejected KDM’s representatives’ testimony about the value of the FF&E and rejected an unauthenticated, 2005 year-end financial statement showing FF&E of $800,000. With no allocation on the Conveyance Fee Statement or in the closing documents, the best evidence available to the Court was the financing appraisal which presented an estimation of value relied upon by KDM’s lender at the time of the sale. The Court utilized such appraisal evidence.

In conclusion, the purchase of an on-going business can have multiple moving parts. If you are contemplating a purchase that includes real estate, remember to document the purchase price allocation between real and personal property in both the Conveyance Fee Statement and closing documents. These simple steps can avoid unnecessary real property taxes and litigation.

© 2011 Dinsmore & Shohl LLP. All rights reserved.

Wisconsin Supreme Court Delivers Win for Hospital Systems with Offsite Facilities

Posted on August 10, 2011 in the National Law Review an article by Craig J. Johnson, Kate L. Bechen, David J. Hanson and Robert L. Gordon   of Michael Best & Friedrich LLP regarding  a major victory for hospital systems with offsite outpatient facilities in Wisconsin.

Last month the Wisconsin Supreme Court provided a major victory for hospital systems with offsite outpatient facilities. Its decision in Covenant Health Care, Inc. v. City of Wauwatosa (2011 WI 80) reversed a Court of Appeals decision and held that an outpatient clinic owned by St. Joseph Hospital (the “Clinic”) constituted property used for the purposes of a hospital under Wis. Stat. § 70.11(4m)(a). As a result, Covenant Healthcare System, Inc., the sole member of St. Joseph Hospital and the owner of the real property on which the Clinic stands, was entitled to a refund of real property taxes paid on the Clinic’s property.

Background

Wisconsin. Stat. § 70.11(4m)(a) excludes from taxation real property used exclusively for the purposes of any nonprofit hospital. The statute specifies that the exemption does not extend to property that is used for commercial purposes or as a doctor’s office, or the earnings from which inure to the benefit of a member.

The Clinic is a five-story building located approximately five miles from St. Joseph Hospital.  Two of the Clinic’s floors are leased to medical providers as office space. The remaining three floors are used to provide outpatient services and include an Urgent Care Center that is open 24 hours a day, seven days a week and is capable of treating all levels of emergency room care, which generally limits its treatment of serious cases to the extent of stabilizing a patient for transport to a different medical facility.

The City of Wauwatosa took the position that the Clinic was in fact a doctor’s office and, therefore, assessed real property taxes on the Clinic. Covenant challenged this assessment as it applied to the Clinic’s three floors that were not used as office space for medical providers.  The Circuit Court ruled in favor of Covenant but the Court of Appeals reversed, holding that the Clinic was a doctor’s office. The Wisconsin Supreme Court reversed the Court of Appeals, ruling in favor of Covenant.

Ruling

The City of Wauwatosa maintained its position that the Clinic was a doctor’s office. The City also took the alternative positions that the Clinic was used for commercial purposes and that the property’s earnings inure to the benefit of Covenant. The Wisconsin Supreme Court held that Covenant had satisfied its burden of proving that each of the City’s assertions was incorrect.

Doctor’s Office

The Wisconsin Supreme Court considered seven factors that were previously laid out by the Wisconsin Court of Appeals in 1997 in St. Clare Hospital v. City of Monroe, which also considered whether a health care facility constituted a doctor’s office. The Supreme Court concluded that five of those factors weighed against the Clinic being considered a doctor’s office, and the remaining two were not determinative.

The five factors which persuaded the Supreme Court that the Clinic was not a doctor’s office were: (1) physicians practicing at the Clinic do not receive variable compensation related to the extent of their services; (2) Clinic physicians do not receive extra compensation for overseeing non-physician staff; (3) the Clinic’s bills are generated on the same software system as those of St. Joseph Hospital; (4) Clinic physicians do not have their own offices at the Clinic but instead have access to communal cubicle space; and (5) Clinic physicians do not own or lease the building or any equipment at the Clinic.

The two remaining St. Clare factors that weighed in favor of the Clinic being a doctor’s office were (1) the Clinic does not provide inpatient services and (2) most patients are seen at the Clinic by appointment and during regular business hours. However, the Court pointed out that advances in technology have allowed for more procedures to be performed on an outpatient basis than when St. Clare was decided. In addition, St. Joseph Hospital (as well as several other large area hospitals) has an outpatient clinic on its hospital grounds.  This hospital-based outpatient center has never jeopardized the tax exemption of St. Joseph Hospital despite only seeing patients by appointment during regular business hours. Therefore, the Court did not weigh either of these factors as significant in reaching its conclusion that the Clinic is not a doctor’s office.

Commercial Purposes

The Court interpreted the statutory prohibition against commercial purposes as being a prohibition against a facility having profit as its primary aim. In determining that the Clinic did not have profit as its primary aim, the Court cited the Clinic’s business plan as listing several goals beyond increasing profit margin, including promoting a greater faith-based health care presence. Further, the Court found that the Clinic serves a greater portion of Medicare and Medicaid patients than other Milwaukee and Wisconsin hospitals, indicating to the Court a focus other than profit.

Private Inurement

Finally, the Court determined that the language of the statutory prohibition against private inurement to any member does not contemplate a not-for-profit member of a nonprofit corporation. According to the Court, interpreting the statute to penalize Covenant’s corporate structure would be an unreasonable construction, and would end up requiring a nonprofit corporation to distribute its assets upon dissolution to unrelated nonprofit entities, rather than its actual member(s), in order to qualify for property tax exemption.

Conclusion

The earlier Court of Appeals decision in this case called into question the property tax exemptions of nonprofit hospital systems with offsite facilities. The reversal by the Wisconsin Supreme Court has provided some reassurance to Wisconsin’s hospital systems. Although the decision was based on facts unique to the Clinic and did not set bright line standards going forward, the Court confirmed that offsite hospital facilities can qualify as exempt under Wis. Stat. § 70.11(4m)(a), and provided guidance on what types of facts and organizational structures will be considered to qualify an offsite facility for exemption.

© MICHAEL BEST & FRIEDRICH LLP

The New Wave of Insurance Construction Defects? Four States Enact Statutes Favoring Coverage for Faulty Workmanship

Recently posted in the National Law Review an article by Clifford J. Shapiro and Kenneth M. Gorenberg of Barnes & Thornburg LLP about whether construction defects are covered by commercial general liability (“CGL”) insurance policies and briefly discuss four new statutes in various states.

 

 

Courts across the country remain split on the issue of whether claims alleging construction defects are covered by commercial general liability (“CGL”) insurance policies. The primary battle ground has been whether such claims involve an accidental “occurrence” within the meaning of the CGL policy coverage grant. Now this issue is getting substantial attention from state legislatures. Four states recently enacted new legislation addressing insurance coverage for construction defect claims, and each statute favors coverage,albeit in different ways and to varying degrees. These statutes signal that the battle over whether construction defects constitute an “occurrence” may have shifted from the courts to state legislatures. The four new statutes are discussed briefly below.

Colorado

Section 13-20-808 of the Colorado Code, effective May 21, 2010, creates a presumption that a construction defect is an accident, and therefore an “occurrence” within the meaning of the standard CGL insurance policy. To rebut this statutory presumption, an insurer must demonstrate by a preponderance of the evidence that the property damage at issue was intended and expected by the insured. The statute expressly does not require coverage for damage to an insured’s own work unless otherwise provided in the policy, leaving that potentially to be decided by Colorado’s courts. In addition, the act does not address or change any policy exclusions, the scope of which will also remain an issue possibly to be determined in court. Thus, it appears that the Colorado statute resolves in favor of coverage that construction defect claims give rise to an accidental “occurrence” under the CGL policy coverage grant, but leaves most other insurance issues affecting coverage in the construction defect context subject to further attention by the courts.

Hawaii

Chapter 431, Article 1 of the Hawaii Revised Statutes provides that “the term ‘occurrence’ shall be construed in accordance with the law as it existed at the time that the insurance policy was issued.” The statute does not declare what the “the law” is now or what “the law” was at any time in the past. However, the preamble explains that the appellate court decision in Group Builders, Inc. v. Admiral Ins. Co., 231 P.3d 67 (Hawaii 2010) “invalidates insurance coverage that was understood to exist and that was already paid for by construction professionals,” and that the purpose of the statute is to restore the coverage that was denied. While not necessarily clear from the appellate court decision, coverage arguably was denied for both defects in the insured’s own work and also consequential property damage caused by faulty workmanship.

Thus, it appears that the legislature’s intent was to allow insurers to deny coverage under policies issued after May 19, 2010 to the extent permitted by the courts based on Group Builders and whatever further judicial decisions may follow, but to require application of the more favorable judicial interpretations of coverage for construction defects that the Hawaii legislature believes existed before that time. In other words, the Hawaii statute appears to be an attempt to preserve more favorable treatment of coverage for construction defect claims for projects currently underway which were insured under policies issued before Group Builders was decided.

This approach, of course, still leaves it to the courts to interpret the applicable law with respect to any particular claim (i.e., the law that existed at the time the policy was issued). But we cannot help but think that the Hawaii courts may be influenced going forward to find more readily in favor of coverage due, at least in part, to the part of the preamble to the legislation that states: “Prior to the Group Builders decision … construction professionals entered into and paid for insurance contracts under the reasonable, good-faith understanding that bodily injury and property damage resulting from construction defects would be covered under the insurance policy. It was on that premise that general liability insurance was purchased.”

Arkansas

Arkansas Code Section 23-79-155 (enacted on March 23, 2011) requires CGL policies offered for sale in Arkansas to contain a definition of occurrence that includes “property damage or bodily injury resulting from faulty workmanship.”It is unclear whether this requirement applies to policies previously issued. The act also states that it does not limit the nature or types of exclusions that an insurer may include in a CGL policy. Thus, the numerous exclusions related to construction defect claims contained in the typical CGL insurance policy are not affected by the Arkansas statute, and the judicial decisions that have interpreted those exclusions presumably remain good law.

South Carolina

Enacted on May 17, 2011, South Carolina Code Section 38-61-70 provides that CGL policies shall contain or be deemed to contain a definition of occurrence that includes property damage or bodily injury resulting from faulty workmanship, exclusive of the faulty workmanship itself. However, whether the South Carolina statute will change the law in South Carolina is unclear because the statute was immediately challenged in court. On May 23, 2011, Harleysville Mutual Insurance Company filed a complaint in the South Carolina Supreme Court seeking injunctive relief and a declaration that the new statute violates several provisions of the U.S. and South Carolina constitutions, particularly with respect to existing insurance policies at issue in pending litigation.

Conclusion

The new state statutes are intended to overrule, at least to some extent, judicial decisions that denied insurance coverage for construction defect claims. The thrust of these statues is to require construction defects to be treated as an accidental “occurrence” within the meaning of the CGL insurance policy. As such, the legislation generally should make it easier for policyholders in the affected states to establish at least the existence of potential coverage for a construction defect claim, and thereby more easily trigger the insurance company’s duty to provide a defense. Whether these statutes will also result in increased indemnity coverage for construction defect claims, however, remains to be seen. Among other things, the statutes generally do not alter the exclusions that already apply to construction defect claims, and they leave the interpretation of the meaning of these exclusions to the courts.

In short, while this new wave of statutes increases the complexity and divergence among the states of this already fractured area of the law, they also appear to increase the likelihood of insurance coverage for construction defect claims in Colorado, Hawaii, Arkansas and South Carolina.

© 2011 BARNES & THORNBURG LLP

EPA and Corps Issue Draft Guidance on Waterways and Wetlands That Fall Under Federal Jurisdiction as Part of Obama Administration’s Just Released Clean Water Framework

Recently posted by Linda H. Bochert of  Michael Best & Friedrich LLP – details about the recent draft guidance issued about when a wetland is subject to federal jurisdiction: 

Five years after the US Supreme Court issued the decision that was supposed to – but didn’t – clarify when a wetland is subject to federal jurisdiction, the United States Environmental Protection Agency (“EPA”) and Army Corps of Engineers (“Corps”) are seeking public comment on draft guidance intended to explain how such decisions are to be made.

The Draft Guidance on Federal Jurisdiction

On April 27, 2011, EPA and the Corps issued “Draft Guidance on Identifying Waters Protected by the Clean Water Act” (“Draft Guidance”). The Draft Guidance interprets two key Supreme Court decisions, often referred to as Rapanos and SWANCC. Rapanos is the 2006 Supreme Court decision in the consolidated cases of Rapanos v. United States and Carabell v. United States Army Corps of Engineers, 547 UW 715 (2006); SWANCC is the 2001 Supreme Court decision in Solid Waste Agency of Northern Cook County v. Army Corps of Engineers, 531 U.S. 159 (2001). The Draft Guidance addresses both wetlands and waterbodies and is limited to whether the federal Clean Water Act applies; it does not determine what state laws or regulations might apply.

After years of confusion, the 2006 decision in Rapanos was widely anticipated to provide a clear test for when a wetland is subject to federal jurisdiction. It failed to do so. The court split three ways, with no point of view supported by a majority of the justices. The prevailing view since Rapanos has been that a wetland is subject to federal jurisdiction if it satisfies either of two tests:  1) the wetland must be immediately adjacent to a navigable body of water that has a relatively permanent flow; or 2) there is a “significant nexus” between the wetland and a body of water that was, is, or could be made navigable. But stating the tests and applying them are two different things – and application of that two-part test has been anything but clear-cut.  For more on Rapanos andSWANCC, see our June 29, 2006 Client Alert: Wetlands and Water Bodies Must Have “Significant Nexus” with a Navigable Water to Fall Under the Jurisdiction of the Clean Water Act.

The EPA and the Corps are taking another run at it. The Draft Guidance is carefully described as “consistent with Supreme Court decisions and existing agency regulations” – presumably to combat anticipated criticism that it either overreaches or underreaches the current state of the law, although the critics have already begun to weigh in. 

Under the Draft Guidance, federal jurisdiction would apply to wetlands that:

  • are adjacent to either traditional navigable waters or interstate waters
  • directly abut relatively permanent waters
  • are adjacent to jurisdictional tributaries to traditional navigable waters or interstate waters if there is a “significant nexus”

    And federal jurisdiction would apply to waterbodies that are:

  • traditional navigable waterbodies
  • interstate waterbodies
  • non-navigable tributaries to traditional navigable waters that are relatively permanent (contain water at least seasonally)
  • tributaries to traditional navigable waters or interstate waters if there is a “significant nexus”
  • in the category of “other waters” – including some that are physically proximate to other jurisdictional waters and some that are not, based on fact specific circumstancesFollowing the 60-day public comment period, EPA and the Corps intend to finalize the Guidance and then initiate formal rulemaking.  The message of that process is that the agencies want to identify as much of the anticipated controversy about their interpretation as possible before drafting a federal regulation implementing that interpretation.

    Effect in Wisconsin

    Implementation of the Draft Guidance is not likely to have a significant impact in Wisconsin.   As far as waterbodies are concerned, Wisconsin has historically taken a broad view of navigability for purposes of state jurisdiction.  With respect to wetlands, as explained in our June 2006 Client Alert following the SWANCC decision the Wisconsin Legislature extended the jurisdiction of the Wisconsin Department of Natural Resources (“WDNR”) to include “nonfederal wetlands”.  Wis. Stat. §. 281.36(1m). Thus, a nonfederal wetland may still be subject to state water quality standards and permit requirements implemented by WDNR, even if it does not come within federal jurisdiction under the Clean Water Act. 

    The Clean Water Framework

    The Draft Guidance is part of the Obama Administration’s national Clean Water Framework also released on April 27, 2011. The Clean Water Framework “recognizes the importance of clean water and healthy watersheds to our economy, environment and communities” and is composed of the following initiatives:

    • promoting innovative partnerships
    • enhancing communities and economies by restoring important water bodies
    • innovating for more water-efficient communities
    • ensuring clean water to protect public health
    • enhancing use and enjoyment of our waters
    • updating the nation’s water policies – this initiative includes the Draft Guidance
    • supporting science to solve water problems

     

    © MICHAEL BEST & FRIEDRICH LLP