Protecting Individual Wealth in New York with Prenuptial Agreements

Prior to 1980, New York's statutory regime for the distribution of property at divorce was a simple one.  The property in question was awarded to whichever spouse held title to it.  Given that women had recently begun entering the labor force as a result of the feminist movement, few women had accumulated much wealth before marriage or even after marriage.  Most husbands still held title to the property shared by the couple.  More often than not, the title system of property division at divorce left the wife in financially difficult circumstances.  A wife could be awarded alimony, but courts were reluctant to do so.  Thus divorced women easily slipped into poverty, at times becoming wards of the State.

Then in 1979 the United States Supreme Court in Orr v. Orr (440 U.S. 278 (1979)) declared that divorce laws that only provided alimony for wives and not husbands were unconstitutional because these laws violated the Equal Protection Clause of the Fourteenth Amendment.  The New York law was thus unconstitutional under Orr, and the State legislature was pressured to act to reform New York's divorce law.

The enactment of Domestic Relations section 236 part B, known as the equitable distribution law, was the result of the redrafted law.  Equitable distribution means that a court can look at the totality of the marital assets acquired jointly or separately during the marriage and divide them fairly between the spouses.  In practice and under the law, this means that no two marriages are alike.  Under equitable distribution, the goal is fairness and judges have latitude and discretion to assess each spouse's economic and non-economic contributions to the marriage.  

In New York, marriage is viewed by the courts as an economic partnership and not solely as a sacred bond.  The judge determines the dollar value of a spouse's non-economic activities, such as housework and child-rearing, and then adds that figure to the totality of the assets to be divided equitably.  Equitable distribution replaces alimony in New York.  Thus, a spouse’s post-marriage economic welfare often depends upon the size of the equitable distribution award.

Since the passage of New York’s equitable distribution law in 1980, an individual’s ability to earn a living and to create wealth prior to marriage has vastly increased.  Women and men are earning college and professional degrees in increasing numbers.  Career and professional women are also delaying marriage and child-bearing, factors that contribute to wealth-building.   Both men and women are saving for retirement in their own savings vehicles.  

As a result, each person's personal wealth acquired prior to a marriage may need to be protected in case of a termination event (divorce, separation, and death).  It is possible that one spouse entering a marriage may have substantially more assets than the other spouse and that one person’s ability to earn money may far outstrip the wage-earning capacity of his/her spouse after the marriage.  Should the couple divorce at a later time, absent a prenuptial agreement the court under equitable distribution will look to the couple’s standard of living during the marriage, among other things.

In order to be valid, each person engages separate legal representation so that the prenuptial agreement can be negotiated at arms length, as with any contract negotiation.  In addition, each party must fully disclose all assets and liabilities.   Like any other contract, it must be a signed writing that clearly states that the parties understand and intend to circumvent equitable distribution.

Therefore, a couple about to enter marriage and wishing to protect their separate future earnings and capital investments from equitable distribution in the event of a divorce or separation may want to budget for the legal fees associated with the drafting of a prenuptial agreement.  

If you would like to discuss your own personal situation with me, or put together a prenuptial agreement that is tailored for your needs, you can get a free 30-minute consultation simply by filling out this contact form. I will get back to you promptly.

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Costly Drafting Errors and the Rule Against Perpetuities: The Case of Symphony Space

There's a saying in New York that every building tells a story.  In the case of Symphony Space, that story is a fascinating legal story with an unforgettable lesson.  Symphony Space is a cultural landmark on New York's Upper West Side, located on Broadway and 95th Street.  I walk by it every day.  And yet I did not know its legal story until I was doing some research recently on New York's Rule Against Perpetuities contained in EPTL § 9-1.1(b).

Simply stated, the Rule Against Perpetuities (RAP) works this way: "No interest is good unless it must vest, if at all, no later than twenty-one years after some life in being at the creation of the interest" (John Chipman Gray, The Rule Against Perpetutities § 201 at 191 [4th ed. 1942]).

At one time, Symphony Space's theater and commercial space was owned by Broadwest Realty Corporation.  Broadwest also owned Pomander Walk and a commercial building, the Healy Building, named after nightclub impresario Thomas J. Healy who had built Pomander Walk in 1921.  Pomander Walk was granted landmark status by New York City in 1982.

In 1978, the New York real estate market was experiencing a severe downturn.  Broadwest needed to sell its properties, but was looking for a way to postpone a final sale of it properties until the market conditions were more favorable.   Broadwest set about looking for a short-term solution to its economic problems by looking for a buyer for its theater and commercial space.

Symphony Space, Inc, a non-profit arts organization, became the perfect candidate for two reasons.  First, the organization had an immediate need for the theater space.  Secondly, and equally important for Broadwest, Symphony Space's non-profit status meant that the entire building -- the theater and the commercial space -- would benefit from a property tax exemption. 

So in 1978 Symphony Space purchased the building housing the theater and the commercial space from Broadwest for $10,010.  The deal included the following parts.  Broadwest would continue to pay the $243,000 mortgage on the property.  Symphony Space, Inc. would lease back the commercial space to Broadwest for $1 per year.  Because of Symphony Space's non-profit status, its use of the theater would grant a property tax exemption for the entire building, including the commercial space.  Finally, as a condition of the sale, Symphony Space granted Broadwest the option to repurchase the building in exchange for $10 consideration.

The option to repurchase the building granted to Broadwest by Symphony Space was a covenant running with the land, meaning that the option could be exercised by Broadwest and its heirs, successors and assigns.  The contract specified four exercise periods for the option:  "$15,000 if (...) on or before December 31, 1987; $20,000 if on or before December 31, 1993; $24,000 if on or before December 31, 1998; and $28,000 if on or before December 31, 2003."  Symphony Space, Inc. v. Pergola Properties, Inc., 669 N.E.2d 799, 801 (N.Y. 1996).

In 1981, Broadwest sold all of its interests, including the option to repurchase, to a nominee who then transferred to rights to Pergola Properties, Inc., Bradford N. Swett, Casandium Limited, and Darenth Consultants as tenants in common.  A year later, Pomander Walk received landmark status, thereby increasing the value of the entire block front to $27 million, assuming that the option to repurchase from Symphony Space was enforceable.  Without the enforceable option, the appraised value decreased to $5.5 million.  It thus became in the new owners' best interest to exercise the repurchase option.

Alleging that Symphony Space had defaulted on the mortgage, Swett served Symphony Space with notice in January 1985 that Swett was exercising the option to repurchase on behalf of all the defendants.  Symphony Space countered that the option agreement might be invalid and in March of 1985 Symphony Space began an action for a declaratory judgment against the defendants.  At issue was whether the option agreement violated New York's Rule Against Perpetuities.

In the case of the Broadwest repurchase option, it was created in 1978.  If RAP was applicable to option agreements, then the latest year during which the option could have been exercised would have been 1999.  Accordingly, if RAP applied, then only three exercise periods were legitimate.  The fourth option exercise period, on or before 31 December 2003,  was outside of the statutory period for RAP.  If RAP were applicable to commercial options, then the entire repurchase option with Symphony Space was invalid and unenforceable by the defendants.  Without a valid option, the value of their properties would decrease by around $21 million.

For the next eleven years, the case wound its way through the courts.  The trial court  ruled that RAP applied to commercial options, that the repurchase option in question violated RAP, and that Symphony Space was entitled to redeem the mortgage.  The defendants appealed and the Appellate Division certified the question to  the Court of Appeals, New York's highest court.  At issue was the novel question of whether options to purchase commercial property are exempt from RAP.

Citing Buffalo Seminary v. McCarthy (86 AD2d 435, affd 58 NY2d 867), the court ruled that RAP did indeed apply to commercial real estate options and that the New York State Legislature had intended for the prohibition against remote vesting to apply to commercial purchase options.  The reason for the legislature's prohibition against remote vesting was to encourage land use and development.

Moreover, the court cited the following defects with the purchase option.  First, the option involved the entire building, the theater and the commercial space, even though the defendants were leasing only the commercial space.  This created a disincentive for Symphony Space to invest in maintaining the property since the option holder would reap the benefit of its investments.  Secondly, the option was not drafted as part of the lease itself, but as a separate agreement.  The purchase option exceeded the term of the lease, meaning that under the terms of the option the defendants could force Symphony Space to sell them the property even though they were no longer tenants of the commercial space.

Nor could the "saving statute" (EPTL 9-1.3), a rule of construction meant to avoid frustrating the creator's intention "unless a contrary intention appears,"  be invoked in this case.  Here the plain language of the option rendered it unambiguous and thus not subject to a rule of construction.

In practical terms, a drafting error in the original repurchase option had neglected to take into account RAP.  During the time of their purchase from Broadwest, the defendants could have caught the error with a thorough legal review of the original documents.  These two failings combined had ultimately cost the defendants over $21 million.

If you would like to discuss your own personal situation with me, review your current legal life plan, or put together a legal life plan that is tailored for your needs, you can get a free 30-minute consultation simply by filling out this contact form. I will get back to you promptly.

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The Basquiat Estate: Trumping The Dead Man's Statute with The Federal Rules of Evidence?

Jean-Michel Basquiat was one of the most gifted artists of the late 20th century, raising graffiti art from its street roots to the pinnacle of fine art and in the process redefining Neo-Expressionism.  His untimely death from a drug overdose in 1988 stunned the art world.  He was 27 years old.  According to Phoebe Hoban in her book Basquiat:  A Quick Killing in Art, the auction house Christie's determined that the artist had left behind a prodigious collection of  917 drawings, 25 sketchbooks, 85 prints, and 171 paintings.

Basquiat died without a Will (intestate).  At the time of his death, his parents Gerard and Matilde were estranged, but not divorced.  New York's EPTL § 4-1.1 (a) (4) states that, where a person dies without a Will and is survived by one or both parents, the whole of the estate goes to the surviving parent or parents.  Gerard Basquiat began the long process of probating the estate, a process slowed by a number of lawsuits against the estate.  Matilde Basquiat died in November of 2008, leaving Gerard as the sole administrator of their son's valuable collection.

In 1993, an art dealer named Michelle Rosenfeld sued the Basquiat Estate for allegedly failing to deliver three paintings that had been purchased from Jean-Michel pursuant to a partly written and partly oral purchase agreement.   At trial, defense counsel for the Basquiat Estate affirmatively waived his objection based on New York's Dead Man's Statute (CPLR  § 4519) to Michelle Rosenfeld's testimony concerning her conversations with the deceased Basquiat.  This affirmative waiver came after the judge in the case said that he would instruct the jury about the Dead Man's Statute if Basquiat chose to invoke it.    Rosenfeld proceeded to testify about her conversations with Basquiat. 

Rosenfeld testified that she had met Jean-Michel Basquiat at his apartment on 25 October 1982.  She said that during their meeting, Jean-Michel had agreed to sell her three paintings, identified in her complaint, for $4,000 each.  Jean-Michel then asked her for a 10% deposit.  Rosenfeld returned ten days later with $1,000 in cash whereupon she asked for a receipt.  According to Rosenfeld, Jean-Michel then set upon writing a "contract" in crayon that identified the three paintings and recited the agreed-upon price and the deposit.  The dated document was signed by both Basquiat and Rosenfeld (Rosenfeld v. Basquiat, 78 F.3d 84).

That trial ended in a hung jury. Rosenfeld filed for a new trial in the United States District Court for the Southern District of New York.  In a pretrial conference, the parties were asked to brief the court regarding the threshold question as to the applicability of the Dead Man's Statute (Rosenfeld v. Basquiat, 866 F. Supp. 790; 1994 U.S. Dist. LEXIS 15662).  The court had to decide three preliminary questions:

"1. Does Basquiat's waiver of his objection based on CPLR 4519 at the first trial, allow Rosenfeld to testify about her transactions with the decedent at the retrial?

2. Is Rosenfeld entitled to a jury instruction concerning the effect of CPLR 4519, if I exclude her live testimony?
3. Is Rosenfeld's prior trial testimony admissible in evidence at the retrial?" Id. at 792.

The district court judge reasoned that the Federal Rules of Evidence (FRE) and specifically FRE 804(b)(1) governed hearsay, and not the Dead Man's Statute. FRE 804(b)(1) "provides that a declarant is 'unavailable'if 'exempted by ruling of the court on the ground of privilege from testifying concerning the subject matter of the declarant's statement.'"  Id. at 793.  As a result, the judge ruled that if Basquiat asserted the Dead Man's Statute, which the judge termed a "privilege" (FRE 804(a)(1)),  then Rosenfeld would become "unavailable" within the meaning of FRE 804(b)(1).  The judge would then admit Rosenfeld's prior testimony, and so instruct the jury.

At the second trial, the trial court allowed the reading of Rosenfeld's prior testimony from the first trial to the jury.  The jury found in Rosenfeld's favor:  "The jury in the second trial reached a verdict in favor of Rosenfeld, returning answers to special interrogatories as follows: Basquiat entered into a written agreement in October 1982 to sell the three paintings to Rosenfeld for $12,000; although there was no initial agreement establishing a delivery date, they made a separate oral agreement approximately ten days later setting the delivery date; a reasonable delivery date was October 1987; Rosenfeld first learned of the breach in August 1988, when Jean-Michel Basquiat died; and the market price of the three works at that time was $395,000." (Rosenfeld v. Basquiat, 78 F.3d 84).  The jury awarded Rosenfeld $384,000, the market value of the paintings minus the remainder of the purchase price, plus $217,301.92 in interest.  The Basquiat Estate appealed to the Second Circuit Court of Appeals.

The Second circuit Court of Appeals distinguished the hearsay exceptions under the Federal Rules of Evidence from the Dead Man's Statute.  The court said that the hearsay rule (Rule 802) is a rule of exclusion that makes certain out-of-court statements inadmissible as evidence.  FRE 804 lists several exceptions to the exclusionary rule for when a witness is "unavailable" to testify.  FRE 804 (a) defines "unavailability," one instance of which is that the declarant "is exempted by ruling of the court on the ground of privilege from testifying concerning the subject matter of the declarant's statement." The District Court had ruled that New York's Dead Man's Statute was such a privilege, thus making Rosenfeld "unavailable" and her prior testimony admissible if the Basquiat Estate asserted the Dead Man's Statute.

But the Second Circuit declined to follow the District Court in is definition of the Dead Man's Statute as a "privilege" under the FRE.  Instead the Second Circuit defined the Dead Man's Statute as a statute regarding witness competency.  But the court went on the say that even if Rosenfeld's prior testimony could have been brought in under an exception to the hearsay rule of the FRE, that testimony would still have been barred by the Dead Man's Statute.  The Federal Rules of Evidence are not independent of state statutes  While FRE 804(b)(1) does not bar the admission of prior testimony of a witness who is now "unavailable," it does not resolve the threshold issue of whether that testimony is admissible in the first place.  New York's Dead Man's Statute made Rosenfeld legally incompetent as a witness.  Therefore, the FRE was irrelevant in this case.  Absent a compelling federal interest, federal courts may not ignore state statutes in their rulings unless the statute is unconstitutional.  The judgment of the district court was reversed a new trial was ordered.

If you would like to discuss your own personal situation with me, review your current legal life plan, or put together a legal life plan that is tailored for your needs, you can get a free 30-minute consultation simply by filling out this contact form. I will get back to you promptly.


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All Not in the Family? The Dead Man's Statute and Pedigree Declarations

At times Wills contest expose deep family secrets. There are even cases where the revelation of the secret leaves even more tantalizing questions unanswered. Such is the case of In the Matter of the Estate of Esther T., 86 Misc. 2d 452; 382 N.Y.S.2d 916 (1976), where a son's use of an exception to the Dead Man's Statute led to an unexpected result.

One exception to the Dead Man's Statute in New York is a pedigree declaration. Pedigree declarations, or statements regarding one's parentage, are admissible in probate proceedings. These declarations necessarily include conversations held by the person testifying with the decedent, something the statute seeks to eliminate because the decedent is unavailable to testify on these same facts.

In the Matter of the Estate of Esther T. ,the Surrogate's Court of New York, Nassau County, heard testimony from a contestant, the decedent's purported son, to the admission of a will to probate by the proponent, the decedent's purported husband. According to the contestant, he was the sole child of the decedent and her "purported" husband George M. "Of necessity, proof of pedigree must be based upon hearsay. The issue of lineage rarely comes into question when all of the parties who could testify are available to testify. The necessary foundation for the admission of pedigree declarations is as follows: (1) the declarant is dead; (2) the declarant was related by blood or affinity to the family concerning which he speaks; (3) the declarations were made ante litem motam" Id., at 455. While pedigree declarations are admissible in evidence, the trier of fact must still weight these declarations to determine their truthfulness.

To support his claim, the contestant also submitted the testimony of the decedent's younger siblings, a brother and a sister. The brother testified that his sister had been born in Brooklyn, NY in 1904 and was about 70 years of age at the time of her death. He further testified that her maiden name was Esther Do, but that she was also known as Estelle Do or Du. In 1928 or 1929, she had married George M, a real estate broker and traveling salesman of novelties, a profession that required frequent out-of-state travel. He was often accompanied by his wife. Esther conducted a tax preparation business from her husband's real estate office. Over objection, the brother testified that Esther has told him that the contestant was her son.

The sister, an attorney, testified that her law office was located close to her deceased sister's home and that she saw her sister frequently. She further testified of her sister's pregnancy in 1946, and that in December of 1946 her sister and George M had closed their office had gone to Florida. She had learned of the birth of her nephew from George M.

It is clear from the record that Esther suffered several miscarriages. At issue was whether she ever experienced a live birth and whether the contestant was indeed her son. Conflicting evidence on this point was presented to the court. George M conceded that the contestant had been held out as the son of the deceased and himself. However, he also testified that the contestant was neither the natural nor the adopted son of the deceased and thus should not be a distributee under the Will. To support this claim, he submitted a certified hospital record from North Shore Hospital dated 29 May 1970 containing Esther's medical history that stated she had experienced one miscarriage and no live children, as well as her blood transfusion record that indicated her blood type was O-RH +.

George M also submitted into evidence a certified copy of a hospital record dated 5 March 1947 from the Atlantic City Medical Center for a certain Estelle Du. Her blood type was AB-RH +. Estelle had given birth there to a child whose footprint was part of the hospital record. Upon recross-examination, the contestant admitted that his blood type was A+.

Because blood typing cannot change, the court determined that the contestant was not the son of the deceased and George M. He was the son of Estelle Du who was 19 years old at the time of his birth, while Esther was 43 years old at the time of his birth. As such, he was not a distributee under the decedent's Will.

Interestingly, the court noted that George M had not submitted any proof that he was the decedent's surviving spouse and thus the decedent's sole distributee. He was ordered to produce proof of his marriage to Esther within 10 days. Absent this proof, Esther's surviving brother and sister and any children of predeceased siblings would become distributees under the Will if admitted to probate, or intestate heirs should the Will not be admitted to probate.

While pedigree declarations are an exception under New York's Dead Man's Statute, they are not automatically admitted as true statements. As the Matter of the Estate of Esther T illustrates, pedigree declarations can sometimes open a Pandora's box of closely held family secrets.

If you would like to discuss your own personal situation with me, review your current legal life plan, or put together a legal life plan that is tailored for your needs, you can get a free 30-minute consultation simply by filling out this contact form. I will get back to you promptly.

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New York's Dead Man's Statute and Oral Promises

Oral promises concerning property made by one family member to another can have devastating consequences after the promisor's death if these promises are not memorialized in writing.  That is because New York's Dead Man's Statute (C.P.L.R. 4519) prohibits the admission of such oral promises by an interested party (in this case, the promisee) in the case of a Wills contest or other litigation.  The family strife that results due to the absence of a writing concerning the future ownership of the property in question can be easily avoided by consulting an attorney. 

Consider the case of Elizabeth Connelly Payne and her brother F. Henry Connelly (Payne v Connelly (1969, 3d Dept) 32 App Div 2d 693, 299 N.Y.S.2d 1013).  At issue in this case was whether Elizabeth could prove that she had been induced to relinquish a present benefit in return for her brother Henry's promise of future gain.  Elizabeth and Henry's aunt owned quite a bit of stock in the National Dairy Products Corporation.  Elizabeth Payne alleged that she was persuaded by her brother to dissuade their aunt from changing her will and leaving all of her stock holdings to Elizabeth (the original will left all of the stock to Henry), in exchange for Henry's promise to give Elizabeth one half of the stock after their aunt's death.

In due course, their aunt passed away leaving Henry as the sole beneficiary of the stock in question.  And then something unexpected happened:  Henry died as well, but without a Will (intestate).  All of his assets were distributed under New York's intestacy law to his spouse, Phyllis (the respondent in this case) and their children.   Henry also left behind significant assets in the Valley Coal and Supply Company to his heirs.  The only people present during the conservations concerning the aunt's will had been Elizabeth and Henry.  The Dead Man's Statute now prohibited Elizabeth from bringing in those conversations as evidence at trial. 

But what about her sister Florence and her brother-in-law's assertions concerning statements that Henry made during a Labor Day family gathering in 1962 during which he purportedly said that Elizabeth was to receive half of the National Dairy Product Corporation stock?  The court found that, while it was clear that the parties were discussing the aunt's Will, Henry's statement still did not go to the issue of whether the aunt had been induced to not make changes in her Will in favor of Elizabeth in return for Henry's promise to give Elizabeth half after their aunt's death.  As a result, Elizabeth's claim was denied by the court.

When it comes to our family, we want to believe that family members have our best interests at heart.  That is the case more often than not.  However, as in the case of Henry, unexpected events such as a sudden death and legal or mental incapacity can rob the best of intentions of their desired impact.  And once the unexpected happens, New York's Dead Man's statute prohibits the testimony of these oral promises with the deceased.

The best course of action when it comes to oral promises between family members or close associates is to memorialize them in writing.  You should consult an attorney to make sure that the proper legal documents are drafted and then properly executed under New York law.  Both parties will then have the assurance that the intentions expressed in oral promises will be carried out no matter what happens to either party.

If you would like to discuss your own personal situation with me, review your current legal life plan, or put together a legal life plan that is tailored for your needs, you can get a free 30-minute consultation simply by filling out this contact form. I will get back to you promptly.

I invite you to join my list of subscribers to this blog by clicking on "Subscribe to" on the left-hand side of the page so that you can receive a notification when the next installment has been published.  Thank you.

New York's Dead Man's Statute: Some Preliminary Considerations

New York is in the minority of states that still have a Dead Man's Statute.  New York's Dead Man's Statute, also known as CPLR § 4519, came into law in 1851.  The legislative concern at the time was over perjury:  that self-interest would prevail when a person testified in a civil matter involving conversations with a now-deceased person where the witness had a pecuniary interest in the outcome of the case.  That concern persists today and is particularly evident in the area of Wills and trusts.

New York's Dead Man's Statute codified what had been common law practice since the time of Elizabeth I of England.   It is intended to protect the decedent's estate against claims of conversations or interactions that cannot be verified.  What a Dead Man's Statute does is make a witness legally incompetent to testify about conversations that the witness had with a deceased person in a case where s/he could benefit financially if the trier of fact found that evidence to be materially determinative.   Since the deceased/legally incompetent person's lips are forever sealed, so must the lips of the other conversant with respect to the matter in contest.  In New York, the statute has been invoked in cases involving such matters as bequests in Wills; trust provisions;  requests for specific performance; and lack of testamentary capacity. 

There are also interesting cases where the Dead Man's Statute intersects with the competency of a witness exception of the Federal Rules of Evidence (FRE) Rule 601, at which point the Dead Man's Statute supplies the state law .  At times, the Dead Man's Statute serves as a statutory exception to the hearsay rule.  At other times, the hearsay exception in the Federal Rules trumps the Dead Man's Statute.  Establishing pedigree for either the witness or the decedent in a Wills contest is one such example (FRE 804(b)(4)).

In New York, there are three exceptions to the Dead Man's Statute:

1. in a tort action for negligence involving a car, boat, or plane, an interested witness can testify to the general facts and results of the accident;
2. in estate cases where the estate "opens the door" by offering evidence or questioning an interested witness about conversations or transactions with the deceased;  
3. where the estate of the deceased does not lodge a timely objection during a Wills contest or trial, then the estate waives it right to object based on the Dead Man's Statute.

The first exception is an important one in vehicular negligence actions because New York does not have a guest statute.  Thus New York's interest is to allow a New York State domiciliary the right to recover damages against a negligent driver.  The next two exceptions can be triggered during an estate contest, for instance, where a  substantial "gift" is concerned.

In future posts, I will examine specific cases in which the Dead Man's Statute figured prominently.  Each case presents an interesting set of facts that prepares the stage for the application of the Dead Man's Statute. 

If you would like to discuss your own personal situation with me, review your current Will, or put together an estate plan that is tailored for your needs, you can get a free 30-minute consultation simply by filling out this contact form. I will get back to you promptly.

I invite you to join my list of subscribers to this blog by clicking on "Subscribe to" on the left-hand side of the page so that you can receive a notification when the next installment has been published.
Thank you.

Remembering the Legal Legacy of the Triangle Shirtwaist Factory Fire 100 Years Later

One hundred years ago on 25 March 1911, New York City suffered its most shocking and deadly industrial tragedy to befall the city when 146 young, mostly immigrant, women died as a result of a fire that broke out on the eighth floor of the Asch Building located on Washington Place and Greene Street (now the Brown Building on the New York University campus).   Much has been written and documented about the Triangle Shirtwaist Factory fire and its aftermath, particularly the fire regulations that were inaugurated as a result.  But fewer people know that the deadly fire occurred one day after the New York Court of Appeals had declared New York's first Workmen's Compensation law unconstitutional, so that the families of the victims of the fire received only minimal compensation for their loss, only $75 per victim.

Known as the Wainwright-Phillips Compulsory Compensation Act (Wainwright), New York's first Workmen's Compensation law had taken effect on September 1, 1910.   It was the country's first modern workmen's (now referred to using the gender-neutral term "workers") compensation statute (John Fabian Witt, "The Transformation of Work and the Law of Workplace Accidents, 1842-1910." The Yale Law Journal, Vol. 107, No. 5 (Mar., 1998), pp. 1467-1502).  In many ways, Wainwright was revolutionary because it substantially altered the degree of responsibility that an employer had for the safety of its employee. 

Prior to Wainwright, three common law defenses operated to shield employers when injured employees sued them for work-related negligence.  The first defense was assumption of the risk:  the employee had assumed the risks of the job by accepting to work for the employer.  The second defense was contributory negligence:  that the worker had not exercised due care in the performance of the job.  The third employer defense,  the "fellow-servant" doctrine, required that the injured employee first bring a cause of action against the fellow employee who caused the acccident, and not against the employer.  The fellow-servant rule thus shielded employers from negligence suits where an employee was injured by a fellow employee.   Wainwright changed this by holding the employer equally liable with the negligent fellow employee for injuries an employee sustained on the job.

Wainwright's  constitutionality was quickly questioned in Ives v. South Buffalo Railway Company, 201 N.Y. 271; 94 N.E. 431 (1911).  Ives had sued the railroad under Wainwright for injuries in the course of his work for the railroad.   Prior to Wainwright, Ives would have had to sue his fellow employee under the fellow-servant doctrine before to bringing a suit directly against him employer given the manner in which he was injured.  Employed as a switchman, Ives claimed that he was standing on a coke train and that he sprained his ankle as a result of the sudden jarring caused when the engineer took up the slack between the trains.  His injuries caused him to lose several weeks of work.  The railroad admitted all of the facts alleged but challenged the constitutionality of the law under which the suit was brought.  The Court of Appeals agreed with the railroad and declared the Wainwright Compensation Act unconstitutional on the grounds that the law deprived the employer of property in violation of the Due Process Clause of the U.S. Constitution.  That left Ives with no further legal recourse for certiorari to the U.S. Supreme Court because the state court had found in favor of the federal due process right. 

But the events of the following day at the Triangle Shirtwaist Factory so shocked the city and the State that progressive reformers began to push for worker protection once again in the New York State legislature.  The result was the passage of the New York's Workmen's Compensation Act of 1914.  Under the new law, workers gave up their right to sue their employers in negligence for injuries, illnesses or disabilities sustained on the job, in exchange for payment from a workers' compensation fund administered by the New York State Insurance Fund.

Today there are Workers Compensation statutes in every state, and each state has set up its own system of regulations and compensation.  Federal employees are covered under the Federal Employees Compensation Act (FECA) that was passed in 1916. The Longshore and Harbor Workers' Compensation Act (LHWCA) was enacted in 1927 to protect workers injured at sea.  The legal legacy of the 146 victims of the Triangle Shirtwaist Factory has been great.  We owe those young women a tremendous debt of gratitude for the statutory protections we enjoy as a result of their tragic deaths one hundred years ago.

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The Surviving Spouse in Same-Sex Marriages: A New Federal Approach in New York

Several foreign countries, eight states, and the District of Columbia now permit gay couples to marry.  Many gay couples who are New York domiciliaries have been married in these jurisdictions.  New York recognizes these marriages, granting these couples equal protection under state law.  As to federal law, these duly married couples have until now been denied the same protection under federal law. 

On 23 February 2011, the Obama administration took a new legal position with respect to the 1996 Defense of Marriage Act (DOMA), in effect granting federal legal protections to married gay couples.  Section 3 of DOMA states: “In determining the meaning of any Act of Congress, or of any ruling, regulation, or interpretation of the various administrative bureaus and agencies of the United States, the word ‘marriage’ means only a legal union between one man and one woman as husband and wife, and the word ‘spouse’ refers only to a person of the opposite sex who is a husband or a wife.”

The administration's position does not go to the issue of whether same-sex couples should be allowed to marry.  Instead, the focus is on preventing federal discrimination against same-sex couples after they have been legally married.

Under this new approach, the burden of proof will now shift from a gay spouse or same-sex couple who challenges a federal statute to show that they are not prohibited under DOMA from making the claim and places the burden on the federal government to show that DOMA does not impermissibly discriminate against the gay spouse or couple.   

Courts will now apply a heightened standard of legal review to cases involving DOMA.  Since the passage of the law, courts have applied a legal standard of review called rational basis to all sexual orientation discrimination cases that concern federal issues.  For instance, same-sex couples who sought equal protection of the law under the Fifth Amendment (the Fourteenth Amendment's equal protection clause applies to the states) were generally denied equal protection so long as the government could state a rational basis for the existence of DOMA.  The government almost always won a legal challenge under rational basis review because the challenger of DOMA had the burden to show that there was no legitimate purpose to the law and that the means used to enforce the law were not rationally related to its purpose. 

But moving forward, the government will no longer defend the law under rational basis review.  Instead, a heightened standard will used by the federal courts in cases involving DOMA.  Henceforth, the burden will fall on the government to show that the law is substantially related to an important government objective.  The government will base its position on the legislative record used to pass the law. 

One case that will be affected by this new position is Windsor v. United States, No. 1:10-cv-8435,  filed in U.S. District Court in the Southern District of New York on November 9, 2010.  In the complaint, the plaintiff Edith Windsor seeks "a refund of the estate tax levied on a married same-sex couple, which would not have applied to a married straight couple, and which consequently violates the United States Constitution."  In 2007 Edith Windsor and Thea Spyer were married in Canada after an engagement lasting 40 years.  Two years later, Spyer passed away as a result of complications from a heart condition.

26 U.S.C. § 2056(a) permits an unlimited marital estate-tax deduction that allows property to pass from a decedent spouse's estate to the surviving spouse free of the federal estate tax.  But because of DOMA, married same-sex couples are denied this marital estate-tax deduction that is enjoyed by every other married couple.

Both spouses had done extensive estate planning, each creating revocable trusts.  According to the complaint, Edith "in her capacity as executor of Thea's estate, filed a Claim for Refund and Request for Abatement (Form 843) and a Disclosure Statement (Form 8275) with the IRS on April 7,2010, stating that Edie and Thea were lawfully married in Toronto, that New York State recognizes that marriage under local law, and that DOMA unconstitutionally discriminates on the basis of sexual orientation. As a result, Edie argued, Thea's estate is entitled to the marital deduction and to a refund in the amount of $363,053.00." (Windsor, at 19).

The IRS replied and denied the refund because "under DOMA '... the words [sic] "spouse" refers only to a person of the opposite sex who is a husband or a wife'. Section 2056 is inapplicable because the surviving spouse is not a spouse as defined by DOMA (Id.)."

But under the new Obama administration position, the federal government will no longer defend the legal position articulated by the IRS.  According to the letter from Attorney General Eric Holder to Speaker of the House John Boehner dated 23 February 2011, " heightened scrutiny is the appropriate standard of review and that, consistent with that standard, Section 3 of DOMA may not be constitutionally applied to same-sex couples whose marriages are legally recognized under state law."

The net effect of the Holder memorandum is that the government will not file a motion to dismiss on or before March 11, 2011.  The case will move forward with the government still a party in the case, but the court will be instructed to apply a heightened standard to the case, and to remove Section 3 of DOMA as a barrier to possible recovery in this case.

If you would like to discuss your own personal situation with me, review your current Will, or put together an estate plan that is tailored for your needs, you can get a free 30-minute consultation simply by filling out this contact form. I will get back to you promptly.
 
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The Medicaid Five-Year Look-Back Asset Transfer Rules: Avoiding Costly Errors in Long-Term Care Planning

For many people, Medicaid (a joint federal and state program) is their only available source for long-term nursing home care.  For those who can afford it, New York State provides a partnership for long-term care with some participating insurers.  Under this program, the insured person can apply for New York State Medicaid Extended Coverage that allows for either partial or total asset protection from the mandated federal estate recovery provisions described below. Even under this program, income is a factor in determining eligibility.

In 1993 Congress passed legislation requiring States to implement a mandatory estate recovery program for Medicaid recipients over the age of 55.  Three years later, Congress mandated that States set up agencies for the recovery of funds spent on long-term care from people who did not meet eligibility requirements.   Then in 2006 the Deficit Reduction Act (DRA 2005) inaugurated changes in the ineligibility period (or penalty period) to the Medicaid asset transfer rules.  Lawmakers were concerned that some Medicaid participants were meeting their eligibility by shifting assets to their children that would otherwise be used to cover the cost of their care.

To be eligible for long-term care in Medicaid nursing homes or for a community waiver, the person requiring the care must be receiving Social Security and his/her income and assets cannot exceed the income and asset guidelines (note that this chart has not changed for 2011).   DRA 2005 mandates a 60-month look-back period for any evidence of asset transfers, a significant increase from the prior three-year look back period.  If any evidence is found, then the clock for the look-back period will begin at the time of the application for services rather than the date of the asset transfer, a rather stiff penalty.

When contemplating a transfer of assets for the purpose of Medicaid long-term care eligibility, it is important to remember that any asset over which the individual retains control may be used to reimburse Medicaid for nursing home expenses.  And sometimes the best intentions of an individual can be defeated by a residual ownership interest.

Matter of Padulo v Reed presents such a scenario.  Between 1976 and 1994, Ada J. Romeo purchased U.S. savings bonds, naming herself and either her daughter Juliet Padulo or one of Juliet's children as the bond owners.  On 15 December 2001, Ada gave all her her bonds to Juliet, and Juliet distributed the bonds among herself and her children. 

In 2004 Ada moved to a nursing home.  In the months between July 2004 and February 2005, Juliet cashed out all of the bonds, including those that she had given to her children.   Juliet took the money and put it into a joint account that she held with her husband and her mother.  She used part of the money derived from the sale of the bonds to pay for Ada's nursing home care.  In September of 2005, Juliet applied for Medicaid benefits on behalf of her mother, thinking that she had met the then three-year look-back period under pre-DRA 2005 rules.  The New York State Department of Health denied the application.

The Appellate Division, Fourth Department agreed with the Department of Health.   Because the proceeds from the sale of the bonds were placed in a joint account with Ada, there was a presumption that Ada had full control over the funds and thus that the money belonged to her.  Joint bank accounts also have a right of survivorship, so it would have been possible for Ada to become the sole owner of the account had her daughter and son-in-law predeceased her.   Thus Ada's transfers to her daughter and grandchildren failed to satisfy the look-back period for Medicaid because she still maintained control over the money.  After Ada's death, her estate became subject to the federal estate recovery provisions for the cost of her nursing home care.

If you would like to discuss your own personal situation with me, review your current Will, or put together an estate plan that is tailored for your needs, you can get a free 30-minute consultation simply by filling out this contact form. I will get back to you promptly.

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Costly Omissions in Wills: The Missing Power of Appointment

We are  a "do-it-yourself" society.  If something needs to be done, then we will find a way to do it.  However, there are certain tasks that we should never tackle without expert professional help (in my case, plumbing goes to the top of the list).  Drafting a Will is one of those tasks because ambiguities and omissions in drafting can be very costly to those you leave behind.

Here are a few reasons why.  Each state has laws that govern the language, including terms of art (language with special legal meaning), the proper means of execution, and a set of distribution rules that must be clearly understood and clearly followed.  In addition, there are tax implications with respect to bequests.  These must be carefully analyzed with your attorney so as to minimize the impact on beneficiaries.  The reason that we write a Will in the first place is to protect the people we love.  By having an attorney draft your Will, you also ensure that the people in your life receive the care and financial support that they will need to carry on.  This is especially true for small children, persons with disabilities, persons with special needs, and surviving spouses or domestic partners.  Finally, things change every year in our lives and it is a very good practice to review the contents of your Will on a yearly basis.  You likely won't change your Will yearly, but you will better understand its meaning with respect to your present circumstances after this review.

Consider the case of Anita Hamilton [In the Matter of the Estate of Hamilton, 190 A.D.2d 927 (1993)].  She married Milton Hamilton in a second marriage.  Milton had two daughters from a prior marriage, Mary H. McLaughlin and Gwendolyn H. Stevens, and Anita had a son by a prior marriage, John H. Ricketson.  

On February 26, 1989  Milton passed away.  Over the years, Milton had drafted several Wills, one in 1966, one in 1975 revoking the 1966 Will, and one in 1982 revoking the 1975 Will. He had drafted his last Will and testament on April 5, 1982 and directing that his residuary estate should be divided into two funds.  Fund A was a marital deduction trust.  Fund B constituted Milton's bequests to his daughters.  With respect to Fund A, Milton directed that the remaining principal be "paid,  transferred or distributed ... in such manner ... as [Anita Hamilton] may by her last Will and Testament direct and appoint" (Hamilton, at 928). 

Milton's Will was very specific concerning this power of appointment.  It was  "exercisable only by specific reference to said power in [Hamilton's] last Will and Testament".  Failure to effectively exercise the power of appointment in this specific way meant that the assets remaining in Fund A passed to McLaughlin and Stevens.

Anita Hamilton passed away 15 days after her husband died.  Her last will and testament dated December 22, 1967, fifteen years before her husband had executed his last Will.  In Anita's Will were the following words:  "By this paragraph of my Last Will and Testament, I do specifically exercise the power of appointment given to me by paragraph "Sixth" of the Last Will and Testament of my husband ... dated the 26th day of August, 1966, in favor of my son, JOHN HENRY RICKETSON ... or to his issue him surviving, to the extent of seven-eighths (7/8ths) of the fund over which I have the power of appointment, and I give, devise and bequeath to SUE M. RICKETSON, wife of my son, one-eighth (1/8th) of the fund over which I have the power of appointment under the said Last Will and Testament of my husband ...  By these provisions, I do specifically exercise the power of appointment given to me by the Will of my said husband" (Id. at 928).  Both Milton's and Anita's Wills were admitted to probate. 

The Surrogate Court of Albany County looked at the specific language in Milton's 1982 Will and decreed that Anita had not made proper reference to that specific power of appointment in her Will.  Instead, she had referenced Milton's 1966 Will that had been revoked by two subsequent Wills.  Consequently, the court decreed that the principal of Fund A be awarded to Milton's daughter's.  Anita's son John Ricketson appealed.

The Appellate Court, Third Department affirmed the Surrogate Court's decision.  The Court made explicit reference to the language of EPTL 10-6.1:  "[i]f the donor has expressly directed that no instrument shall be effective to exercise the power unless it contains a specific reference to the power, an instrument not containing such reference does not validly exercise the power."  Because Anita's Will referenced a Will that had been revoked, her power of appointment failed.  The result was that her stepdaughters received what she had intended for her son and his family.

A carefully review of Anita's Will by an attorney would have revealed the omission.  A do-it-yourself Will in such a case would also be grossly ineffective to preserve the bequest.  Moreover, the Hamilton case illustrates the dependencies of one Will document on another Will document.  Every family is different and each person in it represents a unique instance.   A Will drafted by another family member could impact or limit your ability to pass on a bequest to a designated beneficiary.  That is why it is always best to consult and work with an attorney who is versed in these matters.

If you would like to discuss your own personal situation with me, review your current Will, or put together an estate plan that is tailored for your needs, you can get a free 30-minute consultation simply by filling out this contact form. I will get back to you promptly.

I invite you to join my list of subscribers to this blog by clicking on "Subscribe to" on the left-hand side of the page so that you can receive a notification when the next installment has been published. Thank you.