Recent Publication by Associate Attorney Jacqueline Muttick
By: Gartner + Bloom, P.C.
Date: April 2, 2018
Associate Attorney Jacqueline Muttick was recently published in CLM Construction Magazine. Ms. Muttick examined a New Jersey Supreme Court decision that held that a construction defect action accrues not upon substantial completion of construction but instead when the building’s owner knows or should have known through reasonable diligence about the existence of an actionable claim. See the full publication here.
First Department finds factual issues in §241(6) exclusion, and holds that claim by a lessee’s contractor triggers the lessor’s indemnity
By: Michael E. Kar, Esq.
Associate, N.Y.
Date: December 27, 2017
Synopsis:
Factual issue found in Labor Law §241(6) analysis:
At the Supreme Court below, Plaintiff’s claims under Labor Law §241(6) were dismissed. Section 241(6) imposes on property owners (and lessee’s under Article 10 of New York Labor Law) the duty to provide reasonable protection and safety for workers, and to comply with all Department of Labor regulations. The issue in application of §241(6) was, primarily, centered around the physical location at which the injury took place. The location was the 16th floor of the building in question. A portion of the 16th floor was XCEL’s in practice, an area where they would keep materials and tools used for renovations within the building. However, no personnel or office furniture existed in a permanent capacity, and XCEL had no lease and did not pay any rent for the space. XCEL maintains a separate permanent office and workshop in Queens.
In support of their motion for summary judgment as to the applicability of Labor Law §241(6), Defendant Cayre asserted that the 16th floor is a permanent workshop where “for the past 10 years, the… plaintiff reported to work each day….” Their argument concludes that due to these facts the 16th floor is not the statutorily protected “area[] in which construction, excavation or demolition work is being performed….” N.Y. Labor Law §241(6).
In granting Cayre’s motion for summary judgment below, the Supreme Court found that the 16th floor of the building “was a permanent workshop controlled by XCEL, not a temporary staging area ancillary to the Project and controlled by Cayre.” By extension, this also released Broadway under §241(6).
The First Department reversed and remanded for the court below, finding that “there are disputed issues of fact concerning whether the 16th floor space qualifies as a construction area.” In remanding, the Appellate Division cited such cases as Gerrish v. 56 Leonard, 147 A.D.3 511 (1st Dept. 2017) (factors for determining applicability of 241(6) are physical proximity, common ownership, and operation of off-site premises) and Gonnerman v. Huddleston, 78 A.D.3d 993 (2d Dept. 2010) (241(6) extends to areas where materials are being readied for use, contrary to areas where materials are merely stored for future use).
New Year, New Contract Drafting and Due Diligence Concerns for Partnerships
By: Michael E. Kar
Associate, New York
Date: December 27, 2017
Entities that are taxed as partnerships enter 2018 with fresh concerns in relation to due diligence and contract drafting, in reaction to changes in the statutory regime impacting audit procedures for taxable years starting after December 31, 2017.
By way of background, in the early 1980s a series of statutes, consolidated as the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), changed the way partnerships were audited by the IRS. Where previously each partner was individually audited and then collected from, TEFRA supposedly streamlined the process by auditing the partnership as a whole, and then applying the results to each individual partner, taking into account his or her specific tax attributes. This meant that these adjustments were based in part on each individual partner’s taxable rate. Now, however, new rules will alter that statutory regime, regulations that follow the Bipartisan Budget Act of 2015. The rules of the BBA are effective for partnership returns for tax years beginning after December 31, 2017.
TEFRA was deemed in need of improvement for a collection of reasons. One such reason was who exactly the IRS would deal with in regard to the partnership. There was difficulty in ascertaining who the single ‘tax matters’ partner was. Sometimes, this was an unofficial coalition of partners who would deal with the IRS, creating conflicting information and procedural confusion. Along with a series of other inefficiencies, it was determined that TEFRA resulted in fewer tax-eligible partnerships being audited.
Following the new rules at hand, the most immediate consideration imposed upon partnerships is the necessary designation of a “tax partnership representative”. This is a designated individual (or entity) with whom the IRS interacts. Unlike the ‘tax matters partner’, the tax partnership representative does not have to be a member of the partnership; the only statutory requisite is a substantial presence in the United States.
Although requisites are minimal, this tax partnership representative is given substantial power in regard to potential audits. This representative of a partnership has the sole authority to act on behalf of the partnership with respect to auditing, including any settlement, and can make certain unilateral Internal Revenue Code elections. All partners are bound by this representative’s decisions as well as any final IRS determination relating to the pertinent audit. Drafting tip: a partnership representative should be chosen before 2018 because if there is no designation, the IRS will make the selection. In addition to the benefit of autonomy of choice due to this increased power, partnerships should select their own representative because IRS consent is needed to revoke any IRS-made designation.
The second and far more substantial consideration is that the new rules allow the IRS to collect directly from the partnership, not just from the individual partners therein. This has been termed the “imputed underpayment”, and this adjustment is applied to the year in which the audit was centered, the “review year.”
In terms of tax rates, in contrast to TEFRA and the prior statutory regime which utilized the tax attributes of individual partners, the new rules would apply one rate to the entire partnership. It is important to note that this rate would not be based on the traditional aggregate method of determining tax on partnerships.
For this reason, among other potential considerations, partnerships may wish to avoid these changes. For qualifying partnerships, there are two options available.
The first option is an opt out, exercisable each year by partnerships that furnish less than 100 required (not possible) K-1s. Partnerships can qualify to opt out, generally, as long as there are no owners that are: trusts; tax-disregarded entities; or other partnerships not meeting certain requirements. These qualifications may and should factor into the acquisition and disposition decisions of a partnership, both today and in the future.
The second option, a sort of retroactive opt-out, is the election of a “push out.” If an audit tries to collect based on a previous review year, the partnership can push out the tax responsibility to the partners in that reviewed year, removing the tax responsibility of the partnership as a whole. Drafting tip: in consideration of possible adjustments that may be made under these rules, partnerships may want to impose an obligation on the partnership to push out in the event of an imputed underpayment.
Pushing out requires (i) a timely election within 45 days of IRS notice of final audit adjustment, and (ii) that the partnership provides to each partner during that reviewed year their share of the adjustment. The latter share adjustment must also be sent to the IRS. If executed properly, each notified partner is thereafter responsible for payment. Drafting tip: a partnership may want to secure these obligations contractually with owners, either during the relationship or during the sale or transfer of that owner’s interest. This drafting consideration works both ways. Alternatively, owners who are releasing their interest may seek contractual indemnity for any future audits being done under these new rules, particularly for possible review years in which that owner held interest.
Although this article addresses just a portion of the changes under the new rules, two obvious changes are needed moving forward for most impacted partnerships. First, existing tax distribution provisions should be reviewed in light of these developments, even if a partnership plans on systematic opting or pushing out. Second, new agreements to acquire or transfer interest should consider these rules and inject potential indemnities, preceded by new due diligence as to the partnership’s previous tax and ownership circumstances.
These changes to the statutory regime may and should result in global considerations for acquisition and disposition of partnership interests, as well as a multitude of amendments to operating agreements, partnership agreements, contracts, and other instruments. Some of these changes, especially the designation of a tax partnership representative, demand immediate attention.
NOTE: This is not tax advice.
G + B Participates in the 2017 New York Cares Winter Wishes Program
By: Gartner + Bloom, P.C.
Date: December 11, 2017
Under the leadership of Alex Fisher, g + b was proud this year to participate in the New York Cares Winter Wishes program. The program collects children’s letters to Santa and sends them to volunteers who play Santa and buy, wrap and deliver the gifts before Christmas. Our attorneys and staff provided gifts for twenty-five boys and girls in the New York City area ranging in age from 5 to 11.
For background on the project, visit https://www.newyorkcares.org/winter-wishes/about.
Outside the Coverage Period but Still Covered: New Jersey’s Warning to Insurers in Construction Defect Matters
By: Jacqueline A. Muttick, Esq. & Marc Shortino, Esq.
Associate, New Jersey Partner, New Jersey
Date: October 19, 2017
On October 10, 2017, the New Jersey Appellate Division addressed the “continuous-trigger” theory of insurance coverage in Air Master & Cooling, Inc. v. Selective Insurance Company of America, __ N.J. Super. __, Docket No. A-5415-15T3 (App. Div. Oct. 10, 2017). The Court found that the continuous trigger theory of insurance coverage applies “to third-party liability claims involving progressive damage to property caused by an insured’s allegedly defective construction work” and that the “last pull” of the trigger for ascertaining the end of a covered occurrence “happens when the essential nature and scope of the property damage first becomes known, or when one would have sufficient reason to know of it.” Id. (slip op. at 3).
Selective moved for summary judgment, arguing its policy did not cover water damage that materialized or manifested before the policy coverage began in June 2009. Air Master opposed that motion, arguing that the continuous-trigger theory of coverage applied and that coverage continued until the “last pull” of the trigger of injury occurs. Air Master also argued that manifestation occurs when it is known, or reasonably knowable, that damage is attributable to the work of the insured, which occurred in May 2010 with the issuing of the expert report. The trial judge granted summary judgment, ultimately finding that while the continuous-trigger theory of coverage applied, the damage manifested prior to the start of Selective’s policy period. Air Master appealed that determination.[1]
On appeal, the Appellate Division also found that the continuous-trigger doctrine applies to claims for third-party, progressive property damage in construction defect litigation. “[T]he continuous-trigger theory recognizes that, because certain harms … will progressively develop over time, ‘the date of the occurrence should be the continuous period from exposure to manifestation.’” Id. (slip op. at 12) (quoting Owens-Illinois, Inc. v. United Insurance Co., 138 N.J. 437, 454-56 (1994)) (applying the continuous-trigger theory in the context of property damage claims arising from the installation of asbestos-related products). “Under such a continuous-trigger approach, ‘all the insurers over that period [are] liable for the continuous development’” of the damage. Id. (quoting Owens-Illinois, Inc., 138 N.J. at 450-51). “[T]he continuous-trigger approach requires multiple successive insurers up to the point of manifestation to cover a loss,” which the Court noted provides more coverage for claims and encourages insurers to monitor developing risks. Id. (slip op. at 13) (citing Owens-Illinois, Inc., 138 N.J. at 458-59). The Appellate Division stated that the doctrine was not unfair to insurers, but instead required them to bear a portion of the coverage burden that accumulated while the property harm had not yet manifested, as occurs in construction defect litigation where defects are not immediately obvious. Id. (slip op. at 17) (citing The Palisades at Fort Lee Condominium Association, Inc. v. 100 Old Palisade, LLC, __ N.J. __, Docket No. A-101/102/103/104-15 (2017) (slip op. at 34)).
Appellate Court in Divorce Proceeding Gives Weight to Motive Behind Life Insurance Policy: What Doors Does This Open Moving Forward?
By: Michael E. Kar
Associate, New York
Date: October 4, 2017
In a recent decision, the Second Department has opened the door for matrimonial attorneys and parties to question the motive behind the failure to pay premiums for life insurance policies, for the purpose of automatic orders in divorce actions.
Upon the commencement of all matrimonial actions in New York, a series of automatic orders are initiated, pursuant to Domestic Relations Law § 236(B)(2)(b). The purpose behind these automatic orders, also called ‘notice provisions’, is to maintain the status quo and preserve assets in the time between the filing for divorce and the final determination, either by an agreement between the parties or the decision of the court. Among other restrictions, neither party can: dispose of particular assets (except in the “ordinary course of business”); incur unreasonable debts; or remove from medical insurance either, (i) the other spouse, or (ii) the children. Additionally, the last subsection of § 236(B)(2)(b) provides that upon the commencement of the action each party must “maintain existing life insurance… in full force and effect.” DRL § 236(B)(2)(b)(5).
This last automatic order, in particular, prevents a spouse from changing policies or withholding premiums/payments that may result in jeopardizing the future financial security of the children or the other spouse. If either spouse violates this rule, such as by refusing to pay the premium on a policy, that spouse can be held in contempt of court. A motion to be held in contempt may result in an order forcing the other party to pay arrears, and can even lead to a finding of criminal contempt and incarceration. If a party is held in contempt – by further refusing to comply with a court order -- “willful” disobedience could result in jail time.
In a recent Second Department decision, however, when faced with this exact scenario the court did none of the above. In fact, faced with a wife who refused to maintain her husband’s life insurance policy, the court approved her conduct.
In Savel v. Savel, the wife/mother stopped paying the premiums on her husband’s life insurance policy, after the automatic orders had been put into effect. 153 A.D.3d 872 (2d Dept 2017). The husband’s attorney moved to hold the wife in contempt for violation of the automatic orders, after which she continued to withhold payment. In a relatively-novel defense, the wife claimed that she did not violate the orders because the life insurance policy was intended to be a “savings vehicle.” The wife argued she should not be forced by the court to contribute her post-commencement income to a savings vehicle for the husband. Post-commencement income is of course separate property, not marital, as the filing for divorce stops the clock on the economic partnership.
The wife further argued that the husband’s rights were not “prejudiced” by this violation. Indeed, the parties in this case maintained three whole-life life insurance policies in the amounts of $12 million for the benefit of the children, $7.6 million for the wife, and the subject policy which was the supposed “savings vehicle” owned in the husband’s name.
During the proceedings below, the husband admitted to his policy serving as a “savings plan” as opposed to the traditional motive behind such a mechanism (to wit, as a safeguard for the family in the event of a death). This admission was enough for the Nassau County Supreme Court to rule in the wife’s favor. The Second Department affirmed the decision below denying the husband’s contempt motion and not requiring the wife to pay the premiums on the husband’s life insurance policy.
But for the husband’s admission of the purpose of the life insurance policy as a savings plan, would this whole-life policy be deemed an investment rather than a safeguard? Are policies such as this not usually the result of a hybrid of motives, including death benefit for the family and asset diversification? These questions in regard to the pre-judgment automatic orders are important, but have the potential to be overshadowed by the larger implications of the Savel court’s holding: how does the holding affect the equitable distribution of whole-life insurance policies collectively?
Currently, pre-marital life insurance accounts are deemed separate property, with an argument that premiums paid during the marriage from the marital funds are marital. In this scenario, the non-owning spouse may be entitled to a credit for half the monies paid toward the premiums, but not the balance of the cash value of the policy. On the other hand, investment accounts that are separate property stay separate, unless they are actively managed. Accounts where the appreciation of value is “passive” are deemed not furthered by the economic partnership, and therefore remain separate property. Alternatively, if an investment account fluctuates in value due to “active” involvement of the spouses, the other spouse can receive a credit for all increases in the balance during the marriage.
How many doors does Savel open? For example, are courts now required on pendente lite support motions (for temporary support during pendency of the action) to make a factual finding as to whether an insurance policy is, (i) an investment, or (ii) security/death benefit for a family? Also, now that the door is open to deeming life insurance policies “savings vehicles” in some circumstances, can the cash value of separate whole-life policies be actively managed, and the appreciation thereof subject to equitable distribution?
The Second Department’s evaluation of the motive behind a life insurance policy kicks down a door in relation to automatic orders, and in doing so, possibly opens the door in relation to insurance policy equitable distribution, or credit.