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Michael Antongiovanni Authors, “The RPAPL §881 License: Gaining Access to a Neighbor’s Property”

Enduring the pains of a construction project—the months (or even years) of inconvenience, noise, vibrations, debris and annoyance—is dreadful. This is especially true when the project is not yours but, rather, your neighbor’s. In today’s world of booming high-rises and the repurposing of single-family homes and neighborhoods into multi-family dwellings and mixed-use environments, it is common to see substantial construction projects within close proximity to neighboring buildings and houses (often right up to the adjoining property line). Small buildings are demolished to make room for larger ones.

Sometimes during the construction, access to a neighboring property is required in order to either perform the construction or install safety measures. Such access can entail activities like installing sidewalk sheds on the neighboring property for overhead protection, possessing a portion of the neighboring property during excavation and even underpinning the neighbor’s building.

If access is necessary, there are two ways a property owner may go about gaining it. The first, and most preferable method, is negotiating a license agreement with the neighbor. This method ensures that both sides’ needs are addressed and a mutually agreed upon understanding is reached. The second, and often less preferable method, is for the project owner to petition a court to compel such access pursuant to §881 of the Real Property Actions and Proceedings Law (RPAPL). This method is slower, costlier and can lead to undesirable outcomes for both sides. Nevertheless, sometimes such proceedings are unavoidable either because an agreement cannot be reached through negotiation or access is simply denied outright.

Such proceedings have resulted in a body of case law that helps serve as a guide for what generally can be expected in negotiating such licenses. Understanding the range of acceptable requests and concessions helps facilitate negotiations and avoid unnecessarily escalating the matter to a judicial proceeding.

The Threshold Assessment: Whether the Requested Access Is Truly Necessary. RPAPL §881 permits access for “improvements or repairs to real property” that “cannot be made by the owner or lessee without entering” a neighboring property. In petitioning a court to compel access, the petitioning neighbor must demonstrate why such access is “necessary.”

As RPAPL §881 makes clear, the request for access must be truly necessary in order for a court to grant it. Indeed, there are instances where courts have denied access because the requisite necessity was not demonstrated. See, e.g., In re Tory Burch v. Moskowitz, 146 A.D.3d 528 (1st Dept. 2017) (denying petition because petitioner failed to make a showing as to the reasonableness and necessity of the access requested, including because no plans or approvals for the work had been obtained). In situations where access is not truly necessary, a neighbor from whom a license is sought will have firm grounds for not granting access if it so chooses and superior bargaining leverage in negotiating the license if it is, nevertheless, inclined to do so. On the other hand, if the request is truly necessary for construction—as opposed to a mere convenience—or is needed for safety, a court will most likely award access. See Queens College Special Projects Fund v. Newman, 154 A.D.3d 943, 944 (2d Dept. 2017) (noting courts “must apply a reasonableness standard in balancing the potential hardship to the applicant if the petition is not granted against the inconvenience to the adjoining owner if it is granted”). The same is true with how narrowly tailored the request for access is in relation to the need. A narrowly tailored request is more likely to be granted as it serves the goal of minimizing the burden on the neighboring property. See, e.g., PB 151 Grand v. 9 Crosby, 58 Misc.3d 1219(A) (Sup. Ct. N.Y. Co., 2018) (finding that the petitioner had tailored its original request sufficiently to minimize the burden on the respondent’s property and when weighed against the respondent’s claim of interruption to its hotel business, the balance tipped in the petitioner’s favor). After all, the neighboring property is not obtaining any benefit from the construction—only sustaining a burden—and that burden should be mitigated as much as possible.

While Access May Be Necessary, Concessions by the Project Owner Must Be Made. RPAPL §881 provides that a “license shall be granted by the court in an appropriate case upon such terms as justice requires.” In applying the statute, courts have interpreted this sentence to mean that a neighbor compelled to grant a license should not have to bear any cost in connection with the construction and, in most cases, should be compensated by the project owner to some degree for loss of use and enjoyment of their property during the license period. See North 7-8 Investors v. Newgarden, 43 Misc.3d 623, 627 (Sup. Ct. Kings Co., 2014) (noting that “[t]he risks and costs involved in the use that a Petitioner makes of its neighbor’s property should be borne wholly by the Petitioner. Equity requires that the owner compelled to grant access should not have to bear any costs resulting from the access … ”). While the terms of a license granted pursuant to RPAPL §881 are within a court’s discretion and often dictated by the facts of each case, certain trends have emerged from the RPAPL §881 case law, which assist in setting the range of relief that can be expected should the matter be litigated. As noted above, such trends help parties negotiating a license understand the benefits and risks of a negotiated outcome versus an adjudicated one.

Below are issues that are commonly negotiated.

Scope of the License. Defining the scope of the license is an essential part of license negotiations. There should be a clear understanding of the access being granted and when the license terminates. The access area and the permitted activities therein should be well-defined. As noted above, a licensor will want the scope of the access limited to what is truly necessary to perform the construction so as to limit the burden upon the licensor’s property. If equipment and safety devices are to be erected within the access area, their specifications should be detailed. If such equipment is going to be affixed in some manner to the licensor’s property, the method should be disclosed so that any remediation of the access area that may be required after removal of the equipment may be addressed in the license agreement.

Professional Fees and Costs. It is generally accepted that a licensor’s professional fees should be paid by the licensee. This includes attorney fees incurred to negotiate the license, address issues arising during the performance of the license and, in some instances, litigate an RPAPL §881 proceeding. See, e.g., North 7-8, 43 Misc.3d at 630-633, 982 N.Y.S.2d at 711-713 (awarding respondent attorney fees for negotiating the license and litigating the RPAPL §881 proceeding). This also includes engineering and other technical consulting fees incurred by the licensor to review the project plans, receive advice concerning the requested access and to monitor the project and performance of the license. See, e.g., Columbia Grammar & Prep. Sch. v. 10 W. W. 93rd House Dev. Fund, 2015 N.Y. Slip Op. 31519(U) (Sup. Ct., N.Y. Co., 2015) (awarding respondent engineering fees).

Indemnification and Insurance. Indemnification and insurance are other common and acceptable requests in a license negotiation. See, e.g., 23-31 Astoria Blvd v. Villegas, NO. 911/18, 60 Misc.3d 1217(A) (Sup. Ct., Queens Co., 2018) (finding that, in connection with a license request, a court may order a petitioner to obtain insurance coverage, indemnify the respondent and post a bond). Since the licensor is permitting the licensee and its contractors to access its property for purposes of the neighboring construction, it is prudent and reasonable for the licensor to require that the licensee agree to indemnify it for any losses, claims and damages that it sustains as a result of the construction project. In the same vein, it is also common and reasonable for the licensor to request that the licensee add it as an additional insured to the licensee’s insurance. These requests comport with RPAPL §881’s express mandate that “[t]he licensee shall be liable to the adjoining owner or his lessee for actual damages occurring as a result of the entry.” In additional to physical property damage, such damages could potentially also include any losses sustained by the lessor’s business as a result of the access. See., e.g., PB 151 Grand v. 9 Crosby, 58 Misc.3d 1219(A) (Sup. Ct., N.Y. Co., 2018) (finding that respondent’s claim that it would suffer a loss of business income as a result of the license would be decided by a special referee upon the termination of the license so that the actual loss, if any, could be determined).

Pre-Construction Survey. It is in both parties’ interest to have a survey of the licensor’s property performed prior to construction. This will help assess whether any damage occurred to the licensor’s property during the term of the license or whether such damage was preexisting. The survey is typically performed and paid for by the licensee but it is prudent for the licensor to require that its consultant be present during the survey inspection and that a copy of the survey report be provided to the licensor upon completion.

License Fee. Another common element of a license under RPAPL §881 is the payment of a license fee to the licensor. See Van Dorn Holdings v. 152 W. 58th Owner’s Corp., 149 A.D. 3d 518, 149 A.D. 3d 518 (1st Dept. 2017) (noting that the grant of a license pursuant to RPAPL §881 often warrants the award of contemporaneous license fees). It is also one of the most hotly negotiated points. Such fees are typically paid by the licensee to the licensor on a monthly basis. The amount of the license fee depends upon the scope of the access (i.e., the greater the intrusion on the neighboring property, the greater the fee). Amounts awarded by courts in RPAPL §881 proceedings typically range in the vicinity of several thousand dollars per month depending on the nature of the intrusion. See, e.g., North 7-8 Investors v. Newgarden, 43 Misc.3d 623 (awarding $3,500 per month for erection of a cantilevered balcony that extended six feet onto respondent’s property over a roof deck for one year); see, e.g., Rosma Dev. v. South, 5 Misc.2d 1014 (A) (Sup. Ct., Kings Co., 2004) (awarding $2,500 per month for each of two four-story dwellings for a total of $5,000 per month for sidewalk protection abutting ten feet of sidewalk). Though, in some instances, the scope of access could conceivably be so burdensome that even greater fees may be warranted. The purpose of the license fee is twofold. On the one hand, it compensates the licensor for its loss of use and enjoyment of its property during construction. On the other hand, it serves to motivate the licensee to complete the portion of the construction project utilizing the licensor’s property quickly in order to minimize the amount of licensing fees it must pay. Often license agreements will provide that if the construction is not completed by a date-certain, then the license fee will increase. See, e.g., Columbia Grammar & Prep. Sch. v. 10 W. W. 93rd House Dev. Fund, 2015 N.Y. Slip Op. 31519(U) (Sup. Ct., N.Y. Co., 2015) (awarding a $2,500 per month license fee for 12 months with an increase to $3,500 per month if the work is not completed within one year). Providing for an increase serves as additional motivation for the licensee to complete the project quickly.

Default Provisions. As with any commercial contract, the license agreement should contain a provision governing remedies if either party defaults during the performance of the license. From the licensor’s perspective, it will want a provision permitting it to promptly terminate the license and bar access to the licensed area upon an uncured default. Naturally the licensee will want to draft a flexible provision that permits adequate time to cure any default and continued access while the default is being cured or the issue of the alleged default is adjudicated.

Remediation. The license agreement should specify what the parties’ respective rights and obligations are upon the termination of the license. Ideally, the licensed property will be left in the same condition as it was in prior to the commencement of the license. Unfortunately, this is not always the case. Sometimes the equipment installed in the licensed area will, itself, cause some damage to the licensor’s property. The license agreement should address when, how and by whom the damage is repaired. Again, RPAPL §881 expressly provides that the licensee shall be strictly liable for any damage resulting by reason of the access.

Conclusion

In sum, should access to a neighboring property become necessary for purposes of construction, the law provides a mechanism by which such access may be compelled. As the case law emphasizes, the goal under such circumstances is to narrowly tailor the access to the necessity so as to minimize the burden on the neighboring property. The neighboring property owner should not be burdened with the costs associated with the access and is often entitled to certain concessions to compensate and protect it during the license term. When negotiating a license, there are a number of issues that must be addressed by the parties, who will have differing objectives with respect to each issue. Negotiating a proper license agreement is essential to ensuring that one’s objectives are achieved and interests protected.

 

Reprinted with permission from the December 16, 2019 edition of the New York Law Journal © 2019 ALM Media Properties, LLC. All rights reserved.

Further duplication without permission is prohibited. ALMReprints.com – 877-257-3382 – reprints@alm.com.

 

Click here to view the article on New York Law Journal.

Hon. Ira Warshawsky Authors, “Your Arbitration Provider Has Vanished. Now What?”

It would behoove the parties that enter into contracts that include an arbitration clause to provide an alternative to their favored ADR entity.

 

For decades, scriveners (aka transactional lawyers) have been carefully avoiding litigation by inserting arbitration clauses into their contracts.

Some lawyers use generic terms in referring to an ADR provider, while others specify a provider with whom they are familiar in their community or one that they believe would be specifically knowledgeable in their area of business. There are even some providers that have become industry-specific, e.g., nursing home patient cases or employment cases.

Problems arise in matters where a specific ADR provider is in the agreement and no longer exists (or has been precluded from practicing in your state) and the issue becomes whether the court will assist you in getting another ADR provider. In a recent case, the Supreme Court of the state of Missouri, sitting en banc, affirmed a Circuit Court decision that refused to compel arbitration despite the existence of an arbitration clause.

The Missouri Supreme Court, in affirming the circuit court below, confirmed the court’s position in refusing to compel arbitration specifically “[b]ecause the plain language of the parties’ arbitration agreement shows they agreed to arbitrate before—but only before—the National Arbitration Forum (‘NAF’).” A-1 Premium Acceptance v. Hunter, 557 S.W.3d 923, 924 (Mo. 2018), cert. den. 139 S.Ct. 1340 (2019).

In the A-1 case, the agreement between A1 (the lender) and Hunter (the borrower) read, in relevant part that:

… and any claim or dispute related to this agreement or the relationship or duties contemplated under this contract, including the validity of this arbitration clause, shall be resolved by binding arbitration by the National Arbitration Forum, under the Code of Procedure then in effect. Any award of the arbitrator(s) may be entered as a judgment in any court of competent jurisdiction. Information may be obtained and claims may be filed at any office of the National Arbitration Forum or at P.O. Box 50191, Minneapolis, MN 55405. This agreement shall be interpreted under the Federal Arbitration Act. (Underlining emphasis supplied by author. Bold and italics emphasis is found in decision of the court).

Id. at 924-25.

Section 5 of the Federal Arbitration Act provides:

If in the agreement provision be made for a method of naming or appointing an arbitrator or arbitrators or an umpire, such method shall be followed; but if no method be provided therein, or if a method be provided and any party thereto shall fail to avail himself of such method, or if for any other reason there shall be a lapse in the naming of an arbitrator or arbitrators or umpire, or in filling a vacancy, then upon the application of either party to the controversy the court shall designate and appoint an arbitrator or arbitrators or umpire, as the case may require, who shall act under the said agreement with the same force and effect as if he or they had been specifically

named therein; and unless otherwise provided in the agreement the arbitration shall be by a single arbitrator. 9 U.S.C. §5 (2012) (emphasis in decision).

A-1, 557 S.W.3d at 926.

In 2009, the Minnesota Attorney General’s office entered into a consent decree with NAF requiring it to stop its arbitration services nationwide. A-1, as lender, had required that its borrowers agree to arbitration with NAF as a condition of obtaining loans with A-1.

Now that NAF was unavailable, A-1 reached out to the court, through §5 of the Federal Arbitration Act, to compel arbitration. The court refused to do so at every level: trial term, Circuit Court and Supreme Court.

In refusing to compel arbitration, the Supreme Court ruled:

The FAA “reflects the overarching principle that arbitration is a matter of contract … [a]nd consistent with that text, courts must rigorously enforce arbitration agreements according to their terms, including terms that specify with whom the parties choose to arbitrate their disputes and the rules under which that arbitration will be conducted.” (Internal citations omitted).

* * *

Accordingly, for purposes of analyzing the issue presented in this case, there are two types of arbitration agreements: (1) agreements in which the parties agree to arbitrate regardless of the availability of a named arbitrator, and (2) agreements in which the parties agree to arbitrate before but only before a specified arbitrator. If the former, section 5 of the FAA authorizes and requires courts to name a substitute arbitrator when the agreement fails to identify one or fails to provide a means for naming a substitute. If the agreement is of the latter type, however, nothing in the FAA authorizes (let alone requires) a court to compel a party to arbitrate beyond the limits of the agreement it made. Employing this analysis, the Court holds A-1 and Hunter agreed to arbitrate before but only before NAF and, as a result, the circuit court did not err in refusing to compel Hunter to arbitrate before some other arbitrator under the auspices of section 5 of the FAA.

Id. at 926.

The Missouri court clearly noted: “The unequivocal, plain and clear terms of this Agreement establish that A-1 and Hunter agreed only to arbitrate before NAF. A-1 drafted this provision and it freely chose to require such an agreement from Hunter (and other borrowers) as a condition of obtaining loans from A-1. Having made the choice to insist upon NAF and only NAF as the arbitration forum, A-1 cannot now look to section 5 of the FAA to expand the arbitration promise it extracted from Hunter in the Agreement.” Id. at 928 (emphasis added).

The Supreme Court of Missouri concluded that:

… merely identifying an arbitrator in an arbitration agreement without more cannot justify refusing to name a substitute under section 5 of the FAA on the ground the parties’ agreement was limited to arbitrating before but only before the identified arbitrator. Instead, there must be a basis to

conclude the parties’ arbitration agreement was limited to the specified arbitrator. Here, the plain language of the Agreement provides that basis.

Id. at 929.

While clearly each case of this nature must be evaluated on its specific facts, this case could be considered as a warning to drafters of arbitration clauses of the danger of locking themselves into arbitration with a sole arbitrator without an alternative fallback.

Severability: Another Way To Save the Arbitration Clause

Over 50 years ago, in Prima Paint v. Flood & Conklin Manufacturing, 388 U.S. 395 (1967), the U.S. Supreme Court concluded that under the U.S. Arbitration Act of 1925 courts must enforce an arbitration clause even if there is a claim of fraud in inducement of the agreement that contains the clause (in the absence of evidence that the parties intended to withhold that issue from arbitration). Prima Paint is frequently referenced as an early example of how far the U.S. Supreme Court is willing to go to preserve an agreement to arbitrate.

Thus, separability, now more frequently called severability, would be another method of saving the arbitration portion of a contract even if the arbitrating entity never existed or no longer exists. A judge might need a very sharp scalpel to do it, but it clearly may be done.

In a recent case out of the Court of Appeals in Ohio (the second highest appellate court in Ohio), Paulozzi v. Parkview Custom Homes, 2018-Ohio-4425, 122 N.E.3d 643, the court enforced the severability clause of the contract, thereby saving arbitration, despite the fact that the chosen forum no longer existed.

The lower court had found that the arbitration provision of the contract was “impossible to perform” and, therefore, unenforceable pursuant to the Ohio Arbitration Act, in that “[t]he arbitration agreement did not provide an alternative arbitration forum.”

The Court of Appeals disagreed. It found the agreement was not unenforceable due to impossibility because it was “still possible to arbitrate the issues between the parties despite [the arbitration entity’s] absence.” Id. at 649. The court continued that “to hold otherwise would defeat the parties’ intentions when they entered into the contract and agreed to arbitrate the dispute.” Id. at 650.

The Ohio court stated that it was appropriate to apply the severability clause in the parties’ contract, noting further that severability “depends generally upon the intention of the parties, and this may be ascertained by the ordinary rules of construction.” Id. at 651, citing Ignazio v. Clear Channel Broadcasting, 2007-Ohio-1947, ¶11, 113 Ohio St.3d 276, 865 N.E.2d 18.

Thus the Ohio court, relying on the underlying intent of the parties, used the severability clause to save the parties’ decision to arbitrate.

How Would These Cases Be Decided in New York?

Arbitration in New York is controlled by Article 75 of the CPLR. More specifically, the issue of

when the court is called upon to appoint an arbitrator is dealt with in CPLR §7504, mirroring closely §5 of the FAA:

Court Appointment of Arbitrator

If the arbitration agreement does not provide for a method of appointment of an arbitrator, or if the agreed method fails or for any reason is not followed, or if an arbitrator fails to act and his successor has not been appointed, the court, on application of a party, shall appoint an arbitrator.

In matters where a named arbitration provider or arbitrator currently fails to exist, never existed, or no longer does a specific type of arbitration or mediation, there would appear to be a fairly bright line that may be followed by New York practitioners.

In three cases decided over a 20-year period between 1956 and 1976, the Appellate Division either sent a matter back to trial term to hold a hearing on the intent of the parties or determined that the intent was clear from the unambiguous language of the parties.

In Golenbock v. Komoroff, 2 A.D.2d 742 (1st Dept. 1956), it was not clear whether the parties to a partnership agreement intended that only a named individual, and no one else, could arbitrate their differences or that arbitration “generally” was their object.

In a one-paragraph, per curiam opinion, the majority ruled that under the circumstances “it would seem advisable to remit the matter to Special Term for the purpose of having testimony taken as to the intention of the parties.” Id. at 742.

There was a rather strong dissent from Judge Botein who noted that the court “should decline to appoint a substitute for the person agreed upon unless the willingness of the parties to submit to such a substitute is reasonably apparent.” Id. at 743. (Judge Botein clearly did not think that was the case.)

He continued that “[n]o one is under a duty to resort to arbitration unless by clear language he has so agreed.” Id. at 743, quoting Matter of Lehman v. Ostrovsky, 264 N.Y. 130, 132 (1934).

In another First Department case, Laboratorios Grossman. S.A. v. Forest Labs., 31 A.D.2d 628 (1st Dept. 1968), the court was faced with an agreement that named an arbitration organization that did not exist.

The court noted that the parties had different opinions as to what their agreement meant; arbitration only with this non-existent entity, an arbitration only in Mexico, or arbitration under the auspices of the Inter-American Commercial Arbitration Commission. The bottom line is that the “dominant purpose of the agreement was to settle disputes by arbitration rather than the instrumentality through which arbitration should be effected.” Id. at 629 citing Golenbock, 2 A.D.2d at 742.

Again, if the agreement is ambiguous on its face, the intent of the parties should be determined by a hearing at trial term/Special Term.

The most “recent” case is Zandman v. Nissenbaum, 53 A.D.2d 837 (1st Dept. 1976).In Zandman, a member of a professional dentistry corporation brought an action for a preliminary injunction to prevent his expulsion from the dentistry practice.

The agreement among the members provided that disputes should be arbitrated under the rules of the American Medical Association. The problem was that the AMA did not provide for arbitration of such issues.

Special Term appointed a referee to determine the intent of the parties and denied the preliminary injunction. The Appellate Division, First Department, reversed, ruling that the language of the parties’ agreement “is unambiguous. The language used clearly requires that disputes be settled by arbitration. Where the forum designated for arbitration is inappropriate or fails for any reason, the Court is empowered to appoint an arbitrator (CPLR 7504).” Id. at 838 (exact language of agreement not in the decision). The Appellate Division thus directed Special Term to appoint an arbitrator rather than a referee.

Conclusion

It would behoove the parties that enter into contracts that include an arbitration clause to provide an alternative to their favored ADR entity. That clause should clearly indicate the intent to arbitrate, if that is your goal, not merely naming the provider of arbitration services. The inclusion of a severability clause, though commonplace in most contracts, should not be overlooked by the draftsman as another form of insurance to save the parties’ intent to arbitrate.

 

Reprinted with permission from the November 27, 2019 edition of the New York Law Journal © 2019 ALM Media Properties, LLC. All rights reserved.

Further duplication without permission is prohibited. ALMReprints.com – 877-257-3382 – reprints@alm.com.

 

Click here to view the article on New York Law Journal.

New York Minimum Wage Increases and Other Reminders for Employers As We Head Into 2020

As the end of the year approaches, it is important to remember that New York employers are subject to changes in wage and hour regulations that go into effect on December 31, 2019. Failure to comply with the new requirements could subject a non-compliant employer to significant financial liability.

Minimum Wage Increases

The minimum wage and minimum salary levels in New York increase on December 31, 2019. These increases vary depending upon an employer’s location. On December 31, 2019, the regular minimum wage and fast food minimum wage in New York are as follows:

Location Regular Minimum Wage Fast Food Minimum Wage
New York City $15.00 $15.00
Long Island & Westchester $13.00 $13.75
Remainder of NY State $11.80 $13.75

A “fast food employee” is any individual working in a fast food establishment whose job duties include at least one of the following: customer service, cooking, food or drink preparation, delivery, security, stocking supplies or equipment, cleaning, or routine maintenance.

A “fast food establishment” is any establishment in New York serving food or drink items:

  1. where patrons order or select items and pay before eating and such items may be consumed on the premises, taken out or delivered to the customer’s location;
  2. which offers limited service;
  3. which is part of a chain; and
  4. which is one of 30 or more establishments nationally, including:
    1. an integrated enterprise which owns or operates 30 or more such establishments in the aggregate nationally; or
    2. an establishment operated pursuant to a franchise where the franchisor and the franchisee(s) of such franchisor own or operate 30 or more such establishments in the aggregate nationally.

The rate for spread of hours pay, call-in pay, and similar non-working time payments that are based on the minimum wage will increase to match the minimum wages outlined above.

New York Minimum Salary Levels

On December 31, 2019, the minimum salary levels to qualify for overtime exemptions in New York also increase.  In addition to meeting the duties requirements for the exemptions, an executive/managerial or administrative employee must be paid a minimum salary as follows:

Location Weekly Minimum Salary Level
New York City $1,125.00 ($58,500.00 annually)
Long Island & Westchester $975.00 ($50,700.00 annually)
Remainder of NY State $885.00 ($46,020.00 annually)

Tip Credits And Other Allowances

The tip credit, meal credit, and uniform maintenance allowances permitted by the Hospitality Industry and Miscellaneous Industries and Occupations Wage Orders will also change on December 31, 2019, with the amount varying depending upon the employer’s location and, for the hospitality industry, the designation of whether the employee is a food service worker, service employee, or non-service employee.

Before a New York employer can take a tip credit, they must inform the employee in writing, in English and in the employee’s native language if not English, that the employer is taking a tip credit and the amount of the tip credit. The employer must also provide the employee with notice of their regular rate of pay, overtime rate of pay and their regular payday. In addition, the employer must advise the employee that if the cash wages they receive, plus the employee’s tips, do not equal the regular minimum wage for all hours worked, the employer will pay the employee the difference. Finally, in order to take the tip credit, the employer must notify the employee that the employer will not take any tips received by the employee except those that are contributed to a valid tip pooling or tip sharing arrangement. If an employer fails to provide this information, it cannot take the tip credit.

With these parameters in mind, effective December 31, 2019, the tip credit taken by the employer plus the cash wage that must be paid to such employees is as follows:

Miscellaneous Industries and Occupations

Location Reg. Min. Wage Low Tip Credit Low Tip Credit Cash Wage Low Tip Credit Cash OT Wage High Tip Credit High Tip Credit Cash Wage High Tip Credit Cash OT Wage
New York City $15.00 $2.25 $12.75 $20.25 $3.65 $11.35 $18.85
Long Island & Westchester $13.00 $1.95 $11.05 $17.55 $3.20 $9.80 $16.30
Remainder of NY State $11.80 $1.75 $10.05 $15.95 $2.90 $8.90 $14.80

Employers covered by the Miscellaneous Industries and Occupations Wage Order may take the Low Tip Credit for employees whose average weekly tips are between the low tip credit and the high tip credit.  Employers may take the High Tip Credit for those employees whose average weekly tips equal or  exceed the high tip credit.

Hospitality Industry – Food Service Workers

Pursuant to the Hospitality Industry Wage Order, a “food service worker” is one who:

  • is primarily engaged in serving food and beverages to guests, patrons, and customers, other than delivery employee;
  • customarily and regularly receives tips from such guests, patrons, and customers; and
  • does not spend more than two (2) hours in any day or more than 20% of their time performing work where tips are not customarily received.
Location Cash Wage Tip Credit Reg. Min. Wage

Cash Tipped

OT Wage

New York City $10.00 $5.00 $15.00 $17.50
Long Island & Westchester $8.65 $4.35 $13.00 $15.15
Remainder of NY State $7.85 $3.95 $11.80 $13.75

 Hospitality Industry – Service Employees

A “service employee” in the hospitality industry is one who regularly and customarily receives tips for the work they perform and who is not a food service worker or a fast food employee.

Location Cash Wage Tip Credit Tip Threshold Tip Threshold for Resort Hotels Reg. Min. Wage

Cash Tipped

OT Wage

New York City $12.50 $2.50 $3.25 $8.40 $15.00 $20.00
Long Island & Westchester $10.85 $2.15 $2.80 $7.30 $13.00 $17.35
Remainder of NY State $9.85 $1.95 $2.55 $6.60 $11.80 $15.75

 In order to take the tip credit for service employees, the employee must meet the tip threshold.  This means that the employee’s average weekly tips must meet the minimum amount listed in the chart above per hour worked.

Uniforms

Where employers require employees to maintain their uniforms, unless they are “wash and wear” clothing that do not require any special treatment (i.e. dry cleaning, pressing, repairs), they must provide such employees with uniform maintenance pay.  The uniform maintenance pay will increase on December 31, 2019 to:

Location

Work Week

Over 30 Hours

Work Week More than 20 Hours but Less Than 30 Hours Work Week of 20 Hours or Less
New York City $18.65 $14.75 $8.90
Long Island & Westchester $16.20 $12.80 $7.75
Remainder of NY State $14.70 $11.60 $7.00

Meal Credit 

Pursuant to New York’s Miscellaneous Industries and Occupations and Hospitality Industry Wage Orders, an employer who provides a qualifying meal to an employee may consider that meal to be part of the employee’s wages and take a credit against the employee’s wages for providing that meal.  In order to qualify as a “meal,” it must include each of the following: (1) fruits or vegetables; (2) grains or potatoes; (3) eggs, meat, fish, poultry, dairy or legumes; and (4) tea, coffee, milk or juice. The meal credits shall change on December 31, 2018 to:

Miscellaneous Industries and Occupations

Location All Employees
New York City $5.15
Long Island & Westchester $4.50
Remainder of NY State $4.05

Hospitality Industry – Restaurants and All Year Hotels

Location Food Service Workers Service Employees All Other Employees
New York City $3.60 $4.15 $5.15
Long Island & Westchester $3.25 $3.60 $4.80
Remainder of NY State $3.00 $3.30 $4.30

Hospitality Industry – Resort Hotels 

Location Food Service Workers Service Employees All Other Employees
New York City $3.95 $5.40 $6.75
Long Island & Westchester $3.55 $4.70 $5.85
Remainder of NY State $3.30 $4.25 $5.30

 Notice of Rate of Pay

New York’s Wage Theft Prevention Act (“WTPA”) requires that all New York employers provide a “Notice of Pay” form to all employees at the time of hire and upon a change in their rate of pay.  For employers outside of the hospitality industry, the New York State Department of Labor (“NYSDOL”) has stated that, as long as the new rate of pay is referenced in the employee’s next pay stub, employers do not need to provide a new Notice of Pay as a result of an increase in pay.  Hospitality employers must provide a new Notice of Pay upon an increase in pay because the Hospitality Industry Wage Order specifically requires that employers must provide a new Notice of Pay form to those employees who are affected by the increase to the minimum wage.

The required notices must contain the following information:

  • The employee’s normal rate(s) of pay and the basis thereof (e.g., hourly, shift, weekly, salary);
    • If an employer is taking a tip credit for an employee, the employer should note the full minimum wage as the employee’s hourly rate of pay, rather than the cash wage.
  • If applicable, the employee’s overtime rate of pay;
    • If an employer is taking a tip credit for an employee, the employer should note the full overtime wage, rather than the cash overtime wage.
  • The employee’s regular pay day;
  • Any allowances claimed against the minimum wage (e.g., tip credit, meal credit, lodging allowance, etc.);
  • The name of the employer (including any “doing business as” name);
  • The address of the employer’s main office and a mailing address (if different); and
  • The employer’s telephone number.

The written notice must be signed by both the employer and the employee and must be retained by the employer for at least six years.

The NYDOL has issued sample Notice of Pay forms that employers may use. Although employers are not required to use the NYDOL forms, it is recommended that they do so in order to ensure full compliance with New York law.   The Notice of Pay must be provided in both English and the employee’s native language (if not English), provided the NYDOL has created a Notice of Pay form in the employee’s native language.

Paystubs

 In addition to providing employees with the Notice of Pay, New York employers must continue to provide their employees with detailed paystubs that contain the following information:

  • The dates of work covered by the paycheck;
  • The name of the employee;
  • The name, address and phone number of the employer;
  • The rates of pay (regular and overtime) and basis of pay i.e. whether the employee is paid by the hour, shift, day, week, salary, piece, commission, or other method;
  • Gross wages;
  • A detailed listing of deductions;
  • A listing of any allowances claims as part of the minimum wage; and
  • Net wages.

Employers in New York City who are subject to the New York City Earned Safe and Sick Time Act as well as any employer providing employees with vacation, paid time off, sick time or a similar benefit should also provide detailed information regarding these benefits on employee paystubs.  This will avoid any potential discrepancies and confusion as employees will see on each paycheck the amount of time accrued during that pay period, the total amount of time accrued that year, the amount of time used during that pay period, the amount of time used during that year to date and the amount of time available to the employee.

As a reminder, it is the employer’s responsibility to ensure that paystubs are accurate.  Employers cannot trust their payroll services to ensure that paystubs are compliant.  We recommend consulting with counsel to review all paystubs to ensure that they meet the legal requirements.

New York Paid Family Leave

In addition to the previously discussed wage and hour obligations, there are significant changes to New York Paid Family Leave that employers must be aware of.  The payout increases from 55% of an employee’s average weekly pay to 60% of an employee’s average weekly pay, subject to a cap of $840.70.  Further, the weekly contribution towards such benefits is 0.270% of an employee’s gross wages each pay period with an increased maximum annual employee contribution of $196.72.

Sexual Harassment Statute Compliance

Finally, all employers must ensure that they are in compliance with the sexual harassment laws enacted by New York State and New York City.  All employers should have a compliant sexual harassment policy in place and New York City employers must have posted the required workplace poster and distributed the required notice to all employees.  Employers are also reminded that sexual harassment training for all employees is an annual requirement and all employees, even if they received training in 2019, must once again receive sexual harassment training in 2020.

In anticipation of these changes, New York employers should review their current payroll practices to ensure that they are prepared to meet the increased minimum wages and salary levels on December 31, 2019.  Employers should also ensure that they are prepared to enact the increased maximum deduction permitted by the New York Paid Family Leave law.

Increased Employee Voting Rights in New York

With Election Day on the horizon, employers are reminded that changes to the election law this year afford employees in New York additional rights to time away from work to vote.

Under the new law, New York employers must provide employees with up to three hours of time off from work to vote without a loss in pay for any election.  Employees may take such time off from work either at the beginning or end of their shift.  In order to take advantage of this right, employees must advise their employer of the need for time off from work to vote no less than two working days before the election.

Previously, employers in New York were required to provide up to two hours of paid time off from work to vote only if an employee had less than 4 consecutive hours between the time polls opened and the start of their shift or between the end of their shift and the closing of the polls.  With the elimination of the 4 hour window as a prerequisite for receiving time off to vote, all employees are entitled to receive paid time off to vote.

Employers must pay employees their regular hourly rate of pay for time off to vote.  Tipped employees for whom their employer takes the tip credit should be paid at their full hourly rate of pay.  Exempt employees may not be docked pay and their paid time off, sick leave and vacation balances may not be reduced should they take such time off from work to vote.

Finally, employers must post a notice outlining employees’ rights to take time off from work to vote.  Such notice must be posted in the workplace no less than ten working days prior to every election.

Employers should review their employee handbooks and any workplace policies discussing time away from work to vote in order to ensure that their policies comply with the new legal requirements.  Moreover, employers should ensure that they timely post the required notice of employee rights.

 

For more information on Meyer Suozzi’s Employment Law practice, click here.

 

Three Weeks Until Deadline for Sexual Harassment Training

The deadline for New York employers to provide their employees with sexual harassment training is October 9, 2019.  Employers can fulfill their obligation to provide training through a variety of means including using a live trainer, presenting videos with an interactive
component, or using online modules with interactive components.

Please note that as of August 12, 2019, there are additional requirements for sexual harassment training.  Employers are now required to provide employees with the following at sexual harassment training:

  • A copy of the company’s sexual harassment policy;
  • A copy of the company’s sexual harassment complaint form; and
  • A copy of the materials presented at the training.

Given that many employers started their sexual harassment training prior to the change in law, employers should ensure that they have met the sexual harassment training requirements for all training performed post August 12, 2019.

For more information on Meyer Suozzi’s Employment Law practice, click here.

 

New York State Enacts Stricter Pay Equity Law and Bans Salary History Inquiries

On July 10, 2019, at the ticker tape parade celebrating the US Women’s National Team’s victory at the World Cup, Governor Cuomo signed two bills into law that require equal pay for equal work regardless of membership in any protected class and prohibit employers from asking prospective employees about their salary history.   Employers should be mindful of these changes and
re-evaluate their pay policies.

Expanded Pay Equity Law

Prior pay equity laws only prohibited differentials in pay due to an employee’s gender.  Under the expanded law, employers are prohibited from employee pay differentials based upon employee membership in any class protected under the New York State Human Rights Law (“NYSHRL”) including, but not limited to, age, religion, sexual orientation, disability, and marital status where employees perform equal or substantially similar work.  However, pay differentials will still be permitted where the differentials are based upon:

  • a seniority system;
  • a system that measures earnings based upon quantity or quality; or
  • a bona fide factor other than membership in a class protected by the NYSHRL such as education, training or experience that is job-related and consistent with business necessity.

While pay differentials are permitted under these circumstances, employees will be able to refute the
justification for the pay differential where they establish that the practice has a disparate impact upon a
protected class, that there is an alternative practice that would achieve the same purpose without the
disparate impact, and that the employer refused to adopt the alternate practice.

This law will go into effect on October 8, 2019.

Salary History Inquiry Ban

Following the enactment of similar laws on the local level in Albany, Suffolk and Westchester Counties and New York City, Governor Cuomo signed into law legislation barring employers from relying upon or inquiring about the salary history of a job applicant or current employee as a factor in deciding whether to hire the
applicant, promote the current employee or what salary to offer.  Moreover, employers are also prohibited from:

  • seeking, requesting, or requiring applicants or current employees to disclose their salary history as a condition of consideration for employment, an offer of employment or an offer of promotion;
  • seeking, requesting, or requiring applicants or current employees’ current or former employers or agents to disclose their salary history; and
  • refusing to interview, hire, promote, otherwise employ or retaliate against an applicant or current employee based upon salary history or their refusal to provide their salary history.

However, nothing in the law prohibits an applicant or employee from voluntarily, without prompting,
disclosing their salary history, including for the purposes of negotiation.  Moreover, an employer can confirm salary history after an offer of employment with compensation is made and the applicant or employee proffers their salary history for the purposes of negotiating a higher rate of compensation.

Violation of the ban on salary history inquiries may result in liability for damages, injunctive relive and
attorneys’ fees.

This law will go into effect on January 6, 2020.

What Employers Should Do

Employers should review their compensation practices to ensure that they do not disadvantage members of a protected class.  Moreover, they should review the salaries and wages paid to employees in substantially similar roles to ensure that their pay practices, though neutral, do not disparately impact members of a
protected class.  Where systems are required, such as a seniority system or one that measures earnings based upon quantity or quality, Employers must establish an actual system that is neutral towards protected classes, administered objectively and can be explained cogently in the event it is challenged.

Finally, Employers should review their hiring and promotional practices to ensure that their applications,
interview aids and documents used to aid in the internal promotions process are devoid of any sections where they seek information on applicants’ and employees’ salary history.

For more information on Meyer Suozzi’s Employment Law practice, click here.

New York State Passes Game Changing Legislation Expanding Workplace Harassment and Discrimination Laws

At the close of the legislative session, the New York State Legislature passed a series of bills having a broad impact upon the state’s anti-discrimination and anti-harassment laws.  The changes in law expand upon the sexual harassment reforms enacted last year and further amend the New York State Human Rights Law (“NYSHRL”).  When this legislation becomes effective, it  will impact every employer in New York State.

Expanding Coverage of the NYSHRL to All Employers

Currently, the NYSHRL applies only to employers with four (4) or more employees, except for claims of sex based discrimination, which applies to all employers regardless of size.  Under the new amendments, the entire NYSHRL will now apply to all employers, regardless of size.

Changes to the Burden of Proof and Viable Defenses in Harassment Claims

To establish a claim of harassment under current law, an employee must demonstrate that the alleged conduct was “severe and pervasive.”  The new NYSHRL amendments eliminate this standard.  An employee now needs only to establish that the alleged conduct subjected them to inferior terms, conditions or privileges of employment because they are a member of a protected class.  Moreover, the NYSHRL is now to be construed liberally to maximize deterrence of discriminatory conduct, even if such construction differs from federal law.

The NYSHRL amendments also diminish a long standing defense to harassment claims.  Previously, the Faragher-Ellerth defense allowed an employer to defeat a claim of harassment if it provided a procedure for reporting complaints of harassment, but the employee failed to follow the procedure, thus depriving the employer of the ability to address the alleged harassment.  Now, an employee’s failure to complain is not determinative of an employer’s liability.

Additionally, the NYSHRL amendments now expressly permit an employer to avoid liability for harassment when the employer can establish that the alleged conduct does not rise above the level of petty slights or trivial inconveniences, as viewed through the lens of a reasonable victim of discrimination who is a member of the same protected class.

Harassment Protections Expanded to Domestic Workers and Non-Employees

Last year, the state sexual harassment laws expanded the protections against sexual harassment to non-employees, such as contractors, vendors and consultants.  The new law further expands the state’s anti-harassment laws and now protect domestics workers and non-employees from harassment based upon any protected characteristic.  Thus, employers will now be liable for harassment of domestic workers, contractors, subcontractors, vendors, consultants and any others providing services in the workplace so long as the business knew or should have known that the individual was subjected to harassment in the workplace and took no corrective action.

Expanded Damages

While the NYSHRL currently does not allow successful claimants to recover punitive damages or attorneys’ fees, under the NYSHRL amendments successful claimants can recover punitive damages and “shall” be awarded attorneys’ fees.

Confidential Settlements and Mandatory Arbitration Agreements Prohibited

Last year’s changes to the NYSHRL prohibited non-disclosure clauses in settlement agreements for sexual harassment claims, unless the alleged victim expressly wanted such a clause.  The new NYSHRL amendments expand this provision to cover all discrimination claims.  As a result, confidentiality clauses may only be included in settlement agreements resolving discrimination claims where the alleged victim expressly desires such a clause.  Moreover, the individual must be given at least 21 days to review the agreement and 7 days to revoke the agreement after signing it.  Significantly, any confidentiality language must expressly permit the individual to participate in an investigation with law enforcement agencies, the Equal Employment Opportunity Commission (“EEOC”), the New York State Division of Human Rights (“NYSDHR”) and similar local agencies as well as to speak to an attorney retained by the employee.  Absent such a carve out, the confidentiality language is void.  The confidentiality language must also permit the individual to provide facts necessary to receive unemployment benefits, Medicaid or any other public benefit to which the employee may be entitled.  Further, the language must be both in English and the employee’s primary language.

The new law also expands last year’s prohibition of mandatory arbitration provisions in contracts to resolve complaints of sexual harassment.  More particularly, pursuant to the NYSHRL amendments, any agreement that requires mandatory arbitration of any discrimination claims will be prohibited.  Notably, however, just days after this legislation was passed, the United States District Court for the Southern District of New York ruled that the prohibition on mandatory agreements to arbitrate harassment claims is preempted by the Federal Arbitration Act and, therefore, invalid.  As a result, any such arbitration agreements may potentially be deemed enforceable should they be challenged in court (absent their unenforceability on other grounds).

Finally, the NYSHRL amendments expand confidentiality prohibitions beyond the settlement context.  Under the amendments, any  contractual provision between an employer and an employee or potential employee that precludes disclosing facts related to any future claim of discrimination is deemed void, unless the language advises the employee or potential employee that they are not prohibited from speaking with law enforcement, the EEOC, the NYSDHR, similar local agency, or an attorney retained by the individual.

Expanded Sexual Harassment Training and Policy Requirements

Employers must now provide their sexual harassment policy to employees in English and their native language at the time of hire and at their annual sexual harassment training seminar.  However, if the state does not publish a model sexual harassment policy in the language identified by an employee as their primary language, the employer need only provide the policy to that employee in English.  Employers must also provide employees with a copy of the training materials presented to employees at their sexual harassment training.

Expanded Statute of Limitations to File Claims with the New York State Division of Human Rights

The legislation extends the time period to file a claim of sexual harassment with the New York State Division of Human Rights from one (1) year to three (3) years.

Expanded Definition of Race Discrimination

The definition of “race” within the Education laws and NYSHRL has been amended to include “traits historically associated with race, including, but not limited to, hair texture and protected hairstyles.”  The phrase protected hairstyles refers to styles such as braids, locks, and twists.  This mirrors legislation passed earlier this year by the City of New York .

What Should Employers do Next?

While these revisions to the law will have a significant impact on all New York workplaces, employers can prepare to address the changes.  Employers should review their workplace harassment, discrimination, and dress code/appearance policies and ensure that their sexual harassment training programs are set up to comply with the new requirements.  Employers should also review their standard forms to ensure they do not run afoul of the new rules regarding confidentiality.  We recommend that employers take these steps as soon as possible because, once enacted, some of these changes go into effect immediately while others will go into effect over time.

 

For more information on Meyer Suozzi’s Employment Law practice, click here.

 

Wills, Trusts & Estates 2019 Client Alert – The 2020 Elections: A Stimulus to Use Your Transfer Tax Exemptions?

The upcoming 2020 federal elections have the potential to cause seismic changes to the estate planning landscape.  Should Democrats retake control of the White House and both chambers of Congress, drastic reductions to the estate, gift and generation-skipping transfer (GST) tax exemption amounts and tax rates may be implemented, accompanied by the possible rollback of several traditional estate planning vehicles.  A review of the current platforms of high profile Democratic candidates is a powerful inducement to take action now to use gift and GST tax exemptions and undertake planning opportunities while they are available.

Current Law  

The Federal estate, gift, and GST tax exemptions in 2019 are $11.4 million per individual.  These exemptions, which are indexed annually for inflation, were doubled in 2018 under the Tax Cuts and Jobs Act from $5 million per individual to $10 million per individual, and they are scheduled to revert back to $5 million per individual, as indexed for inflation (estimated at $6.7 million), at the end of 2025 unless new legislation is enacted.  The tax rate for transfers in excess of the estate, gift and GST exemptions is 40%.

Senator Bernie Sanders (D-VT)

Senator Bernie Sanders has advanced what may be the most sweeping and disruptive estate tax reform proposal.  His “For the 99.8 Percent Act,” introduced in January 2019, would significantly reduce current estate, gift, and GST tax exemption amounts and increase tax rates.  The Act would decrease the estate and GST tax exemptions to the 2009 level of $3.5 million, decrease the gift tax exemption to $1 million and increase the estate, gift, and GST tax rates from 40% to a maximum of 77%.

In addition, the Sanders proposal contains other provisions which would eliminate or restrict well-established estate planning techniques, including:

  • Elimination of valuation discounts for “nonbusiness assets” (assets which are not used in the active conduct of a
    business) held by an entity.
  • Elimination of minority discounts where a transferor, transferee, and members of the family of the transferor and transferee control a business or own the majority of the ownership interests (by value) in such business.
  • Limiting the total gift tax annual exclusion for transfers made in a calendar year to twice the annual exclusion amount.
  • Limiting the utilization of grantor retained annuity trusts (GRATs) by requiring a minimum term of 10 years for such trusts.
  • Requiring that the assets of a grantor trust less the amount of any taxable gifts made by the decedent to the trust be included in the grantor’s gross estate.
  • Limiting the utilization of dynasty trusts by eliminating the GST tax exemption for transfers to “non-qualifying trusts” with a duration of 50 years or more from creation.
  • Eliminating the use of Crummey Demand Powers in trusts, including irrevocable life insurance trusts.

Senator Elizabeth Warren (D-MA)

In January 2019, Senator Warren unveiled her “Ultra-Millionaire Tax,” a proposal for an annual tax of 2% on ultra-millionaires who own more than $50 million in assets and an annual tax of 3% on those who own more than $1 billion in assets.  There would also be a 40% tax penalty for those attempting to “evade” taxation by renouncing their U.S.
citizenship.

In March 2019, Senator Warren, along with Senator Kirsten Gillibrand (D-NY) and Senator Edward Markey (D-MA), introduced the “American Housing and Economic Mobility Act of 2019.”  The proposal would reduce the estate and gift tax exemption amount to $3.5 million.  It would also raise to 55% the estate, gift and GST tax rate on transfers of $3.5 million to $13 million, 60% on estates, gifts and transfers over $13 million and not over $93 million, 65% on estates, gifts and transfers of over $93 million and not over $1 billion, and 75% on estates, gifts and transfers of more than $1 billion.

Like the Sanders proposal, this proposal would require a 10 year minimum term for GRATs, require that assets of a grantor trust be deemed included in an owner’s gross estate for estate tax purposes, eliminate the GST exemption for transfers to trusts with a termination date of 50 years or more from creation, and limit the total gift tax annual exclusion for all transfers made in a calendar year to twice the annual exclusion amount.

Senator Joseph Biden (D-DE)

Senator Biden has not yet offered or introduced a specific estate tax reform proposal.  However,  in the past he has voted against raising the estate tax exemption from $1 million to $5 million, voted against making estate tax cuts permanent and voted against repealing the estate tax.

Senator Kamala Harris (D-CA)

Like Senator Biden, Senator Harris has not introduced a specific estate tax reform proposal, but has offered that she would use the estate tax to fund her proposal to give teachers a pay raise.  She has gone on record in the Washington Post that she would increase the estate tax on “the top 1 percent of taxpayers” and crack down “on loopholes that let the very wealthiest, with estates worth multiple millions or billions of dollars, avoid paying their fair share.”

The Time to Act is Now

This Alert is not intended to offer a prediction on the outcome of the 2020 elections or to opine on the merits of any particular proposal, but clearly there is a common theme in the Democratic candidates’ rhetoric and platforms.

Current law provides a tremendous opportunity for families to engage in estate planning right now, while estate, gift and GST tax exemptions remain at historic highs.  This is particularly true with the issuance of proposed regulations by the IRS in November 2018 providing that the use of any gift tax exemption under the Tax Cuts and Jobs Act will be grandfathered and not subject to “clawback” by the IRS.  Since the current law is scheduled to sunset on December 31, 2025 (to an estimated exemption of $6.7 million), the popular belief is that there is plenty of time to take advantage of the temporary exemption amounts.

If, however, the Republicans are swept out of office in the 2020 elections, the current exemptions could be materially curtailed to $3.5 million, and longstanding estate planning strategies may be swept away well before December 31, 2025.  While there is no guarantee that any technique undertaken now will not be adversely impacted under a new law, failure to act now could result in vanished planning opportunities.

Please contact us so that we can discuss the current estate planning strategies available for your particular circumstances before they potentially disappear.

 

For more information on Meyer Suozzi’s Wills, Trusts & Estates Law practice, click here.

 

Our Wills, Trusts & Estates Law practice group includes the following attorneys:

 

Patricia Galteri

pgalteri@msek.com

(516) 592-5790

Nathaniel L. Corwin

ncorwin@msek.com

(516) 592-5740

 

Jayson J.R. Choi

jchoi@msek.com

(516) 592-5799

Elisa Santoro

esantoro@msek.com

(516) 592-5724

 

Paul Millus Authors, “The Ins and Outs of a BCL § 1118 Hearing”

Counsel is presented with an opportunity to represent a petitioner (or a respondent) in a corporate dissolution proceeding. As petitioner’s counsel, a petition under N.Y. Business Corporation Law (“BCL”) § 1104 cannot be filed as the client does not own at least one-half of the votes of all outstanding shares of the corporation. However, as the client owns an excess of 20% of such shares, she is permitted to file under BCL § 1104-a. Respondent’s counsel receives the petition and has two choices: (1) defend on the grounds that a dissolution is not legally viable under § 1104-a or under “common law”; or (2) within 90 days after the filing of the petition, the respondent can elect to purchase the shares owned by the petitioner at their fair value “upon such terms and conditions as may be approved by the court” under BCL § 1118.

Why even consider opting to purchase the minority’s shares if respondent believes that dissolution should not be granted? There are a number of factors that can play into this decision. First, considering the fact that under BCL § 1118 the valuation will be as of the date of the filing of the petition, this may inure to the respondent’s benefit. Respondent may expect a marked change in the success of the company subsequent to the date of the filing of the petition now that the dissatisfied shareholder may no longer be involved in day-to-day operations. Respondent may also believe that, notwithstanding her fervent belief that dissolution is unwarranted, by electing to purchase the shares she removes the uncertainties that any litigation engenders and avoids the costs associated with fighting the aggrieved shareholder who has requested to exit the corporate entity. One of those risks is that if the dissolution is granted, there will be even more costs and court intervention as the company winds down its operations for the purpose of liquidating its assets to effect a distribution to petitioner and any other shareholders. This is a costly and risky proposition for any ongoing concern and may result in a diminution of the value of those assets throughout the dissolution process. Finally, respondent may have no interest in having to deal with the almost constant haranguing that an aggrieved shareholder may engage in – even if his initial attempt at dissolution was unsuccessful.

A decision is made to go the BCL § 1118 route, so what is next?

For either petitioner or respondent’s counsel what comes next is fairly formulaic. The matter is a special proceeding whose procedural aspects are governed by the provisions of Article 4 of the CPLR.[i] There will be an exchange of relevant financial documents which will eventually lead to a hearing where the court will determiner “fair value.” Where the BCL does not define “fair value,” courts are in agreement that “fair value” is the price which a hypothetical “willing purchaser, in an arm’s length transaction, would offer the corporation as an operating business.”[ii] Fair value is not ascertaining the value of an interest in the “throes of liquidation.”[iii] In such a proceeding, neither side has a burden of proof. Rather, it is the court that determines fair value based upon the evidence presented at the hearing, usually through the testimony of experts.[iv] Both sides also know that the date of valuation, as stated above, is the date prior to the date on which the petition was filed.[v] So how do the respective sides begin to determine “fair value,” and what other considerations are there for each side as they try to convince the court that their valuation is more accurate?

Pre-Hearing Prep

There should be no doubt that expert assistance in this matter is essential. Professional appraisers understand the valuation techniques regularly accepted in the industry and by the courts. While a lawyer involved in this line of work should have some working knowledge as to how a business is appraised, no lawyer can be expected to have the level of knowledge that a professionally-certified business appraiser has acquired over years of study. In addition, no matter what skills an attorney may have at cross examination of a business valuation expert, the court is going to want to have a competing valuation to compare and contrast against the valuation of the other side.

With that said, it is time to engage the services of an expert. What should counsel look for when hiring a business valuation expert? Certainly the expert should be “certified.” There are a number of organizations which require appraisers to go through a certification process. Some of the accrediting organizations are USPAP, NACVA, IBA and ASA.[vi] One should also look to an expert who has specific knowledge of the industry which she will be evaluating. The more the expert knows about the particular industry the better.

The expert should be engaged by counsel for their respective parties rather than the parties themselves.[vii] Unlike the attorney-client privilege, the client-accountant communication privilege is limited. However, when an attorney retains an accountant for his expertise to assist in client representation, the privilege will apply to attorney-accountant communications. In this “Kovel Letter,” the attorneys engage the accountant, specifying that the expert is assisting in representation of his specific client under the attorney’s direction, the expert is reporting directly to the attorney, all communications between the expert and the client and between the attorney and the client are privileged for the purpose of assisting the attorney, and that the attorney has ultimate control of the expert’s work and without written permission by the attorney the expert cannot disclose that to anyone.[viii]

There are essentially three predominant methodologies to determine fair value, to wit, (1) net asset value; (2) investment value; and (3) market value.[ix] Net asset value is an asset-based approach focusing on the balance sheet of the company and more appropriate for holding companies with significant tangible assets, i.e., family limited partnerships. Investment value is also known as the “income approach” which is to determine a value that is equal to the present value of future benefits such as revenues, operating profits and cash flow. This involves a capitalization of a single benefit stream or discounting multiple benefit streams. Finally, there is the generally-recognized market approach or market value. Market approach is determining value by observing transactions in the market place that are similar in nature thus ascribing value to the transaction at issue. For most closely-held corporations, it will be difficult to establish a market value approach because of the uniqueness of the company’s operations irrespective of the industry in which the company is involved. Moreover, there may not simply be enough comparables that are similar enough to warrant reliance on such an approach.

Concepts Counsel Should Be Aware Of

Although unquestionably the attorneys in a fair-value proceeding will be relying significantly on their experts, an understanding of several concepts that impact an expert’s valuation will be of great assistance to counsel. For example, but for petitioner forcing this issue through the initial filing for dissolution, it is highly unlikely that petitioner’s shares were readily marketable, and, more likely than not, there are significant restrictions in place preventing transfer of those shares. Nevertheless, under New York law there is no “minority discount” that may be applied in a BCL § 1118 valuation hearing to compensate the other shareholders for the minority shareholders’ lack of control. The rationale is a minority discount would deprive minority shareholders of their proportionate interest in a going concern which would result in minority shares being valued below that of majority shares, thus violating the courts mandate of equal treatment of all shares of the same class in minority stockholder buyouts.[x] However, a “marketing discount” or, as it is commonly known, a “discount for lack of marketability” (DLOM) may be applied to compensate for the lack of a ready market for the shares. However, note that no New York court has ever held that DLOM must be applied in a § 1118 proceeding, although courts have indeed recognized a DLOM.[xi] Also, DLOM is not designed to discount the value of the corporation or any particular asset, i.e., goodwill, but rather is to reflect the lack of marketability of the shares of the corporation.[xii]

Next, counsel should be aware of the possibility that the existence of an embedded capital gains tax or “B.I.G.” may be used to reduce the value of the corporation. The theory is that corporate holdings appreciate in value. As such, an event such as a dissolution could result in the liquidation of a particular asset or assets owned by the corporation, and, thus, a large capital gains tax will result upon the sale of such assets. In New York, it is recognized that embedded capital gains tax assets held by a C corporation will affect what a hypothetical willing purchaser with reasonable knowledge of the underlying facts will pay for the corporate stock. Universally, New York courts have consistently held that a hypothetical willing buyer will insist on a B.I.G. deduction.[xiii]

It has also been held that interest is payable to the petitioner from the date of the filing of the petition. As for the rate of interest, courts generally award an “equitable” rate of interest. In most cases, courts have determined that the “equitable” rate of interest should be the statutory rate of nine percent.[xiv] This is an easy default, but it can be challenged. The court may fix interest at a rate other than the statutory rate if the court finds “such deviance is warranted by the equities” and the court is provided with specifics as to why this should be done.[xv] In today’s low-interest environment, one may argue that nine percent interest is unwarranted coupled with other facts to support that position. There is also the question of whether the petitioner’s cost expenses in attorney’s fees can be awarded by the court. BCL § 1118 makes no provision for the imposition of court costs and disbursements. However, in Blake, it was determined that such awards are discretionary with the court.[xvi]

One factor that the lawyer can add to the expert-driven proceeding, and which may prove detrimental to either parties’ claim in terms of how much interest is awarded (or at all) or whether costs are assessed, is potential “bad faith” by either one of the litigants. Bad faith may be found in connection with one of the shareholders’ actions before the petition was filed or during the fair value proceeding.[xvii] If the court makes a determination that petitioner has acted in bad faith, it could affect the petitioner’s ability to receive prejudgment interest.[xviii]

In sum, notwithstanding the seemingly mechanical process by which value may be determined, the lawyer still has the ability to use his or her talents to affect the outcome.


[i]     See In Re WTB Prop., Inc., 291 A.D.2d 566 (2d Dept. 2002); see also In Re Quail Aero Serv., Inc., 300 A.D. 2d 800 (2d Dept. 2002).

[ii]    Matter of Pace Photographers (Rosen), 71 N.Y.2d 737, 748 (1988); Matter of Penepent Corp., 96 N.Y.2d 186, 193 (2001); and Matter of Seagroatt Floral Co., Inc. (Riccardi), 78 N.Y.2d 439, 445 (1991).

[iii]   Matter of Seagroatt Floral Co., Inc., 78 N.Y.2d at 445.

[iv]    Matter of Cohen, 636 N.Y.S.2d 994 (Sup. Ct., N.Y. Co. 1993), aff’d 240 A.D.2d 225 (1997).

[v]     See BCL § 1118.

[vi]    Uniform Standards of Professional Appraisal Practice (USPAP), National Association of Certified Valuation Analysts (NACVA), Institute of Business Appraisers (IBA), American Institute of Certified Public Accountants (AICPA), American Society of Appraisers (ASA):  CFA Institute (CFAI): Chartered Financial Analyst (CFA).

[vii]   The engagement letter should specify that the expert will solely look to the client for payment of all invoices.

[viii] U.S. v. Kovel, 296 F.2d 918 (2d Cir. 1961).

[ix]    Matter of Friedman v. Beway Realty, 87 N.Y.2d 161, 167 (1995).

[x]     Matter of Friedman, 87 N.Y.2d at 170.

[xi]    Seagroatt, 78 N.Y.2d at 442.

[xii]   Ferolito v. Arizona Beverages USA, 2014 WL 5834862, *18-19 (Sup. Ct., Nassau Co. 2014).

[xiii] Giaimo v. Vitale, 101 A.D. 3d 523 (1st Dept. 2012).

[xiv] See Giaimo, 101 A.D.3d at 526 (the court awarded prejudgment interest at the “equitable rate” of four percent).

[xv]   Rodriguez v. Estevez, 19 Misc.3d 1116(A) (Sup. Ct., N.Y. Co. 2008).

[xvi] Blake v. Blake Agency, Inc. 107 A.D.2d 139, 151 (2d Dept. 1985).

[xvii] McDaniel v. 162 Columbia Heights Housing Corp., 25 Misc.3d 1024 (Sup. Ct., Kings Co. 2009); Hall v. King, 177 Misc.2d 126 (Sup. Ct., N.Y. Co. 1998); Ferolito, 2014 WL 5834862 at *22.

[xviii] Id.

 

Reprinted with permission by the Nassau County Bar Association.