Advisories

T&E Litigation Newsletter - 5/13/13

mswirbalus@goulstonstorrs.com (Mark Swirbalus) — Mon, 13 May 2013 00:00:00 EDT

Last week, the Appeals Court issued a much-anticipated decision in Ajemian v. Yahoo!, Inc., No. 12-P-178 (May 7, 2013), which concerns the question of whether the decedent’s e-mails in his Yahoo! account are property of his estate.

Without ruling on this question, the Probate Court had dismissed the administrators’ complaint, holding that their suit to gain access to the e-mails must be brought in California pursuant to the forum selection clause in the Terms of Service and Privacy Policy (“TOS”) for the Yahoo! account. The Probate Court had also held that res judicata barred the administrators’ suit in Massachusetts, where they had already obtained an unopposed order against Yahoo! permitting them to obtain the headers to the e-mails, but not the contents of the e-mails themselves.

The Appeals Court reversed and remanded, holding that res judicata did not bar the present suit in Massachusetts, and that neither the forum selection clause nor the one-year limitations period stated in the TOS barred the present suit in Massachusetts. The Appeals Court explained that the TOS, which was in the form of a “browsewrap” agreement (where terms and conditions are posted as a hyperlink on the website), had not been reasonably communicated to the decedent or accepted by him. The Appeals Court also explained that it would be unreasonable to enforce the TOS against the administrators, who were not parties to the agreement, and that Massachusetts is the proper jurisdiction to hear the dispute because the decedent was domiciled in Massachusetts and the administrators are residents of Massachusetts.

The Appeals Court declined to address the question of whether the decedent’s e-mails in his Yahoo! account are property of his estate, and thus whether the administrators can access those e-mails. “In these circumstances, the question is best addressed on remand after full briefing and such further proceedings as the probate judge deems appropriate.” So, for the answer to this question, it would seem that we must stay tuned.

Pursuant to IRS Circular 230, please be advised that, this communication is not intended to be, was not written to be and cannot be used by any taxpayer for the purpose of (i) avoiding penalties under U.S. federal tax law or (ii) promoting, marketing or recommending to another taxpayer any transaction or matter addressed herein.

T&E Litigation Newsletter - 4/26/13

mswirbalus@goulstonstorrs.com (Mark Swirbalus) — Fri, 26 Apr 2013 00:00:00 EDT

In Yeomans v. Stackpole, Docket No. MICV2011-01702-F, 2013 Mass. LEXIS 237 (April 13, 2013), the Middlesex Superior Court addressed the question of whether a law firm could be held vicariously liable for legal malpractice based on the alleged breach of fiduciary duty of one of its lawyers as a trustee.

Attorney John Roche served as a trustee of a trust since 1999. In 2001, Attorney Roche joined a law firm (“TG&P”) as a “contract partner.” Under the terms of his contract, Attorney Roche was entitled to keep the trustee fees he earned on trusts that pre-dated his association with TG&P. After Attorney Roche died in 2007, a successor trustee was appointed, and he and a beneficiary then brought suit against Attorney Roche’s estate, TG&P and another law firm with which he had been associated for his allegedly imprudent management of the trust.

The claim against TG&P was that it should be held vicariously liable for Attorney Roche’s alleged negligence. The plaintiffs based this claim on their argument that the beneficiaries had an attorney-client relationship with Attorney Roche. TG&P moved for summary judgment, arguing in part that the firm cannot be held vicariously liable because a viable claim for legal malpractice against Attorney Roche as a partner in the firm does not exist.

The Court granted TG&P’s motion. The Court explained that for a viable legal malpractice claim to exist, there must be an attorney-client relationship, either express or implied, between one of the plaintiffs and Attorney Roche, and that this relationship must exist in the context of his allegedly improper investment and disbursement decisions. The Court held that there was no evidence of such a relationship. All of the interactions with Attorney Roche were as a trustee, not as an attorney. There were no bills for “legal” services, and there was no correspondence on TG&P letterhead that purported to show Attorney Roche giving “legal” advice.

The Court also noted that the trust was not a client of TG&P and that Attorney Roche did not bill for his trustee fees on TG&P letterhead. The only connections between Attorney Roche and TG&P were letters relating to trust management on TG&P letterhead and a meeting at TG&P between Attorney Roche and the beneficiaries. As the Court found, these connections were simply not enough to create an attorney-client relationship between TG&P and the trust.

“Ultimately, there is no record evidence that the law firm . . . had an attorney-client relationship with either plaintiff. Because no attorney-client relationship existed . . . , no duty ran between the law firm and the plaintiffs. Without a duty, the plaintiffs’ legal malpractice claim against [TG&P] must be dismissed.”

In a separate decision pursuant to Rule 1:28 that warrants only passing mention, Asfawossen v. Stahlin, Case No. 12-P-645, 2013 Mass. App. Unpub. LEXIS 464 (April 23, 2013), the Appeals Court held that a party cannot collaterally attack a Probate Court judgment by suing the Probate Court judge in Superior Court. Needless to say, even if the Probate Court judge were not judicially immune from such a suit, the Superior Court lacks subject matter jurisdiction to hear this kind of pseudo-appeal from a Probate Court judgment. Let the world take notice.

This update was authored by Mark Swirbalus, a Director in the firm's Probate & Fiduciary Litigation group. For questions or additional information on this topic, please contact Mark at mswirbalus@goulstonstorrs.com or contact any member of the Probate & Fiduciary Litigation group.

This newsletter should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own lawyer concerning your situation and any specific legal questions you may have.

Pursuant to IRS Circular 230, please be advised that, this communication is not intended to be, was not written to be and cannot be used by any taxpayer for the purpose of (i) avoiding penalties under U.S. federal tax law or (ii) promoting, marketing or recommending to another taxpayer any transaction or matter addressed herein.

©2013 Goulston & Storrs – A Professional Corporation All Rights Reserved

Peace on the PILOT Front?

jeiferman@goulstonstorrs.com (Jack Eiferman) — Wed, 17 Apr 2013 00:00:00 EDT

Decades ago, the City of Boston began collecting payments in lieu of taxes (PILOTs) from major charitable institutions, usually in connection with municipal approval of a major construction project or purchase of formerly taxable property. Some institutions, despite their size, might never have been requested to make a PILOT payment, whereas others that regularly engaged in expansion would be asked many times. Ground rules for PILOTs were unclear, and they occasioned spirited debate.

In response, Mayor Menino established a task force in 2009 to make recommendations regarding the City’s PILOT program. They recommended the following program:

All property of each institution over a minimum size will be assessed and a provisional PILOT payment of 25% of the institution’s assessed property tax will be established.
Community benefits provided by the charitable institution to the City and its residents can offset up to 50% of the PILOT payment.
This program will be phased in over a five-year period.
PILOT payments are voluntary.

The Boston Municipal Research Bureau recently reported on PILOT payments by the City’s 48 largest (by assessed value) tax-exempt institutions during the program’s first year. The City received $19.5 million in PILOT payments, an increase of $4.3 million over the prior year, and more than 90% of what had been requested.

Is PILOT peace at hand? The answer isn’t clear since there remain several open questions: Are assessments of charitable properties set with the same rigor as for taxable property? What community benefits count – anything the institution does related to its core mission, or only programs or services that replace or reduce the burden on city services? We’ll have a better idea next year, when several institutions will be expected to substantially increase their PILOT payments.

This advisory was authored by Jack Eiferman and Matthew Kiefer, Directors in the firm's Medical, Educational and Cultural Institutions group. For questions or additional information on this topic, please contact Jack at jeiferman@goulstonstorrs.com or Matthew at mkiefer@goulstonstorrs.com.

This advisory should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own lawyer concerning your situation and any specific legal questions you may have.

Pursuant to IRS Circular 230, please be advised that, this communication is not intended to be, was not written to be and cannot be used by any taxpayer for the purpose of (i) avoiding penalties under U.S. federal tax law or (ii) promoting, marketing or recommending to another taxpayer any transaction or matter addressed herein.

©2013 Goulston & Storrs – A Professional Corporation All Rights Reserved

T&E Litigation Newsletter - 4/17/2013

mswirbalus@goulstonstorrs.com (Mark Swirbalus) — Wed, 17 Apr 2013 00:00:00 EDT

After more than a month with no summary-worthy decisions reported in this area (in your author’s opinion), the Appeals Court has issued two Rule 1:28 decisions in the same case.

In Guardianship of Kenneth E. Simon, Sr. No. 1, Case No. 12-P-630, 2013 Mass. App. Unpub. LEXIS 400 (April 8, 2013), the Appeals Court affirmed a decision by the single justice denying the guardian’s motion for an enlargement of time to file a notice of appeal from a Probate Court decree. In that decree, the Probate Court ordered the guardian to pay legal fees and costs to the ward’s children.

The guardian argued that (1) the clerk of the Probate Court never provided him with notice that his motion under Rule 63 had been denied, (2) he did not check the docket until after the usual appeal period had already expired, and (3) there was good cause to allow his late filing because there was a meritorious basis for appeal. The Appeals Court disagreed, explaining that an attorney’s oversight or lack of notice of entry of a judgment – the guardian is an attorney – is neither excusable neglect nor good cause to extend the time for filing a notice of appeal. The Court further explained that an attorney cannot simply rely on a clerk’s duty to send notice of orders, because the attorney has an obligation to check docket entries periodically. “The petitioner [guardian] has not shown good cause for failing to check the docket entries . . . Nor does the suggestion of a clerk’s error, without more, create ‘unique and extraordinary’ circumstances.”

Moreover, the Court held that the denial of the guardian’s motion under Rule 63 did not toll the time for filing a notice of appeal in any event. Rather, the denial of the guardian’s motion for a new trial under Rule 59 is what triggered the running of the appeal period, and the guardian did not dispute having received notice of that denial.

In addition to affirming the decree ordering the guardian to pay legal fees and costs to the ward’s children, the Court also ordered the guardian to pay their legal fees and costs on appeal pursuant to G.L. c. 215, § 45.

On the same day, but in a separate decision, Guardianship of Kenneth E. Simon, Sr. No. 2, Case No. 12-P-1510, 2013 Mass. App. Unpub. LEXIS 404 (April 8, 2013), the Appeals Court affirmed a judgment of the Probate Court with respect to the guardian’s first and final account. The issue in dispute was the nearly $330,000 in fees and costs that the guardian and his attorney were ordered to return to the ward’s estate. The Probate Court found that “during the eighty-three days of guardianship prior to the ward’s death, the guardian and his attorney acted in concert, and in their own interest rather than that of the ward, to generate outrageous, excessive, and improper guardian’s and attorney’s fees.”

The Appeals Court held there was no merit to the attorney’s argument that, because he was not a named party to the proceedings, the Probate Court lacked authority and subject matter jurisdiction to enter a disgorgement order against him. The Appeals Court reasoned that the reasonableness of the attorney’s fees and costs had been identified in the pretrial order, and that “it was well within the judge’s broad equitable discretion to order the guardian and his attorney, who acted in concert, to return fees taken that were in excess of those to which they were lawfully entitled.” Their acting in concert “rendered them both fiduciaries who could be required to return to the estate the monies beyond which they were lawfully entitled.”

The Appeals Court rejected the attorney’s argument that he had not been given proper notice and an opportunity to be heard on the question of disgorgement. “The attorney examined the witnesses, reviewed the exhibits, and argued extensively at trial. . . [T]he attorney was well aware that what was at stake during the trial was the reasonableness of the fees charged during the guardianship, as to which the attorney had already received payment (and had assured himself by constantly replenishing his retainer). At no point in the proceedings did the attorney request to testify or present his other evidence as to the reasonableness or necessity of the fees charged or the propriety of an order of disgorgement.”

The Appeals Court also rejected the attorney’s argument that the Probate Court committed error in denying a motion to strike the testimony of the opposing side’s expert witness, who was permitted to testify regarding his survey of attorney rates within Barnstable County. The Appeals Court described this kind of survey as a “historically accepted method of determining local rates.” Moreover, both the expert and the Probate Court had properly relied on the lode-star method of calculating a reasonable fee by multiplying hours reasonably incurred by a reasonable hourly rate. The Appeals Court did not address the attorney’s related argument that the expert’s testimony stifled competition in violation of the interstate commerce clause, other than to find that this argument was waived because it had not been raised below.

Finally, the Court rejected the attorney’s arguments that the judge should have recused himself based on an alleged ex parte communication (bar counsel spoke with the judge’s case manager by telephone to request a copy of the trial transcript) and the judge’s alleged bias, and that the Probate Court improperly denied the attorney’s motion for a new trial pursuant to Rule 63. “Rule 63 does not entitle litigants to a new trial, and the judge did not err in so ruling.”

The Physician Payment Sunshine Act: Shining a Light on New Reporting Requirements for Payments to Physicians and Hospitals

jeiferman@gousltonstorrs.com (Jack Eiferman) — Wed, 3 Apr 2013 00:00:00 EDT

Beginning August 1, 2013, certain medical device and drug manufacturers, as well as group purchasing organizations, will be required to report to the Centers for Medicare and Medicaid Services (CMS) direct and indirect payments and so-called “transfers of value” made by them to physicians and teaching hospitals. CMS will then make this information publicly available. This reporting is mandated by the Physician Payment Sunshine Act that is part of the 2010 Affordable Care Act.

The Sunshine Act does not require physicians and teaching hospitals to report or approve the information submitted about them. However, physicians and teaching hospitals should keep in mind that although all information submitted will become publicly available, they will have a chance to dispute the information prior to it becoming available. Good record-keeping and communication with manufacturers should assist the process of correcting errors.

Key components of the Sunshine Act include the following:

What is Reported. All direct and indirect payments and transfers of value made to physicians and teaching hospitals that do not fall under one of 14 exceptions listed in the Sunshine Act will need to be reported. Exceptions include payments under $10, discounts and rebates, certain products or materials intended solely for patient use (such as product samples), and items provided under contractual warranties. Importantly, the final rules do not provide guidance regarding how the amount of transferred value is calculated or at what point its value is determined.
Reporting Period. All payments and transfers of value made during the August 1-December 31, 2013 period must be submitted to CMS by March 31, 2014. Reports for each subsequent calendar year must be submitted by the following March 31st.
Challenging a Report. Beginning in 2014, physicians and teaching hospitals will be able to sign up to receive notifications from CMS when they are mentioned as the recipients of payments or transfers of value. If a physician or teaching hospital disagrees with a report, it may submit a dispute to CMS within 45 days of the submission of the report. CMS will then forward the dispute to the applicable manufacturer for resolution between the parties. If the parties are unable to come to a resolution and submit a correction (if necessary) to CMS within 60 days of the submission of the report, the information will nevertheless be published according to the data provided by the applicable manufacturer, but will be marked as being disputed.
Publication of Reports. Data for 2013 will be made public by CMS by September 30, 2014 and on a yearly basis thereafter for subsequent years. Limited exceptions, including for information related to medicines in the process of development, allow for delays of up to four years in the publication of submitted data. However, all information will eventually be made public.

Although physicians and hospitals are not subject to new requirements by the Sunshine Act, they should make sure that data submitted by applicable manufacturers about them is accurate. The following are suggestions for physicians and hospitals to consider in light of the Sunshine Act:

Consider adding to any agreements with manufacturers an obligation of the manufacturer to provide an advance draft copy of its report to CMS.
Consider specifying the amount of “transferred value” or a methodology for calculating that amount in any agreements with manufacturers.
Finally, agreed-to and rapid alternative dispute resolution mechanisms to determine disputes regarding the amount of “transferred value” should be considered.

Importantly, organized record-keeping and communication with manufacturers will be key, as will knowledge of applicable reporting exceptions and procedures.

For additional information regarding the Sunshine Act, please contact Attorneys Jack Eiferman or Ann Sultan as follows:

Jack A. Eiferman
617.574.4074
jeiferman@goulstonstorrs.com

Ann K. Sultan
617.574.4067
asultan@goulstonstorrs.com

This newsletter should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own lawyer concerning your situation and any specific legal questions you may have.

Pursuant to IRS Circular 230, please be advised that, this communication is not intended to be, was not written to be and cannot be used by any taxpayer for the purpose of (i) avoiding penalties under U.S. federal tax law or (ii) promoting, marketing or recommending to another taxpayer any transaction or matter addressed herein.

©2013 Goulston & Storrs – A Professional Corporation All Rights Reserved

Rogue Employees - An Export Control Compliance Program's Worst Nightmare

kscarlott@goulstonstorrs.com (Kerry Scarlott) — Fri, 15 Mar 2013 00:00:00 EDT

In recent years, news headlines have reflected the uptick in enforcement actions dealing with U.S. export control laws and regulations, including the U.S. Department of Commerce Export Administration Regulations, the U.S. Department of State International Traffic in Arms Regulations, and special sanction programs administered by the U.S. Treasury Department’s Office of Foreign Assets Control. Notably, two recent enforcement actions extended to criminal prosecutions by the U.S. Government.

In a January 2013 G&S Advisory, we discussed the raid by federal agents of Agiltron, a photonics company headquartered in Woburn, MA, for suspected export control violations. While it will be some time before we know the extent of the alleged violations at Agiltron, one thing is clear – the U.S. Government demonstrated the seriousness of its enforcement activities as it sent in over 100 federal agents to conduct the raid.

Even more recently in Pennsylvania, an employee of Amplifier Research, a manufacturer of microwave amplifiers, was sentenced to 42 months in prison for willfully and knowingly violating the International Emergency Economic Powers Act (IEEPA), and aiding and abetting. The employee worked as the Export Coordinator and Shipping Supervisor for Amplifier, and was responsible for obtaining all necessary export licenses for the company’s overseas shipments. Many of Amplifier’s products are used in military systems, including radar jamming and weapons guidance systems, and are controlled under the Export Administration Regulations and classified under ECCN 3A001. Such products require a license to export to many foreign destinations.

Between 2007 and 2011, the Amplifier employee failed to obtain necessary export licenses for 56 shipments of amplifiers. In order to ensure that the shipments would go through undetected, the employee lied about or altered the applicable ECCN on export documentation, listed false license numbers and/or lied to other employees about the status of licenses. The employee’s only explanation for his actions was that he was overwhelmed at work and was simply “too busy” to obtain the proper licenses. It is worth noting that the prosecution indicated that the employee had received extensive training from Amplifier on which goods and countries required export licenses and how to obtain the necessary licenses.

In addition to the personal liability of the employee, Amplifier itself is now facing an administrative proceeding in connection with its employee’s actions. The company is facing a possible penalty of $14 million due to the involvement of National Security items. This sum is in addition to the expenses (including legal fees) that Amplifier has already spent and will continue to spend until the administrative proceeding is concluded. Beyond the immediate financial implications, the company also faces reputational damage and the potential loss of customers in the short and long terms.

What, then, could Amplifier have done differently? From the court documentation, it appears that Amplifier had adequate compliance procedures in place, and that the company trained its personnel on a regular basis. However, despite these efforts, it is clear that the company did not have adequate checks and balances built into its compliance program, including a robust audit program.

In order to ensure effectiveness, every compliance program must be audited on a consistent basis (e.g., annually or semi-annually) in order to verify that:

Employees are following the procedures as written, and
The procedures remain current with the ever changing realities of day-to-day business operations and legal requirements.

The Amplifier employee’s actions took place over an extended period of time. If Amplifier had performed sufficiently robust audits in a consistent manner, it is likely that the employee’s actions would have been detected much sooner. While it is sometimes impossible to stop an employee from willfully committing a crime, all companies can implement procedures to test their compliance program and, in turn, minimize the risk that these types of violations will occur.

For additional information regarding U.S. export controls, or help with any export control compliance matter, including assistance auditing your compliance program, please contact Attorneys Eby Pineda-Dorcena or Kerry T. Scarlott as follows:

Eby Pineda-Dorcena
617.574.6573
epinedadorcena@goulstonstorrs.com

Kerry T. Scarlott
617.574.3572
kscarlott@goulstonstorrs.com

This newsletter should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own lawyer concerning your situation and any specific legal questions you may have.

Pursuant to IRS Circular 230, please be advised that, this communication is not intended to be, was not written to be and cannot be used by any taxpayer for the purpose of (i) avoiding penalties under U.S. federal tax law or (ii) promoting, marketing or recommending to another taxpayer any transaction or matter addressed herein.

©2013 Goulston & Storrs – A Professional Corporation All Rights Reserved

Boston Moves a Step Closer to Building Labeling

mkiefer@goulstonstorrs.com (Matthew Kiefer) — Mon, 4 Mar 2013 00:00:00 EST

We reported to you last November that Boston’s Office of Environmental and Energy Services was crafting an ordinance that would require reporting of energy efficiency performance for Boston buildings. This so-called Energy Disclosure Ordinance is now before the City Council for approval, with some modifications. If approved, the ordinance would require certain buildings to report annual energy use, water use, and other building characteristics through Energy Star Portfolio Manager or an equivalent mechanism approved by the Boston Air Pollution Control Commission. The key components of the ordinance are as follows:

Owners of nonresidential buildings of at least 50,000 gross square feet (or two or more buildings on the same parcel with a combined floor area over 100,000 gross square feet) would need to submit an initial annual report by May 15, 2014 for the 2013 calendar year. Owners of nonresidential buildings of at least 25,000 gross square feet would need to submit an initial annual report by May 15, 2016 for the 2015 calendar year.
Owners of residential buildings of at least 50 units or 50,000 gross square feet (or two or more buildings in the same condominium that together meet these thresholds) would need to submit an initial annual report by May 15, 2015 for the 2014 calendar year. Owners of residential buildings of at least 25 units or 25,000 gross square feet would need to submit an initial annual report by May 15, 2017 for the 2016 calendar year.
Tenants would be required to provide energy and water use data to building owners.
Reported information, along with derived greenhouse gas emissions and Energy Star ratings for individual buildings, would be made publicly available on the Internet.
Buildings with Energy Star ratings below the 75th percentile in their group (not meeting certain exemption criteria) would be required to conduct energy audits every 5 years to identify opportunities for investments in energy efficiency. The City would develop exemption criteria for buildings that do not qualify for any Energy Star rating and for buildings and groups of buildings that show continuous improvement.
Failure to comply with reporting requirements could lead to fines for owners or tenants.

Boston follows several other large U.S. cities, such as New York, Philadelphia, Washington, D.C., Seattle and San Francisco, that have opted for mandatory reporting of environmental performance over heavy-handed requirements for system upgrades or operations improvements. Reporting is intended to encourage energy efficiency and the reduction of greenhouse gas emissions by Boston businesses, institutions and residents.

Goulston & Storrs continues to follow developments regarding the Energy Disclosure Ordinance. For questions about the information contained in this advisory, please contact your usual Goulston & Storrs attorney or the attorneys listed below.

Matt Kiefer
Director
(617) 574-6597
mkiefer@goulstonstorrs.com

Adam Hundley
Director
(617) 574-3540
ahundley@goulstonstorrs.com

This advisory should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own lawyer concerning your situation and any specific legal questions you may have.

Pursuant to IRS Circular 230, please be advised that, this communication is not intended to be, was not written to be and cannot be used by any taxpayer for the purpose of (i) avoiding penalties under U.S. federal tax law or (ii) promoting, marketing or recommending to another taxpayer any transaction or matter addressed herein.

© 2013 Goulston & Storrs – A Professional Corporation All Rights Reserved

Commonwealth Considers Rule Changes to Impact Multifamily Owners Under Affordable Housing Preservation Law Chapter 40T: Considerations Prior to Marketing a Massachusetts Apartment Complex

dabromowitz@goulstonstorrs.com (David Abromowitz) — Mon, 11 Feb 2013 00:00:00 EST

Overview of Chapter 40T

When an owner of an apartment complex in Massachusetts is anticipating a sale or refinancing, it is important to determine if the property received public funding or other assistance related to affordability in any way. Since 2009, many apartment complexes in the Commonwealth have been subject to MGL Chapter 40T – An Act Preserving Publicly Assisted Affordable Housing - intended to help maintain the affordability of tens of thousands of existing privately-owned affordable housing units in Massachusetts.

The definition of "publicly assisted affordable housing" is quite broad, and at Goulston & Storrs we are finding that some owners may not realize that some of their properties fall under this statute. For example, a rental property that was built as part of a mixed-use project that received Federal Urban Development Action Grant funds, or an apartment building built in an urban renewal area with Chapter 121A involvement, might fall under Chapter 40T. As the Commonwealth’s Department of Housing and Community Development (DHCD) continues implementing Chapter 40T, it is important for apartment owners to consider if the statute is applicable to their portfolio and how it might affect them.

In brief, Chapter 40T requires certain notifications both 2 years and 1 year prior to the expiration of a public affordable housing subsidy. Specifically, an owner of publicly assisted affordable housing must deliver notices to tenants, tenant organizations, the chief executive officer of the town or city in which the housing is located, the Community Economic Development Assistance Corporation, and DHCD before the “termination” of affordability restrictions affecting the housing. The owner must deliver the first notice no less than two years, and the second notice no less than one year, before the restrictions terminate. The statute and regulations define what constitutes “termination,” which includes such events as the final principal payment of a loan, as well as the non-renewal of a subsidy contract and more affirmative actions which result in the end of restrictions under government assistance programs.

In addition, and central to how 40T works to preserve affordability, prior to an owner entering into any agreement related to selling a property defined as publicly assisted affordable housing, the owner must notify DHCD of an intent to sell and give DHCD (or its designee) a ninety day right of first offer to purchase the property. An owner does not have to accept such offer. However, DHCD (and its designee) retain a right of first refusal to purchase the property on the terms which the owner ultimately reaches with a third party. Failure to comply with the giving of either the notice of termination, or the notice of intent to sell that triggers the rights of first offer and first refusal, might cloud title or potentially have other negative consequences for apartment owners.

Properties Covered by Chapter 40T

Chapter 40T applies to housing receiving a wide range of federal and state government subsidies including, among others, section 8 project-based rental assistance, federal or state low-income housing tax credits, mortgage insurance under sections 221(d)(3) and 221(d)(4) of the National Housing Act, interest rate reduction payments under section 236 of the National Housing Act, the Urban Development Action Grant where either the affordability of dwelling units or a project’s rents are restricted pursuant to a government agreement, state project-based rental vouchers, and alternative tax arrangements under chapter 121A if the housing is subject to affordability restrictions entered into in connection with the 121A agreement.

Potential Changes under 40T

In the three years since Chapter 40T went into effect, DHCD has been actively involved with a number of sales of publicly assisted affordable housing, and its designees have successfully purchased over 325 units of housing and several hundred more are under contract at present. Under current regulations, the so-called Notice of Intent to Sell noted above is required in every case where an owner enters into any agreement relating to a proposed sale of the apartment complex, even if the owner definitely intends to sell to another preservation owner. From experience and feedback from owners and advocates over the past three years, however, DHCD has indicated that it plans to create a category of transactions where the current owner intends to sell to a purchaser that will preserve the housing as affordable. In such a case, the selling owner will be able to give a Notice of Intent to Sell to a Preservation Purchaser (whether a specific purchaser or just to such purchasers in general), and DHCD will hold off on exercising its right to choose a designee and make a first offer. DHCD will still retain its right of first refusal as a means of making sure the ultimate sale is in fact a preservation transaction as intended.

In addition, under current regulations even the listing of a property with a broker or any other preliminary written indication of an intent to sell triggers the notice requirements outlined above. DHCD has recognized that merely listing a property for sale often triggers a notice that comes too early in the process to serve the intended purpose, and has drafted possible changes to its regulations that would move the notice requirements later until the time an owner actually enters into some written agreement to sell to a particular party.

Both of these possible changes require a formal regulatory process, which DHCD anticipates beginning later this year. In the meantime, owners considering a sale of a publicly assisted affordable housing property can still seek an exemption and can obtain guidance from DHCD as to particular transactions.

If you own or manage multifamily properties and want to determine if they may be subject to Chapter 40T, or otherwise need assistance in complying with the requirements of Chapter 40T, please contact us.

For questions about the information contained in this advisory, please contact your usual Goulston & Storrs attorney or:

David M. Abromowitz
(617) 574-4016
dabromowitz@goulstonstorrs.com

Steven Schwartz
(617) 574-4147
sschwartz@goulstonstorrs.com

Deborah Horwitz
(617) 574-4123
dhorwitz@goulstonstorrs.com

Elizabeth Lintz
(617) 574-6495
elintz@goulstonstorrs.com

This client advisory should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own lawyer concerning your situation and any specific legal questions you may have.

T&E Litigation Newsletter - 2/11/2013

mswirbalus@goulstonstorrs.com (Mark Swirbalus) — Mon, 11 Feb 2013 00:00:00 EST

In Fowler v. Kulhowvick, Case No. 12-P-277, 2013 Mass. App. Unpub. LEXIS 168 (Feb. 8, 2013), a decision issued pursuant to Rule 1:28, the Appeals Court affirmed the denial of a petition to vacate a decree allowing a will.

Fowler, an interested party, was not given notice of the petition to probate the will, and did not learn about it until after the will had already been allowed. He then filed a petition to vacate the allowance of the will and for leave to file objections. The probate court determined that notice to Fowler was defective and ordered a hearing on whether Fowler could substantiate his claims of lack of capacity and undue influence. In itself, defective service is not enough to vacate a decree allowing a will. "[A] probate judge has discretion to vacate a decree only after ascertaining whether the party seeking revocation can present 'substantial and meritorious grounds' against allowance of the will. Here, after finding that notice was defective, the probate judge ordered a hearing to evaluate whether Fowler had substantial and meritorious grounds against allowing the will. This was the proper procedure under our precedents." (Internal citations omitted.)

After hearing, the probate court denied Fowler's petition to vacate the allowance of the will, holding that he could not substantiate his claims of lack of capacity and undue influence. The Appeals Court affirmed because it found no error in the probate court's ruling.

In Fiumara v. Fiumara, Case No. 12-P-133, 2013 Mass. App. Unpub. LEXIS 130 (Feb. 4, 2013), another decision issued pursuant to Rule 1:28, the Appeals Court affirmed a superior court ruling that the trust at issue was a "sham" because the decedent never intended to relinquish control over the properties placed in the trust or to vest meaningful title in the trustee.

"In order for a trust to be valid in the Commonwealth, it must unequivocally show an intention that the legal estate be vested in one person to be held in some manner or for some purpose on behalf of another." (Internal citation omitted.) Here, the Appeals Court held that the superior court properly relied on the decedent's conduct after executing the trust in finding that he did not intend to part with control of the property or divest himself of ownership. The decision does not recite all of the evidence, but the Appeals Court noted that the decedent never informed the trustee of her responsibilities or of the identities of the beneficiaries, which was characterized as "robust" evidence that no valid trust was ever intended.

Congress Passes Sweeping Tax Legislation Affecting Income, Estate and Gift Taxes

nsamiljan@goulstonstorrs.com (Nancy Samiljan) — Thu, 31 Jan 2013 00:00:00 EST

The American Taxpayer Relief Act of 2012 (“ATRA”) contains several important changes to the estate, gift, generation-skipping transfer (“GST”) and income tax laws. In particular, certain highlights of ATRA include:

A permanent extension of the 2012 estate, gift and GST exemption amounts, with an annual adjustment for inflation to $5,250,000 per person in 2013 ($10,500,000 for married couples). Individuals who did not utilize the gift exemption prior to 2013 may now do so and shift future capital appreciation and income to the gift recipients.
A permanent increase to 40% of the maximum estate, gift and GST tax rates (an increase from 35% in 2012).
Making permanent the “portability” of estate and gift tax exemption amounts between spouses (but does not extend such portability to the GST tax exemption). A federal estate tax return must be filed for a deceased spouse’s estate to transfer the deceased spouse’s unused exemption amounts to the surviving spouse.**
A substantial increase to the income tax of trust and estate income, including the 3.8% Medicare surtax applied to the net investment income of trusts and estates. Trustees and beneficiaries may wish to consider alternative investment strategies and distribution plans to minimize income taxes.
The reinstatement through 2013 of the “charitable rollover” rules for Individual Retirement Accounts. A taxpayer who has reached the age of 70 1/2 may direct distributions of up to $100,000 directly from his or her IRA to certain public charities (not including donor advised funds) without including the IRA distribution in taxable income for federal income tax purposes.

In addition, annual exclusion gifts are $14,000 for 2013 (increased from $13,000 in 2012). Individuals may give any person up to $14,000 in 2013 ($28,000 for married couples) free of gift tax.

ATRA does not affect the Massachusetts estate tax, which currently provides for a $1,000,000 exemption and a top tax rate of 16%.

Given the breadth of the changes made by ATRA, and the more technical rules included in the legislation, you may wish to consult with your financial, tax and estate planning advisors to determine whether any changes should be made or actions taken to meet your planning objectives.

** Federal tax benefits to married couples do not yet extend to same-sex spouses.

For questions about the information contained in this advisory, please contact your Goulston & Storrs attorney or any member of the Private Client & Trust Group.

This advisory should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own lawyer concerning your situation and any specific legal questions you may have.

Pursuant to IRS Circular 230, please be advised that, this communication is not intended to be, was not written to be and cannot be used by any taxpayer for the purpose of (i) avoiding penalties under U.S. federal tax law or (ii) promoting, marketing or recommending to another taxpayer any transaction or matter addressed herein.

© 2013 Goulston & Storrs – A Professional Corporation All Rights Reserved

Time to Revisit Your Export Control Compliance Program: Photonics Manufacturer is Latest Company Raided by U.S. Government Agents for Suspected Violations

kscarlott@goulstonstorrs.com (Kerry T. Scarlott) — Thu, 31 Jan 2013 00:00:00 EST

Last week, Agiltron, a photonics company headquartered in Woburn, MA, was raided by over 100 federal agents representing a variety of U.S. government agencies, including the FBI, Homeland Security, and Immigration and Customs Enforcement. Reports are now surfacing that the raid involved a criminal investigation of suspected U.S. export control violations. The agents spent the entire day at Agiltron’s facility, and were seen carting away boxes of materials and computer equipment.

While we likely won’t know for some time whether or not there was, in fact, wrongdoing at Agiltron, this type of event reveals the high stakes of engaging in international trade, and the critical importance of ensuring compliance with U.S. export control laws and regulations. Agiltron manufactures components, modules, and subsystems for optical communication, sensor, security, medical, environmental, instrumentation, aerospace, and defense applications. The company also regularly engages in trade around the world. Operating in this environment requires particular care.

U.S. export control laws and regulations, including the U.S. Commerce Department’s Export Administration Regulations, the U.S. State Department’s International Traffic in Arms Regulations, and special sanction programs administered by the U.S. Treasury Department’s Office of Foreign Assets Control, impose numerous obligations on U.S. businesses engaged in international trade, and sometimes even impact companies that are not directly engaged in international trade. Penalties for violating these export control regimes can be severe. Strict liability applies, and a company, as well as its individual employees, can be found liable for violating laws and regulations they did not know existed. Penalties range from civil and criminal fines of up to $1M per violation, to loss of export privileges, debarment from federal contracting and imprisonment.

Federal agencies have ramped up their enforcement activities significantly since 9/11. This increase in enforcement activity has, in part, coincided with the formation of interagency task forces headed by various U.S. Attorneys offices to coordinate export control investigations and prosecutions among various federal agencies.

Agiltron’s situation brings to mind the recent compliance issues at Rocky Mountain Instruments, a technology company based in Colorado. Rocky Mountain was raided in a similar fashion several years ago following an employee’s report to federal authorities of possible wrongdoing by the company relating to U.S. export control requirements. The cost of dealing with the ensuing investigation, as well as the loss of business due to bad press, led the company to declare bankruptcy. Rocky Mountain eventually emerged from bankruptcy, but not before entering into a plea agreement with the U.S. Justice Department which involved the payment of significant civil fines and loss of certain export privileges. At least one individual within the company also faced criminal prosecution for violating U.S. export control requirements, resulting in a plea agreement and forfeiture of the proceeds of his misbehavior.

The best defense against this sort of federal action and the inevitable aftermath is to obtain a clear understanding of your U.S. export control compliance obligations, followed by training of personnel and deployment of properly crafted compliance procedures at all levels within your organization.

For additional information regarding U.S. export controls on satellites and related items, or help with any other export control compliance matter, please contact Attorneys Kerry T. Scarlott, Denis M. King or Eby Pineda-Dorcena as follows.

Kerry T. Scarlott
617.574.3572
kscarlott@goulstonstorrs.com

Denis M. King
617.574.6432
dking@goulstonstorrs.com

Eby Pineda-Dorcena
617.574.6573
epinedadorcena@goulstonstorrs.com

This newsletter should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own lawyer concerning your situation and any specific legal questions you may have.

Pursuant to IRS Circular 230, please be advised that, this communication is not intended to be, was not written to be and cannot be used by any taxpayer for the purpose of (i) avoiding penalties under U.S. federal tax law or (ii) promoting, marketing or recommending to another taxpayer any transaction or matter addressed herein.

©2013 Goulston & Storrs – A Professional Corporation All Rights Reserved

Satellite Export Control Reform: Almost There . . . But Important Steps Remain

kscarlott@goulstonstorrs.com (Kerry T. Scarlott) — Mon, 28 Jan 2013 00:00:00 EST

On January 3, 2013, President Obama signed into law the National Defense Authorization Act for Fiscal Year 2013 (NDAA), which included long anticipated satellite export control reform provisions. Before we cover what is expected to change and when, it’s important to review how we got here in the first place.

Brief History of U.S. Satellite Export Controls

The history of U.S. export controls on satellites is long and tortured. In the early 90’s, U.S. origin communication satellites and their specially designed parts and components were subject to the jurisdiction of the U.S. Department of Commerce under the Export Administration Regulations (EAR). Under the EAR, the export of U.S. communication satellites and related items was largely free of restrictions under U.S. law, except with respect to certain countries. This enabled the U.S. satellite industry to increase its worldwide market share. A majority of satellites were produced by the United States, and even foreign-produced satellites were largely based upon U.S. technology and included substantial U.S.-origin content. U.S. satellites and foreign-produced satellites containing U.S.-origin content or based upon U.S. technology were regularly launched by foreign parties, including on occasion by China, with little regulatory oversight. This all changed radically during the late 1990s as a result of certain activities in China and a resulting Congressional backlash.

In the mid-1990’s, Loral Space & Communications and Hughes Electronics were each authorized by the Commerce Department to launch satellites out of China on Long March rockets. Both launches failed, which triggered a Chinese investigation to determine what went wrong. Allegations later surfaced suggesting that the U.S. companies helped the Chinese determine the cause of the launch failures and in so doing transferred sensitive information that helped the Chinese strengthen their rocket and missile design capabilities. A Congressional committee was tasked with investigating the allegations. In response to the committee’s findings, Congress passed the Strom Thurmond National Defense Authorization Act for Fiscal Year 1999 (the “Strom Thurmond Act”). The Strom Thurmond Act included a provision that directed the U.S. Department of State to assume licensing jurisdiction over all satellites, including commercial satellites and their specially designed parts and components (and related technologies), under the International Traffic in Arms Regulations (ITAR).

Compared to the EAR, licensing and other requirements under the ITAR are much more restrictive. These restrictions include licensing on essentially all transfers of U.S.-origin satellites and related items, as well as retransfer and re-export controls on foreign recipients of U.S. –origin satellites and related items. In addition, the ITAR includes an outright ban on the transfer of U.S.-origin satellites, and even foreign-produced satellites that contain U.S.-origin parts or components, to China and certain other embargoed countries, including for launch purposes. Other nations, including EU countries, have never imposed similar restrictions with respect to commercial satellites.

Many have argued persuasively that the imposition of these unilateral restrictions decimated the U.S. satellite industry, with earnest calls for the return of control over satellites to the Commerce Department. However, because Congress had mandated that the State Department exert control under the ITAR, thus removing the President’s traditional authority to determine the export control status of particular items and technologies, there was no hope for such change without further Congressional action. Congress finally answered the satellite industry’s pleas by passing the NDAA.

Changes Authorized by the NDAA (and More Importantly, What is Yet to be Authorized).

The NDAA authorizes the President to proceed with easing export controls on certain U.S.-origin satellites and related items, while maintaining certain existing controls. Thus, the NDAA does not itself remove ITAR controls on U.S. commercial satellites and related items, but it does return to the President the authority to determine which items and activities are worthy of control under the less restrictive EAR regime. On the other hand, the NDAA mandates the continued ban on exports and re-exports of U.S.-origin satellites and related items to China and North Korea, and any other country designated by the State Department as a state sponsor of terrorism (including launching related activities in any of these countries).

In terms of actually easing export controls over satellites, we expect that the Obama Administration will largely follow the recommendations of the U.S. Department of Defense and the State Department in their so-called Section 1248 Report released on April 28, 2012. The Section 1248 report concluded that the following could be subject to EAR control without causing harm to national security:

Commercial satellites that do not contain classified components;
Remote sensing satellites below certain performance thresholds (e.g., lower resolution); and
Systems, subsystems, parts, and components associated with these satellites (including certain related ground-based telemetry, tracking, and control systems), with performance parameters below items designated for continued ITAR control.

While the Section 1248 Report advocated for the easing of export controls over commercial satellites, the DoD and State Department also recommended that services provided in support of foreign launch operations for EAR controlled satellites continue to be subject to the licensing requirements of the ITAR. Therefore, a license known as a Technical Assistance Agreement under the ITAR would be required in order for a U.S. party to furnish assistance in the integration of a commercial satellite on a foreign launch vehicle, or in a launch failure investigation. The Section 1248 Report also recommended that the DoD should be given discretion to determine the need for applying “special export controls” (e.g. government monitoring and oversight) on launch operations regardless of location or parties involved, which means that EAR controlled satellites could be subject to monitoring depending on the countries involved in the launch.

Next Steps and Timing

As noted, actual change to existing export controls on U.S.-origin commercial satellites and related items has not yet occurred. Rather, important steps remain to be completed by the President before the U.S. satellite industry can begin to enjoy the benefits of the legislation. Specifically, the President must:

Provide a report to Congress indicating that the removal of commercial satellites and related items from ITAR control is in the national security interest of the U.S., including identification and analysis of any differences between the draft regulations proposed in the Section 1248 Report and the final regulations to be enacted;
Draft implementing regulations, following the detailed and time-consuming process for rulemaking dictated by the Administrative Procedures Act (including notice to, and receipt of comments from, the public); and
Establish end-use monitoring procedures for satellites that are exported under the EAR.

We expect that it will take at least 6-12 months for any changes to actually take effect. Stay tuned as we expect 2013 to be a promising year of change for commercial satellite manufacturers.

Kerry T. Scarlott
617.574.3572
kscarlott@goulstonstorrs.com

T&E Litigation Newsletter - 1/25/2013

mswirbalus@goulstonstorrs.com (Mark Swirbalus) — Fri, 25 Jan 2013 00:00:00 EST

In two recent decisions, the courts discussed the viability of certain claims against and on behalf of estates.

First, in Kraft Power Corporation v. Merrill, Case No. SJC-11063, 2013 Mass. LEXIS 8 (Jan. 14, 2013), the Supreme Judicial Court addressed whether an estate can be held liable for certain claims against the decedent as a principal of a corporation under the doctrine of corporate disregard, i.e., whether such claims against the decedent survive his death and can be asserted against his estate.

The doctrine of corporate disregard applies as a matter of equity, and the corporate veil can be pierced, in order to disregard a corporation’s existence and impose liability on individual principals for the purpose of defeating some fraud or wrong or remedying some injury.

The decedent was the sole shareholder and officer of Power Wiring. Kraft Power sold equipment to Power Wiring, for which Power Wiring did not pay. Kraft Power obtained a default judgment against Power Wiring for breach of contract in the approximate amount of $260,000, but Power Wiring had no assets to satisfy the judgment. Prior to entry of the default judgment, the decedent died, and Kraft Power subsequently brought claims against the decedent’s estate. Kraft Power alleged that the decedent was personally responsible for Power Wiring’s contractual obligations because he had abused the corporate form by causing Power Wiring, over which he exercised pervasive control, to become insolvent by transferring its assets to another company under his control, and that both companies were operated by the decedent as shams for his personal benefit. Kraft Power asserted claims against the decedent’s estate for breach of contract, fraudulent transfers in violation of the Uniform Fraudulent Transfer Act, G.L. c. 109A, violations of Section 11 of Chapter 93A, unjust enrichment and fraud.

The trial court dismissed the claims. The SJC reversed in large part and affirmed in small part.

The Court explained that claims which survive a defendant’s death pursuant to the survival statute, G.L. c. 228, § 1, include certain enumerated tort claims and common law claims, and that the common law claims that survive include claims based on contract.

With this explanation, the Court held that the breach of contract claim against the decedent’s estate survives, and similarly that the fraudulent transfer claim survives because it is premised on a contractual obligation owed by the decedent’s company. Therefore, neither of these claims should have been dismissed.

With respect to the Chapter 93A claim, which presented a question of first impression, the Court held that the claim itself survives because it is contract-based (some Chapter 93A claims can be tort-based, and some can be mixed in nature), and thus should not have been dismissed, but that the multiple damages available under Chapter 93A, which are intended to be punitive, do not survive. “Like punitive damages in tort actions, multiple damages under G.L. c. 93A can no longer achieve the goals of punishing a defendant or deterring him from future misconduct when the wrongdoer has died[.]”

The Court also reversed the dismissal of the unjust enrichment claim, which is based on the allegation against the executrix of the estate that she is holding assets that properly belong to Kraft Power, and so the doctrine of corporate disregard and the survival statute do not even apply.

The Court affirmed the dismissal of the fraud claim, however, which was based on the allegation that the decedent had fraudulently induced Kraft Power to enter into the contract. This claim was properly dismissed because a claim of fraudulent inducement does not survive under the survival statute or at common law.

Second, in Estate of Steven Gavin v. Tewksbury State Hospital, Case No. 12-P-62, 2013 Mass. App. LEXIS 6 (Jan. 18, 2013), the Appeals Court addressed the dismissal of a claim for wrongful death under the Massachusetts Tort Claim Act, G.L. c. 258, § 4, because the claim had not been presented or filed by the duly appointed executor or administrator of the decedent’s estate.

The decedent died on August 11, 2008, allegedly because of Tewksbury State Hospital’s negligence. The Massachusetts Tort Claim Act (the “Act”) provides that a claim against a governmental entity must be “presented” within two years. Although the executors named in the decedent’s will (his parents) sent a “presentment” letter to the Hospital and to the Attorney General within the two-year window, on July 21, 2010, they had not been appointed as executors at that time. Then, on March 24, 2011, after the six-month waiting period required under the Act had expired, the named executors filed the wrongful death action on behalf of the estate against the Hospital and the Commonwealth of Massachusetts. After being appointed as temporary executors, they then moved to amend the complaint.

The defendants moved to dismiss, arguing that the presentment and the suit were deficient in that they were brought by someone other than a duly appointed executor or administrator of the estate. The trial court granted the motion, and the Appeals Court affirmed. The Court held that because the “claimants” had not been duly appointed at the time of presentment, a condition precedent to suit under the Act was not met, and that their subsequent appointment did not cure this defect. The Court reasoned that the presentment requirement reflects a legislative choice to permit the public employer to investigate any claim in full and to negotiate, arbitrate, compromise or settle any such claim. Accordingly, the claimant must have the power to negotiate, arbitrate, compromise or settle the claim. Because they had not been duly appointed, the named executors (even in their later capacities as the appointed temporary executors) did not have this power.

Justice Agnes dissented, writing that the meaning the majority assigned to the term “claimant” is too technical and contrary to legislative intent.

T&E Litigation Newsletter - 1/16/13

mswirbalus@goulstonstorrs.com (Mark Swirbalus) — Wed, 16 Jan 2013 00:00:00 EST

In Staten v. O’Neill, Case No. 11-P-23, 2013 Mass. App. Unpub. LEXIS 3 (Jan. 3, 2013), a decision issued pursuant to Rule 1:28, the Appeals Court affirmed the dismissal of claims against a lawyer by his former clients, the successor trustees of a trust he had represented.

The defendant lawyer (“Attorney O’Neill”) drafted the trust and served as the trust’s lawyer until 2005. In 2006, a third party wished to pursue a case against the trustees, and Attorney O’Neill referred the third party to his own personal lawyer and allegedly spent four hours on the telephone with that lawyer as he drafted a complaint, which ultimately resulted in a judgment of approximately $300,000 against the trustees in their individual and fiduciary capacities.

The trustees sued Attorney O’Neill for negligence, fraud, breach of fiduciary duty and conflict of interest. The claims rested on the premise that Attorney O’Neill employed knowledge gained during his representation of the trustees and transmitted that knowledge to the lawyer to whom he referred the case against them, which contributed to the judgment against them. The Court affirmed the dismissal of the claims against Attorney O’Neill, which the Court characterized as speculative because they failed to show plausible causation of the eventual judgment by reason of the referral. Most significantly, the Court explained that “[t]he mere referral of a claim against the trustees by [Attorney O’Neill] to separate counsel would not by itself constitute a breach of fiduciary duty or a betrayal. Equally plausibly, the referral could represent compliance with a duty not to undertake a matter against a present or former client.” The Court also noted, however, that the course of maximum prudence would be for a lawyer to abstain completely from contact with a claim against a present or former client.

In Masciari v. Fenichel, Case No. 12-02757 (Middlesex Sup. Ct. Nov. 30, 2012), the Middlesex Superior Court denied a motion to dismiss a legal malpractice action against an attorney who drafted a will that was the subject of a will contest. The executor of the estate, which incurred a $44,000 payment to settle the will contest, claimed in a nutshell that the attorney had failed to take appropriate steps to ensure that the testator possessed testamentary capacity and was free from undue influence.

The Court explained that “[a]n attorney owes to a client, or a potential client, for whom the drafting of a will is contemplated, a duty to be reasonably alert to indications that the client is incompetent or is subject to undue influence and, where indicated, to make reasonable inquiry and a reasonable determination in that regard[,]” and that “[a]n attorney should not prepare or process the will unless the attorney reasonably believes the testator is competent and free from undue influence.” (Citation omitted.)

Although the Court also explained that an attorney’s duty of care to a testator does not extend to the testator’s heirs and beneficiaries, the Court nevertheless denied the attorney’s motion to dismiss because the claims against him were brought by the executor of the estate, rather than by an individual heir or beneficiary. “Massachusetts courts have allowed an administrator of an estate to file an action for legal malpractice against an attorney who had prepared the will of the deceased.” (Citation omitted.) The relief, however, must be limited to the damages sustained by the estate as a result of the attorney’s alleged malpractice.

New Tax Provisions: Fiscal Cliff Averted - Sequestration Resumes in Two Months

sschneider@goulstonstorrs.com (Steven R. Schneider) — Mon, 7 Jan 2013 00:00:00 EST

On January 1, 2013, Congress passed H.R. 8, the American Taxpayer Relief Act of 2012 to avert the immediate tax increases and spending cuts (i.e., the so-called “fiscal cliff”) that were otherwise scheduled to take effect January 1, 2013. Although averting the fiscal cliff, the legislation merely delayed the automatic sequestration of spending cuts until March 1, 2013. The need to raise the debt ceiling also looms large and ensures more Washington political football in the coming months.

Highlights of the Act are described in general terms below:

General Provisions

Income Tax Rates. The 2001 and 2003 Bush tax cuts become permanent except for Individuals and Married-Filing Jointly whose taxable income equals or exceeds $400,000 or $450,000, respectively (indexed for inflation). For incomes in excess of the thresholds, the ordinary income rate rises to 39.6% and the long-term capital gain and Qualified Dividend rate rises to a maximum of 20%.
Itemized Deduction Haircut. The Section 68 reduction of individual itemized deductions returns. In general, deductions are reduced by 3% of the amount by which an individual’s or couple’s Adjusted Gross Income exceeds thresholds of $250,000 and $300,000, respectively. The threshold amounts are indexed for inflation.
Personal Exemption Phase-Out. The personal exemption phase-out returns. Exemptions are phased out at the rate of 2% of Adjusted Gross Income in excess of the new Section 68 thresholds.
Estate, Gift, and Generation-Skipping Transfer Taxes. Estate, gift, and generation-skipping transfer tax exemptions are set at $5 million and indexed annually for inflation for 2012 and subsequent years. The maximum tax rate for all such taxes is set at 40%. Portability, which allows the estate of the first spouse to die to transfer his or her unused estate tax exemption to the surviving spouse, is made permanent.
AMT. The 2012 Alternative Minimum Tax exemption amounts are extended permanently and indexed for inflation.
Roth Conversions. The legislation expands the scope of qualified plans that can be converted to a Roth IRA in a taxable conversion. Specifically it allows an individual to elect any amount in a non-Roth account to be converted to a Roth account in the same plan, whether or not the amount is otherwise distributable because the individual is not at least age 59 ½ or has not separated from service.

Extenders

Each of the last several years Congress has passed a series of specific tax breaks one year at a time. The Act continues the practice of granting short-term extensions of these tax benefits, this time covering both 2012 and 2013.

Individual Extenders. Nine extenders relate to individual tax benefits including (i) exclusion for cancellation of debt on qualified principal residence; (ii) special conservation easement deductions; and (iii) use of IRAs for charitable donations.
Business Extenders. Thirty-one extenders relate to business-oriented tax benefits including (i) research credit; (ii) new market tax credit; (iii) 15-year depreciation for qualified leasehold, restaurant, and retail improvements; (iv) continue the $500,000 limit for expensing and 50% bonus depreciation; and (v) continue 100% gain exclusion for section 1202 small business stock.
Energy Tax Extenders. Twelve-extenders relate to alternative energy incentives including (i) cellulosic bio-fuel producer credit; (ii) incentives for biodiesel; and (iii) wind and certain renewable energy production credit.
Low Income Housing. A Section 42 low income housing tax credit benefit was also extended. Specifically the 9% credit will be available for any credit allocation made before January 1, 2014. Projects receiving these credit allocations need not be placed in service on or before December 31, 2013, as was previously required.
International. Extenders also included the look-through rule under Section 954(c)(6), which has been extended to include subsidiary taxable years beginning before January 1, 2014. This rule will generally allow US corporations with foreign subsidiaries to move active business income among those subsidiaries without immediate US tax.
S Corporations. S corporation charitable contributions made before December 31, 2013 will continue to only reduce a shareholder’s basis by the shareholder’s pro rata share of the S corporation’s basis in the donated property (rather than by the shareholder’s share of the fair market value of the donated property). For determining whether the former C corporation “sting” tax applies to gains recognized in 2012 and 2013, the built-in gain period is reduced from 10 to 5 years.

Other new tax items for 2013

Payroll Tax Holiday Ended. The 2% reduction in employee’s share of Medicare taxes from 2011 and 2012 was not extended.
Higher Medicare Tax. The Patient Protection and Affordable Care Act of 2010 established a new “Additional Medicare Tax” of 0.9%, effective January 1, 2013.
3.8% Net Investment Income Tax. The Patient Protection and Affordable Care Act of 2010 also created a new 3.8% tax on net investment income, effective January 1, 2013.

For more information about any of the points above, please contact your usual Goulston & Storrs attorney or either of the following attorneys:

Steven R. Schneider
202.721.1145
sschneider@goulstonstorrs.com

John R. Grumbacher
617.574.6551
jgrumbacher@goulstonstorrs.com

Visit www.TaxLawRoundup.com for more summaries of important U.S. tax developments that may affect your business, including real estate, general corporate and international.

This advisory should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own lawyer concerning your situation and any specific legal questions you may have.

Pursuant to IRS Circular 230, please be advised that, this communication is not intended to be, was not written to be and cannot be used by any taxpayer for the purpose of (i) avoiding penalties under U.S. federal tax law or (ii) promoting, marketing or recommending to another taxpayer any transaction or matter addressed herein.

© 2013 Goulston & Storrs – A Professional Corporation All Rights Reserved

T&E Litigation Newsletter - 1/3/13

mswirbalus@goulstonstorrs.com (Mark Swirbalus) — Thu, 3 Jan 2013 00:00:00 EST

In Estate of Young v. United States of America, Civil Action No. 11-11829-RWZ, 2012 U.S. Dist. LEXIS 178232 (D. Mass. Dec. 17, 2012), the U.S. District Court for the District of Massachusetts entered summary judgment for the United States on the plaintiff Estate’s claim for a refund of a tax penalty.

Pursuant to an extension, the Estate’s tax return was due by November 14, 2009, and its tax payment was due by May 14, 2010. The Estate made estimated tax payments prior to filing for the extension. The Estate did not file the return by the extended deadline, however, because it was difficult to obtain an accurate valuation of its real estate holdings as a result of the financial crisis and plummeting property values.

The Estate had two options. First, file a timely return using the appraised values and then file an amended return later when the properties were sold, or second, wait until the properties were sold and then file a single late return. Based on the advice of its accountants, who believed there would be no late-filing penalty because the Estate had already paid more than its eventual tax liability, the Estate chose the second option, filing a single late return. The IRS assessed a substantial late-filing penalty.

In entering summary judgment for the United States, the Court rejected the Estate’s argument that its late filing was due to reasonable cause. The Court reasoned that the Estate was aware of its legal requirement to file the return by the deadline, and its reliance on the accountants’ faulty advice that there would be no penalty for late filing did not constitute reasonable cause. “A taxpayer cannot disregard a known duty to file a timely return just because it believes no penalty will result, any more than a pedestrian can disregard a known duty not to jaywalk because he believes no penalty will result.”

Regarding the Estate’s argument that accurate property valuations were not available at the deadline, the Court held that the Estate had an obligation to file a timely return with the best available information. Based on these facts, the Court also found willful neglect. “There is no doubt it was physically possible for the Estate to file an estimated return on time; the Estate simply chose not to, believing it would be better to file late. That conscious choice to file a deliberately late return constitutes willful neglect.”

T&E Litigation Newsletter - 12/19/12

mswirbalus@goulstonstorrs.com (Mark Swirbalus) — Mon, 17 Dec 2012 00:00:00 EST

In Fortier v. Sullivan, Case No. 12-P-231, 2012 Mass. App. Unpub. LEXIS 1258 (Dec. 11, 2012), a decision issued pursuant to Rule 1:28, a beneficiary of a will sued the testator’s estate planning attorney for professional negligence and breach of contract. The Superior Court dismissed the claims. The Appeals Court affirmed the dismissal of the professional negligence claim, holding that no duty of care runs from a testator’s attorney to the testator’s intended beneficiary. The Appeals Court reversed the dismissal of the breach of contract claim, however, holding that it is not barred by the Statute of Frauds, despite the lack of a written contract between the attorney and the testator. The Court highlighted the attorney’s admission that plaintiff was the intended beneficiary of the services that the attorney contracted to provide to the testator.

In Pierce v. Spalding, Case No. 11-P-1373, 2012 Mass. App. Unpub. LEXIS 1200 (Nov. 26, 2012), another decision issued pursuant to Rule 1:28, the Appeals Court affirmed the Probate Court’s denial of legal fees and costs in the underlying trust dispute pursuant to G.L. c. 215, § 45. In affirming the denial of fees, the Court quoted the SJC’s decision in Matter of Estate of King, reiterating that “[a] Probate Court judge has broad discretion to award fees and costs under G. L. c. 215, § 45, and such a decision is ‘presumed to be right and ordinarily ought not to be disturbed.’”

In Nystedt v. Nigro, Case No. 12-1245, 2012 U.S. App. LEXIS 23947 (1^st Cir. Nov. 20, 2012), the First Circuit affirmed the dismissal of claims against a Probate Court-appointed special discovery master in a will contest. The plaintiff prevailed in the will contest, but, because of the litigation’s expense, the value of the estate had been greatly diminished and he was “left holding a nearly empty bag.” The plaintiff’s response was to sue a “phalanx of will-contest participants,” including the special discovery master, who was alleged to have been delinquent in his duties, causing the estate assets to plummet. The claims against the special discovery master were dismissed under the doctrine of quasi-judicial immunity, which provides absolute immunity to those who perform tasks that are inextricably intertwined with the judicial function.

In Liporto v. Liporto, Case No. 12 MISC 462221, 2012 Mass. LCR LEXIS 118 (Nov. 13, 2012), the Land Court heard a dispute between four brothers, who are the four trustees and beneficiaries of a trust established by their father, regarding whether the trust is to terminate by its terms. The plaintiff brothers argued in a motion for summary judgment that, pursuant to the plain language of the trust, its assets “shall be distributed outright equally to the Grantor’s children” following the Grantor’s death, provided that he is predeceased by the parties’ mother. The defendant brothers argued in a cross-motion for summary judgment that although both parents are deceased, the date of outright distribution is not specified in the trust (there is no “definitive end date”) and thus the trust should continue to provide income to the four brothers during their lifetimes. The Court held for the plaintiff brothers, finding that nothing in the trust provides for its continuation during the brothers’ lifetimes and ordering the distribution of the trust’s real property to them as tenants in common. Based on this order, the Court stated that it could proceed to the second question presented in the case, i.e., the absolute right of the co-tenants to seek partition of the property. On this point, the Court noted the well-established principle, now inapplicable to this case in light of the ordered termination of the trust and distribution of the property to the brothers as co-tenants, that property owned by a trust is not subject to partition.

This update was authored by Mark Swirbalus, a Director in the firm's Probate & Fiduciary Litigation group. For questions or additional information on this topic, please contact Mark at mswirbalus@goulstonstorrs.com or contact any member of the Probate & Fiduciary Litigation group.

This newsletter should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own lawyer concerning your situation and any specific legal questions you may have.

Pursuant to IRS Circular 230, please be advised that, this communication is not intended to be, was not written to be and cannot be used by any taxpayer for the purpose of (i) avoiding penalties under U.S. federal tax law or (ii) promoting, marketing or recommending to another taxpayer any transaction or matter addressed herein.

©2012 Goulston & Storrs – A Professional Corporation All Rights Reserved

Boston Proposes Building Labeling

ydeng@goulstonstorrs.com (Yuanshu Deng) — Tue, 6 Nov 2012 00:00:00 EST

Boston’s Office of Environmental and Energy Services is crafting a proposed ordinance that uses transparency requirements to reduce energy and water use and greenhouse gas emissions from buildings. Though the draft ordinance is not yet available for public comment, Environmental and Energy Services has summarized its key components, which include the following:

All large and medium buildings or groups of buildings would be required to report annual energy use, water use, and greenhouse gas emissions through Energy Star Portfolio Manager or an equivalent mechanism. The requirement would initially apply to nonresidential buildings over 50,000 gross square feet, extending to residential buildings with more than 50 units in 2015.
Tenants would be required to provide energy and water use data to building owners.
Reported information, along with Energy Star ratings and other contextual information for individual buildings, would be made available on the Internet.
Buildings with Energy Star ratings below the 75th percentile in their group would generally be required to conduct energy audits every 5 years to identify opportunities for investments in energy efficiency. The City would develop exemption criteria for buildings that do not qualify for any Energy Star rating and for buildings and groups of buildings that show continuous improvement.
Failure to comply with reporting requirements could lead to fines.

Boston follows several other large U.S. cities, such as New York, Philadelphia, Seattle and San Francisco, that have opted for mandatory reporting of environmental performance over heavy-handed requirements for system upgrades or operations improvements. While disclosure could give high-performing buildings bragging rights, the implementation and enforcement of the ordinance could create concerns for owners and managers of other buildings.

Goulston & Storrs is following developments in the draft ordinance. For questions about the information contained in this advisory, please contact your usual Goulston & Storrs attorney or the attorneys listed below.

Matt Kiefer
Director
(617) 574-6597
mkiefer@goulstonstorrs.com

Adam Hundley
Director
(617) 574-3540
ahundley@goulstonstorrs.com

This advisory should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own lawyer concerning your situation and any specific legal questions you may have.

Pursuant to IRS Circular 230, please be advised that, this communication is not intended to be, was not written to be and cannot be used by any taxpayer for the purpose of (i) avoiding penalties under U.S. federal tax law or (ii) promoting, marketing or recommending to another taxpayer any transaction or matter addressed herein.

© 2013 Goulston & Storrs – A Professional Corporation All Rights Reserved

T&E Litigation Newsletter - 10/12/12

mswirbalus@goulstonstorrs.com (Mark Swirbalus) — Fri, 12 Oct 2012 00:00:00 EDT

In Rockland Trust Company v. Attorney General, Case No. SJC-11257 (Oct. 11, 2012), the Supreme Judicial Court allowed the requested reformation of a trust.

The settlor died in 2006. The trust provides that upon the settlor’s death, the income is to be used to fund one or two scholarships of $10,000 to students at Scituate High School. Any income not distributed as scholarships is to be added to principal.

The trustee proposed to reform the trust in two ways. First, the trustee sought to include language in the trust evincing the settlor’s general (as opposed to specific) charitable intent, thereby allowing the trust to qualify as a private charitable foundation and thus be exempt from income tax. Otherwise the trust would have to pay income tax at a high marginal rate, thus reducing the income available to distribute as scholarships. Second, the trustee sought to amend the requirement that any income not distributed as one or two scholarships of $10,000 be added to principal, because undistributed income retained by a private foundation is taxed at the rate of 100%. Again, this tax would reduce the amount available for scholarships.

Based on the evidence in the record, which included an affidavit from the drafting attorney and affidavits from two of the settlor’s friends who attested to her charitable donations and volunteer work, the Court found that the trust’s failure to reflect the settlor’s general charitable intent was a scrivener’s error. The Court also found that imposing a tax on the undistributed income retained in the trust would defeat the settlor’s intent to have as much of the trust income as possible used for scholarships.

Accordingly, the Court held that the trust shall be reformed to include the requested language evincing the settlor’s general charitable intent, and to amend the requirement that the scholarships be limited to one or two in the amount of $10,000, with the undistributed income added to principal. The amended language will read as follows: “If the Distributable Funds exceed Ten Thousand Dollars ($10,000), the Distributable Funds shall be divided into a number of scholarships in equal amounts, provided, however, that each scholarship must be at least Ten Thousand Dollars ($10,000).”

This update was authored by Mark Swirbalus, a Director in the firm's Probate & Fiduciary Litigation group. For questions or additional information on this topic, please contact Mark at mswirbalus@goulstonstorrs.com or contact any member of the Probate & Fiduciary Litigation group.

This newsletter should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own lawyer concerning your situation and any specific legal questions you may have.

Pursuant to IRS Circular 230, please be advised that, this communication is not intended to be, was not written to be and cannot be used by any taxpayer for the purpose of (i) avoiding penalties under U.S. federal tax law or (ii) promoting, marketing or recommending to another taxpayer any transaction or matter addressed herein.

©2012 Goulston & Storrs – A Professional Corporation All Rights Reserved

T&E Litigation Newsletter - 10/9/12

mswirbalus@goulstonstorrs.com (Mark Swirbalus) — Tue, 9 Oct 2012 00:00:00 EDT

In Porst v. Deutsche Bank National Trust Company, No. 11-04137, 2012 Bankr. LEXIS 4680 (Bankr. D. Mass. Oct. 4, 2012), the U.S. Bankruptcy Court for the District of Massachusetts discussed what constitutes valid revocation of a revocable trust and whether the trustee of a revocable trust owes any duties to contingent remainder beneficiaries.

Mother established the revocable trust, naming herself as trustee and reserving to herself a life estate in any real property conveyed to the trust. The trust provided that upon mother’s death, her son would receive a life estate in the family home if it were still held in the trust. The revocation provision provided that mother could revoke or amend the trust by delivering to the trustee a written instrument that she had “signed and acknowledged.”

Ten years later, mother executed a document purporting to revoke the trust. The document bears the signatures of two witnesses, but was not acknowledged before a notary public. In her capacity as trustee, mother also deeded the family home from the trust to her son for one dollar. The son subsequently obtained a loan secured by the family home, and then filed for bankruptcy protection. The holder of the security interest filed a proof of claim in the bankruptcy proceeding. One of the issues in dispute was whether the security interest was valid, which turned on two questions – whether mother’s revocation of the trust was valid, and if not, whether her conveyance of the family home from the trust to her son was valid.

On the first question, the Court set forth the established principle that “a valid trust, once created, cannot be revoked or altered except by the exercise of a reserved power to do so, which must be exercised in strict conformity to its terms.” Based on this principle, the Court held that mother’s revocation of the trust was not valid because it was not in strict conformity to the trust’s revocation provision, which required the instrument to be signed and acknowledged by her. In reaching this holding, the Court relied on the following rationale from Phelps v. State Street Trust Company, 330 Mass. 511, 512-13 (1953): “We think that the requirement of acknowledgement meant that the settlor must acknowledge the instrument making the alteration before a public officer authorized by law to take acknowledgements of other writings. . . . And we think that the requirement of acknowledgement was not wholly for the benefit of the trustees, and that it could not be waived by them.”

On the second question, the son argued that even if the trust revocation were invalid, mother could not convey the family home from the trust to him for the inadequate consideration of one dollar, because doing so constituted a breach of her fiduciary duty to the contingent remainder beneficiaries (including himself, ironically). The Court rejected this argument, holding that because mother had the power to revoke the trust, she was free to do whatever she wanted with the family home. The Court reasoned that during the lifetime of a settlor/beneficiary of a revocable trust, a trustee is under no duty to consider the interests of the contingent remainder beneficiaries, because those interests may be divested by the settlor. “To hold otherwise would eviscerate an underlying purpose of the revocable trust and disrupt the expectations of the settlor.”

Accordingly, mother’s conveyance of the family home from the trust to her son was valid, and thus the security interest in the family home that the son subsequently gave to the lender was valid.

This update was authored by Mark Swirbalus, a Director in the firm's Probate & Fiduciary Litigation group. For questions or additional information on this topic, please contact Mark at mswirbalus@goulstonstorrs.com or contact any member of the Probate & Fiduciary Litigation group.

This newsletter should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own lawyer concerning your situation and any specific legal questions you may have.

Pursuant to IRS Circular 230, please be advised that, this communication is not intended to be, was not written to be and cannot be used by any taxpayer for the purpose of (i) avoiding penalties under U.S. federal tax law or (ii) promoting, marketing or recommending to another taxpayer any transaction or matter addressed herein.

©2012 Goulston & Storrs – A Professional Corporation All Rights Reserved