April 10, 2016

Welcome to the April 2016 Edition of Electronically In Touch

We are pleased to submit the April 2016 edition of Electronically In Touch. This issue consists of informative articles useful to attorneys of all skill levels, including an article regarding how to obtain Infant Compromises, a synopsis of New York's Limited Liability Company Law, and an interesting article on sex-based life insurance rates, as well as a recap of the Young Lawyers Section's 2016 Trial Academy and recommended upcoming events.

Electronically In Touch is a member driven publication. We welcome submissions from members on any relevant topic, including practice tips, substantive legal articles, case updates, work/life balance, and information regarding upcoming meetings and events. Please submit articles to Sasha R. Grandison, Esq. at srgrandison@gmail.com by the 25th of each month.

The Officers of YLS and the Editor of Electronically In Touch wish to make clear that the thoughts and opinions expressed in the articles that follow are those of the respective authors and do not represent the thoughts and opinions of the New York State Bar Association, Young Lawyers Section, or its Officers or Executive Committee.

A Message from the Chair of the Young Lawyers Section

Welcome to the April edition of Electronically In Touch. The Section has just wrapped-up our seventh annual Trial Academy, which was held at Cornell Law School in Ithaca, New York from March 30 - April 3, 2016. Trial Academy is a five-day intensive trial techniques program developed to advance and improve courtroom skills with a focus on attendees' direct participation and learning with critique faculty. Co-Chairs Immediate Past-Chair Sarah Gold and Chair-Elect Erin Flynn put on an amazing program. We could not have done it without the incredibly highly esteemed faculty, or NYSBA staff Megan O'Toole and Adriana Favreau, who play an integral role in planning, organizing, and executing on Trial Academy year-to-year. Thanks so much the presenters/faculty, and to Megan and Adriana! We would also like to extend our thanks to YLS past chairs Sherry Levin Walach and Tucker Stanclift, the founders of Trial Academy. In addition to conceiving of Trial Academy, Sherry and Tucker continue to be involved in the Program every year, and we are so grateful to both of them. We're also thankful to the substantive sections that sponsored Trial Academy - thanks so much for supporting YLS!

Our Spring Executive Committee Meeting was held in Ithaca on March 31st during the Trial Academy, and was well-attended. It was great to have some Trial Academy participants attend. If you did not attend this year, mark your calendars for Trial Academy 2017 - see you there!

Erica M. Hines

Infant Compromise Orders in New York

By: Rohit K. Mallick, Esq. and Hon. Gerald Lebovits


INTRODUCTION

Infant Compromise Orders present unique challenges in personal-injury lawsuits. Infant cases fall under the ambit of rules involving "disabled" litigants under CPLR Article 12. Infants ─ those under 18 years old ─ are "disabled" in that they may not initiate lawsuits on their own. They require a guardian or assigned proxy to represent their interests in court.

In New York, most personal-injury lawsuits never reach trial. They settle. To settle infant claims, both plaintiff and defendant attorneys should note the peculiarities of Infant Compromise Orders, which are integral to a personal-injury practice. Misunderstanding the basics of Infant Compromise Orders will result in frustrated clients, increased costs, and unnecessary delays.

This article covers the requirements of New York Infant Compromise Orders and offers some practical tips ─ and pitfalls to avoid ─ when litigating infant cases.

THE COURT'S DUTY TO PROTECT INFANTS

Typical personal-injury settlements are embodied in general releases and stipulations of discontinuance. These documents release the alleged tortfeasors from liability for an alleged harm to the plaintiff, almost always in exchange for money. Once it is filed with the court, the stipulation of discontinuance, which is signed by all parties to an action and which states that the action is being discontinued with prejudice, the case is finished and can be sent to storage and to the client for final billing.

The courts are bound to protect infants, who are considered wards of the court. (Greenburg v. New York Cent. & H.R.R. Co., 210 N.Y. 505, 509, 104 N.E. 931 (1914)). Due to the special status accorded to infants, the process to settle a case involving infant plaintiffs is more complex than a simple stipulation of discontinuance accompanied by a general release.

This common-law responsibility evolved from the medieval courts of England and Wales, where the courts supervised matters pertaining to infants. (Benson v. Siemons, 92 Misc. 509, 513-14, 156 N.Y.S. 1, 4, (Sup. Ct. Special Term 1915)). By the 16th century, the royal prerogative and duty of the Crown in England and Wales were known as parens patriae, a Latin term meaning "parent of his country. (Black's Law Dictionary (10th ed. 2014). The doctrine compelled the Chancery Courts in England to develop protections for infants and other wards of the courts. (Benson, 92 Misc. at 513-14, 156 N.Y.S. at 4).

The judicial concept of parens patriae arrived in New York upon England's imposition of colonial authority in the 17th and 18th centuries. Following hundred of years of statutory and common-law development, New York courts had adopted parens patriae responsibility with respect to infants. In 1856, the Court of Appeals stated that "the jurisdiction of the Court of Chancery over the persons and property of infants, and to appoint guardians of their persons and estates, whatever may have been its origin, is universally conceded, and is one of the most useful and important functions which it is called upon to exercise . . . .The power formerly possessed in this State by the Chancellor is now vested in the Supreme Court." (In re Hubbard, 82 N.Y. 90, 91, 37 Sickels 90, 91 (1880) (citing Wilcox v. Wilcox, 14 N.Y. 575, 578 (1856)).

The purpose of this protected status is to protect infants from greedy family members and guardians, friends, lawyers, or other members of society. Given that few people are more vulnerable than infants, the courts must step in to ensure that no party other than the infant benefits from the compromise and to safeguard the infant's interests while balancing against the legitimate interests of the family, guardians, and legal representatives of both plaintiff and defendants. (Jeffrey M. Donato, The Infant's Compromise: From Settlement to Hearing, 20 N.Y. St. B. Ass'n Elder L.J., 31, 30-33 (Fall 2010)).

Today's CPLR Article 12 embodies the historic common-law notion of protecting infants involved in legal proceedings. CPLR 1201 defines the disability of infants. It provides that unless a court appoints a guardian ad litem, the infant shall appear by a guardian of the infant's property, by a parent with legal custody of the infant, or by another person with legal custody the infant, or by the adult spouse, if the infant is married to an adult. (CPLR 1201).

CPLR 1207 establishes the court's authority to act on its common-law duty to protect infants by requiring the infant's guardian to move or petition the court to approve any proposed settlement of an infant claim. (CPLR 1207). The remainder of Article 12 delineates the requirements to resolve cases involving litigants with various disabilities. The rules pertinent to Infant Compromise Orders are described below.

COMPONENTS OF THE STANDARD INFANT COMPROMISE ORDER

Assuming the role derived from the doctrine of parens patriae, courts seek full disclosure of all information relevant to an infant compromise. CPLR 1208 sets forth the requirements to file a proper Infant Compromise Order for the court's consideration. These requirements fulfill only the proper filing threshold; they might not satisfy the judge who hears the terms of the proposed Infant Compromise Order.

Under CPLR 1208, any case involving an infant requires the following for proper settlement and adjudication:

A. Affidavit of the infant's representative, which shall state:
i. The infant's legal name and relationship to the representative;
ii. The infant's age and residence;
iii. The circumstances giving rise to the action or claim;
iv. The nature and extent of the client's injuries;
v. The names of all physicians who attended to, treated, or were consulted with reference to the injuries arising from the incident underlying the lawsuit;
vi. All medical expenses (enumerated);
vii. The period of disability and lost wages, if any;
viii. The infant's current physical condition;
ix. The terms and proposed distribution of the settlement, along with the infant's knowledge and approval of the settlement;
x. The details of any other motion or petition for settlement of a claim to recover on the same claim in the same action;
xi. All collateral sources for medical or related expenses;
xii. Whether a representative or any other related party has made a damages claim arising from the incident underlying the infant's cause of action;
xiii. The amount to be paid to settle the claim and the institution that will hold the funds until the time of distribution.

B. Attorney's affidavit, which shall state:
i. The reasons for recommending the settlement;
ii. Whether the attorney represents any other individual for a claim arising from the same underlying incident causing harm to the infant;
iii. That the attorney is not directly concerned in the settlement;
iv. Whether the attorney is collecting a fee with respect to the settlement and the full amount of that fee (including legal expenses);
v. All services the attorney rendered with respect to representing the infant plaintiff.

C. Medical Reports
i. One or more hospital reports, which need not be verified, to substantiate the injuries claimed by plaintiff. (The depth of these records will depend on the severity and complexity of the injury.)
ii. Should be dated less than six months before the proposed order is filed.

D. Appearance Before Court
i. At the hearing, the moving party or petitioner, along with the infant, and the infant's attorney shall appear before the court at the designated time, unless the appearance is excused for good cause.
ii. The appearance is typically on the record and requires testimony from both the infant and guardian.

E. Representation
i. No attorney having or representing any interest conflicting with that of an infant or incompetent may represent the infant or incompetent.
ii. If the infant (and the infant's guardian) are not represented by counsel, the papers may be drafted and the action initiated by the attorney for an adverse party, and in that case the papers must clearly state that fact.

DOCUMENTARY SUPPORT AND THE HEARING

The proposed Order must include the party information, the settlement amount, and where the settlement funds will be deposited in the infant's favor. Many courts will distribute a list of preferred banks, but generally any insured savings bank in New York with appropriate interest-bearing accounts available for deposit will suffice. The Order must also include language that the funds will be reserved solely for the infant and shall be disbursed in the infant's favor only upon the infant's ascension to age 18, or any other arrangement the court deems appropriate. The Order is a simple and short document; it is the supporting documents that bear heavily on approval of any proposed Infant Compromise Order.

The representative's affidavit is perhaps the most important document in the Infant Compromise Order package. The guardian, usually a parent or other close family member, is typically the person most knowledgeable about the infant's injury, medical treatment and recovery, negotiations with the adverse parties, how the proposed settlement amount was reached, and how and where the funds will be deposited. This affidavit should also include all special medical expenses incurred by the plaintiff as well as how these expenses were paid (either by the guardian, insurance, the defendants, or otherwise). The affidavit should also include information for any other claims and lawsuits that arose from the same incident that injured the infant so that the court can determine whether collusion or other sort of foul play is involved in resolving the infant's case. (Donato, supra, at 30-33 & n.5).

Even though the guardian must submit an affidavit, many counties and judges also require an affidavit from the injured infant as well, especially if the infant is over the age of 14 at the time of proposed settlement.

This infant's affidavit should include similar information as the guardian's, but from the infant' s perspective. Whether the infant is fully healed from the injuries should be stated in the affidavit, as well as that the infant agrees with the settlement terms.

The attorney's affirmation is also crucial, but is more focused on the settlement amount and why the settlement amount is in the infant's best interests. The court will rely on this document to determine how the parties came to terms to assess the settlement amount. The affidavit should also outline the full extent of insurance funds available to the infant for settlement, regardless of the final settlement amount. Similarly, any liens or other expenses/disbursements that may be assessed against the settlement amount must be identified. A complete affirmation will also include an analysis of liability and exposure to inform the judge of the practical concerns that could arise were the case to be tried.

The attorney's affirmation should also outline the legal work done on the case. This is particularly crucial for the plaintiff's attorney, who must justify any legal fee taken from the settlement funds. Although the fees outlined in a retainer agreement (typically 1/3 of the total recovery) will usually be sufficient, the affirmation must explain that the attorney conducted competent legal work to validate the fee. Some judges might, for example, reduce fees to 25% when a case has not reached suit and the amount of legal work is disproportionate to the recovery amount. (Glair v. Peck, 6 N.Y.2d 97, 105, 188 N.Y.S.2d 491, 495, 160 N.E.2d 43, 46 (1959); Mahler v. American Airlines, Inc., 49 Misc.2d 693, 697, 269 N.Y.S.2d 342, 347, (Sup. Ct. Westchester County 1966)).

The third key component of the proposed Order is the medical record. Attorneys should include examination reports of the plaintiff that are no older than six months. These reports should address the injuries suffered and whether they are fully resolved or require future treatment. The records should ideally also describe all treatment the infant underwent, as well as all planned future procedures. Timing of the medical reports and physician affirmation or letter is crucial; the court desires full disclosure of the extent of medical treatment and the infant's current
physical condition. As the courts have noted, "only by recent medicals can the Court properly assess the severity of the injuries in relation to the proposed settlement, consistent with the Court's obligation and duty to such infants who sustain personal injuries." (Guerra v. Fernandez,149 Misc. 2d 25, 26, 562 N.Y.S.2d 1020, 1021 (Sup.Ct. Queens County 1990); Donato, supra, at 30-33).

Some courts will also require an affirmation from the medical provider(s). This affirmation should be dated within at least the six months before the date of the proposed Order and be composed in accordance with the requirements found in CPLR 2106 (affirmation of truth of statement by attorney, physician, osteopath or dentist).

With respect to all supporting documents to an Infant Compromise Order, completeness and full disclosure are absolutely necessary. Failure to meet these standards will result in rejection of a proposed Order. The Appellate Division has observed in one case that "[a]lthough the record indicates that timely medical treatment is needed to assure the proper formation and growth of the plaintiff's [injury], there is no evidence that such treatment has been rendered or scheduled in the [time] the case has been pending, or that there has been any precise inquiry into the type, timing, and cost of medical treatment that will be required." (Edionwe v. Hussain, 7 A.D.3d 751, 754, 777 N.Y.S.2d 520, 522 (2d Dept. 2004)). The supporting documents should leave no stone unturned. It should include as many details as possible to ease the court's assessment of the proposed compromise.

The paperwork should be filed as a petition, an ex parte order to show cause, or in some cases as a special proceeding (where the case is pre-suit, for example). Each county, court, or judge will identify the preferred method of receiving the paperwork; checking individual rules and filing fees is critical.

Upon the court's acceptance of the proposed Order and supporting documentation, the court will schedule a hearing. Even if the initial application is ex parte, all parties should be put on notice of the hearing. Accepting the documents does not ensure approval of the proposed compromise.

All parties may appear in court because the matter is typically heard on the record, but defense counsel will commonly waive the defendant's appearance. The court will often question both the infant and the guardian to insure that the injured parties understand the settlement terms and recognize that settlement waives all rights to trial. Judges might question, challenge, and reject a proposed Order. The settlement amounts might ultimately be changed by the judge's recommendation. Should the case involve complex medicals or future medical treatment, defense counsel should be present to protect their client's interests.

The judge presiding will reiterate to the attorneys and guardian that the funds of the settlement terms are the property of the infant alone and are meant solely for the infant's benefit. The designated interest bearing account is not to be modified or accessed until the infant reaches adulthood at 18 or later, should the court so deem.

Counsel should inform their clients that even though an infant plaintiff has agreed to settlement terms, any compromise is subject to the court's approval at the hearing. If the court is dissatisfied with any aspect of the proposed Order, particularly the settlement amount, the attorneys might need to defend their position based on their injury and liability assessments. Alternatively, defense counsel might need to seek additional settlement authority from their client. Defense counsel can save time, costs, and energy by having their clients available by telephone during the hearing, or conference, should the need for these discussions arise.

Even though Infant Compromise Orders declare that the funds are to be made available only at the end of infant's disability, CPLR 1211 allows guardians to petition for early release of funds for infant support. (CPLR 1211). The courts discourage that practice and do not consider these applications routinely. (See, e.g., Conigliaro v. Rosa, 24 Misc.2d 15, 15, 202 N.Y.S.2d 560, 561 (Sup. Ct. Nassau County 1960)). Applications will be denied except in cases demonstrating unusual circumstances or where the guardian cannot otherwise provide for the infant's necessities, treatment, or education.

As stated in In re Stackpole v. Scott, 9 Misc.2d 922, 928,168 N.Y.S.2d 495, 498 (Mun. Ct. Queens County 1957), any petition for early withdrawal of funds should include, among other things, a full explanation for withdrawal reasons, sworn statements by qualified persons about the extent of the alleged expenditures for which the funds are necessary, the family's financial circumstances, recital of available funds, and a clear statement about why the guardians cannot afford the alleged expenditures.

PRACTICE TIPS FOR INFANT PERSONAL-INJURY CASES

A case involving an infant should be handled with extreme care from the onset. Like any other case, plaintiff and defense attorneys should note immediately the statute of limitations that affects their case. The typical personal-injury statute of limitation is three years, but the wide variety of potential torts that affect infants might have different time limits. These time limits are codified in CPLR 213, 214, and 215.

Perhaps the most important regulation is CPLR 208, which tolls any statute of limitation that pertains to an infant's cause of action. Specifically, the "disability" of infancy tolls allows any statute of limitation found in CPLR 213, 214, and 215 until the disability ends, which in the case of infancy means until the infant plaintiff reaches the age of 18. For example, if an infant plaintiff suffers a personal injury on his fifth birthday, the typical statute of limitation would expire the day after his eighth birthday. However, due to the toll found in CPLR 208, the three-year statute of limitation does not begin to run until the infant plaintiff's infancy ends, meaning that in the same example, the five year old plaintiff's time to file a personal injury lawsuit would not expire until the day after his twenty-first birthday, three years after the "disability" of infancy ends. An exception under CPLR 208 and 214-a limits medical, dental, and pediatric claims to 10 years, except for continuous treatment.

Although this tolling seems like a great boon to plaintiffs, there are many practical pitfalls to extensions of time. For example, many infant cases will involve a municipal defendant. In New York, any case involving a municipal defendant requires a 90-day Notice of Claim to be filed under General Municipal Law § 50-e. The tolling provisions of CPLR 208 do not apply to the Notice of Claim, which is a condition precedent to the filing of any lawsuit against a New York public entity. Failure to meet the strict 90-day deadline can result in a plaintiff's losing the case before it begins, even though the applicable statute of limitation might not begin to run for many years.

Another practical pitfall of the extended statute of limitations comes from an investigatory standpoint. Problems arise if the same infant from the previous example were injured on his fifth birthday, but the lawsuit did not commence until his eleventh birthday. For example, a defendant might not be able to contact individuals with knowledge of the alleged harm or preserve surveillance data that might have recorded the incident. Similarly, plaintiffs might lose track of a key eyewitness who supports their case or, if the hypothetical injury concerns a trip and fall, who might be unable to photograph the condition that caused the injury be-fore it is repaired. These factors bear heavily on the ability to prove or defend a case and will ultimately reflect in the value of the settlement agreed upon by the parties and which the court will review in any Infant Compromise Order.

When negotiating a resolution to an infant case, future medical expenses can be a point of contention. Children who suffer significant injury might not be able to undergo surgery until later in life, when they stop growing. Defense attorneys typically downplay the need for future treatment as unnecessary. Defense attorneys also (legitimately) are concerned that any future disbursement of funds for treatment might not be used for medical purposes. The ideal Infant Compromise Order will address how such future treatment is funded. If the future treatment is to be conducted by a doctor other than the one providing the affirmation of medical condition, an additional affidavit by that medical professional describing the future procedures in detail, as well as the projected or agreed-upon costs, is recommended. To protect their clients, defense attorneys should take care to ensure that any future funds may be distributed only after the guardian can generate proof that the plaintiff underwent the medical procedure, with any additional funds disbursed directly to the medical professional after the proof is filed with the court. Failure to properly inform the Court of future medical expenses often unnecessarily delays the resolution of Infant Compromise Orders.

Even when the parties reach an amicable agreement on the consideration needed to resolve the matter, the court, in its "parental" role, must approve any settlement amount. While this article covers the basic requirements of Infant Compromise Orders, many judges have additional requirements to settle an infant case. Beyond that, each individual county court may have its own requirements, too.

In the Bronx, for example, the court requires all information outlined in CPLR 1207 and 1208. But it also requires an affirmation from a doctor who has examined the infant in the preceding six months. The affirmation must discuss the infant's current medical condition. If the infant is over 14, an affirmation from the infant is also required. The infant's presence is also mandatory at the ensuing hearing before the assigned judge. As an additional requirement, any case assigned to the City Part requires an additional worksheet downloadable on the Supreme Court's website. Some other judges require additional items.

In New York County, the county rules require that any Infant Compromise be resolved at a hearing, or conference, on the record, before the assigned judge. An attorney seeking approval of that compromise must serve on all opposing parties a Notice of Conference on Proposed Infant's Compromise at least five days before the scheduled appearance, with a copy of the proposed Order annexed. This requirement stands in addition to the specific rules outlined in the CPLR and in each individual judge's rules.

In contrast to New York and the Bronx, Kings, Richmond, and Queens counties have no specific countywide rules. Judges in these counties maintain their own rules, checklists, and procedures for infant cases assigned to their parts. The lesson for the new or seasoned litigator is to become familiar with both the county rules, if applicable, and the assigned judge's rules. If the case is pre-suit, a special proceeding must be initiated. In that case, a litigant must be prepared to supplement the petition with additional information depending on the assigned judge's individual requirements.

CONCLUSION

Infant Compromise Orders present a unique niche of case resolution in New York. The critical themes of settling infant cases are full disclosure to the courts, thorough and complete affidavits and affirmations, and a concise presentation of all relevant medical information concerning the infant's injury. Attorneys should strive to create an open dialogue with opposing counsel, their clients (plaintiffs or defendants), medical providers, the court, and all other interested parties to the litigation. Every county and judge has a different take on conducting infant-compromise settlements. Thus, individual rules must be studied before the paperwork is filed. Infant Compromise Orders require collaboration above and beyond the typical personal injury settlement and should be handled with prodigious care to protect our most valuable and vulnerable resource: our children.

Rohit K. Mallick is an associate at Kaufman Dolowich & Voluck, LLP, where he focuses on the defense of premises liability, personal injury, professional liability, and maritime cases. He earned his B.A. from New York University in 2007 and his J.D. from the Fordham University School of Law in 2010.

Gerald Lebovits is an acting Supreme Court justice in Manhattan and an adjunct professor of law at Columbia, Fordham, NYU, and New York Law School. This article was originally published in the Richmond County Bar Association 17 (Spring 2015).

Community Service Opportunity

Come join the Young Lawyers Section on Saturday, April 23, 2016 from 8:45 a.m. to 12:30 p.m. to volunteer at the City Harvest Mobile Market in Washington Heights.

City Harvest is the nation's oldest food rescue organization and is dedicated to feeding people without food throughout New York City. Volunteers will be stationed at market tables, which are supplied with fresh produce, to distribute free of charge to market-goers.

Please rsvp to www.nysba.org/cityharvest. All volunteers must sign a release and waiver from City Harvest prior to participation.

The New York Limited Liability Company Law at Twenty: Past, Present & Future

By: Meredith R. Miller, Esq.

The New York Limited Liability Company Law ("LLC Law") has turned 20. This occasion presents an opportunity to reflect on its past, present and future.

I. THE PAST

There was no debate in either the New York Assembly or Senate and, in April 1994, the LLC Law was unanimously passed in both chambers. Governor Mario Cuomo signed the bill into law on July 26, 1994; it took effect 90 days later.1

Indeed, by 1994, enactment of the LLC Law was a foregone conclusion. Well over 40 states had adopted LLC statutes. New York City could not maintain its reputation as the business capital of the world without allowing formation of New York LLCs and recognizing out-of-state LLCs.2 The LLC brought to the landscape an entity that combines both the tax advantages of a partnership and the limited liability of a corporation, as well as supreme flexibility in governance.

Based on the legislative record, the genesis of the actual language used in the LLC Law is elusive. On its face, much of the LLC Law appears to borrow largely from the language of either the New York Business Corporation Law ("BCL") or the New York Partner-ship Law, in all events with alterations to maximize the principles of flexibility and freedom of contract.

By 1994 nearly every state had enacted an LLC statute or was considering one. It is not clear which, if any, other state statutes the legislature looked to in drafting New York's LLC Law. At the time, there was tremendous variety among the state LLC statutes, most of which predated any efforts at uniformity. While a Committee of the American Bar Association had drafted a "Prototype Limited Liability Company Act" in 1992,3 there is scant evidence that the New York LLC Law drafters looked to it for guidance. Moreover, New York, like most states, rushed to enact legislation before the National Conference of Commissioners on Uniform State Laws ("NCCUSAL") finalized the Uniform Limited Liability Company Act ("ULLCA"), which NCCUSAL only first approved in July of 1996.4

A consequence of this history is that the LLC Law does not always work well as a unit--there are provisions that, when read together, are puzzling. In addition, as has been seen in decisional law since its enactment, there are "conspicuous gaps" from its content.5 Indeed, so mysterious is the origination of the statute that, when the New York Court of Appeals had occasion to address whether an LLC member had the right to bring a derivative suit, there was simply no explanation on record for the complete omission of a provision ad-dressing the subject.6

II. THE PRESENT

The present state of LLC law in New York is a patchwork of the statutory language and decisional law interpreting the statute's significant ambiguities and omissions. To be certain, all statutes pre-sent some level of confusion that requires court interpretation. That said, the New York LLC Law is silent or unclear on a number of very fundamental issues about the governance and operation of the LLC.

Some of the significant lingering issues are ably addressed in the articles in this symposium issue. For example, the article by Professor Jack Graves and Yelena Davydan discusses the fundamental question of whether fiduciary duties may be prospectively waived in a New York LLC.7 As they explain, against the backdrop of statutory silence, the New York Court of Appeals has not squarely addressed the issue. In contrast, the Delaware LLC statute expressly permits prospective waiver of fiduciary duty.8

Also in this issue, Professor Miriam Albert writes about piercing the LLC veil.9 As she notes, neither the LLC Law nor the legislative history address whether veil piercing is available in the New York LLC and, if so, what factors should be used to determine whether to pierce the veil. As Professor Albert discusses, since 2005, New York case law has specifically allowed veil piercing in an LLC; however, the courts have not meaningfully analyzed the issues left open by the statute.

These issues are not the only ones that remain open. For example, the LLC Law is silent on whether LLC members may petition for dissolution of the LLC based upon fraud, illegality or oppression, as permitted in a closely-held corporation pursuant to BCL § 1104-a. The New York Court of Appeals has yet to address this issue. In the absence of statutory guidance, at least one court has, without explanation, simply applied BCL § 1104-a to an LLC.10 Other courts have indicated that the LLC is distinct from the corporation and have re-fused to import corporate dissolution standards into the silence of the LLC Law.11 Meanwhile, outside of the dissolution context, in holding that an LLC member may bring a derivative suit, the New York Court of Appeals did extend rights to LLC members that are fundamental to the BCL but omitted from the LLC Law.12

The New York statute is notably silent on other fundamental issues, such as:
(1) Whether the operating agreement may vary the law applicable to the internal governance of the LLC;
(2) Whether there are consequences for failure to adopt a written operating agreement as required by the LLC Law;13
(3) Whether the LLC entity may be used to form a non-profit entity; and
(4) While the LLC law allows the court to issue a charging order, whether creditors may foreclose on a membership interest in the LLC.

The LLC Law also contains ambiguities. For example, § 402 addresses the voting rights of members, and provides that, unless the operating agreement states otherwise, certain extraordinary business decisions require the consent of a majority of the membership interest. However, it is unclear why the following two subsections (c) and (d) are separately listed:
(c) Except as provided in the operating agreement, whether or not a limited liability company is managed by the members or by one or more managers, the vote of a majority in interest of the members entitled to vote thereon shall be required to:
(1) admit a person as a member and issue such person a membership interest in the limited liability company;
(2) approve the incurrence of indebtedness by the limited liability company other than in the ordinary course of its business; or
(3) adopt, amend, restate or revoke the articles of organization or operating agreement, subject to the provisions in subdivision (e) of this section, subdivision (b) of section six hundred nine of this chapter and subdivision (b) of section four hundred seventeen of this article.
(d) Except as provided in the operating agreement, whether or not a limited liability company is managed by the members or by one or more managers, the vote of at least a majority in interest of the members entitled to vote thereon shall be required to:
(1) approve the dissolution of the limited liability company in accordance with section seven hundred one of this chapter;
(2) approve the sale, exchange, lease, mortgage, pledge or other transfer of all or substantially all of the assets of the limited liability company; or
(3) approve a merger or consolidation of the limited liability company with or into another limited liability company or foreign limited liability company.

Likewise, the default voting rights of the members in a member-managed LLC are simply lacking clarity. The statute separately provides for default management rights for managers14 and for members.15 The member voting default rules reference proportionate ownership share, while the manager voting default rules provide for one vote per manager. Section 401(a) provides for the default rule of management of the LLC by its members. Section 401(b) provides:

If management of a limited liability company is vested in its members, then (i) any such member exercising such management powers or responsibilities shall be deemed to be a manager for purposes of applying the provisions of this chapter, unless the context otherwise requires, and (ii) any such member shall have and be subject to all of the duties and liabilities of a manager provided in this chapter.

Does § 401(b)(i) mean that, in a member-managed LLC, manager voting rules are the default for all matters?16 Literally read, it could be taken to suggest as much. However, this would erode the distinction between manager-managed and member-managed LLCs.

Perhaps § 401(b)(i) is referring to the situation where the LLC has a board of managers and some of those managers are also members. In that connection, perhaps this subsection means that, when members are acting as owners, the member voting rules apply but, otherwise, when they are acting as managers, the manager voting rules apply? (Akin to asking whether a shareholder/director is serving at any moment in the capacity as shareholder or director and then applying applicable voting defaults accordingly).

The only strong conclusion to be drawn is that the voting pro-visions and other sections of the New York LLC Law are not a picture of clarity.

Given the omissions and uncertainties, the conventional ad-vice is to clearly contract in a solid operating agreement for the optimal standard for the parties - essentially, leave nothing to the vagaries of statute. This solution is not a panacea given the practical reality: whether because of lack of knowledge or resources or a commitment to informality, so many small businesses form LLCs but never execute an operating agreement. The current proliferation of do-it-yourself ("DIY") forms often leaves the LLC members without a signed operating agreement that would override the uncertainties of the statute.

III. THE FUTURE

The LLC Law has not been significantly reformed since its enactment 20 years ago. The New York legislature should either amend the statute to clarify the numerous uncertainties or simply adopt the Revised Uniform Limited Liability Company Act, which represents a more careful study of the issues that arise in the LLC context.

One way or another, the legislature should address the uncertainties raised in this law review issue. In addition, as Matthew Moisan advocates in his contribution, the publication requirement for formation of an LLC should be eliminated.17

The LLC Law requires that the LLC announce its existence in two newspapers, one of weekly publication and one of daily publication in its county of formation, as designated by the county clerk, for a period of six weeks following formation.18 As Mr. Moisan ex-plains, this requirement needlessly adds potentially significant costs to starting a business,19 and no convincing explanation has been proffered for the requirement. Indeed, no such requirement exists to form a corporation. Further, if jurisdictional competition was at least part of the impetus for joining other states in enacting an LLC statute, New York is at a disadvantage for filings because our neighboring and competitor states (namely, Delaware) do not have a publication requirement.20

It certainly seems that there is currently the political will to spur entrepreneurship in New York. For example, "SUNY Tax-free Areas to Revitalize and Transform Upstate NY" ("Start-Up NY") at-tempts to encourage startup activity in New York by providing tax-free status to new companies built around state universities through- out the State.21 Start-Up NY, as well as already existing tax incentive programs such as Excelsior (a program that gives tax incentives to high-tech strategic businesses),22 is making use of tax incentives as a means to increase small business activity in New York. In line with these initiatives, the legislature must address the problematic state of the LLC statute, including the financial barrier to forming an LLC that is presented by the publication requirement.

In sum, the current LLC Law needs an overhaul. It does not function well as a system of default rules because of its fundamental omissions and uncertainties. Further, through the publication requirement, it introduces unnecessary costs for entrepreneurs. If New York wants to continue to proclaim itself the center of international commerce and attempt to attract startup companies through tax and other initiatives, the New York legislature should revise this system of statutory default rules to be clear and predictable and eliminate needless startup costs. The need for revising the statute is especially acute in this era of DIY entity formation. It is increasingly common that the members of an LLC form without the advice of counsel and, therefore, never adopt an operating agreement. This leaves them with significant uncertainties concerning basic governance issues.23

----

1N.Y. LTD. LIAB. CO. LAW § 1403 (McKinney 1994).
2N.Y. LEGISLATIVE SERV., LEGISLATIVE HISTORY ON THE LIMITED LIABILITIES COMPANY ACT 110 (1994). Senator John B. Daly remarks at the introduction of the bill: "Because of this, LLCs have been formed in over 44 States already, and it's very important that New York State join with that growing list already." Id.
31 LARRY E. RIBSTEIN & ROBERT R. KEATINGE, RIBSTEIN & KETINGE ON LIMITED LIABILITY COMPANIES § 1.7, at 13 (2d ed. 2011).
4See REVISED LTD. UNIF. LIAB. CO. ACT (Preamble) (2006), available at http://www.uni formlaws.org/shared/docs/limited%20liability%20company/ullca_final_06rev.pdf
5Tzolis v. Wolff, 884 N.E.2d 1005, 1008 (N.Y. 2008) ("The Legislature clearly did decide not to enact a statute governing derivative suits on behalf of LLCs. An Assembly-passed version of the bill that became the Limited Liability Company Law included an article IX, entitled 'Derivative Actions.' In the Senate-passed version, and the version finally adopted, the article was deleted, leaving a conspicuous gap; in the law as enacted, the article following article VIII is article X. Nothing in the legislative history discusses the omission." (emphasis added)).
6Id.
7Jack Graves & Yelena Davydan, Fiduciary Duties of LLC Managers: Are They Subject to Prospective Waiver under the New York LLC Statute?, 31 TOURO L. REV 439 (2015).
8DEL. CODE ANN. tit. 6, § 18-1101(c) (West 2013). In addition, the Revised Uniform Limited Liability Company Act ("RULLCA") allows the operating agreement to eliminate "each specific aspect" of the duty of loyalty and allows the parties to alter the duty of care. Though, its provisions are in conflict. See REVISED LTD. UNIF. LIAB. CO. ACT § 110. Section 110(c)(4) of the RULLCA prohibits an operating agreement from eliminating the duty of loyalty, but Section 110(d)(1) provides that the parties may eliminate a specific aspect of the duty of loyalty. Id. § 110(d)(1), (3); see Larry E. Ribstein, An Analysis of the Revised Uniform Limited Liability Company Act, 3 VA. L. & BUS. REV. 35, 69-73 (2008).
9Miriam R. Albert, The New York LLC Act at Twenty: Is Piercing Still "Enveloped in the Midst of Metaphor"?, 31 TOURO L. REV. 411 (2015).
10Scibelli v. Beacon Bldg. Grp., LLC, N.Y. L.J. Aug. 14, 2014, at *1 (Sup. Ct. Queens County June 20, 2014).
11In re 1545 Ocean Ave., LLC, 893 N.Y.S.2d 590 (App. Div. 2d Dep't 2010); Horning v. Horning Constr., LLC, 816 N.Y.S.2d 877 (Sup. Ct. Monroe County Mar. 21, 2006).
12Tzolis, 884 N.E.2d at 1019.
13N.Y. LTD. LIAB. CO. LAW § 102(u) (" 'Operating agreement' means any written agreement of the members concerning the business of a limited liability company and the conduct of its affairs and complying with section four hundred seventeen of this chapter." (emphasis added)); Id. § 417(a).
Subject to the provisions of this chapter, the members of a limited liability company shall adopt a written operating agreement that contains any provisions not inconsistent with law or its articles of organization relating to (i) the business of the limited liability company, (ii) the conduct of its affairs and (iii) the rights, powers, preferences, limitations or responsibilities of its members, managers, employees or agents, as the case may be.
Id. (emphasis added)). Despite the mandatory nature of the statutory language, in Spires v. Casterline, 778 N.Y.S.2d 259 (Sup. Ct., Monroe County 2004), the court held that the failure to adopt an operating agreement did not negate the existence the LLC. Id. at 266. The court also held that the LLC Law did not invoke a penalty for the failure to adopt an operating agreement. Id. at 262.
14 N.Y. LTD. LIAB. CO. LAW § 408.
15 N.Y. LTD. LIAB. CO. LAW § 402.
16Thanks to Professor Jack Graves for meaningful and engaging discussions on this issue.
17Matthew J. Moisan, A Look at the Publication Requirement in New York Limited Liability Company Law, 31 TOURO L. REV. 465 (2015).
18 N.Y. LTD. LIAB. CO. LAW § 203.
19 Angus Loten & Rhonda Colvin, Entrepreneurs Push Back against Rising LLC Fees, WALL ST. J. (Feb. 12, 2014, 7:48 PM), http://www.wsj.com/articles/SB100014240527023 04703804579378733962360294.
20In fact, the RULLCA does not have such a requirement.
21START UP NY, http://startup.ny.gov (last visited Apr. 24, 2015).
22Excelsior Jobs Program, EMPIRE STATE DEV., http://www.esd.ny.gov/BusinessPrograms/Excelsior.html (last visited Apr. 24, 2015).
23If the members of the LLC do not adopt an operating agreement, the default rules pro-vided by the LLC Law apply. Spires, 778 N.Y.S.2d at 266.

Meredith R. Miller is an Associate Professor of Law and Director of Solo & Small Practice Initiatives at Touro College Jacob D. Fuchsberg Law Center and principal of Miller Law, PLLC. This article was originally published in 31 Touro L. Rev. 403 (2015); Touro Law Center Legal Studies Research Paper Series No. 16-02.

Sex, Lies, and Life Insurance

By: Richard A. Booth, Esq.

INTRODUCTION

In a seeming fit of political correctness, the European Court of Justice struck down an exception to the EU antidiscrimination law that permits insurers to charge men and women different rates based on different life expectancies (among other factors).1 The insurance industry was aghast. Insurers maintain that unisex pricing of life insurance products is a bad idea because women live longer than men on the average. It costs more to insure the life of a man because the payoff comes sooner and the present value is greater. So to charge men and women the same price for life insurance would constitute a subsidy running from women (who would pay too much) to men (who would pay too little). As a result, men would buy too much insurance. Similarly, to charge women and men the same rates for annuities would be to subsidize women who are likely to live longer and thus to collect more in benefits.

What can possibly be wrong with that logic? Plenty.
The problem with gender-based rates lies in two unstated premises:
(1) that the present value of lump sum insurance benefits is an accurate measure of value to a consumer, and (2) that unisex pricing will cause consumers to buy more or less insurance or annuities than they would under gender-based pricing. (To be completely clear, we are talking here about term insurance and not about insurance that includes any savings or investment feature.)

Most people buy life insurance with a view to the income it will generate or save for the beneficiary -- whether from investment of the proceeds or from payoff of obligations. And often the best way for the beneficiary to maximize income is to buy an annuity. With both insurance and annuities, the primary value of the product inheres in the periodic income it generates -- not the length of time over which that income will be received.

Consider Homer and Marge - both age 40. Homer is employed. Marge is a stay-at-home mom. Homer can buy $500,000 in life insurance for $664 per year. If he dies tomorrow, Marge can use the proceeds to buy an annuity that pays her $25,596 per year.

Now consider Fred and Wilma - also both age 40. Wilma is employed. Fred is a stay-at-home dad. Wilma can buy $500,000 in life insurance for $556 per year. If she dies tomorrow, Fred can use the proceeds to buy an annuity that pays him $26,488 per year.2

If one looks either at the periodic outlay by the insured or at the income available to the beneficiary under an annuity, gender-based pricing appears to be quite at odds with the reason why people buy insurance and how much they buy. In other words, if one focuses on income rather than present value, gender-based pricing results in radically different outcomes for male and female consumers. Gender-based pricing means that a man must set aside more from his pay during life in order to secure the same insurance benefits as a woman. And a woman who uses the proceeds to buy an annuity must suffer lower benefits for a longer time than a man. To be sure, the present value of Marge's annuity is equal to the present value of Fred's annuity. So one might say that Marge and Fred get equal value for their $500,000. But there is little doubt that Fred is better off.

Ironically, the problem goes away for same sex couples. For men, higher insurance premiums up front are offset by higher annuity payments in the back end. And vice versa for women. But a stay-at-home dad makes out like a bandit, while a stay-at-home mom gets the shaft. So gender-based pricing really hurts only traditional marriages. Thus, it is the height of irony that the plaintiffs in the ECJ case were two gay males.

INCOME MATTERS

One might quibble with the premise that income matters more than present value (although no fan of Jane Austen could have failed to notice that £20,000 a year always beats a remainder interest). But annuities prove the point. Annuities exist only because people are willing to trade a lump sum for an assured income. The essential idea behind an annuity is that people care more about income than about lump sum values. Thus, even though the present value of a man's death benefit is higher than a woman's death benefit -- because it will likely be paid sooner -- what matters most to the consumer is the income it will generate for the beneficiary. And insurance companies have had no trouble seeing the logic in that.

This difference in perspectives is critical. Insurance companies live forever. People do not. Although the cost of writing insurance and annuities quite rightly concerns the insurance company, it has nothing to do with the value perceived by the insured. It is value and not cost that motivates someone to buy something. So the idea that there is a subsidy implicit in unisex insurance rates is mistaken. For the consumer, the purpose of life insurance and annuities is to hedge against the risk that one will die early or late. The present value of the benefits is irrelevant.

NEED TRUMPS GREED
The standard insurance company argument is that with unisex pricing men will buy too much insurance because it is too cheap. But the fallacy in this argument is the chauvinist assumption that people think like insurance companies. The most important factor that determines the amount of insurance one will buy is the amount one can spend up to the point of adequate coverage. Thereafter, it is unlikely that cheaper insurance will induce people to buy more. Insurance is a hedge, not a bet. It makes no sense to hedge more risk than you have.

Moreover, the notion that consumers should always pay the full cost of insurance is fundamentally at odds with the idea of insurance: Some will pay too little, and some will pay too much, but all will gain from reduced risk. No one would argue that those who live a long life somehow subsidize those who die young. To be sure, it is important to guard against moral hazard and adverse selection. But that does not imply that the goal should be for each consumer to pay premiums equal to benefits. That would be nothing more than a glorified savings plan.

In short, if one focuses on benefit to consumers rather than cost to insurers, unisex pricing makes perfect economic sense. This is not to say that gender is never relevant. Gender may be a proper consideration in connection with other types of insurance. For example, if men are more reckless than women, it may be appropriate to charge men higher rates for automobile insurance. But life insurance is different. There is nothing (much) that one can do about one's gender.

None of this is to say that insurance companies are somehow to blame for getting it wrong. They had no choice. In the absence of a law to the contrary, some insurance company was bound to go after female customers by offering them lower rates on life insurance. When that happens, all must follow whether or not the result is ultimately good for consumers.
Ordinarily, people and corporations should be free to make whatever contracts they choose. But this is a classic market failure. No individual insurance company can do the right thing unless all do the right thing. And even if all agreed, it would violate the antitrust laws. The bottom line is that there is no way for consumers and insurance companies to bargain to an efficient solution. Law matters.

Incidentally, the law in the United States is somewhat mixed on the subject of unisex insurance. In Arizona Governing Committee for Tax Deferred Annuity and Deferred Compensation Plans v. Norris,3 the Supreme Court ruled that under the Fourteenth Amendment, state agencies are prohibited from using gender-based pricing in connection with employee benefit plans. Nevertheless, gender-based pricing continues to be the US norm outside of government. The change in EU law is much more sweeping. It applies to all insurance policies written in the EU.

INSURABLE INTEREST
In a subtly related story, the New York Court of Appeals has ruled that the law does not prohibit an individual from obtaining an insurance policy on his own life and immediately transferring the policy to a third party without an insurable interest even though the policy was obtained solely for the purpose of selling it to the third party.4

So why should we care what a buyer does with a valid insurance policy that belongs to him? And why do we require that a buyer have an insurable interest in the first place? Whatever happened to private property and freedom of contract?

The answer is that without an insurable interest requirement one could effectively bet on the life of anyone. That might lead to all sorts of foul play. But that is not a very satisfying answer. We can deal with murder and mayhem when we find it. Besides, close relatives clearly have an insurable interest. Yet most murder and mayhem happens at home.

The real answer is that traditionally gambling was illegal. And gambling contracts (or debts) could not be enforced in court. So the idea of an insurable interest was a way to distinguish legitimate insurance from illegitimate wagering.5 In other words, in order for an insurance policy to be valid one must show that it is more than a wager. (Incidentally, the fact that gambling contracts could not be enforced in court meant that they would need to be enforced by other means. And that led to other obvious problems.)

Needless to say, gambling is no longer seen as the vice it once was. Indeed, the government itself has got into the business. But we still have the quaint insurable interest requirement. So it is not altogether surprising that the New York court ruled as it did thus confining the old rule as much as possible. But there is another better reason for requiring an insurable interest.

It helps to think about the idea of insurance - and not about insurance companies. The basic idea of life insurance is for many individuals to pay into a pool so that if one dies survivors will be paid some amount of money to provide for their needs thereafter - presumably in the form of an income. Thus, a buyer forgoes some current consumption to guard against a possible financial disaster.

Suppose that you participate in such a pool. Someone new wants to buy in and to designate a complete stranger as his beneficiary. Why would anyone want to make such a deal? The obvious answer is that the beneficiary is footing the bill and expects the payoff to be worth more than it costs. But why? One possibility is that the buyer knows something about his health that suggests he will die sooner rather than later. Call it adverse selection. Or maybe the buyer plans to commit suicide. Call it moral hazard. We can deal with these problems by requiring a medical examination, by including a noncontestability period, and by excluding suicides. But as a group we may still be worried that we are charging the new buyer too little to participate for reasons that we have not figured out (but maybe he has). One way to guard against this possibility is to assure ourselves that the new buyer is buying for the right reasons. If the beneficiary is a family member or a business partner or even an existing creditor, we have some assurance that the buyer's motivation is proper. If the beneficiary is a complete stranger, it seems likely that the motivation must be profit. We may not have figured out how their deal works or why. But it is enough to know that the buyers expect somehow to get more out of the deal than they contribute.6 Moreover, it is unlikely that anyone could make money without assuming excessive risk by identifying some instance of mispricing unless they bought a large enough number of insurance policies to achieve significant diversification of their portfolio. Thus, requiring an insurable interest may in fact be a complete solution.

So who would want to buy an insurance policy that belongs to a total stranger? Round up the usual suspects hedge funds. It seems that stranger-owned life insurance (STOLI) is a big business.7 Typically, a broker would advise an elderly individual - almost always a male - to take out a big loan to buy and maintain a big insurance policy. The broker would then seek to sell the policy to a hedge fund that would take over the payments. Needless to say, it would help for the insured to fall ill in the meantime. As one might predict, there is also a tax angle to the STOLI business. The proceeds from a life insurance policy are tax free to the recipient - which obviously adds considerable value to the return.8

STOLI - sometimes more charitably called a life settlement - was a natural outgrowth of so-called viatical settlements. In the 1980s, it became common for AIDS patients to sell their life insurance policies for cash that could then be used for medical expenses. Although some found the business a bit ghoulish, the arrangement was a classic win-win for the participants. In retrospect, it seems inevitable that investors would extend the same model to anyone with a relatively short life expectancy.9

Needless to say, there is an important difference between a viatical settlement and STOLI. With the former, few if any have bought their insurance policies with a view to selling them - let alone as a profitmaking scheme. Moreover, with STOLI the insured takes the risk that he will not be able to sell the policy as many have found out the hard way. Indeed, some consumers who have borrowed to buy insurance have ended up bankrupt when unable to sell the policy to pay back the loan.10

THE ESSENCE OF INSURANCE

Insurance is a peculiar product. In the aggregate, insurance is by necessity a money-losing proposition for the consumer. The insurance company needs to make a profit. Even a mutual company has expenses. So there is no way that consumers in the aggregate get back benefits that are equal to what they contribute. Nevertheless, insurance can be a good deal if the risk avoided is one of an event so catastrophic that one would be ruined. Still, one always must pay a bit more than the possible cost discounted by the probability. That is the way insurance works. Again, the implication is that there should never be any reason to buy more insurance than you need. So when someone buys insurance as an investment, there is every reason to be suspicious.

Moreover, insurance is necessarily a cooperative undertaking. It works only because many people are involved. Much of what one pays for is access to diversification - the ability to spread risk. So it is troubling that consumers would assume the risk of not being able to sell to a hedge fund that can cherry pick the policies it wants.11

STOLI turns the idea of insurance upside down. Aside from the fact that buyers buy to make a profit, STOLI depends on culling from the herd those who are likely to collect sooner rather than later and buying their policies effectively at a discount - albeit at a profit to the insured. Meanwhile, those who turn out to be healthier than average effectively foot the bill. (It is strangely reminiscent of the health care business but with the twist that the losers are all volunteers.) And it is even more troubling that insurance companies themselves would encourage consumers to buy insurance for such purposes. Indeed, AIG has even sought to package such policies into bonds known to some as collateralized death obligations.12

This is more than a little ironic since many observers - including the New York Superintendent of Insurance - argued that one important cause of the recent credit crisis was credit default swaps (CDSs), which in their view, amount to freely tradable bets on the financial health of a business irrespective of whether the bettor has an insurable interest in the debtor.13 Indeed, trading in futures was once largely banned in many states as nothing more than gambling (and some commentators seem to think it would be a good idea to do so again).14 But futures (and CDSs) are different from insurance policies. The point of a futures contract is precisely to permit a bilateral swap of risk, whereas insurance is about pooling risk. There is no obvious reason why we would not want strangers to buy and sell bellies or beans. With insurance, the real worry is that the buyer might know something about the insured. With futures, there is no such worry. Indeed, it is better for the market if well informed traders are free to trade since it drives prices to the correct level that much more efficiently. Moreover, speculators enhance liquidity. Thus, the commodities markets welcome speculators (although speculators must ante up more margin to trade).

THE BOTTOM LINE

So what (if anything) should we do about STOLI? The easy answer is nothing. If consumers have been defrauded by unscrupulous insurance brokers, the victims can always sue the brokers and perhaps even complicit lenders.15 But those who took out the insurance policies (and lost) are not the only victims. STOLI is fundamentally inconsistent with unisex pricing and the gains that consumers would enjoy therefrom. In a world with STOLI people can buy insurance policies for their own gain. Under a system of unisex pricing, men would effectively get a discounted (subsidized) price and would have ample incentive to load up on insurance perhaps as a form of retirement planning.

Thus, it is difficult to argue for unisex pricing - despite the gains that all would enjoy - in the absence of a rule against flipping and perhaps all viatical settlements. But neither does it seem wise to ban life settlements that clearly can be beneficial for all involved. Nor can we ban hedge funds from the business of assembling portfolios of such policies since diversification is key to creating a market that permits mutually beneficial deals to be made.16 The one thing that we might do is enforce the insurable interest requirement - exactly what the New York court declined to do in Kramer.

While one would think that the insurance companies could easily fix the problem by adding some simple language to their policies or by prohibiting flipping - rather than depending on the courts to enforce the insurable interest requirement - it is not clear that they really want to do so. Although some insurers have resisted paying on flipped policies - as did Phoenix in Kramer - many insurance companies (such as AIG) have apparently encouraged their agents to sell policies for exactly such purposes.17

Again, some might argue that the rule is inconsistent with freedom of contract. But freedom of contract is not a free for all. Requiring an insurable interest and mandating unisex pricing would in fact increase consumer choice - and welfare - by addressing discrete market failures that effectively prevent consumers from making the best deal they can. When markets fail, law matters.

-----

1 See Charles Forelle & Leslie Scism, EU Closes Insurers' Gender Rate Gap, Wall Street Journal, March 2, 2011, at C1; Charles Forelle, Battle of Sexes Roils European Insurance, Wall St. J., Oct. 1, 2010, at C6:3. In her opinion, Advocate General Juliane Kokott called the practice "incompatible with the principle of equal treatment for men and women."
2 The insurance rates that I use here are taken from a chart published by Transamerica Occidental Life Insurance Company for a 20-year level premium plan. The figures for annuity payments are calculated for Maryland residents at http://www.immediateannuities.com/ No doubt other sources would quote other rates. But as long as gender-based pricing is used the relationships will hold.
3 Arizona Governing Committee for Tax Deferred Annuity and Deferred Compensation Plans v. Norris, 463 U.S. 1073 (1983).
4 See Kramer v. Phoenix Life Insurance Co., 2010 N.Y. LEXIS 3281. See also Mark Maremont & Leslie Scism, Ruling Gives Life to Death-Bet Insurance, Wall Street Journal, November 18, 2010, at C3.
5 See Kent McKeever, A Short History of Tontines, 15 Fordham J. Corp. &Fin. L. 491(2010). See also Tom Baker & Peter Siegelman, Tontines for the Invincibles: Enticing Low Risks into the Health-Insurance Pool with an Idea from Insurance History and Behavioral Economics, 2010 Wis. L. Rev. 79.
6 A similar explanation is often given for fiduciary duty. In other words, fiduciary duty is often said to be a substitute for contracting under conditions of extreme uncertainty where the parties know that they cannot foresee all of the issues that might arise between them. Thus, where it is too difficult to negotiate a sufficiently detailed contract, the parties effectively form a firm and agree to settle up later. This suggests an alternative way to look at insurance - as a joint undertaking of insureds who thus assume a fiduciary-like duty to each other not to buy insurance for
inappropriate reasons.
7 Rather, STOLI was a big business until financing dried up. See Anne Tergesen, Source of Cash For Seniors Is Drying Up, Wall Street Journal, November 13, 2008, at D1.
8 It is not clear that this way of taxing life insurance makes much sense. Why should the proceeds of life insurance be tax-free? It would seem more sensible to make premiums deductible - on the theory that they are forgone income - than to make proceeds tax free.
9 The SEC was not amused by the emergence of viatical settlements and sought(without success) to characterize such transactions as trading in securities. See SEC v. Life Partners, Inc., 87 F.3d 536 (D.C. Cir. 1996). But when one of the leading firms in this business went public without disclosing that AIDS patients had begun to live longer and longer, the business ultimately ran afoul of the securities laws anyway. See Hertzberg v. Dignity Partners, Inc., 191 F.3d 1076, 1082 (9th Cir. 1999).
10 See Leslie Scism, Regulators Crack Down On Murky Life-Insurance Policies, Wall Street Journal, June 22, 2010, at A1.
11 A similar phenomenon seems to infect the for-profit education industry - and perhaps much of higher education - which depend on borrowing by individual students - and a concomitant assumption of the risk of finding employment - even though the school is in a much better position to diversify. To be sure, at top-tier schools where one can be relatively sure of employment, one could liken tuition to a partnership buy-in. On the other hand, there are any number of businesses in which people seem willing to forgo some compensation for a chance at the brass ring.
12 See Leslie Scism, AIG Tries to Sell Death-Bet Securities, Wall Street Journal, April 22, 2011, at C1. Such instruments are also known as death bonds and blood pools. Such rollups of individual policies are reminiscent of Salomon Brothers sale in the 1980s of interest only (IO) and principal only (PO) strips of treasury securities. When the prices of IOs and POs later fell, Salomon became a buyer and reassembled the pieces - like Humpty Dumpty - into synthetic treasury bonds that they sold again.
13 See Eric Dinallo, What I Learned at the AIG Meltdown, Wall Street Journal, February 3, 2010, at A17.
14 See Lynn Stout, et al., Regulate OTC Derivatives by Deregulating Them, Cato Regulation (Fall 2009). The idea that futures mess with real markets and maybe should be banned seems to come up in most financial crises. For example, following the 1987 stock market crash, many commentators argued that we should ban trading in stock index futures. See Richard A. Booth, The Uncertain Case for
Regulating Program Trading, 1994 Colum. Bus. L. Rev. 1.
15 See Leslie Scism, Regulators Crack Down On Murky Life-Insurance Policies, Wall Street Journal, June 22, 2010, at A1. Compensation practices in the insurance industry clearly exacerbate the problem. Typically, an agent is paid a large percentage of the initial premium payment made by the consumer.
16 Similarly, some commentators argued in the wake of the 2008 credit crisis that we should prohibit banks and other financial institutions from drinking the Kool Aid -investing for their own account in CDOs by forming internal hedge funds. Eventually,
Congress enacted the so-called Volcker Rule to prohibit the largest financial institutions - those deemed to be systemically important - from engaging in such activities. Although many critics seemed to favor a blanket rule, it is difficult to imagine a rule that says that only individuals may invest in certain instruments. And
even if one were to do so, individuals can always form partnerships - hedge funds. Many critics also seemed to favor a requirement that hedge funds disclose their holdings. But that ran afoul of the same problem. Thus, in the end the Dodd Frank Act required only that hedge fund managers register with the SEC as investment advisers.
17 It is hardly news that the insurance business is riddled with conflicts. The reluctance of insurance companies to pay out on claims is almost a cliché as is their inclination to cancel the policy of anyone who dares to make a claim. Needless to say, an insurance company will be more profitable if it maximizes premiums and minimizes benefits. That also explains why insurance companies spend so much money on advertising campaigns trying to get us to be safer.


Richard A. Booth, Esq. is a Professor of Law at Villanova University Charles Widger School of Law. This article was originally published on Social Science Research Network(September 12, 2011), available at SSRN: http://ssrn.com/abstract=1926202 or http://dx.doi.org/10.2139/ssrn.1926202

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May 6, 2016

Starting a Solo Practice in New York 2016- Webcast and Live Program

This program provides an overview of what it takes to own your own practice, including the unique financial, technical, and practical concerns a solo or small firm may face. This program is for recent law school graduates and seasoned attorneys.*

Cost: $195.00 for NYSBA Members.
Time: 9:00 a.m. to 5:00 p.m.
Location: Executive Conference Center
1601 Broadway
New York, NY 10019

www.nysba.org/store/events/registration.aspx?event=0EG04


A full list of all New York State Bar Association Events can be found at www.nysba.org.

*The full event description and details are located on the NYSBA Events page.

The Young Lawyers Section's 2016 Trial Academy

The Young Lawyers Section held its seventh annual Trial Academy from March 30, 2016 to April 3, 2016 at Cornell Law School in Ithaca, New York. Geared toward new and young attorneys, the Trial Academy is open to any attorney wishing to learn or improve their skills and provides a unique opportunity for participants to have a meaningful experience which extends beyond a typical classroom setting.

The five day program included both a criminal and civil fact pattern and consisted of lectures on: Jury Selection; Opening Statements; Evidence, Foundations, and Objections; Direct Examinations; Cross-Examinations; Trial Motions and Motions in Limine; and Closing Arguments. Participants made individual presentations on each of the topics discussed and were critiqued by the participating faculty, which included judges, district attorneys, and attorneys from a variety of practice fields. The presentations were recorded to allow for personal playback and review.

Photographs from the 2016 Trial Academy can be viewed on the Young Lawyers Section's Facebook page at www.facebook.com/NYSBAYLS/

Join the Young Lawyers Section

Become the voice of newly-admitted and young attorneys in the New York State Bar Association. Designed to help make the transition from law school to practice an easier one for newly-admitted attorneys, the Young Lawyers Section connects you with experienced attorneys lending general advice, legal guidance, or expert opinions. Take advantage of educational programs, networking events, and the exclusive Young Lawyers Section Mentor Directory, which is just one of the Section's mentoring initiatives. The Section publishes Electronically In Touch and Perspective. Law students may also join the Section and get a jump start on their careers.


ALREADY A MEMBER OF THIS SECTION? JOIN A COMMITTEE!

Are you interested in volunteering for a Section Committee? Please email Megan O'Toole at motoole@nysba.org and Tina Rothaupt at trothaupt@nysba.org and indicate the committees you wish to join.

Disclaimer


Electronically In Touch is the electronic news-publication of the NYSBA Young Lawyers Section (YLS). It is a member-driven publication that encourages YLS members to write articles. We welcome submissions from members on any relevant topic, including practice tips, substantive legal articles, case updates, work/life advice, and information regarding upcoming meetings and events. Please submit articles to Sasha R. Grandison at srgrandison@gmail.com by the 25th of each month.

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