www.americanbar.org/rpte March/April 2018 Vol. 32 No. 2

ROBATEA Publication of the Real Property, Trust and Estate Law Section ROPERTYIB\ American Bar Association

The Tax Code's Hidden Gem: Installment Sales for Wealth Management and Estate Planning

PRESIDENTSAND PROPERTYLAW

By Blake A. Watson

he current president of the real estate investments.In 1784, George perpetuities, (3) Abraham Lincoln and United States does not hesitate Washington traveled on horseback as deed covenants, (4) Benjamin Harrison T to bring legal actionto protect far as westernPennsylvania, where and theTakings Clause, and (5) Donald or enhance his real estate investments. he found his lands occupied without Trump and liquidateddamages. In each From the mid-1990s through2011, Don­ permission. After returning to Mount instance, thesepresidents-as legislator, ald Trump sued theNew York City Tax Vernon, the hero of the American Rev­ lawyer, or landowner-were involved Commission 55 timesover property olution instructedhis lawyer, Thomas with basic principles of American prop­ assessments, and in 2006 saved about Smith, to sue thesquatters "for Tres­ erty law: $3 million by winning a 10% tax reduc­ passes, rents or otherwise as you shall tionover ten years on theTrump Tower judge best & most proper to obtain jus­ Thomas Jefferson and in midtown Manhattan. Nick Penzen­ tice for me." A trialwas held in October the Fee Tail stadler & David McKay Wilson, More 1786-in the town of Washington-and First-year law students know (or should than 100 Lawsuits, Disputes over Taxes the jury came back witha favorable ver­ know) thatland pwnershipis defined Tied to Trump and His Companies, USA dict. General Washington evicted the by duration(term,.life, or fee estates) Today (May 19, 2016), www.usatoday. squatters and kept theland until1796, and thepresence or absence of condi­ com/story /news/2016/05/19 /trumps­ when he accepted a promissorynote tions.Most states today recognizefour tax-troubles/84543538. More recently, froma purchaser who was unable to while campaigningfor the presidency, ,complete his payments, causing the Trump sued neighbors of his Doral golf property to revert to thepresident. club in Miami for destroying trees and Joel Achenbach, The Grand Idea: George causing $15,000 of damage to landscap­ Washington's Potomac and the Race to the ing. Jose Lambiet, Donald Trump Sues West 144-50 (2004). Neighbors over GolfCourse Landscape, It should not be surprising that Miami Herald (Feb. 28, 2016), www. American presidents have been miamiherald.com/ entertainment/ involved withissues of property law. ent-columns-blogs/jose-lambiet/ Many of our past presidents (such as article63062187.html. Washington, Madison, Jackson, and the Thefirst president of theUnited Roosevelts) were extensive landowners, States also did not hesitate to bring and anothersizeable group (including legal action to protect or enhance his Adams, Jefferson, Pierce, and Lincoln) were lawyers with experiencein real estate matters. This article matches five Blake Watson is a professor of law at the presidents withfive topics of property University of Dayton School of Law in law: (1) ThoinasJefferson and thefee Dayton, Ohio. tail, (2) James Polk and the rule against

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------·------· ·------types of fee simple estate. Fee simple rendering themindependent of, and tail estate is no longer a viable form of absolute is not subject to conditions. disobedient to, their parents." 1 The land ownership in theUnited States. Theother threevariations (the fee sim­ Papei·s of Thomas Jefferson560 (J. Boyd ple determinable, fee simple subject to ed. 1950); and David Thomas Konig, James Polk and the Rule a conditionsubsequent, and feesim­ Legal Fictions and the Rule(s) of Law: The Against Perpetuities ple subject to an executory limitation) JeffersonianCritique of Common-Law Under the common law rule against are subject to conditions and differ Adjudication, in The Many Legalities of perpetuities,no interest is good unless regarding the consequence of a breach. Early America 115 (2001). it must vest, or fail to vest, not later than Common law, however, recognized Shortlyafter writing theDeclaration 21 years after a lifeor lives in being anotherfee estate: thefee tail. of Independence,Jefferson introduced at thecreation of theinterest. Inother A fee tail keeps land in the family by a bill in the VirginiaHouse of Delegates words, therule againstperpetuities restricting theability of future genera­ to abolish the fee tail estate. A promi­ (RAP) is a rule against possible remote tions to alienate the property. Hence, if nent plantation owner, Landon Carter, . vesting.It applies to contingent remain­ John conveyed Blackacre"to my son, declared � a letter to Washington that ders, executory interests, and open class Blake and theheirs of his body," Blake Jefferson must be a "midday drunk­ gifts, and it may apply to otherprop­ received a fee tail and John retained a ard" to attack the"right to do as we erty interests, such as rights of first reversion in fee simple absolute. On please withour own property."Dumas refusal, optionsto purchase, and oil Blake's death( the property would pass Malone, Jeffersonthe Virginian 255 (1948). and gas leases. Furthermore,as noted to Blake's lineal heir or, if none existed, Nevertheless,the bill passed, and nearly inthe 2011 movie, TheDescendants, the John's reversion would become pos­ all states have followed Virginia's exam­ rule appliesto trusts and can limit their sessory. Theholder of a fee simple ple-including Connecticut,which duration. absolute could frustratethe hopes of an provided in 2015 that an estate "given Inits unmodified form, theperpetu­ heir apparent by selling the property, in fee tail shall be an absolute estate itiesrule is concerned with what could but theholder of a fee tail (the"ten- in fee simple to the named grantee." happen instead of what actually does ant in tail") could not easily defeat the Conn. Gen. Stat. Ann. § 47-3. Thus, as happen. Consequently, the common rights of lineal descendants. Jane Aus­ Thomas Jeffersonenvisioned, the fee law RAP invalidatesproperty inter- ten begins chapter sevenof Pride and ests based on such improbable and Prejudice by explainingthat "Mr. Ben­ theoreticalscenarios as the"fertile octo­ net's property consisted almost entirely genarian,"the "unbornwid ow," and in an estate of two thousanda-year, the inexhaustiblegravel pit. W.Bar- which, unfortunately for his daughters, ton Leach, Perpetuities in a Nutshell, 51 was entailed, in default of heirs male, Harv. L. Rev. 638, 642-43 (1938). Most on a distant relation." Consequently, states, however, have modifiedand Mrs. Bennet was most anxious that one constrained the common lawrule. Lynn of her daughters marry theirsecond Foster, Fifty-oneFlowers: Current Perpe­ cousin, William Collins,an obsequious tuities Law in the States, Prob. & Prop., and pompous clergyrµanwho held the July/ Aug. 2008, at 30. reversion in fee simple absolute. James K. Polk, the11th president of Thomas Jeffersondisliked the fee tail theUnited States, was a posthumous estate for several reasons.His wifeMar­ victimof thecommon-law rule against thahad inherited land in fee tail, which perpetuities.After honoring his prom­ made it nearly impossible to sell ( and ise to serve one term, Polk left theWh ite Jeffersonneeded money). Consequently, House in 1849 and returnedto Nash­ in 1774 thecouple petitionedthe Vir­ ville. Just two monthslater, the childless ginia House of Burgesses to "dock the 53-year-old lawyer-politician contracted tail" and remove therestriction. Gov­ cholera and died. Polk had draftedhis emor Dunmore, howeve� failed to own will, which left "Polk Place" to his approve the bill before dissolving the wife Sarah for life. The remainder in fee legislature in response to increasing JAMES K -POLK, THE simple was given to the state in trust, revolutionaryfervor. Aside fromhis 11 TH PRESIDENTOF withinstructions to permit occupation personal affairs, Jefferson also viewed of the house and property by blood rel­ thefee tail as antithetical to republican THE UNITED STATES, atives on the conditionthey shall "keep governmentinsofar as it promoted and WAS A POSTHUMOUS thesame in repair, so as to prevent themfrom delapidating [sic] or falling protected the landed aristocracy. Finally, VICTIM OF THE Jefferson appreciatedthe power of the into decay, shall pay the public taxes threat of disinheritanceand believed COMMON-LAW RULE thereon, and shallpreserve and keep in that the inability to sell entailed lands repair fuetomb which may be placed "does injury to themorals of youthby AGAINST PERPETUITIES. or erected over themortal remainsof

60 PROBATE & PROPERTY ■ MARcH/A�RIL2018 my beloved wife and myself." George Court appearance and hundreds of H. ArmisteadJr., The Void Provisions of cases before theIllinois Supreme Court. a President's Will, 15 Tenn. Hist. Q. 136, N01man Gross, Presidential Bar Leaders: 138 Gune 1956), available at https:/ / Fascinating Facts About America's I.awyer­ drive.google.com/file/ d/OBwy Presidents, 34 Bar Leader No. 3 (Jan./ FMYMZSJV0MFFJZEpTYnBEaGs/ Feb. 2010), www.americanbar.org/ view. groups /bar_services/publications / Because he was a cholera victim, bar_leader /2009_10 /january_feb ruary / JamesPolk was initially buried in the presidential.html. city cemetery; however, in 1850 he One of hiscases was Moore v. Vail, 17 was re-interred at Polk Place, a few ill. 185 (1855), which was argued and blocks from the state capitol. His wife decided duringthe December session of remained at the residence until her theIllinois Supreme Court. Ten months death in 1891. Soon after, 47 descen­ earlier, on February 8, 1855, Lincoln dants of Polk's seven siblings filed �mit came withinfive votes of being elected in chancery court to declare the tes­ by theIllinois House of Representatives tamentary trust null and void. Their to theUnited States Senate.Without chief contention was that the trust vio­ abandoning his political aspirations, lated the rule against perpetuities "in Lincolnrepresented Joshua Moore in a that it provides that Polk Place shallbe THE ISSUE IN suit brought by George Vail and Moses held ...for such personsof thehouse MOORE Dodd for breach of a deed covenant.As of Polk as may be designated by the V. VAILWA S NOT it turnedout, Lincoln also was unsuc­ State, from time to time, forever." WHETHER THE cessful in thisparticular lawsuit. At Thecourt agreed, and held that issue in the case was the transfer of thewill "must be set aside so far as GRANTORS BREACHED property-subject to judgment liens- concernsPolk Place, and that prop­ THEIR COVENANT, BUT in 1836 fromCharles Collins, Ira Munn, erty turned over to his heirs-at-law." and Joshua Moore to George Vail and TheTennessean, May 25, 1892, at 3. WHETHER THE STATUTE Moses Dodd. Theliens were subse­ Althoughacknowledging the ben­ OF LIMITATION� quentlyforeclosed. Bonesteel purchased eficiaries of the trust"need not be in theproperty and took a sheriff'sdeed in existence at thecreation of the trust," BARRED THE ACTION 1839. After a series of conveyances, title the court held "theymust be desig­ FOR BREACH. vested in CatherineLynch, who in 1842 nated and come into existence within took possession of the vacant premises. the timeprescribed by therule against In light of her assertionof paramount perpetuities." . .California,and New Mexico).As a title, Vail and Dodd sued.for breach of Polk Place was sold and demol­ lawyer, however, he violated the rule thecovenant, contained in their 1836 ished. OnSeptember 19, 1893, James against perpetuities by creating a trust deed, thatthe granters would "war- Polk's body was moved yet again to the granting rights to a potentially endless rant and defend thetitle to thesaid east side of thestate capitol and bur­ line of "the house of Polk." premises." ied alongside his wife. Their gravesite The issue in Moore v. Vail was not is rarely visited, overshadowed by an Abraham Lincoln and whether the granters breached their equestrian statue of Andrew Jackson. Deed Covenants covenant, but whetherthe statute State legislators in 2017 considered relo­ Numerous articlesand books have of limitationsbarred theaction for catingJames Polk a thirdtime to the been writtenabout Lincoln thelaw­ breach. Deed covenants fall into two family home in Columbia, Tennessee. yer. See, e.g., Roger Billings, Lincoln and groups: present covenants and future The proposal was opposed by some of lllinois Real Estate: TheMaking of a Mort­ covenants. Present covenants (the cov­ Polk's descendants and defeated. gage I.aw;1er, in Abraham Lincoln, Esq.: enants of seisin,right to convey, and Accordingto one commentator, TheLegal Career of America's Greatest thecovenant against encumbrances) "[t]he frequent observation thata law­ President 105 (Roger Billings & Frank are breached, if at all, upon delivery of yer is incapable of making his own will J. Williams eds., 2010); Brian Dirck, Lin­ thedeed. Incontrast, the future cove­ has been forcibly exemplifiedin the coln the I.awi;er(2007); Mark E. Steiner, nants (warranty,quiet enjoyment, and will of James K. Polk." 26 Am. L. Rev. An Honest Calling: TheI.aw Practice of furtherassurances) are breached "only 897, 897 (1892). As chief executive, Polk Abraham Lincoln (2006); and Allen D. when thegrantee is actually or con­ annexed Texas, presided over theMex­ Spiegel, A. Lincoln, Esquire: A Shrewd, structively evictedby someone holding ican-AmericanWar, and achieved the Sophisticated Lawyerin His Time (2003). superiortitle or suffersother damage." major goals of his presidency (an inde­ By one estimate,Abraham Lincoln John G. Sprankling, Understanding Prop­ pendent treasury,reduction of tariffs, was involved in more than5,100 cases, ertt; I.aw432 (2d ed. 2007). The issue in and acquisition of theOregon Country, including one United States Supreme Moore was whether thefuture covenant

PROBATE & PROPERTY ■ MARcHIAPRIL2018 61 of warranty was breached in 1836 when "public use" for purposesof theFifth thedeed was deliveredor in 1842 when and FourteenthAmendments. The Fifth Lynch took possession. Lincoln argued Amendmentto theConstitution, made for the earlier date, relyingon a stipu­ applicable to thestates by the Four­ lationthat Collins, Munn, and Moore teenth Amendment, provides "private "had no good titleto theland when property [shall not] be taken for public theyso sold and conveyed." 17 ill.at use, withoutjust compensation." Cali­ 189. The court, however, refused to forniain 1887 enacted a law "providing equate lack of titlewith breach of the for the organizationand government future covenant of warranty: of irrigation districts,and to provide for the acquisition of water and other There must not onlybe a wantof property,and for thedistribution of title,but there must be an ouster water therebyfor irrigationpurposes." under a paramount title.... There 164 U.S. at 114. The statute was chal­ was no interference [in thiscase], lenged in federal court on thegrnunds tillMrs. Lynch entered and took that"the use for which thewater is to possession of the property in be procured is not in any sense a public 1842. This entrybeing by para­ one, because it islimited to theland­ mount title, althoughpeaceable owners who may be such at tl1etime and without opposition fromthe MORE THAN A CENTURY when the water is to be apportioned, covenantee, was at least a con­ LATER, IN A HIGHLY and theinterest of thepublic is nothing shuctiveouster and a breach of more thanthat indirect and collateral thecovenant. CONTROVERSIAL benefit."Id. at 156. In adecision that OPINION, THE COURT "stagger[ed] investors and invalidat[ed] 17 ill.at 189, 191. Inother words, if all thebonds issued under theact," the Vail and Dodd had sued for breach of IDENTIFIED FALLBROOK district court declared the1887 statute the present covenantsof seisin, encum­ AS A STARTING POINT unconstitutional.William P. Aiken, The brances, and right to convey,their Irrigation Question in California,5 Yale actionwould have been time-barred. FOR ITS CURRENT L.J. 122, 126 (1896) (quoted in Kay Rus­ 11 Their grantors, however, gave the "PUBLIC PURPOSE sell,The Fallbrook Irrigation District Case, future covenant of warranty,which was 21 J. San Diego HistoryNo. 2 (Spring breached in 1842-by theconstructive INTERPRETATION 1975), www.sandiegohistory.org/ 11 evictioncaused by Lynch's assertionof OF THE "PUBLIC USE jourrtal/1975/ april/fallbrook/ ). possession and paramount title. The irrigationdistrict hired Benjamin TheIllinois Supreme Court cited the REQlJIREMENT. Harrison to argue its case before the holding of Moore v. Vail withapproval Supreme Court (whichincluded David in Scott v. Kirkendall, 88 ill. 465 (1878). Brewer, HenryBillings Brown, �d The Scott decision, in turn,was deemed also theonly chiefexecutive who was George Shiras Jr., appointed by theex- "controlling"by thesame court in preceded and succeeded by thesame president). Harrison apparently earned Brown v. Lober, 389 N.E.2d 1188, 1192 man (Grover Cleveland) and is one of his fee, as thestate law was upheld. In (ill.1979). Severalpr(;'perty textbooks just eight presidents to argue before the his opinion for theCourt, Justice Rufus use Brown v. Lober to educate students U.S. Supreme Court (theothers were Peckham equated "public use" with on thedifferences between present and John QuincyAdams, James Polk, Abra­ "public purpose" and held "[i]t is not future covenants. See, e.g., Grant S. Nel­ ham Lincoln, JamesGarfield, Grover essentialthat the entire community, or son et al., Real Estate Transfer, Finance, Cleveland, William Howard Taft, and even any considerable portionthereof, and Development: Cases and Materials 215 Richard Nixon). Harrison appeared 15 shoulddirectly enjoy or participatein (9thed. 2015); and Jesse Dukeminier et timesbefore theSupreme Court and an improvement in order to constitute a al.,Properti; 620 (8thed. 2014). Law stu­ "remained active in law practice until publicuse." 164 U.S. at 161---62. dents-and lawyers-who read Brown his deathon March 13, 1901, reportedly More thana centurylater, in a highly v. Lober most likely are unaware its legal averaging $150,000 a year." AllenSh arp, controversialopinion, theCourt identi­ reasoning is based in part on a case Benjamin Harrison: High-Priced Counsel, fied Fallbrook as a startingpoint forits involving Abraham Lincoln. in America's LaW1;er-Presidents203 (Nor­ current "public purpose" interpreta­ man Gross ed., 2004). tionof the "public use" requirement. Benjamin Harrison and the InFallbrook Irrigation Dist. v. Bradley, Keio v. CihJ ofNew London, 545 U.S. 469, Takings Clause 164 U.S. 112 (1896), the Court adopted 480 (2005). The 1896 Fallbrook decision Benjamin Harrison is theonly president theposition taken by Harrison's cli­ is cited, both by Justice John Paul Ste­ who was thegrandson of anotherpresi­ ent and held condemnation of land vens, in his majority opinion, and by dent (William Henry Harrison). He is for anirrigation project constitutesa Justice Clarence Thomas, in his strongly

62 PROBATE & PROPERTY ■ MARcHIAPRIL2018 worded dissent.The highly publicized not returned, and to their further dis­ breach are uncertain in amount or dif­ Kela case presented theissue of whether may, the retention of the $8 million was ficult to prove; (2) the parties intended "a city's decision to take property for upheld by the New York courts.The to liquidate damages in advance; and thepurpose of economic development purchase agreement was terminated (3 ) theamount agreed upon must be satisfies the'public use' requirement of and theapartments were once again reasonable and not greatly dispro­ the FifthAmendment." Id.at 477. In a available for sale. portionate to the presumable loss or r 5-4 decision, theCourt held "there is Question: how did Donald Trump injury."Or v. Goodwin, 953 A.2d 1190, no basis for exempting economic devel­ do this?Answer: by including a pro­ 1193 (N.H.2008). If theamount forfeited opment fromour traditionallybroad vision in thepurchase agreement that, is considered excessive or punitive, the understanding of public purpose."Id. in theevent of buyer default, theseller clause may be deemed an unenforce­ at 485. According to Justice Stevens, "shall have theright to retain,as and able penalty. theFallbrook decision is the origin for for liquidated damages, the Down pay­ TheUzan brothers argued thatfor­ thecontemporary interpretation of the ment and any interest earned on the feiture of their 25% down payment was "public use " requirement: "[W]hen this Down payment." Uzan v. 845 UNLtd. an unenforceable penalty.The New Court began applying theFifth Amend­ Partnership, 778 N.Y.S.2d 171, 173 (N.Y. York Supreme Court disagreed, hold­ ment to the States at the close of the App. Div. 2004). A liquidated damages ing that(1 ) the purchase agreements 19thcentury, it embraced thebroader clause "is a contractual provision by "were a product of lengthy negotiation and more natural interpretationof pub­ which theparties stipulate to a fixed between parties of equal bargaining lic use as 'publicpurpose."' Id.at 480 sumto be paid in theevent of a breach." power, all represented by counsel "; and (c iting Fallbrook Irrigation Dist.). Id. at 176 n.3. A liquidated damages (2) a 25% down payment "is common Justice Thomasagreed withJustice clause typically will onlybe enforced if usage in thenew constructionluxury Stevens that "the 'public purpose'inter­ threeconditions are satisfied: "(l) the condominiummarket in New York pretationof thePublic Use Clause stems damages anticipated as a result of the City." 778 N.Y.S.2d at 17 2.The court fromFallbrook Irrigation Dist. v. Bradlei; was less concerned withwhether $8 , ... _ ; Id. at 515. In his view, however, million was a reasonable up-frontesti­ Fallbrook was wrongly decided and is mate of probable damages and more thefirst of "a string of our cases con­ focused on whether the Uzan brothers struing thePublic Use Clause to be a could show "disparity of bargaining virtualnullity, without the slightest nod power between the parties, duress, to its original meaning." Id.at 506. See fraud,illegality or mutual mistake." also Alberto B. Lopez, Revisiting Kela Id.at 176. According to the authorsof and Eminent Domain's "Summer of Smt­ a leading property law textbook, the tiny," 59 Ala.L. Rev. 561, 581-82 (2008) Uzan court "ultimatelyheld that 'rea­ (" According to JusticeThomas' s public sonableness' did not matter-any use genealogy, the Courtbegan its mis­ deposit, even an unreasonable one, can guided trek toward its modem broad be retained by thevendor under New interpretationof the public use limi­ York law." Nelson et al., supra, at 71. tationin Fallbrook Irrigation District v. Not allcourts agree, however. See Mcil­ Bradley"). Despite such protestations, venny v. Horton, 30 2 S.W.2d 70, 72 (Ark Benjamin Harrison's Fallbrook case 1957) (l iquidated damages amount, continues to influencethe scope and which was 16% of thepurchase price, meaningof theFifth Amendment's was "out of all proportion to theprob­ Public Use Clause. able damages, and ...should be construed as a penalty and not liqui­ Donald Trump and dated damages "). Liquidatecl Damages A LIO!)IDATED Thiswas not the firstsetback for the Donald Trump,through his compa­ Uzan brothers,who in 2003 were found nies, is the owner of the TrumpWorld DAMAGES CLAUSE liable for damages in excess of $4 billion Tower at 845 United NationsPlaza in "rs A CONTRACTUAL in connection witha fraudulent deal to New York City.In 1999, two Turkish bil­ PROVISIONBYWHICH develop a cellulartelephone network lionaires, Cem and Hakan Uzan, agreed in Turkey.Motorola Credit Corp. v. Uzan, to pay approximately$3 2 million for THE PARTIES STIPULATE 274 F. Supp. 2d 481 (S.D.N.Y. 2003). As luxury apartments.But, after terrorists TO A FIXED SUM TOBE for Trump, when asked to comment on destroyed the World Trade Center on the Trump Tower lawsuit, thefuture SepteJnber 11, 2001, theUzan brothers PAID IN THE EVENT OF president and authorof The Art of the refused to complete thetransaction and 11 Deal said he was "happy " withthe deci­ asked for their $8 million down pay­ ABREACH. sion.Asbun; Park (N,J.) Press CTune 16, ment.To theirsurprise, thedeposit was 2004), at 11.■

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