Final Producer Act Regulations Published

As noted in "Title Talk" No. 53 (Winter, 2002), the Legislature has enacted the New Jersey Insurance Producer Licensing Act of 2001 ["Producer Act 2001 "], P.L. 2001, c. 210, to be codified as N.J.S.A. 17:22A-26 et seq. Its provisions remain "inoperative" until the earlier of: (a) the adoption of administrative regulations pursuant thereto; or (b) November 12, 2002. It will supersede the current Producer Act, N.J. S.A. 17:22A-1 et seq., which it repeals. The impetus for the adoption of Producer Act 2001 was the enactment of the GrammLeach-Bliley Financial Services Modernization Act of 1999 ["GLBA"], P.L. 106-102, GLBA seeks to encourage, inter alia, uniformity and reciprocity in the insurance licensing laws of the various States.
The regulatory scheme of Producer Act 2001 is substantially similar to the original Producer Act. Producer Act 2001 provides for both individual and organization licenses, as well as resident and non-resident licenses. However, in place of the key terms solicit, negotiate and effect, the new Act uses negotiate, sell and solicit Accordingly, insurance producer is now defined as "... a person required to be licensed under the laws of this State to sell, solicit or negotiate insurance". N.J.S.A. 17:22A-28. From a regulatory standpoint, day-to-day insurance producer operations should not be dramatically affected by the new Act.
The Department of Banking of Insurance ["DOBI"] has recently published final administrative regulations in the New Jersey Register. See 34 N.J.R. 3839 at seq. (Nov. 4, 2002), The regulations take effect on November 4, 2002. The proposed version of the regulations was originally published on July 1, 2002, and was discussed in "Title Talk" No. 55 (Summer, 2002). As pointed out in that article, many of the changes dealt with continuing education requirements.
The major continuing education changes (as adopted) may be summarized as follows: (1) each producer must still obtain 48 credit-hours to renew his or her license, but only one (1) credit will be earned for each hour of instruction; (2) at least one-half (24 credit-hours) must be earned in courses related to the line of insurance in which the producer is licensed (i. e., title insurance), (3) at least six (6 credit-hours) must be earned in courses related to professional ethics, fraud prevention and consumer protection: (4) on-line (computer) and self-study courses are eligible for approval and (5) the exemption for attoneys-at-law of New Jersey form continuing education (in the line of title insurance) is abolished. N.J.A.C. 11:17-3.6 (as amended Nov. 4, 2002).
The proposed regulations did not include a phase-in or transition period regarding attorney licensing, or, for that matter, continuing education requirements in general. However, the final regulations have remedied that shortcoming by adopting transitional rules. These exempt currently-licensed producers from compliance with the rules set forth above until the second license renewal after November 4, 2002. For example, assume that a producer's license next comes up for renewal on January 1, 2003. He will be exempt from demonstrating that he has complied with the new regulations at that time (the first renewal). The second renewal will occur on January 1, 2007 (four years later). At that time he must demonstrate that he has complied with the new rules by having obtained the appropriate credits during the preceding four year period. N.J.A.C. 11:17-3.6 (as amended Nov. 4,2002).
Courses which were approved prior to November 4, 2002 retain the credit value originally assigned to them, until they are submitted for re-evaluation. This must occur by December 31, 2003. See N.J.A.C. 11:1 17-3.6(f)(5). In other words, if a three-hour course was originally approved by DOBI for five credits in October, 2002 (for example), a producer can still earn five (5) credits by attending the course during the year 2003, but only if it is offered prior to re-evaluation. Once the course has been submitted to DOBI for re-evaluation, its credit- hours will be reduced from five to three.

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Federal Tax Liens and Marital Rights: U.S. v. Craft

The idea that a tenancy-by-the-entireties shelters the spouse of a delinquent taxpayer from the government's claim for taxes has been dealt a severe blow by the United States Supreme Court. U.S. v. Craft, - U.S.- (2002) arose in Michigan. Mr and Mrs. Craft owned the marital home as tenants-by-the-entireties. Mr. Kraft failed to pay income taxes for eight (8) consecutive years. As a result, the Internal Revenue Service [" IRS"] assessed a deficiency against him in the approximate amount of $480,000. The IRS subsequently filed a Notice of Federal Tax Lien ["FTL"] against Mr, Kraft. After the assessment and filing of the lien, Mr. and Mrs. Craft executed a quitclaim deed for nominal consideration in favor of Mrs. Kraft, When Mrs. Craft attempted to sell the property to a bone fide purchaser. a title objection was raised regarding the FTL. The IRS agreed that one-half of the sale proceeds could be released to Mrs. Craft, provided that the remainder was held in escrow until the matter was resolved. Mrs. Craft filed suit to obtain the release of the escrow funds, which relief was (perhaps I unsurprisingly) opposed by the IRS.
Michigan's understanding of the common-law estate known as tenancy-by-the-entireties prevents the attachment of a lien to property so held, where the lien is asserted against only one spouse. This is based on the somewhat mystical concept of the union of husband and wife. Since the husband and wife together form a unique entity, a lien cannot be asserted against only one (rather than both). A lien cannot attach (e.g.) to the husband's half interest, because neither spouse holds an identifiable one-half interest. Consistent with the foregoing, it is sometimes said that there is no right of survivorship per se in a tenancy-by-the-entireties. Rather, each spouse holds a complete (100%) interest, subject to complete defeasance upon death. Cf. N.J.S.A. 46:3-17.5 (discussed below).
The foregoing understanding abut the nature of the tenancy is expressed by the common-law maxim: Vir et uxor sunt quasi unica persona, qui carc, et sanguis unus. [Husband and wife are, as it were, one person, because they are only one flesh and blood.] This concept is Biblical in origin. See Genesis 11, 24. Mrs. Craft argued that under Michigan law the FTL could not attach to her husband's interest in the realty, and thus a judgment creditor would have been barred from executing thereon, because of the unique nature of the estate held by husband and wife.
The Supreme Court acknowledged that State law may have supported Mrs. Craft's argument. But it pointed out that Federal law determined whether the FTL attached to Mr. Craft's interest in the realty. It found that Internal Revenue Code ["IRC"] § 6321 [26 U.S.C. §6321], which states that FTLs attach to "-.. all property and rights to property...", was dispositive. In a previous case construing that section, the Supreme Court had held that the government's lien attached where the taxpayer exercised his right under State law to disclaim inherited property. Drye v. U.S., 528 U.S. 49,120 S.Ct. 474 (1999). See "Title Talk" No. 48 (Summer, 2000). In essence, the court held that one cannot hide behind state property rights to defeat the intent of Congress in enacting IRC §6321. Accordingly, the Supreme Court held in favor of the IRS.
Craft is consistent with Drye in that both interpret I.R.C. §6321 broadly in favor of the government. It seems that the court in both cases articulates a two-step analysis. First, the nature of the rights and interests of the various parties under State law is analyzed. Second, the result is compared to the presumed intent of Congress in enacting the relevant sections of the Internal Revenue Code, especially I.R.C. §6321. If the result of the first step would serve to restrict too severely the rights of the government, State law must give way to Federal law.
Although some would argue that the court's analysis merely pays lip service to State law, it should be noted that the result is hardly unjust. The conveyance by Mr. and Mrs. Craft to Mrs. Craft was (almost certainly) made to hinder, delay or defraud creditors, including the IRS. Certainly, Mr. Craft was aware that he had not paid income taxes for eight years, and it is unlikely that Mrs. Craft was wholly unaware of Mr. Craft's tax difficulties. One should not be able to make a fraudulent conveyance and then hide from one's creditors behind common-law principles.
What effect will U.S. v. Craft have in New Jersey? Contrary to Michigan law, the New Jersey courts have adopted a less mystical (and more practical) interpretation of the nature of tenancies-by-the-entireties. It has previously been decided that a judgment creditor whose lien was entered against only one spouse could nevertheless execute against entireties property. Newman v. Chase, 70 N.J. 254 (1976), King v. Greene, 30 N.J. 396 (1959); see also ESB v. Fisher, 186 N.J. Super. 373 (Ch. Div. 1982) (discussing effect of fraudulent conveyance by husband to wife). Although the creditor may execute on the debtor spouse's interest, the interest acquired at the sheriff's sale is subject to that of the non-debtor spouse. If the debtor spouse survives, the successful bidder takes a complete title, if the non-debtor spouse survives, he takes nothing. This result is not inconsistent with a subsequently-enacted statute, N.J.S.A. 46:3.17.5, which states: "Upon the death of either spouse, the surviving spouse shall be deemed to have owned the whole of all rights under the original instrument ... from its inception,"
In sum, Craft should have no effect on New Jersey law or conveyancing practices. If a lien or judgment has been entered against one spouse owning entireties property, the title company insuring the purchaser will usually insist that it be paid at closing. Of course, if the debtor spouse has died, the surviving non-debtor spouse will be able to convey title free of the lien. N.J.S.A. 46:3-17.5, supra.

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Franchise Tax imposed on some LLCs and LPs

In general, New Jersey practitioners and title insurers have assumed that limited liability companies ("LLCs"] and limited partnerships ["LPs"] are not subject to the Corporation Business Tax ["CBT"], commonly known as the franchise tax. In the case of LLCs, a provision of the Limited Liability Company Act, N.J.S.A. 42:2B-1 at seq., implies that LLCs should be exempt from franchise taxes. N.J.S.A. 42:2B-69. The New Jersey Department of the Treasury had therefore taken the position that domestic LLCs are not subject to franchise tax, provided that they have elected to be treated as partnerships for federal income tax purposes,
Nevertheless, a statute enacted last year may make LLCs subject to franchise tax liability under the following circumstances. If a member of the LLC is a corporation (or other business entity which is subject to taxation), the corporation must consent in writing to the LLC's election to be treated as a partnership for tax purposes. If it does not, the LLC must pay franchise tax on so much of its income as would be distributed to that member. N.J.S.A. 54:10A-15.6 (P.L. 2001, c. 136, eff. June 29, 2001).
Similarly, there is no obligation for an LP to pay franchise taxes. LPs, like general partnerships, are (in general) exempt from federal income taxation. 26 U.S.C. § 701. Both domestic and foreign LPs must file annual reports with the State, together with a filing fee. Failure to file reports may cause the LP to be placed on the "inactive list". However, this does not affect the LP's continued existence (i.e., it does not cause a dissolution). N.J.S.A. 42:2A-69 and -70.
Nevertheless, the statute enacted last year (discussed above), applies to LPs as well as LLCs, and thus may make LPs subject to franchise tax liability under the following circumstances. If a partner of the LP is a corporation (or other business entity which is subject to taxation), the corporation must consent in writing to the limited partnership's election to be treated as a partnership for tax purposes. If it does not, the limited partnership must pay franchise tax on so much of its income as would be distributed to that partner. N.J.S.A. 54:1 1OA15.7 (P.L. 2001, c. 136, eff. June 29, 2001).
The foregoing may be illustrated by the following example. Assume that XYZ LP consists of two partners, each holding a one-half interest: John Smith and ABC Corp. XYZ elects to be treated as a partnership for tax purposes. However, ABC Corp. fails to consent. XYZ must file a franchise tax return and pay franchise taxes on the 50% of its earnings that would be distributed to XYZ. If XYZ is an LLC (rather than an LP), the result would be the same.
What is the purpose of this statute? It seems that it is intended as a device for raising revenue by setting a trap for the unwary or dilatory. The imposition of the CBT is wholly dependent on the failure of the corporate member or partner to consent affirmatively to the election. It has nothing to do with the substantive aspects of the entity's organization or its business activities. Yet the members or partners probably chose to organize as an LLC or LP in the first place because of the favorable tax treatment these entities receive. It seems to have been the hope of the Legislature that a substantial number of corporate members (in LLCs) or partners (in LPs) will be careless about paperwork, thereby increasing the State's revenues.
As suggested above. title insurers in the past have usually not imposed requirements regarding franchise tax when insuring a conveyance. lease or mortgage to be made by an LLC or LR However, as the result of the statute discussed herein, some title insurers now believe it is prudent to obtain a franchise tax report in all cases where a partner of an LP or a member of an LLC is a corporation.

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Fraudulent Transfer Act Amended

The Legislature has enacted Assembly Bill No. 2298 as P.L. 2002, c. 100, effective Nov. 18, 2002, which amends the statute of limitations section of the Uniform Fraudulent Trans. ferAct [UFTA]. The amendment eliminates the phrase or could reasonably have been" from N.J.S.A. 25:2-31a, so that the section now reads:
A cause of action with respect to a fraudulent transfer or obligation ... is extinguished unless action is brought: Under [N.J.S.A. 25:2-25a], within four years after the transfer was made or the obligation is incurred, or, if later, within one year after the transfer or obligation was discovered by the claimant; ...
N.J.S.A. 25:2-25 is entitled "Transfers Fraudulent as to Present and Future Creditors" and states [in pertinent part]:
A transfer made or obligation incurred by a debtor is fraudulent as to the creditor, whether the creditor's claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation: a. With actual intent to hinder, delay or defraud any creditor of the debtor
While & section has been (in general) broadly construed in such decisions as AYR Composition, Inc. v. Rosenberg, 21 N.J. Super. 495 (App. Div. 1993) and Firmani v. Firmani, 332 N.J. Super. 118 (App. Div. 2000), it must be applied in conjunction with the statute of limitations found in §31. Under the original formulation of §31 a, the creditor could commence an action to avoid the fraudulent transfer: (a) within 4 years after it was made, or (b) if 4 years had already passed, within 1 year after the transfer was or could reasonably have been discovered by the creditor. The one-year time period may be characterized as a tolling provision,
RL. 2002, c. 100 seems to have been enacted in response to the decision in Sasco 1997 NI, LLC v. Zudkewich, 166 N.J. 579 (2001), which construed §31 a. Two issues were before the court in that case:
... (1) whether the four-year UFTA statute of limitations commenced at the time of transfer or at the time of the judgment; and (2) when could the creditor "reasonably have ... discovered" the transfer, the event that starts the running of the one-year tolling provision of the statute. 166 N.J. at 582.
The court reached the following conclusions:
We hold that the four-year provision runs from the date of transfer, rather than the date of judgment. [The creditor] did not file suit within four years of the date of transfer, and therefore does not fall within that provision. We also conclude that a reasonable commercial creditor would have performed an asset search, at the very latest, when it gave formal notice of default to the primary obligor. The interests of justice require that we apply that holding ... prospectively
Id. at 582 - 583.
In other words, the Supreme Court held that the wording of the statute means that the period for commencing suit under §31 a runs from the time the debtor first defaults in his obligations to the creditor, and not when the creditor subsequently recovers judgment against the debtor. It pointed out that the recovery of a judgment is not a condition precedent for the exercise of remedies by a creditor under the UFTA. Id. at 587. Turning to the one-year tolling provision of §31 a, the panel observed that "... the critical question is when a reasonable commercial creditor would have known about the transfer, rather than whether [the creditor] could, using reasonable means, have discovered the transfer". Id at 590. Thus, for example, if a creditor has loaned money to a debtor, the creditor could perform a search of the debtor's assets at the time the debtor initially defaulted in his obligation to repay interest or principal. If such a search would have disclosed a transfer made in violation of §25a, the time period to commence suit to avoid the transfer under §31 a would begin to run.
Some lenders believed that the court's reasoning imposed an unreasonable burden on them to conduct asset searches (to determine if fraudulent transfers had been made) as soon as a borrower defaulted on a loan, and they sought relief from the Legislature. Under the amended version of the UFTA, the one-year-tolling period will not begin to run until the creditor obtains actual knowledge of a fraudulent transfer by the debtor P.L. 2002, c. 100 thus effectively modifies the holding in Sasco 1997.

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Escheat Act Amended

The Legislature has enacted P.L. 2002, c. 35, effective July 1, 2002, amending the Unclaimed Property Act, N.J.S.A. 46:30B-1 et seq., which governs the escheat of personal property. One significant change in the law involves the presumption of abandonment after a certain period of time. N.J.S.A. 46:30B-7 originally provided for a five (6) year time period; this has now been reduced to three (3) years.
The statute is primarily of interest to title insurers in connection with title indemnity or other escrow deposits. A title company may hold a deposit of funds in connection with an unsatisfied judgment or other lien. Once the lien is no longer viable, the depositor may fail to claim the funds, and the title company may be unable to locate the person entitled thereto. However, after a period of three years (formerly five years), the funds may escheat to the State.
In some instances. the deposit may be held by an attorney, rather than the title company, and the same issue may arise. Accordingly, care should be taken by attorneys and title companies to ensure that any dormant funds in their possession have not escheated to the State.service.

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