Owning Residential and Commercial Properties as Investments

May 3, 2006

CJE Opinion No. 2006-4

You have asked this committee for an opinion on how the Code of Judicial Conduct applies to certain of your real estate holdings.

According to your letter, you have interests in two properties that are at issue here. First, you have an interest in a four-story commercial office building that is rented out to attorneys. You indicate that this is where you conducted your law practice before you were appointed to the bench. This building is owned in the name of a realty trust in which you have a fifty per cent beneficial interest. Your former law partner owns the other fifty per cent interest. He is the trustee of the realty trust and handles the day to day operations of the building. A secretary collects the rents and pays the bills, and she is paid a stipend for those services. Up until now, you have prepared the trust's tax returns without charging a fee. You report fifty per cent of the profit or loss from the realty trust on your personal tax returns.

Second, you have an interest in a two-family residential rental property that is owned in the name of another realty trust. Your wife is the trustee of that trust. You and she each own a fifty per cent beneficial interest in the trust. The tenants pay their rent to your wife as trustee. The mortgage payments for the property are made from a joint personal checking account that you share with your wife. Although you have not said so expressly, it is assumed that the rental payments to your wife as trustee are deposited into this joint account. Maintenance of the residential property is taken care of by one of the tenants.

No tenant in either the office building or the residential property has ever appeared in court before you, and you indicate in your letter that you would never permit a tenant to appear before you. Additionally, these properties are located in counties other than the county in which you sit, although the office building is not very far geographically from the court where you sit.

You have asked the committee whether you may continue to keep these holdings. Your question principally involves Section 4 D of the Code, which governs a judge's financial activities. The section provides in relevant part:

        

"(1) A judge shall refrain from financial and business dealings that tend to reflect adversely on the judge's impartiality, that may interfere with the proper performance of the judge's judicial position, that may reasonably be perceived to exploit the judge's judicial position, or that may involve the judge in frequent transactions or continuing business relationships with those lawyers or other persons likely to come before the court on which the judge serves.

"(2) Subject to the requirements of this Code, a judge may hold and manage investments, including real estate, and receive compensation as set forth in Section 4 H, but shall not serve, with or without remuneration, as an officer, director, manager, general partner, advisor or employee of any business.
 

* * * * *

"(4) A judge shall manage his or her investments and other financial interests to minimize the number of cases in which disqualification is required or advisable. As soon as the judge can do so without serious financial detriment, the judge shall divest himself or herself of investments and other financial interests that might require frequent disqualification."
 

 

Financial activities of judges are also subject to the more general requirements of Canons 1 and 2, i.e., that judges maintain high standards of conduct in all their activities, avoid impropriety and the appearance of impropriety, and avoid any conduct that gives the appearance that any person is in a special position to influence the judge.

As to Section 4 D (4), you have indicated in your letter that the need for disqualification has not arisen to date. You have not said how many attorneys rent space in the office building, or whether any of them is likely to appear in your court in the future. As your financial interest in the rents is substantial, your recusal would clearly be required if any attorney tenants were to appear before you. See CJE Opinion Nos. 91-1 and 93-3. Based on the information supplied in your letter, however, the committee sees no current conflict with Section 4 D (4). The committee simply draws your attention to that provision in the event that disqualification is necessitated often enough so as to affect the work of your court by requiring that cases that would otherwise be assigned to you be taken on by other judges. If that ever became the case, divestiture would be required.

Section 4 D (2) is also involved here. Although Section 4 D (2) generally permits judges to hold and manage real estate investments, it further provides that judges are prohibited from serving, with or without compensation, as an officer, director, manager, general partner, advisor, or employee of a business. In CJE Opinion No. 2004-6, the committee analyzed this section in an effort to distinguish what is permitted "investment" from that which is forbidden involvement in a real estate "business." The committee said in that opinion that factors to be considered include the nature, extent, and complexity of the holdings. The extent of a judge's hands-on involvement (i.e., the division between capital and labor) might be a yardstick to gauge whether the activity was an investment or a business activity. "[A]s any financial pursuit becomes more active, personal, and time consuming, even in the absence of interference with the 'proper performance' of judicial duties, it becomes more business-like and therefore more likely to be prohibited." See J. Shaman, S. Lubet & S. Alfini, Judicial Conduct and Ethics §7.11 (2000). The committee stated that, "In general a judge may establish policy and participate in decisions regarding the purchase, sale, and use of land, but the actual management must be left to others."

In applying these principles to your holdings, the committee concludes that the structure of your interest in the two-family residential rental property is permitted under the Code. Your wife as trustee collects the rents and one of the tenants provides the maintenance. While the commingling of the rents into a joint personal checking account that is shared by both the trustee and all of the trust beneficiaries -- and from which the Trust's mortgage is paid -- may blur the lines between personal ownership and trust ownership of the property, your passive activity in connection with the property is within acceptable limits under the Code.

As to the office building, your active involvement appears to be limited to your preparation of the tax returns for the realty trust. The trustee manages the day to day operations, and a secretary collects the rents and pays the bills. As this commercial building appears to be a substantial business operation, your involvement must be that of a passive owner. The committee has stated before that passive ownership must be truly passive. This requirement is a bright-line rule. As the committee stated in CJE Opinion No. 2004-6, day to day operations including accounting and bookkeeping functions must be handled by others. Similarly, with respect to the office building, the committee advises that you must no longer prepare the tax returns for the realty trust. In other respects, your involvement as a passive beneficiary of the trust comports with the Code, subject to the potential issue of disqualification discussed above, should that ever arise, under Section 4 D (4).