October 28, 2021
Digest: A full-time judge (1) may hold shares in a family-held limited liability company that owns real estate, and participate in management of the company’s real estate investment, but (2) must not manage, operate, or otherwise actively participate in a family-held bar business that operates on the company’s real estate.
Rules: 22 NYCRR 100.0(I); 100.2; 100.2(A); 100.2(C); 100.4(D)(2)-(3); 100.4(D)(3)(b); 100.4(H)(2); Opinions 21-98; 21-22(B); 20-187; 20-155; 18-179; 18-169; 17-52; 14-89; 13-84; 10-203(B); 10-193; 10-77; 06-155; 95-100.
A full-time judge’s parent controls and manages a limited liability company (LLC), which in turn owns and operates a “mixed-use commercial/residential property.” The LLC is closely held by the judge’s family members, as all shareholders are relatives within the third degree of relationship.1 The property includes a commercial bar business, residential apartments occupied by long-term tenants under lease, and air rights to build up some additional stories. The judge’s parent currently holds the liquor license for the bar business and owns and operates it. The judge’s parent now wishes to transfer all ownership and managerial responsibilities to the judge and other family members. The judge thus asks if it is ethically permissible to: (1) own shares in the family’s closely held LLC and, if so, be the majority shareholder; (2) as a shareholder in the LLC, enter contractual lease agreements and collect rents for the commercial business and residential apartments located at the property; (3) own and/or operate the bar business located on the LLC’s property, which involves seeking a liquor license from the liquor authority, leasing the bar business to another family member or a non-family tenant, and entering into contractual agreements with liquor/beer suppliers and other vendors for the operation of a bar business; and (4) as a shareholder in the LLC, be a signatory on bank accounts for the LLC and/or the bar business.
A judge must always avoid even the appearance of impropriety (see 22 NYCRR 100.2) and must always promote public confidence in the judiciary’s integrity and impartiality (see 22 NYCRR 100.2[A]). A judge must not lend the prestige of judicial office to advance the private interests of the judge or others (see 22 NYCRR 100.2[C]). A full-time judge must “not serve as an officer, director, manager, general partner, advisor, employee or other active participant of any business entity,” unless an exception applies (22 NYCRR 100.4[D]). Among the exceptions, a full-time judge may “hold and manage investments of the judge and members of the judge’s family, including real estate” (22 NYCRR 100.4[D]) and “manage and participate in a business entity engaged solely in investment of the financial resources of the judge or members of the judge’s family” (22 NYCRR 100.4[D][b]). The term “member of the judge’s family” presumptively includes relatives within the sixth degree of relationship (see Opinion 14-89, interpreting 22 NYCRR 100.0[I]).
Thus, we have advised that a full-time judge may be an officer of a family corporation that invests in real estate and may be a member of an LLC that owns income-producing real estate along with family members (see Opinion 18-169). Moreover, a full-time judge may continue as owner, officer and managing partner of their family’s various solely owned real estate holdings, including managing the income therefrom and reinvesting it into new real estate properties (see Opinion 10-203[B] [full-time judge “may be a member with his/her siblings of an LLC that will own several pieces of real estate”]). We have also said a judge may serve as “an officer” of closely held family corporations that own real estate (Opinion 10-77).
We thus conclude the judge may be a shareholder, or even the majority shareholder, of a family owned LLC that owns real estate, provided that all members of the LLC are relatives within the sixth degree of relationship to the judge. Moreover, the judge may participate in management of the family-held company’s real estate investment as permitted by prior opinions (see e.g. Opinions 21-22[B] [a full-time judge who solely owns certain rental properties through an LLC may advertise those properties for rent on social media and, if permitted by law, enter into a business arrangement providing a current tenant with a rent credit for referring new tenants, provided the judge’s judicial status will not be referenced]; 18-179 [full-time judge who co-owns commercial properties with their sibling through several LLCs may serve as “owner, officer and managing partner of [the] family’s various solely owned real estate holdings, including managing the income therefrom and reinvesting said income into new real estate properties,” may serve as an officer in such family LLCs “unless and until a non-family member becomes a shareholder,” and “may accept rent from an attorney” where this will not result in frequent disqualifications]; 10-193 [a full-time judge may manage real estate as the sole member of the LLC that owns the property]).2
However, a full-time judge may not be an “active participant” in other types of business entities beyond those narrowly permitted by Sections 100.4(D)(2) and 100.4(D)(3)(b), even if family-owned (see e.g. Opinions 20-155 [for-profit educational company]; 13-84 [spouse’s consulting business]). Accordingly, the judge may not manage, operate, or otherwise actively participate in the bar business (22 NYCRR 100.4[D]). Seeking a liquor license on its behalf would constitute improper active participation in the business, and we note the judge’s application for a liquor license could create an appearance that the judge is seeking to exploit their judicial position (cf. Opinion 95-100 [full-time judge “may not apply for a real estate broker’s or sales license under any circumstance”]; 22 NYCRR 100.2[C]). The judge also must not lease the bar business to another individual, whether or not related to the judge, as the negotiation of the lease would likewise constitute improper active participation in the business. Nor may the judge have signature authority over the bar business’s bank accounts (cf. Opinion 06-155 [full-time judge may not serve as an additional signatory on their sibling’s law office escrow account]). At most, the judge may be a strictly passive investor in the bar business, without “any active role, title, or function in the management or control of the business” whatsoever (Opinions 20-187; 18-169; 17-52; 13-84).
1 The current shareholders include one or more of the judge’s parents, siblings, aunts and uncles; no one other than members of the judge’s family holds shares in the LLC.
2 While Opinion 21-98 focused on whether or not certain financial transactions had to be reported under Section 100.4(H)(2), we observed that those transactions “result from permissible extra-judicial activities” where “the [full-time] judge and another relative are the sole members of an LLC which holds a parcel of real estate,” and the “LLC rents this real estate to a closely held family business (in which the judge does not participate).”