Legal Cases Your Board Should Know From the Court to the Board

 While not everyone who serves on his or her co-op or condo board needs to be an  attorney or have an encyclopedic knowledge of the law, it never hurts to be  aware of the important, often precedent-setting legal decisions being handed  down by the courts. Some of these cases offer useful insights to boards, while  others may ultimately have an impact on how buildings are run from day to day.  Over the past few months there have been several such decisions—here are a few that may provide building administrators with some helpful ideas  and information.  

 Allannic v. Levin

 Lesson: The Business Judgment Rule Only Shields Board Members with Disinterested  Independence

 The board of 682 Sixth Avenue Housing Development Fund Corporation in Manhattan  decided to extend the master lease for a space owned by the cooperative under  the “80/20” rule provisions for commercial space. The shareholders sued the board and  tenant claiming that all shareholders were not being treated equally under the  extension, and that the board had breached its fiduciary obligation to them by  extending the lease. The lower court dismissed the case, but the Appellate Division, First Department  reversed and reinstated the case on the grounds that the board members were not  disinterested members when they voted in favor of the lease extension and thus  not necessarily insulated from judicial scrutiny under the Business Judgment  Rule. The Business Judgment Rule is a powerful shield, but not for board  members with conflicts of interest.  

 Holding Corp. v. Prince Fashions, Inc.

 Lesson: Legal Fees and Costs May Be Recoverable If a Party Engages in Frivolous Conduct

 This was a long, drawn-out litigation between the 542 Holding Corp. cooperative  and its commercial tenant, Prince Fashions, Inc. The co-op was seeking to eject Prince from the premises for lease violations and  aggressively asked the court for injunctive relief concerning Prince’s hazardous spray painting on the premises and unauthorized non-structural  alterations. The co-op also argued that Prince had violated an order the court had issued a  year earlier.  

 The court’s decision does not mention any lease provision stating that the prevailing  party is entitled to recover legal fees and costs from the breaching party (a  helpful contract provision for a prevailing party). It does however mention a  statute allowing for the imposition of sanctions—including an award of legal fees for frivolous conduct by parties in the  lawsuit. Without a statutory or contractual right to legal fees, each party is  responsible for their own legal fees.  

 Consolidated Resources, LLC v.

 210-220-230 Owner’s Corp.

 Lesson: Lenders Beware—Don’t Try to Bypass the Board

 In this case, the original purchaser of a co-op apartment pledged her  proprietary lease and shares as security for a loan from the plaintiff, who was  a private lender. There was no request that the cooperative board issue a  recognition agreement or otherwise consent to the loan, so when the shareholder  defaulted and tried to assign the lease and shares to the lender/plaintiff, the  board refused to do so. Litigation ensued and the court sided with the board.  

 In determining the parties’ rights, the Appellate Division Second Depatment examined the co-op’s offering plan and proprietary lease and held that neither contained an  exception from the board approval requirements with respect to the pledge of or  loans secured by the proprietary lease and cooperative shares. The court stated that the pertinent references to the term “unsold shares” in the lease are embedded in the lease provision requiring the cooperative  corporation to enter into a recognition agreement upon the request of the  purchaser of the unsold shares and another provision regarding the secured  party’s rights in the event of a loan default. According to the Appellate Court, there was no right in the secured party  because there was no recognition agreement request.  

 Berkovich v. Mostavaya

 Lesson: A Court-Approved Settlement Agreement May Not Be Enforceable if the  Terms Violate Public Policy

 This was a dispute between the plaintiff, who owned a Mitchell-Lama cooperative  apartment, and the defendant, a subtenant who subleased the apartment. The parties made a settlement agreement in a landlord-tenant holdover proceeding  which included the defendant’s promise to pay the plaintiff $690 per month for use and occupancy if the  defendant did not surrender the apartment. The Appellate Term, Second  Department approved the settlement and “So Ordered” the agreement.  

 When the defendant did not surrender the premises in a timely manner, the  plaintiff sued them for money under the court-approved settlement agreement.  The defendant claimed that the plaintiff apartment owner illegally sublet the  apartment to them, and charged them excessive rent under the Private Housing  Finance Laws.  

 The court agreed with the defendant that the sublet violated Department of  Housing and Preservation (HPD) rules, but felt that the defendant had had the  benefit of the apartment, and should be required to pay equitably for it. The  court applied the Mitchell-Lama law—which expressly bars the collection of excess rents—and held that defendants cannot be required to pay more than the lawful approved  rents. According to the court, “Since legislative proscriptions of the collection of excess rents are deemed to  implement public policy, agreements—even those embodied in so-ordered stipulations—that provide for the collection of excess rents are void and unenforceable.”  

 Notably, the court recognized a cause of action for the return of overcharges  collected, even though the court found that the Mitchell-Lama law does not  expressly provide for such cause of action.  

 Katsam Holdings LLC v.

 419 West 55th Street Corp.

 Lesson: Sponsors Given Their Kralik, and now their Katsam  

 This is a decision in which the Appellate Division, First Department decided  that the offering plan is binding on a cooperative as a contract. Based on that premise, the court held that according to the co-op’s offering plan provisions—which conflicted with the proprietary lease provisions—the sponsor properly designated Katsam Holdings LLC as a holder of unsold  shares. This entitled the plaintiff to use the premises as a commercial unit  and make alterations to it without board consent.  

 The decision arguably conflicts with the 2005 Court of Appeals decision in  Kralik v. 239 East 79th Street Owners where the New York high court held that a  sponsor’s compliance with the Attorney General regulations does not control whether a  party is a holder of unsold shares. Rather, the court proclaimed that the cooperative corporation’s certificate of incorporation, proprietary lease and bylaws must be considered  to determine whether a party is a holder of unsold shares. The Kralik decision  assisted sponsors, and now Katsam arguably does as well. The Kralik court,  however, did not examine the Attorney General regulation and offering plan in  making its decision while the Katsam court based its decision on the offering  plan which it called a contract between the parties.  

 Hamlet on Olde Oyster Bay Home Owners Assoc. Inc. v. Holiday Organization, Inc.  

 Lesson: Irrespective of the Martin Act, there are Viable Causes of Action  Against Sponsors, their Members and their Professionals for Poor or Defective  Construction

 The plaintiff HOA, condominium and individual owners sued their sponsor  developer, sponsor members and the sponsor’s real estate brokers, engineers and architects for a variety of claims because of—among other things—the shoddy construction of their homes and common areas.  

 With respect to the fraud claim against the sponsor and sponsor members, the  court denied dismissal because while there is no express or implied private  right of action under the Martin Act, “Private causes of action sounding in common-law fraud may rest upon the same  facts that would support an alleged Martin Act violation.”  

 The Martin Act has been called New York’s “blue sky law,” and prohibits a broad range of fraudulent and deceitful conduct, including  securities representing participation interests in condominium and cooperative  apartment buildings. The New York Attorney General is charged with exclusive  authority to enforce the Martin Act. Here, we see again that the courts are rejecting sponsor arguments that fraud  (as well as breach of contract) claims are preempted just because the claims  rest upon allegations that support a Martin Act violation.  

 The Second Department also refused to dismiss a negligent misrepresentation  claim against the sponsor and sponsor members because “‘…Nothing in the clear import of the language of the Martin Act requires a  conclusion that the Legislature intended to abrogate any common-law remedy  arising from conduct prohibited under the act.’” The court also upheld a breach of fiduciary duty claim based on fraud which is  subject to a six year statute of limitations and claims of breach of contract,  fraudulent inducement, negligent misrepresentation and negligence/malpractice  against the sponsor’s professionals. As for them, the court held that there was no evidence that the  plaintiffs were not third-party beneficiaries of the professionals’ contracts with the sponsor.

 Joseph G. Colbert is a partner with Kagan Lubic Lepper Lewis Gold & Colbert, LLP, specializing in the representation of cooperatives and condominiums.

 

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Comments

  • In regard to the Hamlet Olde Oyster Bay, Did the App Div reverse portions of the decision on reargument ? I thought actualkly they upheld the lower court that dismissed claims of breach of fiduciary duty beyond three years old. ( S of L's). ?