Default Judgment Against Guarantor Warranted by Peter Moulinos, Esq.

GLENWOOD MASON SUPPLY CO INC v FRANTELLIZZIIn an action filed by attorney Peter Moulinos, Esq., on behalf of Glenwood Mason Supply Co., Inc., Plaintiff sought to recover monies against a corporate defendant for the delivery of materials. The corporate defendant’s obligations were guaranteed by an individual defendant, Dominic Frantelizzi. Both defendants failed to answer the Complaint filed against them. Plaintiff then moved for a default judgment against both Defendants.

The Supreme Court of the State of New York, Kings County, granted Plaintiff a default judgment against the corporate defendant however refused to grant the same relief against the individual defendant on the basis that it was unclear that the guaranty was enforceable. Plaintiff then appealed to the Appellate Division, Second Department, seeking a modification of the lower court’s order to grant the default judgment against the individual defendant.

The Appellate Division ruled in favor of the appeal filed by Moulinos & Associates LLC. Specifically, the Appellate Division ruled that “On a motion for leave to enter a default judgment pursuant to CPLR 3215, the movant is required to submit proof of service of the summons and complaint, proof of the facts constituting its claim, and proof of the defaulting party’s default in answering or appearing” (Atlantic Cas. Ins. Co. v RJNJ Servs., Inc., 89 AD3d 649, 651; see CPLR 3215[f]; Dupps v Betancourt, 99 AD3d 855, 855). A defendant who has defaulted in answering admits all traversable allegations in the complaint, including the basic allegation of liability, but does not admit the plaintiff’s conclusion as to damages (see Rokina Opt. Co. v Camera King, 63 NY2d 728, 730; 425 E. 26th St. Owners Corp. v Beaton, 128 AD3d 766, 769; Paulus v Christopher Vacirca, Inc., 128 AD3d 116, 126).”

The Appellate Division further ruled that the default judgment against the individual defendant should have been granted given that “the plaintiff submitted proof of service of the summons and complaint upon Frantellizzi, proof of the facts constituting its claim against that defendant, and evidence of his default in answering the complaint or appearing in the action (see Loaiza vGuzman, 111AD3d 608, 609;Dupps v Betancourt, 99AD3d at 855). Contrary to the Supreme Court’s determination, by defaulting, Frantellizzi is deemed to have admitted the factual allegations in the complaint, including the allegation that he “personally. . . agreed and promised to pay [the] [p]laintiff” for the subject goods (see 425 E. 26th St. Owners Corp. v Beaton, 128 AD3d at 769).”

A copy of the Appellate Division’s decision can be viewed here GLENWOOD MASON SUPPLY CO INC v FRANTELLIZZI

New Legislation Involving FIRPTA In Real Estate Transactions by Nicholas Moneta

New legislation through the Protecting Americans from Tax Hikes Act (hereinafter “PATH Act” or “the Act”) has affected the Foreign Investment in Real Property Tax Act of 1980 (“FIRPTA”). The questions posed by many real estate attorneys is what exactly is the effect of this new legislation.

The short answer: The PATH Act will eliminate certain tax liabilities imposed by FIRPTA while also curbing the use of some previously popular tax shelters (e.g., the use of a tax-free U.S. real estate investment trusts (“REITs”) spinoff). The Act amended 26 U.S.C. Section 1445 which generally required withholding on dispositions of United States Real Property Interests (“USRPIs”) at a rate of 10% of the gross proceeds of the sale. Now, the rate of withholding on dispositions of USPRIs generally increases to 15% of the gross proceeds of the sale. Commercial real estate attorneys conducting closings should ensure that they are withholding the correct amount and be aware of the effective date of the PATH Act provisions.

ANALYSIS

FIRTPA was enacted by Congress in 1980 as a means to tax the gains on foreign investors’ income from the sale of U.S. real property. FIRPTA effectively deterred foreign investment, as it limited the amount that foreign investors were able to invest in REITs. This limitation created barriers to foreign investment in U.S. infrastructure and real estate. The PATH Act was signed into law on December 18, 2015, and significantly reformed FIRPTA. The PATH Act will extend a number of tax relief provisions that expired at the end of calendar year 2014. The Act is also expected to alleviate these barriers by attracting foreign investment and reducing some tax liabilities.

The Act was proposed as a part of an ongoing initiative to encourage foreign investment into the U.S. real estate market by reducing the deterrents created by FIRPTA. The PATH Act includes a number of significant changes to the rules governing REITs and the rules for foreign investment in U.S. real property under FIRPTA, including:

1) Increase in the rate of FIRPTA withholding on dispositions of U.S. real property interests. This provision (effective for dispositions occurring 60 days after December 18, 2015) increases the rate of withholding on dispositions of any USRPI under FIRPTA from ten percent to 15 percent;

2) Exception from FIRTPA withholding for interests held by foreign retirement or pension funds. Any USRPI held by a qualified foreign pension fund is exempt from FIRPTA withholding, applicable to dispositions and distributions after the date of enactment;

3) Exception from FIRPTA withholding for certain REIT stock. This provision (applicable to dispositions on or after the date of enactment) increases from five percent to ten percent the maximum stock ownership a foreign shareholder can have in a publicly traded REIT to avoid having the stock treated as a USRPI under FIRPTA on a disposition of the stock;

4) Restrictions on tax-free spinoffs involving REITs. Under this new provision, a spin-off involving a REIT generally qualifies as tax-free only if immediately after the distribution both the distributing and controlled corporations are REITs. Neither the distributing nor spun-off corporation can elect to be treated as a REIT for ten years following a tax-free spin-off transaction. This provision prevents “Opco-Propco” spin-offs from qualifying for tax-free treatment and applies to distributions on or after December 7, 2015 (other than distributions under a transaction described in a ruling request to the IRS on or before that date);

5) Reduction in percentage limitation on assets of REIT which may be taxable REIT subsidiaries (TRSs). Under this provision, the securities of one or more TRSs held by a REIT may not represent more than 20 percent (rather than 25 percent under current law) of the value of the REIT’s assets. This provision applies to tax years beginning after 2017.
Further, under the PATH Act, regulated investment companies (“RICs”) and REITs are excluded from the “cleansing rule” and thus, the cleansing rule will only apply to a corporation that is not a RIC or a REIT.

Tax-Free Spinoffs Involving REITs in Depth

Operating businesses with significant real estate assets have used the tax-free spin-off under Code Section 355, combined with the REIT provisions to tax-efficiently separate real estate from the operating business. The tax-free distribution of real estate assets involving REITs has been perceived as an abuse of the general Code Section 355 requirement that both entities in a spin-off satisfy an active business test.

The Act prevents tax-free spin-offs when either the distributed or distributing entity is a REIT, with exceptions if (1) both the distributing and distributed entities qualify for REIT status immediately after the spin, or (2) a REIT spins-off its taxable REIT subsidiary (“TRS”). Additionally, the Act prohibits a corporation from making a REIT election within 10 years from the date of the tax-free spinoff. Effective Date: These restrictions are effective for distributions made on or after December 7, 2015. However, the restrictions do not apply to any distribution pursuant to a transaction described in a ruling request submitted to the Service on or before December 7, 2015.

Taxable REIT Subsidiaries

The purpose of the TRS limit is to ensure that REITs focus primarily on the real estate business. In 2008, the TRS asset exception was amended to increase the value of TRS shares a REIT can hold from 20% to 25% of total REIT assets. The Service was concerned that allowing 25% of a REIT’s assets, by value, to be stock in TRSs enabled REITs to have significant non-real estate assets. The Act will reduce the limitation back to 20%. Effective Date: This change is effective for tax years beginning after December 31, 2017.

Footnotes

1- 26 U.S.C. Section 1445 states in relevant part, “[I]n the case of any disposition of a United States real property interest (as defined in section 897(c)) by a foreign person, the transferee shall be required to deduct and withhold a tax equal to 10 percent of the amount realized on the disposition. 26 U.S.C. Section 1445

2- “The amendments made by this section shall take effect on January 1, 2015.” Protecting Americans from Tax Hikes Act of 2015.

3- An REIT is an entity used to reduce corporate income tax liability that satisfies certain US federal income tax requirements and elects to be taxed as a REIT. See http://us.practicallaw.com/w-001-1381?source=relatedcontent.

4- Under the pre-Act law, a disposition of USRPIs did not include any interest in a corporation if the corporation did not hold any U.S. real estate at the time of disposition of the interest, and all of the U.S. real estate held by the corporation during the applicable period (the shorter of (i) the period of time after June 18, 1980, during which the taxpayer held such interest, or (ii) the five-year period ending on the date of disposition of such interest), was either disposed of in transaction in which gain, if any, was fully recognized, or ceased to be USPRIs by reason of the application of the cleansing rule.

This article was written by Nicholas Moneta and is not offered as legal advice.

New York Co-op and Condominium Boards Continue to Enjoy Judicial Deference by Nicholas Moneta

Many real estate attorneys and lawyers still discuss the decision of Levandusky v. One Fifth Avenue Apartment Corp. In that action, the New York Court of Appeals decided over 25 years ago that co-op and condominium boards (“Boards”) are generally entitled to judicial deference when decisions are made in the proper exercise of their business judgment. The Court found in Levandusky that Boards enjoy such judicial deference unless an apartment owner can show that the Board acted: 1) in bad faith; 2) outside the scope of its authority; and/or 3) not in furtherance of the condominium or co-op. Boards are protected from judicial inquiry under the “business judgment rule,” which was originally developed in the context of commercial enterprises.

Essentially, a Board that benefits the entity it serves and does so within the scope of its authority can avoid potentially expensive litigation with the protections of an almost certain dismissal of claims against it. Even if in retrospect, the business decision appears to have been “unwise or inexpedient,” Levandusky holds that the decision cannot be questioned. New York courts have since augmented Levandusky protection to embrace Board decisions respecting alterations and repairs, rights of first refusal, sales of common area space and sublet restrictions.

However, the Courts will very likely not employ the business judgment rule for claims involving discrimination, breaches of contract or where the condominium or co-op’s operating documents require the Board to act unreasonably. New York attorney Peter Moulinos represents several Boards and adds that the considerably generous judicial deference afforded Boards has proven to be a useful tool throughout his experience with these types of claims. Mr. Moulinos encourages any Board facing litigation to contact him for a consultation.

This article was written by Nicholas Moneta and is not offered as legal advice.

The relevant case is cited as: Levandusky v. One Fifth Avenue Apartment Corp., 553 N.E.2d 1317 (N.Y. 1990).

Promissory Note Cannot Be Enforced Against Legendary Attorney Percy Sutton by Peter Moulinos, Esq.

Percy Ellis Sutton was a prominent black American attorney, political and business leader. He was a real estate lawyer, business lawyer and the legal representative for Malcolm X. His full biography is prominently found on his own Wikipedia page ( click here to view Mr. Sutton’s Wikipedia page).

Mr. Sutton passed away in New York in 2009 when he was 89 years old. Prior to his passing, he suffered from Alzheimer’s disease and displayed cognitive issues and difficulties prior to March 2003. In March 2003, he allegedly signed a promissory note, in the amount of $2.5 million, to his longtime friend, Beverley Hemmings. Prior to Mr. Sutton’s passing, in 2008, Ms. Hemmings sought to collect on the note claiming that she was owed that money from Mr. Sutton’s estate. The Administratix of Mr. Sutton’s estate claimed that the signature on the note was not that of Percy Sutton and, even if it was, he lacked the mental capacity to know what he was signing. Ms. Hemmings claimed that the note was given to her in consideration of her longtime advisory services to Mr. Sutton over a period of 25 years.

The trial court heard testimony from Mr. Sutton’s physicians who testified that Mr. Sutton lacked legal capacity to sign the note in March 2003. The Court also ruled that “regardless of whether Mr. Sutton did in fact sign the note, the Court finds that he could not have understood what he was signing, as he could not have been indebted to Ms. Hemmings for $2.5 million”.

Claim Against Coop Managing Agent May Proceed by Peter Moulinos

In an action between two cooperative unit owners, the Plaintiff sued the unit owner above him for damage to his unit stemming from a continuous leak into the Plaintiff’s apartment for over 18 months. In addition to suing the unit owner above, the Plaintiff’s real estate lawyer also filed suit against Douglas Elliman Property Management, who was the managing agent of the cooperative. The basis for suing Douglas Elliman was the fact that the cooperative failed to take measures to stop the leak and that Douglas Elliman, in its capacity as managing agent, should be liable for the cooperative’s failure.

Douglas Elliman, through its real estate attorney, moved to dismiss the action on the basis that it could not be held liable for negligent conduct since it was only the agent of the cooperative. The Court however disagreed. It ruled that “the fact that an agent acts for a disclosed principal will not relieve him of liability for his negligent acts, even though the principal may also be liable”. Thus Douglas Elliman could be held liable on a theory of negligence even though it acted only as the agent of the cooperative.

This decision was issued by Judge Deborah James in the action entitled Karydas v. Ferrara-Ruurds, filed in teh Supreme Court of the State of New York, County of New York, bearing index number 101386/12.

Read more: http://www.newyorklawjournal.com/id=1202741935412/Karydas-v-FerraraRuurds-10138612#ixzz3rhmnrtSS

Estate Fiduciary Not Responsible For Mortgage on Deceased’s Property by Peter Moulinos

An intriguing question arose in an estate proceeding about who is responsible to pay mortgages on a property owned by a deceased party, jointly with another party. In a Surrogate’s Court proceeding, the attorney for the surviving party who jointly owned real estate with the deceased argued that the relative of the deceased who inherited the property, who was also the fiduciary administrator of the estate, was responsible for payment of the deceased’s share of the mortgage. The lawyer for fiduciary argued that the mortgages run with the land and they should not be the responsibility of the fiduciary to pay.

The lawyer for the fiduciary cited to EPTL 3-3.6 (a) which provides that:

“Where any property, subject, at the time of decedent’s death, to any lien, security interest or other charge… is specifically disposed of by will or passes to a distributee,… the personal representative is not responsible for the satisfaction of such encumbrance out of the property of the decedent’s estate….”

Based on this statue, the Court agreed that the fiduciary was not responsible. Since the joint property owner inherited the property, and the mortgages ran with the land, they remained liens on the property and were payable by the joint property owner who now owned 100% of the property.

This proceeding is entitled Estate of Harold Fleisher and was filed in the Surrogate’s Court of New York, County of New York.

Real Estate Attorney Not Disqualified In Contract Dispute by Peter Moulinos, Esq.

Plaintiffs sought to purchase a cooperative apartment unit from the Defendant pursuant to a contract of sale. After the Plaintiffs were rejected by the cooperative board, they demanded that the Defendant return their down payment. The Defendant refused and the Plaintiffs then sued the Defendant for recovery of their down payment.

The down payment was held in escrow by the Defendant’s real estate attorney who was also acting as the escrow agent under the parties’ contract of sale That same real estate attorney represented the Defendant in the ensuing litigation. The Plaintiffs in the course of the litigation sought to have the Defendant’s attorney disqualified from representing the Defendant. The reasoning for such a request was that the Defendant’s attorney would likely be a witness and could not act as an advocate for his client and also as a witness.

The Court refused to disqualify the Defendant’s attorney from representing the Defendant in the litigation. It first stated that every party has an entitlement to be represented by an attorney of their own choosing absent a valid reason for disqualification. In this case, there was no valid reason for disqualification of the real estate attorney given that there were other witnesses who could testify to the same facts that the real estate attorney could testify to. In fact, there was no showing that the real estate attorney could provide relevant testimony anyway.

The case is entitled Vukel v. The Joan Dirigolomo Irrevocable Trust and was decided in the Supreme Court of the State of New York, County of Queens.

Condominium Late Fees Found to be Unreasonable by Peter Moulinos

In an action by the board of managers of a condominium seeking to foreclose a common charge lien, the Court ruled that the unit owners were in fact delinquent in paying their common charges and the Court granted summary judgment to the condominium.

However, the question raised by the unit owners was whether the late fees charged by the condominium were appropriate. The condominium bylaws authorized an assessment of $.04 for every dollar amount that remains unpaid to the condominium. The board of managers went further and imposed a late fee in addition to this amount for the sum of $800 per month. In this case, the unit owners’ monthly common charge was approximately $1,266. The additional late fee therefore amounted to a 63% monthly penalty to the unit owners.

Judge Richard Braun of the Supreme Court of New York, in New York County, ruled that this additional charge was not usurious, under the law. However, the judge examined section 190.40 of the Penal Law, which makes an interest charge of more than 25 percent a criminal offense. Based on the 25% interest threshold set by the legislature, Judge Braun determined that any penalty above that rate would be unreasonable and confiscatory in nature. It therefore awarded the condominium only the $.04 per dollar assessment under the bylaws.

This action is captioned as Board of Managers of the Park Avenue v. Sandler, bearing index number 100066/2013.

Consulate of Qatar Seeks to Terminate Real Estate Contract by Peter Moulinos, Esq.

In a bizarre turn of events, the consulate general of Qatar sought to terminate a $90 million contract to purchase real property in Manhattan for numerous evolving reasons.

After agreeing to purchase the property in September 2013, and even hosting a party at the property prior to going into contract, the Qatari consulate decided that it wanted to terminate the contract. Its reason for doing so was that the seller was subject to a money laundering investigation in France. The seller declared Time Of the Essence under the Contract and the buyer defaulted by not closing even though its attorney attended the closing “just to watch the show”. After being sued by the seller in Court, the Qatari consulate then argued that the person who signed the contract on behalf of the consulate lacked the authority to do so. The consulate filed a motion to dismiss a complaint to compel a closing.

In its ruling, the Court refused to dismiss the complaint however directed the parties to conduct limited discovery to ascertain if the signatory of the contract had the authority to enter into the agreement. The Court referred to the Vienna Convention which does not authorize a consulate to enter into real estate contracts such as the one at issue. It instead sought to apply the New York apparent agency authority doctrine which provides that “an agent may bind his principal to a contract if the principal has created the appearance of authority, leading the other contracting party to reasonably believe that actual authority exists”. This is what the court hoped limited discovery would resolve.

The case is cited as 194 Realty LLC v. Consulate General of Qatar, and is pending in the United States District Court for the Southern District of New York.

Read more: http://www.newyorklawjournal.com/id=1202736812376/1964-Realty-LLC-v-Consulate-of-the-State-of-QatarNY-14-Civ-6429#ixzz3mKiUNUBv

Condominium Board Cannot Sue Sponsor For Fraud Based on Martin Act

In Board of Managers of 111 Hudson Street Condominium v. 111 Hudson Street, LLC, the Board sued a sponsor for various items including failing to create a reserve account as required under the condominium’s offering plan and for fraud in failing to disclose in the offering plan the damaged condition of the condominium’s cellar. The sponsor argued that it could not be sued for fraud as such a claim was precluded by the Martin Act.

The Martin Act is New York’s blue sky law which prohibits fraudulent and deceitful practices in the sale of securities. Under the Act, the New York Attorney General has the power to investigate possible securities fraud and to commence civil or criminal prosecutions. It has been used to sue sponsors for fraud in offering condominium units for sale to the general public and for making misrepresentations in a condominium’s offering plan.

The sponsor in this case successfully was able to have the Board’s claim for fraud. It claimed that the Martin Act precluded a claim of fraud against it. In agreeing with the sponsor, the Court ruled that a claim for fraud cannot be based solely on a misrepresentation under an offering plan since such claims are intended to be brought by the New York attorney general solely under the Martin Act. The court did rule that claims for fraud may be brought against sponsors in instances where those claims are not solely based under the Martin Act.

This decision was issued by Judge Anil Singh of the Supreme Court of the State of New York, County of New York, bearing index number 651959/14.