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

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.

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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.

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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.

Prisoner Can Sublease Unit While in Prison by Stephen Tsamblakos

In a holdover proceeding entitled 46 Downing Street, LLC v. Thompson, Mr. Thompson attempted to be “restored to occupancy” to his unit #1C at 46 Downing Street after being incarcerated in prison.

The issue is that the apartment has been occupied by Ms. Watabe for the past three years. The petitioner, 46 Downing Street, LLC, filed a holdover proceeding against Mr. Thompson for subletting the apartment, while he was in prison. The court ruled in favor of the petitioner, and Mr. Thompson was evicted from the apartment.

Upon Mr. Thompson’s release from prison, he filed a pro se post-eviction order. From there, the appellate term ruled in favor of the respondent, arguing that his imprisonment was a reasonable excuse for his absence from the proceedings. The respondent then filed a motion to dismiss the petition, which Judge Wendt granted, as the petitioner did not provide the respondent the necessary thirty days to end the tenancy. The petitioner argued that he had the right to rent the apartment to Ms. Watabe at market-rate because of Mr. Thompson’s incarceration. The respondent’s argument was that he lived in the apartment since he was seven years old and intended to bring his teenage daughter to the United States from Kuwait to live with him. The apartment is also affordable for the defendant at $450 per month, as his income is $800 per month from social security. Ms. Watabe claims that she intends to purchase a home in Manhattan and is concerned that her lease will be terminated because of the lawsuit.

The respondent’s incarceration “is not enough to defeat the tenancy”. In1970, the Court of Appeals ruled, in Corr v. Westchester County Dept. Of Social Services, that “a patient or inmate of an institution does not gain or lose a residence or domicile, but retains the domicile he had when he entered the institution”. Furthermore, the fact that the landlord rented the apartment Ms. Watabe at a reduced rate of $2,000 illustrated their belief that Mr. Thompson would return to the apartment.

The court awarded Mr. Thompson possession of the apartment. This ruling, however, does not prevent Ms. Watabe from suing the petitioner for any damages, in regards to her lease.

The case was cited as 46 Downing Street v. Thompson, 81450/09, NYLJ 1202732411218, at *1 (Civ., NY, Decided July 25, 2015).

This article was written by Stephen Tsamblakos, a legal intern at Moulinos & Associates LLC.

Article 78 Proceeding for NYU Expansion by Stephen Tsamblakos

In Glick v. Harvey, the plaintiff filed an Article 78 proceeding for land against the defendant, including New York University.
In Downtown Manhattan, residents have begun to grow weary of NYU’s rapid expansion in Greenwich Village. This manifested when a dispute arose over four parcels of municipal land, which the plaintiffs argued was to be designated as parkland. These parcels include Mercer Playground, LaGuardia Park, LaGuardia Corner Gardens, and Mercer-Houston Dog Run.

The New York State Court of Appeals ruled in favor of the University’s plans to expand its facilities, as the plaintiffs were not able to demonstrate that the parcels were implied parkland, which would have protected the land under the public trust doctrine. When first developed, LaGuardia Park was to “always remain in Department of Transportation jurisdictional property, available for DOT use” and not to be “formal or implied dedicated parklands”.

In regard to Mercer Playground, the permit for its development calls for the “temporary” use of the land to serve as a park, and “in the event the DOT requires the property to perform construction work, the Department of Parks and Recreation shall vacate it and return it”. The LaGuardia Corner Gardens were leased to the GreenThumbs Garden Program “on an interim basis, pending the future development or other use of the premises”.
Prior to the appeal, “petitioners sought an injunction of the City’s planned transfer of the parcels and a declaration that the City respondents had unlawfully alienated impliedly dedicated public parkland in violation of the public trust doctrine”, The NY Supreme Court ruled in favor of the petitioners, arguing that the alienation of those parcels violated the public trust doctrine.” However, upon appeal, the Appellate Division ruled in favor of the university, “denying the petition and dismissing the proceeding.”

The two necessary conditions to complete a successful challenge to the alienation of land are to show that the land owner’s intent is unmistakable and “that the public has accepted the land as dedicated to a public use.”

The petitioners were unable to prove that the city planned to permanently dedicate the parcels of land, as the permits reference above demonstrate.
The case was cited as Matter of Glick v. Harvey, No. 107, NYLJ 1202730967649, at *1 (Ct. of App., Decided June 30, 2015).