Judgment Against Real Estate Mogul Has Been Affirmed

Real estate mogul Harry Macklowe has received a resounding defeat by the New York Appellate Division regarding his litigation with Warren Cole, his former business right-hand man.

Supreme Court Justice Cynthia Kern’s grant of summary judgment on Mr. Cole’s breach of contract claims were affirmed by a unanimous panel.
A $30 million judgment against Macklowe personally was also affirmed by the appeals court.

This is the sixth time in nine years that the respective parties have appeared in front of the appellate court. This legal dispute came from a limited partnership agreement between Macklowe and Cole, in which Cole would be justly compensated with percentage interests in real estate properties in which Macklowe’s firm were shareholders.

The major issue of the appeal was “the interpretation of the plain language of a limited partnership agreement whereby plaintiff was obligated to sell his partnership interest upon the termination of his employment with defendant.”

Justice Rolando Acosta’s written opinion stated that even though Cole had agreed to a limited partnership agreement in 1994, and a requirement that Macklowe purchase Cole’s 9% interest had been triggered by Cole’s departure in 1999, Cole technically continued to retain his interest as no official sale had ever been consummated.

The property owned by the partnership was sold in 2008 for $231 million, 9% of which was due to Cole under the agreement, according to his claims.
Cole’s argument was that his obligation to was dependent on Macklowe’s setting the purchase price, “which he did not do,” Acosta stated in the written opinion.

Construing a standard limited partnership agreement “buy-sell” clause that requires a buyout of the departing partner’s interest by the partnership at an “‘arms’ length sales value,” the panel said the record was clear that Macklowe had failed in 1999 to make a “proper offer.”
“While the [partnership agreement] does not clearly spell out all the mechanics of executing the buy-sell provision, it is implicit that the initial step was Macklowe’s valuation of the partnership interest,” Acosta said.

The opinion asserted that a 1999 offer by Macklowe to purchase all of Cole’s interests in more than 30 properties for $2.5 million did not constitute an “offer” under the buy-sell provision of the agreement at issue.

That Macklowe failed to prepare and tender to Cole a proper valuation statement for the 1994 agreement was not under dispute. Therefore no further discovery was needed to evaluate whether the offer in 1999 could satisfy the agreement, as ruled by the judicial panel.
The panel rejected claims by Mr. Macklowe that Cole’s claims were barred by waiver doctrines.

In fact, Acosta wrote that “Cole’s inaction does not raise any issues of fact with respect to defendants’ affirmative defenses because the [partnership agreement] imposed no affirmative duty on Cole, even after his employment terminated, to take action to maintain his partnership interest.”
The opinion noted that a previous dismissal case had been reversed by the First Department. Other rulings had given rewards of more than $12 million in damages to Mr. Cole based on claims regarding other properties.

Can a Cooperative Apartment Be Partitioned?

Where owners of real property cannot agree on the continued ownership or operation of a property, they may commence an action for partition in Court seeking the public sale of the property. The proceeds from the sale are then distributed amongst the owners in accordance with their respective interests.

An person holding an ownership interest in a cooperative apartment however does not technically own real property. Rather, shares in the cooperative are owned which entitle the shareholder to occupy a unit pursuant to a proprietary lease. The cooperative shares owned by the unit owner are considered personal property. Where there is a breakdown in the relationship of owners of a cooperative apartment and, and one wishes to sell the cooperative unit, many people question whether they may maintain an action for partition of the unit.

Generally, the law allows for the partition of a cooperative unit and such a litigation to be commenced. New York RPAPL §901(1) is available to permit the partition of cooperative apartments, which defines partition as “the act or proceeding by which co-owners of property cause it to be divided into as many shares as there are owners, according to their interest therein, or if that cannot be equitably done, to be sold for the best obtainable price and the proceeds distributed according to the respective interests. Chiang v. Chang, 137 A.D.2d 371, 529 N.Y.S.2d 294 (1st Dept. 1988). A partition action of a cooperative unit may not be allowed in the event the cooperative’s by-laws or proprietary lease do not permit partition. Even if those documents do, the cooperative may still need to approve the sale of the cooperative unit to a potential buyer at any public sale.

Therefore, the partition of a cooperative apartment is permissible however with some caveats, specifically the governing cooperative documents.

For any questions related to a partition action, you may call Peter Moulinos at 212.832.5981.

Are You Aware Of These Updated Regulations For Property Owners?

In interesting news, new regulations were finalized by the United States Department of Treasury regarding income taxation of property owners. Expect dramatic and significant ramifications. It took almost ten years of government efforts to reduce the confusion and subsequent litigation concerning what expenses may be deducted, as opposed to what expenses must be capitalized. These regulations are typically known as Tangible Property Regulations or the Repair Regulations.

As of now, any taxpayer may deduct all of their ordinary business expenses incurred in its respective trade, including repairs. It must be noted, though, that Code Section 263(a) of IRS Section 162 states that no deduction is permitted for expenses used for “new buildings..or improvements…made to increase the value of any property.”

According to these updated regulations, a taxpayer must divide his or her assets into “units of property.” A “unit of property” is typically a single building, while a “major component” is defined as a part or combination of said parts that perform an important task in the operation of the unit. The taxpayer must capitalize the expense if it does replace a significant portion.

To consider a brief example, say a taxpayer owns a significant office building with 300 windows. The office building itself is considered a “unit of property,” while the windows are considered a “major component” of the building. If the taxpayer fixes 200 windows, they are replacing a significant portion of the “major component,” and the taxpayer must capitalize the cost of those windows.
However, if only 100 windows are replaced, a significant portion of the major component would not be replaced, and the 100 windows may be deducted.

Under these updated regulations significant expenses may be deducted that may have previously had to be capitalized. As another example, what if a taxpayer owned a 10-story structure and decided to repair the lobby floors? The entirety of the building’s floors would be considered a major component. Therefore, the taxpayer has decided to improve a mere 10% of said major component. These renovations could be thus be deducted, since a large portion of the major component would remain untouched.

It must be noted that these regulations contain exceptions that still require capitalization. It is strongly recommended that these be studied in detail. As an example, a taxpayer is required to capitalize an expense if it is involved in restoring a property that had experienced a measure of deterioration to the extent that its intended use is compromised. An expense must also be capitalized if it is paid to adapt a property for an alternate use.

An expense must also be capitalized if it is used for the betterment of a unit of property, including the expansion of a building. If an improvement happens to substitute a substantial structural part of a property, the improvement must be capitalized.

These new rules are a minimal part of the property regulations. As of January, 2014, the regulations are generally in effect. If any taxpayers own pre-existing property they may be required to alter their methods of accounting.

Unit Owner Claims Against Sponsor of Condominium For Construction Defects

With the increasing construction of new condominiums in New York, there is sure to be an increase of claims by unit owners against the sponsor of a condominium for defective and poor construction. Such was the case in the mid and late 2000s when many lawsuits were filed against sponsors for failing to construct a condominium in accordance with the specifications set out in the condominium’s offering plan. During those lawsuits the question arose whether the sponsor breached its warranty which comes with the sale of every new condominium unit sold in New York.

New York State law provides that each single family home, cooperative unit or condominium unit sold by a developer or sponsor be subject to a construction warranty. The law is known as the New York State Housing Merchant Implied Warranty Law, pursuant to General Obligations Law Section 777-a, and provides for the following warranties:

i. one (1) year from and after the warranty date the home will be free from defects due to a failure to have been constructed in a skillful manner;
ii. two (2) years from and after the warranty date, the plumbing, electrical, heating, cooling, ventilation systems must be free from defects due to a failure by builder to have installed such systems in a skillful manner; and
iii. six (6) years from and after the warranty date the home will be free from material defects. This includes physical defects in the structural elements such as foundations, floors, walls and roof framing which make it unsafe or unlivable, pursuant to the Offering Plan, Rights and Obligations of Sponsor.

A sponsor or developer can limit these warranties however cannot shorten the time periods within which they apply. The warranties also do not apply to defects not caused by defective workmanship, materials or design or those defects which were obvious, or would have been obvious, upon inspection. Defects in items sold with a home, such as refrigerators, ovens and air conditioners are not subject to the warranty. A unit owner must also give timely notice to a sponsor or developer in order to claim a breach of warranty.

In order to ascertain the terms of a warranty, a unit owner should review the condominium’s offering plan to determine whether the warranty has been limited, modified or, in some cases, waived by the unit owner at the time it purchased the unit.

For any questions regarding construction defects in condominiums, cooperatives or newly constructed single family homes, please feel free to contact Peter Moulinos at 212-832-5981.

Appellate Division Grants Yellowstone Injunction to Commercial Lease Tenant

In the case of Artcorp. Inc. v. Citirich Realty Corp., Peter Moulinos represented the Plaintiff Artcorp which is a tenant under a commercial lease. The landlord, Citirich Realty, sought to evict Artcorp from its commercial lease premises on the basis that it defaulted under its lease by effectuating an illegal assignment via the transfer of the ownership of Artcorp from one person to another.

On an application to the Supreme Court for the State of New York, County of New York, for a yellowstone injunction, the Hon. Nancy Bannon ruled that Artcorp was not entitled to a yellowstone injunction. A yellowstone injunction prevents a landlord from terminating a commercial lease when a landlord serves a notice of termination on a commercial tenant and the tenant indicates a desire to cure any alleged default. The lower court failed to set forth a valid basis for denying Artcorp injunctive relief.

On appeal, the Appellate Division, First Department, reversed the lower Court’s decision and granted Artcorp a yellowstone injunction. The Appellate Division stated that To obtain Yellowstone relief a tenant need not show a likelihood of success on the merits and that a commercial tenant can simply deny the alleged breach of its lease. The Appellate Division ruled that Artcorp “clearly asserted its willingness to cure the allegedly improper assignment of its shares, and had the ability to do so either by
transferring its shares back to the deceased owner’s estate or by seeking consent from the landlord”. More importantly, the Appellate Division ruled that a cure of an alleged improper assignment of a commercial lease may take place after the assignment by seeking the consent of the landlord. This decision sets a favorable precedent for commercial tenants in New York.

Homeowners Allowed to Pierce Corporate Veil In Contractor Suit

In a huge win for homeowners seeking to recover damages against a construction company arising from the company rendering services at the homeowners’ real estate residence, the Court allowed the homeowners to pierce the corporate veil and pursue their judgment against the individual shareholder of the company.

In the case of Irvine v. Raven Industries Inc., the plaintiff homeowners sued the defendant construction company and obtained a judgment for $187,690.55. The company however was insolvent and the homeowners could not collect their judgment against the company. After serving a restraining notice on the company, the company’s owner transferred ownership of a truck which was owned by the company to the owner, individually. The court found that this transfer was deemed a civil contempt and a fraudulent transfer which was not made for any reason other than to avoid the homeowners’ judgment. By doing so, the Court also found that the company was so dominated by its owner that it allowed the piercing of the corporate veil and to hold the owner personally liable for the full judgment in favor of the homeowners.

According to Peter Moulinos, a real estate attorney, this decision was important in that it allowed a plaintiff the opportunity to collect a judgment which would have been worthless and uncollectable against the construction company. Decisions such as this one allow homeowners to pursue claims against contractors who may be tempted to liquidate a company in order to avoid enforcement of a judgment.

NY Launches Recorded Document Notification Program

In an effort to fight the fraudulent conveyances of properties in New York, by deed fraud, New York City has launched an online program that allows every real estate owner, and their attorney, to be notified if a deed is filed on their property.

Deed fraud is a crime in New York and occurs when someone falsely files a deed, by either forgery or false pretenses, seeking to transfer title and ownership of a property from the rightful owner, without the owner’s consent, approval or knowledge. The new website allows property owners to enroll and be notified of all deeds filed against their property. This will immediately alert a property owner if a deed has been filed, seeking to falsely transfer title of the property, without the owner’s knowledge.

Click here to access and enroll in the NYC Document Notification Program.

Bank’s Bad Faith Forfeits Interest and Real Estate Attorney Fees in Foreclosure Peter Moulinos

Pursuant to New York C.P.L.R. §3408, parties in a real estate foreclosure action are mandated to conduct settlement discussions in order to ascertain whether it is possible to avoid having a defendant lose their home. The statute requires all parties to negotiate in good faith to reach a mutually agreeable resolution, including a loan modification.

In Aurora Loan Services, LLC v. Diakite, the parties agreed that the defendant would make three trial payments as part of a HAMP loan modification. After defendant made those three payments, the Bank rejected any further payments, while also keeping the initial three payments. After twenty-five foreclosure settlement conferences, over the course of more than three years, from January 2010 to April 2013, the referee appointed by the Court found that the bank had acted in bad faith in violation of C.P.L.R. §3408. The defendant, in a bad faith hearing, testified that he submitted modification packages over and over to the bank. At the end of 2009, he was offered a trial modification, and he timely made the three trial payments. Defendant then stated that he was required by the bank to continuously submit further documents to his counsel in an effort to modify his mortgage payments, all to no avail. The bank was unable to provide any evidence that it intended to comply with C.P.L.R. §3408 and even failed to produce the original note and mortgage at the bad faith hearing scheduled by the Court.

As a result, the Court found that the bank failed to negotiate in good faith pursuant to C.P.L.R. §3408 and stayed the collection of all interest, costs, and real estate attorney fees are stayed from March 1, 2010 to October 27, 2014. The judge presiding over this action is the Hon. Genine Edwards of the Supreme Court of the State of New York, County of Kings.

Landscaping Stops Adverse Possession Claim Real Estate Attorney

In an action arising in Queens County, New York, Plaintiffs brought suit against their neighbor, which happened to be Apple Bank, claiming that they were entitled to the right and title of a fenced in portion and unfenced portion of their neighbors land by reason of adverse possession. The Plaintiffs’ real estate attorney asserted that, for over 10 years, the land was fenced in and that they planted, cultivated and watered the vacant land. This was not deemed enough to acquire the land by adverse possession.

In regard to the unfenced portion, the Court ruled that Apple Bank submitted evidence showing that its own landscaper cultivated the land for over 16 years and that the Plaintiffs was allowed onto the Bank’s property “as a neighborly accommodation”. It thus denied that Plaintiffs were entitled to adverse possession of the unfenced portion of the land. In regard to the fenced in portion of the land, the Court ruled found that both parties made claims that they routinely entered the fenced in area in order to maintain the Bank’s property. With both parties claiming that they landscaped that portion of the land, the Court ruled that a triable issue of fact existed which warranted a trial on the matter.

This case was cited as Pritsiolas v. Apple Bankcorp Inc., 120 A.D.3d 647 (2nd Dept. 2014).

Chelsea Piers Not Liable For Trespass Real Estate Attorney

In Abraham v. Chelsea Piers Management Inc.,, Chelsea Piers was sued for the death of an individual who trespassed onto Chelsea Pier’s property and drowned in the Hudson River. The decedent scaled a locked gate at Chelsea Piers while intoxicated. He was part of a group that had been earlier escorted off the property by two Chelsea Piers employees. After the decedent re-entered the property, he was spotted in the Hudson River swimming away from Chelsea Piers. He eventually drowned. The decedent’s real estate attorney argued that Chelsea Piers was liable for this individual’s death.

The Court however disagreed. It ruled that the decedent’s actions, in diving into the Hudson River, were not foreseeable and that Chelsea Piers could not be held liable for the decedent’s death. Equally significant is that the decedent was a trespasser who, after being removed from the property, re-entered it without authorization and without the knowledge of Chelsea Pier’s employees who also re-locked the gate.