Client Advisory - October, 2002 PDF A Board Tries an "End Run" Rather Than a "Dog Run" The Board of Directors of 930 Fifth Corp. (the "Co-op") required prospective unit purchasers ("Purchaser") to sign a letter as part of their purchase application requiring the Purchaser to make certain representations to the Co-op. The representations included the following: (1) that the Purchaser acknowledged being aware that "permission would not be granted for the keeping of any animals"; and (2) "I do not plan to make any alterations to the apartment other than minor decorating and painting" (the "Letter"). A Purchaser signed the Letter, was approved by the Board, and then moved into the building with a small dog. The Co-op brought suit alleging that the Purchaser breached the terms of the proprietary lease. However, that action was dismissed because it was determined by the court to have been commenced more than 3 months after the Co-op or its agents had knowledge that the Purchaser had been openly keeping a dog. Pursuant to Section 27-2009.1(b) of the Administrative Code of the City of the New York, commonly known as the "Pet Law", a proceeding must be commenced within three (3) months of the pet being brought into the building. The dismissal was upheld on appeal. Not willing to be so thwarted, the Co-op commenced a second action relying upon its Letter, this time alleging that the Purchaser had made a fraudulent representation in the Letter that he would not keep animals in his unit. The Co-op sought to rescind the Purchaser's purchase of the stock and proprietary lease, and asked for compensatory damages and attorneys fees. In the matter of 930 Fifth Corp. v. Miller (NYLJ, 8/14/02, p. 18, col. 3), Justice Diamond of the Supreme Court, New York County, disagreed with the Co-op's position that its Letter, which the Co-op had drafted, contained a representation by the Purchaser that Purchaser would never harbor a pet. Justice Diamond found that, at best, the Letter was a mere acknowledgement that the Board would not grant permission for the keeping of animals. The foregoing notwithstanding, Justice Diamond ruled that even if the Purchaser's representation in the Letter was to be construed as the Co-op had pleaded in their Complaint, the Pet Law provides that "[i]t shall be unlawful for an owner or his or her agent, by express terms or otherwise, to restrict a tenant's rights as provided in the Pet Law. Any restriction shall be unenforceable and deemed void as against public policy". The Co-op's effort to restrict pets in this manner was ruled an attempt to circumvent the 3-month rule under the Pet Law and the rights of tenants, and was held to be unenforceable. No Second Chance A shareholder borrowed monies for his business, secured by his stock and proprietary lease. The shareholder defaulted on his business loan and his bank took possession of the stock certificate and proprietary lease in accordance with the terms of the shareholder's collateral pledge. A new stock certificate and a new proprietary lease were issued to the bank's nominee. The shareholder then approached the bank about settlement and agreed to pay the entire outstanding balance of the business loan. The settlement was subject to the Cooperative's consent to the assignment of the shares and lease back to the former shareholder. The former shareholder having a history of failing to make maintenance payments, the Cooperative refused to consent to the bank's proposed assignment to him, resulting in an action by the former shareholder against the Cooperative. In Hochman et al. v. 35 Park West Corp., (NYLJ 4/29/02, page 27, col. 2), the former shareholder alleged that the Board of Directors of the Cooperative (the "Board") had engaged in misconduct and self-dealing. With the burden of proof placed on the challenger of the Board's action, the former shareholder failed to produce any evidence to support his allegations other than his conclusory assertions. In contrast, the Board presented the Court with substantial evidence that the Board members had acted in good faith and within the scope of their authority in denying the former shareholder's request for the assignment. Relying upon its application of the Business Judgment Rule to the Board's decision, the Court granted the Cooperative's motion for summary judgment and dismissed the former shareholder's action. Do You Bill Tenants for Electricity? The tenant of a luxury apartment at 171 West 57th Street (the "Unit") declined to purchase his residential apartment when presented with the sponsor's non-eviction condominium offering plan (the "Plan"). The Plan was ultimately declared effective and the tenant continued to reside in the Unit pursuant to his lease. Nearing the end of his lease's term, the tenant was paying a monthly rent believed to be approximately 40% of the fair market rental value of the Unit, and the Unit had a substantial market value if sold. The tenant fell substantially behind in his rent payments and the Unit's owner ("the Owner") commenced an action in the Civil Court of the City of New York. During this proceeding, the Owner offered to forgive the $40,000 of rent outstanding and pay the tenant $20,000 if he delivered possession of the Unit to the Owner. Shortly before his lease was to expire, the tenant filed for bankruptcy protection, automatically staying the Owner's efforts in state court to collect the rent or evict him. The Owner continued its efforts to regain possession of the Unit by filing a motion in the bankruptcy court to vacate the automatic stay. Since the tenant's lease had expired by then, the tenant argued in the Bankruptcy Court that he was entitled to remain in the Unit since he was a non-purchasing tenant under the Martin Act (N.Y. Gen. Bus. L. Sec.352-eeee (1) et seq.), and that the Martin Act also required that his rent not be subject to unconscionable increases beyond ordinary rentals for comparable apartments during the period of their occupancy. The Owner's motion to vacate the automatic stay was granted. During the state court proceedings thereafter commenced by the Owner, the Owner again offered to forgive the outstanding rent and pay the tenant $20,000 if he delivered possession of the Unit to the Owner. The tenant rejected the Owner's offer. Upon learning of the Owner's offer to purchase whatever rights the tenant may have had, the bankruptcy trustee accepted the Owner's offer over the vehement objection of the tenant, and filed a motion seeking the Bankruptcy Court's approval to sell the tenant's occupancy rights. In the matter entitled In Re Stein (NYLJ, 9/15/02, p. 23, col. 4), the Bankruptcy Court was faced with the question of whether the tenant's right to occupy the Unit as a non-purchasing tenant under the Martin Act, and as incorporated by reference in the Plan, was a property right of the estate as of the day the tenant filed for bankruptcy protection. The Bankruptcy Code defines "Property of the Estate" broadly and includes " all legal or equitable interests of the debtor in the property as of the commencement of the bankruptcy case". Under Section 363(b) of the Bankruptcy Code, the trustee is authorized to sell this "Property of the Estate", after notice and hearing. The presiding judge reviewed the Plan itself and its timing and "effective date" which preceded the bankruptcy filing, and held that the tenant's occupancy right was a property right which could be sold by the trustee. The court reasoned that the tenant was unable to pay the outstanding rent and would ultimately be evicted, and that no one other than the Owner was in a position to offer money for the tenant's occupancy rights. The Bankruptcy Court concluded that the trustee's acceptance of the Owner's offer was the only way to obtain value for the bankrupt estate and its creditors, and thus approved the trustee's sale of the tenant's occupancy rights to the Owner. IMPORTANT NOTE: The material in this newsletter is provided for information purposes only and should not be construed as legal advice. Because the particular facts and circumstances of every situation differs, you should not act or refrain from acting on the basis of this information without consulting an attorney. |
