By far the most interesting case of 2001 was 511 W 232nd
Owners Corp. v. Jennifer Realty Co. Typical of many buildings
converted to co-op Status in the late 1980s under a non-evict
plan, the sponsor initially sold 15-25% of the units. After
the building became a cooperative, the sponsor sold a few
more units, but stopped selling in 1989. At this point,
the sponsor still owned 40-75% of the building. Ten years
went by and the sponsor did not sell another unit. As rental
tenants left, freeing units from rent stabilization, the
sponsor was running a free market rental business and was
not selling.
There is nothing in the business corporation law or in a typical offering
plan which clearly says the sponsor must continue selling apartments
until they are all sold although CNYC and others have always
contended that apartments in a co-op or condo offering should be sold,
not rented.
In 511 West 232nd Owners Corp. v Sponsor. Jennifer Realty Co., 729
NYS2d 34 (1st Dept. 8/9/01), the Appellate Division found that the sponsor
did have an implied duty to continue to sell all the apartments to persons
who intend to reside in the building. This is in accord with earlier
decisions in Washington State and Montana, holding that a promoter of
a cooperative venture had an implied obligation to continue to sell
all the apartments for residential uses. The Jennifer case was appealed
by the sponsor to the Court of Appeals. CNYC and the NY State Attorney
General each wrote friend-of-the-court briefs in support of the cooperative.
On June 11, 2002, the Court of Appeals issued its much-awaited decision
in this important case. The court held that the allegations by the plaintiffs
that the offering plan constituted a contract that contained an obligation
on the part of the sponsor to act in good faith to timely sell so many
shares as necessary to create a fully viable cooperative,
and that by keeping a majority of shares of the cooperative, the sponsor
defeated the purpose of the contract, creating a legally sufficient
pleading for a cause of action for breach of contract.
The ruling, however, was a narrow one. The court did not address the
issues of whether the complaint stated a valid cause of action for fraud,
or whether the cooperative and the purchasing shareholders had standing
to prosecute such claims. It left in place the dismissal of those claims
by the appellate division, and the court expressly declined to rule
on the merits of the contract cause of action that is, whether
there was sufficient proof in the record to show that the plaintiff
had proved its case. The court was very careful to limit its decision
to the claim that the offering plan included an implied covenant to
sell apartments beyond the 15% minimum within a reasonable period of
time in order to create a viable cooperative.
While the decision is a substantial step forward on behalf of cooperatives
and tenant shareholders who have been victimized by the failure of the
sponsors to carry out their offering plans, it does not completely resolve
all issues. The court expressly did not address the issue of whether
the sponsor implied a promise to sell all of its unsold shares, holding
that at the very least
the plaintiff's complaint sufficiently
alleged, at a minimum, that the sponsor undertook a duty in good faith
to timely sell so many shares in the building as necessary to create
a fully viable cooperative.
Thus, while affirming that the door is open for the cooperative to
require the sponsor to sell shares, it leaves the extent to which the
shares must be sold, and in what time frame (to be determined by the
lower courts). There is no statute or court decision which defines a
fully viable cooperative, and the Court of Appeals did not
undertake to do so. Accordingly, the court has laid out a road map for
substantial further litigation in this case. The lower court will have
to wrestle with the concept of what constitutes a fully viable cooperative
whether the facts in this case show this cooperative is not
and how many apartments will have to be sold in a certain time frame
until that standard is reached. Since the Court of Appeals did not reach
the merits of the lawsuit, the burden remains on the plaintiff cooperative
to prove all of the allegations of its complaint. The case also did
not deal with the applicability to holders of unsold shares
of the sponsor's obligation to create a viable cooperative.
On the other hand, the court dismissed the other sponsor contentions
by stating that they were all without merit. The dismissed sponsor contentions
include the claim that this issue is a legislative question and only
the legislature could determine the scope of the sponsor's obligations
under an offering plan; that all of the causes of action in the complaint
were barred by the statute of limitations; that the plaintiffs lack
standing to raise contract claims which in substance were or should
be governed by the Martin Act; and that the remedy of injunctive relief
be dismissed because it would impermissibly create two classes of stock.
In conclusion, to paraphrase Winston Churchill, while this is not the
end of the battle over sponsors failing to carry out their offering
plans, it is certainly the beginning of the end of that battle.