Published: Summer 2002
"THE JENNIFER CASE"
Statement of the
Council of New York Cooperatives & Condominiums
On June 11, 2002, the Court of Appeals issued its much awaited decision
in the case of , and decided for the Cooperative and
the purchasing Tenant Shareholders that the Sponsor of the Cooperative
had an obligation to sell apartments to create a "fully viable cooperative".
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
were a legally sufficient pleading for a cause of action for Breach of
The ruling, however, is 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, and 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 impliedly promised to sell all of its unsold shares, holding that
"at the very least", "plaintiffs' complaint sufficiently
alleged, at a minimum, that the sponsor undertook a duty in good faith
to timely sell so many share 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 decisions 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, whether the facts in this case show this
Cooperative is not, and how many and when apartments will have to be sold
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.