Michael Alvarez is in high spirits. The president of 511 West 232nd Street has just found out that his property's lawsuit against its sponsor, Jennifer Realty, in which the co-op is seeking to force the sponsor to sell units, can continue. On June 11, the Court of Appeals, New York's highest court, ruled against a motion to dismiss put forth by the sponsor. The board has cleared a high hurdle, but it's a cautious celebration.
"It's a big victory for us and for our team, but we're not wearing party hats or anything," Alvarez says. "Really, the decision is a major milestone, a step in the right direction towards getting our co-op to be what it was meant to be — neighbors being owners. However, there is still a lot of work to do." That may be an understatement.
The case against Jennifer Realty began in 1998. Frustrated that the sponsor still owned more than 60 percent of the units — 41 of the 66 apartments — and didn't seem intent on selling any in the near future, the board took the unusual step of suing the sponsor for breach of contract, claiming that it was implied in the offering plan that the sponsor would continue to sell units. It was the first such action by a board. (For more on the case, see "Sponsor, Go Home," Habitat, May 2002.)
This claim was dismissed in Supreme Court but then reinstated by the Appellate Division, First Department. The appellate division went further in its decision, finding that there was an "implied promise to sell the unsold units within a reasonable time." What a reasonable time might be was not defined. Jennifer Realty appealed this decision and arguments were heard in April in the appeals court. It took two months for the court to reach its decision.
While some attorneys are predicting the appeals decision will sound the death knell for sponsors, forcing them to unload their apartments and free the co-ops, in actuality the decision does not do much more than allow the Jennifer Realty case to continue. In fact, the court went out of its way to point out that its decision has nothing to do with the merits of the plaintiff's case, stating, "At this pre-answer stage of the litigation, we need not reach the merits of the plaintiff's contract cause of action and therefore do not address the issue of whether, as alleged, the sponsor implied promise to sell all its unsold shares." Meaning the court found that the appellate division had gone too far in its previous findings.
The ruling, says Marc Luxemburg, a partner with Snow, Becker & Krauss and president of the Council of New York Cooperatives and Condominiums, is a "throwback" to court decisions of old. "One hundred years ago, the theory of court decisions was to decide them as narrowly as possible, only on what was necessary for that case. They left the broader picture unanswered. More recently, courts have been answering policy questions, as well. This decision is a very narrow decision, dealing only with whether a valid cause of action was stated."
What this means is that there is a long road ahead. Essentially, the court has tossed a bone to lawyers. Observes Luxemburg: "A lot of litigation remains to be done in the lower courts, regardless of what happens with this case. Ultimately, the question must be answered as to whether it was implied that the sponsor would sell the units."
David Berkey, attorney for 511 West 232nd Street and a partner in Gallet Dreyer & Berkey, says the co-op is getting ready to take on that question. It is a twofold approach. One side is continuing discovery and depositions to prepare for the case; the other side, occurring simultaneously, is entering into discussions with the sponsor to see if "needless expense" can be avoided by settling out of court. "Realistically," he notes, "we're not going to force the sponsor to sell occupied units, but probably enter into some kind of agreement where they agree to sell units as they come up for occupancy."
The opposing side is also weighing its options. Though unhappy with the decision, Mark Axinn, a partner in Brill & Meisel and attorney for Jennifer Realty, takes some comfort in the narrowness of the court's ruling. "So far, there has been no factual determination by any court of any wrongdoing," he notes. "Nothing has been proven." Protracted litigation, he adds, would just be an "awful waste of co-op resources."
Unfortunately for Jennifer Realty, Alvarez and the board don't see it that way. They intend "to do what they have to do to make the co-op viable," says Alvarez. If that takes a long court case or a settlement, the co-op is prepared for either. Softening the blow to a long case is the fact that, with so many shares in the co-op, Jennifer Realty is also paying for most of the litigation against itself. This will probably be a key factor in how sponsors react to threats of litigation.
The larger implications of this decision remain to be seen. Axinn fears that this will open the door for lawsuits "based on implications rather than on expressed representation." No one is quite sure how a court will rule in future proceedings, whether in favor of the sponsor or in favor of the board. Luxemburg ventures one guess, pulling a clue from page 7 of the court's decision. The court states: "Because the sponsor's documentary evidence does not clearly refute these assertions, and particularly in light of the sponsor's duty imposed by the Attorney General not to abandon the Offering Plan after filing an effectiveness amendment..." (emphasis added)
Says Luxemburg: "If the sponsor can't abandon the plan, then it has to do 100 percent of the plan, not two-thirds. That may be what happens when this gets to court."
Then again, it may not. If not Jennifer Realty, then some case in the future will have to tackle what constitutes a viable cooperative and what is a reasonable time in which to attain that. Co-op owners are holding their breaths and crossing their fingers again.