Attorney Fees, The Sole Broker

Silverman v. 875 Tenant Corp. was a recent case in which the court required a co-op shareholder who had waged a losing battle with a co-op in a dispute over apartment alterations to reimburse the co-op for its legal expenses.

John and Isabelle Silverman were the owners of a unit at 875 Tenant Corp., a co-op at 875 Fifth Avenue in Manhattan. In the complaint, the Silvermans alleged that the co-op had breached its obligations under the proprietary lease, the co-op’s bylaws and an alteration agreement related to construction that the Silvermans wished to undertake. In addition, they maintained that the co-op constructively evicted them from their apartment and committed fraud. The co-op asserted counterclaims for breach of contract, fraud, and attorneys’ fees under the lease and alteration agreement. After several years of protracted litigation including the filing of two amended complaints, the appellate division of the Supreme Court upheld a lower court’s dismissal of the bulk of the Silvermans’ claims and dismissed the remaining causes of action.

In this motion, the co-op sought partial summary judgment on liability on its second counterclaim for attorneys’ fees. The terms of the proprietary lease provided that “if the [co-op] shall successfully defend any action or proceeding (or claim therein) commenced by [the Silvermans], [the Silvermans] will reimburse the [co-op] for all expenses (including but not limited to) attorneys’ fees and disbursements thereby incurred by the [co-op], so far as the same are reasonable in amount, and the [co-op] shall have the right to collect the same as additional rent.”

Thus, the quoted language unambiguously provided for an award of reasonable attorneys’ fees if two conditions were met: an action begun against the co-op by the Silvermans and the co-op’s successful defense of that action. Since both conditions were undeniably satisfied here, the court held that the co-op was entitled to summary judgment on its attorneys’ fees claim.

The Silvermans asserted that the co-op had to prove that a default on their part was baseless since the language of the provision did not contain any such requirement. In the court’s view, there was no merit to the Silvermans’ claim that the attorneys’ fees provision in the proprietary lease was unconscionable or against public policy. Although the quoted language could arguably cover any type of suit brought by the Silvermans against the co-op, there was no dispute that the action at issue involved matters clearly within the parties’ landlord-tenant relationship. Moreover, there were no overriding policy issues here which would insulate the Silvermans from their contractual obligations. In the court’s view, both of them were attorneys who freely entered into an arms-length real estate transaction and could be held to the terms of the contract they had agreed to.

Nor, said the court, was there any merit to the Silvermans’ contention that there was a factual issue as to who the prevailing party was. The court noted that the lease did not even use the term “prevailing party”; it mandated a fee award if the co-op successfully defended an action brought by the Silvermans. Even if the “prevailing party” analysis applied, there was no doubt that the co-op had prevailed. A prior case had held that, “In order to justify an award of contractual attorneys’ fees, the court need not adopt each claim raised in a lawsuit. Rather, the claimant must simply be the prevailing party on the central claims advanced, and receive substantial relief as a consequence.”

Here, the appellate division made clear that the co-op was the prevailing party in all respects when it gave the co-op the “substantial relief” of dismissing the second amended complaint in its entirety. The fact that the co-op had outstanding counterclaims that could eventually be dismissed did not prevent this court from determining that the co-op successfully defended the Silverman’s causes of action and thus was the prevailing party for purposes of this fee application. Likewise, the Silvermans’ contention that the co-op’s motion was premature and must await the outcome of the counterclaims was without merit. The question of whether the Silvermans themselves might be entitled to an award of attorneys’ fees under Real Property Law Section 234 could be addressed after the counterclaims were fully resolved and could not stand in the way of the co-op’s entitlement to summary judgment.

The court said that it would hold a trial on damages to determine the amount and reasonableness of the attorneys’ fees incurred by the co-op. Since its potential entitlement to attorneys’ fees could not be determined at this stage, the court said that it would not make any award relating to them. The Silvermans’ allegations that the co-op engaged in bad faith tactics of unduly delaying and protracting this litigation would be considered by the court in determining the reasonableness of the fees and whether all the fees sought were for appropriate services involved in the defense of the action.

The Silvermans cross-moved for summary judgment, dismissing the co-op’s third counterclaim alleging that the Silvermans fraudulently induced the co-op into entering the subject lease and alteration agreement. The co-op maintained that at the time the Silvermans entered into these contracts, they falsely represented that they would abide by the terms of the agreements concerning renovations to the apartment. The court decided that the fraudulent inducement claim should be dismissed as redundant, being similar to the first counterclaim alleging breach of contract.

Even if the cause of action were sufficiently stated, the court concluded that the Silvermans had submitted proof by affidavit that at the time they entered into the agreements, they did not intend to install a doorway between the two rooms and that that idea only came to them after they began renovations. Since the co-op had not submitted any evidence refuting this proof, it failed to meet its burden of showing that there was any issue of fact as to the Silvermans’ intent. The court was not swayed by the co-op’s argument that there existed circumstantial evidence showing that the Silvermans always had intended to construct the doorway. The fact that the large hole was made in the wall the day after the Silvermans signed the lease does not lead to the conclusion that they falsely misrepresented their intentions, particularly in light of the fact that the air conditioner installer had instructed the Silvermans to make a large opening to facilitate placement of the equipment.

The court rejected the co-op’s claim that the cross-motion was premature and concluded that additional discovery could lead to facts which would defeat the motion. The court stated that the case had been litigated both in the Supreme Court and on appeal for almost three years now and hundreds of thousands of dollars in attorneys’ fees had already been spent. The co-op’s claim that a receipt for lumber and the location of a missing carpenter might lead to proof showing the Silvermans’ fraud was entirely speculative. Finally, even if the co-op could establish fraud, the court found that it had failed to offer any proof showing that it had relied on the alleged misrepresentation when it entered into the lease. Accordingly, it was ordered that the co-op’s motion for summary judgment on liability on the second counterclaim for attorneys’ fees was granted, and the court would hold a trial on the amount and reasonableness of the attorneys’ fees.

Comment: This was initially an action brought by a shareholder against the co-op that was unsuccessful. As a result of the shareholder’s failure, the co-op sought to have the shareholder reimburse the co-op for its legal expenses as provided in the proprietary lease. The co-op succeeded and the case should be a warning to a shareholder who sues his or her co-op that, if the shareholder does not prevail, there is a good chance that he or she may end up paying the legal fees both for the shareholder and the co-op. Such fees may be quite substantial.

The Sole Broker

Can a real estate broker establish a claim for restraint of trade where another broker was the sole broker that a co-op board would permit to present apartment transfers? In Benjamin of Forest Hills Realty Inc. v. Austin Sheppard Realty Inc., the court was called upon to decide whether the practice of the co-op building which, in effect, allowed purchases of its shares only through one specific real estate broker, constituted a violation of General Business Law, Section 340, which was the New York equivalent of the federal Sherman Anti-Trust Act. Under the circumstances of this case, the court concluded that it did not.

The plaintiff, Benjamin of Forest Hills Realty Inc., and the defendant, Austin Sheppard Realty Inc., were licensed real estate brokers located in Forest Hills, Queens. The defendant, 108-46 70th Road Owners Inc., was a co-op corporation, which owned a building located at that address in Forest Hills. The defendant, Alan Shapiro, was a licensed real estate broker and the sole shareholder of Austin Sheppard. Shapiro also was a shareholder, a member of the board of directors, and an officer of the co-op.

In December 1998, Benjamin began the lawsuit asserting two causes of action: (1) tortious interference with a contract for real estate brokerage commissions, and (2) interference with the plaintiff’s free exercise of trade and marketing in violation of General Business Law, Section 340 (commonly referred to as the “Donnelly Act”). The complaint alleged that, on each occasion that Benjamin had obtained prospective purchasers of co-op shares, he was advised that the proposed purchaser would not be approved by the co-op board unless Shapiro/Austin Sheppard was the real estate broker for the transaction.

With respect to the Donnelly Act cause of action, the plaintiff alleged: “On or about December 10, 1997, defendants Shapiro, Austin Sheppard, and members of the co-op’s board of directors conspired to prevent submission of an application for approval of the sale of co-op shares...Said Defendants’ actions and failure to act lawfully interfered with Plaintiff’s free exercise of trade and marketing in the State of New York in violation of Section 340 of the General Business Law ...

“Said defendants have on numerous other occasions conspired to prevent the submission of a prospective purchaser of co-op shares for approval by the co-op board. As a result of the actions and inactions of said Defendants in restraint of Plaintiff’s trade and business, Plaintiff suffered damages.”

Next, the defendants moved for summary judgment arguing that Benjamin’s “conclusory allegations...are legally insufficient to make out a violation of General Business Law Section 340, and compel a dismissal of said cause of action.” However, the Supreme Court concluded that there was “sufficient evidence in the record to create an issue of fact concerning whether the defendants conspired to limit the sales of co-op units to those sales arranged by Austin Sheppard.”

The record before the appellate court demonstrated that sales of the co-op’s units were routinely approved when Austin Sheppard acted as the real estate broker.

Indeed, the application package, which prospective buyers were required to complete as part of their purchase, was obtained from Shapiro and printed under Austin Sheppard’s letterhead. Moreover, the applications were divided into “outside sales,” involving brokers other than Austin Sheppard, and “inside sales,” which were sales brokered only through Austin Sheppard. There was also evidence that suggested that the co-op board has never rejected an application submitted by Austin Sheppard, and that approval had never been forthcoming for an application, which was not submitted by Austin Sheppard. Nonetheless, the court said that while such evidence indicated that the defendants had an arrangement which, in effect, made Austin Sheppard the only real estate broker which could sell co-op shares in the subject building, this did not necessarily constitute a violation of the Donnelly Act.

General Business Law, Section 340, provides, in pertinent part, as follows: “Every contract, agreement, arrangement or combination whereby...competition or the free exercise of any activity in the conduct of any business, trade or commerce or in the furnishing of any service in this state is or may be restrained... is hereby declared to be against public policy, illegal and void.”

The Donnelly Act is generally construed in accordance with the federal law known as the Sherman Act. The Sherman Act and the Donnelly Act require identical basic elements of proof for claims of monopolization or attempt to monopolize, and, in fact, the Donnelly Act was modeled on the Sherman Act.

To state a claim under the Donnelly Act, a party must: (1) identify the relevant product market, (2) describe the nature and effects of the purported conspiracy, (3) allege how the economic impact of that conspiracy is to restrain trade in the market in question, and (4) show a conspiracy or reciprocal relationship between two or more entities. The court noted that merely claiming or even proving a form of monopoly does not demonstrate violation of the statute without concomitant establishment of the relevant market factors.

In a prior case cited by the court, the plaintiff was a cleaning and maintenance company that had provided services to the defendant building and various tenants therein. After the building’s new owner and managing agent terminated the plaintiff’s services for the building, and engaged in practices that made it prohibitive for individual tenants to retain the plaintiff for supplemental maintenance services, the plaintiff started an action and asserted a violation of the Donnelly Act. The plaintiff alleged that it could not perform work in the building on a competitive basis as a result of the defendants’ acts. In measuring the allegations against the defendants’ motion to dismiss under the Federal Rules of Civil Procedure, the court concluded that the plaintiff’s failure to allege a relevant geographic market was fatal to its claim, reasoning as follows:

“The first step in a court’s analysis must be a definition of the relevant markets...because without a definition of that market, there is no way to measure [a defendant’s] ability to lessen or destroy competition... For antitrust purposes, a relevant market consists of both a product market–those commodities or services that are reasonably interchangeable, and a geographic market – the area in which such reasonable interchangeability occurs. The plaintiff must explain why the market it alleges is in fact the relevant, economically significant product market. Plaintiff’s definition of the geographic market at issue–’the Building’– is patently under-inclusive. The building at 135 East 57th Street presumably is not the only building in New York City, much less the only building on that street, to benefit from cleaning services provided by Plaintiff or its competitors.. Furthermore, Plaintiff alleges no facts in support of its claim that the single building in question constitutes a relevant geographic market for antitrust purposes...Plaintiff’s failure to allege a geographic market and a product market is thus fatal to its Donnelly Act claim.”

The court cited several other cases that held that a single building could not constitute a relevant geographic market under the Donnelly Act.

In the case at bar, the plaintiff identified the relevant product market as “the selling and buying of shares in defendant 138-46 70th Road Owners Inc., and the representation of buyers and sellers by real estate brokers.” As the court had shown, a relevant product market must include all products that are reasonably interchangeable and all geographic areas in which such reasonable interchangeability occurs. Here, it said that the plaintiff acknowledged that its business encompassed a much wider geographic area than the one subject co-op building. Nevertheless, the alleged Donnelly Act violation arose out of the sale of co-op units in this one particular building. Therefore, inasmuch as the plaintiff’s real estate business did not solely concern units in the subject building, its identification of the relevant market as only this particular building was “patently under-inclusive” in the court’s view. Accordingly, the court concluded that the plaintiff could not establish impairment of competition in a relevant geographic market sufficient to support its claim of a Donnelly Act violation.

Nor had it been demonstrated how the alleged restrictions imposed by the co-op constituted an unreasonable restraint on trade, or impaired competition in the local real estate market as a whole, as opposed to simply having a claimed adverse effect upon the plaintiff alone. While the plaintiff may have been deprived of certain brokerage commissions as a result of the co-op’s practice, these losses are clearly not tantamount to injury to competition in the market as a whole and thus did not constitute a cognizable claim under the Donnelly Act. In any event, the court held that a company has a right “to select a person with whom it does business and to refuse to deal or continue to deal with anyone for reasons sufficient to itself.”

The court further noted that “antitrust laws are concerned only with acts that harm ‘competition, not competitors,” noting: “[B]ehavior which hurts or even destroys an individual competitor is not illegal under anti-trust laws unless it also adversely affects competition.” Accordingly, the court said that a restraint-of-trade Donnelly Act violation could only occur when the alleged “conspirators” were in competition with one another or with the plaintiff.

Here, there was no allegation of any conspiracy among Shapiro, Austin Sheppard, and its competitors. The alleged conspiracy involved Austin Sheppard and various officers of the co-op and/or its management agency, and none of the latter compete with the plaintiff. Since the plaintiff had not shown a conspiracy or reciprocal relationship between two or more entities, in the court’s view, there could be no Donnelly Act violation.

Thus, under the circumstances of this case, the appellate court reversed the lower court order granting those branches of the defendants’ motions that were for summary judgment dismissing the cause of action alleging a violation of General Business Law, Section 340, and dismissing that cause of action.

Comment: Despite the number of prior cases cited by the court, this case appears to be one of first impression involving the brokerage of co-op apartments. The decision is surprising because it is clearly anti-competitive and at variance with current practice in New York to encourage competition among real estate brokers to secure the best prices. Perhaps the broker sought relief on the wrong theory. Would the result be the same if a co-op shareholder brought an action against the board for restraining trade by allowing only one broker for the building? Doubtful.