When Eliot Spitzer swept into the attorney general’s office on January 1, 1999, he quickly proved himself a force to be reckoned with. Ambitious, aggressive, and media savvy, he put Wall Street in his sights and was soon hanging investment banks on his belt like scalps. By Christmas 2003, he had won a $1.5 billion settlement against some of the biggest brokers on Wall Street – forcing Goldman Sachs, Citigroup, J.P. Morgan, and Merrill Lynch into acknowledging they were bilking small investors. The companies were paying fines and the media was lapping it up.
But not everyone was thrilled. Out of the limelight, in the Real Estate Finance Bureau (REFB), cases that needed the same kind of razor-like intensity were languishing. Small investors of another kind, newly minted condominium owners, found that their complaints of construction defaults or a sponsor’s refusal to cede control, accusations hardly of the headline-grabbing variety, often took years to reach resolution.
It was the same, according to nearly everyone who dealt with the office of the attorney general (AG). “Spitzer was focused on going after Wall Street,” recalls attorney Aaron Shmulewitz, a partner at Reed Smith, and everything else had to take a back seat. At the REFB, there were not enough attorneys to review the complaints, nor were there enough engineers to inspect the buildings that faced complaints. Sponsors pretty much thumbed their nose at the REFB’s request for mediation.
The plight of the Empire Condominium on East 78th Street was indicative of the problem. In 2004, after four years of arguing with the sponsor over construction defects, the board filed a complaint with the REFB, listing numerous problems, including ceilings that were too low, a roof that leaked, and floors that buckled. With the help of the REFB, the board was able to get the sponsor to agree to fix things – which were then never done. The REFB attorney in charge was a good man, but “his hands were tied,” recalls a former board member. Their patience at an end, the Empire Condominium board finally sued the sponsor. The case is still in litigation.
It wasn’t for a lack of trying – it was the work load, insists the former head of enforcement at the REFB, Oliver Rosengart, who retired two years ago. At one point, “I had 83 cases pending,” he recalls. Rosengart admits he was loathe to use the weight of the AG’s office to sue sponsors to force them to make repairs, because litigation could take upwards of four years to be resolved, and there was no guaranteed outcome that would be in favor of the condo owners. “My method was to have the sponsor do the repairs under a jointly retained third-party attorney,” explains Rosengart. It was easier to get the sponsor to do the repairs if both sides agreed through mediation on what had to be done.
Critics of Rosengart, however, say his unwillingness to sue sponsors meant he deprived the REFB of a powerful stick, the Martin Act. That law, which gives the attorney general the power to regulate the sale of condos and co-ops, deals with the issue of full disclosure. In short, was everything material to the sale of the unit revealed to the purchasers? Critics of the REFB say that, with some creative thinking, the REFB could easily sue under the act, making a case that the defects in the building were material to the sale and should have been disclosed to buyers before they closed on the sale.
Moreover, there are several types of claims that co-op and condo owners should have been encouraged to file against problem sponsors: breach of contract (the offering plan implied the unit would be built to code and wasn’t); fraud or negligence (the sponsor and builder failed to exercise care toward the shareholders); negligent misrepresentation in the plan; and deceptive business practices.
“I frankly don’t have a lot of faith in the AG’s office,” complains one attorney, “then or now.” Under Rosengart, cases moved so slowly they seemed to be stuck in neutral. Delays weren’t only typical, they were natural and thousands of frustrated co-op and condo owners had to suffer years of frustration before they saw any resolution to their case.
In all fairness, however, the cards were stacked against the REFB and new unit-owners. According to the Real Estate Board of New York (REBNY), between 2003 and 2008, over 13,000 new Manhattan units were constructed. With the enormous jump in construction came a concurrent increase in complaints about construction – doors that didn’t close properly, roofs that leaked, HVAC systems that didn’t work.
The problems got so bad that in the summer of 2007, the new attorney general, Andrew Cuomo, convened a Real Estate Review Study Group (RESG) composed of lawyers, sponsors, and tenant groups to make recommendations on how to deal with all the problems. The advisory group met over the course of six months. At the end, the list of recommendations for improvements included an increase in offering plan filing fees (so the REFB could hire more staff) and beefed up enforcement.
Finally, the AG’s office was shining a light in the dark crevices of complaints, and things started to move, recalls one attorney, David Berkey, a partner in Gallet, Dreyer & Berkey and a member of the group. After the RESG submitted its recommendations, the REFB started taking a much more “proactive, aggressive role,” says Berkey. More engineers and attorneys were hired, and complaints seemed to move faster through the pipeline. “In the last eight months, enforcement has been able to move forward,” notes Berkey, who, like his clients, is relieved by the changes at the bureau.
“We made certain recommendations and to a large degree, they were adopted,” agrees Shmulewitz. “They increased the filing fees for offering plans and the extra $10,000 per plan was earmarked to hire additional attorneys and engineers whose job would be specifically to deal with complaints from [co-op and] condo boards.” Since then, “they’ve been extraordinarily aggressive and assertive in dealing with complaints filed...against sponsors.”
Life is slowly starting to look up for the unit-owners at the 39-unit condo on West 117th Street. Built in 2002, the building has been plagued with problems – a leaking roof, windows that won’t open, and an HVAC system that hasn’t worked. A board member who requested anonymity says that in the past two months, the AG’s office has been much more responsive to her building – sending out an engineer to review the problems unit-owners have struggled with for six years. What’s more, until the builder fixes the problems, the AG’s office has taken them off a list of approved builders for the city. This kind of aggressive action was rarely seen the past, say attorneys. Things have sped up, and if all goes well, work to fix the problems in the building will start in April. “The proof is in the pudding,” said the board member. “It looks like we are going to get some redress from the AG’s office.”
But not everyone believes that the REFB is moving fast enough. The office, located at 120 Broadway in lower Manhattan, is still spread too thin, according to one attorney who deals with the AG on a regular basis, and complaints still aren’t be addressed promptly enough. “I still don’t think they are doing what they need to be doing, to deal with the issues of faulty construction,” says the attorney. The office remains reluctant to use the power of the Martin Act, and without the threat of litigation, many sponsors are happy to drag their heels on repairs for years.
But Stuart Saft, an attorney and partner with Dewey & LeBouef, defended the REFB. When delays occur, “they arise from the fact that these issues are never black and white,” says Saft. “The AG’s position is that the sponsor has to meet three standards: was the building built in compliance with the plans submitted, was it built in compliance with local construction codes, and was it built in compliance with local practices? There is then a wide variance of what the sponsor is required to do.”
To ascertain whether these standards were met, the AG has to send out engineers to review the alleged defects, make a report, have the report reviewed and then meet with all the parties involved. Even so, the office moves much more quickly now than it did in the past. All things being equal, “I think [cases] are being handled far more aggressively now,” says Saft.
For the board member at West 117th Street, the parting words of advice: don’t wait. “You need to be very aggressive” when problems arise, says the board member. Go through the building with an engineer, make a list of the problems and present the list to the sponsor. If the sponsor doesn’t respond, the board should then file a formal complaint with the REFB.
Be sure to get in contact with the AG’s office, says the board member. And, remember in this case it’s not location times three, but another bit of advice: follow up, follow up, and follow up.
Assistant Attorney General
Chief of Enforcement
Real Estate Financing Bureau
120 Broadway 23rd Floor
New York, New York 10271