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Looking to get a lien before the bank.
When a unit-owner fails to pay assessments properly imposed, can a condominium board foreclose its lien for common charges? That was the question posed in New York Mercantile Exchange Condominium, By its Board of Managers v. Pambassab Ltd.
The condominium is located at 6 Harrison Street, Manhattan. There were units used for commercial purposes. Pambassab Ltd. owned Unit 2 since 1994 and uses it to store furniture and antiques. Pambassab’s proportionate share of the condominium amounted to nearly 25 percent.
The condominium sued to foreclose based on Pambassab’s failure to pay two assessments imposed during a December 12, 2001, meeting of the condo’s board of managers. Pambassab’s representative at the time, Gerard Wollenberger, was not present. He attended the next meeting held on July 11, 2002, and, according to the minutes, did not object to the assessments, or assert that he did not receive notice of the December 12 meeting. At a board meeting held on March 14, 2003, Pambassab’s new representative, Abe Weinberg, who replaced Wollenberger (who had died), asserted for the first time that Wollenberger had not been informed of the December 12 meeting and objected to the amount of one of the assessments.
The first assessment of $341,288 was imposed on all unit-owners to repay certain loan advances made by a unit-owner to the condominium during the early 1990s. According to the condominium’s financial statements, in December 2001, the outstanding principal amount of the loan advances was $123,505. In addition to the $123,505, the amount of the assessment was based on another $58,000 loan made to the condominium by the unit-owner, with interest at a compounded rate of six percent for a total of $341,288. Pambassab had been billed for the loan assessment in the amount of $492 per month and had not paid any of these amounts.
The second assessment was a monthly assessment of $8,335 for three years for the purpose of funding the reserve fund used for necessary work on the building. At a meeting held on July 11, 2002, the board noted that the managing agent had not begun billing the unit-owners for this assessment. At that time, unit-owners were each billed for the retroactive amount. The minutes of the July 11 meeting reflect that Wollenberger was at the meeting and did not object to the assessment or the retroactive billing. The unit-owners were billed for this assessment beyond the three-year period. Pambassab did not pay the amounts billed.
This action, which was started in April 2005, sought (i) to foreclose liens for unpaid common charges and assessments according to Real Property Law Section 339-z; (ii) the amount owed in unpaid common charges together with interest, late fees, and attorneys’ fees; (iii) the sale of the unit and a direction that the common charges be paid out of the proceeds of the sale; and (iv) the appointment of a receiver for rents. Pambassab answered the complaint and, after discovery, the parties moved for summary judgment. Pambassab argued that the condominium violated Section 2.9 of the bylaws by failing to provide it with written notice of the December 12, 2001, meeting and claimed that Pambassab did not waive notice of the meeting.
In addition, Pambassab asserted that the assessments were invalid as they were imposed at the meeting without a quorum. While the minutes of the December 12 meeting indicated that a majority of the five board members were present, Pambassab asserted that the representative from the unit-owner that loaned the money to the condominium had a conflict of interest and should not have been counted toward the quorum. Further, Pambassab claimed that the lender/unit-owner should not have been permitted to vote.
Pambassab also disputed that the amount of the loan assessment accurately reflected the amount loaned to the condominium and argued that the board acted outside its business judgment when it approved the repayment of the inflated loan. Pambassab next argued that the board acted outside its authority when it authorized the reserve fund assessment be extended beyond the three years authorized at the December 12, 2001, board meeting. Pambassab pointed out that the assessments were used to pay operating expenses and not to pay off the loan or to establish a reserve fund.
The condominium opposed the motion and cross-moved for summary judgment, arguing that the board’s imposition of the assessments was protected by the Business Judgment Rule and within the scope of its authority to repay the condominium’s liabilities and maintain the viability of the building. Moreover, the condo argued that if the board failed to observe corporate formalities, Pambassab waived these as there was no evidence that Pambassab or any of the unit-owners objected to the manner in which the condominium conducted its affairs.
The condominium submitted the affidavit from its managing agent, who described the financial problems in the building and the decision to take a loan from a unit-owner. He reported that the condominium’s accountants had reviewed and approved the condominium’s record of assessments. He attended the next meeting, at which the minutes of the December 12, 2001, meeting were approved and at which the board members discussed that the managing agent needed to implement the reserve fund assessment. The condominium asserted that, at this meeting Wollenberger did not object to the assessments and did not complain that he had not received notice of the previous meeting.
With respect to the extension of the reserve fund assessment, the condominium pointed to the deposition testimony of Pambassab’s representative that he had voted to increase the assessment since it was needed to pay shortfalls in the amount of money collected and that he reviewed the condominium’s financial statements before voting to increase the assessments.
The court discussed the standard on a motion for summary judgment, including that the proponent “must make a prima facie showing of entitlement to judgment as a matter of law, tendering sufficient evidence to eliminate any material issues of fact from the case.” Once the proponent made this, the burden shifted to the party opposing the motion to produce evidence in admissible form to establish that material issues of fact existed that required a trial.
The court explained that the propriety of the assessments had to be evaluated in accordance with “a standard of review analogous to the corporate Business Judgment Rule.” It quoted New York State’s highest court in that the rule “protects the board’s business decisions from indiscriminate attack. At the same time, it permits review of improper decisions, as when the challenger demonstrates that the board’s action has no legitimate relationship to the welfare of the cooperative, deliberately singles out individuals for harmful treatment, is taken without notice or consideration of the relevant facts, or is beyond the scope of the board’s authority.”
The court noted that a board acts beyond its authority when action is taken in violation of its own rules. Here the court found that Pambassab failed to meet its burden of establishing that imposing the assessments exceeded the board’s authority, was not in good faith, or violated the Business Judgment Rule. Moreover, the condominium had established its entitlement to summary judgment.
The focus of Pambassab’s argument was that the board acted improperly by not having a quorum and by imposing the assessments without giving proper notice of the December 12 meeting to Pambassab. Pambassab, however, failed to submit any valid proof that it was not given notice. The only proof submitted was the deposition testimony of Weintraub and board minutes indicating that Weintraub raised the issue at the March 14, 2003, board meeting. Weinberg testified only that he believed that the deceased Wollenberger had not received notice of the meeting and admitted that he did not have personal knowledge. This proof was contradicted by Harra’s statements regarding the procedures followed for providing notice of the meetings. Furthermore, the court explained that if there were any irregularity in a board meeting arising from lack of notice, it could be waived or ratified based on a failure to object.
The record showed that Pambassab waived any objection based on the lack of notice or other defect in the procedures relating to the December 12 meeting by approving the minutes of that meeting and by failing to object in a timely manner. Specifically, Wollenberger had not objected to the lack of notice, lack of quorum, or assessments at the July 2002 meeting at which the December 12 meeting minutes were approved; it was not until over a year later at the March 14, 2003, meeting that Weintraub, the new attorney, objected on behalf of Pambassab. Indeed, the court found that the minutes reflected that, at the March 2003 meeting, Weintraub had been given information regarding the calculation of the amount of the loan and indicated that he would assess the information and get back to the board by the end of the month. The court found it significant that there was no evidence that Weintraub had addressed the issue with the board after March.
Furthermore, there was no evidence that Pambassab ever objected to the reserve fund assessment based on any procedural irregularities or to the assessment’s extension beyond the three-year period approved by the board. The condominium actually provided uncontroverted evidence, in the form of Weintraub’s deposition testimony, that Pambassab had agreed that the assessment should be extended. Thus, Pambassab had not only waived any objection to the assessment but ratified its extension.
The court also addressed Pambassab’s argument regarding the amount of the loan from the unit-owner. Pambassab framed the issue as outside the Business Judgment Rule on the grounds that the board approved inflated loan amounts and interest. To argue successfully that the assessments were not shielded by the rule, Pambassab had to show that the assessments lacked a legitimate relationship to the welfare of the condominium or were imposed without consideration of the facts. Pambassab did not meet this burden. The record demonstrated that the assessments were imposed for the purposes of repaying a loan to a unit-owner and to fund the reserve fund. That the assessments were not used for these purposes but were instead utilized to pay operating expenses to keep the condominium viable did not render them improper in the absence of evidence that the board acted in bad faith or breached its fiduciary duties. In addition, the record revealed that the assessments were imposed after the board had discussed them thoroughly.
The loan assessment had been raised as early as October 7, 1997, and the minutes from the meetings held before the imposition of the assessment in December 2001 showed that interest on the loan was discussed as part of the loan repayment and that the amount of the loan due was considered by the condominium’s accountants. Moreover, minutes from a board meeting at which the assessments were imposed indicate that Pambassab was given information in order to verify the amount of the assessment with its accountants.
The record also showed that Pambassab never provided the board with the results of its accountant’s review of the loan amounts or any other specific basis for challenging the amount of the loan assessment even though, at the very latest, Pambassab had the information on which the loan assessment was based in March 2003. Indeed, Pambassab failed to offer any evidence from an accountant or other source to support its assertion that the loan assessment had been improperly calculated.
Under these circumstances, the Business Judgment Rule applied to protect the decision of the board to impose the assessments. The court granted the condominium’s motion for summary judgment and it was directed to provide the court with a breakdown for each assessment of the amounts owed to Pambassab by month based on its failure to pay the assessments since their imposition in December 2001.
Comments: It is important to note the time periods involved in this foreclosure action. Assessments were to be paid beginning in 2001. The action began in 2005 and the condominium was first able to obtain summary judgment in January 2009, eight years after the first payments were due and roughly three years after the action was started. Further, even though the condominium was awarded summary judgment, the action is not over. One of the things this case teaches us is that, if a unit-owner does not pay assessments or common charges in a timely manner, it is imperative that the condominium act as quickly as possible to start and diligently pursue legal proceedings. Indeed, boards should review their bylaws on this point as many require the board to act as soon as a unit-owner is more than 60 days in arrears.
In addition, this case reminds us that it is important that boards maintain minutes of board meetings. It is clear that the court relied, in several instances, on the minutes in order to determine whether Pambassab objected to (or waived objections to) the amount or imposition of the assessments or the vote taken to impose the assessments. This proof was important in order to allow the condominium to meet its burden and challenge Pambassab’s arguments.
Attorneys for Plaintiff:
Castro & Karten
Attorneys for Defendant Pambassab:
Hughes Hubbard & Reed
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