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What you’re about to read is a tale of 81 sponsor units – bought and financed – that ended up causing the near-downfall of a co-op. How this happened depends on who you talk to. The end result is indisputable, though. The co-op and its shareholders landed in an unimaginable place: bankruptcy court.

You need to know that this is an ordinary Queens co-op where most of the residents are first-generation immigrants who were kept in the dark about an unfolding investment scheme. Questionable, too, is whether the board fully understood what was happening or the high stakes being played with its future. As in all tales of intrigue, everyone has a story and some of the stories are different, making motive and truth hard to pin down. »

The meeting was called over the July 4th weekend. It was 2009, and Robert Valdes-Clausell, the co-op’s live-in building manager, had grim news for the Elmhurst shareholders. Ellen Kraus recalls him saying the bank was going to “foreclose on the building because they had some issue with the oil company, that the oil company closed the bank account, and that now the bad, terrible bank is trying to kick us all out of our homes.”

Kraus didn’t live in the co-op, but was at the meeting to help her Chinese parents understand what was going on. There was a lot to take in, and, like most of the building’s residents, her parents didn’t speak much English. “At the meeting,” Kraus says, “we asked, ‘How much do we owe the bank?’ Clausell told us ‘$6 million,’ and we were shocked.” Kraus remembers reading a financial statement a few years earlier that pegged the underlying mortgage around $3 million. How did it nearly double?

“After the meeting,” she says, “a lot of the people weren’t convinced.” A group of owners gathered in the courtyard to talk. “This thing doesn’t make sense,” Kraus remembers people saying. “Maybe we should hire our own lawyer.” They did, with 53 families chipping in $500 each. One of the first things they learned after retaining counsel was that they didn’t owe the bank $6 million. They owed $12 million.

How did a 150-unit co-op in Elmhurst, Queens, that still had more than half its apartments under sponsor control, go from normal to nightmare?


I Say Plan, You Say Scheme

The tale starts with a somewhat mundane transaction that hit a snag. The sponsor of 87-10 51st Avenue Owners Corp., the Birchwood Organization, decided to sell its entire portfolio of 600 unsold units to a real estate developer named Myles Horn. Included in the portfolio were 81 rent-regulated and market-rate apartments in the Elmhurst co-op.

Horn recalls that he had the units under contract but was stymied by Robert Valdes-Clausell, the co-op’s live-in building manager who “refused to do the ministerial act of transferring the shares of stock to me. Normally they cannot refuse to do so, but they did.” Birchwood asked the real estate developer if it could “go ahead and sell you all of our other unsold units and not sell you this one because we may wind up in a lawsuit with these folks. We are going to have trouble here.” Horn said yes, and the Elmhurst apartments were left out of the sale.

Trouble is an understatement.

After Horn was blocked, the co-op, represented by Clausell, offered to buy the block of apartments for $8 million. Birchwood accepted, but there was one major problem: the co-op didn’t have the funds for the purchase price. It could, however, get the money if it refinanced its underlying mortgage. The co-op did just that and, under Clausell’s guidance, borrowed $12 million from the National Cooperative Bank (NCB), paying off its $3 million mortgage early (incurring a hefty prepayment penalty and additional transaction costs of nearly half-a-million dollars). NCB made two loans of $6 million each. The second loan, according to Mindy Goldstein, senior vice president at NCB, allowed the co-op to sell the apartments and with the proceeds, reduce its principal without penalty. The first mortgage closed in October 2007 and the second five months later.

During this period, Clausell says he began to worry that the co-op would violate its tax status if it owned the apartments. This concern, he says, led him to create a corporation called the Empire State Conglomerates, installing the co-op’s janitor as the president of it. The NCB loan documents were modified to reflect that Empire was a subsidiary of the co-op. Clausell’s idea was that Empire could buy the apartments with the money that the co-op lent it. Empire would make payments to the co-op from the rents, ensuring that the co-op could meet its NCB loan payments.

In reality, though, Empire was not a subsidiary of 87-10 51st Avenue. In fact, its deal was pretty sweet. It didn’t have to put up any collateral to buy the shares, and it stood to benefit from rising rents (which Clausell was projecting) and a portion of the money from apartment sales. And if things went bad, Empire could just walk away, leaving the co-op on the hook for the NCB loan.

The deal between Empire and the co-op contained a promise to contribute a total of $500,000 to the co-op’s reserve fund by the end of the NCB loan’s ten-year term. Clausell said that as apartment sales occurred, the proceeds would be split in several ways: 60 percent of each sale would go to buying down the NCB loan, 30 percent of each sale would go to Empire, and 10 percent of each sale would be credited to the co-op’s reserve fund.

The co-op had taken a big step, and, depending on who is telling this story, it was either brilliant or sinister. “NCB was an unwitting participant in what some might describe as a fraud, what others might describe as a terrible misunderstanding,” says Horn. “But whatever you call it, NCB made this loan, and although this was a big mortgage on the co-op, the co-op did not wind up owning the apartments.”


Falling Behind

By taking on so much debt, and ceding control to Empire, the co-op went from being a group of shareholders to a collection of risk-takers. Most co-ops will never cross this threshold, because the downside is too scary if things go wrong. Unfortunately, that’s what happened when the co-op didn’t pay its bills on time.

Clausell claims the co-op was in terrific financial shape, but reality suggests otherwise.

The co-op had fallen behind in paying Castle Oil (now Sprague Energy), its oil supplier, and Castle was losing patience trying to collect. There was a spike in oil prices in the late summer of 2007, and that put even more strain on keeping up. Even so, says Michael Meadvin, Castle’s (and now Sprague’s) senior vice president and general counsel, they “were not a sterling example of a good customer” and had a poor payment record. In July 2008, just four months after the second NCB closing, Castle couldn’t wait for payment any longer. The company filed suit in state court for $233,214.10.

Oddly, the co-op did not respond. Clausell claims it was never notified about the lawsuit, but the court thought otherwise, issuing a default judgment against the co-op. A few days later, a restraining notice was served on the two banks where the co-op kept its funds. The co-op’s bank accounts were frozen, meaning it didn’t have access to its money, and it couldn’t pay any bills. It took ten months to unfreeze the accounts. But during this time the unthinkable happened: the property defaulted on the NCB loan, and in June 2009 spiraled into foreclosure. A receiver was appointed to collect maintenance from the shareholders, and a letter was sent to all of them instructing them where to send their monthly checks.

It was the receiver’s letter that caused the shareholders to meet over that July 4, 2009, weekend and hear Clausell’s grim news. While Kraus, her parents, and other owners were trying to figure out what was really going on, Clausell and the co-op board took an action that sealed the co-op’s fate: they filed for Chapter 11 bankruptcy. Filing, Clausell says, “stopped the foreclosure [and] the receiver and allowed the co-op to continue to manage its affairs.”


The Ultimate Stop

There’s no doubt that filing under Chapter 11 stopped the co-op’s spiral and kept Clausell and its then-board in power. But many shareholders began asking whether Clausell and the board were the people who should be representing them. “We really didn’t understand what was going on,” says Kraus.

The co-op was now in bankruptcy court, and the proceedings were confusing. “Whenever there was a court date,” Kraus said, “our attorney sent one of his junior lawyers, who didn’t understand a thing about bankruptcy procedures.” The lawyers told the group that they didn’t have to appear in court. At one of the meetings, however, Kraus decided “that the only way that the judge can see that this is a case about shareholders who really don’t have a voice, who hardly speak English, and who are mostly seniors, is that every time there is a court appearance we have to show up. The judge has to see that these are the victims...he has to understand that there is something wrong here.”

As the proceedings continued, Kraus and her group became convinced they needed a different attorney. They got several recommendations and interviewed three of them, finally deciding that the man who could help was Joel Miller, a partner at Miller & Miller, who had a long record of experience in the co-op/condo field. Miller asked the group for a small retainer to cover a preliminary review of the materials. A week and many documents later, Miller signed on.

“We were really in a bad situation,” says Jacinto Chua, the co-op’s current board president. “After Joel got our retainer and started looking at our case, he decided he wouldn’t take any more money from us.”

Miller laid out what he thought had happened. “There was a transaction done really without the knowledge of anyone,” he told us. “Clausell convinced NCB that the co-op was buying the 81 apartments, and then at the end of the transaction, they changed the ownership of the shares to this Clausell-controlled company that had put up no money whatsoever.”


What Goes Around

When a corporation goes into Chapter 11, there are three ways to get out of it. The first is to convert to Chapter 7 and liquidate the company. The second is for the case to be thrown out of court because it’s not supposed to be there. And the third is to create a plan on how to get out of trouble and become whole again (reorganization). Becoming whole is what has consumed 87-10 51st Avenue for the past several years.

The cooperative faced nearly $3 million in bankruptcy costs, still had the $12 million NCB loan, and was required to pay back its creditors within three years. It took about two years to get a plan confirmed, and another year to get a settlement where Empire transferred 79 of the 81 units to the co-op. The settlement, in June 2012, also said the old board had to resign, and a new one elected.

The co-op’s back was up against a wall. It had only a year left to settle its debts, and that led them back to Myles Horn. “I got a call from Joel Miller and from the new head of the board who knew that I was once on the contract to buy this,” Horn recalls, “and they asked if I was still interested.” Horn told them to send over the material. “I knew what the rents were. I knew what the maintenance was. I knew how much money had to be spent to repair the building,” Horn says. “I sent the engineers and architects in so I understood how we could do this and still come out making a profit, and at the same time help the shareholders, who clearly needed help.”



Sometimes when you’re standing at the brink, good things happen. Deals get made, you find your footing, and the future looks like, well, it looks like there is a future. For 87-10 51st Avenue, that’s what happened.

Horn bought 79 unsold units for $8.5 million, and paid an additional $500,000 in transaction costs. The creditors were paid off: $3 million went to NCB to reduce the amount of the loan, and the remaining debt was restructured by NCB at a significantly reduced interest rate, with all penalties and fees waived. The co-op was left with $2.5 million to fix up the building. Horn also agreed to advance an additional $1.5 million for curb appeal improvements, with the co-op having to pay back only 48 percent of every dollar spent.

To go along with its new look, 87-10 51st Avenue has a new name: The Continental Park. The sales literature gushes about the “renaissance underway now in Elmhurst, Queens. The Continental Park is at the center of it, where the best in contemporary interiors, spacious apartment layouts and a rare residents-only private park offer an incomparable lifestyle and an exciting opportunity for discerning buyers.”

“The co-op is back,” says Horn proudly. “I have done projects all over Queens, and I think Queens is the last undiscovered borough. I’m gratified every time I can buy a job here and restore the co-op, do right by the people who live there, and at the same time make some money for us. It’s an all-around winning situation.”

It certainly is for the co-op and its shareholders, but the whole ordeal has left its mark on board president Chua, who still has to spend hours each day dealing with the fallout from the affair. “I’m so disappointed with the justice system,” he says. He remains, reluctantly, as president, not quite seeing how he can step down. “This is my third term, and I keep telling people they have to take over. Unfortunately, the building doesn’t have many who speak fluent English, and those who do don’t want to get involved. I’m stuck in the meantime.”

In Queens, there are entire pockets of the borough with first-generation immigrants. “As an immigrant, when you do well you want to own property,” says Kraus, whose parents still live in the co-op. “So you buy an apartment and think, ‘That’s it, I can now have a nice place to live and I’m done.’ But [you’re] not,” she insists. “You’re not just buying the asset, you’re also buying into the liability of the building.”

That’s the chief lesson to be learned at The Continental Park. The very essence of a co-op is that its stock is an asset, but that asset can quickly morph into an untenable liability if led down the wrong path. It is up to the board of directors to make sure this doesn’t happen, and, as in any democracy, it is up to the populace to keep tabs on the board.

“My priority is to make sure that the co-op can stand on its feet,” remarks Chua. And, somewhat optimistically, he adds: “I’m sure when the new shareholders come into the building, they will be very enthusiastic to be on the board.”

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