Published: Spring 1997

UNSOLD SHARES,
APARTMENT AUCTIONS
& LEAD PAINT LIABILITY

CNYC thanks Marc J. Luxemburg, Esq., for this column. A partner in the law firm of Snow Becker Krauss, Mr. Luxemburg was a founder of CNYC and serves as its president.

Apartment Auctions | Lead Paint Liability

What Determines A Holder of Unsold Shares?

The latest round in the continuing saga of purchasers of apartments from a sponsor seeking to have themselves declared holders of unsold shares was recorded in the Thompson v. 490 West End Apartments Corp., Sup. Ct., NY Co. Index No. 130655/96 decision of November 22, 1996 (unreported). In that case the purchaser bought two adjacent apartments from the sponsor, occupied one of the apartments, and continued to sublease the other without consent of the board, claiming to be a holder of unsold shares.

In prior decisions, the court had granted a motion to dismiss on the ground that the plaintiff was not designated a holder of unsold shares. However, the court, on reargument, reversed itself and decided that the Attorney General's regulations or interpretations would not be considered. But notwithstanding the lack of a designation, an issue of fact as presented existed as to whether the plaintiff was a holder. Judge Lehner expressed his skepticism concerning the validity of the court's prior determinations.

At trial, it was revealed that when purchasing the apartment the plaintiff applied for a residential loan indicating that she would occupy both apartments, and told the mortgage broker that was her intent. The court found that the plaintiff purchased the apartment with the intent to occupy it, and could not be a holder of unsold shares pursuant to the terms of the proprietary lease.

When Can An Apartment Be Auctioned?

The courts have continued to express skepticism about the common practice of attempting to auction an apartment immediately after service of a termination, without obtaining a judgment for a warrant of eviction. In Brooks Parker v. 304 East 73rd Street Corp., 654 N.Y.S.2d 762 (App. Div., 1st Dept.) (3/18/97), when the sponsor withheld maintenance payments. In an earlier round of litigation, the court had stayed termination of the leases provided that the sponsor posted a bond for the amount of the arrears and continued to pay current maintenance. Two years later, the sponsor again began willfully withholding maintenance. After the co-op served a notice of termination by reason of violation of the previous order, the sponsor resumed paying.

Although the lower court refused to enjoin an auction sale, the Appellate Division reversed the decision. The court found that the cooperative's "precipitous and extrajudicial determination" that the sponsor breached the prior order, without providing the sponsor with a new notice to cure, was unjustified. The court found that possible loss of the apartments would result in irreparable harm, and granted the injunction of the auction pending a determination on the merits of the underlying dispute.

In Berman v. 300 West 108th Street Owners Corp., N.Y.L.J. 3/19/97, p.25, C2 (Sup. Ct., N.Y. Co.), the plaintiff ceased paying maintenance, claiming a breach of the warranty of habitability. The cooperative served the termination notice, and the plaintiff moved to prevent the corporation from selling the apartment. The court granted an injunction, relying on McMiIlan v. Park Towers Owners Corp., to prevent the cooperative from divesting shareholders of their ownership without any judicial determination of defenses or counterclaims. The court directed that the plaintiff post a bond in the amount of 80% of the disputed maintenance and continue to pay maintenance on an ongoing basis, and the cooperative was permitted to bring an action to determine the amount of the arrears.

Two other interesting points in the case are that the co-op claimed that it was proceeding under the lien law to foreclose a lien, which the court held was not properly supported by notice; and that the court encouraged the shareholders to commence an action in the Housing Court to compel the curing of violations.

It has been common practice in recent years for cooperatives to attempt to auction apartments immediately after the service of a termination notice, but it is evident that the courts will not permit such a procedure and will require the cooperative to obtain a judgment determining its rights before an auction may be held.

Lead Paint Liability Tested

Finally, in Lampeas v. Travelers Indemnity Co., N.Y.L.J. 12/5/96, p.33, C1 (Sup. Ct. Queens Co.), a case not involving a cooperative, a landlord was sued by a tenant because an infant had allegedly ingested lead paint chips. Although the insurance company had denied liability, in this action against the insurance carrier the court held that the pollution exclusion was limited to environmental and industrial pollution, and did not negate coverage for claims arising from the ingestion of lead paint. The insurance carrier was obligated to defend and to indemnify to the extent of the injuries that occurred during the coverage period.