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Council of New York Cooperatives & Condominiums
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Legal Issues

Publication Date: Summer 1999

CNYC president Marc J. Luxemburg, Esq. is an attorney specializing in cooperative and condominium law. In each issue of the CNYC Newsletter he reviews recent court cases that have the potential to answer questions commonly faced by boards of directors as part of their responsibilities. At CNYC's Annual Conference in the fall, Mr. Luxemburg presents a three-hour seminar that reviews many significant cases of the preceding year.


PAIKOFF OUTNUMBERED
In two recent decisions, Civil Court judges in New York County and in Queens County have disagreed with the decision of Judge Finkelstein in Paikoff v. Harris, and have determined that a sponsor does not have to offer renewal leases to a subtenant in a cooperative apartment when the apartment was rented to the subtenant after the conversion of the building to cooperative status.

In the first decision, Square Associates v. Coppola, NYLJ, 5/5/99, p.32, c.6, Justice Franke of the Civil Court in Queens found that the sponsor had rented the apartment to the respondent several years after the building became a cooperative. Carefully analyzing Section 352-eeee of the General Business Law, which is known as the Martin Act, the court concluded that the tenant was not entitled to a renewal lease if the sponsor was a "purchaser under the plan". The statute defines a purchaser at Section 352-eeee(1)(d) as a person who "owns the shares allocated to a dwelling unit". Since the sponsor fell within this definition, the tenant was not a "non-purchasing tenant" and therefore (i) could be evicted when his lease expired, (ii) was not entitled to a renewal lease, and (iii) the sponsor did not have to show a cause for evicting him. The Court stated that it was not bound by Justice Finkelstein's decision in the Paikoff case, because it was a court of equivalent jurisdiction.

Continuing the trend, in Park West Village Associates v. Nishioka, NYLJ, 5/26/99, p.27, c.3 (Civil Court, New York County), Judge Kramer also carefully reviewed the terms of the General Business Law as well as the statutory history of the Martin Act. The court found that there was no intention on the part of the legislature to benefit persons who rented apartments after a co-op conversion, that the plain language of the statute showed that the sponsor was a "purchaser under the plan", and that the tenant was not entitled to a renewal lease.

The Paikoff decision is presently on appeal. The Council of New York Cooperatives & Condominiums submitted an amicus curiae brief drafted by CNYC Board Chairman Stuart Saft, and we are awaiting further word on this issue.

GORBATOV DECISION APPLIED
The decision in Gorbatov v. Gardens 75th Street Owners Corp. 247 App.Div.2d440,668 NYS 2d 661 (2d Dept. 1998) continues to provide the standard for judicial determination of whether or not a shareholder is a "holders of unsold shares". In Lee v. Glen Oaks Village Owners Inc., NYLJ, QDS 72503911, (Sup. Ct. Nassau Co. 4/4/99) the cooperative was granted summary judgment declaring that the plaintiff shareholder was not a holder of unsold shares. The plaintiff owned 36 apartments in the cooperative. The issue was whether 15 of these apartments constituted unsold shares. The court reviewed the Contract of Sale, in which the plaintiff acknowledged that he was purchasing the units for investment or resale purposes, and the fact that the plaintiff was not designated to hold unsold shares by the sponsor as required by the offering plan, and held that the facts of this case closely resembled those in the Gorbatov case. The court held that the plaintiff could not rely on the terms of the proprietary lease, since paragraph 38 does not create rights but merely extinguishes rights.

FAIR DEBT COLLECTION PRACTICE ACT CONTINUES TO EXPAND
In two recent cases, the courts have continued to expand the reach of the Fair Debt Collection Practices Act with respect to attempts to collect rent from defaulting tenants. This law was enacted to regulate the collection of debts arising from consumer credit transactions by professional debt collectors. It is questionable whether Congress ever intended it to apply to the collection of rent from a tenant by a landlord utilizing a managing agent or an attorney. However, the courts continue to expand the reach of the Act by narrowly focusing their attention the language of the Act.

Specifically, the courts have now ruled that 3-day demand notices -- required of the landlord by Section 711(2) of the Real Property Actions and Proceedings Law as a protection for the tenant before bringing an action -- violate the Act because it requires a 30-day notice when a third party seeks to collect a debt. In Goldstein v. Hutton Ingram, et al., 39 F. Supp 2d 394 (199 WL 151096) (USDC, SDNY 3/18/99), the statutory 3-day notice was signed by a vice president of the managing agent for the landlord, however, at the top of the notice, the attorney's name and address were listed, and the return address on the envelope and the certified mail receipt were both care of the attorney's office. The court found that a cause of action for breach of the FDCPA was stated because, even though the notice was signed by the managing agent (a practice that has previously been found to be legitimate), since the notice was mailed out from the attorney's office with a return address of the attorney's office, the notice was "sent" by the attorney rather than by the landlord or the managing agent. The court thus focused on the physical act of putting the envelope in the mail rather than the substantive import of the signature showing on whose behalf the notice was sent.

Based on this case, attorneys who represent cooperatives must be extremely careful in the preparation of notices in order to collect maintenance arrears, to ensure that there is no trace of the attorney's participation on the face of the papers or in the process of mailing. Moreover, 3-day notices will have to be rewritten to balance the requirements both of the Real Property Actions and Procedures Law and the Fair Debt Collection Practices Act. Since the notice is clearly a statutory prerequisite to the bringing of an action, one wonders whether the next challenge will be in the form of the summons and complaint served in the action, notwithstanding that the Act seems to exempt legal process.

Going even further, in Giaio v. Greco, NYLJ, 5/5/99, p.32,c.4 (Cir.Ct. Kings Co.), the court set aside two stipulations in which the tenant consented to final judgment of possession. During the course of the action the tenant admitted owing over $6,000 in rent, made no payments on the judgment, and in fact had not made rent payments for nearly a year. No defense to the rent was asserted in the decision. Nonetheless, because the initial 3-day notice served before the commencement of the proceeding was deemed to have violated the Act, the court although having "some concern about the plight" of the landlord, set aside the judgment, set aside the warrant of eviction, and dismissed the petition.

A.G. SPITZER OUSTS QUEENS DEVELOPERS
FROM CO-OP/CONDO BUSINESS

Attorney General Eliot Spitzer announced on June 7, 1999 that Queens developers Thomas and Alice Huang will no longer be allowed to sell cooperatives and condominiums in New York and will pay $325,000 in back charges due as their share of operating expenses for units they own and rent out in two buildings in Flushing. The couple have consented to a judgment against them that also states that they cannot publicly sell interests in real estate investments vehicles, timeshares and homeowners associations. The settlement is a result of a lawsuit filed by the Attorney General in 1994 alleging that the Huangs and their company violated promises made to renters by failing to pay their share of the operating expense of the building.

"This office is sending Mr. Huang and others like him a strong and clear message" said the Attorney General, "If you break the law,... if you don't live up to your responsibilities, we will find you and prosecute you."

Queens Borough President Claire Shulman praised Attorney General Spitzer for having "hit the ground running, recognizing the importance of protecting co-op/condo residents. Here in Queens", she added, "we have worked diligently with city and state officials to secure troubled buildings and protect those individuals who have invested their savings in this market. I applaud the Attorney General's efforts and success in creating a better climate for co-op and condo residents."

PROGRESS REPORT:
RESOLUTION PART IN HOUSING COURT FOR CO-OP & CONDO CASES

In January of 1998, a pilot program was established with a Resolution Part in the Housing Courts of the Bronx, Manhattan, Brooklyn and Queens to hear cases involving cooperatives and condominiums. Fifteen months into the program, the Bar Association held a meeting to examine its progress.

At a May 11 meeting which CNYC cosponsored, Chief Administrative Judge Fern Fisher Brandveen moderated a discussion with Judge Delores Thomas who is currently sitting on the Separate Part in Brooklyn, Judge Bruce Kramer, currently presiding over the Manhattan Resolution Part, and Judge Ernest Cavallo, who served in Queens during the first year of the program. It was learned that the judges rotate through the separate part, serving there for approximately a one-year period.

Judge Kramer and Judge Cavallo were enthusiastic about the program, agreeing that matters were more quickly resolved by having a judge focus sharply on cases affecting cooperatives and condominiums. They also found a significant advantage to presiding over a Resolution Part, where their roles were never those of the trier of facts in a case. This permits them to go further in their efforts to help the parties come to an agreement without having to send the case to be tried.

CNYC had long advocated for a separate part in housing court for co-op and condo issues and is very pleased with the success of the resolution part. CNYC will continue to support the establishment of a Co-op/Condo Trial Part in each borough as well.

 
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