The Sponsor: Nothing is Settled

Resolution of potential conflicts between resident-shareholders and owners of unsold apartments, especially in a building converted under a non-eviction plan, requires balancing diverse interests.

In 1988, Jennifer Realty converted 511 West 232nd Street to cooperative ownership under a non-eviction plan. Brill & Meisel represented Jennifer Realty as the sponsor of the conversion. At that time, all of the apartments were offered for sale, but only a few tenants chose to buy, many preferring to remain in rent-regulated apartments for as long as they desired. As is customary, the offering plan and proprietary lease provided for the likelihood that there would be unsold apartments that could be sublet without restriction.

Jennifer complied with all attorney general regulations, including turning over control of the board to the resident-shareholders after five years. Neither statutory nor case law nor the attorney general's current regulations require a holder of unsold shares to ever sell them. Moreover, neither the offering plan nor the proprietary lease stated that unsold apartments must be sold. Nevertheless, the board sued Jennifer, alleging the offering plan contained an implied promise to sell all the apartments.

As attorneys for over 100 cooperative and condominium boards, we are particularly mindful of some good policy arguments for desiring orderly sponsor sales, such as lenders' preferences for high owner-occupancy. However, coercive sales, at inopportune times to less desirable purchasers, are in no one's interest. Furthermore, we believe the appropriate vehicle for governing the terms of such sales is by legislative action after due deliberation to guide future conduct rather than by litigation seeking retroactive effect.

In this case, the board is seeking to divest Jennifer of its apartments solely because that might benefit other shareholders. Just as you would not want to be forced to sell your apartment to possibly benefit your neighbors, Jennifer feels the same way. In fact, forced sales may have a deleterious effect: by compelling sponsors to dispose of apartments, boards could flood the market and depress the selling prices of all other apartments.

After reviewing the complaint and knowing there was no express agreement to sell, Jennifer moved to dismiss the lawsuit. Earlier this week, the Court of Appeals, New York's highest court, stated at this preliminary stage, based solely on plaintiffs' allegations, that "plaintiffs' contract cause of action withstands the sponsor's motion to dismiss."

Significantly, the court did not rule on the merits or validity of plaintiffs' claims, and did not determine whether the sponsor had, as alleged, implied a promise to sell its unsold shares. The court only held that the plaintiffs had stated a cause of action. Accordingly, the case was remanded back to the trial judge with the burden on the plaintiffs to prove whether there even was such a promise and, if so, what were the terms of the promise and whether it was breached.

Both Jennifer and Brill & Meisel are hopeful that this matter can be resolved without further litigation, which has been costly for both sides. Clearly, as co-op buildings are comprised of many divergent interests, all boards must consider whether it makes greater sense to work with their shareholders rather than rushing into court.

Mark N. Axinn is a partner at Brill & Meisel, attorneys for Jennifer Realty Company.