View from the Council

On June 11, 2002, the Court of Appeals issued its much-awaited decision in the case of 511 West 232 Street Owners Corp. v. Jennifer Realty Corp., and decided for the cooperative and the purchasing tenant-shareholders that the sponsor of the cooperative had an obligation to sell apartments to create a "fully viable cooperative." The court upheld the allegations by the plaintiffs that the offering plan constituted a contract that contained an obligation on the part of the sponsor to act in good faith to sell, in a timely fashion, as many shares as necessary to create a fully viable cooperative. It also agreed that, by keeping a majority of shares of the cooperative, the sponsor defeated the purpose of the contract. It stated that both were a legally sufficient pleading for a cause of action for breach of contract.

The ruling, however, is a narrow one. The court did not address the issues of whether the complaint stated a valid cause of action for fraud, or whether the cooperative and the purchasing shareholders had standing to prosecute such claims, and left in place the dismissal of those claims by the appellate division. The court expressly declined to rule on the merits of the contract cause of action, that is whether there was sufficient proof in the record to show that the plaintiff had proven its case. The court was very careful to limit its decision to the claim that the offering plan included an implied covenant to sell apartments beyond the 15 percent minimum within a reasonable period of time in order to create a viable cooperative.

While the decision is a substantial step forward on behalf of cooperatives and tenant-shareholders who have been victimized by the failure of sponsors to carry out their offering plans, it does not completely resolve all issues. The court did not expressly address the issue of whether the sponsor implicitly promised to sell all of its unsold shares, holding that "at the very least…plaintiffs' complaint sufficiently alleged, at a minimum, that the sponsor undertook a duty in good faith to timely sell so many shares in the building as necessary to create a fully viable cooperative."

Thus, while affirming that the door is open for the cooperative to require the sponsor to sell shares, it leaves the extent to which the shares must be sold, and in what time frame, to be determined by the lower courts. There is no statute or court decision that defines a "fully viable cooperative," and the Court of Appeals did not undertake to do so. Accordingly, the court has laid out a road map for substantial further litigation in this case. The lower court will have to wrestle with the concept of what constitutes a fully viable cooperative, whether the facts in this case show this cooperative is not, and how many and when apartments will have to be sold until that standard is reached. Since the appeals court did not reach the merits of the lawsuit, the burden remains on the plaintiff cooperative to prove all of the allegations of its complaint. The case also did not deal with the applicability to "holders of unsold shares" of the sponsor's obligation to create a "viable cooperative."

On the other hand, the court dismissed the other sponsor contentions by stating that they were all without merit. The dismissed sponsor contentions include the claim that this issue is a legislative question and only the legislature could determine the scope of the sponsor's obligations under an offering plan; that all of the causes of action in the complaint were barred by the statute of limitations; that the plaintiffs lack standing to raise contract claims which, in substance, were or should be governed by the Martin Act; and that the remedy of injunctive relief be dismissed because it would impermissibly create two classes of stock.

In conclusion, to paraphrase Winston Churchill, while this is not the end of the battle over sponsors failing to carry out their offering plans, it is certainly the beginning of the end of that battle.

Marc J. Luxemburg is president of the Council of New York Cooperatives and Condominiums and a partner in the law firm of Snow Becker Krauss.