Ownership Under Scrutiny

SPONSORS

Ownership Under Scrutiny

Ratcheting up the scrutiny of co-op conversions in the wake of the ongoing lawsuit, 511 West 232nd Owners Corp. v. Jennifer Realty Co. (see “Hotline: Jennifer Realty Revisited,” Habitat, November 2003), Attorney General Eliot Spitzer has raised the volume on the debate over how many units make a viable co-op by filing suit against two Manhattan sponsors who have held on to 20 of the 24 units in their co-op since its conversion in 1986.

The suit, filed in New York Supreme Court on October 9, 2003, charges that Michael and Florence Edelstein, sponsors of West Shore Apartment Corp. at 314 West 94th Street, deliberately defrauded their tenant-shareholders by failing to relinquish control of the board, and continued selling shares in the building after it was converted into a co-op in 1986.

According to the attorney general’s allegations, the Edelsteins, who purchased the rent-stabilized building on the Upper West Side in 1983, sought to convert the building to a co-op in an effort to force out rent-stabilized tenants, and rent the majority of the units in the building at market rent rates after the conversion.

Between the time the Edelsteins converted the building and the present, the sponsors “have failed to form a viable cooperative,” alleges the attorney general. The Edelsteins have failed to relinquish board control after five years (under the requirements of a non-eviction plan), failed to hold board meetings after 1994, stopped selling units after 4 of the 24 were sold, and stopped updating their offering plan in 1991.

The end result, maintains Spitzer, has “made it extremely difficult for bona fide purchasers to sell their apartments or to refinance their mortgages. As a result, purchasers have been deprived of the economic and other benefits of cooperative ownership.”

The attorney for the Edelsteins, Allen Turek, founding partner and principal of his own eponymous firm, declined to comment on the lawsuit. But David Berkey, a partner in Gallet, Dreyer & Berkey, hailed the lawsuit. He called it “a natural extension” of the Jennifer Realtycase in which the shareholders of 511 West 232nd Owners’ Corp. sued their sponsor, Jennifer Realty, in 1998 for failing to relinquish majority control of the building. Berkey’s firm represented the shareholders.

“If you are buying an apartment in a building presented as a cooperative offering of real estate, you want to know when the apartments will be sold,” Berkey says. “If you are not told clearly that a sponsor has a plan to not sell units, but instead to rent them, then you are under a misconception” that the attorney general has called a deliberate defrauding of tenant-shareholders.

“What the Edelsteins did was [to] rent apartments that were vacated, at market rent, as a vehicle for getting around rent regulations,” he continues. “They kept control [of] the building [and of] the management, both of which should have been turned over to the tenant-shareholders. None of that should be happening, so many years after the plan was promulgated and the closing occurred.”

The suit against the Edelsteins seeks monetary damages for the shareholders, a permanent injunction against the Edelsteins from any further conversions, and a requirement that the Edelsteins sell 100 percent of their shares in 314 West 94th Street.

Brad Maione, a spokesman for the attorney general’s office, says the AG has no comment on the suit against the sponsors or the parallels between the case and Jennifer Realty.