The Cost of Alteration Agreements

May a cooperative corporation collect liquidated damages called for in an apartment alteration agreement when a shareholder fails to complete the project on time? That was the question in Cogut v. 1220 Park Avenue Corporation and Brown Harris Stevens, LLC.

Plaintiffs Craig and Deborah Cogut were shareholders of 1220 Park Avenue Corporation, a cooperative housing corporation that owns the property located at 1220 Park Avenue in Manhattan. Defendant Brown Harris Stevens was the managing agent for 1220 Park. The Coguts were the proprietary lessees of apartment 16PHB, a triplex. They purchased their apartment in August 2006 and two months later told Brown Harris that they wanted to renovate.

The proprietary lease stated that all structural alterations required board approval. As a condition of approval, the board required shareholders to execute a standard form alteration agreement.

The co-op’s policy required all alterations to be made within 120 days, which the defendants stated was enforced with respect to every shareholder alteration.

The plaintiffs retained Darius Toraby, an architect, who prepared plans for the alteration. The co-op’s architect, Walter Melvin, found them acceptable. The board approved the alteration.

While this process was under way, Deborah Cogut submitted a signed, but blank, alteration agreement to Brown Harris together with a check for $10,000 for a security deposit. The agreement actually required a deposit of 10 percent of the overall cost of renovations. Since the Coguts’ renovations were more than $1 million, Brown Harris never countersigned this blank agreement. The court noted specifically that this blank alteration agreement did not specify start or completion dates or include any specifics about the alterations the Coguts were planning to make. It did, however, contain a liquidated damages provision.

After the board approved the work, a final alteration agreement was prepared, which stated that work had to be completed within 120 days of the date the work began. This agreement was signed by Deborah Cogut on March 1, 2007, although during the litigation she stated that she had never read the document. She returned it to the managing agent with a security deposit of $100,000 and copies of permits, licenses, and the like. After the co-op countersigned the document four days later, the Coguts were told they could begin work. This agreement also included the liquidated damages provision.

Construction began on March 5, 2007. Construction was still going on six months later. In September, Brown Harris sent a letter to the Coguts advising them that they had exceeded the 120-day allotted time period and that damages had been assessed against them. The Coguts asserted that the scope of work had changed and that, therefore, the 120 days was no longer sufficient. The co-op and Brown Harris asserted that the Coguts had never submitted revised or modified plans to them for review or approval to reflect the changed scope of work.

The board demanded that the Coguts pay the liquidated damages fees provided for in the alteration agreement. The board asserted that this was consistent with its practice and that two other shareholders were required to pay such fees when their alterations took longer than 120 days. The alteration agreement signed by Deborah Cogut stated:

“The work shall commence by ???, the Work Commencement Date, and shall be completed within 120 calendar days. [The Work Completion Date being the date all work has ceased.] If the work shall not have been completed by the Work Completion Date, the Corporation shall be entitled to apply, from the security funds provided pursuant to paragraph 3 (b) of this Alteration Agreement, $250 per day for the first five working days following the Work Completion Date, $500 per day for the next five (sixth through tenth) working days following the Work Completion Date and $1000 for each additional five days (beyond ten working days) following the Work Completion Date... These amounts are acknowledged to be liquidated damages.”

A second aspect of the Cogut litigation centered on the Coguts’ request to upgrade their electrical service. The alteration agreement contained a provision that shareholders could not bring in electrical service without the co-op’s prior written consent. At the time the Coguts began their alterations, the co-op installed new electric meters so that shareholders could upgrade their electrical service. After installation of the new bank, 15 apartments in the building upgraded their service from 100 amps to 200 amps. The remaining 40 units still had only 100 amps.

During their renovations, the Coguts used one of the new meters and upgraded to 200-amp service. They also requested an additional service increase to 300 amps. They were the only shareholders to make such a request. Brown Harris sent the request to IP Group, the co-op’s electrical consultant. IP Group communicated with Toraby and ultimately determined that 200 amp service was sufficient and that 300 amps was unnecessary. IP Group took into consideration that if the Coguts were allowed to install 300 amps, it would leave insufficient room to accommodate additional electric banks for other shareholders. Based on IP Group’s recommendation, the board denied the Coguts’ request for additional service.

The Coguts sued for an order requiring the co-op to allow them to convert their electric service to 300 amps. They alleged, as against the co-op, breach of contract; breach of the covenant of good faith and fair dealing; misrepresentation; and breach of fiduciary duty. They sought an award of attorneys’ fees and an order that they were not required to pay the liquidated damages set forth in the alteration agreement. As to Brown Harris, the Coguts asserted claims for aiding and abetting the co-op’s breach of fiduciary duty and negligent management.

Although Toraby and IP Group initially had disagreed on the appropriate amount of electrical service required by the Coguts (IP Group had recommended that a monitoring device be set up in the Coguts’ apartment, but the Coguts had never agreed), the co-op and Brown Harris argued that the board’s decision not to grant the Coguts’ request for additional electric power was protected by the Business Judgment Rule, based on the advice of its expert. In seeking dismissal of the complaint, the co-op asserted that the Coguts had several large social events in the apartment after their renovations and that electricity was not a problem. In fact, the co-op claimed that the only electric outage occurred at the conclusion of the renovation project when an industrial steam-cleaning machine was plugged in.

The Coguts opposed the co-op’s motion to dismiss, and stated that the board told them there would be sufficient electric power and, further, that Toraby included a letter in their alteration application that stated the renovations would require 300 amps of electricity. They also argued that the Business Judgment Rule did not apply because the board acted in bad faith, negating one of the elements that would otherwise allow a board to exercise its business judgment. As support, the Coguts submitted the deposition of the managing agent who testified that she probably conveyed to the board that she believed Toraby was unreasonable and arrogant. However, she also stated that she did not believe the board took this opinion into consideration when deciding to deny the Coguts’ request for increased electrical service to 300 amps.

The Coguts also argued (1) that there was a factual dispute as to whether they reasonably relied on Brown Harris when it told them the two alteration agreements were substantially the same; (2) that the liquidated damages provision in the alteration agreement was a penalty and should not be upheld; and (3) that Brown Harris improperly inserted the 120-day completion provision while telling Deborah Cogut that the agreement was substantially the same as the form agreement the Coguts had previously signed.

The co-op and Brown Harris submitted the affidavit of a licensed architect from Melvin’s office who had reviewed the Coguts’ plans on behalf of the board. This architect stated that the plans did not indicate a requested upgrade of electrical service to 300 amps, but rather 200 amps, which had been provided. There was a request that Con Ed evaluate the co-op’s electrical capacity, but it was not part of the plans submitted by the Coguts.

The court first discussed the standard for summary judgment – that the one making the motion must show evidence to eliminate any material issues of fact. Upon such a showing, the burden shifts to the opponent, who must present facts in admissible form sufficient to raise a genuine issue of fact that could be brought to trial. The court explained that if there is any question as to whether there is an issue of fact, summary judgment must be denied.

The court dismissed the Coguts’ claims with regard to electrical service, on the grounds that there was no evidence to support the Coguts’ claim that the request for 300 amps was in the alteration application or approved by the board. The letter to Con Ed was an inquiry and, in any event, not part of the application package. In sum, the court explained that there was nothing in the correspondence or the application package that would have led the board to believe it had approved an increase in electrical service to 300 amps.

The court next discussed the Coguts’ argument that the board’s bad faith negated Business Judgment Rule protection. The court explained that “[t]o trigger further judicial scrutiny, an aggrieved shareholder-tenant must make a showing that the board acted (1) outside the scope of its authority, (2) in a way that did not legitimately further the corporate purpose or (3) in bad faith.”

The only evidence of bad faith was that the account executive for the managing agent did not like Toraby and that she may have communicated that to the board. However, there was no indication that the board based its decision on the agent’s opinion of Toraby. The court also noted that the board’s decision was based on the expert opinions of its advisers – an architect and electrician.

As to the Coguts’ claims of misrepresentations, breach of the covenant of good faith and fair dealing and breach of fiduciary duty, the court explained that the Coguts admitted they did not read the agreement before they signed it. Reiterating long-standing law, the court found that the Coguts “cannot now extricate themselves from a contract they feel was a bad faith bargain. An individual who signs a written contract is conclusively presumed to know its contents and to assent to them.” This was particularly true for the Coguts, because they had received the agreement before signing it and were afforded an opportunity to read it. Consequently, they were “conclusively presumed to have known, understood and assented to its terms.”

Finally the court addressed the Coguts’ claim that the co-op was not entitled to liquidated damages. The court found that the co-op and the Coguts, as parties to a contract, had the right to provide for anticipatory damages, so long as the sums payable were not unconscionable or contrary to public policy. The court specifically found that, given the total cost of the renovations and the amount of time the plaintiffs continued to renovate the apartment after the 120-day period, the amounts were not unconscionable.

The court dismissed the Coguts’ complaint in its entirety.

Comment: This case reminds us that agreements entered into between shareholders and their co-op boards are contracts and the courts will treat them as legally binding. It has long been the law that one is presumed to have read what one signs. Plaintiffs’ argument that they had not read the final version of the alteration agreement before signing it was of no moment. Nor could they successfully argue that they reasonably relied on the managing agent’s alleged representations that the agreement was substantially the same as the prior version the plaintiffs had signed.

As to electricity, boards do have the discretion to take the needs of all shareholders into consideration when deciding how to allocate services such as electricity. Plaintiffs’ claim that increased amperage had been approved in their alteration application was belied by documentary evidence. Importantly, boards also have the right – found in statute and case law – to rely on the advice of their experts.

Finally, although we have seen other decisions where the court did not permit liquidated damages, the court here upheld the liquidated damages provisions of the alteration agreement, rejecting arguments that they should be invalidated as an impermissible penalty. The court specifically noted that the amounts charged – $250/day for the first five days; $500/day for the next five days; and $1,000/day thereafter – were not unconscionable or in violation of public policy, particularly given the scope of the project.

ATTORNEYS

For Plaintiffs
Frank S. Occhipinti

For Defendants
Kagan Lubic Lepper Finkelstein & Gold