What to Do When a Buyer Lies

When someone lies on an application to purchase a co-op apartment, can the co-op sue the purchaser? It doesn’t happen often, but such an action was brought by a cooperative in Trump Village Section 4, Inc. v Vilensky.

The backstory. In 2014, Gene Vilensky submitted an application to purchase an apartment at Trump Village Section 4, a large cooperative in Brooklyn. As is common in cooperatives, the sale could not take place without the written consent of the board. Additionally, the Trump Village bylaws give the board the right of first refusal on apartment sales, which is something you often see in condominiums but is not very common in cooperatives. The board waived its right of first refusal and Vilensky completed his purchase application in March 2014.

Although Vilensky signed an agreement that he “would not permit persons other than those permitted by the proprietary lease to live in the apartment,” he began to list the apartment on Airbnb.

Taking action. The board sued Vilensky, alleging that he never intended to reside in the apartment and had bought it with the intention of using it for “commercial purposes.” The complaint further alleged that Vilensky “engaged in the business of renting the apartment on a short-term basis, essentially using the apartment as a hotel room or such other transient occupancy” and that the apartment had been listed on Airbnb.

The complaint asserted a cause of action for fraud, based on Vilensky’s deliberate failure to disclose that he was purchasing the apartment for commercial endeavors; breach of the occupancy agreement (akin to a proprietary lease); cancellation of the stock certificate and occupancy agreement, since his false representation and concealment of the facts were calculated to induce the board to approve the application and waive its right of first refusal; a permanent injunction stopping Vilensky from leasing the apartment; and legal fees. 

Striking back. Vilensky moved to dismiss the complaint, contending that it was devoid of facts, failed to specify what was false or fraudulent and contained vague claims. He then counterclaimed for unlawful eviction (claiming he was physically prevented from entering the apartment), intentional infliction of emotional distress, and breach of warranty of habitability. He also claimed harassment by Trump Village 4, which then made a motion to dismiss all the counterclaims.

The board prevails. The court held that Vilensky’s motion to dismiss the fraud claim must be denied, since Trump Village 4’s complaint sufficiently alleged that his application fraudulently represented that he would be living in the apartment. The court further held that Trump Village 4 sufficiently alleged special damages to support a fraud claim because it alleged that in reliance on the false representation the application, the board waived its option to purchase the apartment. 

The court also dismissed all of Vilensky’s counterclaims. Though Vilensky claimed treble damages for forcible or unlawful entry due to the fact that Trump Village 4 erected a physical barrier to keep him out of the apartment, in truth there was only tape. His claim for emotional distress was also dismissed, since Trump Village 4’s alleged conduct was not deemed to be outrageous or extreme.

Vilensky then appealed the court’s decision that he had committed fraud by his deliberate misrepresentation that he would be the sole occupant and use the apartment as his private residence. Vilensky claimed that it was really a breach-of-contract issue and that in any event it was insufficiently pleaded. 

The appeals court held that general allegations that a party entered into an agreement while lacking the intent to perform it are insufficient to support a claim of fraudulent inducement. However, the board alleged a misrepresentation of facts that served as an inducement for the board to approve the sale and waive its option to purchase the apartment. In that situation, the defrauded party may have a cause of action for fraud. The court therefore held that the trial court had properly permitted Trump Village 4’s first cause of action (fraud) to proceed.

Lessons to be learned. Although the issues of whether a co-op can sue when a prospective buyer makes misrepresentations on a purchase application have not been finally resolved — and courts will continue to hear motions in such cases — it is interesting that the trial court and then an appellate court allowed a cooperative to bring a fraud action in this case. It is not uncommon for an applicant to claim he will move in and instead install an adult child in the apartment or use it as an investment by subleasing the apartment. In the past, boards have had little recourse. Certainly the cooperative might bring an action that the shareholder has violated the lease, but after curing, the violations could continue. Still, the possibility of winning damages in a fraud claim makes it imperative to follow such disputes to their legal conclusion.

Attorneys:

For Vilensky: Jeanette Zelhof

For Trump Village 4: Malvina Lin 

Andrew P. Brucker is a partner at the law firm Armstrong Teasdale. The statements and views in this article are his own and not necessarily those of the firm.