NEGLIGENT SPONSORS AND THE AG

"Spitzer was focused on going after Wall Street," recalls attorney Aaron Shmulewitz, a partner at Reed Smith, www.reedsmith.com/ and everything else had to take a back seat. At the Real Estate Finance Bureau (REFB), there were not enough attorneys to review the complaints or enough engineers to inspect the buildings in question. Sponsors thumbed their nose at REFB requests for mediation.

The plight of the Empire Condominium (below) on East 78th Street in Manhattan is indicative of the problem. Though its residents included the likes of former New York Yankees slugger Jason Giambi, its board filed a complaint with the REFB 2004 after four years of arguing with the sponsor over such construction defects as ceilings that were too low, a roof that leaked and floors that buckled. With the help of the REFB, the board got the sponsor to agree to fix things — which were then never done. The REFB attorney in charge was a good man, recalls a former board member, but "his hands were tied." Their patience at an end, the board finally sued the sponsor. The case is still in litigation.

The REFB's main problem? The work load, insists its former head of enforcement, Oliver Rosengart, who retired in 2007. At one point, "I had 83 cases pending," he recalls. Rosengart admits he was loathe to use the weight of the AG's office to sue sponsors to force them to make repairs, because litigation could take upward of four years to be resolved, with no guarantee the outcome that would be in favor of the condo owners. "My method was to have the sponsor do the repairs under a jointly retained third-party attorney," explains Rosengart. It was easier to get the sponsor to do the repairs if both sides agreed through mediation on what had to be done.

Rosengart's detractors, however, say his unwillingness to sue sponsors meant he deprived the REFB of a powerful stick: the Martin Act. That law (New York General Business Law article 23-A, sections 352-353), which gives the AG the power to regulate the sale of condos and co-ops, mandates full disclosure in offering plans. Critics of the REFB say the bureau could easily sue under the act, making a case that building defects are material to the sale and should be disclosed. Moreover, they say, co-op and condo owners should have been encouraged to file claims against sponsors for breach of contract (the offering plan implied the unit would be built to code and wasn't); fraud or negligence (the sponsor and builder failed to exercise care toward the shareholders); negligent misrepresentation in the plan; and deceptive business practices.

Working It

According to the trade group the Real Estate Board of New York (REBNY), over 13,000 new units were constructed in Manhattan alone from 2003 and 2008. With this enormous jump in construction came an increase in complaints — doors that didn't close properly, roofs that leaked, HVAC systems that didn't work.

The problems got so bad that in summer 2007, new attorney general Andrew Cuomo convened the Real Estate Working Group (REWG), composed of lawyers, sponsors and tenant representatives to make recommendations on dealing with the problems. The advisory group met over the course of six months, and on December 17, 2007, Cuomo announced new legislation to increase Real Estate Finance Bureau funds and thus speed up the processing for co-op and condominium conversions; give tenants earlier access to new offering plans; and enhance oversight and enforcement.

Things finally started to move, recalls attorney and group-member David Berkey, a partner in Gallet, Dreyer & Berkey www.gdblaw.com/ and a member of the group. After the group submitted its recommendations, the AG's office started taking a more "proactive, aggressive role," says Berkey. While subsequent legislation, sponsored by State Senator Owen H. Johnson as S.6540 in the Senate and by Assemblyperson Helene Weinstein as A.9546 in the Assembly, did not pass, important filing fee changes were signed into law on April 23, 2008.

"We made certain recommendations and, to a large degree, they were adopted," agrees Shmulewitz. The $20,000 filing fee for plans with an offering price of $5 million or more had been unchanged since 1989. Now, "They increased the filing fee [to $30,000] and the extra $10,000 per plan was earmarked to hire additional attorneys and engineers whose job would be specifically to deal with complaints from [co-op and] condo boards." Since then, "they've been extraordinarily aggressive and assertive in dealing with complaints filed...against sponsors."

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