Board Member Personally Makes $100K on a Right-of-First Refusal. Legally.
Jan. 3, 2014 — Condominium associations, unlike cooperatives, can't turn down a prospective purchaser except in one way — by exercising its "right of first refusal" and buying the apartment instead. It doesn't happen often, since condo boards usually have just a short amount of time to come up with the cash or let the sale go through. And if the association doesn't have enough money on hand and can't get a conventional loan in time, what's a board to do?
To quote Mel Gibson in The Road Warrior: "You come to me."
"Me" in this case was attorney Joseph T. Wong, a board member of the 32-story condominium The Octavia, at 216 East 47th Street. Completed in 1985, its 48 apartments list for $500,000 to $1.7 million and up. So when Elizabeth Atwood was preparing to sell apartment 22A to attorney Andrew Bittens for $300,000 in July 2012, the board worried this might be a below-market price and might depress the sale prices of other apartments in the building. (The apartment had sold for $230,000 in 1995 and had since been traded among LLCs and Atwood with no recorded money changing hands.)
Fighting Depression
The board held a special meeting and voted to exercise its right-of-first-refusal to buy 22A and, in the words of board president Walter Epstein, proceed with a "quick flip of that unit" for the best interests of the condominium. But it would have to purchase the apartment in 20 days or else waive its right-of-first-refusal. The board didn't have enough money in its reserve funds for the purchase and it didn't want to levy an assessment against the unit owners. With no time to secure a traditional loan from a bank, the board reached out to several people for a private loan.
That's when Wong stepped in. He advised the board he could assist with a quick "loan," to quote court documents, and guarantee the association a minimum return. And since the bylaws allowed the board to have a "designee" buy the apartment, well, away we go.
The board voted to exercise
its right-of-first-refusal and
proceed with a 'quick flip'
for unit-owners' best interests.
That July 25, the board agreed to enter into a joint-venture agreement with Wong or an LLC formed by Wong. Wong would finance and purchase the apartment and then, after re-sale, he and the condo association would split the profits, with the association receiving no less than $100,000. The agreement noted that "Wong shall essentially step into the shoes of the Board and pay any and all costs, fees and taxes due by or from the Board in its exercise of its right of first refusal." As board-president Epstein noted during Bittens' eventual lawsuit, the board was authorized within the bylaws for Wong or his entity — the oddly named 320 57th Street LLC — to receive the money.
Interestingly, another board member, Michael Lam, was a 10 percent owner of 320 57th Street LLC. The board apparently had been unaware of this. In fact, according to the court in the recently decided Bittens v. Board of Mgrs. of The Octavia Condominium, "Lam himself was unaware that he was listed as 10 percent owner of the entity that did the purchasing." The court's December 17, 2013, decision didn't offer any detail of how that 10 percent ownership came about or why it purportedly had been unknown to Lam himself.
A 33 Percent Return
On December 20, 2012, Wong's LLC re-sold the apartment to other purchasers for $540,000. The condominium association received a check for $112,086, which represented 50 percent of the profits from the sale. Wong or his entity received the other 50 percent — roughly a 33 percent return on investment over five months, minus "costs, fees and taxes." Fellow board-member Lam, with his 10 percent share of the LLC, presumably scored $10,000.
Bittens filed suit alleging various infractions including "tortious interference with a contract" and fraud. He said he was advised that Atwood would be selling the apartment to the condominium association and not to an outside LLC, adding that had he known this "he would have made sure to consummate his contract with the Seller." He claimed the board had failed to properly exercise its right of first refusal and, in fact, did not legally exercise it at all, since it was waived on the date of the closing. And he alleged that individual members of the board profited from the transaction, in violation of the bylaws.
The court, however, did not accept his claim of tortious interference, reasoning that "the contract at issue … is the one between himself and the Seller" and that the seller never breached that contract. And since his down payment was returned to him, there were no damages.
The court also noted that the LLC was not an outside party but the condo association's properly appointed designee. As for the board waiving its right-of-first-refusal the day of the closing, the court found that was simply a "ministerial" act since the LLC's title company would not provide title insurance otherwise. Fellow board-member Lam's percentage appeared to be non-issue in the court's eyes.
Justice Joan M. Kenney granted the board and the other defendants, including the building's managing agent, Maxwell-Kates, summary judgment in their favor. And so, it appears, if you're a board member with inside knowledge of a pending right-of-first-refusal and can get the money together, you can legally reap a windfall — like, 50 percent of a sale and not the 10-15 percent generally taken by people acting as agents or the 4 1/2 to 6 percent a lender would have gotten — by getting your fellow board-members to make you the designated buyer.
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