When Condo-Owners Try to Stiff Boards and Others by Transferring Ownership
March 20, 2014 — May unit-owners transfer their condominium unit when to do so avoids foreclosure of that unit to pay a debt?
Sofia Frankel owned a condominium apartment at 160 West 66th Street in Manhattan. She had been a broker at Goldman Sachs when Jeffrey and Lauren Sardis entrusted her with some $19 million to invest on their behalf. They remained clients when Frankel left to join Lehman Brothers but, by 2004, complained that she had fraudulently churned their accounts, causing them more than $9.5 million in losses. The Sardises began an arbitration against Frankel and Lehman, and about two weeks before Lehman filed for bankruptcy, the court awarded the Sardises $2.5 million, holding both Frankel and Lehman responsible.
Shortly after the award was issued, Frankel met with a partner at the law firm of Proskauer Rose. The firm's time records reflect a discussion with Frankel and her son, Michael, regarding an "asset protection plan." Records also reflected discussions concerning "sale/transfer of NY condos" and "option of filing claim in bankruptcy..."
Manhattan Transfer
In early 2009, Ms. Frankel began depleting and relinquishing assets, some of which were the subject of other litigations. She transferred ownership of the condo apartment, previously appraised at $1.175 million, to Michael, for one dollar and "other valuable consideration."
The Sardises sought to set aside the transfer, claiming that it was a "fraudulent conveyance" prohibited by the New York State Debtor and Creditor Law. If the transfer were set aside, the Sardises could force a sale of the apartment in order to pay a portion of the arbitration award. The Frankels challenged the suit, claiming Frankel and her son entered into an oral agreement in late 1999 wherein Michael was to purchase the apartment when he turned 30.
The court found that Michael was, in fact, paying the carrying charges on the apartment since 1999. The Frankels asserted that those payments showed that their agreement was legitimate. But the court noted that, other than the Frankels' "self-serving" affidavits, the only evidence of the purported 1999 agreement was in late 2008 and 2009 when an appraisal was obtained, a deed was recorded and a promissory note was executed by Michael in connection with the transfer.
Good Faith and Begorra
This court explained that the record failed to support the claim that Frankel sold the apartment to Michael based on a 1999 agreement rather than as part of an "asset protection plan" to insulate the property from the claims of the Sardises and other creditors.
The court explained that a "good-faith obligation" is imposed on both the person transferring the apartment and the person taking title. A determination of good faith, the court noted, is made on a case-by-case basis. However, the court clarified that it was the burden of the Frankels to establish good faith — they had to demonstrate that Frankel was a good-faith seller and Michael was a good-faith purchaser and that neither had any knowledge of any fraud. The court explained that when the person who received the property was aware that there was a judgment against the one transferring the property, the transfer will not meet the good-faith requirement and will be set aside as fraudulent.
The court found it apparent that Frankel's transfer of the condo apartment to her son was but one of a series of transactions undertaken as part of an "asset protection plan" devised with the assistance of counsel immediately after the arbitration award. Indeed, the Frankels did not even contend that Frankel acted in good faith, and the court could make no such finding. Further, it was apparent that Michael was a participant in the asset protection plan.
The Takeaway
Why are we discussing fraudulent transactions under the debtor and creditor law? Because, unfortunately, we lately have seen several cases where condo unit-owners, to avoid paying creditors, try to transfer their units to a relative or friend — typically without the "purchaser" paying the monies owed to the condominium.
In this instance, the creditor was a third party. In many instances, however, the creditor is the condo board. Because the transfer of a condo (unlike a co-op) can, and occasionally does, take place without the knowledge of the condominium, a board should determine whether to try to void the transfer, as the plaintiffs here did.
One final aspect of this case concerns Frankel's mortgage. There is no indication that the mortgagee was paid, or that it had agreed to allow title to pass to the son (or, for that matter, that it was ever advised of the transfer). Based on most every mortgage document we have seen, such a transfer typically would constitute a default under the mortgage documents, which would have allowed the mortgagee to foreclose.
Richard Siegler is a partner in the New York City law firm of Stroock & Stroock & Lavan. Dale J. Degenshein is a special counsel for that firm.
Illustration by Liza Donnelly. Click to enlarge.
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