Cooperatives & Condominiums

Supreme Ct., N.Y. Cty

(Lehner, J.).

A subcontractor who performed work on the condominium's common elements in conjunction with the condominium conversion brought an action to recover the alleged unpaid balance from the condominium board's common charges. The court dismissed the complaint, holding that the trust fund provision in the condominium statute does not require the unit owners to assume the liability incurred by the sponsor.

In 1998, the building's owner determined to convert the warehouse space into residential housing, and contracted for the necessary conversion work. The plaintiff in this action subcontracted to perform roofing and exterior masonry work. The subcontractor contends that a balance of $168,000 remains due for the work performed. Meanwhile, the sponsor recorded a condominium declaration and sold the individual units pursuant to an offering plan that indicated the sponsor was obligated to complete the renovation of the building. The subcontractor first sought to foreclose its mechanics lien, but that action was dismissed for failure to file liens against the tax lots created by recording of the condominium declaration. The subcontractor then brought this action pursuant to the trust fund provisions of Real Property Law section 339-l, which provides that common charges received by the condominium board “shall constitute trust funds for the purpose of paying the cost of such labor or materials performed or furnished at the express request or with the consent of the manager, managing agent or board of managers … ” The subcontractor argued that the Sponsor controlled the board at the time the work was performed, and that the work was therefore performed at the request of the board. Hence, the subcontractor argued, the common charges constitute a trust fund for its benefit.

In dismissing the complaint, the court acknowledged that a literal reading of the statute would impose liability on the board for failure to collect common charges to pay for improvements made by subcontractor. The court, however, concluded that a literal reading was inconsistent with the statute's purpose, and read the statute to apply only when the “express request” or “consent” is provided by a board selected by the unit owners. In the court's view, if the unit owners are to pay for improvements, it should be the acts of their elected representatives that create the liability. As a result, the court held that the board was not liable under the trust fund provision.

Business Judgment Rule Does Not Shield Board from Breach of Contract Claim

Rouette v. One West 126th Street Housing Development Corp.

NYLJ 5/12/04, p. 21, col.1

Supreme Ct., N.Y. Cty

(James, J.)

In an action by a co-op unit owner against the co-op board for specific performance of a contract to sell an apartment, the unit owner sought a preliminary injunction restraining sale of the unit to third parties. The court granted the preliminary injunction, holding that the business judgment rule did not protect the board from liability for breach of contract.

The unit owner and the co-op board entered into two contracts of sale, whereby the unit owner agreed to sell his apartment to the board, and the board agreed to sell him another apartment on the same floor. Each contract was explicitly made contingent on performance of the other. The parties set Oct. 17, 2003 as the closing date, but the sales never closed. The unit owner then brought this action seeking specific performance, and sought a preliminary injunction restraining the co-op board from transferring the apartment he had contracted to the purchaser, and from terminating the unit owner's rights in his current apartment. The co-op board contended that the unit owner had breached the contract by not permitting inspection of his apartment prior to closing, and that its actions in terminating the contract for breach should be governed by the business judgment rule. On that standard, the board argued, a preliminary injunction was not warranted.

In granting the preliminary injunction, the court held that the board's reliance on the business judgment rule was not warranted. The court held that the business judgment rule was not applicable in cases where a unit owner sues the co-op board for breach of contract. The court also noted that in this case, the board's contention that the unit owner failed to permit inspection was not supported by the record. Although the board's representatives received no answer when they went to unit owner's apartment the day before the closing, the unit owner made the apartment available for inspection at various other times that day and the following day. In light of controverted evidence that the board never made attempts to contract unit owner to arrange an inspection before showing up at the unit owner's door, the court concluded that unit owner was likely to prevail on the merits, and was therefore entitled to a preliminary injunction.

Validity of Foreclosure Sale Turns on Mortgagee's Actual Notice

New Falls Corp. v. Board of Managers

NYLJ 5/3/04, p. 25, col. 1

AppDiv, First Dept

(memorandum opinion)

In an action to foreclose a mortgage on a condominium unit, the condominium board appealed from a Supreme Court order denying its motion to vacate the judgment of foreclosure and sale. The Appellate Division reversed and remanded, holding that the motion should not have been denied without a determination that mortgagee had no actual notice of the condominium board's ownership interest.

The subject mortgage on a condominium unit was recorded in 1974. New Falls took an assignment of the mortgage in 1995, and recorded the assignment on Jan. 13, 1999. Meanwhile, in 1996, the condominium board had filed a lien for common charges against the same unit, and, in 1998, obtained a judgment of foreclosure and sale. On Dec. 8, 1998, the board took a deed to the unit which incorrectly identified the unit's street address, unit number, and tax lot number. On April 6, 1999, the condominium board recorded a corrected deed that included the right address and tax lot number.

On July 20, 2000, New Falls brought this foreclosure action, alleging upon information and belief that the defendants, the Simmonses, were the occupants of the apartment and the defendant condominium board was the owner of the unit. The condominium board never answered the complaint, and New Falls obtained a judgment of foreclosure and sale. A referee's deed was given to the purchaser at the sale. The condominium board then moved to vacate the judgment and dismiss the complaint, alleging that it was never properly served. A traverse hearing on the service issue proved impossible because the process server had suffered debilitating medical emergencies. New Falls, however, contended that improper service should not affect its judgment of foreclosure and sale because at the time New Falls commenced the foreclosure action, the condominium board had not properly recorded ownership interest in the unit. The Supreme Court agreed, and denied the motion to vacate. The condominium board appealed.

In reversing, the Appellate Division emphasized that even if the deed had not been properly recorded, New Falls would have been obligated to serve the condominium board if it had actual notice of the board's interest in the unit at the time it commenced the foreclosure action. The court observed that New Falls had named the board – and not the original mortgagors — as “owners” of the unit, suggesting that it might have had notice of the condominium board's interest. If New Falls did have such notice, the condominium board was entitled to grant of its motion to vacate the foreclosure judgment.

COMMENT

The First Department's holding that the case turned on New Falls' actual notice of the prior foreclosure sale is peculiar in light of RPL Section 316-1, which presents a statutory mechanism to correct defective deeds and provides that corrected deeds are constructive notice “from the time when the same shall be properly indexed.” In New Falls, the condominium board recorded a corrected deed more than 1 year prior to the mortgagee's commencement of the foreclosure action. The corrected deed was sufficient to constitute constructive notice to the mortgagee undertaking the necessary foreclosure search intended to discover all “Necessary Defendants” as defined by RPAPL 1311. In re Feldman, 252 A.D.2d 76.

There are only three instances in which a properly recorded common charge lien does not make the board a necessary defendant. First, where “the declaration of an exclusive non-residential condominium may provide that the lien for common charges will be superior to any mortgage liens of record.” RPL 339-z. Second, where the condominium board files the lien subsequent to commencement of the foreclosure action. Kursheedt v. Union Dime Sav. Insti. Of the City of N.Y., 118 N.Y. 358 at 363. Third, where a second or more junior mortgage is being foreclosed, the common charge lien would not be subordinate and therefore would not be extinguished and the board unnecessary. RPL 339-z; RPAPL 1311. In New Falls, the condominium is residential, the board properly filed its lien and corrected deed prior to the mortgagee's foreclosure and a first mortgage was foreclosed. The facts and circumstances of the case make the board a necessary defendant to the foreclosure action. Failure to join a necessary defendant leaves that party's rights unaffected by the judgment and sale, and the foreclosure sale may be considered void as to omitted party. Ridge Realty LLC v. Goldman, 263 A.D.2d 22, 701 N.Y.S.2d 69.

Trust Fund Provision Does Not Require Unit Owners to Assume Sponsor Liability

Northeast Restoration Corp. v. K & J Construction Co.

NYLJ 5/19/04, p. 18, col. 1

Supreme Ct., N.Y. Cty

(Lehner, J.).

A subcontractor who performed work on the condominium's common elements in conjunction with the condominium conversion brought an action to recover the alleged unpaid balance from the condominium board's common charges. The court dismissed the complaint, holding that the trust fund provision in the condominium statute does not require the unit owners to assume the liability incurred by the sponsor.

In 1998, the building's owner determined to convert the warehouse space into residential housing, and contracted for the necessary conversion work. The plaintiff in this action subcontracted to perform roofing and exterior masonry work. The subcontractor contends that a balance of $168,000 remains due for the work performed. Meanwhile, the sponsor recorded a condominium declaration and sold the individual units pursuant to an offering plan that indicated the sponsor was obligated to complete the renovation of the building. The subcontractor first sought to foreclose its mechanics lien, but that action was dismissed for failure to file liens against the tax lots created by recording of the condominium declaration. The subcontractor then brought this action pursuant to the trust fund provisions of Real Property Law section 339-l, which provides that common charges received by the condominium board “shall constitute trust funds for the purpose of paying the cost of such labor or materials performed or furnished at the express request or with the consent of the manager, managing agent or board of managers … ” The subcontractor argued that the Sponsor controlled the board at the time the work was performed, and that the work was therefore performed at the request of the board. Hence, the subcontractor argued, the common charges constitute a trust fund for its benefit.

In dismissing the complaint, the court acknowledged that a literal reading of the statute would impose liability on the board for failure to collect common charges to pay for improvements made by subcontractor. The court, however, concluded that a literal reading was inconsistent with the statute's purpose, and read the statute to apply only when the “express request” or “consent” is provided by a board selected by the unit owners. In the court's view, if the unit owners are to pay for improvements, it should be the acts of their elected representatives that create the liability. As a result, the court held that the board was not liable under the trust fund provision.

Business Judgment Rule Does Not Shield Board from Breach of Contract Claim

Rouette v. One West 126th Street Housing Development Corp.

NYLJ 5/12/04, p. 21, col.1

Supreme Ct., N.Y. Cty

(James, J.)

In an action by a co-op unit owner against the co-op board for specific performance of a contract to sell an apartment, the unit owner sought a preliminary injunction restraining sale of the unit to third parties. The court granted the preliminary injunction, holding that the business judgment rule did not protect the board from liability for breach of contract.

The unit owner and the co-op board entered into two contracts of sale, whereby the unit owner agreed to sell his apartment to the board, and the board agreed to sell him another apartment on the same floor. Each contract was explicitly made contingent on performance of the other. The parties set Oct. 17, 2003 as the closing date, but the sales never closed. The unit owner then brought this action seeking specific performance, and sought a preliminary injunction restraining the co-op board from transferring the apartment he had contracted to the purchaser, and from terminating the unit owner's rights in his current apartment. The co-op board contended that the unit owner had breached the contract by not permitting inspection of his apartment prior to closing, and that its actions in terminating the contract for breach should be governed by the business judgment rule. On that standard, the board argued, a preliminary injunction was not warranted.

In granting the preliminary injunction, the court held that the board's reliance on the business judgment rule was not warranted. The court held that the business judgment rule was not applicable in cases where a unit owner sues the co-op board for breach of contract. The court also noted that in this case, the board's contention that the unit owner failed to permit inspection was not supported by the record. Although the board's representatives received no answer when they went to unit owner's apartment the day before the closing, the unit owner made the apartment available for inspection at various other times that day and the following day. In light of controverted evidence that the board never made attempts to contract unit owner to arrange an inspection before showing up at the unit owner's door, the court concluded that unit owner was likely to prevail on the merits, and was therefore entitled to a preliminary injunction.

Validity of Foreclosure Sale Turns on Mortgagee's Actual Notice

New Falls Corp. v. Board of Managers

NYLJ 5/3/04, p. 25, col. 1

AppDiv, First Dept

(memorandum opinion)

In an action to foreclose a mortgage on a condominium unit, the condominium board appealed from a Supreme Court order denying its motion to vacate the judgment of foreclosure and sale. The Appellate Division reversed and remanded, holding that the motion should not have been denied without a determination that mortgagee had no actual notice of the condominium board's ownership interest.

The subject mortgage on a condominium unit was recorded in 1974. New Falls took an assignment of the mortgage in 1995, and recorded the assignment on Jan. 13, 1999. Meanwhile, in 1996, the condominium board had filed a lien for common charges against the same unit, and, in 1998, obtained a judgment of foreclosure and sale. On Dec. 8, 1998, the board took a deed to the unit which incorrectly identified the unit's street address, unit number, and tax lot number. On April 6, 1999, the condominium board recorded a corrected deed that included the right address and tax lot number.

On July 20, 2000, New Falls brought this foreclosure action, alleging upon information and belief that the defendants, the Simmonses, were the occupants of the apartment and the defendant condominium board was the owner of the unit. The condominium board never answered the complaint, and New Falls obtained a judgment of foreclosure and sale. A referee's deed was given to the purchaser at the sale. The condominium board then moved to vacate the judgment and dismiss the complaint, alleging that it was never properly served. A traverse hearing on the service issue proved impossible because the process server had suffered debilitating medical emergencies. New Falls, however, contended that improper service should not affect its judgment of foreclosure and sale because at the time New Falls commenced the foreclosure action, the condominium board had not properly recorded ownership interest in the unit. The Supreme Court agreed, and denied the motion to vacate. The condominium board appealed.

In reversing, the Appellate Division emphasized that even if the deed had not been properly recorded, New Falls would have been obligated to serve the condominium board if it had actual notice of the board's interest in the unit at the time it commenced the foreclosure action. The court observed that New Falls had named the board – and not the original mortgagors — as “owners” of the unit, suggesting that it might have had notice of the condominium board's interest. If New Falls did have such notice, the condominium board was entitled to grant of its motion to vacate the foreclosure judgment.

COMMENT

The First Department's holding that the case turned on New Falls' actual notice of the prior foreclosure sale is peculiar in light of RPL Section 316-1, which presents a statutory mechanism to correct defective deeds and provides that corrected deeds are constructive notice “from the time when the same shall be properly indexed.” In New Falls, the condominium board recorded a corrected deed more than 1 year prior to the mortgagee's commencement of the foreclosure action. The corrected deed was sufficient to constitute constructive notice to the mortgagee undertaking the necessary foreclosure search intended to discover all “Necessary Defendants” as defined by RPAPL 1311. In re Feldman, 252 A.D.2d 76.

There are only three instances in which a properly recorded common charge lien does not make the board a necessary defendant. First, where “the declaration of an exclusive non-residential condominium may provide that the lien for common charges will be superior to any mortgage liens of record.” RPL 339-z. Second, where the condominium board files the lien subsequent to commencement of the foreclosure action. Kursheedt v. Union Dime Sav. Insti. Of the City of N.Y., 118 N.Y. 358 at 363. Third, where a second or more junior mortgage is being foreclosed, the common charge lien would not be subordinate and therefore would not be extinguished and the board unnecessary. RPL 339-z; RPAPL 1311. In New Falls, the condominium is residential, the board properly filed its lien and corrected deed prior to the mortgagee's foreclosure and a first mortgage was foreclosed. The facts and circumstances of the case make the board a necessary defendant to the foreclosure action. Failure to join a necessary defendant leaves that party's rights unaffected by the judgment and sale, and the foreclosure sale may be considered void as to omitted party. Ridge Realty LLC v. Goldman, 263 A.D.2d 22, 701 N.Y.S.2d 69.