Cooperatives & Condominiums

In an action by sellers of co-op units to recover flip taxes paid to the co-op upon sale, the co-op moved to dismiss the complaint and the sellers cross-moved for summary judgment. The court refused to dismiss the complaint, holding that co-op had not furnished sufficient evidence to establish that the flip tax had been validly enacted.

One set of sellers initially moved into the building in 1986, while the other seller moved into the building in 1995. Two of the sellers have served as treasurer for the board, and it is clear that both sellers were aware of the co-op's practice of collecting a flip tax upon sale of co-op units. The co-op computes the tax by subtracting the original purchase price (plus brokerage and attorneys' fees) from the sale price, and then assessing a tax of 5% on the difference. Nevertheless, when sellers sold their respective units in 2010 and 2011, they challenged the legal validity of the flip tax, citing the absence of evidence that the tax had ever been approved by the co-op's board.

The court dismissed sellers' claims against individual board members, citing the business judgment rule. But the court refused to dismiss the complaint against the co-op itself, noting the absence of documentary proof that the flip tax was validly authorized.

COMMENT

Business Corporations Law ' 501(c), as amended in light of Fe Bland v. Two Tree Management Corporation, 66 N.Y.2d 556, authorizes a co-op corporation to impose flip taxes, so long as the flip tax is properly included in the proprietary leases, occupancy agreements, or offering plan. In Fe Bland, the Court of Appeals had invalidated a flip tax that varied based on “whether the assignor was an original purchaser from the sponsor or an outsider and whether he had been an owner for five years or more,” holding that the tax violated the prior statute's requirement that all corporate shares be treated equally, a requirement that the legislature subsequently eliminated for co-op fees.

A co-operative corporation can authorize a flip tax in any one of the governing documents (proprietary lease, bylaws, or certificate of incorporation) so long as the authorization does not conflict with provisions in one of the other documents, and does not violate the co-op's internal procedures. Thus, in Mogulescu v. 255 W. 98th St. Owners Corporation, 135 A.D.2d 32, the court upheld a flip tax imposed by amending the offering plan to include bylaws authorizing the tax, rejecting a challenge by a shareholder who contended that the flip tax was invalid because it was not explicitly authorized in his proprietary lease. The court held that the lease incorporated the cooperative's offering plan by reference. On the other hand, in Pello v. 425 East 50 Owners Corporation, 19 Misc.3d 1125(A), the court invalidated a flip tax enacted by amendment to the co-op corporation's bylaws because the purported amendment was inconsistent a provision of the proprietary lease requiring a vote of two-thirds of the co-op's shares to amend the lease. The board had tried to enact the flip tax by amending the bylaws, which required only the approval of three of the board members, who together controlled only about 40% of the co-op's shares. Similarly, in 79 Street Tenants Corp. v. Brown, Harris, Stevens, Inc., 227 AD2d 149, the court invalidated a flip tax increase that the co-op sought to enact by amending the proprietary lease when the offering plan required that increases be enacted by amending the bylaws.

Though the court invalidated the flip tax in Pello based on the terms of the proprietary lease, the court suggested that had the lease authorized the tax, the corporation could have obtained summary judgment by producing a copy of the bylaws with the flip tax amendment incorporated into it, or a copy of the board resolution adopting it, together with minutes of the board meeting establishing that the amendment had secured the requisite votes. By contrast, the board in Pello actually provided documentation that fell far short of the court's requirements. The cooperative offered a copy of the text of the flip tax typed on a fresh sheet of paper, rather than paginated as part of the bylaws or in a board resolution, which would have offered some measure of authentication and failed to produce minutes of the board meeting adopting the flip tax, despite the bylaws requiring the board's secretary to record and keep such minutes.

Business Judgment Rule Bars Action Against Condo Board Members, But Not Against the Condo Itself

Grubin v. The Gotham Condominium
NYLJ 1/10/12
Supreme Ct., N.Y. Cty.
(York, J.)

In an action by condominium unit owners against the condominium and board members for damages resulting from abhorrent living conditions, the board moved to dismiss various claims against the condominium, and the entire action against individual board members. The court dismissed the complaint against all but two board members, citing the business judgment rule, but denied the motions to dismiss against the condominium itself.

Unit owners contend that a plethora of defects in their unit have gone uncorrected since 2004. They contend that the board and board members have promised to repair the conditions and have failed to do so, and that the board and members made repairs that they knew were inadequate to remedy the defects. In addition, unit owners contend that board members and their representation had made false statements about replacements that allegedly had been ordered and delivered, in order to induce unit owners not to bring suit. Based on these facts, unit owners advanced several causes of action. The board moved to dismiss the complaint in its entirety against all individual board members, and to dismiss the claims against the condominium for fraud, breach of contract and the covenant of good faith and fair dealing, breach of fiduciary duty, and negligence.

The court dismissed the claims against all but two individual board members. The court held that the business judgment rule generally protects board members. The court held that unequal treatment of shareholders may be sufficient to remove the bar of the business judgment rule with respect to the board itself, but that a complaint must allege separate tortious acts against a shareholder in order to state a claim against an individual board member. Here, the court held that alleged false statements about the status of repairs were enough to sustain the complaint against two named board members, but that the complaint failed to allege independent tortious acts by other board members. With respect to claims against the board as an entity, the court held that the complaint adequately and specifically alleged facts that precluded dismissal. In particular, allegations that the building manager had stated that he had fixed leaks when he had not, and allegations that railings had been ordered when they had not were sufficient to sustain a fraud claim when combined with unit owners' claim that the representations induced them to refrain from enforcing their legal rights.

Second-Hand Smoke Claims Raise Questions of Fact

Reinhard v. Connaught Tower Corp.
NYLJ 12/28/11
Supreme Ct., N.Y. Cty.
(Gische, J.)

In an action by unit owner against co-op corporation for failure to remedy second-hand smoke seeping into unit owner's apartment, the co-op corporation sought summary judgment. The court denied the motion, holding that questions of fact remained with respect to the claims for breach of the warranty of habitability, breach of the lease, and negligence.

Unit owner acquired shares associated with her apartment in 2006. When she detected a smell of cigarette smoke in the apartment, she complained to the co-op corporation and its building manager. The property manager's vice president inspected the premises with the building superintendent and detected a “slight smell reminiscent of cigarette smoke.” The manager then wrote to the unit holder, indicating that the smell did not render the apartment uninhabitable, and that the co-op board saw no obligation to do any work at the co-op corporation's expense. Unit owner then hired a hygienic engineer to do an inspection, and the engineer reported a bad odor and recommended sealing a pathway from adjacent units. Unit owner forwarded the engineer's report to the board, which responded by indicating that the engineer's proposed solution could cause moisture and other problems to the building and the unit. Unit owner then brought this action seeking injunctive relief and money damages. The co-op corporation moved for summary judgment.

In denying the motion, the court first held that there were questions of fact about whether the second-hand smoke was so pervasive as to breach the implied warranty of habitability and cause a constructive eviction. The court went on to hold that questions of fact also precluded summary judgment on unit owner's negligence claim, because there was dispute about whether the building's construction was typical for the time in which it was built. Similarly, unit owner raised questions of fact about whether the smoke condition deprived unit owner of quiet enjoyment of the premises. The court did, however, grant summary judgment dismissing a breach of fiduciary duty claim because a corporation does not owe fiduciary duties to its members or shareholders. Finally, the court held that individual officers of the co-op corporation were entitled to summary judgment for want of evidence of independent tortious conduct.

Insufficient Evidence That Flip Tax Was Validly Enacted

Norton v. 360 Riverside Owners Corp.

NYLJ 12/27/11
Supreme Ct., N.Y. Cty.
(Ling-Cohen, J.)

In an action by sellers of co-op units to recover flip taxes paid to the co-op upon sale, the co-op moved to dismiss the complaint and the sellers cross-moved for summary judgment. The court refused to dismiss the complaint, holding that co-op had not furnished sufficient evidence to establish that the flip tax had been validly enacted.

One set of sellers initially moved into the building in 1986, while the other seller moved into the building in 1995. Two of the sellers have served as treasurer for the board, and it is clear that both sellers were aware of the co-op's practice of collecting a flip tax upon sale of co-op units. The co-op computes the tax by subtracting the original purchase price (plus brokerage and attorneys' fees) from the sale price, and then assessing a tax of 5% on the difference. Nevertheless, when sellers sold their respective units in 2010 and 2011, they challenged the legal validity of the flip tax, citing the absence of evidence that the tax had ever been approved by the co-op's board.

The court dismissed sellers' claims against individual board members, citing the business judgment rule. But the court refused to dismiss the complaint against the co-op itself, noting the absence of documentary proof that the flip tax was validly authorized.

COMMENT

Business Corporations Law ' 501(c), as amended in light of Fe Bland v. Two Tree Management Corporation, 66 N.Y.2d 556, authorizes a co-op corporation to impose flip taxes, so long as the flip tax is properly included in the proprietary leases, occupancy agreements, or offering plan. In Fe Bland, the Court of Appeals had invalidated a flip tax that varied based on “whether the assignor was an original purchaser from the sponsor or an outsider and whether he had been an owner for five years or more,” holding that the tax violated the prior statute's requirement that all corporate shares be treated equally, a requirement that the legislature subsequently eliminated for co-op fees.

A co-operative corporation can authorize a flip tax in any one of the governing documents (proprietary lease, bylaws, or certificate of incorporation) so long as the authorization does not conflict with provisions in one of the other documents, and does not violate the co-op's internal procedures. Thus, in Mogulescu v. 255 W. 98th St. Owners Corporation, 135 A.D.2d 32, the court upheld a flip tax imposed by amending the offering plan to include bylaws authorizing the tax, rejecting a challenge by a shareholder who contended that the flip tax was invalid because it was not explicitly authorized in his proprietary lease. The court held that the lease incorporated the cooperative's offering plan by reference. On the other hand, in Pello v. 425 East 50 Owners Corporation, 19 Misc.3d 1125(A), the court invalidated a flip tax enacted by amendment to the co-op corporation's bylaws because the purported amendment was inconsistent a provision of the proprietary lease requiring a vote of two-thirds of the co-op's shares to amend the lease. The board had tried to enact the flip tax by amending the bylaws, which required only the approval of three of the board members, who together controlled only about 40% of the co-op's shares. Similarly, in 79 Street Tenants Corp. v. Brown, Harris, Stevens, Inc., 227 AD2d 149, the court invalidated a flip tax increase that the co-op sought to enact by amending the proprietary lease when the offering plan required that increases be enacted by amending the bylaws.

Though the court invalidated the flip tax in Pello based on the terms of the proprietary lease, the court suggested that had the lease authorized the tax, the corporation could have obtained summary judgment by producing a copy of the bylaws with the flip tax amendment incorporated into it, or a copy of the board resolution adopting it, together with minutes of the board meeting establishing that the amendment had secured the requisite votes. By contrast, the board in Pello actually provided documentation that fell far short of the court's requirements. The cooperative offered a copy of the text of the flip tax typed on a fresh sheet of paper, rather than paginated as part of the bylaws or in a board resolution, which would have offered some measure of authentication and failed to produce minutes of the board meeting adopting the flip tax, despite the bylaws requiring the board's secretary to record and keep such minutes.

Business Judgment Rule Bars Action Against Condo Board Members, But Not Against the Condo Itself

Grubin v. The Gotham Condominium
NYLJ 1/10/12
Supreme Ct., N.Y. Cty.
(York, J.)

In an action by condominium unit owners against the condominium and board members for damages resulting from abhorrent living conditions, the board moved to dismiss various claims against the condominium, and the entire action against individual board members. The court dismissed the complaint against all but two board members, citing the business judgment rule, but denied the motions to dismiss against the condominium itself.

Unit owners contend that a plethora of defects in their unit have gone uncorrected since 2004. They contend that the board and board members have promised to repair the conditions and have failed to do so, and that the board and members made repairs that they knew were inadequate to remedy the defects. In addition, unit owners contend that board members and their representation had made false statements about replacements that allegedly had been ordered and delivered, in order to induce unit owners not to bring suit. Based on these facts, unit owners advanced several causes of action. The board moved to dismiss the complaint in its entirety against all individual board members, and to dismiss the claims against the condominium for fraud, breach of contract and the covenant of good faith and fair dealing, breach of fiduciary duty, and negligence.

The court dismissed the claims against all but two individual board members. The court held that the business judgment rule generally protects board members. The court held that unequal treatment of shareholders may be sufficient to remove the bar of the business judgment rule with respect to the board itself, but that a complaint must allege separate tortious acts against a shareholder in order to state a claim against an individual board member. Here, the court held that alleged false statements about the status of repairs were enough to sustain the complaint against two named board members, but that the complaint failed to allege independent tortious acts by other board members. With respect to claims against the board as an entity, the court held that the complaint adequately and specifically alleged facts that precluded dismissal. In particular, allegations that the building manager had stated that he had fixed leaks when he had not, and allegations that railings had been ordered when they had not were sufficient to sustain a fraud claim when combined with unit owners' claim that the representations induced them to refrain from enforcing their legal rights.

Second-Hand Smoke Claims Raise Questions of Fact

Reinhard v. Connaught Tower Corp.
NYLJ 12/28/11
Supreme Ct., N.Y. Cty.
(Gische, J.)

In an action by unit owner against co-op corporation for failure to remedy second-hand smoke seeping into unit owner's apartment, the co-op corporation sought summary judgment. The court denied the motion, holding that questions of fact remained with respect to the claims for breach of the warranty of habitability, breach of the lease, and negligence.

Unit owner acquired shares associated with her apartment in 2006. When she detected a smell of cigarette smoke in the apartment, she complained to the co-op corporation and its building manager. The property manager's vice president inspected the premises with the building superintendent and detected a “slight smell reminiscent of cigarette smoke.” The manager then wrote to the unit holder, indicating that the smell did not render the apartment uninhabitable, and that the co-op board saw no obligation to do any work at the co-op corporation's expense. Unit owner then hired a hygienic engineer to do an inspection, and the engineer reported a bad odor and recommended sealing a pathway from adjacent units. Unit owner forwarded the engineer's report to the board, which responded by indicating that the engineer's proposed solution could cause moisture and other problems to the building and the unit. Unit owner then brought this action seeking injunctive relief and money damages. The co-op corporation moved for summary judgment.

In denying the motion, the court first held that there were questions of fact about whether the second-hand smoke was so pervasive as to breach the implied warranty of habitability and cause a constructive eviction. The court went on to hold that questions of fact also precluded summary judgment on unit owner's negligence claim, because there was dispute about whether the building's construction was typical for the time in which it was built. Similarly, unit owner raised questions of fact about whether the smoke condition deprived unit owner of quiet enjoyment of the premises. The court did, however, grant summary judgment dismissing a breach of fiduciary duty claim because a corporation does not owe fiduciary duties to its members or shareholders. Finally, the court held that individual officers of the co-op corporation were entitled to summary judgment for want of evidence of independent tortious conduct.