Co-ops and Condominiums

In an action originally brought by unit owner’s law firm to seize and sell the unit for non-payment of legal fees, unit owner’s mortgagee appealed from an order declaring that the co-op corporation’s lien for unpaid legal fees was superior to the mortgagee’s lien. The Appellate Division reversed and concluded that the provision in the proprietary lease regarding legal fees was unenforceable.
Mortgagee bank made a multi-million dollar loan to co-op unit owner, and took the unit owner’s interest in the co-op corporation as security. Subsequently unit owner brought an action against the co-op corporation, alleging racial discrimination. That litigation was resolved in favor of the co-op. Unit owner’s law firm then sought to seize and sell the unit to pay for unpaid legal fees. The law firm then assigned its interest to mortgagee bank and was no longer involved in the litigation. The co-op corporation then filed a lien against the unit for its legal fees based on a proprietary lease provision stating that the co-op would be entitled to its attorney’s fees “[i]f Lessee shall be in default hereunder, and the Lessor shall take any action against the Lessee based upon such default, or if Lessor shall defend an action or proceeding (or claim therein) commenced by the Lessee.” The co-op corporation contended that its lien was superior to the bank’s mortgage lien. Supreme Court agreed. The Appellate Division affirmed based on its conclusion that the bank was collaterally estopped from raising the issue of its priority based on its participation in the prior action brought by the unit owner. Court of Appeals concluded that the bank was not estopped from raising its claim to priority, resulting to remand to the Appellate Division to determine the relative priority of the liens.
In reversing Supreme Court and holding that mortgagee’ bank’s lien enjoyed priority, the Appellate Division held that the provision entitling the co-op to attorney’s fees in any action brought by the unit owner was unenforceable as unconscionable because the right to fees was not contingent on the co-op corporation’s success in the litigation. The court held that it was irrelevant that the co-op was, in fact, successful in the litigation because the agreement, as written, was both unambiguous and unconscionable.

Comment