United States: Marbury Corners: A Legal "Cond-Opera" In Three Acts

Prologue

The Board of Managers of the Marbury Club Condominium (the "Board of Managers" or the "Board") [the "Condominium"], filed suit against Marbury Corners LLC (the "Sponsor" or "MC LLC"), Ginsberg Holdings LLC, Martin Ginsburg ("Ginsburg"), William Riehl, Susan Newman, Dan Mulvey and Rob Lodes (collectively, "Defendants").

The action arose out of the conduct of Sponsor (the developer under a residential condominium conversion plan, its manager and principal), together with the sponsor-appointed and controlled initial board of managers of the Condominium, in signing a $2.2 million note to Sponsor (the "Promissory Note" or the "Note")  secured by an assignment of, and a security interest in, common charges collected by the Board from unit owners.

The Supporting Cast

MC LLC was the sponsor of the Offering Plan.  Ginsburg Development, LLC was the sole member of MC LLC   ("Development").  Ginsburg Holdings, LLC was the purported assignee of MC LLC ("Holdings").

Martin Ginsburg was the manager of Development and Holdings.  William Riehl was an employee of Development LLC. Susan Newman was an employee of Development.  Dan Mulvey was an employee of Ginsburg Development Companies, LLC ("GDC").  Rob Lodes was an employee of GDC.

Ginsburg, Riehl, Newman, Mulvey and Lodes (collectively, the "Sponsor Board") were designated by MC LLC to hold office and exercise, and held office and exercised, all powers of the board of managers of the Condominium until the first annual meeting of the unit owners.

Setting the Scene

During the pre-construction and pre-sale phase of the project, Sponsor, with the purported approval of the Sponsor Board, executed and delivered the 40-year, $2.2 million dollar Promissory Note to Sponsor, together with an assignment of common charges and a security interest therein.

Pursuant to the express terms of Real Property Law 339-jj, Sponsor and the Sponsor Board could not burden the Condominium and the prospective unit owners with any such financial obligation unless authority to do so was expressly provided for in the Condominium's declaration or by-laws.  The declaration and by-laws contained no such provision.  Therefore, the Promissory Note transaction was arguably illegal under R.P.L. § 339-jj.

Accordingly, the subsequent unit-owner elected Board of Managers brought an action in the Supreme Court of the State of New York, County of Westchester, against MC LLC, Development, Holdings (together, "Defendants") and members of the Sponsor Board:  to have the Promissory Note, assignment and security interest declared null and void; to recover the payments made to Sponsor and Holdings; for breach of fiduciary duty; for compensatory and punitive damages; and for the costs and expenses, including legal fees and disbursements, of obtaining the foregoing relief.  The case was assigned to Justice Alan D. Scheinkman in the Commercial Division.

ACT ONE

Statement of Facts

(i)

The Condominium is a 55-unit, one and two bedroom, residential condominium, created and existing pursuant to Article 9-B of the Real Property Law, and located at the intersection of First Street and Third Avenue in the Village of Pelham, Town of Pelham, County of Westchester, State of New York.

Units in the Condominium were offered for sale and sold pursuant to the Offering Plan, accepted for filing by the New York State Department of Law on March 30, 2004, and declared effective in January 2005.

13 NYCRR § 20.3(a)(7) provides in pertinent part as follows:

THIS OFFERING PLAN IS THE ENTIRE OFFER TO SELL THESE CONDOMINIUM UNITS.  NEW YORK LAW REQUIRES THE SPONSOR TO DISCLOSE ALL MATERIAL INFORMATION IN THIS PLAN AND TO FILE THIS PLAN WITH THE NEW YORK STATE DEPARTMENT OF LAW PRIOR TO SELLING OR OFFERING TO SELL ANY CONDOMINIUM UNIT.  FILING WITH THE DEPARTMENT OF LAW DOES NOT MEAN THAT THE DEPARTMENT OR ANY OTHER GOVERNMENT AGENCY HAS APPROVED THIS OFFERING.

Accordingly, the cover of the Offering Plan contained the following statement:

THIS OFFERING PLAN IS THE SPONSOR'S ENTIRE OFFER TO SELL THESE CONDOMINIUM UNITS.  NEW YORK LAW REQUIRES THE SPONSOR TO DISCLOSE ALL MATERIAL INFORMATION IN THIS PLAN AND TO FILE THIS PLAN WITH THE NEW YORK STATE DEPARTMENT OF LAW PRIOR TO SELLING OR OFFERING TO SELL ANY CONDOMINIUM UNIT.  FILING WITH THE DEPARTMENT OF LAW DOES NOT MEAN THAT THE DEPARTMENT OR ANY OTHER GOVERNMENT AGENCY HAS APPROVED THIS OFFERING.

(ii)

Pursuant to the "Declaration Establishing the Marbury Club Condominium" (the "Declaration"), the by-laws govern the operation of the Condominium.

Pursuant to Article III, Section 5 of the by-laws of the Condominium (the "By-Laws"), "[t]he property and business of the Condominium shall be managed by its Board of  Managers[.]"

And, pursuant to Article III, Section 4 of the By-Laws, "[t]he first Board of Managers shall consist of three (3) persons designated by the Sponsor [.]"

(iii)

The Offering Plan stated, in item 24 of the section entitled  "SPECIAL RISKS" that, "[u]pon the conveyance of title to the first Unit, the Condominium will execute and deliver to the Sponsor the Promissory Note in the amount of $2,200,000"; and elsewhere provided that the expenses of the Condominium included "Debt Service" on the Note; that the Note would be for a term of 40 years, payable interest only at the rate of 4.5% for the first five years; payable thereafter at the interest rate of 5.5% with the principal to be amortized over a 35-year period; and secured by a pledge of the Condominium's rights and interests to common charges, a security agreement and UCC-1 financing statements.

On or about  April 14, 2005, Ginsburg, purportedly acting on behalf of the Sponsor Board, executed and delivered the Promissory Note in the initial principal amount of $2,200,000 to the order of MC LLC "FOR VALUE RECEIVED."

On or about April 14, 2005, in connection with the execution and delivery of the Promissory Note, Ginsburg, acting on behalf of Sponsor Board, also executed and delivered to MC LLC an "ASSIGNMENT OF COMMON CHARGES" in favor of MC LLC to secure the payment of the Promissory Note (the "Pledge Agreement").

On or about April 14, 2005, in connection with the execution and delivery of the Pledge Agreement, Ginsburg, acting on behalf of Sponsor Board, executed and delivered to MC LLC a "SECURITY AGREEMENT" granting MC LLC a security interest in all of the Condominium's accounts (the "Security Agreement").

And, on or about April 14, 2005, in connection with the execution and delivery of the Security Agreement, Ginsburg, acting on behalf of Sponsor Board, executed and delivered to MC LLC a UCC-1 financing statement with respect to the accounts covered by the Security Agreement (the "Financing Statement") [with the Pledge Agreement and the Security Agreement, the "Security Documents"].

(iv)

The original Offering Plan, dated March 30, 2004, priced the units so that the gross sales proceeds to Sponsor would amount to $31,452,200.

Just a few months later, Sponsor filed a "First Amendment to Offering Plan" dated June 3, 2004 that "increase[d] the Purchase Prices of all Units by twenty (20) percent"; and increased the gross sale proceeds to Sponsor to $37,742,640.

And three weeks later Sponsor filed a "Second Amendment to Offering Plan," dated June 24, 2004, that once again "increase[d] the Purchase Prices of all Units by [another] twenty (20%) percent"; and increased the gross sales  proceeds to Sponsor to $45,294,168.

Thus, Sponsor raised the aggregate purchase price of the units by almost $14 million, with a concomitant increase in real estate taxes to be paid by unit owners.

The Promissory Note stated that the $2.2 million obligation was "FOR VALUE RECEIVED".  In fact, as the Court subsequently found, the $2.2 million "debt" represented an increase in the purchase price of the units.  What's more, the "SPECIAL RISKS" section of the Offering Plan, as the Court also found, failed to state the purpose of the Note.

(v)

The Promissory Note and all of the Security Documents were signed on behalf of the Sponsor Board by Martin Ginsburg, the principal of Sponsor.

The Sponsor Board authorized Ginsburg to execute and deliver the Promissory Note and the Security Documents; however, approval of the Promissory Note and Security Documents by the Sponsor Board was not memorialized in any minutes or resolutions that were produced in the litigation.

The Offering Plan did not disclose that, as the Court found, the Security Documents were illegal, invalid, non-binding and/or otherwise unenforceable.

On or about April 24, 2009, Ginsburg, as Manager of MC LLC, purported to assign the Promissory Note and the Security Documents to Holdings LLC.

(vi)

Litigation ensued:  chronology (brief and partial) of subsequent legal proceedings:

The Board moved for summary judgment on liability.  The motion was granted.  Defendants moved to reargue.  The motion was denied.  Defendants filed a notice of appeal.  The Board moved for summary judgment on damages.  The motion was denied without prejudice to renew.  Defendants moved for leave to amend.  The motion was granted.

The Board renewed the motion for summary judgment on damages and for dismissal of the Defendants' affirmative defenses and counterclaims.  Defendants perfected their appeal on liability.  The summary judgment motion on damages was held in abeyance pending appeal.

The Second Department affirmed the judgment on liability.  Defendants moved in the Second Department for leave to appeal to the Court of Appeals.  The motion was denied.  Defendants moved in the Court of Appeals for leave to appeal the liability issue to the Court of Appeals.  The motion was denied.

Supreme Court dismissed the Defendants' affirmative defenses and counterclaims; denied the Board's motion for summary judgment on damages; and scheduled an inquest on damages.  Defendants moved to reargue.  The motion for reargument was denied.  The Board and Defendants entered into a stipulation as to damages and for an expedited appeal by Defendants with a stay of execution on the damages.

Defendants filed a notice of appeal to the Second Department from the dismissal of the affirmative defenses and counterclaims and the award of damages.  The appeal was fully perfected.  Shortly before the appeal was to be argued, Defendants moved to stay the appeal pending a motion in Supreme Court to disqualify Justice Scheinkman and to revoke the Supreme Court's prior decisions.  The motion was denied.

The appeal was argued and the Second Department affirmed the final judgment.  Defendants moved in the Second Department for leave to appeal to the Court of Appeals.  The motion was denied.  Defendants moved in the Court of Appeals for leave to appeal the liability and damages issues to the Court of Appeals.  The motion was denied.

ACT TWO

Proceedings As to Liability

(i)

This action was commenced by the filing of a summons and complaint.  Defendants served an answer and affirmative defenses.

The Board moved for partial summary judgment as to liability.

(ii)

Justice Scheinkman granted the Board of Managers' motion for partial summary judgment as to liability upon the first and second causes of action alleged in the complaint; and declared that the Promissory Note and the Security Documents "are illegal, invalid and/or otherwise unenforceable[.]".

The I.A.S. Court noted that R.P.L. § 339-jj was "enacted to protect condominium unit owners from unscrupulous sponsors by ensuring that they have a say in the condominium's borrowing."  Justice Scheinkman also held that, in violation of the language of R.P.L. § 339-jj, "the Unit Owners were required to pay additional consideration for [the] purchase of their units through a compelled indirect financing mechanism under which Sponsor would get more money."

The I.A.S. Court also observed that Sponsor attempted to "hide a sin" by failing to disclose the purpose and details of its scheme, through which the Sponsor attempted to:  (i) deprive a tax authority of tax revenues, on the one hand, and (ii) deceptively obtain more purchase money from the unit owners, without their knowledge or consent, on the other.

Justice Scheinkman found that:

  • The court does not accept Defendants' argument that the Unit Owners benefitted from the reduction in the sales price; the reduction was entirely illusory in that it was going to be recouped...The Sponsor chose this route so as to avoid having to follow the legitimate (but more difficult) route of changing to a cooperative plan.
  • [I]t appears that the present situation involves an effort by a Sponsor to 'hide a sin,' as was feared by some at the time the legislation was being considered.  While the fact of the borrowing was disclosed [in the Offering Plan], the purpose of the borrowing was not.  Nowhere were purchasers informed that the borrowing plan was devised as a means by which the Sponsor could recoup the profits lost by the purchase price reductions made in order to artificially achieve lower realty taxes.  Putting it another way, the unit purchasers were not informed that they were being required to pay rent for parking spaces, which parking was originally intended to be free of charge, so that the Sponsor could receive more money on account of its sale of the units.  Nor were they informed of any risks that the Village might seek to increase their taxes if it found out that the sales price had been reduced by this stratagem.
  • The improper purpose behind the Promissory Note and Security Documents is not lost on this Court and if this Court were to enforce the Promissory Note and Security Documents under such circumstances, it would run counter to the public policies underlying R.P.L. § 339-jj and as well as generally equitable principles.

(iii)

Justice Scheinkman meticulously described the legal dispute:

Plaintiff is the current Board of Managers, elected by the Unit Owners, of the Marbury Club Condominium, a 55-unit residential condominium created pursuant to Article 9-B of the Real Property Law, located in Pelham, New York (the "Condominium").  Units in the Condominium were offered for sale and sold pursuant to an Offering Plan accepted for filing with the New York Secretary of State on March 30, 2004 and declared effective in January 2005.  Defendant MC LLC was the Sponsor of the Offering Plan.

This action arises from a promissory note dated April 14, 2005 in the amount of $2,200,000.00 made by the condominium in favor of the Sponsor, MC LLC (the "Promissory Note")...To secure payment on the Promissory Note, MC LLC received (1) an assignment of common charges dated April 14, 2005 from the Marbury Club Condominium to MC LLC (the "Pledge Agreement")...(2) a Security Agreement granting MC LLC a security interest in all of the Condominium's accounts (the "Security Agreement")...and (3) a UCC-1 Financing Statement with respect to the Security Agreement (the "Financing Statement") (the Pledge Agreement, Security agreement and Financing statement are collectively referred to as the "Security Documents").

The Promissory Note and Security Documents were allegedly entered into with the consent of the Board of Managers of Marbury Corners, LLC (the "Sponsor Board"), consisting of the individual defendants Martin Ginsburg, William Riehl, Susan Newman, Dan Mulvey and Rob Lodes.  The Promissory Note and Security Documents have since been assigned to an affiliated company of MC LLC's, Defendant Holdings LLC, pursuant to various assignments dated April 1, 2009.

It is undisputed that the Promissory Note was fully disclosed in the Offering Plan.  In the section entitled "SPECIAL RISKS", it is stated that "[u]pon the conveyance of title to the first Unit, the Condominium will execute and deliver to the Sponsor a Promissory Note in the amount of $2,200,000" and it further disclosed that "the note would be for a term of 40 years, payable interest only at a rate of 4.5% for the first five years, payable thereafter at the interest rate of 5.5% with the principal to be amortized over a 35-year period; and secured by a pledge of the Condominium's rights and interests to common charges, a security agreement and UCC-1 financing statements..."

Supreme Court summarized the procedural history of the action:

This action was initiated by Plaintiff's filing of the Summons and Complaint...Defendants filed their answer which asserted affirmative defenses and Defendant MC LLC interposed a counterclaim to recover its reasonable attorneys' fees incurred in connection with this lawsuit.

Plaintiff's First Cause of Action seeks a declaratory judgment declaring that the Sponsor Appointed Managers had no "legal right, power or authority to authorize, direct and/or permit Ginsburg to execute and deliver the [Promissory] Note [and Security] Documents to MC LLC" and that the Promissory Note and Security Documents "are illegal, invalid and/or otherwise unenforceable"...  The Second Cause of Action seeks an injunction against the continued payments on the Promissory Note because the Condominium's viability, credit and finances threaten to be irreparably harmed and also seeks an order requiring that the Promissory Note and Security Documents be cancelled, surrendered and returned to Plaintiff and that all liens be released and discharged.  The Third Cause of Action seeks compensatory damages in the form of a return of the interest and principal paid on the Promissory Note...

Justice Scheinkman then described the facts based upon the affidavit of Martin Ginsburg, a principal of Sponsor:

Ginsburg avers that he was involved in obtaining the municipal approvals for the construction of the Condominium and in preparing the Offering Plan.  He reviews the disclosure found in the Offering Plan concerning the transaction, as indicated by Plaintiff in its moving papers, and further attaches the budget for the Condominium which was made part of the Offering Plan.  The budget "specifically included a line item for debt service of the Note and one of the Footnotes to the Budget...explained the terms of the Note and the documents to be executed in connection therewith"...He further points out that each unit owner had to indicate his/her willingness and consent to accept title to his other unit subject to the terms of the Offering Plan...

To support the position that the Promissory Note was supported by consideration, Ginsburg explains that ordinarily condominiums are taxed pursuant to RPL ... 339-y as though they are rental buildings with valuations based on assumed rental income, thereby resulting in assessed valuations lower than the assessed valuations that would apply to comparable single-family homes.  Ginsburg states that the Village of Pelham adopted the Homestead Tax Option under Section 1903 of the New York Real Property Tax Law ("RPTL") and, under this legislation, the units in the Condominium were going to be taxed at full market value and "the sales price of each unit would function as the basis for determining the market value of that unit for tax assessment purposes"...Ginsburg avers that this situation was explained in the Offering Plan and in a tax opinion by the Albert Valuation Group...which was submitted with the Offering Plan to the Attorney General's office.

According to Ginsburg, when he received the estimate of the real estate taxes, it was so "astonishingly high" that "the Sponsor withdrew the then pending Offering Plan for the Condominium and...prepared and submitted to the Attorney General's office an offering plan for cooperative ownership" because a cooperative ownership would allow the building to be treated as a rental building for tax purposes and avoid the "harsh" tax consequences of the Homestead Tax Option...

But, Ginsburg says, when the Village of Pelham got wind of the contemplated change from condominium to cooperative ownership, and the consequent lowering of the prospective tax revenues from the project, the Village threatened to rescind its approvals if the Sponsor moved forward with its plan to change to cooperative ownership.  To avoid a fight with the Village and risk delays in construction and completion of the building, the Sponsor reverted to its condominium plan.  But, as Ginsburg expressly admits, this meant that the Sponsor would reduce the sales prices on which the assessed valuations would be based.  Ginsburg explains this as a means to lower the tax burden on the Unit Owners.  In reality, this was undoubtedly an effort to make the units more marketable.

While the Sponsor was willing to lower the sales price, it was not willing to forego the loss of the sales revenue.  After exploring various options for recouping the lost sales revenue (such as a flip tax and making the garage a separate condominium unit that the Sponsor would keep and lease to the Condominium), the Sponsor decided to take back the $2.2 million Promissory Note and, further, to require Unit Owners to lease at least one parking space in the garage to the Condominium and use the rent to pay the debt service on the Note.  Additionally, the Condominium was to receive a fee for the use of its recreational facilities by a separate condominium also being developed by the Sponsor...

As support that this was the purpose behind the Promissory Note, Ginsburg attaches correspondence during this time frame which shows how this idea evolved...

Ginsburg claims that these facts were fully disclosed in the budget and the footnote to the budget in the Offering Plan, which made clear that the annual revenue from both would be over $112,000 a year —  enough to cover the debt service on the Promissory Note...He avers that this information could not have been included in the Offering Plan because the information would then have been used by the Village of Pelham to include the amount of the Note in determining the assessed values of the units, which would have defeated the purpose behind the Promissory Note...

As to the Board of Managers contentions with respect to RPL § 339-jj, Supreme Court wrote:

Plaintiff's President ... argues that the net effect of the Promissory Note and Security Documents is that defendants placed "an illegal mortgage on the property [and] asserts the Promissory Note and Security Documents are illegal because "[t]he only authority for a board of managers of a condominium to borrow money and incur debt, including the authority to assign common charges to secure such borrowing, is derived from Section 339-jj of the Real Property Law (RPLR 339-jj)" and "[u]nder RPL 339-jj, a condominium board of managers has authority to borrow on behalf of a condominium only where either the condominium declaration or by-laws expressly provide that such borrowing power exists or, beginning five years after the conveyance of a condominium unit, for certain statutorily-enumerated purposes"...

It is Plaintiff's position that the legislative history behind RPL § 339-jj shows that it was intended to limit the authority of a Condominium Board to borrow money secured by the assets of the Condominium and the statute does not permit the Sponsor Board "to authorize the Promissory Note secured by an assignment of common charges at any time, much less a time when it was under sponsor control"[.]

And, as to Sponsor's response, Justice Scheinkman wrote:

Defendants argue that RPL § 339-jj was never intended to apply to a situation such as this one where the Promissory Note and Security Documents were fully disclosed and each unit owner consented to the Promissory Note and Security Documents when they signed the purchase agreement.  Indeed, Defendants argue that such application would be contrary to the legislative history since its purpose was described as providing "assistance to condominiums by allowing a board of managers to borrow for capital purposes subject to safeguards for the protection of the affected unit owners" and that by vesting such power in the Board of Managers by allowing the unit owners to limit or prohibit the board's authority to borrow in the declaration of the condominium, owners would be protected from "improvident borrowing"...Defendants also point to the Bill's Sponsor's description of the Bill's purpose as providing statutory authority for condominiums to borrow for capital purposes from institutional lenders (thereby encouraging lenders to lend) while protecting unit owners by allowing them to prohibit borrowing in the condominium documents...Defendants argue that it is evident that the legislation was intended to address circumstances that do not exist in this case since the Unit Owners each consented to the debt before purchasing their units.

Supreme Court found the promissory notes and security documents to be in violation of RPL § 339-jj and unenforceable on the facts:

In this circumstance, the Sponsor caused the Condominium to incur $2.2 million in debt so that the Sponsor could recoup the sales proceeds that the Sponsor lost as a result of the Sponsor's decision to reduce the sales price of the units in order to lower the tax assessments for the units.  Put another way, the Unit Owners were required to pay additional consideration for their purchase of their units through a compelled indirect financing mechanism under which the Sponsor would get more money for selling the units through a purported parking lease.  Not only is a borrowing by the Condominium for the purpose of financing the acquisition of units, or for the purpose of creating an artificially low sales price for real estate tax purpose, not a borrowing within the scope permitted by the statute, but the borrowing occurred within the first five years of the Condominium.

The Court does not accept Defendants' argument that the Unit Owners benefitted from the reduction in sales price; the reduction was entirely illusory in that it was going to be recouped, at least to a significant extent, by the Sponsor's requirement that each Unit Owner lease a parking space and that the revenues generated by these leases be used to pay off the Promissory Note.  Indeed, the decision to initially reduce the sales price and then make up for the reduction with the Promissory Note was entirely premised on the need for the Sponsor to recoup the profits it lost upon its decision to reduce the basis on which the units would be taxed.  The Sponsor chose this route so as to avoid having to follow the legitimate (but more difficult) route of changing to a cooperative plan and obtaining all new approvals.  While the Court appreciates the Sponsor's bluntness, it cannot turn a blind eye to it.  Moreover, if the Sponsor had simply reduced the sales price and left it at that, the unit Owners would have benefitted from the lower prices (and the truly appropriate lower taxes) but the Sponsor would have lost profits.  Borrowing by the Condominium in order to line the Sponsor's pockets is simply not within the scope of the limited purposes allowed by RPL § 339-jj and certainly not within the contemplation of the legislative drafters, sponsors and advocates.

To the contrary, it appears that the present situation involves an effort by a Sponsor to "hide a sin", as was feared by some at the time the legislation was being considered.  While the fact of the borrowing was disclosed, the purpose of the borrowing was not.  Nowhere were purchasers informed that the borrowing plan was devised as a means by which the Sponsor could recoup the profits lost by purchase price reductions made in order to artificially achieve lower realty taxes.  Putting it another way, the unit purchasers were not informed that they were being required to pay rent for parking spaces, which parking was originally intended to be free of charge, so that the Sponsor could receive more money on account of its sale of the units.  Nor were they informed of any risks that the Village might seek to increase their taxes if it found out that the sales price had been reduced by this stratagem.

and the law –

"[C]ontracts which violate statutory provisions are, as a general rule, unenforceable on public policy grounds where the statute which is violated is enacted to protect the public health and safety...or where the statute's purpose [is] the protection of public...morals or the prevention of fraud"...Thus, "a party to an illegal contract cannot ask a court of law to help him carry out is illegal object...No one shall be permitted to profit by his own fraud...or to found any claim upon his own inequity"...

Here, it is clear that RPL § 339-jj was enacted to protect condominium unit owners from unscrupulous sponsors by ensuring that they have a say in the condominium's borrowing by requiring that the authority of the condominium board to borrow be set forth in the Declaration or By-Laws, by requiring that any such borrowing be delayed for a period of five years, and that it be approved by a majority of the Unit Owners.

And focusing on Sponsor's conduct, Justice Scheinkman concluded that:

The improper purpose behind the Promissory Note and the Security Documents is not lost on this Court and if this Court were to enforce the Promissory Note and Security Documents under such circumstances, it would run counter to the public policies underlying RPL § 339-jj and as well as generally equitable principles.

Accordingly, because RPL §§ 339-jj was enacted to encourage borrowing to fund capital projects while at the same time protect unit owners from borrowing undertaken by Sponsor-dominated boards who were not given express authority to borrow in the Declaration or By-Laws, the Court shall not enforce the Promissory Note and Security Documents and shall declare the Promissory Note and Security Documents void as violative of RPL §§ 339-jj...

(iv)

Defendants moved to reargue and to renew and Supreme Court, as follows, denied Defendants' motion:

With respect to the reargument aspect of the present motion, Defendants' new counsel presents only a rehash of arguments that were raised on the original motion by Defendants' prior counsel.  These arguments were fully considered, and not overlooked, in the deliberations leading to the Prior Decision and Order.  It is well settled law that a motion for reargument is "not to serve as a vehicle to permit the unsuccessful party to argue once again the very questions previously decided"...Defendants have failed to establish that the Court misapprehended or overlooked the facts or misapplied the law, or for any other reason, mistakenly arrived at its determination to the extent reargument is sought.  Accordingly, Defendants' motion to reargue will be denied.

(v)

On August 22, 2012, the Second Department affirmed Justice Scheinkman's decision in a clear and concise Decision and Order.

The first paragraph described the appeal:

In an action, inter alia, for a judgment declaring that a certain promissory note and related documents are illegal, invalid, and/or otherwise unenforceable, the defendants appeal, as limited by their brief, from so much of an order and judgment (one paper) of the Supreme Court, Westchester County (Scheinkman, J.), dated September 22, 2010, as granted those branches of the plaintiff's motion which were for summary judgment declaring that the subject promissory note and related documents are illegal, invalid, and/or otherwise unenforceable and on the cause of action for injunctive relief, declared that the subject promissory note and related documents are illegal, invalid, and/or otherwise unenforceable, and awarded the plaintiff certain injunctive relief.

And the second paragraph resolved the appeal:

In opposition to the plaintiff's prima facie showing of entitlement to judgment as a matter of law, the defendants failed to raise a triable issue of fact...Contrary to the defendants' contention, the Supreme Court correctly determined that the subject promissory note was made in violation of Real Property Law § 339-jj(1)...and that, under the circumstances of this case, the promissory note and related documents are unenforceable[.]

The Second Department denied Defendants' motion to reargue and/or for leave to appeal to the Court of Appeals.  And the Court of Appeals thereafter denied Defendants' application for leave to appeal thereto.

ACT III

Subsequent Proceedings

(i)

Upon the Board's motion, Justice Scheinkman summarily dismissed Defendants' purported affirmative defenses, including the Second Affirmative Defense based on the statute of limitations:

Defendants' 15 affirmative defenses require little discussion.  To the extent that the affirmative defenses seek to avoid invalidation of the Note, the Court has already found the Note to be unenforceable.  In any event, the affirmative defenses are so lacking in merit as to render extended analysis of them unnecessary.  For example, the Fourth, Fifth and Sixth Affirmative Defenses assert the commission of "culpable conduct" of Plaintiff, its unit owners, or third parties, a tort concept and there is no basis for imputing any culpable conduct to Plaintiff for the invalidity of the Note, which was prepared by the developer.  The unit owners have not been made parties to the action and no third parties have been joined either.  The Second Affirmative Defense asserts the statute of limitations, though the Note has already been invalidated and there is no apparent time bar.  Defendants also claim that the action should be barred by "caveat emptor", though, again the Note has been invalidated.  Accordingly, the Court shall dismiss all of the Defendants' affirmative defenses.

(ii)

Supreme Court concluded that Defendants lacked standing to assert their purported First Counterclaim for "unjust enrichment":

Defendants' First Counterclaim asserts that, as consideration for conveying the common areas of the Condominium, including the parking garage, the Sponsor required execution and payment of the Note.  Defendants assert that if the Sponsor had known that the Note was invalid, it would not [have] conveyed the garage to Plaintiff.  Thus, Defendants allege that because of a "technical oversight" Plaintiff will reap an "unconscionable windfall", that is, the retention of ownership of the garage and continued receipt of parking, recreation and storage fees, to the detriment of Defendants.  According to Defendants, "[a]llowing Plaintiff to retain the benefits provided by [Sponsor] would be inequitable and unjust"...As a remedy, Defendants seek the recovery of "substantial damages"...in an amount to be established at trial, together with interest, costs and attorneys' fees[.]

Plaintiff moves for summary judgment dismissing all counterclaims.  Defendants move for summary judgment in their favor as to liability on the First Counterclaim.

Defendants' argument is that, to establish unjust enrichment, they must show:  (1) that Plaintiff was enriched; (2) that the enrichment was at Defendants' expense; and (3) it is against equity and good conscience to permit Plaintiff to keep what is sought to be recovered...They claim that all of these elements are present and, in fact, have been established by them.  Naturally, Plaintiff asserts that none of these elements has been established and that, as a matter of law, the First Counterclaim must fail.

The Court accepts the argument of Plaintiff that neither Defendant has standing to present a claim of unjust enrichment.  The Sponsor (MC LLC) assigned the Note to Holdings LLC by instrument dated April 1, 2009 and recorded by the County Clerk on June 3, 2009.  Defendants' answer concedes that MC LLC "assigned its interest in the Note to...Holdings [LLC], for valuable consideration"...The assignment occurred prior to the commencement of this litigation on December 19, 2009.  While the nature and amount of the consideration transferred by Holdings to MC LLC in exchange for the assignment to Holdings of the Note is not disclosed, the Court is required to accept Defendants' judicial admission that the consideration was "valuable...Whatever consideration MC LLC received from Holdings, it received at the time of the assignment in April 2009, long before any unjust enrichment of Plaintiff occurred by virtue of the invalidation of the Note.  Since MC LLC had already gotten whatever consideration it was entitled to from Holdings and had effectively passed the Note along to Holdings, there is no basis to conclude that its entitlement was diminished on account of the invalidation of the Note at time after MC LLC had already parted with it.  In short, MC LLC has not shown that the invalidation of the Note, after MC LLC had already given it up in exchange for valuable consideration, caused MC LLC any damages.

Stated another way, the heart of the unjust enrichment claim is the allegation that if MC LLC "had known that the Note was or would be alleged to be invalid, it would not have conveyed title to the garage" to Plaintiff...But, since MC LLC had already conveyed its interest in the Note to Holdings several months before the validity of the Note was called into question and since MC LLC received "valuable consideration" for its transfer of the Note to Holdings, the subsequent invalidation of the Note makes no difference to MC LLC's rights in the matter.  In any event, MC LLC has not articulated any plausible reason for it having standing to pursue the claim of unjust enrichment.

Defendants' argue in their memorandum of law that they do not seek to enforce the Note but seek equitable relief...This is not correct in relation to the First Counterclaim in that, while Defendants are not seeking to enforce the Note, they are seeking money damages.  Standing is claimed to exist because "if Plaintiff is permitted to retain title to the garage and the income from it without compensating Sponsor [MC LLC], then Sponsor will incur a significant forfeiture"...for which Defendants want compensation.  The problem with this argument is that MC LLC was already compensated for the Note by Holdings at the time of the assignment.

As to Holdings, while it holds the beneficial interest in the Note (the assignment to the Bank being for collateral purposes only), and it has sustained a cognizable economic loss from the invalidation of the Note, Holdings never had title to the garage, only the right to get paid on the Note.  Accordingly, it cannot be said that Holdings would only have transferred the garage (which it never owned) to Plaintiff but for the Note.

Moreover, the loss sustained by Holdings was the amount of the consideration transferred by it from MC LLC.  Holdings never claimed to be holder in due course of the Note and, to the extent that it is trying to assert that it was deprived of the value of the Note, it cannot seek to revive the invalidated Note by claiming "unjust enrichment."

(iii)

The Offering Plan contained the following provision:

Severability.  If any provision of this Agreement or the Plan is invalid or unenforceable as against any person or under certain circumstances, the remainder of this Agreement of the Plan and the applicability of such provision to other persons or circumstances shall not be affected thereby.  Each provision of this Agreement or the Plan, except as otherwise specifically set forth herein or in the Plan, shall be valid and enforced to the fullest extent permitted by law.

Based upon the "severability" clause, Supreme Court concluded that:

Even if it is assumed that the payment of the Note was [an] integral part of the Offering Plan, the subsequent invalidation of the Note does not affect the portion of the Plan pursuant to which the parking garage was designated as part of the common elements.  While the Note was held invalid, the balance of the Offering Plan was not affected.  Pursuant to the terms of the Offering Plan, it was subject to amendment and the invalidation of the Note may be regarded as bringing about, in effect, an amendment to the Offering Plan.  Further, pursuant to the purchase agreements, the invalidation of part of the Plan, if the Note is so regarded, does not affect the validity of the balance of the Plan, including the definition of the common areas.

(iv)

And, in any event, the I.A.S. Court rejected Defendants' unjust enrichment claim for three material and dispositive reasons:

First, it cannot be said that Plaintiff has been enriched by its continued ownership of the parking garage.  The parking garage was, under the terms of the Offering Plan and of the purchase agreements, to be owned by Plaintiff along with all of the other common elements.  The unit purchasers each paid for an undivided interest in the common elements, including the parking garage.  While it is true that Plaintiff (and its unit owners) are no longer burdened by the obligation to pay the Note, that does not enrich them – it means that Defendants' effort to recoup the profits [was] lost when the Sponsor decided to reduce the basis on which the units would be taxed...To the extent that it could be said that the unit owners benefitted from an "artificially low sales price" set for real estate tax purposes...the unit owners are not themselves parties to this action and, in any event, neither they nor Plaintiff can be said to be "enriched" by being rid of an obligation not properly imposed upon them.

Second, it cannot be fairly said that any enrichment was at defendants' expense.  As recounted in the September 2010 Decision, the Sponsor chose to try  recoup the profits lost upon its decision to reduce the basis on which the units would be taxed rather than embark on the legitimate but more difficult path of changing to a cooperative plan and obtaining new approvals...Additionally, as Plaintiff points out with considerable force, the real estate tax issue is directly related to the pricing that MC LCC was setting.  In the original Offering Plan dated March 30, 2004, MC LC was seeking gross sales proceeds of $31,452,000; under a First Amendment dated June 3, 2004, the gross sales proceeds were increased to $37,742,640; and under a Second Amendment of June 24, 2004, just a few weeks after the First Amendment, the gross sales proceeds were increased to $45,294,168...While Defendants may stand to lose $2.2 million in profits, Defendants have not shown that this loss was actually at their expense.  The construct is that Defendants developed this plan because, if they actually charged the prices they wanted in order to obtain the desired profits, the real estate taxes would have been higher, and the units would not have been marketable.

Defendants' theory has consistently been that the Sponsor would not have given Plaintiff title to the parking garage but for the Note and would have instead retained title and leased the parking spaces or sold the parking spaces to unit owners...However, there is no evidence to show that had Defendants retained the garage, they would have been able to either:  (a) market the units subject to a requirement that unit owners must lease or purchase parking spaces from the Sponsor at particular prices; or (b) market the units without including the parking garage in the common areas; or (c) lease the spaces to anyone else at a profit, bearing in mind that the Sponsor, if had retained the garage, would also have retained all responsibility and liability for the garage.

The third factor in unjust enrichment is that it must be shown that it is against equity and good conscience to permit the defendant to retain what is sought to be recovered.  Here, Defendants have not shown that it is against equity and good conscience to permit Plaintiff to retain the parking garage (or its economic value), which Defendants seek to recover.  The plan all along was for the parking garage to be part of the common elements held by Plaintiff and in which all unit owners have an undivided interest.  Defendants should not be permitted to circumvent the economic consequences of the invalidation of the Note (which was brought about by Defendants' failure to comply with the law) by claiming unjust enrichment.  Such a result would...itself be unjust in that it would deprive unit owners, who are not individually parties here, of their undivided interest in the garage (or its economic value).

Supreme Court addressed Defendants' claim that Sponsor was entitled to certain equitable offsets "for parking, storage and recreation fees" against the amounts claimed by the Board:

Defendants also argue that they should receive a credit for $701,190.00 for parking, storage and recreation fees paid to Plaintiff, which monies Plaintiff would not have received but for the Note...Defendants' theory is that the Sponsor provided Plaintiff with sufficient revenues from the parking, storage and recreation fees to enable it to pay the Note; the point being that the Sponsor would not have turned these fees over to Plaintiff had the Sponsor not created the Note...The Court does not agree with Defendants' theory.

As to the parking fees, Justice Scheinkman held:

This Court has already concluded that the Note was brought into being as a vehicle to give the Sponsor the profits the Sponsor lost by virtue of the Sponsor's decision to reduce the sales prices of the units in order to lower the tax assessments for the units.  While the Court was originally inclined to perceive that Defendants were entitled to a credit for parking fees paid by unit owners, the Court, having carefully reviewed its prior determinations, the Appellate Division decision, and submitted papers, concludes that Defendants are not entitled to any offset for parking fees paid by unit owners[.]

To allow Defendants to obtain a credit for the $631,665.76 in parking fees paid between 2005 and 2010 would permit them to gain at least part of the profit that they were seeking to obtain via the now-invalidated Note.  The parking fees were put into place by the Sponsor so that it could extract profit through the revenue stream created by the mandatory parking lease and parking fee requirements.  Having concluded that the Note is unenforceable, the Court cannot permit Defendants to receive any benefit from the parking fees actually paid, given the Court's prior and affirmed determination that but for the Note, the parking would have been free of charge.

Upon Defendants' motion to reargue, Supreme Court stated:

Defendants contend that this Court overlooked or misapprehended the merit to their statute of limitations affirmative defense.  This Court disagrees.  Most important, the Court states, again, that the subject Note was found to be invalid and unenforceable by this Court by Decision and Order entered September 23, 2010, which Order was affirmed by the Appellate Division, Second Department, on August 22, 2012.

While it may be that Defendants did not raise the issue of statute of limitations in their defense of the validity of the Note, they do not get to try again since the invalidity of the Note has already been established by this Court and by the Appellate Division.  Thus, regardless of the merit of the statute of limitations argument (and the Court does not perceive that it has any merit), Defendants may not raise a new argument as to liability in the context of Plaintiff's efforts to establish damages[.]

(v)

Defendants appealed and, upon the appeal raised only three discrete "issues":  (i) whether the Court below erred in holding that statute of limitations in CPLR § 214(2) did not apply to the Board's Third Cause of Action for restitution; (ii) whether Supreme Court properly granted summary judgment dismissing Defendants' counterclaim for unjust enrichment; and (iii) whether the I.A.S. Court properly held that Defendants could not claim an equitable offset for parking fees.

Defendants abandoned all other claims and affirmative defenses on the second appeal.  Specifically, on the second appeal, Defendants did not contest the I.A.S. Court's dismissal of Defendants' counterclaims for imposition of a constructive trust, reformation by mutual mistake, reformation by unilateral mistake, specific performance and equitable estoppel.  In addition, on the second appeal, Defendants abandoned all of their affirmative defenses, except for Defendants' claim that the statute of limitations of CPLR § 214(2) purportedly barred the Board's Third Cause of Action for compensatory damages.

(vi)

Did the Court below properly dismiss Defendants' Second Affirmative Defense that the Board's Third Cause of Action was barred by CPLR § 214(2)?

Upon the second appeal, the Appellate Division concluded that:

Contrary to the appellants' contention, under the circumstances of this case, the Supreme Court properly granted that branch of the plaintiff's motion which was for summary judgment dismissing their affirmative defense based on the statute of limitations[.]

(vii)

Did Supreme Court properly deny Defendants' motion for summary judgment based upon unjust enrichment?

Upon the second appeal, the Second Department concluded that:

Also contrary to the appellants' contention, the Supreme Court properly granted that branch of the plaintiff's motion which was for summary judgment dismissing their counterclaim to recover damages for unjust enrichment.  In particular, because this Court previously determined that the appellants have unclean hands...their counterclaim to recover damages for unjust enrichment is barred[.]

(viii)

Did the I.A.S. Court properly rule that Defendants could not claim the parking fees as an equitable setoff from the amount that Defendants owed to the Condominium?

And, upon the second appeal, the Appellate Division concluded that:

The appellants' remaining contention [with respect to the parking fees] is without merit.

The Second Department denied Defendants' motion to reargue and/or for leave to appeal to the Court of Appeals.  And the Court of Appeals thereafter denied defendants' application for leave to appeal thereto.

Epilogue

Almost a decade after the Note was signed – and after more than five years of litigation in the Supreme Court, the Appellate Division and the Court of Appeals – the curtain finally came down in our "Cond-Opera".

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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