The Court of Appeals of the State of New York, in the case of 511 West 232nd Owners Corp. v. Jennifer Realty Co. by decision dated June 11, 2002, upheld the Appellate Division's ruling concerning a cooperative's claim of a sponsor's obligation to sell apartments in a building converted to cooperative ownership.
The gist of the State's highest Court's ruling is that cooperators may maintain an action against the sponsor for failure to sell its units based upon a breach of contract claim. The Court took pains to be clear that it was not ruling upon the merits of the claim, but instead ruled that the plaintiff had sufficiently pleaded a cause of action based upon a breach of contract theory. The Court left the actual merits of the claim for the fact finder to ascertain at trial.
The appeal was from an August 9, 2001 ruling of the Appellate Division, 1st Department, of the Supreme Court of the New York. The Appellate Division upheld the right of the Apartment Corporation (and six shareholders) to maintain a cause of action against the sponsor for breach of implied contract on account of the sponsor's failure to sell its unsold units within a reasonable time. The case was sent back down to the trial court to determine the "reasonableness" of sponsor's efforts to sell its unsold units (the sponsor in this case held on to more than 60% of the units for more than 10 years after the conversion of the building to cooperative).
The Court reasoned that the sponsor, by virtue of the filing of its offering plan, had made an implied contract to diligently market and dispose of its units as soon as circumstances permitted. The downturn in the market did little to alter the sponsor's obligations to sell its units. The Court was mindful of the difficulties facing cooperatives with sponsor's owning a substantial number of units, thereby impacting upon its ability to secure underlying mortgage financing and the difficulties facing shareholders with apartment unit financing and sales.
Another issue that remains after the high court decision is what constitutes a "viable cooperative" and at what point has a sponsor sold enough of its apartments to satisfy any obligation it might have.
There promises to be more litigation on this volatile issue and many of the practical details have yet to be worked out by the courts. If you have further questions concerning this issue, you may contact Stephen W. O'Connell in our Real Estate Department to schedule an appointment.
