DEFENDANT'S REPLY MEMORANDUM OF LAW

POINT I

THE NUMBER OF UNITS COOPERATIVE UNITS SHOULD BE
DETERMINED BY REFERENCE TO THE COOPERATIVE DOCUMENTS
NOT BY THE SPONSOR WHOSE ABUSES ARE THE SUBJECT OF THIS ACTION

The Sponsor's argument that the number of units in the Cooperative is fixed by the Sponsor itself on the date of conversion is based on two erroneous premises. First, that the Cooperative Documents do not show that apartment units have been combined. Second, that the Act grants the Sponsor the authority to fix the number of units in the conversion project as of the date the Cooperative is initially formed.

The Sponsor when it contends that units should be determined by reference to the "cooperative documents" as expressly provided for in 15 U.S.C. § 3603(12). We agree. The Abuse Relief Act does not contemplate, however, as the Sponsor argues, that the number of units should be determined by some unspecified uniform Federal standard. On the contrary, the Act contemplates that the Cooperative's governing documents - all of which are creatures of state law - will be the determinative factor. In this regard the following facts are established:

The Sponsor seeks to overcome these indisputable facts by reliance on its own inaccurate Offering Plan and the failure of its own Managing Partner, wearing the hat of the Cooperative's managing agent, to conform the Cooperative's stock records to reflect the combinations approved by the Cooperative's Board of Directors. The errors in these documents, however, do nothing more than prove that the Sponsor violated both the duties imposed by law on persons making public offerings of real estate securities, and the contractual and fiduciary duties of the Cooperative's managing agent.

POINT II

THE SPONSOR MAY NOT RELY ON ITS OWN FAILURE TO OBEY THE
REQUIREMENTS OF ARTICLE 23-A OF THE NEW YORK GENERAL BUSINESS LAW,
A DISCLOSURE STATUTE MEANT TO PROTECT THE PUBLIC AGAINST FRAUD

Article 23-A of the New York General Business Law (the "Martin Act") governs the offer and sale of securities in and from New York State. Section 352-e of that article authorizes the Attorney-General to require sponsors of real estate syndication offerings to file an offering plan prior to selling or offering for sale real estate securities, including cooperative interests in realty (see, General Business Law § 352-e[1][b] [6] ). The statute provides that the offering plan must include the detailed terms of the transaction "and such additional information as the attorney general may prescribe in rules and regulations." As described by the Appellate Division of the Supreme Court, First Department:

Phoenix Tenants Ass'n v. 6465 Realty Co., 119 A.D.2d 427, 429, 500 N.Y.S.2d 657, 659 (1st Dep't 1986). (Emphasis added.) To implement the statutes' purpose of preventing fraud by those making pubic offerings of securities "the Attorney General is authorized under subparagraph 6 of section 352-e to adopt regulations governing the contents of the offering statement." East End Owners Corp. v. Roc-East End Associates, 128 A.D.2d 366, 369, 516 N.Y.S.2d 663, 664 (1st Dep't 1987).

Simply put, the Martin Act imposes upon a cooperative sponsor the obligation to make full and complete disclosures of all material facts [1] in the offering plan. It, self-evidently, does not grant the Sponsor the right to conceal material facts, and, by so doing, claim that such facts do not exist. Accordingly, to the extent that the facts were material, the Sponsor had the obligation to disclose the combinations of apartments shown in the Cooperative's records and those of the New York City Department of Buildings. The Sponsor may not bootstrap its failure to make such disclosures into a purported right to fix the Cooperative's units at an artificial number unrelated to the truth.

Similarly, the Sponsor should not be able to avoid the reach of the Abuse Relief Act because its Managing Partner, in his capacities as managing agent, transfer agent and sometimes attorney of the Cooperative, failed to update the corporate stock records to conform to the unit combinations that had indisputably occurred. Mr. Newman's company, Kenneth B. Newman Realty Corp., as managing agent was responsible for the maintenance of the other corporate records. (See Managing Agent's Contract, ¶¶ (m) and (r), copy attached as Exhibit A to the Reply Affidavit of Mark Lilien.) As transfer agent, his company was responsible for implementing the transfer of Cooperative units. As principal of the Sponsor, Mr. Newman was responsible for the making the disclosures required by law in the form of a Cooperative Offering Plan with periodic amendments to insure continuing completeness and accuracy of the disclosures. As attorney, Mr. Newman would frequently provide the Board of Directors with legal advice concerning corporate affairs. (Reply Affidavit of Mark Lilien at ¶ 5.) If the stock records should have been corrected, it was Mr. Newman's responsibility to do so and his failure in this regard was a breach of both his contractual and fiduciary duties. (See Managing Agent's Contract, ¶¶ (m) and (r), Exhibit A to Reply Affidavit of Mark Lilien.) Such misfeasance is no evidence at all of any intent that the units in question not be combined.

POINT III

THE ABUSE RELIEF ACT DOES NOT GRANT THE SPONSOR THE
RIGHT TO DETERMINE THAT THE NUMBER OF COOPERATIVE
UNITS WILL BE COUNTED ONLY AT THE TIME OF CONVERSION

As we have already shown, the Abuse Relief Act expressly defines "cooperative unit" by reference to the "cooperative documents." 15 U.S.C. § 3603(12). We have also shown that the Cooperative By-laws expressly provide for the combination or subdivision of cooperative units. (See Article 5, Section 4 of the Cooperative's By-laws ("Regrouping of Space"), Exhibit A to Defendant's Notice of Cross Motion.) We do not dispute that the Sponsor and the other holders of Unsold Shares also have the right to combine or subdivide units without Board permission. (Id.) We also acknowledge that, as quoted by the Sponsor at page 11 of its Reply Memorandum, 15 U.S.C. § 3603(14) includes in its definition of successor developers those persons who have the right to "add, convert, or withdraw real estate from the cooperative or condominium project . . . ."

There is nothing in the language of any of the cooperative documents, or in § 3603(14) that states or implies that the number of units is fixed, at the Sponsor's sole discretion, as of the time the Cooperative was formed. Indeed, the language of 15 U.S.C. § 3603(14) shows that the Abuse Relief Act contemplates that the number of units may fluctuate over time. This is confirmed by the language of § 3603(7), which defines the term "conversion project," and §3603(12), which defines the term "cooperative unit," both of which speak in the present tense. (See 1 U.S.C. § 1.) ("In determining the meaning of any Act of Congress, unless the context indicates otherwise . . . words used in the present tense include the future as well as the present . . . .")

But far more important than any arcane rules of grammar is the fact that the Abuse Relief Act contemplates that "the clock started to run on the owners' right to act," not at the earliest possible date as the Sponsor claims, but, rather, "only after developers no longer had the ability to control the owners" organization." Darnet Realty Associates, LLC v. 136 East 56th Street Owners, Inc., 153 F.3d 21, 25 (2d Cir. 1998). Such loss of control can occur in two ways: "through the statutory concept of special developer control or through what could constitute practical working control via sheer force of numbers.." (Id.) (Emphasis added.) To allow the person whose abuses the Act is meant to correct to control these numbers would fly in the face of the Act's consumer protection purpose. Surely, Congress did not intend to set the fox to guard the henhouse.

There is nothing in Board of Managers v. Infinity Corp., 21 F.3d 528 (2d Cir.1994) to the contrary. In Board of Managers, the sponsor retained ownership in fee of the garage space. The condominium association had no interest in that space, and, therefore, no right to interfere with its operation. Explaining the distinction, the Second Circuit stated:

Id. at 533 (citations omitted). Thus, Board of Managers stands only for the proposition that the Abuse Relief Act does not prevent sponsors from retaining fee ownership of a portion of a converted building.

POINT IV

THE LOMANTOS AND THE IWANCZUKS ARE
DEVELOPERS WITHIN THE MEANING OF THE ABUSE RELIEF ACT

The Sponsor's claim that the Lomantos and the Iwanczuks are not "Successors" to the Sponsor within the meaning of § 3603(14) of the Abuse Relief Act because they each owned only a single unit fails as a matter of simple statutory construction. 1 U.S.C. § 1 provides in relevant part:

Here the context indicates that Congress was using the singular and plural interchangeably. This is evident from the fact the "successors" defined in § 3603(14)(B) succeed to the "developers" defined in § 3603(14)(A) as selling only a single unit. ("'developer' means (A) any person who offers to sell or sells his interest in a cooperative or condominium unit not previously conveyed . . . .") (Emphasis added.)

The Sponsor's remaining argument that the Lomantos and the Iwanczuks did not have the right to maintain a sales office or management office is simply false. The Sponsor's Offering Plan provides in relevant part: "A holder of Unsold Shares may use apartments for models or offices . . ." (See Offering Plan, p. 43 third full paragraph, Exhibit D to Defendant's Notice of Cross Motion. The Lomantos and the Iwanczuks also had all the rights of Special Developer Control summarized at page 7 of Defendant's initial Memorandum of Law.

The Sponsor does not dispute that the Lomantos and the Iwanczuks held themselves out as holders of Unsold Shares for twelve and fifteen years respectively, and had access to all the rights of holders of Unsold Share during that time. Instead, the Sponsor claims that they were not really holders of Unsold Shares because they failed to comply with all of the Department of Law's regulations governing such holders. Again the Sponsor seeks to shield himself from the reach of the Abuse Relief Act by his own wrongdoing. Once designated by the Sponsor as holders of Unsold Shares[2], the Lomantos and the Iwanczuks were able to incur substantial savings, and deprive the Cooperative of considerable revenues by subletting their units without the permission of the Board and by avoiding the paying of sublet fees. (See Reply Affidavit of Mark Lilien at ¶¶ 37-40.) These privileges are afforded only to holders of Unsold Shares. (See Proprietary Lease ¶ 38(b), and Offering Plan, p. 43a, Exhibits B and D to Notice of Cross Motion.)

Conversely, the Sponsor can point to no authority or policy that would allow the holders of Unsold Shares, and the Sponsor who procured them, to avoid their obligations on the basis that the holders of Unsold Shares violated the law.

POINT V

THE LOMANTOS AND THE IWANCZUKS HAD THE POWER
TO VETO ANY CHANGES TO THE COOPERATIVE'S BY-LAWS

Given the bundle of rights afforded holders of Unsold Shares, there can be no reasonable dispute that the Cooperative's governing documents were drafted by the Sponsor "in such a way as to retain significant clout over [the Cooperative's] affairs." Darnet Realty Associates LLC v. 136 East 56th Street Owners, Inc. 214 F.3d 79, 83 (2d Cir. 2000). Nor can it be doubted that these rights considerably exceed those retained by the sponsor in Barnan Assoc. v. 196 Owner's Corp., 797 F. Supp. 302 (S.D.N.Y.), which were limited to control of general maintenance expenses. In contrast, among other powers, the Sponsor and other holders of Unsold Shares here have been given the absolute power to veto any changes to the Cooperative's By-laws. Article 10 Section 3 of the By-laws (Exhibit A to Defendant's Notice of Cross Motion) provides:

The Sponsor attempts to escape the import of this provision by arguing "that the restriction of the second sentence of §10(3) . . . is merely a mechanism to prevent repeal of the By-Laws set out in the first sentence. (Sponsor's Reply Memorandum Of Law at p. 27.)

The Sponsor's Managing Partner is a sophisticated real estate developer and an experienced attorney. His argument is a deliberate attempt to obscure the plain meaning of the By-law provision drafted by Sponsor. Far from modifying each other, the two sentences serve separate and distinct functions. The first sentence protects the Sponsor as a lender where he has given a buyer purchase money financing. Significantly, this protection arises in circumstances where the Sponsor no longer owns the shares, but has transferred them to third parties. Moreover, the protection continues for as long as the Sponsor's security interest exists, even after Sponsor no longer owns a single share.

The protections afforded by the second sentence apply to holders of Unsold Shares, including Sponsor, as owners. In direct contrast to the rights given by the first sentence, the veto power given by the second sentence ends when all Unsold Shares have been sold.

The protections given to the Sponsor as lender and to all holders of Unsold Shares as owners also differ in substance. As to the Sponsor as lender, the Cooperative is prohibited from changing the By-laws to prejudice the Sponsor's interests in "any shares and accompanying proprietary leases that may have been pledged . . . ." In contrast, the holders of Unsold Shares are provided with an absolute right to veto any change to the By-laws. The Sponsor's argument ignores these obvious distinctions, is disingenuous and should be dismissed out of hand.

POINT VI

THE GARAGE IS PROPERTY SERVING THE COOPERATIVE UNIT OWNERS

The Sponsor's argument that the Garage is not property serving the unit owners because it is open to the public has been rejected by the Second Circuit from the inception of litigation under the Abuse Relief Act:

Darnet Realty Associates LLC v. 136 East 56th Street Owners, Inc. 214 F.3d 79, 86 (2d Cir. 2000). (Emphasis added.).

POINT VII

THERE IS NO NEED FOR DISCOVERY ON THE TERMINATION VOTE

The Sponsor has submitted no facts that would call the termination vote into question. To remove any doubt in this regard, we have submitted for the Court's review the affidavit of Eric M. Jaffe which confirms the results of the June 27, 2000 shareholders vote.

CONCLUSION

For the foregoing reasons it is respectfully requested that Plaintiff's and Additional Counterclaim Defendant's motion for summary judgment be denied, and that Defendant's cross-motion for summary judgment be granted.

Dated: New York, New York
            July 6, 2001

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