01-9291
IN THE
United States Court of Appeals
FOR THE SECOND CIRUIT
BLEECKER CHARLES CO.,
Plaintiff-Counter-Defendant-Appellee,
BLEECKER PARKING CORP.
Counter-Defendant-Appellee,
--v.--
350 BLEECKER STREET APARTMENT CORPORATION,
Defendant-Counter-Claimant-Appellant.
ON APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF NEW YORK
BRIEF FOR
PAINTIFF-COUNTER-DEFENDANT-APPELLEE
BLEECKER CHARLES CO.
PROSKAUER ROSE, LLP
1585 Broadway
New York, New York 10036-8299
(212) 969-3000
Attorneys for Plaintiff-Counter-Defendant-
Appellee Bleecker Charles Co.
TABLE OF CONTENTS
Page
TABLE OF AUTHORITIES. . . . . . . . . . . . . . . . . . . . . . . . . . iv
INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
QUESTIONS PRESENTED . . . . . . . . . . . . . . . . . . . . . . . . . . .1
STATEMENT OF THE CASE . . . . . . . . . . . . . . . . . . . . . . . . . .4
COUNTERSTATEMENT OF THE FACTS . . . . . . . . . . . . . . . . . . . . . .9
The Co-op Failed to Obtain A Termination Vote in June 1999 . . . . . 12
The Lomantos and Iwanczuks Were Not Statutory Developers;
The Single Unit Sales To Them Were Bona Fide, And They Had
No Interest In The Garage Lease . . . . . . . . . . . . . . . . . . .13
SUMMARY OF THE ARGUMENT . . . . . . . . . . . . . . . . . . . . . . . . 15
ARGUMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22
POINT I THE TERMINATION WINDOW OPENED
MORE THAN TWO YEARS BEFORE
THE MOST RECENT VOTE TO TERMINATE . . . . . . . . . . . . .22
A. The Act Directs Courts To Determine
The Number Of "Units In The Conversion
Project" By Examining The "Cooperative
Documents" And Specifically The
Proprietary Leases And Shares . . . . . . . . . . . . . . . . . 22
B. The District Court's Ruling Avoids
Unnecessary Complexity And Closely
Tracks The Statutory Definitions, But
A Better Result Can Be Achieved By
Construing The Entire Statutory Phrase
"Unit in Conversion Project" To Refer
To The Time Of The Conversion . . . . . . . . . . . . . . . . . 27
C. The Co-op's Proffered Test Ignores The
Act's Language And Would Introduce
Complexity Into A Determination
That Should Be Easy and Straightforward . . . . . . . . . . . . 30
D. The Co-op Would Lose Even Under Its Proffered Test . . . . . . .35
(1) Some Of The Documents The Co-op Relies On Are
Plainly Not "Cooperative Documents," And Others,
Like The By-Laws, Contradict Its Position . . . . . . . . 36
(2) In Addition, The Co-op's Factual Presentation
Relies On Oral Evidence That is By
Definition Not A "Cooperative Document . . . . . . . . . .42
(3) None Of The Co-op's Combination
Theories Alone Supports Its Conclusion . . . . . . . . . .43
E. There Is No Factual Or Legal Basis For
The Co-op's Claim That The Sponsor
Was Obligated To Rewrite Proprietary Leases
And To Reissue Related Shares In The Absence
Of Owner Requests And Board Approval . . . . . . . . . . . . . .46
POINT II NEITHER THE LOMANTOS'NOR THE
IWANCZUKS' SINGLE UNIT IS ATTRIBUTABLE
TO THE SPONSOR UNDER SECTION 3607(b)(2) . . . . . . . . . 50
A. Neither The Lomantos Nor The
Iwanczuks Meets the Statutory
Definition of Developer . . . . . . . . . . . . . . . . . . . . 50
B. Neither the Lomantos Nor The Iwanczuks
Are "Holders of Unsold Shares" . . . . . . . . . . . . . . . . .57
POINT III THERE ARE ALTERNATIVE GROUNDS
SUPPORTING THE JUDGMENT BELOW AND
REQUIRING DENIAL OF THE CO-OP'S
CROSS-MOTION . . . . . . . . . . . . . . . . . . . . . .59
A. The Garage Does Not Primarily Serve
The Co-op's Unit Owners And Is Therefore
Not Subject To Termination Under Section 3607(a) . . . . . . . .59
B. The June 27, 2000 Shareholders Vote
Was Tainted In Various Ways . . . . . . . . . . . . . . . . . . 62
CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .66
TABLE OF AUTHORITIES
CASES
Page
2 Tudor City Place Assocs. v. 2 Tudor City Tenants Corp.,
924 F.2d 1247 (2d Cir.),
cert. denied, 502 U.S. 822 (1991) . . . . . . . . . . . . . . . . 13, 63
305 E 40th Garage Corp. v. 305 E 40th Owners Corp.,
833 F. Supp. 991 (S.D.N.Y. 1993) . . . . . . . . . . . . . . . . .52, 56
Block v. Magee,
146 A.D.2d 730 (2d Dep't 1989) . . . . . . . . . . . . . . . . . . . .65
Board of Managers v. Infinity Corp.,
21 F.3d 528 (2d Cir. 1994) . . . . . . . . . . . . . . . . . . . .23, 30
Bryant v. Maffucci,
923 F.2d 979 (2d Cir.),
cert. denied, 502 U.S. 849 (1991) . . . . . . . . . . . . . . . . . . 61
Coliseum Park Apartments Co. v. Coliseum Tenants Corp.,
742 F. Supp. 128 (S.D.N.Y. 1990)
Cromwell Assocs. v. Oliver Cromwell Owners, Inc.,
941 F.2d 107 (2d Cir. 1991) . . . . . . . . . . . . . . . . . 34, 60, 62
Darnet Realty Assocs., LLC v. 136 E. 56th St. Owners, Inc.,
214 F.3d 79 (2d Cir. 2000) . . . . . . . . . . . . . . . . . .15, 53, 60
Darnet Realty Assocs., LLC v. 136 E. 56th St. Owners, Inc.,
153 F.3d 21 (2d Cir 1998) . . . . . . . . . . . . . . . . . . . . 15, 61
Freytag v. Commissioner,
501 U.S. 868 (1991) . . . . . . . . . . . . . . . . . . . . . . . . . 26
Goldfield Corp. v. General Host Corp.,
29 N.Y.2d 264 (1971) . . . . . . . . . . . . . . . . . . . . . . . . .65
Gorbatov v. Gardens 75th St. Owners Corp.,
247 A.D.2d 440 (2d Dep't 1998) . . . . . . . . . . . . . . . . . . . .58
Hartford Underwriters Ins. Co. v. Union Planters Bank N.A.,
530 U.S. 1 (2000) . . . . . . . . . . . . . . . . . . . . . . . . 22, 25
In re JA. Maurer, Inc.,
77 N.Y.S.2d 159 (Sup. Ct. Queens Co. 1947) . . . . . . . . . . . . . .64
Pacella v. 107 W. 25th St. Corp.,
271 A.D.2d 342 (1st Dep't 2000) . . . . . . . . . . . . . . . . . 57, 58
Rego Park Gardens Assocs. v. Rego Park Gardens Owners, Inc.,
570 N.Y.S.2d 550 (2d Dep't 1991) . . . . . . . . . . . . . . . . . . .64
Thompson v. County of Franklin,
15 F.3d 245 (2d Cir. 1994). . . . . . . . . . . . . . . . . . . . . . 21
Wapnick v. Seven Park Ave. Corp.,
65 8 N.Y.S.2d 604 (1st Dep't 1997) . . . . . . . . . . . . . . . . . .64
West 14th St. Commercial Corp. v. 5 West 14th Owners Corp.,
815 F.2d 188 (2d Cir.),
cert denied, 484 U.S. 850 and 484 U.S. 871 (1987). . . . . . .17, 26, 59
STATUTES AND OTHER AUTHORITIES
13 N.Y.C.R.R. § 18.3(w)(1, 10, 11) . . . . . . . . . . . . . . . . . . .58
New York Business Corporation Law, § 605 . . . . . . . . . . . . . . . .64
New York Business Corporation Law, § 605(a). . . . . . . . . . . . . . .64
New York Business Corporation Law, § 606 . . . . . . . . . . . . . . . .65
New York Multiple Dwelling Law, § 60(l)(b) . . . . . . . . . . . . . . .61
S. Rep. No. 96-736 (1980),
reprinted in 1980 U.S.C.C.A.N. 3506. . . . . . . . . . . . . . . . . .26
15 U.S.C. § 3603(7). . . . . . . . . . . . . . . . . . . . . . . . . . .28
15 U.S.C. § 3603(10) . . . . . . . . . . . . . . . . . . . . . . . .25, 64
15 U.S.C. § 3603(12) . . . . . . . . . . . . . . . . . . . . . . . .24, 36
15 U.S.C. § 3603(13) . . . . . . . . . . . . . . . . . . . . . . . . . .24
15 U.S.C. § 3603(14) . . . . . . . . . . . . . . . . . . . . . . . .30, 50
15 U.S.C. § 3603(14)(A) . . . . . . . . . . . . . . . . . . . . . . . . 51
15 U.S.C. § 3603(14)(B) . . . . . . . . . . . . . . . . . . . . 51, 52, 55
15 U.S.C. § 3607(a) (1) . . . . . . . . . . . . . . . . . . . . . . .59 61
15 U.S.C. § 3607(b)(2) . . . . . . . . . . . . . . . . . . . . . . .passim
15 U.S.C. § 3607(c) . . . . . . . . . . . . . . . . . . . . . . . . . . 35
15 U.S.C. § 3607(d) . . . . . . . . . . . . . . . . . . . . . . . . . . 12
INTRODUCTION
In this action brought by plaintiff- appellee Bleecker Charles Company ("the Sponsor"), the District Court (per Judge Lynch) granted the Sponsor's motion for summary judgment against defendant-appellant 350 Bleecker Street Apartment Corporation ("the Co-op") declaring null and void the Co-op's July 19, 2000 termination notice ("the Termination Notice") (A 167) [1] seeking to terminate the parking garage ("the Garage") lease between the Co-op and the Sponsor ("the Lease") under the Condominium and Cooperative Conversion Protection and Abuse Relief Act, 15 U.S.C. §§ 3601-16, ("the Act") and for related injunctive relief. The Co-op appeals from the final judgment and order entered October 31, 2000 granting all such relief. (A 459-62.)
QUESTIONS PRESENTED
1. Did Judge Lynch err in counting the number of "units," rather than the number of apartments, when "units" is the term used in the Act, § 3607(b)(2)?
2. Did Judge Lynch err in determining the number of "units" by reference to the proprietary leases and shares when "unit" is defined in the Act as land and improvements "as specified in the cooperative documents,"§ 3603(12), and the only "cooperative documents" defining ownership in the Act are those leases and shares, §§ 3603(10) and (13)?
3. Even assuming arguendo Judge Lynch should have counted the number of apartments, rather than "units," and even if "cooperative documents" included not only the leases and shares but all sorts of other Co-op documentation not mentioned in the Act, would the Co-op still lose because the numerical result it urges depends on oral testimony and local zoning and building codes, which cannot reasonably be characterized as "cooperative documents"?
4. Did Judge Lynch err in refusing to count as "units" owned by the "developer" within the meaning of § 3607(b)(2) two "units" owned one each by two families neither of whom met any of the "developer" criteria in the Act's definition of that term, § 3603(14)?
5. If this Court disagrees with the grounds on which Judge Lynch granted summary judgment to the Sponsor, should it reach and affirm the judgment nonetheless on one or more of the following two additional grounds the Sponsor urged below but which Judge Lynch did not reach:
(a) Was the Garage whose lease the Co-op sought to terminate "property serving the ... cooperative unit owners" within the meaning of § 3607(a)(1) when there is no evidence that even one unit owner uses the Garage?
(b) Was the June 2000 shareholder vote to terminate the Lease improper because the Co-op failed to give the Sponsor notice of the meeting, as required by New York Business Corporation Law § 605(a) and by the Co-op's By-Laws, particularly when, after the Sponsor explained why termination was not in the shareholders' best financial interests at the June 1999 shareholders meeting, the shareholders refused to terminate the Lease?
STATEMENT OF THE CASE
The District Court (Lynch, J.) decided the case on cross-motions for summary judgment supported by an extensive stipulation of facts ("Fact Stipulation") (A 440; A 78-167.)
Judge Lynch correctly stated the statutory context. He wrote: "[T]he Act offers a cooperative corporation a limited time period, after the sponsor's control is reduced, during which it may terminate contractual commitments entered into while the sponsor dominated the cooperative." (A 438.) Thus, the Act gives the cooperative this power to terminate such contracts, but also limits the time within which it may be exercised. Appellant's ("the Co-op's") brief does not dispute this.
Judge Lynch described that "limited time period" as follows: "[S]uch a termination is only permitted within a two-year 'window' beginning (so far as this case is concerned) no later than the date on which the Sponsor owned no more than 25 percent of 'units in the conversion project.' 15 U.S.C. § 3607(b)(2)." (A 439.) Indeed, 15 U.S.C. § 3607(b)(2) provides that any such termination "may occur only during the two-year period beginning on the date on which ... the developer owns 25 per centum or less of the units in the conversion project." The Co-op's brief does not dispute this either.
Relying directly on the Fact Stipulation, Judge Lynch then noted that "By October 16, 1997, the Sponsor had sold 103 of the original units, and retained title to only 34, or 24.8%." (A 440.) The Co-op does not dispute these stipulated facts.
Based on the statutory context, the clear statutory language, and the stipulated facts, Judge Lynch thus concluded that the two-year window within which the Co-op could terminate the Lease opened on October 16, 1997 and closed on October 16, 1999. It is undisputed that the Co-op was not able to obtain a sufficient vote of its shareholders to terminate until well beyond that date. Judge Lynch thus concluded that "Sometimes things are just what they seem." (A 454.) Accordingly, Judge Lynch continued, the Co-op no longer had the power to terminate when it attempted to exercise it.
The Co-op's argument below, repeated in this Court, is that this straightforward reading of § 3607(b)(2) should be complicated by the introduction of a moving definition of "units in the conversion project" based on later alterations to apartments - not units, the term the statute actually uses - having to do with kitchens, halls and walls. Not only would this require ignoring the statutory language, but it would be bad policy - as Judge Lynch wrote: "[the] Co-op's various suggested approaches (determining when consolidated apartments count as a single unit by reference to physical criteria, or residential usage, or the vagaries of definition in local zoning or building codes) present undesirable fact-finding difficulties that could become complex and unpredictable . . . ." (A 447.)
Judge Lynch also correctly ruled that the Act defines the term "units" as used in the two-year window provision of § 3607(b)(2). He wrote "[the term 'cooperative unit' is defined in the Act" as. . . 'improvements, land, or land and improvements together, as specified in the cooperative documents.'" (A 444.) (Emphasis in the original.) He reasoned, logically, that the determinative "cooperative documents" are "the 'lease[s]' or other documents that assign possession of portions of the cooperative to individual owners." (A 445.) And he found statutory support for this logical conclusion in the Act's definition of "ccooperative unit owner" as "the person having a ... share interest in the cooperative association and holding a lease . . . of a cooperative unit . . . ." (A 445) (quoting § 3603 (13).)
Here, the stipulated facts established that the number of "units" specified in the cooperative's documents - and, in particular, as Judge Lynch found, in the Proprietary Leases and Related Shares - was 137, and has been 137 since the Co-op's inception (A 442-43.) [2] Thus, the denominator in the 25% calculation was 137, as Judge Lynch's thoughtful opinion concluded. (A 449.)
The Co-op tries to avoid this inevitable conclusion by urging that the Sponsor had some duty, the source of which is not identified, to revise the Proprietary Leases, Related Shares, and unit designations to reflect alterations made to various apartments. Neither the Record nor the Co-op's brief contains any reference to the source of that duty and, as noted below (at 37-38), the very By-Law on which the Co-op relies negates any such duty.
Nor does the Record contain any evidence that anyone ever asked the Co-op's Board of Directors, the Co-op's managing agent or the Sponsor to make such a change to any owner's legal documentation of ownership. Without such a request by the unit owner to alter the legal documents evidencing his/her ownership rights, the Sponsor had no duty or right to make such a change and would be defenseless to a challenge to its having attempted to, for example, turn two Proprietary Leases into one.
The denominator for purposes of the 25% calculation is therefore 137.
(The Sponsor agrees that the District Court reached the correct mathematical and temporal conclusions, and that its reasoning was correct. However, the Sponsor urged below and now re-asserts here, see Point I (B) at 27-30), that an even better construction is to read "units in the conversion project," the term used in § 3607(b)(2), as the number of units specified in the original cooperative documents at conversion (here it is also 137). That number is fixed and cannot be changed by unit owner decisions made later to combine, perhaps temporarily, their apartments.)
The Co-op also argues that the numerator for the 25% calculation should be 36 rather than 34 as Judge Lynch found. Judge Lynch erred (the Co-op argues) by not including two units owned one each by two families (the Lomantos and Iwanczuks) each of whom has owned the unit for more than ten years. The Co-op argues these two units should be counted as developer-owned under § 3607(b)(2) because these owners held so-called "unsold shares" allegedly having some special privileges (to sublet and to avoid sublet fees) that the Sponsor also enjoys.
Judge Lynch meticulously analyzed the statutory language which turns on when the "developer owns" 25% or fewer of the units; "developer," in turn, is specifically defined in § 3603(14) without reference to the ownership of unsold shares." Judge Lynch, therefore concluded that the Co-op's argument on this point, which ignored the statutory language, was "flawed at its very root," and that, on the Record, neither the Lomanto nor the Iwanczuk families were statutory "developers" for several independent reasons summarized below at (19-21) and discussed more fully under Point 11 at 50-58.
On appeal, the Co-op simply repeats the same erroneous reading of the Act Judge Lynch rejected.
COUNTERSTATEMENT OF THE FACTS
The Co-op's statement of facts incorrectly equates the concept of altering the physical structure of apartments with the legal concept of units as evidenced by their underlying Proprietary Leases and Related Shares; it is not appropriate or permissible to use these different concepts interchangeably, as the Co-op does throughout its presentation. [3] There is no proof in the Record that any unit owner requested, or that any Board ever approved, the reissuance of shares or the re-writing of proprietary leases, and there is no legal basis for doing so in the absence of owner request and Board approval.
Indeed, the By-Laws do not permit the rewriting of proprietary leases or the reissuance of shares without an owner's request to do so. See By-Law Art. V, § 4 (A 194), quoted, infra, at 37.
Thus, the central underlying factual issue - when the Sponsor first owned fewer than 25% of the units - is disposed of as follows:
1. Stipulated Fact ¶ 8 (A 80) states that Exhibit E to the Fact Stipulation (A 151-55) sets forth "the respective dates" on which the Sponsor transferred "the Proprietary Leases and Related Shares for the Sponsor's Units designated under the Original Plan to third-parties."
2. Stipulated Exhibit E (A 155), in turn, shows that, as of October 16, 1997, the Sponsor had transferred 103 of the 137 units or 75.2%, leaving it with only 24.8%.
3. Stipulated Fact ¶ 10 (A 8 1 ) shows that none of the apartments physically combined before that date (or indeed after) also involved any re-writing of the Proprietary Leases, or re-issuance of Related Shares, or even elimination of any Unit designations:
The Co-op Failed to Obtain
A Termination Vote in June 1999
The Co-op's statement of facts mentions (at 17-18) the 2000 shareholder vote to terminate but omits the Co-op's first failed attempt to obtain the necessary votes at a June 1999 shareholders' meeting. The Co-op's effort to obtain the vote at that earlier meeting failed, after the Sponsor, who was invited to the meeting, explained its position as to why there would be no net financial benefit to the Co-op's shareholders from the proposed termination. (A 302-03; A 392-93.)
Not until June 2000, did the Co-op choose to raise the termination issue again. And at that belated time, the Co-op did not invite the Sponsor to the June 27, 2000 shareholders' meeting, though it does not dispute that the Sponsor is a shareholder. The Sponsor nonetheless learned of the meeting and addressed the few shareholders in attendance, unaware the Board had already obtained sufficient proxies from non-attending shareholders in advance of the meeting to carry the termination vote. (A 303.)
The Co-op sent the Termination Notice on July 19, 2000, (A 167), and so, under § 3607(d), it was effective 90 days later, on October 18, 2000. See 2 Tudor City Place Assocs. v. 2 Tudor City Tenants Corp., 924 F.2d 1247, 125-3 ) (2d Cir.), cert. denied, 502 U.S. 822 (1991).
The Lomantos and 1wanczuks Were
Not Statutory Developers; The Single
Unit Sales To Them Were Bona Fide, And
They Had No Interest In The Garage Lease
The Co-op was formed in 1985. (A 79, ¶ 2.) That year, the Sponsor transferred the Proprietary Lease and Related Shares for one unit (6A) to Kathleen Giannetti, then a secretary in the office of its outside counsel to the conversion. Ms. Giannetti later married and created a tenancy in common with her husband (Mr. Iwanczuk). (A 82, ¶ 12.) Ms. Giannetti left that law firm 14 years later, before the termination vote of June 2000. (Id.; A 436, ¶ 1.)
In December 1988, the Sponsor transferred the Proprietary Lease and Related Shares covering a single unit (2L) to the Lomantos. (A 81-82, ¶ 11.) Mrs. Lomanto is a secretary in Kenneth B. Newman, P.C.; Mr. Newman is also the Sponsor's liquidating partner. [4] (Id.)
The Co-op does not contend either sale was anything other than bona fide. Both the Iwanczuks and the Lomantos continued to own their individual units at the time of the 2000 vote. (A 309, ¶ 4; A 437, ¶ 4.)
The Record contains no evidence that either the Lomantos or the Iwanczuks had any interest in the Lease that the Co-op's belated Termination Notice would have affected. Both denied receiving notice of the June 2000 shareholder vote on termination. (A 309, ¶ 4; A 437, ¶ 4.)
The Sponsor designated both families as Holders of Unsold Shares, (A 81-82), but neither family complied with the State regulations' requirements for them to maintain that status. (Id.)
In any event, the statute at issue, § 3607(b)(2), refers to units owned by the "developer," not to units owned by Holders of Unsold Shares. The statutory definition of "developer," § 3603(14), does not refer to holders of unsold shares but does refer to one who offers his units for sale. The Record contains no evidence of either the Iwanczuks or the Lomantos ever offering their individual unit for sale.
* * * * * *
The additional facts supporting the two alternative grounds for affirmance are contained within the discussion of those points, infra, at 59 -65.
SUMMARY OF THE ARGUMENT
As this Court wrote in Darnet Realty Assocs., LLC v. 136 E. 56th St. Owners, Inc., 153 F.3d 21, 29-30 (2d Cir. 1998):
Here, the two-year termination window closed before the Co-op attempted to terminate, whether one determines the number of "cooperative units" for purposes of the denominator in the 25% calculation by:
(1) the number of units reflected by the most current proprietary leases and Co-op shares, which Judge Lynch correctly found to be both statutorily supported and dispositive on this Record (Statement of Case at 6-8 and Point I (A) below at 22-26), or
(2) the number of units the Sponsor designated in the original cooperative documents, which the Sponsor urges is the most straightforward, statutorily supported, and easy to administer method of calculation (Point I (B) below at 27-30), or
(3) the Co-op's more expansive definition having to do with the dates on which apartment (not unit) alterations are contingently approved, as evidenced by a mixture of internal Co-op documents and local building department records (Point I (D) below at 35-46).
Judge Lynch's conclusion is fully supported by the stipulated facts in the Record. Despite all the apartment alterations described in the Co-op's brief, which occurred at various time between 1989 and 2000, none of the unit designations, the Proprietary Leases or Related Shares have been altered since the conversion to cooperative ownership in 1985, except that when hall space was added to two units, the Co-op, after a valuation procedure, issued additional Related Shares to those owners. (A 81, ¶ 10; A 366; A 370.)
An even more precise reading of the Act, and even better policy, would follow, the Sponsor urges, if the number of units in the denominator were fixed at the point of cooperative conversion. Doing so would eliminate any gamesmanship on the part of sponsors and Co-op boards seeking to accelerate or to delay the opening. See Point I (B), infra at 27-30.
On the other hand, the Co-op's construction would frustrate Congress's desire for a self-executing, non-judicial remedy, see West 14th Street Commercial Corp. v. 5 West 14th Owners Corp., 815 F.2d 188, 200 (2d Cir.), cert. denied, 484 U.S. 850 and 484 U.S. 871 (1987), and would embroil the federal courts in fact-finding involving combinations of residential units over decades after the conversion date.
One can envision disputes, as there are in this case, over what would be considered a true combination (e.g., the actual removal of a wall versus the installation of a door between units or the number of kitchens in the combined units) or when the combination was deemed to have occurred (e.,g., on board approval, permit application, completion of construction, the issuance of a revised Certificate of Occupancy, or sign-offs by local building departments).
The Co-op's position would also subject interpretation of the Act to the vagaries of state and local building and zoning laws and regulations, which have far different purposes from the Act's goals.
Further, it is to the advantage of Co-ops generally to have the Act's window open as early as possible, permitting them quickly to assume control over a developer's terminable lease. The Co-op here, however, invents a theory to delay the window opening. All Co-ops would suffer unwanted delays if this Co-op's theory were adopted.
This Co-op's theory is an afterthought, used to justify its belated effort to terminate the Lease, following the Board's failure to win termination approval at a June 1999 shareholders meeting. Even at the June 2000 meeting, the Co-op counted the votes by units as reflected in the Proprietary Leases, rather than by counting owners, as it now suggests this Court should do.
We discuss the policy deficiencies in the Co-op's under Point I (C), infra, at 30-35.
In addition, the Co-op would lose even were one to stretch "cooperative documents" way beyond the Proprietary Leases and Related Shares the District Court found conclusive based on the statutory language. See Point I (D), infra, at 35-46.
Thus, whether this Court agrees with the District Court's construction of § 3607(b)(2) or with the Sponsor's, the denominator for purposes of the 25% calculation is 137.
As discussed more fully below (at 50-57) and in the District Court's opinion (A 449), the numerator of the 25% calculation turns on the number of units owned by the "developer." "Developer" is defined in the statute (§ 3603(14)) as someone who both "offers to sell or sells his interest in units" (the reference to "units" suggests that the statute contemplated someone owning more than the single unit owned by each of the Lomantos and Iwanczuks) and who has the right to "add, convert, or withdraw real estate from the ... project," who "maintains sales offices, management offices and rental units," who "exercises easements through common elements for the purpose of making improvements within the cooperative," or who "exercises control of the owner's association."
Judge Lynch saw no reason or basis to ignore the Act's plain language, as well as its purpose, which the Co-op's argument would have required him to do in at least four respects:
1. It is undisputed that neither family offered to sell its unit or sold its unit. The Co-op simply ignores this dispositive ruling. See Point II, infra, at 51-52.
2. The Sponsor, which is the statutory developer, does not own either of their apartments. Indeed, Judge Lynch noted (A 450) that "the Co-op does not contend that the purchase (which occurred long before anyone contends the termination window opened) was a sham, or that the owners are nominees for the Sponsor." Therefore, as the Record contained no contrary evidence, he concluded the sales were "bona fide" transactions. (Id.) See Point II, infra, at 54-56.
3. Judge Lynch further concluded on the undisputed facts that neither family has any interest in what this Court in Darnet described as "the self- dealing contract" at issue. (A 452.) He wrote: "Here, as in Darnet, there is no indication the owners of the two units are alter egos of the Sponsor or are controlled by it. Nor is it contended that the owners have any stake or interest in the garage lease." (Id.) See Point II, infra, at 54-55.
4. Finally, Judge Lynch concluded neither family has "any of the attributes of 'special developer control' listed in the clause." (A 451; emphasis added.) The Co-op tries to avoid this ruling, by omitting the key language "listed in the clause" and by arguing that both families, as holders of unsold shares, have special developer powers. Whether they do or not, it is undisputed they do not have the "attributes of special developer listed" in § 3603(14). See Point II, infra, at 5-5.
Judge Lynch did not reach two additional grounds the Sponsor raised in support of its motion and in opposition to the Co-op's cross-motion. If it becomes necessary to reach those issues, this Court, in accordance with its normal practice, may decide to remand the case to the District Court rather than to decide them in the first instance. [5] However, in the event this Court decides to reach those issues on the merits, they are briefed under Point III, infra, at 59-65.
ARGUMENT
POINT I
THE TERMINATION WINDOW OPENED
MORE THAN TWO YEARS BEFORE
THE MOST RECENT VOTE TO TERMINATE
As shown below, the Co-op's right to terminate expired before it was purportedly exercised under any of the proffered statutory interpretations.
A. The Act Directs Courts To Determine
The Number Of "Units In The Conversion
Project" By Examining The "Cooperative
Documents," And Specifically The
Proprietary Leases And Shares
It is fundamental that the courts' role in interpreting federal statutes is to give effect to Congressional intent as reflected in the words Congress chose to use in the statute. As the Supreme Court repeated recently, "we begin with the understanding that Congress says in a statute what it means and means in a statute what it says there." Hartford Underwriters Ins. Co. v. Union Planters Bank, N.A., 530 U.S. 1, 6 (2000) (internal citation omitted). Thus, the first step in any statutory interpretation exercise must be an examination of the plain language of the statute itself.Id.
In Board of Managers v. Infinity Corp., this Court wrote with respect to the Act itself-
21 F.3d 528, 532-533 (2d Cir. 1994) (citing Park S. Tenants Corp. v. 200 Cent. Park. S. Assocs., L.P., 941 F.2d 112, 114 (2d Cir. 199 1)).
Here, the Congressional measure for purpose of calculating the Sponsor's ownership percentage is identified in § 3607(b)(2) as the "units in the conversion project." [Emphasis added.]
In turn, § 3603(12) defines a "cooperative unit" as "a part of the cooperative property which is subject to exclusive use and possession by a cooperative unit owner .... as specified in the cooperative documents." [Emphasis added.] Judge Lynch was therefore correct in concluding (A 458) that "cooperative documents" are "the determinant of individual units." [6]
Judge Lynch then looked to the next statutory definition, § 3603 (13), to find guidance as to what "cooperative documents" to examine for this purpose. Section 3603(13) defines "cooperative unit owner" as "the person having a membership or share interest in the cooperative association and holding a lease....
Judge Lynch concluded that "These provisions, taken together, appear to indicate that to determine the number of units in a cooperative, one should look to the 'cooperative documents,' and in particular to the 'lease[s]' or other documents that assign possession of portions of the cooperative to individual owners." (A 445.)
In fact, there is additional support in the statutory definitions for the conclusion Judge Lynch reached. Section 3603(10) defines "cooperative project" as real estate containing residential structures that are subject to separate use and possession by individual unit owners "whose interest in such units and in the undivided assets of the cooperative association ... are evidenced by a . . . share interest in a cooperative association and a lease or other muniment of title or possession granted by the cooperative association . . . ." [Emphasis added.]
The Proprietary Leases are the only documents that grant possession of a particular part of the cooperative property to the unit owners. The Related Shares are the only documents evidencing the unit owners' ownership rights in th cooperative association.
The starting point is often the stopping point as well. Where the language of a statute is clear and unambiguous, "the sole function of the courts . . . is to enforce it according to its terms." Hartford Underwriters, supra, 530 U.S. at 5 (citations omitted); Freytag v. Commissioner, 501 U.S. 868, 873 (1991) ("When we find the terms of a statute unambiguous, judicial inquiry should be complete.")
Although unnecessary to go beyond this plain reading of the statute, such a plain reading also advances the Act's goal of easy self-administration. Section 3607 was designed to enable Co-ops to terminate leases without judicial intervention. See S. Rep. No. 96-736 at 51 (1980), reprinted in 1980 U.S.C.C.A.N. 3506, 3558. Thus, a "bright line" construction, which promotes clarity and ease of application and reduces litigation of termination decisions, advances this legislative goal. See West 14th St. Commercial Corp., 815 F.2d at 200.
As stated above (at 16), it is undisputed, indeed stipulated, that the number of units based on the Proprietary Leases and Related Shares is 137, as Judge Lynch concluded. [7].
B. The District Court's Ruling Avoids
Unnecessary Complexity And Closely
Tracks The Statutory Definitions, But
A Better Result Can Be Achieved By
Construing The Entire Statutory Phrase
"Unit in Conversion Project" To Refer
To The Time Of The Conversion
The Sponsor urged below that the number of "units in the conversion project" in § 3607(b)(2) means the number of units specified in the original cooperative documents when the building is converted to cooperative usage.
Contrary to the Co-op's statement (at 25) that Judge Lynch rejected this position, he actually concluded that it was unnecessary to reach it:
Section 3607(b)(2) refers to "units in the conversion project" as the statutory measure. The District Court's opinion comprehends the term "units," but does not refer to the rest of the statutory phrase, "in the conversion project." That latter term is defined in § 3603(7) by reference to the point of conversion.
Thus, the statutory definition of "conversion project" may be said to be focusing on the temporal point of conversion. With "unit" defined by reference to the cooperative documents, the entire phrase "units in the conversion project" in § 3607(b)(2) may be said to refer to the number of units in the cooperative documents at the point of conversion, in our case, 137.
Reading the statutory term "cooperative documents" to refer to the number of units in those documents at the point of cooperative conversion would also further the following policy objectives:
1. It would achieve more certainty, and eliminate litigation, as to the point when the window opens.
2. It would eliminate the gamesmanship and potential prejudice to unit owners that follows from utilization of a moving number of units for purposes of the 25% calculation.
For example, it is likely that Sponsors will normally prefer to have the termination window open as late as possible, thus preserving the (presumably) favorable leases the Act makes subject to termination. Sponsors would be able to delay the window opening, if it were in their overall economic interest to do so, by sub-dividing units (a process over which the Co-op has no control). See By-Law Art. V, § 4 (A 195) (the sponsor, a Holder of Unsold Shares, has "absolute right" to subdivide).
Conversely, under the District Court's ruling (and even more so under the Co-op's broader definition of unit to mean apartment), Co-ops eager to terminate a developer's lease would be impelled to deny shareholders' legitimate requests to combine units, because such combinations would raise the developer's share of total units and cause the window to open later. This is the odd case where is the Co-op trying to delay the window opening because it was unable to obtain a termination vote in time - a bad circumstance on which to build a policy.
The Sponsor's "bright line" construction is also consistent with the fact that the Act makes clear that the developer, not the unit owners, determines how many units there are in the "conversion project." The definition of "developer" defines "successors" to the original developer, among other things, as those "who [possess] ... the right to: u add, convert, or withdraw real estate from the cooperative or condominium pro-ject. . . ." 15 U.S.C. § 3603(14) (emphasis added). In Board of Managers v. Infinity Corp., supra, 21 F.3d at 531-33, this Court recognized the developer's authority to determine the content of the Conversion project" even to the extent of excluding the garage completely.
C. The Co-op's Proffered Test Ignores The
Act's Language And Would Introduce
Complexity Into A Determination
That Should Be Easy and Straightforward
As shown, the Act's definitions refer to the terins "unit" or "units," not to apartments. Despite this clear statutory reference, the Co-op, throughout its statement of facts and argument, uses the term "apartment" interchangeably with "unit," thus implying they are the same when they are not. "Apartment" refers to the physical living quarters that exist at any point in time for occupancy; "Unit" is, as Judge Lynch noted (A 446), a legal term that describes the rights and obligations of a cooperative owner with respect to designated residential space and shares.
Thus, for example, a cooperative owner may dwell in an apartment that consists of two "units." As Judge Lynch correctly observed:
Not only would the Co-op's position ignore the statutory terms discussed in Sub-Points I (A) and (B), supra, but the Co-op cites no legislative history indicating that when Congress used the terms "units" and "cooperative documents," it meant apartments and local building and zoning regulations.
The Co-op argues (at 28-31, 38-39) that "other cooperative documents indicate that the cooperative intended to combine the units and that the units were in fact combined." [Emphasis added.] But intent to combine apartments alone cannot reasonably satisfy the statutory requirement of actual unit ownership rights referenced in § 3603 (10) and (13); nor would it even satisfy an "apartment" (rather than "unit") based test. The combination might never be completed, or completed properly, and the date of completion would never be reliably or easily determinable, as evidenced by the Co-op's cumbersome accumulation of all sorts of documents and personal recollections submitted in affidavit form. (The problems these create are discussed in detail in the next sub-point.)
There does not seem to be any sensible policy reason to avoid the statutory language the District Court found dispositive, and to introduce a test that would be difficult to apply, expensive to litigate, and incapable of providing the certainty sponsors and Co-ops should have concerning when the two year window opens and closes. As discussed above at 17, the Act was designed to be readily self-executing with minimal judicial enforcement and not to be susceptible to manipulation by either the developer or the unit owners.
Below, the Co-op changed its suggested test of apartment completion several times. [8] The District Court pointed out that the Co-op "has not been completely clear or consistent about precisely the criteria it believes should be used to determine when a physical consolidation of apartments effects a change in the number of 'units' that exist for purposes of § 3607(b)" (A 444), and noted the "undesirable fact-finding difficulties" in "the Co-op's various suggested approaches (determining when consolidated apartments count as a single unit by reference to physical criteria, or residential usage, or the vagaries of definition in local zoning or building codes). . . ." (A 447.)
All of the Co-op's approaches could be resolved only by extensive litigation over the applicable criteria; they were therefore sensibly rejected by the District Court based on the statutory language. Now on appeal, the Co-op purports to accept the District Court's reliance on the statutory reference to "cooperative documents." However, the Co-op would achieve the same undesirable fact-finding difficulties the District Court avoided by cramming at least seven different categories of documents (identified below at 36-42) into the definition of cooperative document (while ignoring the most pertinent of those documents, the Proprietary Leases and Related Shares).
Attempts like the Co-op's to read local zoning and building laws and regulations into the Act have been rejected by this Court. See Cromwell Assocs. v. Oliver Cromwell Owners, Inc., 941 F.2d 107, Ill (2d Cir. 1991) (holding that "local zoning law is irrelevant [to the application of the Act] because 'Congress clearly intended to promulgate a uniform standard for use in evaluating terminations of contracts and leases under the Act."'); see also Coliseum Park Apartments Co. v. Coliseum Tenants Corp., 742 F. Supp. 128,132 (S.D.N.Y. 1990) (refusing to apply New York law to interpret who is a "party" to a lease because the "applicability of § 3607 should not vary with the laws of contract and real property in the different states.")
Finally, the Co-op's argument (at 26) that the test should be "force of numbers," as measured by the number of unit owners, departs even further from Congress's use of the term "units." Congress could easily have written a standard that involved the number of owners if that were its intent. This argument also proves too much because it would include even owners of non-contiguous apartments which cannot be physically joined.
And, contrary to its position in this Court, when the Co-op counted the vote at the June 2000 meeting, it counted votes by the original 137 units and disregarded combinations. (A 83.) Thus, it counted as three votes, the vote of a shareholder owning three "units" that had been combined into one apartment but which remained legally as three "units." [9]
D. The Co-op Would Lose Even Under Its Proffered Test
The Co-op urges this Court to look at all sorts of different documentation to determine apartment combinations, but doing so would not alter the District Court's summary judgment ruling.
(1) Some Of The Documents The Co-op
Relies On Are Plainly Not "Cooperative
Documents," And Others, Like The By-
Laws, Contradict Its Position
The Co-op (at 29-31) argues that the District Court should have considered the seven different types of documents discussed below:
(a) The 17th Plan Amendment
The Co-op's reference (at 29) to the 17th Amendment to the Plan is really a reference to the Co-op's accountant's report, attached as Exhibit A to that Amendment filed by the Sponsor, not by the Co-op. (A 210-227.) That accountant's report states in a footnote that "Originally the building contained 137 apartments but certain apartments have since been combined." This accountant's report cannot be considered a "cooperative document" within the meaning of the statutory phrase, "[a] unit ... as specified in the cooperative documents," § 3603 (12). Nor can it be deemed some type of admission by the Sponsor, particularly given that the Sponsor specifically states in the Amendment (A 207) that it:
In any event, the footnote refers only to apartment - not unit - combinations and is therefore not contrary to the stipulated facts.
(b) The Co-ops-By-Laws
The By-Laws actually tend to disprove the Co-op's argument because they treat combining/sub-dividing apartments as separate from reallocating Related Shares and rewriting Proprietary Leases and they also underscore the need (as one would expect) for owner requests as a pre-condition to any such change to legal documentation of ownership. Article 5, Section 4 of the By-Laws provides: "That the board of directors, upon the written request of the owner or owners of one or more proprietaiy leases covering one or more apartments . . .
It thus appears that the Co-op's Board was empowered to allow the physical alteration of "apartments" and to reallocate shares and to re-write proprietary leases, but only on the written request of the owner of the proprietary lease. The Co-op's brief (at 29) refers only to the Board's power to permit the physical alteration of apartments and ignores its power to change the underlying cooperative documents only if requested to do so.
The Record contains: (1) no request, written or otherwise, by the any of those who requested apartment alterations to reallocate shares or to re-write their proprietary leases (and the Sponsor/Managing Agent denied, without contradiction, that any such request was ever made, A 389-90); (2) no approval by the Board of any share reallocation or proprietary lease rewriting; and (3) no direction by the Board to the Sponsor or Managing Agent to reallocate shares or to issue new Proprietary Leases.
(C) the Board Minutes
None of the Board Minutes and Agenda the Co-op refers to (at 29) refers to combining (the legal concept) "units," as the Co-op claims; none refers to re-allocating shares or to re-writing proprietary leases; they refer only to contingent approvals of the physical alteration of certain apartments. (A 361-77)" [10]
The Board Minutes giving contingent approval to apartment alterations do not prove that any of the physical combinations were actually completed, that any of the physical combinations, if and when completed, were in compliance with the Board approved plans and contingencies, or when any of them were completed. (See A 361 (1989 Agenda item (apt. 6V-6W) alteration plan); A 362 (permission to "joinder 4A with 4B .... approved such joinder subject to filing of plans ... and compliance with all Board and governmental regulations."); A 363 ("plans to combine these apartments were presented to the board.")) (Emphases added.)
The completion of the physical combinations or their timing cannot be assumed as they are usually preceded by several, time-consuming steps, including, among others, (a) the filing of a building permit application with the City's Building Department, (b) the signing of an alteration agreement with the Co-op, (c) the hiring of one or more contractors, architects or engineers (d) the contractors' satisfaction of the bonding and other pre-work commencement requirements under the alteration agreement, and (e) the actual performance of the contractors' work. (A 387-89.) Even the Co-op's evidentiary submission showed that some combinations were not completed until years after the Board granted contingent approval. (See A 334-35, ¶¶ 22, 25.)
(d) The Hallway Shares
Hallway shares must be part of some other unit designation; they do not themselves constitute a separate unit. (A 196.) Thus, the 20 (out of 17-22) shares issued in October 1998 (A 153; A 155) reflecting two owners' purchase of hall space proves nothing.
The Co-op suggests (at 30) that it is conclusive proof that "apartments were being used as a single dwelling unit." That sentence would read the same without the word "unit" and is simply another way of saying two apartments - not units - were combined; and in any event, as shown below (at 45-46), even were apartments rather than units the relevant legal concept, because certain apartments (3D, 3E and 3F) were not combined until October 1998, the Co-op's notice would still be untimely.
(e) The Alteration Agreements
The Co-op's standard form Alteration Agreement (A 400-03) contains detailed conditions and limitations placed on the apartments' planned physical alterations and has nothing to do with changing Proprietary Leases or Related Shares. Nor would such forward-looking agreements prove, as the Co-op asserts (at 30), that the apartments had in fact been combined (and certainly not the date by which they were combined).
(f) and (g) The City's Certificate of Occupancy and Building Approvals
Neither the Certificate of Occupancy, which is issued by the City, nor the Building Department's approvals are "cooperative documents" and of course neither refers to any changes in Proprietary Leases or Related Shares. (See A 161-64; A 319-26.) They are governmental records.
And even the amended Certificates of Occupancy the Co-op cited (at 30-31) for three apartment combinations do not provide the completion dates for the combinations. The only date provided is the date of issuance of the amended Certificate of Occupancy. (See, e.g., A 319.) This date depends on the Building Department's administrative convenience, not on the actual completion date of the combination referred to. Moreover, as the Co-op concedes, Certificates of Occupancy need not be amended for every alteration. (A 331, ¶ 10.)
(2) In Addition, The Co-op's Factual Presentation
Relies On Oral Evidence That is By
Definition Not A "Cooperative Document"
The Co-op's presentation to this Court, even using its expansive definition of "cooperative documents," still openly relies on oral testimony at various points:
1. With reference to units 6V and 6W: "Although the combination does not appear on the minutes for that date, it is my recollection that the combination was approved by the Board at or about that time." (A 333, ¶ 18.)
2. With reference to units 3F and 3D: At about the time of these approvals [June 1996], the unit owner "removed the kitchen from former units 3F and 3D and began actually using the three adjacent apartments as a single dwelling unit." (A 334, ¶ 24.)
3. With reference to units 6K and 6L: "The minutes ... do not reflect the Board's approval of the combination of units 6K and 6L. My recollection, however, is that the Board approved this combination some time in the first quarter of 1998." (A 335, ¶ 27.)
One can imagine the type and detail of discovery that would be necessary if window opening decisions turn on this type of oral evidence; and, of course, there is no sensible way to squeeze such testimony into the statutory requirement "as reflected in the cooperative documents."
(3) In Addition, None Of The Co-op's Combination
Theories Alone Supports Its Conclusion
The Record contains a chart (A 395-98) the mathematical effect of which is to demonstrate that under any of the Co-op's apartment combination theories - conditional Board approval of apartment conditions, or Certificate of Occupancy changes, or City Building Department Records - the October 18, 2000 effective date of the Termination Notice was beyond the Act's two year window.
First of all, no Board minutes provide a date of completion for any the combinations. (See generally A 395-98) Thus, if the test is completed combinations as evidenced by Board approval (Ex. 1, column 1), there were 137 units, just as Judge Lynch found.
For four of the seven combinations, the chart shows there are no Board minutes even contingently approving the combinations or noting their completion (Units 3D, 3E and 3F; 6C, 6D and 6E; 6K and 6L; 6V and 6W). Thus, if "conditional" Board approvals are the test, there would have been 135 units on October 10, 1991 (with no subsequent reduction until January 20, 2001), thereby translating the 25% threshold under the Act into 33.75 Sponsor-owned units. On this basis, the window period would have opened on December 16, 1997, when the Sponsor owned 33 units, and would have closed on December 16, 1999, long before the October 18, 2000 Notice effective date.
For six of the seven combinations, the only documentation of completion dates the Co-op offered are inconclusive notations on a Building Department record entitled Property Profile Overview ("Property Profile") (Units 3D, 3E and 3F; 3G and 3H; 4A and 4B; 5W and 5X; 6C, 6D and 6E; 6K and 6L). (A 395-98, Column IV.) For two combinations neither the Co-op's records nor the Property Profile reflect the possible completion of the combinations (Units 5W and 5X; 6V and 6W). (Id.) If completed combinations are evidenced by the notations in the Property Profile, the total number of units was reduced to 136 on March 26, 1996 (with no subsequent reduction until September 11, 1998), translating the 25% limit into 34 total units. The window period would have opened on October 16, 1997 and closed on October 16, 1999.
For three of the seven combinations, the Co-op relies on changes in the Certificate of Occupancy, which do not reflect a final date of completion. (A 395-98, Column III.) Thus, if the Certificate of Occupancy records were the test, there would have been 135 units on March 26, 1996 (with no subsequent reduction until April 7, 2000), translating the 25% threshold into 33.75 units. (A 395-98, Column III.) On this basis, once again, the window period would have opened on December 16, 1997, by which time the Sponsor owned 33 units, and would have closed on December 16, 1999.
Even equating units with apartments, and even assuming completion of apartment alterations were the correct legal standard, the Notice was still untimely. The Co-op admits that the combination of 3D, 3E and 3F was not complete until October 1998. (A 334-35, ¶ 25.) The Sponsor sold no units between December 16, 1997 and November 5, 1998. Therefore, the disqualification of this one asserted combination (because the combination is not a "combination" until completed) would mean that the window period opened on December 16, 1997, when, by the Co-op's account, the Sponsor would have owned 33 of 133 units or 24.81%, and closed on December 16, 1999. (A 155; A 160.)
E. There Is No Factual Or Legal Basis For
The Co-op's Claim That The Sponsor
Was Obligated To Rewrite Proprietary Leases
And To Reissue Related Shares In The Absence
Of Owner Requests And Board Approval
The two most plainly "cooperative documents" are the Proprietary Leases and Related Shares, which, as Judge Lynch concluded based on the Fact Stipulation, did - and still do - reflect 137 units. The Co-op therefore does not advert to these basic cooperative documents in its window argument. Instead, it tries to attribute the failure of those documents to support its position to some unidentified law that somehow required the Sponsor to change the shareholders' ownership documents without their consent.
The Co-op's argument in this regard relies on the disputed facts set forth in the margin, [11] but it fails more fundamentally before reaching those controverted facts because there is no evidence of any request by or intention of any shareholder to have his/her leases rewritten or his shares reissued.
Stipulated Fact ¶ 10 ends with the following reservations of rights:
The Co-op's brief does not cite, and the Record does not contain, any proof of any (expressed or unexpressed) shareholder's intention to revise his/her Proprietary Leases and Related Shares, any evidence of any Board intention to revise Unit designations, and any reference to any "applicable law" requiring the managing agent/transfer agent to do any of those things.
Indeed, to the contrary as shown above (at 37-38), the Co-op's By-laws confirm, rather than eliminate, the need for the Board to obtain the consent of the unit owners before amending either their Proprietary Leases or Related Shares to combine their multiple units into a single unit. (Therefore, it is inappropriate for the Co-op to refer (at 33) to the fact that leases were not rewritten or shares reallocated as "administrative error.")
Nor has the Co-op shown that its managing agent or transfer agent was ever requested to change unit designations or Proprietary Leases or Related Shares.
Finally, it is not clear there is any reason for the unit owners to want to have two proprietary leases rewritten as one, or to have related shares reissued under the By-Law valuation standards. Doing so might adversely affect their right to resell their separate units to separate purchasers, because, if left as two legal units, all the owner would require to sell two separate units is Board permission to do some physical alterations, which might be as simple as replacing a door with a wall. Similarly, an owner's relationship with his/her lender might be affected. [12]
For these reasons, the unit owners, properly advised, might resist having their multiple units redesignated as a single unit without their permission and in violation Of the By-Laws. Thus, the Co-op's contention (at 26) that the units involved in combinations "have been extinguished through combinations" is factually wrong and may be a disservice to the unit owners they purport to represent. In any event, there is no proof in the Record supporting the Co-op's contrary assertion.
POINT II
NEITHER THE LOMANTOS' NOR THE
IWANCZUKS' SINGLE UNIT IS ATTRIBUTABLE
TO THE SPONSOR UNDER SECTION 3607(b)(2)
Section 3607(b)(2) refers to the point in time when the "developer owns less than 25 per centum of the units in the conversion project." On appeal, the Co-op claims that two owners of single units are "developers" based on the concept of holders of unsold shares, a term (and concept) nowhere mentioned in § 3607(b).
A. Neither The Lomantos Nor The
Iwanczuks Meets the Statutory
Definition of Developer
Judge Lynch correctly concluded that the Co-op's argument that the Lomanto and 1wanczuk units are attributable to the Sponsor is "flawed at its very root." (A 449).
"Developer"- the term actually used in § 3607(b)(2) - is defined in § 3603(14) as:
Judge Lynch correctly found that neither the Lomantos nor the Iwanczuks were statutory "developers" because they were neither original developers as defined in § 3603(14)(A) nor "successors" to the original developer (here the Sponsor) as set forth in § 3603(14)(B). (A 450-51.)
The Co-op does not dispute Judge Lynch's finding that neither the Lomantos nor the 1wanczuks were original developers under § 3603(14)(A) because "the units they own were previously conveyed." (A 450-5 1) (emphasis the original.) It does argue that they qualify as statutory developers under § 3603(14)(B). The Co-op is wrong for several independent reasons.
To be a "developer" within the meaning of § 3603(14)(B), the Lomantos and Iwanczuks must meet each of the three definitional prongs: they must be (a) "successors" (b) "who offer... to sell or sell [their] interests in the units" and (c) who ha[ve] the authority to exercise the specific "special developer control" powers listed in § 3603(14)(B), quoted, supra, at 50-51. The undisputed facts demonstrate that neither family meets any - let alone all - of the required criteria.
First, § 3603(14)(B) requires that a successor must offer to sell or sell his/her units before he/she can be deemed a developer. This is not the case here. There is no proof in the Record that either the Iwanczuks or the Lomantos ever offered their units for sale; and in fact each has owned their single unit for more than ten years. (A 81-82, ¶ 11, 12.)
Furthermore, § 3603(14) specifically requires a "successor" to be one who offers to sell "units" (in the plural). The Lomantos and the Iwanczuks have never possessed more than one unit each. (See A 81-82, ¶¶ 11, 12.) As the District Court properly recognized, they do not, unlike the bulk purchasers in 305 E. 40th Garage Corp. v. E. 40th Street Owners Corp., 833 F. Supp. 991 (S.D.N.Y. 1993), hold their shares as "'just conduits for resale of the units,' 'who own for the sole purpose of selling,' rather than 'long term individual owner[s]."' (A 453-54.)
Second, neither the Lomantos nor the Iwanczuks are even "successors" as that term has been defined for this purpose by this Court. This Court recently defined "successor" to mean "a party who not merely succeeds the original developer in time, but who also can be expected to succeed the original developer in interest pertaining to the self-dealing contract at issue." Darnet Realty Assocs., LLC v. 136 E 56th St. Owners, Inc., 214 F.3d 79, 85 (2d Cir. 2000) ("Darnet II"). This Court noted that, if:
Here, Judge Lynch concluded that neither the Lomantos nor the Iwanczuks were controlled by the Sponsor, were the Sponsor's alter ego, or shared its interest in the Lease. Judge Lynch's conclusions in this regard were fully supported by the undisputed facts:
1. Neither Iwanczuk had any relationship to the Sponsor. The Co-op does not claim that Mr. Iwanczuk has any connection to the Sponsor. And the undisputed proof establishes that Ms. Iwanczuk was never employed by the Sponsor or by Mr. Newman, its liquidating partner. (A 436, ¶ 1.) She was formerly employed by Mr. Newman's law firm's landlord, the law firm that represented the Sponsor in the conversion, but she was not employed even by that firm at the time of the shareholder vote to terminate. (Id.; A 82, ¶ 12.)
2. The Co-op does not assert that Mr. Lomanto has any connection to the Sponsor. The undisputed facts establish that the only connection either of the Lomantos has with the Sponsor is that Mrs. Lomanto is an employee of Kenneth B. Newman, P.C., a separate and distinct business from the Sponsor. (A 82, ¶ 11; A 308, ¶ 1.)
These relationships do not rise to the level of demonstrating that either family is either controlled by the Sponsor or is its alter ego. [13] And, as Judge Lynch noted, there is and can be, no contention that the transfer of one unit to each of them more than ten years before was anything other than bona fide. (A 453.)
Judge Lynch therefore rejected, quite logically, the same argument the Co-op repeats in this Court:
The Lomantos and the Iwanczuks have no interest in perpetuating the Lease, the key requirement of this Court in Darnet II. They are not signatories to the Master Lease nor do they derive any benefits from it. (See A 97-107.) As the District Court correctly noted: "[tlhe critical point is that they [have] no economic stake in maintaining the challenged lease." (A 451.)
Third, neither the Iwanczuks nor the Lomantos maintain any of the specified special developer control elements - the right to add/withdraw or convert real estate, to maintain sales offices, to exercise easements for the purpose of making improvements to the cooperative, to control the owners' association - the statute requires. See 15 U.S.C. § 3603(14)(B). There is no evidence that either the Iwanczuks or Lomantos ever had any such rights in connection with their single units.
Judge Lynch rejected the Co-op's effort to lump these family purchasers, who have held their single units for 12 to 15 years, with the bulk purchasers of units for immediate resale found to be "successors" of the developers in a lower court opinion the Co-op cites again (at 40-41) in this Court. [14] He correctly ruled that neither family was a statutory developer for this reason also. (A 453-54.)
The Co-op's argument (at 46) that the sales to these two families would circumvent the statutory termination right is wrong. In addition to Judge Lynch's conclusion that the Sponsor controls neither family's voting, the fact is that the sale of these two units back in the 1980's caused the window to open faster, not slower, by reducing the Sponsor's ownership percentage. Co-ops will generally desire earlier, rather than, as here, later, window openings.
For these reasons, neither family is a "developer" for the purpose of determining when "the developer owns 25 per centurn or less of the units in the conversion project" within the meaning of § 3607(b)(2).
Finally, based on 137 units, unless both families are developers for that purpose, the window period still closed nearly a year before the Termination Notice's effective date, October 18, 2000. If only the Lomantos are found to be "developers," then the window period would have opened on December 16, 1997, when the sale of Unit 6K would have reduced the Sponsor's ownership to 34 of 137 units (or 24.82%), and would have closed on December 16, 1999, still long before the October 18, 2000 termination date. (See A 151-57.)
B. Neither the Lornantos Nor The Iwanczuks
Are "Holders of Unsold Shares"
Not only are the Lomantos and Iwanczuks not statutory developers, they are not even "holders of unsold shares."
Under New York Law, the designation "holders of unsold shares" has a limited purpose unrelated to the Act's purposes or to the particular issues relevant to the calculation of the Sponsor's ownership percentage under the Act. "Holders of unsold shares" are exempt from certain cooperative regulations requiring unit owners, for example, to obtain board approval for subleases, sales and alterations and from some board-imposed fees. See, e.g., Pacella v. 107 W. 25th St. Corp., 271 A.D.2d 342 (1st Dep't. 2000) (finding that shareholder required cooperative corporation's consent to sublet apartments because he was not a holder of unsold shares).
To be considered a holder of unsold shares, the holder must register as a broker-dealer and an amendment to the plan must be filed providing information including his/her relationship to the developer and to any other cooperative property offered for sale by him/her within the past five years. 13 N.Y.C.R.R. § 18.3(w)(1, 10, 11). New York courts have required strict compliance with these requirements. See Pacella, 271 A-D.2d at 342-43; Gorbatov v. Gardens 75th St. Owners Corp., 247 A.D.2d 440, 441 (2d Dep't 1998).
Neither the Lomatos nor the Iwanczuks have taken steps to meet these regulatory requirements. (See A 66-67, T ¶¶ 3-4; A 392, ¶ 16.)
Thus, as a matter of law, there can be no finding that they are "holders of unsold shares." Pacella, 271 A.D.2d at 342-43. [15]
POINT III
THERE ARE ALTERNATIVE GROUNDS
SUPPORTING THE JUDGMENT BELOW AND
REQUIRING DENIAL OF THE CO-OP'S CROSS-MOTION
Below, the Sponsor offered two additional reason for granting it summary judgment and for denying the Co-op's cross-motion. The District Court did not need to reach those two alternative grounds, and did not. In the event, this Court decides it would vacate the District Court's judgment rendered based on Points I and II, supra, and decides to reach the alternative grounds for affirmance, we set forth here the Sponsor's position on each.
A. The Garage Does Not Primarily Serve
The Co-op's Unit Owners And Is Therefore
Not Suject To Termination Under Section 3607(a)
Section 3607(a) (1) provides, a "cooperative association," such as the Co-op, may seek to terminate a lease which, among other factors:
In West 14th Street Commercial Corp. v. 5 W. l4th Owners Corp., 815 F.2d 188, 198 (2d Cir.) cert. denied, 484 U.S. 850 and 484 U.S. 871 (1987), this Court held that the statutory phrase "property serving" "should be accorded its plain, ordinary meaning of providing services." This standard was amplified by the "current use" test, which refers to the use of the garage at the time of the termination vote. See Cromwell Assoc., 941 F.2d at 112 (citing cases).
Here, there is no evidence in the Record that any Co-op uses the Garage, i.e., that it provides any service to unit owners.
Contrary to the Co-op's contention (at 51), Darnet II does not hold that parking garages in Manhattan are per se "property serving the ... cooperative unit owner," within the meaning of § 3607(a)(1). Instead, Darnet II held simply that the lack of a garage use preference did not automatically remove the property from that type of property that serves unit owners. Darnet II, 214 F.3d at 86 (stating that "[w]e hold ... that a parking garage 'with or without tenant preferences' is 'property serving the ... unit owners"').
Darnet II did note that parking garages in Manhattan can be "veritable gold mine[s]" and that unit owners could benefit from the profits derived by their cooperative from operating the building parking garage by using such profits to reduce the cooperative's operating expenses. 214 F.3d at 86. However, to argue, as the Co-op does, that this means all garages serve unit owners because the space is valuable proves too much, for the argument would cover stores whose space is also valuable as well; and it also strays too far from the language of § 3607(a)(1) quoted above. [16]
If Darnet II did not hold that all leases for parking garages appurtenant to Co-ops are per se terminable under the Act, then this Court must affirm the denial the Co-op's motion for summary judgment. The Co-op has failed to prove a necessary element of its claim: that the Garage was "property serving" the Co-op's unit owners. [17]
The Co-op, despite having access to information and ample opportunity to ascertain this information, has failed to submit any evidence on this point. "In assessing the record, all ambiguities and reasonable inferences are viewed in a light most favorable to the nonmoving party." Byant v. Maffucci, 923 F.2d 979 (2d Cir), cert. denied. 502 U.S. 849 (1991). The termination notice should be invalidated on this basis also. [18]
B. The June 27, 2000 Shareholders Vote
Was Tainted In Various Ways
The Co-op's Board properly noticed the June 1999 shareholders' meeting, conducted an open debate at which the Sponsor presented the reasons shareholders should not vote to terminate, and allowed the voting to take place after the open discussion. The shareholders rejected the idea of termination.
No new shareholders' meeting or vote was called again until a year later, in June 2000, when another meeting was called specifically for this purpose. (A 310.)
At that belated time, the Co-op's Board decided not to allow an open discussion and not to give the Sponsor or the Iwanczuks or the Lomantos notice of the meeting. Instead, it appears that one or more Board members went around to individual shareholders before the shareholders meeting called to discuss the issue openly, and collected proxies giving the Board's President the right to vote in favor of termination.
So, at the meeting, the Board simply announced that "the resolution had passed 87 to zero." (A 83, ¶ 14.) The Co-op's affidavit below stated that 77 owners had voted in favor of termination, 67 of whom had voted in advance of the meeting by proxy, [19] four of whom voted at the meeting by proxy, and only six of whom - and for all we know those may have been Board members themselves as unit owners - voted at the meeting. (A 311, ¶ 5.)
After the meeting, the Sponsor demanded access to the proxies and ballots for inspection and copying; the Co-op has refused to produce (or to make available) those ballots/proxies. (A 303, ¶ 6.) The Sponsor requested discovery in this case on whether the announced vote was correct but Judge Lynch did not reach this issue because of his conclusion that the window had already closed before the June 27, 2000 meeting. [20]
In addition, New York's Business Corporation Law § 605(a), and the Co-op's By-Laws, Art. 1, § 2, require that notice of a special shareholders meeting, such as the June 27, 2000 meeting, be "served, either personally or by mail, upon each shareholder of record . . . , not less than ten nor more than fifty days before the date of the meeting." (A 181.) The reason is easily understood: the best decisions are taken in a deliberative format, where all contending interests are represented. See In re J.A. Maurer, Inc., 77 N.Y.S.2d 159, 161 (Sup. Ct. Queens Co. 1947).
Both the Iwanczuks and the Lomantos have sworn they did not receive any such notice for the June 27 meeting. (A 437, ¶ 4; A 309, ¶ 4.) (The Sponsor has also denied that it ever received any mailed notice of this meeting, (A 68), and it in fact contemporaneously alerted the Co-op to the lack of proper notice, (See A 73-74).) [22]
There is therefore at least a fact question as to whether the meeting was improperly convened, and whether the atrocious proxy collection process was lawful, under the By-Laws and State Law., thereby voiding the Termination Notice later sent pursuant to the improperly adopted shareholders' resolution. See Goldfield Corp. v. General Host Corp., 29 N.Y.2d 264, 269 (1971). Under BCL § 606, where the notice of a meeting is improperly given, the impropriety is not waived by the shareholder's participation in the meeting itself Block v. Magee, 146 A.D.2d 730, 733 (2d Dep't 1989).
The vote thus obtained was tainted by the process employed, tainted by the Board's subsequent refusal to give the Sponsor the requested access to the ballots and proxies, and flawed under New York's Business Corporation Law for failure to give notice of the meeting to the Iwanczuks and Lomantos, who, even as holders of unsold shares, are entitled to be heard and to vote.
CONCLUSION
For these reasons, the judgment of the District Court should be affirmed, with costs, in all respects.
Dated: New York, New York
March 25, 2002
Respectfully submitted,
PROSKAUER ROSE LLP
By: /s/ Dale A. Schreiber
Bruce E. Fader (BF-5564)
Dale A. Schreiber (DS-9211)
Allison B. Feld (AF-9464)
1585 Broadway
New York, NY 10036
(212) 969-3000
Attorneys for Plaintiff-Appellee
Certificate of Compliance With
Fed. R. App. P. 32(a)(7)(B)
Pursuant to Fed. R. App. P. 32(a)(7)(B), I hereby certify that the foregoing brief complies with Fed. R. App. P. 32(a)(7)(B)(i), with respect to the 14,000 word type-volume limitation. I make this representation based upon the fact that the word processing equipment used to generate this brief indicated that the brief, excluding those portions exempted by Fed. R. App. P. 32(a)(7)(B)(iii), contains 13,222 words. The font in this brief is Times New Roman, 14 Point.
Dated: March 25, 2002/s/ Dale A. Schreiber
Dale A. Schreiber
FOOTNOTES
[1] "A" refers to the Joint Appendix.
[2] The Proprietary Lease and Related Shares are the basic legal documents issued by the Co-op defining an individual unit owner's ownership rights in his/her unit(s) and in the Co-op itself, for a form of lease see A 245-85.
[3] Judge Lynch noted the difference in his Opinion (at 6):
[4] The Sponsor is a limited partnership consisting of dozens of partners. (A 69.)
[5] Thompson v. County of Franklin, 15 F.3d 245, 253 (2d Cir. 1994) (where the district court has not ruled on an issue, the preferred practice in this Circuit is to remand the issue for consideration by the lower court in the first instance.)
[6] The Co-op persists in suggesting (at 27-28) that a "cooperative unit" for purposes of § 3607(b)(2) turns on the "exclusive use and possession" language in the definition in § 3603(12). However, Judge Lynch correctly rejected that notion in favor of the statutory reference to "cooperative documents" saying:
[7] The cases the Co-op cites (at 32) for the proposition that "stock certificates or proprietary leases are not conclusive as to ownership" are inapposite, for they all involved issues of determining stock ownership, for example, for estate or workers compensation purposes.
Here, there is no disputed issue of stock ownership; the issue is whether proprietary leases or shares were ever changed to reflect some physical alterations of the apartments to which they originally related, and it is undisputed - indeed, stipulated - that they did not.
[8] The Co-op first asserted that any physical combination of apartments providing access from one to another qualifies as a relevant combination. (A 32-33.) Then, it changed its position to be that the relevant combinations were those resulting in only one kitchen in the combined apartments (A 81; A 159-60.) Then, the Co-op argued that one should look to the Board's conditional approval of certain physical combinations. (See Memorandum of Law in Support of Defendant's Cross-Motion for Summary Judgement, dated May 18, 2001, at 7-8.)
[9] By doing so, the Co-op avoided the unfair consequence of the counting system it now advocates. Owners of three units, even if combined into one residence, should have their heightened financial stake in the Co-op association recognized by having three units of voting power under the Act's § 3607(c). Under the Co-op's new counting scheme, however, such an owner would vote only one unit, as if he were owner of a single unit, despite his increased investment and his increased number of cooperative shares.
[10] The Co-op notes (at 6) that the Sponsor's agent kept the minutes until November 1999, possibly implying that the Sponsor either intentionally or negligently caused some error or omission in those minutes. However, the Sponsor denied that he regularly kept the minutes (A 391), and even the minutes prepared after that date do not refer to changes in Proprietary Leases or Related Shares; they refer only to changes in the physical condition of apartments. (See, e.g., A 376, which refers to the Board's approval in January 20, 2000 of plans to renovate apartments 5W and 5X.) The Co-op claims these apartments were in fact combined by the end of March 2000. (A 335.)
[11] 1. The Co-op states (at 6), as if it were undisputed, that "Until November 1999, the Cooperative's minutes were kept, and often prepared, by Kenneth B. Newman." (See also Co-op Br. at 10 ("as shown above, many of the minutes prepared and kept by Kenneth B. Newman were missing. . . .")). Mr. Newman controverted that contention as follows: I seldom prepared Board minutes. Minutes were usually prepared by the Board's elected corporate secretary. Moreover, before my term on the Board expired, I turned over all minutes in my possession to the Board. Some minutes were missing because past corporate secretaries ignored repeated requests to provide me with copies." (A 391, ¶ 13.)
2. Similarly, the Co-op asserts as undisputed (at 6) that Mr. Newman "acted as the Board's principal legal advisor." Again, Mr. Newman denied this, saying: "I never served as the Co-op's general counsel. I did not act as its counsel in any ongoing fashion and did not give the Board legal advice. Rather, over the years, the Co-op retained various attorneys to represent it on specific matters, as it did before and during the period of time (from October 1997 to October 1999) when the Sponsor asserts the window period was open." (A 391, ¶ 14.)
[12] A lender might well object to re-designating two units as one, as it might reduce the ability to sell the two units as two apartments (often two separate apartments have more value than one combined apartment). Any re-designation would at the very least require a change in the financing documents and, depending upon market conditions, may require the unit owner to make some concession to obtain lender consent.
[13] Judge Lynch's conclusion in this regard is further bolstered by the fact that, as the Co-op itself acknowledged (A 311), the shareholder voting on termination was anonymous, and the Sponsor would therefore have no way of knowing how the Lomantos voted or whether they voted at all.
[14] As discussed in Judge Lynch's opinion (A 453-54), in 305 E. 40th Garage Corp., supra, cited by the Co-op (at 40-41), it was reasonable to believe that the bulk buyers in that case were, as Judge Lynch wrote, "'just conduits for the resale of the units," "who own for the sole purpose of selling," rather than "long-term individual owner[s]."' (Id.) Here, by contrast, "The Co-op has made no effort to establish that these characterizations fit the [Iwanczuks and Lomantos], who had owned the units in question for ten to fifteen years at the time of the attempted termination of the garage lease." (Id.)
[15] It is irrelevant to their regulatory status that the Sponsor may have erroneously advised the Co-op's counsel that the Lomantos and/or the Iwanczuks were holders of unsold shares. (A 286.) In any event, more germane is the fact that the Sponsor, in filing the Seventeenth Amendment to the Sponsor's offering plan (A 208; A 232) did not list either the Lomantos (2L) or the Iwanczuks (6A) as holders of unsold shares.
[16] It is also not entirely logical. Developer-retained garage leases are not intrinsically harmful to unit owner financial interests, because the financial advantages provided by such leases enable the developer to "substantially lower prices" to unit purchasers. Darnet I, 153 F.3d at 25 n.5.
[17] As the Co-op correctly observes (at 51-52), New York Multiple Dwelling Law, § 60(l)(b) permits a resident of a covered dwelling to be assigned a parking space in the appurtenant garage within 30 days of his or her written request for an assigned space. But there is no Record evidence that any unit owner ever did so.
[18] At the very least the Co-op's summary judgment motion was premature and the Sponsor is entitled to discovery to determine what the "current use" of the Garage was at the time the vote was taken. See Cromwell Assoc., 941 F.2d at 112.
[19] The Co-op's counsel states in his affidavit (A 311, ¶ 4) that all of those shareholders were "unable to attend." It is unlikely both that he has such personal knowledge of the plans and whereabouts of 67 people that night or that in fact so many people were "unable to attend."
[20] In 2 Tudor City Place Associates v. 2 Tudor City Tenants Corp., 924 F.2d 1247, 1254 (2d Cir. 1991), this Court held that conclusory allegations of fraud in the vote will not support the developer's right to discovery. Here, the situation is quite different: the proponents of termination lost the previous year's vote and then, in the election in issue, failed to give proper notice and adopted tactics to stifle informed debate among unit owners.
[21] Section 3610 allows the incorporation of State law, when it "does not abridge, deny, or contravene any standard for consumer protection established under" the Act. New York has for many years applied the governance provisions of the BCL to cooperative corporations. See, e.g., Wapnick v. Seven Park Ave. Corp., 658 N.Y.S.2d 604, 606 (Ist Dep't 1997); Rego Park Gardens Assocs. v. Rego Park Gardens Owners Inc.,, 570 N.Y.S.2d 550, 552 (1st Dep't 1991). There is nothing intrinsically contraventive of the Act in upholding the requirements of BCL § 605 or By-law § 1(2).
[22] The Co-op could have, but chose not to, hold another election to resolve doubts about the fairness of the election upon which the Termination Notice was based.