Costs of Prosecuting Claims Against Sponsor Can Skyrocket

Copyright by, and republished with permission of, Habitat Magazine.

The board at a 10-unit Tribeca building has learned how difficult it can be for a condominium to fund litigation. The board decided to sue the condominium’s sponsor, claiming that the sponsor failed to reveal physical defects in the building, failed to fund the reserve fund as required, and allowed one of its principals, the owner of the building’s commercial space, to cause structural damage to the building. In its suit, the board claimed unit-owners faced “staggering” costs to repair existing damage and prevent further damage.

Before filing suit, the board had to figure out how to pay for the legal expenses they would be facing. The bylaws of the condominium state that the board of managers, at least annually, shall prepare a budget for common expenses in order to fix the monthly common charges payable by unit-owners. The common charges may include an amount “for a general operating reserve.” The bylaws also provide that the board may impose “assessments as are necessary to provide funds for other condominium purposes [and] expenses which were not anticipated at the last time common expenses were determined.” Assessments greater than $25,000 require the approval of at least 50 percent of unit-owners.

The board voted to authorize a $25,000 special assessment on all unit-owners, to be used for legal fees and expenses. Going further, it also authorized additional common charges of $227,000, spread over a 22-month period, for the funding of reserves to pay legal fees and expenses.

Unit-owners were billed for the special assessment and additional common charges. The owner of the basement and first-floor commercial unit – whose principal was a member of the sponsoring entity – did not pay its bill and challenged both charges. The state Supreme Court rejected the challenge to the assessment out of hand, finding that it clearly fell within the authority of the board granted under the bylaws.

However, the increase in common charges was more problematic. The board argued that the $227,000 in additional common charges was for “a general operating reserve,” as authorized by the bylaws. The sponsor argued that that the term “general operating reserve” was not intended to encompass reserves for litigation. The court found that the documents on their face were insufficient to sustain the board’s position, and that the matter could not be determined without fact-finding proceedings to ascertain their meaning. Fact-finding proceedings can be time-consuming and costly.

The lesson here is that the bylaws of condominiums establish the circumstances under which the board of managers may increase common charges and impose assessments. These circumstances are very often much more restrictive than those under which co-op boards may take similar action. Boards should study their bylaws carefully and seek legal counsel before taking action to raise money from their unit-owners that may be controversial – and subject to legal challenge.

THE ENGAGEMENT “RING” OF LITIGATION

Was an expensive ring a conditional gift given in contemplation of marriage (to be returned if the wedding did not take place) or an outright gift (to be kept whether or not marriage ensued)?

The answer may depend on where the ring was given (New York or elsewhere), and application of principals of choice of law (where the parties resided in different states) and/or conflict of laws (where the laws in different states are not the same).  Three recent cases are illustrative:

McMahon v. Decicco, 2018 NY Slip Op 31706(U), Sup Ct. Suff. Co. (July 18, 2018) Continue reading

A Housing Cooperative Is a Mini-Democracy

Copyright by, and republished with permission of, Habitat Magazine.

This year, as in years past, the cycle of annual meetings at New York co-ops produced its share of hotly contested elections to boards of directors. And, as in years past, some of those disputed elections led to litigation. A new court ruling has underscored a fact of life that sometimes gets lost in the heat of the battles to gain control of co-op boards: cooperative housing corporations are, at bottom, democracies. The majority usually rules.

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