Scott E. Mollen
Scott E. Mollen ()

Condominiums—Attorney General Obtained Court Order Which Enjoined An Attorney and His Condo Developer Clients From Offering or Selling Securities in the State of New York—General Business Law §354—Martin Act

The New York State Attorney General obtained a court order, pursuant to General Business Law (GBL) §354 which, inter alia, bars the respondent attorney and respondent condo developers from offering or selling securities, including cooperative and condominium apartments, in the state of New York.

The Attorney General had received complaints from condominium purchasers regarding “pervasive water leaks and construction defects in their newly constructed building” and the developers’ failure to obtain a permanent certificate of occupancy (C of O) from the NYC Department of Buildings.

The Attorney General had commenced an investigation and found that the developers had “participated in an elaborate ruse intended to defraud homebuyers—a ruse that was facilitated by their lawyer ['A'].” The developers and “A” had submitted and leased “nine false filings to the Real Estate Finance Bureau in their attempt to skirt their obligations to deliver completed apartments to homebuyers and conceal the developers’ identities.” The Attorney General asserted that the developers had listed the 83-year old mother of one of the developers, as “the sole individual controlling developer.” The respondents had allegedly sought to conceal the true developers’ identities in order to avoid disclosing the fact that one of the developers had a prior felony conviction for having committed bank fraud.

The Attorney General further alleged that the developers were also attempting “to walk away with $3.2 million of deposit monies and ‘pin all liability’” on the aforementioned mother. The Attorney General believed that the mother was not complicit in the conduct of her son or the attorney.

The Attorney General had sought a court order under GBL §354 based on the respondents’ “egregious conduct” and “failure to cooperate.” The order required, inter alia, that the respondents deposit $3.2 million with the court, appear at a hearing in open court and produce documents. The order also barred the respondents for offering for sale or selling securities in New York.

The Attorney General predicated its fraud claims on, inter alia, statements of several witnesses, including the attorney’s “current and former employees” and the mother, as well as “substantial documentary evidence.” The Attorney General claimed that notwithstanding such evidence, the developers had refused “to make restitution to the victims or cease their fraudulent practices” and had “defied a subpoena seeking information about the fraudulent activity.”

Comment: The Attorney General’s office has advised me that it subsequently entered into a “so ordered” stipulation which requires, inter alia, the deposit of $200,000 with the Attorney General and weekly status reports on the developers’ progress in obtaining a permanent certificate of occupancy. The stipulation is without prejudice to the Attorney General’s rights to pursue other available remedies with respect to its investigation.

The investigation is being conducted by Assistant Attorney General Serwat Farooq and Jeffrey R. Rendin, Chief of Real Estate Finance Enforcement, under the auspices of Erica F. Buckley, Chief of the Real Estate Finance Bureau and Executive Deputy Attorney General for Economic Justice Karla G. Sanchez. Senior Investigator Richard D. Friedman aided in the investigation.

GBL §354 is a powerful tool in the attorney general’s arsenal. The provision provides that whenever the attorney general has “determined to commence an action under this article,” he may present an application for an order to any justice of the Supreme Court. The order sought may require an appearance before a Supreme Court justice or a referee to answer questions and to produce documents relevant to “alleged fraudulent practices.” The statute also provides that “it shall be the duty of the justice of the Supreme Court…to grant such application.” The statute further states that the applicable legal standard is “material and necessary” and CPLR provisions for pre-action disclosure are inapplicable “except as herein prescribed.”

As to injunctive relief, the statute provides that the court shall grant such injunctive relief “as may appear to such justice to be proper and expedient.” Generally, the attorney general uses GBL §354 only in cases where a sponsor and/or its counsel failed to provide reasonable cooperation with respect to the attorney general’s inquiries.

Matter of an Inquiry by Eric T. Schneiderman v. Scarpinito, Sup. Ct., N.Y. Co., Index No. 452179/13, Lobis, J.

Plaintiff’s Claims That Defendant Defrauded Relatives Out of Their Interest in Their Mother’s Home Barred by Statute of Limitations—Plaintiff Waited Eight Years Beyond the Six-Year Statute of Limitations, Based On Sporadic Empty Promises From His Brother—That Showed a Lack of Diligence

The plaintiff had commenced an action against his older brother (“A”), claiming that “A” defrauded him and his siblings of the profits of their mother’s home. The plaintiff alleged that “A” had “leveraged the value of the home to acquire other properties for ['A''s] and ['A''s girlfriend's] personal gain instead of treating the property as part of their mother’s estate.” The plaintiff asserted “claims for breach of fiduciary duty, conversion, fraud, intentional infliction of emotional distress and [for] an accounting.”

In 1978, the mother executed a will which provided that upon her death, her assets would be distributed one-third to her husband and the remainder equally to her five children. After the mother’s husband had died and the mother had become ill, “A” had allegedly suggested to the mother that she transfer her home to one of her other sons (“B”), who was living with her at the time and advised the mother that such “transfer would be valid under the Medicaid transfer law.” “A” had allegedly advised the mother that the home “would be transferred back to her estate upon her death.” The plaintiff further alleged that “A” had persuaded the mother to appoint him as co-transferee since “B” was “incompetent to manage the home.”

The mother transferred the property to “A” and “B.” When the mother passed away, “A” served as executor for her estate. Thereafter, “A” “allegedly ‘secretly induced’ ['B'] to transfer his interest in the property to him.” “A” paid “B” $3,000 and “B” moved out of the home. “A” thereafter rented out the property. “A” recorded the transfer in 1998 and advised his siblings, including the plaintiff, of the transfer. The plaintiff alleged that “A” promised to manage the home as “an income-producing property and distribute…profits…to each of the sibling-beneficiaries.” The siblings agreed and waited to receive their share of the profits. “Fourteen years later, ['A'] still had not distributed any profits to his siblings.”

The plaintiff alleged that “A” had engaged in a series of transactions involving the home, but kept the profits for himself and his girlfriend. “A” allegedly used mortgage proceeds to make other investments and this continued for more than a decade. The plaintiff alleged that “A” had knowingly made misrepresentations to the siblings in order “‘to lull [them] not to make further inquiries’ and ‘to hide his fraudulent conduct.’” “A” allegedly advised his siblings that “things were moving very slowly” and he was not sure when the property would become profitable, there was no money for distribution and “A” “‘was broke’ due to upkeep expenses.”

The plaintiff filed his complaint in July 2012 and thereafter filed three amended complaints. The defendants moved to dismiss on the grounds, inter alia, that the plaintiff’s claims are barred by the statute of limitations (SOL). The defendants argued that the plaintiff knew of the wrongdoing as early as 1998, when “A” had advised the plaintiff that “B” had sold his interest in the home to “A.” They also argued that the plaintiff had no interest in the property since the property had been removed from the mother’s estate after the 1989 transfer to “A” and “B.”

The court explained that “an action based upon fraud must be brought within the greater of six years…of the alleged fraud, or two years from when a plaintiff was aware or should have been aware of enough facts such that he could have discovered the fraud with reasonable diligence….” Here, the alleged fraud, i.e., “A’s” “acquisition and misappropriation of the…home—arguably first occurred in 1989, when ['A'] gained partial control of the home and promised to transfer the home back to his mother’s estate upon her death.” The defendants and the plaintiff seemed “to identify the fraud as occurring nine years later in 1998, when ['A'] induced ['B'] to sell him his interest in the property.” “A” had recorded the sale in March 1998 and told the other siblings about the sale on or about April 1, 1998.

The court reasoned that “[u]sing the latest of the dates—April 1, 1998, when Plaintiff became aware that ['A'] had not transferred the house back to their mother’s estate and in fact put the home entirely in his own name—Plaintiff had until April 1, 2004 (six years later) to file his complaint. Plaintiff did not bring this action until…more than fourteen years after the sale occurred and eight years after the limitations period had expired.”

The plaintiff countered that “the doctrine of equitable tolling or equitable estoppel” is applicable and that “he only discovered his brother’s fraud in January 2011.” He claimed that “A” had “‘knowingly made misrepresentations…to lull” the beneficiaries into not making further inquiries “and ‘to hide his fraudulent conduct.’” The plaintiff asserted that “after many years of trusting ['A'], he finally ‘peeked behind the curtain’ in 2011 and learned what ['A'] was doing.” The court explained that:

the doctrines of equitable tolling or equitable estoppel may be invoked to defeat a statute of limitations defense when the plaintiff was induced by fraud,…to refrain from filing a timely action…. Equitable tolling applies where a defendant’s fraudulent conduct results in a plaintiff’s lack of knowledge of a cause of action…. A plaintiff must establish that the defendant wrongfully concealed material facts, which prevented plaintiff’s discovery of the nature of the claim, and that plaintiff exercised due diligence in pursuing the discovery of the claim during the period plaintiff seeks to have tolled…. Equitable estoppel, on the other hand, permits the tolling of the statute of limitations in extraordinary circumstances where the plaintiff knew of the existence of his cause of action, but the defendant’s misconduct caused him to delay in bringing suit…. Under either doctrine, the plaintiff must show that his failure to act was not due to lack of diligence on his part during the period he seeks to toll.

The plaintiff knew in 1998 that “A” had not returned the house to the estate as he had promised and instead, “had taken sole possession of it.” The court opined that even if “A” had lulled the plaintiff for a time, “when years went by with no follow-through a reasonably diligent plaintiff would have undertaken some inquiry.” The plaintiff was obligated “to investigate ['A''s] activities long before January 2011″ and the plaintiff could have discovered each of the real estate transactions since “they were all matters of public record.” Apparently, the only thing that the plaintiff did in 2011, “was look at public records” something “he could have done at any time.”

The court further opined that “[w]hile patience and trust in one’s older brother may be reasonable for a time, waiting eight years beyond the six-year statute of limitations, with only sporadic empty promises from the brother in that entire period, plainly demonstrates the lack of diligence that bars equitable relief from the limitations period.” Thus, the court held that the plaintiff’s claims were “untimely.”

Stuart v. Stuart, 12-CV-5588, NYLJ 1202634501891, at *1 (SDNY, Decided Dec. 10, 2013), Seibel, J.

Real Estate Brokerage Fee Earned—Oral Brokerage Agreement Enforceable—If There Was No Agreement as to Amount of Commission, Broker Entitled to a “Reasonable” Commission—Dual Agency

A plaintiff licensed real estate broker commenced an action to recover a $10,000 commission for services rendered in connection with the sale of the defendant’s home. The broker had entered into a written “dual agency” agreement with the buyers. The broker testified at a non-jury trial that “she had no expectation of compensation from the buyers, and had received no compensation from them.”

The defendant had offered his house for sale on the Internet pursuant to an advertisement which stated “no brokers.” Although the defendant had placed a “for sale by owner” sign on the front of his house, the broker had contacted the defendant and advised the defendant of her status as a broker. The broker “showed the house to the buyers on multiple occasions with defendant’s consent, and negotiated the sale of the house.” The broker testified that she had, from the outset, advised the defendant that she had expected him to pay her a flat $10,000 commission for brokering the sale. The broker had forwarded to the defendant, a proposed commission agreement and a dual agency disclosure form. However, the defendant had refused to sign such form or agreement.

The defendant had entered into a contract to sell his house for $637,500 to the broker’s buyers. The contract contained a representation that the broker “was the only broker with whom either the seller or the buyers had dealt.” It further provided that the “Seller shall pay Broker any commission earned pursuant to a separate agreement between Seller and Broker.”

The seller had testified that he had never agreed to pay the broker a commission and had never signed a separate brokerage commission agreement. After the sale was consummated, the defendant refused to pay the plaintiff a commission.

A Civil Court judge had dismissed the complaint, noting that the defendant “had refused to sign the dual agency disclosure form,” the defendant’s Internet advertisement had indicated that he had no intent to hire an agent, the contract stated “that ‘broker’s fees are payable only upon proof of a separate written agreement’…, and that ‘an alleged oral agreement is insufficient by the very terms of the contract.’” The Appellate Term (court) reversed.

The court explained that the contract acknowledged that the broker had been the sole broker involved in the transaction and provided that the seller would “pay Broker any commission earned pursuant to a separate agreement between Seller and Broker.” Moreover, the contract did not require “that such agreement be written, contrary to the finding of the Civil Court.” The court further noted that “an oral agreement to pay a real estate broker, whether express or implied, is enforceable….”

The court emphasized that the broker “had rendered brokerage services which resulted in the sale of defendant’s house” and “[t]he language of the contract…constituted an admission that plaintiff was due a broker’s fee from defendant….” The court concluded that the plaintiff had “sufficiently established that defendant had agreed that she was defendant’s broker and, thus, that she had a right to recover a commission from him….”

Since the defendant had not agreed to the payment of a commission in any specific amount, the court found that the broker was entitled “to be paid a commission in a reasonable amount.” The court held that the broker’s demand for $10,000 which was approximately 1.5686 percent of the purchase price, fell “within the parameters of a ‘reasonable’ commission,” and therefore, the broker should be awarded such sum.

Comment: Occasionally, a seller will attempt to use in the negotiation of the sale price, the fact that he or she will be paying a brokerage commission. A seller may say something like “[R]emember, after I pay the commission, I am only netting ‘X’ dollars.” Some sellers will then fail to pay the broker the commission owed or will attempt to negotiate a lower commission with the broker and pocket the difference. This is why purchasers’ attorneys will attempt to negotiate provisions which explicitly provide that the seller will pay the brokerage commission and the seller will indemnify the purchaser from any claim by such broker.

Belinda G. Schwartz, Chair of Herrick, Feinstein’s real estate department, explained that “attorneys who represent purchasers, therefore ask for full brokerage representations and indemnification from the seller, that will survive closing or termination of contract and the commitment of the seller to pay the commission at closing. The problem is that if the representation is breached and the seller has no assets post-closing, the indemnity may be hard to enforce. Purchasers may ask for some ‘backstop’ for all of the seller’s surviving representations and indemnities, but the ability to obtain that depends on the market. It is difficult to achieve in a ‘seller’s market.’”

Miranda v. Aliotta, 2012-2220 RI C, NYLJ 1202633774411, at *1 (App Tm., Decided Dec. 9, 2013). Before: Pesce, P.J., Weston and Rios, JJ. All concur.

Scott E. Mollen is a partner at Herrick, Feinstein and an adjunct professor at St. John’s University School of Law.