Scott E. Mollen
Scott E. Mollen ()

Landlord-Tenant—Wrongful Eviction—Damage Claim Dismissed Without Prejudice Because District Court Lacked Authority To Award Legal Fees In RPAPL §713(10) Proceeding—Legal Fees Must Be Sued For Separately.

The petitioner had been evicted from his cooperative apartment. He thereafter commenced “an unlawful entry and detainer proceeding pursuant to RPAPL §713(10) (§713[10]) against the cooperative corporation (co-op), seeking to be restored to possession and to recover compensatory and treble damages.”

The co-op answered and moved for summary judgment dismissing the petition. The District Court had granted the co-op’s motion, holding that, the petitioner lacked “standing to commence…§713 (10) proceeding.” The Appellate Term had reversed, holding that the petitioner had standing to maintain the proceeding since he had been in “constructive possession…, through the possession of his subtenant, at the time of the alleged unlawful entry and detainer.”

Following a trial, the District Court found that “the default and termination notices that had been served were ineffective to terminate the petitioner’s tenancy and that petitioner had been wrongfully evicted by [the co-op's] then managing agent, the principal of which was ['A']. The District Court awarded petitioner damages against [the co-op], but did not award him possession because [the co-op] was not the ‘titled owner.’” The apartment shares had been sold at auction to “B,” the sponsor, an entity that was also controlled by “A.” “A” was the co-op’s vice president and he also controlled an entity that was the sponsor.

On a prior appeal, the Appellate Term had directed that a final judgment of possession be awarded to the petitioner and dismissed, without prejudice, the petitioner’s claim for damages. The court found that the eviction was “wrongful” and “because ['A'], the principal of ['B'], was also the president of the company that had managed the property, the vice president of [the sponsor], the person who had issued the defective predicate notices, and the person who had been in control of [the co-op's] defense of this litigation, ['B'] was bound by all the findings previously made in this proceeding.” The court dismissed the damages claim without prejudice, since “damages are not recoverable in a RPAPL 713(10) proceeding and must be sued…separately.”

The petitioner thereafter commenced a Supreme Court action seeking, inter alia, damages. Thereafter, “B” moved to modify the Appellate Term’s prior decision, arguing that that court lacked “subject matter jurisdiction” because an undisclosed prior intervening sale of the subject co-op apartment, at arms’ length had taken place. “B” claimed that it had “purchased the apartment at auction for $4,500 following the eviction, had renovated the apartment and had sold it” thereafter to “C” for $73,000. “B” argued that the Appellate Term “had been ousted of jurisdiction because ['B']” was not “ in possession when this court’s decision and order had been made.” The Appellate Term denied “B’s” motion, “noting that the sale of the shares to a third party did not divest the court of jurisdiction.”

In the interim, “B” moved in the District Court to vacate all prior proceedings and decisions and for a new trial based on a claimed lack of subject matter jurisdiction. “B” also moved to dismiss the petition on the ground that “the same relief had now been requested in the pending Supreme Court action and on the ground that ['B'] had no claim to possession of the premises.” “B” admitted that “at ['A''s] instructions, [the co-op's] managing agent had changed the apartment door locks following the auction sale to ['B'] and had given possession to ['B']….” “B” nevertheless argued, inter alia, that “the District Court, and [the Appellate Term], lacked subject matter jurisdiction because no party originally named as a respondent in this proceeding had been in possession at the time the proceeding had been commenced.”

The petitioner opposed the motion and moved for attorney fees for approximately $90,000, as against “B” and the co-op. The District Court had denied “B” and the co-op’s motions and granted the petitioner’s motion to the extent of finding that since the petitioner had prevailed in the proceeding, the petitioner was entitled to recover attorney fees, as against the co-op and “B” and set the matter down for a hearing to determine reasonable fees owed.

Although the Appellate Term held that the District Court had properly denied “B’s” motion to vacate all the prior proceedings, it held that the petitioner’s motion for attorney fees against “B” should have been denied without prejudice. The court explained:

The District Court’s jurisdiction in all RPAPL article 7 summary proceedings, with respect to the relief that may be granted to a petitioner, is limited to an award of possession, rent, and use and occupancy…. Contrary to petitioner’s contention, nothing in [RPL] §234 enlarges the court’s jurisdiction so as to allow an award of attorney’s fees to a petitioner in an RPAPL 713 (10) proceeding. We note, in any event, that petitioner’s claim for more than $89,000 in attorney’s fees far exceeds the $15,000 jurisdictional limit of the District Court (UDCA 202), and that, while the UDCA expands the District Court’s jurisdiction to allow the recovery, in a summary proceeding, of “rent due without regard to amount”…, the fees sought herein are not “rent due.” In view of the foregoing, [the co-op's] motion for, among other things, leave to amend its answer to seek indemnification for any attorney’s fees awarded against it was also properly denied.

Saccheri v. Cathedral Properties, 2012-333 N C, NYLJ 1202646432875, at *1 (App. Term, 2d, Decided Jan. 27, 2014). Before: Nicolai, P.J., Lasalle and Marano, JJ. All concur.

Co-Ops—Rights and Obligations of Holder of Unsold Shares—”Voting Control” vs. “Will Not Elect” Provisions—There Were Issues of Fact as to Whether Defendant Had a Duty to Sell His Unsold Shares Within a Reasonable Time and Whether He Had, in Fact, Done So

This case involved a dispute between plaintiffs, a residential cooperative corporation (co-op) and members of its board of directors (board) and the defendant, a holder of unsold shares in the co-op, over the defendant’s “rights and obligations as a holder of unsold shares.” The complaint alleged claims for “breach of fiduciary duty, breach of contract, and fraud, and for a declaratory judgment and injunctive relief.” Each party had moved, inter alia, for summary judgment.

In 1983, the building had been converted to a co-op pursuant to a non-eviction plan. The defendant had purchased several apartments in the mid-1980′s and in 1997, he purchased “unsold shares appurtenant to 36 additional apartments from the Coop’s sponsor or the sponsor’s successor in interest, some of which he later sold.” Currently, the defendant is “the holder of unsold shares for 31 or 32 of the Coop’s 72 units,…constituting approximately 45 percent of the Coop/s shares.”

The board is comprised of five members. The defendant was a member of the board from 1984 to 2011. The plaintiffs alleged that the defendant had controlled the board from 2000—2008 and had mismanaged the building. The plaintiffs also alleged that “after a new board was elected in 2008, which included [defendant], numerous disputes arose,…over refinancing of the Coop’s mortgage, building repairs, and maintenance charges.” In January 2011, at an annual shareholders meeting, five board members were elected by the shareholders, none of whom had been designated by the defendant. The defendant had apparently “nominated his candidates after the allotted time to make nominations.” The election had been certified and not subsequently challenged by the defendant. The defendant claimed however, that after the January 2011 meeting, “the plaintiffs failed to call an annual shareholder meeting, as required by the By-Laws, or to call a special meeting to elect a new Board….”

The co-op’s by-laws provide:

At least two Directors representing the Holder(s) of Unsold Shares shall be elected to the Board…of the Apartment Corporation for as long as the Holder(s) of Unsold Shares shall own and possess proprietary leases for at least fifteen (15) apartments. Upon the earlier of three (3) years subsequent to the Closing of Title with the Apartment Corporation or after fifty-one percent (51 percent) of the shares have been sold to other than the Holder(s) of Unsold Shares, such Holder(s) of Unsold Shares will relinquish control of the Board…if they have such control and will not elect a majority of the Directors of the Apartment Corporation even though the number of shares owned by them may enable them to otherwise do so.

The plaintiffs had commenced the subject action to resolve “the issue of whether [defendant] is entitled to cast his votes for all five seats on the…Board.” The plaintiffs sought a declaration that the defendant “may not elect more than a minority of the Board…, even though he may have the votes sufficient to do so,” and “may cast his votes for only two of the five members of the Board…in any election in which he is entitled to vote.”

The defendant sought a declaration that “he is entitled to vote all of his shares at Coop elections for any candidate for the…Board in addition to his two designated appointments as sponsor, and a declaration that plaintiffs have improperly and illegally failed to hold an annual shareholders meeting and failed to hold a special meeting to elect a new Board, and [sought] an injunction directing plaintiffs to do so.”

After reviewing the law with respect to motions for summary judgment and interpretation of contracts, the court noted that the parties did “not dispute that under Article III, section 2 of the…By-Laws, [defendant] is a holder of unsold shares who owns more than 15 apartments, and that more than three years have passed since closing of title and more than fifty-one percent of shares have been sold to other than the holder of unsold shares.” Thus, there was no dispute that the defendant was empowered “to designate two representatives to the Board…, and that the voting rights limits set out in Article III, section 2 apply to [defendant].”

The parties argued, however, about the proper interpretation of Article III, section 2 language which required the defendant to “relinquish control of the Board” and precluded the defendant from electing “a majority of the Directors.” They differed as to whether such clause restricts the defendant “to voting for only the two designated Board members and no others or whether he can also vote his shares for other candidates.”

The court noted that the attorney general’s regulations prohibit “sponsors and holders of unsold shares from indefinitely controlling a cooperative’s board of directors, and to that end, require that if the plan for conversion to cooperative ownership is presented as, or amended to, a noneviction plan, the ‘sponsor and other holders of unsold shares must agree not to exercise voting control of the board…for more than five years from closing, or whenever the unsold shares constitute less than 50 percent of the shares, whichever is sooner.’”

Those regulations apply “where there are no other limitations set out in a cooperative’s offering plan or by-laws and where the offering plan or by-laws of a cooperative address the limits of a sponsor’s control of a board…by incorporating the language of the regulation that a sponsor, or other holder of unsold shares, must relinquish voting control of the cooperative’s board.”

The court explained that judicial precedent has “narrowly construed the phrase ‘voting control’ to mean the power to nominate or designate a majority of board members, or to cause members to be elected that are on the sponsor’s payroll or otherwise receive remuneration from the sponsor.” Therefore, cooperative corporations “cannot prevent the [sponsor] from voting for any director unless it is shown that the director in question is on the [sponsor's] own slate or receives a salary or other remuneration from it.” Thus, board control by a sponsor does not involve “disenfranchisement of the [sponsor] but rather its inability to designate related parties to fill a majority of the board member seats.”

Therefore, “when by-laws or offering plans provide that a sponsor ‘shall relinquish control’ or ‘shall not exercise voting control’ after a period of time or the happening of a particular event,” such provision “merely prevents the designation, by a sponsor or holder of unsold shares, of candidates under its own control so as to create a majority of the board. Unless a restriction on the sponsor’s voting rights is specifically contained within the bylaws, offering plan or certificate of incorporation, a sponsor can vote for unrelated board candidates without limitation.” However, courts have “distinguished the so-called ‘voting control’ cases from cases involving ‘will not elect’ provisions.”

The court noted that although “it appears settled in the Second Department that ‘will not elect’ provisions prohibit a holder of unsold shares from voting its shares for more than one less than the majority of directors to be elected, the issue is not as clearly settled in the First Department.” After reviewing appellate precedent, the court concluded that “appellate precedent in both the First and Second Departments [weigh] in favor of finding, in this case, that [defendant]…should be restricted to voting his unsold shares only for the two directors he is permitted to designate.”

Moreover, “Business Corporation Law §612(a) and the offering plan and By-Laws’ provisions entitling shareholders to ‘one vote for each share’” did not require “a different result.” The by-laws did not bar a sponsor from “casting all its votes, but merely bar the sponsor from obtaining control of the board under certain circumstances.”

The court also held that the plaintiffs had failed to demonstrate their entitlement to injunctive relief related to their breach of contract claim that the defendant had “breached an implied promise to sell all the unsold shares within a reasonable time.” The court explained that even if the defendant had a duty, “as a holder of unsold shares amounting to less than a majority, to sell his unsold shares in a reasonable time, there are issues of fact as to whether he has done so.” The court further noted that the parties had previously agreed that the co-op board would “notice a shareholders meeting within 60 days after the issuance of a decision on the instant motion and cross-motion.”

420 W 206th Street Owners Corp. v. Lorick, 650403/12, NYLJ1202647183703, at *1 (Sup. NY, Decided Feb. 5, 2014), Coin, J.

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