New York State eliminates condominium
property rights. Dismisses trespass and breach of duty to greenlight board
self-dealing and theft in violation of express rules of governing documents and
allocations of individual property rights.
Defendants contrived to steal old elevator shaft space (and common roof space) from their neighbors. Under an express bylaw their neighbors had the exclusive right of use of it and the right to enclose it into their units. The defendants knew this bylaw well.
This was trespass of what was in effect the plaintiffs’ property. The board had the fiduciary duty to seek their permission but used a fraudulent sales scheme to sneak around them. Individuals were simply using board power to self-deal.
A surprise “offer” was emailed to owners purporting to “sell” them shaft space. Plaintiffs were never told anything was first come first served—or, act now or forever hold your peace. The offer itself suggested that one might build in later at one’s own cost. So to the managing agent’s follow up sales call, plaintiffs demurred. After all, the condominium’s governing documents specifically provided that the space was exclusively theirs, should they want it. Board insiders then helped themselves to space set forth in the offer, that was “unsold,” within a stated 30 days. The sole purpose of the offer was to deceive plaintiffs out of their property. There was no common purpose.
The condominium’s governing documents specified plaintiffs’ exclusivity in that space. Plaintiffs therefore did not see that the “sales offer” was calculated to oust them, secretively and permanently.
Board members had hired a lawyer and various “experts” at common expense to rig themselves “bargain” prices to possess others’ real estate “in perpetuity.” In other words, to aid and abet theft.
Condominiums are not supposed to operate in this manner. Collective action is supposed to be open and transparent. Owners have equal rights of notice, informed consent, and vote. Ethical behavior is supposed to be strictly enforced. To sneak around the plaintiffs, failing to ask their permission for an adverse use, under these facts, was a breach of fiduciary duty.
The terms of the proposed contract were kept secret. Plaintiff asked to see a copy, but was told that it would not be shown to anyone who did not pre-agree to the price. Plaintiffs believed it to be a sale of overpriced construction. They were also led to believe that the board agreed that they could build in later at their own cost. So they let it pass. Later, plaintiffs noticed a subtle devaluation of “price” on their floor relative to others. This reflected an existing intrusion.
Before the offer was sent, Defendants One and Two had already been doing construction there.
This case is of significance as a rising form of securities fraud, openly marketed by attorneys as a board insider theft and self-dealing technique. Cf. “Gold Mines in the Halls” citing lawyer Aaron Shmulewitz urging boards to monetize common elements, NY Times.
Lawyer billings on the transaction show only 20 minutes spent on lengthy condominium documents. Instead attorney time is spent on generating complicated, duplicative, self-contradictory paperwork purporting to supersede condominium governing documents—the only owner protection owners will ever have. Board power is excessive. They divert common funds to hire “experts” to help them self-deal.
The structure and economics of the condominium was violated. This changed common interest shares.
Defendant One is a prominent litigation partner in a powerful NYC and global law firm. Defendant Two is a lawyer and real estate agent. Defendant Three was a building manager with the condominium’s building management firm. This was a sophisticated aggregation fraud.
Offering shaft construction to owners was never a common cost. Spaces were only “sold” and paid individually. Favored owners were allowed to bargain their prices down. Disfavored ones were not. It was a profit venture to sell construction to all condominium owners except Defendant One, at irrationally high prices which bore no relation to cost.
Under bylaw § 6.1 only common costs could be divided by
common interest share. Instead the condominium board divided the venture’s profits
by common interest share.
‘There were no proper board resolutions in place: (1) to insert all floor/ceilings into the shaft at common cost, without which the construction was grossly discriminatory; (2) to rent the roof to Defendant One “in perpetuity” for a grossly undermarket price; (3) to resell unit owners’ real estate to them charging some but not all “common interest shares” for that real estate; (4) that the condominium pay Defendant One’s roof construction costs (bulkhead demolition); (5) that others’ “prices” to use the shaft be charged based on that bulkhead demolition cost; (6) that Defendant One be entitled to pay only his cost while all other owners be charged around four times their cost; and (7) to share these profits, by common interest share.
To agree to any profit venture, including those at arm’s length, participants must contract. Not only with respect to profit sharing but with respect to the parties’ contributions—whether of cash or real estate. With full disclosure, no one would have agreed. People bought because they were ordered to by a faithless fiduciary and out of fear and intimidation. This was an abuse of what is now in New York State, grossly excessive board power.
Under § 2.2’s enumerated powers, the board had no power to lease a common element including under its residual powers; the matter was not “determinable” by it due to bylaw § 6.15.4.
Defendants One and Three were cronies. Defendant One was Defendant Three’s contracting client. At one point in the past, Defendant Three had had the condominium pay half of Defendant One’s costs (leak damage from opening the roof, broken toilet leak damage). Their relationship gave Defendant One undue influence over condominium funds Defendant Three controlled. Defendant Three had another conflict of interest, too. He was an employee of the condominium’s management company and wanted to do large construction.
As the “offer” made plain, there was no common project to insert floors. All the board ever did was sell construction, at enormous profit margins, to everyone individually with the exception of Defendant One, who was privileged to pay only his cost to confiscate common roof from everyone and then massively underpay for it on a fair market rental basis.
The condominium default assumption is that individual costs are the individual’s responsibility.
To convey the roof required unit owner vote. This, of course, was never obtained. The thieves twisted themselves in knots to avoid the scrutiny of a unit owner vote.
Defendant One now rents the roof without paying fair market value for it other than a fake “common interest charge”—obviously a deceptive mischaracterization of his “rents.” As he never paid a cent to rent for his continuous adverse (and exclusive) occupancy of the shaft since 1997, it is horrendously unjust to charge anyone else for it now, and to change all common interest shares. The contraption is a pure, selfish scam enabled by an abuse of fiduciary power.
Demand allocation issues in common elements can be solved with fees, e.g., limited parking spaces or basement storage slots, that can of course be booked as profits. But any legitimate fee charge would take the form of month to month—not lease “in-perpetuity.” These words, here, are clear evidence of malice. There was no common purpose to these acts, nor any economic rationality, whatsoever. There was only an intent to steal to privilege select individuals, discriminating unjustly against select others. The shaft is evenly divisible, so there was no need for any fee collections or profit venture.
This “offer” poses the same risks of aggregated fraud that caused FDR to regulate the securities industry heavily in the early 1930s. The keystones to preventing fraud and breach of trust in business transactions, are (1) legal duties of full disclosure of all material facts, and (2) strict enforcement, making fiduciaries who self-deal liable.
The condominium has not paid tax on its venture profits. This is tax fraud. The condominium deposited its profits to the capital, not to an income, account. This is accounting fraud—a grossly malstructured profit venture, masked by the fact that it was imposed by a board under the veil of a “common cost.”
Following the bylaw strictly meant that only owners adjacent to whose units a space was appurtenant were even eligible to ask for board approval of an exclusive enclosure.
To put board approvals up for sale poses an inherent conflict of interest, particularly coupled with rule violations that are intended to force full disclosure, and that affect the common cost sharing structure of the entity. Board approval is a fiduciary duty, not a salable “right.”
The board did not own the shaft, could not pose as its owner, and could not assign arbitrary “prices,” or “common interest share” charges for its use, particularly not as an act of intentional deceit.
Trespass and breach of fiduciary duty, at a high level, covered the case. Trespass invokes both statutory and condominium governance terms, all of which were ascertainable at trial. It was thus error to dismiss on summary judgment. “Each unit, together with its common interest, shall for all purposes constitute real property.” NY RPP. §339-g. There was a ripeness issue to trespass that could have been dealt with by a finding on the unreasonableness of repeated denials and delay to plaintiffs’ requests to enclose the space, that should have been determined at trial.
Exclusive means different things depending on context. A right of exclusive use of a space as if it were a part of one’s unit is in effect one’s “property.” An exclusive type of common use—like residential or commercial—refers to a priorized use of a common element that is in common use. Residential owners are still entitled to use an “exclusively” commercial common element that is in common use. Not all common elements are commonly used. Some are in exclusive use, meaning by only one. The bylaw reserved the space for one owner’s exclusive use, not for common use. In this usage commercial owners do not “own” real estate collectively.
This heavily factual case required a trial and could not be dismissed on summary judgment.
This was a vindictive, malicious theft. It was a conspiracy to benefit Defendant One enlisting the collusion of Defendants Two and Three. It was willful misbehavior.
These were sophisticated thieves—lawyers, a real estate agent, and a building manager, brazenly cheating people by lying to them in a severely ultra vires situation in which cronyism ruled, secrecy was paramount, elections were never held (so boards were rarely if ever elected), rules were never followed, budgets never issued, audits never done, quorums never observed, resolutions not properly recorded, owner email, board meetings and minutes were all closely held, and requests for basic information went unanswered.
Plaintiffs’ reward for respecting others, for following rules, and for whistleblowing, was only to be ripped off. Plaintiffs overthrew much of the board and eventually forced it to comply with a few rules. This case is a gross abdication of judicial responsibility to hold some truly bad actors accountable.