The New York Times (“The Gold Mine in the Halls,” Sept. 1, 2013), once reported on a seemingly new trend as if it were celebrating how to manipulate the corporate veil of condominiums and coops to effectuate fraud and theft. The article went on to describe the use of “sales” of common elements to raise cash. But what it didn’t do was warn about how easy it is for insiders to abuse such transactions to eliminate other people’s property rights and steal cash and real estate for themselves by exploiting board informational advantages. Here’s how.

A condominium pretends to “sell” unit owners their own common element. This is portrayed as a “profit venture” to the “benefit” of “all.” These benefits are not explained to board members not in on the theft racket in any detail. “Profit” sounds good to them. So they gloss over the lack of detail. No one asks about taxes. Nor does anyone ask, how can a board “sell” adversely to its own unit owners?

And wait! A condominium board doesn’t even “own” common elements to “sell”!  Only unit owners “own” such building parts. So how does this make any sense? The answer is, it doesn’t. Yet the board blunders on.

The new “plan”also sounds good because board members are told their common charges will be “reduced,” if they don’t buy. This is a promise of personal gain to those members, a bit of a bribe. Suddenly no one thinks about what the common interest is at all any more. They only think, oh good. I gain.

Pricey “experts” are hired. They issue no opinion letters. They warrant nothing. But they look like a Good Housekeeping Seal of Approval. The Board feels good, but has in fact inquired into, and understood, nothing. There have been no material disclosures. All is omission. And, of course, boards, so often, really like it like that. “All” will “benefit,” someone chants. “I” will “benefit.” That’s all they really care to know.

Unit owners are told even less. All of a sudden they get a strange “purchase offer” in the mail, followed by a sales pitch from the managing agent. Recklessly, they trust this person. They assume these entities exist to protect their interests. But do they? Or do they just cater to the resident board autocrat?

Say an old abandoned elevator shaft—equally and usably divisible by all owners—runs through the middle of a building, the size of two large walk-in closets if owners’ units are two to a floor—or one very big one, about 80 sq. ft., if you own a whole floor. The fraud kingpin, the owner in the penthouse, built into his own space for himself well over a decade ago.

This “sales offer” is nothing but an engine of fraud. It superimposes a contract regime intended to strip some individuals of their property and hand it to others—in total secrecy. Private “sales” contracts are, legally, private. This violates numerous terms of your 350 page condominium governing documents, but that is all ignored. And since when have you read your documents, in detail? The burden now is on the victims of theft to make their case—and boy, is that expensive. To quote one lawyer, “the courts hate these cases.” Simply to get to trial is tricky.

A fake entity “profit motive”now steamrollers all unit owner property rights. The entire elaborate engineering of democracy, openness and fairness of the condominium governing documents are ignored, replaced, as if by a evil changeling, with a set of licenses between third parties purporting to strip you of your property.

Board insiders set their own “bargain” real estate prices, hold a fake sale, then secretly grab all the property they want that is “left over,” for themselves. There is no common interest in this. It is nothing but theft, by thieves, of other people’s property.

It is a fraud that is deconstructible but it is also a Rubik’s Cube. The attorney’s fees would break any normal person’s bank.

First, no real estate is being “sold.” The board did nothing but “sell” board approvals pretending that bid-rigged construction was a sale of real estate. How can a fiduciary fulfill its duty by selling board approvals? Pretending to be real estate? This is obviously corrupt. To sell one’s duty is to breach it—to deprive owners of honest services due them from a board. It is a type of extortion, tantamount to the solicitation of a bribe, by a board abusing its position of power over unit owners.

The next crazy aspect is that structuring this as a profit venture, payable to “all,” makes no sense. Only some are infringed by the taking of their allocable share of property. So, why are “profits” distributed to “all”? “All” have no need of a remedy, only those being blocked out of their space by a neighbor. That means the price list for shaft space is inaccurate. The real price paid by all “buyers” is reduced by all “profits” paid to each “buyer,” rebated by their common interest share, over time.  Taxes are due on all these “profits” every year, at both entity and unit owner levels.

Eight years later, this is a serious tax nightmare. Obviously no one has been reporting or paying tax on any of these “profits” at all. The board has just been dumping the sums collected into general capital.

Condominiums don’t own common elements. Unit owners do. Their common interest shares pay for that ownership. So, barring a special situation, and a great deal of due process to all the owners, condominium boards can’t just “sell” common elements. Nor can they extort money from owners except by special assessment for condominium “costs.” So all of this was really only a cost project—some common costs, some individual responsibilities. The fake “sale” construct simply effected the total elimination of all line item accounting, all owner approvals, all voting rights, and all of the transparency required by the governing documents.

A case, Cohen v. Perry St. Board, has been absurdly misconstrued by some in the real estate bar, over-eager to racketeer these common element “sales” transaction sets to muster slush funds for boards, as holding that a board can “sell” a common element to unit owners at any “price” it wants.

It is important to note that real estate “price” is not determinable by a condominium board at all. A condominium board is just a manager. Not an owner. Only an owner can determine what “price” to set on their real estate. Board insiders can’t just sit around a table pricing a common element, holding a fake sale, then use their informational advantages to help themselves, secretly, to property they now deem “left over” from the fake “sale” they just held for themselves.

Legally, it is an illegal, unregistered offer of sale of derivative securities.

In Cohen v. Perry Board, an owner wanted to enclose 26 sq. ft of hall space just outside his door—well within the allocable portion of a hall he was sharing with his neighbor. He got a Board approval after making a donation to the common fund. In essence he offered his Board a bribe, here relatively harmless, for an approval. The Board took his proferred donation, distributable as income to all owners. (Condominiums for tax purposes are treated as partnerships.)

The difference between this relatively anodyne situation at Perry St., and our hypothetical, is that Perry St. never offered to “sell” all halls in the building to all unit owners. No owner on floor 1 secretly “bought” any hall space outside the door of an owner on floor 2. The Perry St. Board also didn’t illegally enfold any “sale” of construction services into its “price.” Indeed, it quoted no “price” to anyone at all. It just took a gift.

Three fraud kingpins benefitted. The dominant board member by far the most. He walked off with a piece of common roof, for free, in secrecy, evading all required approvals. The money laundry of the Offer was intentionally built so that he got to pay just his cost; everybody else had to pay quadruple their costs. Pooling one person’s very high cost with others’ very low costs, and averaging them, obviously cheats the latter. This was all illegal because it is clear from the very structure of the condominium that these were individual, not common costs. Pooled accounting masks this kind of cheating. Just as, in rhetoric, glossy generalizations “lie” about all the critical details one needs to know to make the right decision.

The false rhetoric of “sale” here had the effect of eliminating Board fiduciary duty. It erected a fake entity “profit” motive completely at odds with the common interest. The common interest was to protect unit owners’ property rights against insider theft and self-dealing.

Taxing users of a common element to benefit nonusers changed everyone’s common interest shares. This is illegal under a statute: NYS R.P.L §339-m.

This board divided up space, corrupted board member judgment with vague promises of kickbacks, then steered all the property they wanted for themselves, to themselves. One of the kingpins arranged to be last in line to “buy.” Because all surrounding floor builds were done and paid for on the price schedule, he thus got his space for free. His property rights now allowed him to just break in and use the floor above as his ceiling and the ceiling below as his floor. He also then had no duty to restore anything at his cost. Because he did not build those floors, or sign any contract agreeing to pay to remove that which he did not build, he could just use his space freely. Delightful. For him.

In fear of losing their property, many owners were tricked into complicity with the thieves. As “buyers” and now trespassers on their neighbors, their own interests were corrupted by being gradually aligned with the corrupt intent of the fraud kingpins.

None of it withstands close inspection. But it is so knotty, it can even fool courts, particularly given the stresses on them that feed their current taste for judicial abdication. How many people in America flee, in rage and tearful frustration—forced to sell by thieving neighbors—rather than stay on to fight fraud?

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