MARBURY CORNERS, LLC, GINSBURG DEVELOPMENT LLC, GINSBURG HOLDINGS, LLC, MARTIN GINSBURG, WILLIAM RIEHL, SUSAN NEWMAN, DAN MULVEY AND ROB LODES, Defendants.
29420/09.
Supreme Court, Westchester County.
Decided September 22, 2010.
Victor M. Metsch, Esq., Michael P. Regan, Esq., Hartman & Craven LLP, 488 Madison Avenue, 16th Floor, New York, New York 10022, Attorneys for Plaintiff.
Mark D. Ginsburg, Esq., Ginsburg & Redmond, P.C., 245 Saw Mill River Road, 2nd Floor, Hawthorne, New York 10532, Attorneys for Defendants.
ALAN D. SCHEINKMAN, J.
Plaintiff, The Board of Managers of the Marbury Club Condominium ("Plaintiff" or the "Board") moves (Seq. No. 2), pursuant to CPLR 3212, for partial summary judgment as to liability and directing an inquest on damages, against Defendants Marbury Corners, LLC ("MC LLC"), Ginsburg Development, LLC ("Development LLC") and Ginsburg Holdings LLC ("Holdings LLC") (collectively "Defendants") upon the First, Second and Third Causes of Action, and upon the grant of summary judgment, Plaintiff seeks an award of attorneys' fees.
Defendants oppose Plaintiff's motion and cross-move (Seq. No. 3), pursuant to CPLR 3212, for summary judgment dismissing Plaintiff's Complaint in its entirety and for an order granting Defendant MC LLC summary judgment on its counterclaim for attorneys' fees.
Because the cross-motion was made in violation of Commercial Division Rule 24, which requires a pre-motion conference prior to the filing of a motion, this Court advised Defendants' counsel that the cross-motion would be considered to the extent it provided opposition to Plaintiff's motion, but the Court would not consider the cross-motion to the extent it sought affirmative relief.
At Defendants' request, the Court held Rule 24 pre-motion conference on July 23, 2010. At the conference, even though the Court expressed its opinion that it would be more prudent for Defendants to await the disposition of Plaintiff's motion prior to making their own motion for summary judgment, Defendants insisted upon proceeding anyway. Their motion is not yet fully submitted, so it will not be considered in this Decision & Order.
FACTUAL AND PROCEDURAL BACKGROUND
Plaintiff is the current Board of Managers, elected by the Unit Owners, of the Marbury Club Condominium, a 55-unit residential condominium created pursuant to Article 9-B of the Real Property Law, located in Pelham, New York (the "Condominium"). Units in the Condominium were offered for sale and sold pursuant to an Offering Plan accepted for filing with the New York Secretary of State on March 30, 2004 and declared effective in January 2005. Defendant MC LLC was the Sponsor of the Offering Plan.
This action arises from a promissory note dated April 14, 2005 in the amount of $2,200,00.00 made by the Condominium in favor of the Sponsor, MC LLC (the "Promissory Note") (Affidavit of Joseph Acocella, sworn to April 11, 2006," Acocella Aff.", Ex. D). To secure payment on the Promissory Note, MC LLC received (1) an assignment of common charges dated April 14, 2005 from the Marbury Club Condominium to MC LLC (the "Pledge Agreement") (Acocella Aff., Ex. E), (2) a Security Agreement granting MC LLC a security interest in all of the Condominium's accounts (the "Security Agreement") (Acocella Aff., Ex. F), and (3) a UCC-1 Financing Statement with respect to the Security Agreement (the "Financing Statement") (Acocella Aff., Ex. G) (the Pledge Agreement, Security Agreement and Financing Statement are collectively referred to as the "Security Documents").
The Promissory Note and Security Documents were allegedly entered into with the consent of then Board of Managers of Marbury Corners, LLC (the "Sponsor Board"), consisting of the individual defendants Martin Ginsburg, William Riehl, Susan Newman, Dan Mulvey and Rob Lodes. The Promissory Note and Security Documents have since been assigned to an affiliated company of MC LLC's, Defendant Holdings LLC, pursuant to various assignments dated April 1, 2009.
It is undisputed that the Promissory Note was fully disclosed in the Offering Plan. In the section entitled "SPECIAL RISKS," it is stated that "[u]pon the conveyance of title to the first Unit, the Condominium will execute and deliver to the Sponsor a Promissory Note in the amount of $2,200,000" and it further disclosed that "the note would be for a term of 40 years, payable interest only at a rate of 4.5% for the first five years, payable thereafter at the interest rate of 5.5% with the principal to be amortized over a 35-year period; and secured by a pledge of the Condominium's rights and interests to common charges, a security agreement and UCC-1 financing statements ....." (Acocella Aff. at ¶ 28; Affidavit of Martin Ginsburg, sworn to May 28, 2008 ["Ginsburg Aff."] Ex. A at ¶24).
This action was initiated by Plaintiff's filing of the Summons and Complaint on December 17, 2009 ("Acocella Aff., Ex. 1). On March 2, 2009, Defendants filed their answer which asserted affirmative defenses and Defendant MC LLC interposed a counterclaim to recover its reasonable attorneys' fees incurred in connection with this lawsuit.
Plaintiff's First Cause of Action seeks a declaratory judgment declaring that the Sponsor Appointed Managers had no "legal right, power or authority to authorize, direct and/or permit Ginsburg to execute and deliver the [Promissory] Note [and Security] Documents to MC LLC" and that the Promissory Note and Security Documents "are illegal, invalid and/or otherwise unenforceable" (Complaint at ¶ 38). The Second Cause of Action seeks an injunction against the continued payments on the Promissory Note because the Condominium's viability, credit and finances threaten to be irreparably harmed and also seeks an order requiring that the Promissory Note and Security Documents be cancelled, surrendered and returned to Plaintiff and that all liens be released and discharged. The Third Cause of Action seeks compensatory damages in the form of a return of the interest and principal paid on the Promissory Note. The Fourth Cause of Action, which is not the subject of the present motion for summary judgment, asserts a claim of breach of fiduciary duty against the individual defendants based on their involvement in the execution of the Promissory Note and Security Documents.
PLAINTIFF'S CONTENTIONS
Plaintiff's President, Joseph Acocella, argues that the net effect of the Promissory Note and Security Documents is that Defendants placed "an illegal mortgage on the property" (Acocella Aff. at ¶ 5-6). He asserts the Promissory Note and Security Documents are illegal because "[t]he only authority for a board of managers of a condominium to borrow money and incur debt, including the authority to assign common charges to secure such borrowing, is derived from Section 339-jj of the Real Property Law (RPL 339-jj')" and "[u]nder RPL 339-jj, a condominium board of managers has authority to borrow on behalf of a condominium only where either the condominium declaration or by-laws expressly provide that such borrowing power exists or, beginning five years after the conveyance of a condominium unit, for certain statutorily-enumerated purposes" (id. at ¶ 39).
Acocella submits the "Declaration Establishing the Marbury Club Condominium," Ex. A to the Complaint (hereinafter "Declaration") and the "Marbury Club Condominium By-Laws," Ex. B to the Complaint (hereinafter "By-Laws") and states that "[t]he Declaration and the By-Laws do not confer borrowing power or authority on the board of managers1 ... [a]nd the transaction contemplated by the ... [Promissory Note and Security] Documents does not fall within the permissible time period and/or the statutorily enumerated purposes of RPL Section 339-jj" (Acocella Aff. at ¶¶ 40-41) since the Offering Plan became effective in January 2005 and the fifth anniversary date had not yet arrived when the Promissory Note and Security Documents were signed (Pltf's Mem. of Law at 12). And, in any event, Plaintiff points out that the Promissory Note's purpose does not fit within the statutorily enumerated purposes of RPL § 339-jj, which are limited to "major and minor maintenance, repairs, additions, improvements, replacements, working capital, bad debts and unpaid common expenses, depreciation, obsolescence and similar purposes" (Pltf's Mem. of Law at 13).
It is Plaintiff's position that the legislative history behind RPL § 339-jj shows that it was intended to limit the authority of a Condominium Board to borrow money secured by the assets of the Condominium and the statute does not permit the Sponsor Board "to authorize the Promissory Note secured by an assignment of common charges at any time, much less a time when it was under sponsor control" (id.).
Plaintiff anticipates Defendants' argument that because the Promissory Note and Security Documents were disclosed in the Offering Plan, they were authorized by the Unit Owners. According to Plaintiff, a sponsor cannot make an unlawful transaction lawful simply by disclosing it and it is the declaration and by-laws — not disclosures in an offering plan — that are controlling since the offering plan does not have the same status as the declaration or by-laws. Plaintiff also argues that the Offering Plan did not fully disclose the Promissory Note and Security Documents as it failed to mention the "purported legal right of the board to incur debt that would be repaid through Unit owner's common charges over a period of several decades" (id. at 18). Plaintiff argues that "the transaction ... was so blatantly unauthorized and inequitable that no amount of the purported disclosure in the Offering Plan could validate the illegality" (id.).
Plaintiff also claims that the Promissory Note and Security Documents violate two other statutes: (1) RPL § 339-r, which requires that "[a]t the time of the first conveyance of each unit, every mortgage and other lien affecting such unit and other such units shall be paid and satisfied of record, or the unit being conveyed and its common interest shall be released therefrom by partial release duly recorded" (RPL § 339-r); and (2) RPL § 339-l, which provides that "[s]ubsequent to recording of the declaration and while the property remains subject to [the RPL], no lien of any nature shall thereafter arise or be created against the common elements except with the unanimous consent of the unit owners...." (RPL § 339-l).
In addition to the claims of statutory invalidity, Plaintiff also questions the validity of the Promissory Note and Security Documents based on the lack of evidence that these were actually authorized by the Sponsor Board.
The authority of the Board to conduct the Condominium's business is expressly set forth in the Condominium's Declaration, which provides that the By-Laws govern the operation of the Condominium. The By-Laws provide that "[t]he property and business of the Condominium shall be managed by its Board of Managers" (Acocella Aff., Exs. A and B), with first Board of Managers consisting of persons designated by the Sponsor (Pltf's Mem. of Law at 4). Plaintiff argues that there is no evidence that Ginsburg, who signed the Promissory Note and Security Documents on behalf of the Sponsor Board, had the "[a]pproval of ... the Sponsor Appointed Managers [since such approval] was not memorialized in minutes or resolutions" and if "the sponsor never sought or obtained the approval of the [Promissory Note and Security] Documents by the Sponsor Appointed Managers then, in such an event ... the [Promissory Note and Security] Documents are a nullity both as a matter of fact and as a matter of law" (Acocella Aff. at ¶¶ 33-34 and n.4). According to Plaintiff, the lack of appropriate documentation (e.g., meeting minutes) is evidence that this was a sham transaction (Pltf's Mem. of Law at 11). Further, according to Plaintiff, because the subject transaction occurred at a time when all the members of the Board of Managers were employees of the Sponsor, it "is subject to a great potential for conflicts of interest, such that a very high standard of duty must be imposed upon it to ensure that its members do not gear their decisions to benefit the sponsor at the expense of the association or its members'" (Pltf's Mem. of Law at 16, quoting Board of Managers of the Fairways at North Hill Condominium v Fairway at North Hills,193 A.D.2d 322, 325 [1st Dept 1993]).
Plaintiff argues that the Promissory Note is a nullity because it does not appear to have been supported by consideration since the purpose of the Promissory Note is not described and the benefit conferred on the Condominium and the Unit Owners is not revealed (Pltf's Mem. of Law at 10-11).
With regard to the impact of the Attorney General's acceptance for filing of the Offering Plan, Plaintiff points out that in accordance with the Attorney General's regulations (13 NYCRR § 20.3[a][7]), the Offering Plan had the following statement on its cover:
THIS OFFERING PLAN IS THE SPONSOR'S ENTIRE OFFER TO SELL THESE CONDOMINIUM UNITS. NEW YORK LAW REQUIRES THE SPONSOR TO DISCLOSE ALL MATERIAL INFORMATION IN THIS PLAN AND TO FILE THIS PLAN WITH THE NEW YORK STATE DEPARTMENT OF LAW PRIOR TO SELLING OR OFFERING TO SELL ANY CONDOMINIUM UNIT. FILING WITH THE DEPARTMENT OF LAW DOES NOT MEAN THAT THE DEPARTMENT OR ANY OTHER GOVERNMENT AGENCY HAS APPROVED THIS OFFERING
Thus, Plaintiff argues that the Attorney General, in accepting the Offering Plan, did not approve its contents and, further, there should be no deference afforded by this Court as a result of the Attorney General's acceptance of the Offering Plan.
DEFENDANTS' OPPOSITION
In opposition, Defendant Martin Ginsburg, the sole manager of MC LLC, submits an affidavit and Defendants' counsel, Stephen Gaines, Esq. of Ginsburg & Redmond, P.C., submits an affirmation.
Ginsburg avers that he was involved in obtaining the municipal approvals for the construction of the Condominium and in preparing the Offering Plan. He reviews the disclosures found in the Offering Plan concerning the transaction, as indicated by Plaintiff in its moving papers, and further attaches the budget for the Condominium which was made part of the Offering Plan. The budget "specifically included a line item for debt service of the Note and one of the Footnotes to the Budget ... explained the terms of the Note and the documents to be executed in connection therewith" (Ginsburg Aff. at ¶ 5). He further points out that each unit owner had to indicate his/her willingness and consent to accept title to his or her unit subject to the terms of the Offering Plan (id.).
To support the position that the Promissory Note was supported by consideration, Ginsburg explains that ordinarily condominiums are taxed pursuant to RPL § 339-y as though they are rental buildings with valuations based on assumed rental income, thereby resulting in assessed valuations lower than the assessed valuations that would apply to comparable single-family homes. Ginsburg states that the Village of Pelham adopted the Homestead Tax Option under Section 1903 of the New York Real Property Tax Law ("RPTL") and, under this legislation, the units in the Condominium were going to be taxed at full market value and "the sales price of each unit would function as the basis for determining the market value of that unit for tax assessment purposes" (Ginsburg Aff. at ¶ 7). Ginsburg avers that this situation was explained in the Offering Plan and in a tax opinion by the Albert Valuation Group (Ginsburg Aff., Ex. C), which was submitted with the Offering Plan to the Attorney General's office.
According to Ginsburg, when he received the estimate of the real estate taxes, it was so "astonishingly high" that "the Sponsor withdrew the then pending Offering Plan for the Condominium and ... prepared and submitted to the Attorney General's office an offering plan for cooperative ownership" because a cooperative ownership would allow the building to be treated as a rental building for tax purposes and avoid the "harsh" tax consequences of the Homestead Tax Option (id. at ¶ 8).
But, Ginsburg says, when the Village of Pelham got wind of the contemplated change from condominium to cooperative ownership, and the consequent lowering of the prospective tax revenues from the project, the Village threatened to rescind its approvals if the Sponsor moved forward with its plan to change to cooperative ownership. To avoid a fight with the Village and risk delays in construction and completion of the building, the Sponsor reverted to its condominium plan. But, as Ginsburg expressly admits, this meant that the Sponsor would reduce the sales prices on which the assessed valuations would be based (Ginsburg Aff., ¶10). Ginsburg explains this as a means to lower the tax burden on the Unit Owners (id. at 11). In reality, this was undoubtedly an effort to make the units more marketable.
While the Sponsor was willing to lower the sales price, it was not willing to forego the loss of the sales revenue. After exploring various options for recouping the lost sales revenue (such as a flip tax and making the garage a separate condominium unit that the Sponsor would keep and lease to the Condominium), the Sponsor decided to take back the $2.2 million Promissory Note and, further, to require Unit Owners to lease at least one parking space in the garage to the Condominium and use the rent to pay the debt service on the Note. Additionally, the Condominium was to receive a fee for the use of its recreational facilities by a separate condominium also being developed by the Sponsor (id. at ¶¶ 9-12).
As support that this was the purpose behind the Promissory Note, Ginsburg attaches correspondence during this time frame which shows how this idea evolved (Ginsburg Aff., Ex. E).
Ginsburg claims that these facts were fully disclosed in the budget and the footnote to the budget in the Offering Plan, which made clear that the annual revenue from both would be over $112,000 a year — enough to cover the debt service on the Promissory Note (id. at ¶ 12). He avers that this information could not have been included in the Offering Plan because the information would then have been used by the Village of Pelham to include the amount of the Note in determining the assessed values of the units, which would have defeated the purpose behind the Promissory Note (id. at ¶ 13).
Defendants' counsel, Stephen Gaines, Esq., avers that prior to working with Ginsburg & Redmond, from 1987-1994 he served as an Assistant Attorney General in the Real Estate Financing Bureau of the New York State Department of Law. During his tenure as Assistant Attorney General, he claims he "reviewed hundreds of cooperative, condominium and homeowners association offering plans and amendments" and since he's been in private practice, he's worked on 25 offering plans and hundreds of amendments regarding conversion to such forms of ownership (Affirmation of Stephen Gaines, Esq. dated May 28, 2010 ["Gaines Aff."] at ¶ 2). Gaines reviews the fact that the Offering Plan disclosed the transaction in the Special Risk section, as did the budget attached to the Offering Plan.
He submits a copy of the purchase agreement signed by each owner as Exhibit A to his affidavit. He avers that each unit owner signed a purchase agreement whereby they expressly agreed that the Offering Plan was incorporated by reference into the Purchase Agreement and that they "accept[ed] and approve[ed] the Plan (including, without limitation, the Declaration and the By-Laws of the Condominium and the Rules and Regulations contained therein) and agree[d] to abide and be bound by the terms and conditions thereof" and that the agreements survived the closing (id. at ¶ 8 [emphasis in original]).
Gaines contends that the only basis for Plaintiff's motion is that the Promissory Note and Security Documents do not comply with RPL § 339-jj. According to Gaines, this is not the first time Plaintiff has made such a claim since Plaintiff sought the assistance of the Attorney General in obtaining a favorable settlement of its dispute with Defendants. Gaines avers that this position is contrary not only to the full disclosure found in the Promissory Note and Security Documents and in the Offering Plan, but also to the legislative history of RPL § 339-jj as reflected in the legislative materials annexed as Exhibit E to his affirmation. According to Gaines, the legislative history
clearly shows that it was never intended to apply to a situation as that presented in the case at bar, where the Note and Security Documents were ... clearly and fully disclosed in the Offering Plan and where each unit owner, prior to the purchase of his or her unit, agreed and consented to such Note and Security Documents when he or she signed a purchase agreement with the Sponsor that expressly incorporated all of the terms and provisions of the Offering Plan and thereafter closed on title to such unit (Gaines Aff. at ¶ 11).
Gaines avers that while the Attorney General's office made many comments during its three-month review of the Offering Plan, no comments were made with respect to the Promissory Note and Security Documents (Gaines Aff. at ¶12).
Gaines asserts that beginning in June 2007 through May 2009, Plaintiff's then counsel, Stephen J. Shore, Esq. of Ganfer & Shore, LLP commenced a letter-writing campaign to the Attorney General's office concerning the invalidity of the Promissory Note under RPL § 339-jj, and made the identical arguments that Plaintiff makes herein. Gaines attaches copies of the letters as Ex. F to his affidavit. Gaines states that the Attorney General's office held a meeting on May 20, 2009 and after hearing Plaintiff's arguments, "declined to take any action against the Sponsor or the Note" (Gaines Aff. at ¶ 15), even though Gaines contends that several "remedial steps" were available to the Attorney General to use against the Sponsor (id. at ¶ 16), though he does not specify what those steps might have been. Defendants argue that deference should be given to "the arduous review process of the Attorney General's Office ... Plaintiff should not be permitted to forum shop and, in so doing, achieve a different result in its second choice of forums, this Court" (id. at ¶ 16).
Gaines points out that because the Sponsor had the express right, pursuant to Section 30 of the Declaration, to amend the Declaration to include the Promissory Note and Security Documents, Plaintiff's action is a non-issue and would be rendered moot if the Sponsor were to make such amendment (id. at ¶¶ 17-18). It is Defendants' contention that the amendment is authorized because they had full knowledge of the Promissory Note and Security Documents and agreed to them in their purchase agreements. Therefore, the amendment would not impact the Unit Owners in any materially adverse way. Further, according to Gaines, because the Promissory Note and Security Documents do not affect any right title or interest in any of the units, there is no impact to the mortgage holders (id. at ¶18). Gaines attaches as Exhibit G the amendment the Sponsor proposes to file if the Court were to find that there was a violation of RPL § 339-jj, which would render Plaintiff's argument concerning the violation of RPL § 339-jj moot.
As their legal argument, Defendants contend that RPL § 339-r has no application because the Promissory Note and Security Documents do not constitute either a mortgage or a lien on any unit in the Condominium or any unit's interest in the common elements of the Condominium and only create a security interest in the common charges of the Condominium. Defendants assert that RPL § 339-l has no bearing on the Promissory Note and Security Documents because they do not create a lien against the common elements of the Condominium and even if they did, because each Unit Owner agreed to the contents of the Offering Plan in their purchase agreements, they "unanimously consented to the Note and Security Documents" (Defs' Opp. Mem. at 6).
Defendants argue that RPL § 339-jj was never intended to apply to a situation such as this one where the Promissory Note and Security Documents were fully disclosed and each unit owner consented to the Promissory Note and Security Documents when they signed the purchase agreement. Indeed, Defendants argue that such application would be contrary to the legislative history since its purpose was described as providing "assistance to condominiums by allowing a board of managers to borrow for capital purposes subject to safeguards for the protection of the affected unit owners'" and that by vesting such power in the Board of Managers and by allowing the unit owners to limit or prohibit the board's authority to borrow in the declaration of the condominium, owners would be protected from "improvident borrowing" (Defs' Opp. Mem. at 8, quoting Gaines Aff. Ex. E [emphasis in original]). Defendants also point to the Bill's Sponsor's description of the Bill's purpose as providing statutory authority for condominiums to borrow for capital purposes from institutional lenders (thereby encouraging lenders to lend) while protecting unit owners by allowing them to prohibit borrowing in the condominium documents (id.). Defendants argue that it is evident that the legislation was intended to address circumstances that do not exist in this case since the Unit Owners each consented to the debt before purchasing their units.
Defendants further assert that Plaintiff's position is contrary to "New York law ... [which] requires that all writings that form part of a single transaction and are designed to effectuate the same purpose be read together..." (id. at 10, quoting Residential Committee of Bd. of Managers of Sycamore v 250 E. 30th Street Owners, LLC (2007 NY Slip Op 52344[U], 17 Misc.3d 1139[A] at *6 [Sup Ct NY County 2007])). Relying on the case of Residential Committee of Bd. of Managers of Sycamore, supra, Defendants argue that "the Offering Plan, the Declaration and the By-Laws must be read and interpreted together, it being said that they are, in the eye of the law, one instrument'" (id. at 7, quoting BWA Corp v Alltrans Express U.S.A., Inc.,112 A.D.2d 850, 852 [1st Dept 1985] [emphasis in original]). Therefore, Defendants argue that "assuming for the purposes of argument that RPL § 339-jj is applicable, the requirement of that Section should be considered satisfied by the terms and provisions of the Offering Plan" (id. at 12).
Defendants reiterate the arguments made by Mr. Gaines concerning the deference that should be provided to the Attorney General's review and acceptance for filing of MC LLC's Offering Plan.
In response to Plaintiff's arguments that the Note is unenforceable as unlawful, Defendants argue that even if RPL § 339-jj were applicable, neither the Note nor the Security Documents are unlawful. Further, say Defendants, the cases cited by Plaintiff are distinguishable since they each involved an express and obvious violation of law whereas given the disclosures in the Offering Plan, there is no basis for a finding that the Promissory Note is illegal.
Alternatively, Defendants argue even if the Promissory Note and Security Documents are technically in violation of RPL § 339-jj(1), for reasons of fairness and equity, they should be enforced in accordance with their terms. Defendants point out that where the illegality in question is not malum in se, but is merely malum prohibitum on the basis of a statutory violation, courts have enforced contracts violative of the statutes in question. In such a situation, a court will consider whether the statute provides that such contracts shall be unenforceable. In addition, courts will not render a contract unenforceable where it would work a substantial forfeiture on one party while allowing the other party who has reaped the benefit of the transaction to avoid a corresponding obligation — i.e., where it is being used as a sword for personal gain rather than a shield for the public good (Defs' Opp. Mem. at 19). Defendants argue that the failure to reference the Note and Security Documents in the Declaration was merely technical in nature and therefore merely a malum prohibitum violation. They point out that an additional reason for enforcing it is that the statute does not contain a voiding provision. Moreover, if this Court were to invalidate the Promissory Note, it would result in a substantial forfeiture and an unjust windfall to the Unit Owners since the Promissory Note and Security Documents were given for valuable consideration — i.e., a reduction in the aggregate sales price of the units, lower real estate taxes as well as the income generated from the leasing of parking spaces and the annual fee paid by the neighboring condominium for the recreational facility. Defendants point out that Plaintiff's claims that the Note is jeopardizing the viability of the Condominium is unfounded since the income for the payment of the Note obligation is already provided for in the above-referenced leasing activities.
In Point VI of their Memorandum of Law, Defendants seek summary judgment dismissing the Fourth Cause of Action for breach of fiduciary duty based on the three-year statute of limitations or, at a minimum, the denial of Plaintiff's motion on this cause of action since Plaintiff did not meet its prima facie burden. However, as already noted, Defendants' motion for affirmative summary judgment relief is not being addressed as Defendants failed to seek permission for their cross-motion. Further, contrary to Defendants' position, Plaintiff has not sought summary judgment on its Fourth Cause of Action for breach of fiduciary duty against the individual defendants so the Court cannot search the record in order to determine the actual merits of this cause of action (see Santagata v Vinegar Hill Group, LLC,41 A.D.3d 576 [2d Dept 2007] [on a motion for summary judgment court may search the record and award judgment where it is warranted in favor of a non-moving party only as to a cause of action that has been placed in issue by the papers]).
Defendants assert that the Sponsor should be entitled to amend the Declaration to remedy this technical deficiency given that there is no harm to the Unit Owners and there is no harm to mortgage holders since the Note and Security Documents do not affect any right, title or interest in any of the Condominium units. In this regard, Defendants submit a proposed amendment as Ex. G to the Gaines Affirmation.
PLAINTIFF'S REPLY
In reply, Plaintiff submits an affirmation and affidavit from its current counsel, Hartman & Craven LLP (Michael P. Regan, Esq. and Victor M. Metsch, Esq.), and an affidavit from its former counsel Steven J. Shore, Esq. of Ganfer & Shore, LLP.
To support the argument that the Promissory Note violates RPL § 339-jj, Regan submits an article written by an attorney from Defendant's counsel's office from April 2007 which reviews RPL § 339-jj and explains that the five-year waiting period for borrowing only occurs when the declaration and bylaws are silent as to the Board's ability to borrow money (the situation here). Regan also attaches a letter Plaintiff received from the Attorney General's office concerning its acceptance of the Condominium's Offering Plan which states that "[a]ny ... concealment of material fact ... renders this filing void ab initio" and "[t]he filing of the offering literature shall not in any way be construed as approval of the contents or terms thereof by the Attorney General of the State of New York" (Affidavit of Michael P. Regan, Esq., sworn to June 15, 2010 at ¶ 7 and Ex. B [emphasis in original]). Regan avers that Defendants have conceded that they intentionally omitted material facts from the Offering Plan concerning the Promissory Note — i.e., that the $2.2 million debt constituted an extra purchase price and that it was fashioned in this manner in order to evade taxes. Thus, the Note was created for an illegal purpose.
Steven Shore, Esq., the counsel who represented Plaintiff during the May 2009 meeting with the Attorney General's office, submits an affidavit which refutes the statements made by Defendant's counsel, Stephen Gaines, Esq.Shore avers that no formal application was submitted to the Attorney General's office because the Attorney General does not have the power to adjudicate disputes of this kind but often brings parties together in an effort to settle such disputes and that this is exactly what Shore requested that the Attorney General do in the letters he wrote on July 13, 2007, January 26, 2009, April 7, 2009 and May 7, 2009 (Affidavit of Steven J. Shore, Esq., sworn to June 14, 2010 ["Shore Aff."] at ¶ 2 and Ex. A thereto). Shore states that after the failed settlement meeting in May 2009 where "Defendants refused to make any changes to the terms of the Note, the Attorney General's Office ultimately gave up on its efforts and advised the Board of Managers that it would have to commence litigation in order to secure a determination on the Note issues that had been raised" (id. at ¶ 4).
Shore also attaches an email from Assistant Attorney General Jensen Ambachen dated October 22, 2009 where the Attorney General "threatened to commence an investigation of the Sponsor in order to persuade the Defendants to compromise on the Note, but even with that threat was unable to secure their agreement to make any changes to the Note" (id. at ¶¶ 5-6).
With regard to the reason for the Note, Shore attests that the first time he learned that the Promissory Note was a means to avoid real estate taxes and secure higher purchase prices was from reading Defendants' papers as this was never communicated during their meeting with the Attorney General's office. He contends that had this been disclosed, "the Attorney General's office, as a law enforcement agency, would have been constrained to either report the scheme to the proper authorities or itself take appropriate legal action because of the non-disclosure" (id. at 7).
Plaintiff's legal arguments in reply are contained in an affidavit from its counsel, Victor M. Metsch, Esq. and its Reply Memorandum of Law. Plaintiff reiterates many of the arguments it previously made concerning the lack of the Sponsor Board's authority to issue the Note given the clear language of RPL § 339-jj. Plaintiff uses Defendants' admissions concerning the purpose of the Note to argue that it is clear that the debt was not incurred for capital purposes and, therefore, the loan was not in accordance with the legislative intent cited by Defendants (Affirmation of Victor M. Metsch, Esq. dated June 15, 2010 ["Metsch Reply Aff."] at ¶¶ 46-47).
Plaintiff's primary arguments in reply are (1) Defendants' "strained reading of RPL § 339-jj unquestionably violates several basic and dispositive canons of statutory construction and should be rejected"; (2) the idea that the Attorney General's acceptance of the Offering Plan somehow gives it the imprimatur of the Attorney General is contrary to settled law; and (3) given the fraudulent purpose behind the Promissory Note and Security Documents, because Defendants' come to the Court with unclean hands, their arguments concerning the inequity of discharging the Unit Owners under the Note should be rejected.
Plaintiff also points out that Defendants have failed to proffer any evidence creating a triable issue of fact that (1) the Promissory Note and Security Documents were properly authorized as they are simply signed by Martin Ginsburg as President of the Sponsor Board, issued to the Sponsor which is an entity controlled by Ginsburg and Defendants failed to attach any board minutes or board resolutions showing that the Sponsor Board authorized the issuance of the Note; indeed, Defendants did not controvert and therefore have admitted paragraph 25 of Plaintiff's Commercial Division Rule 19-a Statement that approval of the Promissory Note and Security Documents by the Sponsor Board was not memorialized in minutes or resolutions (Affirmation of Victor M. Metsch, Esq. dated June 15, 2010 at ¶¶ 30-33 and n.1 ["Metsch Aff."]); and (2) any consideration was received from the Sponsor Board in exchange for giving the Sponsor a $2.2 million Note and no benefits were received from the Unit Owners since Defendants "admit[] that the purchasers were never informed that they were receiving such reductions' or why; and Sponsor also concedes that the so-called lower' purchase prices were illusory, because Sponsor intended to recover the full' purchase prices by way of payments on the Note" (id. at ¶ 37). Plaintiff argues that an agreement such as this one which was "entered into under false pretenses and pursuant to which one party receives a substantial payment in exchange for no consideration, is unenforceable" (Pltf's Reply Mem. at 3, citing Parkchester South Condominium Inc. v Hernandez, 71 A.D.3d 503 [1st Dept 2010]).
Plaintiff argues that where a statute is clear and unambiguous, a court should not resort to legislative history. Moreover, Defendants' argument that this Court should read in the word "offering plan" into RPL § 339-jj along with the words "declaration" and "by-laws" violates a cardinal rule of statutory construction that "a plain reading of a statute cannot be rejected in favor of a contrary reading, suggested only by legislative history and not by the text itself" (Pltf's Reply Mem. at 6, quoting Zucker v Hirschl & Adler Galleries, Inc.,170 Misc.2d 426 [Sup Ct NY County 1996]). Plaintiff's contends that if the Legislature intended for a condominium board to derive borrowing power from an offering plan (a document prepared by the sponsor), language could have been asserted to achieve that result and that the Court should invoke two other rules of statutory construction — (1) "every word in a statute is to be given effect'" and (2) "the expression of one thing excludes others'" (id.). Plaintiff argues that Defendants' position is further undermined by the principle that "[w]hen the legislature prescribes a new rule it may be inferred that it intended that the act should be done in no other way and that the statute is mandatory'" (id., citing Rouse v O'Connell,78 Misc.2d 82, 86 [Sup Ct Suffolk County 1974]).
Plaintiffs contend that, even if the Court were to consider the legislative history cited by Defendants, that history supports Plaintiff's view that the Promissory Note violates RPL § 339-jj (Pltf's Reply Mem. at 5-6). The legislative purpose of requiring the Unit Owners' informed consent to any borrowing undertaken by the Board of Managers is absent here because the purpose of the Promissory Note and Security Documents was not disclosed in the Offering Plan. Accordingly, there was no informed consent by the Unit Owners (id. at ¶ 52). And the legislative purpose of encouraging lenders to loan and to allow the Board of Managers to borrow for capital purposes is likewise missing from this transaction (Pltf's Reply Mem. at 6).
With regard to Defendants' argument that the Offering Plan, Declaration and By-Laws are integrated documents that should be read together, Plaintiff contends that this actually supports Plaintiff "because the Legislature's careful selection of just two integrated documents' (the declaration and by-laws) is proof that the Legislature had a real purpose in excluding one of the three (the offering plan)" (Metsch Aff. at ¶ 53). And there is no basis under the law to find that because the Attorney General's office accepted the Offering Plan, it approved its contents because "the filing requirement set forth in Article 23-A of the General Business Law is merely for informational purposes, and nothing requires the Attorney General to launch a detailed investigation as to the truthfulness of all the representations made in the plan" (id. at ¶ 55; Pltf's Mem. of Law at 8). Further, Plaintiff argues that there should be no deference given because there was no agency determination after a hearing (id. at ¶ 57) and the Attorney General advised the parties to adjudicate their dispute in a court of law (id. at ¶ 58). And as set forth in the Affidavit of Steven J. Shore, Esq., the Attorney General's failure to take sides in connection with the May 20, 2009 meeting is not a tacit approval of the Promissory Note and Security Documents because the Attorney General "never endeavored to adjudicate the merits of the dispute between the parties" and instead just met with the parties in an attempt to broker a settlement.
Metsch asserts that Plaintiff will not receive a windfall if the Promissory Note and Security Documents are invalidated and instead, it is the Sponsor who is seeking to retain a windfall based on monies it wrongfully took and "[a]t the end of the day, the so-called benefit' received by the unit owners was an increase in the purchase price of their units that they never agreed to pay" (id. at ¶ 71). And, Metsch avers there is a public interest "in stopping a developer from cheating, simultaneously, a taxing authority and purchasers of real property as part of a public offering of condominium units filed with the Attorney General" (id. at ¶ 68). Plaintiff argues that "invalidating the [Promissory Note and Security] Documents is necessary to return, ab inititio, all parties to where they should be under the law" (id. at ¶ 75) — i.e., invalidation is necessary to protect the condominium Unit Owners from an unauthorized debt obligation pursuant to RPL § 339-jj.2 Plaintiff contends that it is well settled that "a party to an illegal contract cannot ask a court of law to help him carry out his illegal object'" and a party cannot seek equity if that party comes to court with unclean hands (Pltf's Reply Mem. at 10). Plaintiff further distinguishes the cases in which courts have enforced contracts containing malum prohibitum contract provisions because in those cases, unlike here, there were suitable regulatory sanctions and statutory penalties to punish the wrong committed (id. at 12-13).
Responding to Defendants' argument that the Sponsor should be allowed to fix this technical defect by amending the Declaration, Plaintiff argues:
First, the Sponsor Board is no longer in power; second, the declaration was filed over five (5) years ago, and has never authorized the issuance of such a note; nor have the condominium's by-laws; and third, Sponsor lacks the authority under Section 30 of the declaration to belatedly insert this language, because it would create a new an extraordinary right ... [that] would certainly materially and adversely affect' the condominium's unit owners" (id. at ¶¶ 79-80).
THE LEGAL STANDARDS ON A MOTION FOR SUMMARY JUDGMENT
The proponent of a motion for summary judgment carries the initial burden of production of evidence as well as the burden of persuasion (Alvarez v Prospect Hosp.,68 N.Y.2d 320 [1986]). The moving party must tender sufficient evidence to demonstrate as a matter of law the absence of a material issue of fact. Failure to make that initial showing requires denial of the motion, regardless of the sufficiency of the opposing papers (Winegrad v New York University Med. Ctr.,64 N.Y.2d 851, 643-644 [1985]; Cendant Car Rental Group v Liberty Mutual Ins. Co.,48 A.D.3d 397, 398 [2d Dept 2008]; Martinez v 123-16 Liberty Avenue Realty Corp.,47 A.D.3d 901 [2d Dept 2008]; St. Luke's-Roosevelt Hosp. v American Tr. Ins. Co.,274 A.D.2d 511 [2d Dept 2000]; Greenberg v Manlon Realty, Inc.,43 A.D.2d 968 [2d Dept 1974]).
Once the moving party has made a prima facie showing of entitlement of summary judgment, the burden of production shifts to the opponent, who must go forward and produce sufficient evidence in admissible form to establish the existence of a triable issue of fact or demonstrate an acceptable excuse for failing to do so (Zuckerman v City of New York,49 N.Y.2d 557, 562 [1980]; Tillem v Cablevision Sys. Corp.,38 A.D.3d 878 [2d Dept 2007]). A party opposing summary judgment may not rest on mere conclusions or unsupported assertions (Sun Yau Ko v Lincoln Sav. Bank,99 A.D.2d 943 [1st Dept 1984], affd62 N.Y.2d 938 [1984]; Zuckerman v City of New York,49 N.Y.2d 557, 562 [1980]; see also Pierson v Good Samaritan Hosp.,208 A.D.2d 513, 514 [2d Dept 1994]).
Since summary judgment is a drastic remedy, it should not be granted where there is any doubt as to the existence of a triable issue (Rotuba Extruders, Inc. v Ceppos,46 N.Y.2d 223 [1978]). Thus, when the existence of an issue of fact is even arguable or debatable, summary judgment should be denied (Stone v Goodson,8 N.Y.2d 8 [1960]; Sillman v Twentieth Century Fox Film Corp., supra). In reviewing a motion for summary judgment, the Court must accept as true the evidence presented by the nonmoving party and must deny the motion if there is "even arguably any doubt as to the existence of a triable issue" (Baker v Briarcliff School Dist.,205 A.D.2d 652, 661-662 [2d Dept 1994]).
THE PROMISSORY NOTE AND SECURITY DOCUMENTS ARE UNENFORCEABLE AS THEY VIOLATE RPL § 339-jj
Plaintiff contends that the Promissory Note and Security Documents are unenforceable as violative of RPL § 339-jj, which provides
To the extent authorized by the declaration or the by-laws, the board of managers, on behalf of the unit owners, may incur debt. In addition, subject to any limitations set forth in the declaration or the by-laws, the board of managers, on behalf of the unit owners, may incur debt for any of the purposes enumerated in paragraph (b) of subdivision two of section three hundred thirty-nine-v of this article, provided that (a) such debt is incurred no earlier than the fifth anniversary of the first conveyance of a unit and (b) the incurrence of such debt shall require the consent of a majority in common interest of the unit owners.
RPL § 339-jj thus incorporates RPL § 339-v(2)(b), for the purpose of defining the categories of authorized purposes for borrowing under RPL § 339-jj. RPL §339-v (2)(b), as thus imported into RPL § 339-jj, permits borrowing for "major and minor maintenance, repairs, additions, improvements, replacements, working capital, bad debts and unpaid common expenses, depreciation, obsolescence and similar purposes." Thus, it is evident that the execution of a Promissory Note and Security Documents so as to reduce the sales prices of the condominiums was not one of the authorized purposes for which a condominium board could borrow.
The legislative history submitted by Defendants does not support their position. The legislative materials reflect a legislative understanding that existing law did not permit condominium boards to impose liens against common charges as security for a debt. The legislative memorandum indicates that the Legislature was concerned that older condominiums require expensive capital repairs and improvements which often exceed available reserve funds and that, absent borrowing, it would be necessary to assess unit owners the full cost of repairs in a single year. Thus, "vesting the power to borrow for capital purposes in the board of managers and the unit owners" would permit financial concerns to be addressed "while protecting the owners from improvident borrowing."
Assembly Member Daniel Feldman wrote to the Governor in support of the bill (the Governor had vetoed an earlier version which had not required the consent of the unit owners before borrowing) as follows:
To protect unit owners, the legislation recognizes that unit owners can amend condominium documents to prohibit borrowing. Additionally, the board is empowered to borrow only for specific capital purposes such as for repairs and replacements with consent of a majority of the unit owners. Furthermore, debt can not be incurred earlier than the fifth anniversary of the first conveyance of a unit which allows for non-sponsor units of the condo to be in control.
Assembly Member Feldman summarized the legislation as protecting "the owners' investment by providing a cost effective and prudent way to finance repairs and improvements to maintain their homes without bankrupting them in the process".
Prior to the 1997 enactment of Section 339-jj, there was no explicit mention in the Condominium Act of any power that a board of managers might have to borrow funds. While some declarations and/or by-laws purported to confer such a power — and it could have been argued that any subsequently-acquiring unit owner was bound by the statement of such a power — as a general rule, lenders were unwilling to rely on any such debatable authority (Leeds & Miller, Condominium Act Addition Gives New York Boards of Managers Effective Borrowing Ability, 73 St. John's L Rev 135, 145 [1999]3 ["Leeds and Miller"]). The effect of Section 339-jj was to create two sources of legal authority for borrowing on behalf of condominiums: (a) document-based authority (i.e, authority created in either the declaration or the by-laws); and (b) statutory authority (i.e., the authority found in Section 339-jj itself).
The governing documents do not confer any debt-conveying authority that would permit the borrowing made here. While section 6 of Article X of the By-Laws allows for borrowing by the Board of Managers for the purpose of acquisition of Units by the Board of Managers, or its designee, on behalf of all Unit Owners which could be secured by an encumbrance of the specific unit(s) secured, the construction principle inclusio unius est exclusio alterius leads to the inescapable conclusion that there was no intention to authorize borrowing in any situation other than the one listed. Indeed, the borrowing authority for acquisition of individual units appears, not in a section addressing borrowing generally, but in a section specially captioned as providing for "Financing of Purchase of Units by Board of Managers." Otherwise, the Declaration and By-Laws are entirely silent as to the authority to borrow but the fact that these documents do not prohibit borrowing does not mean that they meet the requirements of RPL § 339-jj.
The Court does not agree with Defendants that it should read the offering plan, by-laws and declaration together to find that the Sponsor Board had the authority to authorize Ginsburg's execution of the Promissory Note and Security Documents in favor of the Sponsor.4 Although Defendants are correct that under New York law, a condominium offering plan, declaration and by-laws are integrated documents that are intended to be read together (Residential Committee of Bd. of Managers of Sycamore v 250 E. 30th Street Owners, LLC, 2007 NY Slip Op 52344[U], 17 Misc.3d 1139[A] at * 6 [Sup Ct NY County 2007]), the offering plan is not one of the places where borrowing authority may be granted under RPL § 339-jj (i.e., the only documents the legislature has deemed of sufficient stature to authorize such borrowing prior to the running of the five years are the Declaration and By-Laws). Moreover, the offering plan assumes that the authority to enter into the transaction exists; it does not itself create, or purport to create, that authority.
Thus, the debt-creating authority, if it exists for the borrowing done here, must be found in the statute.
While the drafters of the legislation recognized the practical need to furnish a board of managers with borrowing power where it is not feasible to amend the declaration and/or by-laws to provide for such authority, they believed that it would be both unwise and unnecessary to grant unlimited authority (Leeds and Miller at 154). The purpose limitation was imposed to prevent unlimited justification for any and all borrowing (id at 156). The not-within-the-first-five-years rule resulted from concerns that the law should not provide a means by which condominium sponsors, who might remain in control for a period of time, could commit any non-consenting unit owner to repay debt, regardless of the wishes of the other unit owners and the worthiness of the purpose. There was also concern that sponsors in control of a debt-incurring board might find some way to misappropriate the borrowed funds or "that the sponsor of an offering plan could somehow hide a sin such as an infirmity in the original budget" (id. at 156-157).
While it is true, as Defendants point out, that the Legislature was not concerned that the fact of borrowing would not be adequately disclosed in offering plans, it is equally true that the Legislature was very concerned as to the scope of the purpose of borrowing in a circumstance where borrowing authority was not provided for in the declarations and by-laws. While a condominium board could be given plenary borrowing authority in the governing documents, if the documents did not provide such authority, the only other source of borrowing authority — the statute — was carefully and intentionally restricted to borrowings for certain purposes (principally capital improvements and repairs) and to borrowings made after the first five years from the first unit sale.
In this circumstance, the Sponsor caused the Condominium to incur $2.2 million in debt so that the Sponsor could recoup the sales proceeds that the Sponsor lost as a result of the Sponsor's decision to reduce the sales price of the units in order to lower the tax assessments for the units. Put another way, the Unit Owners were required to pay additional consideration for their purchase of their units through a compelled indirect financing mechanism under which the Sponsor would get more money for selling the units through a purported parking lease.5 Not only is a borrowing by the Condominium for the purpose of financing the acquisition of units, or for the purpose of creating an artificially low sales price for real estate tax purpose, not a borrowing within the scope permitted by the statute, but the borrowing occurred within the first five years of the Condominium.
The Court does not accept Defendants' argument that the Unit Owners benefitted from the reduction in sales price; the reduction was entirely illusory in that it was going to be recouped, at least to a significant extent, by the Sponsor's requirement that each Unit Owner lease a parking space and that the revenues generated by these leases be used to pay off the Promissory Note. Indeed, the decision to initially reduce the sales price and then make up for the reduction with the Promissory Note was entirely premised on the need for the Sponsor to recoup the profits it lost upon its decision to reduce the basis on which the units would be taxed. The Sponsor chose this route so as to avoid having to follow the legitimate (but more difficult) route of changing to a cooperative plan and obtaining all new approvals. While the Court appreciates the Sponsor's bluntness, it cannot turn a blind eye to it. Moreover, if the Sponsor had simply reduced the sales price and left it at that, the Unit Owners would have benefitted from the lower prices (and the truly appropriate lower taxes) but the Sponsor would have lost profits. Borrowing by the Condominium in order to line the Sponsor's pockets is simply not within the scope of the limited purposes allowed by RPL § 339-jj and certainly not within the contemplation of the legislative drafters, sponsors, and advocates.
To the contrary, it appears that the present situation involves an effort by a Sponsor to "hide a sin", as was feared by some at the time the legislation was being considered. While the fact of the borrowing was disclosed, the purpose of the borrowing was not. Nowhere were purchasers informed that the borrowing plan was devised as a means by which the Sponsor could recoup the profits lost by purchase price reductions made in order to artificially achieve lower realty taxes. Putting it another way, the unit purchasers were not informed that they were being required to pay rent for parking spaces, which parking was originally intended to be free of charge, so that the Sponsor could receive more money on account of its sale of the units. Nor were they informed of any risks that the Village might seek to increase their taxes if it found out that the sales price had been reduced by this stratagem.
Because there are public policy implications associated with RPL § 339-jj and because the statute was enacted to prevent such borrowing prior to the expiration of the five year period, the Court shall declare the Promissory Note and Security Documents as violative of the RPL § 339-jj.
"[C]ontracts which violate statutory provisions are, as a general rule, unenforceable on public policy grounds where the statute which is violated is enacted to protect the public health and safety ... or where the statute's purpose [is] the protection of public ... morals or the prevention of fraud'" (Alsaedi v Alsaedi,177 Misc.2d 440, 442 [Civil Ct Kings County 1998], quoting Benjamin v Koeppel,85 N.Y.2d 549, 554 [1995]). Thus, "a party to an illegal contract cannot ask a court of law to help him carry out is illegal object ... No one shall be permitted to profit by his own fraud ... or to found any claim upon his own inequity'" (McConnell v Commonwealth Pictures Corp.,7 N.Y.2d 465, 469 [1960] [citations omitted]).
The case law concerning the enforceability of contracts that violate statutes is well settled.
A contract which is malum prohibitum is a contract that is illegal based on a statutory violation and courts are provided some discretion in deciding whether to declare the contract unenforceable and the court may consider "the kind of harm which the statute seeks to prevent, and whether or not there are regulatory sanctions or statutory penalties in place to redress the violation" (Unger v Leviton,5 Misc.3d 925, 929 [Sup Ct Nassau County 2004]). By contrast, where a contract is malum in se (a contract that is criminal based on the nature of the acts to be performed), there is no discretion and the contract is unenforceable regardless of the equities involved (see, e.g., Birger v Tuner,104 Misc.2d 63 [Civ Ct, NY County 1980]).
As outlined by the Court of Appeals:
Illegal contracts are, as a general rule, unenforceable. However, "[w]here contracts which violate statutory provisions are merely malum prohibitum, the general rule does not apply. If the statute does not provide expressly that its violation will deprive the parties of their right to sue on the contract, and the denial of relief is wholly out of proportion to the requirements of public policy * * * the right to recover will not be denied" (Lloyd Cap. Corp., supra, 80 NY2d at 127, quoting John E. Rosasco Creameries v Cohen, 276 N.Y. 274, 278 [1937]).
The Court further noted that because "forfeitures by operation of law are disfavored, particularly where a defaulting party seeks to raise illegality as a sword for personal gain rather than a shield for public good' .... [they are inappropriate] where there are regulatory sanctions and statutory penalties in place to redress violations of the law" (Lloyd Cap. Corp., 80 NY2d at 128). In Lloyd Cap. Corp., after finding that the federal statute was enacted "to encourage the growth of small businesses by compensating for the difficulty they may have in obtaining financing from conventional lenders" and not to protect the public's health and safety (id.), the Court decided to enforce a loan agreement over the borrower's defense of illegality based on the loan's violation of the Federal Small Business Administration's regulations, which limited the interest ceiling to 20.125%.
In Wowaka & Sons, Inc. v Pardell (242 A.D.2d 1 [2d Dept 1998]), the Appellate Division, Second Department enforced a home improvement agreement which violated General Business Law Article 3-A, § 771(1)(b),(e),(f) and (h). Defendants contended that the agreement violated the cited law by failing to include the contractor's license number, escrow notices, the amounts of periodic payments due, and defendants' rescission rights. Relying on Lloyd Cap. Corp., the Second Department enforced the agreement on the grounds that the law in question did not "mandate that contracts which are not in strict compliance therewith are unenforceable" and "the denial of relief to the respondent in this case would be out of proportion to the requirements of public policy or appropriate individual punishment insofar as the alleged contractual omissions played no part whatsoever in inducing the appellants to enter into the contract" (Wowoka & Sons, Inc., 242 AD2d at 6).
In contrast, courts regularly declare unenforceable contracts that violate the home improvement licensing statutes since requiring that a contractor be licensed in order to enforce the contracts that he/she enters into is designed to protect the health, safety and general welfare of the public (Richards Conditioning Corp. v Oleet,21 N.Y.2d 895 [1968]; Durao Concrete, Inc. v Jonas,287 A.D.2d 481 [2d Dept 2001]; JP Maguire Assoc., Inc. v Mignone,278 A.D.2d 201 [2d Dept 2000]).
"In determining whether to enforce provisions of a contract that is malum prohibitum, the court must consider several factors, central of which are the repugnance of the illegality, the express provisions of the statute violated, and the public policy considerations in refusing enforcement .... It is well established that licensing requirements that are enacted as revenue-generating measures will not defeat a contract, whereas requirements premised on protecting the life, health and property of New York citizens will counsel against contract enforcement" (Halpern v Greene, 2009 NY Slip Op 51949[U], 24 Misc.3d 1251[A] at * 3 [Sup Ct NY County 2009]). "The rationale for refusing to enforce such contracts is not based upon a desire to relieve a party from the obligation which he has assumed, but rather is based upon the theory that such an agreement is injurious to the interests of society in general, and that the only way to stop the making of such contracts is to refuse to enforce them'" (Eber Bros. Wine and Liquor Corp. v Rare Spirits, Inc.,21 Misc.3d 201, 208 [Sup Ct Monroe County 2008], quoting Village of Upper Nyack v Christian and Missionary Alliance,143 Misc.2d 414 [Sup Ct Rockland County 1988], affd155 A.D.2d 530 [2d Dept 1989]).
That RPL § 339-jj has no provisions for sanctions or statutory penalties lends further weight to the notion that the Promissory Note and Security Documents should be annulled as violative of the statute (see Lloyd Cap. Corp., supra; Joe O'Brien Investigations, Inc. v Zorn,263 A.D.2d 812 [3d Dept 1999]; Specialty Rest. Corp. v Barry,262 A.D.2d 926, 928 [3d Dept 1999], quoting Lloyd Cap. Corp., 80 NY2d at 128 ["Allowing parties to avoid their contractual obligation is especially inappropriate where there are regulatory sanctions and statutory penalties in place to redress violations of the law'"]). Further, while the statute does not expressly state that its violation will deprive the parties of their right to sue on a contract that violates its provisions, it appears clear that the purpose of the statute was just that. It provides that "[n]othing in this section shall impair rights under any loan or other agreement existing prior to the effective date of this section or limit any right or power that a board of managers would otherwise have" (RPL § 339-jj[3]). When a statute does not expressly provide that a violation will render a contract unenforceable, courts routinely imply such a provision when the enforcement of the contract would defeat the central purpose of the statute (Cary Oil Co. v MG Refining & Mkg., Inc.,230 F.Supp.2d 439 [SD NY 2002]). In any event, "the absence of such a voiding provision is simply one of the many factors which courts should consider in determining whether a particular contract should be enforced, and would rarely, if ever, be dispositive" (Alsaeidi, supra, 177 Misc 2d at 443). Finally, the Court views the cases upon which Defendants rely, which, unlike this case, were not enacted to protect Unit Owners from a sponsor's borrowing (i.e., to protect the public from fraud), entirely distinguishable and, therefore, not controlling.
Here, it is clear that RPL § 339-jj was enacted to protect condominium unit owners from unscrupulous sponsors by ensuring that they have a say in the condominium's borrowing by requiring that the authority of the condominium board to borrow be set forth in the Declaration or By-Laws and if it is not authorized in either the Declaration or By-Laws, by requiring that any such borrowing be delayed for a period of five years, and that it be approved by a majority of the Unit Owners.
The Court does not agree with Defendants that it should judicially amend the statute by adding Offering Plan along with Declaration and By-Laws as the documents from which the Condominium Board may be authorized to borrow. "[W]here ... the explicit language of the statute is clear and unambiguous, the court must give effect to the plain meaning of the statute ... [and] it is not for the courts to correct supposed errors, omissions or defects in legislation'" (Zucker v Hirschl & Adler Galleries, Inc.,170 Misc.2d 426, 432-433 [Sup Ct NY County 1996]).
As to Defendants' claims regarding the supposed inaction of the Attorney General, even if it is assumed that the Attorney General was informed as to the true nature of the transaction and even if it is further assumed that the Attorney General made a determination that the Promissory Note and Security Documents did not violate RPL § 339-jj (both of these assumptions being disputed by Plaintiff), the Court would not be required to give such determination deference.
Though the general rule is that "a court should defer to the interpretation given a statute by the agency charged with its enforcement if the interpretation is neither irrational, unreasonable, nor inconsistent with the governing statute .... [n]o deference is accorded to an agency's determination where a court is faced with the interpretation of statutes and pure questions of law' .... Where ... the words of the statute are clear and the question simply involves the proper application of the provision there is little basis to rely on any special competence or expertise of the administrative agency and its interpretive regulations,' especially when the interpretation ... directly contravenes the plain words of the statute'" (Lewis Family Farm, Inc. v Adirondack Park Agency,22 Misc.3d 568, 578-579 [Sup Ct Essex County 2008], affd64 A.D.2d 1009 [3d Dept 2009], quoting Kurcsics v Merchants Mut. Ins. Co.,49 N.Y.2d 451, 459 [1980]).
The Court rejects Defendants' argument that the Attorney General's involvement — both in terms of his office's acceptance of the Offering Plan and his office's involvement by way of facilitating the May 2009 settlement meeting — affects the rights of the parties herein. To begin with, the Attorney General's responsibility with regard to "a proposed offering plan for filing, is limited ... Upon receipt of an offering plan, the Attorney General, may but is not required to, inquire into the truth, accuracy and fullness of the disclosures made'" (Matter of 421 Hudson Street Tenants Assn. v Abrams,140 Misc.2d 166, 170 [Sup Ct NY County 1988]). Indeed, "[t]he fact that an offering statement or plan is accepted for filing by the Attorney General in no way signifies his approval or that it has become effective' so as to preclude him from further investigation and legal action as to the underlying transactions" (Apfelberg v East 56th Plaza, Inc.,78 A.D.2d 606, 606-607 [1st Dept 1980], lv dismissed 54 N.Y.2d 680 [1981]) because the filing requirement is merely for the purpose of affording potential investors and purchasers" an adequate basis upon which to found their judgment....'" (State v Fashion Place Assoc.,224 A.D.2d 280, 281 [1st Dept 1996], lv dismissed 89 N.Y.2d 917 [1996] quoting General Business Law § 352[e][1][b]). Furthermore, the fact that the Attorney General's office attempted to facilitate a settlement by holding the meeting in May 2009 and thereafter took no action cannot be taken by this Court as a determination by the Attorney General's office that the Promissory Note and Security Documents met the requirements of RPL § 339-jj.
Under the provisions of RPL Section 339-jj, Declarations and By-Laws are the only documents identified as authorizing a condominium board to borrow funds on behalf of the condominium. "[T]he power claimed by the [Condominium] Board must either be granted by statute or derived from the Declaration or By-Laws of the Condominium" (Blumberg v Albicocco,12 Misc.3d 1045, 1048 [Sup Ct Nassau County 2006]). "The New York Condominium Act (Real Property Law, Article 9-B) provides that the operation of the condominium property; shall be governed by by-laws, a true copy of which shall be annexed to the declaration. No modification of or amendment to the by-laws shall be valid unless set forth in an amendment to the declaration and such amendment is duly recorded' (RPL § 339-u) ... The by-laws may be amended upon a sufficient vote of the unit owners" (id., quoting RPL § 339-v[1][i]).
Defendants rely heavily on the assertion that the Unit Owners knowingly accepted the Promissory Note and Security Documents as well as the means through which the Sponsor would be paid since these items were revealed in the Offering Plan and budget and their purchase agreements were made subject to the Offering Plan's terms. However, it is undisputed that the reason for the indebtedness — an attempt by the Sponsor to do an end-run around the tax consequences created by the Village of Pelham's adoption of the Homestead Tax Option without having to go through the effort of getting all new approvals from the Village of Pelham if the project were changed from a condominium plan to a cooperative ownership plan — was not revealed in the Offering Plan.
The improper purpose behind the Promissory Note and Security Documents is not lost on this Court and if this Court were to enforce the Promissory Note and Security Documents under such circumstances, it would run counter to the public policies underlying RPL § 339-jj and as well as generally equitable principles.
Accordingly, because RPL §§ 339-jj was enacted to encourage borrowing to fund capital projects while at the same time protect unit owners from borrowing undertaken by Sponsor-dominated boards who were not given express authority to borrow in the Declaration or By-Laws, the Court shall not enforce the Promissory Note and Security Documents and shall declare the Promissory Note and Security Documents void as violative of RPL §§ 339-jj (Gutfreund v DeMian,227 A.D.2d 234 [1st Dept 1996]; Alsaedi, supra).
There is no basis to allow the Sponsor to amend the Declaration as proposed in Exhibit G to the Gaines Affirmation. Defendants are correct that the Declaration authorizes the Sponsor to amend the Declaration without Board or Unit Owner approval to correct technical errors. Thus, the Declaration provides that "the Sponsor reserves the right to amend, modify, add to or delete from this Declaration at any time without the requirements of obtaining the approval, consent or signature of the Board or any Unit Owner for the purpose of making any technical corrections or additions or any others [sic] changes which ...do not materially and adversely affect the Unit Owners or the holder of any mortgage constituting a first lien on any such Unit Owner's Unit. Any such amendment, modification, addition, or deletion of, to or from this Declaration, shall be duly executed, in form for recording, and shall be recorded by Sponsor" (Declaration ¶ 30, Gaines Aff., Ex. D).
This does not avail Defendants of the amendment the Sponsor is proposing; a retroactive authorization in the Declaration for the Sponsor Board to have entered into the Promissory Note and Security Documents is not the type of unilateral amendment that paragraph 30 of the Declaration authorizes, since it would materially and adversely affect the Unit Owners by remedying the original failure to include in the Declaration and the By-Laws the Sponsor Board's authority to enter into this Promissory Note and Security Document so as to comply with RPL § 339-jj. Thus, even if the Unit Owners were aware of the transaction based on the Offering Plan, they may have agreed to the terms not knowing of the failure to comply with Section 339-jj and not knowing of the purpose of the borrowing and not knowing of the possibility that the Village might take action to increase their real estate taxes upon its discovery of the mechanism developed by the Sponsor to obtain a reduction in those taxes.
For these reasons, the Court will grant Plaintiff's motion to the extent of granting summary judgment on the First and Second Causes of Action as seek to declare the Promissory Note and Security Documents void and unenforceable as violative of the RPL § 339-jj. The issue of damages, raised by the Third Cause of Action, appears to be complex, particularly as relates to the payments received by the Condominium from the Unit Owners of the adjoining condominium for use of the recreational facilities of this Condominium. Accordingly, the Court will not grant an inquest; rather, the Court will schedule a conference for the purpose of establishing schedules for the resolution of the remaining issues in this case.
Defendant's cross-motion shall be denied, as previously stated, for failure to seek a pre-motion conference, without prejudice to consideration of such issues as may be properly open for consideration on Defendant's separately prosecuted motion for summary judgment.6
CONCLUSION
The Court has considered the following papers in connection with these motions:
1) Notice of Motion for Summary Judgment dated April 15, 2010; Affidavit of Joseph Acocella, Esq., sworn to April 11, 2010, together with the exhibits annexed thereto;
2) Plaintiff's Memorandum of Law in Support of Motion for Summary Judgment dated April 19, 2010;
3) Notice of Cross-Motion dated May 28, 2010; Affirmation of Stephen Gaines, Esq. in Opposition to Plaintiff's Motion for Summary Judgment and in Support of Defendants' Cross-Motion for Summary Judgment dated May 28, 2010; Affidavit of Martin Ginsburg, Esq. in Opposition to Plaintiff's Motion for Summary Judgment and in Support of Defendants' Cross-Motion for Summary Judgment dated May 28, 2010; together with the exhibits annexed thereto; Affirmation in Support of Award for Attorneys' Fees dated May 28, 2010, together with the exhibit annexed thereto;
4) Defendants' Memorandum of Law in Opposition to Plaintiff's Motion for Summary Judgment and in Support of Defendants' Cross-Motion for Summary Judgment dated May 28, 2010;
5) Reply Affidavit of Victor M. Metsch, Esq., sworn to June 15, 2010; Affirmation of Michael P. Regan, Esq. dated June 15, 2010, together with the exhibits annexed thereto; Affidavit of Steven J. Shore, Esq. in Reply to Defendants' Papers in Opposition to Plaintiff's Motion for Summary Judgment; and
6) Plaintiff's Memorandum of Law in Further Support of Plaintiff's Motion for Partial Summary Judgment.
Based upon the foregoing papers, and for the reasons set forth above, it is hereby
ORDERED that the motion for summary judgment by Plaintiff Board of Managers of the Marbury Club Condominium made pursuant to CPLR 3212 (Motion Seq #002), is granted in part and denied in part as set forth herein; and it is further
ORDERED that Plaintiff Board of Managers of the Marbury Club Condominium is granted summary judgment with respect to its First Cause of Action to the extent set forth herein and not otherwise; and it is further
ORDERED, ADJUDGED AND DECREED that Plaintiff Board of Managers of the Marbury Club Condominium is entitled to a declaration, and the Court hereby declares, that Sponsor Board had no legal right, power or authority to authorize, direct and/or permit Martin Ginsburg to execute and deliver the Promissory Note dated April 14, 2005 and the related Security Documents to Marbury Corners LLC and that the Promissory Note and Security Documents are illegal, invalid and/or otherwise unenforceable; and it is further
ORDERED that Plaintiff Board of Managers of the Marbury Club Condominium is granted summary judgment with respect to its Second Cause of Action to the extent set forth herein and not otherwise; and it is further
ORDERED, ADJUDGED AND DECREED that Defendants Marbury Corners, LLC, Ginsburg Development, LLC, and Ginsburg Holdings LLC are enjoined and restrained from enforcing the provisions of: (1) the Promissory Note dated April 14, 2005; (2) the assignment of common charges dated April 14, 2005, (3) the Security Agreement dated April 14, 2005, and (4) the UCC-1 Financing Statement file stamped August 2, 2005 (collectively the "Note Documents") and Defendants Marbury Corners, LLC, Ginsburg Development, LLC, Ginsburg Holdings LLC and the above referenced documents are hereby cancelled and rescinded; and it is further
ORDERED that the Third and Fourth Causes of Action asserted in the Complaint are severed and continued; and it is further
ORDERED that the cross-motion of Defendants for summary judgment dismissing the Complaint and for an award of attorneys' fees is denied (Motion Seq. #003), without prejudice to Defendants' separate, pending motion for summary judgment; and it is further
ORDERED that counsel shall appear before this Court for a conference on October 8, 2010 at 9:30 a.m. for the purpose of establishing schedules for the resolution of the remaining issues in this case; and it is further
ORDERED that the conference hereinabove provided for may not be adjourned without the prior written permission of this Court.
The foregoing constitutes the Decision, Order, and Judgment of this Court.
Footnotes
1. Section 6 of the Declaration merely authorizes the Board of Managers to borrow funds for the purpose of `acquisition of Units by the Board of Managers, or its designee, on behalf of all Unit Owners" and permits that the "borrowing may be secured by the encumbrance of the specific unit(s) secured" (Pltf's Mem. of Law at 12). Plaintiff argues that "[u]nder the principle of inclusion unius est exclusion alterius ("the inclusion of one thing is the exclusion of others"), the fact that the Declaration expressly confers limited borrowing authority on the Board for a single narrowly-defined purpose establishes that the Declaration does not confer broader borrowing authority outside the scope of that purpose" (Pltf's Mem. of Law at 12).
2. Plaintiff argues that Defendants' reliance on the principle that "`[i]f the statute does not provide expressly that its violation will deprive the parties of their right to sue on the contract, the denial of relief is wholly out of proportion to the requirements of public policy ... the right to recover will not be denied'" is misplaced (Pltf's Reply Mem. at 13, quoting Lloyd Cap. Corp. v Pat Henchar, Inc.,80 N.Y.2d 124 [1992]).
3. The authors describe themselves as the principal drafters of, and spokespersons for, the legislation.
4. Although Plaintiff has raised valid questions concerning the authority of Ginsburg to execute the Promissory Note and Security Documents because Defendants have not provided any evidence of minutes or a resolution authorizing Ginsburg in this regard, the Court need not reach this issue as it is voiding the Promissory Note and Security Agreements as they violate RPL § 339-jj.
5. The Unit Owners of this Condominium may have received some softening of the blow by the requirement that the Unit Owners of another condominium pay for the use of the recreational facilities of this Condominium.
6. This said, to the extent that Defendants, on their separate motion, seek summary judgment in their favor on the same issues as decided here, Defendants would be advised to consider withdrawing the said motion, as the determination herein made would be applied by this Court as the law of the case. Defendants' counterclaim for legal fees, predicated as it is upon a provision of the Promissory Note voided herein, would appear to be no longer viable.
