Opinion
Index No. 154712/2015
03-29-2020
Sharie Graham Plaintiff, v. 420 East 72nd Tenants Corp. Defendants.
NYSCEF DOC. NO. 298 PRESENT: MELISSA A. CRANE Justice
DECISION AFTER TRIAL ORDER
Melissa A. Crane, JSC
In this case, involving a shareholder suing her cooperative apartment building's ("the co-op") board of directors ("the Board") for refusing to approve proposed buyers, the main issue for trial was whether the Board acted in bad faith. This is because the proprietary lease for this co-op provided that the Board could refuse to approve a sale for "any reason and no reason". Both sides concede, however, that this clause cannot insulate the Board from decisions involving bad faith. Here, plaintiff has proven, by a preponderance of the evidence that the Board acted in bad faith.
Plaintiff Sharie Graham testified first. The court finds her to be entirely credible, although some of her testimony did suggest she might be a difficult person with whom to be neighbors. For example, she found it annoying enough to mention at trial that balls, from kids playing in the adjacent back yard, ended up in her yard.
Stuart Levy testified for the defense. Mr. Levy was not a credible witness. He would lie repeatedly and then, when confronted with documentary proof that contradicted his position, would stick to his guns. For example, plaintiff had testified that the Board wanted her to hold off marketing her apartment, while the Board considered buying that apartment and turning it into a gym for the building. Mr. Levy testified that this never happened and accused Graham of being the one pushing the gym idea. This testimony was simply not true. The minutes memorializing a previous July 21, 2014 board meeting stated "There was discussion about the feasibility of the co op to buy an apartment to create a gym" (Plaintiff's Ex. (PX) 38; also found at EDOC 231). These minutes reflect Levy's presence at this meeting, even though he denied being there. Moreover, when confronted with his own email (PX 37), Levy had to admit that he was trying to arrange a time to see Graham's apartment to assess its feasibility for a gym. This same document indicates that it was the Board, and not Ms. Graham, who had pushed to convert apartment1D into a gym.
Other documentary proof belies Mr. Levy's testimony. Indeed, the co-op's own managing agent, Anna Seddio, reported in an email to the Board that she told Ms. Graham the Board was considering a gym, and asked her to keep it confidential. Why would Ms. Graham have to keep something confidential that was her own idea?
Mr. Levy also lied when he denied that the Board ever made an offer to purchase Ms. Graham's apartment, 1D. The Board meeting minutes from November 2014, indicate that the Board approved an offer for apartment 1D (PX 33).
Mr. Levy even lied when answering the court's own questions. For example, even though he was on the board the entire relevant time period, and therefore in charge of approving sales of the shares of apartments, when the court asked why accepted offers appeared to increase on various apartments listed in PX 35 and 9, Mr. Levy actually suggested the highly improbable theory that the price went up because the hallways throughout the building had been renovated. When specifically asked "is it possible the board required a higher price," Levy evasively answered, "no it [meaning the apartment] could have been sold with the contents" (Tr. Pgs 482-483). Accordingly, the court finds Mr. Levy's testimony so riddled with falsehoods that it disregards his testimony altogether under the doctrine in falsus unum; in falsus omnibus. The court has no reason to doubt the credibility of the remaining witnesses, but some may have had a better recollection of relevant events than others. For example, Board Member Freedman's muddled recollection that the Board had rejected the Soffen's second application does not stand up to the facts.
Factual Findings
The sequence of events is largely not in dispute. It is the motivation of the Board that is in dispute.
Plaintiff owned apartment 1D in the building. She also acquired another, larger, apartment on the same floor: 1G. She closed on apartment 1G in August 2014. Graham wanted to sell 1D because she did not need two apartments, and 1D was now empty. However, the managing agent informed her that the Board wanted her to hold off selling, because the Board may have wanted to buy 1D to turn it into a gym for the building. Graham gave the board members access to 1D so they could assess the feasibility of that apartment for a gym. By September of 2014, Graham had not heard from anyone on the Board about buying her apartment. Therefore, she hired RealDirect as her sales broker. RealDirect started marketing the apartment at the price of $499,000.
In November of 2014, the board made an offer of $400,000 for the apartment. Graham rejected this offer, because she suspected it was too low. She was right. Shortly after this, in December 2014, Graham received an all cash offer of $495,000 from a suburban couple named the Soffens, who were both physicians from NJ. The Soffens wanted to use the apartment as a pied a terre. The Board refused to approve the Soffens' offer. Despite the Board's OWN prior offer being $95,000 LESS, the Board claimed the price was too low. The Board informed Graham that they would approve nothing less than $535,000. So, Graham and the Soffens restructured the deal to raise the contract price to $535,000 with the Soffens receiving a rebate of $40k.
Then the transaction stalled. Despite the new $535,000 contract price, a Board interview for the Soffens was never scheduled and no one from the managing agent returned calls to the brokers regarding the sale. Then, in April 2015, Graham learned from the managing agent that the Board now wanted the price to be $610,000 before they would approve the sale.
The court did not permit defendant to introduce evidence that the Board's rejection was based on anything other than price, because defendant refused to answer questions at deposition regarding the reason for the rejection. Nevertheless, the rejection was NOT because the Board did not like the kickback arrangement. Rather, the board rejected the $535,000, but claimed it would now approve $610,000. This requirement seemed tangentially related to a recent price for another D line apartment, on a higher floor and in better condition. Clearly, the Board was irrationally bent on a price higher for 1D than what it was actually worth. Moreover, the Board stalled so long on the Soffens' application that the market increased.
As the Board had not acted on the Soffens' application, Graham hired a lawyer to prompt them. This lawyer sent a letter to the managing agent on April 17, 2015. There was no response. Given the utter lack of response from the Board, Graham decided to sue in May 2015. Still, the Board did not act on the Soffens' application.
It was not until Graham obtained a court order from Justice Mendez directing the Board to issue a response, that the Board finally sent a letter through the managing agent rejecting the Soffens' application. The letter stated no reason for the rejection and Graham was never offered any explanation. Given the letter of October 2015 rejecting the second application, and Graham's motion to force the board to act one way or the other, the vague testimony of Board Members Levy and Freedman, that the Board had rejected the second application much earlier, is simply not credible. Indeed, had the Board already made a decision, the motion for an injunction would have been moot.
Graham refunded the Soffens' down payment and, with her now stale listing, attempted again to sell unit 1D. Eventually she entered into a contract of sale at $530,000 with another couple. But, four months later the Board rejected this purchaser as well. Graham then had to pivot to renting out 1D. She found a tenant in October 2017, nearly three years after the Soffen's first offer.
The only issue here is the Board's bad faith. A cooperative board's right to consent to any proposed transfer "for any reason and for no reason" is not without limits. For example, consent cannot be withheld on the basis of religion or race. In addition, consent cannot be denied in bad faith, including that a Board cannot refuse a sale for spite (see Smolinsky v 46 Rampasture Owners, 230 AD2d 620 [1st Dept 1996] [court reinstated jury verdict that found board acted in bad faith where it was rational for jury to find that the board refused plaintiff's buyer for spite because of previous litigation]; Bernheim v 136 East 64th, 128 AD2d 434 [breach of fiduciary duty claim viable where plaintiff contended that certain members of the board denied her application to purchase the apartment next door from an estate, because the board members wanted to purchase the apartment at below market prices and flip it]; Chappell v Trump Plaza Owners Inc., 2011 WL 5024488 (Sup Ct NY Cty Oct 3. 2011][where board could reject a potential sale for any reason or no reason, court refused to dismiss a claim of bad faith where the co-op had rejected a price as too low so it could allegedly bid at a sale of the seller's apartment and acquire it below market]; see also Pilponic v Laight Coop Corp, 137 AD3d 710, 711 [1st Dept 2016]).
By a preponderance of the evidence Ms. Graham has proven the Board's bad faith. There is simply no other explanation for the Board making its own offer for $400,000, then refusing to allow repeated offers to go through well in excess of that. The overall facts, including: (1) Graham was told it would be in her interests to hold off marketing her apartment initially, (2) the Board's lowball offer, (3) the refusal to consent to the $490,000 offer, but indicating defendant would accept $535,000, (4) then refusing that number, while claiming $610,000 would do the trick, (5) delaying for months and months to take official action on the Soffens' application, (6) indeed refusing to take action on the Soffens' application until forced by court order and then (7) rejecting another offer well above $400,000, reflects bad faith. Indeed, these facts reflect a Board that either did not like Ms. Graham and acted out of spite, or was so blinded by their own power and desire to obtain the apartment at a below market price, they lost all sight of how to exercise fiduciary responsibilities in a fair and good faith manner. Accordingly, defendant Board is liable to Ms. Graham for breach of fiduciary duty. Given that the Proprietary Lease (PX 5 and EDOC 21) required the Board to act in a reasonable period of time on the Soffens' application, and, given the covenant of good faith and fair dealing inherent in every contract, the Board is also liable to Ms. Graham for breach of contract.
DAMAGES
During the motion in limine, plaintiff had argued that her damages should be the equivalent of what a moderately performing mutual fund would generate. The Court dismissed Plaintiff's claim for loss of investment damages as speculative. (Trial Transcript dated April 30, 2019, p. 16, lines 15-23). Now, at page 43 of her post trial brief, plaintiff argues that she should receive statutory interest of 9% on $445,000, representing the lost time value of the money she should have received had she been allowed to sell her apartment. As of May 9, 2019, this amount was $164,380.00 plus $110 per day for every day thereafter.
Unfortunately for plaintiff, the court cannot award statutory interest on the value of the apartment. "CPLR 5001(a) authorizes interest 'upon a sum awarded'' (Manufacturers & Traders Trust Co., v Reliance Insurance Co., 8 NY3d 583, 589 [2007]; see also North American Foreign Trading Corp, 697 FSupp 163 n. 2 [SDNY 1988] [where NY's Uniform Commercial Code § 2-708 allowed for incidental damages, court reluctant to award the time value of money under CPLR 5001: "since CPLR § 5001 limits itself to interest on a "sum awarded," it is better to consider the losses as "incidental"]).
At this point, plaintiff has not suffered damages from the two thwarted sales, as the evidence demonstrates that the New York City real estate has increased in value from 2014 until the time of trial in 2019. Thus, her apartment is worth more today than it was when she first tried to sell it. This court declines to award plaintiff the value of her apartment, because doing so would result in a double recovery once plaintiff does sell. Therefore, there is no "sum" upon which to award interest either.
The same does not go for lost rental income, to which plaintiff is entitled. Plaintiff claims lost rental income of $81,725.00. Plaintiff runs the lost rental income from April 1, 2015, the latest date plaintiff would have transferred the apartment to the Soffens. Given the Board's course of conduct, that date is a reasonable starting point. Although plaintiff testified she only decided to take the apartment off the market and rent it in October 2016 (Graham Testimony p 99, line 16-19), had she known in April 2015 that the Board had no intention of approving the Soffens, or that they would delay a decision until a court order, she obviously would have rented the apartment earlier. Thus, amount the court will award to plaintiff for lost rent is therefore $81,725.00.
The parties appear to agree that the amount of plaintiff's carrying cost component of her damages is $19,476.00, which is Graham's carrying costs of $66,106.00 minus rent received of $53,820.00. Therefore, the court will award $19,476.00 for out of pocket carrying costs.
Litigation Costs
As the prevailing party, plaintiff is entitled to reasonable attorney's fees. To the extent the court finds this case has been over litigated, it will not award fees. Accordingly, the parties are encouraged to work out a reasonable amount for defendant to pay as attorney's fees. Otherwise, the court will expect plaintiff to initiate a motion for same by April 30, 2020. This motion will be on papers only and plaintiff is limited to ten pages for a memorandum of law. Courtesy copies should be emailed to the court. There is no need to send paper copies.
The court declines to award punitive damages. "Punitive damages are permitted when defendant's wrongdoing is not simply intentional, but evinces high degree of moral turpitude and demonstrates such wanton dishonesty as to imply criminal indifference to civil obligations" (Ross v Louise Wise Services, Inc, 8 NY3d 478,489 [2007]; see also Macy's Inc. v Martha Stewart Omnimedia, Inc,, 127 AD3d 48, 57 [1st Dept 2015] ["action did not evince the high degree or moral turpitude or demonstrate such a wanton dishonesty as to imply a criminal indifference to civil obligations"]; Huang v Sy., 62 AD3d 660, 662 [2d Dep't 2009] [after bench trial finding defendant liable for breach of fiduciary duty, court did not err in refusing to assess punitive damages where plaintiff failed to demonstrate a high degree of moral turpitude or criminal indifference]).
Here, while defendant's actions are reprehensible, they do not rise to the level or moral turpitude or criminal indifference sufficient for an award of punitive damages. Although plaintiff presented evidence that tangentially seemed to indicate that defendant Board may have illegally required higher prices for other apartments, as well as plaintiff's, the proof does not rise to the level of clear and convincing sufficient to support an award of punitive damages. For instance, no other shareholder testified about their experiences with the Board in relation to their sales price.
Offset
Just as the court rejected as speculative plaintiff's argument that she should be awarded damages based on what a moderately performing mutual fund would achieve if the sale had gone through and she had invested that way, the court now rejects defendant's attempt to offset damages based on a post-breach valuation. We have no way of knowing when and for how much Ms. Graham may sell her apartment in the future. Accordingly, the court declines defendant's invitation to offset damages.
ACCORDINGLY, the court awards ($81,725.00+ $19,476)= $101,201.00 to plaintiff as damages with 9% statutory interest from March 1, 2017, a reasonable interim date.
The clerk is directed to record the verdict in plaintiff's favor and enter the judgment accordingly.
Dated: March 29, 2020
New York, NY
ENTER:
/s/_________
HON. MELISSA A. CRANE, J.S.C.