Opinion
109201/07.
Decided December 21, 2007.
The Attorney General was represented by Lewis Polishook.
The Building/respondent was represented by Andrea Roschelle.
The Tenants/ petitioners were represented by David Rozenholc.
This proceeding was commenced by Petitioners, Rafael Urquia II and others, (collectively "Urquia") by Order to Show Cause, issued by Hon. Leland DeGrasse on July 6, 2007, pursuant to Civil Practice Law and Rules ("CPLR") Article 78, against Respondents, Andrew Cuomo as Attorney General of the State of New York ("Attorney General") and MH Residential 1, LLC, MH Residential 2, LLC, and MH Commercial, LLC (collectively the "Sponsors"), seeking review of a decision of the Attorney General to accept for filing a Condominium Plan (the "Plan") for the conversion to condominium ownership of a building owned by the Sponsors, located at 200 East 66th Street in Manhattan known as Manhattan House ("Manhattan House"), on the grounds that the acceptance of the Plan by the Attorney General was arbitrary, capricious or an abuse of discretion. Certain preliminary relief was granted in the Order to Show Cause pending the return of such Order, which after adjournments on consent of the parties, was initially heard by this Court on October 3, 2007.
By separate Order to Show Cause, issued by Hon. John E. H. Stackhouse, issued on September 19, 2007, Urquia sought the issuance of subpoenas "ad testificandum and duces tecum" to the custodian of Records of the Attorney General and to Lisa C. Williams, Assistant Attorney General of the State of New York, seeking testimony and documents.
The Plan has, since its acceptance for filing on March 30, 2007, (the "Original Plan") been amended by two amendments which were accepted for filing by the Attorney General respectively on September 21, 2007 (the "First Amendment") and on October 11, 2007 (the "Second Amendment").
At the October 3, 2007 return of the Order to Show Cause, this Court considered arguments relating to the extension of the temporary restraint on certain acts of the Sponsors (which had been restrained through such hearing date by the Hon. Leland DeGrasse) and the standing of Urquia to commence this proceeding Urquia at such time also sought additional time to address the First Amendment and its implications and to submit further on all matters discussed, before a final decision would be rendered. This Court granted such request, setting a briefing schedule and scheduled a second argument for October 30, 2007. Recognizing that during the process of a conversion of a building to condominium ownership, Plans are commonly amended regularly, and that subsequent extensions of this Proceeding to consider any subsequent amendments as they may relate to the substantive issues raised by Urquia could indefinitely prolong the resolution of this dispute, the Court advised the parties at the October 3, 2007 hearing, that while the Court would consider the First Amendment in reaching its decision, the Court would not consider any subsequent amendments or grant further delays for them to be addressed. By the second hearing on October 30, 2007, a Second Amendment had been accepted by the Attorney General for filing. At the October 30, 2007 hearing, Urquia objected to the Court considering the Second Amendment in determining the parties' claims in this proceeding. As the Attorney General and the Sponsor did not rely on the Second Amendment to support their position on the merits of this proceeding and so advised the Court, the Court has not considered the Second Amendment or its contents with respect to the merits of the substantive issues in this case.
The Second Amendment in part, also responds to one issue relating to the temporary relief extended by this Court at the October 3, 2007 hearing. This issue does not relate to the underlying merits of this controversy and will be addressed below in this Decision and Order.
FACTS
The following relevant facts of this controversy are generally undisputed by the parties. Manhattan House is a large apartment building 575 apartments (the "Apartments") with ground floor stores on the avenues, occupying the full city block from Second to Third Avenues and from 65th Street to 66th Street in Manhattan. It was constructed as a luxury rental apartment building after World War II, without government subsidy, and was never subject to rent control. In 1969, pursuant to the Rent Stabilization Law of 1969, (such law, as amended, will hereafter be referred to as "RSL") all Apartments became subject to the RSL. As a result of various provisions of the RSL, a significant number of the Apartments became no longer subject to the RSL over the years and are now rented to tenants whose tenancies are not subject to the RSL (the "Free Market Apartments"). As of March 30, 2007, the date the Original Plan was submitted to the tenants, of the Apartments offered for sale, 218 Apartments (or 38%) were occupied by tenants whose tenancy was subject to the RSL, 124 Apartments (or 21.6%) were Free Market Apartments and 231 of the Apartments (or 40.2 %) were vacant. Petitioners are tenants of 45 Apartments some of which are subject to the RSL and some are not.
One apartment, that of the resident manager, is not being offered for sale. In addition, the Plan offers seven maids room units and eighty-six storage lockers for sale.
Manhattan House was sold by its original owner and builder, New York Life Insurance Company, to the Sponsors on or about October 21, 2005. The Sponsors in turn subsequently submitted a Plan to the Attorney General to convert the Building to condominium ownership, as a non-eviction plan on or about February 5, 2006, submitting copies of the proposed plan (the "Red Herring")to the tenants.
Under law, in a proposed conversion, a copy of the form of plan submitted to the Attorney General for processing must be promptly served on tenants in occupancy. This form of plan is referred to commonly as the Red Herring, a term whose source was a red legend required for preliminary prospectuses under the federal securities act, advising that the prospectus was preliminary and not an offering.
On May 24, 2006, after the Red Herring was delivered to the tenants, counsel for Urquia, representing Manhattan House Tenants Group, Inc., ("MHTG") advised the Attorney General that the Red Herring was improper and complained of many of the same matters raised by Urquia in this Proceeding. The Attorney General advised the Sponsors of such complaint and required the Sponsors to respond to the complaint, which the Sponsors did. The record shows continued contact between MHTG and the Attorney General and continued requests for information from the Sponsors as to the charges made and responses to the Attorney General during the time the Attorney General processed the Plan.
The Court has no knowledge as to the membership of MHTG or whether the Urquia petitioners were all, some, or non of the members of MHTG. The fact that MHTG and Urquia have the same counsel and make similar complaints as well as observations as to how tenant-sponsor disputes arise and are litigated in New York, lead to a reasonable assumption that there is a substantial commonality between the Urquia petitioners and MHTG.
After reviewing the Sponsor's initial filing and the complaints of MHTG, the Attorney General issued letters of deficiency on July 28, 2006 and August 1, 2006, specifying the changes the Attorney General would require to be made to the Plan and advising that the Plan would be rejected unless such deficiencies were corrected within thirty days. The Sponsor apparently complied, and the 950 page Original Plan was eventually accepted for filing by the Attorney General on or about March 30, 2007. The Original Plan, as accepted for filing, was promptly served on all residential tenants of Manhattan House then in occupancy and this proceeding was commenced afterwards on July 6, 2007.
During the process, the principals of the Sponsors, fell out, disagreeing on certain provisions in a buy/sell agreement between them, and eventually, subsequent to the acceptance of the Original Plan for filing, sued each other. The first suit was filed on April 27, 2007. As the Original Plan was accepted for filing before the first suit was commenced, it did not disclose the dispute as it obviously could not, as the suits were not yet then commenced. Both suits were disclosed in the First Amendment.
These suits and all claims therein were eventually settled by certain transactions between the two Sponsors which were consumated on October 9, 2007.
HISTORY OF REGULATION OF CONVERSION OFFERING PLAN
The Attorney General began to regulate the conversion of apartments to tenant ownership after World War II. Before then, apartment buildings were initially constructed either to be cooperatives or rental units, and there were few conversions of rentals to cooperatives. Condominiums did not exist in New York until after the New York Condominium Law (Real Property Law Art. 9-B) was enacted in 1964 by Chapter 82 of the Laws of 1964. During the depression, the mortgages on many existing cooperative buildings were foreclosed, wiping out the economic interests of tenant shareholders and purchasers at foreclosure, thereafter operated such buildings as rentals. In 1943, Congress enacted war-time price controls, freezing rents. In 1947, these Federal controls ceased, but New York elected to continue to regulate rents and evictions for existing apartments, through rent control laws and regulations issued thereunder ("Rent Control"). Because many tenants of buildings which had been cooperatives before the depression and which became rental by reason of foreclosures wished to return to that status, Rent Control provided for the decontrol of apartment buildings if 35% of the tenants in occupancy agreed to purchase their apartments. The 35% number was an arbitrary compromise of the drafters of Rent Control and regulations issued thereunder in 1947 to allow the re-cooperatization of buildings in an orderly and fair fashion. Such requirement was intended to protect against landlord misuse of the conversion process to evict tenants by proposing unacceptable prices, while not creating undue burdens on the process. Through 1969, a significant number of buildings under Rent Control were converted to cooperative ownership under these provisions.
Over the years New York City and New York State have legislated, regulated and exchanged jurisdiction over rent regulation, but Rent Control has been effectively continued to date.
World War II was followed by a spate of new apartment construction in New York City. These new buildings, except for those built under certain governmentally subsided programs, were originally not subject to Rent Control. Although some of these new buildings were built initially as cooperatives, most were rental. As owners could achieve market rents, there was little incentive to convert these new buildings to tenant ownership.
After 1969, following the adoption the RSL, the situation changed. Many owners who had relied on the implicit (albeit not legally binding) promise of 1947 that rent regulations would not apply to post World War II buildings, elected to exit the rental market by converting their buildings to cooperatives. The Code of the Rent Stabilization Association, adopted pursuant to the RSL, tracked provisions of Rent Control to allow buildings to be freed from the RSL where 35% of the tenants had agreed to buy in a conversion.
Although the New York Condominium Act was adopted in 1964, by 1969 only one or two condominium buildings had been constructed and there were no attempted conversions of rental buildings to condominium ownership until several years later.
Until the early 1970's, conversion plans assumed that upon their completion, non-purchasing tenants could be evicted. At that time, the owner of the Parkchester apartment complex in the Bronx, which was under Rent Control attempted to convert the complex to condominium ownership without seeking the right to evict tenants whose apartments were subject to Rent Control, thus by-passing the need to sell 35% of the apartments to tenants to achieve an effective plan. In short, such sponsors proposed the first "Non-Eviction Plan." This in turn created the retronym of "Eviction Plan" to refer to the theretofore standard plan where tenants were subjected to the loss of their rent regulated status because 35% of the tenants had purchased apartments under the plan. Under a Non-Eviction Plan, a sponsor would sell what he could and wait for tenants whose apartments were subject to rent regulation to leave, or for such apartments to become decontrolled, and then sell such apartments for occupancy or investment.
Subsequent to this effort, the legislature adopted the Emergency Tenant Protection Act of 1974, (Laws 1974, C.576) which complicated the situation by subjecting apartments which had become decontrolled through vacancy in many buildings to the RSL.
Aspects of Non-Eviction Plans were challenged in the courts and eventually Laws 1982, C. 555, was adopted re-enacting General Business Laws ("GBL") § 352-eeee to define, regulate and set the parameters for Non-Eviction Plans for both cooperative and condominium conversions in New York City. Chapter 555 repealed and superceded Laws 1979, C. 432, which enacted an earlier GBL § 352-eeee. The Attorney General subsequently, on August 22, 1988, adopted regulations, 13 NYCRR, Part 23, to carry out his obligations under GBL § 352-eeee. Such regulations were subsequently repealed and re-promulgated in February 2, 1989, effective March 14, 1989. These regulations and other part 23 regulations relating to the process of conversion are hereafter referenced as the "Regulations."
It is GBL § 352-eeee and the Regulations which the Attorney General presently administers and which is the authority claimed by the Attorney General for his acceptance the Original Plan and the First Amendment, and this proceeding relates to his powers and duties thereunder.
Standing
Before considering a matter before it, a court must first inquire whether a party seeking judicial relief has the standing to do so. If one seeking to enlist the court's power over another has no standing to be in court, it is particularly unfair to subject the adverse party to the expense and delays of litigation. Standing is generally not an issue in plenary actions, where virtually anyone, other than persons under a legal disability acting on their own behalf, such as infants or adjudicated incompetents, or statutorily disbarred persons, such as corporations doing business in New York who have not qualified to do so, or non-human or inanimate or other whimsical plaintiffs, may sue. For Special Proceedings under CPLR Article 78, the issue is different.
CPLR Article 78 codified what were known as the Extraordinary Writs of Certiorari, Prohibition and Quo Warranto, writs by which action of a government or governmental agency, could be challenged. In their codification, the legislature strictly limited the ability of a petitioner to upset the decisions of a government agency by defining narrowly the grounds for challenge and by providing for a short time limitation period of four months within which to bring a challenge. Further, access to CPLR Article 78 relief was limited to a party "aggrieved" by the decision or action to be challenged. In short, one who was not "aggrieved" had no standing to challenge a governmental decision. Such limitation is particularly apt in the context of government action as there are few acts of government which meet with universal approbation, and many where there is substantive political opposition. Absent such a standard, government acts would be far more subject to challenge and delay for political purpose, whether or not the interests of majority or general good of society were the result or aim of such action. The decision as to which interests arise to the level of aggrievement so as to allow a challenge and which interests are merely those of disagreement, annoyance or political preference, which are not sufficient to allow a challenge, are set by the courts, subject to later legislative expansion, contraction, definition or limitation of interests to be recognized as sufficient or insufficient for this purpose.
Asserting that something is a right does not necessarily make it a legal right. A legal right is one which a Court will recognize and enforce. As examples, New York courts will enforce certain rights to privacy, but do not enforce the sometimes asserted "right to life" to ban abortions or the sometime asserted "right to work" to ban certain union agreements.
The most recent guidance by the Court of Appeals on the issue of standing to challenge governmental actions under CPLR Art. 78 is Society of the Plastics Industry, Inc. v. County of Suffolk, 77 NY2d 761 (1991), where the Court of Appeals, in an extensive and thoughtful opinion by Judge Kaye held that the Society of the Plastics Industry did not have standing to challenge an environmental determination of the Suffolk County Legislature under the State Environmental Quality Review Act ("SEQRA") (NY Environmental Conservation Law Art. 8). Society illustrates the interplay between the Legislature and the Courts in that SEQRA, a State law, significantly expanded the scope of "persons affected" who were given standing to participate in and later challenge governmental actions and decisions involving environmental matters. After finding that the Society of the Plastics Industry was not a member of the expanded class of persons to whom standing had been extended for CPLR Article 78 purposes, the Court analyzed the Society's position under general rules for standing — whether the Society was subject to a direct cognizable harm, and found it was not. The Court thus dismissed Society's petition on standing grounds.
In an earlier case, Whelan v. Lefkowitz, 36 NY2d 75 (1975), the Court of Appeals had addressed the issue of standing of tenants to challenge the acceptance by the Attorney General of a proposed condominium conversion Plan for the Parkchester apartment complex in the Bronx, and found that the tenants of Parkchester had standing to challenge the acceptance for filing of such plan under CPLR Article 78. Whelan made it clear, however, that standing is to be determined as a factual matter under the circumstances. The Court found that under then existing law, there were two reasons why the rights of a non-purchasing tenant would be directly adversely affected. The first reason given was because such a tenant might well face a situation where the owner of his apartment may not be effectively able to perform such owner's continued obligations under Rent Control to maintain the apartment, after the Plan became effective (hereafter the "First Reason"). Finding that a tenants' rights to services to which he had been entitled could be substantively jeopardized should the plan become effective, the Court found that tenants had standing to challenge the action of the Attorney General to accept the plan for filing. Finding standing on the basis of the First Reason was clearly proper under such facts and consistent with general principles of standing law.
For example, a landlord of a rental apartment must paint regularly and must make apartment repairs such as to appliances on a prompt basis. If the landlord is merely an owner of a single condominium apartment, such a landlord may have difficulty in performing such services as condominium owners, not the building, are responsible for such services. An absentee owner might therefore not be in a position to learn of a problem or be available to perform such services or might even have a difficulty in arranging access for his contractors to perform them.
The second reason given the Court for finding standing was that a conversion "reduces the number and importance of rental tenants, thus diluting their negotiation power as a group and in turn diminishing the strength and significance of each individual tenant," (the "Second Reason"). This Second Reason cited neither precedent nor discussed what this reason involved other than reciting the words quoted above.
This Second Reason is at best unclear in its meaning and scope. As Whelan was a Court of Appeals decision, however, such Second Reason is nonetheless binding on this Court, whatever it means, until either the Court of Appeals or the Legislature has otherwise ruled.
The decision of the First Department whose finding of "no standing" was reversed by Whelan, makes no mention of anything relating to the Second Reason although it otherwise discusses the impact on tenancy rights of non purchasing tenants, the basis of the First Reason. Thus, the history of Whelan yields no clue as to the meaning of the cryptic assertion of the Second Reason by the Court of Appeals.
Parkchester Apartments Co. v. Lefkowitz, 44 AD2d 442 (1st Dept 1974).
Up to the time of Whelan, tenants were to expect to have leverage to bargain in a conversion because up to that time, all plans had been Eviction Plans requiring 35% tenants to purchase their apartments for such a plan to become effective. Further, at the time Whelan was decided, tenant groups had begun a campaign to increase their economic leverage by seeking to increase the 35% percentage rule in Eviction Plans to 51%, which campaign was eventually successful in the enactment of Laws 1982, C. 555, which so increased the percentages required for Eviction Plans. This leverage enabled tenants in Eviction Plans to receive or bargain for steep "insider" discounts for their apartments.
The sponsors of Parkchester attempted to bypass the bargaining power the Parkchester tenants would have had under an Eviction Plan by not seeking to evict them, reasoning that the sole source of the tenant's leverage arose from the protections against eviction under Rent Control which then required 35% tenant purchasers. The Second Reason which countered this theory by recognizing tenant leverage, did not discuss and cited no law or precedent as to the source of this leverage or how much leverage existed, when this leverage expired or gave anyone, be it tenant or sponsor, any guidelines so as to address the issue.
Which were effectively the same under the RSL.
Subsequent to Whelan, the Legislature in adopting GBL § 352-eeee in 1979 and expressly eliminated the First Reason which the Court of Appeals found to be the basis for the tenants' standing in Whelan to maintain a CPLR Article 78 proceeding to challenge the acceptance of a Non-Eviction Plan. As GBL § 352-eeee(3), now requires Non-Eviction Plans to provide for a single management of all units, including units in which a non-purchasing tenant resides, and the continued responsibility of the Sponsors to provide all services to which the tenants were entitled, there now is a single responsibility and adequate authority for the manager to provide required services under rent regulations and continue the Sponsors responsibility for proper enforcement of the rights such tenants under rent regulation, the First Reason no longer exists and can no longer be a basis to find standing in a Non-Eviction plan. Further, by re-enacting GBL § 352-eeee in 1982, the Legislature, by codifying and effectively eliminating the bargaining power to be accorded tenants in a Non-Eviction Plan by expressly providing that such plan could be declared effective if 15% of the apartments had been purchased by either "bona fide tenants in occupancy or represent that they intend that they or one or more members of their immediate family intend to occupy the unit when it becomes vacant," also eliminated the Second Reason as a Non-Eviction Plan could become effective even if no tenant in occupancy purchased. The absence of any minimum purchase requirement of tenants represents the Legislative determination that tenants had no legal leverage in a Non-Eviction Plan, as long as there was a material (i.e. 15%) purchase of units by qualifying tenants. This determination of the Legislature represented a major shift from the approach of Eviction Plans which had required purchases by specified percentages of regulated tenants in occupancy. Thus, § 352-eeee while it granted tenants specific and substantial benefits, also in the case of Non-Eviction Plans, removed any legal basis for tenants to block a conversion by refusing to buy. For Manhattan House, by the time the Original Plan was accepted for filing, presented to the tenants, and this proceeding was commenced, 237 Apartments, or approximately 40.4% of the Apartments, were already vacant. Thus the Sponsors only needed to sell 69 of such Apartments to persons who could qualify under GBL § 352-eeee(1)(b), to declare the Plan effective, enabling them easily to reach Plan effectiveness without a single purchase by an existing tenant. Thus, as the Urquia tenants under the Plan had no right or ability to block the plan and had their tenancy rights protected they had no standing to maintain this proceeding under CPLR Art. 78.
Enacted by L. 1979, C. 432 and re-enacted in L. 1982, C. 555.
Note that because non purchasing rent regulated tenants in an Eviction Plan, not otherwise protected as senior citizens or disabled persons under GBL § 352-eeee would be subject to the loss of their apartments if such a plan became effective, such tenants under general principles of standing law would have standing in any event under CPLR Art. 78 to object to the acceptance of an Eviction Plan for filing, by the Attorney General.
GBL § 352-eeee(1)(b) as re-enacted by L. 1982, C. 555. L. 1979, C. 432 did not address the sales necessary to declare a Non-Eviction Plan effective or which buyers could be counted for such purpose.
69 Apartments constitute 15% of all Apartments offered.
Not only are all existing tenants of Manhattan House not disadvantaged in any legally recognized way should the Plan become effective, if the Plan did become effective, their situation would only improve. Tenants under a Non Eviction Plan whose apartments are subject to the RSL not only retain their rights under the RSL, but gain additional rights under a Plan which becomes effective, indefinitely, even if their tenancy ceased to be protected by RSL or even if the RSL (an emergency law which regularly sunsets), were not extended. For example, tenants under the RSL may lose rights thereunder where their rents and income both exceed statutory definitions for luxury decontrol. Such tenants, in the absence of a Plan would be subject to eviction, without recourse, at the end of their leases. After a Non-Eviction Plan becomes effective, such tenants would be forever entitled to renewal leases (subject only to paying market rent). Further, an owner of a building may refuse to renew as many leases for rent stabilized apartment as such owner wished, to the extent such owner in good faith, desired such apartments for personal use and occupancy. Pulty v. Economakis, 40 AD3d 24 (1st Dept. 2007). After a Non-Eviction Plan becomes effective, a Rent Stabilized tenant would not be subject to this risk. Some cases indicate that there may be additional rights available to "super tenants" which are not available to ordinary stabilized tenants, however no cases illustrate any diminution of rights of any class of tenants as a result of a cooperative or condominium conversion in a Non-Eviction Plan.
These tenants are sometimes referred to as "super tenants." See McKinneys Practice Commentaries to GBL § 352-eeee.
See GBL § 352-eeee(2)(c)(ii).
Under GBL § 352-eeee tenants of Free Market Apartments would also be better off after a Non-Eviction Plan became effective as in such event such a tenant could no longer be evicted, and will, at the end of his lease, become a "super tenant" with a perpetual right to a renewal, with rent being set no higher than market.
See GBL § 352-eeee(2)(c)(iv).
These tenant benefits (and owner detriments) were among of the many trade-offs between Sponsors and tenants enacted by the Legislature in GBL § 352-eeee. In both enactments of GBL § 352-eeee the Legislature stated:"The legislature hereby finds and declares that the conversion of residential real estate from rental status to cooperative or condominium ownership is an effective method of preserving, stabilizing and improving neighborhoods and the supply of sound housing accommodations; that it is sound public policy to encourage such conversions while, at the same time, protecting tenants in possession who do not desire or are unable to purchase the units in which they reside from being coerced into vacating such units by reason of deterioration of services or otherwise into purchasing such units under the threat of immediate eviction."
L. 1979, C. 432 § 1, L. 1982, C. 555 § 1. The Legislature made different additional findings in these chapters which related to different concerns addressed by the two chapters.
In these findings the Legislature expressly found and declared that as a matter of public policy, conversions of rental buildings to tenant ownership were beneficial and were to be encouraged subject to according certain additional rights and protections to existing tenants and certain additional protections to buyers. By thus eliminating both reasons articulated in Whelan to be the basis for standing, viz: the problems of multiple owners and recognizing and requiring a fixed percentage of purchasers (but not tenants) to convert under a Non-Eviction Plan. Whelan, although correct under the law when it was decided, has thus become a precedential orphan, as the facts on which it was decided no longer exist.
At the hearing, counsel for Urquia indicated that his clients would not buy under the Original Plan or under the First Amendment. If so, the consummation of the Plan would only enhance their rights as tenants. Accordingly, this Court finds Urquia has no standing to maintain this proceeding and as a result Urquia's petition must be dismissed. As the petition must be dismissed, Urquia's ancillary motion for subpoenas must also be dismissed.
The merits of the Controversy
Although this Court has found that Urquia lacks standing to maintain this proceeding, both the Sponsor and the Attorney General urged, at oral argument, that the Court also address the merits of the controversy. Urquia claimed indifference as to whether the Court should reach such merits if it were to dismiss the Petition on standing issues. Recognizing the public policy enunciated by the Legislature in enacting GBL § 352-eeee to encourage conversions to tenant ownership provided it be done so in a fair and orderly manner in conformity with GBL § 352-eeee and the Regulations, as well as the enormous stakes involved in this controversy, the Court will address such "merits," as if Urquia had standing to raise such issues.
The First Amendment recites that the "Sponsor expects to sell the Apartment Units, Maids Room Units and Storage Lockers which will generate $1,163,322,983." As the Sponsor is retaining the garage and commercial units, the amount involved in full project is substantially higher.
After reviewing the contentions of the parties, as set forth below, this Court concludes that were it to reach the "merits" of this controversy, it would find that Urquia's petition fails to establish a basis for relief, and accordingly Urquia's Petition must be dismissed.
Urquia asserts that because of errors and omissions in the Original Plan, the Attorney General should not have accepted such Plan for filing and seeks the order of this Court to set aside such acceptance. Further, Urquia also asserts that such initial errors and omissions are not curable by the amendment process and that in any event, the First Amendment did not cure all errors and omissions.
Urquia in its papers characterizes these variously as "lies, frauds and perjuries." There is nothing in the record to indicate that the errors and omissions were willful, rather than, at worst, sloppy. The issue of perjury will be discussed below.
Urquia also asserts that the Plan was further defective in that it was filed at a time when Manhattan House had an impermissibly large number of long term vacancies.
In addition, Urquia also asserts a series of other improprieties and advances other reasons why the Plan should be voided.
The Attorney General asserts that this Court is limited, under CPLR Art. 78, to consider only whether his actions in accepting the Original Plan for filing and the First Amendment for filing were arbitrary and capricious, and that in considering such standard, the Court must give substantial deference to the Attorney General's own interpretation of its Regulations and policies, which the Attorney General asserts have been properly and consistently interpreted.
It is the Sponsor's position that it has fully, in the Original Plan and the First Amendment, disclosed all material facts required to be disclosed as of such time, that it has substantially complied with all of the requirements of the Attorney General, and that Urquia is merely trying to delay and hamper the Sponsor in proceeding to convert Manhattan House.
Shortly after the Red Herring was delivered to the tenants of Manhattan House, an unsigned circular was distributed among the tenants. In addition to raising objections to the proposed conversion similar to those made by Urquia and MHTG, the circular recited that it was issued by the "Committee to promote the bankruptcy of Richard Kalikow and Jeremiah O'Connor [the Sponsors] and to evict Douglas Elliman Property Management from Manhattan House." While there is no express evidence tying such circular to either MHTG or Urquia's counsel, Sponsor's belief as to Urquia's motives is understandable. Such belief or its accuracy in fact, however, is irrelevant to the resolution of the issues in this case.
Regulatory Scheme
At the heart of the dispute are conceptual differences. The Attorney General asserts his role is one of general oversight to assure compliance with a disclosure regime with strict enforcement of Sponsor's economic obligations to purchasers for losses arising out of non-disclosure, misdisclosure or deceptive practices. Both the Amendment process and the terms of the Sponsor's Certification as imposed by the Regulations follow this approach. The Amendment process, which has been consistently followed by many Plans over many years by many sponsors and many Attorney Generals, has not only been used to disclose facts arising subsequent to the date an original plan was accepted for filing, but also to correct later discovered errors and omissions in original Plans, or even in prior Amendments. Under this process, to the extent the Attorney General in his review of an Amendment finds that the correction or change could have had a material effect on a purchaser's decision to purchase an apartment, the Attorney General has routinely required sponsors to offer those who had already contracted to buy an apartment, an opportunity to rescind their purchase contracts. This approach which is sustainable as an approach which itself is not arbitrary or capricious, could still be subject to review where in a particular case it might be applied in an arbitrary and capricious manner. Here the Attorney General asserts that both the approach as general a matter and its application to the instant case was neither arbitrary nor capricious.
The Court observes that the Second Amendment which disclosed that the settlement of the lawsuits between the two original Sponsors resulted in one Sponsor withdrawing, leaving a single Sponsor, and thus only one deep pocket to respond to ane purchaser's claims, offered a right of recision to purchasers who had signed contracts before such Amendment. As this Decision does not consider the impact of the Second Amendment on this dispute in addressing whether the Amendment/Recision approach of the Attorney General through the issuance of the First Amendment was arbitrary and capricious, the Court takes no position on whether such recession offer was required or voluntary.
Urquia's approach is different and effectively would require the Courts to void any Plan which was technically not perfect at the time it was accepted for filing and to find that the Attorney General's policy of allowing corrective amendments, even for errors and omissions of minimal materiality, was improper.
The Sponsor supports the Attorney General's position.
Considering the public policy of the regulatory scheme as articulated in the legislative findings to Laws 1979, C. 432 and Laws 1982, Ch 555, as well as the consistent and long term construction of the Regulations by present and prior Attorneys General and their general adherence to such construction in processing Plans, this Court cannot find that the Attorney General's view that as a general rule, errors in Plans accepted for filing are subject to cure by amendment, rather than by automatic and retroactive de-acceptance of such Plans, is arbitrary and capricious. Accordingly, this Court rejects Urquia's position to the contrary.
The principle purpose of offering plans in a conversion is to disclose the risks, parameters, process and results of a conversion to potential purchasers, to give them information relating to the physical condition of the offered building and to establish the legal framework defining the respective rights and obligations of parties to the transaction. Such disclosure is intended to give potential purchasers (including tenants) information on which they may make rational choices whether or not to buy an offered apartment. The process is also designed to assure that purchasers have recourse against Sponsors for losses arising out false, misleading or incorrect information of which Sponsors should or could have been reasonably aware. While the Attorney General reviews plans for facial compliance with the law and Regulations, the Sponsor, not the Attorney General guarantees the information in a Plan. This is consistent with the disclosure nature of the process and the expressed public policy as articulated by the Legislature to promote the conversion of buildings to tenant ownership while protecting certain enunciated tenant's rights. Although in this proceeding, the 45 Urquia petitioners oppose the conversion, it is likely, given that there were 232 vacant Apartments when the Original Plan was accepted for filing and a much larger number of tenants at Manhattan House who are not petitioners, that others will happily buy Apartments when the market, a buyer's desires and the Sponsor's prices coincide. Thus, this Court finds that the approach of the Attorney General, which is consistent with the legislative purpose of GBL § 352-eeee and the public policy expressed on its enactment, is neither arbitrary nor capricious.
Now almost nine months later, there could be expected to be additional vacant Apartments.
Although this Court finds the general approach of the Attorney General to allow amendment to correct errors and omissions as neither arbitrary nor capricious as a general matter, the Court recognizes that some Plans or Amendments may be so defective that the Attorney General could properly refuse to accept such plan or Amendment, or even found to be arbitrary and capricious for having not rejected such a plan or amendment.
However, this Court finds as a factual matter, to the extent the Original Plan had defects, such defects were far from being too defective for cure. The defects claimed by Urquia must be considered in the context of their nature and their number in a 950 page Plan and the additional documents submitted to the Attorney General as required by the Regulations. An analysis of these "defects" in the context of the purpose of GBL § 352-eeee and the Plan show them to be of minimal concern to the class of persons protected by GBL § 352-eeee and the Regulations.
Engineers Certification
Regulations § 23.7 require a Plan as a condition of its acceptance for filing to set forth a report of the condition of the building (the "Engineering Report") prepared by an engineer. Regulations § 23.4 requires the inclusion of the Certification of the engineer who prepared the Engineering Report (the "Engineer's Certification"). The Original Plan set forth the Engineer's Report, but failed, as Urquia has correctly noted, to set forth a copy of the Engineer's Certification.
Such failure is therefore, indeed a defect of the Original Plan. Although the Engineers Certification was made in a timely fashion and related to the Engineering Report, the Engineers Certification was not included as an exhibit to the Original Plan, but was included in the First Amendment. The record shows no basis to believe that the Engineer's Certification did not exist at the time it was supposed to exist, i.e. prior to the submission of the Red Herring to the Attorney General.
Thus, this Court must consider what the consequences of such omission is and whether the response of the Attorney General, to accept the First Amendment to cure this deficiency of the Original Plan, was arbitrary and capricious.
The failure to initially include the Engineer's Certification of the Engineer Report, although a technical defect, would not in any way have induced a purchaser to buy. At most, a purchaser aware of the failure to include the Engineer's Certification, might have been deterred from buying. As the Engineer's Report was in fact included and certified (even though the Engineer's Certification was not included in the Original Plan), a buyer, whether tenant or not, had the requisite information in the Plan as to the building's condition to make a reasoned decision to buy or not buy. Curing the omission by inclusion of the Certification in the First Amendment was of little matter and no protected person was hurt by such action.
Accordingly, the Attorney General was not arbitrary or capricious in allowing this omission to be cured by the First Amendment.
Sponsor's Profit
Urquia asserts that the Original Plan was defective because the Sponsor failed to properly disclose the Sponsor's Profit, and that accordingly, the Attorney General's acceptance of the Original Plan for filing was arbitrary and capricious. Further, Urquia asserts that such defect could not be cured by the First Amendment and accordingly, the acceptance of the First Amendment by the Attorney General was arbitrary and capricious.
GBL § 352-eeee imposes no requirement that any Sponsor disclose its profit in a conversion. Regulations § 23.3(af), however, require the Sponsor of a Plan to disclose the Sponsor's Profit, but only if the building was acquired by the Sponsor within three years of the date the Plan is initially submitted to the Attorney General. While perhaps of curiosity to a buyer, the Sponsor's profit should hardly be relevant to the decision of a rational purchaser of an apartment whose decision should instead be based on the price of such apartment vis-a-vis market values for comparable apartments, the physical state of the apartment and the building and the operational details of the plan and the building's post conversion operations. That the sponsor's profit is not of critical importance to the conversion process is illustrated by Regulations themselves which would have required no disclosure had the Sponsors bought Manhattan House eighteen months earlier. Thus, even if any mention of the Sponsor's Profit was omitted from the Plan it hardly would be a matter of prime or central importance to a reasonable purchaser, or to the regulatory scheme and its purpose, and this Court cannot see how any protected person might be hurt by such failure. Further, the Sponsor's Profit cannot be known as a fact until a Plan becomes effective, and even then, it cannot be known until the final sell out by the Sponsor which may have to await the vacation of the last Apartment occupied by a "supertenant." Any estimate must depend, inter alia, on speculations as to future market prices of Apartments, the number of purchasing tenants and the dates of vacation of non purchasing tenants, and the spread between rent received from non purchasing tenants over financing and maintenance costs.
The Sponsors bought Manhattan House on October 21, 2005, had the Plan been filed after October 21, 2008 there would be no requirement to disclose profit. See Regulations § 23.3(af). The Plan was filed on March 30, 2007.
The Original Plan disclosed the sponsor's profit as follows:
"Sponsor expects to sell many Residential Units at full market value (to other than Tenant Purchasers) from time to time as they become vacant and to generate substantial profits therefrom. The exact profit to be realized by Sponsor cannot now be determined and may increase or decrease substantially depending upon variable factors such as the uncertainty of future market conditions including the availability and cost of money, the length of time required to sell the Residential Units, losses or expenses arising from obligations assumed or waived by Sponsor under this Plan and other contingencies."
The First Amendment includes the following statement:
"The following information supplements the disclosure set forth in the Section of the Plan entitled "Sponsor's Profit":
"Sponsor acquired title to the Property on October 21, 2005. Based upon the purchase prices set forth on Schedule A of the Plan as of the Filing Date, Sponsor expects to sell Apartment Units, Maids Room Units and Storage Lockers which will generate approximately $1,163,322,983 based upon a projected sale of 341 apartment Units to Bona Fide Tenant Purchasers ($660,328,958) and 234 apartment Units, 7 Maids Rooms and 86 Storage Lockers to Non-Tenant Purchasers ($502,994,025). Sponsor's costs for purchasing and operating the Property, together with the estimated expenses of Sponsor's projected as of the Filing Date in connection with this offering include, without limitation, costs associated with the acquisition of the Properly ($665,000,000), capital expenditures to be made to the Property (approximately $39,000,000), apartment renovations (approximately $79,000,000), condominium conversion costs and sales commissions (approximately $93,000,000); and operating deficits, financing costs and interest costs (approximately $150,000,000). Sponsor may be expected to realize a profit of approximately $131,000,000 after deducting its costs and the estimated expenses of Sponsor in connection with this offering. The exact profit to be realized by Sponsor cannot now be determined and may increase or decrease substantially depending upon variable factors such as the uncertainty of future market conditions, including the availability and cost of money, the cost of operating the Property, the length of the sales period, losses or expenses arising from obligations assumed by Sponsor under the Plan and future vacancies."
As this Court finds both statements to be both effectively true and of little or no practical value to a prospective purchaser, this Court could not find that either the Attorney General's acceptance of the disclosure of sponsor's profit in the Original Plan or the amended disclosure of the sponsor's profit in the First Amendment was arbitrary and capricious.
Sponsor's Certification
Urquia claims the sponsor's certification (the "Sponsors Certification") in the Original Plan did not comply with the Regulations requirements for the Sponsor's Certification.
Urquia further urges that the certification was "perjurious" because the Sponsors could not have read the Original Plan as some documentation included of the Original Plan were dated subsequently (the "Post Dated Documents") and that the assertions in the Sponsor's Certification as to the Plan's accuracy completion and compliance is further belied by the failure to include the Engineer's Certification and the full disclosure of the Sponsor's profit. Urquia also asserts that the failure to disclose in the Original Plan the disputes between the Sponsors constitute additional omissions and that the Sponsor's Certification assertion of completeness is further improper by such failure to disclose.
See "Intra-Sponsor Dispute, infra, for a discussion of this issue.
Regulations § 23.4(b) requires that as a condition of acceptance for filing, a sponsor must include as a part of the Plan a certification (the "Sponsors Certification") as to certain matters "in the following form." The Sponsors submitted an executed Sponsors Certification in exactly such form, sworn to before a notary public on January 19, 2006.
Urquia asserts that because the Sponsor's Certification was dated prior to the dates of the Post Dated Documents it was faulty and contradicts the Sponsor's Certification that the Sponsors read the entire Plan. Further, the Sponsor's Certification, Urquia contends, was improper as the Sponsor's certified that there was no material omission to the plan. The Sponsors did not include an amended or redated Sponsor's Certification in the First Amendment, and the Attorney General accepted the First Amendment for filing.
The following documents in the Original Plan were sworn to or dated subsequently to January 19, 2006, the date the Sponsor's Certification was notarized:
1. The letter of Douglas Elliman, relating to compliance with the Real Property law § 339-i was dated January 30, 2006.
2. The Opinion of Counsel dated as to taxation was January 25, 2006.
3. The Engineering Report was dated January 23, 2006.
4. The Engineer's Certification, executed before a notary public on January 30, 2006. (included in the First Amendment and not in the Original Plan).
5. The Opinion of counsel as to aspects of RPL § 339-i was dated January 31, 2006.
6. The Certification of Douglas Elliman as to the budget was notarized on January 26, 2006.
7. Certificate of Douglas Elliman as to common charges was dated January 26, 2006.
The Attorney General's position is that the purpose of a Sponsor's Certification is to make Sponsors personally responsible and liable to purchasers for the consequence of all material misstatements and omissions in the Plan and amendments thereto and to estop Sponsors from claiming lack of knowledge, failure to investigate or personal unawareness of any detail in what may be an extensive Plan such as the 950 page plan (and whatever the additional length of the many amendments which will inevitably follow the Plan through the completion of the condominium conversion). In support of his position the Attorney General notes that the form of Sponsor's Certification required by the Regulations not only relates to past disclosures and documents, but to future amendments and other material to be submitted, which by definition can never exist as of the date of a Sponsor's Certification.
The process by which Plans are processed over the years by this and prior Attorney Generals is consistent with this approach. After the Red Herring is submitted, containing the Sponsors Certification, the Attorney General's review usually results in a deficiency notice, indicating changes the Attorney General wishes. These changes are made or negotiated until the Attorney General is prepared to accept the plan for filing so that the sponsor may begin selling. This process assumes that portions of the plan can change or be supplemented, but the process does not require a new Sponsor's Certificate, as the changes additions and deletions are clearly known to the Sponsor (or at least the sponsor's attorney submitting or negotiating these changes whose actions bind the sponsor).
The Court notes that, with the exception of the failure to include the Engineer's Certification, all the Post Dated Documents were included in the form of Plan delivered to the Attorney General together with the Sponsor's Certification on February 5, 2006. The assembly of the Plan and other documents was a significant undertaking of pulling together many documents as well as relevant facts. The Plan could not have been prepared without the Sponsors having input from each person preparing the Post Dated Documents, and the Plan was delivered to the Attorney General by Sponsor's counsel only after all documents, including the Post Dated Documents, were assembled. The delivery of the Sponsor's Certification therefore only occurred after the Post Dated Documents were received. Recognizing the realities of the process and the above facts, the Attorney General did not consider the date differences under the circumstances to be an appropriate reason to deny the acceptance of the Original Plan for filing.
This Court finds that the Attorney General's process, analysis and position as to the purpose, meaning and effect of the Sponsor's Certification in plans in general and as specifically applicable to this case to be neither arbitrary nor capricious. Further, no rational buyer of an apartment, whether a tenant or outsider, really cares whether the Sponsor has read the Plan, but instead ought to be concerned whether the Sponsor will be responsible and liable for factual misassertions in the Plan and in any amendments or whether the Sponsor be able to mount a defense claiming a lack of knowledge of such misstatement, by asserting he did not read the plan. While Regulations § 23.4(b) which mandates the form of the Sponsor Certification might have been drafted in a more felicitous language as to tenses and antecedent references, the required form covers the functional purposes for which the Attorney General states it was designed. Accordingly, the Attorney General, having in the Original Plan secured for the benefit of the protected class of persons for whom § 352-eeee and the Regulations were designed to protect, i.e., the full liability of the Sponsors for misinformation and misstatement in the Plan and amendments and in other documents used in connection with the plan, the Attorney General was neither arbitrary nor capricious for not rejecting the Originally Plan initially or recalling such Plan, notwithstanding any irregularity with respect to the date of the Sponsor's Certification, and the date of documents in the Original Plan.
Under Urquia's theory which focuses on the act of reading as distinct from the assumption of legal responsibility and estoppel to claim otherwise, a Sponsor who was a dyslexic, a non-English speaker or who had not proceeded past second grade or otherwise claimed he did not comprehend what he read, could honestly defend against liability that he had indeed read but did not understand the Plan.
Intra-Sponsor Dispute
Urquia objects to the Attorney General's acceptance of the Original Plan for filing on the grounds that the Original Plan failed to disclose the dispute between the two original Sponsors. While the Sponsors may have had disagreements prior to the time the Original Plan was accepted for filing on March 30, 2007, such disputes did not blossom into litigation until one sponsor sued the other on April 27, 2007 and the other sponsor sued the first on May 10, 2007. Such suits were disclosed in the First Amendment and the full settlement of such disputes and the law suits by October 9, 2007 was further fully disclosed in the Second Amendment. This Court finds that the Attorney General's determination that these sponsor disputes need not be disclosed until they resulted in litigation was neither arbitrary nor capricious. Business relationships between partners are never perfect and disputes over major and minor matters are common. However, most disputes between partners are resolved by negotiation. It is therefore, not arbitrary and capricious for the Attorney General to limit disclosure of disputes to those which have matured to litigation, as litigation indicates a breakdown of the usual and continuous process of negotiation between business partners, serious enough to warrant disclosure.
Other Process Defects Asserted
In addition to its assertion as to errors and omissions in the Plan, Urquia claims that other Sponsor improprieties and infractions require this Court to set aside the Attorney General's acceptance of the Original Plan for filing. These, in the order presented by Urquia, are "Illegal Warehousing," the selection of an improper escrow agent, the alleged conflict of interest of Douglas Elliman which provided two certifications for the Plan, the improper public disclosure of aspects of the Original Plan before its acceptance for filing, and claims of tenant harassment by the Sponsors.
" Illegal Warehousing "
Owners of rental properties in New York have no obligation to rent their properties, as the right not to rent or to withdraw a property from the rental market, is an inherent aspect of the right to own property. Seawall Assoc. v. City of NY, 74 NY2d 92 (1989). While the State may regulate the conditions on which an apartment may be rented and regulate the landlord tenant relationship, including, in an emergency, the rent to be paid, government may not tell an owner he must rent. Accordingly, there is nothing "illegal" per se about withholding apartments from the rental market at any time, from time to time or for any period.
The process leading up to the adoption of L. 1979, C. 432, and later L. 1982, C. 555, tenants' and owners' representatives bargained inter alia, for their own economic interest as to various aspects of cooperative and condominium conversions. One interest of tenants was to secure as much leverage to block a conversion to enable them to bargain a better deal from owners in a conversion. Owners in turn sought to limit such powers.
Both Chapters reflect a series of compromises of these interests, imposing, for example, a requirement of the sale of 15% of all apartments to certain buyers who need not be existing tenants before a Non-Eviction Plan could become effective and by Chapter 555, by raising the requirement for eviction plans from 35% to 51% of tenant purchasers.
Among other compromises enacted was a new concept created by GBL § 352-eeee(2)(e) which directed the Attorney General not to accepting a Non Eviction Plan for filing unless he affirmatively finds:
that an excessive number of long-term vacancies did not exist on the date that the offering statement or prospectus was first submitted to the Department of Law. "Long-term vacancies" shall mean dwelling units not leased or occupied by bona fide tenants for more than five months prior to the use of such submission to the Department of Law." "Excessive" shall mean a vacancy rate in excess of the greater of (I) ten percent and (ii) a percentage that is double the normal average vacancy rate for the building or group of buildings or development for two years prior to the January preceding the date of the offering statement or prospectus was first submitted to the Department of Law.
The significance of vacancies in a conversion is that they are of value to sponsors. In Non-Eviction Plans there are three reasons for this value. First, vacant apartments are available for immediate sale to anyone without being subject to a tenant. It is thus far easier to sell such an apartment than an occupied apartment, especially one occupied by a rent regulated tenant where the strictures of rent regulation sometimes practically limit the only buyer to be the tenant in occupancy. Second, because rental tenants in occupancy have not elected to buy apartments elsewhere at prevailing market prices, most are not in the market to buy and are in Non-Eviction Plans, usually offered at reduced "insider" prices for their apartments to induce them to buy. Accordingly, the sale of vacant apartments will be at higher prices and be of greater value to sponsors. Third, as plans pursuant to GBL § 352-eeee restrict the termination of tenancies of non-buying tenants, a tenanted apartment will be of less value to a Sponsor after conversion than before as the Sponsor must, as long as the tenant wishes to remain a rental tenant, forego the possibilities of a vacancy which may be easily sold.
The Original Plan offered tenants in occupancy a 7 ½% discount from prices offered to "outside" buyers, the First Amendment increased this discount to 15%.
Whether nor not statutory restrictions on short or long term vacancies in a Non-Eviction Plan make any economic sense, GBL § 352-eeee(2)(e) imposes the limitation and imposes on the Attorney General the statutory duty to enforce such provision.
As GBL § 352-eeee(2)(e) was a compromise of many interests, is not the province of this Court to rebalance the compromise, but to enforce the statutes as enacted. In doing so, however, the court notes that no party has raised the question as to whether the restriction on long term vacancies is constitution in light of Seewall Assoc. v. City of NY, supra, which was decided in 1989, after GBL § 352-eeee. This Court takes no position on such issue as it need not address such issue under the facts of this case.
At the time the Plan was originally submitted to the Attorney General, the Sponsor advised that there were 29 "long term vacancies" as defined in GBL § 352-eeee(2)(e), or 4.97% of the Apartments. The Attorney General's investigation confirmed this assertion and found that there were no excessive long term vacancies at such time. This Court may, under CPLR Article 78, consider whether such finding was arbitrary and capricious, whether it is a Sponsor or a tenant who complains that the Attorney General found that particular vacancies were or were not "long term vacancies" within the statutory meaning. Cf., Burton Hay Associates v. Abrams, 4/24/91 NYLJ 27, col. 1 (Sup.Ct., Albany Co., 1991, Harris, J.) (upholding a determination by the Attorney General that a particular vacancy was a long term vacancy against the challenge of a sponsor) with 525 Park Ave. Tenants Assn. v. Abrams, NY Co. Index No. 13408/08 (NY Co. Sup. Ct., Nov. 21, 1988, Lebedeff, J.) (upholding a determination by the Attorney General as to the count of long term vacancies against the challenge of the tenants association).
At such time there were a total of 50 vacancies shown on the Red Herring.
The dispute on vacancies here centers on the fact that subsequent to the Sponsor's submission of the Plan for filing, the Sponsor took various actions to obtain other vacancies, including entering into short term extensions of leases for Free Market Apartments where leases were expiring to continue the terms of such leases past the window period. Urquia asserts that such were subterfuges to avoid the problem of "Illegal Warehousing."
Calling the issue one of "Illegal Warehousing" is advocate's rhetoric. The statutory compromise created a rule on the one hand and a "safe harbor" on the other, upon which owners and the Attorney General can rely, as to how many long term vacancies are permitted as of the submission date, as well as the definition of a long term vacancy.
GBL § 352-eeee (2)(3) expressly fixes the date on which the Attorney General must examine vacancies to determine if excessive long term vacancies exists as the date the Original Plan is submitted to the Attorney General, and not thereafter. The Attorney General reviewed the state of facts at Manhattan House as they existed on such date. His conclusion was that the Sponsors were in compliance, and Urquia at the oral argument conceded that the statutory compliance standard was met. Urquia effectively urges that this Court should rewrite such requirement because the Sponsors took actions in their interests to obtain additional vacancies. This Court will not. Neither the law nor the Regulations prevent the Sponsor from taking legal steps and pursuing legal strategies to increase vacancies and thus the Sponsor's profits from the conversion, after the date on which the "excessive long term vacancy" rules are to be applied. There is no restriction under the common law, any rent regulation or under the GBL to prevent Sponsors from entering into short term extension leases of Free Market Apartments or to exercise rights not to renew leases of Free Market Apartments as they expire during the period between submission of the Plan and the declaration of the its effectiveness. Accordingly, Urquia cannot establish that the Attorney General in performing his statutory mandate under GBL § 358-eeee (2)(e) to refuse to accept a Plan where on the date of submission there were excessive long term vacancies, acted in an arbitrary and capricious manner. The Legislature has established the parameters of the rules as to long term vacancies, which were complied with by the Attorney General and the Sponsors. It is not the provence of this Court to legislate different rules.
Under the Rent Stabilization Law, owners must instead, under most circumstances, offer one or two year renewable leases to stabilized tenants, the term being of the tenant's option.
Escrow Agent
Urquia also contends that the designation in the Plan of the Sponsor's attorney as escrow agent for purchaser down payments was improper. The basis for this assertion is that under Regulations § 23.3(q)(2)(iv) the escrow agent who is to hold purchaser down payments in conversions must be "independent" of the Sponsor and that because the escrow amounts may be large, the Sponsor's lawyer should not be qualified. Urquia cites no authority for such proposition, nor has he submitted any showing that the attorney designated to be escrow agent has any financial or any ownership interest in the Sponsor, or in the Building or that any Sponsor is a partner or associate of such attorney's firm. Under the conversion process, Sponsor's attorneys have traditionally served as Escrow Agents for purchaser's deposits. Such function is recognized and regulated in Regulation § 23.3(q)(2)(iv), which requires that attorneys acting as escrow agents comply with Appellate Division rules relating to client funds. Such Appellate Division rules have never differentiated as to which attorneys may act as escrow agents on the basis of the size of the escrowed funds. Holding of down payments by seller's attorneys is a long tradition in New York real estate transactions outside of the conversion field. Urquia's contention with respect to the propriety of the Escrow Agent under the plans must therefore be rejected.
In any event, as Urquia petitioners' counsel had made it clear that they are uninterested in buying under the Plan, no Urquia petitioner would be placing a down payment in escrow, and would thus be unaffected by this "deficit."
Certifications of Managing Agent
Urquia also asserts that the "certifications" and compliance letters from Douglas Elliman and its affiliates ("Douglas Elliman") relating to the condominium's proposed budget and common charges and the method of allocating common interests constitutes an impermissible conflict of interest because Douglas Elliman is also the selling agent in the conversion and therefore in a position to receive brokerage fees on the sale of units in the conversion. In support of this position Urquia cites 13 Regulations § 23.3(i)(2) relating to the method used under RPL § 339(i) to allocate common elements, which requires that the Plan:
"Include an opinion from a licensed real estate broker or other expert appraiser who does not have any beneficial interest in the sponsor or the profitability of the conversion.
This certification discloses which of the methods for the allocation of common charges under RPL § 339-I has been used in the Plan.
Although the Regulations do not require independence from experts who are cited in the Plan as experts who have reviewed the estimates projected of income and expenses for the initial year of operation and the adequacy of the budget, the Original Plan discloses that a Douglas Elliman affiliate reviewed such material and that neither the Sponsor or any of its affiliate has any affiliation with any expert and that no such experts "have no financial interest in Property, the Residential Units, the Condominium or this offering except for their fees for services rendered."
Urquia asserts that because Douglas Elliman will earn brokerage on sales, it falls within this prohibition. However, the Attorney General has always recognized that in the conversion process, a single real estate firm ordinarily fills the function of certifying the budget and common charges, certifying as to the methodology of compliance with RPL § 339-i, and serving as the selling agent. Regulations 23.3(i)(2) expressly recognizes such multiple roles by requiring the fact that the expert giving the opinion on RPL § 339(i) may be the selling agent to be disclosed. The opinion of Douglas Elliman in the Original Plan so discloses such relationship. Reading these provisions of the Regulations together support the position of the Attorney General that Urquia's assertions on this issue are without merit. Except for the argument and the citation of what this Court finds to be a non applicable regulation, Urquia presents no support for its assertion that the Attorney General arbitrarily and capriciously permitted Douglas Elliman to supply these certifications and opinions. This contention must therefore be rejected.
Pre-Acceptance Disclosure
Urquia asserts that the Sponsors violated the Martin Act (GBL Art. 23-A) by making premature disclosures of the Plan and its details, and that the Attorney General failed to investigate these claims.
The process of selling apartments pursuant to a Plan requires a Sponsor to refrain from discussing the sale of Apartments with tenants and potential purchasers of Apartments until a plan is accepted for filing by the Attorney General. Prior thereto, except for the delivery of a Red Herring to tenants, the Sponsor may not otherwise discuss, sell or offer Apartments to tenants or potential purchasers.
Prior to the acceptance of the Original Plan for filing the Sponsors made certain disclosures to Credit Suisse First Boston ("CSFB"), the lender which provided Sponsor with mortgage financing for Sponsor's acquisition of Manhattan House from the prior owner in October, 2005.
The Martin Act places no limit or restrictions on Sponsors making disclosures to their lenders for the purpose of financing or refinancing of a Sponsor's mortgage, provided such disclosure is not a subterfuge designed to market Apartments. The disclosures to CFSB, made so that CFSB could underwrite the acquisition loan, occurred prior to the time the Sponsors became the owners of Manhattan House and months prior to the time the Sponsors initially submitted the Plan to the Attorney General. CSFB subsequently in November 2006, a month after the loan was made to the Sponsors, syndicated the Sponsor's loan together with a number of other loans in the public bond market in a mortgage backed conduit. In the course of its syndication of the conduit, CSFB disclosed aspects of its loan to Sponsors which included as part of underwriting considerations to demonstrate the soundness of the loan, the possibilities of condominium conversion. A second allegedly improper disclosure occurred on December 16, 2005, when William O'Connor, a son of the Sponsor, presented an investment case study as to the acquisition and development of Manhattan House at a seminar at Columbia Business School Alumni Club. The seminar was by invitation only and not generally to the public. While the seminar was not directed to potential purchasers of Apartments, some tenants of Manhattan House elected to attend. Although he is the son of a Sponsor, William O'Connor, has no economic interest in Manhattan House.
Except to the extent the financing itself is a public syndication subject independently subject to the Martin Act.7
Urquia's counsel, on behalf of MHTG, brought both of these instances to the attention of the Attorney General in May 2006, prior to the acceptance of the Original Plan for filing, and the Attorney General, after making inquiries, declined to take action under GBL § 352-eeee(1)(a). As the Attorney General has the prime responsibility for the enforcement of the Martin Act, this Court must defer to his decision which, being a matter of prosecutory discretion, is not subject to this Court's review. Therefore notwithstanding that the parties have addressed this issue, this Court takes no position as to whether either, both or neither of these disclosures violated of the Martin Act.
Allegations of Tenant Harassment
A final objection to the Plan is that the Sponsors harassed the tenants of Manhattan House and that there were leaks and flooding, heat and hot water problems, as well as friable asbestos and fire and code violations. These allegations were also brought to the Attorney General's attention by Urquia's counsel acting on behalf of MHTG. The Attorney General found that the asbestos issue was properly disclosed in the Original Plan. Further, although GBL § 352-eeee(4) gives the Attorney General the power to seek a court order to enjoin a sponsor of a Plan if the Attorney General found such sponsor to be intentionally harassing tenants, he found no harassment, and has sought no such a court order. In any event, even where the Attorney General has found harassment, and has commenced an action to enjoin such actions, the Attorney General may not restrain the sale of the unit involved or the entire offering. Only the Court has the power to impose such a remedy in its discretion upon the application of the Attorney General under GBL § 352-eeee(4).
Whatever asbestos was in Manhattan House preceded its acquisition by the Sponsors.
Many of these complaints made by Urquia in the Petition were also made directly by Urquia's counsel on behalf of MHTG to the Attorney General between the time of the submission of the Red Herring and the acceptance of the Original Plan for filing. While it is not clear the extent to which the Attorney General must investigate each complaint made by a tenant or group of tenants before accepting a Plan for filing, the record shows that the Attorney General made substantial inquiries as to such assertions and may have required such some changes to the Red Herring while it was being processed a result of such complaints. The Attorney General did not, however, seek remedies from a Court under GBL § 352-eeee(4) based on such allegations. As prosecutory discretion is granted to the Attorney General under such section, his decision not to proceed is unreviewable by this Court.
Under GBL § 352-eeee(4) any determination of the Attorney General not to pursue allegations of harassment in connection with a condominium conversion is not the end of the line for tenants. Such section preserves to the tenants whatever other rights they may have, whether before the State Division of Housing and Community Renewal, in the case of tenants subject to the RSL or before a court of competent jurisdiction, in the case of all tenants, to seek remedies for illegal harassment or other illegal Sponsor acts. In rejecting Urquia's claims relating to such issues here, this Court does not decide the merits of Urquia's assertions or the Sponsor's responses thereto. This court only decides that such claims may not constitute the basis for this Court to set aside the acceptance by the Attorney General for filing of the Original Plan or the First Amendment in this proceeding under CPLR Art. 78. Urquia is free to address its complaints in an appropriate forum.
Perjury
Urquia's petition charges inter alia, the Sponsors committed perjury in their execution and submission of the Sponsor's Certification. Under New York Law, perjury is a crime. See NY Penal Law Art. 210. If Urquia is serious about this charge (as distinct from employing it as a rhetorical device) Urquia should bring the facts which constitute the basis for this charge to the appropriate District Attorney who has the responsibility to enforce the Criminal Law. This Court, under doctrines of separation of powers in our Constitution may not, except for contempt, institute criminal charges.
The Attorney General and the Sponsor have treated these charges as rhetorical devices. As this Court has no jurisdiction in this CPLR Art. 78 proceeding to address a criminal charge or its validity, this Court declines to address the issue.
Conclusion
The purpose of a Plan is to give tenants relevant information upon which they may make their own decisions to buy or not to buy an offered apartment. To the extent the representations in a plan are fraudulent, misleading or incorrect, a buying tenant has recourse. The Attorney General oversees but may not pass on the merits or pricing of the plan. This Court finds that under all of the circumstances set forth above, the Attorney General did not act arbitrarily or capriciously in accepting the Plan for filing.
Temporary Restraint
When this proceeding had commenced, the Hon. Leland DeGrasse tolled the exclusive period for tenants to purchase under the plan until this Court heard the case. When this Court did, Urquia requested that such tolling be continued. As the Court learned that a dissolution of the stay would result in the exclusive period expiring in two days, the Court extended the tolling until the next hearing date for all Urquia petitioners and for a reasonable time with respect to tenants not a party to this proceeding, so that they could act, if they wished, to exercise their exclusive right to purchase their apartments under the Plan. The Urquia tenants were not certified as a class to represent the interests and rights of other tenants. Such other tenants were free to obtain for themselves any stay benefits by suing or asking to be added to this proceeding as petitioners to have the extension could apply to them. None have.
Discovery
CPLR Article 78 proceedings do not carry with them the full array of discovery rights available to a litigant in a plenary action. This is true statutorily. Article 78 proceedings are in the nature of summary proceedings to decided on the papers submitted. While the CPLR does authorize the Court, on a showing of ample need or good cause to deviate from this principle, Urquia has made no showing here. The issues raised were determinable on the papers, and upon the law.
Urquia's requests were over broad, to say the least and, based on Urquia's deep knowledge of facts relating of this case as illustrated by the exhaustive affidavits and memoranda submitted by Urquia, the request appears to this Court to be little more than a fishing expedition and a basis for delaying a resolution of the dispute, rather than a need for information. As the First Department noted in Stapleton Studios, LLC v. City of New York , 7 AD3d 273 (1st Dept., 2004) it is appropriate for a court to consider whether a petitioner would be entitled to Article 78 relief while considering a request for discovery. As Urquia's claims are that the Attorney General was arbitrary and capricious and that certain portions of the Plan, as related to the Escrow and Certifications, were improper is a matter of law, no discovery is needed as to these issues. As to "excessive long term vacancies," Urquia's objection related to the time the vacancies were counted, and the owner's subsequent acts in vacating other Apartments. As such assertion only raises questions of the proper interpretation of the law by the Attorney General, discovery with respect to such issue is unnecessary and inappropriate.
As this Court may not address issues relating to alleged illegal harassment or other alleged illegal Sponsor acts in this CPLR Article 78 proceeding, and as Urquia is free to raise such issues in an appropriate forum, discovery of matters relating to such assertions are not appropriate here.
Accordingly, were this Court to reach the merits of the discovery motion, it would deny such motion.
The Petition is dismissed.
This is the Decision and Order of the Court.