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Co-Ops—Purchaser Entitled to Return of Deposit—Seller’s Claim That Purchaser Deliberately Sabotaged Board Interview Rejected

By Jeffrey R. Metz


Realty Law Digest
By Scott E. Mollen

June 08, 2011

A purchaser of a cooperative apartment had made a 10 percent down payment toward the purchase price of $3 million. The purchase contract (contract) required that the purchaser provide copies of “her financial information (including net worth and copies of income tax returns) and personal letters of reference to [the co-op Board (Board)].” The contract provided that if it was not cancelled for a good faith reason, the seller could retain the down payment.

The purchaser had travelled from her home in Turkey for her interview with the Board. The purchaser and the seller disagreed about what occurred during the interview. Although the seller was not present at the interview, the seller claimed that “an unidentified Board member informed him that [the purchaser had] sabotaged the interview by answering questions in a way that would ensure the application would be rejected….” The Board did in fact reject the purchaser’s application. Thereafter, the purchaser requested that the seller return the deposit. The seller refused, citing the purchaser’s alleged wrongful conduct. The purchaser then commenced the subject action and moved for summary judgment. The seller cross-moved for summary judgment. The court granted the purchaser’s motion for summary judgment.

The purchaser had provided “all necessary paperwork…prior to the interview.” However, the seller cited certain emails wherein the purchaser exhibited “a lack of ‘surprise, regret or even outrage’ after learning of her application’s rejection.” The purchaser, in an affidavit, expressed her “disappointment in losing the apartment” and explained that as a “prominent businesswoman in Turkey,” she has learned “to keep one’s emotions at bay.” The seller argued that the purchaser had had a “change of heart” with respect to the purchase.

The court noted that the seller lacked direct knowledge of the facts, had relied on “hearsay and his own conjecture” and such hearsay did not “create an issue of a fact” and could not “preclude summary judgment.” The seller had not even provided the name of the Board member who had allegedly advised the seller of the purchaser’s bad faith during the Board interview.

The seller had also cited the purchaser’s concern as to whether her “college-aged daughter or her other children could stay in the apartment unattended.” The purchaser had said in an e-mail, that her “three children can and must stay in the apartment as long as they want without us.”

However, the real estate broker had assured the purchaser that the co-op rules did not bar such use. The purchaser thus stated that she had received “reassurance that her children could live in the apartment.”

The court found that the seller’s assertions were “without evidentiary support…and wholly insufficient to create a triable issue.” Accordingly, the court granted the purchaser’s motion for summary judgment.

Comment: Generally, co-op boards may reject an applicant for any reason that is not barred by anti-discrimination statutes. Even if a co-op board rejects purchasers on a statutorily prohibited basis, it will rarely be held accountable. The reason is that in most cases, neither the seller nor the purchaser will have sufficient evidence to support such claim, since co-op boards need not disclose the reason for a rejection.

Further, a co-op board owes no fiduciary duty to a prospective purchaser. The board does owe a fiduciary duty to its shareholders. Thus, for example, a board may not reject a prospective purchaser because a board member wants the apartment for his or herself (self-dealing). Moreover, shareholders rarely want to sue their boards because, inter alia, such litigation is expensive and time consuming. A board may use a building’s revenue as a litigation “war chest,” while the shareholder has to personally incur the cost of the litigation. Furthermore, most shareholders usually just want to sell their apartment fast. Most purchasers will not wait around when a shareholder has to first sue a board. The litigation would take a year or two. Purchasers may have sold their prior homes or may have to vacate a previously rented apartment. They may also be concerned about, inter alia, a school commencement date for their children or volatile real estate markets and interest rates. Additionally, shareholders know that the board will have to approve the next potential purchaser if the litigation is unsuccessful.

Accordingly, sellers of cooperative apartments should consider not only which prospective purchaser will pay the highest price, but also, which prospective purchaser is likely to be approved by the board. For example, the highest bidder may have a materially weaker financial statement than the second highest bidder or the second highest bidder may have a materially stronger background and nothing objectionable in his or her background, such as a five year old prior conviction for criminal conduct or a history of job instability.

Cetindogan v. Schuyler, 112418/09, New York Law Journal, 1202491240812, at *1 (Sup., NY, Decided April 7, 2011), York, J.

Adam Leitman Bailey, P.C.

NEW YORK REAL ESTATE ATTORNEYS