New York Mercantile Exch. Condominium, By its Bd. of Mgrs. v Pambassab, Ltd.

[*1] New York Mercantile Exch. Condominium v Pambassab, Ltd. 2009 NY Slip Op 50105(U) [22 Misc 3d 1112(A)] Decided on January 6, 2009 Supreme Court, New York County Madden, J. Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. As corrected in part through February 5, 2009; it will not be published in the printed Official Reports.

Decided on January 6, 2009
Supreme Court, New York County

New York Mercantile Exchange Condominium, By its Board of Managers, Plaintiff,

against

Pambassab, Ltd., et al, Defendants.



104744/05

Joan A. Madden, J.

In this action by a condominium board to foreclose on liens for unpaid assessments, defendant Pambassab, Ltd. ("Pambassab") moves for summary judgment dismissing the complaint. Plaintiff New York Mercantile Exchange Condominium, By Its Board of Managers, ("The Condominium") opposes the motion and cross moves for summary judgment. For the reasons set forth below, the motion is denied, and the cross motion is granted.

BACKGROUND

The Condominium is a New York corporation located at 6 Harrison Street, New York, NY (hereinafter "the Building") consisting of the units below which are used for commercial purposes. Pambassab is the record owner of Unit 2 of the Condominium, which it acquired in 1994. Pambassab uses Unit 2 to store furniture and antiques. Pambassab's proportionate share of the Condominium amounts to 24.0437%. Non-party Communications Workers of America Local 1180 ("the Union") purchased Unit 3 in 1987, and in 1994, purchased Units 4 and 5. In or about 2000, the Union sold Unit 5 and purchased Unit 1-B. As the owner of Units 3, 4, and 1-B, the Union's proportionate share of the Condominium is 38.295%.

The current owners of the remaining units and their proportionate shares are as follows: Unit 1-A is owned by Girolle, Inc. ("Chanterelle")-12.433%; Unit 5 is owned by James Thomas Realty-13.479%; and Unit 6 is owned by Franklin Credit Management-11.7486%. The managing agent of the Condominium is William Harra of ABC Realty.

At issue in this action is Pambassab's failure to pay two assessments imposed during a December 12, 2001 meeting of the Condominium's Board of Directors. Pambassab's representative at the time, Gerard Wollenberger, was not present at the Board meeting. Mr. Wollenberger attended the next meeting held on July 11, 2002, and according to the minutes from that meeting, Mr. Wollenberger did not object to the assessments, or assert that he did not receive notice of the December 12, 2001 meeting. At a Board meeting held on March 14, 2003, Pambassab's new [*2]representative Abe Weinberg (who replaced Mr. Wollenberger who had passed away), asserted for the first time that Mr. Wollenberger had not been informed of the December 12, 2001 meeting and objected to the amount of one of the assessments, and has not raised the issue at any subsequent meetings.

The first assessment of $341,288 was imposed to repay certain loan advances made by the Union to the Condominium during the early 1990's (hereinafter "the Loan Assessment"). According to the Condominium's financial statements, in December 2001, the outstanding principal amount of the loan advances was $123,505. In addition to the $123,505, the amount of the Loan Assessment was based on a $58,000 loan made to the Condominium by Comtrad, the former owner of Units 4 and 5, and assigned to the Union, with interest at a compounded rate of 6%[FN1] for a total of $341,288.[FN2] The Union prepaid its share of the loan amount, equal to $138,000, with the remaining amount to be paid by the other unit holders. Pambassab has been billed for the Loan Assessment in the amount of $492 per month, and has not paid any of these amounts.

The second assessment was a monthly assessment of $8,335.00 for three years for the purpose of funding the reserve fund used for necessary work on the Building (hereinafter "the Reserve Fund Assessment"). At a meeting held on July 11, 2002, the Board noted that the Managing Agent had not begun billing the unit holders for the Reserve Fund Assessment. At that time, unit owners were billed and the Managing Agent sent each of them a bill for the retroactive amount. The minutes of the July 11, 2002 meeting reflect that Mr. Wollenberger was at the meeting and did not [*3]object to the Reserve Assessment or its retroactive application. The unit holders have continued to be billed for the Reserve Fund Assessment, beyond the three-year period approved for the assessment. Pambassab has been billed for the Reserve Fund Assessment in the amount of $2,003 per month, and has not paid any of these amounts.

This action, which was commenced in April 2005, seeks (i) foreclosure upon liens for unpaid "common charges" and assessments pursuant to Real Property Law § 339-z,[FN3] (ii) the amount due for unpaid common charges together with interest, late fees and attorneys' fees, (iii) the sale of the Unit and a direction that the common charges be paid out of the proceeds of the sale, and (iv) the appointment of a Receiver for rents. Pambassab interposed an answer to the complaint. After discovery was completed and extensive settlement negotiations, the instant motion and cross motion for summary judgment were made.

Pambassab argues that it is entitled to summary judgment as the Board of the Condominium acted beyond the scope of its authority as defined by the Condominium's By-laws when it imposed the two assessments at the December 12, 2001 meeting. Specifically, Pambassab argues that the Condominium violated Section 2.9 of the By-laws by failing to provide Pambassab's representative at the time, Mr. Wollenberger or any other representative of Pambassab, written notice of the December 12, 2001 meeting, and that neither Mr. Wollenberger nor other representative of Pambassab waived such notice as provided in Section 2.11 of the By-laws.

In addition, Pambassab asserts that the assessments are invalid as they were imposed at the meeting without a quorum, which is defined under section 2.2-1 of the By-laws as a majority of the members of the Board. While the minutes of the December 12, 2001 meeting indicate that a majority of the five Board members were present, including Mr. Cheliotes, the representative from the Union, Karen Waltuck, a representative from Chanterelle and Joseph Caiazzo, a representative of Unit 6, Pambassab asserts that as a representative of the lender, Mr. Cheliotes has a conflict of interest with respect to the loan, and should not have voted on the issue, and therefore a quorum was not present. [*4]

Pambassab also disputes that the amount of the Loan Assessment accurately reflects the amount loaned to the Condominium by the Union, and argues that the Board acted outside its business judgment when it approved the repayment of inflated loan amounts, which included $58,000 purportedly loaned by a former Unit holder and assigned to the Union. In support of this position, Pabassab submits the 2001-2002 financial statements for the Condominium indicating that the $58,000 sought by the Union in connection with the assignment of a former Unit holder's interest in a loan to the Condominium needs to be verified.

Pambassab also notes that the Loan Assessment included interest despite the absence of a written loan agreement providing for such interest.

Pambassab next argues that the Board acted outside its authority insofar as the Reserve Fund Assessment has been extended beyond the three years authorized at the December 12, 2001 Board meeting. Additionally, Pambassab points out that the Loan Assessment and the Reserve Fund Assessment have been used to pay operating expenses of the Condominium and not to pay off the loan to the Union or to establish a reserve fund.

The Condominium opposes the motion, noting that Pambassab fails to submit an affidavit from any person with knowledge, and cross moves for summary judgment, arguing that the Board's imposition of the assessments is protected by the business judgment rule and within the scope of its authority to repay the Condominium's liabilities and maintain the viability of the Building. Moreover, the Condominium argues that to the extent Pambassab argues that the Board failed to observe corporate formalities, Pambassab waived these formalities, and notes that there is no evidence that Pambassab or any of the unit holders objected to the manner in which the Condominium conducted its affairs, including the manner in which notice of the meetings was provided.

The Condominium submits the affidavit of Mr. Hara, the the Building's Managing Agent. Mr. Harra states that since about 1990, the Building experienced financial problems due to the failure of certain unit holders to pay their maintenance. As a result of its financial difficulties, the Condominium took several loans from the Union. According to Mr. Harra, these loans were fully disclosed to the unit holders, and it was fully disclosed that Mr. Cheliotes was the President of the Union and a member of the Board. In support of Mr. Harra's statements, the Condominium submits copies of the minutes of the Board indicating that the issue of the loan made by the Union and the need to repay it, with interest, was raised at Board meetings held since October 7, 1997 and that a representative of Pambassab was present at these meetings.

In addition, Mr. Harra states that before the loan repayment [*5]assessment was implemented, the Board had numerous meetings to confirm the amount of the loan due to the Union and to negotiate a repayment schedule, and that the Condominium's accountants reviewed the records concerning the loan and prepared an amortization schedule indicating the balance due with interest. In support of this statement, the Condominium submits minutes from Board meetings held on October 7, 1997, December 29, 1999, March 8, 2001, and December 12, 2001, and an amortization schedule.

Mr. Hara further states that he was responsible for ensuring that every unit holder was notified of all meetings and that while notices were either typed or emailed to the unit owners, copies were not maintained by his office.

In addition, the Condominium notes that although Pambassab's representative, Mr. Wollenberger, was not present at the December 12, 2001 meeting, when the assessments were approved, he attended the next meeting on July 11, 2002, at which the minutes of the December 12, 2001 meeting were approved, and the Board members discussed that the Managing Agent needed to implement the Reserve Fund Assessment. The Condominium points out that at this meeting, Mr. Wollenberger did not object to the assessments, did not complain that he did not receive notice of the prior meeting, and therefore asserts that any objection to the assessments was waived.

With respect to the extension of the Reserve Fund Assessment, the Condominium points to the deposition testimony of Mr. Weintraub that he voted to increase the assessment since it was were needed to pay shortfalls in the amount of money collected and he reviewed the Condominium's financial statements before voting to increase the assessments.

DISCUSSION

On a motion for summary judgment, the proponent "must make a prima facie showing of entitlement to judgment as a matter of law, tendering sufficient evidence to eliminate any material issues of fact from the case." Winegrad v. New York Univ. Med. Center, 64 NY2d 851, 852 (1985). Once the proponent has made this showing, the burden of proof shifts to the party opposing the motion to produce evidentiary proof in admissible form to establish that material issues of fact exist which require a trial. Alvarez v. Prospect Hospital, 68 NY2d 320, 324 (1986).

The propriety of the assessments imposed by the Board must be evaluated in accordance with "a standard of review analogous to the corporate business judgment rule." 40 West 67th Street v. Pullman, 100 NY2d 147, 153 (2003). The Court of Appeals has written that:

The business judgment rule protects the board's business [*6]decisions from indiscriminate attack. At the same time, it permits review of improper decisions, as when the challenger demonstrates that the board's action has no legitimate relationship to the welfare of the cooperative, deliberately singles out individuals for harmful treatment, is taken without notice or consideration of the relevant facts, or is beyond the scope of the board's authority.

See, Levandusky v One Fifth Ave. Apartment Corp., 75 NY2d 530, 540 (1990).

In other words, under the business judgment rule, courts will not inquire into actions of the board of a condominium as long as the board acts for the purposes of the condominium, in good faith, and within the scope of its authority. Id., at 537. It had been held that a board acts beyond the scope of its authority when board action is taken in violation of its own rules as embodied in its by-laws. 49 West Tenants Corp. v. Seidenberg, 2003 WL 25516152 (Sup Ct, NY Co 2003), aff'd 6 AD3d 243 (1st Dept 2004).

Here, for the reasons set forth below, Pambassab has failed to meet its burden of establishing that the imposition of the assessments was beyond the scope of the Board's authority or otherwise not in good faith or in violation of the business judgment rule. Moreover, the Condominium has established its entitlement to summary judgment.

The focus of Pambassab's argument is that the Board acted beyond the scope of its authority by imposing the assessments without giving proper notice of the December 12, 2001 meeting to Pambassab and in the absence of a quorum as required by the By-laws of the Condominium, thus rendering the Board actions at the meeting invalid. See Rapport v. Schneider, 29 NY2d 396, 401 (1972).

Pambassab, however, fails to submit competent proof that it was not given notice of the December 12, 2001 meeting. The only proof submitted by Pambassab is the deposition testimony of Abraham Weintraub, who succeeded Mr. Wollenberger at Board meetings after Mr. Wollenberger passed away in 2003, and Board minutes indicating that Mr. Weintraub raised the issue of notice at the March 14, 2003 Board meeting. Mr. Weinberg testified that he believed that Mr. Wollenberger did not receive notice of the meeting but admitted that he did not have personal knowledge.This proof, based on Weintraub's belief that Mr. Wollenberger did not receive notice is not only incompetent but has been controverted by Mr. Harra's statements regarding the procedures followed for providing notice of the meetings, and to a certain extent, by the presence at the meeting of the other unit holders.Furthermore, any irregularity in a [*7]Board meeting arising from lack of notice or any other defect may be waived or ratified based on a failure to object. See Pierre v. Psathas, 293 AD2d 364 (1st Dept 2002)(although the manner of adoption of amendments to corporate constitution may have imperfect, plaintiff ratified the amendments by operating under them for several years without objection); Union Hospital Assoc. of the Bronx v. Carty, 185 AD2d 787 (1st Dept 1992)(holding that by failing to object to the propriety of notice or any other defect regarding the regularity of the meeting, plaintiff has waived such objection); Winter v. Bernstein, 177 AD2d 452, 453 (1st Dept 1991)(holding that ratification and acquiescence barred claims of plaintiff alleging that board failed to declare all earnings of corporation as dividend); Doehler v. Real Estate Board of New York Bldg., 150 Misc 733, 750 (Sup Ct NY Co. 1934)(rejecting claim that action taken at a board meeting was a nullity based on lack of notice to board member when board member did not object to lack of notice and the corporation ratified the actions taken at meeting by carrying them out); 14A, New York Jur2d, Business Relationships,§ 594.

Here, the record reveals that Pambassab waived any objection based on the lack of notice or other defect in the procedures relating to the December 12, 2001 meeting by approving the minutes of that meeting and by failing to timely object. Specifically, at the meeting in July 2002 when the minutes from the December 12, 2001 meeting were approved, Mr. Wollenberger did not object to the assessments or raise the issue of lack of notice of the meeting, or the alleged absence of a quorum based on a conflict of interest or otherwise. Instead, it was not until March 14, 2003 meeting over a year after the assessments were voted on by the Board, that Mr. Weintraub objected to the Loan Assessment on the ground that Mr. Wollenberger did not receive notice of the meeting and that Pambassab "did not have enough information (from [its] to justify the amount of the loans." See Minutes of the Board of Directors Meeting dated March 14, 2003.

The minutes reflect that at the March 14, 2003 meeting, Mr. Weintraub was given information regarding the calculation of the amount of the loan and indicated that he would attempt to assess the information and get back to the Board by the end of March 2003. Significantly, however, there is no evidence that Mr. Weintraub addressed the issue of the amount of the Loan Assessment with the Board after the March 14, 2003 meeting. [*8]

Furthermore, there is no evidence in the record that Pambassab ever objected to the Reserve Fund Assessment based on any procedural irregularities at the December 12, 2001 meeting or to the assessment's extension beyond the three year period approved by the Board. To the contrary, the Condominium provides uncontroverted evidence, in the form of Mr. Weintraub's deposition testimony,[FN4] that Pambassab, through Mr. Weintraub, agreed that the assessment should be extended. Thus, Pambassab not only waived any objection to the Reserve Fund Assessment but ratified its extension.

In fact, with the exception of the objection raised by Mr. Weintraub at the March 2003 meeting, the record is devoid of any evidence, including an affidavit from Pambassab's principal, indicating that, Pambassab objected to either of the assessments either orally or in writing. Under these circumstances, any objection to the assessments on the grounds of lack of notice or that the By-laws were otherwise violated when they were imposed at the December 12, 2001 meeting were waived by Pambassab.

Finally, as to Pambassab's argument regarding the amount of the union loan, it frames the issue as outside the business judgment rule on the grounds that the Board approved inflated loan amounts and interest. To successfully argue that the assessments are not shielded by the business judgment rule Pambassab must show that the assessments lacked a legitimate relationship to the welfare of the Condominium or were imposed without consideration of the relevant facts. See, Levandusky v One Fifth Ave. Apartment Corp., 75 NY2d at 540. Not only has Pambassab not met this burden; rather the proof indicates that the Board's determinations as to the assessments are protected by the business judgment rule and that the Condominium is entitled to summary judgment on its claims.

First, the uncontroverted record demonstrates that the assessments were imposed for the legitimate purposes of repaying a loan to the Union, and to fund the Reserve Fund used for necessary repairs to the Condominium. Moreover, that assessments were not used for these purposes but were instead utilized to pay operating expenses to keep the Condominium viable does not render [*9]them improper in the absence of evidence that the Board acted in bad faith or breached its fiduciary duties. See Jones v. Surrey Cooperative Apts, Inc., 263 AD2d 33, 36 (1st Dept 1999).

In addition, the record reveals that the assessments were imposed after due consideration by the Board. With respect to the Loan Assessment, the issue was raised as early as October 7, 1997, and the minutes from the meetings held prior to the imposition of the assessment in December 2001 show that interest on the loan was discussed as part of the loan repayment, and that the amount of the loan due was considered by the Condominium's accountants.[FN5] Moreover, minutes from a Board meeting at which the assessments were imposed indicate that Pambassab was given information in order to verify the amount of the assessment with his accountants.

However, the record reflects that Pambassab never provided the Board with the results of its accountant's review of the loan amounts or any other specific basis for challenging the amount of the Loan Assessment even though, as indicated above, the record reveals that, at the very latest, Pambassab had the information on which the Loan Assessment was based in March 2003. Indeed, in defense of this action, Pambassab still fails to offer any evidence from an accountant or other source to support its assertion that the Loan Assessment was improperly calculated, or was based on inflated amounts.

Under these circumstances, the business judgment rule applies to protect the determination of the Board to impose the assessments. Accordingly, Pambassab's motion for summary judgment is denied, and the Condominium's cross motion for summary judgment is granted.

The Condominium is to settle an order and judgment on notice, and provide the court with breakdown for each assessment of the amounts owed to Pambassab by month based on its failure to pay the assessments since their imposition in December 2001.

DATED: January 6, 2009 [*10]

J.S.C. Footnotes

Footnote 1:According to the Condominium's 2001-2002 financial statement, at the December 2001 meeting, the Condominium agreed that the Union would "amortize the loan at a 6% interest rate for a 30 year term, with a balloon payment due at the end of the 5th year. The balloon payment is to be divided into 12 equal payments payable monthly during the 6th year with no interest charge during the 6th year."

Footnote 2:The record does not specifically indicate how the total amount of owed for the Loan Assessment was calculated, except that it consisted of $123,505 in principal borrowed from the Union and $58,000 borrowed from the former unit owner, which was then assigned to the Union, and interest at a compounded rate of 6%. According to the Condominium's 2001-2002 financial statement, interest on the loans, some of which dated from the early 1990's, as of September 30, 2002 was between $139,000 and $190,000.

Footnote 3: Real Property Law § 339-z gives a condominium association priority for liens for common charges. In its answer, Pambassab asserts as its second affirmative defense, which it does not pursue on this motion, that it has paid all common charges and that "the instant dispute arises solely out of disputed amounts that have been and continued to be billed by plaintiff as a special assessment against Pambassab's Condominium Unit.

Footnote 4:Mr. Weintraub's deposition testimony refers to his agreement to further assessments but does not specifically identify the assessments as Reserve Fund assessments. However,in reply, Pambassab does not contradict the Condominium's characterization of Mr. Weintraub's testimony.

Footnote 5:Although Pambassab claims that the Loan Assessment is invalid since the loans were not approved by the Board before they were made as required under 2.2-2.10 of the By-laws, which provides that any loan exceeding $10,000 in a year must be approved by 66-2/3% of the unit holders, the record contains no evidence that Pambassab or any other unit holder objected to the loan on this ground.