Matter of Sephardic Found. for Torah Studies Inc.

[*1] Matter of Sephardic Found. for Torah Studies Inc. 2008 NY Slip Op 50397(U) [18 Misc 3d 1141(A)] Decided on March 3, 2008 Supreme Court, Kings County Rivera, J. Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. This opinion is uncorrected and will not be published in the printed Official Reports.

Decided on March 3, 2008
Supreme Court, Kings County

In the Matter of the application of Sephardic Foundation for Torah Studies, Inc., For Leave to Sell Its Real Property Constituting Substantially All of Its Assets



3010/08

Francois A. Rivera, J.

Upon the foregoing papers, Labaton Sucharow LLP, counsel to petitioner Sephardic Foundation for Torah Studies, Inc. (petitioner), makes an application for approval of petitioner's sale of real property known by street address 402 Avenue U, Brooklyn, New York, and block number 7129, lot number 0001 (the property), constituting substantially all of petitioner's property. The Attorney General of the State of New York (Attorney General) has, by stamping a proposed order granting the petition, indicated that its office has no objection to the granting of judicial approval hereon. For the reasons set forth herein, the court concludes that the substantive and evidentiary flaws in the petition preclude its approval.

FACTS

The petition alleges that petitioner, a Type B Corporation[FN1] with its former principal place of [*2]business located at 402 Avenue U in Brooklyn, is a not-for-profit corporation duly organized pursuant to N-PCL § 402 and incorporated on September 24, 1998. The petition states that petitioner's directors are Murray Dweck, Eli M. Dweck, Maney Douek, Charles Beyda, and Morris Benun.[FN2]

As further alleged, the function of petitioner, as set forth in its certificate of incorporation, was to "encourage, promote and finance research into the history, culture, traditions, litany and other aspects of Sephardic Jewry in the United States and abroad and to publish or otherwise disseminate the results of such research in order to propagate the faith and maintain and perpetuate the heritage."[FN3] As additionally set forth in its certificate of incorporation, petitioner "shall not operate for pecuniary profit or financial gain" and "[n]o part of the net earnings of the Corporation shall inure to the benefit of any member, trustee, director, officer of the Corporation, or any private individual (except that reasonable compensation may be paid for services rendered to or for the corporation)...." As set forth in its by-laws, petitioner has no members.

The petition further alleges that, at a board meeting conducted on February 12, 2007, a resolution was made, voted upon, and adopted by its Board of Directors approving the sale of the subject property to Oceangate Condominium LLC (purchaser) for an aggregate value of $5.5 million pursuant to the Contract of Sale, dated as of April 12, 2007, as amended by the Amendment to Contract of Sale, dated as of December 27, 2007 (as so amended, the contract of sale). The minutes of the February 12th board meeting acknowledged that the contract of sale was approved by three out of the five directors of petitioner because the two remaining directors, Murray Dweck and Eli M. Dweck, were part of the purchaser group and recused themselves from the board's discussions concerning the contract of sale as well as the vote taken thereon.

In the affirmation submitted in support of the petition, petitioner's counsel alleges that at a board meeting conducted on January 16, 2008, a resolution was made, voted upon, and adopted by petitioner's Board of Directors that the cash portion of the consideration to be received by petitioner under the contract of sale ($3.5 million) will be distributed to satisfy, inter alia, "a certain indebtedness of the Foundation in the sum of $1,900,000 and interest accrued thereon pursuant to Foundation's Promissory Note dated June 21, 2007 to the order of Murray Dweck and Joseph Bijou...." In their respective affidavits, each sworn to on December 26, 2007, and submitted with the petition, Messrs. Dweck and Bijou set forth the amounts of their purported loans to petitioner, the purported repayments they received from petitioner, and the purported balances due them from petitioner. Murray Dweck asserts in his affidavit that he made loans to petitioner between October 22, 1988 and January 31, 2004, in an aggregate amount of $1,304,000, that he received a total of [*3]$679,717 from petitioner, and that the accrued and unpaid interest on his loans to petitioner is $263,307. Joseph Bijou asserts in his affidavit that he made a one-time loan of $950,000 to petitioner on April 1, 2004, that he received no repayment of his loans from petitioner, that the accrued and unpaid interest on his loans to petitioner is $114,792, of which he forgave $52,382, leaving the unpaid balance of $62,410.

LAW

When a non-for-profit corporation seeks to sell all or substantially all of its assets, N-PCL 510 and 511 collectively set forth the procedure, with Supreme Court approval and attendant Attorney General notification, designed to preserve charitable assets for public purposes (see Manhattan Eye, Ear & Throat Hosp., 2 NY3d at 590). Where consent to the alienation of the property by a not-for-profit corporation has been withheld by the court, the contract of sale is rendered "inoperative" (see Church of God of Prospect Plaza v Fourth Church of Christ, Scientist, of Brooklyn, 76 AD2d 712, 717 [1980], aff'd, 54 NY2d 742 [1981]).

Pursuant to N-PCL § 511(d), the court must assess whether "the consideration and terms of the transaction are fair and reasonable to the corporation and that the purposes of the corporation ... will be promoted" (see Manhattan Eye, Ear & Throat Hosp., 2 NY3d at 590).

In terms of board approval, N-PCL § 510(a)(2) requires that where, as here, a not-for-profit entity has no members, a sale of substantially all of its assets "shall be authorized by the vote of at least two-thirds of the entire board..." (emphasis added). N-PCL § 702(a) defines the "entire board" as "the total number of directors entitled to vote which the corporation would have if there were no vacancies."

In this case, two out of the five board members abstained from voting on the proposed sale because they also serve as principals in the purchaser and, therefore, are not disinterested. Although the remaining three board members of petitioner who were entitled to vote did vote in favor of the sale, their vote did not constitute two-thirds of the entire board of petitioner as required by N-PCL § 510(a)(2).

N-PCL 715(b) is "a safe harbor protecting interested directors involved in a transaction if the same is approved by a fully informed vote of disinterested directors" (see In re New York Stock Exchange/Archipelago Merger Litigation, 12 Misc 3d 1184(A), 2005 WL 4279476 *11 [2005]). N-PCL § 715(b) provides, in relevant part: "if the vote of such interested director ... was necessary for the authorization of such contract or transaction at a meeting of the board ... at which it was authorized, the corporation may avoid the contract or transaction unless the party or parties thereto shall establish affirmatively that the contract or transaction was fair and reasonable as to the corporation at the time it was authorized by the board ...."

The "fair and reasonable" requirement of N-PCL § 715(b) is one prong of the two- prong test, set forth in N-PCL § 510(d), for approval of a sale of substantially all assets by a not-for-profit corporation.

DISCUSSION

Pursuant to N-PCL §715(b), the burden is on petitioner to establish that the transaction contemplated by the contract of sale is fair and reasonable to petitioner. In addition, pursuant to N-PCL § 510(d), the purposes of petitioner must be promoted by such transaction. These requirements [*4]are not satisfied in this case. Rather, the proposed transaction will serve to monetize petitioner's real estate and to repay petitioner's questionable obligations(see Manhattan Eye, Ear & Throat Hosp. v Spitzer, 186 Misc 2d 126, 154 [1999]).

The court starts its analysis with a review of the pertinent terms of the contract of sale. Under the contract of sale, the purchase price includes $2 million deemed paid by the purchaser's construction and delivery of title to petitioner of a replacement facility to be built by purchaser at the subject property. However, the contract of sale permits both a full and a partial cash-out of the purchaser's obligation to provide such replacement facility to petitioner. Section 18(c) provides, in pertinent part: "Purchaser hereby agrees that in the event that the Foundation Space ... is not delivered to Seller [the petitioner] on or prior to September 30, 2011 ..., Seller shall have the right to deliver to purchaser thirty (30) days written notice wherein Seller may elect not to have the Foundation Space built.... If Seller duly delivers such notice, Purchaser shall pay to Seller, as liquidated damages, a payment in the amount of TWO MILLION AND 00/100 ($2,000,000) as liquidated damages ... and, at Seller's option, Purchaser shall deliver the unfinished Foundation Space to Seller."[FN4]

(emphasis added).

Thus, the purchaser is not obligated to build the replacement space for petitioner and, upon petitioner's request, may satisfy its entire obligation to build by paying petitioner $2 million, or the full balance of the purchase price, albeit without interest for the intervening years.

In the alternative, Section 18(e) of the contract of sale permits a partial cash-out of the purchaser's obligation to provide such replacement facility for petitioner. Section 18(e) provides, in pertinent part: "Within 30 days after the Foundation Space is delivered by Purchaser to Seller, an independent real estate appraiser licensed in the State of New York shall prepare and deliver to Seller a written appraisal of the then fair market value of the Foundation Space ("Foundation Space Value"). In the event the Foundation Space Value is less than $2 million, Purchaser shall pay to Seller, within thirty (30) days after submission of such written appraisal, a certified or bank check in an amount equal to the difference between $2 million and the Foundation Space Value. This provision shall survive Closing."

(emphasis added).

Neither Section 18(c) or 18(e) of the contract of sale is referenced in the petition, which gives the court the erroneous impression that, as a result of the proposed transaction, petitioner will have a similar or a better replacement space for its activities when, in fact, the purchaser is excused from building all or a part of it.[FN5] The court concludes that unless petitioner is firmly entitled to a similar [*5]or better replacement facility from the purchaser, its function as an educational or cultural institution will not be served by the proposed transaction[FN6] (see Agudist Council of Greater New York v Imperial Sales, 158 AD2d 683, 684 [1990], appeal denied, 76 NY2d 707 [1990] [disapproving a sale of petitioner's property housing its senior citizen center where, despite initial assurances by a third party that relocation of petitioner's senior citizen's center was possible, and despite concerted investigations of alternative sites, no suitable alternative site could be found to house the center, and dissolution would have resulted if the contract between the parties had been specifically enforced]).

The court next reviews the fairness and reasonableness of proposed consideration as required by N-PCL §§ 511(d) and 715(b). "Generally fair market value is determined by reference to the sales prices of similar parcels in the area .... In using this method of valuation, the expert witness begins with the sales prices of the comparable parcels and makes adjustments upon them based upon his own experience to arrive at a probable market price for the subject premises for its highest and best use" (see Matter of City of New York [Shorefront High School], 25 NY2d 146, 148-49 [1969] [citations omitted]). See also Village of Irvington v Sokolik, 13 Misc 3d 1220(A), 2006 WL 2882587, *5 [select "properties that are similar to the subject property in terms of characteristics such as property type, date of sale, size, physical condition, location and land use constraints .... Look for differences between the comparable sale properties and the subject property .... Then adjust the price of each sale property to reflect how it differs from the subject property" ] [citing The Appraisal of Real Estate, Appraisal Institute [12th ed. 2001] at p. 417]).

The petition includes two appraisals to support the proposed sale price of $3.5 million ($5.5 million, less $2 million assigned for a replacement facility).[FN7] Both appraisals utilize the comparable sales approach.[FN8]

The first appraisal, prepared by Victor Schlesinger Republic Valuations, Inc. (the Schlesinger appraisal), estimated the value of the subject property at $3.5 million as of February 1, 2007, or approximately two months prior to the date of the contract of sale. This appraisal was prepared for petitioner as a "borrower," rather than as owner, even though there is no evidence in the record that petitioner contemplated using the subject property as collateral for any loan. This appraisal used, as the basis for its conclusion, the sale prices for four properties closed between June 2006 and February 2007. This appraisal then calculated the price per square foot for each comparable sale, obtained the high and low points for the price per square foot for all sold properties, and used the average price per square foot to arrive at the appraised value of the subject property, without making any adjustments with respect to the location, utility, or the size of the properties. All of the comparable properties included in this appraisal lacked a description of whether a further development on such properties was intended or required, and no photographs of the properties [*6]referenced in the appraisal were included therein.[FN9] In light of its deficiencies, the Schlesinger appraisal is unreliable.

The second appraisal, prepared by Anthony F. Lama Realty Services, Inc. (the Lama appraisal), estimated the value of the subject property at $3.3 million as of October 18, 2007, or approximately six months subsequent to the date of the contract of sale. The Lama appraisal used, as the basis for its conclusion, sales of six comparable properties, which closed between February 2005 and May 2007. The appraisal estimated the maximum amount of the area that could be developed at each property (maximum developable square footage) by multiplying the total square footage of the land by the "floor area ratio,"[FN10] which was between 2.43 and 4 depending on the applicable zoning district. The appraisal then divided the actual sale price by the maximum developable square footage to arrive at the floor area ratio per square foot (FAR/sf) for each property. The appraisal further applied upward or downward adjustments to the FAR/sf for each property depending on the location and utility of such property relative to the subject property, the timing of the sale, and the property size. While the methodology utilized in the Lama appraisal is appropriate, the court is of the view that the Lama appraisal has been tailored to meet petitioner's requirements, rather than being an independent appraisal. In its final analysis, the Lama appraisal excluded one property (210 Avenue P) as being "extreme" (sold for $5,050,000 in January 2007), even though it was intended to be used to develop a residential condominium like the subject property. Next, the Lama appraisal hedged its valuation by using the word "say":

"Considering the subject's location, physical characteristics, size and zoning, ... we have concluded a value toward the mid-range, say $110/FAR."

(Anthony Lama Appraisal, at 42 [emphasis added]).

Finally, the Lama appraisal used the valuation date of October 2007, which was six months after the contract date. That was incorrect because the contract date is the proper valuation date (see Wolkoff v Church of St. Rita, 132 Misc 2d 464, 472 [1986], aff'd, 133 AD2d 267 [1987]).

The purpose of judicial approval of a sale of substantially all assets by a not-for-profit corporation is to protect it from loss through unwise bargains (see Wolkoff v Church of St. Rita, 132 Misc 2d 464, 471 [1986], aff'd, 133 AD2d 267 [1987]).The Schlesinger appraisal is deficient, while the Anthony Lama appraisal appears to have been prepared to give the transaction a patina of [*7]legitimacy.

The court next considers the use of the cash proceeds to pay certain indebtedness of petitioner. According to the minutes of petitioner's Board of Directors, of the $3.5 million to be received by petitioner in cash, $1.9 million will be paid to satisfy the indebtedness purportedly owed by petitioner to Murray Dweck and Joseph Bijou. The validity of this indebtedness is proffered to the court in the form of separate affidavits from Messrs. Dweck and Bijou as petitioner's creditors. Although there is a reference in the record to a purported written note executed by petitioner in favor of Messrs. Dweck and Bijou, jointly, in June 2007[FN11] (which is approximately nine years after the first purported loan was made by Mr. Dweck to petitioner and approximately three years after the purported loan was made by Mr. Bijou to petitioner), such note is not included with the petition. Where an instrument establishing the debt exists, its submission is required (see State of New York Mortg. Agency v Lavin, 249 AD2d 380 [1998]). In any event, the validity of such a post-facto note is doubtful at best.

In view of its enumerated deficiencies, the petition is denied and dismissed. The contract of sale is inoperative and void.

The clerk shall serve a copy of this decision on Paula Gellman, Esq., Section Chief in the Charities Bureau of the Office of the Attorney General for the State of New York at 120 Broadway, New York, New York 10271.

The foregoing constitutes the decision, order, and judgment of the court.

___________________________________x

J. S. C.

ENTER FORTHWITH___________________________________xJ. S. C. Footnotes

Footnote 1: Under New York Non-for-Profit Law (N-PCL), there are four types of not-for-profit corporations: Types A, B, C and D (see N-PCL § 201[b]). N-PCL § 510 (a) (3) mandates that Type B and C not-for-profit corporations receive judicial approval of contracts to sell all or substantially all of their assets (see 64th Associates v Manhattan Eye, Ear & Throat Hosp., 2 NY3d 585, 588 n.1 [2004]).

Footnote 2: Each director also serves as an officer of petitioner: Murray Dweck and Eli M. Dweck as Vice Presidents, Maney Douek as President, Charles Beyda as Secretary, and Morris Benun as Treasurer.

Footnote 3: The petition states that petitioner does not operate as a house of worship. Prayer services when they are held are incidental to the lectures, study groups, and discussion groups provided by petitioner. Petitioner has no fixed membership or congregation and does not charge membership dues. The majority of people attending petitioner's functions are members of synagogues throughout the community.

Footnote 4: The provisions of Section 18 survive the closing under the contract of sale (§ 18[f]).

Footnote 5: The pages of the contract of sale are unnumbered and the contract of sale contains no table of contents.

Footnote 6: The court need not rule on whether or not petitioner constitutes a religious corporation subject to the provisions of the New York Religious Corporation Law.

Footnote 7: The entire purchase price of $5.5 million must be justified because, as stated above, the purchaser is not obligated to build a replacement facility for petitioner.

Footnote 8: The court notes that it was hindered in reviewing these appraisals due to a lack of analysis by the Attorney General's office.

Footnote 9: The property on West 23rd Street, which is identified only by street name and without a building number, is inadequately described.

Footnote 10: "The floor area ratio (FAR) is the principal bulk regulation controlling the size of buildings. FAR is the ratio of total building floor area to the area of its zoning lot. Each zoning district has an FAR control which, when multiplied

by the lot area of the zoning lot, produces the maximum amount of floor area allowable in a building on the zoning lot. For example, on a 10,000 square-foot zoning lot in a district with a maximum FAR of 1.0, the floor area of a building cannot exceed 10,000 square feet" (see NYC Zoning Glossary available at http://www.ci.nyc.ny.us/html/dcp/html/zone/glossary.shtml#floor [accessed on February 21, 2008]).

Footnote 11: See Minutes of Board of Directors Meeting of Sephardic Foundation for Torah Studies, Inc. Held on January 16, 2008.