W. 14TH ST. COMMER. CORP. v. 5 W. 14TH ST. OWNERS

• Citation: 625 F. Supp. 934
• Decision Date: 13 January 1986
• Docket Number: No. 85 Civ. 5138 (WK).,85 Civ. 5138 (WK).
• Parties: WEST 14TH STREET COMMERCIAL CORP., West 14th Street Garage Corp. and West 14th Street Laundry Corp., Plaintiffs, v. 5 WEST 14TH STREET OWNERS CORP., Defendant.
• Court: U.S. District Court — Southern District of New York

625 F. Supp. 934

WEST 14TH STREET COMMERCIAL CORP., West 14th Street Garage Corp. and West 14th Street Laundry Corp., Plaintiffs, v. 5 WEST 14TH STREET OWNERS CORP., Defendant.

No. 85 Civ. 5138 (WK).

United States District Court, S.D. New York.

January 13, 1986.

Joseph L. Forstadt, Stroock & Stroock & Lavan, New York City, for plaintiffs.

Alan Warshauer, Galef & Jacobs, New York City, for defendant.

MEMORANDUM & ORDER

WHITMAN KNAPP, District Judge.

Three separate but related corporations, West 14th Street Commercial Corporation, West 14th Street Garage Corporation and West 14th Street Laundry Corporation ("plaintiffs"), invoking our jurisdiction to interpret federal statutes, bring this action to enjoin defendant 5 West 14th Street Owners Corporation ("14th Street Corporation") from terminating certain contracts and leases. Now before us are cross motions for summary judgment and defendant's motion to dismiss the complaint. For reasons which follow, we grant plaintiff's motion for summary judgment.¹

The Parties

Defendant 14th Street Corporation is the cooperative owner of a 429 unit apartment house situated on the corner of Fifth Avenue and 14th Street in Manhattan. Its stockholders include persons owning about 85 percent of the building's units who purchased shares of capital stock and received proprietary leases when the building was converted to cooperative status on September 6, 1984. The occupants of the remaining units, having declined to purchase cooperative shares, remain as tenants under statutory leases protected by New York City's rent stabilization laws.

Each of the three plaintiff corporations is party to a lease or contract with defendant dated September 6, 1984. West 14th Street Commercial Corporation has a contract which, for a specified annual payment, authorizes it to lease to the public at any price it can obtain space for four stores on the building's ground floor. This lease is for a term of 20 years with an option to renew for another 20 years. West 14th Street Garage Corporation has a similar 20 year renewable lease authorizing it to operate a parking garage in the building. West 14th Street Laundry Corporation has a 15 year concession to provide and service washing machines and dryers for the use of building residents.

The defendant and each of the plaintiff corporations were created by Parker 14th Associates ("Parker" or "sponsor"), the original owner and builder of the apartment house, for the purpose of effectuating its conversion from rental to cooperative status.²

The Conversion

The entire process of converting the building from rental to cooperative status lasted from the spring of 1982, when the four mentioned corporations were created, to September 6, 1984, when defendant 14th Street Corporation received title to the building and issued shares of its capital stock and proprietary leases to purchasing tenants. Conversion was effected pursuant to applicable provisions of the Martin Act, New York General Business Law §§ 352-e et seq. (McKinney 1984), which governs all cooperative conversions in New York City.

A brief description of the Martin Act's comprehensive regulation of the conversion process will aid understanding of the facts in this case. The statute was enacted for the protection of "tenants in possession who do not desire or who 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." Legislative Findings, 1982 N.Y.Laws § 1, ch. 555. Particular protection is granted to persons sixty two years of age and older. Thus, the legislature found (Ibid.)

that in the City of New York the position of non-purchasing tenants who are sixty-two years of age or older is particularly precarious by reason of the limited financial resources of many such persons and the physical limitations of many such persons; that preventive action by the legislature in restricting rents and evictions during the process of conversion from rental to cooperative or condominium status is imperative to assure that such conversions will not result in unjust, unreasonable and oppressive rents and rental agreements affecting non-purchasing tenants especially those who are sixty-two years of age or older, and other disruptive practices affecting all tenants during the conversion process which threaten the public health, safety and general welfare....

To address these issues, the statute provides two avenues by which an owner (such as Parker) can convert a building. The first, known as an "eviction plan", authorizes the conversion sponsor to convert the building and then cancel the leases of and force out non-purchasing tenants. At the time Parker was first contemplating conversion, that avenue required that the sponsor, as a condition precedent to declaring the plan effective, obtain from tenants written commitments for the purchase of 35 percent of the units in the building.³ The second method, called a "non-eviction plan", reduces the required number of purchase commitments to 15 percent but imposes on the sponsor the obligation to honor the lease of any tenant who does not wish to purchase but elects to continue renting.⁴

The statute extends particular protection to senior citizens and disabled persons. Senior citizens are all persons over the age of 62 and their spouses. N.Y.Gen.Bus.Law § 352-eeee(1)(f). Disabled persons are those with a physical or psychological condition which prevents them from working and their spouses. § 352-eeee(1)(g). The statute mandates that any such person who elects within a given time not to purchase may not be evicted (even pursuant to an eviction plan). § 352-eeee(2)(d)(iii). In addition, the statute continues the applicability of any governmental regulation such as rent control or rent stabilization laws in effect at the time of conversion, § 352-eeee(2)(d)(iv), and directs that tenants whose leases are not so protected may not be charged rent increases above those charged for apartments in buildings with comparable services. § 352-eeee(2)(d)(iii).⁵

Parker's original intention was to avail itself of the provisions for an "eviction plan". It thus would have been required to obtain commitments for the purchase of 35 percent of the units in the building and would have been entitled to evict those who did not buy (except, of course, non-purchasing elderly or disabled tenants).

Upon learning of Parker's intention, the tenants immediately organized an association called the Tenants Unity Group ("Unity Group") to present Parker with a united front in the contemplated negotiations. Unity Group's purposes, set forth in its Articles of Association, were to disseminate to tenants information about the conversion, to hire lawyers and expert consultants, and "to secure unified action in advancing the common interests of its members."

Unity Group's first significant action was to persuade 65 percent of the tenants to enter into a "no-buy pledge" contract committing them to refrain from purchasing any apartment under an eviction plan.⁶ Upon learning of this action, Parker abandoned all efforts to employ that form of conversion.

Parker's first formal offer — made under the non-eviction provisions of the Martin Act — was presented in July, 1982. This offer ("offering plan") was a comprehensive document setting forth all elements of the proposed conversion. Two of its provisions were of particular significance for present purposes. First, it provided that the proposed cooperative corporation's stock be issued to tenants at a price of $80.00 per share. At this price, a typical two-bedroom apartment would cost $85,920.00. Second, it proposed that the corporation enter into contracts with the three present plaintiffs for the above-described purposes. Under this proposal, the building would receive: (a) from West 14th Garage Corporation, a rent of $25,000 per year for the first five years, increments every five years thereafter, and an annual rent in the twentieth year of $31,000; and (b), from the West 14th Street Commercial Corporation, $50,000 per year for the first five years, increments every five years thereafter, and a final annual rent of $65,000. Had the plan been accepted, the building would have received from the two corporations a total of $75,000 in the first year and $96,000 in the twentieth.⁷

The first section of the offering plan was titled "Special Risks." It explained that these contracts might not be "arms-length" arrangements, that the cooperative corporation would likely receive from them less than the full market value of the permitted operations, and that Parker would correspondingly profit therefrom. Thus, it stated:

2. The Plan provides for leases of the garage-space and commercial space by the Apartment Corporation defendant to the Owner or a related entity plaintiffs. These leases may not be "arms-length" transactions and may result in the Apartment Corporation's realizing less than the full economic value of the garage-space and commercial space. The difference realized over the terms of such leases may be deemed additional profit to the Owner Parker. Furthermore, over the years the rent payable under these leases may become increasingly less than the said portion of the Apartment Corporation's aggregate costs in maintaining these spaces. (emphasis in original).

Only a handful of tenants elected to purchase under this offer, but it immediately sparked formal negotiations between Parker and Unity Group. Foremost among the issues upon which these negotiations centered was the price at which the tenants could purchase their apartments (i.e., the price per share of cooperative stock). Not surprisingly, the tenants wished to obtain the most favorable possible below-market "insider's price".

With respect to the challenged contracts, Unity Group expressed its outright opposition to their...