815 F.2d 188 (2nd Cir. 1987), 27, West 14th Street Commercial Corp. v. 5 West 14th Owners Corp.

Docket Nº:27, Docket 86-7210.
Citation:815 F.2d 188
Party Name:WEST 14TH STREET COMMERCIAL CORP., West 14th Street Garage Corp., and West 14th Street Laundry Corp., Plaintiffs-Appellees, v. 5 WEST 14TH OWNERS CORP., Defendant-Appellant.
Case Date:March 18, 1987
Court:United States Courts of Appeals, Court of Appeals for the Second Circuit

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815 F.2d 188 (2nd Cir. 1987)

WEST 14TH STREET COMMERCIAL CORP., West 14th Street Garage

Corp., and West 14th Street Laundry Corp.,



5 WEST 14TH OWNERS CORP., Defendant-Appellant.

No. 27, Docket 86-7210.

United States Court of Appeals, Second Circuit

March 18, 1987

Argued Aug. 25, 1986.

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Alan Warshauer, New York City (Galef & Jacobs, Daniel A. Nadborny, New York City, of counsel), for defendant-appellant.

Robert J. Zastrow, New York City (Stroock & Stroock & Lavan, Joseph L. Forstadt, Andrew R. Kaplan, New York City, of counsel), for plaintiffs-appellees.

Joseph Gaier, New York City (Joseph Gaier, P.C., Steven A. Gold, Mark L. Koren, New York City, of counsel), filed a brief amicus curiae.

Marc L. Luxemburg, New York City filed a brief for amicus curiae Council of New York Cooperatives.

Before FEINBERG, Chief Judge, CARDAMONE, Circuit Judge, and

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KELLEHER, District Judge. [*]

CARDAMONE, Circuit Judge:

This appeal requires us to construe the Condominium and Cooperative Abuse Relief Act, 15 U.S.C. Secs. 3601--16 (1982) (Act), enacted to protect the rights of tenants whose residential apartment buildings are converted to cooperatives or condominiums. Realizing that many tenants are too unsophisticated on account of age or infirmity to evaluate properly the complex choices offered them upon conversion, Congress sought to alleviate developer abuses during the conversion process. At the same time Congress recognized that developers deserve a fair return on their investment. Yet when a developer's profit is unconscionable, it comes at the tenants' expense. Thus, the scope of the Act must be determined in light of these concerns.


In 1982 Parker 14th Associates (Parker or the developer) sought to convert its apartment building located at 5-19 West 14th Street in New York City to a cooperative form of ownership. Believing the offering plan to be unfair, the tenants banded together and signed a no-buy pledge agreement. Later, they negotiated with the developer for a year over the details of the conversion, the plan became effective and title to the building was transferred to 5 W. 14th Owners Corp., the cooperative association owned by the tenant-shareholders. Owners Corp. now owns the building and is the defendant-appellant in this action.

As part of the negotiated conversion plan, Owners Corp.--while still managed by directors appointed by the developer--signed three long-term contracts that assigned profitable rights to the plaintiffs-appellees, three developer-affiliated corporations, West 14th Street Commercial Corp., West 14th Street Garage Corp. and West 14th Street Laundry Corp. The instant suit was precipitated when a tenant-controlled board took over Owners Corp. and, under the authority of the Act, purported to terminate the three contracts negotiated by the tenants' organization.

  1. The Conversion

    After Parker--the owner of the subject high-rise multiple residence building at Fifth Avenue and 14th Street in Union Square--decided to convert the building to a cooperative, it filed an Offering Plan in 1982 that included the three contracts in question. In response the tenants organized the P.G. Tenant's Unity Group (Unity Group) and collected no-buy pledges from over 65% of the tenants. These actions deprived the developer of the number of inside buyers it needed to evict non-buying tenants under New York's Martin Act, N.Y.Gen.Bus.Law Sec. 352-eeee (McKinney 1984), amended by 1982 N.Y. Laws c. 555 Sec. 2. Parker then proposed a non-eviction plan which, to become effective under the Martin Act, required that 15% of the insiders purchase their apartments. Id. Obtaining subscriptions from only 4% of the tenants, the developer was forced into negotiations with Unity Group.

    Although they now dispute the nature and extent of these negotiations, the two sides met several times during the year, filed amendments to the Offering Plan, and made material changes in all three contracts. The developer stated in the record that it "remained completely adamant" that the laundry, garage and commercial space be leased back to it as part of the conversion plan. It negotiated only as to the rent it would pay. There is evidence that the Unity Group and Parker reached at least a tentative agreement on these leases, which was communicated to the tenants in a newsletter and at a meeting. By January 6, 1984 when the Plan was declared effective, 36% of the units had committed to purchase and by the end of January 85% of the tenants had purchased. On August 28, 1984, a week before the closing, the three contracts were sent to Unity Group's attorney

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    for comments. On September 6, 1984, with Unity Group representatives present, the closing was held at which all three of the contracts in question were signed. At that time defendant Owners Corp. was still under the legal control of directors appointed by the developer, and the closing documents were signed for all parties by persons associated with the developer.

  2. The Contracts

    The three contracts at issue are the Master Commercial Lease, the Parking Garage Lease, and the Laundry Concession.

    1. The Master Commercial Lease

      Owners Corp., after replacing the developer as landlord, leased space to plaintiff 14 West Commercial Corp. in the building for four commercial retail stores. The lease ran for a period of 20 years, with a 20-year option to renew. The rent was admittedly well below market, providing plaintiff Commercial Corp. with an opportunity to sub-let the property at a substantial profit. This additional profit potential was acknowledged in the "Special Risks" point of the Offering Plan. Owners Corp. remained responsible for providing water, utilities and insurance over the lease term and was obliged to absorb any increase in these expenses. The retail stores were to be open to the general public.

    2. The Parking Garage Lease

      Plaintiff 14 West Garage Corp. leased the parking garage space in the building's basement and cellar from Owners Corp. This lease also ran for 20 years at admittedly below market rent with a similar renewal option. Although the parking garage was open to the general public, unit holders leased about one-third of the spaces and the Garage Corp. had an obligation--stated in the Offering Plan--to give building residents first preference when spaces became vacant. The garage lease included a covenant that the space be used only as a parking garage, and set forth the understanding of the parties that the service of a parking garage was an "integral part of the operation of a high-class multiple dwelling."

    3. The Laundry Concession

      Owners Corp. also entered into an agreement with 14 West Laundry Corp. for the latter to provide coin-operated washing machines and dryers in the building's laundry room and receive the income from those machines for the next 20 years in return for paying the cooperative $1,500 per month. The laundry room serves the building's residents and is not open to the general public.

  3. The Termination and Proceedings Below

    On October 10, 1984 a meeting of the shareholders of Owners Corp. was held at which officers and directors independent of the sponsor were elected. The outgoing Board requested, but was denied, a ratification of all prior corporate acts. On June 12, 1985, in accordance with Sec. 3607 of the Act, a meeting of the shareholders was held at which a resolution was passed--by more than the statutorily required 2/3 majority--to terminate the three described contracts. On July 3, 1985 Owners Corp. served upon plaintiffs the statutorily required 90 day notice of termination. Plaintiffs immediately filed this declaratory judgment action and sought injunctive relief in the United States District Court for the Southern District of New York (Knapp, J.). The district court declared Owners Corp.'s termination of the contracts void and granted plaintiffs' motion for summary judgment holding that the challenged contracts fell outside the scope of the Act. It also denied defendant's motions for summary judgment or dismissal of plaintiffs' complaints. From the district court's opinion and judgment, 625 F.Supp. 934 (S.D.N.Y.1986), Owners Corp. appeals.



    Owners Corp. argues for the first time on appeal that the district court lacked

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    subject matter jurisdiction. Because all the parties are New York corporations, if jurisdiction is to be found it must rest upon 28 U.S.C. Sec. 1331 (1982) which grants jurisdiction to federal district courts for civil actions "arising under" federal law.

    To define what constitutes federal question jurisdiction, it is helpful to analyze the subject in historical perspective. Under the Constitution federal question jurisdiction was originally very broad. Chief Justice Marshall, commenting on the constitutional provisions of Art. III Sec. 2 in Osborn v. Bank of United States, 9 Wheat. 738, 22 U.S. 326, 6 L.Ed. 204 (1824), stated that "[w]hen a question to which the judicial power ... extend[s] ... forms an ingredient of the original cause, it is in the power of congress to give the circuit courts jurisdiction of that cause, although other questions of fact or of law may be involved in it." 9 Wheat. at 823, 22 U.S. at 362. Later, as a result of a statutory enactment, access to a federal forum was restricted. Judiciary Act of 1875, Act of March 3, 1875, ch. 137, Sec. 1 et seq., 18 Stat. 470. Section 5 of that Act directed a federal court to dismiss or remand a suit if it appeared at any time "that such suit does not really and substantially involve a dispute or controversy properly within [its] jurisdiction." There is wide agreement that the statute narrowed the path, see, e.g., Romero...

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