Phoenix Tenants Ass'n v. 6465 Realty Co.

• Decision Date: 01 April 1986
• Parties: PHOENIX TENANTS ASSOCIATION, et al., Plaintiffs-Appellants, v. The 6465 REALTY CO., et al., Defendants-Respondents-Appellants, and Robert Abrams, etc., Defendant-Respondent.
• Court: New York Supreme Court — Appellate Division

Page 657

500 N.Y.S.2d 657

119 A.D.2d 427

PHOENIX TENANTS ASSOCIATION, et al., Plaintiffs-Appellants, v. The 6465 REALTY CO., et al., Defendants-Respondents-Appellants, and Robert Abrams, etc., Defendant-Respondent.

Supreme Court, Appellate Division,

First Department.

April 1, 1986.

M. Stein, New York City, for plaintiffs-appellants.

A. Blumstein, New York City, for defendants-respondents-appellants.

G.J. Hurwitz, New York City, for defendant-respondent.

Before SANDLER, J.P., and ROSS, ASCH and ELLERIN, JJ.

MEMORANDUM DECISION.

Order, Supreme Court, New York County (Bruce McM. Wright, J.) entered January 24, 1985 which denied plaintiffs' motion for a preliminary injunction and directed defendants to file an amendment to the Offering Plan disclosing the existence of the federal statute and its applicability in a form satisfactory to the Attorney General is affirmed, without costs. Non-purchasing tenants who are eligible to purchase are granted an additional thirty-day period from the date of this Court's order to exercise their exclusive right to so purchase.

At issue on this appeal is the sufficiency of the disclosure ordered by Special Term to be made in the Offering Plan for cooperative conversion of the building known as the Phoenix.

At the outset we note that the relief sought by plaintiffs at Special Term was not for the judicial declaration proposed by the dissent, but was for a preliminary injunction to enjoin the scheduled closing on the conversion of the premises on the ground that the sponsor had failed to make necessary disclosures in the offering statement.

The plaintiffs, an unincorporated "tenant's association" and two individual tenants, challenged the sufficiency of the offering statement originally filed by the defendant sponsor and accepted for filing by the Attorney General. They claimed that the offering statement failed to reveal the existence of a relevant federal statute known as the Federal Condominium and Cooperative Conversion Protection and Abuse Relief Act of 1980 (15 U.S.C. Sections 3601 et seq.). The content and purposes of that Act are discussed in detail in the dissent.

Plaintiffs, who brought this action literally on the eve of the scheduled closing and on the sole ground of the alleged misrepresentation or "concealment" by the sponsor in its failing to disclose the federal statute, sought a preliminary injunction to enjoin the non-Attorney General defendants from closing title and an extension of the time within which tenants in occupancy would have the exclusive right to purchase their apartments.

Special Term denied the request for extraordinary injunctive relief, but granted the motion to the extent of directing the sponsor to file with the Attorney General, in a form acceptable to it, an amendment to the Plan which disclosed the existence and provisions of the federal statute and its applicability, and granted the tenants an additional thirty-day period following the filing of the amendment in which to exercise their exclusive rights to purchase. Since we agree that this was the proper extent of disclosure required by the Martin Act (General Business Law Section 352, et seq.) at that juncture, we affirm.

The purpose of the Martin Act is to protect the public and prevent fraud in the offering of securities and in that regard General Business Law Section 352-e prescribes filing requirements for real estate syndication offerings, including cooperative conversion plans, "as will afford potential investors, purchasers and participants an adequate basis upon which to found their judgment and shall not omit any material fact or contain any untrue statement of a material fact". (General Business Law, Section 352-e [1][b] ). The offering statement is filed for informational purposes only, in order to provide an adequate factual basis upon which potential investors, prospective purchasers and participants can intelligently make their choice and found their judgment. Implicit in the statutory mandate is a legal obligation on the sponsor of a cooperative conversion plan to accurately and thoroughly disclose the potential risks involved (See, Matter of Whalen v. Lefkowitz, 36 N.Y.2d 75, 365 N.Y.S.2d 150, 324 N.E.2d 536; Matter of Charles H. Greenthal & Co., v. Lefkowitz, 32 N.Y.2d 457, 346 N.Y.S.2d 234, 299 N.E.2d 657; Apfelberg v. East 56th Plaza, Inc., 78 A.D.2d 606, 432 N.Y.S.2d 176, app. dsm. 54 N.Y.2d 680). For this purpose, the relief fashioned by Special Term is appropriate.

In response to Special Term's order, the sponsor has filed an amendment to the offering plan, accepted by the Attorney General, in which it discloses, in detail, the provisions of the federal statute, the history of this litigation, the contentions of the parties as to the applicability of the federal statute, and the content of Special Term's decision and order. The amendment also advises offerees to consult with their attorneys concerning the significance of this material. Of course, the Plan disclosed, from the outset, the terms of the agreement which provide that, on the closing date, the apartment corporation will enter into a non-cancellable five-year management agreement with an affiliate of the sponsor and will also enter into a non-cancellable fifteen-year Master Lease with the sponsor covering commercial space, with options to renew for an additional thirty-five years. These agreements reflect, on their face, that they are, as described in the dissent, "sweetheart" deals or windfalls for the sponsor. Clearly, the totality of this information is sufficient to provide "an adequate basis" upon which a purchaser may form his or her judgment, and satisfy the "informational" purpose of Section 352-e.

Plaintiffs, however, now seek more. They would, in effect, have this court "guarantee" the economic positions of the purchasers in this prospective business deal between private parties by issuing a premature advisory ruling on the applicability of the federal statute to the management agreement and Master Lease at issue in this Plan, and requiring inclusion of that ruling in the prospectus. Such is not the function of the disclosure requirements of the Martin Act, nor is it the function of our courts to issue advisory opinions.

The offering statement of a cooperative conversion plan can only reveal the facts and figures from which one can estimate the future fiscal risks and benefits of purchase (see Schumann v. 250 Tenants Corp., 65 Misc.2d 253, 317 N.Y.S.2d 500). These risks and benefits cannot be predicted with precision. It is sufficient that the sponsor has revealed the risks involved, and, in this case, revealed a possible potential benefit for prospective purchasers under the terms of the federal statute in relation to cancellation of the management agreement and Master Lease. Prospective purchasers can utilize this information and seek legal advice as to the advisability of the transaction from their own private attorneys, a far more appropriate avenue in this context, than seeking declaratory relief from the courts. (see, 1045 Park Avenue Tenant Association v. 1045 Park Avenue Owners Corp., 119 Misc.2d 339, 462 N.Y.S.2d 740).

The CPLR confers the power to render a declaratory judgment as to the rights of parties to a justiciable controversy (CPLR 3001). The power to render a declaratory judgment does not, however, extend to the giving of an advisory opinion with regard to a future event which is beyond the control of the parties and which may never occur. "Thus it is settled that the 'courts will not entertain a declaratory judgment action when any decree that the court might issue will become effective only upon the occurrence of a future event that may or may not come to pass' " (see, New York Public Interest Research Group v. Carey, 42 N.Y.2d 527, 399 N.Y.S.2d 621, 369 N.E.2d 1155).

The conjectural nature of the future events which must occur before cancellation of the Lease could be effected under the federal statute emphasizes the inappropriateness of granting declaratory relief at this time. First, it is necessary that the requisite number of tenants buy their apartments so that the conversion plan is consummated and becomes effective. Then, developer control over the apartment corporation must terminate, following which the owners of the corporation must, by a two-thirds vote, elect to terminate the lease within two years after the plan is consummated. Only upon the happening of all of these future events would termination of the "sweetheart" agreements be possible. At this juncture, when all of these essential prerequisites have not yet come to pass, and may never do so, a declaratory judgment would be a premature impermissible advisory opinion.

It is also of consequence that we are dealing with a relative new federal statute which has not been extensively interpreted. While the dissent's analysis of the applicability of that statute generally to agreements such as the Master Lease is most persuasive, the case of West 14th Street Commercial Corp. v. 5 West 14th Owners Corp., 625 F.Supp. 934, which is cited by the dissent, demonstrates the wisdom of refraining from pronouncements in the abstract and reserving the decisional function for the realities of a justiciable controversy. That case holds the federal statute inapplicable to garage and laundry sweetheart leases, similar to those at issue, within the framework of the particular facts there present. It is the facts that actually develop in the instant case that will control the ultimate determination and not the facts that "might or might not be." (Cf., 233 E. 86th St. Corp. v. Park East Apartments, App.Div., 499 N.Y.S.2d 853. The language of the amendment ordered by Special Term, and filed by the sponsor with the Attorney General, has the requisite certainty and provides all the necessary information to enable a prospective purchaser to make a reasoned judgment at this stage of the cooperative conversion...