State v. Rachmani Corp.

• Decision Date: 02 June 1988
• Citation: 525 N.E.2d 704,71 N.Y.2d 718,530 N.Y.S.2d 58
• Parties: , 525 N.E.2d 704, Blue Sky L. Rep. P 72,905 STATE of New York, Respondent, v. RACHMANI CORPORATION et al., Appellants, et al., Defendant.
• Court: New York Court of Appeals Court of Appeals

Page 58

530 N.Y.S.2d 58

71 N.Y.2d 718, 525 N.E.2d 704, Blue Sky L.

Rep. P 72,905

STATE of New York, Respondent, v. RACHMANI CORPORATION et al., Appellants, et al., Defendant.

Court of Appeals of New York.

June 2, 1988.

Donald S. Snider, Gerald M. Levine and Randall T. Sims, New York City, for appellants.

Robert Abrams, Atty. Gen. (Peter W. LaVigne, O. Peter Sherwood and Donna Miller, New York City, of counsel), for respondent.

OPINION OF THE COURT

HANCOCK, Judge.

On defendants' appeal in an enforcement action brought by the Attorney-General under the antifraud provisions of the Martin Act we must decide whether the failure to mention an unsatisfied precondition to a cooperative conversion of an apartment house constituted fraud which justified the issuance of an injunction under General Business Law § 353 and Executive Law § 63 (12). Because the omitted information had previously been furnished in the original offering plan and, in any event, would not have been a significant factor in the purchase decision of a reasonable tenant, we conclude that the omission did not constitute actionable fraud. ¹ The order of the Appellate Division, 122 A.D.2d 710, 505 N.Y.S.2d 566, should, therefore, be reversed, the injunction vacated, and the complaint dismissed.

I

The Attorney-General commenced this action for an injunction pursuant to General Business Law § 353 and Executive Law § 63 (12) based on allegedly fraudulent acts committed during the eviction-type cooperative conversion of Gramercy Park Towers, a 328-unit apartment at 205 Third Avenue, New York City. ² The defendants are the selling agent, Rachmani Corporation, and its president, Jay Rachmani. ³ The action arises from the July 3, 1980 notice delivered by defendants to the tenants two days before the deadline for the exercise of their rights to purchase their apartments at the "insider price". The claim of fraud concerns information pertaining to the terms and conditions of the offering plan for the cooperative conversion, specifically two conditions for the effectuation of the plan: the requirement that for the plan to be effective as an eviction-type conversion, 35% of the eligible tenants must have subscribed prior to July 6, 1980; and an unrelated requirement, imposed by the mortgagee, that 40.5% of the apartments be sold prior to June 26, 1981.

Defendants, in the July 3, 1980 notice, advised the tenants, as they were required to do by statute, that the 35% precondition had been met. There was no mention in this notice of the then unmet 40.5% condition, however, and it is the omission of this allegedly material information on which the Attorney-General's claim of fraud is based. To explain the Attorney-General's action, we first summarize the relevant details of the plan and the critical events leading up to July 6, 1980, the cutoff date for the rights of tenants to purchase at the insider price.

The terms and conditions of the proposed conversion had been described in an offering plan (see, General Business Law §§ 352-e, 352-eeee) which was accepted for filing by the Attorney-General and distributed to the tenants on December 26, 1979. Thereafter, as a result of protracted negotiations with the sponsors, the tenants--who had formed a tenants' association and hired counsel--succeeded in obtaining certain favorable revisions in the plan including a reduction in the price per share offered to tenants. These revisions were the subject of four amendments to the plan, the last one of which was filed on May 30, 1980.

The plan, as amended, contained the following pertinent provisions:

(1) The condition that 35% of the tenants subscribe. The plan provided--as mandated by section YY51-6.0(c)(9)(a) of the Administrative Code of the City of New York and section 61(4) of the Code of the Rent Stabilization Association of New York City, Inc. (Rent Stabilization Code)--that it could be effected as an eviction-type conversion only if 35% of the nonexempt tenants (occupying 93 of the apartments) subscribed to purchase agreements prior to June 26, 1981. In an amendment to the plan, the sponsors agreed to change the proposed conversion to the noneviction type if this 35% requirement was not met by July 6, 1980; if the 35% was achieved prior to June 26, 1981, the conversion would still be effective, but the nonpurchasing tenants could not be evicted. The 35% condition was satisfied prior to the July 6, 1980 deadline, and the tenants were so advised in the July 3 notice.

(2) The insider price option. Until July 6, 1980, the tenants could purchase shares at the insider price. After July 6, 1980--assuming that the conversion was ultimately sanctioned as an eviction plan--the tenants would have to buy at the higher outsider price or face eviction at the end of their leases.

(3) The condition that 40.5% of the apartments be sold. The plan also required that 40.5% of the apartments be sold on or before June 26, 1981. This condition--which is at the root of the Attorney-General's complaint--was separate from and unrelated to the 35% precondition. The 40.5% requirement was not mandated by statute and had nothing to do with the protection of the tenants or with the plan's approval as an eviction-type rather than a noneviction-type conversion. It was imposed by the mortgagee, solely for its protection, as a condition for its consent to any cooperative conversion of the building. The mortgagee could modify or waive the requirement entirely and the 132 apartments (40.5%) could be sold to tenants and nontenants alike.

(4) Return of tenants' moneys if plan abandoned. If the plan was not declared effective within the time limits set forth, it would be deemed abandoned and "all monies would be returned to the purchasers, in full, with interest, if any".

By July 1, 1980, only five days prior to the deadline for insider purchases and satisfaction of the 35% requirement, fewer than 10 tenants had signed up as subscribers. At a meeting that night, the negotiating committee announced to the tenants' association that it had attained the best deal available and that each tenant should do as he or she saw fit. By the night of July 3, 96 valid subscriptions from tenants had been secured, and the sponsors had thus exceeded the 35% requirement (93 subscriptions) for an eviction plan.

Immediately thereafter, defendants, as mandated by Rent Stabilization Code § 61(8), ⁴ delivered the following letter to each tenant:

"July 3, 1980

"Dear Tenant:

"On behalf of the Sponsor, 19th Street Associates, and the Apartment Corporation, 205 Third Avenue Owners', Inc., please be advised that this letter is formal notice to you, as per the requirement of paragraph 8 of Section 61 of Rent Stabilization Code, that 35% of tenants in occupancy at the time of presentation of the Plan, have subscribed to purchase shares allocated to their apartmnets [sic].

"An Amendment to the Plan will be filed shortly, disclosing the names of all purchasers, the apartments sold and the purchase price of each apartment."

No reference was made to the 40.5% requirement imposed by the mortgagee. Nor was any mention of this requirement made in other communications to the tenants, including the various amendments to the original plan and a letter to all tenants dated June 30, 1980 reminding them that the period during which they could purchase at the insider price expired on July 6, 1980. ⁵

In his complaint, the Attorney-General alleges that defendants defrauded the tenants by stating falsely in the July 3 letter that the requisite 35% of the tenants had agreed to purchase apartments. The trial court found, however, that more than 35% of the tenants had, in fact, signed valid subscriptions on July 3 and that, therefore, the notice did not contain any false statement. The Attorney-General was permitted to amend his complaint to conform to the proof and to include the contention that the July 3 notice omitted material information, i.e., that the plan also contained the 40.5% condition imposed by the mortgagee and that this level of subscriptions had not been reached as of July 3, 1980. Based on this omission alone, the trial court found that defendants had committed fraud under the Martin Act, stating: "By failing to call attention to the 40.5% requirement in the interim communications and particularly in the July 3, letter, the defendants the Rachmani Corporation and Jay Rachmani violated the fraud and good faith requirements of the Martin Act. Many tenants reasonably assumed, on reading the July 3 letter, that all of the conditions precedent to declaration of effectiveness of the eviction plan had been attained and were thereby induced to subscribe to the cooperative conversion plan."

The court imposed an injunction on defendants pursuant to General Business Law § 353(2) and, upon its further finding that defendants' conduct constituted persistent fraud, it based its injunction on Executive Law § 63(12), as well. The Appellate Division (one Justice dissenting) affirmed for the reasons set forth in the trial court's decision, and the appeal is before us by leave of that court. We now reverse.

II

The Attorney-General's claim of fraudulent practices under the Martin Act is not based on any intentionally misleading conduct, misrepresentation, or misstatement by defendants. ⁶ Nor is it claimed that any statement was untrue. Indeed, the Attorney-General does not now dispute the trial court's findings that more than 93 of the nonexempt tenants had then signed purchase agreements on July 3 and that, therefore, the statement in the letter that the 35% condition had been satisfied was true.

Instead, the Attorney-General's claim is founded entirely on defendants' failure to make reference to the fact that, although on July 3, 1980 the 35% requirement had been met, the sponsor still had to sell 132 apartments (40.5%) prior to June 26, 1981 to secure the mortgagee's consent. As previously noted, unlike the notification in the ...