Williams v. 5300 Columbia Pike Corp.

• Citation: 891 F. Supp. 1169
• Decision Date: 13 July 1995
• Docket Number: Civ. A. No. 95-225-A.
• Parties: Julia B. WILLIAMS, et al., Plaintiffs, v. THE 5300 COLUMBIA PIKE CORP., et al., Defendants.
• Court: U.S. District Court — Eastern District of Virginia

891 F. Supp. 1169

Julia B. WILLIAMS, et al., Plaintiffs, v. THE 5300 COLUMBIA PIKE CORP., et al., Defendants.

Civ. A. No. 95-225-A.

United States District Court, E.D. Virginia, Alexandria Division.

July 13, 1995.

COPYRIGHT MATERIAL OMITTED

Julian Karpoff, Karpoff, Title & Mitnick, Arlington, VA, for plaintiffs.

Thomas C. Mugavero, Montedonico, Hamilton & Altman, P.C., Washington, DC, for defendants.

MEMORANDUM OPINION

ELLIS, District Judge.

This action is a collection of federal and state claims in which a few residents of a cooperative apartment building complain they were treated unfairly by the cooperative corporation when the cooperative was converted to condominiums. Plaintiffs' basic complaint is that, while the condominium conversion increased the apartment units' value, this increase was enjoyed solely by the residents who participated in the conversion and purchased condominiums. But plaintiffs, who were unable to obtain financing to participate in the conversion, did not receive the benefit of this increase. In plaintiffs' view, this violated federal antitrust and housing discrimination laws, and amounted to a breach of contract and fiduciary duties under state law.

The antitrust claims fail to pass threshold muster and must be dismissed. The housing discrimination claim survives threshold dismissal, although it remains to be determined whether it may be resolved on summary judgment. The state claims, entertained pursuant to supplemental jurisdiction, also require further development and argument for disposition.

I.

Carlyle House, the building at the center of this dispute, is located at 5300 Columbia Pike in Arlington, Virginia, and contains 136 residential units. It was built in 1976 and operated initially as a rental apartment building. In 1980, the building was converted to ownership by a cooperative association. In this connection, a Delaware corporation was formed, namely the defendant The 5300 Columbia Pike Corporation ("the Co-op Corporation"). The Co-op Corporation purchased Carlyle House, financing the purchase with a mortgage secured by the building. The corporation then issued stock allocated among the various apartment units in the building. Each shareholder, in addition to being a partial owner of the corporation, became entitled to occupy an apartment in the building under a proprietary lease. The corporation relied on the shareholders' monthly payments under the proprietary leases to meet its mortgage obligations. From time to time, shareholders defaulted on their proprietary lease payments. When these defaults went uncured, the Co-op Corporation obtained possession of the defaulting shareholder's shares and their apartment units. The corporation would then hold these "defaulted shares" until they could be sold to a new shareholder.

The Board of Directors of the Co-op Corporation consisted of five individuals, each a resident¹ of the building. In the early 1990's, the Board began to explore the idea of converting the building to a condominium form of ownership. In September 1993, the corporation's by-laws were amended to permit the Board to develop a plan for such a conversion. The amended by-laws provided that upon approval by a majority of both the Board and the shares, the Board would have discretion to implement the plan "in the best interests of the shareholders as a whole," and its discretion would be subject to challenge only upon a showing of bad faith.

The Board developed a condominium conversion plan under which each resident would have the opportunity to purchase his or her unit in fee simple as a condominium in return for a payment equal to a proportionate share of the Co-op Corporation's mortgage. Because most residents would need to borrow money to make this purchase payment, the corporation arranged with a lender, Crestar Bank, to offer financing to each of the residents in the form of mortgages on the condominium units. Once the Co-op Corporation sold the units to the residents and collected the purchase payments, it would then be able to retire its own mortgage on the building and dissolve. After the conversion, the building's common areas would be owned and maintained by a condominium association to which each resident would belong. A Virginia corporation would be formed for this purpose, namely the defendant The Carlyle House Unit Owners' Association, Inc. ("the Condominium Association"). The five directors of the Co-op Corporation would become the directors of the Condominium Association.

The Board's conversion plan dealt with two anticipated complicating factors. First, it was anticipated that not every resident would be willing or able to purchase her unit from the Co-op Corporation in the conversion. As a result, the plan called for the Co-op Corporation to sell each of these "non-participating" units to the newly-created Condominium Association, and to use the proceeds first to pay off the unit's share of the master mortgage, then to repay any remaining debts owed by the non-participating shareholder to the Co-op Corporation, and finally to pay the seller's portion of the closing costs of the acquisition. Any remaining proceeds, or "equity," would go to the non-participating shareholder in exchange for cancellation of her stock and proprietary lease interest. The second complicating factor anticipated by the plan was that some of the building's units were unoccupied, the former residents having defaulted on their obligations and surrendered their shares to the Co-op Corporation. To cover this complication, the plan called for the Co-op Corporation to sell these defaulted units to the Condominium Association, with the proceeds, after satisfaction of debts, to be distributed ratably among the Co-op Corporation's shareholders at its dissolution.

With respect to disposition of both nonparticipating and defaulted units, the Board had to set the price at which the units would be sold to the Condominium Association. In this regard, the Board expected that the market value of the building's units as condominiums would be higher than the market value of the corresponding shares in the cooperative. Conversion, the Board recognized, might well result in an increase in each unit's market value.² To ascertain what the units might be worth as condominiums, the Board commissioned preparation of "target" appraisals. These appraisals are the subject of dispute, for plaintiffs allege that the Board improperly concealed them from the residents. Thus, the minutes of the Board's June 15, 1994 meeting reflect a decision to "keep the exact amounts of the target appraisals unpublicized for now, to prevent owners from taking premature marketing or selling measures."

According to plaintiffs, the Board initially intended that the increase in market value attributable to the conversion would be enjoyed by all of the building's residents, even those who did not purchase their units as condominiums. In support of this assertion, plaintiffs note that the Board held several meetings during late summer 1994 to acquaint residents with the proposed plan. In these meetings, the Co-op Corporation's President, David Falk, allegedly stated that non-participating units would be sold to the Condominium Association at their lower "co-op value," but would then be re-sold on the open market as condominium units, with the increase in value being remitted to the non-participating shareholders.³ But the Board ultimately adopted a different course. It decided that the units would be sold to the Condominium Association at a price equal to their appraised fair market value as cooperative units, with the Condominium Association to retain any increase in value realized when the units were later re-sold as condominiums. Thus, the plan contained no provision by which non-participating shareholders might benefit from the increase in market value attributable to the conversion.

On September 27, 1994, the conversion plan was approved by a properly-noticed shareholder vote. The building's residents then applied for loans to purchase their units. While most of the residents obtained such loans, the residents of six units, including plaintiffs, were either unable to qualify for loans or unwilling to accept the interest rate offered to them. On December 30, 1994, the building was declared to be a condominium. By deed of January 6, 1995, the Co-op Corporation conveyed the six non-participating units, along with sixteen defaulted units, to the Condominium Association in return for the sum of $2,502,000. The Condominium Association financed this purchase by borrowing from Crestar Bank.⁴ After distributing the proceeds according to the plan's terms, the Co-op Corporation dissolved.

Following the conversion, the Condominium Association allowed a grace period of six months for plaintiffs and other non-participating shareholders to rent and continue living in their units, during which time they could still seek financing to purchase their units. Plaintiffs contend that the proposed rents exceeded the amount they were previously paying under their proprietary leases and exceeded the units' fair market rental value.

In February 1995, while the six-month grace period was still in effect, plaintiffs commenced this action seeking damages and injunctive relief against the Co-op Corporation, the Condominium Association, and the five individuals who served as directors of both entities. Plaintiffs present two federal claims: (i) violation of the Sherman Act, 15 U.S.C. §§ 1-2, and (ii) violation of the Fair Housing Act, 42 U.S.C. §§ 3601-3631. In addition, plaintiffs present two state-law claims alleging breach of contract and breach of fiduciary duty. Defendants have moved to dismiss all four counts, while plaintiffs seek summary judgment as to liability on the state-law claims.

Diversity jurisdiction is not present here. As a result, the Court has subject matter jurisdiction over plaintiffs' state-law claims...