$9M on Ice While Flatiron Condo Fight Heats Up

TAKEAWAY Even before a hotly contested litigation is fully adjudicated, a court may effectively punish a defaulting sponsor by depriving it, for an extended time period, of substantial profits from a sale of one or more of its units. When an inequity or impropriety is suspected, it will also step in and protect a Board of Managers against an allegedly unscrupulous sponsor. To assure a positive result, counsel for a Board of Managers should carefully review the offering plan and relevant documents, and present cogent evidence of a sponsor’s wrongdoing before a trial is scheduled so that the court can direct appropriate, albeit punitive, relief. While a $500,000 undertaking may also seem daunting, it is a small price to pay compared to the risk that sponsors' assets will be prematurely transferred, and/or inaccessible to the condo, making any victory meaningless.

BOARD OF MANAGERS OF 45 E. 22ND ST. CONDO v. 45 E. 22ND ST. PROP. LLC

WHAT HAPPENED The board of Madison Square Park Tower, an 81-unit luxury condominium in the Flatiron district, sued the sponsor who built the building and the architect who designed it. The board claimed there were construction defects and that the sponsor had lied about things in the offering plan. In July 2023, the Supreme Court ordered that the proceeds of a sponsor apartment sale, which exceeded $9 million, be held in escrow until the lawsuit about the building defects was settled. Then, in 2024, the board went back to court asking that ALL the sales money stay locked up in that account. They were worried that the sponsor was trying to move its money around or hide it, which would mean that even if the condo board won its lawsuit, there wouldn't be any money left to pay for fixing the building’s problems. The sponsor fought back, saying the condo board was actually the one playing games - trying to tie up the developer's money so they couldn't afford to do about $1 million worth of repairs that needed to be done. The architect asked to be removed from the case entirely, claiming this money fight had nothing to do with him and he shouldn't be involved in the escrow dispute.

IN COURT The judge sided with the condo board and ruled that the sponsor could not distribute the proceeds from the $9 million apartment sale that was being held in escrow. Its ruling was based on strong and convincing evidence that the sponsor didn't follow building codes and regulations when constructing the building and didn't build according to the official plans that were approved by the Department of Buildings. The board persuaded the court that the escrowed funds should not be released until the entire lawsuit is finished. The judge also said the architect had to stay in the case because if it turns out the building was designed wrong or violated building codes, the architect could be responsible too. To assure that the sponsor would be “made whole” in the event it prevailed in the underlying litigation, the court directed the board to post $500,000 for damages and costs that the sponsor could incur as a result of the ongoing restraining order.

COUNSEL for the board JONATHAN JEREMIAS, MICHAEL BECK, JACQUELINE BARTHA Schwartz Sladkus Reich Greenberg Atlas; COUNSEL for defendants; Attorneys from Kucker Marino Winiarsky & Bittens, Boyd Richards Parker & Colonnelli, Kriss & Feuerstein, Milber Makris Plousadis & Seiden; Justice James Edward D'Auguste