Estate of Angela Schiller

May a co-op refuse to permit the transfer of shares and a proprietary lease for a co-op apartment to an approved purchaser where the seller refuses to pay the co-op disputed amounts? The answer was a clear “no” in Estate of Angela Schiller.

In this case, the fiduciaries of the estate of Angela Schiller sought a preliminary injunction permitting them to proceed with the scheduled closing of the sale of Schiller’s shares in a co-op. Their petition also sought a determination of the validity of a claim by the co-op against the estate.

The present application arose within the following context. Schiller died on November 30, 2001, in an apartment fire at 60 East End Avenue in Manhattan that also killed her husband. She was survived by her daughter from a prior marriage and, possibly briefly, by her husband (who may have died shortly after the fire rather than during it). A proceeding was started to probate an instrument under which Schiller gave her co-op shares to her husband if he survived her and, after various pecuniary bequests, left her residuary estate to three charities. Preliminary letters for Schiller’s estate (valued at roughly $10 million) were issued on December 10, 2004, to the nominated executors.

Some six months after their appointment, the preliminary executors, in the absence of consent from the daughter and the husband’s successor-in-interest, requested court authorization to put the apartment up for sale. They ultimately obtained such authorization under a stipulation among all interested parties. Thereafter, they entered into a contract to sell the apartment for $2.75 million. After the co-op board approved the buyer, a closing date was set for May 16, 2006.

The co-op, however, had taken a position that threatened the fiduciaries’ ability to close and put the estate at risk of an aborted contract. The co-op was among numerous claimants who alleged that Schiller’s negligence had caused the fire. The co-op had informally demanded payment from the fiduciaries to cover damage to the building, increased insurance premiums, and miscellaneous other expenses, as well as legal fees incurred in relation to the fire.

The co-op conceded that it was uncertain as to the damages it ultimately could claim to have suffered (which apparently are subject to recalculation after various contingencies have been eliminated). Nevertheless, the co-op had reported in writing to the fiduciaries that its current estimate of its damages was $120,000, that it expected the fiduciaries to satisfy its claim at or prior to the closing, and that it would not permit such closing otherwise.

The papers indicated that the fiduciaries offered to place the amount demanded by the co-op in escrow pending resolution of the dispute. When that offer was refused, the fiduciaries began the present proceeding in which they asked that the validity of the co-op’s claim be determined and that the co-op be enjoined from interfering with the scheduled closing.

The co-op maintained that a provision of the parties’ proprietary lease entitled it to immediate payment. The terms in question were part of paragraph 16 of the co-op’s proprietary lease (under the heading “Assignment”) and said:

“16. (a) The Lessee shall not assign this lease or transfer the shares to which It is appurtenant or any interest therein, and no such assignment or transfer shall take effect as against the Lessor for any purpose, until ... (iv) [all] sums due from the Lessee shall have been paid to the Lessor, together with a sum to be fixed by the Directors to cover reasonable legal and other expenses of the Lessor and its managing agent in connection with such assignment and transfer of shares.”

In the court’s view, the quoted provision did not support the co-op’s position. The court said that it could not reasonably be read as intended to give the co-op the power to hold an approved sale hostage unless the shareholder satisfied claims that were unproved, unsettled, and unadjudicated. Such a reading would, in effect, make the instrument a license to use as a threat to the shareholder’s property. It could be leverage for forcing him to make concessions on a disputed claim.

Under the only reasonable reading, however, the court determined that the provision instead gave the co-op the right at closing to be paid only on its liquidated claims (i.e., “sums due”), as well as its fees and other expenses relating to the share transfer per se. Indeed, if the language in question were given the meaning urged by the co-op (i.e., giving it the right to demand payment on its unliquidated and liquidated claims), such provision would constitute an unreasonable restraint on alienation of property in the court’s view.

The co-op purported to distinguish a prior reported case (Chemical Bank) in which the shareholder had a claim against the co-op, rather than vice versa. But such distinction did not amount to a meaningful difference, said the court. The co-op in Chemical Bank proposed to use its power over a closing as a way to force a shareholder into concessions that he otherwise would not have made. The court said that the co-op here proposed to do the same. The co-op tried to distinguish the two cases by arguing that the shareholder here (unlike his counterpart in Chemical Bank) did not have to settle or surrender as the price for going forward with the closing. The co-op insisted (without any support from the terms of the proprietary lease, said the court) that the shareholder here could simply pay “under protest” and seek to recover the funds thereafter. It was observed that the prospect of payment “under protest” appeared to have arisen not from the lease, but rather only as a possible concession offered by the co-op during abortive settlement discussions with the fiduciaries.

At least equally important, a payment by the fiduciaries “under protest” would give the co-op/claimant an inordinate advantage in any litigation, relieving it of its burden of proving liability and damages and shifting the burden of proof to the fiduciaries. Accordingly, the courts said that the co-op’s insistence that the fiduciaries would “lose nothing” by caving in to its demand was hollow (particularly in light of the co-op’s clear conviction that it, on the other hand, would “gain something” as a result).

Consequently, the elements needed to warrant the issuance of a preliminary injunction were present here. First, the fiduciaries had a likelihood of success on the merits of whether an injunction should issue enjoining the co-op from preventing the closing from occurring. Second, the record indicated that the estate would suffer irreparable harm if an injunction were not issued: the loss of a sale in an uncertain market.

The court noted that the interim relief sought by the fiduciaries, in effect, amounted to an injunction that is mandatory as well as prohibitory (requiring cooperation as well as restraint on the part of the co-op) and thus required special justification.

Nevertheless, such an interim mandate was justifiable where, as here, its denial would result in irreparable harm to the applicant (rendering ultimate relief academic), and the granting of it will result in less or no harm to the enjoined party. In this case, where the estate was solvent, there could be no harm whatsoever to the co-op, particularly if the injunction was conditioned on the establishment of an escrow of the disputed amount.

The court ordered that the co-op and its managing agent, pending the final decree in this proceeding, be restrained and enjoined from obstructing the pending sale of the shares in the co-op held by the executors and from requiring the executors to pay the claim of the co-op as a precondition to a closing of the sale.

The court further ordered that the preliminary executors deposit the sum of $135,000 in escrow in an interest-bearing attorney’s subaccount of counsel to the executor under the estate’s and co-op’s taxpayer identification numbers.