First published: Apr 2025

The Never-Ending Sponsor

By: William J. Geller, Braverman Greenspun

TAKEAWAY The co-op found itself in trouble by mistakenly asserting that because the sponsor was “not an individual person which is a condition required to qualify as a Holder of Unsold Shares under the cooperative’s offering plan and . . . proprietary lease,” even though the offering plan did not actually require a holder to be an individual. It is unclear whether the co-op’s position was simply an error, or perhaps a calculated gamble to gain leverage over the sponsor and force it to sell apartments. Regardless, co-ops must be very careful in dealing with holders of unsold shares and understand that their proprietary leases likely provide for very different treatment than average tenant-shareholders. Attempting to charge a holder a flip tax will not only result in a loss in court, but will also require the board to pay the sponsor’s attorneys’ fees as well.

320 W. 87, LLC V. 320 W. 87TH ST., INC.

WHAT HAPPENED 320 West 87th began its life as a co-op in 1984 when the sponsor began offering shares in the corporation to existing tenants and the public. Forty-one years later, the sponsor still owns unsold units. Common among offering plans during that era, it stipulated that many of the rules and restrictions applicable to shareholders would not be applicable to the holder of unsold shares. These included not requiring the sponsor to pay a flip tax when it sold apartments or seek approval from the board for any sales, sublets or renovations or to comply with any other rules that regular shareholders had to follow. The litigation originated over these issues, and the court ruled against the co-op.

IN COURT The sponsor then sought an award of attorneys’ fees based on a provision of the proprietary lease authorizing an award of attorneys’ fees based on a finding that either party “be in default” under the lease. The co-op opposed the application for two reasons. First, even though the court had determined the co-op was not entitled to charge flip taxes, there had been no finding that it was in “default” under the lease. Second, the sponsor had not pleaded a separate cause of action for attorneys’ fees and also had not submitted any invoices or other evidence when it had moved for summary judgment.

The court ruled against the co-op and referred the matter to a Special Referee for an inquest to determine the proper amount of attorneys’ fees to be awarded to the holder of unsold shares. The court found that “by invoicing the plaintiff improperly and demanding that it be entitled to withhold consent to, and charging the plaintiff for, subletting the subject apartments, among other things,” the co-op “failed to perform covenants and agreements under the lease.” Accordingly, the sponsor was entitled to an award of reasonable attorneys’ fees and disbursements.

COUNSEL for the co-op PATRICK PALLADINO Milber Makris Plousadis & Seiden JERRY WEISS Gallet Dreyer & Berkey; for the holder of unsold shares JOHN MCCARTHY, MORGAN MANLEY Smith, Gambrell & Russell; Justice John J. Kelley