Order of Attachment / Slash and Burn

Somewhat gory staged photo of a man with clown makeup, sitting on the ground, holding a hatchet, with blood on his shirt. Illustrates a case study about an order of attachment

[Reader Advisory:
This case study begins with a graphic and possibly upsetting description of violent events leading up to a criminal case. Then, the narrative continues with a discussion of the accompanying civil case. If the reader prefers to begin with the discussion of the civil case, they may skip to the second heading “Order of Attachment.”]

He Drove from New York to Florida.

“Jeff” drove to his ex-wife, “Lauren”‘s Florida condominium and attacked her in her home. Jeff handcuffed Lauren’s arms and legs so she was unable to move. Then, Jeff repeatedly cut, beat, suffocated, threatened and tortured his ex-wife for over six hours. Throughout this ordeal, Jeff forced Lauren to answer intimate questions by threatening her with a knife he held up to her neck, putting tape over her mouth and suffocating her by putting a pillow over her face. Jeff referred to this as “phase one” of his plan. He threatened to do her more harm during “phase two” of his planned attack.

While being held against her will, Lauren continuously pled with Jeff for her life and safe release to no avail. Lauren’s son-in-law saw the ordeal as it was taking place because Jeff was broadcasting it online. He called the police, who arrested Jeff before “phase two” could take place and, luckily, before further harm could be done to Lauren.

In the criminal case, the jury rendered verdicts against Jeff, finding him guilty of aggravated battery with a deadly weapon; kidnapping; aggravated assault with a deadly weapon; and assault. Jeff was sentenced to 15 years in prison.

Order of Attachment

Lauren retained a personal injury attorney to sue Jeff in a civil action in New York for the intentional torts he committed against her. Jeff owned a couple of buildings in New York and a half-interest in the Florida condominium. The attorney hired Richard A. Klass, Your Court Street Lawyer, as special counsel to seek to ” attach ” Jeff’s properties to ensure that he wouldn’t sell, mortgage or dispose of them in order to evade payment of monetary damages to Lauren.

An ” Order of Attachment ” is a provisional remedy used by a judge to ensure that there will be assets and property belonging to the defendant to pay any prospective judgment to be awarded to the plaintiff after trial. The operative rule, CPLR 6201, provides, in relevant part:

An order of attachment may be granted in any action, except a matrimonial action, where the plaintiff has demanded and would be entitled, in whole or in part, or in the alternative, to a money judgment against one or more defendants, when:

3. the defendant, with intent to defraud his creditors or frustrate the enforcement of a judgment that might be rendered in plaintiff’s favor, has assigned, disposed of, encumbered or secreted property, or removed it from the state or is about to do any of these acts;

As held by the Second Department in Mineola Ford Sales Ltd. v Rapp, 242 AD2d 371, 371 [2d Dept 1997], ” In order to obtain an order of attachment under CPLR 6201(3), the plaintiff must demonstrate that the defendant has or is about to conceal his or her property in one or more of several enumerated ways, and has acted or will act with the intent to defraud his or her creditors, or to frustrate the enforcement of a judgment in favor of the plaintiff (see, Arzu v. Arzu, 190 A.D.2d 87, 91, 597 N.Y.S.2d 322; Societe Generale Alsacienne De Banque, Zurich v. Flemingdon Dev. Corp., 118 A.D.2d 769, 772, 500 N.Y.S.2d 278). The moving papers must contain evidentiary facts-as opposed to conclusions-proving the fraud (Societe Generale Alsacienne De Banque, Zurich v. Flemingdon Dev. Corp., supra; see also, Rothman v. Rogers, 221 A.D.2d 330, 633 N.Y.S.2d 361; Rosenthal v. Rochester Button Co., 148 A.D.2d 375, 376, 539 N.Y.S.2d 11). In addition to proving fraudulent intent, the plaintiff must also show probable success on the merits of the underlying action in order to obtain an order of attachment (see, CPLR 6212[a]; Societe Generale Alsacienne De Banque, Zurich v. Flemingdon Dev. Corp., supra; Computer Strategies v. Commodore Business Machs., 105 A.D.2d 167, 172, 483 N.Y.S.2d 716). “

In her request for the Order of Attachment, Lauren provided recordings of jailhouse telephone conversations between Jeff and another party which demonstrated that Jeff intended on quickly transferring his various real estate interests, seemingly to avoid a prospective judgment against him. The judge decided to issue the Order of Attachment in order to keep Jeff’s real estate in place to ensure that Lauren would have available assets from which to collect her potential judgment.

Out-of-State Property May Be Attached.

As to the Florida condominium unit jointly owned by Lauren and Jeff, the judge determined that he had jurisdiction to issue an injunction to prevent Jeff from disposing of his interest in it. While generally a New York State court has jurisdiction over only property located within the State, it can exercise jurisdiction over property in another state under certain circumstances. See, Gryphon Domestic VI, LLC v. APP International Finance Company, B.V., 41 AD3d 25 [1st Dept. 2007] (New York court can restrain transfers of property outside the state so long as it has jurisdiction over the transferor).

The defendant Was Deemed a New York Domiciliary.

Jeff made a request of the judge to dismiss the lawsuit against him, claiming that the court did not have jurisdiction over him because he was now considered a Florida resident (because he ‘resides’ in jail in Florida). This request was challenged by showing the judge that Jeff’s last residence before entering prison was New York.

In Farrell v Lautob Realty Corp., 204 AD2d 597, 598 [2d Dept 1994], the Second Department held that:

…it is long-established law in New York that a person does not involuntarily lose his domicile as a result of imprisonment. …As stated by the Court of Appeals: ” [A] patient or inmate of an institution does not gain or lose a residence or domicile, but retains the domicile he had when he entered the institution ” (Matter of Corr v Westchester County Dept. of Social Servs., 33 NY2d 111, 115).

Further, the fact that the prison is located in a different state from the defendant’s previous state of domicile is irrelevant to the above jurisdictional rule. See, Poucher v. Intercounty Appliance Corp., 336 F.Supp.2d 251, 253 (E.D.N.Y.2004) (” It is well-established that a prisoner does not acquire a new domicile when he is incarcerated in a state different from his previous domicile.”)

Notice of Attachment

The judge granted the Order of Attachment in favor of Lauren. This allowed a Notice of Attachment to be filed against each of Jeff’s properties. A Notice of Attachment is similar to a Notice of Pendency (Lis Pendens) in that it serves as notice to others that there is a pending lawsuit that may affect the ownership of real estate. Once the Order of Attachment was granted, the parties entered into a settlement agreement, where Jeff agreed to transfer to Lauren one of his buildings and his half-interest in the condominium.

Prior results do not guarantee a similar outcome.
Image at top of page: Shutterstock

R. A. Klass
Your Court Street Lawyer

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Richard A. Klass awarded General Practice Section Award

Richard A. Klass, Esq., Principal, wearing colorful tie and dark blue suit coat.

The New York State Bar Association’s General Practice Section Award is given annually, or at the discretion of the General Practice Section, to honor an individual who is outstanding, innovative, and has made significant contributions to improve the daily practice of law for general practitioners in New York State.

We are pleased to announce that Richard A. Klass, Your Court Street Lawyer, is the recipient of the 2018 General Practice Section Award. It will be presented at the General Practice Section’s Annual Meeting, on January 15, 2019.

This award recognizes a person who has contributed their time and expertise to improve the daily practice of law for general practitioners in New York State, and who has demonstrated a strong dedication to the profession. Consideration is also given for involvement in NYSBA and/or General Practice Section activities.

Past Recipients of the General Practice Section Award:

2017 – Martin Minkowitz
2016 – Robert L. Ostertag
2015 – Willard H. DaSilva
2014 – Leonard E. Sienko, Jr.

R. A. Klass
Your Court Street Lawyer

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Richard A. Klass Selected for the Fourth Time for the New York Metro Super Lawyers List

Super Lawyers logo for Richard A. Klass Selected for the Fourth Time for the New York Metro Super Lawyers List

We are pleased to announce that Richard Klass, has been selected to the 2018 New York Metro Super Lawyers list. This is an exclusive list, recognizing no more than five percent of attorneys in the New York Metro area.

Super Lawyers, part of Thomson Reuters, is a research-driven, peer influenced rating service of outstanding lawyers who have attained a high degree of peer recognition and professional achievement. Attorneys are selected from more than 70 practice areas and all firm sizes, assuring a credible and relevant annual list.

The annual selections are made using a patented multiphase process that includes:

  • Peer nominations
  • Independent research by Super Lawyers
  • Evaluations from a highly credentialed panel of attorneys

The objective of the Super Lawyers lists is to create a credible, comprehensive and diverse listing of outstanding attorneys to be used as a resource for both referring attorneys and consumers seeking legal counsel.

For more information about Super Lawyers, go to SuperLawyers.com. Super Lawyers is a registered trademark of Thomson Reuters.

R. A. Klass
Your Court Street Lawyer

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Real estate joint venture: Nothing Ventured, Nothing Gained.

Cartoon of house exploding that illustrates article by Richard Klass, Esq. about a failed real estate development joint venture agreement in New York.

Two developers were in the business of purchasing New York State real properties for purposes of building, renovation, rehabilitation and/or construction of those properties for sale, conversion into condominiums or retain as rental properties.

The developers found a Manhattan property owned by two people. The four of them decided to enter into a joint venture – the two property owners would transfer the property into a limited liability company (LLC) to be formed and the two developers would take care of constructing three single-family townhouses on the property. They entered into a joint venture agreement laying out the terms of their deal.

Joint venture agreement…

In furtherance of their joint venture, the developers laid out money for expenses, including architect and survey fees and mortgage costs. Unfortunately, the property owners failed to transfer the property into the LLC, despite the terms of their agreement to do so.

The relationship between the four joint venturers broke down. The developers decided to sue the property owners in state court. The developers hired Richard A. Klass, Esq., Your Court Street Lawyer, to file a lawsuit against the owners. The complaint alleged that the property owners committed fraud by promising to transfer the property into the LLC but failed to do so, thereby, breaching the joint venture agreement. They also alleged that a “constructive trust” should be imposed upon the property and a court declaration that the developers were equitable owners of the property. The property owners countered that the joint venture agreement contained a clause that any disputes between them were to be submitted to arbitration and that the developers should be compelled to proceed to arbitration. The developers agreed to arbitrate their claims.

Notice of Pendency

Since the property owners did not transfer the property into the LLC pursuant to the joint venture agreement, the developers needed to ensure that the owners did not sell the property out from under them to a third party. Their fear was that, without any protection, the owners could simply sell the property to someone else and not reimburse them for the moneys they laid out and their share of profits under the joint venture agreement. To protect the developers from this happening, a Notice of Pendency (also known as a Lis Pendens) was filed against the property. A Notice of Pendency is a statutory creation under New York’s Civil Practice Law and Rules Article 65. This filing gives notice to the entire world that there is a dispute which affects the title, use or possession of real property. The filing of this Notice preserves the rights of a party from an owner transferring title to the property to someone else, as whoever buys the property is deemed to have knowledge of the dispute.

Request to Cancel Notice of Pendency

The property owners made a motion before the arbitrator to cancel the Notice of Pendency based upon their claim that it was improperly filed since the developers’ interest in the LLC to be formed was an interest in “personal” property, not real property; therefore, there were no grounds to file the Notice of Pendency in the first instance.

In response, the developers argued that the filing of the Notice of Pendency was both proper and necessary to protect their property interests. The developers cited to the case holding in Nastasi v. Nastasi, 26 AD3d 32 [2 Dept. 2005], as their basis for the arbitrator to reject the property owners’ request to cancel the Notice of Pendency. In Nastasi v. Nastasi, the appellate court considered this issue, stating that “no case has been located addressing the concept of abatement in relation to the mandatory cancellation of a notice of pendency while the action has been stayed pending arbitration.”

Action Was Not “Abated” by Arbitration

Once a Notice of Pendency has been filed against real property, CPLR 6514(a) mandates cancellation of the Notice of Pendency if the action has been “settled, discontinued or abated.” The argument in Nastasi v. Nastasi was that a motion to compel arbitration and, in effect, stay the action amounts to the action being “abated.” In rejecting this argument, the court analyzed the definition of the word “abate” as meaning “to put an end to” or “to nullify.” There is a concept that an action which has abated is dead. However, in this context, the availability of a Notice of Pendency in an action stayed pending arbitration is a perceived “loophole” not intended or foreseen by the drafters of the statute; therefore, it could not be said that the action abated or ended.

After argument by the parties, the arbitrator determined that “the notice of pendency should not be cancelled merely because this matter has been sent to arbitration as the underlying action has not been abated. Finally, Claimants [developers] have sufficiently plead an interest in the subject properties as equitable owners to allow them under CPLR 6501 to sustain the notice of pendency at this time.” Therefore, the Notice of Pendency was to remain filed against the property, preserving the developers’ rights in the property until their dispute is determined through the arbitration process.

Richard A. Klass, Esq.


Richard A. Klass, Esq., maintains a law firm engaged in civil litigation at 16 Court Street, 28th Floor, Brooklyn, New York. He may be reached by phone at (718) COURT●ST or at RichKlass@courtstreetlaw.com with any questions.
Prior results do not guarantee a similar outcome.

©2018 Richard A. Klass.
Credits:
Marketing by The Innovation Works, Inc.
Image at top of page: Shutterstock

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Richard Klass Selected for New York Super Lawyers List for Third Year in a Row.

Logo for Super Lawyers, part of Thomson Reuters, a research-driven rating service of outstanding lawyers. Richard A. Klass selected to the 2017 New York Metro Super Lawyers list.

We are pleased to announce that Richard A. Klass, has been selected to the 2017 New York Metro Super Lawyers list. This is an exclusive list, recognizing no more than five percent of attorneys in the New York Metro area.

Super Lawyers, part of Thomson Reuters, is a research-driven, peer influenced rating service of outstanding lawyers who have attained a high degree of peer recognition and professional achievement. Attorneys are selected from more than 70 practice areas and all firm sizes, assuring a credible and relevant annual list.

The annual selections are made using a patented multiphase process that includes:

  • Peer nominations
  • Independent research by Super Lawyers
  • Evaluations from a highly credentialed panel of attorneys

The objective of the Super Lawyers lists is to create a credible, comprehensive and diverse listing of outstanding attorneys to be used as a resource for both referring attorneys and consumers seeking legal counsel.

Super Lawyers is a registered trademark of Thomson Reuters.

– R. A. Klass
Your Court Street Lawyer

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New book by Richard Klass!

Cover of new book by Richard Klass: Killing the “Zombies”: Recent Changes to New York State’s Foreclosure Laws

Killing the “Zombies”

Recent Changes to New York State’s Foreclosure Laws:
·   Eliminating vacant and abandoned properties
·   Streamlining foreclosure settlement conference part
·   PreForeclosure Notices
·   Getting Foreclosed Houses to Market Quicker

Free E-Book! Download it here.

39 pages/3,028 KB. PDF format.
Includes illustrations and sample forms.
by Richard A. Klass, Esq.

 

 

 

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Lawyers are men whom we hire to protect us from lawyers

Funny man with fists raised illustrating article by Richard Klass about attorney charging liens and an associate of a law firm moving to a new firm with a client or clients.

“Lawyers are men whom we hire to protect us from lawyers.”

— Elbert Hubbard, The Fra Magazine, Sept. 1911

The associate of a law firm found another opportunity and decided to leave his current firm for another. The associate contacted existing clients of his current law firm to ask if they wanted him to continue as their attorney and follow him to the new firm. A bunch of clients agreed to transfer their cases to the new law firm.

Unlike many other areas of commerce, a law firm may not impose restrictions on the right of an attorney to practice after termination from the firm, including “grabbing” clients with whom the attorney had a prior professional relationship. See, Rule of Professional Conduct 5.6.

Law firm’s right to assert charging lien

While it may be the prerogative of a client to continue with the attorney who has been handling his case, it is also the right of the law firm who employed the attorney to claim a lien on the case for legal services rendered by that law firm, including those services rendered by the attorney-employee prior to his departure. In this particular situation, the law firm retained Richard A. Klass, Your Court Street Lawyer, to assert its charging liens against the cases which the former associate took with him to his new firm.

Under New York Judiciary Law Section 475, a charging lien is a lien that attaches to any verdict, report, determination, decision, award, settlement, judgment or final order in favor of the attorney of record, if such a favorable result is ultimately achieved by him. Basically, the charging lien recognizes that the attorney has an equitable ownership interest in the case and the attorney is entitled to “collect his fee from the fund that he created for that purpose on behalf of the client.” See LMWT Realty Corp. v. Davis Agency, 85 NY2d 462 [1995].

Substitution of counsel doesn’t defeat the lien.

Despite the former associate taking a bunch of clients with him, the law firm did not lose its right to charging liens on those client’s cases. A charging lien is not lost because there is a substitution of counsel from the old firm to the new one. See, In re Burroughs & Brown, 239 AD 794 [2 Dept. 1933]. When a client discharges an attorney “without cause,” the attorney is entitled to recover compensation from the client measured by the fair and reasonable value of the services rendered. Matter of Montgomery, 272 NY 323 [1936]. That compensation may either be a fixed dollar amount determined at the time of discharge or the attorney may opt for a contingent percentage fee determined by the court (typically at the conclusion or settlement of the case). See, Lai Ling Cheng v. Modansky Leasing Co., Inc., 73 NY2d 454 [1989].

Associate is not deemed “attorney of record.”

The prior law firm filed a petition to enforce its charging lien against the potential recovery in one of the contingency cases, naming both the former client and former associate. In response to the petition, the former associate argued that he should be deemed the “attorney of record” because he was the attorney primarily responsible on the particular case, handling almost all of the work done on the case while previously employed at the law firm. He claimed that the law firm was not entitled to maintain its lien on the case.

In reply to the former associate’s argument, Richard A. Klass, Your Court Street Lawyer, urged the court to follow longstanding New York law that an associate or of-counsel is not entitled to assert his own lien because he is not the “attorney of record.” See, Edelman v. Orseck, 99 AD2d 763 [2 Dept. 1984]. The standard rule that the former associate failed to realize was that, while he was an associate, he was an employee who worked on files and matters assigned to him by his former employer. The law firm served as the ‘attorney of record’ in those matters, supported by its attorneys, associates and support staff. Indeed, all of the work and effort put into the cases by the associate while he was employed at the law firm inures to the benefit of his employer.

Associate of a law firm is not an independent contractor

In granting the law firm’s petition to enforce its charging lien, the judge held that the former associate was not an independent contractor when he works at the law firm, he was an employee. The judge specifically held that the work the associate did was not on his own account but on account of his former employer, and that whether the associate did most, if not all of the work on the case while he was employed there was irrelevant to the issue as to whether the law firm maintained its claim for services rendered.

— Richard A. Klass, Esq.

©2017 Richard A. Klass.
Credits: Photo of Richard Klass by Robert Matson, copyr. Richard A. Klass, 2015. Newsletter marketing by The Innovation Works, Inc. www.TheInnovationWorks.com. Image at top: Photo credit: Copyright: Elnur / 123RF Stock Photo

 

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Richard Klass Selected for 2016 New York Super Lawyers List

Image of Super Lawyers logo. Richard A. Klass has been selected for the 2016 New York Metro Super Lawyers List.

We are pleased to announce that Richard A. Klass, has been selected to the 2016 New York Metro Super Lawyers list. This is an exclusive list, recognizing no more than five percent of attorneys in the New York Metro area.

Super Lawyers, part of Thomson Reuters, is a research-driven, peer influenced rating service of outstanding lawyers who have attained a high degree of peer recognition and professional achievement. Attorneys are selected from more than 70 practice areas and all firm sizes, assuring a credible and relevant annual list.

The annual selections are made using a patented multiphase process that includes:

  • Peer nominations
  • Independent research by Super Lawyers
  • Evaluations from a highly credentialed panel of attorneys

The objective of the Super Lawyers lists is to create a credible, comprehensive and diverse listing of outstanding attorneys to be used as a resource for both referring attorneys and consumers seeking legal counsel.

Super Lawyers is a registered trademark of Thomson Reuters.

 

R. A. Klass
Your Court Street Lawyer

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RPAPL Section 1308 Enacted

RPAPL Section 1308

Real Property Actions and Proceedings Law (RPAPL) Section 1308 (RPAPL Section 1308) has been enacted, “Subject to bankruptcy filings, cease and desist orders, threats of violence or active loss mitigation efforts, within 90 days of a borrower’s delinquency, the servicer authorized to accept payment of the loan shall complete an exterior inspection of the subject property to determine occupancy. Thereafter, throughout the delinquency of the loan, the servicer shall conduct an exterior inspection of the property every 25-35 days at different times of day.” If the house is determined to be vacant and abandoned, the servicer has to post a notice within 7 days on an easily accessible part of the house with the servicer’s contact information. If there’s not response to the notice, then the servicer must take certain steps to secure the house, including boarding up windows and doors, taking measures concerning basic utilities on the property, and removing any harmful risks to neighboring properties. The servicer has to take reasonable and necessary actions to maintain the house until one of the following events occur: an occupant claims a right to occupy the house or the servicer has received threats of violence, the borrower files for bankruptcy, a court orders the care to cease, the property has been transferred to a new owner, the mortgage on the property has been released, or the mortgage note has been assigned, transferred or sold to another servicer.

RPAPL 1309

RPAPL 1309 allows for an expedited foreclosure process when the house is vacant and abandoned. As opposed to the normal foreclosure step of seeking the appointment of a referee to compute the amounts due to the foreclosing plaintiff on the mortgage, the plaintiff may apply to the court for a judgment of foreclosure and sale immediately after the time for the defendant/homeowner to answer has expired and is in default. Specific notices, affidavits, information concerning utilities and photographs establishing vacancy and abandonment are required to be included in the motion papers to be served upon the defendants. The court may then dispense with a referee’s computation and, instead, proceed directly to judgment based upon the calculations set forth by the plaintiff.

– Richard A. Klass, Esq.
Your Court Street Lawyer

 

R. A. Klass
Your Court Street Lawyer

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Caveat emptor: Developer should’ve taken ” Loft Law 101 “

Caution Buyer Beware: illustrating article about New York Loft Law, Caveat Emptor, special facts doctrine, Transfer of Development Rights, and temporary restraining order
He was the owner of two buildings on one lot in Greenpoint, Brooklyn. Greenpoint is an area well known for its warehouses and lofts, and is now a very desirable neighborhood for residential development. It is also well known that many tenants in commercial lofts in and around Greenpoint reside in them instead of just using them as artist studios or business spaces. One building housed the owner’s gym business and the other was a three story loft building. Along with the property itself, the Transfer of Development Rights (TDRs) were very valuable to developers, as they would allow greater development of another property. The owner negotiated the sale of the whole property for $16 million. The buyer was a sophisticated real estate developer with numerous large real estate projects who already owned other lots next to the owner’s property. He had designs to demolish the existing structures and build residential apartments on the combined properties.
The contract of sale was signed by the parties; it included various representations and warranties of both the seller/owner and buyer. The contract included a schedule of all rents, security deposits and lease expiration dates of the loft tenants, along with copies of the leases (which referred to the lofts as ‘apartments’). There was also a statement made in the contract that all of the loft leases were commercial leases.
After the contract was signed, the seller/owner directed his attorney to make crystal clear to the buyer by giving notice that most of the loft tenants were living there (despite there being commercial leases). The owner’s attorney emailed the buyer’s attorney to inform that most, if not all of the loft tenants resided in their lofts in violation of their leases and to extend to the buyer a 7-day period in which to cancel the contract and receive a full refund of his down payment. The buyer declined this opportunity to cancel the contract, opting instead to proceed with the purchase. The closing took place and the $16 million purchase price was paid to a §1031 qualified intermediary company so that the seller could purchase a replacement property as a like-kind exchange and defer capital gains taxes under the Internal Revenue Code.

Subsequent to the closing of title, the buyer/developer learned that the loft tenants had filed a loft law application with the New York City Loft Board to recognize their status as residential tenants. The implications of their attaining residential loft status would mean that the building would have to be upgraded to bring it up to the City’s residential code and the certificate of occupancy would have to be revised from commercial to residential. Obviously, the loft law application created a huge impediment to the developer’s plan to demolish the building. So, the developer decided to sue the owner for allegedly not disclosing that loft tenants were residing in the commercial units in violation of their leases. The developer claimed that he was fraudulently induced into buying the property for $16 million when it was now virtually worthless because of the loft law application and his inability to demolish the structures.

Temporary restraining order granted without notice

Simultaneously with filing his lawsuit, the developer requested that the judge immediately restrain the $16 million being held by the §1031 qualified intermediary company. He made this request without giving prior notice to the owner. In tying up the $16 million, the developer was preventing the owner from closing on his replacement property that he already went to contract to purchase and putting at risk both the down payment moneys paid for the replacement property and substantial tax liabilities. The developer relied upon an exception to the notice rule laid out in Rules of Court §202.7(f) that a party seeking a temporary restraining order (TRO) does not have to give notice to the other side of the request when there is a risk of ‘significant prejudice.’ He alleged that the $16 million would be spirited away if notice was given. After the temporary restraining order was granted, the court scheduled a date for the owner to appear and oppose the imposition of an injunction on the money throughout the pendency of the lawsuit.

No grounds for a preliminary injunction

The owner hired Richard A. KlassYour Court Street Lawyer, to ask the court to lift the restraining notice and obtain the immediate release of his $16 million. The owner argued that there were no grounds for the court to grant the developer a preliminary injunction. CPLR 6301 requires a party seeking an injunction to show (1) a likelihood of success on the merits; (2) irreparable injury in the absence of the injunction; and (3) a balancing of the equities in its favor. Courts realize what a drastic remedy an injunction is and, therefore, require a demonstrated clear right to the relief based upon undisputed facts; where the facts are sharply in dispute, an injunction will not issue. See, Sumiko Enterprises, Inc. v. Town Realty Co. LLC, 259 AD2d 483 [2 Dept. 1999]. Here, the facts were very much in dispute – the owner alleged that the developer was fully aware from the time he negotiated the deal through the closing that tenants were residing in the commercial lofts in violation of their leases.

Caveat Emptor – Buyer Beware!

This well-known expression means that the law does not impose any duty on the seller to disclose information concerning a purchase when the contracting parties deal at arm’s length with each other unless there is some conduct on the part of the seller which constitutes active concealment. See, Platzman v. Morris, 283 AD2d 561 [2 Dept. 2001]. The doctrine of caveat emptor applies to real estate transactions, where the buyer has the duty to satisfy himself as to the quality of his bargain. London v. Courduff, 141 AD2d 803 [2 Dept. 1988]. In the context of real estate transactions, a claim of fraudulent misrepresentation or inducement must be analyzed within the doctrine of caveat emptorMandarin Trading Ltd. v. Wildenstein, 16 NY3d 173 [2011]. The owner urged that he owed no duty to the developer concerning the loft tenants; and he did not actively conceal the fact they were living there. Rather, it was argued that the developer utterly failed to perform any due diligence before making the purchase. Indeed, the owner suggested that a couple buying a single family home did more to look into their purchase than the developer did. Shockingly, the developer claimed that he did not even walk through the whole building, order a building inspection or even an appraisal, and a visual view of the building plainly showed what looked like an apartment building.

Sophisticated developer did not exercise due diligence

The owner contended that the real estate developer did absolutely no due diligence before plunking down $16 million in cash, including claiming that: the developer claimed he did not walk through a single loft unit; the developer did not obtain any building appraisals; the building looks like an apartment building with lots of windows; the owner told him that commercial tenants were living there; the real estate broker knew tenants were living in the building; the leases referred to “apartments;” the owner’s real estate attorney emailed the developer’s attorney to notify that tenants were living there and gave the developer a 7-day right to cancel the contract; the developer requested from the owner authorizations to review the records of the NYS Homes and Community Renewal and NYC Loft Board; and the contract of sale permitted the developer to enter the premises to inspect.
There is a principle that a sophisticated party has the “duty to exercise ordinary diligence and conduct an independent appraisal of the risks [he is] assuming.” Abrahami v. UPC Constr. Co., Inc., 224 AD2d 231, 234 [1 Dept. 1996]. Accordingly, a sophisticated party cannot claim it justifiably relied on alleged misrepresentations if that party failed to make use of available means of verification that would have likely disclosed the risk. See, Lampert v. Mahoney, Cohen & Co., 218 AD2d 580 [1 Dept. 1995]. The owner asserted that the developer should be held to the sophisticated party standard. (Indeed, the judge later found that the developer was a “sophisticated party well-versed in the purchase of multi-million dollar properties.”)
Moreover, the owner asserted that the special facts doctrine did not apply to this case. The special facts doctrine requires the satisfaction of a two-pronged test: that the material fact was information peculiarly within the knowledge of one party and that the information was not such that could have been discovered by the other party through the exercise of ordinary intelligence. Black v. Chittenden, 69 NY2d 665 [1986]. By the developer not taking an appraisal or walking through the loft units, the owner suggested to the court that the developer “never even bothered to ‘kick the tires’ of the property.”

Contractual Disclaimers

Aside from the back-and-forth allegations as to whether the developer knew loft tenants lived in the building, the contract of sale contained very specific disclaimers which could bar any action. New York contract law provides that, where a contract of sale contains a provision that the plaintiff is fully aware of the condition of the premises based upon its own inspection and is not relying upon any representations of the seller, any subsequent action for fraud is barred. See, Daly v. Kochanowicz, 67 AD3d 78 [2 Dept. 2009]. In this contract of sale were various provisions, including representations that:
  • Purchaser inspected the premises, is fully familiar with its condition and is accepting it in “as is” condition;
  • Purchaser examined the operations of the premises and is not relying upon any warranties or statements of the seller not expressly set forth in the contract;
  • Seller does not warrant that any particular lease or tenancy will be in force and effect at the closing or that the tenants will have performed their obligations thereunder;
  • Purchaser had the right to access the property to conduct inspections, investigations and studies prior to closing;
  • The contract constituted the entire understanding of the parties and any prior agreements or statements merged into the contract – the so-called “Merger Clause;” and
  • Seller made no representations or warranties as to the suitability of the premises for Purchaser’s intended use.
Courts have held that specific disclaimers in contracts of sale, which are not just ‘generalized boilerplate exclusions’ and which cover the subject matter of the alleged misrepresentation with sufficient specificity bar fraud claims. See, HSH Nordbank AG v. UBS AG, 95 AD3d 185 [1 Dept. 2012]; Danann Realty Corp. v. Harris, 5 NY2d 317 [1959] (The court actually held that not enforcing the specific disclaimer clause would be tantamount to condoning the fraudulent statement of a purchaser that he was not relying on anything else except the contract representations themselves).

Vacating Temporary Restraining Order and Denying Injunction

In granting the owner’s motion to vacate the temporary restraining order and deny the developer the injunction, the judge found that the developer’s “decision to rely on [the owner’s] statements in lieu of inspecting the tenants’ units to verify the ‘real quality’ of defendant’s representation that the tenants and leases were ‘commercial’ shows a lack of due diligence.” The developer could not show that he would be irreparably harmed if money damages could be awarded; merely claiming an increased difficulty in enforcing a possible judgment is not enough to show irreparable harm. In balancing the equities of the situation, the party seeking the injunction must show that the burden caused to a defendant by the imposition of an injunction is less than the harm caused to the plaintiff by the defendant’s activities. See, Edgeworth Food Corp. v. Stephenson, 53 AD2d 588 [1 Dept. 1976]. In this case, the owner has placed all $16 million into a §1031 Like-Kind Exchange with a replacement property; he would have lost his entire down payment if he didn’t timely close and would have also suffered severe tax liabilities on the proceeds from the sale of the Greenpoint property.
– Richard A. Klass, Esq.
Richard A. Klass, Esq., maintains a law firm engaged in civil litigation at 16 Court Street, 28th Floor, Brooklyn Heights, New York. He may be reached by phone at (718) COURT-ST or e-mail at RichKlass@courtstreetlaw.com with any questions. Prior results do not guarantee a similar outcome.