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Northridge Cooperative Section No. 1 v. 32nd Avenue Construction Corporation

Supreme Court of New York, Appellate Division

June 28, 1955

Northridge Cooperative Section No. 1
v.
32nd Avenue Construction Corporation

Page 423

[Copyrighted Material Omitted]

Page 424

[142 N.Y.S.2d 536] Paul W. Williams, New York City, of counsel (David Morgulas, New York City, and Irwin Schneiderman, Brooklyn, with him on the brief, Cahill, Gordon, Reindel & Ohl and M. Carl Levine, Morgulas & Foreman, New York City, attorneys), for appellants.

Bernard Buchwald, New York City, of counsel (Bernard Nadel, Maxwell H. Tretter, Edmund B. Hennefeld and Irving Margolies, New York City, with him on the brief, Hoffman, Buchwald & Hoffman and Maxwell H. Tretter, New York City, attorneys), for respondent.

Before PECK, P. J., and COHN, CALLAHAN, and RABIN, JJ.

CALLAHAN, Justice.

This is an appeal involving the sufficiency of a complaint. The pleading may be summarized as follows:

[142 N.Y.S.2d 537] In December 1950, the defendants-appellants Winston and Muss promoted a project to construct a co-operative apartment house in the borough of Queens, city of New York. They caused plaintiff to be incorporated as a co-operative corporation under the laws of New York and arranged for a mortgage loan by a bank, which applied to the Federal Housing Administration for insurance of the mortgage under section 213 of the National Housing Act of 1950, 12 U.S.C.A. § 1715e. The building was to be constructed on land leased to plaintiff by defendant E & M Greenway, Inc., for 99 years at a net ground rent of $9,440 a year. It was to be erected by the defendant-appellant 32nd Avenue Construction Corp. for a sum represented by the aggregate of the amounts to be paid by tenants for their apartments, plus the mortgage loan in the sum of $3,091,200. The prices to be paid for the apartments by the tenants and the schedule of carrying charges were approved by the Federal Housing Administrator. Defendants-appellants Winston and Muss, the promoters, controlled all three of the corporations aforesaid, viz., the plaintiff-owner, the defendant-appellant 32nd Avenue Construction Corp. and defendant E & M Greenway, Inc., which was the landlord under the ground lease.

After the application for mortgage insurance was approved by the Federal authorities, and beginning late in December 1950, the stock of plaintiff was placed on the market and sold to tenants, who signed subscription agreements to become effective when 90% of the apartments were sold. These subscription agreements, among other things, stated that the tenants had

Page 425

exhibited to them and had read the ground lease and the construction contract.

After completion of the building and the making of payments under their subscriptions, the tenants took over control of plaintiff. It now brings this action against the promoters and numerous other defendants, who were agents of the promoters and involved in fostering the project.

The complaint contains three causes of action. The first is a complicated pleading that alleges numerous acts of misconduct by the individual defendants-appellants Winston and Muss. They are charged with dominating and controlling the other defendants, among whom are included the directors and officers of plaintiff at the time the ground lease and the building contract were entered into. The lease is attacked as calling for excessive ground rent. The defendant-appellant 32nd Avenue Construction Corp., and Winston and Muss who controlled the company, are charged with exacting an excessive price for erecting the building. Various corporate defendants are named as having been used as instrumentalities by Winston and Muss in accomplishing these ends, and various individual defendants are joined who were the directors of the said corporation.

[142 N.Y.S.2d 538] The second cause of action is for breach of contract against defendant 92nd Street Building Corp. as assignee of the construction contract. The sufficiency of this cause of action is not presently questioned.

The third cause of action is on a performance bond given by the said defendant 92nd Street Building Corp. and defendants-appellants Winston and Muss.

The defendants-appellants moved at Special Term to dismiss the complaint for insufficiency, to strike various portions of the first cause of action as sham, etc., and for other forms of relief. Under one or more branches of the motion, affidavits were submitted showing the facts in connection with the subscriptions by tenants. All branches of these motions were denied. Some of the grounds of attack raised below are not pressed on this appeal. However, the motions to dismiss and strike portions of the complaint as sham are before us.

The first question to be considered is how far plaintiff, the co-operative corporation, has the legal right to attack the alleged excessiveness of rent under the ground lease and the excessiveness of costs under the construction contract.

In testing the sufficiency of the complaint in these regards, we must determine the legal duty owed to plaintiff company by its officers and directors before the issuance of stock to the

Page 426

tenants, and what right accrued to plaintiff as distinguished from those accruing to the subscribers for its stock. For the purposes of this appeal, we will assume that the tenants became the owners of plaintiff's stock upon the respective dates when they signed their subscription agreements, though, in fact, their stock was not issued until much later. The tenants subscribed on different dates, all after the construction contract was formulated and the commitment for the mortgage made. Up to the time the project was approved as to mortgage insurance, the stock of plaintiff was owned or controlled by the individual defendants-appellants as promoters of the project or by their nominees. They also owned the property contributed.

A persual of section 213 of the National Housing Act and the regulations issued thereunder discloses that the law, while it relates principally to the insurance of mortgages by the federal agency, contemplates a method for the promotion of the construction of co-operative housing units by private sponsors. This is to be done by the presentation of plans to the Federal agency by way of applications by mortgagees for insurance of projected mortgage loans on housing to be built. These steps involved submission of full details of the projected housing development, including the cost of land (or lease) and building construction, and, in addition, a schedule of proposed subscription prices and carrying charges to be ...


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