The opinion of the court was delivered by: MARY JOHNSON LOWE
Before this Court is the summary judgment motion filed October 16, 1992 by plaintiff 305 East 40th Garage Corp. ("305 Garage"). Also before the Court is the partial summary judgment motion filed October 16, 1992 by defendant 305 East 40th Owners Corp. ("305 Owners"). For the reasons stated below, 305 Garage's motion for summary judgment is denied, and 305 Owners' motion for partial summary judgment on the issues of timeliness of termination, constitutionality of 15 U.S.C. § 3607, and estoppel is granted.
The facts pertaining to the present motions for summary judgment are uncontested. The property at 305 East 40th Street ("the Property") comprises residential apartments, commercial space, laundry facilities, common areas for tenants' use, and a parking garage. On January 6, 1983, the Property was converted from rental apartments to cooperative ("co-op") ownership pursuant to a non-eviction
offering plan ("the Plan") sponsored by the developer Parman Co. ("Parman"). 305 Owners became the owner and operator upon closing. As is typical in such conversion plans, 305 Owners was controlled by Parman at the time of closing, although by August 19, 1983, Parman no longer controlled a majority of the seven-member board of directors of 305 Owners.
The Plan provided for the disposition of ownership shares that were unsold at the time of closing. Unsold shares were to be purchased by individual holders produced by Parman and whose obligations were guaranteed by Parman. Two such individuals ("the Holders") purchased the shares unsold on the closing date. About one month after closing, the Holders owned approximately 87,000 shares out of a total of 222,015 shares.
Regarding the substance of the rights, the proprietary lease gives the Holders a veto power over the board of directors of 305 Owners with respect to the following decisions:
1. Whether to hire additional employees or provide services and equipment, beyond those specified in the Plan or required by law;
2. Whether to increase 305 Owners' mortgage indebtedness, alter the terms of the mortgage, enter any new mortgage or any contract to sell or lease the Property; and
3. Whether to increase reserves beyond the provision of the Plan (except for annual carry-over amounts).
The by-laws match these veto powers, and contain three additional powers. First, the Holders are given the additional power to veto capital improvements to the property. Second, the Holders are given the additional power to veto decisions to lease portions of the property, with the exception of proprietary leases and, in the event of default by the garage tenant, the garage lease. Third, the Holders are given the additional power to veto amendments to the by-laws. A different durational limit is attached to the last of these powers; by-laws amendments can be vetoed as long as the Holders own any shares.
The Plan, in the form it took at closing, provided that 305 Owners would lease the parking garage at the Property to Parman's affiliate, 305 Garage, for fifteen years with an option to renew for two additional five year periods. On June 24, 1988, 305 Owners delivered to 305 Garage a notice of termination of the garage lease pursuant to the Condominium and Cooperative Conversion Protection and Abuse Relief Act of 1980 ("the Act"), 15 U.S.C. § 3601-16.
305 Garage brought this action on August 31, 1988, seeking a declaratory judgment that 305 Owners' purported termination of the garage lease was null and void, and injunctive relief against any further attempt to terminate the lease under the Act. Cross-motions for summary judgment were filed on October 16, 1992. 305 Garage moves for summary judgment on the grounds that 305 Owners' purported termination was not timely under § 3607(b)(1) and that § 3607 violates the Due Process Clause of the Fifth Amendment to the United States Constitution. 305 Owners moves for partial summary judgment dismissing so much of the complaint as seeks declarations that the purported termination was untimely, that the Act is unconstitutional, and that the right to terminate the garage lease was waived by 305 Owners' execution of an estoppel certificate. The motions thus raise common issues except for the estoppel issue raised by 305 Owners.
A court may grant summary judgment only when it is clear that no genuine issue of material fact remains to be resolved at trial and the movant is entitled to judgment as a matter of law. Fed. R. Civ. P. 56; Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250, 91 L. Ed. 2d 202, 106 S. Ct. 2505 (1986). The parties agree that certain potentially dispositive legal issues are ready for decision at this stage of the case.
Section 3607 of the Act enables a co-op association (such as 305 Owners) to terminate self-dealing contracts that were made while the association was controlled by a developer (such as Parman). Self-dealing contracts are implicitly defined in the statute as including those between the association and an affiliate of the developer, entered while the association was controlled by the developer, lasting more than three years, and providing for the operation, maintenance or management of the association or of property serving the co-op owners.
The parties do not dispute that the garage lease fits these requirements and therefore is a self-dealing contract within the terms of § 3607. The parties do dispute whether the purported termination was timely, whether the Act is constitutional, and whether an estoppel should be found.
305 Garage contends that the purported termination of its lease was not timely within the terms of the Act. Section 3607(b) states:
(b) Any termination under this section may occur only during the two-year period beginning on the date on which--
(1) special developer control over the association is terminated; or
(2) the developer owns 25 per centum or less of the units in the conversion project,
whichever occurs ...