Adam Leitman Bailey, P.C. Received a Rare Injunction Stopping the Foreclosure Auction, Forcing the Sponsor to Abide by the Settlement Agreement Ensuring Millions Paid, and Both Condominium Unit and Numerous Parking Spaces at No Charge
In 2018, Adam Leitman Bailey, P.C. was retained by a group of unit owners at a new construction condominium in Williamsburg, Brooklyn. The new building was advertised as a luxury condominium, and encompassed an entire block, with over 200 units consisting of one to three-bedroom units, duplexes, lofts, penthouses, and townhomes.
On paper, the building sounded like paradise. In reality, however, the building was plagued with construction defects and shoddy workmanship from the start. Shortly after moving in, residents quickly discovered a myriad of issues including leaks from ceilings, windows, and terrace doors, excessive air at windows and doors, noxious smells permeating from unit to unit, and significant deviations in the quality of finishes and amenities from what was promised in the offering plan.
Through constant advocacy and tireless work, calls, emails, meetings, etc., over a four-year period, Adam Leitman Bailey, P.C. was ultimately able to secure a landmark settlement for the condominium. The Sponsor agreed to pay millions of dollars to the condominium, sufficient to cover all of the remediation of all of the construction defects at the building. In addition, the offering plan required that the board purchase the Resident Manager Unit and five handicapped parking spaces from the sponsor for a total cost of over $1 million. Adam Leitman Bailey, P.C. was also able to negotiate the Sponsor handing over the Resident Manager Unit and five handicapped parking spaces (the “RMU” and the “Parking Spaces”) to the board free of charge. And lastly, the Sponsor agreed to turn over control of the Board to the residents ahead of schedule.
However, the Sponsor breached the settlement agreement and failed to timely close on the transfer of the RMU and Parking Spaces. After diligent investigation work, Adam Leitman Bailey, P.C. discovered that the Sponsor’s breach was caused by its default under the loan agreement with its construction lender for the project.
Specifically, the Sponsor pledged all of the units owned by the Sponsor and its membership interests as collateral for the loan it obtained to construct the building. The Sponsor was served with a Notice of Disposition of Collateral, advising that the Sponsor’s lender intended to sell the membership interests of the Sponsor at a public sale pursuant to the Uniform Commercial Code. In its advertisements of the sale, the lender represented that the Sponsor’s assets were luxury condominium units at the Condominium and parking spaces, including the RMU and the Parking Spaces promised to the Board as part of the settlement agreement.
The Sponsor maintained that it could not complete the transfer of the RMU and Parking Spaces to the Board as a result of its default under the terms of the loan agreement because the Lender would not release the RMU from its collateral under the loan agreement. This put the Board in a very precarious position: without the partial release of the mortgage for the RMU, the RMU would remain subject to foreclosure by the Lender, even if it was transferred to the Board.
Adam Leitman Bailey, P.C. went right back to work. Using their expertise in title litigation, the law governing condominiums, foreclosures, and the sale of assets under the Uniform Commercial Code, a team of attorneys at Adam Leitman Bailey, P.C. prepared a bullet-proof Order to Show Cause, with a request for a temporary restraining order and preliminary injunction, seeking a stay of the UCC sale and requiring that any terms of sale include that the RMU and the Parking Spaces were required to be sold to the Board. The Board asserted a claim that any purchaser of the membership interests of the Sponsor would “step into the shoes” of the Sponsor and be obligated to fulfill the Sponsor’s obligation under the settlement agreement. And, if the sale of the membership assets of the Sponsor satisfied the amounts due and owing to the lender, the lender could no longer seek to foreclose upon the RMU and the Parking Spaces.
The papers argued that the Board satisfied all of the requirements for a preliminary injunction and temporary restraining order: (1) a likelihood of success on the merits; (2) irreparable harm; and (3) the equities weigh in favor of the Board. Adam Leitman Bailey, P.C. demonstrated a clear likelihood of success on the merits of its claims. Citing case law directly, the Board argued that a transfer of ownership of a limited liability company does not affect the rights and obligations of that entity, and as such, it was likely to succeed on its claim that any purchaser would be required to honor the Sponsor’s agreement to sell the RMU and the Parking Spaces to the Board.
There was also no question that the Board would be irreparably harmed without the requested injunctive relief. The Board pointed out that it is essential that the Board have the RMU to comply with New York City law requiring a resident janitor under New York City Administrative Code §27-2054. The Board could not risk that a purchaser of the membership interests of the Sponsor could claim status as a bona fide purchaser without notice of the Board’s claims to the RMU, thus depriving Plaintiff of its ability to comply with the law. And for this reason, too, the equities favored the Board.
The Court agreed with Adam Leitman Bailey, P.C., and issued an order, stating the UCC sale of the membership interests of the Sponsor pending a determination of the Board’s claims. This pressure created by Adam Leitman Bailey, P.C. forced the Lender to agree to release the RMU and Parking Spaces from its collateral in exchange for the Board’s withdrawal of its request to stay the sale.
The parties then successfully closed on the transfer of the RMU and the Parking Spaces. And now, the Board owns both the RMU and the Parking spaces, free and clear of all liens and encumbrances.
Our clients’ years-long battle with the Sponsor was hard-fought and encountered many obstacles throughout the way. However, through the persistence and ingenuity of the attorneys at Adam Leitman Bailey, P.C., justice for the residents of the building was finally achieved.
Adam Leitman Bailey, Dov Treiman, Jeffrey R. Metz, Rachel Sigmund McGinley, and Courtney J. Lerias represented the client in this matter.
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