LAW-50-11-00002-P Determining When Funds Escrowed in Connection With the Offer or Sale of Cooperative Interests in Realty May be Released

12/14/11 N.Y. St. Reg. LAW-50-11-00002-P

NEW YORK STATE REGISTER

VOLUME XXXIII, ISSUE 50

December 14, 2011

RULE MAKING ACTIVITIES

DEPARTMENT OF LAW

PROPOSED RULE MAKING

NO HEARING(S) SCHEDULED

 

I.D No. LAW-50-11-00002-P

Determining When Funds Escrowed in Connection With the Offer or Sale of Cooperative Interests in Realty May be Released

PURSUANT TO THE PROVISIONS OF THE State Administrative Procedure Act, NOTICE is hereby given of the following proposed rule:

Proposed Action:

Amendment of sections 18.3, 20.3, 21.3, 22.3, 23.3, 24.3 and 25.3 of Title 13 NYCRR.

Statutory authority:

General Business Law, sections 352-e(2)(b) and (6)

Subject:

Determining when funds escrowed in connection with the offer or sale of cooperative interests in realty may be released.

Purpose:

Elimination of the Attorney General's role in adjudicating such disputes.

Substance of proposed rule (Full text is posted at the following State website: http://www.ag.ny.gov/bureaus/ real_estate_finance/rulemaking.html):

The proposed amendments eliminate the Attorney General’s role in adjudicating contractual disputes between sponsors of cooperatives, condominiums, homeowners’ associations, timeshares, and senior residential communities and contract vendees, thereby leaving such matters to be adjudicated in court, as is done in the case of analogous disputes concerning contracts to purchase private homes and transactions between non-sponsor sellers and purchasers.

Text of proposed rule and any required statements and analyses may be obtained from:

Lewis A. Polishook, Chief Counsel for Real Estate Finance, New York State Department of Law, 120 Broadway, New York, NY 10271, [phone], email: [e-mail]

Data, views or arguments may be submitted to:

Same as above.

Public comment will be received until:

45 days after publication of this notice.

Regulatory Impact Statement

1. Statutory Authority. New York General Business Law ("GBL") Section 352-e(6) authorizes the Attorney General to adopt, promulgate, amend, and rescind suitable rules and regulations to carry out the legislative mandates of Section 352-e of the General Business Law. GBL § 352-e(2-b) further authorizes the Attorney General to "adopt, promulgate, amend and rescind suitable rules and regulations to carry out the provisions of this subdivision, including, but not limited to, determining when escrow funds may be released."

2. Legislative Objectives. GBL 352-e requires that, "[i]n the case of offerings of cooperatives, condominiums, interest in homeowners association and other cooperative interests in realty, . . . the attorney general may refuse to issue a letter of acceptance unless the offering statement, prospectus or plan shall provide that all deposits, down payments or advances made by purchasers of residential units shall be held in a special escrow account" or other appropriate form of security "pending delivery of the completed apartment or unit and a deed or lease whichever is applicable." The Attorney General has promulgated detailed regulations, codified at 13 NYCRR §§ 18.3(p), 20.3(o)(3), 21.3(l), 22.3(k), 23.3(q), and 24.3(m) concerning escrow accounts or other suitable substitutes. Although the statute authorizes the Attorney General to issue regulations concerning "when escrow funds may be released," it does not direct the Attorney General to be the arbiter of such disputes.

3. Needs and Benefits. In 1992, the Attorney General amended Title 13, Parts 18, 20, 21, 22, 23, and 24 to require sponsors, and permit purchasers and escrow agents, to apply to the Attorney General for a determination on the disposition of a down payment and any interest earned thereon in connection with the purchase of residential units. At the time, the vast majority of offering plans involved the conversion of tenanted buildings from rental to cooperative or condominium ownership. The escrow deposits in such offerings were generally for small sums, and disputes over the release of these funds generally involved the question of whether the sponsor had complied with the requirements set forth in the procedure to purchase section of the offering plan. Primarily, those disputes involved procedural requirements such as whether the sponsor gave proper notification that the funds had been deposited into escrow, adequately noticed the closing date, or properly demanded payment.

In recent years, however, the down payment disputes submitted to the Attorney General have both broadened in their scope and multiplied in number. In particular, the individualized and fact-specific nature of these disputes has required the expenditure of significant resources in areas not exclusively within the province of the Attorney General's jurisdiction. For example, purchasers submitting disputes often contend that the units as constructed materially deviate from representations in the offering plan or are defective in ways not apparent without review by an engineer. Other disputes raise contested factual issues as to representations sponsors or selling agents allegedly made to purchasers and whether the unit was in fact ready for occupancy. Some disputes concern compliance with statutes over which the Attorney General has no jurisdiction, such as the federal Interstate Land Sales Full Disclosure Act and the Building Code of the City of New York. Furthermore, the submitted disputes more often than not involve deposits of hundreds of thousands, and sometimes millions of dollars, with the purchasers being persons of substantial means. The severe downturn in the real estate market in 2008 accelerated the volume of disputes submitted to the Attorney General from 15 disputes in 2005 to a high of 473 in 2009.

Unlike the limited scope of disputes envisioned by the 1992 regulation, most of the down payment disputes involving cooperatives, condominiums, interests in homeowners' associations, timeshares, and senior residential communities that have been submitted to the Attorney General in recent years involve fact-specific issues similar to those regularly addressed as part of an adversarial process in courts of law. The Attorney General believes that such disputes more appropriately should be addressed by the court system, which has the capacity and procedures necessary for conducting evidentiary hearings that traditionally form the core of the judicial system.

Over the years, escalating real estate prices have obviated another intended purpose of the 1992 regulation: Providing a means of legal redress for purchasers and sellers who, because of personal economic circumstances or the amount in controversy, would not have ready access to legal representation or judicial relief. The Attorney General notes in this regard that the cost of purchasing cooperatives, condominiums and interests in homeowners' associations is comparable to and often higher than the cost of purchasing private homes. Contracts for the purchase and sale of private homes typically require that the parties or escrow agent seek a judicial or arbitral determination as to the entitlement to escrowed funds. The Attorney General's proposed regulations would leave purchasers and sellers of cooperatives, condominiums, interests in homeowners' associations, timeshares, and interests in senior residential communities similarly situated to purchasers and sellers of private homes - a result congruous with their similar costs.

The proposed regulations will also apply to existing offering plans and purchase agreements, all of which currently provide that in case of a dispute the escrow agent will hold the escrowed funds pending a joint written direction by the parties, a judicial order, or a determination by the Attorney General. Notwithstanding the reference to determinations by the Attorney General in such existing plans or agreements, the Attorney General will no longer make such determinations on applications submitted after this regulation takes effect and will issue further guidance via policy memorandum as to the amendment of such existing plans.

4. Costs. The proposed regulations impose no additional costs to either the regulated parties or local and state governments. Purchasers and sellers might incur increased filing and attorneys' fees in connection with participating in court proceedings. However, the Attorney General notes that retaining counsel in connection with the submission of applications for the disposition of down payments is costly, and, under the current system, the losing party may still pursue judicial review of such determinations pursuant to Article 78 of the New York Civil Practice Law and Rules ("Article 78"), which adds to the cost of the dispute determination process. As a result of this change, the courts may experience a slight increase in case load as a result of disputes being filed in court rather than before the Attorney General. Again, however, some of these matters are already brought in court as petitions for review pursuant to Article 78.

The adoption of the rule will impose no additional costs on the Department of Law.

5. Local Government Mandates. The proposed regulations do not impose any programs, services, duties or responsibilities on any county, city, town, village, school district, fire district or other special district. However, local courts may experience a minimal increase in the number of cases filed as a result of the proposed regulations.

6. Paperwork. There are no additional reporting or paperwork requirements as a result of the proposed regulations.

7. Duplication. The proposed regulations will not duplicate any existing state or federal rule.

8. Alternatives. The Attorney General has considered alternatives, including preserving the existing regulation or limiting the dispute resolution function to cases that fall below a jurisdictional maximum dollar amount. As the accompanying reasons underlying the Attorney General's finding of necessity make clear, the Attorney General believes that maintenance of the status quo is unnecessary for disputes involving more expensive properties. Moreover, the vast majority of disputes concerning cooperative interests in realty submitted to the Attorney General in recent years are more amenable to resolution in a judicial forum, because of the nature of the issues, the amounts in controversy, and the fact that the parties in most of the disputes currently before the Department of Law are ordinarily represented by counsel highly capable of litigating the matter in court as part of the adversarial process.

The Attorney General also considered and rejected preserving the dispute resolution function for disputes involving sums that fall under a jurisdictional maximum dollar amount. The Attorney General rejected that possibility for two reasons. First, any jurisdictional limit would be arbitrary, especially given the different percentages of the total purchase price required as a deposit in different contracts. For example, a $100,000 deposit could represent either 10 percent of the purchase price of a million-dollar unit or 25 percent of the purchase price of a $400,000 unit. Although the sum in dispute is the same, the purchasers of those two units are not similarly situated. Second, the Attorney General believes that dispute resolution for transactions concerning the sale and purchase of private homes or transactions between non-sponsor sellers of cooperatives, condominiums, homeowners' associations, timeshares, and interests in senior residential communities are currently resolved in the courts regardless of amount in dispute, and that those fora provide a reasonably efficient system for dispute resolution. Third, courts have the capacity and procedures necessary for conducting evidentiary hearings that traditionally form the core of the judicial system. Finally, for very small sums, the courts of limited jurisdiction are available for ease of access and lower cost.

Finally, the Attorney General considered applying the proposed regulations retroactively to all pending applications. However, the Attorney General has determined that because the parties to such disputes have already expended significant time and effort in presenting their positions to the Attorney General, it would not be appropriate to require those parties to start anew in litigation. Accordingly, the proposed regulations will apply only to disputes submitted after the regulations become effective.

9. Federal Standards. The proposed regulations do not exceed any minimum standards of the federal government for the same or similar subject.

10. Compliance Schedule. The proposed regulations will go into effect upon the publication of a Notice of Adoption in the New York State Register.

Regulatory Flexibility Analysis

1. Effect of rule. The proposed regulations change the forum for resolving disputes concerning the disposition of down payments, and do not impact the factual or legal determinations that may be made in those disputes. Parties are already spending substantial sums for attorney representation in connection with disputes concerning the disposition of down payments that have been submitted to the Attorney General for determination. Certain attorneys have represented multiple purchasers before the Attorney General, and may now bring these disputes on behalf of their clients in a court of law. Local governments will not be affected in any way. However, local courts may experience a minimal increase in case loads.

2. Compliance requirements. The proposed regulations simply change the forum for certain dispute determinations from the Department of Law to a court of law. They require no new obligations in terms of reporting or record keeping.

3. Professional services. When submitting or opposing an application for a determination, almost all sponsors (even the smallest sponsoring entities) and most purchasers have retained attorneys to prepare the required submission and responses thereto. The proposed regulations, which change the designated forum from the Department of Law to a court of law, should require no material additional professional services.

4. Compliance costs. Sponsors and purchasers may incur some additional costs, such as filing fees and attorneys' fees for court appearances. As a result of this change, the courts may experience a slight increase in case load as a result of disputes being filed in court rather than before the Attorney General. Again, however, some of these matters are already brought in court as petitions for review pursuant to Article 78.

5. Economic and technological feasibility. The proposed regulations contain no technological requirements and impose no new demonstrable costs on regulated small businesses.

6. Minimizing adverse impact. The change in regulation should have minimal impact. Purchasers and sellers may still seek neutral adjudication of their disputes, albeit in a different forum. To further minimize the impact of the instant regulatory change, the amendment will not affect applications submitted to the Attorney General before the Attorney General proposed the instant amendments.

7. Small business and local government participation. To ensure that small businesses have an opportunity to participate in the rule making process, copies of the proposed regulations will be sent to members of the Bar who represent purchasers and offerors of cooperatives, condominiums, interests in homeowners' associations, timeshares, or interests in senior residential communities for review and comment. Copies of the proposed regulations will also be posted on the website of the Attorney General of the State of New York. Local courts may experience a minimal increase in the number of cases filed as a result of the proposed regulations.

Rural Area Flexibility Analysis

1. Types and estimated numbers of rural areas. The proposed regulations apply uniformly throughout the state, including all rural areas. Executive Law, Article 19-F Rural Affairs Act, Section 481(7) defines a rural area as a county with a population of less than 200,000. New York currently has 44 rural areas. However, because the vast majority of the offering plans submitted to the Attorney General that are affected by the proposed regulations are for properties in New York City and its suburbs, the impact of the regulations on both rural sponsors and rural purchasers should be minimal.

2. Reporting, recordkeeping, and other compliance requirements. The proposed regulations simply change the forum for dispute determination in connection with the sale of many cooperatives, condominiums, interests in homeowners' associations, timeshares, or senior residential communities from the Department of Law to a court of law. They do not require new obligations in terms of reporting or record keeping.

3. Costs. Because rural sponsors do not frequently avail themselves of the Attorney General's dispute determination procedures, there should be minimal additional costs incurred by regulated parties, including those located in rural areas, in complying with the proposed regulations. There will be no variation in costs for entities in rural areas. However, the courts, including those located in rural areas, may experience a minimal increase in case load as a result of disputes being filed in court rather than before the Attorney General.

4. Minimizing adverse impact. The change in regulation should have minimal impact, especially on rural areas, as the Attorney General has received virtually no applications for adjudication of disputes concerning cooperatives, condominiums, homeowners' associations, timeshares, or senior residential communities located in rural areas. Moreover, purchasers and sellers may still seek neutral adjudication of their disputes, albeit in a different forum. To further minimize the impact of the instant regulatory change, the amendment will not affect applications submitted to the Attorney General before the Attorney General proposed the instant amendments.

5. Rural area participation. To ensure that entities in rural areas have an opportunity to participate in the rule making process, copies of the proposed regulations will be sent to members of the Bar who represent sponsors of condominiums, cooperatives, homeowners' associations, timeshares, and senior residential communities for review and comment. Copies of the proposed rules will also be posted on the website of the Attorney General of the State of New York.

Job Impact Statement

1. Nature of impact. The proposed regulations will have no impact on jobs and employment opportunities. The only tangential effect on employment will be that attorneys who formerly submitted applications to the Attorney General will now file such matters as lawsuits in court.

2. Categories and numbers affected. Attorneys will be affected by the proposed amendments in terms of where they file matters but there should be no impact on the employment of attorneys; it is impossible to estimate the number of attorneys that might submit such disputes to the Attorney General or file them in court.

3. Regions of adverse impact. The proposed amendments will have no adverse impact on any region. The Attorney General notes that the vast majority of disputes submitted in the past concern condominiums and homeowners' associations located in New York City.

4. Minimizing adverse impact. The proposed amendments should have minimal impact. Purchasers and sellers may still seek neutral adjudication of their disputes, albeit in a different forum. To further minimize the impact of the instant regulatory change, the amendments will not affect applications submitted to the Attorney General before the Attorney General proposed the instant amendments.

5. Self employment opportunities. As noted above, the proposed amendments will affect the practice, but not the employment, of attorneys, some of whom are self-employed.