A group of owners within the Rafaello, Chicago’s only so-called "condo hotel," have sued members of their condo association’s board, asserting they violated their duty to the association and enriched themselves by pushing through a “self-dealing sale” of the Rafaello for millions of dollars less than a competing offer.
On July 14, Rafaello condo unit owners Sridhar Talanki, Subba Talanki and Laxmi Cheela filed suit in Cook County Circuit Court, purportedly on behalf of the Rafaello Condominium Association, against Rafaello board members Richard Weisfisch, Lisette Ruiz and Tal Bar-Or.
The condo unit owners are represented in the action by attorneys Adam K. Beattie and Mark J. Altschul, of the firm of Chuhak & Tecson P.C., of Chicago.
The lawsuit centers on the sale of the building, located at 201 E. Delaware Place, in Chicago’s Streeterville neighborhood.
According to the complaint, the sale was completed in October 2019, when the Rafaello association board approved a $17 million offer from a group of corporate entities known as SVHU.
These entities are connected to the Maxwelle Real Estate Group, a real estate investment firm based in Miami.
According to the complaint, the SVHU and Maxwelle group purchased enough units in the association to eventually seize control of the board. All three individual defendants in the lawsuit are associated with Maxwelle and SVHU, particularly Weisfisch, who served as the Rafaello board’s president.
According to the complaint, Weisfisch owns and manages SVHU.
After taking control of the board and coming to own more than 75% of the units in the Rafaello, the board allegedly pushed through the sale for $17 million. That approval came just about four months after the association board recorded a mortgage of more than $29 million against the Rafaello property.
The complaint also asserts the sale was approved even after the association board was presented with a competing offer of $30 million.
Further, the complaint alleges the association board “brazenly” pushed through a $3 million special assessment “on the eve of the sale.” This, they said, pushed the costs of repairs needed at the property onto the backs of owners who refused to approve the sale.
“The Purchase and Sale Agreement between SVHU and the Association is not a contract that was bargained for at arm’s-length,” the complaint said. “Instead, the contract was effectively bargained for by the same parties on both the buyer’s-side and the seller’s-side.
“… SVHU, Weisfisch, Ruiz and Bar-Or entered into a one-sided sale agreement that strongly favors Buyer over the unit owners.”
APPELLATE DECISION
The lawsuit comes on the heels of a state appeals panel’s decision earlier this summer, allowing a group of condo owners in suburban Roselle to pursue a lawsuit on similar grounds against their association board, upending a DuPage County judge’s earlier ruling in favor of that condo association.
In that decision, the appeals court ruled the common law of fiduciary duty – in this case, essentially the duty of a board or other legal representative to look out for the best interests of its association members – applies even to the sale of condo buildings under an Illinois legal provision governing such sales.
Known as Section 15 of the Illinois Condo Act, the provision grants condo association boards the power to sell all units included in the association at once, provided the sale receives at least 75 percent of weighted votes at an election called on the question by the association.
The use of the provision has stirred controversy in recent years, as many condo association boards, usually spurred by developers and real estate investors, have sought to convert the condo buildings into apartments for rent.
In the Roselle case, a group of individual condo unit owners sued the board of directors for the various buildings within the Spring Hill condominium complex.
They asserted the boards had been taken over by a corporation known as Mosaic Spring Hill LLC, and then, in 2018, allegedly steered a bulk sale of all the remaining units to a related corporate entity.
The sale prompted objections and a lawsuit from nearly all of the owners of those remaining units, asserting breach of fiduciary duty, fraud and civil conspiracy.
Initially, a DuPage County judge sided with Mosaic Spring Hill defendants, and dismissed the lawsuit.
On appeal, however, a three-judge panel of the Illinois Second District Appellate Court said the lower court had erred.
The Mosaic defendants had asserted the procedures governing the bulk sale of condos laid out in Section 15 essentially removed any fiduciary duty obligations in approving such sales.
Not so, said the appellate court.
In another section of the Condo Act, state lawmakers expressly placed a fiduciary duty on condo association boards and their members. Combined with silence in Section 15 on the question of fiduciary duty, the appeals panel said “the common law of fiduciary duty ‘remains in full force’ and applies to the bulk sale of condominiums under Section 15.”
Justice Schostok authored the court’s opinion. Justices Zenoff and Jorgensen concurred.
“When there is no self-dealing involved, the majority owners and the minority owners have the same interest—maximizing the price they will receive for their units— and majority owners can be expected to refuse to agree to any price that is significantly lower than the fair value of their units,” Justice Schostok wrote.
“In these circumstances, the market functions as it should to set the appropriate price, and the buyer must be given a voice to protect its interests in that process. When the majority owners and the buyer both seek a lower sale price, however, the market is distorted.
“And when the minority owners cannot refuse to sell (as is ordinarily the case in a bulk sale under section 15), that distortion can result in substantial unfairness.”
The justices also rejected the assertion that the sales should be allowed under the so-called “business judgment rule,” which holds a corporation’s leadership is presumed to act in good faith, based on available information, and with the interests of all other members or shareholders at heart.
The appeals court, however, noted it could not undo the sales, which had already closed years earlier.
In the lawsuit against the Rafaello board members, the plaintiffs have asked a Cook County judge to force the three Rafaello association board members to pay them an unspecified amount, saying only it should be “in excess of $50,000.”