Cooperatives & Condominiums

Record Not Sufficiently Developed to Confirm Co-Op Election

Matter of 300 Ocean Owners Corp. v. Bouskila

NYLJ 11/24/09, p. 34, col. 1

AppDiv, Second Dept.

(memorandum opinion)

In a proceeding to confirm the election of members of a coop board of directors, a victorious candidate appealed from Supreme Court's judgment that he was not qualified to be elected. The Appellate Division modified, holding that the record was insufficiently developed to determine the candidate's eligibility for office.

Holders of unsold shares voted for McDowell as a candidate for the co-op's Board of Directors. He was subsequently elected to the position. McDowell's opponents contend that his election was invalid, contending that a sponsor may not vote for a director who is part of a slate prepared by the holder of unsold shares or who receives a salary or other remuneration from the holder of the unsold shares. In this case, McDowell accepted a mortgage loan from a holder of unsold shares. Supreme Court concluded that the mortgage was something of value, and that acceptance of the mortgage rendered McDowell unqualified to be elected to the board. McDowell appealed.

In modifying, the Appellate Division held that whether a mortgage is “something of value” in the hands of a mortgage debtor depends on the facts of the case, which have not been developed in the present record. The court also held that there was no basis for holding, as a matter of law, that a purchaser who accepts sponsor financing as an inducement to purchase a unit is, for that reason alone, ineligible to run for the co-op board. As the result, the court held that Supreme Court had improperly made a declaration about McDowell's status on the board of directors.

COMMENT

Attorney General regulation 13 NYCRR 18.3(v)(5)(I) requires that a non-eviction offering plan for a cooperative conversion contains assurances that the sponsor or holder of unsold shares will relinquish voting control five years from the closing or once the unsold shares constitute less than 50% of the shares, whichever is sooner. The Second Department has narrowly construed the phrase “voting control” to mean a sponsor's power to nominate or designate a majority of board members or to vote for a candidate who receives a salary or other remuneration from the sponsor. For example, in Park Briar Assocs. v. Park Briar Owners Inc., 182 A.D.2d 685, the court granted the sponsor's motion to set aside an election of the board where the sponsor had been prohibited from voting for more than three of the seven directors. In holding that the sponsor was entitled to vote for all directors, the court quoted comments from the Attorney General, emphasizing that the regulation is not intended to limit the sponsor from voting its shares for independent members, but rather to restrict the sponsor's nomination or designation of “related parties” to fill a majority of board positions.

The Park Briar opinion suggested that a “related” party is one on the sponsor's own slate or one who receives a salary or other remuneration from the sponsor. However, the courts have never overturned an election on the ground that a sponsor has appointed related parties to a majority of board positions. In particular, courts have been reluctant to find a party is “related” absent a showing that the candidate is a salaried employee of the sponsor. In Rego Park Gardens Associates v. Rego Park Garden Owners, 174 A.D.2d 337, the court held, in part, that the defendant's allegation that the candidate received campaign assistance from the sponsor was insufficient to constitute remuneration. Similarly, the Appellate Division in Matter of 300 Ocean Owners Corp. v. Bouskila held that a candidate's acceptance of a sponsor-financed mortgage as an inducement to purchase a unit was inadequate to establish the candidate was a related party.

Courts will, however enforce provisions in the bylaws or offering plan that place greater limitations on a sponsor's ability to vote once the initial control period expires. For example, in Matter of Visutton Associates v. Anita Terrace Owners, 254 A.D.2d 295, the court upheld an election in which the sponsor was not permitted to vote for four of the seven members of the co-op board. The court held enforceable a provision prohibiting the sponsor from voting its unsold shares for more than one less the majority of directors to be elected. In contrast with by-laws modeled closely on the Attorney General regulation, which refers to the sponsor's ability to “control” the board, the language of the by-laws in Visutton explicitly limited the sponsor's right to vote. The Appellate Division enforced those restrictions.

Record Not Sufficiently Developed to Confirm Co-Op Election

Matter of 300 Ocean Owners Corp. v. Bouskila

NYLJ 11/24/09, p. 34, col. 1

AppDiv, Second Dept.

(memorandum opinion)

In a proceeding to confirm the election of members of a coop board of directors, a victorious candidate appealed from Supreme Court's judgment that he was not qualified to be elected. The Appellate Division modified, holding that the record was insufficiently developed to determine the candidate's eligibility for office.

Holders of unsold shares voted for McDowell as a candidate for the co-op's Board of Directors. He was subsequently elected to the position. McDowell's opponents contend that his election was invalid, contending that a sponsor may not vote for a director who is part of a slate prepared by the holder of unsold shares or who receives a salary or other remuneration from the holder of the unsold shares. In this case, McDowell accepted a mortgage loan from a holder of unsold shares. Supreme Court concluded that the mortgage was something of value, and that acceptance of the mortgage rendered McDowell unqualified to be elected to the board. McDowell appealed.

In modifying, the Appellate Division held that whether a mortgage is “something of value” in the hands of a mortgage debtor depends on the facts of the case, which have not been developed in the present record. The court also held that there was no basis for holding, as a matter of law, that a purchaser who accepts sponsor financing as an inducement to purchase a unit is, for that reason alone, ineligible to run for the co-op board. As the result, the court held that Supreme Court had improperly made a declaration about McDowell's status on the board of directors.

COMMENT

Attorney General regulation 13 NYCRR 18.3(v)(5)(I) requires that a non-eviction offering plan for a cooperative conversion contains assurances that the sponsor or holder of unsold shares will relinquish voting control five years from the closing or once the unsold shares constitute less than 50% of the shares, whichever is sooner. The Second Department has narrowly construed the phrase “voting control” to mean a sponsor's power to nominate or designate a majority of board members or to vote for a candidate who receives a salary or other remuneration from the sponsor. For example, in Park Briar Assocs. v. Park Briar Owners Inc., 182 A.D.2d 685, the court granted the sponsor's motion to set aside an election of the board where the sponsor had been prohibited from voting for more than three of the seven directors. In holding that the sponsor was entitled to vote for all directors, the court quoted comments from the Attorney General, emphasizing that the regulation is not intended to limit the sponsor from voting its shares for independent members, but rather to restrict the sponsor's nomination or designation of “related parties” to fill a majority of board positions.

The Park Briar opinion suggested that a “related” party is one on the sponsor's own slate or one who receives a salary or other remuneration from the sponsor. However, the courts have never overturned an election on the ground that a sponsor has appointed related parties to a majority of board positions. In particular, courts have been reluctant to find a party is “related” absent a showing that the candidate is a salaried employee of the sponsor. In Rego Park Gardens Associates v. Rego Park Garden Owners, 174 A.D.2d 337, the court held, in part, that the defendant's allegation that the candidate received campaign assistance from the sponsor was insufficient to constitute remuneration. Similarly, the Appellate Division in Matter of 300 Ocean Owners Corp. v. Bouskila held that a candidate's acceptance of a sponsor-financed mortgage as an inducement to purchase a unit was inadequate to establish the candidate was a related party.

Courts will, however enforce provisions in the bylaws or offering plan that place greater limitations on a sponsor's ability to vote once the initial control period expires. For example, in M atter of Visutton Associates v. Anita Terrace Owners, 254 A.D.2d 295, the court upheld an election in which the sponsor was not permitted to vote for four of the seven members of the co-op board. The court held enforceable a provision prohibiting the sponsor from voting its unsold shares for more than one less the majority of directors to be elected. In contrast with by-laws modeled closely on the Attorney General regulation, which refers to the sponsor's ability to “control” the board, the language of the by-laws in Visutton explicitly limited the sponsor's right to vote. The Appellate Division enforced those restrictions.