Cooperatives & Condominiums

Non-Judicial Foreclosure Sale Subject to Proprietary Lease Terms

LI Equity Network LLC v. Village in the Woods Owners Corp.

NYLJ 10/26/10, p. 27, col. 6

AppDiv., Second Dept.

(Opinion by Belen, J.)

In an action by purchaser at a non-judicial foreclosure sale to require a co-op corporation to close on title to the unit, the co-op corporation appealed from Supreme Court's award of summary judgment to the purchaser. The Appellate Division reversed, holding that the purchase was subject to the terms of the proprietary lease, which prohibit ownership of units by corporate entities.

Prior unit owners financed the purchase of their unit with a bank mortgage. When they defaulted on the mortgage and their maintenance, the bank foreclosed and conducted a non-judicial foreclosure sale pursuant to article 9 of the UCC. Plaintiffs purchased at the foreclosure sale, and sought to close on the unit and resell it to a board-approved purchaser. The co-op board refused to transfer the shares, relying on provisions in the co-op's governing documents barring ownership by corporate entities. Plaintiff purchaser brought this action seeking specific performance, seeking damages from the co-op corporation for breach of the implied duty of fair dealing, and seeking damages for breach of contract from he bank. Purchaser argued first that a co-op's governing documents cannot prevent transfer of shares allocated to a foreclosed unit “by operation of law,” and second, that the proprietary lease itself includes an exception permitting transfer of shares to an individual without consent of the co-op board upon default on a bank mortgage. Supreme Court awarded summary judgment to purchaser on its specific performance claim.

In reversing, the Appellate Division first held that the UCC 9-610 does not exempt a foreclosure sale purchaser from approval requirements contained in a co-op corporation's governing documents. The court then turned to the proprietary lease, and concluded that its exemption for mortgage defaults permits transfers only to individuals, not to corporations, without the consent of the co-op board, and then only on condition that the individual does not actually occupy the unit. As a result, the court held that purchaser was not entitled to summary judgment on the specific performance claim, and enjoined purchaser from entering the apartment pending resolution of the action.

COMMENT

Article 9 of the Uniform Commercial Code (UCC) permits a cooperative cooperation to enforce, against a creditor or a transferee, restrictions on the transfer of a proprietary lease and stock contained in a cooperative's bylaws. Relying on UCC 9-504(4) (now UCC 9-617(c)(1)), which provides that a “transferee takes the collateral subject to the debtor's rights in the collateral,” the court in Bank of New York v. Carr, 161 Misc.2d 332, held that a secured creditor foreclosing on cooperative shares was subject to the purchase option provisions of the cooperative cooperation's bylaws. Those bylaws permitted a shareholder to transfer shares to a third party only upon payment of a $7,500 fee in return for which the co-operative corporation would waive its option to purchase the shares at book value. In supporting its decision, the court noted that a “waiver of option fee” is a permissible restriction on cooperative shares, suggesting that other restrictions on the transferability of cooperative shares would be enforceable against a creditor or a transferee as long as the restriction is permissible according to cooperative law.

Although the court's holding in LI Equity is consistent with the approach taken by the court in Bank of New York, the restrictions in LI Equity could prove far more onerous to lenders than the waiver of option fee at issue in Bank of New York. In the latter, lender could realize on its security (by selling the shares associated with the unit), so long as it paid a fee of $7,500. In LI Equity, by contrast, because the co-op board asserted a right to prevent anyone from occupying a unit without the board's consent, the board could theoretically make it impossible for the lender to sell the collateral to any willing purchaser.

Condominium Tenant Has No Claim Against Broker for Negligence

Reiter v. Columbus Real Estate, Inc.

NYLJ 11/08/10

Supreme Ct., N.Y. Cty.

(Gische, J.)

In an action by lessees against real estate broker, broker moved to dismiss for failure to state a cause of action. The court granted broker's motion, holding that the broker owed no duty to lessees.

Lessees negotiated a one-year lease for a residential apartment in a condominium building. The lease, which was signed by lessees on Jan. 22, 2010, was for a lease term to begin on Feb. 15, 2010. The lease expressly provided that the condominium had a right of first refusal on the apartment. The condominium did not waive its right of first refusal before Feb. 15, and as a result, lessees were not permitted to move in on that date. Lessees brought this action, contending that the broker had represented that lessees could move in on the 15th, and that broker's negligent delay in submitting the condominium package to the managing agent caused lessees to suffer damages. Lessees also sought a return of brokerage fees they paid in reliance on broker's representation.

In granting the broker's motion to dismiss, the court started by noting that lessees signed the lease knowing that the lease commencement date was contingent on the condominium's waiver of its first refusal right, and noted that even if the broker had submitted the package to the condominium immediately upon the contract signing, the condominium had 30 days to approve the package, and the condominium did act within that time period. As a result, no breach of duty caused the late start to the lease. More important, the court noted that the broker, who was an agent of the unit owner, owed no duty to the lessees. In the absence of duty, the broker could not be liable for negligence. Moreover, the only duty owed to the lessees by the unit owner was a duty in contract, and lessees could not sue in negligence for a relationship governed by contract. As a result, broker was entitled to dismissal of the complaint.

Non-Judicial Foreclosure Sale Subject to Proprietary Lease Terms

LI Equity Network LLC v. Village in the Woods Owners Corp.

NYLJ 10/26/10, p. 27, col. 6

AppDiv., Second Dept.

(Opinion by Belen, J.)

In an action by purchaser at a non-judicial foreclosure sale to require a co-op corporation to close on title to the unit, the co-op corporation appealed from Supreme Court's award of summary judgment to the purchaser. The Appellate Division reversed, holding that the purchase was subject to the terms of the proprietary lease, which prohibit ownership of units by corporate entities.

Prior unit owners financed the purchase of their unit with a bank mortgage. When they defaulted on the mortgage and their maintenance, the bank foreclosed and conducted a non-judicial foreclosure sale pursuant to article 9 of the UCC. Plaintiffs purchased at the foreclosure sale, and sought to close on the unit and resell it to a board-approved purchaser. The co-op board refused to transfer the shares, relying on provisions in the co-op's governing documents barring ownership by corporate entities. Plaintiff purchaser brought this action seeking specific performance, seeking damages from the co-op corporation for breach of the implied duty of fair dealing, and seeking damages for breach of contract from he bank. Purchaser argued first that a co-op's governing documents cannot prevent transfer of shares allocated to a foreclosed unit “by operation of law,” and second, that the proprietary lease itself includes an exception permitting transfer of shares to an individual without consent of the co-op board upon default on a bank mortgage. Supreme Court awarded summary judgment to purchaser on its specific performance claim.

In reversing, the Appellate Division first held that the UCC 9-610 does not exempt a foreclosure sale purchaser from approval requirements contained in a co-op corporation's governing documents. The court then turned to the proprietary lease, and concluded that its exemption for mortgage defaults permits transfers only to individuals, not to corporations, without the consent of the co-op board, and then only on condition that the individual does not actually occupy the unit. As a result, the court held that purchaser was not entitled to summary judgment on the specific performance claim, and enjoined purchaser from entering the apartment pending resolution of the action.

COMMENT

Article 9 of the Uniform Commercial Code (UCC) permits a cooperative cooperation to enforce, against a creditor or a transferee, restrictions on the transfer of a proprietary lease and stock contained in a cooperative's bylaws. Relying on UCC 9-504(4) (now UCC 9-617(c)(1)), which provides that a “transferee takes the collateral subject to the debtor's rights in the collateral,” the court in Bank of New York v. Carr, 161 Misc.2d 332, held that a secured creditor foreclosing on cooperative shares was subject to the purchase option provisions of the cooperative cooperation's bylaws. Those bylaws permitted a shareholder to transfer shares to a third party only upon payment of a $7,500 fee in return for which the co-operative corporation would waive its option to purchase the shares at book value. In supporting its decision, the court noted that a “waiver of option fee” is a permissible restriction on cooperative shares, suggesting that other restrictions on the transferability of cooperative shares would be enforceable against a creditor or a transferee as long as the restriction is permissible according to cooperative law.

Although the court's holding in LI Equity is consistent with the approach taken by the court in Bank of New York, the restrictions in LI Equity could prove far more onerous to lenders than the waiver of option fee at issue in Bank of New York. In the latter, lender could realize on its security (by selling the shares associated with the unit), so long as it paid a fee of $7,500. In LI Equity, by contrast, because the co-op board asserted a right to prevent anyone from occupying a unit without the board's consent, the board could theoretically make it impossible for the lender to sell the collateral to any willing purchaser.

Condominium Tenant Has No Claim Against Broker for Negligence

Reiter v. Columbus Real Estate, Inc.

NYLJ 11/08/10

Supreme Ct., N.Y. Cty.

(Gische, J.)

In an action by lessees against real estate broker, broker moved to dismiss for failure to state a cause of action. The court granted broker's motion, holding that the broker owed no duty to lessees.

Lessees negotiated a one-year lease for a residential apartment in a condominium building. The lease, which was signed by lessees on Jan. 22, 2010, was for a lease term to begin on Feb. 15, 2010. The lease expressly provided that the condominium had a right of first refusal on the apartment. The condominium did not waive its right of first refusal before Feb. 15, and as a result, lessees were not permitted to move in on that date. Lessees brought this action, contending that the broker had represented that lessees could move in on the 15th, and that broker's negligent delay in submitting the condominium package to the managing agent caused lessees to suffer damages. Lessees also sought a return of brokerage fees they paid in reliance on broker's representation.

In granting the broker's motion to dismiss, the court started by noting that lessees signed the lease knowing that the lease commencement date was contingent on the condominium's waiver of its first refusal right, and noted that even if the broker had submitted the package to the condominium immediately upon the contract signing, the condominium had 30 days to approve the package, and the condominium did act within that time period. As a result, no breach of duty caused the late start to the lease. More important, the court noted that the broker, who was an agent of the unit owner, owed no duty to the lessees. In the absence of duty, the broker could not be liable for negligence. Moreover, the only duty owed to the lessees by the unit owner was a duty in contract, and lessees could not sue in negligence for a relationship governed by contract. As a result, broker was entitled to dismissal of the complaint.