Cooperatives & Condominiums

Supreme Ct., N.Y. Cty.

(Coin, J.)

In an action by a co-op corporation for a declaratory judgment that holder of unsold shares is not entitled to vote for three seats on the five-seat co-op board, both parties sought summary judgment. The court granted summary judgment to the co-op corporation, holding that a provision in the co-op bylaws barred the holder of unsold shares from voting for a majority of board seats.

In 1997, holder of unsold shares bought shares appurtenant to 36 apartments from the co-op's sponsor. Currently, he owns 32 of the co-op's 72 units. He was a member of the board until 2011, when he apparently failed to nominate candidates, resulting in the election of five directors, none of whom designated by the holder of unsold shares. The latter contends that since 2011, the board has failed to call an annual shareholder meeting or to call a special meeting to elect a new board.

In this action, the board sought a declaration that the holder of unsold shares may not vote for any board members other than the two he is permitted to designate. The dispute centered on the co-op's bylaws, which provide that two representatives of the holder of unsold shares shall be elected to the board so long as the holder owns proprietary leases for at least 15 apartments. The board did not dispute the holder's right to designate those two representatives. But the bylaws go on to provide that once three years have passed after the closing of title, the holder of unsold shares will relinquish control of the board “and will not elect a majority of the Directors of the Apartment Corporation even though the number of shares owned by them may enable them to otherwise do so.” The board contended that this provision precludes the holder of unsold shares from voting for any directors other than those the holder is permitted to designate.

In awarding summary judgment to the co-op board, the court indicated that language in this co-op's bylaws, which provides that the holder “will not elect” a majority of the board, differs materially from bylaw provisions that require the holder of unsold shares to relinquish “voting control” of the co-op. The court held that “will not elect” provisions bar the holder of unsold shares from voting for directors other than those the holder is entitled to designate.

COMMENT

Where a regulation or offering plan provides that a sponsor or other shareholder of a cooperative or condominium may not exercise “voting control” over elections of the boards of these entities, the sponsor may nevertheless vote its shares in ballots for each board seat. Regulation 13 NYCRR 18.3(v)(5)(i), which applies to noneviction plans of conversion to cooperative ownership, provides that the sponsor and other holders of unsold shares of the cooperative are “not to exercise voting control of the Board of Directors for more than five years from closing, or whenever the unsold shares constitute less than 50% of the shares, whichever is sooner.” 13 NYCRR 18.3[v][5] [i]. This language does not restrict the sponsor's right to vote; it only prevents the sponsor from nominating and electing all of the directors on the board. In Park Briar Assocs. v. Park Briar Owners Inc., 182 A.D.2d 685, the court granted the sponsor of a cooperative a preliminary injunction preventing the elected Board from acting on behalf of the condominium because, during the election, the board prohibited the sponsor from voting for four of the seven director vacancies. The court stated in dictum that the corporation may only prevent the sponsor from voting for a candidate who is on the sponsor's own slate or receives a salary or other remuneration from the sponsor and voting for the candidate in question would give the sponsor majority control of the board. Id. at 686 .

Where sponsors have adopted the “voting control” language found in Regulation 13 NYCRR 18.3(v)(5)(i) in their offering plans,courts have interpreted the voting control clause in the same manner. For example, in Rego Park Garden Assocs. v. Rego Park Gardens, Inc. 174 A.D.2d 337, the court ruled that the sponsor was entitled to vote its shares in an election where the offering plan provided that the sponsor was entitled to designate two board members to a five member board under the condominium offering plan, but prohibited the sponsor from exercising “voting control” over the condominium's board once the sponsor owned less than 50% of the outstanding shares. The court noted that a showing that the sponsor exercised voting control must be based on more than an assumption that power to elect a majority of directors equates with exercising voting control of the board.

By contrast, an explicitprovision restricting a sponsor's ability to elect a majority of board members, even if the sponsor controls enough votes, may prevent the sponsor from even castingballots in an election for a majority of the seats on a condominium or cooperative board. For example, in Flagg Court Realty Co. v. Flagg Court Owners Corp., 230 A.D.2d 740, the court ruled that a provision in the offering plan, which provided that the sponsor “will not elect a majority of the Board, even though the number of shares owned by them would enable them to do so,” prevented the sponsor from voting for any board positions aside from the minority he had the right to designate. Though the court did not quote the violated provision in its decision, the terms of the offering plan have been discussed in commentary. See Andrew P. Brucker, “Tenant/Shareholders Battle Co-op Sponsors; Voting Control, 'Unsold Share' Issue,” NYLJ, Oct. 12, 1999 at S1. When the provision in the offering plan is less explicit, one court has permitted the sponsor tocombining its votes with the votes of other shareholders to elect a majority of board members. In Madison v. Striggles, 228 A.D.2d 170, the court ruled that a provision in an offering plan which stated that a “sponsor will vote its shares so that its votes and those of other holders of Unsold Shares will not elect a majority of the Board of Directors” did not prevent the sponsor from combining her votes with those of other shareholders, who did not hold unsold shares, to elect a majority of the board. Although the different language in the offering plan may explain the difference in results in Flagg and Madison, the cases do leave uncertainty about the meaning of “will not elect” provisions.

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Bylaw Provision Bars Voting by Holder of Unsold Shares

420 W. 206th St. v. Lorick

NYLJ 3/19/14

Supreme Ct., N.Y. Cty.

(Coin, J.)

In an action by a co-op corporation for a declaratory judgment that holder of unsold shares is not entitled to vote for three seats on the five-seat co-op board, both parties sought summary judgment. The court granted summary judgment to the co-op corporation, holding that a provision in the co-op bylaws barred the holder of unsold shares from voting for a majority of board seats.

In 1997, holder of unsold shares bought shares appurtenant to 36 apartments from the co-op's sponsor. Currently, he owns 32 of the co-op's 72 units. He was a member of the board until 2011, when he apparently failed to nominate candidates, resulting in the election of five directors, none of whom designated by the holder of unsold shares. The latter contends that since 2011, the board has failed to call an annual shareholder meeting or to call a special meeting to elect a new board.

In this action, the board sought a declaration that the holder of unsold shares may not vote for any board members other than the two he is permitted to designate. The dispute centered on the co-op's bylaws, which provide that two representatives of the holder of unsold shares shall be elected to the board so long as the holder owns proprietary leases for at least 15 apartments. The board did not dispute the holder's right to designate those two representatives. But the bylaws go on to provide that once three years have passed after the closing of title, the holder of unsold shares will relinquish control of the board “and will not elect a majority of the Directors of the Apartment Corporation even though the number of shares owned by them may enable them to otherwise do so.” The board contended that this provision precludes the holder of unsold shares from voting for any directors other than those the holder is permitted to designate.

In awarding summary judgment to the co-op board, the court indicated that language in this co-op's bylaws, which provides that the holder “will not elect” a majority of the board, differs materially from bylaw provisions that require the holder of unsold shares to relinquish “voting control” of the co-op. The court held that “will not elect” provisions bar the holder of unsold shares from voting for directors other than those the holder is entitled to designate.

COMMENT

Where a regulation or offering plan provides that a sponsor or other shareholder of a cooperative or condominium may not exercise “voting control” over elections of the boards of these entities, the sponsor may nevertheless vote its shares in ballots for each board seat. Regulation 13 NYCRR 18.3(v)(5)(i), which applies to noneviction plans of conversion to cooperative ownership, provides that the sponsor and other holders of unsold shares of the cooperative are “not to exercise voting control of the Board of Directors for more than five years from closing, or whenever the unsold shares constitute less than 50% of the shares, whichever is sooner.” 13 NYCRR 18.3[v][5] [i]. This language does not restrict the sponsor's right to vote; it only prevents the sponsor from nominating and electing all of the directors on the board. In Park Briar Assocs. v. Park Briar Owners Inc., 182 A.D.2d 685, the court granted the sponsor of a cooperative a preliminary injunction preventing the elected Board from acting on behalf of the condominium because, during the election, the board prohibited the sponsor from voting for four of the seven director vacancies. The court stated in dictum that the corporation may only prevent the sponsor from voting for a candidate who is on the sponsor's own slate or receives a salary or other remuneration from the sponsor and voting for the candidate in question would give the sponsor majority control of the board. Id. at 686 .

Where sponsors have adopted the “voting control” language found in Regulation 13 NYCRR 18.3(v)(5)(i) in their offering plans,courts have interpreted the voting control clause in the same manner. For example, in Rego Park Garden Assocs. v. Rego Park Gardens, Inc. 174 A.D.2d 337, the court ruled that the sponsor was entitled to vote its shares in an election where the offering plan provided that the sponsor was entitled to designate two board members to a five member board under the condominium offering plan, but prohibited the sponsor from exercising “voting control” over the condominium's board once the sponsor owned less than 50% of the outstanding shares. The court noted that a showing that the sponsor exercised voting control must be based on more than an assumption that power to elect a majority of directors equates with exercising voting control of the board.

By contrast, an explicitprovision restricting a sponsor's ability to elect a majority of board members, even if the sponsor controls enough votes, may prevent the sponsor from even castingballots in an election for a majority of the seats on a condominium or cooperative board. For example, in Flagg Court Realty Co. v. Flagg Court Owners Corp., 230 A.D.2d 740, the court ruled that a provision in the offering plan, which provided that the sponsor “will not elect a majority of the Board, even though the number of shares owned by them would enable them to do so,” prevented the sponsor from voting for any board positions aside from the minority he had the right to designate. Though the court did not quote the violated provision in its decision, the terms of the offering plan have been discussed in commentary. See Andrew P. Brucker, “Tenant/Shareholders Battle Co-op Sponsors; Voting Control, 'Unsold Share' Issue,” NYLJ, Oct. 12, 1999 at S1. When the provision in the offering plan is less explicit, one court has permitted the sponsor tocombining its votes with the votes of other shareholders to elect a majority of board members. In Madison v. Striggles, 228 A.D.2d 170, the court ruled that a provision in an offering plan which stated that a “sponsor will vote its shares so that its votes and those of other holders of Unsold Shares will not elect a majority of the Board of Directors” did not prevent the sponsor from combining her votes with those of other shareholders, who did not hold unsold shares, to elect a majority of the board. Although the different language in the offering plan may explain the difference in results in Flagg and Madison, the cases do leave uncertainty about the meaning of “will not elect” provisions.

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