Cooperatives & Condominiums

AppDiv, First Dept.

(Opinion by Acosta, J.)

In an action by co-op sponsor and another shareholder to set aside a co-op board election, the co-op corporation and elected board members appealed from Supreme Court's order dismissing their counterclaim petition to set aside an earlier board election. The Appellate Division reversed and set aside the earlier election, holding that the earlier vote violated a stipulation limiting the voting power of holders of unsold shares.

When the co-op faced foreclosure in 1992, TPR took an assignment of the mortgage and effectively became a successor sponsor of the co-op. Pursuant to a stipulation of settlement of the foreclosure action, the parties agreed that TPR was to be deemed a holder of unsold shares, and any shares transferred to TPR were deemed to be unsold shares. For as long as the mortgage remained outstanding, TPR would be entitled to elect two of the board's five members. After that time, holders of unsold shares would be entitled to elect one less than a majority of the board. Shares would remain unsold shares until the associated apartment was sold to a person who became a bona fide occupant of the apartment. The stipulation was incorporated into the offering plan by a 2013 amendment. The proprietary lease incorporated all the terms of the offering plan.

In 2014, TPR assigned apartment 22 and its shares to Johnson, subject to the limitations in the proprietary lease. Johnson did not move into the apartment, and therefore remained a holder of unsold shares. At the next annual shareholder meeting, TPR's representatives voted for the sponsor's two principals as board members, while Johnson voted for himself. As a result, Johnson and the two principals of TPR were elected. Another board member elected at the annual meeting then served a notice to shareholders of a subsequent meeting to “correct” the error in allowing three representatives of holders of unsold shares sit on the board. At the new election, only one TPR representative was elected. TPR then brought this action to set aside the later election, and the co-op board and other directors elected at the later meeting counterclaimed to set aside the earlier election. Supreme Court dismissed both the petition and the counterclaim petition, concluding that Johnson was not bound by the stipulation, and that Johnson should not be treated differently from purchaser who bought before the stipulation of settlement.

In reversing, the Appellate Division emphasized the incorporation of the stipulation of settlement into the proprietary lease, and concluded that Johnson was therefore bound by the stipulation. The court also indicated that TPR should not be permitted to frustrate its obligations under the offering plan by transferring its shares to “puppet entities.” Finally, the court rejected the argument that distinguishing between two classes of co-op shareholders was impermissible.

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