Understanding the Business Corporation Law

A Co-op's Base Line

By Raanan Geberer
Hannah Fons

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If you live in a co-op, as opposed to a condo, in New York State, chances are that your co-op has been organized under the designation of the Business Corporation Law, or BCL.

But what is the BCL? The BCL, which has been in force for more than a century, is basically a law governing corporations chartered within the state. And since co-ops are corporations, over time it began to be applied to co-ops.

Among the topics it covers are boards of directors, shareholders' rights and obligations, board meetings, elections, certificates of incorporations, filings, fiduciary responsibility and more. Much of the law can be found online at http://law.onecle.com/new-york/business-corporation/index.html.

"Most of the co-op housing corporations in New York State were organized under the BCL," says attorney Richard Siegler of Stroock & Stroock & Lavan LLP. "If you file a charter under the BCL, you submit yourself to that law."

Bruce Cholst, an attorney with Manhattan-based Rosen & Livingston, added, "The BCL is an integral law, and should be side by side with your bylaws and your certificate of incorporation. They all act together.

"There are two aspects to a co-op: its existence as a legal entity, and the fact that it's basically a landlord," he says. The BCL, bylaws and certificate of incorporation all deal with the co-op's first aspect, whereas the propriety lease applies to the second.

When did the Business Corporation Law begin to be applied to co-ops? Those interviewed for this article didn't provide a precise date, but all agreed that this has been the case for a long time. Attorney Theresa Racht of the New York law firm of Racht & Taffae LLP, says, "Its application to co-ops has been applied since I started working with co-ops in 1979."

Attorney Steven Wagner of Wagner Davis PC cautioned that some earlier co-ops were formed under another law, the Cooperative Corporations Law. "That law was enacted for agricultural cooperatives," he says, "but because it has that name, they used that law."

One difference involves cumulative voting (designed by Investorwords as a voting system that gives minority shareholders more power, by allowing them to cast all of their votes in a board election for a single candidate, as opposed to regular or statutory voting, in which shareholders must vote for a different candidate for each available seat) vs. straight voting. Under the BCL you need an amendment to the certificate of operation authorizing cumulative voting, while in Cooperative Corporations Law, cumulative voting applies by stature, Wagner says.

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All in all, however, the percentage of co-ops under the jurisdiction of the BCL "is in the high 90s," says Wagner. By the way, Mitchell-Lama co-ops and certain formed pursuant to different statutes, but even there, he says, there is in some instances a limited applicability of the BCL. "In the absence of other language, you go to the BCL."

The BCL and Your Co-op

Now that we know about the BCL and what it governs, how does it apply to the day-to-day operations of a housing cooperative?

It governs board elections, defines many shareholders' rights and obligations to shareholders, how board meetings should be conducted, how board elections are conducted and even how board members should be removed from office.

Key sections, says Racht, "deal with proxies, conducting annual meetings, special shareholders' meetings, the election of shareholders and officers and amending documents. Other sections that I refer to deal with reviewing documents and the rights of shareholders."

The BCL also comes into play when the co-op gets involved in a lawsuit—although not always.

"It has little impact on third-party claims, or when the co-op is evicting someone for non-payment," says Wagner.

However, when someone sues the co-op or board members for "improper actions" including waste, mismanagement or breach of fiduciary duty, the law comes into play more significantly—both in defining the obligations and rights of the parties, and in insurance and indemnification (a subspecies of compensation under the law).

Racht also says that the type of lawsuit determines whether, and how, the BCL applies. For example, if someone is suing over whether a flip tax, or fee for the sale of a co-op unit, is legal, then the BCL comes into play, she says. Under the BCL, a flip tax, to be valid, has to be mentioned in the bylaws, proprietary documents or offering plan.

The BCL also comes into play in cases of contested elections—questions can include whether enough notice about the election was given under the bylaws, and if proxy voting took place, whether the proxies followed the law's requirements.

"One thing that comes up from time to time is, 'How to you remove a director from a board?' There, you usually refer to the BCL," she says.

Obviously, the Business Corporation Law is a New York State statute. However, according to the attorneys we spoke to, other states all have their equivalents.

Changes in the BCL

Like other laws, the Business Corporation Law has been amended over the years.

Some of these amendments have been made to keep up with changing technology. "For example," says Siegler, "there is now a provision for telephone conference calls. Fifty years ago, they didn't exist. Now, they are absolutely used by co-ops." Similarly, making proxy votes by fax or other forms of electronic transmission is also expressly allowed nowadays.

Wagner says that in his understanding, amendments have been made for two reasons. The first, he said, is "to avoid or correct a situation that has arisen out of court determination."

For example, one court decision held that within a co-op, flip taxes had to be equal, on a per-share basis. In the mid-1980s, the BCL was amended to allow flip taxes to be based on criteria other than the number of shares—such as a percentage of gross sales price.

"This is the only time I'm aware that an amendment was made solely to take into account co-op housing issues," said Siegler.

The second reason amendments have been made, Wagner said, comes about through competition with other states—remember, the BCL applies to corporations in general.

"New York State competes with other states for filing fees and taxes paid by corporations, and New York prides itself as being one of the leaders in commercial leaders," Wagner explains. "Another time we change is to stay competitive where other states have enacted changes in the law."

As an example, he gives the matter of indemnification of officers and directors. In the late 1980s, he says, the law was amended to allow much greater indemnification of boards. In this case, he says, "New York enacted statutes similar to those in Delaware."

Explaining how important this topic is, Racht elaborates: "A co-op is run by volunteers. Many people do not want to serve unless they're sure that if they're sued they will be defended by the corporation, or that the corporation will advance money [if the shareholder or officer elects to hire his or her own lawyer] under the BCL."

An important series of amendments to the BCL (some of which like the one about sending proxies by fax we've already mentioned) were made in 1998.

Cholst recently detailed some of them. For example, before 1998, it was necessary to obtain the approval of the holders of at least two-thirds of outstanding shares to make an amendment to a co-op's bylaws. In 1998, the requirement was changed so that now only a bare majority of the votes cast at a shareholders' meeting where a quorum is present is required to amend the bylaws.

Also, says Cholst, before the overhaul of the BCL in 1998, boards were permitted to ignore any provision in the bylaws requiring the appointment of election inspectors, as long as no shareholder demanded such an appointment. But now, if a co-op has such a provision in its bylaws or certificate of incorporation, the board must comply and appoint election inspectors.

In the past, the same person was prohibited from serving as both president and secretary of a co-op. Now, the same person can serve in both positions.

Consult Your Attorney!

What should board members and managers know about the Business Corporation Law and how it affects their buildings?

Those attorneys interviewed for this article were unanimous: consult an attorney who is familiar with the BCL and its application to co-op operations.

If we're not talking only about the actual Business Corporation Law, the board members and managers can also consult their bylaws and certificate of incorporation.

"Often, the answers to questions I receive are answered directly by the bylaws, and what I do as part of my practice is to not only take them to the section that's applicable, but get them used to looking at the bylaws," says Wagner. "The bylaws were adopted in most cases pursuant to the BCL."

But when it comes to the BCL itself, it's better not to "play lawyer," no matter how intelligent, well-informed and accomplished in other fields you are.

"I have a shareholder in a building I represent who's a podiatrist—he thinks he's a lawyer - who keeps citing sections of the BCL to me, and he's totally wrong," says Racht. "I've seen managing agents do the same things. Leave it to the professionals."

Raanan Geberer is a freelance writer and editor living in New York City.

Comments

Richard I. Lawson, Jr.

Please check out the Co-op City Management for me.

warren gross

excellent as always. (1) thought I applied and was accepted for membership/mailling list, etc. can you check. (2) as important at this moment. does the BCL oblige a board or managing agent to reply in writing within a stated time frame regarding a shareholder's inquiry, e.g. what is the board and corporation's insurance coverage, if the shareholder has the legiitimate interest by the question in protectting his equity investment. thank you warren gross

Steven R

can a co-op board preclude a shareholder from runing for a seat on the board?

David Jacobs

Can a Board President without Board approval unilaterally a) cancel a scheduled meeting? b) direct the removal of shareholders' personal property from storage rooms? c) mandate that shareholders individually pay for removal and temporary storage fees?

A Lee

Can a managing agent demand a finders fee from a tenant who wishes to sublet, or should this fee be paid by the shareholder who wishes to sublet the apartment ?

R

is the co-op board required to provide shareholders the co-op's annual financial statements?

Ms. Diane D'Agostino

I would like to know where I can attain a copy of the BCL book. Our Co-op is in disaray and full of corruption. I need to know how to remove four of the seven Board members, including the President. She has excommunicated three members including the Vice President from attaining any information from the Accountant, Management and even a bank that we were to refinance our mortgage from. We need to gain control or we will be out of control.

Marie

Can a coop due away with proxies or is it mandatory to have them. we have several coops in our area that do not use them.

an unknown user

can a co op board in nassau county n y deny a buyer without tellin seller the reason for same

gina

can a board sue the corporation shareholder for interfering with them carrying out their duties as board members.

MS

Where can I obtain a copy of the BCL?

mare

our board jerrymands elections every year. who is allowed to be an election inspector and who appoints one? what if a board doesnt appiont election inspectors.

an unknown user

Can original coop-up owners rights to sublet their apartment be changed by a Board resolution which refers to the BCL Section 501(c)?It seems that the appelete adivision of the Suprem Couty of N.Y. has ruled that section 501 (C) prohibits giving Original owners more favorable subletting rights than non original purchasers.Is this possible to take away rights that were there when unit was bought by original owners which had the right to rent indefinately now can rent 3 out of 5 yrs.

louise gianfrancisco

I have requested back up to the 2009 Financial Statement such as the detail general ledger expense reports,and the 2010 budget.The board and attorney claims that I have no right to see these documents. Are they correct.

t.k.starr

Our Board has not made a decision regarding a request for accommodation from a disabled senior shareholder. How can the rest of the shareholders separate ourselves should the Board/Coop be sued or fined?

gina

is it lawful for security cameras to be placed inside a co-ops community room that shareholders are paying to use for their private parties. Is this not intrusion of privacy.

franjoy

can the mgmt company and board refuse to give you a copy of the election results and can one file a complaint if it is so denied. Our board is a mess

burrwinnie@aol.com

Where are the answers to the above questions?

an unknown user

can shareholders retain an atty on suing for mismanagement on a contingency fee basis if it is shown the shareholders have a good case.

Anonymous

Google "new york business corporation law", you will get link to the law itself. But, be warned, this is just the statute, there is also case law (decisions by judges and juries) that is relevant. Unless you know how to do legal research (need access to Westlaw or Nexis), you are MUCH better off finding a lawyer than trying to do it yourself.

sharon

What does the BCL provide for inappropriate actions by managment firm? Like surpressing monthly invoices from shareholders? Also, What is the ruling for proper notification for entering an apt to fix a leak? Lastly, is it legal for an HDFC coop to have a 10% of the gross monthly mantainance as a late fee agregated on a monthly basis? Thanks.

Unosay

What can you do when the cooperative has a wife in the office of mgt. son as the super and the husband on the board as vice president? Shareholders didn't understand what they done as they felt they didn't have a choice. Vice president was former super of thirty plus years and a shareholder. Isn't this a conflict of interest as wife is privy to all information of shareholders? What can be done to change the situation legally? Any advice?

veronica

Where can I get the BCL laws, or where can i print them out on the computer

Anonymous

How can you find out if your coopertive file a charter under the BCL?

clt

Where can we get a copy of the BCL laws?

elaine

can a Board action be taken during a meeting where everyone is in attandance only by email? is there any minimum notice requirement for the "email meeting"?

jimmy

everyone has look threw the Proprietary lease and your own coop's bylaws regarding the questions asked! Your by-laws are the rules regarding your coop! Get to know them well!

Cleo Silvers

My co-op Board president is engaging in corrupt behavior with the support of the sponsor and the management company. Shareholders and other residents are being threatened and our building is in definite trouble. We have documentation of what they are doing. They have now coerhsed a two month hiatus without having a bylaw requied election. How can we find help to counter this activity.

Mary Comparetto

I am in the midst of refinancing my co-op and the BOD is giving me a hard time by insisting they have the right to do exactly what they did during my first mortgage, such as credit check (which the bank has done and is very good), background investigations (which has been done on me 3X for no good reason) and delaying the bank process which will make me lose $500. What recourse do I have? I've already told the BOD that their actions are inane.

richard

my mothers co-op board and superintendent are very corrupt and are bankrupting the building is there any way we could request the financial books to be able to put a stop to it

Bernard

Can a coop due away with proxies or is it mandatory to have them. we have several coops in our area that do not use them.

joan

I am in the midst of selling my apartment I have a buyer I have been in contract over six months and my apartment stay vacant for over three years never sublet after my buyer been approved by the board of directors three days after the management and the president of the board charge me in my maintenance bill for sublet fees six years ago which I never sublet can the board do that now my apartment is on hold the board charge me a fee of over 6,000 can the board do that I need answer I submit all proof of residency and I still getting a hard time with the board can I sue the board if my buyer walk the president of the board don't return calls or want to meet with you as a shareholder

ALICE REYNOLDS

THANK YOU MUCH INFORMATION OBTAINED

alice scanlon

My board has been allowing its property manager to charge me no insurance fees for over 5 years although my insurance company has sent then proof of insurance over and over. They now owe me over $3000. I simply cannot get them to oH me back although I've written a thousand times. I could hire an attorney but that would cost as much b as what they owe me. What can I do?


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