Cooperative Rules

Understanding the Business Corporation Law

By Liz Robbins

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Every condo and co-op has its own set of governing documents by which building administrators direct their community's day-to-day business. Bylaws, rules and regulations, and precedent-setting legal cases help keep boards within the letter of the law, and offer a framework within which they can operate consistently from year to year.

Several laws apply to real estate in New York: for example, condos are governed by the New York Condominium Act, and the Real Property Actions and Proceedings Law (RPAPL) deals with landlord-tenant issues between a co-op and its shareholders. Case law interprets these statutes and sets legal precedent for co-op and condo owners; indeed the law governing co-ops in New York is mostly created by judge-made case law.

One statute originally created to regulate businesses, the Business Corporation Law—or BCL, for short—primarily governs how cooperative corporations, including housing co-ops, must be run.

The BCL provides specific rules regulating the corporate governance practices of co-ops, including the manner in which boards and shareholders conduct meetings, amend bylaws, and vote, and the BCL prescribes the rights and responsibilities of boards and shareholders. While it may be asking a lot of volunteers to pore over the entire BCL or know its nuances by heart, it's a good idea for all board members to at least be aware of its existence, and better to have a passing familiarity with its contents.

History and Background

The BCL was implemented over a century ago to regulate governance of corporations in New York, and remained more or less unchanged until it was overhauled in 1998. “The BCL was drafted generally for corporations, [the legislature] didn’t have co-ops in mind, and the courts have applied the BCL to co-ops,” explains Stephen M. Lasser, an attorney shareholder with the Manhattan office of the law firm Stark & Stark.

What happens if a co-op’s bylaws are inconsistent with the BCL? The BCL provides that when there is a conflict, the BCL will prevail: “The bylaws may contain any provision relating to the business of the corporation, the conduct of its affairs, its rights or powers or the rights or powers of its shareholders, directors or officers, not inconsistent with this chapter or any other statute of this state or the certificate of incorporation.” The BCL is a default set of rules.

“If the governing documents are silent on a particular matter then you have to look to the BCL,” says Lasser. “Oftentimes, the bylaws will track the language in the BCL, but you can’t assume that’s always the case. In some instances, there are provisions of the BCL that would trump.”

For example, if a lease has a requirement that contradicts the BCL, the BCL would trump the contradicting provision in the lease. “When you are making a corporate decision you have to look at the governing documents and see whether or not the documents were drafted in contradiction with the BCL,” according to Lasser.

Only one section of the BCL was drafted specifically for co-ops, a section pertaining to flip taxes. “Although the BCL was not drafted with co-ops in mind,” says Lasser, “Section 501 of the BCL was revised in 1986 to deal with a legal issue unique to co-ops, the imposition of flip taxes. Specifically, BCL 501(c) provides an exception to the rule that all shares be treated equally and allows co-ops to impose flip taxes that are not based on the number of shares owned by a selling shareholder.”

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While the BCL was not created initially for co-ops, most co-ops are organized under the statute. “In my experience, 99 percent of the cooperative housing corporations are organized under the BCL,” says attorney Richard Siegler, a partner with Manhattan-based law firm Stroock & Stroock & Lavan LLP. “There’s only one co-op I have ever represented which was organized under the Cooperative Corporations law of New York State.” That particular co-op, according to Siegler, was established in the 1960s and had approximately 3,000 units. “Because of certain unique characteristics,” Siegler says, “it was organized under a law that was designed basically for agricultural cooperatives.”

Other states such as Florida and New Jersey have statutes designed specifically for cooperative housing corporations. However, New York’s BCL, drafted for business corporations in general, seems to adequately address the issues of co-op corporate governance. “If it ain’t broke you don’t fix it,” says Siegler. “For all these years, co-op housing corporations have been governed by the BCL even though it’s not specific to them, and as a result, I don’t think it’s necessary to enact a cooperative housing corporation law.”

Shareholder Rights &

Board Responsibilities

Which parts of the BCL are most important for co-op boards and shareholders to be informed about? According to Siegler, there are two sections of the BCL for boards and shareholders to pay close attention to: Article 6, which deals with shareholder rights, and Article 7, which deals with how the corporation is managed, explaining the rights and responsibilities of directors and officers.

“Under the BCL, any shareholder has standing to review certain important building documents—such as financial statements, shareholder lists, or the minutes from shareholder meetings,” says attorney Bruce Cholst, a partner with the law firm of Rosen Livingston & Cholst LLP in Manhattan. “Shareholders may also make extracts from said documents, provided the review be for ‘any purpose reasonably related to such person’s interest as a shareholder.’ Shareholders also have the right under case law to review the corporation’s other books and records, so long as the inspection is sought in good faith and for a purpose consistent with the shareholder’s right to monitor his investment in the corporation.”

For example, if shareholders seek to challenge an action of the board, according to Siegler, they can invoke the BCL. Article 7, Section 717(a) of the BCL provides that “a director shall perform his duties as a director, including his duties as a member of any committee of the board upon which he may serve, in good faith and with that degree of care which an ordinarily prudent person in a like position would use under similar circumstances. In performing his duties, a director shall be entitled to rely on information, opinions, reports or statements including financial statements and other data…” Shareholders could potentially bring lawsuits under those provisions, Siegler says.

Shareholders and board members, however, should consult a lawyer before assuming that a board member has violated or satisfied his or her duty to act in “good faith.” Many terms in statutes become legal terms of art, which take on new meaning through judicial interpretation. The business judgment rule, which is not written into the BCL, is a doctrine of the courts, which largely shields the actions of board members.

Case Law

“Levandusky vs. One 5th Avenue Corp. (1990) is the seminal New York Court of Appeals case that held that the case law business judgment rule standard of judicial review, applicable to corporations generally, should apply to cooperative corporations,” says Lasser. The business judgment rule prevents judges from questioning actions of corporate directors "taken in good faith and in the exercise of honest judgment in the lawful and legitimate furtherance of corporate purposes." In other words, a court will not second-guess a director’s decision, even if it turned out to be a bad one, as long as the action was taken in good faith. Today, Lasser says, “all New York courts begin their evaluation of challenges of board decisions based on the analysis set forth in Levandusky to determine whether the business judgment rule should be applied.”

By acting in good faith directors can shield themselves from personal liability for actions taken in their capacity as a director. However, the indemnification provided by the BCL and the deference of the business judgment rule will not be available if there is an adjudication that establishes that the director acted in bad faith.

Board Meetings & Voting Requirements

In addition to outlining board responsibilities and shareholder rights, the BCL provides detailed regulations on the manner in which boards and shareholders conduct meetings and do business. The rules outlined in the BCL have the potential to empower shareholders to ensure their boards are performing lawfully. According to Siegler, shareholders can potentially bring lawsuits under Article 6 to assert their rights. “Suppose a co-op corporation doesn’t have an annual meeting for two years? Can a shareholder seek to have an annual meeting to elect new directors? The answer is yes—it’s in Article 6—they can have a special meeting to elect directors.”

As far as voting requirements, Article 6 of the BCL also provides that a majority of all outstanding shares is required to amend a co-op’s bylaws. A bill that passed the state Legislature shortly after the 1998 overhaul further reduced the requisite vote for amending co-op bylaws to a bare majority of the votes cast at a shareholder’s meeting at which a quorum is present,” says Cholst. “In addition, a resolution by the board (without shareholder approval) to the extent authorized in the co-op’s bylaws or its Certificate of Incorporation may also amend bylaws. However, any such board-enacted bylaw is subject to repeal by vote of the shareholders.”

The BCL also permits shareholder action by less than unanimous (but not less than majority) written consent if the certificate of incorporation so provides. All written consents must be signed within 60 days. Notice of any action taken in this fashion must be provided to those shareholders that did not issue their written consent. “Boards may wish to take advantage of this aspect of the law, which obviously facilitates the shareholder approval process, by enacting the appropriate amendment to their Certificate of Incorporation; such an amendment requires approval by both the board an the shareholders,” says Cholst.

For shareholder meetings, Section 602 of the BCL allows cooperatives to create their own rules in the bylaws, as these meetings “may be held at such place, within or without this state, as may be fixed by or under the bylaws, or if not so fixed, at the office of the corporation in this state.” The BCL does prescribe, however, that annual meetings must be held for the election of directors and transaction of other business. Meetings via conference call or video conference are now permitted by the BCL as long as everyone in the meeting can hear each other at the same time.

“The BCL does not deal explicitly with issues such as who presides during meetings, what parliamentary rules govern, nominating procedures, proper format for committee reports, the method and timing of notices, the format of proxies, or methods by which questions from the floor are fielded,” according to Cholst. “The absence of clear-cut guidelines regulating the precise manner in which shareholder meetings are noticed and conducted often lead to confusion and sometimes rancor at shareholder meetings. This is particularly the case when insurgent shareholders perceive that the rules are being arbitrarily applied for the sole benefit of the incumbent board.”

Other important provisions of the BCL pertain to the election process, the form of proxies, and the treatment of abstentions.

The Future of the BCL

As of this writing, we can expect to hear about New York’s BCL more than we usually do. According to property manager Michael Berenson, president of Manhattan-based management firm AKAM Associates, Inc., a recent proposal coming from the federal government would place restrictions on the imposition of private transfer fees, commonly called flip taxes.

“The recently-proposed Federal Housing Finance Agency (FHFA) ruling would prohibit Fannie Mae or Freddie Mac from purchasing loans in co-ops where there is a transfer fee/flip tax or other similar revenue-generating device,” Berenson notes.

Opponents from all over the co-op world are lining up to challenge this proposal. “First there is the argument that transfer fees/flip taxes have historically been a boon to co-ops,” says Berenson. “Second is the fact that Section 501(c) of New York’s Business Corporation Law permits transfer fees/flip taxes. To do away with transfer fees/flip taxes would not only hurt the residential cooperative corporations that rely on them for important income, but also would affect a right derived from the Business Corporation Law, which no doubt will be invoked as the debate about FHFA’s restrictive proposal becomes more public.”

Because all shareholders in a cooperative have rights and duties under the BCL, it is wise for board members and shareholders alike to familiarize themselves with this body of law, instead of only relying on the bylaws of the cooperative. The text of the law is available on the New York Legislature website at http://public.leginfo.state.ny.us/menuf.cgi under “Laws of New York.” Board members and shareholders should look most closely at Article 6, titled “Shareholders,” and Article 7, titled “Directors and Officers.” Shareholders and board members should beware, though, that the law is extensive, and to properly understand the law and to deal with potential issues, a lawyer should be consulted.

Elizabeth Ilene Robbins is a freelance writer and a June 2010 graduate of the Benjamin N. Cardozo School of Law.

Comments

Co-op passer-by...

The BCL is indeed very explicit as to the nature of notice for shareholder meetings, cf. Article 6, Section 605 of the BCL at the link provided in the article under “Laws of New York.” then select BSC, then Article 6 for Secton 605. Not sure how the two lawers contributing to that article could have missed it: Not fewer than 10 days nor more than 60 days via electronic or first class mail; not fewer than 24 days nor more than 60 days when mailing via third class mail.

Alvin Brown

Question. I am a co-op owner. Renovation Plan was approved by the Building Board & City. Con-Edison added a new power line to the building at no cost because the building was at its capacity for the existing electrical load. It cost the building $150,000 to meter the new power line and also some other renovation in the building to facilitate the installation. The Building Board decided that the cost should be borne by the first ones who need to add the extra power. This decision was made after my renovation plan was accepted by the Building Board and, for that reason, is retroactive to me. The addition is to the common area and for that reason the cost is the cost of the cooperative building. What law can I cite to state that I am not liable for the $15,000 charged to may Co-Op unit in that building ($150,000 divided by 10)?

TJ

Iam the POA for my aunt, who has alzheimers, and no longer lives in her coop in Yonkers. For four years I have been trying to sell this unit for under $100K. I have had five buyers over this time. Each time a "contract" is presentedfor me to sign the process starts. After many months of "vetting" the applicants, most were paying cash, one already had a loan commitment and one never got to finalization. However, each applicant was systematically "turned down" by the board. No reasons, no explanations, no notice. I have learned that only 1 unit has sold in this entire building in over 5 years!!! The board has turned down every buyer by every seller. Same thing-no reasons. Many have been minority buyers, others retired teachers, police and other walks of life. The board has held EVERY seller hostage-with no repurcussions. How can this be?? Are there no governing bodies? Does Fair Housing come into play? Can they and the management company be held liable? I am at my wits end here with these people and they believe they are above laws and reproach. I am unfamiliar with coop laws & regs. Can you advise?

TT

The BCL is very informative, however it does not address the issue of who can be on the board of a cooperative. I live in a building where there are renters, subletors, and shareholders. The Offering Plan is dated from 1986 and allows anyone including non-residents to be board members should they receive the number of votes from the shareholders necessary to qualify. Is there any legislation which speaks directly to matters of a board can only consist of people who are shareholders? Thank you

dsm

i have a co-op in white plains can the board put in for a loan for 500.000.00 without a shareholders vote

Lillian Lopez

What can be done if the President of the Co-op board refuses to show members the ballets of tenant shareholders who are aware that the votes were tampered with and a new president was elected and the board stayed the same?

joanne

I owe maintenance in a Westchester coop and I will be moving to a senior citizens apartment building in january 2013. The aparment is going to the coop association and the first payoff will be my lender due to a reverse mortgage i received a few years ago. There is no other debt on my apartment. My question is my star abatement that is distributed to all shareholders on a 12 month basis.Am I entitled to my proportionate share of my star abatement or does the board have the right to retain these funds and apply it to my arrears. This money is rightfully mine I think. Please help

wishiwere@mail.com

I lost my apartment last winter when my elderly landlady hurt herself and her daughter sold the 2-family house. I've been staying with my mother in her coop in Queens since. I'm disabled with a chronic neuro. condition, and can't find an apartment in NY, esp. since Sandy, so I am trying to search out of state, but it's difficult. My mother and I have always had a difficult relationship, and living together for 10 months in a 1-bedroom apt. has made it unbearable. She now threatens me with eviction by the police whenever she gets angry. If she goes through with that, can they throw me out?

mms

I am living with my aunt in a two bed room coop, originally its just the two of us. eventually i got married so my husband moved in with me, and a cousin from foreign country moved in with us since she has no one to live with ans shes on a student visa which she can not afford to pay her own rent. I got my son last june from my country hes 9y/o. it makes us 5 in a two bed room unit. the board now says that there is a maximum of 4 occupants in a 2 bedroom unit and gave us a decision that one should leave. since my aunt does not earn enough to pay for all the expenses me and my husband needs to share. but we can not let go of my cousin who needs help for accommodation more than anything else. Is there such a thing as maximum occupancy?

Dolores

I bought an apartment for my aging father in my building. He has since passed away and I've been renting out the apartment, with board approval. I am one of 3 or 4 people in the building who keep an extra apartment. I am retired and depend on the income of that apartment. Our rule has been that as long as you reside in the building, you can continue to rent out an additional apartment that you own. However you can only rent out your own apartment for 18 mos, and then you must return or sell. I am on the board, but voting on this issue was dominated by board members who don't like this rule. Am I grandfathered in or do I have any senior status exemtion?

denise

ive been approved byBoard and now have a renter of four years. I had to move out to care for parents. the current Board wants someone else to rent and to get rid of my tenant

Gladys Carlino

I'm a shareholder in Co-op. At last night' shareholders annual meeting ,A QUORUM AGAIN was NOT reached & NO ELECTIONS for the BOD took place.(the last election was in 2009).The BCL allows only a 13 month extention(sect. 602) NUMEROUS times in past 3 yrs.I've informed the BOD,MANAGEMENT & CO-OP's LAWYER via mail BUT the BY-LAWS & BCL is ignored. Other shareholders want to become members of the BOD, but are not able to be voted-in BECAUSE there hasn't been an election OR ANY ATTEMPT to "adjourn meeting to a future date when a quorum is present"..WHAT ACTION DOES ARTICLE 6 recommend (Siegler staiting "bring lawsuits under Article 6:" Section under Board Meetings & Voting Requirements: ?).CAN I OBTAIN this info.if I go to the Law Library & look up answer in the BCL?..Can a few of us Shareholders prceed with a lawsuit against the present BOD ?..or IS IT NECESSARY TO HIRE A LAWYER?..ANY INFO YOU CAN PROVIDE WOULD BE EXTREMELY HELPFUL THANK YOU IN ADVANCE FOR YOUR RESPONSE !!....

shareholder concern

Is it legal for a NYC residential co-op building's management company to demand a deposit for work (not requiring an Alteration agreement), when there is no such l building rule?

Bob. Walsh

The supt and porter are union in my building...can we go. With out union. ???? Make building. Non union. Too expensive. Union. Co op building

Sheryl Dale

I have lived in the coop one bedroom unit I bought nine years ago. When I purchased the unit the rules were that you could sublease your unit after you have lived there for 3 years. I need a larger place to live and the co-op is telling me the rules have been changed by the board and you can no longer sublet your apartment unless you list it with a realtor first for sale. I would sell the unit but with the drop in housing prices the unit is now worth less then what I owe I'm the mortgage and I would loose a significant amount of money if I sell in today's market. If the unit does not sell after a year you must get your name on a waiting list as they only allow a certain number of the units to be sublet. I feel trapped and have no way out. Should the rules under which I purchased the unit stand. Is there any way out?

Susan Taraby

I live in a residence which is a coop. I would like to know : 1. Do the by laws of our complex over ride those of the BCL. 2. Can a person of 82yrs. of age who has lived in her home for 30 years have her lease retracted if the board of Directors decide to conduct a vote and the majority of members vote in favor of doing so. I await your reply.

Joe Richardson

My mother is a shareholder without a title and has requested maintance repairs on her apt. Such as walls falling down in her bedroom under her window for over two years. She had to call the city housing inspector to come into the matter. While inspecting the apt. she saw the sink in the kitchen was about to fall from the countertop and wrote that up also. The maintance manger and others came into my mothers apt and told her that she is responsible for the repairs financially. My mother has section 8 housing voucher which she could lose because of the validations, but the worst part of it all is my mother lives on a fixed income. She just can not afford the repairs.what can she do about this matter,please help my mother she is almost 80 years old now and has worked all her life but still is poor . Thank you kindly just having this outlet for her to be heard.

an unknown user

what is property manager responsibilties when squatter move in a coop do any one know

an unknown user

My coop is forcing us to sell our apartment in 12 and if we do not have a contract of sale we will lose money of a settlement agreement. Their reason is that they do not want us in their coop because we are interracial. My question is , can a corporation force you to sell your shares and in this case to loose your home, just because they do not like you? I understand put the property for sale, but having a contract of sale in 12 months is something we c?annot control? Thanks.

Concerned Parents

My husband has a share with Co-Op in the Bronx. He has been living here for 10 yrs. My daughter and I have been here for 5 yrs. Since my husband and I have been living here, our place HAS NEVER BEEN TRULY PAINTED. I heard that there is a law in NYC stating that your apartment should be painted AT LEAST ONCE EVERY 3 YRS no matter if you still live there. I called Co-Op about having my apartment painted. They told me that we have to do it our self. What I don't understand, is if we do paint it ourselves and it doesn't meet their standard paint, we get penalized if the apartment is not the way it was first bought if we decide to move out. No test is ran on my apartment's paint. How do I know if we not breathing something in that could cause us damage. Please Help. Are they suppose to paint apartment at least once every 3 years.....

Angela

I have a question about a coop in Brooklyn Heights. Can you give me some advice? I don't see anwers on this blog, only questions. Please let me know, I have an important question

GH

I reside and own a Co-op apt. in Spring Valley, NY. I am disabled(2008) with Multiple Sclerosis. Want to move due to my disable fixed income and various Maintenance increases. I also owe Mortgage of 107,000,therefore I am paying $1400 monthly on a $1700 income. Was advised to stop payments on Mortgage and do Short Sale. Continue to pay Maintance until I get a new apartment. Will the Bank stop me from getting a new apt? Can I apply for section 8 so that I could stay here?

Lisa

A new mgmt company recently took over mgmt of our bldg early 1st quarter this tr. do they hv the right to add fees (proceeding fees) & implement them just because they are now the new managing company?

Concerned Shareholder

I live in a garden co-op for more than 35 years. Is it legal for the BOD to enter an apartment and make an inspection? I remember 25 years ago it was deemed illegal. Did anythig change?


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