Given the state of the economy and the real estate market, a novel issue is whether when a bank conducts a foreclosure sale on the shares relating to a cooperative apartment (without a judgment of the court), the successful bidder is subject to the approval of the cooperative’s Board of Directors and must otherwise comply with the cooperative’s governing documents. That was precisely the issue raised in LI Equity Network, LLC v. Village in the Woods Owners Corp., 2010 N.Y. Slip. Op. 07514 (2d Dep’t October 19, 2010).
In LI Equity, the plaintiff LI Equity Network, LLC (“LI Equity”) commenced an action in the Supreme Court, Suffolk County against the cooperative corporation, Village in the Woods Owners Corp. (“Village in the Woods”) and the bank that had conducted a public auction of the cooperative shares, Washington Mutual Bank (“WAMU”). LI Equity claimed that although it was the successful bidder at the auction, Village in the Woods refused to provide it with a purchase application and advised it that it would not approve LI Equity for the sale. LI Equity sought for the court to direct that Village in the Woods close on the shares. Simultaneously with the commencement of the lawsuit, LI Equity moved the Court to prevent Village in the Woods from selling the shares at another public auction.
The trial court granted LI Equity’s motion, directing the closing of title of the shares and precluding the sale of the shares at another foreclosure sale. An appeal by Village in the Woods ensued.
The Business Judgement Rule
The Appellate Division, Second Department reversed the trial court and held that LI Equity was subject to the approval requirements of Village in the Woods and that the cooperative had properly exercised reasonable business judgment when it applied its approval requirements to the proposed sale. It held that the Uniform Commercial Code (UCC) requires that every aspect of sale of collateral by a secured party (such as a bank) could be done by one or more contracts and on any terms and that, here, the “Terms of Sale” clearly stated that “[t]he apartment is sold . . . subject to the . . . bylaws; rules, regulations, procedures, resolutions, Offering Plan, charges, fees and any amendments thereto . . . .”
In coming to its decision in LI Equity, the appellate court stated that the public auction of the shares constituted a non-judicial sale under UCC Article 9 and that the auctioneer conducted the sale pursuant to the provisions of the “Terms of Sale,” which were agreed to by prospective bidders by signing a “Memorandum of Sale.” Item 6 of the Terms of Sale stated that the apartment was sold “as is” and subject to, among other things, the bylaws, rules, regulations, procedures, resolutions and offering plan of the cooperative. Village in the Woods’ proprietary lease stated that the premises must be used only a private dwelling for the lessee(s) and members of their family and that should a bank foreclose on an apartment, it must sell the apartment to an individual. Further, over ten years prior to LI Equity’s purported purchase, Village in the Woods enacted a rule that individuals who purchased an apartment must live there for at least a year.