UCC Changes Could Mean Challenges for Boards

The Uniform Commercial Code (UCC) is essentially an assemblage of various statutes enacted to regulate commercial transactions which - to encourage national commerce - are adopted in the same form by virtually every state. Currently, the new and updated Article 9, which governs secured transactions (usually bank loans secured by pledges of personal property), is in use in more than 40 states. Since the late 1980s, there have been technical variations in the New York version of the pre-existing Article 9 with respect to co-ops' filing requirements, duration of those filings, etc. for a variety of reasons - including encouraging banks to make subordinate loans against cooperatives.

As Usual, NYC's A Little Different

In order to make the new statute conform to these technical requirements, lawmakers recognized that significant changes would have to be made to the New York version. Meanwhile, for a number of years there has been a great deal of uncertainty as to the right of co-op boards to enforce residents' obligation to pay maintenance against co-op shareholders without having to bring court proceedings. This has been a major problem for co-ops because their right to litigate in the event of default isn't always clear, either.

Courts have been reluctant to give shareholders the same rights as lenders who take pledges of shares under the UCC because co-ops do not generally follow the same formalities in obtaining pledges by their shareholders as do banks when they make loans. Although banks are able to take advantage of this law to force an auction of a shareholder's interest in a co-op apartment without resorting to litigation, the courts have been reluctant to allow cooperative boards this same power. In fact, the Court of Appeals has expressly declined to rule on the rights of a co-op in this situation.

New Article 9

The new Article 9 attempts to remedy this problem in favor of co-ops. It specifically gives most co-ops with standard forms of proprietary leases and bylaws the rights of a secured party under the statute without the co-op having to do anything. It places the co-op in a superior position to secured lenders who follow the requirements of the law. This means a co-op board does not have to go to court to declare a default and auction off the shares and proprietary lease of a delinquent shareholder.

There is another law that also has an impact here. The courts have ruled that the statutory warranty of habitability (Real Property Law 235-b) is applicable to co-ops. This means every shareholder in occupancy is entitled to "a dwelling unit fit for human habitation and shall not be subject to conditions dangerous, hazardous, or detrimental to life, health, or safety." Shareholders in occupancy can take advantage of this law to bring action against their cooperative, or to defend an eviction action.


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