Unlawful Stock Transfers and Termination Courts Deny Co-op's Automatic Liens

Co-ops have to be vigilant and address defaults due to nonpayment, objectionable conduct, illegal sublets, bank foreclosures and below market resales, and shareholders declaring bankruptcy. Some proprietary leases and bylaws appear to give co-op boards incredible authority. By a mere majority vote, boards can declare a shareholder, investor or even a sponsor in default due to their own actions, or the actions of the subtenants and renters. Boards may mistakenly believe that by a mere vote and then notification, they can terminate the shareholders’ stock and lease. Boards who read their proprietary lease and bylaws in a narrow and literal way may begin to think they can solve their resident problem cases by eliminating the shareholders’ or investors’ rights and interest in the stock and lease, without a judicial procedure. The court cases cited above show that even with a court action, the co-op may not be able to terminate the stock and lease! Boards often believe that after stock is terminated, the apartment and stock automatically revert back to the co-op, as the co-op’s property without a private, public or foreclosure sale.

I am not an attorney. As director of Diversified Property Management in Brooklyn, I work under the "law of agency" representing cooperatives. Like many of our colleagues, Diversified has established an active closing department in which transferring stock to a shareholder purchasing a co-op is fairly routine. Stock transfers are based on long-established presumptions that the co-op corporation (the Lessor ) has absolute control over the stock it issues and has a primary, built-in lien on the shares. That lien allows the co-op to collect maintenance and other charges ahead of any other lien, including bank loans or other encumbrances. But is this presumption actually clearly established in the laws of New York State? Surprisingly, the answer is no. There have been a number of court rulings, unknown to boards and managing agents (and even to some real estate attorneys) that shake the foundation of this core belief that co-ops have automatic liens on their own stock.

Inaccurate Interpretations of Co-op Rights

I recently encountered a situation where, despite advice from their attorney and myself, a co-op board was moving forward to terminate the lease and cancel the stock of an investor. Their goal was to expedite evicting the investors’ subtenant, John Doe, due to his objectionable conduct. In order to genuinely rid themselves of this subtenant, the board also sent notice to the sponsor that they were terminating one of his leases and canceling the stock appurtenant to one of his free market apartments, where John’s girlfriend (Jane Doe) rented. The board wanted to make sure that John didn’t simply move in with Jane and continue to live in the co-op.

The actions of this board became increasingly radical. Their inaccurate interpretation of the proprietary leases’ "use of premises" clause was that residents had the right to use inside apartment space, but not the common areas outside the apartment, such as the private parking lot and swimming pool, without the explicit consent of the board. They ignored my advice that this distinction was not stated in the lease or anywhere else in the offering plan. This board decided that they could restrict anyone who they declared to be in default of the proprietary lease (including subtenants) from using the co-op amenities, as if they were trespassers. They hired a security guard service to stand guard at the pool gate entrance to physically restrain John and Jane from access to the pool. They even sought the involvement of the police and chairman of the neighborhood community board.

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11 Comments

  • Does coop board have right to terminate master lease and force sale of shares of unit owner who is mentally ill and who board now considers a threat to building residents?
  • Can a coop terminate membership and convert shares to "nonvoting certificate of interest" because the member did not contribute to a call for prepaid nonqualified unit retain?
  • Who has the right on a co-op board or property management for a co-op board to ask where you are?
  • Recently shareholders have asked to have family names added to proprietary stock certificates (I was told to avoid estate "problems" in the future.) I balked (I'm on the board) stating the legal rights of ownership, and liabilities, then also transfer. Thus, these relatives can insist on occupying the space in the event of death of occupant without being interviewed by the Board (not good). Additionally, these relatives can have financial problems that could possibly then attach to the property. My question: am I correct in these two assumptions: the relatives of original stock holder (who did apply, giving all financials and interview) can occupy without board interview/consent; or, any financial problems the relatives may have can have a direct impact on said coop thru the requested transfer of stock. Please reply and thank you.
  • I live in a Article 213 coop and my husband died without a will. I have resided wtih my husband for 15 years in the coop and the court appointed me as Executor.To transfer the stock into my name, the Board intends to perform a closing with closing costs. Is this the usual procedure for transferring stocks?
  • Cindylou Smith SWEETIECLS@YAHOO.COM on Wednesday, November 14, 2012 3:08 AM
    We lived in a Co-Op Apartment in Honolulu Hawaii and in May of this year the Co-Op board took us to court for default on our maintenance fee. They said it was for a breech of contract and they also cancelled our certificate of stock. We were served with court papers by the sheriff for eviction. Well I have checked the City and County of Honolulu Property Tax Website and as of November 11, 2012 my boyfriend is still listed as the leesee. Now it has been approximately 6 months since the eviction and the management company handleling the Co-Op has been renting our unit since we were out. We have not heard or received anymore court papers from Management and we do know that we still owe for the maintenance fee plus whatever the attorney and court fees which will be added to the bill. Now I did read through the propreitary lease and it said for what ever the default the unit is to be put up for private or public sale and that the proceeds shall be applied towards the default amount any balance of the proceeds shall be given to the shareholder or in the case of the proceeds are not enough to cover the default then the management may deemed to seek other means of collection. There was nothing or anywhere in this lease stating that the Co-Op can be rented out by the Management Company. So with it being rented out, could the money that they been collecting for the past 6 months could be used towards what we owe on the default. What can we do about it?
  • Excellent article. Thank you.
  • A mentally ill co-op owner has been sent to a hospital for treatment. His roommate - also mentally ill - remains, creating unsanitary conditions and intimidating residents. A GAL has been appointed but he remains. What next?
  • The last question above probably came from my building. Court has so far refused to allow eviction of the remaining roommate, and no maintenance is being paid. Adjacent apartments are devalued by the smell emanating from his apartment. Advice?
  • I think you're off-base stating that through a judicial proceeding (or summary proceeding), if a judgment is obtained against the shareholder the proprietary lease and shares are not null and void. Once you sever the landlord tenant relationship, through appropriate predicate notices and obtainment of a judgment, you are able to evict the shareholder. Then the provisions of the lease control. If it states that the co-op may auction the property and proscribes requisite steps, the co-op should follow that. If silent, the co-op board assumes control of the unit. They may re-rent at the account of the evicted shareholder or sell (keeping the portion due) and disbursing the remaining proceeds to the shareholder.
  • At my co-op, we have an example of such a miss-guided board. The new board has been trying to take my apartment since I lost the elections, because they didn’t agree with me following the rules when I held the presidency, so are now seeking retaliatory relief. They first initiated an intrigue of supposed theft, to get me to make a false confession out of fear. When that didn’t work, they sent spies to encourage us to sell and move out, but we stayed put. Then they threatened a hold over case based on false accusations, but that never picked up steam. Now the board has supposedly invented a brand new innovative technique, dubbed the “lien method”, where a lien on my unit is asserted, based on no evidence, and then a judge is petitioned to get the lien approved and issue an eviction order, in order for the co-op to resolve the lien. It has to be one of the most insane co-op board schemes I’ve ever heard of. You may want to add that to your examples in the next edition of your article.