The case of Fe Bland v. Two Trees Management Co., et al. is best known for its role in sharply restricting co-op boards’ power to impose “flip taxes,” or transfer fees, on their shareholders. However, this classic court decision also casts a long shadow over many other aspects of co-op building operations as well.
In this 1985 case, the court of appeals, New York State’s highest tribunal, invalidated flip taxes that had been imposed by two separate co-op boards. In one instance, the transfer fee varied from $50 per share to $200 per share depending upon whether the selling shareholder was an original purchaser from the sponsor or an outsider and whether he had been an owner for a period of more or less than five years. In the other instance, the transfer fee was a uniform two percent of the gross sales price.
There were two reasons for the court’s decision. First, it concluded that the language in each of the co-op’s proprietary leases and bylaws did not authorize imposition of a flip tax. Accordingly, in each case the board’s attempt to levy such a transfer free without first amending the respective governing documents to provide for proper authorization was deemed illegal. Since the governing document language at issue here was highly typical of proprietary lease and bylaw language in co-ops throughout the state, the court’s conclusion had widespread implications.
Separate and apart from the issue of a board’s authority to impose flip taxes in the face of restrictive governing document language, the court of appeals held that any transfer fee provision that assesses one shareholder more on a per share basis than another shareholder in the same building violates Section 501(c) of the state’s business corporation law.
That statute states: “…each share [of corporate stock] shall be equal to every other share of the same class…” The court of appeals construed that phrase as precluding different treatment of shareholders of the same class. (Co-op corporations, as opposed to many business corporations, have only one class of stock. Thus, by definition, all tenant-shareholders in a co-op are of the same class).
Since a flip tax that levies charges on the basis of the nature of the selling shareholder’s predecessor (i.e., sponsor versus outside purchaser) or on the basis of the number of years the selling shareholder resided in the building will result in a different per share amount for each departing shareholder, each share is not “equal to every other share.”
(The flip tax provision that assessed fees of two percent of the gross sales price was illegal for the same reason; the amount charged would vary from shareholder to shareholder depending upon the contract sales price. However, since the plaintiffs challenging that particular transfer fee did not assert the business corporation law argument, the court did not invalidate that fee on those grounds).
The restrictive effect of the Fe Bland decision on co-op building operations was so profound that industry groups such as the Council of New York Cooperatives lobbied for reform. The state legislature responded by amending Section 501(c) of the business corporation law to exclude co-op flip taxes from the requirement that “each share (of corporate stock) be equal to every other share,” provided that maintenance and assessment charges be determined on an equal per share basis and that the transfer fee be embodied either in the co-op’s offering plan or its proprietary lease.
The Fe Bland decision and the amendment to Section 501(c) that it spawned have enormous implications for co-ops today because so many boards are now looking to flip tax revenue as a cure for their fiscal woes. However, before enacting any flip tax resolution, boards must confirm that either their offering plan or governing documents authorize its imposition. If not, then the co-op’s bylaws and proprietary lease must be amended to provide for such authorization before the flip tax is implemented. To the extent that any such amendment requires approval by a super-majority of shareholders, that ratification must be obtained before the tax can be imposed. Any flip tax imposed by board resolution without proper prior authorization in the offering plan or governing documents is highly vulnerable to legal challenge under the Fe Bland doctrine.
Thanks to the legislature’s amendment to Section 501(c), boards have enormous flexibility in the types of flip taxes that can be imposed. For example, instead of being limited to a per share type of fee, boards can also impose a tax based upon a percentage of sales price, gross profit, or net profit. They can levy flip taxes aimed exclusively at speculators or those who have been in the building only a short period of time. They can even fashion a flip tax with exemptions, such as transfers to relatives, trust transfers, transfers where the seller remains in the building, and transfers by long-time residents, so as to garner any requisite political support for the provision.
Previously enacted flip taxes that are levied on a per share basis may now be modified to provide for assessment of fees by any of these alternative methods. However, flip taxes calculated on other than a per share basis that were not enacted before conversion must be implemented by means of a proprietary lease amendment under the revised Section 501(c). Moreover, under Section 501(c), this kind of flip tax cannot be imposed where maintenance and assessments have not been levied on an equal per share basis.
This amendment, however, applies only to flip taxes. As a result of the Fe Bland court’s interpretation of the original statute, in all other instances board regulations that have a disparate impact upon the co-op’s shareholders are deemed illegal. Thus, sublet fees that are levied on a uniform basis (i.e., $200 per month) or on a graduated basis (i.e., $200 per month the first year, $300 the second year, etc.), or those that are calculated on the basis of the amount of rent collected by the shareholder are vulnerable to legal challenge. In each of these cases, the sublet fee results in a different per share charge for different shareholders of the same co-op. The only kind of sublet fee consistent with the Fe Bland court’s interpretation of Section 501(c) is one that is levied on a per share basis. (Sublet fees that are a percentage of prevailing maintenance meet this standard because maintenance is computed on a per share basis.)
All other charges routinely assessed by boards on a flat fee basis (i.e., move-in fees, storage and license fees, parking fees, fees for processing of alterations, sales and sublet applications) violate Section 501(c) as interpreted by the Fe Bland court in the same fashion. One can even argue that house rules that have a disparate impact upon shareholders violate the business corporation law, Section 501(c), as interpreted by the Fe Bland court.
It is readily apparent that many typical board practices run afoul of the Fe Bland ruling, if strictly applied. Perhaps the time has come for the state legislature to once again modify Section 501(c) by exempting all co-op regulations and fees from its purview.