Richard Siegler is a partner in the New York City law firm of Stroock & Stroock & Lavan, and a member of the Committee on Condominiums and Cooperatives of the Real Property Section of the New York State Bar Association. He is also an adjunct professor at New York Law School, where he teaches a course on cooperative and condominium law.
In Sassi-Lehner vs. Chariton Tenants Corp., the court concluded that two sisters, whose mother had transferred a co-op apartment to them, were not holders of unsold shares. This is significant because in the future, if the women had won, more cooperative units might have been sold without board approval.
In this case, which began in the early 1990s, the plaintiffs’ parents had purchased the shares allocable to three apartments at 210 Avenue of the Americas. Mark Greenbaum had acquired such shares from the sponsor of the conversion. When Greenbaum failed to pay a debt secured by the shares and the proprietary lease for Apartment 4C, the Federal National Mortgage Association sold the shares and lease at a foreclosure sale to Michael and Christina Sassi. Michael Sassi was then president of the defendant co-op and plaintiffs’ counsel was then attorney for the co-op.
After Michael Sassi died in June 2001, his widow owned the shares and lease until December 2003 when she transferred them to her adult daughters, the plaintiffs. Neither the plaintiffs nor their parents had ever resided in Apartment 4C, which, until recently, was occupied by a rent-regulated tenant. Further, plaintiffs stated that neither of them had any intention to live there.
The daughters desired to sell the lease and shares to the apartment. The co-op’s board of directors would not consent to the sale unless a formal application was made for its approval. Plaintiffs maintained that no such approval was required since they were the owners of unsold shares, and sale by a holder of unsold shares needed only the consent of the managing agent. This was contrasted with the rights of the board, which may withhold its consent for any reason, except for one involving illegal discrimination.
Paragraph 38 of the lease was explicit: “The term ‘Unsold Shares’ means and has exclusive reference to the shares of the Lessor which were issued to the Sponsor or individuals produced by the Sponsor pursuant to the Offering Statement-Plan of Cooperative Organization or Contract of Sale under which the Lessor acquired the Leasehold to the building; and, all shares which are Unsold Shares retain their character as such (regardless of transfer) until (a) such shares become the property of a purchaser for bona fide occupancy (by himself of (sic) a member of his family) of the apartment to which such shares are allocated, or (2) the holder of such shares (or a member of his family) becomes a bona fide occupant of the apartment. This Paragraph 38 shall become inoperative as to this Lease upon the occurrence of either of said events with respect to the Unsold Shares held by the Lessee named herein or his assignee”.
Under General Business Law Section 352-e(6), the attorney general was authorized to issue regulations “to carry out the provisions of this section.” Such regulations were adopted, setting forth requirements concerning unsold shares.
In another case, Kralik vs. 239 East 79th Street Owners Corp., the plaintiffs claimed to be holders of unsold shares and thus, under the corporate documents, maintained that they were not required to pay a sublet fee. In granting the defendant co-op summary judgment in that case, the Appellate Division, First Department wrote: “Plaintiffs contend that they are holders of unsold shares by virtue of their compliance with paragraph 38 (a) of the proprietary lease. However, such a provision, alone, ‘does not create rights [as a holder), it merely extinguishes them’ … There must also be compliance with regulatory requirements pertaining to such holders …”
In reversing, the Court of Appeals held in Kralik in 2005, “that whether plaintiffs are holders of unsold shares should be determined solely by applying ordinary contract principles to interpret the terms of the documents defining their contractual relationship with the cooperative corporation.”
In rejecting the applicability of the regulations, the court ruled: “Because section 352-e is a disclosure statute, designed to protect the public from fraudulent exploitation in the sale of real estate securities’ … part 18 [of the Regulations] is similarly limited and only applies to disclosures made in a public offering. Thus, part 18 does not apply to plaintiffs unless and until they offer apartment 16Es shares for sale to the public, and, in that event only the Attorney General may enforce part 18’s requirements .
“In short, the terms of the controlling documents – not part 18 – determine whether plaintiffs are holders of unsold shares. Plaintiffs status must be decided by applying the usual rules of contract interpretation to those documents…”
The action was remanded to the Supreme Court for an examination of the controlling documents, which include the co-op corporation’s certificate of incorporation and bylaws, the proprietary lease, and the offering plan together with the amendments.
Regarding amendments to the offering plan, the defendants said that no amendment after one on July 2, 1990 (stating that Greenbaum was the holder of 483 unsold shares) shows any ownership of unsold shares. In the plan, the term “Unsold Shares” is defined as shares “not sold by the Closing Date that are acquired by one or more members of Sponsor or one or more financially responsible individuals designated by him as a holder of Unsold Shares…” The plan said that the sponsor is liable to the defendant cooperative for any default under a proprietary lease by a holder of Unsold Shares who does not occupy the unit covered by such lease. This latter provision is similar to the subparagraph (3) of Section18.3(w) of the regulations, in which a sponsor is required to “guarantee payment of all maintenance charges and assessments due from the holder of unsold shares.”
An initial examination of these documents indicates a lack of clarity with respect to the term “Unsold Shares.” Paragraph 38 of the lease states that “Unsold Shares retain their character as such (regardless of transfer) until” the shares are acquired by one who intends to occupy the apartment or the holder becomes an occupant. On the other hand, the offering plan refers to a holder as one who is “designated” by the sponsor. From the standpoint of the sponsor, he would probably wish to make the term very broad so that his designees would have a more marketable asset. But he would also not want to guarantee without limit the obligations of all transferees by his designated choices.
In considering the Court of Appeals decision in Kralik, it was evident to the court here that its reversal of the appellate division decision was based on the conclusion that the lower court was incorrect in holding that in order to be a holder of unsold shares there must, in addition to a contractual right to such status, “also be compliance with regulatory requirements pertaining to such holders.”
Thus, the Court of Appeals statement that various cases and others relying on them were incorrect to the extent they suggest that the requirements of the regulations apply where no shares are offered for sale did not indicate in the court’s view a criticism of the holdings in said cases to the extent they interpreted the rights of shareholders under the co-op’s controlling documents.
Before reviewing the case law before Kralik, the court said that an examination was required of the wording of Paragraph 38 of the lease, compared to the similar wording of Paragraph 38(a) cited in the various cases to be discussed below. The language in Paragraph 38(a) of the leases in those cases appeared to be similar to the Paragraph 38 of the lease in this case, except that the lease referred to shares of the lessor “issued to the Sponsor or individuals produced by the Sponsor, whereas in some of the cases cited the similar phrase refers to shares ‘issued to the Lessor’s grantor or individuals produced by the Lessor’s grantor.” Since the grantor of the lessor – the co-op – would be the sponsor of the conversion, this difference in wording, contrary to the argument of plaintiffs, was of no significance.
In Craig vs. Riverview East Owners Inc., in 1989, the court commented that the petitioners had contended that they were entitled to the rights of a holder of unsold shares by virtue of the provisions of Paragraph 38(a). However, the court remanded the matter for a hearing on “the status of petitioners’ shares,” holding, without any reference to the regulations, that while Paragraph 38(a) “includes a definition of the term ‘holder of unsold shares,’ its operation is merely to extinguish the rights of a holder of unsold shares if the shares become the property of someone, including the holder, ‘for bona fide occupancy’ ... [and the] provision, therefore, does not create rights, it merely extinguishes them.”
This interpretation of Paragraph 38(a) was reiterated by the court in its decision in Kralik. In a 1998 case, the plaintiff had purchased the shares allocable to the subject apartment directly from the sponsor. As the trial judge in that case, the judge in this case said he had held there that plaintiff was not a holder of unsold shares because she had made the purchase with intent to occupy the apartment. In this decision, the court noted that if the plaintiff were deemed a holder of unsold shares, the sponsor would remain liable for the maintenance obligations, and the co-op would be deprived of the right to control who could reside in the building. On appeal, the court affirmed the aforesaid factual finding, and also held that plaintiff in that case misconstrued the provisions of Paragraph 38(a) and that “her shares do not fall within the definition of unsold shares.”
In the final analysis, the crucial cooperative document to determine the issue was the plan, which provided that a holder of unsold shares must be a person “designated” by the sponsor. Accordingly, the court found that since neither plaintiffs nor their parents were so designated, plaintiffs were not the holders of unsold shares, and therefore their motion seeking a contrary declaration was denied, as was their request for injunctive relief.
Comment: This decision undercuts the ruling of New York’s highest court in the recent Kralik case, which recognized the broad contractual rights of holders of unsold shares in the face of regulations of the attorney general that sought to limit them. Here, the co-op’s offering plan had been amended in 1990 to require a holder of unsold shares to be designated by the sponsor – a requirement derived solely from the attorney general’s regulations – and this expanded definition in that plan was seized upon by the court to invalidate the claim of holders of unsold shares.