Default Threat

Phillips Nizer
Marc A. Landis,
Partner

The 120-unit co-op was originally sponsored by the New York City Department of Housing Preservation and Development (HPD). After years of alternating between occasional discussions and benign neglect without any definitive action taken by either party, the HDFC cooperative received a notice that it was in default because it had failed to pay HPD a portion of the profits earned upon the sale and re-sale of apartments. Simultaneously, the city agency notified all shareholders of the default, creating a fear that the building could face foreclosure, leading to a loss of residents’ homes and equity. The cooperative corporation did not have sufficient reserves to reinstate or satisfy the payment obligations. The corporation did not have access to mortgage financing; nor could the shareholders afford to satisfy their financial obligations through assessments.

Legal Lesson

Apart from the obvious lesson (i.e., avoiding payment defaults in the first place), the board of directors was able to address HPD’s concerns and enter into a new regulatory agreement and a restructured payment agreement as a result of strategic action. That meant:

• Prompt notification and frequent follow-up communications with all shareholders, through written reports, supplemental shareholder meetings, and committee meetings. This educational process enabled the board to secure the support of the necessary supermajority to revise the corporation’s governing documents to allow the new regulatory agreement.

• Outreach by the corporation’s counsel and board of directors to local, state, and federal elected officials and to other key community contacts. This was intended to ensure that HPD heard from many advocates on behalf of the corporation and its shareholders, and evidencing the commitment of the board of directors and shareholders to improving fiscal management and responsibility.