You can thank a farmer in Kansas for what is about to happen to the world of New York co-op lending.
Whether you call him Terry Kinderknecht, Terrance J. Kinderknecht, Terry J. Kinderknecht, or Terrance Joseph Kinderknecht, he was a farmer who hit hard times and declared bankruptcy in 2002. A year before going under, though, Kinderknecht had financed two new tractors from John Deere, and the loan documents were filed under the name “Terry J. Kinderknecht.”
And therein lies the problem.
Terry’s journey from tractor to bankruptcy identifies him as using all these names. In fact, the Terry, Terrance, or Terry J. conundrum caused the John Deere company to be left high and dry when it tried to collect on its loan in bankruptcy court.
What This Means for Co-op Boards
But, you may say, we’re not in Kansas. Well, no, but it still could concern you. The dilemma of Terry aka Terrance aka Terrance Joseph, et al. – and other situations like it – has rattled the legal and financial communities. It’s clear to see why: no lender wants to make a loan it can’t collect on – and certainly not because of simple name variations on documents. So in 2008, the Uniform Law Commission and the American Law Institute began work to fine-tune the Uniform Commercial Code (UCC) statutes. That work led to Governor Andrew Cuomo signing into law in December 2014 some significant amendments and revisions to New York’s UCC, including Article 9. That’s the part the co-op community will need to embrace.
Going forward, any purchaser who applies for a co-op loan or an existing owner who wants to refinance will have to supply the lender with a current New York State driver’s license, or in the case of a non-driver, a New York non-driver photo identification. The UCC financing statement will use the name indicated on the ID.
This issue lands in the laps of co-op boards because the co-op corporation provides the stock certificate and proprietary lease when a loan is made. In an ideal world, the name on these corporate documents would match that on the financing statement. The issue can easily become more complicated when one of the existing shareholders wants to refinance, and the name on the stock certificate and proprietary lease doesn’t match the name on the current driver’s license, which can happen for any number of reasons, including marriage, divorce, or widowhood.
Nevertheless, one of the board’s responsibilities is to make sure the co-op corporation doesn’t impede refinancings or sales, and name differences might do just that. There are workarounds, of course, and boards need to check with their lawyers on what to do.
Here Comes Title Insurance
In the world of buying and selling houses and condos – real property – sellers commonly buy title insurance. This guarantees clear title to the buyer, and anyone else who may buy the property down the road.
Title insurance is not something that is traditionally bought in the co-op world, however. But the revisions to Article 9 may change that now. “If the bank is nervous,” says Stanley Simon, a partner at the law firm of Allen, Morris, Troisi & Simon, “the bank is going to say to the buyer, ‘Your seller can’t produce all their drivers’ licenses over the past 30 years. We don’t know if there is a UCC out there that we can’t discover, and we may be in second lien position. That’s not acceptable. So, buyer, you have to buy title insurance.’” And, Simon continues, the buyer is going to turn to the seller and say, “Hey, I wouldn’t have to buy this if, seller, you had all your drivers’ licenses. So you should pay for it.”
“Best case scenario,” says Simon, “if I were on a board and I wanted to make sure all the owners in my building don’t have problems refinancing in the future, don’t have to worry about title insurance issues, and won’t have problems selling, this is what to do. Every time someone submits an application for a refinance loan or a purchase loan, also have them provide a clean, readable copy of their New York State driver’s license or New York State non-driver photo ID. And if they don’t have one of those, then have them fill out this form saying, ‘This is my first personal name, and this is my surname.’”
If the co-op keeps that on file, says Simon, when it comes time for an owner to sell, the co-op will have a record of all recognized loan transactions and the accompanying driver’s license or non-driver photo ID. Including this requirement in the admissions package would be very helpful and may prevent problems in future.