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Habitat Magazine October 2020 free digital issue

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ARCHIVE ARTICLE

Co-op Battles LLC Over Unsold Shares

Holders of unsold shares in a co-op typically have rights and privileges that the ordinary tenant-shareholder doesn’t have. One of these is that the unsold shareholder can be an LLC, or limited liability company, whereas most co-ops don’t permit LLCs to own shares. When an LLC’s unsold shares are transferred to a bona-fide occupant of the apartment, or when the shareholder or a family member moves into the apartment, the shares lose their unsold shares status. That was the situation in Bellstell 7 Park Avenue, LLC v. Seven Park Avenue Corp.
The plaintiff, an LLC, owned several unsold-share apartments in the building, but the apartment at issue here was subleased to Ciro Campagnoli. He had lived in the apartment for more than a year when the cooperative’s counsel informed the LLC that Campagnoli qualified as a family member of the LLC-holder and that the apartment would no longer have unsold-share status. The question at the center of this lawsuit is whether Campagnoli is a “member of the family” of the holder of unsold shares. If so, the apartment would lose its status as unsold, and its special rights and privileges would disappear.
After receiving this notice, the LLC objected and eventually began this action demanding that its status remain in place. (As background, the LLC was owned by a New York corporation that, in turn, was owned by an Italian entity. Campagnoli and his sister held a 50 percent contingent interest in the Italian entity – their father holds 100 percent during his lifetime – and Campagnoli is the CEO of the New York corporation and of the LLC).
The court, in a case of first impression, reviewed the specific language of the proprietary lease. The LLC-holder argued that, because “member of his family” can refer only to individuals and not entities, there is no basis for the court to conclude that the LLC-entity has any family members. The cooperative countered, unsuccessfully, that if that were the case, an LLC could not hold shares in the first place since the lease presumes that a holder of unsold shares has family members. While the court acknowledged both arguments, it stated it would not give “significant weight” to the argument that because LLCs do not have family members, “LLCs cannot be subject to the bona-fide-occupant restriction on unsold shares.”
The LLC-holder also argued that, given the corporate nature of the LLC, it would be difficult for a court to determine who is a member of the LLC’s family. The court explained that that difficulty would exist whether an individual has a share of the LLC through multiple levels of corporate ownership, or the individual is one of a number of members or officers of the LLC.
Ultimately, the court decided the “only reasonable reading of ‘member of his family’... is that this language does not encompass individuals connected to LLCs or corporations that hold unsold shares.”
The Takeaway
It used to be that cooperative sponsors were required to transfer shares to individuals within a period of time after conversion, and that those individuals would then be holders of unsold shares. When the Internal Revenue Code was amended in the late 1980s, there was no longer a prohibition against entities owning unsold shares.
The reason why this case is important is that it would allow, theoretically, individual unsold shareholders to assign their shares to an entity owned by them. Depending on the language in the lease, this could happen either without board approval or with approval from the managing agent, not to be unreasonably withheld.
Principals of the entity could then, theoretically, move into the apartment, live there for a period of years, and then – when they vacate – have the owner/entity maintain its unsold status so that it continued to receive the benefit of special rights. These could include the right to sublet or sell without interference and, possibly, exemption from certain fees.
One final note: the cooperative argued that the plain language of the lease – the same language relied on by the holder-LLC – did not permit ownership of unsold shares by an entity because entities do not have families. Thus, plaintiff would have lost unsold-share status in all of the apartments it owned.
This decision is being appealed.

Dale J. Degenshein is a partner at the law firm Armstrong Teasdale. The statements and views in this article are her own and not necessarily those of the firm.

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