When owners fail to pay maintenance or common charges, boards typically take them to housing court and threaten eviction. Given the huge backlog of cases resulting from the state’s eviction moratorium, are there nonjudicial alternatives to collecting your money?
There are a number of alternatives. The path of least resistance for many cooperatives is to take a look at whether the shareholders have a loan with a bank. If they do, hopefully the co-op has a recognition agreement on file. The recognition agreement is between the bank and the shareholder which essentially says that in the event of a monetary default, the cooperative will give notice to the bank of the default. The bank, in order to protect its security interest, is supposed to write a check to the cooperative for the arrears, and the burden falls on the bank to pursue its remedies against the shareholder lessee, including foreclosure.
If the shareholder doesn’t have a loan, what recourse does a board have?
A proprietary lease is a contract, and there’s an obligation to pay rent or maintenance to the co-op. In a condominium, of course, there is no right to seek eviction because unit-owners actually own their apartments. But both co-op and condo boards have the right to pursue a regular collection action in either city Civil Court or state Supreme Court, which isn’t associated with eviction. The delineating factor is generally the amount of money in dispute, so the Civil Court has jurisdiction up to $25,000, and the Supreme Court has jurisdiction over $25,000.
How does that work? What’s the process boards have to follow?
You bring a basic complaint alleging arrears and document that you’ve sent statements to the shareholder or the unit-owner. The shareholder or unit-owner can potentially answer with a counterclaim, but generally there is a waiver of counterclaims in a collection proceeding, and you can get a summary judgment.
That can be enforced in several ways. If we know the bank account that someone has, we can put a levy on it. I recommend that buildings with direct deposit of maintenance or common charges get copies of those checks from the banks, because that is a fast track potentially to enforcing a judgment.
Also, New York allows for you to garnish up to 10% of a person’s wages, where the employer has to deduct money from the paycheck until the judgment is satisfied. Those judgments come with interest — in New York it’s 9% — so you can actually wind up making more money than if the shareholder or unit-owner had actually paid the maintenance or the common charges.
That sounds pretty straightforward. But are there defenses shareholders or unit-owners can use that are harder to get around?
It doesn’t happen often, but filing for bankruptcy could stop a collection proceeding in its tracks, but only temporarily. There would be a day of reckoning. There would be a reorganization where the shareholder lessee or unit-owner comes up with a plan with the bankruptcy trustee and where certain payments are going to be made to work off of the arrears and also stay current.
And once a bankruptcy proceeding is commenced, you must start paying on a current basis. So there can be a slight detour, but risking that detour is still better than waiting for Housing Court, which is even more backed up because of the pandemic and eviction moratorium.
Are there any other options available to boards to get their money?
In cooperatives, there is what I call the nuclear option. In all proprietary leases there’s a section that deals with events of default, and many have a provision that says you can serve a notice to cure, typically 10 days. If the money is not paid within that period, you can give a five-day notice of termination, and once the lease is terminated, you can set up a foreclosure proceeding. It’s still nonjudicial. You do a lien search, give notice in a newspaper ad to all the creditors. You hire a licensed auctioneer and sell the shares to the highest bidder
There’s still a problem, though. You’ve sold the shares and you’re entitled to issue a new proprietary lease to a successful purchaser, but you still have to evict, which means you wind up in Housing Court and the current eviction moratorium. Even if it’s extended beyond Jan. 15, 2022, the backlog of cases means your case will probably not be heard until 2023. You’re kicking the can down the road.
So to recap, boards have judicial and nonjudicial options. But is there something boards can do before going to Housing or Civil Court?
We recommend opening up a dialogue about working out some type of a payment schedule where the shareholder or unit-owner can work off the arrears over a period of time, maybe even several years. People are often embarrassed, so you want to find some common ground that allows them to preserve their dignity. But the real takeaway is that there’s no one model that fits all cases, for both sides. Every board should consult with an attorney before they decide what path to take.
WHO’S SUING WHOM
Lender May Have Sent Insufficient Notices of Foreclosure
Around 2013 a shareholder of a Manhattan Housing Development Fund Corp. cooperative (HDFC) fell behind in her maintenance payments and on her loan payments to her lender. The HDFC began eviction proceedings, and the lender commenced a foreclosure action. Despite owing money, plaintiff commenced action in November 2015 against the HDFC and the lender, alleging, among other things, 15 causes of action based upon harassment, breach of fiduciary duty, breach of contract, abuse of process and other claims. In a 37-page decision the court found she failed to establish her claims. However, it did not grant the lender summary judgment, finding that there were issues of fact as to the sufficiency of the notices sent to the plaintiff in advance of the nonjudicial foreclosure.
Arthur v. 1809-15 7th Ave. Hous. Dev. Fund Corp.
April 9, 2021