Robert D. Tierman in Board Operations on July 4, 2013
In the seminal decision Fe Bland v. Two Trees Management Co. (1985), New York's highest court held that a co-op cannot impose flip taxes, even through a shareholder-approved amendment to its governing documents, unless all shareholders are charged in proportion to their shareholdings, and thus treated equally. That case barred a flip tax that varied per share based on the term of ownership of the shares.
The state legislature came to the rescue with a 1986 amendment to New York Business Corporation Law (BCL) Section 501(c), applicable retroactively, that exempted flip taxes from the equality of treatment requirement. Yet while saving flip taxes from this, the legislature failed to close the Pandora's Box that Fe Bland opened.
Citing it as precedent the appellate court governing Manhattan and The Bronx first held, in Wapnick v. Seven Park Ave. Corp. (1997), that the special sales and subletting preferences that a co-op sponsor conferred on the original purchasers of apartments constituted unequal treatment, and noted that the legislature's amendment to the BCL exempted only flip taxes.
Then the appellate court governing the rest of New York City, Long Island and Westchester held, in Lescht v. Concord (1999), that a co-op might have violated the BCL's equality of treatment requirement by freely subletting apartments it acquired through foreclosure while subjecting shareholders to its restrictive sublet policy. The court felt so bound to impose the equality requirement that it expressly refused to accept the co-op's explanation that it was, in fact, leasing, and not subleasing, those apartments.
One month later, the Manhattan/Bronx appellate court, in Susser v. 200 East 36th Owners Corp. (1999), exercised some restraint in this regard, by holding that the BCL does not bar a sponsor's reservation of special subletting rights. Why? Because such rights are permitted under the New York attorney general's regulations governing co-op offerings, and also because a sponsor's unsold apartments typically are inhabited by rent-regulated tenants, who are entitled to renewals of their leases (actually subleases) from the sponsor.
When it next confronted this, in Krakauer v. Stuyvesant Owners, Inc. (2003), that same appellate court held unenforceable a provision granting preferential rights (presumably to original purchasers) but left intact "the corporations [sic] authority with respect to the regulation of subtenancies."
The Spiegel Catalog
Later that year, in Spiegel v. 1065 Park Ave. Corp. (2003), that same court confronted a shareholder claiming special rights to sublet that the sponsor granted to an original purchaser. The court reaffirmed the unenforceability of those rights because they violated the BCL's equality of treatment requirement. But here, for the first time at the appellate level, a co-op was the proponent and beneficiary of the application of that requirement to subletting. In Bregman v. 111 Tenants Corp. (2012), that same court, also at a co-op's behest, also held illegal special subletting rights that a shareholder allegedly received from a sponsor.
There, co-ops received a huge boost for their regulation of shareholders generally. "Although the board's new policy ... may prevent plaintiff from subletting her apartments in the same manner as she had done for the first 30 years," wrote the court, "adoption of the resolution does not qualify as the type of deliberately abusive treatment that would justify allowing a legal challenge to the board's decision. Assuming that plaintiff's situation was the impetus for the board's decision to restrict subletting, and that plaintiff is, as she claims, currently the only shareholder affected by the resolution, nevertheless the board's adoption of a restrictive resolution applies to all shareholders. The fact that plaintiff will be more immediately affected by the resolution does not render defendant's act discriminatory or applicable solely to her."
By the Time We Got to Woodstock
This has all led to such cases as Razzano v. Woodstock Owners Corp. (2012), in which a shareholder purchased a co-op apartment in 2007 with knowledge of a policy that restricted subletting for those purchasing after 2002. The trial court rejected her claim that the policy violated the BCL equality of treatment requirement even though certain shareholders could sublet and others could not. The court was content that the board had good reason to adopt the policy under the Business Judgment Rule.
Razzano might seem to give co-ops some comfort in enacting a sublet policy with a different sublet rule for existing and new shareholders. But I question whether that decision would be upheld if appealed, especially in light of Bregman's resolve, however misguided, to continue the application of the BCL's equality of treatment requirements to subletting.
Robert Tierman is a partner in the law firm of Litwin & Tierman.
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