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A Tool for Co-op Boards to Collect Arrears and Legal Fees

Marc Schneider in Board Operations on January 28, 2020

New York City

Landlord-tenant, non-judicial foreclosure, collecting arrears, co-op boards.

The threat of losing shares is usually enough to get delinquent shareholders to pay up.

Jan. 28, 2020

Co-ops are feeling the ramifications of the Housing Stability and Tenant Protection Act of 2019, especially when attempting to collect legal fees during eviction proceedings. This is because the act included language which provides that when a rental tenant (or co-op shareholder) defaults and does not show up in court for a summary proceeding, a landlord (or co-op board) can no longer recover attorneys’ fees in that proceeding. Furthermore, the act states that the recovery of “fees,” “charges,” or “penalties” in a summary proceeding is not permitted. It is unclear whether “fees,” “charges,” or “penalties” applies to attorneys’ fees, but at least one New York landlord-tenant court has held that it does! 

This is particularly unfair to co-op boards, which have a landlord-tenant relationship with shareholders but are not the same as for-profit landlords. For co-ops, if the defaulting shareholder is not responsible for the legal fees, the rest of the shareholders are forced to bear this expense – surely an unintended consequence of the act. While everyone agrees the act was not intended to reach to co-ops, unfortunately it does – until the law is amended. However, many co-ops do not realize that they have an alternative solution to collect arrears and legal fees from defaulting shareholders. 

Rather than commencing a separate lawsuit to collect legal fees and maintenance, co-ops have the option of commencing what’s known as a non-judicial foreclosure sale under the Uniform Commercial Code (UCC). This is because in co-ops, unlike condos, the shareholder owns stock in the corporation, which is personal property (not real property) that can be foreclosed under the UCC. As such, our firm’s clients have been seeking monies owed, including legal fees, via non-judicial foreclosure sale and have had great success in doing so. 

Unlike in landlord-tenant court, where a shareholder can litigate or delay a case while racking up huge legal fees for the co-op, there is no court proceeding for UCC foreclosure sales, and the shareholder would actually have to commence a lawsuit (racking up huge legal fees for the shareholder) to stop the sale. In our experience, once a co-op sends out notice of the sale, the shareholder either pays what is owed or strikes a deal with the co-op – without the time and expense of a drawn-out court proceeding. 

Recently, a co-op that we represent became frustrated after commencing numerous eviction proceedings against a shareholder who repeatedly fell into arrears. This shareholder would cause the co-op to expend thousands of dollars in legal fees, only to pay everything owed except the legal fees, which caused the co-op to withdraw the eviction proceeding. Having done this many times, there was a significant balance owed on the shareholder’s account. The co-op’s initial strategy was to leave all fees on the account and collect the arrears when the shareholder sold the apartment. However, four eviction proceedings later, this co-op had had enough, and with our advice saw an end to the problem. 

We sent notice of a non-judicial sale of the stock for all monies owed. The shareholder, when faced with losing his shares in the apartment, finally struck a deal with the co-op to pay back the legal fees he had created. The co-op was thrilled with the result. Of course, in order to do this, the governing documents must have language entitling the co-op to the legal fees being sought (which most proprietary leases do), and entitling the co-op to a lien on the shareholder’s shares for the indebtedness and obligations. This tool is best used simply to collect arrears – and not to evict a trouble-making shareholder. Its power is in the threat of depriving a shareholder of ownership of shares.

Marc Schneider is the managing partner at the law firm Schneider Buchel.

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