Bill Morris in Legal/Financial on October 16, 2015
"When we moved in, it seemed like everything was working well," Williams recalls. "The sponsor was the managing agent, and he was selling off apartments."
There were three red flags that a more experienced board might have noticed: (1) the sponsor doubled as managing agent; (2) the sponsor held nearly half of the shares in the corporation; and (3) the sponsor controlled the board of directors.
With the sponsor doubling as the agent, the board lacked an independent voice advising it on financial matters; with the sponsor in control, it would have been tricky for the board to initiate tough actions against him; and with nearly half the shares in his possession, the sponsor was in a nearly impregnable position. That led to the first crisis — the potential default, which the board had resolved.
Now it was facing the threat of being downgraded to a rental. The problems went back to the original sponsor's unwillingness to pay for routine maintenance. These four pre-World War II, six-story brick buildings now needed immediate work — on the chimney, roof, boilers, elevator, and exterior bricks. But the arrears had a ripple-down effect. Strapped for cash, the board couldn't afford to fix the apartments the co-op owned, and because they couldn't fix the apartments, they couldn't sell them. This created a double bind: every unsold unit meant one less shareholder in the co-op, and one less monthly maintenance check in the co-op's coffers. Between the empty apartments and the increasing amount of back maintenance due, the revenue stream turned into a trickle. Put another way, the co-op was apartment-rich, but cash-poor.
So the bank wanted to sell the mortgage to an investor who, in turn, would return the property to rental status.
Conversion Back to Rental: A Death Blow?
To forestall the threat to the co-op's continued existence, the board decided to seek bankruptcy protection. As the workout progressed over the course of two years, the shareholders decided to cast their fate with an investor named Jacob Selechnik. In exchange for the corporation's 63 former sponsor apartments, Selechnik agreed to refinance the $6 million mortgage, put money into the reserve fund, and pay off back taxes and legal bills. In return, he became the managing agent and gained control of the board.
The face of the board changed — and with that change came a new insight into the situation, which seemed to some to be history repeating itself. As the co-op was coming out of bankruptcy, Williams left the board and Trudy Tejado was elected. She had immediate misgivings about the new sponsor.
"He was a very charming and shrewd man," Tejado, the board's current vice president, says of Selechnik. "I liked him but I didn't like what he was doing. He allowed some shareholders to not pay their maintenance, then he bought them out for very little money. He was controlling the building. I didn't like the idea."
Key Lesson: Get a Lawyer
Tejado decided the shareholders had to do something besides reacting to one crisis after another. They had to be proactive. One of the shareholders suggested she call Abbey Goldstein, a partner in the law firm of Goldstein & Greenlaw, who eventually agreed to help Tejado and her fellow insurgents in their efforts to wrest control from Selechnik.
The problems with the investors running the board could have been resolved years earlier, says Goldstein, if the shareholders had examined — or had hired someone to examine — the co-op's offering plan. "It had language saying that the sponsor may not elect the majority of the board. So if the non-sponsor shareholders had been aware of this language, they could have elected a majority of the board members — meaning three out of five — without the sponsor voting. They didn't know this. We went to court and eventually got a court order saying that the sponsor couldn't vote his shares."
Trudy Tejado and the other shareholders on the board took control, Goldstein explains, and sued the sponsor for various infractions. Eventually, they prevailed in the high-stakes court battle. The new board set out to collect damages from Selechnik. But just before that case went before an arbitrator in early 2009, Selechnik offered a cash settlement. The co-op made a counteroffer: it asked Selechnik to surrender his 96 units and walk away from any financial liability. Selechnik took the deal, relinquishing any ownership claim to the apartments. There was speculation in the co-op that Selechnik had done so to avoid possible prosecution for the misuse of corporation funds.
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