Court Rules on Non-Judicial Foreclosure Sale Does a Coopertive's Rules and Regulations Apply?

Court Rules on Non-Judicial Foreclosure Sale

 Given the state of the economy and the real estate market, a novel issue is  whether when a bank conducts a foreclosure sale on the shares relating to a  cooperative apartment (without a judgment of the court), the successful bidder is subject to the  approval of the cooperative’s Board of Directors and must otherwise comply with the cooperative’s governing documents. That was precisely the issue raised in LI Equity Network,  LLC v. Village in the Woods Owners Corp., 2010 N.Y. Slip. Op. 07514 (2d Dep’t October 19, 2010).  

 In LI Equity, the plaintiff LI Equity Network, LLC (“LI Equity”) commenced an action in the Supreme Court, Suffolk County against the cooperative corporation,  Village in the Woods Owners Corp. (“Village in the Woods”) and the bank that had conducted a public auction of the cooperative shares,  Washington Mutual Bank (“WAMU”). LI Equity claimed that although it was the successful bidder at the auction,  Village in the Woods refused to provide it with a purchase application and  advised it that it would not approve LI Equity for the sale. LI Equity sought  for the court to direct that Village in the Woods close on the shares. Simultaneously with the commencement of the lawsuit, LI Equity moved the Court  to prevent Village in the Woods from selling the shares at another public  auction.  

 The trial court granted LI Equity’s motion, directing the closing of title of the shares and precluding the sale  of the shares at another foreclosure sale. An appeal by Village in the Woods ensued.  

 The Business Judgement Rule

 The Appellate Division, Second Department reversed the trial court and held that  LI Equity was subject to the approval requirements of Village in the Woods and  that the cooperative had properly exercised reasonable business judgment when  it applied its approval requirements to the proposed sale. It held that the Uniform Commercial Code (UCC) requires that every aspect of  sale of collateral by a secured party (such as a bank) could be done by one or  more contracts and on any terms and that, here, the “Terms of Sale” clearly stated that “[t]he apartment is sold . . . subject to the . . . bylaws; rules, regulations,  procedures, resolutions, Offering Plan, charges, fees and any amendments  thereto . . . .”  

 In coming to its decision in LI Equity, the appellate court stated that the  public auction of the shares constituted a non-judicial sale under UCC Article  9 and that the auctioneer conducted the sale pursuant to the provisions of the “Terms of Sale,” which were agreed to by prospective bidders by signing a “Memorandum of Sale.” Item 6 of the Terms of Sale stated that the apartment was sold “as is” and subject to, among other things, the bylaws, rules, regulations, procedures,  resolutions and offering plan of the cooperative. Village in the Woods’ proprietary lease stated that the premises must be used only a private dwelling  for the lessee(s) and members of their family and that should a bank foreclose  on an apartment, it must sell the apartment to an individual. Further, over ten years prior to LI Equity’s purported purchase, Village in the Woods enacted a rule that individuals who  purchased an apartment must live there for at least a year.  

 Follow Your Own Rules

 Undoubtedly, the rules and regulations established by cooperatives are important  to its shareholders. Although one particular instance when a cooperative may  feel like it’s unable to control the sale of cooperative shares is at a bank foreclosure,  this need not be the case. First, the cooperative should ensure that its  bylaws, rules and regulations are carefully drafted. For example, although the  proprietary lease at issue in LI Equity permitted the transfer of shares by a  secured party without board approval, the lease did require that the purchaser  be an individual. This was one reason why the appellate court agreed that the cooperative was not  required to close on the sale to the corporate entity plaintiff.  

 Furthermore, the cooperative should make its requirements clear to the bank and  auctioneer conducting the foreclosure sale and require that prospective bidders  agree to be bound by the cooperative’s governing documents. In the LI Equity case, the cooperative repeatedly made  its requirements that a purchaser of shares to an apartment in the cooperative  be an individual who would reside in the apartment for at least a year. Prospective bidders were also required to agree to the “Terms of Sale” by signing a “Memorandum of Sale.” The terms clearly stated that the apartment was being sold subject to the terms  of the bylaws, rules, regulations and other governing documents of the  cooperative.  

 In sum, the LI Equity decision makes clear that a cooperative may have a certain  amount of control over a non-judicial bank foreclosure on shares to an  apartment, particularly if it has carefully drafted governing documents and  makes its requirements clear to the bank and auctioneer conducting the sale, as  well as the prospective purchasers. 

 Jarett L. Warner is an attorney and of counsel at the law firm of Havkins  Rosenfeld Ritzert & Varriale, LLP in New York City.

 

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Comments

  • I HAVE VERY SIMILAR SITUATION,BUT WHEN BEFORE AUCTIONER START TO SELL COOP,PRESIDENT & VICE PRESIDENT OF THE COOP WAS AT THE AUCTION,LOUDLY INFRONT OF EVERY BIDDER TOLD THAT THEY WOULD NOT LET ANYBODY PASS THE BOARD,BUT I WAS SUCCESIFUL BIDDER,AFTER THE AUCTION,THEY CALLED BANK ATTORNEY TO NOT ACCEPT MY BID,BUT ACCEPT THEIR BID AS NEXT TO SUCCES BIDER,TELLING THE BANK ATTORNEY ITS WAISTE OF TIME,THEY'LL NOT PASS THE BOARD FOR ANYBODY, SOON AFTER I SUBMITED MY APPLICATION TO BOARD,THEY DENIED ME,AND CONTACTED THE BANK ATTORNEY TO REFUND MY DOWNPAYMENT,AND TRANSFER SHARES TO THEM AS NEXT TO SUCCECUFULL BIDER,BANK ATTORNEY REFUSED THEM,BY TELLING THAT IT WOULD PUT BACK TO THE AUCTION OR THEY CAN BUY TERM OF SELL FROM ME,RIGHT AFTER THAT,COOP ATTORNEY CONTACTED ME WITH THE OFFER TO ASSIGN MY BID TO THEM FOR 10K,I TOLD HIM THAT IF I CAN ASIGN TO MY SISTER ,THEY TELLING ME ITS NOT GOING TO WORK. I STRONGLY BELIVE HERE,THAT THEY DID CONSPIRACY TO COMIT THE FRAUD. I WAS REJECTED BY THE BOARD,BY THEY BELIVE THAT AFTER MY REJECTION,BANK ATTORNEY SHOULD AUTOMATICALLY TRANSFER TO THEM AS NEXT TO SUCCESIFULL BIDER.