A couple years ago, I became genuinely surprised to learn of conflicting opinions throughout the legal community and in court decisions (including rulings from New York State Supreme Court’s Appellate Division) which centered on how to classify cooperative apartment stock and how to deal with liens on co-op stock. The issue became so contentious that there are even several court decisions challenging whether a co-op corporation’s built-in lien on its own stock (as described by the proprietary lease and bylaws) is a perfected security agreement.
Some New York Courts have ruled that unless a cooperative apartment corporation files a financial statement, the mere language of its own proprietary lease does not constitute a security agreement for unpaid maintenance, etc. Judges in J. McMillan v. Park Towers Owners Corp. (Supreme Court, Appellate Division, Second Department 3/25/96) wrote: “Since reservation of title under a lease does not create a security interest unless the parties so intended, the mere existence of a proprietary lease, without more, does not establish an enforceable security agreement to which the Uniform Commercial Code [UCC] applies. Preservation of the status quo, absent a clear showing of entitlement to proceed under Uniform Commercial Code Article 9 [the UCC section dealing with judicial sales, private sales, and foreclosure sales], is essential because otherwise, a cooperative corporation would be able to divest shareholder-lessees of their ownership interests in their apartments without any judicial determination of equitable defenses or counterclaims.”
The revised Article 9 must be modified for New York State because the national prototype overlooks the unique aspects of buying and selling into a residential cooperative. In its current form it fails to address the concept of a co-op having a “perfected built-in lien” against stock in the apartment corporationówhich is necessary so a cooperative can be assured of collecting maintenance owed by the owner of the stock ahead of bank loans and other liens.
On the federal level, the National Conference Commissioners on Uniform State Laws has issued a prototype revised Article 9 of the UCC, which affects trillions of dollars each year in loans or credit (other than leasing) that uses personal collateral to secure a debt. The new prototype, which has already been adopted by 34 states, must be in place in all 50 by July 1, 2001. (Bills in 14 other states have passed through at least one house. And the two remaining states where the bill remains merely introduced are New York and Massachusetts.)
New York’s Special Circumstances
New York State, in particular, must modify the revised Article 9 to address the unique aspects of buying and selling into a residential cooperative. The New York State Bar Association Committee on Liens has been working for over two years on these modifications, which have now been introduced into the state legislature for enactment.
Horrendous complications for cooperatives would result if the new Article 9 is adopted by the New York State Legislature WITHOUT modifications (as proposed by the N.Y.S. Bar Association Committee on Liens). Five examples illustrate these potential problems:
1. A co-op would have to file a UCC financing statement for the stock appurtenant to every unit in the corporation to perfect its right to collect maintenance. If a co-op failed to file the proper UCC form, or failed to execute a security agreement (see no. 2) it could lose its right to collect outstanding maintenance ahead of a bank (in the event a shareholder defaulted due to non-payment).
2. A co-op would have to enter into a security agreement with each shareholder (in addition to the proprietary lease issued or assigned by the co-op).
3. The national filing statements for recording UCC liens against corporate stock do not have a place to list the county, block and lost where the cooperative is located. The national filing statements are based on the debtors’ name. The errors in title searches would magnify a hundred-fold, and the opportunity for fraud would also increase.
4. Co-op boards, attorneys, managing agents and transfer agents, along with title search companies and title insurance companies would be exposed to new liability and insurance claims.
5. All costs related to stock transfers, mortgage refinances and lines of credit (issued to shareholders), to title searches and title insurance would rise dramatically.
In the current New York State statutes there is no definition of co-op stock or a proprietary lease, nor is there a clear understanding of which laws to apply when dealing with co-op apartments. This has allowed the state courts, on a case-by-case basis, to engage in a legislative exercise in deciding whether to apply the rules governing stock, or the rules governing apartment leases, when issuing decisions. Many had court decisions, including those from the appellate departments [and the landmark decision from the Court of Appeals which confusingly merged stock and leaseholds together in dealing with co-ops] go against commonly held assumptions and practices within the co-op community. The objective of the proposed modifications from the Liens Committee is to clear up the confusion that currently exists in the courts and among real estate attorneys. Under their modified version of Article 9:
1. A cooperative will have an automatic perfected lien against its own stock. This assures financial stability by prioritizing the co-ops right to collect maintenance, assessments, etc. before other lenders.
2. Lenders will have to file a unique UCC Co-op Addendum Financing Statement, which would include real property filing data such as street, town and city address, corporate name, county, block and lot (in addition to the debtor’s name) to perfect their secured interest (lien) against the stock.
3. Such a filing will be effective, unless terminated, for 50 years.
4. The lender (secured party) will now be held responsible to file a termination statement.
5. If a co-op allows secondary financing or a line of credit against the value of the stock, the lien priority (after the apartment corporation’s primary lien) will be based on the actual date of the loan or advance.
This last item is critical to lenders. If not adopted, loan advances by the first lender (who might refinance a loan in a greater sum) could hypothetically destroy the collateral of a secondary lender, whose second loan or line of credit was issued before the refinanced advance by the primary lenderósimply because the date of the loan or advance did not secure their secondary loan. This would have a chilling effect on all other lenders and create an unfair advantage for the primary lender.
What the New York state legislature will adopt is not yet known. The revised Article 9 has just been introduced (as part of a legislative package) in the state assembly. The absolute deadline to adopt the new Article 9 is July 1, 2001. Will the legislature allow chaos to descend into the cooperative community by not adopting the proposed modifications? Will state courts continue to leave contradictory decisions? Will there continue to be confusion and even unlawful stock transfers? We shall see.
The opinions expressed in this column belong to the author. The Cooperator neither endorses nor refutes the statements made herein.