Brownstone Brouhaha

Nine bucks. That’s the price of real estate happiness for Dean Starkman. And because it wasn’t paid, Starkman is a very unhappy camper. He estimates that “it cost me money; it cost me an interest rate hike because interest rates moved; it took months; it was a total hassle…enormously frustrating, expensive. I still am not exactly sure what happened.”

The story starts a little over a year ago, when Starkman, a shareholder and board member at a 12-unit Brooklyn Heights co-op, negotiated with a lender to refinance the mortgage on his apartment, a fairly routine affair. He had assembled all the required paperwork for the bank, and, recalls Starkman, “the last piece of the puzzle was our certificate of good standing as a corporation.”

At that point, the lender informed Starkman that it was putting a hold on the deal. When Starkman asked why, he was told that the co-op’s corporate status had been revoked. Under New York State law, the deal – any corporate deal – could not be closed.

“We were told that it had been revoked for years,” Starkman says. “And the bank wouldn’t budge. They wouldn’t close without a certificate of good standing. They were doing what a bank is supposed to do.”

The board began to investigate. The co-op’s attorney, Theresa Racht, a partner at Racht & Taffae, discovered two problems, one involving an unmade biennial corporate filing and the other concerning unpaid state income taxes. In short, the corporation had been dissolved by the state for failure to file corporate tax returns and pay corporate taxes.

Exactly what is the biennial corporate filing? According to Jim Goldstick, a management executive at Mark Greenberg Real Estate, domestic and foreign business corporations are required by Section 408 of the Business Corporation Law to file a biennial statement every two years with the New York Department of State. This statement, adds Robert Woloshen, a CPA at Woloshen & Herman, must provide the name and business address of its chief executive officer, the street address of its principal executive office, and the address to which the secretary of state should send any information or copies of legal documents accepted on behalf of the corporation. A corporation or LLC that fails to file will be marked in its records as “past due,” which will prevent it from, among other things, taking part in a “business transaction” such as refinancing a mortgage. In co-ops, the managing agent is primarily responsible for filing. The filing fee is $9. Reinstating the corporate status costs $59 (the original $9 fee and a $50 fine). The corporation is responsible for the filing, but usually delegates it to the manager, says Goldstick.

To her surprise, Racht discovered that not only had the filing not been made, but state taxes had not been paid.

How could that be? Racht talked with the building’s manager and the accountant, and both insisted that they had fulfilled their responsibilities. Curiouser and curiouser. Further sleuthing by Racht found the solution: the employer identification number (EIN) on the building’s tax statement did not match the EIN on its state tax forms. The same was true of the biennial filing. There were apparently two entities with very similar names and EINs. At some point in the last few years, the addresses associated with the EINs got switched, and the filings and taxes for Starkman’s co-op were being credited to the other entity. This second property was apparently inactive, and therefore did not file a biennial statement or pay taxes.

The state can, at any time after a one-year period of not receiving tax filings, deactivate or dissolve a corporation. In this case, for whatever reasons, the state didn’t get around to doing that until about a year before Dean Starkman tried to refinance. Although no one in Starkman’s co-op knew it, theirs was a dissolved corporation because the state claimed that there had not been any taxes paid.

Once the problem was defined, however, it was not very difficult to pay the $50 fine and re-file the biennial statement, and then go about clearing up the mess of corporate decision-making that had occurred during the time that the co-op had unknowingly not been a corporation. “To be safe, any decisions made while you were not a corporate entity should be ratified,” observes Robert Tierman, a partner at Litwin & Tierman.

But there are other lessons to draw from this brouhaha. Most professionals agree it shouldn’t have gotten to the point of a mortgage refinancing stalling to get the board’s attention. You can protect yourself by taking two steps. First, check that you are still corporate. Someone needs to see that the correct corporate name and the correct corporate EIN are in place. At least once every two years, a board member should verify on the NYS Department of State website (http://bit.ly/CorpStatus) that their corporate entity is still active and hasn’t been dissolved. And second, check the paper trail. If you’ve changed managing agents, make sure any notices are being forwarded to your new manager. If they’re not, you may have already dissolved – and not even know it. Scary.