FLIP TAXES: COURT CONFUSION OVER IMPLEMENTING THEM LEGITIMATELY, PART 2

In 1986, legislation was passed, amending the New York State Business Corporation Law (BCL), that allowed co-op corporations to impose flip taxes on something other than a per-share basis — and that this would no longer violate the requirement that all shares within a class be treated equally. The new legislation said the flip tax had to be provided for in either the proprietary lease, the offering plan, a plan amendment or an occupancy agreement. This left real estate attorneys hard-pressed to understand those subsequent cases that permitted such non-proportional flip taxes to be authorized initially and solely by bylaws.

It began with the appellate division's ruling in Quirin vs 123 Apartments Corp., in which the court of appeals' search for authorization in corporate documents for the power to enact a transfer fee was turned on its head. Quirin concluded that, "…the proprietary lease does not specifically exclude the collection of a flip tax, nor does the certificate of incorporation."

Wait a moment. A normal person understands that if something needs to be authorized, and it isn't, it is excluded. To say that if something isn't specifically excluded, it is authorized is, at the least, a stretch.

What the Offering Plan Said

On January 12, 1988, the same appellate division decided Mogulescu, et al. vs 255 West 98th Street Owners Corp. Like Quirin, the offering plan provided for bylaws containing a transfer fee, here calculated on a declining percentage of profit based on time of sale (in other words, it was a non-proportional flip tax).

The plaintiffs clearly had read the court of appeals' decisions carefully and first argued that the transfer fees charged them were invalid under the seminal December 19, 1985 Court of Appeals case FeBland vs. Two Trees Management Co., et al.  and its companion case, 3 30 West End Apartment Corporation vs. Kelly, because of the "absence of specific authority for a transfer fee in the[ir] proprietary lease."

The court redrafted the plaintiffs' argument against them by writing that the proprietary lease did not exclude the imposition of a transfer fee and, indeed, expressly provided that '[t]his lease incorporates by reference … all the terms of Lessor’s Plan to Convert to Cooperative Owner…as amended prior to the date of this lease.'"

Adherence to the terms of the offering plan is a pretty good argument for upholding this transfer fee. The 1986 BCL amendment after all permits non-proportional flip taxes which are contained in offering plans — and this one was, even though it was contained in the bylaws portion of the plan.

But the Mogulescu court actually wrote, "The statute [BCL 501(c)(3)], consequently, permits the imposition of a transfer fee which has been validly adopted pursuant to the terms of the offering plan, proprietary lease and bylaws, considered in conjunction with one another, despite the fact that the charges assessed may not be equal per share or that the holders of unsold shares retain certain benefits not available to the other shareholders."

Misinterpreting the Statute?

The statute itself, however, has never said anything about a flip tax being valid if contained in bylaws. The flip tax here may have been in the bylaws but only because it first originated in the offering plan. Where and how did the court come up with the conclusion that, contrary to the plain language of the statute, a flip tax originating in bylaws was valid?

In the years since FeBland, the cases have been all over the map. Too many have looked not for authorization in the corporate documents to impose flip taxes, but instead for exclusion of such language. And many have continued to quote Mogulescu's unique interpretation of BCL 501(c) to the effect that non-proportional transfer fees may validly appear in bylaws (but not house rules, and why not?) despite the clear contrary language of the BCL. But the appellate division followed Mogulescu, and in 2005 overturned a perfectly reasoned decision of the Westchester Supreme Court in Zilberfein vs Palmer Terrace Co-op Inc.