CO-OP BOARD DENIES WINNER OF FORECLOSURE AUCTION

The 2010 case that set the precedent on this was LI Equity Network LLC v. Village in the Woods Owners Corp. In 1998, Alfred Gerard and Greg Walters obtained a co-op loan from the now-defunct Washington Mutual Bank. As standard, the loan was secured by a lien on the shares allocated to the apartment: Number A2 at 2 Eucalyptus Court, Selden, New York, on Long Island. In January 2007, the co-op evicted Gerard and Walters for failing to pay their co-op maintenance fees.

After their eviction, they defaulted on their loan. The lender declared the loan in default and scheduled a public auction — in this case, a "nonjudicial" sale. LI Equity was the successful bidder — but then the co-op's board of directors said that it would not approve the transfer of shares to. While LI Equity never filed a formal application with the board to obtain the shares, the board independently reviewed and rejected the company's proposal to close on the unit and then, well, sell it to a board-approved purchaser. What's the problem?

LI Equity, naturally, sued the co-op in May 2007 on the ground that the company was statutorily entitled to own the apartment, regardless of the terms of the co-op's governing documents. It also sought damages for breach of the implied duty of fair dealing. And the company won in a lower court, which directed that the co-op transfer the shares to LI Equity. The court reasoned that the co-op board did not have the power to interfere with the transfer of the lease and shares from a "judicial" sale, so the same would hold true of "nonjudicial" sale.

The appellate court, however, reversed that decision.

What, My Money's No Good?

That court found that LI Equity was subject to the approval requirements found in the co-op's governing documents. It further said that the co-op board properly exercised its business judgment when it applied the approval requirements to the LI Equity's request to close on the shares.

LI Equity argued that the co-op approval requirements could not prevent the transfer of the shares allocated to the foreclosed unit by "operation of law," i.e., the Universal Commercial Code (UCC). LI Equity relied on cases holding that co-ops may not interfere with a judgment-creditor's levy and execution on the shares or with a decedent tenant's right to bequeath the shares.

The court discussed the terms of sale, which stated, at Paragraph 6, that "the apartment is sold...subject to the...bylaws; rules, regulations, procedures, resolutions, Offering Plan, charges, fees and any amendments thereto of [the co-op]." At the direction of the lender's counsel, the apartment was sold in accordance with these provisions. The auctioneer provided the representative of LI Equity with the terms of sale prior to the auction, and LI Equity signed a memorandum of sale and acknowledged that it agreed to "comply with the terms and conditions of the sale of the said apartment" as set forth in the terms of sale.

UCChhhhh!

The court said that LI Equity incorrectly argued that the terms of the governing documents could not interfere with its ability to close title because they contravened the rights conferred by UCC 9-610(b). The court explained that the statute provided that when a debtor defaults on a security agreement, the secured party "may sell, lease, license, or otherwise dispose of the collateral" and that disposition of collateral must be commercially reasonable and, if so, the collateral could be disposed of "by public or private proceedings...at any time and place and on any terms..."

The court thus found that the terms of sale to which LI Equity assented were in addition to, and not in conflict with, the statutory rights derived from the UCC.

Moreover, the court explained that transfers that occurred by operation of law could be modified by a proprietary lease, bylaws, or other governing documents. The courts have consistently upheld that a co-op's governing documents may permissibly modify the rights prospective co-op tenants obtain by operation of law.

Next page: Wait. It gets Worse. >>