FORECLOSURE WINNER DENIED, P.2

The court discussed a previously decided case, wherein a co-op tenant/debtor pledged the shares of his apartment for a business loan from a creditor. When the tenant defaulted, the creditor took possession of the shares and the co-op issued a new stock certificate and lease to the creditor. Thereafter, the creditor agreed to reconvey the shares and lease to the debtor if he paid the entire balance on the loan, but conditioned it upon the consent of the co-op. The debtor sued, claiming that it had the statutory right under UCC Article 9 to redeem the shares from the creditor. The court disagreed and held that the proprietary lease, not the statute, governed the terms of the reconveyance.

The court noted that it previously applied these same rules in cases involving trusts and estates and that trusts were bound by the terms of proprietary leases and any restrictions contained therein.

No Corporations Allowed? Why'd You Take Our Bid?

The co-op made an additional argument supported by reference to several provisions of the lease and bylaws: that the governing documents prohibited the transfer of shares to a corporate entity. Moreover, the co-op's application package included the following language: "Occupancy of the subject unit must be for a period of one (1) year, thereafter subletting will not be allowed... I understand apartments can only be purchased and/or owned by natural persons, not by corporations, partnerships or other entities..."

Here, the court reviewed the terms of sale. Paragraph 6 stated that the apartment was sold subject to the bylaws, lease, and other governing documents. Paragraph 8 of the terms of sale did the same in some greater detail; however, the terms stated that corporate bidders were specifically exempt from the provisions of Paragraph 8.

The court discussed general rules of contract construction and determined that LI Equity could not enforce Paragraph 8 against the co-op because the co-op was not a party to the terms of sale. The terms of sale formed a contract solely between LI Equity and the lender by virtue of execution of the memorandum of sale.

Accordingly, the appellate court reversed the lower court, denied LI Equity's motion for specific performance to compel the closing of title, and granted the co-op's motion to enjoin LI Equity from entering the apartment while any action was pending.

Comment: The case is consistent with other cases that have held that, provided the terms of sale contain a provision making the sale subject to the rules of a co-op, a successful bidder should not expect to be able to immediately move in to the apartment. To the contrary, the bidder must be prepared to comply with the rules, regulations, and policies established by the co-op. This may result in the co-op refusing to issue the shares and lease to the successful bidder.

Based on the court's analysis of who is bound by the terms of sale, we do not know how the court would have decided the case if the terms of sale had not included language making the auction subject to the terms and conditions of the co-op's governing documents.

As there may be more nonjudicial foreclosure sales given the recent economic climate, we caution boards to be proactive and make certain that the terms of any sale include provisions making it clear that the sale is subject to the co-op's governing documents.

Richard Siegler is a partner in the New York City law firm of Stroock & Stroock & Lavan.  Dale J. Degenshein is a special counsel for that firm.

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