SURPRISE FORECLOSURES

"The co-op got a letter from a man who says he bought the apartment at auction and he wants to close on it as soon as possible," says the president of the Manhattan building. According to the co-op auctioneer, Victor Marino, the apartment was purchased on May 29, 2008, for $302,000 by one Adam Plotch. The shareholder, however, told the board that no one, including the bank, told the shareholder that the apartment had been sold. "He needs a lawyer but can't afford one," the board president continues. "What, if any, is the co-op's involvement in this?"

That's just one of many questions. Is a shareholder's bank obligated to notify the board before, during or after a foreclosure proceeding? Boards sign "recognition agreements," which many argue obligates the bank to inform the board. What about going to auction? If the bank had notified the board that it was taking the apartment to auction, the co-op could have purchased the apartment itself, flipped it and made money for the building. (See "Right of First Refusal: Flipping a Below-Market Apartment")

Recognition Agreement

If a bank sends a shareholder a notice of default, the lender is required to notify the board or management company, says attorney Steve L. Einig, who represents lenders in co-op foreclosures. That's because of the recognition agreement signed by the bank, the shareholder and the co-op board at purchase. At each step of the foreclosure process, the board or management company is supposed get the same letters the shareholder receives, Einig says. If the shareholder cannot pay, work out a deal with the bank, or sell, the unit goes to auction. If that happens, the cooperative is paid for back maintenance before the bank gets reimbursed.

At a bank auction, the lender sets the price, looking to get the best deal to cover the loan. If that minimum price isn't met, the bank will try to auction the property later. "The bank does not want to be the winning party," says attorney Bruce Cholst, a partner at Rosen & Livingston, which represents about 175 co-ops and condos in the city.

An individual co-op board can decide to buy the apartment at the auction, and then re-sell it for a profit. Einig says that, in his experience, not many small co-ops do this because of the large amount of cash needed. Cholst says he often sees co-ops at least try to make a bid: "Co-ops will often send a representative to the auction, hoping to pick up a bargain."

How Auctions Work

While a condo or home auction is a court proceeding, a co-op auction is simply a business transaction made under the federal Uniform Commercial Code (UCC), says William Mannion, an auctioneer who has conducted New York City co-op auctions for 25 years.

Most co-op auctions in Manhattan are held at the New York County Courthouse, at 60 Centre Street. There a buyer must put down 10 percent of the purchase price and be able to close within 30 days, Mannion says. Most buyers at co-op auctions are investors, not potential residents.

Is a buyer allowed to move into the apartment? Can he or she turn around and sell it, and does that second buyer automatically get in? The answer's no on the latter: Almost all leases provide that if the apartment is purchased by an investor who sells, that potential resident has to go for a full financial review before the board like anyone else, says Cholst.

It also depends on the building's proprietary lease, he says, since some require board approval in case of auction, while others treat successful bidders like holders of unsold shares, giving the board no right of approval. And some leases say the management agent has control and cannot "unreasonably" withhold approval

Foreclosure by Boards

Banks are not the only ones that can initiate foreclosure. A board can take that path if a shareholder fails to pay maintenance. "Years ago, it was only the bank selling," says auctioneer Mannion, who schedules about five auctions a week. "Now, it's almost a 50-50 split between co-ops selling and lenders selling." Attorney Geoffrey Mazel, a partner in Hankin, Handwerker & Mazel, says he's initiated about a dozen such foreclosures on behalf of boards this year, though only a handful have gone to auction. A board will pursue a foreclosure only in cases of chronic non-payment and usually not before someone is at least six to nine months behind, he adds.

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