Will Your Co-op or Condo Lose Its Corporate Status? Because It Happens
Oct. 6, 2014 — Dean Starkman, a board member of 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 and, he recalls, "the last piece of the puzzle was our certificate of good standing as a corporation." At that point, the lender informed Starkman it was putting a hold on the deal because the co-op's corporate status had been revoked. How could that be?
"We were told that it had been revoked for years," Starkman says. "And the bank wouldn't budge. They were doing what a bank is supposed to do." Indeed, under new York State law, the deal — any corporate deal — could not be closed.
What Happened?
The co-op board began to investigate. Its 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. The filing fee for the biennial corporate filing is $9. Reinstating the corporate status costs $59 (the original $9 and a $50 fine).
Racht talked with the building's manager and the accountant, and both insisted that they had fulfilled their responsibilities. Further sleuthing found that the employer identification number (EIN) on the building's tax statement did not match the EIN on its state tax forms or the biennial filing. There were apparently two entities with very similar names and EINs. At some point in the last few years, the two got switched, and the filings and taxes for Starkman's co-op were being credited to the other entity, which was inactive and not filing the statement or paying taxes.
Once the problem was defined, however, it was not very difficult to pay the $50 fine, refile 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.
How to Prevent It
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 Department of State website that their corporate entity is still active.
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.
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Adapted from "Brownstone Brouhaha" by Tom Soter (Habitat, October 2014)