New York Caselaw: Foreclosure of a Co-op: In Sassi-Lehner v. Charlton Tenants Corp., the New York Appellate Division evaluated whether or not the individuals who had obtained stock in a cooperative that had been originally obtained through a foreclosure were entitled to rights as holders of “unsold shares” of the cooperative. Specifically, one unit of a cooperative was not sold during the initial conversion of the property. The sponsor of the “unsold shares” then sold his rights to another individual. That individual defaulted and the shares and proprietary lease were sold at a foreclosure sale. The plaintiffs’ parents purchased the shares and proprietary lease at the sale and the rights transferred to the plaintiffs’ upon their parents’ death. The question for the Court was whether or not the rights transferred were those of a traditional cooperative owner, or whether they maintained the characterization as “unsold shares.” Here, the Court held that they did not maintain the character of “unsold shares.”
In a cooperative housing corporation, “unsold shares” generally refer to those shares of stock that have not been purchased for residential purposes. For example, in Sassi, the stock was originally characterized as “unsold shares” because when the building was converted to a cooperative, a particular non-purchasing tenant did not vacate the apartment because the apartment was rent stabilized. In that scenario, the shares that represented the rented portion of the property were unsold shares. Unsold shares are generally held by a sponsor until they can be sold. However, according to the cooperative’s governing documents, when the shares were subsequently sold to an individual and/or entity for investment purposes, these shares maintained their identity as unsold shares. It is not until the sponsor himself or a subsequent purchaser resided in the apartment that the shares lost their status as unsold shares.
A holder of unsold shares of stock is often given preferable treatment in comparison to holders of sold shares. For instance, the cooperative board generally must give approval when an owner seeks to sell his shares or sublet his apartment. Holders of unsold shares do not need to obtain board approval to sell or sublet the apartment. Holders of unsold shares are also given differential treatment in other ways as may be set forth in the cooperative Offering Plan or proprietary lease.
Where a cooperative has many holders of unsold shares of stock, it could very well defeat the essence of a cooperative because a large number of individuals have broad discretion to do what they please with their unsold shares in comparison to the holders of sold shares of stock who are confined by the restrictions set forth in the offering plan or proprietary lease.
The Court indicated that a question of whether or not the transferred interest maintains its characterization of “unsold share” shall be governed by the cooperative’s governing documents. For instance, in Sassi, rules relating to “unsold shares” were set forth in the offering plan as well as the proprietary lease. The Court noted that the documents specifically stated that “unsold shares retain their character as such (regardless of transfer) until (a) such shares become the property of a purchaser for bona fide occupancy . . . , or (2) the holder of such shares (or a member of his family) becomes a bona fide occupant of the apartment.” Sassi-Lehner v. Charlton Tenants Corp., 2008 WL 3288075 (1st Dept. 2008). However, in further review of the documents, the Court noted that the “regardless of transfer” language could only be applied to those transfers effected by “individuals produced by the [s]ponsor pursuant to the [o]ffering [p]lan.” Id. Accordingly, because the plaintiffs had obtained the shares from their parents who purchased the stock in a foreclosure sale, they were purchased from someone who was not designated by the sponsor. Accordingly, the Court held that the plaintiffs did not have the added benefits as holders of “unsold shares.”
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