Philadelphia Skyline

Getting a Coop Paid Back Maintenance In Full with a Non-Judicial Sale

May 2014

This is an instructional tale about how a coop can get paid in full when a shareholder defaults. 

In September of 2012, John Smith [his name wasn’t “John Smith”, but we changed it for purposes of this blog], owner of a cooperative apartment on East 73rd Street in Manhattan, failed to pay his maintenance fees.  Soon thereafter, the Board retained Itkowitz PLLC.  Mr. Smith made promises to the Board to sell his apartment in the short sale, so the Board decided to hold off on legal action.  However, after seven months of non-payment of maintenance in a building with only seven owners, the exasperated Board asked us to commence a lawsuit against Mr. Smith.  In April 2013, Itkowitz PLLC commenced a summary proceeding against Mr. Smith.  The Board was awarded a judgment of possession and warrant of eviction against Mr. Smith in November 2013 and had the NYC Marshal evict Mr. Smith on December 2, 2013.

All the time Mr. Smith was not paying maintenance to Coop, he was also not paying his mortgage.  After the summary proceeding, Mr. Smith‘s mortgage bank asked the Board to agree to a “deed in lieu” sale, and offered the Coop only $5,000 for the roughly $60,000 in maintenance the Coop board was owed.  The bank could not consummate the transaction without the Board’s approval since the Coop’s lien had priority over the bank’s lien and because each new owner needs approval from the Board.  The bank was unwilling to negotiate and increase its low-ball offer, and we refused to agree to a “deed in lieu” sale on the bank’s terms.

Instead, we commenced a UCC Article 9 non-judicial auction of Mr. Smith’s shares.  At this point, it may be helpful to point out how a condominium (“condo”) differs from a cooperative apartment (“coop”).  A condo owner owns real property; specifically the part of the building where the condo unit is located in.  That means that each condo unit has its own block and lot number and can be taxed separately.  On the other hand, a coop owns the entire building, and each unit owner owns shares and has a proprietary lease, which entitle the owner to an apartment.

Article 9 provides the rules governing any transaction (other than a finance lease) that couples a debt with a creditor’s interest in a debtor’s personal property.  If the debtor defaults, the creditor may repossess and sell the property (generally called collateral) to satisfy the debt.  The creditor’s interest is called a “security interest.”  Article 9 also covers certain kinds of sales that look like a grant of a security interest.  Pursuant to most well written coop by-laws and proprietary lease, such as the ones in this case, a coop has a perfected security interest in the coop shares, and the board can auction them off pursuant to the UCC if an owner is delinquent in paying maintenance.

We hired auctioneer Bill Mannion and sent out the proper notices to Mr. Smith and the bank.  Literally, the day before the auction, we received a phone call from the bank and were able to work out a settlement whereby the Coop received the full amount of money for maintenance due the Coop and all of the legal fees in the case.  Additionally, the bank agreed to pay the maintenance going forward until the unit is sold.  

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