New York Co-op Dispute: Did Occupancy of an Apartment Result in Loss of ”Unsold Share” Rights?

This was originally published on the SGR Blog.

Under the uniform New York co-op lease, the holders of unsold shares enjoy rights in addition to those ordinary shareholders have. Among other things, an apartment lessee who holds a block of unsold shares may sublet the apartment or assign the lease without approval of the coop’s board of directors or other shareholders, as would ordinarily be required. Only the building’s managing agent’s approval is required.

Supreme Court was recently called upon to determine the legal status of shares in a cooperative apartment located at 7 Park Avenue. Bellstell 7 Park Avenue, L.L.C., holder of all the unsold shares, sought a declaration that Seven Park Avenue Corporation impermissibly determined that Bellstell had lost its unsold-shareholder rights with respect to one of the apartments in the building.

The building was converted to a cooperative in 1982 by its then-owner, Seven Park Associates. Most of the shares were subscribed before the closing date of the conversion offering plan. The offering plan treated those shares that remained unsubscribed as of the closing date as “unsold shares.”

Once sold by the co-op sponsor (here, Seven Park Associates) to one or more individuals under certain requirements of the offering plan, a block of unsold shares “retain[ed] their character as such (regardless of transfer) until . . . the holder of such shares (or a member of his family) becomes a bona fide occupant of the apartment” to which the shares are allocated.

In 1987, Seven Park sold all the unsold shares to Alvin Rosenthal in accordance with the offering plan’s terms. In 1998, Rosenthal sold all his unsold shares to Bellstell. Bellstell executed leases for all the apartments to which the unsold shares were allocated. The cooperative offering plan was amended to reflect that Bellstell was the holder of the outstanding unsold shares (and had leased the corresponding apartments).

Bellstell is a New York limited-liability company. Its sole member is Beni Internazionali (U.S.A.) Inc., a New York corporation. Beni’s sole shareholder is an Italian corporation, Edilverde e Beni Internazionali S.p.A.

In November 2015, with the approval of Seven Park’s managing agent, Bellstell sublet one of its apartments to Ciro Campagnoli. Campagnoli and his sister each held a 50% contingent remainder interest in Edilverde (with their father holding a 100% interest during his lifetime). Campagnoli occupied the apartment on and off until January 2017.

In April 2017, Seven Park’s counsel wrote to Bellstell that Campagnoli qualified as a family member of Bellstell for purposes of the co-op lease and the shares corresponding to the apartment that Campagnoli had occupied would no longer be treated as “unsold shares.”

Bellstell’s objected and brought an action seeking a declaratory judgment that Campagnoli was not — and could not be — a family member of Bellstell and the apartment’s shares retained their “unsold shares” status.

Bellstell moved for summary judgment on its claims. Seven Park also moved for summary judgment, seeking dismissal of Bellstell’s claims and a declaration that the apartment’s shares were no longer “unsold” within the meaning of the lease and the offering plan.

The parties’ respective summary-judgment raised the same issue — whether the shares to the apartment occupied by Campagnoli were still “unsold shares.”

There was no material dispute of fact. The question was, instead, whether the Court could determine the status of the disputed shares as a matter of law. To resolve this question, the Court applied ordinary contract principles to interpret the relevant terms of the controlling cooperative documents. Both parties effectively treated the co-op lease as the controlling document.

The issue was one of first impression. The Court therefore began with the language of the lease itself, which provided that unsold shares retained their status until “the holder of such shares (or a member of his family) becomes a bona fide occupant of the apartment.”

Bellstell contended that “member of his family” appears most naturally to refer only to individual, natural persons and that there was no basis to extend its scope to apply to artificial persons like limited-liability companies, which cannot be said in ordinary usage to have “family members.”

Bellstell argued that interpreting the lease to extend to individuals who have some connection to an LLC (or corporation) holding unsold shares would create a host of difficulties — in particular, determining how close the connection must be for an individual to be considered a member of the LLC’s “family.” Those difficulties existed both “vertically” (when the individual in question had a share of the LLC’s control only through multiple levels of corporate ownership) and “horizontally” (when the individual was only one of a number of members or officers of the LLC, or shareholders of the corporation that is a member of the LLC).

Seven Park did not attempt to remedy the difficulties inherent in defining “member of his family” in this context. At most, Seven Park emphasized that, in this particular case, Campagnoli “is a principal [of Bellstell] and member of the family which owns and controls Bellstell.”

Seven Park failed to explain why a court should deem an LLC’s officers — as opposed to its members — to be the LLC’s family, nor which officers should count if so. Seven Park also did not indicate when (or why) it was appropriate to look through the corporate form and treat the individuals ultimately exerting control over the LLC as the LLC’s family.

The Court saw no principled or practical means of defining when an individual’s ties to an LLC should suffice to make them a “family member” for purposes of determining when the individual’s occupancy of an apartment stripped the shares of unsold-share status. The Court concluded that, as a matter of law, the only reasonable reading of “member of his family” in the lease was that this language did not encompass individuals connected to LLCs or corporations that hold unsold shares.

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