Court Considers Whether an LLC is the Holder of “Unsold Shares” Within the Meaning of a Cooperative’s Proprietary Lease

• Posted on: Jan 6 2020

Under New York’s rules of contract interpretation, “when parties set down their agreement in a clear, complete document, their writing should be enforced according to its terms.” Riverside S. Planning Corp. v. CRP/Extell Riverside, L.P., 13 N.Y.3d 398, 403 (2009); W.W.W. Assoc. v. Giancontieri, 77 N.Y.2d 157, 162 (1990). The courts are “extremely reluctant to interpret an agreement as impliedly stating something which the parties have neglected to specifically include.” Rowe v. Great Atl. & Pac. Tea Co., 46 N.Y.2d 62, 72 (1978). Consequently, courts will not “by construction add or excise terms, nor distort the meaning of those used and thereby make a new contract for the parties under the guise of interpreting the writing.” Reiss v. Financial Performance Corp., 97 N.Y.2d 195, 199 (2001) (internal quotation marks and citation omitted).

When the parties to a contract dispute its meaning, resolution of the dispute often turns on the meaning of a term or terms in the agreement. Such was the case in Bellstell 7 Park Ave. LLC v. Seven Park Ave. Corp., 2019 N.Y. Slip Op. 29402 (Sup. Ct., N.Y. County Dec. 23, 2019) (here), an action involving the meaning of a term in the proprietary lease of a co-op apartment building and the rights attendant to the “unsold shares” status of the shares corresponding to an apartment in the building.

It is well settled that “[t]he relationship between the shareholder/lessees of a cooperative corporation and the corporation is determined by the certificate of incorporation, the corporation’s bylaws and the proprietary lease.” Fe Bland v. Two Trees Mgt. Co., 66 N.Y.2d 556, 563 (1985). Whether a particular shareholder is a holder of unsold shares is determined by the cooperative documents, such as the offering plan and propriety lease. 210-220-230 Owners Corp. v. Arancio, 24 Misc. 3d 1228(A), 899 N.Y.S.2d 63, 2009 WL 2356893 (City Ct., City of New Rochelle 2009). Accordingly, the qualification for being deemed a holder of unsold shares may vary depending upon the corporate document provisions of a given cooperative. Id.

To enjoy the status of a holder of unsold shares, a shareholder or his or her direct predecessor in interest must have obtained shares in an apartment that was occupied at the time of cooperative conversion, never occupied it himself or herself, and the original purchaser of the occupied apartment’s shares must have been either “produced” by the sponsor at the cooperative’s closing as a purchaser/holder of unsold shares, or, after such cooperative’s closing, “designated by” the cooperative’s sponsor as a holder of unsold shares. 210-220-230 Owners Corp., supra. See also Sassi-Lehner v. Charton Tenants Corp., 55 A.D.3d 74 (1st Dept. 2008); LJ Kings, LLC v. Woodstock Owners Corp., 46 A.D.3d 321 (1st Dept. 2007).

A holder of “unsold shares” is not subject to many of the cooperative’s rules and regulations that bind other shareholders. 210-220-230 Owners Corp., supra. Among other things, a holder of unsold shares who has not occupied his or her apartment need not obtain the permission of the cooperative’s board to sublet his or her apartment or sell his or her shares to a particular individual. Id. See also Kralik v. 239 E. 79th Street Avenue Corp., 5 N.Y.3d 54 (2005); Craig v. Riverview East Owners Inc., 156 A.D.2d 157 (1st Dept. 1989). Given the benefits attendant to unsold shares, it is not surprising that the status of such shares is often litigated.

Bellstell 7 Park Ave. LLC v. Seven Park Ave. Corp.

Background

Bellstell concerned the legal status of unsold shares in a cooperative apartment building located on Park Avenue in New York County (the “Building”). Plaintiff, Bellstell 7 Park Avenue, L.L.C. (“Belstell”), held all the unsold shares in the Building. Bellstell is a New York limited-liability company. Its sole member is Beni Internazionali (U.S.A.) Inc. (“Beni”), a New York corporation. Beni’s sole shareholder is Edilverde e Beni Internazionali S.p.A. (“Edilverde”), an Italian corporation.

Bellstell sought a declaration that defendant, Seven Park Avenue Corp., impermissibly determined that Bellstell had lost its unsold-shareholder rights with respect to one of the apartments that Bellstell owned in the building.

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

Relevant to the dispute, under the proprietary lease, once sold by the co-op sponsor (i.e., Seven Park Associates) to one or more individuals under certain requirements of the offering plan, a block of unsold shares “retain[s] 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 Associates sold all the unsold shares to Alvin Rosenthal in accordance with the terms of the offering plan. 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).

In November 2015, with the approval of Seven Park Avenue’s managing agent, Bellstell sublet one of its leased apartments to Ciro Campagnoli (“Campagnoli”). Campagnoli and his sister each hold 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 Avenue’s counsel wrote to Bellstell, informing it that Campagnoli qualified as a family member of Bellstell for purposes of the proprietary lease and, therefore, the shares corresponding to the apartment that Campagnoli had occupied would no longer be treated as unsold shares.

After Bellstell’s objections to this conclusion proved unavailing, Bellstell brought the action, seeking a declaratory judgment that Campagnoli was not – and could not be – a family member of Bellstell and, therefore, the apartment’s shares retained their unsold shares status. Bellstell moved for summary judgment on its claims. Seven Park Avenue 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 proprietary lease and the offering plan.

The Court’s Decision

As an initial matter, the Court noted that “[t]he parties’ respective summary-judgment motions [were], in substance, a motion and cross-motion addressing the same issue – whether the shares corresponding to the apartment occupied by Campagnoli [were] still ‘unsold shares.’” Slip Op. at **2-3. This issue, observed the Court, “appear[ed] … to be one of first impression.” The Court noted that although issues relating to unsold share status had been litigated many times since the Court of Appeals decided Kralik v. 239 E. 79th St. Owners Corp., 5 N.Y.3d 54 (2005), the issue of “entity holders of unsold shares . . . avoid[ing] their obligations” under “proprietary leases” had never arisen before. Slip Op. at *4 n.4.

Having framed the issue, the Court determined that its resolution depended not on a ruling concerning a material issue of disputed fact, but rather on an issue of law. Slip Op. at *3 (“There is no material dispute of fact in this case, however. The question is, instead, whether this court may determine the status of the disputed shares as a matter of law.”). “To resolve th[e] question,” the Court applied “ordinary contract principles to interpret the relevant terms of the controlling cooperative documents, which the parties considered to be the proprietary lease. See Kralik, 5 N.Y.3d at 59.

In Kralik, the Court of Appeals held that whether a shareholder is a holder of unsold shares turns on the documents central to the formation of the cooperative corporation and its relationship to its shareholders, i.e., the cooperative’s certificate of incorporation, offering plan, and proprietary lease. In particular, the Court held that it would “apply[ ] ordinary contract principles” to the interpretation of those documents:

We conclude that whether plaintiffs are holders of unsold shares should be determined solely by applying ordinary contract principles to interpret the terms of the documents defining their contractual relationship with the cooperative corporation. . . In short, the terms of the controlling documents … determine whether plaintiffs are holders of unsold shares. Plaintiffs status must be decided by applying the usual rules of contract interpretation to those documents.

Id. at 59.

Against this analytical framework, the Court looked at the proprietary lease, which provided that unsold shares retained their status until “the holder of such shares (or a member of his family) [became] a bona fide occupant of the apartment.” The Court concluded that “as a matter of law, the only reasonable reading of ‘member of his family’ in [paragraph] 38 (b) of the lease is that this language does not encompass individuals connected to LLCs or corporations that hold unsold shares.” Slip Op. at *5.

In so holding the Court avoided the question of whether a limited liability company can be a person for purposes of the lease:

Bellstell contends first that “member of his family” appears most naturally to refer only to individual, natural persons and that there is 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.” On the other hand, as Seven Park Avenue rightly points out in response, this very language, read literally for all it is worth, might indicate that artificial persons like limited-liability companies cannot hold unsold shares in the first place, precisely because they do not have families. That interpretive issue, to be sure, is not properly before this court now, and the court therefore does not reach it or how the court’s resolution of the status of an LLC’s contested shares in a particular case might be affected by principles of waiver or estoppel. At a minimum, though, the fundamental interpretive tension here inclines this court against giving significant weight to the argument that because LLCs by definition do not have family members, LLCs cannot be subject to the bona-fide-occupant restriction on unsold shares.

Slip Op. at **3-4.

The Court next addressed the definition of “family members”. In particular, the Court considered whether the proprietary lease extended “to individuals who have some connection to an LLC (or corporation)” and, if so, “how close the connection must be for an individual to be considered a member of the LLC’s “family.” Id. at *4. Answers to those questions created difficulties too, noted the Court, “both ‘vertically’ (when the individual in question has a share of the LLC’s control only through multiple levels of corporate ownership) and ‘horizontally’ (when the individual is only one of a number of members or officers of the LLC, or shareholders of the corporation that is a member of the LLC).” Id.

Given the definitional difficulties, the Court held that it saw “no principled or practical means of defining when an individual’s ties to an LLC should suffice to make them a ‘family member’ of the LLC for purposes of determining when the individual’s occupancy of an apartment strips the apartment’s shares of unsold-share status under the lease.…” Id. (Orig’l emphasis.) Accordingly, the Court concluded that “the only reasonable reading of “member of his family” in … the lease is that this language does not encompass individuals connected to LLCs or corporations that hold unsold shares.” Id.

The Court rejected Seven Park Avenue’s assertion that Campagnoli qualified as a family member of Bellstell because he was a “legal representative” of the company under the lease. Seven Park Avenue claimed that Campagnoli is a manager of Bellstell, that he has the authority as a manager to bind his principal through his actions, and that this authority makes him a “legal representative” of Bellstell, such that in occupying the apartment at issue he stood in Bellstell’s shoes for purposes of the proprietary lease. Id. at *5. The Court said that it was “not persuaded” by the argument. Id.

The Court reasoned that the term “legal representative” had narrow a meaning: “A legal representative . . . in the ordinary sense is one who manages the legal affairs of another because of incapacity or death – not merely an agent, but a principal who has been assigned the rights and obligations of the party itself.” Id. (citations and internal quotation marks omitted). The Court saw no “reason why [it] should disregard the ordinary, limited scope of the term ‘legal representative.’” Id. “Indeed,” said the Court, “the language of [paragraph] 40 itself confirms that this term is being used in the conventional sense.” Id. In that regard, observed the Court, the term appeared in a list of parties formally “assigned the rights and duties” of the lessee, whether through a written instrument or a court filing “associated with Surrogate’s Court practice.” Id. “Each term,” concluded the Court, “denoted a party that ha[d] taken on the legal rights and responsibilities of the party itself in some form, not merely one who is serving as a high-level agent of the party.” Id. Accordingly, the Court held that “Campagnoli was not a ‘legal representative’ of Bellstell within the meaning of [paragraph] 40 of the co-op lease” and that his occupancy of the apartment “did not affect the ‘unsold share’ status of the apartment’s corresponding co-op shares.” Id.

Takeaway

Whether a plaintiff is a holder of unsold shares is determined by applying ordinary contract principles to interpret the terms of the documents defining their contractual relationship with the cooperative corporation. Kralik, 5 N.Y.3d at 59. Under this standard, the Bellstell court determined that the character of the unsold shares at issue had not changed. Bellstell remained the holder of the shares within the meaning of the proprietary lease, and the shares never lost their character as unsold because Campagnoli occupied the apartment.

Tagged with: Co-Op Corporation, Commercial Litigation, Contract, Contract Interpretation, Cooperative Corporation, Unsold Shares