Sunday, September 4, 2011

HOA Denies Winning Bidder Title To Co-Op Unit Bought At F'closure Sale; NYS Appeals Court: Sale Subject To Association's Governing Docs, Restrictions

In New York City, Habitat Magazine reports:

  • Congratulations! You're the successful bidder at a foreclosure sale of co-op shares. But wait! Can you actually take ownership of the apartment — or do you still need permission from the co-op board? Does a co-op's governing documents trump long-established precepts of property ownership? The answer may surprise you.

  • The 2010 case that set the precedent on this was LI Equity Network LLC v. Village in the Woods Owners Corp.


  • After their eviction [for failure to pay co-op maintenance fees], [the unit owners] defaulted on their loan. The lender declared the loan in default and scheduled a public auction — in this case, a "nonjudicial" sale. LI Equity was the successful bidder — but then the co-op's board of directors said that it would not approve the transfer of shares to.

  • While LI Equity never filed a formal application with the board to obtain the shares, the board independently reviewed and rejected the company's proposal to close on the unit and then, well, sell it to a board-approved purchaser. What's the problem?

  • LI Equity, naturally, sued the co-op in May 2007 on the ground that the company was statutorily entitled to own the apartment, regardless of the terms of the co-op's governing documents.

  • It also sought damages for breach of the implied duty of fair dealing. And the company won in a lower court, which directed that the co-op transfer the shares to LI Equity. The court reasoned that the co-op board did not have the power to interfere with the transfer of the lease and shares from a "judicial" sale, so the same would hold true of "nonjudicial" sale.

  • The appellate court, however, reversed that decision.

    What, My Money's No Good?

  • That court found that LI Equity was subject to the approval requirements found in the co-op's governing documents. It further said that the co-op board properly exercised its business judgment when it applied the approval requirements to the LI Equity's request to close on the shares.

For more, see Who Owns a Co-op Apartment When You Win a Foreclosure? Maybe Not You.

For the ruling, see LI Equity Network LLC v. Village in the Woods Owners Corp., 910 N.Y.S.2d 97, 79 A.D.3d 26 (App. Div. 2nd Dept., 2010).

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