- Role of Attorney General
- Securities Law and Contracts Law
- Purchasing a Sponsor-Owned Unit or from a Holder of Unsold Shares
Role of Attorney General
The Attorney General is the promulgator of the regulations governing formation and administration of co-ops in New York.
Securities Law and Contracts Law
Co-op shares are governed by securities law and contracts law. The following quote from Kralik v. 239 E. 79th St. Owners Corp., 5 N.Y.3d 54 (2005), is informative:
. . . regulations promulgated by the Attorney General under 23-A of the General Business Law (the Martin Act) and codified at 13 NYCRR part 18.
. . .
The Martin Act governs the offer and sale of securities in and from New York State, including securities representing “participation interests” in cooperative apartment buildings. The Attorney General bears sole responsibility for implementing and enforcing the Martin Act, which grants both regulatory and remedial powers aimed at detecting, preventing and stopping fraudulent securities practices (see CPC Intl. v McKesson Corp., 70 N.Y.2d 268, 514 N.E.2d 116, 519 N.Y.S.2d 804 ). According to the Attorney General, who filed an amicus brief in this case, his duties under the Martin Act with respect to cooperative apartments are twofold. First, he reviews the disclosures required by General Business Law § 352-e for sufficiency. Second, he may investigate and initiate civil or criminal actions where he believes there is fraud (see General Business Law §§ 352, 352-c, 353, 354).
To carry out his responsibilities under section 352-e, the Attorney General has promulgated 13 NYCRR part 18 (see General Business Law § 352-e [b] [empowering Attorney General to “adopt, promulgate, amend and rescind suitable rules and regulations” relating generally to General Business Law § 352-e]). Because section 352-e is “a disclosure statute, designed to protect the public from fraudulent exploitation in the sale of real estate securities” (Council for Owner Occupied Hous. v Abrams, 72 N.Y.2d 553, 557, 531 N.E.2d 627, 534 N.Y.S.2d 906 ), part 18 is similarly limited and only applies to disclosures made in a public offering. Thus, part 18 does not apply to plaintiffs unless and until they offer apartment 16E’s shares for sale to the public, and, in that event, only the Attorney General may enforce part 18’s requirements (see Vermeer Owners v Guterman, 78 N.Y.2d 1114, 585 N.E.2d 377, 578 N.Y.S.2d 128  [no private cause of action under General Business Law § 352-e]).
In short, the terms of the controlling documents–not part 18–determine whether plaintiffs are holders of unsold shares. Plaintiffs’ status must be decided by applying the usual rules of contract interpretation to those documents (see e.g. Fe Bland v Two Trees Mgt. Co., 66 N.Y.2d 556, 563, 489 N.E.2d 223, 498 N.Y.S.2d 336  [“The 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 under which a particular apartment is occupied, subject, of course to applicable statutory and decisional law”]).
Purchasing a Sponsor-Owned Unit or from a Holder of Unsold Shares
Fact Scenario: An investor might purchase the interest of a sponsor or from a “holder of unsold shares” at a premium because such shares are exempt from some of the restrictions applicable to residential tenants.
- We are talking about investors. Once a purchaser buys for occupancy, the status as a “holder of unsold shares” is gone. But an investor might purchase “unsold shares” with the idea of keeping the status of “holder of unsold shares.”
- “Unsold shares” might not have some restrictions:
- The shares might not have the standard restriction on sublets without approval from the co-op board or payment of a sublet fee. See, e.g., Kralik v. 239 E. 79th St. Owners Corp., N.Y.3d 54 (2005).
- The purchaser might not have to submit an application to the board for approval.
- Because “unsold shares” and “sponsor units” can have fewer restrictions, they can be sold at a premium premium.
A sponsor is always a holder of unsold shares, but a holder of unsold shares can be someone other than a sponsor.
A bulk purchaser of unsold shares is deemed to be a sponsor. See Cole v. 1015 Concourse Owners Corp, 70 AD3d 597 (1st Dept 2010) (“Since defendant indisputably acquired 80% of the co-op’s shares in a bulk purchase from the sponsor’s successor, it is deemed a sponsor, and thus bound by the sponsor’s obligations.”).
Question: How can you verify the status as a “sponsor unit” or “holder of unsold shares”?
To determine whether a seller is a holder of unsold shares, you must examine the documents (the offering plan, by-laws, or lease) and apply the usual rules of contract interpretation to those document; whether the purported holders complied with regulations governing holders of unsold shares is irrelevant. Kralik v. 239 E. 79th St. Owners Corp., 5 N.Y.3d 54 (2005) (“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.”); Cole v. 1015 Concourse Owners Corp, 70 AD3d 597 (1st Dept 2010) (“[T]he co-op’s offering plan and proprietary lease make clear that [defendant] is in fact a holder of unsold shares . . . even though it was never formally designated as such and has never complied with regulations governing holders of unsold shares.”).
- At a minimum, the purchaser must get the offering plan. If a co-op is a sponsor-owned unit or a unit owned by a “holder of unsold shares,” then there must be an offering plan. If the purported “sponsor” is not providing an “offering plan,” then that person cannot claim “sponsor” status.
- The offering plan will either be up-to-date with amendments through the Attorney General’s office, or it will be Cooperative Policy Statement #5 (CPS-5) qualified because the sponsor owns less than the threshold percentage. CPS-5 qualification exempts a sponsor from filing formal amendments to the plan.
- Offering plans prior to 1981 are different than post 1982 due to a change in the AG regulations. Question: How do you determine whether the seller needs to get the purchaser approved?
Whether a sponsor needs to get a purchaser approved will be in the plan, the by-laws, or the lease. Look for a section about the rights of holders.
- Most plans say if it is a sponsor deal then the managing agent’s approval is not necessary, but some plans require managing agent approval.
Question: How do you facilitate a closing and share issuance without board application review and approval?
- The sponsor has an existing relationship with the co-op and, presumably, the managing agent. The sponsor will submit the contract for closing when the time comes to issue the stock and lease. It is the job of the sponsor to liaison with the transfer agent to get to the closing table.
- The sponsor must also submit its stock and lease for cancelation. Sometimes, there is one aggregate stock certificate for all unsold shares; but other times, each unit has its own stock certificate with its shares issued individually.
A consequence of default is that the co-op board may send a notice of default form that threatens lease termination.