Addressing Differences Between the Business Corporation Law and the Cooperative Corporations Law

May 11, 2023New York Law Journal

Andrew B. Freedland and Deborah Koplovitz wrote an article for the New York Law Journal's Condominium and Cooperative column discussing the differences between the Business Corporation Law (BCL) and the Cooperative Corporations Law (CCL).

Historically, when a sponsor of a parcel of real property sought to sell the ownership of the real property, one means was to transfer ownership of the land into a corporation, and to then sell shares of the corporation to individual purchasers who were then issued proprietary leases appurtenant to individual apartments. The proprietary lease would allow the shareholder to reside in the "coop apartment", and the stock certificate would make purchaser a shareholder of the corporation. A sponsor choosing the corporate form of ownership would ordinarily form a corporation in accordance with New York’s BCL. However, a corporation may also have been formed under New York’s CCL - though the Legislature did declare that the policy behind the CCL was "to encourage … effective organization" of associations of "producers, marketers or consumers of food products" with the aim of "rendering of mutual help and service" to those entities. N.Y. Coop. Corp. Law Section 2.

The overwhelming majority of the disputes in our judicial system relating to residential "coop" cases involve BCL corporations; unsurprisingly, far fewer cases address the applicability and interpretation of the CCL. Recently, however, one such case was appealed to the Appellate Division, First Department. The case,Oliver 889 v. 889 Realty, 212 A.D.3d 531, 532 (1st Dept. 2023), was filed by the shareholder of the commercial space located at 889 Broadway, New York, New York, which was comprised of three separate units, 1A, 1B, and 1C. Among other issues in the case, the plaintiff, Oliver 889 LLC, challenged the corporation’s requirement that Oliver 889 LLC enter into a voting trust or "voting agreement," as they called it, upon its acquisition of the 2,860 shares appurtenant to the commercial space. According to the plaintiff, the voting trust would impermissibly prevent it from freely voting 2,630 of its 2,860 shares, thus restricting the shareholder from voting over 90% of the total shares it owns. Oliver 889 v. 889 Realty, 212 A.D.3d 531, 532 (1st Dept. 2023).

Like the Oliver 889 court, CCL Section 5 is the provision which practitioners who are advising CCL corporations must turn to for the answer to that question. That provision specifies, in the first instance, that the BCL "applies to every corporation heretofore or hereafter formed under this chapter [the CCL], or under any other statute or special act of this state …". Subsection 5(a) of the CCL further qualifies, however, that "if any provision of the business corporation law conflicts with any provision of this chapter [the CCL], the provision of this chapter shall prevail, and the conflicting provision of the business corporation law shall not apply in such case. If any provision of this chapter relates to a matter embraced in the business corporation law but is not in conflict therewith, both provisions shall apply." Therefore, it was not surprising that the Appellate Division affirmed Justice Lebovitz's conclusion that BCL Section 501(c) applied to 889 Realty Inc.

The Appellate Division opined that the "voting agreement" could not be enforced in its entirety under Section 609 and 620 of the BCL. The court also explained that BCL Section 609, which authorizes the use of proxies in BCL corporations, does not apply to corporations formed under the CCL.

Ultimately, the court reversed, in part, and invalidated Section 1(b) of the voting trust, concluding that the paragraph violates the BCL "because [the voting agreement] indefinitely links together the votes allocated to 2,630 of plaintiff’s shares and the votes cast by all other shareholders"… thus "effectively and impermissibly" creating a "permanent class of 2,630 nonvoting shares." This partial reversal was probably not what the cooperative sought in its appeal, as Paragraph 1(b) was the essence of the "voting agreement." This permanent class of non-voting shares runs afoul of BCL Section 612 which permits shareholders to cast one vote for every share owned. See Madison v. Striggles, 228 A.D.2d 170 (1st Dept. 1996); Yu v. Linton, 68 A.D.2d 856 (1st Dept. 1979).

Practitioners advising coop boards should always start by obtaining the organization’s certificate of incorporation to determine whether that entity was organized pursuant to the BCL or CCL. If applicable, CCL Section 5(b) must then be understood by cross-referencing that provision with the respective BCL provisions. In this way, when questions arise from a corporate client, the operational differences between a CCL and a strictly BCL entity can be identified and properly addressed.

This is discussed in the full analysis that originally appeared in the May 11, 2023 publication of the New York Law Journal. Access may require a subscription.

For more information on condominium and cooperative law matters, please contact:

Andrew B. Freedland at +1 212 592 1623 or [email protected]