How Russian Sanctions Affect the Collection Procedures and the Administration of Co-ops & CondosApril 13, 2022
The sweeping economic sanctions spawned by Russia's invasion of Ukraine impact co-op and condo operations in terms of admissions and collection procedures and the administration of certain services to building residents. This is because conducting business with foreign nationals or entities who are subject to the sanctions could expose an association to enforcement proceedings by the United States Treasury Department.
By way of background, by Executive Order 14066 of March 8, 2022, President Biden recognized that the Russian Federation’s "unjustified, unprovoked, unyielding, and unconscionable war against Ukraine… constitutes an unusual and extraordinary threat to the national security and foreign policy of the United States." In conjunction with this Executive Order, President Biden blocked "all property and interests in property that are in the United States, that hereafter come within the United States, or that are or hereafter come within the possession or control of any United States person."
This blocking order prohibits any U.S. person or entity from transferring, paying, exporting, withdrawing or otherwise dealing in any property and interests in property.
To assist members of the public in determining whether a person or an entity’s property is blocked, a division of the Treasury Department known as the Office of Foreign Assets Control ("OFAC"), maintains a "Specially Designated Nationals and Blocked Person List" (the "List"). The List sets forth the names of individuals and entities subject to the Russian sanctions. Violations of this Executive Order, and others, are punishable by civil penalties and presumably by injunction.
For our co-op and condo clients, it may be surprising to learn that acceptance of maintenance or common charges by a person or entity on the List would be in violation of the United States sanctions programs and could subject a co-op or condominium board to enforcement proceedings by OFAC.
Similarly, certain services typically rendered by co-op and condo boards, such as approving alterations and refinancing applications and providing apartment repairs could also be deemed to fall within the purview of "dealing in" a "Blocked Person's interest in property in the United States."
Moreover, prior to becoming a member of a community, an application is submitted to boards. Approval of such a submission could well be deemed "dealing in" such a person's "interest in property in the United States."
As an example, in 2012, a Texas Homeowners Association received a $9,000 civil penalty for collecting overdue assessment arrears and late fees upon the sale of a home in which a person on the List held an interest. (A summary description of the enforcement action is available here.)
Based on the foregoing, we urge co-op and condo board clients to always conduct a search of the List utilizing seller's and purchaser's names. Where there is an entity purchaser or seller, such as an LLC or trust, we further advise adopting a rule requiring disclosure of all names of all natural persons associated with the entity and searching those names as well to fully search the List. This policy must be applied uniformly to all purchasers and sellers to avoid discrimination charges on the basis of national origin.
Whenever a co-op purchaser or seller's name appears on the List, the board should consider outright rejection on the ground that the transaction is prohibited and therefore unlawful. We do not believe that a person who has been rejected on this ground should have a viable discrimination claim, since the basis for such a rejection is not national origin, but because their name on the List prohibits the transaction as a matter of law. As an alternative to outright rejection, a co-op board could require the applicant whose name has appeared on OFAC’s List to obtain a specific license from OFAC for the transaction in order to continue with the application process.
Condo purchasers are, of course, not subject to direct rejection by the board, only to its exercise of the Right of First Refusal. However, most condominium by-law provisions concerning the Right of First Refusal require that the transaction be "bona fide." We take the position (although, to our knowledge there are no cases on point) that a transaction involving a person on the List is not bona fide, and therefore the Right of First Refusal is not applicable. Accordingly, the board may lawfully refuse to recognize any such transfer.
The foregoing advice also applies to refinance, rental, sublet and alteration applications.
Prudence would dictate that the List be checked prior to initiating any arrears-collection action against a delinquent member of the association. A cautious board might also wish to check the List with respect to each of its association members so as to be on heightened alert against dealing with a “Blocked Person.”
Counsel should be consulted before denying any building services, including apartment repairs, or refusing to review any board application on the ground that the recipient or applicant is on the List to ensure that the denial refusal is legally permissible.
© 2022 Herrick, Feinstein LLP. This alert is provided by Herrick, Feinstein LLP to keep its clients and other interested parties informed of current legal developments that may affect or otherwise be of interest to them. The information is not intended as legal advice or legal opinion and should not be construed as such.