BY ROBERT GRANT, DIRECTOR
MIDBORO MANAGEMENT
A nationwide prototype of Article 9 of the Uniform Commercial Code (the first revision in almost 30 years) was issued for states to adopt in 1998. Article 9 of the UCC affects trillions of dollars each year in loans or credit - other than leasing - that uses personal collateral (e.g., property, stock) as security for a creditor or lender. The most important changes in the new Article 9 deal with: a) how and where to file and terminate notices of liens against the collateral (or stock), b) how to perfect the lenders' security interest and c) enforcement in the event of a default. The revised Article 9 has already been adopted or introduced into state legislation by over 44 states and must be in place in all 50 states by July 1, 2001.
In New York State the revised Article 9 must be modified because the national prototype overlooks the unique aspects of buying and selling into a residential cooperative. In its current form it fails to address the concept of a co-op having a "perfected built-in lien" against stock in the apartment corporation - which is necessary so a cooperative can be assured of collecting maintenance owed by the owner of the stock ahead of bank loans and other liens.
Horrendous complications for cooperatives would result if the new Article 9 is adopted by the New York State Legislature without modifications (as proposed by the NYS Bar Association Committee on Liens). Five examples illustrate the potential problems:
1. A co-op would have to file a UCC financing statement for the stock appurtenant to every unit in the corporation to perfect its right to collect maintenance. If a co-op failed to file the proper UCC form, or failed to execute a security agreement (see #2) it could lose its right to collect outstanding maintenance ahead of a bank (in the event a stockholder defaulted due to non-payment).
2. A co-op would have to enter into a security agreement with each stockholder (in addition to the proprietary lease issued or assigned by the co-op).
3. The national filing statements for recording UCC liens against corporate stock do not have a place to list the county, block and lot where the cooperative is located. The national filing statements are based on the debtors' name. The errors in title searches would magnify a hundredfold, and the opportunity for fraud would also increase.
4. Co-op boards, attorneys, managing agents and transfer agents, along with title search companies and title insurance companies would be exposed to new liability and insurance claims.
5. All costs related to stock transfers, mortgage refinances and lines of credit (issued to shareholders), to title searches and title insurance would rise dramatically.
In the current New York State statutes there is no definition of co-op stock or a proprietary lease, nor is there a clear understanding of which laws to apply when dealing with co-op apartments. This has allowed the state courts, on a case-by-case basis, to engage in a legislative exercise in deciding whether to apply the rules governing stock or the rules governing apartment leases, when issuing decisions. Many bad court decisions, including decisions from the appellate departments (and a landmark decision from the Court of Appeals which confusingly merged stock and leaseholds together in dealing with co-ops) go against commonly held assumptions and practices within the co-op community. The objective of the proposed modifications from the Liens Committee is to clear up the confusion that currently exists in the courts and amongst real estate attorneys. Under their modified version of Article 9:
1. A cooperative will have an automatic perfected lien against its own stock. This assures financial stability by prioritizing the co-ops' right to collect maintenance, assessments, etc. before other lenders.
2. Lenders will have to file a unique UCC Co-op Addendum Financing Statement, which would include real property filing data such as street, town and city address, corporate name, county, block and lot (in addition to the debtor's name) to perfect their secured interest (lien) against the stock.
3. Such a filing will be effective, unless terminated, for 50 years.
4. The lender (secured party) will now be held responsible to file a termination statement.
5. If a co-op allows secondary financing or a line of credit against the value of the stock, the lien priority (after the apartment corporations' primary lien) will be based on the actual date of the loan or advance.
This last item is critical to lenders. If not adopted, loan advances by the first lender (who might refinance a loan in a greater sum) could hypothetically destroy the collateral of a secondary lender, whose second loan or line of credit was issued before the refinanced advanced by the primary lender - simply because the date of the loan or advance did not secure their secondary loan. This would have a chilling effect on all other lenders and create an unfair advantage for the primary lender.
What the New York state legislature will adopt is not yet known. The revised Article 9 has just been introduced (as part of a legislative package) in the state assembly. The absolute deadline to adopt the new Article 9 is July 1, 2001. Will the legislature allow chaos to descend into the cooperative community by not adopting the proposed modifications? Will state courts continue to leave contradictory decisions? Will there continue to be confusion and even unlawful stock transfers?