A Newsletter of the Real Estate Law Committees
of the Association of the Bar of the City Of New York

Proposed New UCC Article 9 Must Address NY Coop Lending

by Matthew J. Leeds, © 1999¹

Several professional organizations, including the Association of the Bar of the City of New York and the New York State Bar Association, are currently formulating their views on the proposed adoption in New York of revised Article 9 of the Uniform Commercial Code.²

Without quarreling with the general notion of uniform state laws, particularly for matters that often pertain to interstate commerce, it must be remembered that historically New York practice has spawned special statutory provisions. With respect to Article 9, highly significant among these are the 1988 Amendments to Article 9³ with respect to the creation and perfection of certain liens on the stock and proprietary lease allocated to a cooperative apartment.⁴

Simply put, these special provisions have been the basis for lending on cooperative apartments for eleven years. It is critical that these provisions not be ignored by drafters of the revised New York version of Article 9. It is not hyperbole to say that these fundamental provisions regarding loans on cooperative apartments affect more than one million people who own or live in cooperative apartments in New York, probably billions of dollars of loans, every bank or other lender which holds cooperative apartment loans, and all others who hold interests as creditors or owners, including all of the cooperative apartment corporations themselves.

It is submitted that in any sensible approach, the drafters must take these provisions into account. However, there are a number of ways in which to do that. Presumably, approaches could include:

• Carrying the existing provisions directly over into the new statute;
  
• Moving the provisions to another statute where it might be felt that they are more appropriate and less likely to cause frustration in the event of other revisions of uniform laws;
  
• Attempting to improve the existing provisions (while being very careful not to disrupt the then current operation of the provisions that might be changed); or
  
• Including appropriate provisions in an even more comprehensive statute dealing with cooperative apartments. (That is, this review of the provisions regarding liens on cooperative apartments might give rise to an appropriate opportunity to reconsider broader questions such as concerns about the filing system, priority and the like.)

It might also be sensible to take into account the effects of other laws, in particular Article 8 of the Uniform Commercial Code which has been the subject of some discussion in the legal community, as to such issues as that of the "issuer's lien," which some practitioners have argued is the source of an apartment corporation's lien against the shares of a tenant-shareholder to secure maintenance charges and other obligations of the tenant-shareholder to the apartment corporation.⁵

Of course, any approach must begin with an understanding of the fundamentals of the following current fundamental provisions:

UCC Section 9-304 (7)⁶

Generally, this section provides for the perfection of a security interest in shares of a cooperative apartment corporation and the appurtenant proprietary leasehold by the filing of a Uniform Commercial Code financing statement, as otherwise required by the statute. (Normally, a security interest in stock would be perfected by possession.) This notion (instituted in 1988, as stated above) accomplished at least three things which were not present under previous law:

• It regularized cooperative lending, creating some certainty by the requirement of a filing in a public record which can be searched;
  
• It created a mechanism for second loans with respect to cooperative apartments, so the statute created the possibility of home equity loans on cooperative apartments. (That is, if possession were the way to perfect a security interest, only one lender could be secured.)
  
• The statute requires the filing to identify the real estate owned by the apartment corporation. This paved the way for cross-references against the property rather than limiting searches to the names of owners. Although this has not been a universal practice, it is available to some extent in locations such as with the Register of the City of New York where it is theoretically possible to search for financing statements against the stock allocated to an apartment, even with respect to owners prior to the owner whose name is being searched.

UCC Section 9-401(1)(b)⁷

This section requires the financing statement to be filed in the same office as a mortgage would be filed on the real estate in which the cooperative apartment is located. Again, this can help to provide certainty and more efficient documentation and searchable records for liens.

UCC Section 9-403(9)⁸

As opposed to the normal rule of a financing statement having a life of only five years, unless renewed, this section states that financing statements with respect to cooperative apartment loans are effective until a termination statement is filed.

Whatever solution to the issues raised above is adopted, the necessary input from the Bar will, doubtless, ensure that the appropriate provisions co-exist with what-ever are deemed other appropriate provisions in the new proposed revised Article 9.

Endnotes

¹ Matthew J. Leeds is a partner in Robinson Silverman Pearce Aronsohn & Berman LLP. Among other bar association, lecturing and writing activities, he is Co-Chair of the New York State Bar Association Real Property Section Condominiums and Cooperatives Committee.

² E.g., McLaughlin and Cohen, "Preparing Now for Revised Article 9," New York Law Journal, February 17, 1999; Association of the Bar of the City of New York Program "Y2001: Are You Ready for New Article 9?," May-June, 1999.

³ New York Session Laws of 1988, Chapter 333, Sections 2 and 3.

⁴ See, generally, Miller, Chair, "Liens on Individual Cooperative Apartments," a Report of the Liens Subcommittee of the Committee on Condominiums and Cooperatives of the New York State Bar Association Real Property Law Section, First Revision, June 6, 1997; Leeds, Chair, "Non-Judicial Foreclosures on Cooperative Apartments," Practising Law Institute, 1992.

⁵ See, e.g., ALH Properties Ten Inc. v. 306-100th Street Owners Corp., 86 N.Y.2d 643, 635 N.Y.S.2d 161 (1995).

⁶ N.Y.U.C.C. § 9-304(7) (McKinney, 1999):

Notwithstanding the provisions of Section 9-305 of this code, or any provision of this section to the contrary, a security interest in shares or other ownership interests evidenced by stock certificates or other instruments, and a leasehold evidenced by a proprietary lease or either of the foregoing from a corporation or partnership formed for the purpose of cooperative ownership of real property, or in such stock certificates alone can be perfected only by filing in accordance with paragraph (b) of subsection one of Section 9-401 of this code. Such filing must identify the real estate or house or building owned by such corporation or partnership with a description sufficient for its identification.

⁷ N.Y.U.C.C. § 9-401(1) (b) (McKinney, 1990):

(1) The proper place to file in order to perfect a security interest is as follows: . . .

(b) . . . when the collateral is an ownership interest evidenced by certificates of stock or other instruments, and a leasehold evidenced by a proprietary lease, or either of the foregoing, from a corporation or partnership formed for the purpose of cooperative ownership of real estate, then in the office where a mortgage on the real estate concerned would be filed, recorded or registered, viz., in the office of the recording officer in the county where the real estate or house or building owned by such corporation or partnership is located; . . .

⁸ N.Y.U.C.C. § 9-403(9) (McKinney, 1999):

(9) When a financing statement covers shares of [sic] other ownership interests evidenced by stock certificates or other instruments, and a leasehold evidenced by a proprietary lease, or either of the foregoing, from a corporation or partnership formed for the purpose of cooperative ownership of real property and the filed financing statement so states, it is effective until a termination statement is filed.