A Smarter Way to Handle a Problem Shareholder

Dealing with a neighbor who stops paying maintenance is one of the most stressful situations a co-op building can face — and most people assume the only fix is a slow, expensive slog through housing court. Attorney Moshe Bobker, partner at Tane Waterman & Wurtzel, explains a little-known legal tool that's been quietly changing the way co-ops handle defaulting shareholders. It's faster, cheaper, and in many cases far more effective than anything a courtroom can offer. Bobker draws on real cases to explain how this strategy shifts the pressure in ways that get people to the table quickly — and why it's been gaining serious traction since the COVID era exposed just how broken the traditional process really is. Habitat's Emily Myers conducts the interview. 

The business of running a building is demanding work that requires making endless decisions — some that can quickly lead your board into a quagmire of legal difficulties. Legal Talk interviews New York's leading co-op/condo attorneys to find solutions, and get some guidance, on these challenges.  For more co-op and condo insights, sign up to receive Habitat's free newsletters or become a Habitat subscriber today!

Transcript

Emily Myers: Every co-op wrestles with arrears, and the numbers can climb quickly. And for a co-op, relying on housing court to get relief can be a very slow process. But there is another option, one that can be faster, less expensive, and often more effective

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Emily Myers: I'm Emily Myers with Habitat Magazine, and my guest today is Moshe Bobker, partner with Tane, Waterman & Wurtzel. Moshe, thanks so much for being here.

Moshe Bobker: Thank you for having me, Emily. It's always nice to speak with you. 

Emily Myers: So when a shareholder is in default, it can obviously put a lot of pressure on the building. How should co-op boards be approaching this problem? 

Moshe Bobker: There's always the, this is a constant issue as, every co-op board knows.

This is, they deal with this on and off, some buildings more than others. And certainly always, just from a general perspective, it's always important to stay on top of, the rent rolls and making sure that people aren't falling too far behind. Certainly usually not worth a- and not really, a great way to manage the building if you're chasing everyone after a month or two.

But certainly once, you hit the three-month mark is typically a night, where we start saying, certain actions have to be taken. And then the question is really just how aggressive the board wants to be. Typically management will, will reach out initially and try and see if they can resolve it.

And then from there, again, if that doesn't resolve it, then you're, typically looking at your co-op, your general counsel your, law firm to, to help you with that, those collections that, that still remain outstanding. 

Emily Myers: But you've been using a non-judicial foreclosure more often.

Can you explain what that is and how it differs from pursuing perhaps an eviction through housing court and getting reimbursed that way? 

Moshe Bobker: Yeah, absolutely. So this is something that is unique to co-ops because of the way that they're structured. You have obviously shareholders have an ownership interest in the co-op that entitles them to a proprietary lease, which allows them to to, to lease the apartment.

That's why they're able to live there. The way standard proprietary leases work is that they provide a, the co-op with a security interest in the shares and, in the stock and lease, which, go hand in hand. And so they're essentially sec- as a secured party, they are able to to proceed non-judicially because it's not real property.

You don't have to go through a full-blown judicial foreclosure action as you would in, let's say, a condo. And so boards in co-ops have the ability to commence a non-judicial foreclosure, and we can discuss the process of, what it looks like in a minute. But essentially, this is an- another option to housing court, which again, any board that's dealt with it, recently during, during or after the COVID shutdowns know that it's a long and slow and expensive process.

And the non-judicial foreclosure in most cases, again, will resolve it one way or another in a much shorter amount of time, much cheaper and much more efficiently and gets the, the building back to as close to whole as possible and gets, lets them move on to, other aspects of managing the building.

Emily Myers: Yeah. So I mentioned eviction, but really it's a non-payment procedure. But why, so why is the non-judicial foreclosure why is it faster, cheaper, and more effective for boards? 

Moshe Bobker: In, in in very simply it's 'cause you avoid courts which are notoriously slow and take, time-consuming and expensive.

So the non-judicial foreclosure is essentially a, it, as, as exactly as it sounds is it avoids judicial the judicial system entirely with, with the obvious exception is if the shareholder were to commence it. But from the board's perspective, you are able to start the process.

You, you issue a notice of default letting them know, "Hey, you're in arrears. You owe X dollars." They have a time to pay. Most proprietary leases give the shareholder 10 days. If they still don't pay, you can terminate. And after that, rather than filing a housing court and, filing for, an eviction proceeding, you would then simply, commence a public auction or public sale of the stock and lease as you would, under the UCC, which is Uniform Commercial Code.

If the shareholder, and again, throughout the process if the shareholder pays, obviously that can resolve it, and at that point, they would be, the building would be made whole. If they don't you will, you would be able to, within a matter of weeks or months, be able to have auctioned the property.

You would have a new shareholder in place and you would then, that new shareholder would then be responsible for not only paying the maintenance obviously once they become a shareholder, but also dealing with the actual possession as far as evicting the former shareholder from the apartment.

That does not have to be the board's responsibility or issue to deal with 

Emily Myers: So I imagine this is often just a very good way of getting the shareholders' attention. 

Moshe Bobker: Absolutely. Yeah, in, in our experience, it has been a great way to to get the shareholders to deal with the issue.

And that doesn't always mean terminating and auctioning the shares. Sometimes it just means getting them to the table to discuss a payment plan or something like that, which most boards and, most buildings are not opposed to. It's just sometimes, with certain shareholders you have trouble getting...

Even getting the line of communication open. They're not responsive to management. They may not even be responsive to to attorney, letters and rent demands and things like that. And, m-many shareholders may even realize that they'll take me to housing court, and then, we'll fight about it, and then maybe in a year from now I'll have to pay whatever, whatever the judge says.

But hey, that's... I don't have to do anything immediately." so this is a great way of telling them, "Hey, if you don't do anything your lease not only will be terminated, your, your shares will be will be auctioned off, and you'll no longer have this this apartment. You'll no-no longer have the ownership interest."

So it really does grab their attention, yeah. 

Emily Myers: Can you share an example of a board that perhaps used the non-judicial foreclosure and how it played out, and perhaps con-contrast it with a building that took the housing court route? 

Moshe Bobker: Yeah. So we actually did two relating... We did both, I should say, relating to a shareholder relatively recently.

We actually started a non-pay because that was, again, the traditional route. And we, we had started it thinking the shareholder's gonna come to court, we'll negotiate a, a payment plan or whatever it is, and then, we'll get paid and that's... We'll all go on our way.

That case for, for, it was... COVID ended up delaying us quite some time, and after years of litigation, we had to go to trial because there was a habitability counterclaim that was alleged, so that, led to a, an extended trial. And even though we won and we got a judgment for the full amount of maintenance, it took us, two, three years to get it.

Thereafter, same shareholder then defaulted again in paying maintenance. She paid the judgment and then immediately started accruing arrears. Or she paid the judgment while accruing arrears, and the judgment only covered a certain period up to the time of trial. And so instead of going through that process again and waiting another year or two to collect, we issued the notice of default, started the non-judicial foreclosure, and within months we had worked out, payment in full, and the arrears were paid and everyone's kinda, everyone's been able to move on.

Like I said earlier, rather than, l-litigating for another two or three years, this was resolved in a matter of months. So it's just... it was a very stark contrast as far as... Again not every case is different, but the differences between going to housing court versus going the non-judicial route, there's certainly those, the advantages time efficiency, yeah.

Emily Myers: Yeah. So the example you're using is actually the same shareholder. You had one... The s- shareholder who you ended up taking to court, then you got the payment, and then the same arrears was being accrued by the same shareholder, and you chose a different path. 

Moshe Bobker: That, that's exactly right. That's exactly right.

It was the same exact shareholder. And again we saw the delays in housing court, which again, every board, every attorney who deals with this is, is familiar with. And we... Again, the board decided they did not want to go down that, go down the court route again and wait another year or two of fighting because the shareholder clearly knew she could delay things and buy time.

Even if she ended up having to pay, the board was gonna have to wait, months if not years in order to get paid. And then, so we went the other route. She actually did file a for a preli- preliminary injunction to stop the auction. But at the end of the day, realized it was, it was basically a losing battle.

At some point, she was gonna have to pay these arrears. And so we were able to work out a, settlement which essentially had the, made the building whole including its legal fees, and again, like I said, resolved it in a m- in a fraction of the time. 

Emily Myers: Okay. And so what's the situation now?

Because clearly, a problem shareholder can remain a problem shareholder. How does the board navigate the future with this situation? 

Moshe Bobker: Yeah. There's always as there's always shareholders who tend to, who seem to constantly be in arrears. The non-judicial foreclosure route is not a it's not the be all and end all.

It doesn't guarantee you that shareholders are gonna pay, that going forward they're gonna pay. But I do think it sends, as we discussed earlier, a strong message that this is not going to be a game that they can play for months and years and ends up and just say, "Okay, I'll pay you," or, "I'll, I'll pay you over the course of 6 or 12 months," and be able to string the, the building along.

And so there is... It's not a silver bullet. It doesn't res- you know, solve all the problems. You still will have shareholders in arrears. You'll still have to send out the notices. But again the process for for starting, the starting the process, starting the non-judicial foreclosure process, because it's much more straightforward, it's simpler.

It's... And once you've done it once with a shareholder, you already have all the pertinent information in the file. You can send out those notices and start, again, putting the shareholders on notice no pun intended, fairly easily and quickly and efficiently. And again, then the ball's in their court to either resolve it, come up with a payment plan, or again, then you're looking at auctioning their shares if they don't.

Again, it doesn't solve everything prospectively, but it certainly helps out if you ever do need to go down that route. 

Emily Myers: And so for this shareholder, presumably the knowledge that the board will use this strategy is an incentive to keep up with payments. 

Moshe Bobker: Absolutely. And I, as far as I'm...

My understanding is that she has been p- timely paying since the last res- the resolution of her, the non-judicial foreclosure. So I do think that, again, she realizes that this is not a game the board's gonna play. And if they are... If she's gonna stop paying for whatever reason, and especially if it's a, not an illegitimate reason, they're not going to hesitate to do the non-judicial foreclosure or start, or at least start the process, which is then gonna put pressure on her to either go to court or pay and, that keeps...

Again, for most shareholders, it certainly is enough incentive to keep them in line as, as much as possible. 

Emily Myers: You mentioned that the shareholder tried to fight back, tried to file an injunction. How does that work and what happens if that is successful? 

Moshe Bobker: Sure. So that is the one real way that the shareholder can fight back other than again, to the extent that a resolution that, that, a settlement can be reached.

I am always in favor of that. What the shareholder... And again, this puts the onus on the shareholder to go to court in the non-judicial foreclosure route rather than the burden of proof being on the building to prove that you served the rent demand, you served the petition, this amounts are outstanding, the ledger is all accurate all those things, those burdens really all get shifted, or the burden, general burden, I should say, gets shifted to the shareholder.

It's now incumbent on them to prove the, requirements for a prelim- preliminary injunction, which are fairly strenuous. They're not all that easy. They, and they have to af- affirmatively take those steps of either going to court themselves if they're gonna do it on their own or retaining an attorney.

And while many, some shareholders will do it, many shareholders will realize that it probably makes more sense to either come up with a payment plan or to pay the arrears if they're capable of doing that, instead of paying an attorney to to fight the the to f- to, to stay the foreclosure and fight the case.

That certainly ends up being expensive on the shareholder's part. So it is something that obviously boards should be aware of. It's not, it's not a guarantee that you're gonna be able to auction it or get paid. There's a certainly a possibility of litigation because as I said, the shareholder can certainly file that case.

But again, the burden would be on them. They'd have to prove that they have the ability to cure the default, which would mean having the money to pay that for, anything that's outstanding. And in my experience, when even when the shareholders are, have filed for a preliminary injunction, most of the time it's really just a way of preserving their ownership and avoiding the foreclosure and, to buy themselves time to work out the payment plan or to come up with the money, whatever it might be.

It's the rare case where they're really looking to litigate it through and fight whatever it might be. Because I think in most cases, the maintenance isn't really, being disputed If there's some other ancillary issue, like a habitability issue or something, that can usually, again, be negotiated out.

So it's, again even if you end up in court, it's not necessarily the worst thing. It's certainly, sometimes it's just a stepping stone to get to that that settlement or whatever or other resolution. 

Emily Myers: Yeah. And you make an interesting point about shifting the burden in terms of, the shareholder then becomes responsible, whereas for a non for a housing court action, of course, it's very procedural and you need to, the board needs to be doing everything by the book.

And that, in a sense that sort of shifts that to the shareholder. 

Moshe Bobker: Yeah. Ab- absolutely, because in, in the non-judicial foreclosure, again, we are not going to court. As, we as the board are not filing in court. So it's, that's the, rule number one of litigating is that the plaintiff who- or the petitioner, whoever's filing the case in court, they have the burden of proof.

And so if you're filing a non-pay, again, an attorney who's knowledgeable is able to, make sure that, the notices are served timely, the, the petition is served timely. But again, any attorney knows that in any case there's, 100 different stumbling blocks you can fall over, whether it's through, through no fault of your own.

And and you never, you might not know that until six or 12 months down the road when the, the tenant makes a motion or other, comes up with some other reason why the case should be dismissed. And in the non-judicial foreclosure even if they, again, even putting aside the very high burden that a preliminary injunction carries, even just generally speaking, when they file in court, the burden is on them to prove, again, the notice of default was effective somehow.

They would have to prove that there was some, an issue with it, that you didn't do it in enough time or it wasn't served properly, whatever it might be. So the burden rather of having to prove that serve- service was proper and the notices were proper, the burden is on them to prove that they were improper somehow.

And again, an attorney who knows what they're doing is gonna be able to minimize those possibilities in the, even in the in the non-judicial foreclosure where, you know, where the where the shareholder would have that burden it becomes a high burden for them to be able to meet.

Emily Myers: Yeah. And is there any information you can share about the auction process? Are there risks that perhaps the apartment sells too low or there are complications if some- someone's still living there? 

Moshe Bobker: Certainly. There certainly are other factors to take into account. There's no perfect process where...

Again, I-- and certainly that is as you mentioned, very a big concern for many boards as well. If it goes to auction, you're not gonna get near fair market value typically. Typically the, the purchase price is gonna be much lower. But even if... What I would say is twofold.

Number one is it's still probably overall a better method to to get the arrears paid than it is to, than to do the non-payment proceeding. And number two is even if you do the non-pay and you end up getting the judgment or whatever it is, you're end up, you're gonna end up auctioning the apartment anyway in order to recoup those arrears.

So you... If this is like a shortcut going to step five let's say, rather than having to do, rent demand, petition, litigate in court, get a judgment, get a warrant, evict them, and then do the auction. Here you're really just doing the two notices I mentioned, then you have to, you deal with the auction, you send out, you have to publish a notice, et cetera.

But you get to that auction process much quicker. So it's certainly something to be to be cognizant of and boards should consider whether, again, whether it's something they want to bid on because they want the price to be higher or what, whether they can, whether there's other ways to ensure that that it doesn't sell too low.

Although I also think that in my experience, even the boards who were concerned with it selling low didn't really affect future sales. I think most brokers and buyers that, when they're doing it on the open market understand that, something that sells at auction is always gonna have a lower price and is not a comparable sale for the, for, as far as what you're listing or selling or buying an apartment for.

So I think that's... it's certainly a concern, something to take into consideration, but is not necessarily the be-all and end-all. 

Emily Myers: Okay. And are there any other concerns that boards have raised when you've suggested this route? Perhaps being seen as too aggressive or trying to obviously avoid this spiraling.

How are you-- How do you address the concerns of boards? 

Moshe Bobker: Yeah. I would say there's one concern that boards always have that I'd like to just mention about the auction itself is that they don't... They all are-- Many boards have asked me are we still gonna be able to re-reject or approve the potential purchaser at auction?"

The as you, you can imagine, most of the bidders at auction are there for, prospecting. They're there for investment purposes. They're not, a newly married couple who's looking to, to buy their first home. And so you are gonna get a lot of the same, the same, those kinds of of folks and they're there regularly at the auctions.

So you are getting a, that those are your typical bidders at auction. But the answer to the, that, that question, which again, many boards have asked, is yes, you still get the ability to review and deny or reject purchasers if for whatever reason they do not, meet any sort of, financial qualifications or whatever other qualifications such as, primary residence in certain buildings.

They would be able to reject the purchaser and then there's, typically we leave several options open as far as, auctioning it or offering it to the next highest bidder, things like that. So the board doesn't have to worry about some random person is gonna come in here and buy and we're not gonna be able to say, to say anything about it.

So that's not the case. They do have the ability to still review the purchaser. As far as your question about being aggressive, it certainly is in my opinion, a more aggressive approach. The non-pay, as we've discussed, is the slow, like we'll send you an initial notice or a re- you know what?

We'll send you a or a demand letter. We'll send you a rent demand. We'll take you to court if we, you still don't pay, and then we'll, talk, about settlement for six to 12 months. So that certainly is a relatively passive approach, but that passivity does cost, with time and money.

So it is aggressive and I don't necessarily recommend it to most boards as far as an initial step. I wouldn't un-except in a case where like the shareholder we discussed earlier, where, they know that they're in arrears. They've played this game before, and they know that they have to pay.

For a shareholder who's not really been in arrears rec- for much of their their tenancy I would certainly have management send out a demand letter first. I would even send, have an attorney's letter saying, "Hey, we're, law-lawyers are now involved. If you don't take this issue seriously and address it now, we're gonna start, the process of collection and, you probably wanna avoid that, and so contact us or pay the arrears in order to avoid that."

It certainly is a board decision. Boards who want to be less aggressive may want to have it as a last, last resort, maybe even start the non-payment case or s- send a rent demand. Maybe that will get their attention. But at the end of the day, all those steps, if they aren't successful are, I say wasted money, but they're certainly time and money that's been spent.

I do think that it's, it's certainly not my first option. But as far as steps that we can take, again, if a shareholder is not paying and something has to be done, your, you have your two options that we've discussed, and I really strongly feel that the non-judicial foreclosure is a much better option in the vast majority of cases than the non-pay is.

Emily Myers: Okay. Goodness. It seems a good place to leave it, but I'll just ask if there's any other takeaways for boards from this conversation. 

Moshe Bobker: Yeah, no I think we've covered a lot. I would just tell the boards that, again, if it... The boards that have not been apprised of this should obviously, discuss with their counsel.

Boards that are, curious about the process, whatever, obviously it's something that has certainly proliferated, I'd say, much more in the COVID, after the COVID shutdown when you couldn't do anything. But co-ops, were able to at least were at least able to do, this.

So I think it... And even thereafter when the courts opened, or reopened I should say it's, it still became the process was still so slow and the delays were so long that I think, many boards and certainly our thinking at our firm has shifted to where it was, maybe in, in certain cases it makes sense with, certain variables.

Whereas now it's really become the standard because it's a much more effective way of collection, especially buildings certain buildings have, high arrears rates, they have a lot of apartments in arrears. And it creates so many various other issues with, if there's underlying mortgages and things like that that, it makes, it really makes it a Much more efficient way to get your arrears in order and to get the arrears paid that again, I think it's something that it's really proliferated a lot recently and it's something that every board should consider even if they decide it's not for them.

It's certainly something that, I think it would be it's wise to at least consider and, figure out does your building, does your, lease allow it? Do, what would it look like? What would it cost? Would our shareholders, be good with this?

All those kinds of questions, but certainly something to, to, that should be considered because of its advantages. 

Emily Myers: And are there some leases that, that would limit a board from going down this route? 

Moshe Bobker: It's certainly possible. The standard for proprietary lease that I'd say most co-ops and fair market co-ops have have it.

I would say even other ones that have exception FHA 213 buildings most of them I believe have it. So either, Mitchell-Lamas would be an exception. They don't have that kind of that ability, so you're back to, your only, your real option is go to court which is unfortunate, it is what it is.

But I would say the vast majority of buildings, I should say HDFCs also again, it's typically in the lease. So I'd say you're looking at, 90 or maybe even more percent of the buildings in the city that would have this ability should they ch-choose to use it. 

Emily Myers: Okay. Brilliant. Moshe, thank you so much.

It's been great chatting with you. 

Moshe Bobker: Thank you for having me. It's been a pleasure. 

Emily Myers: Moshe Bobker, partner at Tane, Waterman, and Wurtzel. Thank you to our listeners for tuning in to Habitat's coverage on issues affecting co-op and condo boards.