When a Breakup Becomes the Board's Problem

When one shareholder wants out and the other wants to stay, the fallout doesn't just involve the two of them, it lands squarely on the board's desk. Matthew Goldberg, partner at Hankin & Mazel, walks through a real case involving an unmarried couple who bought a co-op together, only to face a breakup that turned into a stock transfer, a lender negotiation, and a financial review most boards wouldn't see coming. He breaks down what boards are actually responsible for reviewing when ownership changes hands and what can happen when an agreement falls apart entirely. Goldberg offers real lessons for any board that assumes a breakup, divorce, or ownership change is simply a private matter. Habitat's Carol Ott 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

Carol Ott: Divorce is all too common today, and while you would think this is only a personal matter, in a co-op it isn't. That's because dividing up ownership often means reevaluating the owners

Folson Group: At the Folson Group, our mission is to help boards make smart decisions every day. From end-to-end property management searches and construction project management to cost optimization, we help boards achieve sustainable savings, on-time projects, and long-term performance that speaks for itself 

Carol Ott: I'm Carol Ott with Habitat Magazine, and today we're going to untangle how a shareholder split up winds up at the door of the co-op board.

My guest today is Matthew Goldberg, partner at Hankin & Mazel. Matt, you have recently dealt with a case involving an unmarried couple who bought a co-op together and later split up. Can you walk us through what happened? 

Matthew Goldberg: Yes. Thank you for having me firstly. And yes I recently dealt with a situation at one of our buildings where a, an unmarried couple who I guess were dating at the time, purchased shares together to purchase a co-op.

They lived there for a number of years, and ultimately the relationship ended and the spouse, or not spouse, the shareholder who was no longer gonna be living there basically wanted to get their money back and wanted the unit sold. The shareholder who was living there did not wanna sell the unit, so amongst themselves, they had to come to a, basically, for lack of a better word, a buyout agreement between the parties so that one can retain the ownership and the other could get some equity back versus selling the unit in its entirety.

Carol Ott: So that buyout agreement, at that point, the board isn't involved. They're splitting up. They worked out their arrangement, correct? 

Matthew Goldberg: Yeah, correct. The board only becomes involved once the parties have reached an agreement either to sell it to a third party or to essentially do a stock transfer between the two of them.

However, it's not such a simple transfer because one of the shareholders is leaving. Anytime any shareholder is being removed from the shares, it has to be approved by the board as any change in shares do. 

Carol Ott: And why don't you tell us, when you say it has to be approved, what does that mean for the shareholder who's staying or who I guess has bought or retaining ownership?

What does that mean for that person? 

Matthew Goldberg: So obviously, when the shareholders attempted to purchase the co-op initially, they submitted a board application. The co-op board reviewed their application, their background, their finances to make sure that they were applicable for the building, they could financially carry it.

Now that they're removing one of those shareholders and essentially one of their incomes, it's in best interest to protect the building, the co-op needs to review whether the remaining shareholder can financially carry the unit themselves. A stock transfer application in this instance was completed and submitted to the board for review, including all the financial information of this remaining shareholder so that the board can make a proper determination if they would allow this stock transfer to take place.

Carol Ott: And is that the information that they had c- to give to the board, is that the same information that a new purchaser would've had to give? 

Matthew Goldberg: For the most part, yes. Obviously, the board has a history with the current shareholder. They can look back and see how they've dealt with the maintenance payments and assessment payments while they've been shareholders.

That's an added factor that the board can look into themselves. It's not typically part of the application, but yes, almost all the same financial information is submitted. The other complicating factor with this specific instance was that the two shareholders had a mortgage. So in addition to getting approval by the co-op, the remaining shareholder needed to get approval by the lender to have the other shareholder removed as well.

Carol Ott: And I'm, I don't know how they worked out what the buyout was, but if they bought the co-op in one year and then it was four years later, it has increased in value. And- In 

Matthew Goldberg: theory, yeah ... 

Carol Ott: in probably- Hopefully. Yeah ... in practice also. Yes. 

Matthew Goldberg: Yeah. 

Carol Ott: Is that reflected at all in what- the board has to look at?

Matthew Goldberg: So the shareholder essentially had two options when it comes to the lender. They could essentially refinance get a new appraisal for the new value of the unit, refinance the unit, or they can keep their existing-- or what they can do, depending on the lender, was keep their existing loan and essentially just remove this borrower.

So they had to go through a process with their lender where the lender approved this basically reapproved the purchaser essentially and all they're doing is signing is, new recognition agreements because the recognition agreements have to match the names on the shares. They'd have to bring the old stock and lease to the closing once approved by the board to cancel, and then they'll take the new stock and lease back as collateral.

What I've advised shareholders in this situation too, 'cause typically since we're the transfer agent for almost all of our buildings, this question comes to us before the process starts. So my first step is always telling them, "You need to get your bank on board before you start involving the co-op," because if your lender's not gonna be on board, there's no point in going through the co-op review process, because if the co-op approves and your lender doesn't, it doesn't help you.

You can't complete the transaction. 

Carol Ott: And when you say get your lender on board, that is not to refinance the apartment, but to just take off one of the names. Is that correct? 

Matthew Goldberg: Yeah. Remove one of the borrowers. In th- in this instance, this loan, from my understanding, was a little less complex because the remaining shareholder was actually the only borrower.

The r- the shareholder who's being removed is on the stock and lease, but they were not on the note. So as far as the bank was concerned, it wasn't as much of a review process from my understanding. Obviously, if both shareholders' financials were involved with the bank and they were both on the note, that may change the bank's opinion of this.

But in this specific situation that we're discussing, the lender was okay with this removal and they were on board. So at that point is when the shareholder submitted the application to the board for review. 

Carol Ott: And let me ask you if another wrinkle had happened and, B- both of the shareholders were on the note and the bank said basically we're gonna give you a new loan."

Is that correct? 

Matthew Goldberg: They, yeah, they can either say, "We're not gonna amend the loan," or y- the, the remaining shareholder has to apply for a new loan themselves. That's really between the shareholders and the bank. It's not really a matter for the board unless until it's an application submitted and the board has to review the financing that the new borrower is taking and factor that into the building requirements and the board's decision.

One o- the other aspect or potential fork in the road would be if the bank denied them or if they couldn't work out an agreement, but the, the shareholder who wants to leave still wants to get their money back or some money out of it, then again, it's not a matter that initially concerns the co-op, but what th- that shareholder is gonna do is bring what's called a partition action in court, which is essentially a proceeding where they're asking the court to divide the property evenly amongst the owners.

But obviously the co-op is not gonna order that someone comes and cuts the buil- the, the unit in half in the building. So the-- what happens is it's unable to be separated physically, so it has to be sold and divided financially essentially. So in that situation, they have to sell it. The court appoints either a referee or receiver to facilitate the sale.

Ends up costing the shareholders a lot more money 'cause there's receiver fees, court fees, attorney fees, things like that, and then it gets sold pursuant to the court order. And I said initially that, it doesn't concern the co-op at the beginning, but it will concern the co-op because in any partition action that the shareholders make, they do have to name the co-op because as the co-op technically owns the unit.

They just have shares a- and the lease. So the co-op will be named as a defendant in the lawsuit. Typically in that situation, the co-op's position is we have no-- you know, we don't take a side one way or the other. We'll do whatever the court orders us to do in terms of them selling the unit amongst themselves.

Carol Ott: But the co-op has had to engage its attorney to do that. 

Matthew Goldberg: Yes, and pursuant to the proprietary lease of this building and most of the other buildings, the court the co-op's attorney's fees would be the responsibility of the parties amongst themselves. We put that in typically as our, one of our claims in our answer to the action.

It is our claim for the co-op's legal fees for having to defend this action. 

Carol Ott: And during this, partition event, h-how long does that last? And then who's responsible for paying the maintenance or assessments, or what happens when that gets screwed up? 

Matthew Goldberg: Yeah. So in short, the, it's, from a maintenance perspective, the co-op doesn't care that there's a pending lawsuit.

The shareholders are jointly and severally liable to pay the maintenance. If they don't, co-op can bring their non-payment proceeding whether there's a case pending or not. They'd most likely try to get a stay of that action pending this, but in situations like that, we would've made a an application or a motion in that case for the court to order the payments be made while they fight over the action.

In terms of timing, just like any court case, there's really no set answer. It really depends on how far each side pushes, whether there's a settlement, whether it has to go all the way through trial, how backed up the court is. So there's not a set answer in that. Al- but from the co-op's perspective and how we advise our boards, we wanna make sure that the maintenance and assessments are paid, so we would, again, make that application to the court.

You guys take however long you want to fight over the unit, but we gotta make sure we're getting paid or we have the rights to bring our proceeding. So that, that's really our biggest concern when pr- protecting the co-op itself. 

Carol Ott: And I'm just curious in your practice, are there more cases of co-ownership among non-married partners or family members becoming...

Is that more common? 

Matthew Goldberg: We do our office handles, thousands of closings a year for our clients I don't know an exact percentage breakdown, but I think that it's becoming just like with the times that we're living in, I think it's becoming a lot more e- a lot more frequent than it used to be.

It's, a lot of times that's also when it's an unmarried couple that plan on getting married, but they buy the pla- the place first. Maybe sometimes the marriage doesn't work out. Obviously there are, we deal with situations all the time where they do buy it when they're married, and then they get divorced and something similar happens, typically of a divorce decree there, which is the court order dictating how the unit is to be handled.

So it's definitely, I would say, more than when I first started practicing but I, it's not like a, a majority or even, 30, 40%, anything that high. 

Carol Ott: So what's finally, what is, what would be your advice for boards and how they should handle couples breaking up? 

Matthew Goldberg: Yeah. So a- again, the co-op's really only concern, obviously aside from the human element and the situation between the parties, is their fiduciary obligation to the corporation.

So just like any other shareholder, you wanna make sure that any shareholder the board is approving is financially qualified for living in the building and carrying the unit. So in a situation like this where the board has previously approved shareholders We don't know how long, for-- it's not a set time how long they've owned it, what was reviewed at the time of ownership, what the financial situations are now versus then.

So it's always important when the board is doing a- any type of stock transfer that they're approving, that they know that the final remaining shareholder that they have approved can financially carry the unit. So reviewing their up-to-date financial position is extremely important, and we would advise all of our boards to do that anytime there is a stock transfer or name removal.

Whether it's a mom removing a, a daughter or a parent who helped purchase the unit being removed, or again, a, a divorce or a breakup. You always wanna make sure that anytime the stock is changing, the board's reviewed up-to-date financial information to make sure the remaining shareholder is financially stable enough to carry the unit.

Carol Ott: Terrific. That's terrific advice. Thank you so much. 

Matthew Goldberg: No problem. Thank you for having me.