The prime issue raised on plaintiffs' summary judgment motion for a declaration that they should be deemed the holders of "unsold shares" is whether they are entitled to such status in light of the fact that they acquired the shares from their mother who, together with her husband, had purchased them at a foreclosure sale.

In the early 1990s, plaintiffs' parents purchased the shares allocable to three apartments in the cooperatively owned building at 210 Avenue of the Americas. Such shares had been acquired by Mark Greenbaum from the sponsor of the conversion to cooperative status. When Greenbaum failed to pay an indebtedness secured by the shares and the appurtenant proprietary lease for apartment 4C (the "Lease"), said shares and Lease were sold at a foreclosure sale by the Federal National Mortgage Association to plaintiffs' parents, Michael and Christina Sassi. Mr. Sassi was then president of the defendant cooperative corporation, and plaintiffs' counsel is stated to have then been attorney for the corporation. No information has been provided as to what approval, if any, was obtained by the Sassis in connection with that purchase. After Mr. Sassi died in June 2001, the shares and Lease were owned by his widow until December 2003 when she transferred same to her adult daughters, the plaintiffs herein. Neither the plaintiffs nor their parents have ever resided in apartment 4C (the "Apartment") which, until recently, was occupied by a rent regulated tenant. Further, plaintiffs state that neither of them has any intention to reside there.

Plaintiffs now wish to sell the Lease and shares allocable to the Apartment. The cooperative's board of directors (the "Board") will not consent to the sale unless a formal application is made to it for its approval. Plaintiffs maintain that no such approval is required as they claim to be the owners of unsold shares. Under the cooperative documents, a sale by a holder of unsold shares needs only the consent of the managing agent, which consent may not be unreasonably withheld. This is contrasted with the rights of the Board which, under present law, may withhold its consent for any or no reason, except for a statutorily prohibited discriminatory purpose. [*2]

Paragraph 38 of the Lease provides in part:

"The term Unsold Shares' means and has exclusive reference to the shares of the Lessor which were issued to the Sponsor or individuals produced by the Sponsor pursuant to the Offering Statement-Plan of Cooperative Organization or Contract of Sale under which the Lessor acquired the Leasehold to the building; and, all shares which are Unsold Shares retain their character as such (regardless of transfer) until (a) such shares become the property of a purchaser for bona fide occupancy (by himself of (sic) a member of his family) of the apartment to which such shares are allocated, or (2) the holder of such shares (or a member of his family) becomes a bona fide occupant of the apartment. This Paragraph 38 shall become inoperative as to this Lease upon the occurrence of either of said events with respect to the Unsold Shares held by the Lessee named herein or his assignee" (emphasis supplied).

Under General Business Law § 352-e(6), the Attorney General is authorized to issue regulations "to carry out the provisions of this section." Pursuant thereto, regulations were adopted, with 13 NYCRR § 18.3(w) (the "Regulations") setting forth certain requirements with respect to unsold shares.

In Kralik v. 239 East 79th Street Owners Corp., the plaintiffs claimed to be holders of unsold shares and thus, under the corporate documents, maintained that they were not required to pay a sublet fee. In granting the defendant cooperative corporation summary judgment, the First Department wrote [4 AD3d 144 (2004)]:

"Plaintiffs contend that they are holders of unsold shares by virtue of their compliance with paragraph 38 (a) of the proprietary lease. However, such a provision, alone, does not create rights [as a holder], it merely extinguishes them' (Craig v. Riverview E. Owners, 156 AD2d 157, 158 [1989]). There must also be compliance with regulatory requirements pertaining to such holders (see Pacella v W. 25th St. Corp., 271 AD2d 342 [2000])"

In reversing, the Court of Appeals held [5 NY3d 54, 57 (2005)], "that whether plaintiffs are holders of unsold shares should be determined solely by applying ordinary contract principles to interpret the terms of the documents defining their contractual relationship with the cooperative corporation." In rejecting the applicability of the Regulations, the court ruled (p. 59):

"Because section 352-e is a disclosure statute, designed to protect the public from fraudulent exploitation in the sale of real estate securities' (Council for Owner Occupied Hous. v. Abrams, 72 NY2d 553, 557 [1988]), part 18 is similarly limited and only applies to disclosures made in a public offering. Thus, part 18 does not apply to plaintiffs unless and until they offer apartment 16E's shares for sale to the public, and, in that event only the Attorney General may enforce part 18's requirements ....

"In short, the terms of the controlling documents not part 18 determine whether plaintiffs are holders of unsold shares. Plaintiffs' status must be decided by applying the usual rules of contract interpretation to those documents ...."

Regarding amendments to the offering plan (the "Plan"), defendants have indicated that no amendment subsequent to the Eleventh Amendment dated July 2, 1990, which states that Greenbaum is the holder of 483 unsold shares allocated to the Apartment, shows any ownership of unsold shares. In the Plan, the term "Unsold Shares" is defined as shares "not sold by the Closing Date that are acquired by one or more members of Sponsor or one or more financially responsible individuals designated by him as a holder of Unsold Shares" (emphasis supplied), and the Plan provides (p. 49) that the sponsor is liable to the defendant cooperative for any default under a proprietary lease by a holder of Unsold Shares who does not occupy the unit covered by such lease. This latter provision is similar to the subparagraph (3) of § 18.3(w) of the Regulations, whereby a sponsor is required to "guarantee payment of all maintenance charges and assessments due from the holder of unsold shares."

An initial examination of the above referenced documents indicates a lack of clarity with respect to the term "Unsold Shares." In paragraph 38 of the Lease it is stated that "Unsold Shares retain their character as such (regardless of transfer) until" the shares are acquired by one who intends to occupy the Apartment or the holder becomes an occupant. On the other hand, the Offering Plan refers to a holder as one who is "designated" as such by the sponsor. From the standpoint of the sponsor, it would seem that on the one hand it would wish to make the term as broad as possible so that its designees would have as marketable an asset as possible, whereas on the other hand it would not want, as stated in the Plan, to guarantee without limitation the obligations of all transferees of its designees.

In considering the Court of Appeals decision in Kralik, it is evident that its reversal of the Appellate Division was based on the conclusion that the lower court was incorrect in holding that in order to be a holder of unsold shares there must, in addition to a contractual right to such status, "also be compliance with regulatory requirements pertaining to such holders" (p. 58). Thus, the Court of Appeals statement in footnote 2 that "Craig, Gorbatov and Pacella and other cases relying on them are incorrect to the extent they suggest that the requirements of 13 NYCRR part 18 apply where no shares are offered for sale," does not indicate a criticism of the holdings in said cases to the extent they interpreted the rights of shareholder-lessees under the cooperative's controlling documents.

Before reviewing the case law prior to Kralik, an examination is required of the wording of paragraph 38 of the Lease, compared to the similar wording of paragraph 38(a) cited in the [*4]various cases to be discussed below.^[FN1] The language in ¶ 38(a) of the leases in said cases appears to be similar to ¶ 38 of the Lease except that the Lease refers to shares of the lessor "issued to the Sponsor or individuals produced by the Sponsor, " whereas in some of the cases to be cited the similar phrase refers to shares "issued to the Lessor's grantor or individuals produced by the Lessor's grantor." Since the grantor of the Lessor (the cooperative corporation) would be the sponsor of the conversion, this difference in wording, contrary to the argument of plaintiffs, is of no significance.

In Craig v. Riverview East Owners, Inc., 156 AD2d 157 (1st Dept. 1989), the petitioners contended that they were entitled to the rights of a holder of unsold shares by virtue of the provisions of ¶ 38(a). However, the court remanded the matter for a hearing on "the status of petitioners' shares," holding, without any reference to the Regulations, that while ¶ 38(a) "includes a definition of the term holder of unsold shares,' its operation is merely to extinguish the rights of a holder of unsold shares if the shares become the property of someone, including the holder, for bona fide occupancy' ... (and the) provision, therefore, does not create rights, it merely extinguishes them" (p. 158).

The foregoing interpretation of ¶ 38(a) was reiterated by the First Department in its decision in Kralik, where reversal occurred, as indicated above, only because that court also mandated compliance with the Regulations in order to be a holder of unsold shares. In Thompson v. 490 West End Apartments Corp., 252 AD2d 430 (1998), lv. to ap. den., 92 NY2d 814 (1998), the plaintiff had purchased the shares allocable to the subject apartment directly from the sponsor. As the trial judge in that case, I held that plaintiff was not a holder of unsold shares because she had made the purchase with an intent to occupy the apartment (NYLJ, December 11, 1996, p. 26, c. 6). In my decision I expressed misgivings with a prior holding of a fellow justice in that case that a triable issue existed even though the sponsor had not designated the plaintiff to be a holder of unsold shares, noting that if the plaintiff was deemed a holder of unsold shares, the sponsor without his consent would remain contingently liable for the maintenance obligations, and the cooperative would be deprived of the right to control who could reside in the building. On appeal, the First Department affirmed the aforesaid factual finding, and also held that plaintiff misconstrued the provisions of ¶ 38(a) and that "her shares do not fall within the definition of unsold shares" (p. 434).

These holdings regarding the effect of ¶ 38(a) were followed by the Second Department in Gorbatov v. Gardens 75th Street Owners Corp., 247 AD2d 440 (1998), although in that case the court, in addition to examining the offering plan, the proprietary lease and the subscription agreements, also relied on the Regulations in determining that plaintiffs were not holders of unsold shares.

Since from the submitted papers it does not appear that a hearing could provide any further evidence on the issue before me, I find, in light of the foregoing rulings that ¶ 38 is not determinative, that the crucial cooperative document to determine the issue is the Plan, which [*5]states that a holder of unsold shares must be a person "designated" by the sponsor. Accordingly, I find and declare that since neither plaintiffs nor their parents were so designated, plaintiffs are not the holders of unsold shares, and therefore their motion seeking a contrary declaration is denied, as is their request for injunctive relief.

This decision constitutes the order of the court.

Dated: March 28, 2007_________________

J.S.C.