New York Law Review

Tag: Cooperative Privatization

  • Trump Village Section 3, Inc. v. New York City Department of Finance, 22 N.Y.3d 453 (2013): Real Property Transfer Tax and Mitchell-Lama Cooperative Privatization

    22 N.Y.3d 453 (2013)

    A residential housing cooperative corporation’s termination of participation in the Mitchell-Lama program and amendment of its certificate of incorporation as part of its voluntary dissolution and reconstitution as a cooperative corporation governed by the Business Corporation Law does not constitute a taxable transfer under Tax Law § 1201 (b) and section 11-2102 (a) of the Administrative Code of the City of New York.

    Summary

    Trump Village, a Mitchell-Lama cooperative, sought a declaratory judgment that its exit from the Mitchell-Lama program and reconstitution as a Business Corporation Law (BCL) corporation did not trigger the New York City Real Property Transfer Tax (RPTT). The Department of Finance argued that the reconstitution was effectively a conveyance of real property. The Court of Appeals held that amending the certificate of incorporation was not a taxable event because it did not constitute a conveyance of real property from one entity to another. The RPTT applies to deeds transferring real property interests, and the amendment did not meet this definition.

    Facts

    Trump Village Section 3, Inc. was incorporated in 1961 as a Mitchell-Lama cooperative. In 2007, Trump Village, with shareholder approval and state permission, terminated its participation in the Mitchell-Lama program. It amended its certificate of incorporation to reconstitute itself as a corporation under the Business Corporation Law (BCL), removing itself from the restrictions of the Private Housing Finance Law.

    Procedural History

    The New York City Department of Finance issued a Notice of Determination to Trump Village for a tax deficiency exceeding $21 million, asserting that the exit from the Mitchell-Lama program constituted a conveyance subject to RPTT. Trump Village sued, seeking a declaration that the RPTT was inapplicable. The Supreme Court ruled for the Department of Finance. The Appellate Division reversed, granting summary judgment to Trump Village. The Court of Appeals affirmed the Appellate Division.

    Issue(s)

    Whether a taxable transfer pursuant to Tax Law § 1201 (b) and section 11-2102 (a) of the Administrative Code of the City of New York occurs when a residential housing cooperative corporation terminates its participation in the Mitchell-Lama program and amends its certificate of incorporation as part of its voluntary dissolution and reconstitution as a cooperative corporation governed by the Business Corporation Law?

    Holding

    No, because the amendment of the certificate of incorporation to reconstitute the corporation under the Business Corporation Law does not constitute a conveyance or transfer of real property as required to trigger the Real Property Transfer Tax.

    Court’s Reasoning

    The Court of Appeals determined that the RPTT, under section 11-2102 (a) of the Administrative Code, is imposed on each “deed” at the time of delivery. A deed is defined as a document conveying real property or an interest therein. The Court rejected the Department of Finance’s argument that the amendment to the certificate of incorporation qualified as a “deed.” The court emphasized the plain language of the statute requires a conveyance from one entity to another. The court stated that doubts concerning a taxing statute’s scope and application are to be resolved in favor of the taxpayer, citing Debevoise & Plimpton v New York State Dept. of Taxation & Fin., 80 NY2d 657, 661 (1993).

    Further, the Court reasoned that Trump Village remained the same corporation, merely amending its certificate of incorporation rather than forming a new entity. The Court highlighted that the Private Housing Finance Law provides two options for privatization: conveyance of title or reconstitution via amendment. Trump Village chose the latter. The court dismissed the argument that the amendment radically altered the business, clarifying that the RPTT taxes conveyances, not changes in the corporation’s purpose. The court emphasized that the RPTT would still be collected on the sale of individual apartment shares.

    Finally, the Court distinguished East Midtown Plaza Hous. Co., Inc. v Cuomo, 20 NY3d 161 (2012), noting that it concerned Martin Act disclosure requirements related to shareholder rights and did not support imposing the RPTT in a Mitchell-Lama privatization.

  • East Midtown Plaza Housing Co. v. Cuomo, 19 N.Y.3d 164 (2012): Martin Act Applicability to Mitchell-Lama Privatization and Voting Rights

    East Midtown Plaza Housing Co. v. Cuomo, 19 N.Y.3d 164 (2012)

    The Martin Act applies to the proposed privatization of a Mitchell-Lama cooperative apartment complex, and a vote to determine whether the cooperative withdraws from the Mitchell-Lama program must be counted on a per-apartment basis when the certificate of incorporation so specifies.

    Summary

    East Midtown Plaza, a Mitchell-Lama cooperative, sought to privatize. The Attorney General required the filing of a cooperative offering plan under the Martin Act and mandated a per-apartment vote, based on the certificate of incorporation. East Midtown challenged this, arguing the Martin Act didn’t apply and the vote should be per share under Business Corporation Law. The Court of Appeals held that the Martin Act does apply because privatization constitutes a new offering of securities due to substantial changes in shareholder rights, including the ability to sell at market rates. The court further held that the vote was correctly counted on a per-apartment basis due to the cooperative’s certificate of incorporation. This decision ensures that shareholders are fully informed about the risks and benefits of privatization and protects the voting rights established in the cooperative’s governing documents.

    Facts

    East Midtown Plaza, a 746-unit Mitchell-Lama cooperative, sought to withdraw from the program. A 2004 vote favored privatization on a per-share basis but not per-apartment. The Attorney General required a cooperative offering plan under the Martin Act and mandated a per-apartment vote based on the certificate of incorporation. A revised 2008 plan avoided a physical exchange of shares, but a 2009 vote mirrored the 2004 result. East Midtown sought to declare the plan effective based on a per-share count, which the Attorney General rejected.

    Procedural History

    East Midtown filed an Article 78 proceeding to compel the Attorney General to accept the privatization plan and recognize the per-share vote. Supreme Court denied the petition. The Appellate Division affirmed. The Court of Appeals granted leave to appeal and affirmed the Appellate Division’s order.

    Issue(s)

    1. Whether the Martin Act (General Business Law art 23-A) applies to the privatization of a Mitchell-Lama cooperative apartment complex.

    2. Whether the shareholder vote to privatize East Midtown should be counted on a one-vote-per-apartment basis or a one-vote-per-share basis.

    Holding

    1. Yes, because the privatization of East Midtown’s cooperative apartment complex results in substantial changes to the nature of its shareholders’ interests, constituting an “offering or sale” of securities under the Martin Act.

    2. Yes, because East Midtown’s certificate of incorporation expressly provides that its shareholders “shall be entitled to one vote at any and all meetings of stockholders for any and all purposes regardless of the number of shares held by such holder, except as otherwise provided by statute,” and the Business Corporation Law does not mandate a different method of vote calculation in this context.

    Court’s Reasoning

    The Court reasoned that the Martin Act, aimed at preventing fraudulent securities practices, should be liberally construed. Citing federal precedents, the court emphasized that changes in the rights of existing securities holders can amount to a “purchase or sale” if there is a “significant change in the nature of the investment or in the investment risks as to amount to a new investment” (Gelles v TDA Indus., Inc., 44 F.3d 102, 104 [2d Cir 1994]). Privatization enables residents to sell shares at market rates, a significant change from the Mitchell-Lama program where resale prices are capped. The court dismissed the argument distinguishing the 2004 and 2008 plans as elevating form over substance, stating, “the end result under either proposal is the same—privatization and market value resale potential.”

    Regarding the voting rights, the Court noted that Business Corporation Law § 612(a) establishes a default rule of one vote per share “unless otherwise provided in the certificate of incorporation.” East Midtown’s certificate explicitly provided for one vote per apartment. The Court rejected East Midtown’s argument that Business Corporation Law § 1001 mandated a per-share vote, reasoning that § 1001 focuses on *who* can authorize dissolution, not *how* the votes are weighted. “In substance, the one-vote-per-apartment rule set forth in East Midtown’s certificate of incorporation entitles the holder of shares to one vote at stockholder meetings.” The Court also found that an HPD regulation requiring two-thirds approval of outstanding shares was compatible with the certificate of incorporation’s voting method.