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Court Holds That When an LLC Owns Unsold Shares, They Retain That Status Despite Occupancy by a Member of the LLC’S Owner’s Family

            In past issues of this Client Advisory, we have reported on disputes concerning whether a cooperative sponsor or its successor remains a “holder of unsold shares,” whose units are exempt from requirements such as board approval of purchasers and payment of flip taxes or sublet fees. The standard form of proprietary lease provides that the status of a holder of unsold shares will be lost if “the holder of such shares (or a member of his family) becomes a bona fide occupant of the apartment.” A recent case raised the issue of how to interpret this provision when, as is often the case, the sponsor or its successor is an entity, such as a limited liability company (LLC) rather than an individual. Bellstell 7 Park Avenue, LLC v. Seven Park Avenue Corporation, 2019 N.Y. Misc. LEXIS 6871, 2019 N.Y. Slip Op. 29402 (Sup. Ct. N.Y. Co. Dec. 23, 2019).

In this case, the successor to the sponsor was an LLC named Bellstell. Through a series of intermediate entities, Bellstell is ultimately owned by one individual. In 2015, Bellstell sublet one of its apartments to that individual’s daughter. The Cooperative notified Bellstell that because the apartment had been occupied by a family member of the owner, the shares corresponding to it were no longer “unsold shares.” Bellstell disagreed and filed a declaratory judgment action asking the court to decide. Bellstell contended that because it is not an individual but an entity, the concept of “members of his family” did not apply and that any attempt to define an LLC’s “family members” would create difficulties. The Cooperative responded that the apartment was being occupied by “a principal … and member of the family which owns and controls Bellstell,” so the occupant should be considered a family member in determining “holder of unsold shares” status.

The court agreed with Bellstell, stating that it could see no principled or practical means of defining when an individual’s relationship with an LLC is sufficient for him or her to be deemed a “family member” of the LLC. (The court also observed in passing that the language of the proprietary lease “read literally for all it is worth, might indicate that artificial persons like limited-liability companies cannot hold unsold shares in the first place, precisely because they do not have family,” but did not rule on this issue.) This case was decided by a single trial court, and it remains to be seen whether it will be followed by other courts. The decision has been appealed, and we will report in this Client Advisory when the appeal is decided.