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Sulcov v. 2100 Linwood Owners, Inc.

303 N.J. Super. 13, 696 A.2d 31 (App. Div. 1997)

COOPERATIVES; FLIP FEES—To be valid, authority for a cooperative housing corporation’s share transfer fee (“flip fee”) must be provided for in its certificate of incorporation, bylaws or proprietary lease. The offering statement or mere board resolutions will not suffice.

Tenants of numerous cooperatives challenged the validity of transfer fees paid to a cooperative corporation when shares of the cooperative are transferred. All parties to this class action suit moved for summary judgment, and the motion judge held that transfer fees were not illegal per se, but were invalid in this case because the governing documents of the cooperatives failed to explicitly provide for them. The cooperatives appealed.

The applicable statute permits “reasonable restrictions” on the transfer of shares, but only if provided for by the cooperative’s governing documents, i.e., its certificate of incorporation, by-laws, and proprietary lease. The Appellate Court refused to read this statue broadly, holding that transfer fees do not qualify as “reasonable restrictions” if not expressly provided for in the corporate documents or other controlling agreement between the shareholders and the cooperative. Even though a cooperative’s by-laws may authorize its board of directors to impose charges, adopt rules and amend the by-laws, the Court held that these rights alone do not permit transfer fees. The Court also rejected the business judgment rule as justification for allowing transfer fees. Furthermore, a cooperative may not rely on the fact that transfer fees are described in the offering statement. In addition to the offering statement not being listed in the statute as one of the documents that may impose reasonable restrictions on transfer of shares, the Court stated that an offering statement only imposes duties on a developer, and does not constitute a contractual agreement between the shareholder and the cooperative. [Note: Certification was granted on October 21, 1997.]


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