Evaluating Cooperative Legitimacy: Lessons From Baldwin v. McCarry

Adam A. Elashker

Introduction

On March 24th, 2023, the New York City Civil Court rendered a landmark decision in Baldwin v. McCarry, reshaping the cooperative housing landscape in New York City. By closely scrutinizing the subject premises’ operational essence, particularly its lack of democratic governance, the Court's decision addressed rent stabilization concerns and set a precedent for defining cooperative legitimacy.¹

The case related to a holdover proceeding initiated by Susan Baldwin (“Baldwin”) against Daniel McCarry (“McCarry”), arguing an unregulated tenancy. Baldwin sought possession of 452 West 23rd Street, Apt. 1A, New York, New York (“subject premises”), claiming exemption from rent stabilization due to cooperative status.² In contrast, McCarry disputed the unregulated tenancy by questioning the premises’ cooperative status and rent stabilization law compliance, emphasizing the building's informal management style.³

Ultimately, the Court held that Baldwin failed to prove the subject premises were exempt from rent stabilization, as it did not constitute a genuine cooperative, and merely claiming it as one in name was insufficient. Thus, the Court's determination of the property’s cooperative status was linked with the outcome of the holdover proceeding.⁴

First, the Court examined the cooperative conversion documents (including the offering plan and its amendments) to evaluate cooperative status.⁵ Although the subject premises met the formal requirements for a cooperative due to the offering plan and additional acknowledgments from the Attorney General's Office, the Court noted the lack of genuine cooperative operations, raising doubts about its legitimacy.⁶ Next, Baldwin failed to fulfill her duty of creating a functional cooperative by treating most units as traditional rentals instead of selling them as shares.⁷ Additionally, the absence of a genuine cooperative board, elections, and democratic decision-making processes indicated a non-functioning cooperative.⁸ The Court further emphasized that housing court decisions should not merely rely on formal documents but rather assess the purported cooperative's actual functioning.⁹ As such, the ruling underscores the importance of maintaining genuine corporate governance when operating a cooperative to properly claim exemption from rent stabilization law in New York City.

Governing Law       

I. The General Business Law § 352-eeee

The General Business Law § 352-eeee (“GBL”) provides a framework for what constitutes a cooperative in New York City.¹⁰ The GBL defines cooperatives as democratically functioning entities that rely on shared responsibilities, collective decision-making, and consensus; thus, decisions should not be made unilaterally or influenced heavily by a few individuals.¹¹ The case relies on this statute to formally identify the subject premises as a cooperative based on the presented documents, which included the offering plan and its amendments.¹²

Another pivotal aspect of the GBL's definition is the absence of typical landlord-tenant dynamics. Individuals have a more complex and intertwined relationship in a cooperative than in a standard landlord-tenant relationship.¹³ They are both tenants and co-owners, owning shares in the cooperative that owns the building and residing within individual units. This dual role can significantly affect their rights, responsibilities, and legal protections. Essential for this case, “[t]enants who take occupancy of sponsor-owned apartments after a cooperative conversion do not enjoy the protections of either the Rent Stabilization Law or GBL § 352-eeee.”¹⁴

II. The Rent Stabilization Code 9 N.Y.C.R.R. § 2520.11(l)

The Rent Stabilization Code (“RSC”) acts as a shield for tenants, ensuring they are protected from arbitrary rent hikes and unfair practices.¹⁵ There are certain exemptions for buildings and arrangements that promote community involvement and shared responsibility, such as cooperatives. This provision acts upon the recognition established by GBL § 352-eeee. Once a building is acknowledged as a cooperative under the GBL, the RSC dictates the exemptions of housing accommodations from rent stabilization.¹⁶

Further, 9 N.Y.C.R.R. § 2520.11(l) “exempts from coverage housing accommodations contained in buildings owned or operated as cooperatives on or after June 30, 1974.”¹⁷ Thus, the Court carefully examined the RSC exemptions to determine if the building was truly a cooperative or merely claiming to be in one name.¹⁸ The Court’s main concern was whether decisions and management were controlled by only one (or a few) individual(s) rather than multiple shareholders due to the absence of a shareholder-driven model as required under the RSC.¹⁹

Factors Assessed By The Court

I. Ownership Structure & Traditional Corporate Governance  

The Court noted that a typical cooperative operates on democratic principles where each member holds a share of the cooperative and votes in decision-making processes, including voting on essential matters during shareholder meetings and electing a board of directors.²⁰ In this case, since 1982, a distinct model of apartment ownership in the subject premises became evident, where it was customary for individuals like Baldwin to secure ownership of two apartments (as opposed to one), one for personal living and the other for rental purposes.²¹ This unique ownership distribution highlighted the cooperative's deviation from traditional operational standards. The typical democratic hallmarks of a cooperative, such as elections and shareholder meetings, were noticeably absent, positioning Baldwin as the primary decision-maker.²² Ultimately, the Court assessed whether the cooperative's operational standards moved away from a democratic, member-driven model to a more centralized, landlord-like model.²³

II. Subletting & Centralized Property Management

Also, subletting practices in the cooperative were primarily driven by Baldwin, who regularly rented apartments. Moreover, despite the presence of other shareholders, property management responsibilities, such as rent collection and property inspections, were predominantly undertaken by Merryman Gatch (“the Other Shareholder”).²⁴ This centralized control further highlighted the cooperative's departure from a democratically governed model. Also, financial matters, including decisions about the cooperative's budget and maintenance fees, were mainly handled by Baldwin.²⁵ While there were instances of consultations between Baldwin and the Other Shareholder, the unilateral setting and adjusting of maintenance costs were evident, emphasizing the centralized nature of financial control.²⁶

III. Evidence of Disputes & Operational Conflicts

Additionally, the Court assessed various evidence, including text messages, letters, and affidavits, demonstrating the underlying operational challenges of the subject premises.²⁷ These documents highlighted frequent property management disagreements, rent-related disputes, and periods when apartments were intentionally kept vacant for Baldwin’s family and friends.²⁸ This evidence further substantiated the claims regarding the centralized and non-democratic operations of the subject premises and played a crucial role in the Court's analysis of genuine cooperative status.²⁹

Court’s Holding And Reasoning

I. Baldwin Bore the Burden in Substantiating Her Claims

Reflecting the principles elucidated in Wayne Cty. Vinegar & Cider Corp. v. Schorr's Famous Pickled Prod., Inc., the Court reaffirmed that the burden of proof is on the Petitioner, especially when there is a denial of specific allegations.³⁰ Thus, the Court noted Baldwin bore the burden of providing robust evidence—especially in the face of denied allegations—which could prove the subject premises were a genuine cooperative exempt from rent stabilization.³¹ Ultimately, the Court determined that Baldwin provided sufficient evidence to support a prima facie finding that the building was a cooperative due to “the offering plan, the amendments to the offering plan, and the acknowledgments from the Attorney General's Office.”³² However, this prima facie finding would be subject to further analysis.³³

      

II. Subject Premises Did Not Operate as a Genuine Cooperative

Next, the Court examined the subject premises' operations to discern its authenticity as a cooperative. Using guidance from Lee v. 191 Edge Water Equity LLC, which emphasized the necessity of looking beyond mere formality to ascertain a building's operational reality, the Court highlighted the importance of a building's operations aligning with the ideals of a cooperative.³⁴ Accordingly, the fact that Baldwin disproportionately influenced the building's operations suggested that it “operate[d] as it would when one discrete landlord held sole title to the Building,” calling into question its claim to function as a genuine cooperative.³⁵ The Court further noted, “[i]n the forty-plus years since the putative conversion of the Building to cooperative status, the only discernible board members have been Petitioner and, for a time at least, Petitioner's Attorney.”³⁶ Ultimately, The Court determined that for a building to be deemed a cooperative, its operations must not be unduly influenced by a singular entity or individual, and the subject premises failed to meet this criterion.³⁷ Thus, given Baldwin's significant influence and control, the Court did not consider it a genuine cooperative under GBL § 352-eeee.³⁸

          

III. A Lack of Democratic Functioning

Further, the Court underscored the necessity of collective self-determination in a genuine cooperative. Specifically, the absence of democratic processes like regular elections and the prevalence of unilateral decision-making weighed against the finding of a genuine cooperative.³⁹ The unilateral decisions and absence of regular elections further undermined the building's claim to function as a cooperative. Referring to 930 Fifth Corp. v. King, the Court highlighted the principle of collective self-determination, where every member’s voice holds weight, ensuring decisions are not unilateral.⁴⁰ The Court noted the subject premises "has never held an election for board members. [Baldwin] sets the maintenance on her own according to her own counsel.”⁴¹ As such, the Court found that the power dynamics of the building did not match the principle of collective self-determination required for establishing a genuine cooperative under GBL § 352-eeee and 9 N.Y.C.R.R. § 2520.11(l).

           

IV. Baldwin’s Sponsorship Duty in Cooperative Conversion Was Not Met

The Court also examined Baldwin’s sponsorship role in the subject premises during cooperative conversion.⁴² The Court held that Baldwin's sponsorship responsibilities during cooperative conversion were not met adequately, weakening the subject premises' claim to be a cooperative. Citing 511 W. 232nd Owners Corp. v. Jennifer Realty Co., the Court sought to define the sponsor’s role in cooperative conversions, emphasizing that the sponsor has a duty to facilitate the shift to a democratic structure post-conversion.⁴³ In Baldwin, the Court had reservations regarding how the conversion was handled, suggesting discrepancies between the sponsor's duties and actions.⁴⁴

Notably, Baldwin continued treating the units as rentals even after their conversion, further undermining the claim that the premises were a genuine cooperative.⁴⁵ The Court stated, “[a]s a sponsor of the cooperative conversion, [Baldwin] undertook a duty in good faith to timely sell as many shares in the Building as necessary to create a fully viable cooperative. . . . Rather than discharge [her] duty as a sponsor, [Baldwin] has continued to treat the remaining apartments in the Building, . . . as rental properties.”⁴⁶ Therefore, The Court held that Baldwin breached the duty to facilitate a democratic structure during the cooperative conversion, further negating the subject premises' cooperative identity.⁴⁷

Conclusion and Implications

Ultimately, the Court's decision in Baldwin emphasized assessing cooperative housing beyond mere formalities, focusing on its actual operations and conversion. While Baldwin provided evidence to support a prima face finding of a cooperative, through its analysis, the Court found that the cooperative fell short in embodying democratic principles, shared responsibilities, and corporate governance, as required by GBL § 352-eeee. Crucially, the Court noted the subject premises’ lack of democratic processes, Baldwin's disproportionate influence in operations, and her failed role as a sponsor during conversion. As such, because it failed to constitute a genuine cooperative, the subject premises were not exempt from rent stabilization laws, and Baldwin could not prevail in her holdover proceeding against McCarry.⁴⁸

The case stresses the importance of genuine cooperatives functioning democratically with shared decision-making. Also, it demonstrates that cooperative sponsors must ensure a shift to a democratic structure post-conversion to avoid questions about authenticity. Accordingly, providing substantial evidence of equitable power distribution within cooperatives is crucial. Legal practitioners play a vital role in ensuring the legitimacy of cooperative housing arrangements. They should advise their clients to maintain accurate documentation and prioritize corporate governance. Additionally, practitioners should guide sponsors during cooperative conversions and emphasize the need to provide evidence of shifts toward the proper democratic structure.

1. Baldwin v. McCarry, No. 305742/2020, 78 Misc. 3d 1214(A), 185 N.Y.S.3d 651, 2023 N.Y. Slip Op. 50226(U), 2023 WL 2621206, 4 (N.Y. City Civ. Ct., Mar. 24, 2023).

2. Id; N.Y. Comp. Codes R. & Regs. tit. 9, § 2520.11(1) (N.Y.C.R.R) and N.Y. Gen. Bus. Law §352-eeee.

3. Baldwin 78 Misc. 3d 1214(A) at 3.

4. See Gouverneur Gardens Hous. Corp. v. Silverman, 26 Misc 3d 133(A)(App. Term 1st Dept. 2010) (finding “[h]ousing Court does not determine questions of title or ownership in summary proceedings. However, Housing Court may determine whether a petitioner in a summary proceeding has met its burden of proving that a dwelling is exempt from Rent Stabilization by virtue of being a cooperative unit”).

5. Baldwin 78 Misc. 3d 1214(A).

6. Id at 4.

7. Id.

8. Id.

9. Id.

10. N.Y. Gen. Bus. Law §352-eeee.

11. Baldwin v. McCarry, No. 305742/2020, 78 Misc. 3d 1214(A), 185 N.Y.S.3d 651, 2023 N.Y. Slip Op. 50226(U), 2023 WL 2621206, 4 (N.Y. City Civ. Ct. Mar. 24, 2023).

12. Id.

13. N.Y. Gen. Bus. Law §352-eeee.

14. Baldwin 78 Misc. 3d 1214(A) at 4.

15. N.Y. Condo. & Coop. Law § 2:6.

16. 9 N.Y.C.R.R. § 2520.11.

17. Baldwin 78 Misc. 3d 1214(A).

18. Id.

19. Id.

20. Id.

21. Id at 2.

22. Baldwin 78 Misc. 3d 1214(A).

23. Id.

24. Id at 1.

25. Id at 4.

26. Id.

27. Baldwin v. McCarry, No. 305742/2020, 78 Misc. 3d 1214(A), 185 N.Y.S.3d 651, 2023 N.Y. Slip Op. 50226(U), 2023 WL 2621206, 3 (N.Y. City Civ. Ct. Mar. 24, 2023).

28. Id at 4.

29. Id.

30. Id at 3 (referencing Wayne Cty. Vinegar & Cider Corp. v. Schorr's Famous Pickled Prod., Inc., 118 Misc. 2d 52, 61 (Civ. Ct. Kings Co. 1983)).

31. Baldwin 78 Misc. 3d 1214(A) at 4.

32. Baldwin v. McCarry, No. 305742/2020, 78 Misc. 3d 1214(A), 185 N.Y.S.3d 651, 2023 N.Y. Slip Op. 50226(U), 2023 WL 2621206, 4 (N.Y. City Civ. Ct. Mar. 24, 2023).

33. Id.

34. Id (referencing Lee v. 191 Edge Water Equity LLC, 2016 NY Slip Op 32228(U) (S. Ct. NY Co.)).

35. Baldwin 78 Misc. 3d 1214(A) at 4.

36. Id.

37. Baldwin v. McCarry, No. 305742/2020, 78 Misc. 3d 1214(A), 185 N.Y.S.3d 651, 2023 N.Y. Slip Op. 50226(U), 2023 WL 2621206, 4 (N.Y. City Civ. Ct. Mar. 24, 2023).

38. Id at 5.

39. Id at 4.

40. Id (referencing 930 Fifth Corp. v. King, 71 Misc. 2d 359, 364 (App. Term 1st Dept. 1972)).

41. Baldwin 78 Misc. 3d 1214(A) at 4.

42. Baldwin v. McCarry, No. 305742/2020, 78 Misc. 3d 1214(A), 185 N.Y.S.3d 651, 2023 N.Y. Slip Op. 50226(U), 2023 WL 2621206, 4 (N.Y. City Civ. Ct. Mar. 24, 2023).

43. Id at 5 (referencing 511 W. 232nd Owners Corp. v. Jennifer Realty Co., 98 NY2d 144,      152 (2002)).

44. Baldwin 78 Misc. 3d 1214(A) at 4.

45. Id at 5.

46. Id at 4.

47. Baldwin 78 Misc. 3d 1214(A).

48. Id at 5.