Read More »" /> Co-op Law for Dummies. Randall Pentiuk; Pentiuk, Couvreur & Kobiljak P.C. | National Cooperative Law Center - Part 2

Co-op Law for Dummies

C. State Corporate Law Environment

1.  Nonprofit Corporation Act

a.  The Act defines the parameters of corporate affairs

b.  Of importance:

i. It contains mandatory provisions that all corporations must place in their articles or bylaws
ii. It contains permissive provisions that corporations may take advantage of by placing them into the articles
or bylaws
Example: Liability Limitation of Directors

c.  If the articles and bylaws are silent, the Act may furnish direction

i. Other mandatory requirements are found in Act
Example: Filing of Annual Report with State in order to maintain corporate status.  Failure to do so in
Michigan results in loss of corporate status.  If sued, you do not have a corporate shield to protect the
individual members from personal liability.  In addition, some one else may take your corporate name.

2.  Cooperative Statute: In Michigan, attached to the end of the Nonprofit Corporation Act is a chapter that deals
specifically with cooperatives.  It allows a housing cooperative to “opt in” in order to take advantage of its
provisions.  Thus, it is important to know whether your cooperative did so, because it has provisions that
are inconsistent with the other sections of the Nonprofit Corporation Act.

D. Robert’s Rules of Order: while not normally thought of as a “governing document, it has this status since the Bylaws
often make it the “fall back” resource to supply parliamentary procedure when the articles and
bylaws are silent.
Examples:
Motion for reconsideration [may be made by one on the prevailing side]
Motion to adjourn [always in order and not debatable]

E. Federal, State & Local Regulatory Framework: again, it is important to recognize that cooperatives operate within
the broader body of law and even though this is not generally regarded as “governing documents” the articles, bylaws,
etc. can be preempted by changes in these laws.
Example: Effect of Michigan Elliot-Larsen Civil Rights Act upon proxies that limit the right of a married member
to appoint only his or her spouse – violation of marital discrimination prohibition

F. Contractual & Covenant Framework: As with federal, state & local laws, the cooperative must operate within the
parameters of its contracts and covenants. Contracts can be breached but exposes the cooperative to liability for
damages.
Example: covenants which run with the land, which limit the cooperative as to its use of property; thus, you may
not be able to build or use an adjacent lot owned by the cooperative.
Example: if the cooperative refinances, the lender may impose some conditions that must be honored to avoid a
default and foreclosure of the mortgage

III The Hierarchy of Governing Documents:

A.The interplay between the governing documents require legal expertise.

B.With the foregoing caveat, the general hierarchy is:

1.Federal, state & local law, including corporate law

2.The HUD Regulatory Agreement and associated HUD laws

3.Covenants & contracts

4.Articles

5.Bylaws

6.Roberts Rules

7.Board Policies

IV. How to Change the Governing Documents

To amend the articles or bylaws, the cooperative must follow the process described within these documents themselves. If
HUD is still involved, it must approve of them. If these documents do not proscribe the process, then you must resort to
the state corporate law for direction.

V. When HUD is no longer involved

A. Two Schools of Thought

1. The “Do Nothing School”
Rationale: By operation of law, the obsolete references in the them. articles and bylaws are void; thus, it is
unnecessary to amend

2. The “Avoid Confusion School”
Rationale: Few people, including members, judges and future boards understand cooperative law; thus, it is best
to eliminate unnecessary confusion where possible. In addition, when the mortgage is paid off, most
members are excited and expecting to address the future of the cooperative, and are usually
receptive to change.

B.Matters that may be addressed:

1. Remove references to HUD, the Regulatory Agreement, FHA Commissioner.

2. Consider cleaning up problems that have occurred over the years:

a. Quorum

b. Voting Procedure

c. Proxies

d. Any other concerns unique to your cooperative

3. Consider taking advantage of corporate law benefits that have been made available since the original incorporation
of your cooperative, such as the liability limitation for officers and directors

VI. When a Coop is transformed from Limited Equity to Market Rate:

Many cooperatives, when they have paid off the original mortgage, and no longer have to abide by HUD restrictions, opt to
move from limited equity to market rate – allowing members to transfer their memberships for whatever a buyer is willing to
pay. In such case, modifications will be necessary to the bylaws – such as the equity table for transfer values. Qualified
legal assistance is strongly recommended. Note: We are not recommending this but merely mention it as an option to
consider. It is beyond the scope of this class and requires much due diligence including an analysis of your members’
economic status and the market for coop units in your surrounding area.

Pages: 1 2 3 4 5 6 7