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Drew Associates of N.J. v. Travisano

Decided: July 17, 1989.


On appeal from Superior Court, Chancery Division, Middlesex County.

Petrella, Gruccio and Landau. The opinion of the court was delivered by Landau, J.A.D.


Plaintiff-appellant Drew Associates of N.J., L.P. (Drew) appeals from entry of summary judgment in favor of the defendant-respondent the New Jersey Department of Community Affairs (DCA) in its suit challenging the constitutionality of The Cooperative Recording Act of New Jersey (Act), N.J.S.A. 46:8D-1 et seq.

Drew, a limited partnership that owns a multi-unit apartment building which is to be converted into a cooperative, filed an order to show cause and a verified complaint on May 5, 1988 against Travisano and DCA to enjoin enforcement of the Act and have it declared unconstitutional.

Prior to the return date of the order, the trial judge granted Drew's petition to convert the action into a motion for summary judgment. DCA cross-motioned for summary judgment. See R. 4:46.

On October 7, 1988, the trial judge held that the Act was constitutional, and granted DCA's cross-motion for summary judgment. In an oral opinion rendered on October 7, the trial judge stated that the classifications established under the Act were reasonable and thus not violative of equal protection; that the imposition of the realty transfer fees did not constitute a double tax; that although certain provisions could have been drafted more carefully, the Act was not violative of due process; and that the provision requiring consent of a cooperative's

board of managers before transfer of an individual unit was not an unreasonable restraint on alienation when considered in light of the entire Act.

The Act became effective on May 7, 1988, and applies only to cooperatives which come into existence after that date.*fn1 The Act defines "cooperative" as:

[A]ny system of land ownership and possession in which the fee title to the land and structure is owned by a corporation or other legal entity in which the shareholders or other coowners each also have a long term proprietary lease or other long term arrangement of exclusive possession for a specific unit of occupancy space located within the same structure. [ N.J.S.A. 46:8D-3(f).]

See also Bluvias v. Winfield Mut. Housing, 224 N.J. Super. 515, 522 (App.Div.1988), certif. granted, 111 N.J. 621 (1988), app. dism. 114 N.J. 589 (1989). It creates a title registration system for recording and taxing the creation and transfer of ownership in cooperative units. See Presten v. Sailer, 225 N.J. Super. 178, 184 & n. 2, 189 n. 6 (App.Div.1988). The Act also requires lenders who acquire a security interest in a cooperative to record the lien under applicable laws and on the master register for the cooperative. N.J.S.A. 46:8D-14.

The underlying purpose of this remedial measure is stated in the Act:

The Legislature finds that issuance of proprietary real estate leases by cooperative corporations and other cooperative legal entities is becoming a popular practice in New Jersey which is usually accomplished by a ledger book transfer to the lessee of stock or another indicia of ownership of an interest in the cooperative corporation or other cooperative entity which owns the real estate and that there is no public record of the transaction. The Legislature further finds that this is a hybrid transaction which is not capable of classification entirely as realty or personalty but that the public perception of a cooperative unit is that it in some manner involves real estate; that members of the public seek protection in cooperative leasing transactions similar to those protections available in transactions for the purchase of real estate, namely, a public title record, title searches to guarantee security of title, freedom from

easements or rights in unknown third parties, unpaid liens, unsatisfied judgments, unpaid taxes, freedom from municipal violations, title insurance and the equivalent of a mortgage where a cooperative unit is the asset to be pledged as security for the purchase loan. The Legislature declares that enabling legislation in the form of a cooperative recording act is desirable because it would provide a title registration system for cooperative units and would provide additional revenue to county recording offices and to the State of New Jersey by applying the Realty Transfer Tax to proprietary leases issued by cooperatives and assignments thereof which are not presently covered by that tax. [ N.J.S.A. 46:8D-2.]

The recording requirements of the Act are administered by the clerk of the county or counties in which the creation and transfers are recorded. N.J.S.A. 46:8D-5. The DCA, which is responsible for the registration of planned real estate developments, such as cooperatives, under The Planned Real Estate Development Full Disclosure Act, N.J.S.A. 45:22A-21 et seq., also has certain duties with regard to the Act's implementation. N.J.S.A. 46:8D-18(a).

Pursuant to the Act, the creation of a new plan of cooperative ownership requires the recording of a master declaration and a master register. N.J.S.A. 46:8D-5 to -7. The master declaration must include, among other things: a legal description of the land to be dedicated to cooperative ownership; a copy of the recorded deed which vests ownership in the person who signs the master declaration to create the cooperative; the bylaws governing the cooperative; a statement of existing financing which is a lien on the cooperative and the manner in which such lien will be discharged before and after closing on individual cooperative units; a schedule of each owner's percent of common elements which constitute part of such ownership shares and which reflects common expenses and surplus; a written description and scaled architectural plans of the cooperative; and such other provisions as may be desired, including reasonable and lawful restraints on transfer and use. N.J.S.A. 46:8D-6. The master register requires a list of the names and addresses of individual unit owners and/or occupants, as well as separate identification of each unit by letter, name, number or a combination thereof. N.J.S.A. 46:8D-7.

The Act also provides for termination of a cooperative plan by the filing of a deed of revocation. N.J.S.A. 46:8D-16. Termination under this provision, however, does not preclude subsequent resubmission of the property as a cooperative pursuant to the Act. N.J.S.A. 46:8D-17.

Prior to adoption of the Act, no specific New Jersey statutes regulated the establishment and method of governance of cooperatives. Bluvias, 224 N.J. Super. at 522.

Drew urges that the Act deprives it of due process because it is arbitrary, irrational, confusing and vague, and that the Act violates its equal protection rights by creating an invalid distinction between new and existing cooperatives that bears no rational relation to the objectives of achieving certainty in title and raising revenue. Drew also says that by treating the distribution of shares of a cooperative as realty subject to transfer and recording fees, the Act imposes an impermissible double tax; and that N.J.S.A. 46:8D-11(g), which requires consent by a cooperative's board of managers to transfer of an individual unit, contains no standards to govern consent and is contrary to the policy that real estate be freely alienable.



Drew asserts that the Act is arbitrary because the information to be contained in the public recording is duplicative or unnecessary. It argues that the Act would create confusion by permitting a lender's lien to be recorded against both the deed of the cooperative association and the shareholder's unit interest, giving rise to competing first mortgages. Drew also says that the possibility of foreclosure by the unit owner's lender creates the prospect of partition of the individual unit owner's interest and thus destruction of the cooperative association itself. It further urges that the Act is unconstitutional because of the uncertainty involved in determining the consideration upon which the transfer tax is based, and because the Act

incorrectly presupposes that the cooperative's financial status can be determined accurately on any given day. It also says that the effect of the ...

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