
    [658 NE2d 1034, 635 NYS2d 161]
    ALH Properties Ten, Inc., et al., Appellants, v 306-100th Street Owners Corp., Respondent.
    Argued October 18, 1995;
    decided November 30, 1995
    
      POINTS OF COUNSEL
    
      Robinson Silverman Pearce Aronsohn & Berman, New York City (Robert A. Wolf and Kenneth H. Amorello of counsel), for appellants.
    I. The order of the court below runs counter to the priority provisions set forth in the recognition agreement between Friesch-Groningsche Hypotheekbank Realty Credit Corporation and Owners Corp. (Midlantic Commercial Leasing Corp. v D.B.A. Knits, 167 AD2d 117; Roemer & Zeller v Ace Transmission Ctr., 114 Misc 2d 415; Commercial Trading Co. v Little N. Parkway Realty Corp., 41 Misc 2d 472.) II. The lien granted Owners Corp. under its bylaws does not encompass the sponsor’s nonmaintenance obligations under the offering plan. (Procopio v Fisher, 83 AD2d 757; Weber v Sidney, 19 AD2d 494, 14 NY2d 929; Fe Bland v Two Trees Mgt. Co., 66 NY2d 556; Vermeer Owners v Guterman, 78 NY2d 1114; Rego Park Gardens Owners v Rego Park Gardens Assocs., 191 AD2d 621; Board of Mgrs. of Fairways at N. Hills Condominium v Fairways at N. Hills, 150 AD2d 38; Central Trust Co., Rochester v Sheahen, 66 AD2d 1015.) III. Owners Corp. does not have an "issuer’s lien” upon the unsold shares that extends to the sponsor’s nonmaintenance obligations. (Silverman v Alcoa Plaza Assocs., 37 AD2d 166; Allen v Biltmore Tissue Corp., 2 NY2d 534; Matter of Carmer, 71 NY2d 781; Matter of State Tax Commn. v Shor, 43 NY2d 151; United Hous. Found, v Forman, 421 US 837; Grenader v Spitz, 537 F2d 612, 429 US 1009; Weiss v Karch, 62 NY2d 849; Friedman v Sommer, 63 NY2d 788.)
    
      Wolf Haldenstein Adler Freeman & Herz LLP, New York City (Eric B. Levine and Stuart M. Saft of counsel), for respondent.
    I. The apartment corporation’s lien secures all obligations of a shareholder, not only maintenance defaults. (Quatrochi v Citibank, 210 AD2d 53.) II. Since a cooperative sponsor’s unsold shares are "securities” under article 8 of the UCC, the apartment corporation’s "first lien” is valid against plaintiffs under UCC 8-103. (Gross v Vogel, 81 AD2d 576; Matter of State Tax Commn. v Shor, 43 NY2d 151; Fe Bland v Two Trees Mgt. Co., 66 NY2d 556; Matter of Levandusky v One Fifth Ave. Apt. Corp., 75 NY2d 530; Agar v Orda, 264 NY 248; Bache & Co. v International Controls Corp., 339 F Supp 341, 469 F2d 696; United Hons. Found, v Forman, 421 US 837; Lebowitz v Mingus, 100 AD2d 816; Meyer v Nelson, 83 AD2d 422; Rosner v 80 CPW Apts. Corp., 73 AD2d 39.) III. The apartment corporation’s first lien, as to all obligations, was noted on the stock certificates in accordance with UCC 8-103. (Allen v Biltmore Tissue Corp., 2 NY2d 534; Gillman v Chase Manhattan Bank, 135 AD2d 488, 73 NY2d 1.) IV. The parties here did not, through the "recognition agreement,” agree to subordinate the portion of the apartment corporation’s lien that relates to "nonmaintenance” defaults. (Matter of State Tax Commn. v Shor, 43 NY2d 151; Royal Coach Lines v National Labor Relations Bd., 838 F2d 47.)
   OPINION OF THE COURT

Chief Judge Kaye.

In October 1987, Westend Property Associates, a partnership in the business of promoting the conversion of Manhattan apartment buildings from rental to cooperative status submitted an offering plan seeking to convert a residential building located on Manhattan’s Upper West Side. As sponsor for the conversion, Westend, whose general partner was Jerry Donatelli, retained title to 12 of the unsold apartments and defendant, 306-100th Street Owners Corporation, became the owner of the building itself.

A year and a half later, on March 6, 1989, Diversified Realty Financial Partners Limited Partnership — an entity also controlled by Donatelli, and the assignee of Westend’s interest in the 12 unsold apartments — obtained a $12.75 million loan from plaintiff Friesch-Groningsche Hypotheekbank Realty Credit Corporation (FGH), a German bank licensed to do business in New York. Along with a promissory note evidencing the loan, Diversified entered into a security agreement, signed by Donatelli in his capacity as general partner, and dated March 6, 1989, whereby it pledged to plaintiff as collateral for the loan "a first and prior security interest in * * * all of [Diversified’s] right, title and interest” in the 12 cooperative apartments at 306 West 100th Street, along with unsold apartments it owned in 16 other buildings.

After execution of the promissory note, the security agreement and the other related loan documents, plaintiff filed UCC-1 financing statements perfecting its security interest in the 12 apartments (see, UCC 9-304 [7]).

In September 1989, five months after receiving the $12.75 million FGH loan, Diversified began defaulting on its maintenance payments to defendant for the 12 apartments. In order to preserve the value of its collateral, plaintiff began to cure the default by making these monthly payments so that by May of 1995, plaintiff had paid in excess of $630,000 in maintenance arrearages.

By January of 1990, Diversified’s financial situation had further deteriorated and it began defaulting on the interest payable to plaintiff on the $12.75 million loan. On March 7, 1991, in accordance with the applicable provisions of the promissory note and security agreement, plaintiff exercised its right to accelerate the outstanding principal and accrued interest due (then in the range of $12.3 million). When Diversified failed to pay, plaintiff gave notice of its intent to foreclose on the 12 apartments (see, UCC 9-504). An auction took place on May 28, 1991, and plaintiff’s affiliate and designee submitted the highest bid at $498,000.

Defendant, however, refused to transfer title to plaintiff, claiming that it had a senior security interest both as to any unpaid maintenance charges and as to any outstanding non-maintenance obligations resulting from Westend’s failure to perform certain renovation and repair work as agreed under the offering plan. According to defendant, this work — which was to have been completed within six months of the 1989 building conversion — consisted of plumbing, electrical and masonry repairs, as well as installation of a new roof and windows and refurbishment of the building’s elevator.

Plaintiff commenced this action to compel defendant to transfer title to the shares. On the consent of the parties, plaintiff’s motion for a preliminary injunction was converted to one for summary judgment. Supreme Court granted summary judgment in favor of plaintiff and denied defendant’s cross motion, holding that plaintiff is the senior secured party with respect to the apartments. The Appellate Division, however, reversed, reasoning that defendant has the first, or "issuer’s” lien pursuant to UCC article 8 (191 AD2d 1). On remand, the trial court found that the unpaid maintenance obligation for the 12 apartments totalled $84,975 and the nonmaintenance obligation $676,755.

In that the parties do not dispute either the fact that defendant has a senior security interest in outstanding maintenance payments or the accuracy of the amounts found by the trial court, we granted leave to decide the law question of which party has the senior security interest with respect to the nonmaintenance obligations. We now conclude that plaintiffs interest is superior.

UCC 8-103, entitled "Issuer’s Lien,” provides that: "A lien upon a security in favor of an issuer thereof is valid against a purchaser only if * * * the security is certificated and the right of the issuer to such lien is noted conspicuously thereon.”

As support for the proposition that it has an issuer’s lien in the nonmaintenance obligations, defendant points to a legend in the second full paragraph printed on the back of the stock certificates corresponding to the shares in the 12 apartments indicating that the "Corporation, by the terms of said By-laws and the proprietary lease, has a first lien on the shares represented by the certificate for all sums due and to become due under said proprietary lease.”

Even if the coop certificates in question could be considered a "security” for purposes of UCC article — a question we do not reach — no issuer’s lien was created securing defendant’s interest in nonmaintenance obligations arising with respect to the 12 apartments since the statutory predicate for an issuer’s lien under UCC 8-103 is that the alleged lien be "noted conspicuously” on the share certificates. Here, the only lien noted conspicuously on the certificates is one for all sums due under the proprietary lease. These sums, consisting primarily of maintenance and other regular common charges associated with cooperative apartment ownership, are not equivalent to the repair/renovation responsibilities of the sponsor at the time of the original building conversion. Nowhere on the legend is there any reference to defendant’s lien with respect to Westend’s obligations under the offering plan.

In order to overcome the evident failure of the stock certificates themselves to provide adequate notice as to the existence of defendant’s alleged lien for nonmaintenance obligations, defendant points to the fact that the first full paragraph on the back of the stock certificates incorporates by reference the provisions of defendant’s bylaws, which state in pertinent part that defendant has "a first lien * * * for all indebtedness and obligations * * * arising under the provisions of any proprietary lease * * * or otherwise arising” (emphasis added).

Though it is doubtful that the phrase "otherwise arising” is sufficiently specific to encompass the specific repair obligations of the sponsor under the offering plan, the strict notice requirements of UCC 8-103 do not permit a party to create what would essentially be a hidden hen by referring merely to the existence of a separate document on a stock certificate, without specifying in any way the particular language in that document which is applicable (compare, Allen v Biltmore Tissue Corp., 2 NY2d 534). Though the Allen Court noted that "a restriction is sufficiently 'stated’ by a legend noting that the stock is 'issued subject to restriction’ and specifying where its full text may be found” (id., at 540 [citations omitted]), the failure of the share certificates to conspicuously indicate any lien other than that arising under the proprietary lease for unpaid maintenance charges not only fails to inform a potential creditor where to look for the existence of any other lien, but, as noted above, strongly implies that no such lien even exists. "If the issuer may not at the inception of its relation with the registered owner create a secret right in its own favor, much less may the issuer do so after the owner has used his certificates to obtain credit from a lender” (In re Hawaii Corp., 829 F2d 813, 815).

No issuer’s lien having been established with respect to the nonmaintenance obligations under the circumstances presented, the judgment appealed from and the order of the Appellate Division brought up for review should be modified in accordance with this opinion, with costs to appellants, and, as so modified, affirmed.

Judges Simons, Titone, Bellacosa, Smith, Levine and Ciparick concur.

Judgment appealed from and order of the Appellate Division brought up for review modified in accordance with the opinion herein, with costs to appellants, and, as so modified, affirmed. 
      
       The question whether tenant-shareholders’ sui generis ownership interests in cooperative apartments are UCC article 8 securities (Matter of State Tax Commn. v Shor, 43 NY2d 151, 154) has vexed courts — both State and Federal — in varying contexts (see, First Sav. Bank v Barclays Bank, 618 A2d 134 [DC]; Presten v Sailer, 225 NJ Super 178, 542 A2d 7; Silverman v Alcoa Plaza Assocs., 37 AD2d 166 [1st Dept]; In re McNair, 90 Bankr 912 [ND 111]; Superior Fin. Corp. v Haskell, 556 F Supp 199 [SD NY]). Indeed, while not presented by the facts before us, a related issue concerns the proper method for the cooperative corporation to perfect its lien with respect to outstanding maintenance charges (see, e.g., Siegler, Collecting Rental Arrears, NYLJ, Mar. 1, 1995, at 3, col 1; DiLorenzo, Sponsor Defaults, NYLJ, Feb. 23, 1990, at 2, col 3; Saada v Master Apts., 152 Misc 2d 861).
     