Firth v. Lu

• Decision Date: 06 November 2000
• Docket Number: No. 45247-9-I.,45247-9-I.
• Citation: 103 Wash.App. 267,12 P.3d 618
• Court: Washington Court of Appeals
• Parties: Donald R. FIRTH and Barbara A. Palecek, husband and wife, Respondents, v. Hefu LU and Qian Sun, husband and wife, Appellants.

12 P.3d 618

103 Wash.App. 267

Donald R. FIRTH and Barbara A. Palecek, husband and wife, Respondents, v. Hefu LU and Qian Sun, husband and wife, Appellants.

No. 45247-9-I.

Court of Appeals of Washington, Division 1.

November 6, 2000.

Howard Goodfriend, Edwards, Sieh, Smith & Goodfriend, P.S., Kenton Longley, Seattle, for Appellants.

Jeffery Eustis, Law Offices of J. Richard Aramburu, Seattle, for Respondents.

BECKER, A.C.J.

Although the purchaser of a cooperative apartment unit receives shares of stock rather than a deed, the interest transferred is an interest in real property because the shares of stock do not have the attributes of true securities and are necessarily accompanied by a proprietary lease. A contract to purchase real property must contain a legal description of the property to comply with the statute of frauds. In the present case, the contract to purchase a cooperative unit lacked a legal description, and is therefore unenforceable. We reverse and remand for an order dismissing the purchaser's suit for specific performance.

At issue is an order enforcing, on summary judgment, an agreement to purchase a co-op unit despite the absence of a legal description of the property. This court reviews summary judgment de novo by engaging in the same inquiry as the trial court. Brower v. State, 137 Wash.2d 44, 52, 969 P.2d 42 (1998), cert. denied, 526 U.S. 1088, 119 S.Ct. 1498, 143 L.Ed.2d 652 (1999). Summary judgment is proper as a matter of law when no genuine issue exists as to any material fact. CR 56(c).

The material facts are undisputed. Maryland Apartments, Inc. is a corporation founded in 1948. The corporation owns a 19-unit apartment building in the Capitol Hill neighborhood of Seattle for the purpose of providing housing to its shareholders. Donald Firth, who uses a wheelchair, lived for 20 years in one of the two apartments on the ground floor. Firth and his wife became interested in moving to Apartment 2, the other ground floor apartment, because it is larger. Firth negotiated an agreement to purchase Apartment 2 from its occupants, Hefu Lu and his wife, Qian Sun. Lu put the agreement in writing in April 1997 and both couples signed it:

Barbara A. Palecek and Donald R. Firth agree to purchase Apartment 2 (626 13th Avenue East) from Hefu (Max) Lu and Qian (Jeanette) Sun for $180,000. Possession to take place on October 15, 1997 after exchange of remainder of purchase price and receipt of stock certificate.

Enclosed are checks for $500 given in earnest.

A couple of months later, Firth paid an additional $1,500 in earnest money after learning that Lu's wife was reluctant to sell. Lu did not cash the earnest money checks, now totaling $2,000.

Before the date set for Firth to take possession, a disagreement surfaced between Lu and his wife about whether they should sell their unit for the agreed upon price. When October came, Lu's wife had convinced him they should not sell unless the price was increased by $50,000. Lu asked Firth to extend the closing date for a month, but he did not communicate any misgivings about the price, stating only that his new apartment was not ready to be occupied. Firth verbally agreed. Later, Firth verbally agreed to extend the closing until the end of the year.

In January 1998, Lu informed Firth that he was no longer willing to sell his interest for $180,000. He said he wanted to increase the purchase price to $230,000. This increase was not acceptable to Firth. Firth sued Lu for breach of contract and sought an order of specific performance.

Lu brought a CR 12(b)(6) motion to dismiss the complaint on the basis that the contract was unenforceable under the statute of frauds because it lacked a legal description of the property. The court denied Lu's motion. Firth then moved for summary judgment. The court granted the motion and ordered specific performance by Lu. The court's order, dated August 27, 1999, states:

Judgment shall be entered in favor of plaintiffs finding the defendants Hefu Lu and Qian Sun to have breached the agreement to convey their interests associated with apartment 2 in Maryland Apts., Inc. and for specific performance directing Hefu Lu and Qian Sun to perform as provided for under the agreement to purchase dated April 18, 1997 upon the tendering of purchase price by Donald Firth and Barbara Palecek to occur within 60 days of the entry of judgment.

Upon entry of the order, Firth paid Lu $180,000 and took possession of Apartment 2. Lu deposited the funds into the court registry and filed this appeal. He assigns error to the court's decree of specific performance and also to its order denying his motion to dismiss.

The pivotal issue is whether the conveyance of an interest in a cooperative housing unit is a transfer of an interest in real property. If so, it is subject to the statute of frauds for real estate transactions, and must contain a legal description to be enforceable.

The special statute of frauds relating to real property provides that every "conveyance of real estate, or any interest therein, and every contract creating or evidencing any encumbrance upon real estate, shall be by deed". RCW 64.04.010.¹ Our courts have repeatedly held that "in order to comply with the statute of frauds, a contract or deed for the conveyance of land must contain a description of the land sufficiently definite to locate it without recourse to oral testimony." Martinson v. Cruikshank, 3 Wash.2d 565, 567, 101 P.2d 604, (1940). In Martin v. Seigel, 35 Wash.2d 223, 229, 212 P.2d 107 (1949), the Washington Supreme Court clarified the requirements of the statute:

In the interests of continuity and clarity of the law of this state with respect to legal descriptions, we hereby hold that every contract or agreement involving a sale or conveyance of platted real property must contain, in addition to the other requirements of the statute of frauds, the description of such property by the correct lot number(s), block number, addition, city, county, and state.

Recently, the court was asked to replace Martin's strict requirement of a legal description with a rule that would permit the use of a street address to describe the property. The court declined to overrule Martin. Key Design Inc. v. Moser, 138 Wash.2d 875, 983 P.2d 653 (1999).

Whether a transfer of an interest in a cooperative apartment is subject to the statute of frauds is a question of first impression in Washington. The only Washington case examining the cooperative structure is State ex rel. Leavell v. Nelson, 63 Wash.2d 299, 387 P.2d 82 (1963). Leavell involves the issue of voting rights for nonresident shareholders, and does not get at the nature of the property interest acquired by the purchaser of a unit.

Cooperatives were introduced in this country after World War I. They were precursors to condominiums, which came into being in the 1960s. 4 Thompson on Real Property, Thomas Edition § 36.05 (David A. Thomas ed., 1994). The purpose of both property structures is to secure the benefits of individual ownership together with shared responsibilities. Thompson, § 36.01. The difference between the two forms is that condominium purchasers acquire a fee interest in their individual unit, whereas in a cooperative, a corporation or other such entity owns the entire project. Thompson, § 36.04(b). A co-op purchaser receives stock or similar evidence of ownership. Leavell,63 Wash.2d at 300,387 P.2d 82; Thompson, § 36.04(b). Typically, shareholder status entitles a cooperative resident to hold a proprietary lease to a particular unit. Leavell,63 Wash.2d at 300,387 P.2d 82; Thompson, § 36.06(a). A proprietary lease is an agreement between a shareholder and the cooperative association through which the shareholder is "entitled to the exclusive possession of a unit in a cooperative." 15A Am.Jur.2d Condominiums § 62 (2000). Ownership of stock and the interest in the lease are interdependent. Thompson, § 36.04(b).

The organization of the Maryland Apartments follows the usual model. Each shareholder owns a block of shares corresponding to a residence unit. The number of shares assigned to each unit is fixed in the bylaws. The number of shares assigned to each unit varies, ranging from 4,250 to 5,500 shares per unit. According to the bylaws, each shareholder has a "right to a proprietary lease for the apartment associated with the block of shares owned by each shareholder." A shareholder may not sell, transfer, pledge or encumber shares without the approval of the corporation. A block of shares corresponding to a unit must be sold in its entirety. Each shareholder is entitled to one vote in the shareholder meetings, regardless of the number of shares owned.

Because the corporate entity owns the real property, a conveyance of an interest in cooperative housing occurs by means of a transfer of stock. Firth would have received a stock certificate rather than a title or deed upon concluding his purchase of Apartment 2. He therefore contends that his contract with Lu is for the transfer of personal property, not for the transfer of an interest in real estate.

New York and New Jersey regard an interest in a cooperative housing unit as an interest in real property, and their courts have consistently held that an agreement to convey an interest in a cooperative apartment is unenforceable without a writing that satisfies the real estate statute of frauds. See Pollard v. Meyer, 61 A.D.2d 766, 402 N.Y.S.2d 15 (1978)

; Moloney v. Weingarten, 118 A.D.2d 836, 500 N.Y.S.2d 320 (1986); Presten v. Sailer, 225 N.J.Super. 178, 542 A.2d 7 (1988).

In Presten, the New Jersey court rejected an attempt to characterize the transaction as a sale of stock. The court was influenced, in part, by the United States Supreme Court's decision that federal securities law does not apply to cooperative shares. United Housing Foundation, Inc. v. Forman, 421 U.S. 837, 95 S.Ct. 2051, 44 L.Ed.2d 621 (1975). Cooperative shares are not...