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ALEXY v. KENNEDY HOUSE

February 4, 1981

James A. ALEXY and Betty Jean Alexy, his wife
v.
KENNEDY HOUSE, INC.



The opinion of the court was delivered by: SHAPIRO

FINDINGS OF FACT AND CONCLUSIONS OF LAW

The issue is whether the By-Laws of a non-profit cooperative apartment house, insured by the Federal Housing Administration under the National Housing Act, are rendered an illegal restraint on alienation by the impact of inflation. The cooperative members, if terminating their occupancy, are required to transfer their membership shares at a price formula agreed upon when they acquired their occupancy rights. It is alleged that the agreed transfer price is confiscatory, illegal and unenforceable because it does not provide for any increase due to inflation during their years in residence. In effect, in this diversity action plaintiffs seek a declaratory judgment that the apartment they lived in as a cooperative must become a condominium in violation of their contract and the wishes of the other members. We find no reason in law or social and economic policy to permit this and enter judgment for defendant on the following Findings of Fact and Conclusions of Law.

 FINDINGS OF FACT

 1. Plaintiffs, James A. Alexy and Betty Jean Alexy, his wife, are now, and since June of 1977, have been residents of the State of New Jersey, residing at 10 Dunbarton Road, Wexford Lens, Cherry Hill, New Jersey.

 2. James A. Alexy is an attorney, admitted to practice in Pennsylvania and New Jersey, an instructor in business law at Drexel University, Rutgers University and the Wharton School of the University of Pennsylvania and describes himself as a real estate practitioner.

 3. Defendant is a non-profit corporation, incorporated under the laws of the State of Delaware, which owns and operates a cooperative apartment house located at 1901 John F. Kennedy Boulevard, Philadelphia, Pennsylvania, and named "Kennedy House."

 4. Kennedy House is a cooperative housing corporation organized and operated under Section 213 of Title II of the National Housing Act, as amended, and the administrative regulations propounded thereunder. The mortgage on its building is insured by the Federal Housing Administration ("FHA") under Section 213. Under a Regulatory Agreement executed at the time of a construction loan closing, the Federal Housing Commissioner still retains significant controls with respect to the operation of the cooperative:

 a) The mortgagor may not execute an instrument which imposes a restriction upon the sale, leasing or occupancy of the property on the basis of race, color or creed. (P 10).

 b) Kennedy House as mortgagor has also agreed that there shall be full compliance with the provisions of (1) any state or local laws prohibiting discrimination in housing on the basis of race, color, creed or national origin, and (2) with the Regulations of the FHA providing for non-discrimination and equal opportunity housing. (P 16).

 5. Each of the approximately 650 members of Kennedy House is entitled to occupy an apartment unit in the apartment building by virtue of such membership and pursuant to the terms of an Occupancy Agreement between the member and Kennedy House (in effect, a lease).

 6. The tenant-members of Kennedy House elect a Board of Directors which manages the apartment house with the aid of committees comprised of members, a tenant council and an outside management agent.

 7. Maintenance charges are fixed at the beginning of each year, in an amount calculated to cover the expenses of the operation of the building and debt service on the mortgage, and each member pays his proportionate share thereof (the equivalent of rent).

 8. On July 11, 1966 plaintiffs, James A. Alexy and his wife Betty Jean, executed a "Subscription Agreement" to entitle them to become members of Kennedy House and to occupy an apartment in Kennedy House, for which they paid a subscription price of $ 3,292.00.

 9. The apartment which this would entitle them to occupy when the apartment was constructed was Apartment 2606, a 2 bedroom, 2 bath apartment on the 26th floor of the building. At the time plaintiffs paid their subscription price to defendant for the membership certificate in question, the apartment had not yet been constructed.

 10. Concurrently with the execution of the Subscription Agreement the Alexys were provided by Kennedy House with an "Information Bulletin." Said Information Bulletin explained what a housing cooperative was and how it operated. It also contained copies of the following documents: (1) Kennedy House's Certificate of Incorporation; (2) the Regulatory Agreement between Kennedy House and the Federal Housing Commissioner; (3) the form of Subscription Agreement between Kennedy House and each member; (4) the Cooperative Service Agreement between Kennedy House and Frankel Management, Inc. (the Management Agent for Kennedy House); and (5) the proposed By-Laws of Kennedy House. Plaintiffs also received from Kennedy House a "Supplement to the Information Bulletin," modifying and updating the Information Bulletin.

 11. The proposed By-Laws of Kennedy House, which were part of the Information Bulletin plaintiffs received from Kennedy House, were adopted by Kennedy House on March 20, 1967, in precisely the form they appeared in said Information Bulletin. These By-Laws were model By-Laws prepared by the FHA, and FHA approval of the By-Laws was required in order for Kennedy House to qualify for mortgage insurance (and, therefore, mortgage financing) pursuant to Section 213 of the National Housing Act.

 12. a) The total cost of constructing the apartment house was $ 14,120,917.00.

 b) The mortgage on this project, insured by the FHA under Section 213 of Title II of the National Housing Act, was in the amount of approximately $ 12,700,000.00 for a term of forty (40) years or 480 equal monthly installment payments of $ 63,513.48, applied first to interest at 51/4% and the balance to principal.

 c) The mortgage payments began on March 1, 1969.

 d) The ratio of total construction cost ($ 14,120,917.00) to the amount of the mortgage ($ 12,700,000.00) in effect created 90% mortgage financing.

 e) As initial subscribers for membership, plaintiffs' investment constituted a portion of the working capital used to help finance construction. While waiting from the summer of 1966 until construction was completed in April of 1969, plaintiffs received no interest on their investment of $ 3,292.00.

 13. a) On April 28, 1969 the Alexys and Kennedy House executed an "Occupancy Agreement" which entitled the Alexys to occupy Apartment No. 2606 of Kennedy House, and on that same date Kennedy House issued to the Alexys "Membership Certificate" No. 550. On that same date, April 28, 1969, the Alexys commenced occupancy of Apartment 2606.

 
Neither this agreement nor the Member's right of occupancy shall be transferrable or assignable except in the same manner as may now or hereafter be provided for the transfer of memberships in the By-Laws of the Corporation.

 14. Article III, Section 8(b) of the By-Laws of Kennedy House, in regard to the procedure when a tenant-member desires to vacate his apartment, provides:

 
If the member desires to leave the project, he shall notify the Corporation in writing of such intention and the Corporation shall have an option for a period of ninety (90) days thereafter, but not the obligation, to purchase the membership, together with all of the member's rights with respect to the dwelling unit, at an amount to be determined by the Corporation as representing the transfer value thereof, less any amounts due by the member to the Corporation under the Occupancy Agreement, and less the cost or estimated cost of all deferred maintenance, including painting, redecorating, floor finishing, and such repairs and replacements as are deemed necessary by the Corporation to place the dwelling unit in suitable condition for another occupant. The purchase by the Corporation of the membership will immediately terminate the member's rights and the member shall forthwith vacate the premises.

 15. "Transfer value," as used in subsection (b) of Article III, Section 8 of the By-laws, is defined in subsection (d) thereof as follows:

 
Whenever the Board of Directors elects to purchase a membership, the term "transfer value' shall mean the sum of the following:
 
(1) The consideration (i. e., down payment) paid for the membership by the first occupant of the unit involved as shown on the books of the Corporation;
 
(2) The value, as determined by the Directors, of any improvements installed at the expense of the member with the prior approval of the Directors, under a valuation formula which does not provide for reimbursement in an amount in excess of the typical initial cost of the improvements; and
 
(3) The amount of principal amortized by the Corporation on its mortgage indebtedness and attributable to the dwelling unit involved as paid by the member involved and previous holders of the same membership. However, the amount of principal paid by the Corporation for a period of three (3) years after the Corporation has made ...

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