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Washington's highest court has considered whether the Statute of Frauds applies to a transaction involving a transfer of shares in a cooperative apartment building. Click here to read an earlier summary of this decision posted in The Letter of the Law.
Donald Firth and Barbara Palecek ("Buyers") lived on the first floor of the Maryland Apartments, Inc. ("Co-op"), a 19-unit cooperative apartment building in Seattle. The Co-op was owned by a corporation, and was structured like most cooperative buildings. The shareholders of the Co-op corporation were the residents of the individual apartment units, and each shareholder's shares entitled them to an exclusive lease for a particular unit. However, all leases had to be approved by the Co-op's Board of Directors. A conveyance of an interest in the Co-op involved a transfer of stock.
The Buyers negotiated to buy the unit across the hall from them, which was occupied by Hefu Lu and Qian Sun ("Sellers"). Based on their negotiations, Mr. Lu drafted an agreement which stated that the Buyers "agree to purchase Apartment 2 (626 13th Avenue East)" from the Sellers. While the contract set forth a price and a closing date, the quoted language was the extent of the property's description. Everyone signed the contract, and the Sellers accepted the Buyers’ earnest money (although never deposited the check). The transaction never closed, as the Sellers first postponed the original closing and then demanded an increased sale price. The Buyers brought a lawsuit seeking specific performance of the contract, while the Sellers argued that the statute of frauds barred enforcement of the agreement. The trial court granted the Buyers specific performance, and the Sellers appealed. On appeal, the appellate court reversed the trial court and ruled that the statute of frauds barred enforcement of the agreement. The Buyers appealed this ruling.
The Supreme Court of Washington reversed the appellate court, finding that the statute of frauds did not bar the enforcement of the purchase agreement. The court first considered whether the conveyance of shares in a cooperative housing unit was a transfer of a real property interest which would be subject to the state's statute of frauds ("Statute"). Among other provisions, the Statute provides that every contract which transfers an interest in real property must be in writing, and also requires that the description of the property must be sufficient so that oral testimony is not required to locate the property. The Statute is intended to prevent fraud caused by the uncertainty which can arise in oral contracts. The appellate court had found that the Statute barred this transaction because the purchase agreement failed to meet the Statute's terms, as the purchase agreement lacked a proper legal property description.
Looking at the interest the Sellers were conveying to the Buyers in this case, the court found that the Statute did not bar the enforcement of the purchase agreement. The court found that a sale of an interest in a cooperative housing unit involved a transfer of stock, not real property. The transfer of stock was subject to the approval of the Co-op's Board of Directors, following which the purchaser would receive a proprietary lease for an apartment in the Co-op. Therefore, the court concluded that the purchase agreement did not involve a transfer of real property, as the Co-op was the only titleholder of the Co-op's real property. The court rejected the various arguments made by the Sellers that the transfer of an interest in cooperative housing was treated like a real property transfer in the federal tax code as well as by courts in other states, finding both arguments unpersuasive. Thus, the appellate court was reversed, and the case was sent back to the appellate court so that it could consider the other defenses raised by the Sellers.
Three justices dissented from this opinion, agreeing with the appellate court that this purchase agreement was subject to the Statute because the transfer involved the transfer of an interest in real property.
Firth v. Lu, 49 P.3d 117 (Wash. 2002).