Firth v. Hefu Lu , 146 Wash. 2d 608 ( 2002 )

Sanders, J.

— We here consider whether an agreement to transfer shares in a corporation that operates a housing cooperative is subject to the real estate statute of frauds, RCW 64.04.010. We hold that it is not because stock in a cooperative corporation is not an interest in real property transferable by deed.

FACTS

In 1977 Donald Firth and Barbara Palecek moved into the Maryland Apartments, a housing cooperative on Seattle’s Capitol Hill. The housing cooperative was organized in 1948 by the filing articles of incorporation for the Maryland Apartments, Inc., the corporation that owns the land and building commonly referred to as the Maryland Apartments. The building contains 19 apartment units, each associated with a separate block of shares in the corporation. These cooperative units are rented out by the corporation to its shareholders under long-term proprietary leases. One may become a resident of the Maryland Apartments only by acquiring the block of shares associated with a particular unit—i.e., by becoming a shareholder of the corporation Maryland Apartments, Inc.¹

A key component of any cooperative housing is the ability of its management to exercise control over who may become a member and resident. In the case of the Maryland Apartments, the board of directors of the corporation exercises this control by virtue of the corporate bylaws, which restricts shareholders’ ability to transfer their shares. A shareholder may transfer his or her stock only upon the approval of the board of directors. If the board approves the proposed transfer, the departing shareholder surrenders his or her share certificate to the corporation, which issues a new certificate to the entering shareholder. Only after the proposed stock transfer has been approved is the entering shareholder entitled to a proprietary lease for the apartment unit to which the shareholder’s block of shares is associated.

Donald Firth has had paralysis of the legs since being struck with polio at the age of two. He and his wife Barbara Palecek (the Firths) therefore moved into apartment 3, one of the ground-floor units at the Maryland Apartments. In 1994, Hefu Lu and Qian Sun (the Lus) moved into the other ground-floor unit, apartment 2. Some two years later Lu approached Palecek to ask if she and her husband were interested in buying his and Sim’s interest in apartment 2 for $165,000. The Firths were interested because apartment 2 was the bigger of the two ground-floor units, but Lu left the country on business before a written agreement could be prepared. Negotiations continued while Lu was in Europe, with Lu’s business partner John Swaner acting as an intermediary.

The parties eventually settled on the purchase price of $180,000, at which point Swaner and the Firths drew up the following agreement:

April 18, 1997

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.

Clerk’s Papers (CP) at 153. The Firths signed the agreement the day it was drafted and provided Swaner with deposit checks for the Lus in the amount of $500. The Lus signed on the 23rd of April when Swaner met up with them in Europe, but only after the Firths agreed to provide an additional $1,500 in deposit.

When the Lus returned from Europe in September 1997 Sun was reluctant to sell at the agreed-on price of $180,000. She wanted an additional $50,000 and convinced her husband to approach the Firths to request an extension of the date on which the Firths were to take possession of apartment 2. Unaware of Sun’s reluctance to go through with the deal, the Firths agreed in early October to extend the date one month to November 15, 1997, and again in early November to extend the date to the end of December. In early January 1998, Lu informed the Firths of his wife’s dissatisfaction with the purchase price and that she wanted to raise it to $230,000.

The new price was unacceptable to the Firths, who initially attempted to resolve the matter out of court. When those attempts fell through the Firths commenced the instant action to obtain an order compelling the Lus to specifically perform the agreement and transfer the block of shares associated with apartment 2 to the Firths. The Lus moved to dismiss for failure to state a claim upon which relief can be granted, arguing the agreement did not comply with the real estate statute of frauds and was therefore unenforceable. The Lus’ motion was denied, after which the Firths filed their own motion for summary judgment. In opposition the Lus again argued the agreement was unenforceable for failure to comply with the statute of frauds. They also claimed the contract was unenforceable because it lacked essential material terms and the Firths were allegedly unable to perform. The trial court granted the Firths’ motion for summary judgment and directed the Lus to specifically perform the agreement by transferring to the Firths the shares associated with apartment 2 upon the Firths’ tender of the $180,000 purchase price.

The Lus deposited the purchase money into a blocked trust account² and appealed. The Court of Appeals reversed, concluding the contract lacked a legal description of apartment 2 and was therefore unenforceable under the real estate statute of frauds, RCW 64.04.010. Firth v. Hefu Lu, 103 Wn. App. 267, 268, 12 P.3d 618 (2000). The Court of Appeals did not address the Lus’ arguments the contract was unenforceable because it lacked essential material terms or that the Firths were allegedly unable to perform. The Firths then petitioned this court to review the applicability of the statute of frauds to this contract. We granted review and reverse, remanding to the Court of Appeals for further proceedings pursuant to RAP 13.7(b).³

DISCUSSION

We review a summary judgment, making the same inquiry as did the trial court. Kruse v. Hemp, 121 Wn.2d 715, 722, 853 P.2d 1373 (1993). Summary judgment is proper only when pleadings, depositions, admissions, and affidavits show there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. CR 56(c); Barrie v. Hosts of Am., Inc., 94 Wn.2d 640, 642, 618 P.2d 96 (1980). The applicability of the statute of frauds to this transaction is a question of law.

I

The real estate statute of frauds provides in part:

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. Although the general statute of frauds, RCW 19.36.010, differs from the real estate statute of frauds, the two share common theoretical underpinnings. For example, the main purpose of both statutes is to prevent fraud in contractual undertakings. Miller v. McCamish, 78 Wn.2d 821, 828, 479 P.2d 919 (1971). We previously said RCW 19.36.010 must be narrowly construed to achieve its purpose to prevent fraud or avoidance of otherwise enforceable agreements. See Bell v. Hegewald, 95 Wn.2d 686, 691, 628 P.2d 1305 (1981) (citing Chambers v. Kirkpatrick, 145 Wash. 277, 280, 259 P. 878 (1927)). Since RCW 64.04.010 shares the same purpose it too must be narrowly construed and not applied to agreements that are not "strictly within its terms.” Chambers, 145 Wash. at 280.

By its plain language RCW 64.04.010 applies only to the following agreements: (1) actual conveyances of title or interests in real property; and (2) agreements that create or evidence an encumbrance of real property. If an agreement falls into either of these categories, it is enforceable only if executed in the form of a deed. RCW 64.04.010, .020; State ex rel. Wirt v. Superior Court, 10 Wn.2d 362, 366, 116 P.2d 752 (1941). Conversely, if an agreement does not fall within any of these three categories, RCW 64.04.010 does not apply and the agreement may be enforced even if not executed by a deed.

This agreement is for the purchase of apartment 2 in the Maryland Apartments by exchange of cash for stock. Title to the land on which that cooperative unit is located is held by Maryland Apartments, Inc., and is not affected per se. A grantor of property can convey no greater title or interest than the grantor has in the property. Sofie v. Kane, 32 Wn. App. 889, 895, 650 P.2d 1124 (1982). The agreement between the Lus and the Firths therefore does not convey real property.

Nor does the agreement create or evidence an encumbrance of real property. An agreement to lease property for more than one year is within the real estate statute of frauds because long-term leases encumber real property. Family Med. Bldg., Inc. v. Dep’t of Soc. & Health Servs., 104 Wn.2d 105, 108, 702 P.2d 459 (1985); Tibbals v. Iffland, 10 Wash. 451, 455, 39 P. 102 (1895). But cf. Presten v. Sailer, 225 N.J. Super. 178, 542 A.2d 7, 12 (1988) (indicating a proprietary lease grants an interest in real property). But this agreement was neither one to lease property for more than one year nor was it an agreement to transfer a long-term proprietary lease. Although the Lus did hold a long-term proprietary lease for apartment 2, they had no right or ability to transfer that lease to the Firths.⁴ Their lease was expressly tied to the block of shares associated with the cooperative unit referred to as apartment 2. A shareholder-tenant in the Maryland Apartments may sublet his or her apartment, but a change in lessees can be effected only by the departing shareholder proposing to transfer his or her block of shares to an entering shareholder—a transfer that is subject to approval by the board of directors. Only if the proposed stock transfer is approved will the corporation issue a new proprietary lease to the entering shareholder.

Consequently, the agreement between the Firths and the Lus would be subject to RCW 64.04.010 only if it could be considered a conveyance of an interest in real property. This would require us to view stock in a cooperative corporation as an interest in real property.

Stock in a corporation whose only asset is real property is not an interest in real property. See Bell, 95 Wn.2d at 692. Stock evidences ownership in a corporation, not its realty. See id. The real estate is owned by the corporation alone. Id. Furthermore, if an agreement is not for the actual conveyance of real property or an interest therein, it does not fall under the real estate statute of frauds even if the end result is an interest in land.

For example, in Malnar v. Carlson we held the statute of frauds does not apply to an agreement to establish a partnership for the purchase and sale of real estate because “[s]uch agreements are not contracts for the sale or transfer of interests in land.” 128 Wn.2d 521, 533, 910 P.2d 455 (1996). See also 25 David K. DeWolf & Keller W. Allen, Washington Practice, Contract Law and Practice § 3.3 (1998) (citing John D. Calamari & Joseph M. Perillo, Contracts § 19.14, at 794 (3d ed. 1987)). Courts elsewhere have reasoned along similar lines, and have held the statute of frauds does not apply to contracts to build a building on another’s land or agreements to lend money for another’s acquisition of land because they are not agreements to transfer an interest in real property. See, e.g., McCaffrey v. Strainer, 81 A.D.2d 977, 439 N.Y.S.2d 773, 774 (1981); Horner v. Frazier, 65 Md. 1, 4 A. 133, 136 (1886). Thus, even if we were to construe the agreement between the Firths and the Lus as one that results in an interest in or encumbrance on real property—in the form of the Firths being issued a proprietary lease for apartment 2 upon approval of the proposed stock transfer—it would still not fall within the real estate statute of frauds.⁵

II

The Court of Appeals concluded the interest transferred in an agreement to purchase a cooperative apartment unit is an interest in real property because the shares are necessarily accompanied by a proprietary lease and the shares of stock are not true securities. Firth, 103 Wn. App. at 268. We disagree.

The fact that ownership of stock in a cooperative corporation may entitle the shareholder to a future proprietary lease does not make such stock an interest in real property. Under Malnar an agreement which results in or is accompanied by an interest in land does not fall under the real estate statute of frauds because the agreement itself does not convey an interest in real property. 128 Wn.2d at 533.

The Court of Appeals emphasized case law from New York and New Jersey to support its conclusion transfer between the Lus and the Firths involved the transfer of an interest in real property. Firth, 103 Wn. App. at 273. Primarily the court relied on the New Jersey case Presten v. Sailer, 225 N.J. Super. 178, 542 A.2d 7 (1988). We disagree with the Court of Appeals that the Presten court’s observations apply with respect to the Maryland Apartments or any other housing cooperative in the state of Washington. See Firth, 103 Wn. App. at 274.

To begin, the New Jersey real estate statute of frauds is very different from RCW 64.04.010. Compare RCW 64.04.010 with N.J. Stat. Ann. §§ 25:1-11, 25:1-13 (West 1997). Washington’s statute of frauds is associated with additional requirements that the property in question be described “by the correct lot number(s), block number, addition, city, county, and state.” Martin v. Seigel, 35 Wn.2d 223, 229, 212 P.2d 107 (1949). For the same reason, the relatively extensive body of case law on cooperative housing from New York is of little guidance to us here in Washington on the issue of whether stock in a cooperative corporation is an interest in real property. See N.Y. Gen. Oblig. Law § 5-703 (McKinney 2001).

More importantly, the Court of Appeals’ reliance on Presten for the proposition that the transfer of any interest in a cooperative unit is a transfer of a real property interest, if that indeed is what the Presten court concluded, fails to take into account the well-settled rule that a grantor can transfer no more title or interest than the grantor has in the property. See Sofie, 32 Wn. App. at 895. The grantors in this case, the Lus, did not have an interest in the real property on which apartment 2 is located. The only interests the Lus had with respect to their cooperative unit in the Maryland Apartments were a block of shares associated with apartment 2 and a proprietary lease for that apartment. Even if we were to accept the Presten court’s characterization of a proprietary lease as an instrument granting an interest in real property, see Presten, 542 A.2d at 12, the Lus nevertheless had no ability to directly transfer their lease for apartment 2 to the Firths. This was an agreement to transfer stock.

Presten also discussed the hybrid nature of cooperative ownership and how a shareholder-tenant generally perceives himself or herself to be a homeowner, much like the owner of a condominium. Presten, 542 A.2d at 12-13. While the common perception may be that cooperative housing and condominium associations are essentially the same, there are crucial legal distinctions between the two forms of ownership. The purchaser of a condominium acquires full title to an individual unit in the complex as well as an undivided interest in common areas such as lobbies and recreational facilities. 4 Thompson on Real Property § 36.04, at 192 (David A. Thomas ed., 1994). In contrast, occupants of a cooperative housing are merely tenants of the entity which owns the real property, typically a corporation, as well as owners of that entity. Id. §§ 36.03, at 191-92, 36.06, at 197 & n.44. The purchaser of a cooperative housing unit, meaning one who agrees to purchase an existing shareholder’s stock in the cooperative corporation, acquires from the seller part ownership of the legal entity that owns and operates the housing cooperative. Id. The purchaser of a cooperative housing unit obtains no title or other interest in the cooperative’s real property by virtue of his or her agreement with the existing shareholder.

The Lus have brought to our attention cooperative units are typically advertised for sale under the homes-for-sale section of newspapers. They also point to their agreement with the Firths and argue its wording, “Barbara A. Palecek and Donald R. Firth agree to purchase apartment 2 (626 13th Avenue East),” evidences the parties’ intent to transfer an interest in real property. CP at 153. Lastly, the Lus repeatedly point to the “practical” or “economic” realities of the transfer of a cooperative unit and argue this shows their agreement was one for the transfer of a real property interest.

The Court of Appeals reasoned along the same lines when it stated the agreement between the Lus and the Firths shows “the practical reality of a sale of a cooperative unit is a transfer of an interest in real property”:

The transfer of stock was incidental; the real import of the transaction, as perceived by the parties, was the transfer of the right to possess and occupy the apartment unit.

Firth, 103 Wn. App. at 274.

However, neither common perception, intent of the parties, nor practical or economic realities affects the legal status of this agreement. Cf. dissent at 628 (suggesting the relevant concern is the “essence” of the transaction). As a matter of law, the agreement between the Lus and Firths did not, and could not, convey realty as such or any interest in realty.

The Court of Appeals also relied on Presten’s analysis of federal tax law, noting this body of law treats cooperative housing similar to ownership of a house in terms of mortgage deductions. Firth, 103 Wn. App. at 273. But the Court of Appeals misread Presten’s tax analysis and misunderstood why the internal revenue code allows owners of cooperative housing to deduct interest payments. Contrary to the Court of Appeals assertion, federal tax law does not support the conclusion that stock in a cooperative corporation should be considered an interest in real property.

A taxpayer may deduct from his or her gross income interest paid or accrued during the taxable year on “acquisition indebtedness” or “home equity indebtedness” with respect to a “qualified residence.” I.R.C. § 163(a), (h)(l)-(3). For purposes of our discussion here, this basically means a homeowner may deduct mortgage payments, within certain limits. See, e.g., I.R.C. § 163(h)(3)(B)(ii), (C)(ii). See also 3 Stand. Fed. Tax Rep. (CCH) f 9402. This mortgage deduction under section 163 is not directly available to shareholder-tenants in a cooperative housing since they are not the owners of the real property. Instead, the interest deduction under section 163 is directly available only to the cooperative corporation, as it is the owner of the real property. But the internal revenue code allows shareholder-tenants to deduct from their gross income a proportionate share of interest deductions the corporation may claim under section 163. See I.R.C. § 216(a)(2). In other words, if a shareholder-tenant in a cooperative housing finances a purchase of stock in a cooperative corporation, he or she may deduct interest payments under circumstances similar to a homeowner’s deduction of mortgage payments.

A homeowner is allowed to deduct mortgage payments not because his or her home is real property, but because it is a residence—or more precisely a “qualified residence.” See I.R.C. § 163(h)(4)(A). A simple example involving a taxpayer with three homes reveals this distinction. A home constitutes a “qualified residence” if it is a taxpayer’s principal or second residence. I.R.C. § 163(h)(4)(A)(i); 26 C.F.R. § 1.163-10T(p)(l) (2001). Thus, even if a taxpayer has three homes only two of them will qualify for the interest deduction under I.R.C. § 163.

Similarly, a shareholder-tenant may deduct interest payments not because stock in a cooperative housing corporation is an interest in real property, but because a cooperative housing unit is considered a residence under the internal revenue code. A “residence” is generally defined to include “a house, condominium, mobile home, boat, or house trailer, that contains sleeping space and toilet and cooking facilities.” 26 C.F.R. § 1.163-10T(p)(3)(ii) (2001). For purposes of the interest deduction under section 163, the term residence also

includes stock in a cooperative housing corporation owned by a tenant-shareholder if the house or apartment which the tenant-stockholder is entitled to occupy by virtue of such stock is a residence within the meaning of paragraph (p)(3)(ii) of this section.

26 C.F.R. § 1.163-10T(q)(l) (2001). Thus stock in a cooperative corporation is considered a “residence” under federal tax law; it is not considered an interest in real property.

Lastly, the fact that stock in a cooperative corporation is not a true security is no reason to categorize it as an interest in real property. Again the Court of Appeals relied on Presten as support on this point, which in turn relied on United Housing Foundation, Inc. v. Forman, 421 U.S. 837, 95 S. Ct. 2051, 44 L. Ed. 2d 621 (1975). See Firth, 103 Wn. App. at 273. The issue in United Housing Foundation was markedly different from the one we face here, and had nothing to do with the statute of frauds. The only issue before the Court was whether stock in a cooperative corporation can be considered “securities” for purposes of the Securities Act of 1933 and the Securities Exchange Act of 1934. United Hous. Found., Inc., 421 U.S. at 840. The Court concluded such stock does not fall within the statutory definition of “securities” because it lacks the common features of securities, such as the right to receive dividends, negotiability, voting rights in proportion to the number of shares owned, and because the inducement to purchase such stock is to obtain housing, not to invest for profit. Id. at 851. This conclusion is no basis for extending application of Washington’s real estate statute of frauds to stock in cooperative corporations.

CONCLUSION

The only interest the Lus transferred by their agreement with the Firths was their stock in the Maryland Apartments, Inc. Stock is not an interest in real property. Therefore the parties’ agreement is not covered by RCW 64.04.010. The contract whereby the Lus agreed to sell their stock in the Maryland Apartments to the Firths for $180,000 may be enforceable even though not in the form of a deed.

The real estate statute of frauds was the sole ground for the Court of Appeals’ reversal of the trial court’s summary judgment in favor of the Firths, see Firth, 103 Wn. App. at 278, although the alternative unresolved defenses may support the same result. We therefore remand to the Court of Appeals for further proceedings consistent with this opinion. RAP 13.7(b).

Alexander, C.J., and Smith, Madsen, and Ireland, JJ., concur.

1 Nonshareholders may reside at the Maryland Apartments by virtue of the right of shareholder-tenants to sublet their units. The ability to sublet is subject to certain restrictions and is of no concern to our resolution of this case.

2 The deposit of the purchase money was carried out pursuant to a stipulated arrangement between the parties, based on which the trial court entered an order directing the Lus to place the sale proceeds in the blocked trust account.

3 “If the Supreme Court reverses a decision of the Court of Appeals that did not consider all of the issues raised which might support that decision, the Supreme Court will either consider and decide those issues or remand the case to the Court of Appeals to decide those issues.” RAP 13.7(b).

4 Contrary to the dissent’s characterization, we do not conclude transfers of long-term proprietary leases are outside the real estate statute of frauds. See dissent at 622. Whether such transfers are within RCW 64.04.010 is not an issue here. Cf dissent at 628 (noting transfer of long-term leases falls under the real estate statute of frauds). As a matter of law, the transfer between the Lus and Firths was not, and could not be, one to transfer a long-term lease since the Lus had no ability to transfer their lease to anyone other than Maryland Apartments, Inc.

5 Since we hold a transfer of stock in a cooperative-housing corporation is not a transfer of an interest in real property and therefore does not fall within RCW 64.04.010, we do not reach the issue of whether the agreement in question was unenforceable for want of a proper legal description. See dissent at 629-30; Firth, 103 Wn. App. at 275. For the same reason, we find unpersuasive the Lus’ alternative argument the agreement is unenforceable because it lacks essential material terms insofar as the terms to which the Lus refer are uniquely required to create an enforceable agreement to transfer real property or an interest therein. See Hedges v. Hurd, 47 Wn.2d 683, 687, 289 P.2d 706 (1955); Kruse v.Hemp, 121 Wn.2d 715, 722, 853 P.2d 1373 (1993).