CNYC president Marc Luxemburg, Esq. is an attorney specializing
in cooperative and condominium law. In each issue of the
CNYC Newsletter he reviews recent court cases that have
the potential to answer questions commonly faced by boards
of directors as part of their responsibilities. At CNYC’s
23rd annual Housing Conference on Sunday, November 16, 2003,
Mr. Luxemburg will again present his annual review of the
year's Significant Legal Decisions. To review previous decisions
he has discussed, please visit CNYC's World Wide Web Information
Center at www.CNYC.coop.
In its recent decision in 40 West 67th Street Corp., v.
Pullman, 2003 WL 21057407 (May 13, 2003), the Court of Appeals
has again broken new ground in extending the reach of the
Business Judgment Rule, the standard by which decisions
of a board of directors of a cooperative or condominium
are to be reviewed by the courts. In the Pullman case the
Court found that a decision of a cooperative to evict a
shareholder for objectionable conduct was generally not
reviewable by the courts, and the board's decision itself
served as competent evidence upon which a court could base
an eviction, without having to litigate the details of the
shareholder’s underlying conduct.
The facts in the Pullman case were extreme. Mr. Pullman,
after having demanded changes in various building services,
accused his elderly upstairs neighbors of make noise late
at night, of running a loud and illegal bookbinding business,
and of storing toxic chemicals in their apartment. Upon
investigation, the board determined that there was no truth
to any of those charges. There was next a physical altercation
between the shareholder and his upstairs neighbor, following
which the shareholder distributed allegedly libelous statements
to all the other shareholders, wrote 16 letters of complaint
in one month alone, and then started four lawsuits against
various parties, including the president of the cooperative
and the cooperative corporation, and tried to commence three
more actions.
As a result of this conduct, his occupancy was terminated
under the clause of the Proprietary Lease prohibiting objectionable
conduct. This clause required that two-thirds of the Shareholders
vote to terminate the Lease, which was done at special meeting
of the shareholders which Mr. Pullman did not attend. The
cooperative then sought to evict Mr. Pullman.
The Court held that the Business Judgment rule is applicable
to the conduct of the cooperative, regardless of the nature
of the legal proceeding in which the board’s determination
is sought to be challenged, so long as the board acts (i)
for the purposes of the cooperative, (ii) within the scope
of its authority, and (iii) in good faith. The Court held
that so long as the board did not engage in arbitrary or
malicious decision-making, or unlawful discrimination, the
courts should avoid undue court involvement and judicial
second-guessing of board decisions.
The Court then examined the facts of the case carefully
to see if these three standards were followed. The Court
reviewed whether the board’s conduct was in the scope
of its authority. It found that the requirements and procedures
of the Proprietary Lease, including the calling of a special
meeting and giving the defendant an opportunity to be heard
were all carried out, and that the shareholder vote fulfilled
the requirements for termination contained in the lease.
With respect to corporate purpose, the Court determined
that the shareholders properly found that Mr. Pullman’s
behavior was excessive, and that the board was under a fiduciary
duty to further the collective interests of the cooperative.
The eviction had an obvious and legitimate relation to the
cooperative’s purposes. Finally with respect to good
faith, the Court found there was no evidence of any arbitrariness,
favoritism, discrimination, or malice, and that the eviction
would not result in a forfeiture of all of the shareholder’s
rights.
While some apprehension has been expressed that this case
could lead to widespread action by cooperatives to evict
dissident or annoying shareholders, in practice it is likely
to be applied in much narrower circumstances – only
where it is clear that a shareholder’s conduct has
been truly objectionable – not just a series of disagreements
with the board.
However, as in all cases, there is language in the decision
that could be read broadly as well as narrowly. In particular
in this case the Court found that the form of the legal
action is irrelevant as to the standard by which legitimacy
of board action is to be measured – a statement in
which the Court may be saying that the application of the
Business Judgment Rule to a very wide range of corporate
decisions would be in order, and that those decisions by
themselves would be competent evidence in court –
without a court determination of the underlying facts to
allow the eviction of a shareholder. How this will play
out with respect to ordinary non-payment or holdover proceedings
– where a board determines to evict a Shareholder
for, among other things, unlawful subletting or unauthorized
alterations of the apartment, and whether the Court will
accept the decision of the board that the shareholder has
violated the proprietary lease, rather than conducting a
trial of such merits of the issues, remains to be seen.
Another open question is how the Court’s analysis
will be extended to a situation where the shareholder’s
complaints, issues or disputes are legitimate.
What if a shareholder embarks on a deliberately annoying
or disruptive course of conduct to further legitimate complaints
about noise or leaks. It may well be that the Pullman analysis
will be applied, and a shareholder vote to evict would be
upheld. It appears that there will be a burden of proof
placed on a shareholder to establish, in the shareholder's
defense, that the board's action was, in the words of the
Court, the product of "unlawful conduct, discrimination,
vendetta, arbitrary decision-making or favoritism."
The ultimate lesson may be that grievances against the cooperative,
its board, or other shareholders must be pursued in a civil
manner, regardless of their validity.