Published: Summer 2004

CNYC president Marc J. 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 as part of their responsibilities. This article features highlighted cases from his annual seminar at CNYC’s 23rd annual Housing Conference.

BUSINESS JUDGMENT
40 West 67th Street v. Pullman, 760 NYS2d 745 (Ct. Apps. 5/13/2003) may well be the most significant case in a number years. Mr. Pullman accused his upstairs neighbors of a gamut of infractions from noise violations to running a bookbinding business to housing toxic substances. Upon investigation, the board ascertained that they had no such equipment and didn’t even have a TV. Mr. Pullman initiated four lawsuits against the co-op and, after a period of time, the co-op decided to evict Pullman for “objectionable conduct”. A special meeting of shareholders was called for this purpose and the requisite supermajority was reached to terminate his lease.

The case went to court and the co-op ran into the Real Property Actions and Proceedings Law, Section 7-11, which essentially states that a co-op must prove a person’s actions to be objectionable. The court found that the determination of the shareholders itself constitutes satisfactory proof that Mr. Pullman acted objectionably, and the cooperative did not have to bring in witnesses to testify as to what he did. This case demonstrates that lower courts normally defer to the highest state court, the Court of Appeals, which is where the use of the business judgment rule originated.

TRANSFERS
Leist v. Goldstein, [Westhampton Bath & Tennis Club Owners Corp.] 760 NYS2d 191 (2d Dept. 5/12/2003) is typical in that the purchaser was rejected and brought suit. The court ruled that a purchaser is not party to any agreements with the board (he’s not yet a shareholder!) and therefore has no standing to enforce the proprietary lease.
The protagonist of Liberman v. Jacoby & Meyers Law Offices LLP [411 West End Ave. Owners Corp.], Sup. Ct. NY Co., Index No.122912/97, (9/29/1999) was an elderly gentleman being cared for by an aide. He was moved from the building and some time later the aide returned to sell the apartment. The aide presented a power of attorney at the closing, but when that purchaser attempted to sell the apartment a few years later, the protagonist’s family realized the apartment had been sold after the man had passed away. The board and the managing agent’s failure to inquire whether the power of attorney was valid was found to be evidence of negligence.

SUBLETS
In Rosenberg v. Riverwood Owners, Inc., 756 NYS2d 900 (2d Dept. 4/7/2003), the board had twice denied consent to sublet. The court found that this withholding was reasonable; that it had a legitimate relationship to the welfare of the cooperative. The lesson of this case is that if cooperatives behave in a procedural way and document their decisions, those decisions are likely to be able to withstand challenge.

445/86 Owners Corp. v. Haydon, 751 NYS2d 456 (1st Dept. 12/12/2002) dealt with a man who moved his mother-in-law into his vacated apartment. The board argued that sublet fees were due because of the ‘Lessee and Lessee’s family’ wording in the proprietary lease. The court ultimately decided, “Any non-consented occupancy does not constitute a sublet”. While Haydon did not have to pay sublet fees, his mother-in-law did have to leave the apartment. Note that CNYC’s new Proprietary Lease and Shareholders Agreement contains clear language on this subject.
Both Spiegel v. 1065 Park Ave. Corp., 759 NYS2d 461 (1st Dept. 5/13/2003) and Krakauer v. Stuyvesant Owners, Inc., 753 NYS2d 367 (1st Dept. 1/23/2003) dealt with offering plans and proprietary leases which state that “original purchasers but not their successors”, have the privilege of selling or subleasing without the consent of the board. Such clauses are common, and the courts have made it perfectly plain that you can’t enforce them because they give some shareholders more rights than others, and the Courts have interpreted the Business Corporation Law to require that all shareholders must have equal rights.

DOUBLE JEOPARDY?
Tsabbar v. Delena, 752 NYS2d 636 (1st Dept 12/24/2002) and Kelly v. 2 Beekman Place Owners Corp., NYLJ, 7/23/2003, p. 18, c. 1 (Sup. Ct.. NY Co.) are both cases where the shareholder tried to take a second bite of the apple. Mr. Tsabbar wanted to sublet his office but was turned down by the Board. His first lawsuit, claiming that he had an oral agreement permitting a sublet, was tossed out. Then he brought a second suit that the board discriminated against him. The court’s response was, in essence: “Sorry, you should have brought that up in the prior suit.” Ms. Kelly claimed she discovered her apartment was smaller than every other in her line. Her first case seeking reallocation of shares was thrown out. Then she argued her apartment was illegal which was also thrown out. Again, the courts decided that such issues should have been brought it up in the first case.

CHANGING CHARGES
In both Lesal Assocs. v. Board of Managers of the Downing Court Condominium, 765 NYS2d 352 (1st Dept. 10/14/2003) and Board of Managers of the 229 Condominium v. J.P.S. Realty Co., 764 NYS2d 405 (1st Dept. 9/4/2003), the board decided to reallocate common charges at the expense of commercial elements. In each, the board lost. The Downing Court board wanted to combine all the expenses and charge according to everybody’s percentage interest. However, the court did not allow them to charge commercial units for things that are strictly residential. The principal in the 299 case is the same: You can’t force commercial units to pay a piece of the residential expenses unless it was set up that way in the original bylaws. Condominiums cannot change the bylaws to try to make the commercial tenants pay more.

Zack v. 3000 East Ave. Condominium Assoc., 762 NYS2d 459 (4th Dept. 6/13/2003) was a bit different. This was a battle among residential units where charges were based strictly on a percentage. Owners of with larger units argued they were overtaxed; the portion of services used by smaller units was actually greater. The unit owners voted for a compromise: half the charges would be based on percentage and half on a per-unit basis. This policy continued for several years until Zack came along and challenged it in the courts. The 4th department upheld Zack’s argument, citing the Real Property Law: expenses have to be distributed according to respective common interests or special or exclusive use. The condominium couldn’t demonstrate this by either the large or small units so the compromise was invalid.

BOARD CONSENT
A body of cases from the past said once consent is given by a board, the consent can’t be revoked. Two cases that demonstrate courts are gradually retreating from this position are 10 East 70th Street, Inc. v. Gimbel, 2003 WL 22413647 (1st Dept. 10/23/2003) and Fried v. 20 Sutton Place South, Inc., Sup. Ct. NY Co., Index No. 123273/01, (11/22/2002). Mr. Gimbel claimed he had co-op board and government approval to erect a structure, however, the board was able to establish that what Gimbel constructed was not built according to the plans they had approved. Therefore, the board’s decision to require removal to comply with fire regulations and to allow for facade inspection and maintenance was shielded by the Business Judgment Rule. Gimbel had to take the structure down. However, the extensive nature of the work strongly suggested that it could not have been performed without the acquiescence of the board and the oversight of the management company. This raises the issue as to who is obligated for removal expenses and remains to be litigated.

Similarly, Fried v. 20 Sutton Place South, Inc., Sup. Ct. NY Co., Index No. 123273/01, (11/22/2002) came about when the board president signed Mrs. Fried’s Department of Buildings (DOB ) application for a penthouse extension. The board claimed its purpose for signing the application was to give Mrs. Fried an opportunity to determine what DOB would allow. The board subsequently refused permission for the renovation and cited reasons why they wouldn’t allow it; in particular, that Ms. Fried’s proposal would partially obstruct her neighbor’s view. The court found that even if the president’s signature constituted board consent, this is of no moment. No alteration agreement was ever signed. The court found the decision to rescind to be protected by the Business Judgment Rule.

However, in Horwitz v. 1025 Fifth Ave., Inc., Sup. Ct. NY Co., Index No. 115319/00, (6/19/2003) the board could not compel the removal of a terrace awning to permit installation of a through-the-wall air conditioner by an upstairs neighbor due to lack of proper documentation to support alleged board decisions. The bottom line here is the board didn’t do its paperwork correctly.

FEES & FINES
The board in Old Yorktown Village Corp. v. Hitt, 2003 WL 22038417 (App. T 2d Dept. 7/18/2003) swung but did not get a hit. It passed a regulation prohibiting livery-plated vehicles from parking on the premises. The appellate term overturned the lower court’s decision, saying the plaintiff’s evidence that its assessed fines remained unpaid was insufficient. This is contrary to the reasoning in the Pullman case. The court found that the co-op must introduce proof of the violation and that the claims gave rise to liability. The plaintiff failed to do this, even though the defendant admitted he did generally park a livery-plated vehicle. If the board had created a paper trail, including granting Hitt an opportunity to rebut the allegations, they might have succeeded. As with a number of recent cases, the court is saying a board has to go through the proper procedures to back up their actions.
The case of 179 East 70th Street Corp. v. Steindl, NYLJ, 5/14/2003, p.21, c. 3 (Sup. Ct. NY Co) demonstrates that a co-op’s demands for liquidated damages resulting from overtime alterations must be reasonable. The co-op demanded $500 a day, totaling $175,000. The court said liquidated damages must bear a reasonable proportion to the actual loss. You can’t judge the validity of this kind of penalty without taking into account how much the job originally cost. The burden of proof is on the co-op to prove the liquidated damages clause is reasonable.

A condominium won liquidated damages in Buziashvili v. New Hampshire House Condominium, 2003 WL 1957102 (App. T. 2d Dept. 2/5/2003). Ms. Buziashvili did not pay her condo charges on time and the board charged late fees totaling $365 for two months which was held to be proportionate to arrears.

TORT CLAIMS
Kaniklidis v. 235 Lincoln Place Housing Corp., 759 NYS2d 389 (2d Dept. 5/19/2003) is a classic case. A shareholder argued that sounds of heavy walking, banging and a washer/dryer were so excessive that he was deprived of essential functions of a residence. When he was unable to prove this at the trial, the case was dismissed.

In Simon v. 160 West End Ave. Corp., NYLJ, 9/3/2003, p. 18, c.3 (Sup. Ct. NY Co.), an elderly woman, Ms. White, sought to transfer her unit to Ms. Simon and Mr. Portius as joint tenants. A board member said the transfer was legally and morally improper; Simon and Portius were acting unethically by influencing the elderly woman. When Ms. White died, she bequeathed her apartment to the couple. Again, the co-op rejected them. The court threw out all of the charges —- the co-op did not breach its fiduciary duty and defamation claims against the director were barred by the one-year statute of limitations. Expect to see this case again!

TAX ISSUES
One of the more famous recent cases was 439 East 88 Owners Corp. v.Tax Commission, 763 NYS2d 12 (1st Dept. 7/10/2003). The commission wanted to determine the extend of alleged fraudulent activities and instituted a requirement that to file for the real-estate tax abatement, a form, which denied any fraudulent activity, must be submitted. The suit claimed the tax commission couldn’t implement a rule that prevented tax abatement applications. The court agreed. The tax commission simply did not have the authority to impose a disclosure requirement without changing the statute.
Another case to be noted is Mutual Redevelopment Houses, Inc. v. Roth, 763 NYS2d 124 (3d Dept. 7/3/2003) in which the court found the generation and transmission of electricity to shareholders on a metered basis with a separate bill was a sale and therefore subject to sales tax.

LIABILITIES TO THIRD PARTIES
Watch your step: Castro v. Marble Hall Apts., Inc., 755 NYS2d 248 (2d Dept. 2/18/2003) held the owner of land abutting a public sidewalk owed no duty to keep the sidewalk in safe condition. However, New York City now has a new sidewalk law: The administrative code was amended in 2003 to provide that the city is not responsible for the sidewalk, the adjacent building owner is.
The cases of Thompson v. St. Charles Condominiums, 756 NYS2d 530 (1st Dept. 3/4/2003) and Loreto v. 376 St. Johns Condominium, Inc., 2003 WL 21704418 (Sup. Ct. NY Co. 7/2/2003) give the Board reason to require that any time anybody comes to do anything in the building, they must sign an appropriate agreement (even if they are just painting). In both cases, the collapse of makeshift platforms, from which a worker fell, triggered absolute liability against the building. These cases make it clear that you definitely need a decorating agreement alongside your alteration agreement.

SPONSORS
Bleecker Charles Co. v. 350 Bleecker Street Apt. Corp., 327 F.3d 197 (2d Cir. 4/23/2003) dealt with the termination of sweetheart lease deals. Once this sponsor’s number of units fell below a certain percentage, the cooperative had a two-year window to terminate his lease deal. (This had been fixed at the time of conversion.) The court threw out the co-op’s right to terminate since its notice fell after this date. This is interesting because the court interpreted a statute that was written for the benefit of the cooperative in a way that is basically a trap for the unwary.

DOGS
What would an article on significant co-op and condo cases be without any reference to dogs? In Olympic Tower Condominium v. Cocoziello, 761 NYS2d 179 (1st Dept. 6/19/2003), the court found the condominium was not entitled to a preliminary injunction prohibiting dogs without showing they constituted a physical danger - The alleged soiling of common areas was insufficient. And in Kips Bay Towers Condominium v. Megibow, NYLJ, 7/16/2003, p.19, c.6 (Sup. Ct. NY Co.), the condominium’s action against a unit owner was found to be governed by the New York City Pet Law. The triable issue was whether the condominium had knowledge of the dog more than three months before starting the action.