Published: Summer 1997

Cooperatives and condominiums are taking an active stand to defend their rights. As the following cases show, timely assertion of these rights can often bring success.

CNYC thanks Marc J. Luxemburg, president of CNYC, for the following article,which highlights recent cases addressing matters of importance to cooperatives and condominiums.

Co-op Challenges Insurance Disclaimer

In recent years it has become more and more common for insurance carriers to disclaim with respect to defense of lawsuits brought against cooperatives. It often seems to be the case that the smaller the claim, the more likely the insurance carrier is to disclaim any responsibility (possibly on the theory that if the claim is too small, it does not pay for the cooperative to sue the carrier). Many of these disclaimers involve highly questionable interpretations of the insurance policy. In Gardens West Tenants Corp. v. Nationwide Mutual Ins. Co., NYLJ, 6/19/97, p. 35, c. 2 (App. Div. 2nd Dept.), the issue posed was whether the cooperative's directors and officers liability policy covered the defense of a suit based on the alleged retaliatory firing of an employee who claimed to have been a "whistle-blower".

The cooperative did not take the disclaimer lying down, and brought suit. The policy covered "wrongful acts",` which included any negligent act or breach of duty on the part of the directors. The claimant against the cooperative alleged that he had been fired for notifying the authorities that there was asbestos on the plaintiff's premises, and claimed that his dismissal was in violation of §740 of the Labor Law which protects "whistle blowers". The insurance carrier disclaimed liability and refused to defend on the ground that the complaint alleged an intentional tort, and not a "wrongful act" as defined in the policy.

The court found that although the policy contained at least 13 specific exclusions from liability, none of the exclusions included retaliatory personnel claims. The court found that the language of the insurance policy must be given its ordinary meaning. The test applied is what the average person believes is covered. Since the coverage for "breach of duty" was separate from the coverage of "negligent act", the cooperative was granted summary judgment, and the insurance carrier was compelled to defend and indemnify the cooperative in the underlying action.

In Grinell HDFC v McLain - James, 658 NYS 2nd 33 (App. Div. 1st Dept. June 10, 1997), the defendant had failed to provide the cooperative with access to her apartment to make repairs and had failed to pay maintenance for ten years. The Supreme Court granted an injunction directing her to give access to the cooperative, pay maintenance on a continuing basis, and make a deposit of approximately $87,000.00 in arrears to the court. The Appellate Division affirmed the requirement for giving access, based on the deteriorating condition of the apartment, and affirmed the requirement that maintenance be paid on a current basis based on the terms of the proprietary lease, however the court reversed the requirement of the maintenance deposit because there were unresolved issues of fact, and the failure of the plaintiff to take any action to collect maintenance for 10 years cast suspicion upon the bona fides of the cause of action. The subject of paying maintenance into court during the pendancy of an action is a topic that has been much discussed recently and was the subject of part of the recent legislation renewing the rent laws, and will be discussed in a future issue of this Newsletter.

In Collins v. Douglas Elliman-Gibbons and Ives, Inc., NYLJ, 5/7/97, P 29, C 4 (Sup Ct. NY Co.) a cooperative was required to pay $146,000 to the Long Island Savings Bank because it transferred an apartment without ascertaining whether the shares and proprietary lease had been pledged. It appears that when the selling shareholder had purchased the apartment in 1985, the cooperative had entered into a recognition agreement with the bank, which granted them a mortgage. But intervening changes of managing agents had caused the original file to be lost. At the closing, the selling shareholder did not produce the original proprietary lease or shares, but signed an affidavit saying that the shares had been lost and had not been pledged. When the selling shareholder stopped making mortgage payments to the bank, the bank threatened to reclaim the apartment, and the new purchaser brought suit against the cooperative to protect its interest.

The court awarded judgment to the bank against the cooperative because the cooperative had violated the terms of the recognition agreement, which provided that the cooperative would not permit a transfer of the shares without the bank's consent. The cooperative's defense that the recognition agreement did not render it liable was dismissed and judgment was awarded to the bank. The cooperative's cross-claim against the managing agent has not yet been determined. It is evident that if the selling shareholder shows up at a closing without the original proprietary lease or shares, the cooperative can not permit the transfer simply on an affidavit of lost shares without further investigation. Counsel should always be consulted in such circumstances.

Finally, Callas v. Vastola, NYLJ, 8/6/97, P 22, C 5 (Sup. Ct. NY Co.) involved another interpretation of the rights of the sponsor after more than five years from the original closing. In this case, even though five years had elapsed, the sponsor continued to own a majority of the shares.

The offering plan and the cooperative bylaws provided that sponsor would surrender "control" or "voting control" of the board of directors on and after the fifth anniversary of the closing. The year before the election, at which he was to relinquish control of the board, the sponsor sold an apartment to the defendant, Mr. Vastola, and gave him a nonrecourse loan. It also appears that Mr. Vastola and the sponsor previously had a business relationship with each other. Mr. Vastola bought the apartment as an investment, and did not personally reside in the apartment.

At the annual meeting, the sponsor, as the plan provided, designated three members of the board, and the shareholders nominated four people, Mr. Vastola nominated himself. The sponsor voted its shares for three of the shareholder nominees, plus Mr. Vastola, who was elected since the sponsor held a majority of shares. The resident shareholders objected to the election on the grounds that by reason of the business connection between Mr. Vastola and the sponsor, and the fact that Mr. Vastola was elected with the sponsor's vote, the sponsor had in fact controlled the board.

The court found that the language of the bylaws did not cause the sponsor to give up its right to vote its shares for all seven seats, and that the plan does not state that the sponsor may only participate in the formulation of the board by designating its three board members. The court found that the such a limitation would in any event be barred by Business Corporation Law §612(a), which requires that a deprivation of voting rights may only be accomplished through a provision in the certificate of incorporation.

The sponsor's agreement not to exercise control does not prevent the sponsor from voting for a director as long as such director is not on the Sponsor's payroll. The cooperative's motion for a preliminary injunction setting aside the election was denied because the court found that there was insufficient evidence that Mr. Vastola received a salary or remuneration from the sponsor. However, on the other side of the coin, the court found that there were sufficient allegations in the complaint to allow discovery on this issue, and therefore allowed the complaint to stand and the action to proceed.