Published: Winter 1998

MAJOR DECISIONS OF 1997
OFFER SERIOUS LESSONS FOR BOARDS

Marc Luxemburg, president of the Council of New York Cooperatives & Condominiums, is an attorney specializing in cooperative and condominium law. In each issue of the CNYC Newsletter, Mr. Luxemburg reviews recent court cases. At CNYC's annual Cooperative Housing Conference, he presents a workshop on that year's significant legal decisions.

The following is a look at court decisions that made headlines, or merely made waves, in 1997. All had an impact on the law as it applies to cooperatives and condominiums.

DIRECTORS LIABLE FOR RACIAL DISCRIMINATION
Can individual directors be held responsible for a discriminatory board decision? In the much-publicized case of Broome v. Biondi, 1997 WL 691421 (USDC SDNY 11/5/97), the answer was a resounding yes.

The plaintiffs, an interracial couple, applied to sublet an apartment in a cooperative. They were invited for an initial interview with the committee that was considering their sublet application. A board member on the committee mentioned to another that the male applicant was black, and the second director wrote the word "black" at the top of his notes. Then, one of these directors told the shareholder who owned the unit that he felt better about the process because the wife was white, while the other board member confided to the board president that he was uneasy. The president replied that if they rejected a black applicant, "we're going to be sued." At a second interview before the entire board, someone asked the plaintiffs if they were going to sue because they felt they were racially discriminated against in the application process.

This fact-pattern is a textbook lesson in what NOT to do, and the applicants, both of whom were attorneys, did sue, alleging racial discrimination. The shareholder of the unit also joined the case. In its defense, the board said that it perceived the plaintiffs as confrontational and litigious, and felt that the sublettor was trying to intimidate them into accepting the subtenants by raising charges of racism.

The court advised the jury to consider a number of things. First, that boards of directors must judge applicants based on uniform standards. Accusing someone of appearing to be litigious is not a good defense in a discrimination suit. Second, the board did not follow its normal procedure in interviewing these applicants. It was not usual practice in this cooperative to have applicants face a second interview before the full board. Finally, the court noted that only two people on the board had said anything that could be construed as discriminatory. There was no direct evidence that the other board members said or did anything that indicated discrimination against African-Americans. In addition, the offending statements were not made at board meetings.

The jury found the board culpable, but the two vocally discriminatory members more culpable than the rest. It assessed liability against the corporation, against all the board members in their official capacities and against the two board members in their personal capacities. The jury awarded $235,000 in compensatory damages and $410,000 in punitive damages to the applicants, plus liability to the apartment owner of $100,000 in compensatory damages and $50,000 in punitive damages.

The lesson here is a difficult one for boards. It may be impossible to control the biases and opinions of others, but a wise board helps its directors learn their responsibilities by providing orientation sessions or insisting they attend courses provided by CNYC (see pages 16 and 17 for listings) or other competent educators. Service on the admissions committee should be limited to seasoned board members or well-briefed individuals who understand their responsibilities.

Furthermore, directors should constantly watch for evidence of any individual board members committing acts that could be construed as discriminatory (or otherwise inappropriate). If you identify such a catastrophe unfolding, the board should take immediate action. Consult your professionals for advice on the specific incident, but, at the very least, the other board members should clearly state on the record that they object to the actions and statements of the individual or individuals, and that these statements or actions do not reflect the opinions of the entire board. Race, religion, natural origin, handicap status, sex, sexual orientation and age are all topics that may not enter the review process.

BOARD OFFICERS FACE
CRIMINAL PROSECUTION
OVER WINDOW GUARDS
In one of the most publicized court decisions of the year, People v. Premier House, Inc., 1997 WL613337 (Crim. Ct. Kings Co. 9/8/97). a court addressed the question of whether corporate officers may be held criminally liable for failure to comply with the New York City window-guard law. CNYC discussed this case in the Autumn 1997 issue of this Newsletter (the article is available on the CNYC Website at www.cnyc.coop), and has pledged to seek protection from criminal charges for volunteers who are officers of cooperative and condominium boards. Assemblymembers Jeff Durowitz and Ivan Lafayette and State Senator Frank Padavan have introduced A8891/ S5999 to this effect (see Legislative Priorities for 1998).

AN APPLICANT'S RIGHT TO SUE
In 1996, there had been a number of cases confirming the right of prospective purchasers to sue boards under the terms of the proprietary lease after they had been rejected. That trend has been reversed in the case of GSG Holdings, Inc. v. Multi Boro Realty Corp., 658 NYS2d 271 (App. Div. 1st Dept. 6/3/97). Here the court said that if a board turns down a prospective purchaser, the purchaser has no right to sue under the proprietary lease. Why? As a candidate to purchase an apartment and not as an owner, the prospective purchaser is not a party to the proprietary lease.
This case highlights the shortcomings of last year's decisions. It stands to reason that a prospective purchaser has no right under the agreement, and therefore the board can't breach a duty outside the agreement. True, the prospective purchaser is a party to the contract of sale, but that contract is subject to the board's consent as a condition of closing.

BUYER BEWARE, REVISITED
Several years ago, the co-op at 650 Park Avenue was successfully sued by a shareholder who said the elevator in the garage next door, which abutted the building, was a nuisance. Last year, in the case of Root v. 650 Park Avenue Corp., NYLJ 3/20/97, p. 27, c. 4 (Sup. Ct. NY Co.), a subsequent purchaser of the same apartment again sued because of the noise. Yet rather than deciding that the elevator's rumble was the co-op's responsibility, as had been the outcome of the first case, this time the court had a much different opinion.

In the Root case, the co-op argued that the most recent inhabitant of the apartment had bought it on an "as is" basis, and had been given an opportunity to inspect the unit before deciding to purchase it. The court agreed, while also observing that the owner did not start complaining about the noise until she went to sell the apartment and found she could not get her asking price.

ABORTED AUCTION CASES
For years, attorneys have been at odds over the correct way to handle non-payment by shareholders. Many say that the best way to proceed is, as soon as the shareholder goes into arrears, the cooperative should serve a notice of default, followed by a notice of termination, followed by a notice of auction, after which the apartment is sold at auction. The courts, they say, need never be involved. Others contend that a cooperative cannot auction off an apartment without a court order.

But in cases decided in 1997, it became very clear that the courts do, indeed, need to be part of the process.

In Parker v. 304 East 73rd Street Corp., 661 NYS2d 1 (App. Div. 1st Dept. 7/10/97), Parker, the sponsor, owned 35% of the building's apartments. When he went into default on many of those units, the co-op sent him this series of non-payment notices. When Parker ignored the notices, the co-op started the process of auctioning his apartments. The default had occurred in 1993 or 1994, but by 1997 the matter had still not been resolved.

In July 1997, the appellate court noted that the co-op's sending a notice to auction was "precipitous and extrajudiciary". It stated that the co-op did not provide Parker with a proper notice to cure. The court said the co-op had erred when it unilaterally decided to begin auctioning Parker's units, and decided that the co-op was not entitled to begin an auction until all underlying circumstances of the case had been resolved.

There was one bright spot in this case, however. In 1993, a court had held that the co-op could not collect rents on the units for which the sponsor was in default. But the appellate court last year reversed that opinion, allowing the co-op to collect rents directly from the tenants as the proceedings unfolded.
In another non-payment case decided last year, Berman v. 300 W. 108 Owners Corp. NYLJ, 3/19/97, p. 25, c. 2 (Sup. Ct. NY Co.), a shareholder refused to pay maintenance because, he said, persistent dampness in his apartment breached the co-op's warranty of habitability. The co-op proceeded with the string of non-payment notices and then attempted to auction the apartment for $13,000 worth of alleged arrears.

The co-op's attorney chose the novel approach of arguing that the co-op was not seeking to auction the apartment under the Uniform Commercial Code, which is a remedy that seizes personal property, but that the auction was pursuant to the lien law -- a rarely-invoked law that permits the placing of a mechanic's lien on the property for non-payment. This was an interesting idea, but one that did not work, perhaps because the co-op had not properly served notice pursuant to the lien law, and so did not qualify. Nor, said the court, was there a lien.

Previous court decisions have held that the proprietary lease is not a security interest under the UCC, which is why you cannot have a UCC auction of a co-op apartment. But if the proprietary lease is not a security interest, then it's equally not a lien. The lien law requires that there be personal property involved and that the lienor have personal possession of it.

Most importantly in this case, the court went on to say that co-ops cannot divest shareholders of their ownership interests in their apartments without judicial determination of equitable defenses or counterclaims. That means that you if you want to get a shareholder out on non-payment, you have to go into court and get a judgment.