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Legal Issues

Publication Date: Winter 1999

CNYC thanks Marc J. Luxemburg, Esq., for this column. A partner in the law firm of Snow Becker Krauss, Mr. Luxemburg was a founder of CNYC and serves as its president. His workshop discussing legal decisions of the prior year is featured at each year's Cooperative Housing Conference.


LEGAL DECISIONS OF 1998:
A Good Year for Co-ops & Condos

According to Mr. Luxemburg, 1998 was without significant headline events in co-op and condo litigation -- which is significant, he says, because "when there's big news about co-ops and condos, it's not always good news." That's not to say the year was devoid of interesting cases. The following highlights some of the court decisions of 1998 which Mr. Luxemburg reviewed in his Conference Workshop:

LIABILITY OF DIRECTORS
Biondi v. Beekman Hill House Apartment Corp., NYLJ 8/26/98, p. 22, c. 3, arises out of one of the most highly publicized cases of 1997, Broome v. Biondi, 1997 WL 691421 (USDC SDNY 11/5/97). In Broome, the co-op and its directors were found liable in federal court for punitive damages for discrimination against a racially mixed couple who sought to sublet in the building. In this latest installment, the board president, Mr. Biondi, sued the co-op in state court to be indemnified for what he had to pay out as damages and attorney's fees in the previous federal case.

The co-op opposed the indemnification and claimed the State did not have jurisdiction because Biondi failed to set forth a reasonable cause for not seeking the indemnification in the federal court action. Beekman maintained that Biondi was engaging in "impermissible forum-shopping" to avoid being swept up in the anti-board sentiment of the judge in the federal trial.

The state court found that the bylaws granted Biondi indemnification under several categories, and that the Business Corporation Law (BCL) states that the fact that a director has been found liable does not create a presumption that the director did not act in good faith. Therefore, his action against the co-op for indemnification was only a question of whether he acted in what he believed to be the best interest of the co-op - even thought the action had already been found to constitute a tort against the other parties. The state court ruled that Biondi was entitled to seek reimbursement of compensatory damages and attorney's fees, but not punitive damages.

In Adelstein v. Waterview Towers, Inc. 673 N.Y.S2d 465 (2d Dept. 5/26/98), after a shareholder's wife was murdered by another shareholder in the accused killer's apartment, the husband brought a wrongful death action against the directors and the admissions committee for allowing the alleged killer to purchase in the building. But this case was thrown out on a preliminary motion, with the court stating that the law does not impose a duty to prevent third parties from injuring others - unless the co-op has the ability to control the third party's conduct, or unless the action was foreseeable.

These two tests have their ambiguities. For example, if the admissions committee had recommended allowing a paroled criminal to purchase an apartment, could it be held responsible because it could have foreseen a future crime? Or, if a building employee committed a murder, could the board be held responsible because it had the ability to control the employee's conduct? These issues have not been litigated.

THE CO-OP PROPRIETARY LEASE
Schachter v. Lefrak, 223 Bankruptcy Dec. 431 (USBC SDNY 8/14/98) was a bankruptcy case that raised the issue of whether a co-op proprietary lease must be rejected or accepted in a bankruptcy filing. Under Section 365d of the Bankruptcy Code, "a trustee must assume or reject unexpired leases within 60 days of the order for relief. If he fails to do so, the lease will be deemed rejected". That means the rights of the shareholder under the lease will terminate.

The question to the court was whether a proprietary lease can be defined as a lease under Section 365d. The judge, proceeding on the grounds that Section 365d only applies to "true" or "bona fide" leases, noted that New York treats tenant-shareholders as lessees for some purposes and as real property owners for others, as determined on a case-by-case basis. The judge assessed whether the lease created a landlord-tenant relationship, or instead conferred the benefits and rewards of homeownership. While a lessee does not fund the landlord's acquisition of the building, has a relatively short lease, pays a fixed rent, and does not acquire an asset he can pledge or sell, a proprietary lessee has many of the rights and responsibilities of someone who buys a house.

The judge concluded that a proprietary lease is not a true lease under Section 365d. So, there was no need to accept or reject the lease within 60 days; the proprietary lease, by its special nature, remains in force.

TRANSFERS & SUBLETS
In Levine v. Yokell, NYLJ, 1/14/98, p. 26, c. 5 (Sup. Ct. N.Y. Co.) a prospective purchaser of a cooperative apartment sued the cooperative, its individual directors and the managing agent, claiming that the defendants wrongfully denied his application to purchase, on the alleged ground that they believed the purchase price was too low and would devalue their own apartments. In a previous decision, the court had dismissed the action as against the cooperative and its managing agent.

The present motion concerned the claims against the individual directors. Several causes of action alleged tortious interference with the contract to purchase on the theory that the board members were acting in self-interest because the low purchase price would negatively affect their own apartments.

The court held that this did not state a basis for tortious interference. Assuming that the economic considerations alleged were the basis for the rejection, tortious interference requires an unjustified intent to harm, and an economic motive was inconsistent with such requirement. In addition, since the plaintiff was never a shareholder, the individual defendants did not owe any duty to act in good faith. Accordingly, the complaint was dismissed as against the directors.

REPAIRS
In Weiner v. State Farm Fire & Casualty Co., NYLJ, 6/17/98, p.31, c.1 (Civ. Ct. NY Co.), a pipe burst inside of a wall, causing a flood in an shareholder's apartment. The co-op's and the shareholder's insurance companies battled it out. This could have gone any number of ways, because the issue of "who is supposed to repair what" is one of the most heavily debated topics in co-op law.

However, the court reached what can be considered to be an intelligent and equitable decision: The co-op's insuror was required to pay for the replacement of the floor, while the shareholder's insuror was required to pay for refinishing and resurfacing the floor. This decision appears to reflect the intention of the proprietary lease, which puts matters of building repairs into the board's hands. The decision affirms that the board's judgment as to what it takes to repair the building shall not be decided by a court.

APPURTENANT SPACE IN BUILDINGS
In 1050 Fifth Avenue, Inc. v. May, 668 N.Y.S. 2d 600 (1st Dept. 3/19/98), a woman had used a terrace for 30 years when a dispute arose over her right to use the terrace. Tucked away in the language of the proprietary lease -- and most proprietary leases – is a clause that said that use of facilities is based on a "revocable license". As a result, the woman's history of using the terrace did not constitute proof of her right to use the space, and that privilege was taken away.

In a similar case, Mirandi v. The 210 West 19th Street Condominium, 669 N.Y.S. 2d 592 (1st Dept. 3/12/98), the bylaws said that anybody who had an exclusive access to a space -- in this case a ground floor unit with a backyard area -- had an exclusive right to use it. In addition, the managing agent had signed an agreement stating that the apartment owner did have exclusive use.

However, a fire escape egress went into this area, as did an exterior doorway to the laundry room. The court said that since these were part of the space, the shareholder did not have the exclusive right to be in there, so it was not his private yard.

MANAGING AGENTS & EMPLOYEES
Hill v. Douglas Elliman-Gibbons & Ives, NYLJ, 10/16/98, p.28, c.3 (Sup. Ct. NY Co.), was an employment discrimination case brought against the managing agent and about 12 upper-income cooperatives. The complaint alleged that the plaintiff was "refused employment as a doorperson because she is an African-American woman." The co-op defendants said they did not know this woman and had never heard about her, and the managing agent did not give any reason why she was not selected for several doorperson positions.

The court refused to dismiss the case, finding that a jury must decide what the cooperative's responsibility was to direct management in such hiring matters. At a trial, the jury could find that the managing agent did discriminate, and it might also find the cooperative liable for discrimination by the managing agent in hiring decisions. This column will report on the outcome of the trial, if it takes place.

 
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