Publication Date: Winter 2000

Significant Cases of 1999

Marc J. Luxemburg, Esq. is president of the Council of New York Cooperatives & Condominiums. Each year at the Housing Conference, Mr. Luxemburg presents a workshop reviewing the most significant legal issues of the year. Reviewed below are three key cases which he discussed at that seminar. On several fronts, 1999 proved to be a good year for New York cooperative and condominium boards. As seen in the selection of cases below, various rights and powers given to boards in dispensing their duties were upheld or re-enforced by the courts.

BCL SECTION 501 CHALLENGE
YEAR'S MOST SIGNIFICANT CASE
Ever since the decision in the case of Wapnick v. The Seven Park Ave. Corp., 658 NYS2d 604 (1st Dept. 1997), courts have looked to Section 501 of the Business Corporation Law as a standard for judging the fiduciary duties of cooperative boards. Section 501 states that all shares of the same class entitle the holders of those shares to the same rights. The rights in question include the right to the distribution of dividends, voting rights and the right to liquidation of their shares.

The upshot of the Wapnick case, however, was that the court confused the distinction between share rights and proprietary lease rights. The court basically said that all rights that accrue from the proprietary lease must be equal for every shareholder-- or, simply stated, that the rights of all shareholders are equal. The statute did not necessarily intend this type of conclusion.

In Susser v. 200 East 36th Street Owners Corp., 692 NYS2d 334 (1st Dept. 6/22/99), this interpretation of BCL Section 501 was revisited-- with more favorable results for boards. Susser, a shareholder, sublet his apartment. The board allowed the sublet, and assessed a sublet fee, but the board later declared that there would be a limit on the time an apartment could be sublet in the building, and Susser had exceeded the limit. Only the building's sponsor could continue to sublet apartments for a longer period. By continuing to sublet, the board said, Susser was violating the rules. Susser brought the matter to court, claiming he was discriminated against. He said the board had imposed a discriminatory scheme by allowing the building's sponsor to sublet while giving all other shareholders lesser rights. This, he asserted, violated BCL Section 501C.

The court said that the sponsor's exemption from sublet restrictions was permissibly imposed on the board in the offering plan, so it was not part of a board scheme. In addition, the court found that the exemption was justified by the obligations that were imposed on the sponsor (by the Attorney General's requirements for sponsors)-- obligations which were not shared by the other shareholders. The court said it saw no basis to conclude that there had been unequal treatment under Section 501C. The court added that the challenged restrictions on subletting serve numerous legitimate ends for cooperatives. For instance, it said, they promote the residential nature of co-ops and they facilitate access to financing. The court concluded that it is not consistent with the intent of Section 501C to try to strip the co-op of this managerial imperative.

At first blush, this sounds like a good decision for cooperatives. But it could have been better. We must consider that Section 501C, as this court has interpreted it, now says that all shareholders are treated equally- unless they're sponsors. This leads the interpretation of Section 501 into dangerous intellectual ground, which is why CNYC submitted an amicus curiae in this case, asserting that the concept of using Section 501 as a standard of fiduciary duty is wrong. The law never intended to promote a general standard of fiduciary conduct with an exception on behalf of sponsors.

REJECTED PURCHASERS CANNOT RELY ON PARAGRAPH 17
The proprietary lease is a complex document, and claims and defenses of all description have arisen from the nooks and crannies that can be found in most leases. Such was the case in Pober v. Columbia 160 Apts. Corp., 1998 WL 998070 (1st Dept. 11/4/99), in which an apartment purchaser asserted that he had rights under a proprietary lease clause intended to protect lenders.

The paragraph in question, number 17B, C, or D (depending on how the lease was written), purports to give extensive rights to banks to transfer defaulted units. This sounds like it is good for banks, and not so good for boards. But, in practice, most banks do not rely on the rights granted to them under paragraph 17.

However, every so often, purchasers from banks and private investors do invoke this clause-- which was the situation in Pober. In the case, Independence Savings Bank found a purchaser for a defaulted unit, but the purchaser was turned down by the cooperative board. The denied purchaser claimed he had rights to circumvent board approval under paragraph 17B (of that particular co-op's lease). The court had a different view. It said for starters that the prospective purchaser was not a party to the proprietary lease. It added that the rights under paragraph 17B belong only to the bank, and that the board had every right to interview and decide whether to approve the purchaser. The plaintiff also claimed that Independence Savings Bank had breached its contract of sale and that the breach had been tortuously induced, which the court rejected.

The decision was a victory for boards. Among all the complexities found in a proprietary lease, at least this one cannot be used by a rejected purchaser.

CONDOS NOT FREE FROM SUBLET RESTRICTIONS
In Four Brothers Homes at Heartland Condominium II v. Gerbino, 691 NYS2d 114 (2d Dept. 6/1/99), the bylaws contained a provision-- unusual for a condominium--: that only owners could live in the homes and that the homes could not be leased. An owner argued that the prohibition was a significant restraint on homeowners to fully alienate their property, and that this restraint was unreasonable.The court dismissed this argument, noting that in choosing to purchase a home in a condominium the owner gave up certain rights and privileges, and that this condominium's prohibition on subletting was not unreasonable. The court said here that the condominium could act exactly like a cooperative. This is not a matter of law, but it instead depends on how the offering plan was drafted. And offering plans can be drafted or amended to make a condominium exactly like a cooperative in terms of the rules that are enforced.