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Council of New York Cooperatives & Condominiums
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Legal Issues

Published: Summer 2001

CNYC thanks Marc J. Luxemburg for the following article. A founder and president of CNYC, Mr. Luxemburg is a partner in the New York law firm of Snow Becker Krauss. Each year he leads a workshop on Current Significant Legal Issues at CNYC's Housing Conference where he reviews recent court decisions that have particular significance for cooperatives and condominiums. Summarized below are some of the cases he discussed at CNYC's 20th annual Conference.

At CNYC's 21st annual Housing Conference on Sunday, November 11th, Mr. Luxemburg will review court decisions of the year 2001 that have importance for New York cooperatives and condominium. To register for his class, consult the Conference Brochure inserted opposite page 10 of this Newsletter.


ULTERIOR MOTIVES
In Kravtsov v. Thwaites Terrace House Owners Corp., 700 NYS2d 177 (1st Dept. 12/21/99)(a different Thwaites case from the one with I.R.C. Section 277 impact), there was a longstanding dispute over leaks in Mr. Kravtsov's apartment. The board decided that it was going to delay and then disapprove Mr. Kravtsov's application to sell his apartment in order to force a settlement of the dispute. The Appellate Division, First Department, which is the principle source of law for cooperatives, did not think that this tactic was proper.

Disapproving the transfer application in order to force a settlement or a discontinuance of the claim for water damage was an act of bad faith, the Court ruled. It denied Mr. Kravtsov's claims against individual directors, saying that the individual directors cannot be held liable for a breach of fiduciary duty unless there is an individual tort separate from the disapproval. It went on to say, however, that the corporation could itself be held liable. There was an issue of fact as to whether it would be liable for attempting to tie together the settlement of the water leak and the consent to the transfer.

BUSINESS JUDGMENT
The same court took a different tack in Sherry Associates v. The Sherry-Netherland, Inc., 708 NYS2d 105 (1st Dept. 6/1/00). The Sherry-Netherland is a split building that has hotel rooms along with owner-occupied cooperative units. There was ongoing tension between the hoteliers, who were looking to use the Sherry-Netherland for profit by renting out rooms, and the cooperative shareholders who were looking to live there. The hoteliers claimed that the board should have run the cooperative in a way that allowed the hotel to make more profit. The Court said that this was a matter of business judgment, and went on to say that there was a "strong presumption" that the corporation, controlled by resident shareholders, acted in good faith and in the interest of honest judgment. Cooperatives should take heart that courts would have a "strong presumption" that a board is acting in good faith.

REVOCATION OF CONSENT
In Whalen v. 50 Sutton Place South Owners, Inc., 714 NYS2d 269 (1st Dept. 10/17/00), the board signed an alteration agreement authorizing proposed work to be done in a shareholder's apartment. But, the day the work started, the board tried to revoke the alteration agreement, claiming that there was insufficient electrical capacity to allow the alteration to proceed. Mr. Whalen sued for breach of contract and the Court found in his favor.

In the decision, the Court rejected the Board's claim that this action was protected under the Business Judgment Rule. The Court stated, "We reject the claim that the co-op's decision to rescind the approval was not an impermissible breach of contract, but was a valid exercise of discretion protected by Business Judgment. [The shareholders] seek to enforce specific rights granted to them by the approved alteration agreement, and, while it may have been good business judgment to walk away from the contract, it's not a defense to the breach of contract claim, and therefore the question of whether the co-op had breached the alteration agreement by attempting to change its position after the work had started opened the co-op up to a claim of damages."

In this instance, the shareholders were forced to sell the apartment in a half-altered condition, which significantly decreased its sale value. The Court found a triable issue of fact as to what damages resulted from the co-op's breach of its agreement. The case was sent to trial to determine what the co-op must pay Mr. Whalen in damages. The lesson for boards: Changing your mind is not a good idea. When consent is requested, you have to be very careful to first think it all the way through. Once you consented to an alteration agreement or other contract, it is extremely inadvisable to try to pull back your consent.

PRESIDENTIAL POWER
Common practice says that decisions governing a cooperative are made by the Board acting as a body; the Board president has limited authority, and can only exercise the powers granted to him by the board. But Park River Owners Corp. v. Bangser Klein Rocca & Blum LLP, 703 NYS2d 465 (1st Dept. 2/24/00 proves an exception to this rule. In this case, there was a battle between the co-op and the sponsor. The Board president retained attorneys to bring a suit against the sponsor.

The sponsor, who had seats on the board, subsequently convinced three of the five members on the board to vote to fire the attorney, but the Court determined that the Board had no right to do this. The Court held that the president had presumptive authority to have instituted the action on the plaintiff's behalf and to have engaged counsel without formal authorization from the Board. The Court observed that there must be a majority vote of the board to fire the attorney, but that since the people who were voting to disengage the attorney had an interest in the case, their votes did not count here.

Thus, ruled the Court, the sponsor did not have a majority to terminate the attorney's authority to sue. This allowed the suit against the sponsor to continue, even though the suit was being brought essentially by the president.

DOGS AND BOARD NOTIFICATION
There has always been a question of how a co-op board needs to be notified of events that go on in the building. The New York City Pet Law, for example, allows people who 'openly harbor a pet' to keep that pet unless the building owner (the Board) notifies the pet owner within 90 days that the pet is not permitted. In a lot of dog cases, people seem to assume that if someone simply walks a dog in front of building staff, the board thereby officially "has knowledge" of the presence of the dog. But building personnel are not agents for the co-op for all purposes, and in Seward Park Housing Corp. v. Cohen, 705 NYS2d 875 (App. Term 1st Dept. 2/25/00), we finally have recognition of that fact.

The premises is a complex containing over 1,700 apartments. The plaintiff claimed that certain security personnel or members of the large maintenance staff observed him with a dog, and that this meant the board knew or should have known of the dog's presence. The suit was brought by the board within three months (90 days) of the time that the board says it did know about the dog, which is the allowable amount of time following such notice under the Pet Law. The Court ruled in the co-op's favor, stating that merely walking a dog past unidentified personnel does not constitute notice.

But the other side of the coin was seen in Beach Haven Apts #1 Inc. v. Cheseborough, NYLJ 8/30/00, p.25 c. 1 (Civ. Ct. K. Co.), Here, the dog owner claimed that the doorman, Keith, came over and petted the dog when the owner brought it into the building. The fact that the doorman petted the dog was notice to the board, the dog owner said, and that notice started the time running on the 90 days that the Board has to take action to have the dog removed.
The co-op did serve a default notice with 90 days of this notification, but did not commence litigation within that period. Under the Pet Law, some Courts have extended the 90-day period: 1) if the co-op tried negotiating in good faith to try to get the dog out, or 2) if it served a default notice within 90 days. But these exceptions are not reliable, and in Beach Haven the Court found the service of a default notice to be insufficient.

So prevalent and volatile are dog issues in housing cooperatives and condominiums that attorney Robert Tierman introduced a workshop entitled Dog Tales at CNYC's 20th annual Housing Conference in November of 2000. Mr. Tierman will offer this session again at the 21st annual Conference on Sunday, November 11th.

 
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