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.
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.
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.
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
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
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.