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Council of New York Cooperatives & Condominiums
CNYC Newsletter
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COURT CASES: THE BUSINESS JUDGMENT RULE

Published: Summer 2003

CNYC president Marc Luxemburg, Esq. is an attorney specializing in cooperative and condominium law. In each issue of the CNYC Newsletter he reviews recent court cases that have the potential to answer questions commonly faced by boards of directors as part of their responsibilities. At CNYC’s 23rd annual Housing Conference on Sunday, November 16, 2003, Mr. Luxemburg will again present his annual review of the year's Significant Legal Decisions. To review previous decisions he has discussed, please visit CNYC's World Wide Web Information Center at www.CNYC.coop.

In its recent decision in 40 West 67th Street Corp., v. Pullman, 2003 WL 21057407 (May 13, 2003), the Court of Appeals has again broken new ground in extending the reach of the Business Judgment Rule, the standard by which decisions of a board of directors of a cooperative or condominium are to be reviewed by the courts. In the Pullman case the Court found that a decision of a cooperative to evict a shareholder for objectionable conduct was generally not reviewable by the courts, and the board's decision itself served as competent evidence upon which a court could base an eviction, without having to litigate the details of the shareholder’s underlying conduct.
The facts in the Pullman case were extreme. Mr. Pullman, after having demanded changes in various building services, accused his elderly upstairs neighbors of make noise late at night, of running a loud and illegal bookbinding business, and of storing toxic chemicals in their apartment. Upon investigation, the board determined that there was no truth to any of those charges. There was next a physical altercation between the shareholder and his upstairs neighbor, following which the shareholder distributed allegedly libelous statements to all the other shareholders, wrote 16 letters of complaint in one month alone, and then started four lawsuits against various parties, including the president of the cooperative and the cooperative corporation, and tried to commence three more actions.
As a result of this conduct, his occupancy was terminated under the clause of the Proprietary Lease prohibiting objectionable conduct. This clause required that two-thirds of the Shareholders vote to terminate the Lease, which was done at special meeting of the shareholders which Mr. Pullman did not attend. The cooperative then sought to evict Mr. Pullman.
The Court held that the Business Judgment rule is applicable to the conduct of the cooperative, regardless of the nature of the legal proceeding in which the board’s determination is sought to be challenged, so long as the board acts (i) for the purposes of the cooperative, (ii) within the scope of its authority, and (iii) in good faith. The Court held that so long as the board did not engage in arbitrary or malicious decision-making, or unlawful discrimination, the courts should avoid undue court involvement and judicial second-guessing of board decisions.

The Court then examined the facts of the case carefully to see if these three standards were followed. The Court reviewed whether the board’s conduct was in the scope of its authority. It found that the requirements and procedures of the Proprietary Lease, including the calling of a special meeting and giving the defendant an opportunity to be heard were all carried out, and that the shareholder vote fulfilled the requirements for termination contained in the lease. With respect to corporate purpose, the Court determined that the shareholders properly found that Mr. Pullman’s behavior was excessive, and that the board was under a fiduciary duty to further the collective interests of the cooperative. The eviction had an obvious and legitimate relation to the cooperative’s purposes. Finally with respect to good faith, the Court found there was no evidence of any arbitrariness, favoritism, discrimination, or malice, and that the eviction would not result in a forfeiture of all of the shareholder’s rights.

While some apprehension has been expressed that this case could lead to widespread action by cooperatives to evict dissident or annoying shareholders, in practice it is likely to be applied in much narrower circumstances – only where it is clear that a shareholder’s conduct has been truly objectionable – not just a series of disagreements with the board.
However, as in all cases, there is language in the decision that could be read broadly as well as narrowly. In particular in this case the Court found that the form of the legal action is irrelevant as to the standard by which legitimacy of board action is to be measured – a statement in which the Court may be saying that the application of the Business Judgment Rule to a very wide range of corporate decisions would be in order, and that those decisions by themselves would be competent evidence in court – without a court determination of the underlying facts to allow the eviction of a shareholder. How this will play out with respect to ordinary non-payment or holdover proceedings – where a board determines to evict a Shareholder for, among other things, unlawful subletting or unauthorized alterations of the apartment, and whether the Court will accept the decision of the board that the shareholder has violated the proprietary lease, rather than conducting a trial of such merits of the issues, remains to be seen.

Another open question is how the Court’s analysis will be extended to a situation where the shareholder’s complaints, issues or disputes are legitimate.

What if a shareholder embarks on a deliberately annoying or disruptive course of conduct to further legitimate complaints about noise or leaks. It may well be that the Pullman analysis will be applied, and a shareholder vote to evict would be upheld. It appears that there will be a burden of proof placed on a shareholder to establish, in the shareholder's defense, that the board's action was, in the words of the Court, the product of "unlawful conduct, discrimination, vendetta, arbitrary decision-making or favoritism."
The ultimate lesson may be that grievances against the cooperative, its board, or other shareholders must be pursued in a civil manner, regardless of their validity.

 


 
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