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Council of New York Cooperatives & Condominiums
CNYC Newsletter
CNYC
Court Cases: Significant Legal Decisions of 2002

Published: Winter 2003

CNYC president Marc J. 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 as part of their responsibilities. At CNYC’s 22nd annual Housing Conference in November, 2002, Mr. Luxemburg presented his annual review of the year's Significant Legal Decisions. The article that follows features highlighted cases from this seminar. To review previous decisions he has discussed, please visit our archive.

OBJECTIONABLE CONDUCT
What is a board to do with a difficult shareholder whose behavior only gets worse with time? That was the focus of 40 West 67th Street v. Pullman 742 NYS2s 264 (1st Dept. 15/23/02), one of the more controversial cases of the past year.

The defendant was accused of "objectionable conduct" by his fellow shareholders, who asserted a long list of offenses by Mr. Pullman. They claimed that from the time he moved in, Mr. Pullman began insisting that numerous changes be implemented to the building’s facilities and services. He started by requesting that the lobby mailboxes be replaced, a video camera be installed, and 24-hour door attendance be hired.

But it didn’t stop there. Soon Mr. Pullman began complaining about noise in the apartment above him. In 16 written complaints to the managing agent sent in October 1999, Mr. Pullman claimed that there was a banging noise emanating from above that kept him up at night. He accused the residents in the apartment above of housing a commercial bookbinding business. The upstairs neighbors were, the board found, a retired college professor and his wife with no bookbinding business. Mr. Pullman insisted that they operated their stereo and television at high decibel levels, and, in an affidavit in yet another action, he stated that the prior lessees of his apartment had also complained about the apartment above. The board investigated Mr. Pullman’s claims and found them to be unsubstantiated.

In the course of the year 2000, Mr. Pullman instituted four lawsuits – two against his upstairs neighbors, the first for noise and nuisance and the second seeking an injunction. His third action was against the cooperative president, alleging a breach of fiduciary duty for not stopping the noise. The fourth was against the managing agent for allowing breaches of the warranty of habitability relating to the noise. Mr. Pullman also attempted to start two other lawsuits with orders to show cause, but the Court refused to sign the orders.

Mr. Pullman circulated leaflets to the other shareholders, as well. In one, he claimed that the upstairs neighbor should be evicted because, he said, the neighbor "had the makings of a psychopath". During this time, the board sent Mr. Pullman a letter saying he had violated the proprietary lease by renovating his kitchen, installing soundproofing inside his windows and employing a construction worker on a Sunday, all without board consent. Mr. Pullman ignored all these claims and refused to allow an inspection of his apartment.

A special meeting of shareholders was convened on June 27, 2000, to discuss Mr. Pullman’s conduct, and to determine whether it was considered "objectionable" within the meaning of the proprietary lease. Like most proprietary leases, theirs included a provision allowing shareholder’s lease to be terminated for "objectionable conduct" by vote of a supermajority of all outstanding shares. All those who attended this meeting (75% of the shareholders) voted in favor of terminating Mr. Pullman’s proprietary lease. Mr. Pullman had been invited to defend himself, but he declined to attend.

The crucial question considered by the Court was whether a trial had to be held to determine the truth of all these allegations and counter-allegations before eviction could be pursued.

The Court found that the business judgment rule rendered a trial on the truth of the allegations unnecessary, because there was no allegation that the board's decisions were made in bad faith or in violation of the other protective standards of the business judgment rule. The Court upheld the vote of the shareholders, stating that Mr. Pullman had not provided any evidence for his allegations that he was evicted based on illegal or impermissible considerations. Although the Court found that under the business judgment rule the determination of the board was binding on Mr. Pullman, the Court also seemed to conclude that on the facts presented, Mr. Pullman was the objectionable party.

It should be noted that this cooperative patiently exercised all of its responsibilities in dealing with the extreme conduct of Mr. Pullman: 1) his various complaints were investigated; 2) notices advised him of his violations of building rules and tried to bring him into compliance; 3) when this failed, a meeting of shareholders was called, where he was invited to defend his conduct, and; 4) the requisite 2/3 supermajority vote for termination of his proprietary lease was obtained. Actions that will result in the eviction of shareholders are quite serious and should not be taken lightly.

TRANSFER ISSUES
Two cases in 2002 highlighted ongoing and diverse issues surrounding apartment transfers. In Wiener v. 150 West End Owners Corp., 2002 WL 31249545 (A.D. 2d Dept. 10/7/2002), the Court determined that the managing agent had not acted improperly by withholding consent to the transfer of a foreclosed unit. The corporate documents stated that consent of the managing agent was necessary for such a transfer. Mr. Wiener, a sponsor/investor had purchased the unit at auction, intending not to live there but to sublet. Had management routinely consented to this sale, this cooperative, which was still almost 50% sponsor owned, would have increased, not decreased, the percentage of apartments that were not occupied by shareholders. The managing agent deemed that this would not have been in the best interest of the cooperative in terms of operations or financial well-being, and that the plaintiff’s stated intention to sublet the apartment violated the board’s policy against selling to non-resident owners.

Mr. Wiener complained that the managing agent had consulted with the co-op's attorney in coming to that conclusion. But the Court found there was no prohibition against the managing agent consulting with the cooperative or with the cooperative’s counsel concerning what kind of policy to follow.
In Seif v. 72 Horatio Street Owners Corp, NYLJ, 2/6/2002, p. 18, c. 5 (Sup. Ct. NY Co.), the Court dealt with the effect of a transfer fee in a small (8-unit) cooperative. On March 29, 2000, less than two months after the death of a shareholder, the remaining seven shareholders held a special meeting in which they voted to impose a transfer fee of 3% of the sales price exclusively on the sale of apartments belonging to deceased shareholders. Of course, there was only one at the time; given that this was an eight-unit cooperative, the likelihood of another shareholder death in the immediate future was slim.

When this was challenged, the Court found that there were problems with the imposed transfer fee. First, the executors of the estate were not invited to the meeting. Thus the meeting was invalid, and the transfer fee had not been properly adopted. The more significant point was that the Court then considered the fee on the merits, and said that the majority shareholders – the people who have the power and authority to direct and control the affairs of a cooperative – have a fiduciary duty to all shareholders to adhere to a code of conduct requiring that all shareholders be treated equally. If the shareholders had enacted a transfer fee that was applicable only to the estate of any shareholder who subsequently died, it is possible that the action might have been lawful. But in this instance, enacting the fee targeting a specific estate right after the shareholder died fell right within one of the exceptions to the business judgment rule – specifically trying to harm a particular shareholder.

SPONSORS' DUTY TO SELL
One of the most publicized and talked-about cases of 2002 was 511 W 232nd Owners Corp v. Jennifer Realty Co. ( 746 NYS 2d 131 (Ct. Apps. 6/10/2002), which involved a sponsor's obligation to sell apartments. This sponsor converted the building to a cooperative in the late 1980s, sold 25 apartments out of 66, and essentially stopped selling around 1990. According to the shareholders, this perpetuated a litany of problems that arise out of a situation where less than 50 percent of the apartments are sold. The Appellate Division held that the sponsor had a duty to sell all of the units in a reasonable period of time.

Jennifer Realty appealed, and The Court of Appeals, remanding the case to the Appellate Division, upheld the shareholders' claim: that the offering plan required that the sponsor had an obligation, at the very least, to sell a sufficient number of shares in a timely manner so as to create a "viable cooperative". The Court stated this was a valid cause of action.

One remarkable element of the Jennifer case is that three of the terms used in the case remained undefined by the Court: 1) "timely manner", 2) "sufficient number of shares", and 3) "viable cooperative". Nor did the Court deal with the applicability of this situation to "holders of unsold shares" who were not sponsors. In effect, the Court held that the shareholders had the right to proceed with their case, and, at some future point these ambiguities would likely be resolved.

We are not aware of any prior case, statute or document that uses the phrase "viable cooperative", and would thus help define the term. And, while it is possible to infer through reading the decision what the Court may have meant, the Court did not expressly define it.

The bottom line in the Jennifer case is that the Court of Appeals was feeling its way into a new area, and declined to set a more definitive rule. It opted instead to place the case before a trial Court for the issues to be considered in greater detail than available to an appellate Court before trial.

For more information on the Jennifer case, see the Archive section.. Click here for CNYC’s position paper on what makes a cooperative or condominium "viable".

 
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