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
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
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
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
CONDOS NOT FREE FROM SUBLET
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.