Published: Spring 2018

CNYC president Marc J. Luxemburg is an attorney specializing in cooperative and condominium law. Each year at CNYC's annual Conference, he reviews dozens of recent court cases that have the potential to answer questions commonly faced by boards of cooperatives and condominiums as part of their responsibilities (or to create new questions for boards to ponder). Consider this article a preview of Mr. Luxemburg's three hour morning presentation at CNYC's 38th annual Conference on Sunday, November 11, 2018, for which CNYC applies annually to provide CLE credit to attorneys who attend. The Conference brochure will be posted in August on the CNYC website and will subsequently be mailed first to CNYC members and subscribers and then to non-affiliates who have expressed interest in possibly attending.

FINES FOR VIOLATION OF THE BY-LAWS

A pair of recent cases again delves in to the issue of the appropriate amount that a board can fine a unit owner for a violation of the rules or the by-laws.

FINES CAN'T BE UNREASONABLE OR CONFISCATORY
Although the decisions of a cooperative or condominium board are generally governed by the business judgment rule, the courts have found various ways to limit the application of the rule in specific cases. Particularly with respect to fines, the courts have created a standard that a fine can not be unreasonable or confiscatory. There is no statutory basis for this rule, nor is there any decision of the state's highest court, the Court of Appeals, authorizing a deviation from the business judgment rule in this area, but the lower courts have created this new standard nonetheless.

NO DEFINITION OR STANDARD
Although the business judgment rule has objective standards to measure whether a board's conduct is appropriate, namely the board must be acting in the best interest of the cooperative or condominium, and the action must not be designed to single out an owner for harmful conduct, the "unreasonable or confiscatory" rule evidently has no standard to measure when a fine is appropriate. Accordingly boards and practitioners have been left to guess how much of a fine will be upheld in any specific instance. Particularly with respect to the "confiscatory" standard, there is no definition of what interest is being confiscated, and very little as to what level of fine will be held to confiscate such interest.

RECENT CASES ADDRESSING FINE
Some light has been shed on this by the two recent cases. In Board of Managers of Downtown Club Condominium v. Sun, 2018 WL 1172599 (Sup.Ct. NY Cop. 3/6/18), the board sought an injunction for leasing out an apartment for periods of less than 30 days, and the sum of $2,000 for fines, and attorney's fees. The unit owner defaulted, and on an inquest the court found that the apartment had been rented on a short term basis on numerous occasions over the course of a year. The board had imposed two fines of $1,000 each for this conduct. The court granted the injunction and held that the amount of $2,000 fine was not unreasonable or confiscatory. One might say that such a fine for such conduct was at most a slap on the wrist.

STEEP FINE DEEMED CONFISCATORY
The second decision, Vidov v. Morton Square Condominium, 2018 WL 1558428 (Sup. Ct. NY Co. 3/30/18), also involved rental of a unit on a transient basis. The condominium imposed a fine of $119,000, representing $1,000 for each night that the unit had been used illegally. The fine was based on the amount the unit owner charged for the unit, namely $700 per night, plus $300 per night as a deterrent. Noting that a prior appellate case had found that a fine of $500 per night for violation of a guest policy was confiscatory, the court found that basing the fine on the amount the unit owner earned is the very definition of confiscation, annulled the fine, and said the burden was on the board to show that a smaller fine would not adequately deter the improper conduct.

WHAT TO CONCLUDE?
In summary, a slap on the wrist fine is acceptable, a fine intended to seriously deter the wrongful conduct by depriving the wrongdoer of the economic benefit of its illegal conduct is confiscatory. One is again constrained to ask exactly what interest it is that the courts are protecting against confiscation. In this case it appears the interest being protected is the making of an illegal profit. Perhaps the good news is that the door has apparently been opened for a board to justify a substantial fine on the basis that a smaller fine would not adequately deter the conduct sought to be prevented.