Since my column in June of this year, there have been some significant cooperative and condominium cases that have been given little publicity. The most interesting case, may be the West Gate House case which brings the infamous Jennifer Realty (sponsor divestiture) and Pullman (shareholder "objectionable conduct") doctrines together for the first time. In a few cases, the courts give the business judgment rule a good workout. In two cases, we learn more about the courts' views on board rulemaking and in another case, we learn what could happen if a contract is not drafted thoroughly.
The First Department's decision is less than one page long, but it is noteworthy in the continued battle between co-ops and sponsors who fail to divest themselves of apartments. The well known Jennifer Realty decision recognized that a sponsor might be liable in contract to a co-op for failing in good faith to timely sell so many apartments as necessary to create a fully viable co-op. The Jennifer Realty Court left many questions unanswered (such as, what exactly is a "fully viable co-op"), and left plenty of room for the law regarding sponsor divestiture to evolve for some time.
An interesting argument was crafted by West Gate House, Inc.'s counsel that piggy-backs the Jennifer Realty doctrine with the infamous Pullman opinion regarding a board's decision to terminate a shareholder's tenancy because the shareholder engaged in "objectionable conduct." The co-op's argument was that the defendant sponsor's continued rental of its non-rent stabilized apartments to tenants who were undesirable constituted "objectionable conduct." The sponsor owned 51 percent of the co-op's shares and apartments for almost 20 years after conversion and sold only one apartment since conversion. According to the co-op, the sponsor's tenants in those unsold apartments were impinging upon the quality of life in the building by not following move-in, move-out rules, not cooperating in correcting building code violations in apartments and creating security risks. The co-op board notified the sponsor that the continued subletting of the unsold apartments was "objectionable conduct." The sponsor ignored the notice and commenced a lawsuit seeking an injunction preventing lease terminations by the cooperative.
The Appellate Court affirmed the lower court's denial of the injunction not under the Pullman doctrine, but on the ground that under the Jennifer Realty doctrine the sponsor should have been divesting itself of the apartments, and not renting them to undesirable tenants. Between the lower court's decision and the Appellate Court's decision, the co-op terminated the sponsor's proprietary leases for its non-rent stabilized apartments because of the sponsor's "objectionable conduct." The court did not discuss the co-op's mixture of the Jennifer Realty and the Pullman doctrines. However, by leaving intact the co-op's termination of the sponsor's leases for "objectionable conduct," the court validated the co-op's argument piggy-backing the two doctrines. Co-ops may be able to add this decision to their arsenal in dealing with sponsors who are holding unto their apartments and renting them to undesirable tenants.
Some boards mistakenly believe that the business judgment rule applies to all of their actions. Essentially, the rule is that board decisions are not subject to judicial scrutiny unless the board acts for purposes other than those of the co-op, acts without its authority or acts in bad faith. Justice Deborah James of the Supreme Court, New York County, decided that the business judgment rule does not apply with respect to the One West 126th Street co-op board's refusal to honor a contract to buy plaintiff Rouette's apartment in return for another apartment owned by the co-op.