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Past Precedents How Legal Cases Shape Board Policy

New York City real estate is governed by a number of things: available housing stock, the economy, state legislation, and quite often by major legal cases argued in the courts and then applied by proxy to building communities all over the city. The courts thus have the ability to greatly impact the way boards, managing agents, and shareholders/owners conduct business.

While every case affects the people directly involved, certain historic decisions have profoundly affected the world of NYC real estate. A sample of these noteworthy cases include Levandusky vs. One 5th Avenue Corp. (1990), which dealt with what's referred to as the "business judgement rule"; 40 W. 67th Street Corporation vs. Pullman (2003), which dealt with boards having the ability to eject so-called "objectionable tenants"; Biondi vs. Beekman Hill House Apartment Corp. (1997), which dealt both with discrimination and indemnification of board members from punitive damages in lawsuits; and the Jennifer Realty case (2001), which dealt with sponsors being legally obligated to sell units in converted co-op buildings.

Levandusky

Out of these recent cases, Levandusky vs. One 5th Avenue Corp. (1990) (Levandusky), is perhaps the single most important decision ever rendered in the field of co-op/condo law in New York, according to Stuart Saft, a partner at the law firm of Wolf Haldenstein Adler Freeman & Herz LLP in New York.

"Every major co-op or condo decision in the last 10 years has referred to Levandusky," reports Saft, who is chairman of the Council of New York Cooperatives and Condominiums (CNYC) and has written 10 books relating to commercial real estate.

The case revolved around Ronald Levandusky, a co-op shareholder at One Fifth Avenue who was in the process of renovating his kitchen when he realized that he needed to move a steam riser pipe by two inches to accommodate new cabinetry. After both he and the board of directors of his building hired independent engineers to look at the situation, the board decided not to let him move the pipe, figuring on the "leaving well enough alone" principle. Levandusky, however, failed to heed the order of the board and hired a contractor to move the pipe anyway. The board issued a stop-work order and Levandusky subsequently took them to court.

In this case, the court ruled in the board's favor, citing two precedents of law: the Reasonableness Standard and the Business Judgment Rule. According to the Federation of New York Housing Cooperatives and Condominiums (FNYHC), under the Reasonableness Standard, the board had to prove that it was acting in a reasonable manner; and the Business Judgment Rule holds that a court will defer to the decision of the board, so long as upon review the court determined that "[the decision] was made in good faith and in exercise of honest judgment in the lawful and legitimate furtherance of the corporate purposes. Further, absent a showing of a breach of fiduciary duty, the exercise of the cooperative board's powers for the common and general interest of the corporation may not be questioned although the results may show that what they did was unwise or inexpedient."

"Levandusky established the principle that the courts will not look into the actions of a co-op board (or, by extension, a condo board) unless there is an accusation of bad faith or self-dealing," says Saft. "It gave boards a free hand to make decisions with regard to the building, the corporation or the condo, and the shareholders or unit owners."

This decision, which was handed down unanimously from the New York Court of Appeals, New York's highest court, gave cooperative boards the authority to manage their buildings in the way they determine is best for the apartment owners as a group.

"Any case decided by the Court of Appeals is significant because the court only hears cases that involve important legal issues of broad significance," explains John Van Der Tuin, an attorney at Balber Pickard Battistoni Maldonado & Van Der Tuin, PC, who was directly involved in the Pullman case, representing the co-op. "The full impact of the decision frequently only becomes known over time as the lower courts apply the decision."

"In this way," Van Der Tuin continues, "the Pullman case - though significant in itself - is also an application of the Levandusky case and shows how the principle established in the Levandusky case could be more widely applied."

Pullman

The Business Judgment Rule was significantly reinforced in the case of 40 W. 67th St. Corporation vs. Pullman (2003) (Pullman). David Pullman was a co-op owner in an upscale community near Central Park who was ousted from his home by his fellow shareholders after he behaved in a way that they deemed "objectionable."

According to the board, Pullman made unreasonable, unceasing demands on the board, as well as complaints about his elderly neighbors, who he alleged played their stereo too loud and ran an illegal bookbinding business out of their apartment. Eventually, Pullman pulled the last straw when he got into a physical confrontation with the elderly neighbor - a professor whom Pullman called "a potential psychopath in our midst." Pullman accused the professor of cutting his telephone lines, publicly accused the professor's wife of having an affair with a board member, and subsequently filed four lawsuits against his neighbors.

The board called a special shareholders meeting, who voted on Pullman's "objectionable behavior." By a vote of 2,048 shares to 0, Pullman's lease was terminated and his shares in the co-op cancelled. Pullman did not attend the meeting.

"Pullman was new law and held that a board did not have to prove to a landlord/tenant judge that a shareholder's actions were objectionable - that under the Business Judgment Rule, it was the board that would decide this," explains Saft. "All the court can do is make certain that they do not act in bad faith or self-deal."

According to a September 2002 New York Law Journal article by Richard Siegler and Eva Talel, partners in the firm of Stroock & Stroock & Lavan, in the Pullman case, "the majority held that the Business Judgment Rule is the standard of review to be applied to all co-op board determinations. The majority noted that a shareholder sought to be evicted was not without remedy if the shareholder could show that the board action was illegal, discriminatory or in bad faith - the touchstone elements that remove a determination from the protection of Levandusky."

How does the Pullman case affect members of a cooperatively-owned building?

"The individual apartment owner who is the thorn in his or her neighbor's side and does not want to conform to the generally accepted standards of behavior in a building is going to be more at risk of sanctions or eviction," warns Van Der Tuin.

"My fear was that boards would use Pullman because it made getting rid of a troublesome shareholder so much easier," says Saft. "However, we have not seen any large scale increase of objectionable conduct cases."

The attorneys point out, however, that neither Levandusky nor Pullman involved a condominium. The rules of condo boards are typically somewhat different from co-ops in that residents own their condos and may only have a lease agreement in a co-op arrangement, according to Van Der Tuin. However, these court decisions will reinforce the authority of the condo boards, as well.

Biondi

Biondi vs. Beekman Hill House Apartment Corp. (1997) (Biondi), which dealt with both discrimination and indemnification of board members from punitive damages in lawsuits, is another case of particular interest to co-op and condo communities.

In this case, a Manhattan jury awarded $640,000 in both compensatory and punitive damages to an African-American man and his spouse - both attorneys - who applied to sublet an apartment in a co-op at 425 East 51st Street in May 1997. Their application was rejected by the co-op board for reasons the couple believed were racially biased.

Of that amount, board president Nicholas A. Biondi, was ordered to pay $230,000 in compensatory damages and $125,000 in punitive damages. After subsequent settlement conferences, the compensatory damages ended up being paid by the co-op's insurance carrier, but Mr. Biondi was still personally liable for the $124,000 in punitive damages. According to Saft, the decision handed down by a federal court jury surprised both board members and attorneys.

One reason was that this was the largest housing discrimination award in recent history. A second reason was that many boards tended to see their decision to rent or not to rent to a potential shareholder as virtually their own. Now, however, boards have to be extremely careful about how they evaluate potential admissions and the reasons they give for turning someone down.

Perhaps the biggest shock of all came from the fact that several board members were held personally liable for damages in this case - to the tune of $25,000 apiece.

"Biondi underscores the risk and penalties for directors who abuse their power," says Van Der Tuin. "If directors discriminate illegally, or engage in bad faith behavior, they do so at their own financial risk. Well-informed boards are aware of the Biondi decision and will not tolerate behavior of this type by board members."

Saft agrees. "Biondi has made boards nervous and careful, which is good," he says. "Boards are more cautious as a result of this case. Biondi confirmed that a board member would be personally liable for discrimination and that insurance would not protect a board member's bad faith. This was not new law, but rather reinforced Levandusky which said that bad faith was not covered by the Business Judgment Rule."

Jennifer Realty Case

A somewhat narrower precedent was set in 2001 by the so-called Jennifer Realty case (511 West 232nd Owners Corp. v Sponsor. Jennifer Realty Co., 729 NYS2d 34), which involved an action brought against Arthur Weiner, a developer who converted his apartment building into a co-op under a non-eviction plan. The 2001 action was brought against defendant Weiner and co-defendant Jennifer Realty Co. by the tenant-owners and the co-op board, who argued that the defendants breached their contractual duty to dispose of the co-op's shares within a reasonable time.

Weiner had not sold any shares since 1990 and still owned 41 of the 66 units in the building. Basically, he was running a free market rental business even though he had agreed to run a cooperatively-owned building.

While the Jennifer Realty case has definite applications in certain sponsor/shareholder disputes, Saft doesn't believe that the case has quite the far-reaching, policy-changing impact on co-op and condo boards of a Levandusky or a Pullman.

"Jennifer did not say much," he says. "It was a Court of Appeals decision that basically provided that a sponsor could be sued for not having formed a viable cooperative. The problem with Jennifer is the court did not say what made a co-op viable, and it is only applicable to co-ops in which sponsors retained an interest and control."

Van Der Tuin also views Jennifer as a case with definite but limited repercussions. "The Jennifer decision will have more limited impact," he says. "The facts in Jennifer were extreme, and it is unlikely the decision will be expanded to apply to less egregious sponsor actions."

"Jennifer is beneficial to co-ops to which it applies," Van Der Tuin continues, "I just don't think many cooperatives have the extreme circumstances that Jennifer would apply to."

In Conclusion

So what can board members and cooperative shareholders learn from cases like these?

"Be careful," advises Saft. "Use resources - like lectures and seminars given by organizations like the CNYC - and read publications like The Cooperator, Habitat, The New York Times, and Newsday. Every one of these cases has had a beneficial effect for co-ops and condos; even Biondi, which sent a warning to boards that they would be held accountable for misbehaving."

While litigation generally indicates that something has gone wrong, boards can rest assured that some good news comes out of these negative situations.

"Levandusky and Pullman mean that boards and apartment owners are less subject to abuse by the out-of-control neighbor who will not or cannot comply with the co-op's rules, or who creates acrimonious and expensive litigation," says Van Der Tuin. "This is good for the vast majority of apartment owners. By the same token, Biondi puts limits on the out-of-control director - the one who acts for illegal, discriminatory, or bad faith purposes. Individual apartment owners need to know that directors cannot abuse their authority without impunity."

It's that kind of balance that the law seeks to strike, and what is illustrated so clearly in major precedent-setting cases like those discussed here. As time goes on and the laws governing the co-op and condo community in New York City are built upon with new cases and decisions, boards, shareholders, managers, sponsors, and unit owners should make it their mission to be aware of and understand the impact and implications of the decisions affecting them and their neighbors.

Domini Hedderman is a freelance writer and a frequent contributor to The Cooperator.

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Comments

  • Seems to be that the legislation protecting Board Members of Coop is written in a vacuum supposing that most board members are above reproach. This is often NOT the case and it is far too difficult for a shareholder with a meritorious cause of action to go against a board. Especially since attorney fees cannot be recouped even if the shareholder wins. When a breach of fiduciary duty exists, often, the board members and the coop attorney are acting as one. If the shareholder brings the board members to court, the coop attorney just keeps padding the case with unnecessary litigation, motions, adjournments, etc thereby making the costs impossible for a shareholder to sustain - so the board gets to continue even the most blatant illegal behavior.