From the Court to the Board Lessons From Recent Decisions

Over the past few months there have been several interesting and insightful court decisions. Here are a few legal cases that provide some helpful lessons for boards and managers alike.

19 Pond, Inc., et al. v. Goldens Bridge Community Association, Inc., et al. 

Board members may have extremely busy lives, but sometimes an immediate vote on a pressing issue is necessary. Calling an in-person or telephone meeting are possibilities, but how about using email?  It’s convenient, but—as we learned from the recent presidential election—email can be troublesome if not managed correctly. 

The condominium board in this case decided to exercise its right of first refusal with regard to the sale/purchase of a unit, and the decision was made by a vote using email. The Second Department Appellate Court recognized this was not allowed under the applicable New York statutes or the condo’s governing documents, but the board took the next required step of ratifying the email vote at their next formal board meeting. The Second Department upheld the board’s practice of using email to make a decision—as long as the vote is subsequently ratified at a duly called and formal meeting.

When conducting votes via email, it’s critical that board members use a dedicated email address for board-only business that the board can control and access whenever necessary. They must also save all board-related emails. Imagine having to go back and corral individual members’ emails regarding the vote months or years after it takes place. board members may no longer be on the board, or have access to their personal or work email used in the vote at issue.

Lesson: boards can use email to make decisions, but they must ratify the decision at the next board meeting.

Hersh v. One Fifth Avenue Apartment Corp., et al.

 One Fifth Avenue in Manhattan is a co-op with a greenhouse on its roof. As the building and its components aged, the plaintiff, Ms. Hersh, began to experience leaks in her apartment. In this case, a professional engineer advised undertaking substantial exterior repairs, but the board opted not to act on that advice, or even more modest temporary alternatives. When the leaking and mold got worse, the board eventually changed its decision, but by that time there was a lot of animosity and damage, and Ms. Hersh brought litigation against the board. 

The board’s counsel tried to argue that the board was protected under the Business Judgment Rule in its decision not to make the repairs. The court rejected the argument, explaining that “[T]he business judgment rule, an import from commercial law, protects co-op boards from judicial inquiry into the efficacy of decisions made within the scope of their authority...However, no court has ruled that the shield of the business judgment rule may be fashioned into a sword that cuts away proprietary lessees’ rights under the statutory warranty of habitability.”

Boards sometimes think that the Business Judgment Rule will always serve to protect them. When it comes to the warranty of habitability however, that is not the case. The One Fifth Avenue Apartment Corp. board found out the hard way from Ms. Hersh that repairs are often necessary (particularly when strongly recommended by experienced, professional engineers) and in the long run may end up costing less than the damages awarded in a lawsuit. 

Lesson: Co-op boards cannot hide behind the Business Judgment Rule when they are breaching the Warranty of Habitability.

Esplanade Gardens, Inc. v. Simms

Collecting arrears nowadays is hard enough. Add the failure of a co-op’s counsel and management to communicate so that the co-op’s rights are not inadvertently waived, and collections become that much more complicated - and expensive.  In this case, there was a breakdown in communication, and the co-op accepted money for maintenance after a predicate Notice of Termination expired, and before the holdover proceeding was commenced.

The end result was a blistering multipage decision by Landlord-Tenant Court Justice Michael L. Weisberg in which the court laid out what has become black-letter law in New York City, and then dismissed the cooperative’s holdover petition, forcing the cooperative to start its collection efforts from scratch. The error resulted in both wasted legal fees and precious time.

Lesson: A co-op’s counsel and management must make sure not to waive their client’s rights in collection proceedings.

Matter of Tiemann Place Realty LLC et al v. 55 Tiemann Owners Corp. et al. 

The Appellate Division First Department was asked to review a decision involving the status of a “Holder of Unsold Shares” in the context of control of a co-op’s board.  There was little question that the transfer from the sponsor of the cooperative was to a Holder of Unsold Shares with all of the attendant benefits, like being able to transfer or sublease without approval of the board, being immune from other requirements of shareholders, etc.

Here, the sponsor had previously entered into a stipulation with the cooperative that restricted the sponsor’s voting rights so that the sponsor could only elect one less than a majority of directors.  The transfer to the Holder of Unsold Shares here was done right before an annual election in order to try to obviate the stipulation that the Holder argued did not apply to it.  

The lower Court agreed with the Holder, but the First Department reversed the decision, finding that the Holder was bound by the stipulation even though the Holder was not a signatory to it.  The Court noted that the sponsor “Should not be permitted to frustrate its obligations under the offering plan or stipulation by transferring its shares to puppet entities to syphon votes away from resident shareholder candidates in order to control the board well beyond the period contemplated by the Attorney General.” 

Co-ops may be able to use this decision to their advantage in dealing with Holders of Unsold Shares who only want the good aspects of being a Holder but not the bad aspects like being bound by agreements that the sponsor previously entered. 

Lesson: Holders of Unsold Shares have to take the bad with the good.

Konigsberg, et al. v. 333 East 46th ST. Apt. Corp.

Back in 1994, there was a fire in the complaining shareholder’s apartment and renovations were necessary. The cooperative here signed an alteration agreement for an apartment renovation, agreeing that “The co-op was obligated to give plaintiffs notice if the operation of the washer/dryer was causing problems with the plumbing lines, and that removal of the washer would only be required if plaintiffs were unable or failed to cure such problems.” While the board approved the renovations, it did not approve the installation of the washer/dryer. The fight began and ended up in litigation.

Prior to 2012, the cooperative allowed shareholders to install washers/dryers in their apartments. However, in 2012 the house rule was changed to provide that “[T]he installation within apartments of clothes washers, clothes drying machines … is prohibited without the prior written approval of the Corporation.” because of the board’s concern that the building plumbing was old and the use of washing machines could create problems with the pipes necessitating extensive repair work.  

Because of the Business Judgment Rule, the Court upheld the board decision despite the prior rule that was in effect for 20 years allowing such installations and the prior alteration agreement. The Court held that “The fact that plaintiffs were allowed to keep a previously approved washer/dryer for 20 years before the new house rule was adopted, does not prevent the board from enforcing the new house rule” now.

Lesson: The Business Judgment Rule can protect a board that decides to change its mind after 20 years.

Sharie Graham v. 420 EAST 72nd Tenants Corp., et al.

The cooperative here wanted to purchase a shareholder’s apartment in order to create a gym. The shareholder listed the apartment with a real estate broker for $499,000.  The co-op board offered $400,000 for the apartment, but the offer was rejected as being below market.  The shareholder eventually received an all-cash offer for $495,000. The board rejected the transfer because the sales price was below market, which the board then thought was $535,000.  The purchaser agreed to pay the $535,000, but the board again rejected the transfer, changing its position that market price should be $610,000.  

The board’s alleged self dealing based on these facts was sufficient to warrant discovery according to the Court, and if true could spell trouble for this cooperative board and its individual board members that could be on the hook  personally for substantial damages that may not be covered by directors & officers (D&O) insurance.

Cooperative boards have the power to approve most transfers by shareholders.  If the board wants to purchase the apartment however, it cannot self-deal in exercising its approval rights.  In this case, the Court saw enough allegations of self-dealing that it refused to dismiss the case against the board based on the Business Judgment Rule and allowed discovery to proceed.

Lesson: The Business Judgment Rule will not protect a self-serving board.                  

Joseph G. Colbert, Esq. specializes in the legal representation of New York condominiums, cooperatives and homeowners associations.

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