You're Fired Evicting Shareholders for Objectionable Conduct

While not a common practice, boards of directors of New York cooperatives have, at times, reached the decision to evict a shareholder based on objectionable conduct. Nearly every cooperative corporation's proprietary lease contains a section on dealing with default. Objectionable conduct on the part of the shareholder or other residents in the apartment provides the board with the basis for terminating the shareholder's shares and evicting them from the building.

Originally, these provisions required the corporation to prove in a Housing Court trial or hearing, that the occupants' behavior was in fact objectionable and warranted eviction. Not surprisingly, many judges were hesitant to find the behavior of these residents questionable, leaving the boards in the precarious position of placating upset shareholders and dealing with the difficult resident on their own. However, as a result of two recent court decisions heralding the removal of what were once major roadblocks, a board's recourse for dealing with a difficult shareholder/occupant has become much clearer.

The first court decision was handed down by the New York Court of Appeals in 2003 in 40 West 67th Street v. Pullman. In Pullman, the proprietary lease provided that the court did not have the authority to make the determination as to whether the resident's behavior was objectionable, if the board was exercising its business judgment and was not acting out of discrimination, self interest or bad faith.

Suddenly the rules changed, and instead of the board being required to convince a judge that the shareholders' behavior was objectionable, the burden shifted to the shareholder to demonstrate that the board violated the business judgment rule, as laid down by the Court of Appeals in its landmark 1990 decision in Levandusky v. One Fifth Avenue Apartment Corp. In Levandusky, the unanimous outcome was that courts could not look into decisions made by cooperative and condominium boards unless there was a showing of bad faith, self dealing or discrimination.

Despite the drastic change brought about by the Pullman case, the decision left one very large question: could a board act without a vote by the shareholders? In Pullman, the board acted after a shareholder vote because the proprietary lease for 40 East 67th Street clearly stated that such a vote was necessary before a lease could be terminated for objectionable conduct. However, the question still remained. If a given lease did not require it, would the courts still require a shareholder vote to evict an owner/occupant?


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