Cooperatives & Condominiums

In affirming, the Court of Appeals first held that RPAPL 711(1) was applicable to the proceeding, but concluded that the statute's requirement of competent evidence could be satisfied by a showing that the co-op had followed its own procedures. The decision would be reviewed under the business judgment rule, which would ordinarily mean deference to the vote. Here, the co-op corporation followed the procedures in the proprietary lease, and the court, applying the business judgment rule, held that the board was entitled to summary judgment.

COMMENT

See article by Joel E. Miller on page 1.

Preferential Sublet Provisions Violate BCL 501(c)

Speigel v. 1065 Park Avenue Corp.

NYLJ 5/15/03, p. 19, col. 6

AppDiv, First Dept

(memorandum opinion)

In co-op shareholder's declaratory judgment action, the co-op appealed from Supreme Court's determination that shareholder's remedy for unreasonable withholding of consent was further application to the co-op board. The Appellate Division modified to declare that the preferential sublet provisions of the bylaws and proprietary lease violate section 501(c) of the Business Corporation Law (BCL).

The proprietary lease and bylaws provide that original purchasers of the co-op's sales need the consent only of the co-op's managing agent to sublet their apartment. The documents also provide that consent shall not be unreasonably withheld, and that if consent is withheld, an original purchaser can apply for consent to the co-op board or the shareholders. The proprietary lease prohibits non-original purchasers from subletting without the consent of the board or a supermajority of the lessees, and provides that consent may be withheld for any reason or for no reason. Plaintiff shareholder, an initial purchaser, applied to the managing agent for permission to sublet, and the agent withheld consent. Plaintiff shareholder sought an injunction compelling consent, but Supreme Court determined that shareholder's remedy was to seek approval from the co-op board.

In modifying, the Appellate Division held that the proprietary lease and the bylaws violate section 501(c) of the BCL by giving original purchasers more favorable subletting rights than non-original purchasers. The court then held that the co-op was not estopped from asserting illegality in a motion for summary judgment even though the co-op had not raised illegality in its answer. Finally, the court found no waiver or estoppel resulting from the shareholder's purchase in reliance on sponsor's offer of special subletting premises when she purchased her original apartment or when she purchased a second larger apartment in the building.

COMMENT

Business Corporation Law section 501(c), which prohibits unequal treatment of shareholders holding the same class of shares, applies to cooperative apartment corporations. A 1986 amendment to Section 501(c), however, provides a single exception allowing cooperatives to impose a transfer fee, or 'flip tax,' that varies depending on whether a shareholder is an original or subsequent purchaser of shares. The amendment effectively overruled the New York Court of Appeals' decision in Fe Bland v. Two Trees Mgt. Co., 66 N.Y.2d 556, in which the court held invalid under 501(c) a 'flip tax' that ranged from $50 to $200 per share depending on whether the assignor was an original purchaser from the sponsor or an outsider.

Courts have invoked Section 501(c) to prohibit the imposition of preferential subletting rights on original purchasers ' holders of shares bought directly from the sponsor. Thus, in Wapnick v. Seven Park Avenue Corp., 240 A.D.2d 245, the First Department invalidated provisions of a cooperative's proprietary lease and corporate by-laws for conferring 'preferential treatment on original purchasers with respect to the imposition of certain fees and consent requirements relating to the shareholders' ability to move, sublet, or assign their lease or transfer their shares.'

While a cooperative may not give preferential treatment to original purchasers, courts have interpreted Section 501(c) to permit cooperatives to provide preferential subletting or voting rights to holders of unsold shares (usually the sponsor). Thus, in Susser v. 200 East 36^th Owners Corp., 262 A.D.2d 197, 198, the court distinguished between a sponsor and an original purchaser by noting that the sponsor must fulfill certain obligations not shared by other shareholders, such as providing renewal leases to non-purchasing tenants who remain in possession pursuant to a non-eviction plan. Discharge of those obligations would be rendered difficult, if not impossible, if the sponsor were subject to restrictions on subletting applicable to regular tenant owners. 262 A.D.2d at 198. Likewise, in Mogulescu v. 255 West 98^th Street Owners, Corp., 135 A.D.2d 32, 37-38, the court upheld cooperative provisions granting preferential voting rights, such as allowing holders of unsold shares to designate one director so long as they own at least 25% of the shares, provided that 'every shareholder of record is entitled to one vote for each share owned.'

When courts have found discriminatory subletting provisions, they have remedied the violation by applying restrictive subletting requirements to all shareholders rather than granting more lenient subletting rights to all shareholders. Thus, in Krakauer v. Stuyvesant Owners, Inc., 753 N.Y.S.2d 367, the First Department voided a provision in the plaintiff-shareholder's proprietary lease which stated that the board could not unreasonably withhold consent to sublet requests made by original shareholders. Similarly, in the principal case, the court invalidated the provision affording preferential subletting rights to the plaintiff-shareholder.

Courts may have chosen to apply the stringent subletting requirements as a prediction of the cooperative's likely choice of outcomes if it had known that the statute prohibited differentiation. Relaxed subletting rules would serve to undermine the right of cooperative tenants to 'decide for themselves with whom they wish to share their elevators, their common halls and facilities, their stockholders' meetings, their management problems and responsibilities and their homes.' Weisner v. 791 Park Avenue Corp., 6 N.Y.2d 426, 434. However, because the court's chosen remedy denies, rather than extends the subletting privilege to all shareholders, this remedy may have the undesired effect of dissuading aggrieved shareholders from contesting Section 501(c) violations.

Speigel v. 1065 Park Avenue Corp.
NYLJ 5/15/03, p. 19, col. 6
AppDiv, First Dept
(memorandum opinion)

In co-op shareholder's declaratory judgment action, the co-op appealed from Supreme Court's determination that shareholder's remedy for unreasonable withholding of consent was further application to the co-op board. The Appellate Division modified to declare that the preferential sublet provisions of the bylaws and proprietary lease violate section 501(c) of the Business Corporation Law (BCL).

The proprietary lease and bylaws provide that original purchasers of the co-op's sales need the consent only of the co-op's managing agent to sublet their apartment. The documents also provide that consent shall not be unreasonably withheld, and that if consent is withheld, an original purchaser can apply for consent to the co-op board or the shareholders. The proprietary lease prohibits non-original purchasers from subletting without the consent of the board or a supermajority of the lessees, and provides that consent may be withheld for any reason or for no reason. Plaintiff shareholder, an initial purchaser, applied to the managing agent for permission to sublet, and the agent withheld consent. Plaintiff shareholder sought an injunction compelling consent, but Supreme Court determined that shareholder's remedy was to seek approval from the co-op board.

In modifying, the Appellate Division held that the proprietary lease and the bylaws violate section 501(c) of the BCL by giving original purchasers more favorable subletting rights than non-original purchasers. The court then held that the co-op was not estopped from asserting illegality in a motion for summary judgment even though the co-op had not raised illegality in its answer. Finally, the court found no waiver or estoppel resulting from the shareholder's purchase in reliance on sponsor's offer of special subletting premises when she purchased her original apartment or when she purchased a second larger apartment in the building.

Comment

Business Corporation Law section 501(c), which prohibits unequal treatment of shareholders holding the same class of shares, applies to cooperative apartment corporations. A 1986 amendment to Section 501(c), however, provides a single exception allowing cooperatives to impose a transfer fee, or 'flip tax,' that varies depending on whether a shareholder is an original or subsequent purchaser of shares. The amendment effectively overruled the New York Court of Appeals' decision in Fe Bland v. Two Trees Mgt. Co., 66 N.Y.2d 556, in which the court held invalid under 501(c) a 'flip tax' that ranged from $50 to $200 per share depending on whether the assignor was an original purchaser from the sponsor or an outsider.

Courts have invoked Section 501(c) to prohibit the imposition of preferential subletting rights on original purchasers ' holders of shares bought directly from the sponsor. Thus, in Wapnick v. Seven Park Avenue Corp., 240 A.D.2d 245, the First Department invalidated provisions of a cooperative's proprietary lease and corporate by-laws for conferring 'preferential treatment on original purchasers with respect to the imposition of certain fees and consent requirements relating to the shareholders' ability to move, sublet, or assign their lease or transfer their shares.'

While a cooperative may not give preferential treatment to original purchasers, courts have interpreted Section 501(c) to permit cooperatives to provide preferential subletting or voting rights to holders of unsold shares (usually the sponsor). Thus, in Susser v. 200 East 36th Owners Corp., 262 A.D.2d 197, 198, the court distinguished between a sponsor and an original purchaser by noting that the sponsor must fulfill certain obligations not shared by other shareholders, such as providing renewal leases to non-purchasing tenants who remain in possession pursuant to a non-eviction plan. Discharge of those obligations would be rendered difficult, if not impossible, if the sponsor were subject to restrictions on subletting applicable to regular tenant owners. 262 A.D.2d at 198. Likewise, in Mogulescu v. 255 West 98th Street Owners, Corp., 135 A.D.2d 32, 37-38, the court upheld cooperative provisions granting preferential voting rights, such as allowing holders of unsold shares to designate one director so long as they own at least 25% of the shares, provided that 'every shareholder of record is entitled to one vote for each share owned.'

When courts have found discriminatory subletting provisions, they have remedied the violation by applying restrictive subletting requirements to all shareholders rather than granting more lenient subletting rights to all shareholders. Thus, in Krakauer v. Stuyvesant Owners, Inc., 753 N.Y.S.2d 367, the First Department voided a provision in the plaintiff-shareholder's proprietary lease which stated that the board could not unreasonably withhold consent to sublet requests made by original shareholders. Similarly, in the principal case, the court invalidated the provision affording preferential subletting rights to the plaintiff-shareholder.

Courts may have chosen to apply the stringent subletting requirements as a prediction of the cooperative's likely choice of outcomes if it had known that the statute prohibited differentiation. Relaxed subletting rules would serve to undermine the right of cooperative tenants to 'decide for themselves with whom they wish to share their elevators, their common halls and facilities, their stockholders' meetings, their management problems and responsibilities and their homes.' Weisner v. 791 Park Avenue Corp., 6 N.Y.2d 426, 434. However, because the court's chosen remedy denies, rather than extends the subletting privilege to all shareholders, this remedy may have the undesired effect of dissuading aggrieved shareholders from contesting Section 501(c) violations.

40 West 67th Street Corp. v. Pullman
NYLJ 5/14/03, p. 26, col. 1,
Court of Appeals
(Opinion by Rosenblatt, J.)

In an action by co-op corporation for possession of a co-op apartment, and for a declaratory judgment canceling unit owner's stock, unit owner appealed from the Appellate Division's grant of summary judgment to the co-op corporation. The Court of Appeals affirmed, applying the business judgment rule to hold that the determination by the co-op board and co-op shareholders satisfied the requirement of RPAPL 711(1) that tenant's objectionable conduct be established by competent evidence.

Unit owner bought the shares associated with this apartment in 1998. He immediately began to complain about his upstairs neighbors, who had lived in their apartment for more than 20 years, accusing them of excessive noise and storage of toxic chemicals. He wrote 16 letters to the co-op in 1 month alone, but investigation by the co-op board failed to substantiate unit owner's claims. Unit owner began distributing flyers calling his neighbor a psychopath and making other apparently false statements. Unit owner also performed work in violation of house rules and would not respond to board requests for correction. He also brought four lawsuits against the upstairs neighbor, the co-op president, and the co-op management. At that point, the co-op board called a special meeting of shareholder, pursuant to the proprietary lease, which provides for termination of a tenancy because of objectionable conduct on the part of the lessee. The co-op board informed the shareholders that the purpose of the meeting was to determine whether unit owner had engaged in conduct that made the tenancy undesirable. By a vote of 2048 shares to 0, the shareholders in attendance declared unit owner's conduct objectionable and directed the board to cancel his shares and terminate his lease. The board then served a notice of termination, but unit owner remained in the apartment, causing the board to bring this action. Supreme Court denied co-op's summary judgment motion, invoking RPAPL 711(1) to hold that a co-operative may not terminate a tenancy for objectionable conduct without proving its claim to the satisfaction of a court. A divided Appellate Division reversed and granted the board's summary judgment motion, relying on the business judgment rule. Unit owner appealed.

In affirming, the Court of Appeals first held that RPAPL 711(1) was applicable to the proceeding, but concluded that the statute's requirement of competent evidence could be satisfied by a showing that the co-op had followed its own procedures. The decision would be reviewed under the business judgment rule, which would ordinarily mean deference to the vote. Here, the co-op corporation followed the procedures in the proprietary lease, and the court, applying the business judgment rule, held that the board was entitled to summary judgment.

COMMENT

See article by Joel E. Miller on page 1.

Preferential Sublet Provisions Violate BCL 501(c)

Speigel v. 1065 Park Avenue Corp.

NYLJ 5/15/03, p. 19, col. 6

AppDiv, First Dept

(memorandum opinion)

In co-op shareholder's declaratory judgment action, the co-op appealed from Supreme Court's determination that shareholder's remedy for unreasonable withholding of consent was further application to the co-op board. The Appellate Division modified to declare that the preferential sublet provisions of the bylaws and proprietary lease violate section 501(c) of the Business Corporation Law (BCL).

The proprietary lease and bylaws provide that original purchasers of the co-op's sales need the consent only of the co-op's managing agent to sublet their apartment. The documents also provide that consent shall not be unreasonably withheld, and that if consent is withheld, an original purchaser can apply for consent to the co-op board or the shareholders. The proprietary lease prohibits non-original purchasers from subletting without the consent of the board or a supermajority of the lessees, and provides that consent may be withheld for any reason or for no reason. Plaintiff shareholder, an initial purchaser, applied to the managing agent for permission to sublet, and the agent withheld consent. Plaintiff shareholder sought an injunction compelling consent, but Supreme Court determined that shareholder's remedy was to seek approval from the co-op board.

In modifying, the Appellate Division held that the proprietary lease and the bylaws violate section 501(c) of the BCL by giving original purchasers more favorable subletting rights than non-original purchasers. The court then held that the co-op was not estopped from asserting illegality in a motion for summary judgment even though the co-op had not raised illegality in its answer. Finally, the court found no waiver or estoppel resulting from the shareholder's purchase in reliance on sponsor's offer of special subletting premises when she purchased her original apartment or when she purchased a second larger apartment in the building.

COMMENT

Business Corporation Law section 501(c), which prohibits unequal treatment of shareholders holding the same class of shares, applies to cooperative apartment corporations. A 1986 amendment to Section 501(c), however, provides a single exception allowing cooperatives to impose a transfer fee, or 'flip tax,' that varies depending on whether a shareholder is an original or subsequent purchaser of shares. The amendment effectively overruled the New York Court of Appeals' decision in Fe Bland v. Two Trees Mgt. Co., 66 N.Y.2d 556, in which the court held invalid under 501(c) a 'flip tax' that ranged from $50 to $200 per share depending on whether the assignor was an original purchaser from the sponsor or an outsider.

Courts have invoked Section 501(c) to prohibit the imposition of preferential subletting rights on original purchasers ' holders of shares bought directly from the sponsor. Thus, in Wapnick v. Seven Park Avenue Corp., 240 A.D.2d 245, the First Department invalidated provisions of a cooperative's proprietary lease and corporate by-laws for conferring 'preferential treatment on original purchasers with respect to the imposition of certain fees and consent requirements relating to the shareholders' ability to move, sublet, or assign their lease or transfer their shares.'

While a cooperative may not give preferential treatment to original purchasers, courts have interpreted Section 501(c) to permit cooperatives to provide preferential subletting or voting rights to holders of unsold shares (usually the sponsor). Thus, in Susser v. 200 East 36^th Owners Corp., 262 A.D.2d 197, 198, the court distinguished between a sponsor and an original purchaser by noting that the sponsor must fulfill certain obligations not shared by other shareholders, such as providing renewal leases to non-purchasing tenants who remain in possession pursuant to a non-eviction plan. Discharge of those obligations would be rendered difficult, if not impossible, if the sponsor were subject to restrictions on subletting applicable to regular tenant owners. 262 A.D.2d at 198. Likewise, in Mogulescu v. 255 West 98^th Street Owners, Corp., 135 A.D.2d 32, 37-38, the court upheld cooperative provisions granting preferential voting rights, such as allowing holders of unsold shares to designate one director so long as they own at least 25% of the shares, provided that 'every shareholder of record is entitled to one vote for each share owned.'

When courts have found discriminatory subletting provisions, they have remedied the violation by applying restrictive subletting requirements to all shareholders rather than granting more lenient subletting rights to all shareholders. Thus, in Krakauer v. Stuyvesant Owners, Inc., 753 N.Y.S.2d 367, the First Department voided a provision in the plaintiff-shareholder's proprietary lease which stated that the board could not unreasonably withhold consent to sublet requests made by original shareholders. Similarly, in the principal case, the court invalidated the provision affording preferential subletting rights to the plaintiff-shareholder.

Courts may have chosen to apply the stringent subletting requirements as a prediction of the cooperative's likely choice of outcomes if it had known that the statute prohibited differentiation. Relaxed subletting rules would serve to undermine the right of cooperative tenants to 'decide for themselves with whom they wish to share their elevators, their common halls and facilities, their stockholders' meetings, their management problems and responsibilities and their homes.' Weisner v. 791 Park Avenue Corp., 6 N.Y.2d 426, 434. However, because the court's chosen remedy denies, rather than extends the subletting privilege to all shareholders, this remedy may have the undesired effect of dissuading aggrieved shareholders from contesting Section 501(c) violations.

Speigel v. 1065 Park Avenue Corp.
NYLJ 5/15/03, p. 19, col. 6
AppDiv, First Dept
(memorandum opinion)

In co-op shareholder's declaratory judgment action, the co-op appealed from Supreme Court's determination that shareholder's remedy for unreasonable withholding of consent was further application to the co-op board. The Appellate Division modified to declare that the preferential sublet provisions of the bylaws and proprietary lease violate section 501(c) of the Business Corporation Law (BCL).

The proprietary lease and bylaws provide that original purchasers of the co-op's sales need the consent only of the co-op's managing agent to sublet their apartment. The documents also provide that consent shall not be unreasonably withheld, and that if consent is withheld, an original purchaser can apply for consent to the co-op board or the shareholders. The proprietary lease prohibits non-original purchasers from subletting without the consent of the board or a supermajority of the lessees, and provides that consent may be withheld for any reason or for no reason. Plaintiff shareholder, an initial purchaser, applied to the managing agent for permission to sublet, and the agent withheld consent. Plaintiff shareholder sought an injunction compelling consent, but Supreme Court determined that shareholder's remedy was to seek approval from the co-op board.

In modifying, the Appellate Division held that the proprietary lease and the bylaws violate section 501(c) of the BCL by giving original purchasers more favorable subletting rights than non-original purchasers. The court then held that the co-op was not estopped from asserting illegality in a motion for summary judgment even though the co-op had not raised illegality in its answer. Finally, the court found no waiver or estoppel resulting from the shareholder's purchase in reliance on sponsor's offer of special subletting premises when she purchased her original apartment or when she purchased a second larger apartment in the building.

Comment

Business Corporation Law section 501(c), which prohibits unequal treatment of shareholders holding the same class of shares, applies to cooperative apartment corporations. A 1986 amendment to Section 501(c), however, provides a single exception allowing cooperatives to impose a transfer fee, or 'flip tax,' that varies depending on whether a shareholder is an original or subsequent purchaser of shares. The amendment effectively overruled the New York Court of Appeals' decision in Fe Bland v. Two Trees Mgt. Co., 66 N.Y.2d 556, in which the court held invalid under 501(c) a 'flip tax' that ranged from $50 to $200 per share depending on whether the assignor was an original purchaser from the sponsor or an outsider.

Courts have invoked Section 501(c) to prohibit the imposition of preferential subletting rights on original purchasers ' holders of shares bought directly from the sponsor. Thus, in Wapnick v. Seven Park Avenue Corp., 240 A.D.2d 245, the First Department invalidated provisions of a cooperative's proprietary lease and corporate by-laws for conferring 'preferential treatment on original purchasers with respect to the imposition of certain fees and consent requirements relating to the shareholders' ability to move, sublet, or assign their lease or transfer their shares.'

While a cooperative may not give preferential treatment to original purchasers, courts have interpreted Section 501(c) to permit cooperatives to provide preferential subletting or voting rights to holders of unsold shares (usually the sponsor). Thus, in Susser v. 200 East 36th Owners Corp., 262 A.D.2d 197, 198, the court distinguished between a sponsor and an original purchaser by noting that the sponsor must fulfill certain obligations not shared by other shareholders, such as providing renewal leases to non-purchasing tenants who remain in possession pursuant to a non-eviction plan. Discharge of those obligations would be rendered difficult, if not impossible, if the sponsor were subject to restrictions on subletting applicable to regular tenant owners. 262 A.D.2d at 198. Likewise, in Mogulescu v. 255 West 98th Street Owners, Corp., 135 A.D.2d 32, 37-38, the court upheld cooperative provisions granting preferential voting rights, such as allowing holders of unsold shares to designate one director so long as they own at least 25% of the shares, provided that 'every shareholder of record is entitled to one vote for each share owned.'

When courts have found discriminatory subletting provisions, they have remedied the violation by applying restrictive subletting requirements to all shareholders rather than granting more lenient subletting rights to all shareholders. Thus, in Krakauer v. Stuyvesant Owners, Inc., 753 N.Y.S.2d 367, the First Department voided a provision in the plaintiff-shareholder's proprietary lease which stated that the board could not unreasonably withhold consent to sublet requests made by original shareholders. Similarly, in the principal case, the court invalidated the provision affording preferential subletting rights to the plaintiff-shareholder.

Courts may have chosen to apply the stringent subletting requirements as a prediction of the cooperative's likely choice of outcomes if it had known that the statute prohibited differentiation. Relaxed subletting rules would serve to undermine the right of cooperative tenants to 'decide for themselves with whom they wish to share their elevators, their common halls and facilities, their stockholders' meetings, their management problems and responsibilities and their homes.' Weisner v. 791 Park Avenue Corp., 6 N.Y.2d 426, 434. However, because the court's chosen remedy denies, rather than extends the subletting privilege to all shareholders, this remedy may have the undesired effect of dissuading aggrieved shareholders from contesting Section 501(c) violations.