Cooperatives & Condominiums

AppDiv, First Dept

(memorandum opinion)

Commercial unit owner appealed from Supreme Court's grant of summary judgment to the condominium on common charges. The Appellate Division modified to deny the summary judgment motion and remand for further proceedings, holding that the business judgment rule did not insulate the association from claims that the board acted outside the scope of its authority in assessing expenses to the condominium when those expenses were properly attributable to the residential cooperative that held an 89% share in the condominium.

Commercial unit owner owns four units with a combined 8% interest in the condominium. Two professional units hold an additional 3% combined interest, and a residential cooperative, comprised of 50 apartments, owns the remaining 89%. In 1995, the condominium board perfected a lien for common charges and special assessments against the commercial unit owner; the board refiled the lien in 2001. In this action, the board sought to foreclose the lien and sell the commercial units, or to recover a damage award representing the unpaid charges. Commercial unit owner paid the amount of the charges into an escrow account, and challenged the charges, contending that the condominium board had calculated the charges to include expenses of the cooperative, thus benefiting the residential owners at the expense of commercial unit owner. Supreme Court granted summary judgment to the condominium, concluding that the board's allocation of common charges and special assessments was subject to the business judgment rule, and that commercial unit owner had not raised any issues of fact about improper allocation of charges and assessments.

In modifying to deny summary judgment, the Appellate Division noted that the business judgment rule does not apply where the board fails to act within the scope of its authority and in good faith. Here, commercial unit owner alleged that the board acted in bad faith by allocating to the condominium charges attributable to the cooperative. The court noted that an accountant had made some assertions with respect to allocations of expenses and fees that on their face were sufficient to give rise to an inference of improper allocation. As a result, summary judgment was inappropriate.

COMMENT

Although New York courts have not addressed the issue, courts in other jurisdictions frequently apply a reasonableness standard rather than the more deferential business judgment rule to situations – like the one in JPS Realty – in which a group of unit owners whose interests differ from the condominium unit owners at large allege that they are being treated unfairly by the board of directors because of their minority status.

Boards of Directors of condominiums with multiple classes of units are held to a higher standard in order to prevent discrimination against minority unit holders. Thus, in Ridgely Condominium Association v. Smyrnioudis, 105 Md. App. 404, the board of directors enacted a bylaw amendment prohibiting clients of the seven first floor commercial condominiums from using the lobby to gain access into the building. The amendment was passed in response to concerns expressed by residential unit owners who feared that clients of the first floor business could easily reach the residential units on the remaining 27 floors via the elevator in the lobby. Id. at 943. Although the Court of Special Appeals of Maryland generally applies the business judgment rule (see Black v. Fox Hills, 90 Md. App. 75) when assessing the validity of restrictions found in the original condominium documentation, the Ridgely court affirmed the trial court's determination enjoining the board from prohibiting access to commercial units via the main lobby. The court concluded that the bylaw amendment was unreasonable and that use of a more deferential standard could lead to the possible demise of the commercial units if more discriminatory use restrictions are passed. Id. at 421. The court distinguished earlier cases applying the business judgment rule by noting that in those cases, the use restrictions had been included in the original condominium declaration, so that all purchasers had notice of the restrictions.

Courts apply the reasonableness test not only to cases involving multiple classes of condominium units, but also to various other situations in which the court identifies a minority of unit owners whose rights are allegedly being overlooked by the board of directors. In Buckingham v. Weston Village Homeowner's Ass'n, 571 N.W.2d 842, for example, owners of units located in a recently built area of the condominium development contested an amendment to the condominium bylaws which changed allocation of special assessments from a system based on the benefits conferred on each unit to one that required uniform allocation of expenses. As a result of the amendment, owners of the new units would have to share equally in the cost of street repairs to the original development even though only unit owners who owned homes in the original area would benefit from the repairs. Id. at 843 – 844. While the Supreme Court of North Dakota has previously held that the actions of a condominium's board of directors should be evaluated under the business judgment rule (see Aggassiz West Condominium Ass'n v. Solum, 527 N.W.2d 244), in Buckingham the court remanded so that the amendment could be evaluated under the reasonableness test. In so holding, the court stated that the “reasonableness test protects against the imposition by a majority of a rule or a decision reasonable on its face, in a way that is unreasonable and unfair to the minority because of its effect to isolate and discriminate against the minority.” Id at 845.

Condominium Board Lacks Power to Require Acknowledgment of Proxies

Brodsky v. Board of Managers of Dag Hammarskjold Tower Condominium

NYLJ 9/10/03, p. 19, col. 5

Supreme Ct., N.Y. Cty

(Ajello, J.)

Condominium unit owners brought an article 78 proceeding to have themselves and another unit owner declared duly elected members of the condominium board, and to compel the existing board to hold a meeting of unit owners for the purpose of filling the remaining seats on the board. The court granted the petition, holding that the board did not have power to require acknowledgment of proxies, and that proxy votes were therefore valid even if they had been defectively acknowledged.

For many years, no members of the condominium board had been elected at the association's annual meeting because no quorum was present at the meeting. Fifty-one unit owners out of about 250 are corporations or foreign governments). Instead, pursuant to a provision in the board's bylaws, the existing board members elected members to fill vacant positions on the board. In December 2002, the board notified shareholders that extensive work on the building was necessary. As a result, the board voted to levy a special assessment of $975,000. A number of unit owners then formed a group requesting an annual meeting for the election of all nine board members. The board responded that only three positions were subject to election each year. At that point, the group fielded a slate of three candidates and solicited proxies for those candidates. Because the board had, in 1997, enacted a resolution requiring acknowledgments on all proxies, the group had all of the proxies notarized. One member of the group's slate of candidates served as notary for many of the proxies. When the group's slate of candidates appeared to win the election, the board refused to recognize the slate as duly elected board members, contending that 61 ballots were invalid because they were notarized by an interested party. As a result, the board contended, there were an insufficient number of owners present at the meeting to conduct the election. Two of the group's slate then brought this article 78 proceeding.

In granting the petition, the court started by noting that the condominium's bylaws permitted voting by proxy “in writing both signed and dated by the designor and delivered to the Secretary of the Condominium.” The court concluded that in light of this bylaw provision, the board had no power to impose an additional requirement that the proxy be notarized. In addition, even if notarization were required, the court held that notarization of proxies by a candidate for a board position was not improper. As a result, the court concluded that there was a quorum present at the meeting. The court went on to hold that the remaining six board positions should also have been subject to election at the meeting, because that the board could only appoint members for a term to expire “when a successor will be elected at the next annual meeting.” As a result, the court ordered an election for the remaining six board positions, for staggered terms to expire in successive years.

Sale of Unit to Satisfy Judgment

Sunset View Association, Inc. v. Olsen

NYLJ 9/10/03, p. 20, col. 5

Supreme Ct., Kings Cty (Lewis, J.)

Co-op corporation sought an order authorizing, nunc pro tunc, sale of a co-op unit to satisfy a judgment for rent and arrears. The court held that the sale was invalid for failure to account for shareholder's homestead exemption, but outlined a procedure the corporation could use to conduct a proper sale.

Co-op corporation had been awarded a default judgment against tenant-shareholder for $5657 in rent and arrears. Corporation then turned the judgment over to a city marshal for collection. The co-op corporation was the successful bidder at the sale, at a price of $6676.11. The co-op corporation wanted to resell the unit, and sought court validation to make the unit more attractive to prospective purchasers.

In refusing to validate the sale, the court noted that CPLR 5206 provides that shares of co-operative stock qualify for the $10,000 homestead exemption. Because the sale conducted by the co-op corporate brought a purchase price of less than $10,000, the sale was not valid. Although the co-op corporation contended that the unit did not qualify for the exemption because it was not occupied as a primary residence, the court noted that there had been no conclusive indication that shareholder had suspended, or intended to suspend, her occupancy for a period of at least 1 year. The court noted, however, that the co-op corporation contends that the unit will sell for more than $10,000, and the court emphasized that CPLR 5206(e) provides a procedure for a judgment creditor to bring a proceeding requesting a sale of premises exceeding $10,000 in value. In that proceeding, the court can marshal the sale to assure that debtor obtains full value of the homestead exemption, and the creditor receives the balance.

Business Judgment Rule Does Not Insulate Condominium Board from Challenge

Board of Managers of the 229 Condominium v. JPS Realty Co.

NYLJ 9/8/03, p. 19, col. 4

AppDiv, First Dept

(memorandum opinion)

Commercial unit owner appealed from Supreme Court's grant of summary judgment to the condominium on common charges. The Appellate Division modified to deny the summary judgment motion and remand for further proceedings, holding that the business judgment rule did not insulate the association from claims that the board acted outside the scope of its authority in assessing expenses to the condominium when those expenses were properly attributable to the residential cooperative that held an 89% share in the condominium.

Commercial unit owner owns four units with a combined 8% interest in the condominium. Two professional units hold an additional 3% combined interest, and a residential cooperative, comprised of 50 apartments, owns the remaining 89%. In 1995, the condominium board perfected a lien for common charges and special assessments against the commercial unit owner; the board refiled the lien in 2001. In this action, the board sought to foreclose the lien and sell the commercial units, or to recover a damage award representing the unpaid charges. Commercial unit owner paid the amount of the charges into an escrow account, and challenged the charges, contending that the condominium board had calculated the charges to include expenses of the cooperative, thus benefiting the residential owners at the expense of commercial unit owner. Supreme Court granted summary judgment to the condominium, concluding that the board's allocation of common charges and special assessments was subject to the business judgment rule, and that commercial unit owner had not raised any issues of fact about improper allocation of charges and assessments.

In modifying to deny summary judgment, the Appellate Division noted that the business judgment rule does not apply where the board fails to act within the scope of its authority and in good faith. Here, commercial unit owner alleged that the board acted in bad faith by allocating to the condominium charges attributable to the cooperative. The court noted that an accountant had made some assertions with respect to allocations of expenses and fees that on their face were sufficient to give rise to an inference of improper allocation. As a result, summary judgment was inappropriate.

COMMENT

Although New York courts have not addressed the issue, courts in other jurisdictions frequently apply a reasonableness standard rather than the more deferential business judgment rule to situations – like the one in JPS Realty – in which a group of unit owners whose interests differ from the condominium unit owners at large allege that they are being treated unfairly by the board of directors because of their minority status.

Boards of Directors of condominiums with multiple classes of units are held to a higher standard in order to prevent discrimination against minority unit holders. Thus, in Ridgely Condominium Association v. Smyrnioudis, 105 Md. App. 404, the board of directors enacted a bylaw amendment prohibiting clients of the seven first floor commercial condominiums from using the lobby to gain access into the building. The amendment was passed in response to concerns expressed by residential unit owners who feared that clients of the first floor business could easily reach the residential units on the remaining 27 floors via the elevator in the lobby. Id. at 943. Although the Court of Special Appeals of Maryland generally applies the business judgment rule (see Black v. Fox Hills, 90 Md. App. 75) when assessing the validity of restrictions found in the original condominium documentation, the Ridgely court affirmed the trial court's determination enjoining the board from prohibiting access to commercial units via the main lobby. The court concluded that the bylaw amendment was unreasonable and that use of a more deferential standard could lead to the possible demise of the commercial units if more discriminatory use restrictions are passed. Id. at 421. The court distinguished earlier cases applying the business judgment rule by noting that in those cases, the use restrictions had been included in the original condominium declaration, so that all purchasers had notice of the restrictions.

Courts apply the reasonableness test not only to cases involving multiple classes of condominium units, but also to various other situations in which the court identifies a minority of unit owners whose rights are allegedly being overlooked by the board of directors. In Buckingham v. Weston Village Homeowner's Ass'n, 571 N.W.2d 842, for example, owners of units located in a recently built area of the condominium development contested an amendment to the condominium bylaws which changed allocation of special assessments from a system based on the benefits conferred on each unit to one that required uniform allocation of expenses. As a result of the amendment, owners of the new units would have to share equally in the cost of street repairs to the original development even though only unit owners who owned homes in the original area would benefit from the repairs. Id. at 843 – 844. While the Supreme Court of North Dakota has previously held that the actions of a condominium's board of directors should be evaluated under the business judgment rule (see Aggassiz West Condominium Ass'n v. Solum, 527 N.W.2d 244), in Buckingham the court remanded so that the amendment could be evaluated under the reasonableness test. In so holding, the court stated that the “reasonableness test protects against the imposition by a majority of a rule or a decision reasonable on its face, in a way that is unreasonable and unfair to the minority because of its effect to isolate and discriminate against the minority.” Id at 845.

Condominium Board Lacks Power to Require Acknowledgment of Proxies

Brodsky v. Board of Managers of Dag Hammarskjold Tower Condominium

NYLJ 9/10/03, p. 19, col. 5

Supreme Ct., N.Y. Cty

(Ajello, J.)

Condominium unit owners brought an article 78 proceeding to have themselves and another unit owner declared duly elected members of the condominium board, and to compel the existing board to hold a meeting of unit owners for the purpose of filling the remaining seats on the board. The court granted the petition, holding that the board did not have power to require acknowledgment of proxies, and that proxy votes were therefore valid even if they had been defectively acknowledged.

For many years, no members of the condominium board had been elected at the association's annual meeting because no quorum was present at the meeting. Fifty-one unit owners out of about 250 are corporations or foreign governments). Instead, pursuant to a provision in the board's bylaws, the existing board members elected members to fill vacant positions on the board. In December 2002, the board notified shareholders that extensive work on the building was necessary. As a result, the board voted to levy a special assessment of $975,000. A number of unit owners then formed a group requesting an annual meeting for the election of all nine board members. The board responded that only three positions were subject to election each year. At that point, the group fielded a slate of three candidates and solicited proxies for those candidates. Because the board had, in 1997, enacted a resolution requiring acknowledgments on all proxies, the group had all of the proxies notarized. One member of the group's slate of candidates served as notary for many of the proxies. When the group's slate of candidates appeared to win the election, the board refused to recognize the slate as duly elected board members, contending that 61 ballots were invalid because they were notarized by an interested party. As a result, the board contended, there were an insufficient number of owners present at the meeting to conduct the election. Two of the group's slate then brought this article 78 proceeding.

In granting the petition, the court started by noting that the condominium's bylaws permitted voting by proxy “in writing both signed and dated by the designor and delivered to the Secretary of the Condominium.” The court concluded that in light of this bylaw provision, the board had no power to impose an additional requirement that the proxy be notarized. In addition, even if notarization were required, the court held that notarization of proxies by a candidate for a board position was not improper. As a result, the court concluded that there was a quorum present at the meeting. The court went on to hold that the remaining six board positions should also have been subject to election at the meeting, because that the board could only appoint members for a term to expire “when a successor will be elected at the next annual meeting.” As a result, the court ordered an election for the remaining six board positions, for staggered terms to expire in successive years.

Sale of Unit to Satisfy Judgment

Sunset View Association, Inc. v. Olsen

NYLJ 9/10/03, p. 20, col. 5

Supreme Ct., Kings Cty (Lewis, J.)

Co-op corporation sought an order authorizing, nunc pro tunc, sale of a co-op unit to satisfy a judgment for rent and arrears. The court held that the sale was invalid for failure to account for shareholder's homestead exemption, but outlined a procedure the corporation could use to conduct a proper sale.

Co-op corporation had been awarded a default judgment against tenant-shareholder for $5657 in rent and arrears. Corporation then turned the judgment over to a city marshal for collection. The co-op corporation was the successful bidder at the sale, at a price of $6676.11. The co-op corporation wanted to resell the unit, and sought court validation to make the unit more attractive to prospective purchasers.

In refusing to validate the sale, the court noted that CPLR 5206 provides that shares of co-operative stock qualify for the $10,000 homestead exemption. Because the sale conducted by the co-op corporate brought a purchase price of less than $10,000, the sale was not valid. Although the co-op corporation contended that the unit did not qualify for the exemption because it was not occupied as a primary residence, the court noted that there had been no conclusive indication that shareholder had suspended, or intended to suspend, her occupancy for a period of at least 1 year. The court noted, however, that the co-op corporation contends that the unit will sell for more than $10,000, and the court emphasized that CPLR 5206(e) provides a procedure for a judgment creditor to bring a proceeding requesting a sale of premises exceeding $10,000 in value. In that proceeding, the court can marshal the sale to assure that debtor obtains full value of the homestead exemption, and the creditor receives the balance.