Cooperatives & Condominiums

Business Judgment Rule Applies to Shareholder Eviction

1050 Tenants Corp. v. Lapidus

NYLJ 4/25/07, p. 25, col. 1

AppDiv, First Dept.

(memorandum opinion)

In a co-op corporation's ejectment action against a shareholder, shareholder appealed from the Supreme Court's grant of summary judgment to the co-op corporation. The Appellate Division affirmed, holding that the business judgment rule required deference to the co-op board's determination.

Shareholder, a New York real estate lawyer, has been involved in litigation with the co-op corporation for more than 15 years. The co-op corporation has brought numerous non-payment proceedings against shareholder, resulting in numerous judgments against shareholder, and numerous stipulations imposing obligations on shareholder ' which shareholder sometimes ignored. Ultimately, the co-op board sent notice to tenant of a special meeting of the board to consider a resolution to terminate the proprietary lease on the ground that their tenancy was undesirable due to chronic withholding of maintenance, refusing to dismantle an air-conditioning system that caused damage to a downstairs neighbor, and protracted litigation in which shareholder's arguments were repeatedly found to be meritless and in bad faith. The board unanimously adopted the resolution, and scheduled a special shareholders meeting to consider the issue. Shareholder threatened to sue any shareholder who voted to terminate, leading the board to enact a resolution to indemnify and hold harmless the shareholders. Although shareholder warned the co-op shareholders of 'serious legal consequences' and 'substantial liability' if they voted to evict, 98% of the shares voted in favor of the eviction resolution. Shareholder did not leave, and the co-op corporation brought this ejectment action. The Supreme Court awarded summary judgment to the corporation, and shareholder appealed.

In affirming, the Appellate Division rejected shareholder's argument that the provision in the proprietary lease specifying certain forms of conduct as objectionable excluded the possibility that other forms of conduct could be sufficiently objectionable to subject a shareholder to eviction. The court then rejected the argument that the term 'objectionable and undesirable conduct' was so vague as to be unenforceable. The court then rejected the argument that the proprietary lease violated public policy by restricting access to the courts. As a result, the court, citing the business judgment rule, concluded that the Supreme Court had properly awarded summary judgment to the co-op corporation.

Unit Owners Do Not Hold Unsold Shares

Sassi-Lehner v. Charlton Tenants Corp.

NYLJ 4/25/07

Supreme Ct., N.Y. Cty

(Lehner, J.)

In an action by co-op unit owners for a judgment declaring that they are the holders of unsold shares, unit owners moved for summary judgment. The court, relying on provisions in the offering plan, held that unit owners were not holders of unsold shares.

The parents of current unit owners acquired shares associated with an apartment at a mortgage foreclosure sale. The prior owner of those shares had received them from the sponsor of the co-operative conversion. At the time unit owners' parents acquired the shares, unit owners' father was president of the co-op; the subject apartment was rented to a rent-regulated tenant. That tenant has recently vacated the apartment, and current unit owners now wish to sell the shares, but the co-op board will not consent to the sale unless unit owners make a formal application to the board; unit owners contend that because their shares are 'unsold shares,' they do not need to seek board approval, but rather approval of the managing agent, which may not be unreasonably withheld.

The offering plan for the co-op conversion defined unsold shares as shares not sold by the closing date and 'acquired by one or more members of Sponsor or one or more financially responsible individuals designated by him as a holder of Unsold Shares.' By contrast, the proprietary lease defines unsold shares as shares 'issued to the Sponsor or individuals produced by the Sponsor pursuant to the Offering Statement … until … [one of a variety of circumstances occurs]. In construing these two provisions the court, relying on precedent, concluded that the proprietary lease provision was focused on what terminated 'unsold shares' status, not on what qualified shares as unsold shared in the first place. Hence, the court concluded that the offering plan controlled. Because neither shareholders, their parents, or the person whose interest had been foreclosed had ever been designated by the sponsor as a holder of unsold shares, unit owners could not now claim status as holders of unsold shares.

Business Judgment Rule Applies to Shareholder Eviction

1050 Tenants Corp. v. Lapidus

NYLJ 4/25/07, p. 25, col. 1

AppDiv, First Dept.

(memorandum opinion)

In a co-op corporation's ejectment action against a shareholder, shareholder appealed from the Supreme Court's grant of summary judgment to the co-op corporation. The Appellate Division affirmed, holding that the business judgment rule required deference to the co-op board's determination.

Shareholder, a New York real estate lawyer, has been involved in litigation with the co-op corporation for more than 15 years. The co-op corporation has brought numerous non-payment proceedings against shareholder, resulting in numerous judgments against shareholder, and numerous stipulations imposing obligations on shareholder ' which shareholder sometimes ignored. Ultimately, the co-op board sent notice to tenant of a special meeting of the board to consider a resolution to terminate the proprietary lease on the ground that their tenancy was undesirable due to chronic withholding of maintenance, refusing to dismantle an air-conditioning system that caused damage to a downstairs neighbor, and protracted litigation in which shareholder's arguments were repeatedly found to be meritless and in bad faith. The board unanimously adopted the resolution, and scheduled a special shareholders meeting to consider the issue. Shareholder threatened to sue any shareholder who voted to terminate, leading the board to enact a resolution to indemnify and hold harmless the shareholders. Although shareholder warned the co-op shareholders of 'serious legal consequences' and 'substantial liability' if they voted to evict, 98% of the shares voted in favor of the eviction resolution. Shareholder did not leave, and the co-op corporation brought this ejectment action. The Supreme Court awarded summary judgment to the corporation, and shareholder appealed.

In affirming, the Appellate Division rejected shareholder's argument that the provision in the proprietary lease specifying certain forms of conduct as objectionable excluded the possibility that other forms of conduct could be sufficiently objectionable to subject a shareholder to eviction. The court then rejected the argument that the term 'objectionable and undesirable conduct' was so vague as to be unenforceable. The court then rejected the argument that the proprietary lease violated public policy by restricting access to the courts. As a result, the court, citing the business judgment rule, concluded that the Supreme Court had properly awarded summary judgment to the co-op corporation.

Unit Owners Do Not Hold Unsold Shares

Sassi-Lehner v. Charlton Tenants Corp.

NYLJ 4/25/07

Supreme Ct., N.Y. Cty

(Lehner, J.)

In an action by co-op unit owners for a judgment declaring that they are the holders of unsold shares, unit owners moved for summary judgment. The court, relying on provisions in the offering plan, held that unit owners were not holders of unsold shares.

The parents of current unit owners acquired shares associated with an apartment at a mortgage foreclosure sale. The prior owner of those shares had received them from the sponsor of the co-operative conversion. At the time unit owners' parents acquired the shares, unit owners' father was president of the co-op; the subject apartment was rented to a rent-regulated tenant. That tenant has recently vacated the apartment, and current unit owners now wish to sell the shares, but the co-op board will not consent to the sale unless unit owners make a formal application to the board; unit owners contend that because their shares are 'unsold shares,' they do not need to seek board approval, but rather approval of the managing agent, which may not be unreasonably withheld.

The offering plan for the co-op conversion defined unsold shares as shares not sold by the closing date and 'acquired by one or more members of Sponsor or one or more financially responsible individuals designated by him as a holder of Unsold Shares.' By contrast, the proprietary lease defines unsold shares as shares 'issued to the Sponsor or individuals produced by the Sponsor pursuant to the Offering Statement … until … [one of a variety of circumstances occurs]. In construing these two provisions the court, relying on precedent, concluded that the proprietary lease provision was focused on what terminated 'unsold shares' status, not on what qualified shares as unsold shared in the first place. Hence, the court concluded that the offering plan controlled. Because neither shareholders, their parents, or the person whose interest had been foreclosed had ever been designated by the sponsor as a holder of unsold shares, unit owners could not now claim status as holders of unsold shares.