Cooperatives & Condominiums

Business Judgment Rule

Bregman v. 111 Tenants Corp.

NYLJ 5/10/12

AppDiv, First Dept.

(Opinion by Saxe, J.)

In an action by co-op shareholder challenging the board's refusal to approve a sublease of her apartment, shareholder appealed from Supreme Court's grant of summary judgment to the co-op corporation. The Appellate Division affirmed, holding that the business judgment rule protected the co-op's board's decision to limit subletting within the building.

Shareholder was a rent-controlled tenant in 1972 when the owners sought to convert the building to co-operative ownership. At that time, a principal in the group of owners of the building suggested she buy two apartments to help them reach the number of subscriptions necessary for the conversion. She bought the apartments, allegedly on the understanding that she would have perpetual sublet rights, but at least two documents, the proprietary lease itself and an agreement signed by the owners and the sponsor, indicated that she would be permitted to sublet only if she obtained the board's consent. The proprietary lease indicated that there would be no limit on the board's right “to grant or withhold consent, for any reason or for no reason, to a subletting.” The then-owners of the building did, however, indicate that they would use their best efforts to have the board not unreasonably withhold consent to any subletting, but that agreement was not signed by anyone on behalf of the board. Shareholder then sublet both apartments without incident for 30 years.

In 2003, however, allegedly because a board member learned how much the rent shareholder charged her subtenants, the board adopted a resolution providing that no tenant could sublet an apartment for more than two years out of four. Shareholder sublet apartment 10A in 2003, and in 2005, the board refused to permit her to sublet it again. Shareholder then brought this action, relying on two documents. First, she relied on a 1983 letter from a lawyer for the board authorizing a sublet “[i]n view of the arrangements made at the time the building went cooperative and you purchased two apartments on condition that you ' be permitted to sublet same.” Second, she relied on a 2007 affidavit by a former board member indicating that the board would abide by the agreement with the sponsor. Supreme Court nevertheless awarded summary judgment to the board.

In affirming, the Appellate Division held that neither of the two documents supported her claim of unfettered sublet rights, noting that both documents were consistent with the requirement that the board consent to all subtenant. The Appellate Division then held that even if the initial agreement did confer preferential sublet rights on shareholder, those rights would have been precluded by Business Corporations Law section 501, which requires that each share be equal to every other share of the same class. The court then held that the board's decision to limit sublet rights was prompted by a legitimate interest in maximizing owner residency and therefore the value of the shares. As a result, the business judgment rule insulated the decision from attack by disgruntled shareholders.

Injunctive Relief

Weinreb v. 37 Apartments Corp.

NYLJ 5/14/12

AppDiv, First Dept.

(Opinion by Saxe, J.)

In an action by co-op shareholder against the co-op board and its individual members, the co-op board members appealed from Supreme Court's denial of their motion to dismiss, as against them, the claim for a permanent injunction. The Appellate Division reversed and dismissed the claim against the board members, concluding that in the absence of a substantive claim against the board members, injunctive relief is not available against them.

Shareholders sought approval of their plans to renovate their penthouse apartment. They contended that the co-op board withheld approval in violation of the proprietary lease, which provided that consent would not unreasonably be withheld. Shareholders started submitting plans in 2006, and, despite numerous amendments to the plans, the board continued to withhold approvals through 2010. In March 2011, shareholders brought this action contending that the board members breached their fiduciary duty, and seeking a permanent injunction requiring the board members to sign the documents necessary to effectuate board approval. The action also alleged a breach of proprietary lease by the co-op corporation. Supreme Court dismissed the breach of fiduciary duty claim against the individual board members, but refused to dismiss the claim for injunctive relief.

In reversing, the Appellate Division started by noting that the business judgment rule generally protects individual board members from liability for decisions made within the scope of their duty. The court noted that individual members might be subject to suit if the complaint pleads independent tortuous acts by those directors, but observed that in this case, shareholders did not appeal from dismissal of the breach of fiduciary duty claim against the board members. Once the breach of fiduciary duty claim was dismissed, without leave to replead, the court held that there was no basis for upholding the claim for injunctive relief. The court observed that an injunction is merely a form of legal relief once a proponent establishes the merits of substantive claims; dismissal of the claims requires dismissal of the request for an injunction.

Business Judgment Rule

Bregman v. 111 Tenants Corp.

NYLJ 5/10/12

AppDiv, First Dept.

(Opinion by Saxe, J.)

In an action by co-op shareholder challenging the board's refusal to approve a sublease of her apartment, shareholder appealed from Supreme Court's grant of summary judgment to the co-op corporation. The Appellate Division affirmed, holding that the business judgment rule protected the co-op's board's decision to limit subletting within the building.

Shareholder was a rent-controlled tenant in 1972 when the owners sought to convert the building to co-operative ownership. At that time, a principal in the group of owners of the building suggested she buy two apartments to help them reach the number of subscriptions necessary for the conversion. She bought the apartments, allegedly on the understanding that she would have perpetual sublet rights, but at least two documents, the proprietary lease itself and an agreement signed by the owners and the sponsor, indicated that she would be permitted to sublet only if she obtained the board's consent. The proprietary lease indicated that there would be no limit on the board's right “to grant or withhold consent, for any reason or for no reason, to a subletting.” The then-owners of the building did, however, indicate that they would use their best efforts to have the board not unreasonably withhold consent to any subletting, but that agreement was not signed by anyone on behalf of the board. Shareholder then sublet both apartments without incident for 30 years.

In 2003, however, allegedly because a board member learned how much the rent shareholder charged her subtenants, the board adopted a resolution providing that no tenant could sublet an apartment for more than two years out of four. Shareholder sublet apartment 10A in 2003, and in 2005, the board refused to permit her to sublet it again. Shareholder then brought this action, relying on two documents. First, she relied on a 1983 letter from a lawyer for the board authorizing a sublet “[i]n view of the arrangements made at the time the building went cooperative and you purchased two apartments on condition that you ' be permitted to sublet same.” Second, she relied on a 2007 affidavit by a former board member indicating that the board would abide by the agreement with the sponsor. Supreme Court nevertheless awarded summary judgment to the board.

In affirming, the Appellate Division held that neither of the two documents supported her claim of unfettered sublet rights, noting that both documents were consistent with the requirement that the board consent to all subtenant. The Appellate Division then held that even if the initial agreement did confer preferential sublet rights on shareholder, those rights would have been precluded by Business Corporations Law section 501, which requires that each share be equal to every other share of the same class. The court then held that the board's decision to limit sublet rights was prompted by a legitimate interest in maximizing owner residency and therefore the value of the shares. As a result, the business judgment rule insulated the decision from attack by disgruntled shareholders.

Injunctive Relief

Weinreb v. 37 Apartments Corp.

NYLJ 5/14/12

AppDiv, First Dept.

(Opinion by Saxe, J.)

In an action by co-op shareholder against the co-op board and its individual members, the co-op board members appealed from Supreme Court's denial of their motion to dismiss, as against them, the claim for a permanent injunction. The Appellate Division reversed and dismissed the claim against the board members, concluding that in the absence of a substantive claim against the board members, injunctive relief is not available against them.

Shareholders sought approval of their plans to renovate their penthouse apartment. They contended that the co-op board withheld approval in violation of the proprietary lease, which provided that consent would not unreasonably be withheld. Shareholders started submitting plans in 2006, and, despite numerous amendments to the plans, the board continued to withhold approvals through 2010. In March 2011, shareholders brought this action contending that the board members breached their fiduciary duty, and seeking a permanent injunction requiring the board members to sign the documents necessary to effectuate board approval. The action also alleged a breach of proprietary lease by the co-op corporation. Supreme Court dismissed the breach of fiduciary duty claim against the individual board members, but refused to dismiss the claim for injunctive relief.

In reversing, the Appellate Division started by noting that the business judgment rule generally protects individual board members from liability for decisions made within the scope of their duty. The court noted that individual members might be subject to suit if the complaint pleads independent tortuous acts by those directors, but observed that in this case, shareholders did not appeal from dismissal of the breach of fiduciary duty claim against the board members. Once the breach of fiduciary duty claim was dismissed, without leave to replead, the court held that there was no basis for upholding the claim for injunctive relief. The court observed that an injunction is merely a form of legal relief once a proponent establishes the merits of substantive claims; dismissal of the claims requires dismissal of the request for an injunction.