<i>Levandusky</i> After 25 Years

Alterations and Repairs

In Baxter Street Condominium v. LPS Baxter Holding Co., 126 A.D.3d 417 (1st Dept. 2015), a condominium building experienced recurring water leaks allegedly caused by construction defects. The board sued the condominium's sponsor based on the flawed design and construction of the building, but concurrently imposed an assessment on all unit owners for the cost of necessary repairs. The defendant commercial unit owner refused to pay its $700,000 proportionate share of the assessment and was sued by the board to recover the same. The defendant claimed the board acted improperly in imposing the assessment.

New York's Appellate Division, First Department, unanimously affirmed the lower court's award of summary judgment upholding the board's claim, deferring to the board's judgment that the assessment was necessary for repair work and holding that the condominium's bylaws did not require unit owner approval of the assessment. The court rejected defendant's contention that the pending action against the sponsor required the board to await its resolution before imposing the challenged assessments, finding that the condominium's bylaws unequivocally permitted board-imposed assessments for repairs. The court further held that defendant failed to show that the board acted in bad faith, and that defendant cannot avoid summary judgment by speculating that discovery could provide evidence of bad faith.

In Berenger v. 261 West LLC, 93 A.D.3d 175 (1st Dept. 2012), the plaintiff condominium owner's penthouse unit was disturbed and damaged by noise and leaks from the cooling tower on the building's roof. The defendant board members, who were also principals or representatives of the sponsor, determined to make certain repairs, which the unit owner claimed were inadequate. When the unit owner sued, among others, individual members of the board, the First Department held that the business judgment rule protected the board and its members from liability with respect to decisions concerning the manner and extent of the challenged repairs, performance of which were within their scope of authority. As such, the board's decisions were shielded from review.

In Cannings v. East Midtown Plaza Housing Company, 33 Misc.3d 1216(A) (Sup. Ct. N.Y. Co. 2011), a Mitchell-Lama co-op board determined to replace the building's aging windows and to finance the project with a bank loan, to be repaid by a five-year assessment on shareholders-a window replacement plan confirmed by a majority vote of shareholders. (A Mitchell-Lama co-op is a cooperative apartment building or complex specifically built for middle-income buyers, with government assistance, in accordance with New York's 1955 Limited Profit Housing Companies Act.) Because the co-op was seeking to withdraw from the Mitchell-Lama program, the board elected to use private financing instead of a “grant” from the New York City Housing Development Corporation (HDC), which would have required the co-op to remain in the Mitchell-Lama program for another 15 years.

A shareholder sued, objecting to the window replacement plan and arguing that an HDC grant would have replaced the windows “for free.” The court found that it was within the scope of the board's authority to decide on window replacement financing and repayment assessments, noting that the board's determination was supported by an engineer's report establishing the necessity for the repairs and an estimated budget for the work to be performed.

In Katz v. Board of Managers, 83 A.D.3d 501 (1st Dept. 2011), a condominium board planned and arranged for repair of a fire-damaged unit. The unit owner claimed that the restoration was unfinished for an extended period, and challenged the board's restoration plan. The First Department affirmed summary dismissal of the case, holding that the board's right to direct unit repairs was supported by the bylaws and were in good faith, and that the board worked diligently to accomplish the restoration, noting that the unit owner engaged in delay-causing conduct which prolonged the restoration process.

Right of First Refusal

In Bittens v. Board of Managers of Octavia Condominium, 132 A.D.3d 487 (1st Dept. 2015), the board exercised its right of first refusal (ROFR) ' via a designee ' to purchase the unit that the plaintiff had contracted to purchase. The First Department held that although the ROFR-designee was a member of the board, exercise of the ROFR was in accordance with the bylaws and in good faith, and the profit made by the board in buying and reselling the unit conclusively demonstrated that exercise of the ROFR was in furtherance of the condominium's purposes.

In South Tower Residential Board of Managers of Time Warner Center Condominium v. The Ann Holdings, 127 A.D.3d 485 (1st Dept. 2015), the selling unit owner challenged the board's exercise of its ROFR via a designee ' who was also an unsuccessful direct bidder for the unit and the beneficial owner of the adjacent unit, and who agreed to pay a $400,000 license fee to the condominium for the use of the hallway between the two apartments. The selling owner refused to close, and the board sued for specific performance. The defendant unit owner argued that the condominium bylaws did not permit the board to designate a third-party entity to purchase the unit and for the board to do so constituted, among other things, self-dealing and unequal treatment of apartment owners, thereby vitiating board protection under the business judgment rule.

The First Department held that the bylaws authorized the board to exercise its ROFR via a designee and did not require the designee to be an entity organized and owned by the board; further, although the ROFR-designee's wife was a member of the board, she did not participate in the board's decision to exercise the ROFR. The court also noted that there was a substantial financial benefit for the condominium from the license fee it would receive from the ROFR-designee, and the defendant unit owner would receive the same amount of money he would have received had the unit been sold to the party with whom he had contracted. Therefore, deference to the board's business judgment was warranted.

Sale of Common Area Space

Newman v. 911 Alwyn Owners Corp., 47 Misc.3d 1213(A) (Sup. Ct. N.Y. Co. 2015), involved a board's cancellation of the offer for sale of certain building hallway closets and bathrooms. The co-op had solicited bids for the sale of such common areas, and one shareholder was the highest bidder for several hallway closets. The board did not accept any bids or sign any contracts and subsequently cancelled the proposed sale because it determined that continuing to rent the spaces would be more financially advantageous for the co-op. The disappointed shareholder sued the board for breach of fiduciary duty, claiming that the board's decision to cancel the sale was due to “personal animus” toward him. The Supreme Court, New York County, deferred to the board's judgment and dismissed the case, holding that a mere claim of board animus was insufficient to show bad faith.

Subletting Restrictions

In Bregman v. 111 Tenants Corp., 97 A.D.3d 75 (1st Dept. 2012), a co-op shareholder purchased two apartments in the building upon its conversion to a co-op in 1972 and thereafter sublet them for several decades. In 2003, the board prohibited subleasing for more than two years in any four-year period without board approval. The board subsequently denied the shareholder's request to sublease one of her apartments, and the shareholder sued, alleging bad faith on the part of the board and that the resolution's intent was to discriminate against her. Although the shareholder claimed that the sponsor had agreed to allow her to sublet her apartments in perpetuity, she had no written support for this claim.

The First Department held that the board's actions were protected by the business judgment rule, explaining that there is no prohibition against a board's adoption of a policy protective of the co-op's broader interests ' maximizing owner residency and the value of shares ' even if the policy is restrictive of a single shareholder's situation or conduct.

Big Four LLC v. Bond Street Lofts Condominium, 94 A.D.3d 401 (1st Dept. 2012), involved a commercial unit owner's attempt to lease its unit to a 7-Eleven store. The board objected to the lease, citing a provision in the condominium's bylaws prohibiting on-premises cooking in commercial units. The commercial unit owner sued, claiming that the board's true motives were distaste for the tenant and arguing that the board's speculative objection to on-site cooking constituted bad faith.

The First Department held that, absent any credible support of the commercial unit owner's claim of bad faith, the court should defer to the board's judgment ' that there was a rational basis to believe that 7-Eleven planned to use the premises for cooking, thereby breaching the bylaws.

Actions Not Protected By the Rule

Discrimination Claims

In Fletcher v. Dakota, Inc., 99 A.D.3d 43 (1st Dept. 2012), board members sought to rely on Levandusky to support their motion to dismiss tort claims asserted against them as individuals. In this wide-ranging case, the co-op board had refused to consent to an existing shareholder's purchase of an additional apartment, citing concerns regarding the sufficiency of his finances. The shareholder sued the co-op and individual board members, claiming that the refusal was due to his race (African-American) and in retaliation for his support of the rights of other minority and Jewish shareholders and applicants. He alleged several specific incidents in support of his discrimination and retaliation claims.

The board members claimed protection under the business judgment rule, citing the First Department's Levandusky -based decision in Pelton v. 77 Park Avenue Condominium, 38 A.D.3d 1 (1st Dept. 2006), where claims against a condominium board and individual board members stemming from alleged discrimination based on a purported failure to accommodate a disability were held barred by the business judgment rule.

However, the First Department in Fletcher explicitly overruled Pelton, holding that the business judgment rule was inapplicable to tort/discrimination claims, and denied the board members' motion to dismiss such claims. The court thereby allowed the shareholder's discrimination and retaliation claims to proceed against individual board members, holding that participation of an individual director in a corporation's tort is sufficient to give rise to individual liability.

Although the claims in Fletcher were eventually dismissed on the merits, lower courts have followed its reasoning in allowing discrimination claims to proceed in the face of Levandusky -based motions to summarily dismiss such claims. For example, in Berkowitz v. 29 Woodmere Blvd. Owners, 2015 N.Y. Slip Op. 25401 (Sup. Ct. Nassau Co. 2015), the co-op board rejected the application of a single-male prospective purchaser of plaintiff's apartment, claiming that the purchase price was too low. Although the purchaser expressed a willingness to increase his offer and proposed various higher prices, the board did not alter its determination. After the board approved a transfer to a married couple at a lower purchase price ($40,000 less), the selling apartment owner sued the board and its individual directors, claiming unlawful discrimination based on the single-person marital status of the initial purchase applicant. Citing Fletcher, the court allowed the discrimination claims to proceed.

Board Consent Not to Be Unreasonably Withheld

In Kaplan v. Park South Tenants Corp., 2014 N.Y. Slip Op. 30708(U) (Sup. Ct. N.Y. Co. 2014), the co-op's proprietary lease provided that apartment and terrace alterations could not be made without board consent, which consent could not be “unreasonably withheld.” The plaintiff shareholder sought board consent to install an air-conditioning system on his allegedly private roof area. The board denied the request. In the ensuing lawsuit, the board attempted to defend its actions as barred from judicial review under Levandusky. However, the Supreme Court, New York County, held that review of such board actions was proper in order to determine whether the board acted reasonably, as required by the terms of the lease.

In Goldstone v. Gracie Terrace Apartment Corporation, 110 A.D.3d 101 (1st Dept. 2013), a shareholder's co-op apartment was extensively damaged when the 10,000-gallon water tank above her apartment overflowed, causing water damage and, thereafter, mold. The co-op board's planned repairs would result in a 50 square-foot reduction in the size of her 1,400 square-foot apartment. The shareholder objected, arguing this reduction would violate her proprietary lease (which defined the apartment as the space partitioned on the date the lease was executed), and sued for an injunction to prevent the board from proceeding with its planned work.

The board claimed that judicial review of its repair decisions was barred by Levandusky . The First Department disagreed, holding that, because the shareholder alleged a breach of contract (not solely a poor board decision), her claim was outside the scope of business judgment deference: “[W]hile it may be good business judgment to walk away from a contract, this is no defense to a breach of contract claim.” 110 A.D.3d at 105. (However, the First Department affirmed the lower court's ruling denying plaintiff injunctive relief because there was no clear showing of irreparable harm ' any configuration adjustments to the apartment necessitated by the board's restoration plan were compensable in money damages and, standing alone, the diminution of square footage was de minimis with regard to establishing irreparable harm.)

Conclusion

Levandusky and the business judgment rule protect decisions by boards and their members so long as they do not act in bad faith, without authority or contrary to the furtherance of the condominium's or co-op's purpose. Importantly, the burden of establishing a prima facie case of a board's lack of entitlement to the protections of the business judgment rule rests on the apartment owner challenging the board's action. However, board actions are not protected from judicial review where an apartment owner successfully alleges a prima facie case of breach of the terms of a contract (including the proprietary lease), unlawful discrimination or commission of a tort.

Richard Siegler is of counsel to Stroock & Stroock & Lavan. Eva Talel is a partner at the firm and an adjunct professor at New York Law School. This article also appeared in The New York Law Journal, an ALM sister publication of this newsletter.