Cooperatives & Condominiums

In reversing, the Appellate Division concluded that the board's action had singled out non-resident shareholders for unfavorable treatment, and was therefore acting in bad faith and not in furtherance of the corporate purpose. As a result, the board's action was not protected by the business judgment rule. The court also held that the board's assessment of a window-replacement fee on a per-unit basis rather than a per-share basis was inconsistent with the provisions of the proprietary lease, which required that cash requirements for maintenance be assessed on a per-share basis.

COMMENT

Although BCL § 501(c) provides that shares of the same class must be equal, courts have upheld board resolutions permitting some forms of discrimination; in particular, courts have upheld resolutions permitting resident shareholders, but not non-resident shareholders, to serve as directors of a co-op corporation. In Realty Enter. LLC v Hyde Park Owners Corp., 2005 N.Y. Misc. LEXIS 3527, the court rejected a non-resident unit owner's challenge to a cooperative board's by-law amendment to requiring that directors be residents of the cooperative, holding section 501(c) inapplicable because stock ownership does not create a vested right to become director. Id. at 6. The court noted that even if section 501(c) were otherwise applicable, BCL section 701 explicitly authorizes the bylaws to establish qualifications for directors.

At least one previous court has upheld a regulation that gave one shareholder power over decisions affecting another shareholder. In Braun v. 941 Park Ave., Inc., 32 A.D.3d 21, a divided Appellate Division upheld a house rule allowing one co-op apartment owner to control a vestibule shared with another owner. In light of the constricted area involved, the court concluded that the board's allocation of responsibility had a reasonable basis. Id. at 24-25.

Four-Month Statute of Limitations Bars Claim That House Rules Violated Proprietary Lease
Musey v. 425 East 86 Apartments Corp.
NYLJ 10/5/17, p. 22, col. 1
AppDiv, First Dept.
(memorandum opinion)

In co-op shareholder's action for a declaration that house rules violated the proprietary lease, shareholder appealed from Supreme Court's grant of the co-op corporation's motion to dismiss the complaint as time-barred. The Appellate Division affirmed, holding that shareholder's complaint was subject to the four-month statute limitations applicable to article 78 proceedings.

In 2012, shareholder contracted to buy the shares associated with a penthouse apartment. Because the building's roof was undergoing extensive repairs, she was unable to inspect the apartment's terrace. In July 2013, five months after shareholder finalized her purchase, the co-op board enacted house rules requiring protection of the roof membrane from planters, deck covering, foot traffic, and furniture. The house rules provided that the board would engage a professional engineer to decide what protection would be necessary, and that the protection might include a secondary membrane or installation of a separator pad. Any protection was to be installed at the shareholder's expense, and the shareholder was required to indemnify the co-op corporation for the cost of repairing damage to the underlying roof membrane.

Shareholder exchanged multiple emails with members of the co-op board contending that the new rules deprived him of the right to quiet enjoyment of the terrace in violation of the proprietary lease, and that the board was trying to shift costs of roof maintenance from the coop to him, also in violation of the proprietary lease. When those complaints fell on deaf ears, shareholder, in July 2014, brought this action for a declaration that the rules violated the proprietary lease, and contending that the co-op's failure to install a flooring surface designed to insulate the roof membrane from ordinary use constituted a breach of the warranty of habitability. Supreme Court dismissed the complaint as time-barred because shareholder's remedy was to bring an article 78 proceeding, subject to the four-month statute of limitations applicable to article 78 proceedings. Shareholder appealed.

In affirming, the Appellate Division held that when a co-op shareholder seeks to challenge a co-op board's house rules, the challenge must be made in the form of an article 78 proceeding. The court concluded that the shareholder's failure to bring the action until nearly a year after the rules were enacted made the action untimely. The court also concluded that shareholder's effort to characterize this complaint as one for breach of the proprietary lease must fail. Finally, the court concluded that failure to provide a safe and suitable terrace would not constitute a breach of the warranty of habitability because a terrace is an amenity, not an essential function.

COMMENT

If a shareholder's claim against a co-op corporation requires a finding that a co-op bylaw or house rule is invalid, Article 78's four-month statute of limitations applies. In Katz v Third Colony Corp., 101 A.D.3d 652, the court held that Article 78's statute of limitations applied to former shareholder's claim for return of a “flip tax” Paid upon sale of shares in two apartments Although shareholders characterized their claim as a “wrongful extraction of money” and sought only damages in the amount of the flip tax, the court concluded that shareholder's claim was really challenging the validity of the bylaw that imposed the flip tax, and that shareholders could not escape the four-month statute of limitations by re-packaging their grievances into a claim for money damages. Id. Although shareholder brought their action within weeks of the sale, the claim was untimely because the bylaw had been enacted years earlier.

Similarly, in Buttitta v. Greenwich House Cooperative Apartments, Inc., 2003 WL 25780826, aff'd 11 A.D.3d 250, the court held that Article 78's statute of limitations applied to shareholder's claims that co-op's bylaws were an unreasonable restraint on alienation. 11 A.D.3d 250, 256. Plaintiff sought to prevent co-op from enforcing bylaws ratified in 1920, which gave co-op the right to redeem shares at cost in order to provide affordable housing at below-market rates, in order to sell her shares at market price. 2003 WL 25780826, at *1-2. Because shareholder sought to attack the validity of the bylaws, her claim was time-barred.

However, claims that do not attack the validity of a co-op's bylaws or house rules are not subject to Article 78's four-month limitation. In Chappell v. Trump Plaza Owners, Inc., 2011 WL 5024488, the court held that the Article 78's statute of limitations did not apply to plaintiff shareholder's claim against co-op board for money damages resulting from board's failure to approve a purchase. Id. at *6. Shareholder contracted to sell her apartment for $599,000 to a purchaser with substantial liquid assets, but the board refused to approve the sale and rejected a subsequent offer by purchaser for $675,000. Id. at *2-3. Shareholder alleged that the board knew she was in financial distress and that the board was attempting to force her into default in order to bid on the apartment at auction and sell for a profit. Id. The court rejected co-op's reliance on Buttitta as a statute of limitations defense, because Chappell, unlike Buttitta, involved no challenge to a co-op bylaw. Id.

Similarly, in Estate of Del Terzo v. 33 Fifth Ave. Owners Corp., 136 A.D.3d 486, the court held that Article 78's statute of limitations did not apply to shareholder's claim for breach of proprietary lease. Id. at 487-88. Shareholder attempted to devise her apartment shares to her sons, but the co-op board refused to approve the transfer because one of the brothers was financially irresponsible and because both of their families would exceed the allowable occupancy. Id. at 487. The court concluded shareholder was not time barred by Article 78 because the substance of the dispute was controlled by a provision in the proprietary lease. Id. at 488.