Habitat Magazine, which focuses on cooperatives and condominiums in the New York City area, recently ran this article online about the decision of the Court of Appeals:
A Win For Boards? The Pullman Appeal
By Stuart Saft (a partner in the law firm of Wolf Haldenstein Freman & Herz)
The New York State Court of Appeals unanimously upheld the right of a cooperative to terminate a shareholder's proprietary lease and cancel his stock certificate without a landlord/tenant court proceeding. The court, in 40 West 67th Street v. Pullman, held that the business judgment rule permitted the board of directors to terminate the lease for objectionable conduct and obtain possession of the apartment and eject the shareholder as well as cancel the shares without being required to prove to the court that the shareholder's conduct was objectionable.
The court, basing its decision on the appeals court decision in Levandusky v. One Fifth Ave. Corp., stated: "We are satisfied that the relationships among shareholders in cooperatives are sufficiently distinct from traditional landlord-tenant relationships that the statute's 'competent evidence' standard is satisfied by the application of the business judgment rule." The court added that to overcome the business judgment rule, the shareholder would have had to demonstrate that the board had acted in bad faith or arbitrarily, or demonstrated favoritism, discrimination, or malice.
The underlying dispute began when, shortly after moving in, David Pullman began complaining about facilities and services. He threatened to sue the agent and president for failing to abate an alleged noise. The board found the complaints to be unsubstantiated. At the end of 1999, Pullman claimed his upstairs neighbor had assaulted him. Shortly after that incident, he circulated a leaflet to other shareholders urging them to evict his upstairs neighbor. Another leaflet urged the ouster of the president. In early 2000, Pullman began four lawsuits against his upstairs neighbor, the co-op, and its managing agent. During this same period, the co-op board sent Pullman a letter stating that he was not in compliance with his lease because he had performed alterations without consent.
Not surprisingly, these events greatly troubled the owners of the 37-unit building. Accordingly, a number of shareholders decided to take action. Using a provision commonly found in many bylaws, a group of shareholders signed a petition for a special meeting to determine whether Pullman's tenancy in the building was "objectionable." In June 2000, such a meeting was held and the shareholders voted by a count of 2,048 shares to none in favor of a resolution saying it was and directed the board to terminate his proprietary lease. After Pullman refused to move, the co-op began this action.
This is an important decision for cooperatives because it reinforces the board's authority. It also provides corporations with the ability to rid themselves of objectionable shareholders without the necessity of a protracted and expensive fight in landlord/tenant court where the corporation would have to prove to a judge that the shareholder's conduct was objectionable by a standard to be set by the court, which would not necessarily be objective. A loss by the corporation in Pullman would have been a serious setback for cooperative boards because it would have limited the applicability of the business judgment rule.
[MY NOTE: Stuart Saft is also chairman of the board of directors of the Council of New York Cooperatives and Condominiums]