ACTION ALERT
Proposed NYC Legislation Is Detrimental to Cooperatives
Your Help Is Urgently Needed To Defeat Intro 119 of 2006

Legislation has been introduced in the City Council which threatens the long established right of housing cooperatives to use discretion in approving prospective shareholders as members of their community. Intro 119 would require cooperative boards to provide detailed written reasons when rejecting an applicant – a requirement that is not imposed on the sellers of any other form of real property. Failure or delay in providing these reasons would subject cooperatives and individual board members to stiff fines and to litigation, including possible suits by brokers seeking lost commissions.

Intro 119 gives no consideration to the special nature of cooperatives – where ownership and governance are shared by all and where it is imperative that every shareholder understands and accepts this concept of community. Passage of Intro 119 will discourage service on the board; it will bring greater rigidity to the admissions process and it will invite lawsuits and ill will.

Intro 119 is deceptively called a Human Rights Law. But substantial protections already exist in Federal, State and City laws forbidding discrimination against 14 protected categories. These laws are vigorously enforced and there is no evidence that they are failing to achieve their purpose. Intro 119 adds nothing of substance to those laws.

The Council of New York Cooperatives & Condominiums and the Real Estate Board of New York have prepared a set of Admissions Guidelines which list the 14 ‘classes’ protected by existing Human Rights Laws. The Guidelines also out-line recommended admissions procedures to ensure the protections in these laws are upheld. They can be found as a pdf file at www.CNYC.coop. We have also prepared a Statement of Purchasers’ Rights which is part of REBNY’s Standard Admissions Package.

Your help is needed to ensure the defeat of Intro 119.

Please contact your City Council representative today to ask that they oppose Intro 119. Write as individuals and as a Board to your Council mem-ber and to City Council Speaker Christine Quinn at City Hall, NYC 10007. To find your council member and contact information visit the website http://www.nyccouncil.info/constituent/index.cfm.

If your representative is currently listed as a sponsor of this legislation, ask that they remove their name and their support. Ask to meet with them to explain how cooperatives function and how this legislation would adversely affect your cooperative. Point out that you volunteer your time as a Board member, that you work together with fellow board members to ensure that your cooperative will be safe, well run and affordable; that you seek to understand issues and to make sound decisions for the good of the cooperative and your fellow shareholders. Mention your concerns about frivolous and costly lawsuits and personal liability if Intro 119 were to become law.

Please click to download this notice in PDF Format.

September 11, 2003

THE BUSINESS JUDGMENT OF THE BOARD

I THE COOPERATIVE IS A CREATURE OF THE STATE AND/OR FEDERAL LAW AND IS OPERATED PURSUANT TO THE GOVERNING DOCUMENTS, WHICH ARE AS FOLLOWS:

1. The Certificate of Incorporation
2. The By Laws
3. The Proprietary Lease
4. The Rules and Regulations
5. Board Policies and Procedures

II THE COOPERATIVE IS GOVERNED UNDER THE CONTROL OF:

1. The Governing Documents
2. Statutory Law eg. local, state or federal law
3. Decisional Law, promulgated by the Courts

III THE BUSINESS JUDGMENT OF THE BOARD

A. The actions of the Board and the business of a cooperative take place pursuant to a resolution of the Board or by executive decision, which must be “taken in good faith and in the exercise of honest judgment in the lawful and legitimate furtherance of corporate purposes”. Absent a showing of a breach of fiduciary duty, “the exercise of the Cooperative Boards powers for the common and the general interests of the corporation may not be questioned although the results show that what they did was inexpedient or unwise.” The aforesaid quotations are known as and will be referred to hereafter as the “The Business Judgement Rule”.

1. The Business Judgment Rule¹ as it is applied in New York is made up of various components:
   
   (i.) Good Faith
   
   (ii.) Honest Judgment
   
   (iii.) Lawful and legitimate furtherance of corporate purposes
   
   (iv.) The absence of breach of fiduciary duty
   
   (v.) The exercise of Board power for the common and general interests of the corporation

IV The Governing Documents

1. The Business Judgment Rule, must be exercised pursuant to:

(i.) The Governing Documents:

a.) The governing documents set forth the powers, duties and responsibilities of the Board of Directors and Officers
(see paragraph I above)

b.) The governing documents, along with Board policy, determine governance of the Cooperative

c.) Each Board Member and Officer must be familiar with the governing documents

V. Application of The Business Judgment Rule

1. Tenant-Shareholders

(i.) The Board is a quasi government. It was described by New York States highest Court, the Court of Appeals as: “a little democratic sub society of necessity wherein the proprietary lessees consent to be governed, in certain respects, by the decisions of a board. Like a municipal government, such governing boards are responsible for running the day to day affairs of the cooperative and to that end, often have broad powers in areas that range from financial decision making to promulgating regulations regarding pets and parking spaces. Through the exercise of this authority, to which would-be apartment owners must generally acquiesce, a governing board may significantly restrict the bundle of rights a property owner normally enjoys.”

(ii.) There must a system in place to check against potential abuse of power by a board. The boards powers to regulate Tenant-Shareholders conduct, lifestyle and property rights, must be balanced with the desires to promulgate the primary objective of the cooperative structure, which protects the entire community of residents in an environment managed by the board, for the common benefit.

The Courts in New York, will defer to The Business Judgment of the Board.

B. THE LEGISLATIVE OVERSIGHT AUTHORITY BY THE MUNICIPAL STATE AND FEDERAL LAWS

(i.) The board cannot violate state and federal civil rights laws eg. race, creed, color, national origin, gender, sexual orientation, marital status, age, occupation, disability.

(ii.) The states have adopted legislation and written laws which impact on The Business Judgment Rule.

(a.) In New York, we have a statute which provides that “to terminate a tenancy for objectionable conduct, the landlord must by competent evidence establish to the satisfaction of the Court, that the tenant is objectionable.

However, the New York Court of Appeals has ruled that pursuant to The Business Judgment Rule, the Court will defer to the decision of the board, so long as upon review by the Court, it is determined by the Court that it was made in good faith and in the exercise of honest judgment in the lawful and legitimate furtherance of the corporate purposes. Further, absent a showing of a breach of fiduciary duty, the exercise of the cooperative boards powers for the common and general interest of the corporation may not be questioned although the results show that what they did was unwise or inexpedient

Moreover, the New York Court of Appeals, explicitly addressed the limitations on deference to cooperative board action and the role of the court in such situations when it wrote that The Business Judgment Rule, “permits review of improper decisions, as to when the challenger demonstrates that the boards action has no legitimate relationship to the welfare of the cooperative, deliberately singles out individuals for harmful treatment, is taken without notice or consideration of the relevant facts, or is beyond the scope of the Board’s authority”.

VI THE BUSINESS JUDGMENT RULE IN PRACTICE

A. Termination of tenancy for objectionable conduct

(i.) Do the corporate documents eg. the Proprietary Lease (the “Lease”), allow for the termination of the lease for objectionable conduct

(ii.) Procedure to terminate the Lease

(iii.) Termination of the Lease by:

(a.) vote of the shareholders

(b.) vote of the Board of Directors

(iv.) Notice to tenant-shareholders and due process

(v.) Application of local, state and federal statutes or regulations. eg. is notice to the tenant-shareholder required and must an administrative hearing be conducted, as a predicate to the cooperatives determination that the tenant-shareholder is objectionable.

An illustration of a case in point, is a case decided by New York States Court of Appeals, New York States highest court in May 2003.

The Court of Appeals decision held that The Business Judgment Rule, applies to the termination of a Tenant-Shareholder’ tenancy, for objectionable conduct.

The Court stated that while a competent standard applies, courts should generally defer to the findings of the Shareholders in the termination of the Tenant-Shareholder’s tenancy.

The case in point is 40 West 67th Street vs. David Pullman (“Pullman”), strikes a balance between protecting the collective rights of shareholders and shielding unpopular residents from the wrath of neighbors.

In the Pullman case, Mr. Pullman was characterized in the decision as demanding, disruptive and ultimately intolerable. Mr. Pullman complained that the elderly upstairs neighbors played a television and stereo too loud, ran an illegal and loud bookbinding business and were storing toxic chemicals in their apartment. The board determined that the couple did not possess a stereo or television and that there was no evidence of a bookbinding business or other commercial enterprise in their apartment.

Hostilities thereafter escalated between Mr. Pullman and his elderly neighbor into a physical altercation. Following the altercation, Mr. Pullman distributed flyers to the cooperative residents in which he referred to the elderly neighbor as a “potential psychopath” and accused him of cutting his telephone lines. In another flyer, Mr. Pullman described one of the elderly neighbors as having “close intimate personal relations with the Board President”. Mr. Pullman’s complaint against his elderly upstairs neighbors resulted in a stream of vituperative letters to the cooperative, sixteen (16) letters in the month of October 1999 alone.

Mr. Pullman commenced four (4) lawsuits against the upstairs elderly neighbors, the president of the cooperative and the cooperative management and attempted to commence three (3) additional lawsuits thereafter.

The Lease contained a provision providing for the termination of the tenancy of a Tenant-Shareholder if the cooperative shareholders by a two-thirds vote determine that “because of objectionable conduct on the part of the Lessee, ***the tenancy of the Lessee is undesirable”.

The cooperative board of directors convened a special meeting pursuant to the provision of the Lease, pursuant to timely notice to Mr. Pullman. At the special meeting the owners of more than seventy-five (75%) percent of the outstanding shares of the cooperative were present and voted, unanimously to declare Mr. Pullman’s conduct objectionable.

The Court of Appeals applied the business judgement of the tenant-shareholders of the cooperative applying the Rule of a previous courtdecision known as Levandusky vs. One Fifth Avenue Corp. (“Levandusky” ) a 1990 case which held that there would be no judicial scrutiny of actions of cooperative board’s “taken in good faith and in the exercise of honest judgement in the lawful and legitimate furtherance of corporate purposes.”

Mr. Pullman argued that the Levandusky Rule should not be applied in this case but that the court should apply Civil Practice Law and Rules, Section 711 which requires a court to make its own evaluation of the board’s conduct based on a judicial standard of reasonableness. The court ruled that the Business Judgement Rule is consistent with Section 711 in that the shareholder’s vote, in finding Mr. Pullman objectionable, is consistent with the statute in that it was competent evidence of the tenant being objectionable. In addition if the Lease did not contain a termination provision for objectionable conduct Section 711 would apply and proof would have to be presented to the court of objectionable conduct by competent evidence.

The court in the Pullman case recognized that a cooperative board’s broad powers to terminate a tenancy could lead to abuse through arbitrary or malicious decision making, unlawful discrimination or the like. However the court recognized that “ the purposes for which the residential community and its governing structures were formed were such that they should protect the interest of the entire community of residents, in an environment managed by the board for the common benefit.” The court concluding that the Business Judgement Rule best balances these competing interests. And also noted that the limited review afforded by the rule protects the cooperative against Judicial Second Guessing.

It is important to note that a cooperative can not terminate the tenancy of a tenant-shareholder absent language in the Lease granting the power of the cooperative to terminate the Lease. This is not a termination of lease pursuant to a Resolution of the Board of Directors but a termination of a lease pursuant to a vote of the tenant- shareholders by a super majority, a two-thirds (2/3) vote. Therefore the cooperative was acting within the scope of its authority in that the Lease provided for the termination for objectionable conduct, the tenant-shareholder had notice and an opportunity to be heard and in this case, Mr. Pullman chose not to appear or challenge the basis for his termination at the tenant-shareholder’s meeting called for that purpose.

The Court next reviewed a second provision of the Business Judgement Rule with regard to the board acting in furtherance of the corporate purpose, specifically there must be a legitimate relationship between the board’s action and the welfare of the Cooperative. The purpose of the termination of the tenancy must be closely related to legitimacy of purpose and in good faith.

The Business Judgment Rule further provides that the board must act in the exercise of honest judgement. The Court went on to caution that the board of a cooperative in its governance carries the potential for abuse when a board singles out a person for harmful treatment or engages in unlawful discrimination, vendetta, arbitrary decision making or favoritism which can be determined to be abuses and are incompatible with good faith and the exercise of honest judgement. The court went on to state that The Business Judgment Rule, while deferential should not serve as a rubber stamp for cooperative board actions, particularly those involving tenancy terminations.

The court concluded with affirming the right of the cooperative to terminate the tenancy of Mr. Pullman pursuant to the terms and conditions of the Lease, wherein his conduct was declared to be objectionable.

2. Pursuant to Decisional Law in New York, there are several cases where the Court ruled on The Business Judgment Rule.

(i.) A Lessee entered into a Proprietary Lease with the cooperative wherein the tenant-shareholders occupancy provided for a combination residential and art related business or professional use. The tenant-shareholder used the apartment for a residence and a dance studio. Thereafter, an upstairs neighbor tenant-shareholder complained that the mixed use of the tenant-shareholders space was illegal in that it violated the Certificate of Occupancy. The Board of Directors received opinions of counsel, that based on the history of the building, the tenant-shareholders mixed use could be ratified by an amendment to the Certificate of Occupancy. The Board of Directors put this issue of amendment of the Certificate of Occupancy to a vote of the shareholders and the shareholders voted against approval. Thereafter, the Cooperative Board of Directors refused to sign the application for amendment to the Certificate of Occupancy, notwithstanding opinions of counsel which stated that based upon the history of the building that the tenant-shareholders mixed use could be ratified by amendment of the Certificate of Occupancy. The Appellate Court thereafter upheld the right of the tenant-shareholder to make application for amendment to the Certificate of Occupancy and that the cooperative breached the Proprietary Lease in failing to execute the application for an amended Certificate of Occupancy to reflect the mixed use of the tenant-shareholder’s premises as specifically contemplated under the Lease agreement notwithstanding The Business Judgment Rule and decision to the contrary by the Board of Directors.

(ii.) An Injunction was issued against a board as they acted outside the scope of their authority by prohibiting a Tenant from erecting a succah on a balcony. A succah is a tent like-structure erected by persons of the Jewish faith. The Business Judgement Rule does not protect the cooperative board from its own breach of contract;

(iii.) The cooperative was determined to have acted in bad faith in prohibiting a tenant from displaying a religious statute in the yard;

(iv.) A board vote amending the by-laws to declare plaintiff tenant-shareholder ineligible to sit on a cooperative board was not shielded by the Business Judgement Rule.

(v.) A tenant-shareholder pledged its stock to a bank as security for a loan. Thereafter, the tenant-shareholder defaulted, the bank foreclosed and took title to the stock and Lease. A new stock and Lease was issued to the bank’s nominee. Thereafter, the former tenant-shareholder settled with the bank, and an application was made by the bank’s designee as tenant-shareholder to transfer the stock and Lease back to the original tenant-shareholder. The board of Directors denied the tenant-shareholder’s request to approve the transfer of shares and Proprietary Lease back to him, due to his alleged former financial difficulties and history of failure to make maintenance payments. The tenant-shareholder argued that the Board’s action was in bad faith and that in light of these facts, The Business Judgment Rule of the Board should not be upheld. The Court ruled that pursuant to The Business Judgment Rule, the tenant-shareholder seeking a review of the Board’s actions had the burden of demonstrating the breach of fiduciary duty through evidence of unlawful discrimination, self-dealing or other misconduct by board members. The Court concluded that the cooperative acted in good faith and within the scope of its authority and therefore upheld The Business Judgment Rule.

¹ Levandusky v. One Fifth Avenue Apt. Corp. [75 N.Y. 2nd 530] [553 N.E. 2d 1317] New York Court of Appeals [1990]

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